Aha, Congress isn’t being so supine after all. Christopher Dodd, who in his initial press comments seemed to be behind the Paulson bailout plan, instead appears to be supportive of the general concept of Doing Something, as opposed to the particular embodiment served up by the Administration.
Dodd is circulating a draft bill of his own that is more attentive to the moral hazard issue and the need for taxpayers to share in upside than the Treasury proposal. The big difference is that his proposal gives the US a stake in companies in which it buys bad assets. This creates a disincentive against using the program casually as a dumping ground, against inflating the value of assets sold (the higher the amount sold, the greater the equity acquired) and gives taxpayers the opportunity to profit. Of course, just about anything different would be an improvement.
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….
“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…..
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.
Yves here. Note that this is a vastly shorter leash. The Treasury plan called for a report after the first quarter, then semi-annually thereafter.
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,
And the markets are voting massively against the bailout. While the fall in the Dow is almost inconsequential (260+ points as of this writing), given the monster rallies late last week, the dollar is tanking, and more important for domestic politics, oil has gone up $25 a barrel so far today. That should give Congress and the Administration plenty of cause for pause. Voters will be mighty unhappy with again-hugely-pricey oil.
We said before that the dollar (more accurately, oil as the anti-dollar trade of choice) would constrain policy options. Will Bernanke and Paulson take heed?
From the Wall Street Journal:
Crude-oil futures surged more than $25 a barrel Monday as stocks fell, the dollar slid and Treasurys declined amid an investor flight out of U.S. assets.
Stocks traded sharply lower, while the dollar and Treasury prices took a hit as traders fretted that the vast spending necessary to prop up the financial industry will make the government itself a somewhat less attractive borrower. Oil prices soared by the daily limit of $10 as the likelihood of a bailout prompted bets that the economy would stay on firmer footing, keeping demand for fuel on an even keel.
The Dow Jones Industrial Average was recently off about 268 points, or 2.4%, at 11120.91, held down by sharp losses for all of its financial components.
Reader Michael passed us this tidbit from Tony Crescenzi at TheStreeet.com ($):
The U.S. consumes roughly 20.5 million barrels per day, which means that a $1 change in the price of a barrel of oil costs U.S. consumers roughly $8 billion per year.
Accounting for the fact that some of that money is income to U.S. producers and shareholders, the actual hit is closer to $5 per barrel. This means that today’s $10 gain represents a $50 hit to consumers — if the price were to hold for 12 months, of course.
If the $25 gain holds, make that $125 billion.
Update 3:00 PM The Journal provides a bit more detail on the Dodd draft:
Senate Banking Committee Chairman Christopher Dodd of Connecticut began circulating his 44-page draft Sunday night. The draft is likely to prove problematic for the Bush administration, which has tried to prevent lawmakers from making big changes to a much simpler proposal it unveiled over the weekend…..
Sen. Dodd’s plan would not allow the Treasury Department to purchase any assets “unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased.”
Reader Michael, via e-mail, pointed out that gas prices have not (yet) followed the rise of oil:
3-2-1 Crack spreads went negative (as diesel and gas didn’t move up with
2bbl gasoline = $2.70 x 84 gallons
1bbl diesel = $3.03 x 42 gaollons
Add those products
Divide by 3 and that is the $ refiners make on a bbl of oil.
122.50bbl of oil and gas at 2.70; disel at 3.03 — refiners lose ~$4.50 per
Aka the oil is worth more than the output!
In other words, those are trading sardines, not eating sardines.
Update 6:00 PM Francois in comments tells us that Bloomberg, via Calculated Risk, has said that Paulson is willing to concede on the equity stakes issue (but only because the financial
lobbyists industry says it’s OK.