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Monday, September 29, 2008

Economy: The $700 Billion-Dollar Bailout Bill

From Walt Handelsman at Newsday

People, La Casa de Los Gatos does not include any trained economists within its ranks. None of us has much of a clue about economics as a field of study. We know a little bit about the stock market and a little bit about money as it relates to the litte bit of money what we got, and that ain't much. So we beg your indulgence as we attempt to delve into this field and figure out just what the fuck is going on as Congress attempts to wrassle with this $700 billion piece of legislation that is supposed to save us — and, incidentally, the rest of the world, the financial markets having become globalized to a hitherto unprecedented extent.

First off, what the fuck is this bill?

It's called the Emergency Economic Stabilization Act of 2008. At present,it has failed to pass the House, which means we don't have a bill as such, just a piece of legislation that is being wrangled over by our Congresscritters. The text of the draft bill may be found here. La Casa de Los Gatos offers grateful thanks to commenter and fellow-blogger nunya of politickybitch for sending us the link.

Caveat: This document is approximately 110 pages long, and if you don't have any experience with legalese and the recondite world of financial systems, you might have a hard time reading and understanding it. We'll take a bash at it tomorrow. In the meantime, we fall back upon the abridged information.

Here we provide you with an analysis performed by the Congressional Budget Office.

The bill creates an entity known as TARP (Troubled Assets Relief Program). It allows Paulson and his successors to appropriate the required amount of money (not to exceed $700 billion) over a period of as many years as they, with the oversight of various Congressional committees, deem necessary, to purchase or insure troubled assets and to cover all administrative expenses of purchasing, insuring, holding, and selling those assets. The assets to be purchased or insured are based on or related to residential or commercial mortgages issued prior to March 14, 2008. This might mean that the weasels who bought in expectation of being bailed out won't get anything for their efforts.

Caveat: Although the purchase price of all such assets outstanding at any one time cannot exceed $700 billion, cumulative gross purchases might well exceed $700 billion as previously purchased assets are sold. This amount ($700 billion) does not include the expense required to administer these "troubled assets."

Note: CBO estimates, based on costs incurred by private investment firms that acquire, manage, and sell similar assets, that the administrative costs of operating the program could amount to a few billion dollars per year, until the government manages to sell off all or most of the purchased assets.
This ought to explain clearly why Rudi Giuliani is already trying to weasel his way into the bailout scheme.

The good news is:
  • only (hah!) $250 billion worth of purchases can be made once the bill is enacted;

  • A further $100 billion will be made available to Paulson and his successors if the President submits to the Congress a written notification that Paulson or his successors have found a further $100 billion of assets needing rescue;

    This means that, as usual, authorization of that money will be in the hands of Congress and will need to be approved by the various committees involved. This could be a good thing or a bad thing. The good part: we the people can put pressure on our representatives. The bad part: This really is an honest-to-deity fucking economic crisis and, unfortunately, swift action might be required to nip it in the bud before we all lose our homes, savings, assets, businesses, and sources of loans.

  • The amount available can go up by another $350 billion (to total $700 billion, as provided by the bill) if the President submits a report detailing a plan to use the remaining $350 billion in purchase authority; that expansion would be subject to a 15-day Congressional review for potential disapproval of the plan.
Again, that leaves a little breathing space in between these gouts of bleeding. The point to take away so far is that the entire crisis MIGHT well cost under $350 billion — but only, unfortunately, if we come up with a solution now and implement it quickly.

This bill also lets the federal government insure troubled assets, including mortgage-backed securities. Terms and conditions for such insurance must be developed by the Secretary of the Treasury. What this means is, the federal government can collect premiums from the financial institutions that participate in this program. The total amount we're paying for this rescue is $700 billion or less, minus the insurance premiums paid. So the taxpayers will, hopefully, get some of their money back.

This bill expires on December 31, 2009. It can be extended through two years from the date of enactment if Paulson or his successors certify that such an extension is necessary.

Where is the money coming from to fund this bill?

We're borrowing it. The bill specifies that the federal debt limit be increased by $700 billion. *If, five years after enactment of the bill, OMB's director, in consultation with CBO's director, determines that the TARP has incurred a net loss, the President has to submit a legislative proposal to recoup the losses from those companies that benefited from TARP.

So what does this mean for us taxpayers?

This means that the ultimate cost of the TARP program equals the difference between whatever the government spends to purchase and earnings + sales proceeds if any from sale of all assets at future date, i.e., probably substantially less than $700 billion but likely greater than zero.

So, $700 billion + administrative costs (several billion per year x however many years the government has to hang on to this toxic shit) minus (earnings from assets, if any + sale prices of assets when we can finally junk them).

*Note: The proposal to recoup any costs requires a future Presidential submission and a future act of Congress to implement. Savings from such legislation would be estimated when the proposal is considered and would be credited to that legislation for Congressional scorekeeping purposes.

Based on what we know, this means that we'd better all familiarize ourselves with these arcane subjects and the workings of our Halls of Power and make sure that whoever is in those seats (OMB, CBO, WH, and Congress) do whatever is necessary to make sure that the companies that benefited from this bill return the money to the taxpayers when the time comes.

CBO's analysis goes on to state that other provisions in this bill would add to the budget deficit:
  • Change in the tax treatment of certain types of income, losses, or deductions of corporations or individuals;

    The bill contains provisions that would limit the amounts that certain firms selling assets can claim as tax-deductible executive compensation; allow losses incurred by certain taxpayers on preferred stock in Fannie Mae and Freddie Mac to be treated as ordinary, not capital, losses; and not count as income the cancellation of mortgage debt of individuals in certain circumstances. The Joint Committee on Taxation estimates that, on net, these provisions would reduce federal revenues.

  • Certain financial institutions seeking to sell assets through TARP must meet appropriate standards for senior executive officers’ compensation, as determined by the Secretary of the Treasury;

  • Secretary of the Treasury must maximize assistance for homeowners, including encouraging servicers of the underlying mortgages to take advantage of the Hope for Homeowners Program under section 257 of the National Housing Act;

  • FRS (Federal Resesrve System) might pay interest on certain reserves held on deposit at the Federal Reserve, starting on October 1, 2008;

    Under current law, the FRS doesn't need to start paying interest on these till October 1, 2011. This means the FRS payments of its profits to the Treasury, which are classified as revenue in the federal budget, would be reduced over the next three years.

  • Federal Housing Finance Agency, the FDIC, and FRB (Federal Resesrve Board) must implement measures to reduce foreclosures on properties they control, including modifying the terms of such loans; and

  • Establish Congressional oversight and reporting requirements related to implementation of the legislation, along with a Financial Stability Oversight Board with responsibility for overseeing operations of the program.
From the CBO:
The bill would require that the federal budget display the costs of purchasing or insuring troubled assets using procedures similar to those specified in the Federal Credit Reform Act, but adjusting for market risk (in a manner not reflected in that law). In particular, the federal budget would not record the gross cash disbursements for purchases of troubled assets (or cash receipts for their eventual sale), but instead would reflect the estimated net cost to the government of such purchases (broadly speaking, the purchase cost minus the present value, adjusted for market risk, of any estimated future earnings from holding those assets and the proceeds from the eventual sale of them).

Enacting the legislation could also affect other federal spending—including, for example, outlays from the operations of Fannie Mae, Freddie Mac, federal housing programs, and deposit insurance. Some of those effects would be related to how TARP would be used to purchase assets (including what kinds of assets would be acquired and from what types of institutions), and how successful the program would be in restoring liquidity to the nation’s financial markets.
So there's no guarantee that this will work. On the plus side, at least some consumer and taxpayer protections appear to have found their way into the draft bill. On the minus side, it looks like the FDIC and other Federal institutions might suffer unexpected damage.

We wish there was time to think this thing out carefully, but at least the damn thing expires at the end of next year, at which time it could be resuscitated with additional provisions as we deem necessary. From CNBC:
Citing recent bank failures in the United States and Europe, Paulson said regulators and legislators need to act "as soon as possible" to ensure the health of credit markets that U.S. businesses depend on to meet payrolls and purchase inventory.
That's the important thing to remember. This has to be enacted soon because many organizations which are innocent of the shenanigans the financials market have engaged in must borrow money to meet their payroll. So you're pootling along working for Joe Goodhart Industries and suddenly credit has dried up and the CEO Mavis Goodhart can't make payroll. You're affected. Your wife/spouse/partner who works for BrilliantBrains, Inc. is also affected because those folks can't make payroll either.

Yeah, the bad guys will take it up the keister. Unfortunately, so will the rest of us. If your car breaks down irreparably tomorrow and you can't get credit to buy or rent a new one, you're gonna suffer much worse than Mr. Paulson, who is rumoured to be worth about half a billion and doesn't need to show up for work.

Here's the numbers on what's happening in the market. We hear the financial markets lost a trillion dollars today. They'll lose more in the coming days. This affects all of us, the smallest of us the worst. It's your retirement, your pension, your 401(k), your savings, and your credit that will be the hardest hit. When you have $100 million in the bank, like John McCain, you can lose $700K or even $70 million and still be OK. When your life savings are a measly $100,000, you lose $70,000 and you're as good as dead.

The Boston Globe is saying the bill needs to pass. Of course John "pass me a handkerchief, boys" Boner is too busy weeping because Nancy Pelosi spoke sternly to him to sign off on any bills.

Before you decide a position on this bill, please read this diary by RenaRF of DailyKos, who knows much more about economics than your humble blogger.

Finally, we offer Paul Krugman's perspective. We agree that this is not how this bill should have been constructed. We would have preferred his solution. But has anybody written legislation that would incorporate Krugman's solution? Would it have enough votes to pass? The House Republicans are crying so hard they can't find their pens (or other things that might look similar).

We agree with Nouriel Roubini that the attempt to purchase toxic instruments that the markets cannot accurately value is the worst possible response to the financial crisis. But we're not seeing anything else by way of a viable solution. If commercial paper is in serious trouble, the entire economy is on the verge of collapse. And to do nothing is worse, in this case, than to do something half-arsed that could keep collapse from happening. Note that Roubini is not saying we should do nothing, rather he is saying that he doesn't like what we're doing.

We know people out there are saying "The Federal Reserve system should be abolished," and "down with Wall Street," and all that. But you know what, we're in the middle of the crisis now. Dismantling various organizations might be needed and might be important, but you don't do that while the fire is burning down the house. An economic collapse right now will destroy us all. So first let's shore the system up then let's calmly and rationally examine it and decide what needs to go and what needs to stay.

Once again, we apologize for our lack of information and knowledge in this field. We welcome your comments and thoughts.

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At 8:58 PM, Blogger One Fly said...

Thanks for this Pcat. That's one hell of a post!

At 1:09 AM, Blogger BadTux said...

I agree 100% and have a similar post over on my own site. There's way too many people on both the right *and* the left who are going all doctrinaire here and putting some sort of vague "principle" ahead of doing what has to be done to keep things from falling into a deflationary spiral like the nation hasn't seen since the time period 1930-1932. You simply can't "vanish" as much money from an economy as has been vanished from ours and have things work normally...

- Badtux the Economics Penguin


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