Emergency Economic Stabilization Act of 2008

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The Emergency Economic Stabilization Act of 2008 (Division A Pub.L. 110-343, 122Ã, Stat.Ã, 3765, enacted October 3, 2008), commonly referred to as the bailout of the US financial system, is subsequent legislation on subprime mortgage crises authorizing the US Treasury to spend up to $ 700 billion to buy troubled assets, particularly mortgage-backed securities, and supplying cash directly to banks. Funds for the purchase of distressed assets are largely diverted to inject capital into banks and other financial institutions while the Treasury continues to examine the usefulness of purchasing targeted assets. Both foreign and domestic banks are included in this program. The law was proposed by Treasury Secretary Henry Paulson during the 2008 global financial crisis and signed by President George W. Bush on October 3, 2008.

Video Emergency Economic Stabilization Act of 2008

History

The law began in early 2008, Treasury Secretary Henry Paulson directed two of his aides, Neel Kashkari and Phillip Swagel, to write a plan to recapitalize the US financial system in the event of a total collapse. The plan, which was also presented to Federal Reserve Chairman Ben Bernanke, called on the US government to buy about $ 500 billion in distressed assets from financial institutions.

The original proposal was submitted to the United States House of Representatives, with the aim of buying bad assets, reducing uncertainty about the value of the remaining assets, and restoring confidence in the credit market. The bill was later expanded and put forward as an amendment to H.R. 3997. The amendment was rejected by the DPR vote on 29 September 2008, voting 205-228.

Proponents of the plan argue that market interventions called for by the plan are important to prevent further erosion of confidence in the US credit market and failure to act can lead to economic depression. Opponents objected to the cost and speed of the plan, pointing to a poll showing little support among the public for the Wall Street bailing out bank, claiming that a better alternative was not considered, and that the Senate forced part of the unpopular version through opposing home by "sweetening" the bailout package.

On October 1, 2008, the Senate debated and voted on an amendment to HR 1424, which replaced the revised version of the Emergency Economic Stabilization Act of 2008 for HR 1424. The Senate accepted the amendment and passed all modified bills, a 74- 25. Additional unrelated provisions add about $ 150 billion for the cost of the package and increase the bill length to 451 pages. (See i Public Law 110-343 for details on additional provisions.) The modified version of HR 1424 was sent to Parliament for consideration, and on 3 October the House voted 263-171 to enforce the bill as law. President George W. Bush signed the bill into law within hours of the congress, creating a $ 700 billion Troubled Asset Relief Program (TARP) to buy failed bank assets.

On October 8, the UK announced their bank rescue package consisting of funding, debt guarantees and investing into banks through preferred shares. The model is followed by all of Europe, as well as the US Government, which on October 14 announced a $ 250bn (Â £ 143bn) Capital Purchase Program to buy shares in various banks in an attempt to restore confidence. in this sector. The money comes from the $ 700bn Assisted Asset Relief Program.

Over the next six months, TARP is dwarfed by guarantees and other lending limits; analysis by Bloomberg found that the Federal Reserve, in March 2009, committed $ 7.77 trillion to save the financial system, more than half the value of everything produced in the US that year.

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Following the release of world capital markets in the 1970s and the abolition of the Glass-Steagall Act in 1999, banking practices (mostly Greenspan inspired "self-regulation") along with subprime mortgages sold without risk investments, reached a critical point during September 2008 , characterized by severe contract liquidity in the global credit market and insolvency threats against investment banks and other institutions. In response, the US government announced a series of comprehensive measures to address the problem, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $ 85 billion liquidity facility for American International. The group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers.

On Monday, October 6, the Dow Jones Industrial Average fell more than 700 points and dropped below 10,000 for the first time in four years. On the same day, CNN reported the world stock market events:

• The UK FTSE 100 index is down 7.9%
• The German DAX is down 7.1%
• French CAC 40 fell by 9%
• In Russia, stock trading was suspended after the RTS stock index fell more than 20%.
Iceland suspended trading of six bank shares while the government drafted a crisis plan.

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Paulson's proposal

US Treasury Secretary Henry Paulson proposed a plan in which the US Treasury Department would obtain mortgage-backed securities of up to $ 700 billion. The plan was soon endorsed by President George W. Bush and negotiations began with leaders in the US Congress to draft appropriate legislation.

Consultation between Finance Minister Henry Paulson, Federal Reserve Chairman Ben Bernanke, US Securities and Security Commission Chairman Christopher Cox, congress leader, and President Bush, are moving forward with a proposal for a comprehensive solution to the problems created by illiquid assets. News of the upcoming plan resulted in some stock market stability, bonds, and currency on September 19, 2008.

The proposal calls on the federal government to buy up to 700 billion of illiquid mortgage-backed securities with the intent to improve the liquidity of the secondary mortgage market and reduce the potential losses faced by financial institutions that have securities. The draft proposal was well received by investors in the stock market, but caused the US dollar to fall against gold, Euro, and petroleum. The plan was not immediately approved by Congress; Debates and amendments look likely before the plan to accept legislative enforcement.

Throughout the week of September 20, 2008, there was a controversial debate among members of Congress over the terms and scope of the bailout, reinforced by persistent failures of institutions such as Washington Mutual, and November 4 national elections.

• On September 21, Paulson announced that the original proposal, to be issued by a foreign bank, was revised to include a foreign financial institution with a presence in the United States. The US government pressured other countries to prepare the same bailout plan.
• On September 23, the plan was presented by Paulson and Bernanke to the Senate Banking Committee, which rejected it as unacceptable.
• On September 24, President Bush addressed the prime television, illustrating the seriousness of the financial crisis if the action was not immediately taken by Congress.
• Also on 24 September 2008 Republican Presidential candidate John McCain and Democratic presidential candidate Barack Obama issued a joint statement outlining their shared view that "Efforts to protect the American economy should not fail."

The plan was introduced on September 20, by Paulson. Named the Troubled Asset Assistance Program, but also known as Paulson Proposal or Paulson's Plan, it should not be confused with Paulson's previous page 212 plan, Blueprint for Reform of the Modernized Rule , released on March 31, 2008.

The proposal was only three pages long, deliberately lacking details to facilitate a brisk walk by Congress.

Purchase of mortgage asset

An important part of the proposal is the federal government's plan to buy up to $ 700 billion of an illiquid mortgage-backed securities (MBS) with a view to improving the liquidity of the secondary mortgage market and reducing the potential losses faced by financial institutions that have securities. The plan's draft proposal is well received by investors in the stock market.

This plan can be described as a risky investment, compared to cost. MBS within the scope of the purchase program has the right to cash flow from the underlying mortgage. Thus, the initial flow of government funds to buy SBM will be offset by the cash inflows represented by monthly mortgage payments. Furthermore, the government may ultimately be able to sell the assets, whether or not the profit or loss will remain visible. While incremental loans to get the funds needed to buy MBS can add to the US public debt, the net effect will be much less because the additional debt will be offset largely by MBS assets.

A key challenge is assessing the purchase price of SBM, which is a complex exercise that depends on many of the variables associated with the housing market and the credit quality of the underlying mortgage. The ability of governments to offset purchase prices (through long-term collection of mortgages) depends on the judgment given to SBM at the time of purchase. For example, Merrill Lynch writes his MBS value up to about 22 US cents in Q2 2008. Whether the government can ultimately resell the asset above the purchase price or will continue to simply collect the mortgage payment is an open item.

On February 10, 2009, the newly confirmed Finance Minister Timothy Geithner outlined his plans to use the $ 300 billion or more left in the TARP fund. He mentioned that the US Treasury and the Federal Reserve wanted to help fund private investors to buy toxic assets from banks, but some details have not been released yet. There is still some skepticism about the premise that taxpayers can buy troubled assets without having to pay more. Oppenheimer & amp; Company analyst Meridith Whitney argues that banks will not sell bad assets at fair market value because they are reluctant to record assets. Removing toxic assets will also reduce the volatility of bank stock prices. Since stock is a call option on a company asset, this lost volatility will harm the depressed share price of the bank. Therefore, these banks will only sell toxic assets above market prices.

On April 6, 2008, the State Foreclosure Prevention Working Group reported that the foreclosure rate exceeded the capacity of the homeowners rescue program, such as the Hope Alliance Now, in the first quarter of 2008.

The power of sweeping

The original plan would give the Minister of Finance an unlimited power to spend, which proves his actions against congressional or judicial reviews. Section 8 of Paulson's proposal states: "Decisions by the Secretary under the authority of this Act shall not be subject to review and commit to agency policy, and shall not be subject to review by any judicial or administrative court." This provision is not included in the final version.

Potential effect

The maximum cost of a $ 700 billion bailout would be a $ 2,295 estimated cost per US (based on an estimated 305 million Americans), or $ 4,635 per American worker (based on an estimated 151 million in the workforce). Much of this money will be used to buy mortgage backed securities, which are ultimately supported by American homeowners, which may then be sold profitably by the government. Economist Michael Hudson predicts that a bailout will lead to hyperinflation and the dollar collapses.

However, there is no persuasive evidence of price increases and the US Dollar Index has actually climbed to a higher level than it was before the announcement of the plan. Indeed, for a week before and after EESA was agreed, the UBS investment bank consistently rejected that such bailouts were inflationary, insisting they were anti-deflationary, not inflationary.

The 2008 federal budget proposed by the president is $ 2.9 trillion, which means a $ 700 billion bailout will represent a 24% increase to $ 3.6 trillion, which will exceed the $ 3.1 trillion budget of 2009. The total government commitment and proposed commitment so far in current and proposed bailouts are reported to be $ 1 trillion compared to $ 14 trillion in the US economy.

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Rationale for bailout

Government officials

In his testimony before the US Senate, Treasury Secretary Henry Paulson summarized the reasons for the bailout:

• Stabilize the economy: "We must... avoid a series of financial institution failures and freeze credit markets that threaten the financial welfare of American families, the feasibility of both small and large businesses, and the very health of our economy. "
• Increase liquidity: "This bad credit has created a chain reaction and last week our credit market froze - even some Main Street non-finance companies have trouble financing their normal business operations. survive, it will threaten all parts of our economy. "
• Comprehensive strategy: "Now we have to take tougher and decisive action to fundamentally and comprehensively address the root causes of this turmoil.And the root cause is a housing correction that has resulted in a liquidity-related illiquid assets strangle the tremendous flow of credit for our economy We must address this fundamental problem, and restore confidence in our financial markets and financial institutions so they can carry out their mission to support future prosperity and growth. "/li>
• Immediate and significant: "This troubled asset aid program should be properly designed for immediate and large enough implementation to have maximum impact and restore market confidence, and it should also protect taxpayers to the maximum extent possible , and includes provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and effectively. "
• Extensive Impact: "This troubled asset purchase program is the single most effective thing we can do to help homeowners, Americans and stimulate our economy."

In his testimony before the US Senate on September 23, 2008, Fed Chairman Ben Bernanke also summarized the reasons for the bailout:

• Investor confidence: "Among the companies under the biggest pressure are Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group (AIG). As investors lose confidence in them, these companies see their access to liquidity and capital markets increasingly disrupted and their stock prices fall sharply. "He also stated:" Purchases of damaged assets will create liquidity and promote price discovery in the market for asset- this asset, while reducing investor uncertainty about the current value and prospects of financial institutions.Moreover, removing these assets from the balance sheets will help to restore confidence in our financial markets and allow banks and other institutions to raise capital and expand credit to support economic growth. "
• Impact on the economy and GDP: "The unusually volatile conditions in global financial markets... these conditions have caused equity prices to fall sharply, short-term credit costs - if available - to soar up, and liquidity dries up in many markets The loss of large money market mutual funds triggers a widespread withdrawal of these funds The marked increase in demand for safe assets - flights to quality - sends Treasury yields down by a few hundred percent. assets and potentially limiting the flow of credit to households and businesses, this development poses a direct threat to economic growth. "

Regarding the $ 700 billion figure, Forbes.com quotes a Treasury spokesman: "It's not based on certain data points, we just want to choose a very large amount."

Journalist

According to CNBC commentator Jim Cramer, large corporations, institutions, and wealthy investors withdrew their money from bank money market funds, supporting government-backed Treasury bills. Cramer called it "an invisible run in the bank," which has no lines in the lobby but pushed the bank to its zenith. Because the reserve capital of the bank evaporates, so does its ability to lend and collectively make money. "The lack of confidence inspired by Lehman's death, poor public health of many banks, this will turn this into a difficult moment," Cramer said, "if someone in government does not start pushing for longer deposit insurance.

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Reaction to original proposal

Skepticism about the plan took place early in the House. Many members of Congress, including the House of Representatives, did not support the plan at first, especially the conservative free-market Republican and the liberal anti-corporal Democrats. Alabama Republic Spencer Bachus called the proposal "a weapon in our head."

Immediate market reaction

On September 19, 2008, when news of bailout proposals appeared, the US stock market rose 3%. Foreign equity markets also surged, and foreign currencies fell slightly, having dropped earlier in the month. The value of the US dollar fell compared with other world currencies after the plan was announced. Future front oil futures increased more than $ 25 a barrel during Monday Sept. 22, ending the day for more than $ 16. This is the biggest one-day record rise. However, there are other factors that cause a massive jump in oil prices. Traders who were "caught" by the end of the October contract session were forced to buy large amounts of oil to cover themselves, adding to the price spike. Furthermore, the oil futures contract rose about $ 5 per barrel. Mortgage rates rose following news of the bailout plan. Fixed rate mortgage 30 years averaged 5.78% in the week before the plan was announced; for the week ended September 25, the average rate was 6.09%, still well below the average level during the early 1990s recession, when it reached 9.0%.

Potential conflicts of interest

There are fears that the current plan creates a conflict of interest for Paulson. Paulson is a former CEO of Goldman Sachs, who benefited from the bailout. Paulson has hired Goldman executives as advisors and former advisor Paulson has joined the banks that also benefit from the bailout. Furthermore, the original proposal freed Paulson from judicial oversight. So there is a concern that illegal activities by financial institutions or executives may be hidden.

The member of the treasury staff responsible for managing the bailout fund is Neel Kashkari, a former vice president at Goldman Sachs.

In the Senate, Senator Judd Gregg (R-NH) is the leading Republican author of the TARP program while he has a multimillion-dollar investment in Bank of America.

Public

Protests against the bailout took place in more than 100 cities across the United States on Thursday 25 September. The grassroots group TrueMajority says its members organize more than 251 events in more than 41 countries. The biggest meeting took place in New York City, where more than 1,000 protesters gathered near the New York Stock Exchange along with union members organized by the New York Central Labor Council. Other grassroots groups have planned rallies to protest the bailout, while angry citizens continue to express their opposition online through blogs and special websites.

• In a September 19-22 survey by the Pew Research Center, 57 percent to 30 percent, the US supported the bailout when asked "As you know, the government has the potential to invest billions to try and keep financial institutions and markets keep it safe Do you think this is the right thing or the wrong thing to do by the government? "
• In a survey conducted September 19-22 by Bloomberg/Los Angeles Times, by 55 percent to 31 percent, the United States opposed the bailout when asked if "the government should use taxpayer dollars to save sick private financial firms collapse could have an adverse effect on the economy and the market, or is it the government's responsibility to save private companies with taxpayer dollars? ".
• In a September 24 survey by USA Today /Gallup, when asked "As you know, the Bush administration has proposed a plan that will allow the Treasury to buy and resell up to $ 700 billion in assets problematic financial firms.What do you want to see Congress do? ", 56 percent of respondents wanted Congress to pass a plan different from Paulson's original proposal, 22 percent backed Paulson's proposal in preliminary form, and 11 percent wanted Congress not to take action.
• Senator Sherrod Brown says he has received 2,000 e-mail and phone calls a day, about 95 percent opposed.
• On Thursday, September 25, the office of Senator Dianne Feinstein (D-Calif.) has received a total of 39,180 e-mails, phone calls and letters about the bailout, with the majority of constituents opposing it.

Politicians

Supporters of the plan include presidential candidates Barack Obama and John McCain, and British Prime Minister Gordon Brown.

Critics include Former Arkansas Governor Mike Huckabee, Congressman Ron Paul, Libertarian presidential candidate Bob Barr, and Senators Christopher Dodd, Richard Shelby, and Jim Bunning.

In a Wall Street Journal opinion, Senator Hillary Clinton advocated addressing default rates and mortgage foreclosures that sparked the crisis, not only giving the Wall Street company a guarantee: "If we do not take action to cope with the crisis facing borrowers , we will never solve the crisis facing the lender. "He proposed a new Home Loan 'Loan Loan (HOLC), similar to that used after the Depression and which was launched in 1933. The new HOLC is to manage a national program to help homeowners refinance their mortgage. He also called for a moratorium on foreclosures and freezing interest rate hikes in adjustable rate mortgages.

Barack Obama, the Democratic presidential candidate, said that every bailout should include plans to recover money, protect working families and large financial institutions and be created to prevent such a crisis from happening again.

Financiers

Former Federal Reserve Chairman Alan Greenspan backs Paulson's plan.

Investor Warren Buffett says he can put $ 10B plus $ 90B of nonrecourse debt; ie, without having to pay beyond $ 10B if the mortgage does not pay. (This is 10 to 1 leverage, 10 times upside down with 1 downside.) He also said that the government should pay the market price, which may be below the carrying amount. Buffett said: "I would think they might have insisted on the directors of the institutions that participated in the program by freeing up all the directors' fees for several years, they should, perhaps, eliminate the bonuses." Buffett says "... if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion on the market and then have that Financial game,.... you do not want the Treasury to be patsy." Buffett has a financial company that will benefit both directly and indirectly.

Investor George Soros opposes Paulson's original plan: "Paulson's proposal to buy a mortgage-related securities problem caused a classic problem of asymmetric information.The effects are difficult to assess but the seller knows more about them than the buyer: in every process Treasury auctions will end in rubbish. full of latent interest conflict issues.Unless the Treasury pays for the securities, the scheme will not bring help. "- but called Barack Obama a list of conditions for the" right principle "plan.

Other critics include Carl Icahn Jim Rogers, and William Seidman. Seidman compared the bailout with the actions that he and his team at Resolution Trust Corporation took during the savings and loan crisis of the 1980s: "What we do, we take over the bank, nationalize it, fire management, take bad assets and return a good bank into the system. "

Economist

Journalist

• The Economist Magazine says that although "Mr. Paulson's plan is not perfect... that's good enough" and "Congress must pass - and soon."
• "Paulson's agreement is not excessive, that includes no oversight of his closed operations, it only gives blessing and congressional funding to what he has done, ad hoc." - Robert Kuttner
• Journalist Rosalind Resnick likes a hypothetical scenario where "consumers and businesses will be able to borrow at a 2 percent fed funds rate, as big banks do, meaning that any cash-strapped homeowner will be able to refinance his mortgage and cut their payments to half, save thousands of homes from foreclosure.Customers can also refinance their credit card balances, auto loans and other debts at the interest rate they can afford "and that this plan will cost the US taxpayer absolutely nothing. "He did not discuss how the Federal Reserve will manage mortgages, credit cards, and auto loans the US population in practice.

Alternate proposal

The suggested alternative approaches to addressing the underlying problems of the financial crisis include: mortgage aid proposals trying to increase the value of the asset base while limiting foreclosure disruption; recapitalization of banks through equity investments by the government; asset liquidity approach to involve market mechanisms to assess problematic assets; and financial market reforms that promote transparency and conservatism to restore confidence by market investors.

Mortgage assistance

• The Conservative Representative of the Republic has offered mortgage insurance plans as an alternative to a bailout. There is speculation that US Senator John McCain might support this plan but this is not confirmed.
• Senator Hillary Clinton has proposed a new Home Loan 'Loan Loan (HOLC), similar to that used after the Depression, launched in 1933. The new HOLC will set up a national program to help homeowners refinance their mortgages. He also called for a moratorium on foreclosures and a freeze on interest rate hikes with adjustable rates of mortgages.
• Jonathan Koppell, Associate Professor of Politics and Management at Yale School of Management, recommends helping homeowners by lowering lending rates by default. The money spent will be paid back from the profits when the house finally sells after the housing market has recovered.

Recapitalize bank

• The ten-point plan by New York University economist Nouriel Roubini transcends the Home Owner Loan Company to include creating a combination of Corporation Trust Resolution, and Corporate Finance Reconstruction. Roubini has advocated recapitalizing banks (by providing cash in exchange for preferred shares) and suspending all dividend payments.
• Economist Paul Krugman recommends equity investments in banks, an approach similar to what happened during the S & amp; L, GSE bailout, and Swedish banking rescue of the 1990s. This avoids the assessment questions involved in direct MBS purchases.
• The first half of the bailout money is primarily used to purchase preferred stock in the bank rather than a troubled mortgage asset. This has led some economists to argue that buying preferred stock would be far less effective than buying a common stock.
• Luigi Zingales, Professor of Entrepreneurship and Finance at the University of Chicago, has proposed a special chapter of the bankruptcy code to turn bank debt into equity that will increase the capital adequacy ratio and enable repayment of loans.
Janet Tavakoli, a financial consultant and former professor of derivatives at the University of Chicago's Graduate School of Business, criticized the bailout because he thought it was hiding the problem and price uncertainty. He also supports forced restructuring, with a combination of debt forgiveness and debt to swap equities, not a bailout.

Liquidity of assets

• Christopher Ricciardi, former Merrill Lynch banker, wrote a letter to Treasury Secretary Henry M. Paulson Jr. proposed an alternative that the government should support some troubled assets to encourage private investors to buy them - as opposed to the direct purchase of troubled assets from financial institutions.
• Investors Warren Buffett believes that the government should pay the market price for the asset rather than the very high hold-to-maturity price. The market price will be determined by selling some of the assets to private investors.

Financial market reform

• Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, has recommended three short-term actions to help banks: the provision of liquidity, the purchase of distressed assets, and recapitalization. In addition, he argues for addressing structural issues with more prudential regulations, better accounting rules, and higher transparency.

Reform of monetary consensus

This process consists of nationalizing most private industries. Short-term effects prove costly, but beneficiary rewards are highly beneficial for a sustainable economic future.

1. Nationalize federal reserves.
2. Deregulation of corporate image of United States.
3. The rest of the proposal is equated with different variables and will be followed up accordingly.

According to Jon Daemon, the proposal was dismissed by bureaucrats and lobbyists according to private banks and federal reserve dispatchers.

Legislative history

Over the weekend (27-28 September), Congress continues to develop proposals. The following Monday, the House of Representatives put the resulting effort, the Emergency Economic Stabilization Act of 2008, for voting. It did not pass. US stock markets fell 8 percent, the biggest percentage decline since Black Monday in 1987.

Congress leaders, including both presidential candidates, began working with the Bush Administration and the Finance department on major negotiation points as they worked to finalize the plan. Key points covered include:

• Additional avoidance and homeowner help
• Executive payment limit
• The interests of government equity in companies participating in the program, to provide additional taxpayer protection
• Judicial review, Congressional oversight, and the right to audit
• The structure and authority of the entity that will manage the program

First House Voice, September 29

Right after midnight Sunday, September 28, Senate and House leaders, along with Finance Minister Paulson, announced a temporary agreement was reached to allow government purchases of up to $ 700 billion in mortgage backed securities to provide liquidity to security holders, and to stabilize US companies and financial markets. The bill was finalized later on Monday morning. Debates and voting are scheduled for the House of Representatives for Monday, September 29, to be followed by Senate debate on Wednesday. In a morning press conference, on Monday 29 September, President George W. Bush expressed confidence that the bill would pass Congress, and that would provide assistance to the US economy. A number of Republicans remain opposed to the deal and intend to oppose it.

On the same day, the law for the bailout was put before the United States House of Representatives and failed 205-228, with one not voting. Democrats voted 140-95 in favor of the law, while Republicans voted 133-65 against it. During the legislative session, at the end of the vote, the chairman declares the size, HR3997, to be an unfinished business.

House Speaker Nancy Pelosi told a press conference after the vote: "The law has failed. The crisis has not disappeared, we must continue to work in a bipartisan way." Senate Banking Committee Chairman Christopher Dodd, Democrat Democrat, appeared at a joint press conference with Senator Judd Gregg, a New Hampshire Republican, said the bailout plan could still pass Congress. Dodd said: "We do not intend to leave here without the work done, even though it may take several days, we believe it can happen."

Market reaction until September 29

After the House vote, the Dow Jones Industrial Average fell more than 777 points in a single day, its biggest single-day point decline until 2018. The $ 1.2 trillion loss in market value received a lot of media attention, though it still did not rank among the top ten drops in percentage. S & amp; P lost 8.8 percent, its seventh worst day in terms of percentage and its worst day since Black Monday in 1987. The NASDAQ composite also suffered its worst day since Black Monday, losing 9.1 percent on the third worst day ever. TED spread, the difference between what the banks charge each other for a three-month loan and what is billed by Treasury, reaching 26-year highs of 3.58%; Higher rates for interbank loans than Treasury loans are a sign that banks are afraid that their fellow banks will not be able to pay off their debts. Meanwhile, US light crude oil for November delivery fell $ 10.52 to $ 96.37 a barrel, the second-biggest one-day decline, on expectations of an economic slowdown that reduced oil consumption and demand. The Dow Jones industrial average recovered 485 points or about 62% of all losses the following day.

The market had forecast the bill to pass and had moved into arguing whether it was enough already excited after news that Wachovia Bank was being bought by Citigroup to avoid a ruin. The incident was compounded by news from Europe that the Dutch-Belgian Fortis Bank was given $ 16.4 billion to avoid collapse, the failure of British bank Bradford & Bingley was nationalized, and Germany expanded banking and real estate giants Hypo Real Estate to ensure its survival.

Then in October, after the bill has been ratified, the Dow Jones Industrial Average will fall more in percentage, and market volatility remains at historically high levels, as measured by VIX.

Senate Voice October 1

On Wednesday evening, October 1, 2008, the Senate debated and voted on a revised version of the 2008 Emergency Economic Stabilization Act (EESA 2008). The Act was framed as an amendment to HR1424, replacing all charges with the revised 2008 EESA text. (Amendments to the text of the 2008 Emergency Economic Stabilization Act) Senate Committee on Banking, Housing and Urban Affairs (CBHUA)) (October 1, 2008) ) (Retrieved 1 October 2008)
See also CBHUA Senate web page This amendment is approved by a 74-25 vote, and all bills are also passed with the same margin, 74-25 (R: 34-15, D: 40-10). Only cancer senator Ted Kennedy did not vote. Under the legislative rules for the bill, sixty votes are required to approve the amendment and the bill. A House leader accused the Senate of legalizing "with blunt force" without public approval.

Describing the Senate's reasons for passing the bill, former Senator Evan Bayh "described a scene from 2008 in which Ben Bernanke warned senators that the sky would collapse if the bank was not saved." We looked at each other, "Bayh said," and say, okay, what we need. '"

Second Home Sound, October 3

The revised HR1424 was received from the Senate by Parliament, and on 3 October, he voted 263-171 to enact the bill into law. Democrats voted 172 to 63 supported the law, while Republicans voted 108 to 91 against it; In all, 33 Democrats and 24 Republicans who previously opposed the bill supported it in the second vote.

President Bush signed the bill into law within hours of its enactment, creating a $ 700 billion Treasury fund to buy failed bank assets.

The revised plan left a $ 700 billion bailout intact and added a stalled tax bill. This law has three main divisions, Division A: Emergency Economic Stabilization Act of 2008; Division B: Energy Enhancement and Extension Act of 2008, and Division C: Tax Extenders and Alternative Tax Relief Act of 2008. The tax section of the law has a provision that will have net expenses of $ 100 billion over 10 years. It has stalled because of a dispute between Democrats who do not want to increase spending without a corresponding increase in taxes and Republicans, who insist against opposing tax increases.

Primary item in law

On October 3, 2008, the Emergency Economic Stabilization Law became law with the signing of Public Law 110-343, which included the law. Below is a list of the main items and how the law deals with them.

Bank deposit interest held by Federal Reserve

Although the original bill submitted on September 20 does not contain such provisions, Section 128 of the Act allows the Federal Reserve System (the Fed) to start paying high interest rates on their held deposits for reserve requirements. It reads:

SEC. 128. ACCELERATIVE DATE OF EFFECTIVE DATE.

Section 203 of the Financial Services Assistance Act 2006 (12 U.S.C. 461) was amended by crossing 'October 1, 2011' and entering 'October 1, 2008'.

The Fed announced that it would begin to pay increased interest on the balance of reserves and excess reserves on October 6, 2008. The Bank immediately increased their money amount on deposits with the Fed, up from about $ 10 billion total at the end of August 2008., up to $ 880 billion by the end of the second week of January 2009. For comparison, the reserve reserve increase only reached $ 65 billion after September 11, 2001 before falling back to normal levels within a month. The US Treasury explained the change, saying:

The Federal Reserve will continue to take a leadership role with respect to liquidity in our market. It is committed to using all available tools to provide the liquidity improvements that are now required to function effectively from financial markets. In this case, the authority to pay interest on reserves provided by EESA is crucial, as it allows the Federal Reserve to expand its balance sheet as necessary to support financial stability while conducting monetary policy that promotes Federal Reserve's maximum employment and stable macroeconomic objectives. The Federal Reserve and the Treasury Department are consulting with market participants about ways to provide additional support for the long-term unsecured fund market.

Reactions to change vary, with banks generally agreeing on their new ability to earn high interest without risk to the funds they are supposed to use to extend credit to benefit their shareholders while those involved in market securities, the primary and secondary sectors of the economy goods and services, delivery, etc. depending on bank liquidity are more skeptical of further pressure on credit availability amid the ongoing credit liquidity crisis.

The day after the change was announced, on Oct. 7, Fed Chairman Ben Bernanke revealed some confusion about it, saying, "We are not quite sure what we have to pay to get the market rate, which includes some credit risk, get to the target We will experiment with "The Fed adjusted rates on October 22, after the initial rate they set on Oct. 6 failed to keep US benchmark rates overnight close to their policy targets, and again on Nov. 5 for similar reasons. Beginning December 18, the Fed directly sets the interest rate paid on the required reserve balance and excess balance instead of assigning it to the formula based on the target federal funds level.

The government spent $ 400 billion of short-term debt intended to help replace the $ 1.8 trillion commercial paper market that was removed by the change, (compounded by the sudden denial of money market funding to support commercial paper as well) but the world economy began to deflate as International shipping, depending on commercial paper, slows down in some areas up to a few percentage points before the change. The FDIC announces a new program on October 14, in which newly issued unsecured senior debt issued on or before 30 June 2009, will be fully protected if the issuing institution then fails, or the parent company files for bankruptcy. The FDIC program is expected to cover about $ 1.4 trillion in bank debt.

The Congressional Budget Office estimates that interest payments on reserve balances will weigh on American taxpayers about a tenth of the current 0.25% interest rate at $ 800 billion in deposits:

The expenditure is pale in comparison to the worldwide lost tax revenues resulting from the decline in economic activity due to damage to short-term commercial paper and related credit markets.

On January 7, 2009, the Federal Open Market Committee decided that, "the size of the balance sheet and the level of excess reserves will need to be reduced." On January 13, Ben Bernanke said, "In principle, the Fed's interest rate pay on bank reserves should set the overnight rate, because banks should not want to lend reserves at a lower rate than they can receive from the Fed. , the federal funds rate has fallen slightly below the reserve interest rate in recent months, reflecting the excessive volume of excessive reserves, the lack of experience of banks with the new regime, and other factors.But as excess reserves decrease, the financial condition normalizes, and banks adapt to the new regime, we expect the interest rates paid on reserves to be effective instruments to control the federal funds rate. "On the same day, Financial Week said Bernanke admitted that the increase in excessive reserves of large banks has hampered the Fed's monetary policy measures and its efforts to revive pi private sector.

On January 15, the president of the Chicago Fed and members of the Federal Open Market Committee, Charles Evans said, "once the economy recovers and financial conditions stabilize, the Fed will return to its traditional focus on federal funds levels and should also reduce the use of emergency lending programs and reducing the size of the balance sheet and the level of excess reserves.'Many of these scaling will occur naturally because market conditions are improving because of how these programs have been designed, but financial market participants need to be prepared for the dismantling of existing facilities during financial turmoil, he said. "

At the end of January 2009, the balance of excess reserves in the Fed reached $ 793 billion but less than two weeks later on February 11, the total reserve balance fell to $ 603 billion. On April 1, the balance of reserves increased to $ 806 billion, and by the end of November 2009, they reached $ 1.16 trillion.

Troubleshooting Asset Management Program

The bill authorizes the Minister of Finance to establish a Troubled Asset Assistance Program to purchase problem assets from financial institutions. The Office of Financial Stability is created within the Ministry of Finance as the institution where the Secretary will run the program. The Secretary is requested to consult the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Currency Supervisor, the Director of the Treasury Office, and the Secretary of Housing and Urban Development while running the program.

Funding

The bill gives $ 700 billion for the program. The Finance Minister has direct access to the first $ 250 billion. Thereafter, an additional $ 100 billion may be authorized by the President. For the last $ 350 billion, the President must notify Congress of intent to provide additional funds to the Ministry of Finance; Congress then has 15 days to give a resolution that does not authorize the authorities. If Congress fails to pass a resolution against funding within 15 days, or if the resolution passes but is vetoed by the President, and Congress does not have enough votes to override the veto, the Treasury will receive a final $ 350 billion.

The interests of government equity in participating companies

The Minister of Finance is required to obtain a financial order guaranteeing the right to purchase a non-voting stock or, if the company can not issue a warrant, senior debt from any company participating in the program. The secretary is allowed to make de minimis exceptions to the rules, but the exceptions may not exceed $ 100 million.

Executive payment limit

If Treasury buys assets directly from the company, and also receives significant equity or debt position in the company, the company is not allowed to offer incentives that encourage "unnecessary and excessive risk" to senior executives (ie, the top five executives). Also, the company is prohibited from paying a gold parachute to a senior executive. Both of these restrictions end when the Treasury no longer holds an equity or debt position in the company. The company is also granted "clawback" permission; that is, an opportunity to recover senior executive bonuses or incentive payments based on earnings, profits, or other data that proved inaccurate.

If the Treasury buys the asset through an auction, and the purchase exceeds $ 300 million, any new employment contract for senior officers may not include the provisions of the golden parachute in cases of voluntary dismissal, bankruptcy filing, bankruptcy, or curators. This prohibition applies only to future contracts; the existing gold parachute will remain unaffected.

In any scenario, no limit is placed on executive pay, and existing gold parachutes will not be changed.

Seizure avoidance and homeowner assistance

For mortgages involved in assets purchased by the Ministry of Finance, the Minister of Finance is required to (1) implement a plan that seeks to maximize assistance for homeowners, and (2) encourage underlying mortgage servicers to take advantage of HOPE for Homeowners Program of Housing Law National or any other program available to minimize foreclosure. Furthermore, the Secretary is allowed to use loan guarantees and credit enhancements to encourage loan modifications to prevent foreclosures. The bill does not provide a mechanism to change the mortgage terms without the consent of any company that holds shares in the mortgage. Section 110: Help for Homeowners of the 2008 Emergency Economic Stabilization Act "requires federal entities holding mortgages and mortgage-backed securities to develop plans to minimize foreclosures".

The $ 24 billion asset-detaching plan was requested by Federal Deposit Insurance Corporation Chair Sheila Bair, but the Treasury did not use the provision. "The main purpose of the bill is to protect our financial system from destruction," Minister Henry Paulson told the House Financial Services Committee, "The rescue package is not intended to be an economic stimulus or economic recovery package."

Judicial review

The bill stipulates that the actions taken by the Minister of Finance regarding the program are subject to legal review, reversing the demand for immunity made in Paulson's original proposal.

Supervision

Some supervisory mechanisms are established by the bill. Contractors are also used to help manage TARP funds.

Financial Stability Supervisory Board

The Financial Stability Supervisory Board is created to review and make recommendations on Treasury actions. The members of the council are:

• Chairman of the Federal Reserve Board
• Minister of Finance
• Director of the Federal Housing Finance Agency
• Chairman of the Securities and Exchange Commission
• Secretary of the Department of Housing and Urban Development

Congressional Control Panel

The Congressional Control Panel is established by law to review the market situation, the current regulatory system, and the Ministry of Finance's management of the Troubled Asset Relief Program. Panels are requested to report their findings to Congress every 30 days, calculated from the first asset purchases made under the program. The Panel should also submit a special report to Congress on regulatory reform on or before January 20, 2009.

The panel consists of five outside experts appointed as follows:

• One member is elected by the House Speaker
• One member is selected by the minority leader of House
• One member is selected by the Senate majority leader
• One member is selected by the Senate minority leader
• One member elected by the Speaker of the House and the Senate majority leader, after consulting with minority leaders from Congress

Comptroller General supervision requirements

The General Financial Supervisor (director of the Government Accountability Office) is required to monitor program performance, and report the findings to Congress every 60 days. The Financial Supervisor is also required to audit the program every year. The bill gives the General Controller access to all information, records, reports, data, etc. Owned or used by the program.

Office of the Special Inspector General

The bill creates the Office of the Special Inspector General for the Asset Relief Assistance Program, designated by the President and confirmed by the Senate. The purpose of the Special Inspector General is to monitor, audit and investigate the activities of the Ministry of Finance in program administration, and to report findings to Congress every quarter.

FDIC Insurance

From the date of enactment of the bill (October 3, 2008) to December 31, 2009, the amount of deposit insurance provided by the FDIC increased from $ 100,000 to $ 250,000.

Terms related to budget

Title II establishes guidelines for consultation and reporting between the Minister of Finance, the Office of Management and Budget, and the Congressional Budget Office.

Tax conditions

The bill makes the following changes to the tax law.

• Eligible financial institutions can calculate the loss on FNMA and FHLMC of preferred stocks against ordinary income, rather than capital gains income.
• New limitations are added to the reduction of executive compensation by companies participating in the bailout.
• The mortgage loan terms of the Mortgage Forgiveness Debt Relief Act of 2007 are extended for three years, so apply to forgivable debt throughout 2012.
• Extend the expiration date of section 41 Research & amp; Development Tax Credit from December 31, 2007 to December 31, 2009; also, increase the percentage of Simple Alternative Credits from 12% to 14%.

Legal administration

The CAMELS rating is used by the United States government to help decide which banks provide special assistance and which are not part of the capitalization program adopted by the 2008 Emergency Economic Stabilization Act.

The New York Times states: "The criteria used to select who gets the money seems to set the stage for consolidation in the industry by supporting those most likely to survive" because the criteria seem financially favorable to the best banks and banks too great to be allowed to fail. Some lawmakers are angry that the capitalization program will end the destruction of banks in their districts.

The known aspect of the capitalization program "suggests that the government can freely define what constitutes a healthy institution.The profitable banks over the past year are the most likely to receive capital.Banks that have been losing money over the past few years.Years, however, must pass additional tests. [...] They also asked whether banks have enough capital and reserves to withstand severe losses to construction loan portfolios, bad debts and other troubled assets. "Some banks receive capital on the understanding that banks will seek merger partners. To receive capital under the program bank is also "necessary to provide a special business plan for the next two or three years and explain how they plan to spread the capital."

Effect on national debt

The annual budget deficit of the United States for fiscal year 2009 exceeded $ 1 trillion. Paulson's original proposal will lift the US federal debt ceiling of $ 700 billion, to $ 11.3 trillion from $ 10.6 trillion today.

More information

A review of investor presentations and conference calls by executives from about two dozen US-based banks by The New York Times found that "some [banks] cite loans as a priority." The vast majority see bailout programs as fortune without a strap without bonds that can be used to repay debt, gain another business or invest for the future. "

See also

References

External links

• Library of Congress drafts:
  • Pub.L. 110-343
  • H.R. 1424
• The original Paulson proposal text
• Stimulus.org, a comprehensive guide to all economic recovery efforts.
• Employment and Economic Growth - a discussion of proposals from the White House Archives George W. Bush.
• Accept the Resolution-House draft for a bailout (110 pages)
• Text version of Bailout House Charge Res 1517
• Text from revised bill
• Erin Aigner; Amanda Cox; Farhana Hossain; Archie Tse (September 30, 2008). "The No Votes: Details about Republican and Democratic representatives who voted against the 700 billion dollar bailout plan." The New York Times . Retrieved September 30, 2008 . (US list and map with the congressional voting district "no".
• Nocera, Joe; Sorkin, Andrew Ross; Henriques, Diana B.; Andrews, Edmund L. (October 1, 2008). "36 Hours of Alarm and Action as Crisis Spiraled". The New York Times . Retrieved October 2, 2008 . (Background development of Treasury proposal to Congress)
• US Government Agency Related Agency Reports, Action, Documents, Video and News Concerning Emergency Economic Stabilization Act of 2008/TARP (Asset Relief Assistance Program)
• Nomi Prins: "Too Much Banking Banking" - video report by Democracy Now!

Source of the article : Wikipedia