Wall Street bailout

The Emergency Economic Stabilization Act of 2008, often called the "bank bailout of 2008", was proposed by Treasury Secretary Henry Paulson, passed by the 110th United States Congress, and signed into law by President George W. Bush. It became law as part of Public Law 110-343 on October 3, 2008, in the midst of the financial crisis of 2007–2008. It created the $700 billion Troubled Asset Relief Program (TARP) to purchase toxic assets from banks. The funds were mostly redirected to inject capital into banks and other financial institutions while the Treasury continued to examine the usefulness of targeted asset purchases.

A financial crisis had developed throughout 2007 and 2008 partly due to a subprime mortgage crisis, causing the failure or near-failure of major financial institutions like Lehman Brothers and American International Group. Seeking to prevent the collapse of the financial system, Secretary of the Treasury Paulson called for the U.S. government to purchase several hundred billion dollars in distressed assets from financial institutions. His proposal was initially rejected by Congress, but the ongoing financial crisis and lobbying by President Bush ultimately convinced Congress to enact the proposal as part of Public Law 110-343.

Early estimates for the bailout's risk cost were as much as $700 billion; however, TARP recovered $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6%, and perhaps a loss when adjusted for inflation.

History

After the freeing up of world capital markets in the 1970s and the repeal of the Glass–Steagall Act in 1999, the banking practices (mostly Greenspan inspired "self-regulation") along with monetized subprime mortgages sold as low risk investments, reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $85 billion liquidity facility for American International Group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers.

The legislation had its origin in early 2008 when Secretary of the Treasury Henry Paulson directed two of his aides, Neel Kashkari, to write a plan to recapitalize the U.S. financial system in case of total collapse. The plan, which was also presented to Federal Reserve Chairman Ben Bernanke, called for the U.S. government to purchase about $500 billion in distressed assets from financial institutions.

The original proposal was submitted to the United States House of Representatives, with the purpose of purchasing bad assets, reducing uncertainty regarding the worth of the remaining assets, and restoring confidence in the credit markets. The bill was then expanded and put forth as an amendment to . The amendment was rejected via a vote of the House of Representatives on September 29, 2008, voting 205–228.

Supporters of the plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the plan's cost and rapidity, pointing to polls that showed little support among the public for "bailing out" Wall Street investment banks, claimed that better alternatives were not considered, and that the Senate forced passage of the unpopular version through the opposing house by " sweetening" the bailout package.

On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424.Amendment to HR 1424
(the amendment being the text of the Emergency Economic Stabilization Act of 2008 along with the Energy Improvement and Extension Act of 2008, and Tax Extenders and Alternative Minimum Tax Relief Act of 2008.) Senate Committee on Banking, Housing and Urban Affairs (October 1, 2008) ( Retrieved October 1, 2008) See also the Senate Committee on Banking page
Emergency Economic Stabilization Act of 2008
/ref> The Senate accepted the amendment and passed the entire amended bill, voting 74–25. Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the length of the bill to 451 pages. (''See'' Public Law 110-343 for details on the added provisions.) The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263–171 to enact the bill into law. President George W. Bush signed the bill into law within hours of its congressional enactment, creating the $700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets.Temple-Raston, Dina (October 3, 2008)
"Bush signs $700 billion bailout bill"
. NPR.

On Monday, October 6, the Dow Jones Industrial Average dropped more than 700 points and fell below 10,000 for the first time in four years. The same day, CNN reported these worldwide stock market events: Britain's FTSE 100 Index was down 7.9%; Germany's DAX down 7.1%; France's CAC 40 dropping 9%; In Russia, trading in shares was suspended after the RTS stock index fell more than 20%; Iceland halted trading in six bank stocks while the government drafted a crisis plan.

On October 8, the British announced their bank rescue package consisting of funding, debt guarantees and infusing capital into banks via preferred stock. This model was closely followed by the rest of Europe, as well as the U.S Government, who on the October 14 announced a $250bn (£143bn) Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $700bn Troubled Asset Relief Program.

Over the next six months, TARP was dwarfed by other guarantees and lending limits; analysis by Bloomberg found the Federal Reserve had, by March 2009, committed $7.77 trillion to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

Paulson proposal

U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities.
The plan was immediately backed by President George W. Bush and negotiations began with leaders in the U.S. Congress to draft appropriate legislation.

Consultations among Treasury Secretary Henry Paulson, Chairman of the Federal Reserve Ben Bernanke, U.S. Securities and Exchange Commission chairman Christopher Cox, congressional leaders, and President Bush, moved forward efforts to draft a proposal for a comprehensive solution to the problems created by illiquid assets. News of the coming plan resulted in some stock, bond, and currency markets stability on September 19, 2008.

The proposal called for the federal government to buy up to US$700 billion of illiquid mortgage-backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal was received favorably by investors in the stock market, but caused the U.S. dollar to fall against gold, the Euro, and petroleum. The plan was not immediately approved by Congress; debate and amendments were seen as likely before the plan was to receive legislative enactment.Andrews, Edmund L. (September 19, 2008)
"Bush Officials Urge Swift Action on Rescue Powers"
''The New York Times''.
''The New York Times'', Associated Press, September 20, 2008.

Throughout the week of September 20, 2008, there was contentious wrangling among members of Congress over the terms and scope of the bailout,Prins, Nomi (September 24, 2008)
"Bailout plan not embraced"
The Real News amplified by continued failures of institutions like Washington Mutual, and the upcoming November 4 national election.

*On September 21, Paulson announced that the original proposal, which would have excluded foreign banks, had been revised to include foreign financial institutions with a presence in the United States. The U.S. administration pressured other countries to set up similar bailout plans.
* On September 23, the plan was presented by Paulson and Bernanke to the Senate Banking Committee, who rejected it as unacceptable.
*On September 24, President Bush addressed the nation on prime time television, describing how serious the financial crisis could become if action was not taken promptly by Congress.
*Also on September 24, 2008, Republican Party nominee for President, John McCain, and Democratic Party nominee for President, Barack Obama, issued a joint statement describing their shared view that "The effort to protect the American economy must not fail."

The plan was introduced on September 20, by Paulson. Named the Troubled Asset Relief Program, but also known as the Paulson Proposal or Paulson Plan, it should not be confused with Paulson's earlier 212-page plan, the ''Blueprint for a Modernized Financial Regulatory Reform'', that was released on March 31, 2008.

The proposal was only three pages long, intentionally short on details to facilitate quick passage by Congress.

Mortgage asset purchases

A key part of the proposal is the federal government's plan to buy up to $700 billion of illiquid mortgage-backed securities (MBS) with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market.

This plan can be described as a risky investment, as opposed to an expense. The MBS within the scope of the purchase program have rights to the cash flows from the underlying mortgages. As such, the initial outflow of government funds to purchase the MBS would be offset by ongoing cash inflows represented by the monthly mortgage payments. Further, the government eventually may be able to sell the assets, though whether at a gain or loss will remain to be seen. While incremental borrowing to obtain the funds necessary to purchase the MBS may add to the United States public debt, the net effect will be considerably less as the incremental debt will be offset to a large extent by the MBS assets.

A key challenge would be valuing the purchase price of the MBS, which is a complex exercise subject to a multitude of variables related to the housing market and the credit quality of the underlying mortgages. The ability of the government to offset the purchase price (through mortgage collections over the long-run) depends on the valuation assigned to the MBS at the time of purchase. For example, Merrill Lynch wrote down the value of its MBS to approximately 22 cents on the dollar in Q2 2008. Whether the government is ultimately able to resell the assets above the purchase price or will continue to merely collect the mortgage payments is an open item.

On February 10, 2009, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the $300 billion or so dollars remaining in the TARP funds. He mentioned that the U.S. Treasury and Federal Reserve wanted to help fund private investors to buy toxic assets from banks, but few details have yet been released. There is still some skepticism about the premise that taxpayers can buy troubled assets without having to overpay. Oppenheimer & Company analyst Meridith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs. Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is a call option on a firm's assets, this lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.

On April 6, 2008, the State Foreclosure Prevention Working Group reported that the pace of foreclosures exceeded the capacity of homeowner rescue programs, such as the Hope Now Alliance, in the first quarter of 2008.

Sweeping powers

The original plan would have granted the Secretary of the Treasury unlimited power to spend, proofing his or her actions against congressional or judicial review. Section 8 of the Paulson proposal states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." This provision was not included in the final version.

Rationale for the bailout

Government officials

In his testimony before the U.S. Senate, Treasury Secretary Henry Paulson summarized the rationale for the bailout:

*Stabilize the economy: "We must... avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy."
*Improve liquidity: "These bad loans have created a chain reaction and last week our credit markets froze – even some Main Street non-financial companies had trouble financing their normal business operations. If that situation were to persist, it would threaten all parts of our economy."
*Comprehensive strategy: "We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil. And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth."
*Immediate and significant: "This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively."
*Broad impact: "This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy."

In his testimony before the U.S. Senate on September 23, 2008, Fed Chairman Ben Bernanke also summarized the rationale for the bailout:

*Investor confidence: "Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply." He also stated: "Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth."
*Impact on the economy and GDP: "Extraordinarily turbulent conditions in global financial markets... these conditions caused equity prices to fall sharply, the cost of short-term credit—where available—to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets—a flight to quality—sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth."

Regarding the $700 billion number, ''Forbes.com'' quoted a Treasury spokeswoman: "It's not based on any particular data point. We just wanted to choose a really large number."

Journalists

According to CNBC commentator Jim Cramer, large corporations, institutions, and wealthy investors were pulling their money out of bank money market funds, in favor of government-backed Treasury bills. Cramer called it "an invisible run on the banks," one that has no lines in the lobby but pushes banks to the breaking point nonetheless. As a bank's capital reserve of deposits evaporate, so too does its ability to lend and correspondingly make money. "The lack of confidence inspired by Lehman's demise, the general poor health of many banks, this is going to turn this into an intractable moment," Cramer said, "if someone in the government doesn't start pushing for more deposit insurance."

Reaction to the initial proposal

Skepticism regarding the plan occurred early on in the House. Many members of Congress, including the House of Representatives, did not support the plan initially, mainly conservative free-market Republicans and liberal anti-corporate Democrats. Alabama Republican Spencer Bachus has called the proposal "a gun to our head."

Immediate market reactions

On September 19, 2008, when news of the bailout proposal emerged, the U.S. stock market rose by 3%. Foreign stock markets also surged, and foreign currencies corrected slightly, after having dropped earlier in the month. The value of the U.S. dollar dropped compared to other world currencies after the plan was announced. The front end oil futures contract spiked more than $25 a barrel during the day Monday September 22, ending the day up over $16. This was a record for the biggest one-day gain. However, there are other factors that caused the massive spike in oil prices. Traders who got "caught" at the end of the October contract session were forced to purchase oil in large batches to cover themselves, adding to the surge in prices. Further out, oil futures contracts rose by about $5 per barrel. Mortgage rates increased following the news of the bailout plan. The 30-year fixed-rate mortgage averaged 5.78% in the week before the plan was announced; for the week ending September 25, the average rate was 6.09%, still far below the average rate during the early 1990s recession, when it topped 9.0%.

Potential conflict of interest

There was concern that the current plan created a conflict of interest for Paulson. Paulson was a former CEO of Goldman Sachs, which stood to benefit from the bailout. Paulson had hired Goldman executives as advisors and Paulson's former advisors had joined banks that were also to benefit from the bailout. Furthermore, the original proposal exempted Paulson from judicial oversight. Thus, there was concern that former illegal activity by a financial institution or its executives might be hidden.

The Treasury staff member responsible for administering the bailout funds was Neel Kashkari, a Connecticut Democrat, appearing at a joint press conference with Senator Judd Gregg, a New Hampshire Republican, said a bailout plan could still pass Congress. Dodd said: "We don't intend to leave here without the job being done. While it may take another few days, we're confident that can happen."

Market reaction to September 29 vote

Following the House vote, the Dow Jones Industrial Average dropped over 777 points in a single day, its largest single-day point drop until 2018. The $1.2 trillion loss in market value received much media attention, although it still does not rank among the index's ten largest drops in percentage terms. The S & P lost 8.8%, its seventh worst day in percentage terms and its worst day since Black Monday in 1987. The NASDAQ composite also had its worst day since Black Monday, losing 9.1% in its third worst day ever. The TED spread, the difference between what banks charge each other for a three-month loan and what the Treasury charges, hit a 26-year high of 3.58%; a higher rate for inter bank loans than Treasury loans is a sign that banks fear that their fellow banks won't be able to pay off their debts. Meanwhile, the price of U.S. light crude oil for November delivery fell $10.52 to $96.37 a barrel, its second largest one-day drop ever, on expectations of an economic slowdown reducing oil consumption and demand."Stocks crushed"
CNN.com, September 29, 2008 The Dow Jones industrial average recovered 485 points or about 62% of the entire loss the very next day.

Markets which had expected the bill to pass and had moved on to debating whether it would be sufficient were already skittish after news that Wachovia Bank was being bought out by Citigroup to avoid collapse. The events were compounded by news from Europe that Dutch-Belgian Fortis Bank was given a $16.4 billion lifeline to avoid collapse, failing British bank Bradford & Bingley was nationalized, and Germany extended banking and real estate giant Hypo Real Estate billions to ensure its survival.

Later in October, after the bill had been passed, the Dow Jones Industrial Average would drop by more in percentage terms, and market volatility remained at historically high levels, as measured by the VIX.

Senate vote October 1

On Wednesday evening, October 1, 2008, the Senate debated and voted on a revised version of the Emergency Economic Stabilization Act of 2008 (EESA 2008). The legislation was framed as an amendment to HR1424, substituting the entire bill with the newly revised text of the EESA 2008. The amendment was approved by a 74–25 vote, and the entire bill was also passed by the same margin, 74–25 (R: 34-15, D: 40-10). Only cancer-stricken Senator Ted Kennedy did not vote. Under the legislative rule for the bill, sixty votes were required to approve the amendment and the bill.
A House leader accused the Senate of legislating "by blunt force" without public consent.

Describing the Senate's reason for passing the bill, former Senator Evan Bayh "described a scene from 2008 where Ben Bernanke warned senators that the sky would collapse if the banks weren't rescued. 'We looked at each other,' said Bayh, 'and said, okay, what do we need.

Second House vote, October 3

The revised HR1424 was received from the Senate by the House, and on October 3, it voted 263-171 to enact the bill into law. Democrats voted 172 to 63 in favor of the legislation, while Republicans voted 108 to 91 against it; overall, 33 Democrats and 24 Republicans who had previously voted against the bill supported it on the second vote.

President Bush signed the bill into law within hours of its enactment, creating a $700 billion dollar Treasury fund to purchase failing bank assets.NPR (October 3, 2008

Retrieved October 17, 2012.

The revised plan left the $700 billion bailout intact and appended a stalled tax bill. The law has three major divisions, Division A: the Emergency Economic Stabilization Act of 2008; Division B: Energy Improvement and Extension Act of 2008, and Division C: the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. (Access to legislative history of H.R. 1424) The tax part of the law has provisions that will have a net expenditure of $100 billion over 10 years. It had been stalled due to a disagreement between Democrats that did not want to increase spending without a corresponding increase in taxes and Republicans, who were adamantly opposed to any tax increases.

Key items in the legislation

On October 3, 2008, the Emergency Economic Stabilization Act became law with the signing of Public Law 110-343, which included the act. Below is a list of key items and how the legislation deals with them.

Interest on bank deposits held by the Federal Reserve

Although the original bill proposed as late as September 20 contained no such provision, Section 128 of the Act allowed the Federal Reserve System (the Fed) to begin paying banks a high interest rate on their deposits held for reserve requirements. It reads:

:Section 203 of th
Financial Services Regulatory Relief Act of 2006
is amended by striking `October 1, 2011' and inserting `October 1, 2008'.

The Fed announced that it would begin paying such increased interest on both reserve and excess reserve balances on October 6, 2008. Banks immediately increased the amount of their money on deposit with the Fed, up from about $10 billion total at the end of August 2008, to $880 billion by the end of the second week of January 2009. In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. The U.S. Treasury Department explained the changes, saying:

The Federal Reserve will continue to take a leadership role with respect to liquidity in our markets. It is committed to using all of the tools at its disposal to provide the increased liquidity that is now required for the effective functioning of financial markets. In this regard, the authority to pay interest on reserves that was provided by EESA is essential, because it allows the Federal Reserve to expand its balance sheet as necessary to support financial stability while conducting a monetary policy that promotes the Federal Reserve's macroeconomic objectives of maximum employment and stable prices. The Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets.

Reactions to the change were mixed, with banks generally approving of their new ability to earn high interest without risk on funds that they would otherwise need to use to extend credit in order to make a profit for their shareholders, while those involved in the commercial paper markets, the primary and secondary sectors of the goods and services economy, shipping, and others depending on the liquidity of credit from banks were more skeptical of the further pressure against credit availability in the midst of the ongoing credit liquidity crisis.

The day after the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."Lanman, S. (October 22, 2008
"Fed Raises Rate It Pays on Banks' Reserve Balances (Update2)"
''Bloomberg'' The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target, and again on November 5 for the same reason. Beginning December 18, the Fed directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate.

The government issued $400 billion of short-term debt intended to help replace the $1.8 trillion commercial paper market which was wiped out by the change, (exacerbated by money market funds' sudden refusal to support commercial paper as well) but the world economy began to deflate as international shipping, dependent on commercial paper, slowed in some regions to a few percent of levels prior to the change. The FDIC announced a new program on October 14, under which newly issued senior unsecured debt issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. The FDIC program is expected to cover about $1.4 trillion of bank debt.

The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:

Those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreasing economic activity due to damage to the short-term commercial paper and associated credit markets.

On January 7, 2009, the Federal Open Market Committee decided that, "the size of the balance sheet and level of excess reserves would need to be reduced." On January 13, Ben Bernanke said, "In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed. In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime, and other factors. However, as excess reserves decline, financial conditions normalize, and banks adapt to the new regime, we expect the interest rate paid on reserves to become an effective instrument for controlling the federal funds rate." The same day, ''Financial Week'' said Mr. Bernanke admitted that a huge increase in banks' excess reserves is stifling the Fed's monetary policy moves and its efforts to revive private sector lending.

On January 15, Chicago Fed president and Federal Open Market Committee member Charles Evans said, "once the economy recovers and financial conditions stabilize, the Fed will return to its traditional focus on the federal funds rate. It also will have to scale back the use of emergency lending programs and reduce the size of the balance sheet and level of excess reserves. 'Some of this scaling back will occur naturally as market conditions improve on account of how these programs have been designed. Still, financial market participants need to be prepared for the eventual dismantling of the facilities that have been put in place during the financial turmoil,' he said."

At the end of January 2009, excess reserve balances at the Fed stood at $793 billion but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion, and late November 2009, they stood at $1.16 trillion.

Management of the Troubled Asset Relief Program

The bill authorizes the Secretary of the Treasury to establish the Troubled Assets Relief Program to purchase troubled assets from financial institutions. The Office of Financial Stability is created within the Treasury Department as the agency through which the Secretary will run the program. The Secretary is required to consult with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, and the Secretary of Housing and Urban Development when running the program.

Funding

The bill authorizes $700 billion for the program. The Treasury Secretary has immediate access to the first $250 billion. Following that, an additional $100 billion can be authorized by the President. For the last $350 billion, the President must notify Congress of the intention to grant the additional funding to the Treasury; Congress then has 15 days to pass a resolution disallowing the authority. If Congress fails to pass a resolution opposing the funding within 15 days, or if the resolution passes, but is vetoed by the President, and Congress does not have enough votes to override the veto, the Treasury will receive the final $350 billion.

Government equity interests in participating firms

The Treasury Secretary is required to obtain a financial warrant guaranteeing the right to purchase non-voting stock or, if the company is unable to issue a warrant, senior debt from any firm participating in the program. The Secretary is allowed to make a de minimis exception to the rule, but that exception may not exceed $100 million."Breakdown of the Final Bailout Bill"
The Washington Post, September 28, 2008.

Executive pay limits

If the Treasury purchases assets directly from a company, and also receives a meaningful equity or debt position in that company, the company is not allowed to offer incentives that encourage "unnecessary and excessive risks" to its senior executives (that is, the top five executives). Also, the company is prohibited from making golden parachute payments to a senior executive. Both of these prohibitions expire when the Treasury no longer holds an equity or debt position in that company. The company also is given "clawback" permission; that is, the opportunity to recover senior executive bonus or incentive pay based on earnings, gains, or other data that proves to be inaccurate.Congress Passes New Limits on Executive Compensation Paid by Troubled Financial Institutions
Sonnenschein Nath & Rosenthal LLP., October 3, 2008. Amendment to HR 1424
Division A, Section 111.

If the Treasury purchases assets via auction, and that purchase exceeds $300 million, any new employment contract for a senior officer may not include a golden parachute provision in the case of involuntary termination, bankruptcy filing, insolvency, or receivership. This prohibition only applies to future contracts; golden parachutes already in place will remain unaffected.

In either scenario, no limits are placed on executive salary, and existing golden parachutes will not be altered.

Foreclosure avoidance and homeowner assistance

For mortgages involved in assets purchased by the Treasury Department, the Treasury Secretary is required to (1) implement a plan that seeks to maximize assistance for homeowners, and (2) encourage the servicers of the underlying mortgages to take advantage of the HOPE for Homeowners Program of the National Housing Act or other available programs to minimize foreclosures. Furthermore, the Secretary is allowed to use loan guarantees and credit enhancements to encourage loan modifications to avert foreclosure. The bill does not provide a mechanism to change the terms of a mortgage without the consent of any company holding a stake in that mortgage. Section 110: Assistance to Homeowners of the Emergency Economic Stabilization Act of 2008 "requires federal entities that hold mortgages and mortgage-backed securities to develop plans to minimize foreclosures".

This $24 billion asset detoxification plan was requested by Federal Deposit Insurance Corporation Chair Sheila Bair, but the Treasury did not use the provision. "The primary purpose of the bill was to protect our financial system from collapse," Secretary Henry Paulson told the House Financial Services Committee, "The rescue package was not intended to be an economic stimulus or an economic recovery package."

Judicial review

The bill establishes that actions taken by the Treasury Secretary regarding this program are subject to judicial review, reversing the request for immunity made in the original Paulson proposal.

Oversight

Several oversight mechanisms are established by the bill. Contractors were also used to help manage the TARP funds.

The Financial Stability Oversight Board is created to review and make recommendations regarding the Treasury's actions. The members of the board are:

* Chairman of the Board of the Federal Reserve
* Secretary of the Treasury
* Director of the Federal Housing Finance Agency
* Chairman of the Securities and Exchange Commission
* Secretary of the Department of Housing and Urban Development

A Congressional Oversight Panel is created by the bill to review the state of the markets, current regulatory system, and the Treasury Department's management of the Troubled Asset Relief Program. The panel is required to report their findings to Congress every 30 days, counting from the first asset purchase made under the program. The panel must also submit a special report to Congress about regulatory reform on or before January 20, 2009.

The panel consists of five outside experts appointed as follows:

* One member chosen by the Speaker of the House
* One member chosen by the minority leader of the House
* One member chosen by the majority leader of the Senate
* One member chosen by the minority leader of the Senate
* One member chosen by the Speaker of the House and the majority leader of the Senate, following consultation with the minority leaders of Congress

The Comptroller General (director of the Government Accountability Office) is required to monitor the performance of the program, and report findings to Congress every 60 days. The Comptroller General is also required to audit the program annually. The bill grants the Comptroller General access to all information, records, reports, data, etc. belonging to or in use by the program.Sweet, Lynn
"Bailout bill 'Emergency Economic Stabilization Act of 2008' searchable summary"
, ''Chicago Sun-Times'', September 28, 2008.

The bill creates the Office of the Special Inspector General for the Troubled Asset Relief Program, appointed by the President and confirmed by the Senate. The Special Inspector General's purpose is to monitor, audit and investigate the activities of the Treasury in the administration of the program, and report findings to Congress every quarter.

FDIC insurance

From the date of enactment of the bill (October 3, 2008) until December 31, 2009, the amount of deposit insurance provided by the FDIC is increased from $100,000 to $250,000.Sahadi, Jeanne
"Bailout 101: What new law says"
CNNMoney.com, October 4, 2008.

Budget-related provisions

Title II sets out guidelines for consultation and reporting between the Treasury Secretary, the Office of Management and Budget, and the Congressional Budget Office.

Tax provisions

The bill makes the following changes to tax law.

* Qualified financial institutions may count losses on FNMA and FHLMC preferred stock against ordinary income, rather than capital gain income.
* New limitations are added on deductibility of executive compensation by corporations participating in the bailout.
* The mortgage debt forgiveness provision of the Mortgage Forgiveness Debt Relief Act of 2007 is extended by three years, so that it applies to debts forgiven through the year 2012.
* Extend the expiration date of the section 41 Research & Development Tax Credit from December 31, 2007, to December 31, 2009; also, increase the Alternative Simplified Credit percentage from 12% to 14%.

Administration of the law

CAMELS ratings are being used by the United States government to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the Emergency Economic Stabilization Act of 2008.

''The New York Times'' states: "The criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive" because the criteria appears to favor the financially best off banks and banks too big to let fail. Some lawmakers are upset that the capitalization program will end up culling banks in their districts.

Known aspects of the capitalization program "suggest that the government may be loosely defining what constitutes healthy institutions. .. Banksthat have been profitable over the last year are the most likely to receive capital. Banks that have lost money over the last year, however, must pass additional tests. ..They are also asking if a bank has enough capital and reserves to withstand severe losses to its construction loan portfolio, nonperforming loans and other troubled assets." Some banks received capital with the understanding the banks would try to find a merger partner. To receive capital under the program banks are also "required to provide a specific business plan for the next two or three years and explain how they plan to deploy the capital."

Effects on national debt

The United States annual budget deficit for fiscal year 2009 surpassed $1 trillion. The original Paulson proposal would lift the United States federal debt ceiling by $700 billion, to $11.3 trillion from $10.6 trillion.

Other information

A review of investor presentations and conference calls by executives of some two dozen US-based banks by ''The New York Times'' found that "few ankscited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses, or invest for the future."McIntire, Mike
"Bailout Is a Windfall to Banks, if Not to Borrowers"
''The New York Times''. January 17, 2009.

References

* (List and U.S. map with districts of members of Congress voting "no".
* (Background on development of the Treasury proposal to Congress)


* ttps://archive.today/2011.08.05-001826/http://i1.democracynow.org/2009/9/15/nomi_prins_obama_banking_too_much Nomi Prins: "Obama Banking Too Much on Banks"- video report by ''Democracy Now!''

External links

Emergency Economic Stabilization Act of 2008PDFdetails
as amended in the GPObr>Statute Compilations collection

Emergency Economic Stabilization Act of 2008
as enacted in the US Statutes at Large

Text of original Paulson proposal

Stimulus.org
a complete guide to all economic recovery efforts from the Committee for a Responsible Federal Budget

Jobs and Economic Growth
a discussion of the proposal from th

{{Authority control

Acts of the 110th United States Congress
2008 in American politics
2008 in economics
Great Recession in the United States
George W. Bush administration controversies
Troubled Asset Relief Program
United States federal banking legislation
Articles containing video clips