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.