Sunday September 29, 2008 12:30 a.m.
The detailed draft of the bill to establish the Emergency Economic Stabilization Program is now available on the internet and the 110 page draft makes for interesting reading. Borrowing from the days of the New Deal it proposes to establish powers for the government and the Federal Reserve operating principally through the Secretary of the Treasury and the Financial stability oversight board which authorize these parties to acquire troubled assets from a wide range of financial institutions, community banks, retirement pension funds and where appropriate individuals in exchange for cash or quality financial assets in order to assist both institutions and homeowners and communities to avoid bankruptcy and foreclosure.
The terms are very broad and inclusive and the amount of funds authorized very substantial. A total of $250 billion dollars initially followed if Congress approves by further tranches up to a maximum of 700 billion over the next several years. The bill also authorizes the Secretary to sell insurance to firms which prefer this approach to guarantee their troubled assets in return for appropriate premiums which will be paid into an actuarially sound Troubled assets insurance Financing fund .The total amount available for the purchase of assets will be reduced by the amount that is allocated to insurance guarantees.
The financial stability oversight board consists of the Chairman of the Federal Reserve, the Secretary of the Treasury, the Director of Federal Home Finance, Chairman of the SEC, and the Secretary of HUD.They are required to meet monthly to excercise oversight over the draw down of $50 billion tranches and the acquisition of troubled assets through auctions or reverse auctions designed to ensure the purchase of assets at appropriate prices that protect the taxpayers interests. As well, the program is designed so that the goal of eventually selling off these acquired assets at a profit in the years to come is realized.The revenues from these sales will be used to pay down the national debt that will clearly be expanded to finance the program.
The bill explicitly calls for the expansion of the debt limit authorization to 11.3 trillion dollars or about
77 % of the GDP in gross debt to GDP terms.Selling debt instruments in the money markets should pose no problem for the Fed since there is an enormous demand for safe treasuries at the moment. Interest costs will be minimal.
The bill also proposes to limit senior manageent salaries in firms which are bailed out through the purchase of assets and also empowers the treasurer to take warrents for non voting common or preferred stock or good quality debt instruments in exchange for acquiring troubled assets from the firm concerned. The bill also asks the Comptroller general to study and report on the role that leverage and sudden deleverage played in the financial crisis. The report is due June 1, 2009 and should prove very interesting reading. A good chunk of the bill discusses how distressed homeowners should be assisted and indeed mandates the Secretrary to provide that assistance wherever possible to reduce foreclosures and hardship on both beleagured homeowners and tenants in buildings that are being foreclosed.
The bill will not please all critics of the approach but it is a potentially very effective and inclusive piece of legislation that should help restore both liquidity and a measure of confidence to the markets. That being said, however, there will still be considerable downword pressure on the American and therefore global economy in the months to come even as the markets stabilize.
The bill should pass by mid week. Let us hope for brighter days ahead.
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