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Sunday, September 21, 2008

Details of Financial Bailout Package

In an effort to end the worst financial disaster since The Great Depression, on Saturday the Bush Administration sent congress a $700 billion plan to purchase toxic debt from troubled financial institutions.


The Democrats, who control both the House and Senate, questioned whether there were sufficient protections for taxpayers and homeowners, but they acknowledged the need to act quickly. Some Democrats said they might use the opportunity to add some limits on what corporate executives are paid and look for ways to reduce home foreclosures.

Some details of the plan:
  • Raises the public debt limit to $11.3 trillion.

  • Earlier this year, Congress voted to increase the debt limit to $10.6 trillion as part of omnibus housing legislation that included broader federal authority over Fannie Mae and Freddie Mac. Fannie and Fannie have since fallen under government control. See The Rise and Fall of Fannie Mae and Freddie Mac

  • The proposal would give the US Treasury secretary Paulson significant leeway in buying, selling and holding residential or commercial mortgages, as well as "any securities, obligations or other instruments that are based on or related to such mortgages."

  • Total purchases can not exceed $700 billion outstanding at any one time.

  • Treasury could hire asset managers to handle the debt purchases, which could include residential or commercial mortgages and related instruments that were originated or issued on or before Sept. 17, 2008.

  • Hedge Funds would not be eligible under the plan to offload troubled assets.
House Speaker Nancy Pelosi (D., Calif.) said, "We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform."

Senate Majority Leader Harry Reid (D., Nev.) was more critical saying, "while the Bush proposal raises some serious issues, we need to resolve them quickly."

Financial Services Chairman Barney Frank (D., Mass.) would like to see limits put on executive compensation.

The Republicans praised the plan and called for swift action to enact the required legislation.

Treasury secretary Hank Paulson said "I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion."

The stock markets liked the news and rallied Thursday and Friday, but they remain in bear market territory. See Market Update for September 21, 2008

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