I went through the full text of the failed Emergency Economic Stabilization Act of 2008, AKA the Bailout Bill, and here is my overview.
The program that would be created by this bill is called the Troubled Assets Relief Program, or TARP. The program would purchase “troubled assets” from financial institutions. A trouble asset is defined as any mortgage or other financial instrument whose purchase would promote market stability. It’s a pretty broad definition.
An institution is not allowed to sell an asset to the Treasury for a price greater than what it paid for it in order to prevent companies from profiting from the program.
The Secretary of the Treasury is required to establish a program to insure troubled assets of financial institutions. This appears to be one of the compromises that provides an alternative to purchasing assets.
The Secretary is supposed to take into consideration the interests of the taxpayers, providing stability to financial markets and the banking system to protect jobs and retirement security, the need to keep families in their homes, providing assistance to all institutions regardless of size in order to protect smaller institutions and those that serve low and middle-income Americans.
The bill would create the Financial Stability Oversight Board which reviews the implementation of the bill.
Throughout the bill there are a number of clauses that require frequent reporting of progress at all levels of the program.
Any profits from the sale of troubled assets are required to be put toward paying down the national debt.
If the Secretary needs to hire contractors those contractors should be minority and woman-owned business to the maximum extent possible.
The Secretary is required to develop a program to help prevent future foreclosures by encouraging mortgage companies to modify their loans, as well as using loan guarantees and credit enhancement.
In terms of golden parachute compensation, any institution whose assets are bought directly by the Treasury may not provide them. If assets were bought at an auction, golden parachute payments face a 20% tax and prevent payments of above $500,000 from being lessened by tax deductions.
The Secretary is encouraged to reach out to other countries to implement their own versions of the act.
The Secretary would encourage private institutions to purchase troubled assets.
Passing the bill would authorize $700 billion to purchase troubled assets, but only $250 billion would be available immediately. The President would have to send a certification to Congress to increase the amount to $350 billion, and then once again send a certification to increase the amount to $700 billion. If the President requests the $700 billion amount, Congress has 15 days to pass a Joint Resolution of Disapproval if they do not want the increase. If that Resolution passes, the maximum amount remains $350 billion. It is important to not that these numbers refer to the maximum dollar amount of troubled assets the Treasury is allowed to hold at one time.
The Comptroller General of the United States is required to monitor the program and present reports to Congress. The Comptroller is also required to initiate a study on the role that leveraging and deleveraging by financial institutions played in the current crisis. Leveraging is the practice of taking on excessive debt in order to initiate growth, and deleveraging occurs when a company attempts to pay off its existing debt due to slower than expected growth.
The act calls for judicial review of the Secretary of the Treasury and TARP in order to make sure that all actions are within the law.
The authority of the act is set to expire on December 31, 2009, though Congress is able to extend the effective date to no later than two years from the date of passage, which is effectively just short of an additional year.
The act calls for the creation of a Special Inspector General for TARP who is appointed by the President and confirmed by the Senate. The Special Inspector audits and investigates the actions of the Secretary of the Treasury in carrying out the act.
The act would amend the United States code to raise the limit on public debt to $11,350,000,000,000. Yup, over 11 trillion dollars.
The act amends the National Housing Act, also known as Hope for Homeowner, by increasing the eligibility of the act to help prevent foreclosures.
A Congressional Oversight Panel would be created consisting of 5 members. The Majority and Minority Leaders of the House and Senate each appoint 1 member. The fifth member is jointly appointed by the Speaker of the House and the Senate Majority Leader after consulting with the minority leaders. The five members would be outside experts. The panel can hold hearings and take sworn testimony on the state of the markets and the actions taken by TARP.
The Federal Deposit Insurance Act would be amended to included stronger provisions penalizing against institutions that falsely claim to be covered by FDIC insurance.
Federal financial regulatory institutions would be required to cooperate with the FBI.
The Financial Services Regulatory Relief Act of 2006 would take effect immediately. It is currently not set to take effect until October of 2011. The summary I read indicates that the act allows the Federal Reserve to pay interest on its reserves.
The Security and Exchange Commission would be authorized to suspend mark-to-market accounting. Mark-to-market accounting is the practice that Enron used to cook their books. Essentially the concept is that you have a futures contract that doesn’t mature for another 10 months, so you don’t know what the actual value is going to be. If you marked the contract to market, you would value it at the day’s market price. Companies have used this to come up with arbitrary valuations in order to balance their accounts. The bill would also call for a study on mark-to-market accounting and how it impacts the quality of financial information.
In 5 years the President is required to submit a proposal to Congress that recovers from the financial industry any losses taken by taxpayers.
That’s my summary of what the bill does. Unfortunately there isn’t really a way to sum it all up in a paragraph or two. If you have any questions I’ll do my best to answer them for you. Leave them in the comments.