$700 billion U.S. Congress’ bailout plan

 

Download: $700BN Congressional Bailout Bill

(Reuters) – Leaders in the U.S. Congress have agreed to the underpinnings of a deal that will allow the Treasury Department to buy up to $700 billion in troubled securities to soothe global credit markets. In recent days, congressional negotiators amended the Treasury Department’s original proposal to add new oversight powers and conditions that would protect taxpayers. Early Sunday, congressional leaders announced they had reached agreement on key elements of the plan and that staff were writing the final language. The full House of Representatives and Senate must both ratify the plan.

Below are key elements of the rescue plan:

The $700 billion in buying power would be doled out by Congress in stages. After the first $250 billion is authorized, the President could request another $100 billion. The final $350 billion could be cleared by a further act of Congress.

  • - Washington will take a stake in companies helped through the program so that taxpayers can share in the profits if those companies get back on their feet.
  • - A new congressional panel would have oversight power and the Treasury secretary would report regularly to lawmakers in two elements of a multi-level oversight apparatus.
  • - Compensation limits would be set for the chiefs of participating firms to prevent excessive pay and “golden parachutes” for those who might tap government aid and then quit.
  • - The federal government may stall foreclosure proceedings on home loans purchased under the plan.
  • - Alongside the plan to buy securities outright, the Treasury Department will conceive an alternative insurance program that would underwrite troubled loans and would be paid for by participating companies.
  • - If the government has taken losses five years into the program, the Treasury Department will draft a plan to tax the companies that took part to recoup taxpayer losses.

 

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Q&A: US $700bn bail-out plan

(BBC News) – The US administration and Congressional leaders politicians have agreed a bipartisan $700bn (£380bn) bail-out plan aimed at preventing US banks from running out of cash. The plan has now been sent for approval to the US Senate and the House of Representatives. If they vote yes, it will be the start of the biggest government intervention in the economy since the Great Depression of the 1930s.

Why do rich banks need a bail-out?

The world’s financial markets are in deep trouble, because too many banks have invested heavily in the huge US mortgage market. Since the US housing bubble burst, banks don’t know how many of these loans will be paid back. What started as a little local difficulty has now engulfed banks around the world. Banks simply no longer know how much the investments on their books are worth. That makes these investments difficult to sell, and results in some supposedly sound banks running out of cash. On top of that, banks don’t trust each other. They don’t know which other banks could get into trouble and are reluctant to lend to each other. This has brought the global financial system to a standstill, sent interest rates soaring and hits both consumers and businesses. Already, the credit crunch has resulted in the collapse of several large financial institutions – both in the United States and across Europe.

How is the rescue deal supposed to work?

US Treasury Secretary Hank Paulson will use the money to buy up many of the dubious mortgage investments. In return, US taxpayers will get a non-voting stake in the banks that they rescue. So if the banks recover, taxpayers might even make a profit. However, if taxpayers make a loss, then the rest of the financial services industry will be forced to carry some of the cost of the bail-out. The bosses of banks that are being bailed out will see limits placed on the size of their pay deals, and so-called golden parachutes – huge payments to bankers leaving a bank – have been ruled out. On top of that, financial institutions will have to take out an “insurance policy” against future losses on mortgage-backed securities. And in another big departure from the original plan, there will now be four agencies to monitor how the money is doled out.

Will the bail-out affect me?

Yes, it most certainly will. If you live in the United States, another $2,300 will be added to your share of the national debt. All bail-outs are expected to add up to a whopping $1.8 trillion. That’s $15,000 per US household. But there is an upside, and that is affecting everybody in the world. Without a bail-out, the economic crisis is likely to deepen. In a worst-case scenario there could have been a domino effect of banks failing around the world.Not only would that overwhelm any systems protecting savers and investors, it could have triggered a global economic crisis, with millions of companies going out of business and tens of millions of jobs lost. Assuming that the bail-out works, the worst of the crisis could be avoided, although it is unlikely to bring everything back to normal.

Can the deal still falter?

On 25 September US politicians announced that they had struck a deal, only to see later negotiations end in a shouting match. Already critics in both political parties are calling for the deal to be blocked. However this time round a failure is less likely. Republican and Democrat leaders and the US government have agreed a very detailed deal in writing. The proposed law has been “frozen”, which means that critics can’t pick out provisions they don’t like. Given the strong backing for the deal – including from both presidential candidates Barack Obama and John McCain, it is likely that the deal will be approved.

How will the US government finance the purchase?

The US government will borrow the money from world financial markets. The proposed legislation gives the Treasury the authority to issue an additional $700bn worth of Treasury securities. The hope is that eventually the Treasury can sell the distressed assets back into financial markets once the housing market stabilizes, perhaps making a profit on the sale. Others are concerned that issuing more government debt, and virtually doubling the size of the budget deficit, could be inflationary. The sale could also make the US more dependent on foreign banks, who may be the biggest purchasers of Treasury securities.

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