Congressional leaders today said they’d reached compromises on some disputed issues surrounding the Bush administration’s plan to empower the Treasury Department to buy billions in risky investments from banks and financial institutions to prevent a lending collapse.
Details of the compromise have not been released. But it’s expected to at least partially address criticism that the plan originally put forward by the Treasury Department over the weekend included no direct aid to troubled borrowers, and left taxpayers on the hook for a bailout of companies and investors who fueled the housing boom and bust through reckless lending.
The Bush administration is seeking authorization to borrow $700 billion to buy up "toxic assets," including mortgage-backed securities backed by risky loans. Many of the banks and financial institutions that own such assets are either in danger of going out of business or have cut back on lending because they cannot raise capital.
The compromise plan would reportedly give the Treasury Department the initial authority to borrow up to $350 billion, but give Congress the right to veto the final $350 billion of the $700 billion Treasury issuance sought by the Bush administration.
The compromise bill may require companies that participate in the program to give the government an equity stake, and agree to limits on executive pay, the Wall Street Journal reported. Those measures have been opposed by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, who don’t want to limit participation in the competitive "reverse auctions" through which the government intends to buy many assets.
Although Paulson testified at a congressional hearing Wednesday that he was open to the idea of imposing limits on executive pay at companies that unload assets on the government, he said it would have to be done in a way that did not interfere with participation in the program.
Tom Millon, president of Capital Markets Cooperative, a Ponte Vedra Beach, Fla.-based firm that helps banks sell mortgages in the secondary market, agrees that restrictions on executive pay might deter some companies from participating.
"If you’re the president of some big bank, and you have some nonperforming stuff on your books, short of your firm being in bankruptcy you may just decide to roll the dice" and keep the loans on the books rather than participate in the program, Millon said.
But Millon doesn’t see why some mechanism couldn’t be created so that companies that benefit from the program help pay for it.
Companies could pay higher taxes or share future revenue with the government, for example, so that "in some way the firms are held responsible. I certainly agree with that. As a business owner myself, if those guys are getting a big handout, they should have to pay for it."
Some lawmakers are also pushing for more relief for troubled homeowners. Although Treasury Secretary Paulson said Wednesday that the government will have more leverage to push servicers to do loan modifications rather than foreclose on homeowners whose loans it ends up owning, he is opposed to a push by Democrats to allow bankruptcy judges to "cram down" loan modifications.
While the Bush administration’s original plan contained no direct aid for troubled borrowers, Paulson and Bernanke have said the program would have indirect benefits because it would unfreeze credit markets, fuel lending, and speed a housing recovery. The administration already has other initiatives under way to help borrowers, they said, such as the FHA Hope for Homeowners loan guarantee program, which helps homeowners facing foreclosure finance into more affordable loans.
If the government buys billions in mortgage-related assets and steps up efforts to do workouts with borrowers and modify loans, that could also prevent foreclosures that would otherwise worsen the housing glut.
Sen. Chris Dodd, D-Conn., wants to put the FDIC in charge of such efforts, citing its track record as conservator of IndyMac Federal Bank since July. That could also save taxpayers money, Dodd said, as the FDIC estimates performing loans are worth about 87 percent of their face value, while nonperforming loans are worth only about 36 percent of par.
Brad Geisen, the founder and chief executive officer of Foreclosure.com, doubts the bailout will affect the number of foreclosures or housing inventories.
He said many banks are holding on to real estate-owned properties for as long as they can, because selling them now would mean taking big losses. For accounting purposes, the homes banks have repossessed look more valuable on their books than if they sold them at a big loss, Geisen said.
But many banks are in desperate need of cash, so they "throttle off" real estate-owned properties as needed. "It comes down to how much cash they need," Geisen said. "The more they need, the more aggressive they are in selling them off."
Despite claims by Democrats that a compromise had been reached, the picture remained uncertain as congressional leaders interrupted several hours of negotiations to meet at the White House with President Bush and administration officials including Treasury Secretary Paulson.
Top Democrats including Senate Banking Committee Chairman Dodd, House Financial Services Committee Chairman Barney Frank, D-Mass., and House Speaker Nancy Pelosi, D-Calif., said most obstacles to House and Senate passage of a bill have been cleared, the Associated Press reported.
Support from some key Republicans appears to be weaker. Rep. Spencer Bachus of Alabama, the ranking Republican on the Financial Services Committee, was more restrained in characterizing progress made at the negotiating session, saying only that "there was progress today," AP said.
Sen. Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, is opposed to a bailout and did not attend the meeting, the Journal reported.
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