10/21/2008 05:12 am ET Updated May 25, 2011

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.