Following President Bush's speech Wednesday evening, there is mounting optimism that a final deal on the financial markets rescue package will be worked out today. If so, legislative text can be drafted quickly and brought to the House and Senate floors by early next week or – according to senators and their staff – possibly as soon as Friday or Saturday. A text agreed upon by both chambers would eliminate the need for a conference and speed the bill on to the White House for signing.
- House and Senate Democrats agreed on their position early in the day and conferred with Congressional Republicans at 10 a.m. EST. At noon, the bipartisan leaders of both chambers held a press conference indicating a deal is almost certain to be finalized today.
- The last piece may fall into place at a 4 p.m. meeting at the White House between President Bush and Congressional leaders, along with presidential candidates Barack Obama and John McCain, who yesterday issued a joint statement supporting the package.
- In a sign of market confidence in expectation of a deal, the US markets climbed today as the news from Washington became increasingly optimistic. European markets were slightly up, though Asian markets fell, perhaps based on yesterday's uncertainty about progress in Washington.
It appears that the following difficult issues may be moving toward solution:
- Bipartisan oversight board. While not part of the Administration's original package – which vested almost total power in the hands of the Treasury Secretary – there now is agreement on creation of an oversight board with members selected both by the Administration and Congressional leadership of both parties. President Bush mentioned this in his speech last night. Still, Treasury Secretary Henry Paulson would wield broad authority and discretion over the program.
- Limitations on executive compensation of participating institutions. Proposed by Congressional Democrats and some Republicans, and initially opposed by the Administration, the latter has now accepted in principle the Congressional position. Details still need to be worked out, however, regarding who would be covered: all executive officers, or just certain people at the top?
Important issues that remain unsettled:
- Federal government equity in bailed-out firms. While there had been indications that Congressional Democrats would back off on this demand, resolution remains unclear. House Financial Services Chairman Barney Frank indicated at today's noon press conference that he and Secretary Paulson would accept a solution that required participating firms to give warrants only in cases in which the federal government loses money on the sale of assets. Still, some Congressional Democrats are pressing for a requirement that all participating financial institutions surrender an equity share to the government.
- A federal government equity interest in participating firms – whether in the form of warrants or preferred stock – could in turn hurt the future marketability of government-purchased assets and, paradoxically, the potential for the government to sell the assets at break-even value or a profit and return the funds to the US Treasury. It could also discourage some institutions from participating. See "Why Warrants Could Be Counterproductive to the Purposes of the Rescue Package."
- Money all at once, or in stages? Many in Congress have expressed wariness at handing the Treasury Department the requested US$700 billion all at once, especially in view of the short remaining tenure of Secretary Paulson and the Bush Administration. Early reports indicated Congress was moving toward full funding up front. However, this afternoon Financial Institutions Subcommittee Chairman Charles Schumer said money would be released in installments, starting with US$250 billion. It remains unclear how this issue will be handled in the final agreement.
- While incremental release of funds would increase Congressional control over a massive grant of authority to the Treasury Department, reducing the up-front commitment of funds might have a negative impact on perceptions of decisive government action and thus reduce market confidence.
- Balking by Congressional Republicans. A core group of conservative Republicans, especially in the House, has opposed the package. While this resistance no doubt has been reduced after the President's speech and Sen. McCain's announcement of support, the White House and Congressional GOP leadership still need to guarantee enough Republican votes to make this a truly bipartisan package.
- Assistance to individual mortgage holders. This issue remains unsettled. At noon Senate Banking Chairman Chris Dodd listed "protection for homeowners" as an agreed-upon item. But earlier there were reports that Democrats privately had conceded they would drop their demand that bankruptcy judges have authority to rewrite mortgages, and that this issue might be addressed instead in a separate piece of legislation. House Speaker Nancy Pelosi has said she might bring a stimulus package bill, a possible vehicle for homeowner relief, to the floor as early as tomorrow.
Why Warrants Could Be Counterproductive to the Purposes of the Rescue Package
For the rescue package to have its maximum effect, all institutions holding the subpar mortgage-related paper must participate to the fullest extent possible. There is no requirement that an institution sell its assets to the government. If an individual institution determines that the price of government intervention is too onerous, it may decide not to participate.
- Demands by the Democrats that the government receive warrants for equity positions in an institution in exchange for the purchase of the assets would dilute existing shareholders' interests. Some institutions may decide that the dilution is too high a price to pay and seek alternatives, such as capital raising (which in today's market would be difficult) or a merger with a stronger institution, either domestic or foreign.
- Opponents of warrants observe that the government will probably benefit over the long term through the purchase and liquidation of assets, assuming the assets are marked to their true present value. Forcing an equity position could make it more difficult for institutions to participate.
- Some have observed also that the government's holding equity positions in private institutions could be problematic (issues relating to socialism in a capitalistic economy aside), especially if those positions are akin to common, as opposed to preferred, shares because of shareholder voting rights issues. Either could potentially dilute existing shareholders' interests.