Treasury Bailout Proposal: Zero Pain for the Perpetrators, Toxic to Taxpayers

True to its pedigree, the Bush administration's proposal to bailout the financial system contains not a single element of shared pain by Wall Street. According to the text I have read, the bozos who bought the mortgage-related assets (MRAs) that contained toxic loans, or that floated the toxic loans in the first place, get those loans purchased by the US government.

That's it. No pain for Bush-McCain-Paulson pals on Wall Street.

The only "considerations" for the Treasury Secretary, who is to do the purchasing, is to foster financial stability of the banking system and to "protect" the taxpayer.

I propose several additional "considerations"

1) Change the word "considerations" to "requirements."

2) No employee or consultant of any organization that sells an MRA under this law may earn total compensation of more than $150,000 plus no more than 25% in benefits.

3) No employee or consultant of any organization that sells an MRA under this law may receive a severance package of more than 2 months' base salary; if an organization already has contractual obligations for larger severance than permitted under this law, it must first change all those contractual obligations prior to selling an MRA under this law.

Why should organizations that the government bails out be allowed to pay their executives huge compensation? They absolutely should not. And, note the government is not dictating the compensation package--all it is saying is that, if an institutions wants to take advantage of the government bailout, then it must abide by certain rules.

No organization is compelled to avail itself of the bailout option. The availability of the bailout does, however, erect a force-field around the executives: if the company fails because the executives do not want to abide by the requirements above, then shareholders will hold them responsible. If an executive leaves prior to renegotiating a severance contract to comply with the requirements, he resigns--and severance usually can only be triggered by a termination without cause, not a resignation.

Toxic to taxpayers. Under the proposed bill, the Treasury Secretary has the power to: "designate financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them".

So, get this, the Secretary is going to designate financial institutions to earn money from the government to determine, for example, the value of the assets of other financial institutions that the government will then purchase.

This provision is highly toxic to the taxpayer. To value the assets--that today, by hypothesis, have little to no value because the holders cannot sell them--a financial institution will have an incentive to assign them a relatively high value because that will establish comparative value for its own similar assets.

I propose, therefore, the following additional requirements:

4) The Secretary should be prohibited from hiring any financial institution to value these MRAs. Nor should he be able to hire any of the major accounting or other firms that do business with banks.
5) The Secretary should be required to get an independent valuation of the MRAs the government buys before the purchase is made. Such independent valuations should be performed by organizations that meet the limitations of #4 above, and have no relationships with organizations in the field.
6) In the Secretary's quarterly reports to Congress, a written basis for the valuation of the MRAs must be included. The Congress reserves the right to forbid certain firms from being engaged by the Secretary at any time.

If this bailout is to be successful, and there are many other reasons to think it may not, it must last least have the sustained support of the American people who, after all, are paying for it not only in cash, but in lost opportunities. Old-boy networking among financial institutions, and high compensation for the perpetrators of this fiasco, will kill it before it gets off the ground.

Comments

[tompoe]

Not much of a plan as far as I can tell. Where's the proclamation that no foreclosures will move forward based on adjustable loans? Keep the homeowners in their homes. Stop the 8,000 foreclosures every day of the week. Contain the damage. Where's corporate welfare? In your plan, but not one peep of help for homeowners. Nonsense.

[Aaror]

One problem I see with point 4, finding qualified accountants who are not working for one of the big international accounting firms will be difficult. The only place I can think to look would be the Accounting professors of the ivy league schools...

[Paul Abrams - Huffpost Blogger]

There are thousands of small accounting firms dotted around the country. They deal with small businesses, and have all the skills of the large firms, but not the capital to get into other businesses.

In fact spreading the work among those firms is actually one way of increasing confidence in the valuations--no one can have a disproportionate influence.

[sproul]

Rather than impose operating requirements like maximum salaries, which make us feel good but don't actually get us our money back, I'd rather have the program require that benefiting companies pay a significantly higher tax rate over an extended period (e.g., a hundred years).

The terms should be onerous enough that only companies truly threatened by bankruptcy will apply, fixing a couple of the proposal's worst flaws:

1.) as currently formulated, anyone owning mortgage securities can participate, even if not threatened by financial problems. This is poor targeting, and needlessly expensive for taxpayers.

2.) the movement of money seems to be one-way to the banks. We need a mechanism to recover that money (and hopefully more) if/when the banks return to profitability. Adjusting tax rates for those companies accomplishes this nicely.