Bailout Compromise Reached

It appears that House and Senate negotiators are on the verge of an agreement with the administration on a plan to address the financial crisis.

Congressional negotiators and the Bush administration’s top Treasury officials go to work Sunday on settling the final details of a historic $700 billion Wall Street bailout aimed at keeping credit flowing and saving the nation’s shaky economy from collapsing into a crippling recession.

[…]

All sides expressed optimism and Senate Majority Leader Harry Reid, D-Nev., said he expected an announcement soon. “We’ve still got more to do to finalize it, but I think we’re there,” said Treasury Secretary Henry Paulson, who participated in the negotiations in the Capitol. “We worked out everything,” said Sen. Judd Gregg, R-N.H., the chief Senate Republican in the talks.

Under the plan, the federal government would purchase mortgage-backed securities and other bad debts held by banks and other investors. The money should help troubled lenders make new loans and keep credit lines open. The government would later try to sell the discounted loan packages at the best possible price. At the insistence of House Republicans, some of the program’s $700 billion would be devoted to a program that would encourage holders of distressed mortgage-backed securities to keep them and buy government insurance to cover defaults.

The legislation would place “reasonable” limits on severance packages for executives of companies that benefit from the rescue plan, said a senior administration official who was authorized to speak only on background. It also calls for the financial sector to help make up the difference if the government does not recoup its investment in five years, the official said, but details remained unclear. Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies’ future profits.

To help struggling homeowners, the plan would require the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers’ monthly payments so they can keep their homes.

The amendments all make sense and help alleviate the most common concerns about the original administration proposal. At a matter of optics, this looks less like a bailout and more like a loan guarantee. The taxpayers are on the hook either way, of course, but this more clearly signals that we’re not nationalizing the financial industry but merely backstopping illiquid assets that we expect to resell once their value rebounds to rational levels.

Capping the golden parachutes going to CEOs whose companies are being bailed out and the sop of homeowners who get in over their heads are both populist gimmicks that make little economic sense. They’re understandable, though, at the political level and, again, it gives the sense that we’re not just bailing out the fat cats while letting the little guy suffer.

Steve Bainbridge noted on this week’s OTB Radio that capping executive parachutes could well be illegal, violating the Takings Clause if they have a contractual right to the money. That’s almost certainly right. Any such provision will be largely symbolic.

FILED UNDER: Campaign 2008, Economics and Business, US Politics, , , , , ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Davebo says:

    Steve Bainbridge noted on this week’s OTB Radio that capping executive parachutes could well be illegal, violating the Takings Clause if they have a contractual right to the money. That’s almost certainly right.

    Actually, no.

    No executive is forced to have his organization participate in the bail out unless of course they are taken over by the government all together ala WaMu.

    And Wamu’s CEO sure made out in the deal. 19.1 million for three weeks work is pretty sweet.

  2. Bithead says:

    Steve Bainbridge noted on this week’s OTB Radio that capping executive parachutes could well be illegal, violating the Takings Clause if they have a contractual right to the money. That’s almost certainly right. Any such provision will be largely symbolic.

    First of all, let me point out that the real abuse of such things seems to be focused on the GSE’s such as Fannie and Freddie, given that taxpayer money is involved there.

    In private corporations, that’s neither the concern of government, nor of anyone who doesn’t have a voting interest outside that company.

    What such legislation does do, however is install the camel’s nose firmly under the tentflap in terms of government dictation of what anyone will be paid for a given task… something of which Marx would loudly approve of.

  3. PD Shaw says:

    I believe Prof. Bainbridge said that dealing with executive pay raised takings clause issues. I think it depends on a few things that we don’t know about individual compensation arrangements, such as whether the compensation is vested or not, and whether the government action was prospective or retroactive.

    Corporate exectuives are not the corporations. The corporation cannot voluntarily waive the rights of its employees, whether they be janitors or CEOs.

    I haven’t seen actual language, but the earlier language punted the issue to Treasury, who would have to create rules that passed Constitutional muster.

  4. Davebo says:

    In private corporations, that’s neither the concern of government, nor of anyone who doesn’t have a voting interest outside that company.

    Great, their lousy paper is then no longer a concern of the government, nor anyone who doesn’t have a voting interest.

    If you don’t want your parents complaining about how you handle your finances, don’t borrow money from them.

  5. Zelsdorf Ragshaft III says:

    I know this is off topic, but I have been watching the news all day. It is depressing. Obamites all over the place spewing falsehoods in machinegun like fashion. If their lips are moving they are lying. It is impossible for me to believe people have fallen for the campus bull shitter. This dude, Obama, is all talk and no action. He takes credit for the acts of others, but a fact search shows he has accomplished very, very little. Nothing as a community organizer. Nothing of value when he was CEO of the Ayers led Chicago Annenberg Challenge. He got himself elected to the Illinois State Senate. What did he do there? Nothing. His mentor, president of the state senate gave him cover and credit for things he had nothing to do with. He voted present over a hundred times! With this background and no real competition, he ran for U.S. Senate, once again based on promises not actions. After just a short period of time in the U.S. Senate. Enough time to earmark a fortune and collect a lot of grease, he is running for the Presidency of the United States and he could win. Based on what? I am sure any thinking individual could see through this fake yet many support someone who, no one from his past has come forward to stand up for him. We do not even know what he believes in. If judged by his associates, he hates America and the change he has in mind will be ugly. I cannot imagine this cretin in charge of the justice department. He intends to steal your money and give it to those who have not earned it because of what Rev. Wright told him and is what he believes is just.

  6. Web Smith says:

    The first real estate deal the government makes when they get into the business is to buy $700 billion worth of bad mortgages and hope they go up. In the meantime, the government sells $400 billion worth of good WaMu assets to the Rockefellers for less than $2 billion. If this is typical of the deals the government is going to make now that they’re in private business, we can kiss $700 billion good by.

    This was caused by the government being involved with private industry.

    http://ewebsmith.com/finance/thecause.html

  7. inhumans99 says:

    Geez, Zelsdorf…give it a rest. Your man McCain will most likely lose to the ‘cretin’ you loathe so much because he ran a crap campaign, and picked a VP that that would tell folks that she knows that 2 + 2 = 4, and yet, folks would still be highly suspicious that someone fed her the answer via an earpiece.

    By the way, folks can accuse Obama of many things, but being a cretin…yeah, you keep telling yourself Obama is not operating with a full deck of cards, whatever keeps you happy and lets you sleep at night.

  8. sam says:

    What such legislation does do, however is install the camel’s nose firmly under the tentflap in terms of government dictation of what anyone will be paid for a given task… something of which Marx would loudly approve of.

    Jesus, Bit, stop it. You’re scaring me.

  9. anjin-san says:

    MaCain when asked if he would support the bailout: “I’d like to see the details, but hopefully, yes.”

    This from the man who just a few short days ago “suspended” his campaign so he could rush to the capital, take command, and save the economy.

    My goodness…

  10. Bithead says:

    Jesus, Bit, stop it. You’re scaring me.

    I’m not happy about it, either, frankly, but there it is. And I note you don’t disagree, except by emotion.

  11. sam says:

    And I note you don’t disagree, except by emotion.

    Irony? What?

  12. Bithead says:

    Well, look, Sam…

    Jerry Pournelle:

    Golden parachutes: we may detest them, but they are not the cause of the problem. And every one of the Democrats involved in this bailout benefited from Fannie Mae and Freddie Mac, and every one of them was in favor of the CRA provisions requiring more and more sub-prime loans in order to increase home ownership.

    No kidding. We see where that led. As a direct result of that push, how many millions did Democrat cronies walk away with from Government sponsored entities like Fannie and Freddie? Those were government’s responsibility… not the income of those working for private concerns.

    And that the Democrats put that up so high on their list in spite of the real issue, tells me that there’s something they want out of that aspect, something of at least some psychological import; A reinforcement of socialist thought…. that success can only happen when government is running things.

    Otherwise, why bother with it at all, since the numbers tell the story… that what CEO’s get paid in the private sector really doesn’t mean much, in the end?

  13. sam says:

    Yeah, but Bit, that’s not what I was responding to. What I was responding to was your (kind of) hair-on-fire claim that this was the first step down the path to government wage controls for all of us. That’s a stretch, no? Besides, as James indicates, any such provision will be largely symbolics, i.e., pretty damn small potatoes in the scheme of things.

  14. Bithead says:

    Yeah, but Bit, that’s not what I was responding to. What I was responding to was your (kind of) hair-on-fire claim that this was the first step down the path to government wage controls for all of us. That’s a stretch, no?

    Frst step? Hardly.

    Merely another along the way.

    The first step? That was already taken when we accepted (Without anyone asking us) that the government has the right to decide who gets paid what. No, the first step was taken when we accepted the idea that such would be a good thing, (for reasons we never quite defined) if only the government could “do soemting about it”.

  15. DMan says:

    Ragshaft, I don’t get it. Why do you bother to read intelligent sites like OTB? You’re obviously more comfortable with Rush Limbaugh talking points, does all the substance on OTB hurt your head?

  16. […] and for the last couple days I’m not at all happy abut the direction this thing is taking. Me at OTB this afternoon: Yeah, but Bit, that’s not what I was responding to. What I was responding to […]

  17. I’ve quoted you and linked to you here.