HANK PAULSON’S FAITH BASED BAILOUT PLAN

Political Power for Real People

Political Power for Real People

Ralph J. Shapira, the Chairman of You2Gov posted this on the You2Gov home page blog today, September 29, 2008.

http://www.you2gov.com/index.php/Blog/Default-Category/HANK-PAULSON-S-FAITH-BASED-BAILOUT-PLAN.html

The Bush Administration’s bail-out plan to be voted on this week by Congress has been amended in response to many valid concerns raised by critics.  But the amendments are drafted so vaguely that we must take on faith that the concerns will be appropriately addressed.  The law merely sets out broad purposes and goals; the Secretary of the Treasury will issue guidelines and policies to accomplish them.  There are no specifics as to how effectively any of the purposes of the amendments will be accomplished.

Here are some examples:
Criticism:  the original plan did nothing to help financially ailing homeowners avoid foreclosure.  “Solution”:  the Treasury Secretary will develop a plan to lessen foreclosures and to encourage loan servicers to modify loan terms to assist homeowners [Section 110].  The law has no specifics about how many homeowners will be helped or in what way.  The people must take on faith that the plan will actually do something meaningful to help homeowners.
Criticism:  the original plan didn’t require the government to take ownership interests in the companies it helps.  Such ownership interests would allow the taxpayers to earn something back, lowering the cost of the bailout, if the companies prosper after the bailout.  “Solution”:   the government will get warrants to buy stock in any publicly traded financial institution it helps.  However, the law has no specifics about how much stock the warrants will cover or what price the government will have to pay to buy the stock.  The people must take on faith that the government will drive a reasonable bargain for stock.
Criticism:  the original plan didn’t limit the obscenely high compensation often paid to executives of the companies getting the bailout money, or their receipt of golden parachutes.  “Solution”:  the government will set “appropriate standards” for compensation of the top five executives of companies it buys securities from [Section 111].  There are no specific limits on compensation, and whatever limits the government does eventually decide on will apply only while the government holds stock or debt in the company.  There are no limits at all on how much the companies can pay to anyone other than the top five executives.  The companies will not be allowed to grant or pay golden parachutes, but again only during the time that the government holds an interest in the company.  The people must take on faith that much of the taxpayer money given to the companies will not be paid out in huge bonuses to company executives other than the top five, or even to the top five after the government sells the stock or debt it owns in the company.
Criticism:  the original plan didn’t assure that the government would pay the lowest prices when it buys securities from troubled financial companies.  Solution:  the Secretary will buy the securities “at the lowest price that the Secretary determines to be consistent with the purposes of this Act” [Section 113].  However, the purposes of the Act include “providing financial assistance to financial institutions” and “restor[ing] the financial institutions to at least an adequately capitalized level” [Section 103(6)].  Furthering those purposes will permit — or even require — the government to overpay for securities in order to financially assist the sellers and restore their capital.  Here, the people should have no faith that the government will drive the best deal on its purchases, because paying the lowest prices would not help restore the troubled financial institutions’ capital.
CONCLUSION:
Most economists and leading businessmen, including the revered Warren Buffett, are warning that the bailout or something like it must be passed to avoid an imminent complete collapse of our economy.  It’s difficult to oppose the bailout bill under those circumstances.  The bill has been much improved from the original plan.  However, there are no guarantees in the bill that a number of the valid concerns raised by the plan’s critics will be sufficiently addressed in the actual administration of the program.  An enormous amount of responsibility and trust, not to mention $700 billion, will be given to the Secretary of the Treasury.  And while most agree that Hank Paulson is a capable man, no one knows who the Treasury Secretary will be in the next administration.
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