BailoutNation: Democrats Try to Rein in Paulson

From Bloomberg today:

Dodd, a Connecticut Democrat, is circulating a draft of his bill as Congress seeks to deal with a financial crisis that has been called the U.S.'s worst since the Great Depression.

The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn't publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.

Dodd's proposal also would create a five-member oversight board to supervise the Treasury secretary's purchase and sale of distressed mortgage debt.

It would consist of the chairmen of the Federal Reserve, Federal Deposit Insurance Corp. and the Securities and Exchange Commission as well as two members from the financial industry designated by congressional leaders.

The board would be authorized to set up a so-called credit review company consisting of Treasury employees to study the soundness of the purchases. Under the plan, the government would be required to obtain an equity stake equal to the value of the debt that is purchased from the companies, including those whose shares are not publicly traded. The Treasury secretary would also be required to issue weekly public reports on the amount of assets bought and sold by the U.S.

Dodd is [also] proposing to penalize executives who take "inappropriate or excessive'' risks. The executive compensation and severance packages could be reduced if that is "in the public interest,'' the proposal says. It would also force executives to give back profits they earned that were based on company accounting measures that are later found to be inaccurate.

A couple of things:

(1) Why, oh why, would the oversight board consist of the Fed chair (Bernanke - tool), the FDIC chair (Bair - don't know anything about her, but the FDIC has not exactly managed risk well over these last few years), SEC head (Cox - tool) and two member of the FINANCIAL INDUSTRY??  Why don't we actually put some people on the board who - oh, I don't know - would be accountable to taxpayers??

(2) On principal, I like the idea that taxpayers may get upside of recovery (via equity).  In practice, I'm not sure there will be any upside.  Furthermore, given that this is already the game that we're playing with Freddie, Fannie and AIG, shouldn't the government be balancing out its own risk profile?  The bloomberg update says that the government would be senior debt in case of bankruptcy.  Does this mean senior debt even if there is no bankruptcy?  So that the banks that sell assets to the government would actually be on the hook for the difference between the price paid by the government and price ultimately recovered by the government?  That seems inordinately fair to me and would achieve the stabilizing/recapitalizing effect that Paulson was theoretically aiming for.  And I say theoretically, because the alternative is that he was aiming to fill his friend's pockets with one last cash infusion before the whole nutty tower comes crashing down.

(3) The executive penalties are too squishy.  I'd like to see more pushing for recovering bonuses from top executives (not just CEO, but I would say top 10-20 earners) for the past 2-3 years.  It's done in bankruptcy, so why not here?

Finally, the way that Paulson has managed this entire bailout package has been irresponsible and reprehensible.  He announced the bailout late last week, in fairly definitive terms, knowing that he had no authority to do so and that any package would have to get the approval of Congress.  So the market, incorporating his announcement, surged 3-4% each Thursday and Friday.  This meant that when the Democratic Congress, doing their constitutional duty to stop the friggin raping and bleeding of America, steps in and tries to patch up the plan as best they can, it inevitably sets the markets a-rattling again (note today's 300 point drop). 

So Paulson gets to be seen as savior and Congress as the bad guys.

Well, at least in the blogosphere, I'm seeing pretty unanimous anger by the taxpayers against this plan.  Let's hope that their righteous anger remains focused.

Comments

[some body]

kady:

i've (hopefully better explained my alternative bailout proposal at bg's. some of my friends liked it enough that i was encouraged to e-mail it to nouriel roubini and some senators. don't really expect to hear back, though i still think it is better than the currently proposed $700 billion bailout.

- s.b.