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Paul Kiesel
Paul Kiesel
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Bush Bailout Plan Part II: Why the House Turned Its Back on the $250 Billion Revised Package (with a $450 Billion Option)

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After the biggest one day point drop ever for the Dow Jones Industrial Average, due in large part to widespread panic after the “Bush Bailout Bill Part II” was defeated in the House earlier today, many analysts and observers are scratching their heads and wondering why the House was unable to pass the $700 billion bailout package that seemed like a slam dunk yesterday.

First, let’s look at the bill’s key provisions, which were added to the “Bush Bailout Plan Part I):

Who gets the money: The available $700 billion would be disbursed in stages (similar to the housing rescue package signed into law back in July). $250 billion would be made available immediately for the Treasury Department’s use. The current language in the revised bailout package state that the money would expire on December 31, 2009, however, Congress can certify a one-year extension, if it’s necessary.

Two scenarios for the taxpayer: 1. If (and this is a big if) the Treasury pays fair market value for the assets it purchases from the banks, taxpayers stand a chance to break even or even make a profit if those assets throw off income or appreciate in value by the time the government sells them. If it overpays for the same assets, the government could be holding a lot of worthless assets and would suffer a huge net loss, but would likely mitigate the total loss by dumping the assets onto the open market and hoping they eventually sell.

If for some reason the Treasury ends up with a net loss to taxpayers for five years after the plan is enacted, the next president will have to propose legislation to recoup money from the financial industry.

Curbing foreclosures: Since the government will be absorbing a lot of illiquid assets (or bad debt), the bill calls for the government to exert its influence on loan servicers to modify more mortgages that are in default, in various stages of foreclosure or at risk of being in either stage in the near future (option ARM loan resets).

Golden parachutes for CEOs: Any company that participates and sells mortgages to the Treasury will not be able to deduct the salary they pay to executives above $500,000. They will also be prevented from writing new contracts that allow for “golden parachutes” for their top executives if they are let go or the company goes under. Unfortunately, any executive that has a current contract, which may include a golden parachute, will get to reap the benefits from it regardless.

Insurance: The Treasury must establish an insurance program.

Oversight: Two oversight boards will be created. 1. The Financial Stability Oversight Board will ensure that policies implemented keep taxpayers interests in mind and protect their financial stake. 2. A congressional oversight panel would be charged with reviewing the health of financial markets and the implementation of a reformed regulatory system. The panel would include five experts from outside the Beltway, appointed by House and Senate leaders.

Why the Bill Failed

House Republicans are blaming partisan politics by Democrats for why the bill failed today (they point to Nancy Pelosi’s speech on the legislation in particular, however, the Republicans’ argument is fueled by their own partisan ideology.) Also, it’s important to note that only 60% of Democrats voted in the affirmative for the passage of the bailout package. Republicans were also not happy with the addition of the foreclosure provision and many who voted “no” voiced concern about the upcoming elections in their respective districts, leading outside observers to suggest that a large number of Republican representatives (again contradicting their own argument) put politics before the severity of the economy’s health first.