The Deal that Blew Up

The following is the text of the "agreement on principles" that blew up yesterday at the White House, as House Republican leader John Boehner blindsided negotiators by saying Republicans wouldn't support the deal. Sen. John McCain who had arranged the photo op, refused to state where he stood.

The text --- like Treasury Secretary Paulson's original proposal --- is breathtaking in its brevity. They are talking, after all, about authorization to spend $700 billion (or more since it is a revolving fund).

Meanwhile the financial crisis grows worse: the failure of Washington Mutual was the largest bank failure in history.

The annotations are mine. For more discussion, go here

September 25, 2008, 4:26 pm

Text of Lawmakers' Agreement on Principles

Congressional Republicans and Democrats came to an agreement on principles for the Treasury's Troubled Asset Relief Program that they will take into final negotiations with the White House. It includes sections on taxpayer protections, oversight and transparency, homeownership preservation and funding authority. -Phil Izzo

The full text follows:

Agreement on Principles

1. Taxpayer Protection
a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

This is basically a sop for public outrage, designed to insure Wall Street nabobs don't pay themselves millions in bonuses after running their firms into the ditch. Frankly, they'd be smart to volunteer to work for a dollar for the first year; there will be infinite ways to pocket big rewards if their firms are rescued from their follies.

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

This is a vital addition to the Paulson plan. It would give taxpayers an equity stake in the banks that are saved, so that if they prosper, taxpayers, who have taken on their toxic paper that now has no market, have a chance at sharing in the upside.

c. Requires most profits to be used to reduce the national debt

This is sop to the conservative Republicans and Blue Dog Democrats who are posturing on the rising deficit. Fact is Congress should be spending a lot more money getting the economy going -- investing in new energy and conservation, rebuilding roads and sewers, modernizing our electric grid and transport system to put people to work. If the recession continues to deepen, the cost of bailing out the banks will soar.

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

A sharp contrast to Paulson's plan which called for total discretion, with no judicial review.

b. Establishes strong oversight board with cease and desist authority

This is vital -- particularly if the board includes not simply financial gray beards, but independent representatives of workers and consumers. They can keep Paulson from being too generous with taxpayer money to his former colleagues on Wall Street.

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary's authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary's authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation
a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure
b. Requires loan modifications for mortgages owned or controlled by the Federal Government
c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America's housing needs

This "requires" modifications on mortgages that are picked up in the bailout. What is missing is the logical authority to allow bankruptcy courts to work out mortgages. It is bizarre that Paulson, Wall Street and Republicans have decided to oppose what would be the most logical way to work out bad mortgages -- a hearing officer on a case by case basis deciding the best way to proceed.

4. Funding Authority

a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed
b. final $350 billion is subject to a Congressional joint resolution of disapproval

This is designed a bit to limit the initial price of the package, and a bit to keep Paulson from spending it all in the few months before Democrats hope they have their own Treasury Secretary.

What's missing here:

1. Sensible Regulation: There are no requirements for re-regulating the banking system, no listing of no-brainer reforms, like extending limits on capital and leverage to the shadow banking system. A bailout that rescues Wall Street without re-regulation is a fool's errand. If the bankers think their losses are covered and no limits are put on their gambles, they will soon be taking even greater risks. Paulson wants bailout now and regulation later. But when Wall Street is back on its feet, its lobby will fight relentlessly against regulation.

2. Help for the Real Economy: It is simply perverse that the president argues we need $700 billion tomorrow to save the banks but that it is "pre-mature" to have another stimulus program for the real economy. Layoffs are accelerating. States and localities are about to cut back on police, health care, schools, construction projects. We should be investing major sums -- $250 billion or more -- now in the real economy, to put people back to work. If the recession worsens, the balance sheet of banks will worsen, as more people default on credit card, auto and consumer loans.

3. Power for bankruptcy courts to work out mortgages (as noted above)