No Runny Eggs

I wish I had one of those flashy light thingys that Drudge has….maybe I can get Steve to get me one for Christmas!

Speaking of Christmas….

It was closing in on midnight as I was tearing into the sausage last night. I tried to give a bit of editorial but honestly had though through it well enough. Today is another day and I have now had a chance to drink some coffee and think through this mishmash of legislation.

One line from last night’s post popped out at me this morning:

Treasury is also to focus on purchases assets held by retirement plans

Huh?   I thought the purpose of this bill was to reflate capital in companies that are at the core of our lending. What have retirements funds got to do with that?

Sure, large pension funds invest in assets. Sure, they invest in debt backed securities. Some of them even do a small amount of direct lending. While there could be some, I’m not aware of any pension fund that lends directly to homeowners.

This provision, this single paragraph in the bill, is there to provide political cover for Democrats. They have inserted this provision to reflate numerous union pension funds. Merry Christmas pension funds!   This is a horrible provision!

If the purpose of this bill is to restart our lending and pension funds do little if any direct lending, why are we allowing any of these funds to be allocated to them? This will siphon some amount of funds and move them away from their primary target. Which brings me to my other concern with this bill.

This bill gives far too much latitude without even so much as guidelines to the folks who brought this disaster to us. They didn’t make good decisions in the past, why should we expect them to now?

I remain conflicted on this bill. I feel a little like the first person who received chemo for cancer felt:

Doctor: “You have cancer. We believe that the best way to cure it is to give you poison! We think we can poison you to the fine point where your body throws out. If we miss by just a little bit, well, you die.”

Patient: “Oh, OK.”

I’ve read the bill…all 110 pages.   You can to, it’s here!

While most of this has been reported, there are a few clarifications that are worth noting:

Trouble Assets Relief Bill – TARP

• Gives the Secretary of the Treasury the ability to Purchase or Insure these assets.   The combination of the amount purchased and the net amount, after premiums paid, can not exceed $700B
• Several times in the bill there are notations that TARP should act to maximize the taxpayer’s dollars…nice sentiment, we’ll see what happens.

While generally saying they are to be non discriminatory, there are areas where the bill says Treasury should consider uniquely:

• Treasury is instructed to consider the financial health of the institution they buy assets from.   If the asset purchase will not help the financial viability of the entity, Treasury is “instructed” to put that institution at the bottom of their purchase list.
• On the other hand, the Treasury is to look favorably on institutions that have less than $1B, were adequately capitalized as of 6/30/08 and served low or moderate income populations…..isn’t that part of what go us into this problem?
• Treasury is also to focus on purchases assets held by retirement plans

The Board of TARP includes: Chair of the FED, the Secretary of the FED, Director of the Federal Home Finance Agency, Chairman of the SEC, Secretary of HUD…none of these people seemed to have forseen this problem.   Are they the best folks to have giving oversight to this?   I’ve heard Mitt Romney’s name proffered to handle this thing.   Wouldn’t it be best to have some folks that are outside of those who created or allowed the problem to direct the resolution?

All revenues recouped go to the General Fund for reduction of Debt – This is a big issue!   How do you suppose the Dems will glom onto this and play games like have been done with Social Security?

The “Golden Parachute prohibition” does not apply to existing contracts and only applies as long as TARP owns securities or debt of the particular institution as a part of the asset purchase

As has been reported, TARP gets $250B now, $100B after the President sends a report to Congress and the remaining $350 after a second Presidential certification.   The final amount does not need Congress’ consent but Congress may vote to block it.

The bill does require TARP to receive warrants for non voting shares or Senior Debt of each company it buys assets from.   The bill leaves up to the Secretary for the Treasury to determine what price the warrants will be or what amount of debt.   The bill does not have a provision for how or when the warrants or debt would be extinguished.   There ought to be a provision that requires sale or forfeiture of the warrants within a certain period after the debt is cleared.   We don’t want the Federal Government being stockholders of any publicly traded stocks for an extended time.

Any gain (Ha!) or loss from the sale of preferred stock of Freddie Mac or Fannie Mae will be allowed to be recognized as an ordinary loss (no gains here) for financial institutions as long as they were purchased prior to 9/6 2008.   Typically, if they were held over a year, these loses would be capital and limited to certain limitations.   This is a nicety, I don’t know that it means much to these institutions.

The institutions that have assets purchased from them will not be able to deduct more than $500K of executive compensation.   This only applies to institutions that have at least $300M purchased from them and applies until TARP terminates which would be 2011 at the latest.

A few thoughts:

This program should not cost the taxpayers anywhere near $700B.   If Paulson and company do their job properly, this should cost no more than administrative costs and may return positive money to the treasury.

I can’t seem to find a provision that says TARP needs to do something with the warrants by a certain date.   Typically, warrants have an expiration date so perhaps that is part of the negotiating.   I’m nervous that the Secretary of the Treasury gets to negotiate all of the warrants or debt received.   When you get to negotiate not only the amount you will pay for the debt but the amount someone will pay you to take it, well, that sounds a whole lot like loan sharking to me!

I like the continued references to focusing on managing for the taxpayer.   Unfortunately, this is a governmental agency that they are asking to do it.   Can anyone name me one governmental agency that is careful with taxpayer money?

I’m sure there will be more clarification coming.

I wrote last week that McCain’s gambit of suspending his campaign made the events of this weekend something like the gunfight at the campaign corral. It was going to be a high stakes gamble that would put the possibility of McCain’s election in the balance. It’s 7:30 PM and the House leaders have just had a brief news conference. Based on what it appears now will be passed, I’d say that as the smoke clears, McCain wins.

Remember that when McCain suspended his campaing last week, many people believed he did it as a political stunt. Blame John McCain for that as not doing a good job of communicating what he walked into. According to Bloomberg.com Lindsey Graham is quoted as saying:

“The fact is the House Republicans were not in the mix at all” until McCain arrived at the talks, said Graham, a South Carolina Republican. McCain “was decisive in regards to the House being involved.”

Tonight during the press conference, John Boehner, House Minority leader said:

they would have run over me like a freight train

While Nancy Pelosi calls House Republicans “unpatriotic” for missing a meeting, It turns out that they weren’t invited to it!

OK, so McCain was involved. Now the question is whether his attendance made any difference? To that, I’d have to say yes.

The latest bill has had the following positive changes:

• Funds that were to be siphoned to ACORN and La Raza have been stripped from the bill.
• The provision that allowed judges to reset mortgage terms has been stripped
• If the “work out” (no longer called a bail out) costs taxpayers money after 5 years, Congress has an affirmative responsibility to present a plan to recoup the cost.
• There will be an insurance program available as part of the program.

In comparison to what was inkled to us on Thursday, as Barney Frank and Chris Dodd frantically tried to head off McCain’s appearance in Washington, this bill has more accountability and doesn’t throw all vestiges of free market economics into the abyss.

While I’m far from happy about having to do this at all, I’ve concluded over the weekend that something needs to be done and the pure insurance option that the House Republicans were offering had too many shortcomings to effectively change the trajectory in any short order.

Had John McCain not arrived when he did, we would have had a 100% socialist, Big Government “solution” provided. Admittedly, this may only be 92% socialist, Big Government. Under the circumstances, I’d say that was an important 8%.

With the American public as anti “bail out” as the poles have suggested, the House Republicans have a good story to tell about how they, and only they, fought at all for the Taxpayer. If the Republicans point out McCain’s intervention and the changes made, I think the American public will see once again, who was a Leader and who merely tried to manage through a situation.