I had hoped to do a post on this yesterday, but I wanted to actually see the bill before I did anything on it. It took them a while to get the bill language up, and I found out that it was about 110 pages long (it is available here if you’re interested). Also, here’s the bill that the Senate didn’t vote to pass (it needed 60% to pass).
As I’m sure all of you know, the House voted down yesterday’s bill, H.R. 3997, the “Emergency Economic Stabilization Act of 2008″ 205 (140D/65R) – 228 (95D/133R), with 1 not voting (R).
The following is the summary of the act, courtesy of the Financial Services Committee of the House:
SUMMARY OF THE “EMERGENCY ECONOMIC STABILIZATION ACT OF 2008″
I. Stabilizing the Economy
The Emergency Economic Stabilization Act of 2008 (EESA) provides up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets that are clogging the balance sheets of financial institutions and making it difficult for working families, small businesses, and other companies to access credit, which is vital to a strong and stable economy. EESA also establishes a program that would allow companies to insure their troubled assets.
Alright, this basically explains the principle that the Representatives who were for the bill were advocating: This is an investment, not a bailout (similar to the Chrysler government loan guarantees of the 1970s and 1980s, where we co-signed on a $1.5 billion loan). They argue that we will make our money back, and even possibly make a profit (like we did with Chrysler). Here’s the problem with that thinking: many American people who are in crisis right now are NOT helping the situation. I gave an example of a woman who simply left her old home and mortgage in the middle of the night and bought a house in the Carolinas (I don’t remember which off the top of my head) the next day, before the credit caught up to her. There have been stories of people tearing apart houses right before the bank repossesses them, “because the bank is the bad guy” when in actuality, it’s both the bank’s fault for giving a loan to somebody who never should have been able to get one as well as the homeowner’s fault for trying to buy a house that he/she simply couldn’t afford. It’s a lack of basic family budgeting and spending principles that helped get us into this situation. Then mortgage companies gave out Adjustable Rate Mortgages to people who NEVER should’ve been able to get one, and people looking to buy homes ignored the first basic principle of fiscal responsibility: don’t buy something you can’t afford! So, we’re going to buy these mortgages, but that’s not going to stop people from not being able to pay the mortgages. Instead of banks losing money, it’ll be the government.
Now, on the other hand, it IS unfair for responsible buyers who happened to get a mortgage from the wrong company to have to suffer, and it is THESE instances that I am more willing to accept government intervention, but how the government is to analyze and weed out the good from the bad is quite a problem, considering the massiveness of banks and mortgage companies that have failed or are looking like they will fail.
II. Homeownership Preservation
EESA requires the Treasury to modify troubled loans – many the result of predatory lending practices – wherever possible to help American families keep their homes. It also directs other federal agencies to modify loans that they own or control. Finally, it improves the HOPE for Homeowners program by expanding eligibility and increasing the tools available to the Department of Housing and Urban Development to help more families keep their homes.
Now, that last sentence is where the government could lose a lot of money. When you expand eligibility and increase tools for helping people stay in their homes, you’re saying that these people are getting help to stay in homes that they can’t afford, which means that the government is footing the bill, and that’s money that the government will not see back in its hands a good chunk of the time.
III. Taxpayer Protection
Taxpayers should not be expected to pay for Wall Street’s mistakes. The legislation requires companies that sell some of their bad assets to the government to provide warrants so that taxpayers will benefit from any future growth these companies may experience as a result of participation in this program. The legislation also requires the President to submit legislation that would cover any losses to taxpayers resulting from this program from financial institutions.
This is again, where the “investment” principle comes into the bill. And this could be good for the government, like the bailout of Chrysler was profitable to the government in the 1980s and 1990s. The part that confuses me is that last sentence – why the President is the one to draft legislation to cover taxpayer losses seems to confuse me, unless that’s their way of knowing that the President will approve of the measure, since he himself drafted it. I’ll have to look into that a little more to understand what all that would do.
IV. No Windfalls for Executives
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. In order to participate in this program, companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits “golden parachutes” and requires that unearned bonuses be returned.
If these executives cared about their companies, most of them just would stop taking pay. I guarantee you that if I were the CEO of AIG, and if I were set for life, I wouldn’t take another pay check until the company was back on track.
V. Strong Oversight
Rather than giving the Treasury all the funds at once, the legislation gives the Treasury $250 billion immediately, then requires the President to certify that additional funds are needed ($100 billion, then $350 billion subject to Congressional disapproval). The Treasury must report on the use of the funds and the progress in addressing the crisis. EESA also establishes an Oversight Board so that the Treasury cannot act in an arbitrary manner. It also establishes a special inspector general to protect against waste, fraud and abuse [sic]
Good. Frankly, I don’t trust the Treasury Department after they advocated the Fannie and Freddie bailouts. I want to know where this money is going, and I want Congressional approval of it (even though I don’t support the Democrats in Congress, the more people that have to approve where the money goes, the better).
So, that’s the summary, and here’s the section-by-section analysis of the bill, basically the summary with details, also courtesy of the Financial Services Committee:
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short Title.
“Emergency Economic Stabilization Act of 2008.”
Section 2. Purposes.
Provides authority to the Treasury Secretary to restore liquidity and stability to the U.S. financial system and to ensure the economic well-being of Americans.
Section 3. Definitions.
Contains various definitions used under this Act.
Title I. Troubled Assets Relief Program.
Section 101. Purchases of Troubled Assets.
Authorizes the Secretary to establish a Troubled Asset Relief Program (“TARP”) to purchase troubled assets from financial institutions. Establishes an Office of Financial Stability within the Treasury Department to implement the TARP in consultation with the Board of Governors of the Federal Reserve System, the FDIC, the Comptroller of the Currency, the Director of the Office of Thrift Supervision and the Secretary of Housing and Urban Development.
Requires the Treasury Secretary to establish guidelines and policies to carry out the purposes of this Act.
Includes provisions to prevent unjust enrichment by participants of the program.
Like I said above. The government has to be careful that this really is an investment, because if more companies say, “We can take risks, because we’re too big, so the government will HAVE to bail us out,” then it becomes purely a bailout and a terrible investment that will cost taxpayers billions (if not ultimately trillions, since this bill alone would authorize up to $700 billion). Personally, I really don’t think the government should be doing this at all, but since some bailout bill will eventually pass, I’d want it filled with as many fiscal conservative principles as possible.
Section 102. Insurance of Troubled Assets.
If the Secretary establishes the TARP program, the Secretary is required to establish a program to guarantee troubled assets of financial institutions.
The Secretary is required to establish risk-based premiums for such guarantees sufficient to cover anticipated claims. The Secretary must report to Congress on the establishment of the guarantee program.
Again – I like the whole reporting to Congress idea.
Section 103. Considerations.
In using authority under this Act, the Treasury Secretary is required to take a number of considerations into account, including the interests of taxpayers, minimizing the impact on the national debt, providing stability to the financial markets, preserving homeownership, the needs of all financial institutions regardless of size or other characteristics, and the needs of local communities. Requires the Secretary to examine the long-term viability of an institution in determining whether to directly purchase assets under the TARP.
Section 104. Financial Stability Oversight Board.
This section establishes the Financial Stability Oversight Board to review and make recommendations regarding the exercise of authority under this Act. In addition, the Board must ensure that the policies implemented by the Secretary protect taxpayers, are in the economic interests of the United States, and are in accordance with this Act.
The Board is comprised of the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development.
Section 105. Reports.
Monthly Reports: Within 60 days of the first exercise of authority under this Act and every month thereafter, the Secretary is required to report to Congress its activities under TARP, including detailed financial statements.
Tranche Reports: For every $50 billion in assets purchased, the Secretary is required to report to Congress a detailed description of all transactions, a description of the pricing mechanisms used, and justifications for the financial terms of such transactions.
Regulatory Modernization Report: Prior to April 30, 2009, the Secretary is required to submit a report to Congress on the current state of the financial markets, the effectiveness of the financial regulatory system, and to provide any recommendations.
Section 106. Rights; Management; Sale of Troubled Assets; Revenues and Sale Proceeds.
Establishes the right of the Secretary to exercise authorities under this Act at any time. Provides the Secretary with the authority to manage troubled assets, including the ability to determine the terms and conditions associated with the disposition of troubled assets. Requires profits from the sale of troubled assets to be used to pay down the national debt.
Section 107. Contracting Procedures.
Allows the Secretary to waive provisions of the Federal Acquisition Regulation where compelling circumstances make compliance contrary to the public interest. Such waivers must be reported to Congress within 7 days. If provisions related to minority contracting are waived, the Secretary must develop alternate procedures to ensure the inclusion of minority contractors.
Allows the FDIC to be selected as an asset manager for residential mortgage loans and mortgage-backed securities.
Section 108. Conflicts of Interest.
The Secretary is required to issue regulations or guidelines to manage or prohibit conflicts of interest in the administration of the program.
Section 109. Foreclosure Mitigation Efforts.
For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.
This is the section that is most helpful directly to taxpayers, but will also award people for bad fiscal principles. If you can’t afford a loan that you took out, it’s not the government’s job to use loan guarantees (essentially co-sign on the loan). If you lose your house, that’s your own fault. It’s harsh, but it’s fair.
Section 110. Assistance to Homeowners.
Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.
Again, the government will lose a lot of money here, and so will banks. If they’re letting people stay in houses when they can’t afford them, somebody is going to lose money, and it will be both banks and other lending agencies as well as the government.
Section 111. Executive Compensation and Corporate Governance.
Provides that Treasury will promulgate executive compensation rules governing financial institutions that sell it troubled assets. Where Treasury buys assets directly, the institution must observe standards limiting incentives, allowing clawback and prohibiting golden parachutes. When Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20% excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000.
Section 112. Coordination With Foreign Authorities and Central Banks.
Requires the Secretary to coordinate with foreign authorities and central banks to establish programs similar to TARP.
Section 113. Minimization of Long-Term Costs and Maximization of Benefits for Taxpayers.
In order to cover losses and administrative costs, as well as to allow taxpayers to share in equity appreciation, requires that the Treasury receive non-voting warrants from participating financial institutions.
Section 114. Market Transparency.
48-hour Reporting Requirement: The Secretary is required, within 2 business days of exercising authority under this Act, to publicly disclose the details of any transaction.
Good, if we’re going to screw our economy up more, I at least want to understand exactly how it happened.
Section 115. Graduated Authorization to Purchase.
Authorizes the full $700 billion as requested by the Treasury Secretary for implementation of TARP. Allows the Secretary to immediately use up to $250 billion in authority under this Act. Upon a Presidential certification of need, the Secretary may access an additional $100 billion. The final $350 billion may be accessed if the President transmits a written report to Congress requesting such authority. 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.
Again, good – it at least gives us the hope that we won’t use all $700 billion, at least on this bailout.
Section 116. Oversight and Audits.
Requires the Comptroller General of the United States to conduct ongoing oversight of the activities and performance of TARP, and to report every 60 days to Congress. The Comptroller General is required to conduct an annual audit of TARP. In addition, TARP is required to establish and maintain an effective system of internal controls.
Section 117. Study and Report on Margin Authority.
Directs the Comptroller General to conduct a study and report back to Congress on the role in which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis.
Section 118. Funding.
Provides for the authorization and appropriation of funds consistent with Section 115.
Section 119. Judicial Review and Related Matters.
Provides standards for judicial review, including injunctive and other relief, to ensure that the actions of the Secretary are not arbitrary, capricious, or not in accordance with law.
Section 120. Termination of Authority.
Provides that the authorities to purchase and guarantee assets terminate on December 31, 2009. The Secretary may extend the authority for an additional year upon certification of need to Congress.
Section 121. Special Inspector General for the Troubled Asset Relief Program.
Establishes the Office of the Special Inspector General for the Troubled Asset Relief Program to conduct, supervise, and coordinate audits and investigations of the actions undertaken by the Secretary under this Act. The Special Inspector General is required to submit a quarterly report to Congress summarizing its activities and the activities of the Secretary under this Act.
Section 122. Increase in the Statutory Limit on the Public Debt.
Raises the debt ceiling from $10.6 trillion to $11.3 trillion.
Section 123. Credit Reform.
Details the manner in which the legislation will be treated for budgetary purposes under the Federal Credit Reform Act.
Section 124. Hope for Homeowners Amendments.
Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.
I’ve already voiced my opinions on this – this is gonna hurt us.
Section 125. Congressional Oversight Panel.
Establishes a Congressional Oversight Panel to review the state of the financial markets, the regulatory system, and the use of authority under TARP. The panel is required to report to Congress every 30 days and to submit a special report on regulatory reform
prior to January 20, 2009. The panel will consist of 5 outside experts appointed by the House and Senate Minority and Majority leadership.
Section 126. FDIC Enforcement Enhancement.
Prohibits the misuse of the FDIC logo and name to falsely represent that deposits are insured. Strengthens enforcement by appropriate federal banking agencies, and allows the FDIC to take enforcement action against any person or institution where the banking agency has not acted.
This wasn’t prohibited before? I feel like that should’ve been outlawed back when the FDIC was FORMED!
Section 127. Cooperation With the FBI.
Requires any federal financial regulatory agency to cooperate with the FBI and other law enforcement agencies investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products.
Again, this needed to be in a bill?
Section 128. Acceleration of Effective Date.
Provides the Federal Reserve with the ability to pay interest on reserves.
Section 129. Disclosures on Exercise of Loan Authority.
Requires the Federal Reserve to provide a detailed report to Congress, in an expedited manner, upon the use of its emergency lending authority under Section 13(3) of the Federal Reserve Act.
Again, if we’re going to kill our economy, at least we know how we did it so we don’t do it again.
Section 130. Technical Corrections.
Makes technical corrections to the Truth in Lending Act.
Section 131. Exchange Stabilization Fund Reimbursement.
Protects the Exchange Stabilization Fund from incurring any losses due to the temporary money market mutual fund guarantee by requiring the program created in this Act to reimburse the Fund. Prohibits any future use of the Fund for any guarantee program for the money market mutual fund industry.
Section 132. Authority to Suspend Mark-to-Market Accounting.
Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.
Section 133. Study on Mark-to-Market Accounting.
Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.
Section 134. Recoupment.
Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.
Again, why is the President writing this proposal? And how do they honestly plan on recouping losses? How do you get back billions of dollars from the financial industry? I feel sorry for whoever has to write that proposal.
Section 135. Preservation of Authority.
Clarifies that nothing in this Act shall limit the authority of the Secretary or the Federal Reserve under any other provision of law.
Title II-Budget-Related Provisions
Section 201. Information for Congressional Support Agencies.
Requires that information used by the Treasury Secretary in connection with activities under this Act be made available to CBO and JCT.
Section 202. Reports by the Office of Management and Budget and the Congressional Budget Office.
Requires CBO and OMB to report cost estimates and related information to Congress and the President regarding the authorities that the Secretary of the Treasury has exercised under the Act.
Section 203. Analysis in President’s Budget.
Requires that the President include in his annual budget submission to the Congress certain analyses and estimates relating to costs incurred as a result of the Act; and
Section 204. Emergency Treatment.
Specifies scoring of the Act for purposes of budget enforcement.
Title III-Tax Provisions
Section 301. Gain or Loss From Sale or Exchange of Certain Preferred Stock.
Details certain changes in the tax treatment of losses on the preferred stock of certain GSEs for financial institutions.
Section 302. Special Rules for Tax Treatment of Executive Compensation of Employers Participating in the Troubled Assets Relief Program.
Applies limits on executive compensation and golden parachutes for certain executives of employers who participate in the auction program.
That I agree with. If we’re bailing out these companies, lets at least waste the money solely on the companies.
Section 303. Extension of Exclusion of Income From Discharge of Qualified Principal Residence Indebtedness.
Extends current law tax forgiveness on the cancellation of mortgage debt.
Alright, so that was the full summary of the bill that FAILED the House yesterday.
I want give you a quote from Representative Ron Paul (R-TX), given during yesterday’s House session:
Mr. PAUL. Madam Speaker, I rise in strong opposition to this bill. This is only going to make the problem that much worse. The problem came about because we spent too much; we borrowed too much, and we printed too much money; we inflated too much, and we overregulated. This is all that this bill is about is more of the same.
So you can’t solve the problem. We are looking at a symptom. We are looking at the collapsing of a market that was unstable. It was unstable because of the way it came about. It came about because of a monopoly control of money and credit by the Federal Reserve System, and that is a natural consequence of what happens when a Federal Reserve System creates too much credit.
Now, there have been a fair number of free market economists around who have predicted this would happen. Yet do we look to them for advice? No. We totally exclude them. We don’t listen to them. We don’t look at them. We look to the people who created the problem, and then we perpetuate the problem.
The most serious mistake that could be made here today is to blame free market capitalism for this problem. This has nothing to do with free market capitalism. This has to do with a managed economy, with an inflationary system, with corporatism, and with a special interest system. It has nothing to do with the failure of free markets and capitalism. Yet we’re resorting now, once again, to promoting more and more government.
Long term, this is disastrous because of everything we’re doing here and because of everything we’ve done for 6 months. We’ve already pumped in $700 billion. Here is another $700 billion. This is going to destroy the dollar. That’s what you should be concerned about. Yes, Wall Street is in trouble. There are a lot of problems, and if we don’t vote for this, there are going to be problems. Believe me: If you destroy the dollar, you’re going to destroy a worldwide economy, and that’s what we’re
on the verge of doing, and it is inevitable, if we continue this, that that’s what’s going to happen. It’s [Page: H10370]
going to be a lot more serious than what we’re dealing with today.
We need to get our house in order. We need more oversight–that is a certainty–but we need oversight of the Federal Reserve System, of the Exchange Stabilization Fund and of the President’s Working Group on Financial Markets. Find out what they’re doing. How much have they been meddling in the market?
What we’re doing today is going to make things much worse.
Pure economic genius from Dr. Paul.
And here’s a quote from Representative Marilyn Musgrave (R-CO):
Mrs. MUSGRAVE. Madam Speaker, I am pleased that the strong opposition to the initial administration proposal has helped to force some very important changes such as the bipartisan oversight board, which is an online database that will allow greater oversight of the Secretary’s actions, but this is still a bailout for Wall Street that will cost the average Colorado household thousands.
I simply cannot stomach transferring that kind of money from the middle class families to a bunch of Wall Street bankers whose avarice and greed put us in this situation in the first place. It’s interesting that, when working families were being crushed by soaring energy prices this summer, Congress went on vacation. Yet, when Wall Street faced the consequences of its actions, we worked around the clock to help them. We should place the same priority on helping Main Street that we place on helping
And there she expresses what most Americans are expressing: “Why use my money to bail out people and companies who acted irresponsibly?”
A full record of everything said at yesterday’s House session is available on C-Span’s website here (it’s actually pretty cool – I never knew they had that!).
So, again, I am glad that the House voted down this bill. Hopefully I’ll be able to see the next bill BEFORE there’s a vote on it – I was very disappointed that there was no record of this until today, and even then, so many people were trying to access it that they were killing GovTrack.us and the House websites.
On a side note, here’s a copy of the roll call vote, and I’d like to note that I’m terribly disappointed in Representative Tancredo (R-CO) for voting Aye on this.