Highlights of $700B Financial Markets Bailout Plan

Sep.29, 2008 in Market Outlook

WASHINGTON (Dow Jones)–Here are highlights of the “Emergency Economic
Stablization Act” of 2008:

-ASSET PURCHASES: The Treasury Department could purchase up to $700 billion in
troubled mortgages and other assets through a “Troubled Asset Relief Program” or
“TARP.” The $700 billion would be available in phases. The first $250 billion
will be immediately available to the Treasury secretary. The next $100 billion
will be available if the president issues a certification of need. The final $350
billion would come if the president sends a written report to Congress seeking
it; Congress could disapprove these additional funds. Treasury’s authority to
purchase troubled assets would initially expire on Dec. 31, 2009, but could be
extended.

-EXECUTIVE COMPENSATION LIMITS: If the Treasury purchases at least $300 million
in mortgage-based assets from a financial institution, that company would lose
the ability to take a tax deduction on the amount of salaries that exceed
$500,000 for its top five individuals. It also includes a 20% excise tax on
golden parachutes payments triggered by events other than retirement.

-WARRANTS, EQUITY STAKES: The bill requires the Treasury receive “non-voting
warrants” from financial institutions participating in the program.This would be
regardless of whether the government is purchasing troubled assets directly or
through an auction process, a Treasury official said. That would give taxpayers
an ownership stake and profit-making opportunities in participating companies.
Foreign banks with a “sufficient U.S. presence” taking part in the program would
also have to give up warrants to the U.S. government, Treasury said.

-MARK-TO-MARKET ACCOUNTING. The bill restates the Securities and Exchange
Commission’s authority to suspend the application of the Financial Accounting
Standards Board “Statement Number 157″ - or mark-to-market accounting - if the
SEC determines “that it is in the public interest and protects investors.” A
study on the same topic is also required.

-TOXIC ASSET INSURANCE: The Treasury secretary is required to create a program
“to guarantee troubled assets of financial institutions” purchased by the U.S.
government. The Treasury is required to establish “risk-based premiums for such
guarantees sufficient to cover anticipated claims.” Financial firms can choose to
unload their troubled assets via U.S. government acquisition or by participating
in the industry-funded insurance program, Treasury officials said. Companies that
participate in that insurance program would have to pay premiums to insure those
assets.

-INTEREST ON RESERVES: Provides the Federal Reserve with the ability to pay
interest on the regulatory reserves it requires financial firms to hold for
capital adequacy reasons in 2008, rather than in three years’ time, as it is
currently scheduled to do.

-FORECLOSURE RELIEF: For the mortgages acquired by the TARP, the Treasury
secretary is to implement a plan to “mitigate foreclosures and to encourage
servicers of mortgages to modify loans through Hope for Homeowners and other
programs.” Hope For Homeowners was an anti-foreclosure program in the housing
bill passed earlier this year. It requires the Federal Reserve, FDIC and Federal
Housing Finance Agency to develop plans to minimize foreclosures.

-TAX BREAKS:A tax benefit is included to help, primarily, community banks that
held Fannie Mae and Freddie Mac preferred stock. It allows them to treat their
losses in preferred stock in Fannie and Freddie as ordinary tax losses, rather
than capital losses. For individuals, the bill extends through 2012 a provision
to minimize the tax hit on homeowners facing foreclosure. This item, passed as
part of housing legislation this year, makes tax-free amounts that a bank
forgives a homeowner as part of foreclosure or work-out proceedings. Those
amounts would otherwise be taxed as income to the homeowner.

-OVERSIGHT: Creates a “Financial Stability Oversight Board” to oversee the
program, which includes the chairmen of the Federal Reserve Board, the Securities
and Exchange Commission; the Federal Home Finance Agency director and the Housing
and Urban Development secretary. Also requires the U.S. comptroller general to
report to Congress every 60 days about the program. An independent inspector
general will oversee the Treasury Department’s decisions, which will be subject
to judicial review. It also will require posting of transactions online for
public view.

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