TITLE I - Authorizing the Treasury Department to Buy Mortgage-Related Assets
Sec. 2. Authority to purchase troubled assets. (37 Comments)
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OFFICES; AUTHORITY.
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AUTHORITY.The Secretary is authorized to establish a program to purchase, and to make and fund commitments to purchase troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with policies and procedures developed by the Secretary.
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ESTABLISHMENT OF TREASURY OFFICE.The Secretary shall implement any program under paragraph (1) through an Office of Financial Stability, established for such purpose within the Office of Domestic Finance of the Department of the Treasury, which office shall be headed by an Assistant Secretary of the Treasury.
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NECESSARY ACTIONS.The Secretary is authorized to take such actions as the Secretary deems necessary to carry out a program established under subsection (a), including, without limitation
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appointing such employees as may be required for such purpose and defining their duties;
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entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code;
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designating appropriate entities as financial agents of the Federal Government, authorized to perform in such capacity all such reasonable duties related to this Act as may be required;
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establishing vehicles that are authorized to purchase troubled assets and issue obligations, subject to approval and supervision by the Secretary; and
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issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out this Act.
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LIMITATION ON AUTHORITY.
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IN GENERAL.The Secretary may not purchase, or make any commitment to purchase, any troubled asset unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased.
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SHARES TO BE RECEIVED.
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CONTINGENT SHARES.
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IN GENERAL.The contingent shares to be received by the Secretary under paragraph (1) may, at the determination of the Secretary, include shares of the financial institution, its parent company, its holding company, any of its subsidiaries, or any other entity which is owned, controlled, or managed by such institution.
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DEBT INSTRUMENTS.In the event that the equity of the financial institution from which such troubled assets were purchased is not publicly traded on a national securities exchange, the Secretary shall acquire a senior contingent debt instrument in lieu of contingent shares, which shall automatically vest to the Secretary on behalf of the United States Treasury in an amount equal to 125 percent of the dollar amount of the difference between the amount the Secretary paid for the troubled assets and the disposition price of such assets. The Secretary may demand payment of such contingent debt instrument under such terms and conditions as determined appropriate by the Secretary.
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MULTIPLE CLASS OF SHARES.If the financial institution from which troubled assets are to be purchased has more than 1 class of shares, the contingent shares to be received by the Secretary shall be that class of shares with the highest trading price during the 14 business days prior to the date of the purchase of such assets.
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CONTENT.The instrument representing the contingent shares shall contain anti-dilution provisions of the type employed in capital market transactions, as determined by the Secretary, to protect the Secretary from transactions such as stock splits, stock distributions, dividends, and other distributions, mergers, and other reorganizations and recapitalizations.
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VESTING OF SHARES.If, after the purchase of troubled assets from a financial institution, the amount the Secretary receives in disposing of such assets is less than the amount that the Secretary paid for such assets, the contingent shares received by the Secretary under paragraph (1) shall automatically vest to the Secretary on behalf of the United States Treasury in an amount equal to
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125 percent of the dollar amount of the difference between the amount that the Secretary paid for the troubled assets and the disposition price of such assets; divided by
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the amount of the average share price of the financial institution from which such assets were purchased during the 14 business days prior to the date of such purchase.
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DEFINITION.As used in this subsection, the term "contingent share" means any equity security traded on a national securities exchange.
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37 comments on Sec. 2. Authority to purchase troubled assets.
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Note that the Sec. 2(c)(3) vesting of contingent shares are measured at the market value of the shares at the time the troubled asset was purchased. It's the direction that the share price moves after the purchase that determines if Treasury loses or wins. Let's say the Troubled Asset Program (TAP) purchases mortgage-backed securities with a market value of $500,000 from Company A, whose stock is trading at $50/share. Company A would have to give TAP warrants for 10,000 shares ($500,000/$50). A year goes by and TAP sells the mortgage-backeds:
posted by Mithras Invicti, mithras.blogs.com at September 22, 2008
1. Scenario 1: Proceeds of the sale are $750,000. The profit of $250,000 is split 20% to residential assistance programs and 80% to the Treasury. The warrants in Company A lapse.
2. Scenario 2: Proceeds of the sale are $500,000. No gain or loss. The warrants in Company A lapse.
3. Scenario 3: Proceeds of the sale are $250,000 and the stock price of Company A is $100 per share. TAP is vested in 5,000 shares of Company A ($250,000 loss/$50 price at time of purchase). Selling 5,000 shares @ $100 per share yields $500,000, so overall TAP profits $250,000. (Presumably, this is a "profit" sale situation that triggers the same treatment as Scenario 1.)
4. Scenario 4: Proceeds of the sale are $250,000 and the stock price of Company A is $50/share. TAP is vested in 5,000 shares of Company A ($250,000 loss/$50 price at time of purchase). Selling 5,000 shares @ $50/share yields $250,000. No gain or loss overall.
5. Scenario 5: Proceeds of the sale are $250,000 and the stock price of Company A is $0.10 per share. TAP is vested in 5,000 shares of Company A ($250,000 loss/$50 price at time of purchase). Selling 5,000 shares @ ten cents each yields $500. Net loss is $249,500. -
Section 2 is the most important in the entire bill, because it establishes the means of pricing and disposing of the securities which taxpayers (collectively) will be purchasing, and also because the means established here is an authentic investment in not just the securities purchased but also in the companies from which they're being purchased. Dodd's bill isn't a giveaway of taxpayer funds to big-money political contributors, but an investment in the nation's future. There's magnificent integrity and care in Dodd's work here.
posted by Eric Zuesse at September 22, 2008
Taxpayers benefit if either the securities or the selling-firm's stock-price rise. Taxpayers lose only if both values decline.
That's not a taxpayer-giveaway to financial firms; it's an authentic investment, which provides those firms with fast capital to get them going again, iff the given firm is capable of getting going again.
I've always wondered what calibre of representative of the people Dodd has been as the head of the Senate Finance Committee, but now I think that in this, his supreme test, I finally know: He's phenomenally good! Wow! -
2a1 "...from any financial institution..." Wow, just wow. Doesn't this grant him authority to rescue any institution in the world?
posted by Another Taxpayer at September 22, 2008 -
I agree. The wording of 2a.(1) is terribly open-ended, and the potential for conflicts of interest are too great. Eric Zuesse's claims of "authentic investment" are farcical. There is no way to guarantee that these buyouts will not collapse further. Right now we see AIG being bought out at $2 per share, so it might be easy to think that all future buyouts will take place at what is perceived as rock bottom costs, but there is nothing that guarantees that in the wording of this legislation. We cannot grant this sort of risk-taking authority to our Treasury!
posted by Concerned Layman at September 23, 2008 -
2a1 - you need to look under the definitions section at the end to see the definition of financial institution, which makes things a bit clearer. There is flexibility in the language which I understand, although it still isn't very reassuring
posted by Anonymous at September 23, 2008 -
It's as good as massive government intervention can be. The only issue is who is going to do it?
posted by Benny Daon at September 23, 2008
The bill has in 2.b.1 "appointing such employees as may be required for such purpose and defining their duties;" this is not specific enough. I would change it to "recruiting and appointing civil servant CFOs to act as CFOs" .
We, through civil servants, need to control the way those troubled company manage their finances. The challenge is to find good CFOs who are willing to work as civil servants with no stock options and no stake in the company, and be happy with a government salary.
Maybe it's time to set up a task force of honest CFOs who made a bundle and are now ready to focus on the greater good? -
Everyone who trusts the government's ability to discover accurate (and favorable to the buyer) pricing in any type of security, please raise your hand!
posted by Daniel Schwartz at September 23, 2008
This is the government that said FNM and FRE were stable at, oh, $10-15 a share. Maybe we should have backstopped them there.
This plan reeks of desperation by Dodd. He had a plan on the table to offer government backing for loans if the banks would write the principal down 10%. The plan never raised an eyebrow.
The banks want their money back in full and they want it now. A government guarantee for the life of the loan at 90% isn't as good as full value in cash now. And Dodd is willing to give it to them. Time for another fax to the honorable Senator..... -
The provision to buy any and all assets from any institutions is ridiculous. So we will own derivatives, options and junk bonds/securities? This is why this bailout will fail to fix the problem, there are tens or hundreds of trillions out there of this stuff... with more being written as soon as this bill is signed. Why is there no protection of future bad debt?
posted by Concerned Citizen at September 23, 2008 -
I think most of the comments above are not specific to this section and should be in the section for comments on the bill in general:
posted by Mithras Invicti, mithras.blogs.com at September 23, 2008
http://publicmarkup.org/bill/dodds-le...
Daniel Schwartz-
You said, "Everyone who trusts the government's ability to discover accurate (and favorable to the buyer) pricing in any type of security, please raise your hand! "
All of the assets being purchased are traded on public markets and are selling at significant discounts from face value. The government will not be discovering accurate prices (whatever that means), it will be buying distressed assets in bulk and trickling them back onto the market over time.
You also said, "The banks want their money back in full and they want it now."
Perhaps they do, but that's not what this plan gives them. It gives them the current trading price of impaired assets, which is not "in full".
To criticize this proposal rationally, you have to understand what the proposal iis. -
I've suggested here http://www.samefacts.com/archives/gar... that the plan can easily be amended to provide for the capital injection that Paul Krugman, Sebastian Mallaby and others think essential. You just replace the 125% contingent equity by 100% contingent equity + (say) 25% real equity in cash. There's no time to argue about who's right, so "belt and braces" is safest.
posted by James Wimberley (retired Brit) at September 23, 2008 -
In Section 3(b), I think the price referred to should be the adjusted price, to reflect stock splits and the like. For example, if the loss is $1000, and the share price on the purchase date was $10, then the amount calculated by the formula would be (1000*1.25)/10 =125 shares.
posted by Marty Joyce at September 23, 2008
But if the number of shares outstanding is doubled after the purchase date, then the value of 125 shares is only half what it should be. -
Marty Joyce-
posted by Mithras Invicti, blog Fables of the Reconstruction at September 23, 2008
Sec. 2(c)(2)(C) already says:
"The instrument representing the contingent shares shall contain anti-dilution provisions of the type employed in capital market transactions, as determined by the Secretary, to protect the Secretary from transactions such as stock splits, stock distributions, dividends, and other distributions, mergers, and other reorganizations and recapitalizations." -
This must read
posted by Dahna Branyan, citizen Comanche, Texas at September 23, 2008
1. .... "purchase troubled assets from any US - owned financial institution..." -
What is the government going to do with any shares acquired through this bill? Will it hold them indefinitely? Will it sell them all at some future date? Should this bill contain instructions as to how to sell off the shares? We certainly wouldn't want the treasury to dump all the shares at once. I think that the bill should specify that all future share buybacks that the company enacts will purchase the shares from the treasury until the treasury's shares have all been sold, and that the treasury should also be instructed to sell the shares in a manner which will not significantly impact the price.
posted by jkw at September 23, 2008 -
Sec. 2. a. 1. Stop right there. This is the place to begin adding oversight and accountability:
posted by Dawn Nelson at September 23, 2008
Before the period add "after review and approval by ( name of oversight entity to be made up of Congressionally appointed civil and public servants strictly vetted to have no ties to Wall St.).
Sec. 2. b. Strike "without limitation". See above. This is critical: as it stands, it gives the Secretary authorization for appointing cronies, issuing no-bid contracts, etc.
If these two sections stand as written, it doesn't much matter what else is in the bill. -
I think the valuation of assets (specifically Credit Default Swaps) needs to be better specified. Part of what got us into this is lack of transparency in the CDS system, and no transparent rating system for CDS assets. They should be valued based on the amount they are expected to pay out over time and estimates on the downstream risk involved (the likelihood that an owner will have to pay out while holding a CDS). Many of these companies may not have enough other assets on their books to make up for over-valued CDS sales to the government, so even ending up with total control of the company might be a net loss for the government. Thus, assets (or specifically CDS) should be re-valued by the government according to a Congressionally approved metric.
posted by Andrew at September 23, 2008 -
No why buy something that is loser and will always be a loser that nobody else wants this is insane. You guys are being pushed around by bankers that couldn't trade there way out of a paper bag unless they are backstopped by the tax payer.
posted by jonathan day at September 24, 2008 -
The way the shares in the participating institutions are allocated here seem to be good provisions. They allow the taxpayer to share in any upside created, which is crucial.
posted by anonymous lawyer at September 25, 2008
However, I have a question. Subsection (b)(4) allows the Secretary to create "vehicles" to carry out this authority. My question is, if such a vehicle is created, is it subject to the provisions of (c) (which requires the shares to be exchanged)?
This is very important. Because if the answer is "no", then this is a very easy way around the requirement that shares be transferred.
Note the limitation of authority in (c): "The Secretary may not purchase, or make any commitment to purchase..." To close off any possible evasion of this limitation, this should read: "The Secretary may not purchase, or make any commitment *or authorization* to purchase..." This change would preclude the Secretary from "authorizing" a "vehicle" to do what the Secretary himself could not do.
Maybe this is the intended interpretation anyway (or maybe not!), but this would avoid any possible misinterpretation on this point. -
Sec 2.b.2.B "MULTIPLE CLASS OF SHARES" the concept of a share "with the highest price" doesn't really make sense. One should replace it by "the most senior form of capital issued by the financial institution" For instance, in the case of Goldman, it should be the same preference share than the one bought by Berkshire and other investors, NOT the common share.
posted by shameful investment banker at September 25, 2008 -
One further point here. Notice that (c)(2)(A)(i) states that the shares transferred by the seller of the asset need not be shares in the entity that actually sells the asset, but can be shares in a subsidiary or affiliate.
posted by anonymous lawyer at September 25, 2008
Most of these institutions have dozens (hundreds, even) of SPVs and other kinds of entities in their corporate structures. I would guess that a lot of these subsidiaries are insolvent, poorly performing, or otherwise compromised in some way. If the selling institution ponies up "shares" in one of these entities (most of which are not traded on a public exchange), then under (c)(2)(A)(ii), the Secretary will take a debt instrument rather than an equity interest (which would, or could, be worthless anyway).
But what good is taking a debt instrument from an insolvent (or at least undercapitalized) subsidiary? The entity cannot perform its obligation! It has no money to repay, and because there's no mechanism for piercing the corporate veil here, taxpayers end up with nothing.
Notice that the decision to take shares in a subsidiary (rather than the corporate parent) is fully left to the discretion of the Secretary. I thought the whole idea of putting these kinds of provisions in the bill was to restrict the discretion of the Secretary...? But as it stands, these provisions are easily sidestepped.
This is not a conspiracy theory... this is a straightforward analysis of the law. Anyone disagree here? -
I want to know why don't the execs of these failing companies use their OWN money to bail their companies out?
posted by Eric at September 25, 2008 -
So we are buying bad loans from banks? If the loans are bad then in fact we are buying real estate that we can't sell. How about this solution?
posted by Brian Lowe, Disgruntled Taxpayer at September 25, 2008
The mortgage problem is two-fold:
1. People bought more than they could afford.
2. Institutions lent them the money when they should not have.
Clearly both the buyer and the lending institution are at fault. So let them both share the fix and the cost. Here's how we do it--set up a government lending institution (call it Bank Assisting Idiot Lenders, or BAIL). If someone can't pay their mortgage they walk into BAIL and say "here's my mortgage info, we can't make our payment after the balloon comes due."
The BAIL agent makes a full (and realistic) evaluation of the borrower's ability to pay and gets an accurate (also realistic) evaluation of the worth of the borrower's home. Half of the difference between the current value and the existing mortgage payoff is calculated and called the "total idiot penalty", or TIP.
This will result in one of two outcomes:
1. The borrower still can't afford the home and the agent says "you're out of luck, you need to find a place to rent." At that point the original lender has an opportunity to repossess the home and offer it for lease to the former borrower. Otherwise the original lender owns the home. Lender and borrower need to "grin and bear it."
2. The borrower _can_ afford the home with a new loan. BAIL will pay the original lender their loan payoff minus the TIP and the borrower will refinance the current value of the home plus the TIP. If borrower does not want to pay more for a home than its market value, go to result 1.
We taxpayers take the initial hit of paying the TIP to the lender, but get that back plus interest over the term of the loan. This solution gives the qualified buyer a home and the lender a loan payoff. Both share equally in the penalty for making and taking a bad loan. It prevents you and me from taking a massive loan from our children. It allows the market to set home prices. It only spends money where needed. It can allow private lenders to provide refinance loans the same as BAIL is doing. -
AUTHORITY.The Secretary is authorized to establish a program to purchase, and to make and fund commitments to purchase troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with policies and procedures developed by the Secretary.Good God Almighty!! To me this paragraph alone tells me everything I have to know about this bill. The "Secretary" seems to have all the power, the power to establish the programs, the power to make/fund commitments, the power to determine which financial institutions to fund, the power to make terms/conditions, and the power to develop policies/procedures. WOW. Are we really willing to trust the exact same people in government who have put us in this position? Come on........
posted by HarleyOne American tax payer at September 26, 2008 -
"AUTHORITY.The Secretary is authorized to establish a program to purchase, and to make and fund commitments to purchase troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with policies and procedures developed by the Secretary."
posted by Bill Wilt, Viet Vet, Retired, living on SS at September 26, 2008
I very much liked the sound of the "Swedish Program" as to how it managed that country's housing/financial crisis back in the 1990s, I think it was.
I would have the US Treasury (acting on behalf of We the People," who did "ordain and establish this constitution for the United States of America," and all that good "representational republic stuff,"...) to purchase stock or shares or ownership positions in any company seeking to avail itself of "the taxpayers' money."
This would mean, also that we "taxpayers" would not only become owners of portiions of such companies, we would also take positions on the boards of directors of these companies.
In other words, if companies want the government to "help them out" or want to raise public money from the government, then they have to sell shares in their company to the agent for the public.
I see absolutely no value in buying rotten (or not) "debt" from these companies in some super-complex valuations game.
If the companies can't make it on their own, they either go out of business, the good ol' "free market" way, or they sell themselves to We the People, in return for our saving their brisket or bacon or collective butts.
As I believe the Swedish former secy of the Treasury put it, many Swedish companies that had been begging for a federal handout or a federal "cushion" at the expense of "ordinary citizens,' figured out a way to solve their own problems on the "free market economy," rather than being nationalized by the people's government.
We could also follow Ceasar Chavez' lead as to a much more aggressive pricing posture on nationalizing companies. -
Ooops--I meant to type Hugo Chavez, of Venezuela, not Ceasar Chavez, of migrant workers' rights fame.
posted by Bill Wilt, ret. Correction at September 26, 2008 -
I say we not buy any bad assets at all, let those bank have losses, and move on, let the soon to be foreclosed loans be reworked with another bank, and let the federal government stay out of the real estate market period. Prices need to drop, most properties are way over priced, and will never be bought by people that want a home to live in, most of these properties went sour because of investors trying to make money, and not actually living in a home. Prices of these home need to come down to pre-1971 prices when our money was actually backed by something of value like gold, instead of the fake fiat money. Wake up America!
posted by Tess, Conservative Republican at September 27, 2008 -
This could all be resolved by taking one simple step.
posted by Penny Patterson at September 27, 2008
Remove the mark-to-market accounting rule and replace it with a "direct cash flow" accounting rule. Doing so would:
1. Enable firms to record a more realistic value for their assets.
2. Boost balance sheets & restore credit ratings.
3. Provide useful information that would serve to create a liquid
market for these assets.
In short, this one simple regulatory change would accomplish everything the "Big Bailout" is supposed to achieve, with NO expenditure of federal funds.
I in no way believe that the American Taxpayer should foot the bill for these failing companies. We have not ever bailed out failing companies and we should not start now. No bailout! -
The Secretary is authorized to establish a program to make and fund commitments to purchase or guarantee only the underlying tangible assets (defaulted mortgages) upon which the financial institution's troubled assets (toxic derivatives) are based. Paulson knows as well as I do that the only way to truly quantify and liquidate a toxic derivative is to stabilize the underlying asset - it doesn't work the other way around.
posted by D Edwards - Citizen at September 27, 2008 -
Why not peel each mortgage off individually and put them up on e-bay. I'd buy mine for 70 cents on the dollar.
posted by J. Trautwein at September 28, 2008 -
The Secretary has almost unlimited power. What checks and balances are in place to keep the Secretary honest. Our Congress of late do not shine in the light of honesty and regard for common citizens.
posted by Craig Bryant, Citizen at September 28, 2008 -
If this is an authentic investment, then let's put our Social Security money in it.
posted by Angela Thornton at September 28, 2008 -
Chance Sec. 2 - part 1 - we should NOT bail out ANY FINANCIAL INSTITUTION - limit this to US Institutions only. NO BAILOUT for Foreign Banks.
posted by Judith Weller at September 28, 2008
Purchase of bad assets must be at current market value even if that is only 10 cents on the dollar.
Still too much power for Treasury. -
I don't understand investing in such a loosing proposition; and I totally fail to grasp who will oversee and regulate these institutions once the government "nationalizes" them by owning controlling shares. In my day, we called than the fox guarding the hen house.
posted by Florida Grammy private citizen at September 28, 2008 -
If the open market (Wall Street) sees no value here, where is the value of this stock.
posted by Military Vet at September 28, 2008 -
Hey guys, we are providing 100% loan to value? Will the shares' value be adjusted to match market value daily/monthly? Will additional shares be provided if needed? Eh, who cares at this point.
posted by Trevor Hodge (Orlando,Florida) at September 29, 2008 -
My childrens childrens childrens children will be paying for this debacle. What an absolute atrocity our government has committed by passing this bill. They should rename it, "Passing the Buck"! Those who voted NO will be able to say' "I told you so" for the rest of their lives. Those who voted yes deserve to suffer poverty and hunger for saddling future generations with the consequences of their actions. It is a terrible choice to allow this. Canada is looking better everyday!
posted by Ray Hudon, citizen at October 3, 2008 -
Life cannot be lived over,but consider this...
posted by PorPeoples Invention Registry ceo Toby Todd at November 30, 2008
How did rich people get rich? Ans:Off poor people.
How did poor people make rich people rich? Ans:Buying their goods and/or services.
Now rich people are too greedy, that is why they cannot fix our country. They have ripped off the public and they know it. So they hit the public's source "GOVERNMENT". In addition our president was in China while the Olympic Games were played. Weeks later Fannie/Freddie bailout(China stockholders). On the other hand, poor
people are the have not's. With money in their hands they will spend. The money will reach the top. Expecting the rich to let money twinkle down IS NOT HAPPENING.