Congress has released a draft of the proposed bailout Bill, the full text of which is embedded below (information on download is here: Bailout Bill)
In summary, it seems like 3 major positives have emerged from the negotiations. On the whole, I think people are making reasonable compromises and that as a result something will get passed shortly.
1) Mortgage Modifications. Beginning on page 27, the bill discusses the requirement that the fund work with homeowners to modify their mortgages to the extent doing so would save money for all involved (i.e. foreclosures can destroy value for all involved if home values in the area are already severely depressed). This is an excellent idea, and for those of you who are familiar with my work on this topic, it is one that strikes close to home. Basically, it looks like Congress is trying to take some of the stumbling blocks out of the way for rational the renegotiation of home mortgages.
2) Equity Participation. Beginning on page 45, the bill introduces a requirement that the fund take warrants in any company that is registered, or has approval to be registered (Read: Goldman Sachs or Morgan Stanley), and is aided by the bill. The purpose of which is to:
provide for reasonable participation by the Secretary, for the benefit of taxpayers, in equity appreciation [created by the bailout]
This is great news, and this addresses my primary concern with the initial draft. Although it does not eliminate moral hazard, at least we (taxpayers) get to benefit with those who are bailed out.
3) Judicial Review. As expected, on page 65, the Bill introduces the concept of judicial oversight which was lacking in Mr. Paulson’s initial proposal.
These are phenomenal developments, and it shows that the regulatory process is working. I would love it if a bailout was unnecessary and preventable. However, given that it is inevitable at this point, I am very glad to see that our government and our leaders are coming to reasonable and rational conclusions on these matters.
It gives me faith in our government and our country. Let’s hope they keep moving in this direction.
Another interesting structuring detail: On page 50-51, the bill discusses a gradual provisioning of authority. Basically, the fund will start with $250B, then with Presidential authority and Congressional notice, the limit is raised to $350B, and finally it can be raised to $700B (it looks like Congress has veto power over any amounts over $350B, although it must exercise disapproval before the limitation kicks in).
One final somewhat “negative” develoment. Suspension of Mark-to-Market Accounting. A sign of the likely trade-offs made to get the bill closer to the finish line is buried near the back of the Bill, starting on page 95. It appears that the Bill gives the SEC authority to ban mark-to-market accounting as well as requiring a report on the accounting standard. This seems like an example of the regulators getting the cart before the horse. One would imagine that a study should precede any rule change, but it seems like Banking lobbyists have a lot of pull.
Here is the bill: