Emergency Economic Stabilization Act of 2008: A Layman's Explanation

Last week Nancy Pelosi announced that the completed version of the Economic Stabilization Act of 2008 is now available on the House of Representatives website. I spent a few hours reading through the bill and would like to highlight what I think are the most important parts. What was immediately clear from my review was that the bill sends us into a new period of financial regulation after a decade of deregulation and leverage. As most of you may already know, the bill was passed late last week in both houses and was signed into law by the President. At this point, considering the market turmoil is worse than it was before the bill passed, we wait to see if these new provisions will be successful in the way of instilling confidence to a market system which by most measures appears nearly broken.

Perhaps the most fundamental aspect of this bill is the establishment of the Troubled Assets Relief Program. This is the infamous ‘$700 billion dollars’ which may ultimately be used to buy distressed assets off the balance sheets of various financial institutions. It was released today that Neel Kashkari, a former Goldman executive will be heading up TARP. The bill contains three main provisions which I’ll dive into now:

Distribution of Funds: Congress doesn’t want Hank Paulson to have free reign over fund distributions as originally outlined in the ‘3-page’ version of this bill. The funds will be disbursed in traunches (first distribution will be $250,000,000,000) and Congress, by way of various reports and newly established agencies, will oversee the progress of their spending. Harry Reid talked on Sunday about the original document which gave Paulson unfettered authority over fund distributions. He spoke about halted student loan payments being an ominous sign of what could be a prolonged economic slowdown with far reaching effects. The original blank check format is now hundreds of pages and contains multiple supervision provisions.

Golden Parachutes and CEO Compensation: I’m sure many of you have heard this term ‘golden parachutes’ thrown around over the past few days. This basically refers to employment contract clauses which provide lucrative severance benefits to executives if and when they are asked to leave. This usually happens during management shifts. This piece of legislation really represents the first time the government will have the power to regulate the exorbitant compensation which CEOs and other corporate executives have been accustomed to over the past few decades. Apparently the golden parachute clauses were met with a lot of resistance during hearings but Democrats wouldn’t consider the bill without it. Companies which use the TARP will obviously be subjected the most to new compensation guidelines.

Taxpayer Protection: Perhaps the most adamant point throughout the past week of negotiations has been that taxpayers will not pay the brunt of these costs, even if the program falls short of its goal. One interesting way of ensuring this is via the recoupment mechanism. Basically, if after a 5 year period the government hasn’t recovered the total amount of money which it laid out, corporations who participated in the program will have to issue a financial statement and a timeframe for paying back their portion of the difference. The goal, of course, is to ensure that this $700B is a loan aimed at restoring consumer faith and movement of the credit and lending industries--not bailing out Wall Street.

Government leaders have agreed that this legislation is only permissible because it’ll ultimately help more ordinary people to pass this bill than to reject it. Nancy Pelosi on Sunday talked about job creation and children going to college and other important economic factors which could be at risk if this didn’t get passes. It sounded all around like a bi-partisan effort.

Raising FDIC Limits: The bill raises federal insurance on bank deposits up to $250,000 from $100,000. The idea here is to make consumers feel more comfortable that they won’t lose the money which they keep in checking and savings accounts. It probably also got a few people on board in terms of getting this bill through the House of Representatives. In reality, it will raise FDIC insurance premiums, which are paid by banks!

A major change in the way of transparency will be that updates and changes to the bill will be posted on the internet within 48 hours of occurring, the goal being that Americans can read and understand any legislative updates which may affect their tax bill or other effects which may trickle down. The Troubled Asset Relief Program [TARP] will also have a board of directors which joins up with Hank Paulson to oversee this $700 billion in asset purchases. Some find the planned purchase and re-sale of assets to be analogous to a hedge fund managed by Mr. Paulson, along with the team of private asset managers hired by Mr. Paulson. Fortunately for us, Paulson is the former CEO of Goldman Sachs, and a person very familiar with asset management.

This is what I’ve uncovered for now--feel free to chime in with any questions or comments. I’m sure we’ll be talking about these times for decades, hopefully as a rough economic patch which passed over.

Comments

[TV FRIESEN:]

Essential Caveat To Fix Financial Crisis

The current financial crisis is a result of financial institutions developing a fear of lending. That IS the crisis…and the U.S. $700 billion bailout doesn’t directly address that. Banks may continue to sit on OUR money.

Medication should be applied before the patient dies…..and the U.S. government should provide the needed liquidity....but THE BANKS MUST BE FORCED TO LEND THE GOVERNMENT PROVIDED LIQUIDITY. Whether the government provides loans or buys the dumb “toxic” loans, financial institution getting assistance must agree to lend at least 50% of the money within 30 days and the remainder within 90 days and keep that money loaned to US businesses and US homebuyers for the duration of the government loans. That must be part of the deal or the US government is likely wasting our money on a dead patient.

Banks profit from lending and everything will return to normal sooner if the banks immediately provide the liquidity required for business to function and homebuyers to buy homes.

2008 Oct 08 11:43 AM

[PainfullyAware:]

I fear that your column is misleading. You are obviously not a lawyer. The devil is in the details.

This Bailout Was A Criminal Heist.

A look at the structure of money allocated and oversight is reprehensible. The proposal was the same as the first Paulson proposal only with more middle men and greater length and complexity of language.

A summary of the bill:

Treasury gets the money, writes the rules, decides who it wants to bailout (Vague implications of bailing out foreign companies as well), Allowed to set their own premiums, Allowed to pay full price originally paid for assets insured, Financial Stability Oversight Board are the same people who get to write the rules (consists of appointments and members who helped create the problem), Congress gets reports but no say, congress has to Agree to deny more funding (just like congress gets their pay raises), and other fundamental flaws.

This is The Fox Guarding The Hen House In All Respects.

To Assume Benevolence Is Foolish.

I Wish More People Would Have Debated Ron Paul Rather Than Dismissed Him. Debate Is The Distillation Of Reality.

The Worst Is Yet To Come.

2008 Oct 08 04:42 PM