The Deal that Blew Up

The following is the text of the "agreement on principles" that blew up yesterday at the White House, as House Republican leader John Boehner blindsided negotiators by saying Republicans wouldn't support the deal. Sen. John McCain who had arranged the photo op, refused to state where he stood.

The text --- like Treasury Secretary Paulson's original proposal --- is breathtaking in its brevity. They are talking, after all, about authorization to spend $700 billion (or more since it is a revolving fund).

Meanwhile the financial crisis grows worse: the failure of Washington Mutual was the largest bank failure in history.

The annotations are mine. For more discussion, go here

September 25, 2008, 4:26 pm

Text of Lawmakers' Agreement on Principles

Congressional Republicans and Democrats came to an agreement on principles for the Treasury's Troubled Asset Relief Program that they will take into final negotiations with the White House. It includes sections on taxpayer protections, oversight and transparency, homeownership preservation and funding authority. -Phil Izzo

The full text follows:

Agreement on Principles

1. Taxpayer Protection
a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

This is basically a sop for public outrage, designed to insure Wall Street nabobs don't pay themselves millions in bonuses after running their firms into the ditch. Frankly, they'd be smart to volunteer to work for a dollar for the first year; there will be infinite ways to pocket big rewards if their firms are rescued from their follies.

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

This is a vital addition to the Paulson plan. It would give taxpayers an equity stake in the banks that are saved, so that if they prosper, taxpayers, who have taken on their toxic paper that now has no market, have a chance at sharing in the upside.

c. Requires most profits to be used to reduce the national debt

This is sop to the conservative Republicans and Blue Dog Democrats who are posturing on the rising deficit. Fact is Congress should be spending a lot more money getting the economy going -- investing in new energy and conservation, rebuilding roads and sewers, modernizing our electric grid and transport system to put people to work. If the recession continues to deepen, the cost of bailing out the banks will soar.

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

A sharp contrast to Paulson's plan which called for total discretion, with no judicial review.

b. Establishes strong oversight board with cease and desist authority

This is vital -- particularly if the board includes not simply financial gray beards, but independent representatives of workers and consumers. They can keep Paulson from being too generous with taxpayer money to his former colleagues on Wall Street.

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary's authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary's authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation
a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure
b. Requires loan modifications for mortgages owned or controlled by the Federal Government
c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America's housing needs

This "requires" modifications on mortgages that are picked up in the bailout. What is missing is the logical authority to allow bankruptcy courts to work out mortgages. It is bizarre that Paulson, Wall Street and Republicans have decided to oppose what would be the most logical way to work out bad mortgages -- a hearing officer on a case by case basis deciding the best way to proceed.

4. Funding Authority

a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed
b. final $350 billion is subject to a Congressional joint resolution of disapproval

This is designed a bit to limit the initial price of the package, and a bit to keep Paulson from spending it all in the few months before Democrats hope they have their own Treasury Secretary.

What's missing here:

1. Sensible Regulation: There are no requirements for re-regulating the banking system, no listing of no-brainer reforms, like extending limits on capital and leverage to the shadow banking system. A bailout that rescues Wall Street without re-regulation is a fool's errand. If the bankers think their losses are covered and no limits are put on their gambles, they will soon be taking even greater risks. Paulson wants bailout now and regulation later. But when Wall Street is back on its feet, its lobby will fight relentlessly against regulation.

2. Help for the Real Economy: It is simply perverse that the president argues we need $700 billion tomorrow to save the banks but that it is "pre-mature" to have another stimulus program for the real economy. Layoffs are accelerating. States and localities are about to cut back on police, health care, schools, construction projects. We should be investing major sums -- $250 billion or more -- now in the real economy, to put people back to work. If the recession worsens, the balance sheet of banks will worsen, as more people default on credit card, auto and consumer loans.

3. Power for bankruptcy courts to work out mortgages (as noted above)

Comments

[springsm]

No matter what...J. Boehner is a bully. He will vote with bush 100% of the time. He has gotten so full of his mantan self because of his successes in bullying Pelosi's speakership. Boehner is a jerk, a phoney and makes me want to vomit. Look at him to mess anything up if it didn't come from his lips. GO OHIO.

[lion1]

To be extremely frank, its thanks to the US military occupation of Iraq that has cost the United States and emptied the US coffers by US$10 billion a month from March 2003 till today , totalling 700 billion US dollars, which has brought about the credit crunch in the United States.

The Bush admistration has emptied US financial coffers. The US financial system is under seige by hostile forces.

It is thanks to the US $700 billion blunder in Iraq ,that the US is now in a severe economic crises, which is driving the United States to bankruptcy thanks to the flawed policies of the Republican Party and the Bush Administration.

The way to solve the US credit cruch is easy.

Heres the answer.

Divide up Iraq into 3. Divide Turkey into 2.

Establish the Republic of Kurdistan.

Expand the Iraqi Kurds admistration area in a new Republic of Kurdistan.

Establish a US poxy government structure in a Republic of Kurdistan.

Leave a new smaller Iraq and reposition US military forces in Kurdistan, saving billions of US dollars in the process.

Easy as 1,2,3

What are they waiting for?

[freshnotbitter]

I guess they are hesitating because your plan declares war on UK, France, Germany, Italy, Spain and every other country in NATO

[olephart]

Over the last several days I have never seen so much absolute bullshit written about a subject as has been written about the bailout. The Secretary of the Treasury and the Chairman of the Federal Reserve have been reacting like hysterical monkeys for the past year. They"ve been throwing their every resource at the collapsing empires of financial malfeasance without success. Their every action is to sacrifice the honest for the dishonest. To make matters worse, they"re incompetent! Each of their "that ought to do its" has failed.

Now they"re playing "The sky is falling" card. It"s never mind how we got here we have to save the economy for everyone"s sake. If we don"t act quickly we"re all doomed! I"ve seen better pitches by smucks selling time shares in Florida. This is a con job to bail out their bumbling billionaire bond barons. It is unfortunate that the "leaders" of the Democratic Party have no balls. It is ironic that those who allowed this to happen by their stupid and corrupt philosophy of non Government intervention in the Markets are opposing the bailout. It is frightening that no one can read the handwriting on the wall that says "The U.S. Government is next."

[freshnotbitter]

What's really scary is that the Paulson plan basically invites the next crisis.

The NY (Wall Street) Times reports today that Fortune 100 CEO's from areas outside Wall Street are calling Bush and saying he needs to get the bailout plan passed. Example? The CEO of General Motors, Mr. Wagoner.

But Mr. Wagoner is just a recession away from asking for his own bailout, right?

So why do you think he is calling DC to support bailouts?

And how do we deny him?

There are adequate alternative plans out there which would liquefy mortgage backed ASSETTS, if that is what is required, without buying the assetts or taking over the mortgages.

I think the problem may be that Wall Street wants their worthless gambling debts paid off, i.e. derivatives without a real piece of real estate backing.

[yakmeat]

The proposed bail-out will cost $700 Billion (maybe more). This equals about $5,072 for every taxpayer in America. If they're going to use our money, we taxpayers must be treated as investors, not as donors. If the proposed plan works, that $700 Billion investment will eventually turn a profit.

If those profits are kept by Wall Street, the taxpayers end up becoming donors. Some in Congress have suggested that when the banks start making money again, they should share profits with the government. When profits are made, dividends are paid to shareholders. That idea only gets half-way there. Since we are the shareholders, the government should pass those dividends on to us. Each $5,072 "share" should be treated as any other private individual investment. It might be easier to convince us to go along if they agree to just pay each of us individually in cash. Think of it as another "economic stimulus payment", only this kind happens more than once. Because just like with privately held investments, dividends would be payed regularly to each "shareholder" until we choose (individually) to cash out our "stock".

America currently has a negative per-capita savings rate. That could change immediately if every American taxpayer got a tax-deferred $5,072 investment portfolio to help finance college educations or retirement. The benefits could be greater if (like with private investments) our children could inherit our "stock" when we die. Such a plan might solve more than just Wall Streets problems.

[Bladernr1001]

I agree, except that if the government gets any windfall from this do you think that they will pass it on to you???? hell no...they will use it to expand government.

[LuckyBlessed]

No unless required, but more likely as has been the case for some time, it will go to those who used Lobby Blood Money for Corporate Welfare.

Hey buddy, can't you spare 5 Gs?

[freshnotbitter]

"$5000 per taxpayer".......

But that is just the beginning, right? That figure doesn't take into account further losses if real estate values fall further or unemployment (which is rising) goes up and a recession comes.

[researcher]

if history is any indicator of the future then the demos will fold like a deck of cards.

americans this two party system no longer represents you

it is corp fascism now big time

look at the gas prices dropping like a rock even while the price of oil is rising

they are conning you into thinking things are getting better

it is a sham

watch the gas prices rise again after nov 4

wake up america wake up we are being conned by both parties

wall street will win t his on and give themselves big bonuses with our money

wake up america this is a con job

demos are pretending to be on your side

[Ironfox]

It is corp and COP fascism now big time.

[batguano]

So, let me get this straight; an ongoing criminal enterprise (see RICO) aided and abetted by the Bush admn and their cronys in and out of business with the help of massive "deregulation", makes billions in profit by stealing from American homebuyers via mortages sold only to make money under false and misleading sales pitches......and when they steal too much, they must be bailed out by even more theft from the very people, the taxpayers, they stole from in the first place.

Add to this the Bush tax cuts that benefitted mostly the richest 1% of Americans (that Bush wants to make permanent!), a pre-emptive war of chioce that will cost by some estimates $3 trillion and benefitted more cronys, a borrow and spend economy that is costing many more billion$ in interest the taxpayers must shoulder, and a wish-list of military hardware and equipment that boggles the mind.

Instead of "bailing out" these criminals, they should have all their posessions and bank accounts confiscated (including the players who "got out" early) and thrown in the slammer with no bail available....and that includes impeachment of Bush&co! This is the most egregious theft in American history with the victims being blackmailed to give the thieves even more money at the same time millions are losing their homes. And the Dems have almost as much to be blamed for as the Repubs. Unbelievable.

[bayside]

Hitler did this in the 30s right before he took over the country..Neo Nazis think they are clever but they are not as smart as they think they are.Their house of cards is going down..

[Ironfox]

No, actually they are re-enforcing the foundation. Re-read your history.

[charles77]

It does not matter how "regulated" or "unregulated" the trading of these securites was, the problem is that these securites when based on loans with no down payment, no income requirements to people with bad credit so low income groups could buy houses they could not afford.

If the money in the bank vault loses its value, it does not matter how many guards were around the vault!!
http://strategicthought-charles77.blogspot.com/2008/09/democrats-created-fannie-mae-and.html

[Ironfox]

Blaming the victim is a waste of time and unfair. This scam is far more complicated and sofisticated than you present. The 'blame' begins at the top, not at the bottom.

[Ironfox]

Pardon me, Sophisticated

[JustMyWords]

Why does it sound suspiciously like you're blaming the people who went into debt with loans that the lenders assured them were affordable and a good way to invest in their future?

Why doesn't anyone want to blame the idiots that gave those loans?

[Charley2u]

The entire thing is bassackwards, Bob.

Any plan should begin with deep tax reduction of working Americans - 75 to 100 dollars a week. Only if this does not stem the problem should additional help be extended to the financial sector. And, only at a steep cost:

1. We receive an equity position, for any help.
2. No corporate officer receiving pay in excess of a US Representative.
3. Union rights for all employees.

Pay for the tax reduction with an equal reduction in military spending. Don't guarantee the investment of any sovereign wealth fund, central bank, or others at the expense of the standard of living of working American families.

[Zeje]

Good ideas!!

[Ironfox]

The current situation is not so much a crisis of capitalism as a crisis of democracy.

We have a president, who, through a signing statement has given himself the authority to declare a state of emergency at a whim. We have voluntarily sacrificed free speech, habeas corpus, and personal privacy to lesser threats than economic cataclysm.

In the 1930's many Europeans chose to place their material well being above their political rights. It is dangerous to assume that this could not happen again, or that it could happen here. An elite ologarchy with the total control of political, military and now economic power is not a democracy, it is a dictatorship.

[Zeje]

It looks like this is what's happening.

[paixa3]

Good blog Robert. However you can say the same in one line:""give evil one inch and it will take one mile (or more).""

[anniegirl9]

I've never been much for conspiracy thoeries, but I've been having some thoughts here. I find it very hard to believe that Paulson and a few other chief advisors didn't see that this thing was going to blow up. I think they knew for maybe the better part of a year that we were on a sinking ship, but also knew that fixing it would not be easy and would point to their own inneptitude and greed. I think they just weren't sure when it was all going to blow up. So they sat with their fingers crossed hoping things would remain relatively calm for at least another year. That way, another administration and cabinate would be at the helm - hopefully mitigating their blame to some degree. Meanwhile they told us everything was fine.

It would be very easy to find out. Check out thier personal finances and see if they began diverting $ away the stock market and at what point in time.

[apduncan1]

I have a name for you: ENRON.

[anninroosevelt]

What I have been trying to figure out is why the Senate Banking and House Financial Services Committees should have known, and why they didn't. I have always assumed that Congress has access to the same information and has financial analysts alerting them when they should put the brakes on the executive. Does the Treasury Dept. have the corner on information and analysis?

[Charley2u]

If you feel you are indeed paranoid, you might read this obscure footnote from the 19th century:

"The following shows how such times are exploited by the "amis du commerce." "On one occasion (1839) an old grasping banker (in the city) in his private room raised the lid of the desk he sat over, and displayed to a friend rolls of bank-notes, saying with intense glee there were £600,000 of them, they were held to make money tight, and would all be let out after three o"clock on the same day." ("The Theory of Exchanges. The Bank Charter Act of 1844." Lond. 1864, p. 81). The Observer, a semi-official government organ, contained the following paragraph on 24th April, 1864: "Some very curious rumours are current of the means which have been resorted to in order to create a scarcity of banknotes.... Questionable as it would seem, to suppose that any trick of the kind would be adopted, the report has been so universal that it really deserves mention."

This is from Karl Marx in the 19th Century, when creating "money famines" were pretty much routine on the part of London banks.

Here: http://www.marxists.org/archive/marx/works/1867-c1/ch03.htm#a51

While it would be difficult to detect, an artificial credit crisis could be very simple to stage, since Wall St. is the credit market center for our economy.

I am not sure there have been examples in our own country's history.

[freshnotbitter]

Well, just think for a moment. In the last two weeks Goldman Sachs and Morgan Stanley (the last two mega huge investment houses) converted to banks. In the old days it took a year or so to get a bank charter. Know why? They wanted to make sure everything was on the up and up and that the people who use the bank were dealing with straight people.

But GS and MS were investment "banks" not chartered banks because they make "bets" that regulated banks don't make. Now they are banks and we have Paulson up there telling us that the mortgage backed securities that are "illiquid" are hard to value because they are complex.

it's hard to get information but it seems to me that we are in the process of bailing out bad gambloing debts that are being hidden under the sanctimony of middle class "house ownership".

[kyeblue]

There will be re-regulation, but can a good plan be hatched in a matter of weeks.

[ctman47]

Why all the angst and worry over the financial "crisis". I saw Sarah Palin on the news the other day in NY City. She has "seen" Wall Street" and so by the laws of nature she is not a "financial expert".
Just turn the financial system over to her and she will have it all running smoothly within a day!!

[ChelleGeo]

This comment is just too funny ctman47.

[boo127tx]

Thought McCain was suppose to save us all.What happened with that?

And he invented the Blackberry,LOLOL.

Problem with this idiotic stuff is there are real people with real voter cards that are real foolish into thinking whatever the republicans put out is the real truth.

That's what we deal with evryday..real stuped people.

Just think...Like Palin is ready to be vice or Presidents.And seiously.There are people who believe that.

STRANGE WORLD

[rubinoff]

McSame, 'blinked.'...his little ploy didn't work. lmao

[paixa3]

You want to learn how to spell the word 'stupid'.

[rip]

Sorry, but this is not just a Republican mess. A lot of the table was set during Clinton's presidency when Glass-Steagall was repealed.

There is plenty of blame to go around. Now I'm not saying Wall St. deserves a pass. Far from it.

But in fact, first thing most Americans should do is look in the mirror. Who got all those now-worthless mortgages crushing Wall St.? Who signed ridiculous mortgages just so they could get in on the real estate hit parade? Who created the demand for tv shows like "House Flippers?" Who used their homes as piggy banks, taking out home equity loans? Who is carrying on average thousands in perennial credit card debt?

Face it, America is a debtor society. When it comes to debt, everyone is equally responsible. Or equally irresponsible.

You can only borrow for so long. At some point someone will want to collect. On a macro level it will probably be some corporation or, say, China.

[JustMyWords]

Last time I checked, the borrower isn't the person that has the final say-so in giving a loan. When it comes right down to it, the LENDER has the final say. Have you forgotten that the so-called "financial experts" were recommending buying the absolute maximum house you could squeeze out a payment for? That you couldn't turn on the TV without seeing some finance guru saying "put your equity to work for you"?

I keep hearing people say that those millions of people taking out those sub-prime or risky mortgages should just be left to flounder, because they should have known better. They should have checked out what they were getting into. That sounds great, except that the people they would have been checking with were the ones recommending those massive mortgages in the first place.

[freshnotbitter]

The deregulation of banking (Glass Steagel) was Phil Gramm's bill and Clinton signed it. Clinton didn't ask for it. A republican legislature was yelling and screaming about deregulation and "freedom" and how liberals were ruining America with regulation.

Banks were re regulated after the depression for a reason.

Phil Gramms de-regulation schemes are logical and idiotic,.