The White House and lawmakers say they have reached an agreement on legislation to establish a program for the U.S. Treasury to purchase up to $700 billion in toxic mortgage assets infecting U.S. financial institutions. The latest version significantly strengthens oversight of the program, breaks up the $700 billion in acquisitions into at least three installments and enables the potential suspension of mark-to-market accounting. A vote could come as early as today.
The Troubled Asset Relief Program would be authorized under the Emergency Economic Stabilization Act of 2008, according to a analysis of the bill released by Congress.
House Speaker Nancy Pelosi explained in a press release Sunday that agreement had been reached over enabling the government to possibly profit from the plan, providing foreclosure forebearance on acquired loans and limiting executive compensation at companies benefiting from the plan.
Assets should only be acquired from institutions that have long-term viability, the analysis said. Any profits from the sale of the assets would be applied to the national debt.
The bill includes provisions to mitigate foreclosures on mortgages purchased under the plan or backing securities acquired under the plan. Among the mitigation methods to be used are modifications, loan guarantees and credit enhancement.
Institutions that sell assets directly to the Treasury will face limitations on incentives, claw-backs and golden parachutes. Institutions that sell more than $300 million in assets at auction to the Treasury will be subject to a 20 percent excise tax on golden parachute payments triggered by events other than retirement and a limit on tax deductions for compensation above $500,000.
In addition, the Treasury will receive non-voting warrants from participating financial institutions.
"Executives who made bad decisions should not be allowed to dump their bad assets on the government, and then walk away with millions of dollars in bonuses," a summary of the bill stated. "Taxpayers should not be expected to pay for Wall Street's mistakes."
In a move to appease congressional Republicans, the legislation also calls for the establishment of a program to guarantee troubled assets of financial institutions. Risk-based premiums would be utilized for the guarantees.
An Office of Financial Stability would be established within the Treasury to implement TARP in consultation with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Director of the Office of Thrift Supervision and the Secretary of Housing and Urban Development, according to the analysis.
An oversight board would be established to review the Treasury's activity under the act. It would consist of the Fed chairman, the Treasury Secretary, the director of the Federal Housing Finance Agency, the Securities and Exchange Commission chairman and the secretary of HUD.
An inspector general would be created to audit TARP activities, while a congressional oversight panel would also be established.
The Treasury secretary would be required to report TARP activities to Congress within 60 days of the first acquisition then monthly thereafter. In addition, for every $50 billion in assets purchased, the secretary would be required to provide a detailed description of all transactions, a description of the pricing mechanisms used and justifications for the financial terms of the transactions.
The comptroller general would be charged with ongoing oversight of TARP and required to report to Congress every 60 days. It would also be required to conduct an annual audit. The bill additionally requires the comptroller to study and advise Congress of the impact that leveraging and sudden de-leveraging had on the current crisis.
By April 30, 2009, the Treasury secretary would need to give Congress an update on the state of the financial markets and effectiveness of financial regulation.
The Treasury can immediately purchase up to $250 billion in assets. With presidential certification, another $100 billion can be accessed.
"The final $350 billion may be accessed if the president transmits a written report to Congress requesting such authority," the analysis stated. "The secretary may use this additional authority unless within 15 days Congress passes a joint resolution of disapproval which may be considered on an expedited basis."
The TARP program terminates in December 2009, though the Treasury secretary is authorized to extend it one year.
One provision of the proposed legislation is the requirement for the SEC, Fed and Treasury to study the impact of mark-to-market accounting standards as provided in FAS 157 on balance sheets and the quality of financial information. It also restates the SEC's authority to suspend FAS 157 "if the SEC determines that it is in the public interest and protects investors."
The bill would raise the debt ceiling to $11.3 trillion from $10 trillion. It would also require the president to submit a proposal to Congress within five years that would recoup projected taxpayer losses from the financial industry.
In a statement released by the White House, the Bush administration noted the bill, which has come together in a bipartisan way, is needed to deal with a financial crisis that threatens then entire economy. It noted that other ideas from members of Congress were added to the original proposal.
"This bill provides the necessary tools and funding to help protect our economy against a system-wide breakdown," the White House stated. "Without this rescue plan, the costs to the American economy could be disastrous."
ACORN, however, issued an announcement denouncing the lack of a bankruptcy cramdown provision, which mortgage bankers vehemently oppose.
A vote on the bill could occur as early as this morning, according to one House staffer.
Bailout Deal Possible by Next Week
Lawmakers' discussions on the housing bailout package remain fluid, and all sides are now negotiating and making public statements indicating that they are working together. So, it appears that some sort of agreement will eventually be reached and passed -- possibly by this Sunday.
800 Pound Gorilla Entering Secondary Market
As the U.S. government positions itself to become the biggest secondary mortgage market player in the history of the universe, recent entrants to the market who had hoped to capitalize on bargain basement prices may find the game more expensive to play. But at least one private equity firm sees opportunity in the government's participation.
Bailout Legislation Bogged Down
House Democrats have drafted their own mortgage bailout plan that calls for more oversight of the Treasury in its purchase of mortgage assets. As Congress grapples with the legislation, Republican presidential nominee John McCain is suspending his campaign to return to Washington, D.C., to deal with the crisis.
Mortgage Bankers Warn of Cramdown Consequences
Mortgage bankers have sent a letter to Congress warning that a proposal to allow bankruptcy judges the ability to modify mortgages could raise the cost of mortgages and stifle the recovery effort.
Bailout Goals Clouded
There is a significant controversy ensuing between the administration and various factions in Congress over warrants and related issues such as executive compensation.
|More Details Emerge on Mortgage Bailout
More details have emerged on the Bush administration's legislative proposal to acquire mortgage assets and prevent a full-scale collapse of the U.S. financial system. The latest move is the biggest yet among a host of historical actions by the government this year.