Equity stakes and executive penalties
in the Democrat's bailout package

By Jon Fernquest

The draft law counter-proposal to the Bush administration financial rescue package has been online for several hours (Read draft law and Bloomberg announcement).

As the New York Times summarises the Democratic response to the Bush administration's rescue plan:

Early on Monday, Senator Christopher J. Dodd, Democrat of Connecticut, and chairman of the banking committee, introduced a 44-page draft bill that his staff pulled together on Sunday incorporating many priorities of Senate Democrats — a hefty counterproposal to the administration’s initial three page proposal.

Representative Barney Frank, Democrat of Massachusetts, and chairman of the Financial Services Committee, who had already submitted a series of demands to the Treasury, worked Monday to revise his version of the legislation to reflect various agreements with the administration on oversight and other issues. (Source: New York Times, 22-09-08, link)

Photo on right is of Barney Frank and Fed Chairman Bernanke at a committee meeting last Wednesday.

Four possible scenarios for the federal agency overseeing the bailout are suggested in today's New York Times by University of Chicago finance professor Anil K Kashyap and Jeremy C. Stein , professor of economics at Harvard:

1. Profit-seeking investor: "...act as a deep-pocketed private investor that sees a bargain buying opportunity — Warren Buffett on steroids"
2. Mortgage debt restructuring: "...restructure the mortgages it acquires...reduce required interest payments so that fewer homeowners default on their loans...this could avoid costly foreclosures, thereby benefiting homeowners while also raising the value of the securities that the government has bought.
3. Recapitalisation: "directly subsidize financial firms to increase their capital. One way to accomplish this would be the agency’s purposefully overpaying — relative to underlying fundamental values — for the mortgages it acquires."
4. Debt-equity swap or debt-forgiveness: "The government should refuse to buy any toxic mortgage assets from a bank unless it first reaches an agreement with its long-term debt holders to erase some of the debt it owes, perhaps in exchange for stock."

Here is the first article to read and analyse the bill:

Dodd Proposes Giving U.S. Equity Stake for Bad Debt (Update2)

By Dawn Kopecki and James Rowley

Sept. 22 (Bloomberg) -- Senate Banking Committee Chairman Chris Dodd offered an alternative today to the Bush administration's financial rescue plan aimed at giving the U.S. Treasury an equity stake when it helps companies burdened by debt.

Dodd, a Connecticut Democrat, is circulating a draft of his bill as Congress seeks to deal with a financial crisis that has been called the U.S.'s worst since the Great Depression.

The Bush administration is proposing a $700 billion plan to buy devalued assets from investment firms to keep the financial system from coming to a halt. Democrats have pledged to act quickly on the measure, even as they seek to create an oversight structure, limit the compensation of executives at the companies benefiting from the rescue and provide mortgage relief for struggling borrowers.

"We cannot just turn over $700 billion in taxpayer money and not insist that that taxpayer is going to be protected in this," Dodd told reporters yesterday.

Treasury Secretary Henry Paulson has urged Congress to pass legislation without delay and without linking it to new programs.

"We need this to be clean and quick, and we need to get it in place," Paulson said yesterday in an interview with ABC News.

Equity Stake

The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn't publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.

Dodd's proposal also would create a five-member oversight board to supervise the Treasury secretary's purchase and sale of distressed mortgage debt.

It would consist of the chairmen of the Federal Reserve, Federal Deposit Insurance Corp. and the Securities and Exchange Commission as well as two members from the financial industry designated by congressional leaders.

The board would be authorized to set up a so-called credit review company consisting of Treasury employees to study the soundness of the purchases. Under the plan, the government would be required to obtain an equity stake equal to the value of the debt that is purchased from the companies, including those whose shares are not publicly traded. The Treasury secretary would also be required to issue weekly public reports on the amount of assets bought and sold by the U.S.

Penalize Executives

Dodd is proposing to penalize executives who take "inappropriate or excessive" risks. The executive compensation and severance packages could be reduced if that is "in the public interest," the proposal says. It would also force executives to give back profits they earned that were based on company accounting measures that are later found to be inaccurate.

Republican presidential candidate John McCain, who has supported giving shareholders a bigger say in executive compensation in the past, said today that taxpayers shouldn't foot the bill for "golden parachutes" for officers of companies that have crumbled in upheaval on Wall Street.

"The senior executives of any firm that is bailed out by Treasury should not be making more than the highest paid government official," McCain said at a campaign event in Scranton, Pennsylvania.

The president is the highest paid federal official, with a salary of $400,000 a year.

U.S. Representative John Campbell, a California Republican and a member of the House Financial Services Committee, said that while he supports the Treasury proposal, he's willing to consider the creation of an oversight board and executive-pay limitations.

Committee Republicans plan to meet later today to discuss the issue, Campbell said.

"I don't think we have a lot of choice," Campbell said. "And the consequences of doing nothing are unconscionable."

(Source: Bloomsberg, 22-09-08, Dawn Kopecki and James Rowleylink)

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Vocabulary:

pull together - bring together many different items and join them together

hefty - very large

a proposal - a plan or idea for future action, for people to think about, discuss, and decide upon

a counterproposal - a plan that is a response to a prior plan (that modifies the prior plan and asks for compromises)

revise - rewrite to improve

legislation - proposed laws to be voted on

a profit-seeking investor - what an investor normally does, but not the US government

deep-pocketed - has a lot of money to spend or invest

Warren Buffett - an American owner of many successful businesses, one of the world's greatest investors (See Wikipedia)

X on steroids - X to even a greater degree than X

Warren Buffett on steroids - an even better investor than world famous investor Warren Buffet

debt restructuring - a process that allows a borrower facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue functioning

recapitalisation - put more capital into a business or change the way the capital is held

capital - money invested in a business

a debt-equity swap - a refinancing deal in which a debt holder gets an equity position in exchange for cancellation of the debt, could help avoid bankruptcy if a firm is in financial trouble (See Wikipedia on debt restructuring)

debt forgiveness, debt relief - an agreement that a percentage of one's debt need not be repaid

Senate Banking Committee, United States Senate Committee on Banking, Housing, and Urban Affairs - the US Senate committee that deals with laws on: banks and banking, price controls, deposit insurance, export promotion and controls, federal monetary policy, financial aid to commerce and industry, issuance of redemption of notes, currency and coinage, public and private housing, urban development and mass transit, and government contracts (See Wikipedia)

US Senator Chris Dodd - a US Senator from Connecticut who has been a senator since 1981 and is currently head of the Senate Banking Committee (See Wikipedia)

Federal Reserve - the US central bank (See Wikipedia)

Federal Deposit Insurance Corp - the US government corporation insuring bank deposits (See Wikipedia)

Securities and Exchange Commission (SEC) - an independent agency of the US government that has responsibility for enforcing securities laws and regulating the stock market (See Wikipedia)

an alternative - another possible choice

a draft of Y - not a final version, a preliminary version before the final version

circulating Y - make a report or text available to people so they can read it, think about it, and comment on it

circulating a draft of his bill - letting people read the law (bill) before it is revised

revised - rewrite to improve

devalued assets - assets that have lost the value that they had before

in place, get it in place - is working and able to be used

an equity stake - owning part of the company, holding stock shares in the company

company isn't publicly traded -

senior debt - debt that must be paid off before other debt (if there is a problem paying off the debt)

bankruptcy - when a company makes an official legal declaration that they can no longer pay back the money they (pay their creditors), a court case will then sell off the company's assets to pay creditors (See Wikipedia)

oversight - making sure that something works or functions properly (See glossary)

an oversight board - a group of people who watch over some activity and make sure that it functions properly

distressed debt - money that a borrower is having trouble paying back

distressed mortgage debt - home loans that the borrower is having troubler paying back

designated - formally give something a name

review - a formal examination and check to see whether things are being done correctly and whether they can be improved

sound - in good condition and healthy

soundness - the state of being in good condition

compensation - the money and benefits (health insurance, holiday and sick leave) paid to employees in exchange for their work

severance - the money that a company gives an employee when it stops employing them

executive compensation and severance packages - things and money that a company agreed to give to a high level manager when they hired them

in the public interest - for the good of all the people in a country

giving shareholders a bigger say in executive compensation - allowing the people who own shares in a company to decide on how much executives get paid

foot the bill for Y - be the person who pays the bill for Y

golden parachutes - an agreement to pay a high-level manager in a firm (executive) a certain amount of money if their employment contract is ended (See Wikipedia)

foot the bill for "golden parachutes" -

the consequences of Y - things that happen because action Y was chosen

unconscionable - the person responsible for bad events happening should be ashamed

Posted by Jon Fernquest at 06:00 AM | Permalink | Comments (0)