Breakdown of Rescue Bill Proposed By Senate

After the Emergency Economic Stabilization Act of 2008 was rejected by the House of Representatives on Monday, the Senate has put forth an amended bill that it will vote on later Wednesday.

Click here to read the full Senate bill

The bill is designed to restore liquidity and stability to the financial markets and protect home values, college funds, retirement accounts and savings account. As part of the revised bill the Federal Deposit Insurance Corp.(FDIC) will increase the amount of deposits insured to $250,000 from $100,000. With some exceptions, the authorities of the act will terminate two years from the date of the enactment.

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TROUBLED ASSETS RELIEF PROGRAM

As part of the bill, the Treasury Secretary is authorized to create a troubled asset relief program called TARP to purchase troubled assets from any financial institution. Troubled assets include residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to mortgages. It also includes any financial instruments that the secretary determines necessary to purchase to promote stability in the financial markets. That includes troubled assets held by, or on behalf of, eligible retirement plans.

The secretary is only allowed to spend $250 billion to buy troubled assets at any one time. The president has the authority to request an additional $350 billion from Congress. The secretary has access to a total of $700 billion.

PREVENTING UNJUST ENRICHMENT

The bill allows the secretary to take necessary steps to prevent cpmpany owners from profiting through sales of troubled assets to, such as prohibiting the assets from being sold at a higher price than what the financial institution had originally paid. This act guarantees troubled assets originated or issued before March 14, 2008.

Any financial institution that chooses to sell troubled assets to the government will be subject to executive compensation requirements. Executives that take unnecessary and excessive risk will see their compensation limited. Financial institutions selling the troubled assets would be required to pay back any bonuses or incentive compensation paid to senior executives if statements of earnings and gains are later proven to be inaccurate. Financial institutions will not be able to make any "golden parachute" payments during the period in which the secretary holds an equity or debt position in the company.

EFFORTS ON FORECLOSURES

If the secretary acquires mortgages, mortgage back securities, and other assets secured by residential real estate, the secretary must implement a plan to assist homeowners and to encourage the servicers of the underlying mortgages to take advantage of HOPE, the government’s foreclosure prevention program. The secretary may also use loan guarantees and credit enhancements to facilitate loan modifications to prevent foreclosures that can be avoided. Assistance for homeowners can come in the form of reduction in interest rates and reduction of loan principle.

MONITORING AND REPORTING OF NEW POLICY

The bill contains the establishment of the Financial Stability Oversight Board, which is designed to monitor the act. The Oversight Board, is charged with reporting any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General for TARP or the U.S. Attorney General. The board includes the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities Exchange Commission, and the Secretary of Housing and Urban Development.

The secretary is required to provide a monthly report that provides an overview of the actions being taken. The report will include the actual obligation and expenditure of the funds provided for administrative expenses and a detailed financial statement with respect to the exercise of authority under this act.

The oversight panel will submit a special report on regulatory reform by Jan.20, 2009. The report will analyze the current state of the regulatory system and its effectiveness in overseeing the actions of financial companies and protecting consumers. The report will provide recommendations on whether any financial markets outside the regulatory system should be subject to oversight.

The secretary is required to make available to the public in electronic form the description amounts and pricing of assets acquired under the act within two business days of the purchase or trade.


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