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.


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