4:15 pm – Dow 777.68 (6.98%). This delay was because it took 15 or so minutes to collate all the latest transactions.
4:13 pm – Dow 770.59 (6.92%)
4:10 pm – Dow 6.60% Nasdaq 9.14%.
Breaking News: The House has defeated the $700 billion bailout bill. This is the very definition of huge unexpected breaking news. Dow 5.53% Nasdaq 6.66%
Edit: 2pm. Paul Kedrosky and the Campaign spot is where I got news updates from. Also have BBC news on. Dow Jones now 4% down, and NASDQ down 5.69%. Also 207 yeas and 226 nays. 218 yeas are needed to pass the bill. The BBC is going crazy – they can’t understand that the vote can be kept open.
Edit: 1:55 pm. (courtesy The Campaign Spot) Currently, the vote on the Bill is 205 yeas to 228 nays. They can keep the vote open, and will try to swing the requisite votes so they can get the bill approved.
The stock markets are seeing massive losses – DOW down 3.7%, NASDAQ down 5.81%. GOOG goes below $400 for the first time in 2 years. AAPL is down 16.49% (two analyst reports also had a part).
Edit: These are my thoughts after reading 60% of the Bailout Bill. I’ll think through my thoughts and finish the bill and add more later –
At this point my 5 main takeaways would be
- The Secretary is going to be the most powerful man in the world if this Bill passes.
- The bill postures to ‘save taxpayers’ – however, the facts seem to indicate that troubled financial institutions will be the primary beneficiaries. I say this because the mechanisms to help taxpayers are at best vague (encourage institutions to reduce foreclosures etc.) whereas the benefits to financial institutions is clear (buying their trouled assets with the $700 billion).
- There is very little transparency.
- The bill talks about and explains the solution. However, it does not explain why we are in this mess, and how the bailout will actually solve the problem and prevent it happening in the future.
- This is socialization of the economy with profits to the banks and losses shared by the taxpayers.
The huge emphasis on ‘trying to save the taxpayers’ doesn’t vibe with the fact that all of the $700 billion will go from taxpayer money to bail out financial institutions.
Edit: This is where i originally started – Paul Kedrosky linked to The Discussion Draft of the Bailout Bill. I have to confess that although both my parents are in the stock market I have zero idea of the financial ramifications and what the underlying issues are – why does the US need a bailout? Why are there so many takeovers? And why do the US taxpayers have to pay 700 billion to save the banks?
I’m not even sure if these are the correct questions to be asking. So what better than to read through the whole document – surely, this draft being presented to congress would offer a good clean explanation of the necessity for a $700 billlion bailout.
And since I don’t really have a ‘personal’ blog I might as well put down my thoughts and findings here. Note that although it is primarily commentary on what the document says, by virtue of my being human it does include some of my gut reactions. I’ll also mark out where I quote directly from the Discussion Draft as a blockquote.
The Discussion Draft – 110th Congress 2D Session.
To provide authority for the Federal Government to purchase and insure certain types of troublet assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting tax-payers, and for other purposes.
This Act may be cited as the “Emergency Economic Stabilization Act of 2008”.
This is followed by a Table of Contents which I just skimmed over. A further discussion on purposes lists among other things providing authority to Secretary of the Treasury to restore liquidity and stability to the financial system of the United States. And to ensure that that authrity is used to protect home values, college funds, retirement accounts, and life savings. Basically from the purpose it seems that the aim of the bill is to help US taxpayers.
There’s a definition for terms used, and that brings us to Title 1 – Troubled Assets Relief Program. The Secretary will establish a TARP, and has total freedom to buy troubled assets from any financial institution on any terms the Secretary determines. Also, following the rules in the Bailout bill itself.
Also the Secretary will consult with the Board of Governors of the Fed, and a few other people representing governmental agencies.
An office of financial stability will be setup and be headed by an assistant secretary of the treasury appointed by the President (with the advice and consent of the Senate).
Now there’s an interesting part where the scope of the Secretary’s activites and freedom is spelled out –
- Appoint people to carry out the Bill.
- Enter into contracts.
- Designate Financial Institutions as financial agents of the Federal Government.
- Establish vehicles to purchase, hold, and sell troubled assets and issue obligations.
- Issue regulations and guidance to carry out the bill.
After this there’s a discussion of how within 2 days of purchasing troubled assets the Secretary will publish program guidelines. I guess this is about transparency.
Preventing Unjust Enrichment
This little piece really caught my eye –
In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.
This is just too full of vagueness and loopholes. And it doesn’t seem to look at the reality that very very few, if any assets have a market value of what they were bought for. I think this is one of the finds for me – its the equivalent of a blank check.
Moving on, there’s another really big thing i.e.
Insurance of Troubled Assets
Basically this part says the Secretary will be able to give guarantees for any troubled assets originated or insured prior to March 2008. And also be able to determine the terms and what the premiums for these guarantees will be.
There’s a whole section on premiums which lets the Secretary determine what premiums should be, let them vary based on level of risk, etc.
A few boring subsections, and we’re on to another interesting section –
Sec 103 – Considerations
This section basically again spells out how the Bill is aiming to help taxpayers, and help families keep their homes and stabilize communities.
This section is actually more of a ‘everyone we’re trying to help, everyone we’ll help, we’ll be fair, we’ll save the taxpayers’ section.
Sec 104 – Financial Stability Oversight Board.
This is basically a ‘make sure everything is above board and things are being done well’ board, with membership including –
- Chariman of the Board of Governors of the Federal Reserve System.
- The Secretary of the Treasury.
- Director of the Federal Home Finance Agency.
- Chairman of the SEC
- Secretary of Housing and Urban Development.
Also that the chariman of this board will be one of the members, excepting the Secretary of the Treasury.
An interesting thing is that they’ll meet 2 weeks after formation, and then every month. However, their reporting to Congress will be every 6 months. That just seems too far apart, given that banks are collpsing every week.
Sec 105 – Reports
The Secretary of the Treasury will report to Congress every 30 days. These reports will include details on purchases of troubled assets, explanation of valuation method, justifications, future outlook, etc.
Also, these reports must come in 7 or less days after every 50 billion dollars is spent.
25% through the Bailout Bill, A Break and My Thoughts.
I’m a quarter through the report, and I must say that the Secretary of the Treasury is beginning to look like the most powerful man in the universe.
Also it’s interesting the number of times altruistic terms like ‘saving taxpayers’, ‘saving retirement funds’, and ‘saving families’ homes’ are mentioned.
On with the Bailout Bill …
Second Quarter of the Bailout Bill
Sec 106 – RIGHTS; MANAGEMENT; SALE OF TROUBLED ASSETS; REVENUES AND SALE PROCEEDS.
Basically gives the Secretary of the Treasury total powers to do any sales, exercise, purchases. That’s what the wording seems to indicate.
Sec 107 – Contracting Procedures
The Secretary may waive specific provisions of the Federal Acquisition Regulation. Must report this and justification with 7 days. There’s a subsection there Sec 107 c) that totally flew over my head.
Sec 108 – Conflicts of Interest
Truth is this whole section is pointless because its basically saying – the Secretary will determine hw to avoid conflicts of interest, and go ahead and do what he has to do and send you an assurance that no conflict of interest occurred.
Another really interesting section –
Sec 109 – Foreclosure Mitigation Efforts
A section on how the Secretary will take advantage of HOPE for homeowners program to try to minimize foreclosures. It does limit participation to the extend possible by mortgages taken on by the government.
There’s also an interesting Sec 109 c) subsection on ‘Consent to Rasonable Load Modification Requests’.
Another really interesting section –
Sec 110 – Assistance to Homeowners.
Note: It’s not very clear to me whether we’re exclusively discussin the Fed and Fed controlled mortgages or all mortgages.
Again, talks about how ‘whoever has the rights to your home/home loan’ will try to use the HOPE for homeowners plan to help you out, and avoid foreclosures.
These methods of helping you may include –
- reduction in interest rates
- reduction of loan principals
- other similar modifications
These plans have to be developed by the Financial institutions within 60 days of the passing of the Bailout Bill. And they have to report to congress every 60 days.
Sec 111- Executive Compensation and Corporate Governance.
Any company that sells troubled assets to the Fed has to adhere to the executive compensation requiements under certain sections of the Internal Revenue Code of 1986, section 302.
It specifically puts limit on the top 5 executives of any corporations that sell the Fed troubled assets.
Its a really complicated section – I don’t understand it much at all. There are so many conditions that you get lost in the weeds.
Sec 112 – Coordination with Foreign Authorities and Central Banks.
Secretary shall coordinate with foreign financial authrities and central banks towards the establishment of similar programs by them. And, perhaps i have this wrong – however it seems to say that the Fed could buy these troubled assets off of them.
Sec 113 – Minimization of Long Term Costs and Maxmization of Benefits for Taxpayers.
Actually most of this section seems to deal again with the powers of the Secretary – holding assets for as long as ideal, determining best prices, using market mechanisms, encouraging private participation, and so forth.
Sec 113 is probably the biggest and most important section – why is it mislabeled as ‘maximization of benefits for taxpayers’ when it’s actually ‘maximization of powers of the Secretary’.
Sec 114 – Market Transparency
A section I like – within 2 days of any purchase the Secretary will make available in electronic form the details of the deal.
The section on requiring financial institutions to disclose all details to the public is weak – all it says is that the Secretary will ‘recommend’ that the institution reveals details. Would you offer someone a loan without knwoing their financial health?
Sec 115 – Graduated Authorization to Purchase
This is really interesting – initially the secretary has access to $250 billion. On Presidential approval, another $100 billion will be available. And on joint passage of ‘some sort of approval’ by Congress, another $350 billion will be available. If news reports are accurate, this is courtesy Nancy Pelosi.
Then some details on ‘joint approval’, procedures, etc. There’s basically 5 or so pages detailing what this joint approval means, how to get it, how to fast track it, and so forth.
Sec 116 – Oversight and Audits.
Comptroller General of the United States will commence ongoing oversight of the performance and activities of the TARP.
A whole bunch of criteria for this oversight and auditing. This is another huge section (3-4 pages) and makes little sense to me.
Sec 117 – Study and Report on Margin Authority
This is the most fascinating part to me – the Comptroller General will undertake a study to determine to what extent leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis.
Sec 118 – Funding.
Securities issued under Chapter 31 of title 31, United States Code will be used for funding the administrative and other costs of doing all these Bailout Bill activites. (i think they mean running costs).
Sec 119 – Judicial Review and Related Matters
Something I don’t understand at all.
Sec 120 – Termination of Authority.
This is a compelling section – The Bailout Bill expires Dec 2009. It may not be extended any longer than 2 years from when it is initially enacted so October 2010. I hope i read this right.
It seems to be the right place to cut it off. We’ve gone through 60% or so of the Bill and skimming over the rest shows me that I’ll need a lot more time and energy to make sense of it. I’m adding my conclusion at the beginning.