What Part of the Bailout Plan Did You Miss?

So much outrage over yesterday's bailout rejection by the House of Representatives swarmed the market that many seemed to forget that the original plan got a drastic facelift over the weekend, which should have put to rest a handful of the complaints laid upon Hank Paulson's original plan.

No, the plan wasn't perfect, and I'll throw in my two cents where a few holes resided, but here are some of the more notable changes made over the weekend:

  • An up-front $250 billion injection, rather than the originally proposed $700 billion lump sum. The president could then issue an additional $100 billion at any time, while an additional $350 billion could be made available upon Congressional approval. This was a pretty big step for the proposal, since it would give the Treasury room to test the bailout on a smaller scale instead of jumping in head-first with a $700 billion shopping spree. 
  • Taxpayers would get at least some reassurance that they won't be completely pillaged of their hard-earned money, with a new clause that grants permission to come after the financial industry to make up for any shortfall five years down the road. The clause goes on to say it's being implanted, "… to ensure the [bailout] does not add to the budget deficit or the national debt." That's all good news, but of course, it relies on the assumption that the companies that benefit from the bailout will be healthy enough to pay in five years. After Washington Mutual (NYSE: WM  ) and Wachovia's (NYSE: WB  ) recent demises, that seems like a shot in the dark. 
  • Salary caps would be placed on executives taking part in the plan … sort of. Any company that benefits from the bailout wouldn't be allowed to deduct more than $500,000 per executive as an expense. Companies could still pay them more than that amount -- they just can't deduct it from their tax liabilities.
  • An oversight board would be created to make sure the program doesn't run astray. The board would include the chairman of the Federal Reserve (Ben Bernanke), the Treasury secretary (Hank Paulson), the chairman of the SEC (Chris Cox) the director of the Federal Home Finance Agency, and the secretary of Housing and Urban Development. Having oversight would certainly take some of the uncertainty out of the plan, but remember, these are completely uncharted waters we're navigating. Regardless of who's on the oversight board, mistakes will be made along the way.
  • The ability to take an equity stake in any company that participates in the plan, just as AIG (NYSE: AIG  ) , Fannie Mae (NYSE: FNM  ) , and Freddie Mac (NYSE: FRE  ) had to give up in the past few weeks. Forcing companies to forfeit equity when they use the bailout program will likely scare away banks that don't necessarily need much help, such as Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) . When a company has to pay a hefty price for taxpayers' assistance, only banks that are struggling for survival should ask for help, which is exactly the way it should be

Investors and taxpayers alike should have been pretty pleased with these developments; they're all steps in the right direction, particularly since enormous steps were taken to ensure taxpayers aren't getting completely hosed. Stay tuned.

For more bailout Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (16)

Comments from our Foolish Readers

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  • Report this Comment On September 30, 2008, at 5:49 PM, Tygered wrote:

    Just one big problem with this article. Nobody told the people these details. I've been looking for days just to find out what exact limits would be placed on CEO salaries. Now I know, not much.

    I hope that Plan B Bailout at least publishes the details before we get screwed.

  • Report this Comment On September 30, 2008, at 6:12 PM, rarunach wrote:

    "The ability to take an equity stake in any company that participates in the plan"

    That's just granting a Right, not a Demand. Instead, if the bill demands an equity stake for every bailout, then it will appeal much more. Nobody should get a blank check.

  • Report this Comment On September 30, 2008, at 6:22 PM, TMFHousel wrote:

    rarunach,

    Thanks for your comments. In fact, it is a demand, not just a right.

    From the proposed plan: "GENERAL.—The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives from the financial institution from which such assets are to be purchased—"

    Then it goes on to describe what the treasury can accept, including warrants or direct equity.

    Thanks,

    Morgan Housel

  • Report this Comment On September 30, 2008, at 6:49 PM, jdgee2 wrote:

    Just one more big problem with this article. MOST hard working blue collar Americans do not want it . Thank goodness for that !

  • Report this Comment On September 30, 2008, at 7:30 PM, rd80 wrote:

    The equity warrant provision sounds nice, but it severely reduces the potential effectiveness of the plan.

    Banks with sound balance sheets (there are a few) won't participate because of the equity dilution. Troubled banks will participate because they have little choice, but they won't be able to put all the cash into the credit markets because they'll need to keep much of it to strengthen their balance sheets.

    Bottom line, the banks that are in the best position to make loans won't participate and the plan relies on incompetent management for its success.

    The '5-year recoup the money' provision also sounds good, but sets the stage for the gov't to tax the financial industry to death or nationalize it. Note that the provision allows the gov't to come after the financial industry, not just companies that participate in the plan.

    The other points helped improve the plan, but it's still a bad idea.

  • Report this Comment On September 30, 2008, at 7:51 PM, mashuribc wrote:

    I didn't miss any of it and am glad the House punted it back. I will feel better once suspending mark-to-market value for the troubled assets is in the bill. In fact, the House Republicans said it would have passed easily had that requirement been in there. Think about it, once the government buys these securities, they will not be valued at mark-to-market anyway -- so why not do the same but keep them in the private sector??

  • Report this Comment On September 30, 2008, at 9:58 PM, ButtSauce wrote:

    That is not a salary cap. The whole thing has been an attempt to mislead the public and it stinks. If they do indeed take 20% off the top of a compensation package for a CFO on his way out as a penalty, the board of directors will still vote yes and give the $50+ million to the Sullivans of the investment world. The 20% shaved of the top comes from the shareholder, so you mostly shafted the wrong people once again. The CFO still gets $40+ million when he should have gotten some handcuffs. How about a real salary cap instead of one that comes from the land of unicorns and faeries?

  • Report this Comment On October 01, 2008, at 9:43 AM, griderX wrote:

    What is your take on modifying the accounting rules in regards to "Market to Market"?

  • Report this Comment On October 01, 2008, at 10:47 AM, GMSInvesting wrote:

    I think warrants work so long as the government sells the warrants rather than uses them to gain an voting stake in the comany.

  • Report this Comment On October 01, 2008, at 11:14 AM, chrisjrogers wrote:

    $500,000? The provision should require that CEOs who ran their banks into the ground and profited from it should be FIRED. No severance pay, no pensions, NOTHING.

    Why is it that people who can never seem to get enough money are the mega rich?

  • Report this Comment On October 01, 2008, at 11:21 AM, RaulChapin wrote:

    How does this feel??

    http://blogs.moneycentral.msn.com/topstocks/archive/2008/09/...

    19 Million to run Wachovia for less than 1/2 a year...if he even has to stay that long... so far only a few weeks.

    Still think it is a good idea to save the failing banks?

    It makes more sense to:

    Give money to banks that are SOLVENT and not under risk of bankrupcy, give them a 30 year payment plan (so that they do not have to worry about quickly dispossing of the assets bought from the failing banks). Put in a clause that if a payment is missed, the bank is under the obligation of giving the equivalent plus a premium in equity (common shares). Put in a clause that any person in management can only get a severance pay after his work has been audited and found to not have harmed the banks original position.

    Going into the future, the law should be ammended so that:

    Any severance pay to a failed manager should be considered a criminal act and further more, the manager should be PERSONALLY responsible for the damage his actions bring to the equity of the firm he manages. If He/She brings x ammount of investors into ruin, is it not fair that at a minimum he should be made bankrupt... Until there is true liability like the one demanded from everyday people, there is no cure for this system.

  • Report this Comment On October 01, 2008, at 12:48 PM, vest0r2 wrote:

    Where do I get one of those golden parachutes? Sounds like a pretty sweet deal -- and I'll bet that guy never broke a sweat or busted a knuckle turning a wrench, am I right?

    To hell with the bailout. And the Federal Reserve. Let the house of cards fall down hard.

  • Report this Comment On October 01, 2008, at 1:45 PM, richman1211 wrote:

    They should give equal billing to insuring the debt instead of buying it and taking an equity stake.

    Also, as far as I know the bill would get attached to a tax bill which isn't mentioned here.

    I'm still unclear how this bill stems foreclosures and and the slide in housing prices. I'm also unclear how it actually makes banks willing to lend again. So hence, I'm still having trouble seeing it as anything but a bailout.

  • Report this Comment On October 03, 2008, at 4:26 PM, 1Hippydippy wrote:

    Just who will be watching the watchers, the good old boy network works because it rewards blind allegiance

  • Report this Comment On October 03, 2008, at 6:26 PM, ironheadnc wrote:

    I agree that some type of bailout is necessary. However, I hope the President vetoes this one passed by the house and senate which has earmarks like: a subsidy for the wooden arrow industry; extension of credits for Puerto Rican rum and so forth.

    Is anybody out there interested in starting a movement for term limits? Let's throw all the bums out if they can't give up their personal interests for the greater good.

  • Report this Comment On October 04, 2008, at 11:27 PM, ALondonCPA wrote:

    Thank God that the first version of the Bail-Out plan did not pass the house. We got a much improved bill with the Senate version!

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