Bailout action moving at brisk pace
As Treasury’s financial rescue plan accelerates, the chances are increasing that Congress could face another vote this year on releasing the second half of the $700 billion authorized by lawmakers earlier this month.
President Bush announced Tuesday that the administration is committing the first $250 billion to an ambitious plan under which the government will purchase preferred, nonvoting shares in banks. Minutes later, the White House gave notice to lawmakers that Treasury will want access to a second tranche of $100 billion to begin the purchase of troubled mortgage assets under a series of auctions over the coming months.
Plans for the first of these auctions could be announced as early as next week. Depending on its success, Treasury may soon be in a position to want to tap into the second $350 billion. This translates into a faster pace of spending than most lawmakers assumed when the rescue plan was signed into law Oct. 3, and could set the stage for a vote after the November elections on the release of the remaining funds.
Democratic leaders are already talking of bringing lawmakers back then for debate on a second economic recovery or stimulus bill. The result could be a remarkable convergence of economic issues at a time when the White House and Treasury will also be making a last push to overcome labor opposition and win House action on the Colombia trade agreement.
Administration officials said no decision has been made yet on the timing of the second $350 billion, but it could be in Treasury’s interest to press for an early decision this fall — not later. Under the authorizing legislation, any single lawmaker can trigger a resolution disapproving the release of the funds. But with Bush in office, it would take a two-thirds majority of both the House and Senate to be effective and overcome his expected veto.
“Today’s actions are not what we wanted to do — but today’s actions are what we must do to restore confidence in our financial system,” said Treasury Secretary Henry Paulson, a slow-to-the-table advocate for the bank stock purchases.
“Government owning a stake in any private U.S. company is objectionable to most Americans — me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”
By his side, both the Federal Reserve and the Federal Deposit Insurance Corporation moved ahead with their own initiatives to ease the credit crunch by buying up short-term debt and greatly expanding federal guarantees for bank deposits and loans between banks. But Treasury remains the most pivotal — and Tuesday’s announcements were played out, ironically, in the department’s historic “Cash Room.”
Eleven days after passage of the rescue bill, what’s taking shape is at least a three-part attack. The bank stock purchases will supplement — if not supplant — the initial emphasis on auction purchases of assets. And by stepping in so directly to help the U.S. banks, Washington also hopes to draw back billions from the sovereign wealth funds controlled from Singapore or oil-rich Arab states.
At one level, the whole struggle has been to find the right balance between government intervention and leveraging outside capital. And given the market turmoil just weeks before national elections, it has been an ever-changing landscape in which once radical-sounding options seem suddenly palatable.
As first conceived by Paulson last month, auctions were to be the chief mechanism by which the government bought up the bad assets held by banks and now clogging the credit system. The goal was two-part: to inject new capital into the markets but also to use the auctions as some novel experiment in price discovery that would help define the potential value of securities, which have fallen to “fire sale” prices with the collapse of the housing bubble in the U.S. market.
If this were done, Federal Reserve Chairman Ben Bernanke hoped it would invite in more private investment. But from the very first meeting in the Capitol last month, prominent lawmakers such as Rep. Spencer Bachus (R-Ala.) argued in favor of more direct investments in banks — rather than through auctions.
Though Paulson resisted this approach, Bernanke was more open to the idea, and the authorizing legislation was broadened to give the administration this option if it chose that path finally.
That became certain when Great Britain’s government announced it would invest in major banks there. As Wall Street fell dramatically last week, Paulson moved in that direction as well. American banks were fearful that their overseas competitors would outpace them with infusions of government funds, and Washington was under pressure to act more in tandem with its allies.
Nine leading U.S. banks, after some jaw-boning by Treasury, have agreed to participate in the program and will consume half or $125 billion of the $250 billion commitment. Small and medium-sized banks and thrifts will have through Nov. 14 to elect to participate, and Treasury officials estimate that the full $250 billion will be committed by the end of this year.
The minimum subscription amount available to a participating bank is 1 percent of its risk-weighted assets. The maximum subscription is the lesser of $25 billion or 3 percent of risk-related assets.
All participants will be subjected to government-imposed rules limiting executive pay and severance packages as long as Treasury continues to hold an equity interest. And the interest dividend charged would ratchet up from 5 percent to 9 percent after five years, creating another incentive for companies to buy out the government after a period.
Both Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, welcomed the administration’s action — and Paulson’s embrace of executive compensation limits that had been a priority for many lawmakers.
“The steps that the Treasury announced today with respect to executive compensation are historic and set an important precedent,” Frank said. “This is the first time in American history that the federal government has applied restrictions on the compensation that goes to top executives.”
In rushing to put its program in place, Treasury has met criticism from black lawmakers, fearful that minority firms will be excluded from the process. But elsewhere, Paulson has gotten good marks for Treasury’s cooperation with the Government Accountability Office, which said Tuesday that it had assigned an estimated 20 people already to oversee the operation.
Going forward with the auctions, conflict-of-interest issues will become more important. And after being briefed by GAO, Frank said there is some evidence that the standards imposed by Treasury on law firms have already begun to bite, which may be why three dropped out after being invited to make submissions for a contract.
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Bailout action moving at brisk pace
By DAVID ROGERS | 10/14/08 6:27 PM EDT
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