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Bailout Deal Possible by Next Week

Update on congressional negotiations

September 26, 2008

Canfield & Associates Inc.

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.

Of course, the "devil is always in the details," but here is where it stands now.

A Treasury plan, as modified by the House and Senate Democrat and Republican negotiators today, will be the basis from which any agreement will emerge. While it is not clear what changes will be made, the changes could range from adding another element to the plan -- such as a new loan insurance component -- to reducing the scope of the troubled asset purchase program.

But congressional policymakers continue to view the package as a financing plan and not an asset purchase plan. As a result, they continue to include provisions that will likely make the program unworkable.

For example, it does not appear that warrants or executive compensation provisions would work.

If these provisions remain in the bill, either nothing will happen because no one will participate or taxpayers will lose money because companies will factor in the cost of warrants and compensation into their asset sale decisions. Another possible outcome is that only companies with worthless assets or warrants will participate.

Legislators also need to realize that the mark-to-market accounting requirement is coming under significant criticism because it created an unncessary crisis. This flawed accounting rule has failed miserably by creating unstable markets which have only benefitted short-sellers and vulture funds taking advantage of the volatility and artificially depressed asset prices.

Essentially, bad mortgages were at the bottom of this debacle. But the rule took a bad situation and needlessly created a disaster out it.

Policymakers should first suspend the mark-to-market rule and, ideally, shelve it permanently.

On a longer-term basis, lawmakers should improve financial industry regulation and replace substance over form. They should also place absolute leverage limitations on financial institutions at much lower levels than the 30:1 levels (60:1 in the case of Fannie and Freddie) that led to this crisis.

Other possible enhancements include the outlawing of off-balance sheet entities, a complete restructure of the government sponsored enterprise model after they emerge from conservatorship and changing incentives so that securitizations are not favored over holding assets on the balance sheet.


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.

Paulson Sees Bank Failures Ballooning Without Plan Approval
The secretary of the U.S. Department of the Treasury warned Congress today that if his mortgage bailout plain isn't passed -- the credit markets will freeze up and the country will see a stream of bank failures.

Paulson Sees Bank Failures Ballooning Without Plan Approval

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.

Plan calls for U.S. purchase of up to $700 billion in mortgage assets

Paulson Announces Major Steps to Restore Mortgage Liquidity
The Bush administration announced major steps in unclogging mortgage securities in the U.S. financial system and said legislation may be passed as early as next week to relieve financial institutions of illiquid mortgage assets.

Paulson says GSEs, Treasury to step up MBS purchases

Anne Canfield is Executive Director of the Consumer Mortgage Coalition, a trade association representing national mortgage lenders, servicers and service providers. As the Executive Director of the CMC, Ms. Canfield has appeared publicly on nationally televised programs, at industry conferences, and testified on Capitol Hill to advocate proposals to streamline the mortgage process along with other initiatives that would benefit the industry and consumers alike. Ms. Canfield received degrees from Northwestern University and the University of Paris, Paris, France.

e-mail Anne at [email protected]

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