All together now

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Recap of all blog entries related to the housing problems and the ensuing financial crisis:

Executive compensation (Section 111) – October 4th
MOAB – October 4th
Quotes… (updated) – October 4th
Fingers crossed – October 4th
Great quotes – October 2nd
Wall Street vs. Main Street – II – October 2nd
Wall Street vs. Main Street – October 1st
Yet another plan (Soros) – October 1st
Ouch – II – October 1st
Ouch – September 30th
All about CDSs – September 30th
Genius! – September 30th
Crisis expanding – September 29th
Great quotes – September 27th
Redefining “too big to fail” – September 27th
Crashing the party– September 27th
Rough Landing – September 25th
Confused and nowhere to go (updated) – September 24th
Street-wise – September 24th
One can dream – September 23rd
Government bailouts – September 23rd
What it took – September 23rd
Truth RIP (updated 9/22) – September 22nd
Vox clamantis in deserto – September 22nd
Finely calibrated reactions – September 16th
Fannie and Freddie – September 10th
Fannie Mae and Freddie Mac – July 24th
Mortgage meltdown (update) - April 1st
Mortgage meltdown – March 31st
Housing Stories III – July 29th
Housing stories – II – May 6th
Housing stories – April 5th

Executive compensation (Sec 111)

So Congress can claim that limits have been place on executive pay so that the leaders who caused this mess can't get massive paychecks and bonuses. This appears to be Section 111 of the MOAB (see below). However, reading this section, it doesn't seem all that onerous. It covers two different sets of situations - where the Treasury does "direct purchases", and where the Treasury does "auction purchases."

In the first possibility (i.e. direct purchases) there will be conditions only if the Treasury a) buys "directly" without an auction, etc., and b) also takes a "meaningful equity or debt position" in the company. So, if the Treasury buys toxic waste and does not also take an equity position, no conditions on pay. If all three conditions are met then there are "restrictions" - the institution has to follow appropriate standards (again undefined! And, actually, it looks like the company is only prohibited from offering the executives incentives to take unnecessary risk! This blogger believes we can assume that every company would deny ever having done this!) for executive compensation, but only as long as the equity position is maintained; executive bonuses could be "recovered" if based on false information; and, lastly, golden parachutes (undefined!) are not allowed while Treasury has an equity position.

In the second possibility (i.e. auction purchases) restrictions only enter into effect IF the purchases exceed $300 million. The "restrictions" here are only on new contracts, and only prohibit the payment of golden parachutes (undefined) IF the company goes bankrupt or insolvent or IF the executive is terminated....

Bottom line, this is very lose - with undefined terms and hedged with exceptions and 'outs.' Enough for senators and representatives to tell their constituents that they have acted on this matter, too little for any meaningful effect...

Note: This blogger does not believe that any current contract should be abrogated. He is also skeptical of this entire proposition. Thus he is not upset by the looseness of the rules, just extremely disgusted at mendacious senators and representatives!

SEC. 111. EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE.

(a) APPLICABILITY.—Any financial institution that sells troubled assets to the Secretary under this Act shall be subject to the executive compensation requirements of subsections (b) and (c) and the provisions under the Internal Revenue Code of 1986, as provided under the amendment by section 302, as applicable.
(b) DIRECT PURCHASES.—
(1) IN GENERAL.—Where the Secretary determines that the purposes of this Act are best met through direct purchases of troubled assets from an individual financial institution where no bidding process or market prices are available, and the Secretary receives a meaningful equity or debt position in the financial institution as a result of the transaction, the Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance. The standards required under this subsection shall be effective for the duration of the period that the Secretary holds an equity or debt position in the financial institution.
(2) CRITERIA.—The standards required under this subsection shall include—
(A) limits on compensation that exclude incentives for senior executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution during the period that the Secretary holds an equity or debt position in the financial institution;
(B) a provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; and.
(C) a prohibition on the financial institution making any golden parachute payment to its senior executive officer during the period that the Secretary holds an equity or debt position in the financial institution.
(3) DEFINITION.—For purposes of this section, the term ‘‘senior executive officer’’ means an individual who is one of the top 5 highly paid executives of a public company, whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934, and any regulations issued thereunder, and non-public company counterparts.
(c) AUCTION PURCHASES.—Where the Secretary determines that the purposes of this Act are best met through auction purchases of troubled assets, and only where such purchases per financial institution in the aggregate exceed $300,000,000 (including direct purchases), the Secretary shall prohibit, for such financial institution, any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership.
The Secretary shall issue guidance to carry out this paragraph not later than 2 months after the date of enactment of this Act, and such guidance shall be effective upon issuance.
(d) SUNSET.—The provisions of subsection (c) shall apply only to arrangements entered into during the period during which the authorities under section 101(a) are in effect, as determined under section 120.

MOAB

As referenced in 'Fingers Crossed!' the "mother of all bailouts' (or MOAB) was passed by the House. Since the Senate had passed an identical version there was no need for reconciliation, and the President immediately signed the Emergency Economic Stabilization Act of 2008. This blogger listed some of the "goodies" slipped in to ensure passage in 'Quotes... (updated)." Should the entrepid reader wish to delve into the 400+ pages, below is a list of the various sections - chose the section you want to investigate, jump to the pdf. and search...

Sec. 101. Purchases of troubled assets.
Sec. 102. Insurance of troubled assets.
Sec. 103. Considerations.
Sec. 104. Financial Stability Oversight Board.
Sec. 105. Reports.
Sec. 106. Rights; management; sale of troubled assets; revenues and sale proceeds.
Sec. 107. Contracting procedures.
Sec. 108. Conflicts of interest.
Sec. 109. Foreclosure mitigation efforts.
Sec. 110. Assistance to homeowners.
Sec. 111. Executive compensation and corporate governance.
Sec. 112. Coordination with foreign authorities and central banks.
Sec. 113. Minimization of long-term costs and maximization of benefits for taxpayers.
Sec. 114. Market transparency.
Sec. 115. Graduated authorization to purchase.
Sec. 116. Oversight and audits.
Sec. 117. Study and report on margin authority.
Sec. 118. Funding.
Sec. 119. Judicial review and related matters.
Sec. 120. Termination of authority.
Sec. 121. Special Inspector General for the Troubled Asset Relief Program.
Sec. 122. Increase in statutory limit on the public debt.
Sec. 123. Credit reform.
Sec. 124. HOPE for Homeowners amendments.
Sec. 125. Congressional Oversight Panel.
Sec. 126. FDIC authority.
Sec. 127. Cooperation with the FBI.
Sec. 128. Acceleration of effective date.
Sec. 129. Disclosures on exercise of loan authority.
Sec. 130. Technical corrections.
Sec. 131. Exchange Stabilization Fund reimbursement.
Sec. 132. Authority to suspend mark-to-market accounting.
Sec. 133. Study on mark-to-market accounting.
Sec. 134. Recoupment.
Sec. 135. Preservation of authority.
Sec. 136. Temporary increase in deposit and share insurance coverage.
TITLE II—BUDGET-RELATED PROVISIONS
Sec. 201. Information for congressional support agencies.
Sec. 202. Reports by the OMB and the CBO.
Sec. 203. Analysis in President’s Budget.
Sec. 204. Emergency treatment.
TITLE III—TAX PROVISIONS
Sec. 301. Gain or loss from sale or exchange of certain preferred stock.
Sec. 302. Special rules for tax treatment of executive compensation of employers
participating in the troubled assets relief program.
Sec. 303. Extension of exclusion of income from discharge of qualified principal residence indebtedness.

Quotes... (updated)

"We will not Christmas-tree this bill. The times are too urgent. Everyone has their own desires and needs. It's going to have to wait." - Senator Chuck Schumer (D-NY) re the MOAB on September 22nd...

However, for politicians every day can be Christmas. To 'lubricate' passage of the MOAB, more formally known as the Economic Stabilization Act of 2008, a number of additions of all types were made, for example:

• "Tucked into pages 262 and 263 of the bill, for example, are provisions that will aid the manufacturers of "certain wooden arrows designed for use by children." The bill will exempt the arrows from an excise tax of 39 cents. There are also tax breaks for race-track owners, for rum imported from Puerto Rico, for worsted wool makers, Hollywood film and television production companies and on and on...." here
• Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children. Sec. 317. Seven-year cost recovery period for motorsports racing track facility. Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands. Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation. Sec. 201. Deduction for state and local sales taxes. Sec. 309. Extension of economic development credit for American Samoa. Sec. 211. Transportation fringe benefit to bicycle commuters. And others, see here.
• "... The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on... It lets the IRS give information from individual tax returns to any federal law enforcement agency investigating suspected "terrorist" activity, which can, in turn, share it with local and state police... " See here.
• "... The Senate bill includes $3.3 billion in federal aid for rural schools, a two-year extension of the popular deduction for states that rely on sales tax and another one-year patch to protect millions of middle-income households from paying the dreaded alternative minimum tax..." See here.
• Rum imported from Puerto Rico and Virgin Islands gets an excise tax rebate of $13.25 per gallon. The rebate lasts through the end of 2009 and is worth $192 million.
• Pork Additive #1 - Provisions to keep movie and television production in the U.S. It allows production companies to deduct the cost of “producing” the movies from their taxes. How Much? – It will cost taxpayers about $478 million over 10 years. Pork Addictive #2 – Allow plaintiffs who won damages from the Exxon Mobile spill to average their awards over three years (as oppose to treating it as single year income). How Much? – It will cost the taxpayers about $49 Million.Pork Additive #3 – Allow a seven-year recovery cost for people who build motorsports racetracks.How Much? – It will cost the taxpayers $100 Million.Pork Addictive #4 - Allow citizens who do not pay state income tax also deduct what they pay in sales tax. How Much? – It will cost the taxpayers about $3.3 Billion. See here...
• "...The benefit allows employers to reimburse bike commuters up to $20 per month tax free for expenses related to their commute by bike. Bike commuters who receive other commuter benefits, such as a transit pass, are not eligible for further reimbursement..." See here.
• "... 16. Enhanced charitable deductions for contributions of food inventory. 17. Extension of enhanced charitable deduction for contributions of book inventory to schools. 18.Transfer - abandoned mine reclamation fund - Abandoned Funds given to United Mine Workers of America Combined Benefit Fund. 19. Doubles the subsidy for biodiesel production from 50 cents per gallon to $1.00 per gallon. 20. The bailout bill pays a marketing campaign for the Forestry Service or the Bureau of Land Management..." See here.
• "... And tucked away in the tax provisions is a landmark health care provision demanding that insurance companies provide coverage for mental health treatment—such as hospitalization—on parity with physical illnesses... estimated $3.8 billion five-year cost..." See here.
  
• "... The biggest single piece in the package is an extension of protections for millions of middle class families who would otherwise find themselves exposed to the higher levy under the alternative minimum tax... Cost $78.8 billion..." See here.
  
• "... a plug-in hybrid vehicle tax credit that was probably first seen in some GM wet dream: "The credit is a base $2,500 plus $417 for each kWh of battery pack capacity in excess of 4 kWh, to a maximum of $7,500 for light-duty vehicles," up to $15,000 for vehicles weighting more than 26,000 pounds..." See here.

You won't find any representative or senator admitting to voting because of these additions However, "... That is why things are … added to bills, to get other people on," House Majority Leader Steny Hoyer, D-MD, said Thursday.

In the House 33 Democrats and 25 Republicans switched votes from "nay" to "yea." Regardless of the merits of the original bill, this blogger has respect for Representatives who voted "yea" or "nay' the first time following their convictions and not because it was the easy thing for them to do (for some examples, see 'The risks of being a yes man.'). However, this blogger has no respect for these fifty-eight representatives. Although there were slight changes to the original bill that these folks had voted against (e.g. raising the FDIC guarantee from $100,000 to $250,000) to provide them a fig leaf for their volte-face, these changes were mostly cosmetic in nature, and their votes were mostly bought.

Note: this blogger does approve of "mental health parity"...

Update: Uh, OK, apparently "... some prayed..." That's OK then...

Fingers crossed!

The MOAB (mother of all bailouts) passed the House yesterday on its second go around, by a vote of 263 to 171. The previous (original) version had failed by a vote of 228 to 205.

Fed Chairman Bernanke said "I applaud the action taken by the Congress. It demonstrates the government's commitment to do what it takes to support and strengthen our economy. The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses. The Federal Reserve will continue to work closely with the Treasury as it undertakes these new initiatives. We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy."

Treasury Secretary Paulson said "By acting this week, Congress has proven that our Nation’s leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans. The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans. This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy. There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets. We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy."

Various politicians claimed victory...

OK, they've better get cracking, and the rest of the country can keep their fingers crossed! It doesn't seem to this blogger that they have done anything about the root cause of the problem i.e. falling home prices. But then again, this blogger isn't sure that anything really can be done about this - prices were too high and so should (and did) fall; the concern is that they go too far the other way. Some have suggested that the government help home owners directly. For example, Glenn Hubbard has suggested that "... the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac...." He estimates that price tag at much less than the MOAB's cost.

This blogger isn't all that sympathetic to those who bought houses they couldn't afford while gambling that higher home prices would save their skins, but could go along with something like this in the name of the greater good and to save the economy. Unfortunately, it is not at all clear that this would save house prices, given that this plan would be aimed (correctly!) only at homeowners' principal residences, while excluding vacation homes and homes bought for speculation.... Given that these represent a significant part of the problem (this blogger doesn't know exactly how big a piece, but saw somewhere that in recent years approximately 40% of house sales fell into these two categories!) even a 'Hubbard plan' might not stop the fall...

So, back to the crossed fingers :)

Mental Health Break

Surprise (not!)

Perusing various blogs to get reactions to Thursday's vice-presidential debate between Governor Sarah Palin and Senator Joe Biden it was clear, unsurprisingly, that blogosphere reactions to the candidates coming out of the debate reflected the various views going in to the debate. So if you google "McClennan McKiernan correction" you get over two thousand hits as every pro-Obama blogger felt compelled to point out one of Palin's errors. Meanwhile Pro-McCain bloggers felt compelled to point out Biden's errors (e.g. Hamas won the elections on the West Bank).

Actually, these days the candidates don't mis-speak, make errors, or engage in puffery or exaggerations. They "lie", or so would have you believe the multiple blogs that catalog these "lies" and castigate the candidates for "lying." Some few are, in fact, outright lies (Senator McCain especially has been responsible for some egregious misrepresentations), but most often the examples cited are merely the candidates indulging in simplification, exaggeration, hyperbole, or puffery! Ah, but in this era of video someone will find a snippet on YouTube "proving" that the candidate is "lying"!