This is a reminder of what the "compromise" bill was and what leaders in Washington are trying to resurrect. It is abstracted from item 87 of my scandals list which deals with the history of the housing and financial crisis.
On Sunday September 28, 2008, Bush, the Presidential candidates, and Congressional leaders of both parties endorsed a “compromise” bailout plan (HR 3997). The bill was 110 pages long, so much longer than the original 2 page Paulson plan. But it was still the Paulson plan, just a lot of lipstick had been added. Paulson would still be able to buy, hold, and sell what he wanted (not just mortgage backed securities but any securities he wished) from whom he wanted (both American financial companies and any foreign one with “significant” US interests not owned by a foreign government). He would be the one to set up the market mechanisms (reverse auctions) to buy the finance industry’s crap assets. He would be the one to hire employees and contract companies to manage the auctions and assets, and he would be the one to write the conflict of interest rules which would govern these and ensure he could hire anyone he wanted. One of the few additions is an insurance program for bad assets which was unlikely to be widely used but was included to mollify rebellious House Republicans.
Of central importance was the retention of the $700 billion figure. The bill engaged in some kabuki on this to make it seem that there were conditions on the money but there really weren’t. Paulson would initially get $250 billion. When this was exhausted, he could make a determination to Congress and with the President’s OK alone get another $100 billion. The other $350 billion was also effectively at his disposal since it required a joint resolution of both Houses to disapprove it and in the face of a likely Presidential veto the Congressional resolution would require a veto override (a 2/3 vote in both Houses) to prevent its disbursement.
Most notably absent from the bill was any attempt to re-regulate markets now or to extend direct aid to distressed homeowners (except for continuing an income tax exclusion). On the other hand, it contained a veritable blizzard of oversight panels and calls for reports. A Financial Stability Oversight Board, the Comptroller General (GAO), SEC, Fed, OMB, CBO, a program Inspector General, various House and Senate committees, and an online list of the bailout’s business were all supposed to be part of the oversight process. Yet none of these had any enforcement authority. That power remained with Paulson. Among the reports (in addition to all the audits), one was supposed to give recommendations for market regulation to be completed by April 30, 2009, 7 months away and in another Administration. Another also on regulation by the Congressional Oversight Panel was due January 20, 2009, i.e. on Inauguration Day. A third was to examine the role of mark to market accounting (pricing assets according to their current sale value) in bank failures and a fourth was to cover the effects of leveraging and de-leveraging.
There were also interesting bits hidden away in the nooks and crannies of the bill. One particularly artful example involved a simple change of date to a prior bill but what it did in effect was to allow the Fed to pay interest on reserves held by banks and permit banks to carry zero reserves. Another suspended mark to market accounting allowing financial institutions to artificially inflate the value of their assets to improve their balance sheets.
Interestingly Paulson held no press conference on the bill’s contents for the public but he did make a private telephone conference call to 800 bankers and financial officers to discuss it. This call was subsequently leaked to the internet. His take home message was I’ll get the $700 billion, and I will take care of you guys. Paulson said that if Treasury was forced to make direct purchases from companies of their assets, then he would follow the same aggressive method he had used with Fannie, Freddie, and AIG where CEOs lost their jobs. However, if companies opted to participate voluntarily in the bailout program, he was willing to be generous. He would not buy their assets at fire sale prices but at what he called a “reasonable” value. Restrictions on golden parachutes applied prospectively, and only in cases of bankruptcy or firing. He would not seek stock warrants (essentially options to sell stock at some future time) on the first $100 million of assets purchased, and the warrants would be for non-voting stock. Finally, he sought to re-assure them over a provision of the bill that called for the government to recoup any losses to its $700 billion fund after 5 years from the financial industry generally. He said that this was essentially boilerplate that showed up in many Congressional bills, that 5 years was a long time away, and that new legislation would be required at that time for it. In other words, he thought it would be defeated and wouldn’t happen.
On September 29, 2008, in a 15 minute vote that was held open for 38 minutes, conservative Republicans and liberal Democrats defeated the bill 205-228 in the House. 140 Democrats voted for the Bush-backed “compromise”. 133 Republicans opposed it and their President. It is probably too much to hope for but it would be nice if at this point lawmakers discarded the Paulson plan and considered alternatives.