No Runny Eggs

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.