Monday, September 29, 2008

The Treasury Plan

From the WSJ:

The bill authorizes $700 billion for the fund in installments. Treasury will first get $250 billion, with an additional $100 billion immediately accessible. Congress would have the option of blocking the final installment of $350 billion by issuing a joint resolution within 15 days of any requests.

Although I don't like the spending this is a lot more palatable. It gives the Treasury enough money to probably make a dent in the current situation while allowing Congress to use the "power of the purse" to control the situation.

Treasury plans to hire asset managers to determine how to buy bad loans and other ailing assets from financial institutions. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. The legislation requires Treasury to set guidelines within 45 days for pricing methods and setting the value of troubled assets, as well as mechanisms for purchasing assets, procedures for selecting asset managers and criteria for identifying troubled assets to buy.

The legislation requires Treasury to purchase assets at the lowest price, and allows the government to buy through auction or direct from institutions.

Treasury expects to start buying the simplest assets first -- mortgage-backed securities, for example -- followed by more complex securities. Treasury likely will publish a list of the assets it is seeking to purchase. Banks and other institutions are expected to submit bids in a competition to sell bad loans and securities.


This is where we had problems before and still have them. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. That phrase should scare the hell out of anyone reading it -- and rightfully so. It's a terrifying phrase.

This isn't too hard people. If you're going to do this you should set a few basic guidelines. One -- those who made really stupid decisions in buying this paper without analyzing it should not be able to dump it at an above market rate. Letting them do so subsidizing that mistake on the backs of taxpayers.

I have no problem with hiring asset managers. I've worked with these type of people before and they're very capable. But with the amount of money involved -- and with tax dollars on the table -- more details need to be included here.

The legislation places restrictions on executive compensation for certain companies that sell assets to Treasury. If Treasury buys assets from a company directly -- something it would do if a firm were failing -- then no "golden parachute" exit payments could be made during the period when Treasury has an ownership stake in the firm. Companies that sell assets to Treasury through an auction process will be subject to some limits. Firms that sell more than $300 million of assets to Treasury won't be allowed to make any new golden-parachute payments to top executives. A tax-deduction limit on compensation above $500,000 also will apply.

This should be regulated by Boards of Directors. But that isn't going to happen anytime soon. So this is a good start. Paying people for failure encourages bad management decisions. Someone has to tell that to companies in the market place.

The legislation requires Treasury to receive warrants in companies that participate in the program. If a company sells its assets through an auction, Treasury will get a nominal amount of nonvoting warrants. If Treasury buys assets directly, it could get a majority equity stake.

No problems here. The bottom line is we're engaging in a partial nationalization scheme here. Might as well go full boat and actually own part of these companies.

The Troubled Asset Relief Fund will be overseen by a bipartisan congressional commission that will receive reports from Treasury every 30 days. The program will also be overseen by a board comprising the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission, the Housing and Urban Development Department and the Federal Housing Finance Agency.

The office of accountability will have an inspector-general office within Treasury.

Treasury will have to submit a written report to Congress no later than April 30 on the overall financial regulatory system and "its effectiveness at overseeing the participants in the financial markets, including the over-the-counter swaps market and government-sponsored enterprises" and recommend improvements.

Not good. There are a lot of inside players here who have an interest in not performing decent oversight. I would prefer to see some outside parties from industry players who aren't participating in the program (which might be hard to find). In lieu of that, perhaps econ and finance professors who know high-finance. This looks like letting the fox guard the hen house.

If after five years the government has a net loss, the president will be required to submit a legislative proposal to seek reimbursement from the financial institutions that participated.

Good idea, but we need more meat on the bones. My guess is there isn't any meat because doing so would make this a non-starter legislatively.

Treasury will buy mortgage-backed securities, mortgages and other assets secured by residential real estate. The legislation requires Treasury to use its position as the investor in those loans and securities to "encourage the servicers of the underlying mortgages" to help minimize foreclosures.

It also calls for Treasury to "identify opportunities" to acquire "classes of troubled assets" that will improve the ability of Treasury to help modify and restructure loans. The idea is that Treasury would be more patient with homeowners who have fallen behind on their payments than commercial lenders.

There is way too much soft language in this section to make it meaningful. The Treasury will "use its position to encourage...." Simply put this is feel-ggod language that has no bite. It's a dead issue.

The bill would require Treasury to establish, alongside the asset-purchase plan, a program to insure mortgage-backed securities. Financial institutions that want to participate would essentially pay the government a fee and, in return, the government would insure their assets against any future losses.

This should have been done when times were good. This will help should there be another crisis in 10 or more years. For now, this is a good start.

The legislation would require the Securities and Exchange Commission to study so-called mark-to-market accounting standards, which require that firms reflect the market value of assets on their books. Such accounting has culminated in many financial institutions writing down big losses as the value of certain assets has fallen in price. The SEC would have to study the accounting rule's effect on balance sheets and report to Congress within 90 days of its findings.

Excuse me? How in the hell did this get in there? This looks to me like the beginning of serious trouble. First, the SEC is a neutered animal right now. It has done nothing during the current crisis to warrant any confidence in any of its abilities. Secondly, I can tell you exactly what that report will say. "Mark to market caused the problem. Let's use a new "mark to fantasy" method of accounting that will make the books look really good." That's where this one is leading folks.