28 September 2008

A first look at a bailout (and potential fallout)

I think I have just as many concerns as I did at the beginning of last week. It looks very much like a plan for Congress and the Administration to avoid their responsibilities in the crisis (including the failure to agree to change the regulatory structure of Fannie & Freddie that Sen. McCain pushed for two years ago), and to protect businesses that failed to meet their fiduciary responsibilities, and to protect individuals from facing their own personal responsibilities. Here's the link (http://www.foxbusiness.com/pdfs/rescuebill_First%20Draft.pdf). You decide.

Wading through Fed. financial rescue plan will take a while, but here's a first look at some sections that jumped out at, and concerned, me.

(5) ensuring that all financial institutions are
16 eligible to participate in the program, without dis17
crimination based on size, geography, form of orga18
nization, or the size, type, and number of assets eli19
gible for purchase under this Act;
20 (6) providing financial assistance to financial
21 institutions, including those serving low- and mod22
erate-income populations and other underserved
23 communities, and that have assets less than
24 $1,000,000,000, that were well or adequately cap25
italized as of June 30, 2008, and that as a result
1 of the devaluation of the preferred government-spon2
sored enterprises stock will drop one or more capital
3 levels, in a manner sufficient to restore the financial
4 institutions to at least an adequately capitalized
5 level;

Hmmm, there's a good argument to be made that insistence on the part of Congress that financial institutions provide easy-credit mortgages to under-served communities is part of the root of the current problem. Of course, there's also a good argument to be made that individual homeowners should have known better than to take out loans with payment terms that exceeded their income. Either way, should we be bailing out everyone and their brother?

22 (a) ESTABLISHMENT.—There is established the Fi23
nancial Stability Oversight Board, which shall be respon24
sible for—
23 (b) MEMBERSHIP.—The Financial Stability Over24
sight Board shall be comprised of—
1 (1) the Chairman of the Board of Governors of
2 the Federal Reserve System;
3 (2) the Secretary;
4 (3) the Director of the Federal Home Finance
5 Agency;
6 (4) the Chairman of the Securities Exchange
7 Commission; and
8 (5) the Secretary of Housing and Urban Devel9
10 (c) CHAIRPERSON.—The chairperson of the Financial
11 Stability Oversight Board shall be elected by the members
12 of the Board from among the members other than the Sec13

Excellent - a new gov't agency to suck in money and find new ways to spend it.

8 (a) STANDARDS REQUIRED.—The Secretary shall
9 issue regulations or guidelines necessary to address and
10 manage or to prohibit conflicts of interest that may arise
11 in connection with the administration and execution of the
12 authorities provided under this Act, including—
13 (1) conflicts arising in the selection or hiring of
14 contractors or advisors, including asset managers;
15 (2) the purchase of troubled assets;
16 (3) the management of the troubled assets held;
17 (4) post-employment restrictions on employees;
18 and
19 (5) any other potential conflict of interest, as
20 the Secretary deems necessary or appropriate in the
21 public interest.

Does this mean Sen. Dodd and Sen. Obama can no longer get money from Fannie Mae and Freddie Mac. Given that they were number 1 & 2 in accepting funding, and that Sen. Obama has the disgraced former head of Freddie on his team, it might be advisable to look at conflicts of interest among Congress.

3 STANDARDS.—To the extent that the Secretary acquires
4 mortgages, mortgage backed securities, and other assets
5 secured by residential real estate, including multifamily
6 housing, the Secretary shall implement a plan that seeks
7 to maximize assistance for homeowners ...

10 REQUESTS.—Upon any request arising under existing in11
vestment contracts, the Secretary shall consent, where ap12
propriate, and considering net present value to the tax13
payer, to reasonable requests for loss mitigation measures,
14 including term extensions, rate reductions, principal write
15 downs, increases in the proportion of loans within a trust
16 or other structure allowed to be modified, or removal of
17 other limitation on modifications.

What, no limits on who gets assistance? Encouraging renegotiation of basic loan terms? I have no problem with limiting packages to departing CEO's who failed to manage their firms and assets well, but this sounds like tough love on one level and a love fest on the other. There's enough blame and responsibility to go around, and everyone should be willing to swallow their medicine. I think we won't do that however. Given the likelihood that we will do something, we all need to read this proposal and give out input to our respective representatives and senators. At least the House and Senate GOP leadership is now talking about their acceptance of the proposal, and taxpayer protections.

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