Congress Unveils Bailout Plan, but Will the Markets Respond?

By Jason Simpkins
Associate Editor

After some late-week political wrangling that also consumed most of the weekend, congressional leaders late yesterday (Sunday) announced their agreement to a detailed version of the long-awaited $700 billion bailout plan that analysts say is crucial to keep the U.S. economy out of a Depression-like downturn.

The bill will be introduced in the U.S. House of Representatives early this morning (Monday) and will then head over to the Senate for consideration by Thursday, Senate Majority Leader Harry Reid, D-Nev., said late last night.

Lawmakers must somehow steer a path that allows them to traverse taxpayer and (and soon-to-be) voter ire for having to once again pay for the mistakes brought on by Wall Street greed, and yet still pass the legislation that's needed to shore up the U.S. financial system, Bloomberg News reported.

Indeed, without the bailout package the United States very likely faces a “deep and painful recession,” President George W. Bush said during a speech yesterday.

While President Bush and House Majority Leader Steny Hoyer, D-Md., both predicted the measure would pass, Senator Reid and House Speaker Nancy Pelosi suggested the outcome of any vote was currently unclear. Indeed, appearing together at a Capitol Hill press conference last night, Reid told reporters that “now we have to get the votes,'' while Pelosi told gathered journalists that “we will have to have bipartisanship to pass it.”

The draft bill – which lawmakers have dubbed as the “Emergency Economic Stabilization Act of 2008" – is an amended version of the $700 billion plan that had been proposed the weekend before by U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. Paulson unveiled his plan of action as the as U.S. financial markets were poised for a complete collapse, a daunting reality brought on by the collapse of the U.S. subprime mortgage market and a credit crisis that was threatening to go global.

The newest revisions include an incremental payout of the $700 billion under conditions that include limits on executive pay, significant federal oversight, and ownership stakes in participating companies to go to the U.S. Treasury.

"We've made great progress toward a deal which will work and be effective in the marketplace," Paulson told reporters after nine hours of negotiations yesterday. "We've still got more to do to finalize it, but I think we're there … so far, so good.”

The bill still honors Treasury Secretary Paulson's request for the authority to purchase as much as $700 billion in bad mortgage assets from financial institutions, which according to Paulson, will encourage banks to resume lending and return full functionality to the credit markets.
However, rather than receiving the entire $700 billion in one lump sum, the Treasury Department will receive $250 billion immediately, with the remainder to be paid in installments. The Treasury will then have to give "notification" to Congress if it intends to spend an extra $100 billion.

This codicil is supposed to give lawmakers a chance to monitor the plan’s effectiveness – before they commit additional resources. Four oversight entities will be created, including a "strong oversight board" appointed by Congress, an independent inspector general "to monitor the Treasury secretary's decisions," and "meaningful judicial review" of the secretary's actions.

Curbs will be placed on corporate bonuses at participating companies to ensure that taxpayer money does not line the pockets of executives. Specifically, companies that participate will not be able to deduct the salary they pay to executives above $500,000.

Finally, the Treasury to receive the option to take ownership stakes in participating companies, with the hope that some, if not all, of the money used to soak up the troubled assets will eventually be repaid.

House Opposition and an Alternative Plan

Many of these principles had been agreed upon last week, but GOP opposition in the House of Representatives proved to be a costly delay.  Dissatisfied with Paulson’s solution, members of the House Representatives sketched out their own plan to save the U.S. economy.

That plan included the creation of a mortgage-backed securities insurance fund that would charge the holders of mortgage-backed securities a premium for coverage.  According to the plan’s outline, Wall Street participants would be forced to fund their own bailout by injecting private capital, which could be raised, in part, by suspending dividends. Measures such as these would be facilitated, the Republicans said, by the removal of “regulatory and tax barriers that are currently blocking private capital formation.” 

The Republican plan also requires participating firms to disclose the value of mortgage-related assets currently on their books, a review of credit rating agencies, and an audit of failed companies to ensure their financial position was accurately portrayed.

After being confronted with stiff opposition from members of his own party, President Bush said in a speech Friday morning that he was optimistic a rescue package would be passed soon.

“There is no disagreement that something substantial should be done,” he said. “We are going to get a package passed. We will rise to the occasion.”
While Democrats hold a majority in the House of Representatives, Pelosi has made it clear that she will not agree to a bill without the full support of Congress.

After talks at the White House crumbled Thursday night, Treasury Secretary Paulson reportedly knelt down in front of Pelosi and pleaded with the house speaker to not “blow up” the deal by withdrawing her party’s support.

“I didn’t know you were Catholic,” Rep. Pelosi reportedly retorted in reference to Paulson’s kneeling. She went on: “It’s not me blowing this up, it’s the Republicans.”

A comment, to which Paulson responded with a sigh saying: “I know. I know.”

However, the U.S. Congress will not be the only body to vote on this legislation. According to Money Morning Contributing Editor Shah Gilani, investors all over the world will digest this plan over the next several days, and they will determine its immediate effectiveness. And that judgment will not necessarily be a positive one.

“The whole world’s watching,” said Gilani, who last week put forth his own plan the resolve the current fiscal predicament. “The proposed plan will be voted on, not just by Congress, but by a quorum of the world’s markets, definitely all the U.S. domestic markets, and ultimately in November by the electorate who will strip naked any politician who voted for this package and short sell them until their political future is [worthless].”

 “I’m not sure that this legislation has a snowball’s chance in Hell if the markets, on Monday, pronounce it DOA,” he added.

News and Related Story Links: