Update on the Troubled Asset Relief Program
October 3, 2008
October 3, 2008 at 1:30 pm
On October 1, the Senate approved H.R. 1424 by a vote of 74-25. This bill, among other things, would allow the federal government to purchase assets blamed for the freezing credit markets. On October 3, the House approved the Senate-amended version of H.R. 1424 by a vote of 263-171. The legislation will be sent to the White House where President Bush is expected to sign the bill in the immediate future.
The core of the proposal remains the same, despite the House defeat on Monday. Highlights of the enacted bill include:
- Phased-in Federal Funds. The bill would require the Department of Treasury to establish an office to manage the Troubled Asset Relief Program, and would give the department wide latitude in how to identify, purchase, price, value, manage, and sell the assets. Any proceeds from resales would be deposited into Treasury's general fund, with no money directed toward state and local governments through the Affordable Housing Trust Fund. The bill would provide $700 billion for the asset purchase program in installments. Treasury would have access to $250 billion immediately, and $100 billion would be available upon certification of the president. The remaining $350 billion would be subject to a Congressional vote. The department would be able to buy bad assets until December 31, 2009. The bill broadly defines the types of firms that would be eligible to sell their mortgage-related assets to Treasury, including but not limited to any bank, savings association, credit union, security broker or dealer, or insurance company established and regulated under U.S. laws with significant operations in the United States. In addition, foreign banks that receive bad assets as collateral from a credit line they had given to a U.S. bank that fails would be able to participate, but the bill excludes foreign central banks and institutions owned by foreign governments.
- Homeowner Assistance. The bill directs Treasury to encourage servicers of underlying mortgages to take advantage of the HOPE for Homeowners Program under the National Housing Act or other available programs to minimize foreclosures. In addition, the department may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
- Tax Provisions. The package includes an array of tax extenders that would renew tax breaks scheduled to expire, including renewable energy incentives and relief from the Alternative Minimum Tax. The bill would also provide a one-year extension of an existing tax deduction that gives $1,000 for families and $500 for individual homeowners who do not itemize on their tax returns.
- Deposit Insurance. The legislation increases deposit insurance limits to $250,000.
- Accounting Rules. The bill gives the SEC the authority to suspend the application of fair-value accounting rules if the agency determines that such action is in the public interest and protects investors. The bill calls for the SEC in consultation with the Federal Reserve and the Treasury Department to conduct a study looking into whether fair market accounting rules contributed to the credit crisis.
- Safeguards. The bill directs the president to propose legislation requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. The bill stipulates that Treasury set up an insurance program, to be funded with risk-based premiums paid by the industry, to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.
- Executive pay. The bill places curbs on executive pay for companies selling assets or buying insurance from the federal government. Any bonus or incentive paid to a senior executive officer for targets met would have to be repaid if it's later proven that earnings or profit statements were inaccurate. The bill would cap tax deductions for executive compensation and bonuses at $500,000. The legislation would prevent companies that have been completely taken over by the federal government, such as American International Group Inc., from giving executives so-called "golden parachutes." In cases where Treasury has purchased at least $300 million worth of bad assets from a company, its senior executives would also be prohibited from receiving severance pay through contracts drawn up after the firm enters the program in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership. But such salary curbs do not apply to contracts that existed before a company enters the bailout program.
- Oversight. The bill would set up two oversight committees. A Financial Stability Oversight Board would include the Federal Reserve chairman, the SEC chairman, the Federal Home Finance Agency director, the HUD secretary and the Treasury secretary. A congressional oversight panel, to which the Financial Stability Oversight Board would report, would have five members appointed by House and Senate leadership from both parties.
- Cost: The tax provisions of the bill may reduce federal tax revenue by $110 billion over 10 years, according to estimates from the Joint Committee on Taxation. More than half of that is due to the 1-year extension of AMT relief. The Congressional Budget Office said it cannot estimate the net budget effects of the troubled asset program because of the unknowns with that piece of the bill. However, the agency noted in a letter to lawmakers on Wednesday, it expects the program "would entail some net budget cost" but that it would be "substantially smaller than $700 billion."
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