By Mark Huffman
ConsumerAffairs.com
September 28, 2008
After all the negotiation and heated rhetoric behind closed doors,
Congressional leaders have signed off on a version of legislation to
allow the government to buy distressed mortgage securities.
Wall Street analysts say the action was necessary to keep U.S. credit markets from seizing up and global financial markets from collapsing, perhaps as early as Monday morning.
Not all consumers are happy with the plan. One, Ivan Fail of Sparta, Mo., is trying to organize a massive class-action lawsuit against the financial services firms involved in the bailout.
The plan contains many of the elements originally proposed by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Congress added provisions to make it politically palatable, since the plan drew strong opposition from the public.
Among the provisions, the plan establishes a government entity to purchase mortgage-backed securities from banks, who for months have not been able to find anyone to buy them. That's because, with so many foreclosures, it's difficult to know how much value the securities have.
Under the plan, the government will offer to buy the assets at a low price. While the banks will lose money on the deal, they will at least have liquidity with which to make loans, and hopefully become profitable again.
The government will eventually sell the assets, hopefully at a higher price than it purchased them.
The banks holding the distressed assets can also choose to keep them, and purchase government insurance to guarantee their value. That provision was added because of House Republicans, who never liked the idea of a government "bailout of wall street."
Executive pay
At the insistence of Democrats, the legislation will place "reasonable" limits on executive pay, especially severance packages for CEO fired after running their companies into the ground. It would specifically affect executives at financial services firms, with some retroactive terms.
The plan will give the government stock "warrants," meaning taxpayers would make money if financial services firms in which it holds these warrants become profitable again.
Lawmakers said the financial sector would be required to pay an additional tax if taxpayers lost money, but details were not provided.
As part of the plan, the government would try to renegotiate terms for homeowners struggling to pay their mortgages.
Supporters of that provision say that not only does it help consumers, but helps ensure the plan's success, since there would be fewer bad mortgages within the various securities.
Finally, lawmakers have decided the plan should be phased in. While a total of $700 billion is being allocated for the plan, only $350 billion will be available at first. If the government needs more than that, Congress would have to approve it.
Lawmakers have not yet gotten the entire deal down in writing, but timed their announcement before the Asian financial markets open for a new week of trading. The house will vote first on the measure, possibly as early as Monday.
