CNN has reported that a draft of the "Main Street Bailing Out Wall Street Bill" is here! Thank you Main Street. This latest compromise bill is one hundred and ten pages and therefore 3,500% better than Hank Paulson's original three page plan. The draft is now circulating through Congress as leaders try to gauge support. We will keep you posted as I read through the Act.
Here is a copy of the proposed bill courtesy of CNN
http://money.cnn.com/2008/09/28/news/pdf/index.htm
Its name is, "The Emergency Economic Stabilization Act of 2008" Reading now. I like "Main Street Bailout of Wall Street Act of 2008" better.
It appears that the Act gives Treasury the decision making power whether to purchase troubled assets (which are described as residential and commercial mortgages and any security related to those instruments.) or to turn to the House Republicans plan of offering a credit guarantee on any related troubled asset. The House Republicans are going to be pissed when Treasury completely ignores this option. This will make the oversight meetings interesting. Also, if Treasury deems it necessary to purchase any other asset class, it must first consult with The Federal Reserve and transmit its intent to Congress.
The Act calls on Treasury to come up with a methodology for pricing and valuing troubled assets, procedures for selecting asset managers (Remember PIMCO said they'd work for free if everyone else did!), a criteria for identifying troubled assets for purchase. Treasury has forty-five days from the passing of the bill to come up with the goods.
The Act establishes a Financial Stability Oversight Board to oversee the implementation of the Act. The Board will be made up of The Chairman of The Federal Reserve Board, The Secretary of The Treasury, The Chairman of the SEC, The Secretary of HUD and the Director of the Federal Home Finance Agency. The Act calls for some pretty detailed reporting of activities to the oversight board. The Board will review actions almost on a line by line basis with regard to purchasing or insuring troubled assets.
The Act addresses "Foreclosure Mitigation Efforts" on any underlying mortgage that Treasury might purchase. The Treasury can use credit enhancements and loan guarantees to mitigate avoidable foreclosures. I'm no expert but this appears to be where this Act dovetails with the "Economic and Housing Recovery Act of 2008". The Treasury can target pools of loans underlying securities it has purchased and work to modify terms and conditions of existing mortgage contracts. The Democrats didn't get their wish for bankruptcy procedure changes but they have granted Treasury a lot of latitude in the Act to mitigate foreclosures.
The Act has many pages dedicated to executive compensation caps and golden parachute snips. A pimple on an elephant's butt so I don't care. Just political red meat. God bless.
The Act states that Treasury cannot purchase assets from any institution without first receiving warrants to purchase common or preferred non-voting stock. Woooooooooohoooooooooooo!! They will also contain anti-dilution provisions.
The Act calls for $250 billion of funds available to Treasury at any one time. The President can submit to Congress his approval to move that available funds amount to $350 billion. The President can then submit to Congress a strategy to utilize the remaining $350 billion if needed and a joint resolution will increase the maximum funds outstanding at any one time to $700 billion. The Act lays out rules for debate with regard to the resolution.
The bill goes on in painful but necessary detail, laying out the checks and balances around the implementation of the Act. It makes it even more amazing that The White House thought they could hand a three page, double spaced document to Congress, for this authority and think that ANY of them would have signed it!
Whoa! On page 96 - The Chairman of the SEC can suspend mark to market accounting? Lucky for the bill, no one in Congress knows what that means except what Yingling over at the ABA tells them, which is, "get rid of mark to market accounting." Good thing the Chairman of the SEC is a smart guy..oh wait...no. Well, at least the SEC is going to commission a study of mark to market accounting. I guess if we didn't have mark to market accounting everything would be okay right now. Unpatriotic accountants!
I can't find it, probably to do with my ADD, but Bloomberg News is reporting that the Act will also give the Federal Reserve the authority to pay interest on deposits. This is important because right now, banks with excess cash are hoarding it as opposed to the normal Fed Funds and longer term based lending to banks that have deficits. Now, banks with excess can bring it to the Fed and receive a market interest rate. The Fed, in turn can get the funds to banks who are short. This is a nice step. If you can't trust the Fed then....?
*As of 8:10 PM House Republican rank and file are still behind closed doors listening to their leadership, that has already agreed to the package. This has been going on for three hours. Analysts are saying that if the leadership had the votes in pocket this scene wouldn't be going on. Until those boys come out of that room and say they got the votes, I wouldn't assume this bill is a done deal.
* 8:20 PM....House Minority Leader John Boehner just came out to address the press. He looked just like Tommy Kirk when he had to shoot "Old Yeller"! He and Representative Roy Blunt spent the last three hours going over the new bill with the rank and file. I would say by the looks on their faces that the bill is going to get the votes because they carried themselves as guys who are doing something they just don't want to do.
Here's a tip to all these great Americans that we have in Congress. The guys who keep talking about "Wall Street" as if its some secret evil society that they never interact with, and "Main Street", this mythical place where everyone is pure as the driven snow. Hard working, responsible, God-fearing, etc, etc. Hey boys, cut the bullsh*t! You've been living off the Wall Street teat most of your adult lives. You ever take money from a banking lobbyist, or a real estate development lobbyist? Have you ever voted to help some big old company get a deal that put hard working Americans out of work? Sure you have. Here's another question; Any of you fine fellows serve on any banking or housing committees? I'm sure you have. Did you support deregulation of the financial sector? Did you ever ask any questions when the folks in your hometown were buying all kinds of things they couldn't afford. If "Wall Street" is such a bad, awful, un-American place, did you ever try to figure out what exactly it did? Did you ever actually try to understand how the American economy works? I have to tell you boys that from listening to you guys the last few weeks, you don't know a bond from a basketball. So give your little speech and then vote for the damn bill.
"AIG needs more cash because the CDS party for Lehman gets started on Friday where they try to figure out who owes who what. Guess who was a big player in the space selling insurance. Ding, AIG. WaMu's party is getting held on the 23rd.
I wouldn't be a bit surprised to see all of that 37 billion leave AIG very shortly."
Many players in the banking system underwrote protection on Lehman and Wamu and on many other names that very well may trigger future events of default in the future. It is the "perfect" environment to continue cash hoarding. The "Shadow Banking System" of Credit Default Swaps has now come into the light. Like a veteran pass-thru (MBS) trader once told me, "No matter what you do, eventually everything settles to cash." On top of that, we are looking at potential massive hedge fund redemptions going into year end. That means big outflows of cash held at banks who serve as prime brokers.
**Two-year swap spreads are out nine basis points this morning, to 145 basis points over the two-year treasury note. TED spreads continue to widen. It's like you plug a hole in one place (like commercial paper) and another hole springs up.