Sold to American taxpayers for up to $US700 billion ($840 billion): an unprecedented plan to buy distressed banks' least desirable mortgage assets.
What started as a fairly simple three-page proposal giving the Treasury secretary unchecked power to orchestrate a bailout of the country's financial system has ended up as a complex rescue package, with enhanced congressional oversight, some added protections for taxpayers and a slap on the wrist to highly paid, underperforming executives.
The ultimate goal of the plan remains the same: buy bad mortgage-related bets from weakened financial companies so they can raise fresh capital and resume normal lending operations to businesses, municipalities and consumers.
These are the key elements of the Emergency Economic Stabilization Act of 2008, which is expected to come to a vote in the House on Monday:
Bailout for troubled financial firms
- Introduction of the rescue plan will be phased, beginning with an initial authorisation for the US Treasury to purchase up to $US250 billion in "troubled assets''. At the request of the president, this can be increased to $US350 billion.
- The plan gives Congress a veto power over purchases above that limit and sets a ceiling for all purchases of $US700 billion.
- Gives taxpayers an ownership stake in companies that take advantage of the bailout, raising the possibility of the public making profits if market conditions improve or of recovering some assets if participating companies.
- Eventual profits from the sale of government-owned assets will be used to retire federal debt, with a portion set aside for a federal housing authority.
- Calls on the Treasury secretary to coordinate with foreign financial authorities and central banks about establishing similar rescue programs.
Limits on excessive pay and bonuses
- No "golden parachutes'' for CEOs or other executives who lose or leave their jobs at companies participating in the plan as long as the Treasury holds equity in those firms.
- Limits CEO bonuses or other compensation deemed to encourage unnecessary risk-taking. Also sets a $US500,000 cap on executive remuneration that can be subject to corporate tax deductions.
- Recovers bonuses paid based on expected gains that turn out to be false or inaccurate
Oversight of plan administration
- Implementation of the plan by the US Treasury will be overseen by a board including the chairman of the Federal Reserve, the Treasury secretary and the chairman of the Securities and Exchange Commission - the Wall Street regulator.
- A presence for Congressional watchdog the General Accounting Office at the US Treasury Department to oversee the program and conduct audits.
- An independent Inspector General to monitor the Treasury Secretary's bailout decisions.
- Judicial review of the Treasury Secretary's actions.
Homeowner protection
- Protection for homeowners facing foreclosure, the root cause of the crisis, with up to 2 million foreclosures possible in the next year.
- Gives government the power to renegotiate terms of mortgages to ease pressure on homeowners facing foreclosure.
- Provides aid to small community banks hurt by mortgage crisis.
While Democratic negotiators made significant changes to the plan Treasury Secretary Henry Paulson sent Congress a week ago, they did not get everything they had sought, particularly more help for troubled homeowners.
House Republicans, meanwhile, fought hard for - and won - a provision that would establish a program whereby banks could buy government insurance to back the principal and interest on certain troubled assets, rather than selling them outright. They argued this was a better deal for taxpayers, and would reduce the overall cost of the rescue package.
Paulson told negotiators that he believed the insurance plan would have only limited benefits.
Responding to the outcry of constituents, Congress structured the bailout in a way that sets limits on executive compensation at companies whose bad debt is purchased by the government.
Lawmakers also established various oversight boards, including one with members appointed by Congress and another whose members will include the Treasury secretary and the chairman of the Federal Reserve.
Despite all the oversight and restrictions Congress added to Paulson's original proposal, the Treasury secretary will still have wide latitude in deciding such things as how to value the toxic assets and what experts to hire to run the program.
Paulson, who lost in an effort to have his decisions exempted from congressional review, has indicated that he expects to use a type of ``reverse'' auction in which the companies with the winning bids will be the ones willing to take less, say 50 cents on the dollar rather than 60 cents on the dollar, for the assets.
Analysts said they believe the plan will give critical support to the financial system, helping to establish a vibrant market for hundreds of billions of dollars in mortgage assets that at the moment can't be priced because no one wants to purchase them.
Brian Bethune, chief US financial economist for Global Insight, a Lexington, Massachusetts, economic consulting firm, said Sunday that he believed the bailout plan "will provide some critical life support for the US financial system, which has been hit by a very dangerous escalation in volatility in turmoil since early July''.
wires
