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Congress Closes In On Approving Bailout Plan

WASHINGTON - Congressional leaders said yesterday that they are close to hammering out an agreement with the Bush administration on legislation that would give the secretary of the Treasury broad authority to purchase up to $700 billion of "troubled" securities sold by financial firms, including illiquid auction-rate securities issued by state and local governments.

Some market participants, including the Regional Bond Dealers Association, are strongly urging lawmakers to give the Treasury wide discretion to purchase illiquid auction-rate securities, in addition to the troubled mortgage-related assets of financial companies.

Separately, as the major securities firms have disappeared from Wall Street, either through mergers, bankruptcy filings, or by becoming bank holding companies, the changes are leading the 15-member Municipal Securities Rulemaking Board to significantly alter its composition because it is statutorily required to include five representatives of securities firms.

Perhaps the most significant change revolves around Ronald Stack, the managing director and head of public finance at Lehman Brothers, who in July was elected chairman of the board for a one-year term beginning Oct. 1. If he remains on the board, one of the bank-dealer representatives would likely have to leave in light of the British bank Barclays PLC's purchase last week of Lehman's broker-dealer subsidiary for $1.75 billion. The deal, which was announced following the bankruptcy of Lehman Brothers Holdings Inc., would mean that Stack would have to fill a bank-dealer seat.

Similarly, it was unclear yesterday if Kevin Willens, managing director at Goldman, Sachs & Co., would remain on the board after the Federal Reserve Board announced Sunday night that it would recognize Goldman, along with Morgan Stanley, as bank holding companies rather than securities firms.

Jennifer Galloway, chief communications officer for the board, said yesterday that the MSRB is still working through its internal guidelines and procedures to determine who will serve on the board for the fiscal year that starts next week.

"We are reviewing the implications of changes at institutions represented on the board to ensure its composition is consistent with the relevant statute," she said.

Meanwhile, House Financial Services Committee chairman Barney Frank, D-Mass., said yesterday that Congress would likely strike a deal with the Treasury in the next three days that would give the department temporary authority to purchase troubled securities off the books of any American-based financial institution in exchange for an equity stake in the firm as well as "warrants" so that if the company becomes profitable, "we get more than the general share for taking these risks." The legislation would raise the national debt to $11.315 trillion and would establish an independent panel to oversee the Treasury Department's securities purchases.

Frank added that the administration and Congress are still negotiating on issues related to bankruptcy law to help struggling homeowners as well as limits to executive compensation for firms that receive assistance from the government. He also said that his committee's proposal is "very close" to legislation drafted over the weekend by Senate Banking Committee chairman Christopher Dodd, D-Conn.

"We accept reluctantly the fact that bad decisions in the private sector, unconstrained by appropriate regulations, have brought us to the point where we have to do this," Frank told reporters at an afternoon press conference. "The markets are so depressed psychologically that a lot of the value out there is undervalued, which means that if someone with very deep pockets could buy and hold [the securities] and then ... sell [them] in a very controlled fashion, we have a very good chance of breaking even or even making a little money. Only the federal government can do that."

Michael Decker, co-chief executive officer of RBDA, said yesterday that the Treasury should be allowed to purchase illiquid ARS because "those clearly fall under the category of troubled assets. As a practical matter, a viable solution for the holders of those securities is for them to be included in the Treasury purchasing proposals."

Decker said that regional securities firms or their customers currently hold about $60 billion of ARS.

Treasury spokeswoman Jennifer Zuccarelli said yesterday that the secretary intends to purchase mortgage-related assets, but has the broad discretion to purchase other securities as he deems necessary.

Meanwhile, municipal market groups representing state and local governments said yesterday that they are still trying to discern whether the federal bailout will change their financial picture indirectly over the next couple of years.

"There's clearly been a reshuffling of risk across all instruments, so does that mean that state and local governments will pay higher interest rates?" said Raymond C. Scheppach, executive director of the National Governors Association.

One question was the degree to which the $700 billion proposal would change the federal funding picture for the near-term. Michael Bird, federal affairs counsel for the National Conference of State Legislatures, said the group is concerned that the giant bailout expense will mean other actions, such as a second economic stimulus package that has been floated in the Senate and House, will be pushed aside. The stimulus package would include billions for infrastructure, as well as a bevy of other provisions to spur job and economic growth.

"If it gets jettisoned, that's just one less resource for us to try to stem what is really a negative tide right now for most states," Bird said. "Does [the bailout] essentially close the door on finishing any other activity, except maybe a continuing resolution?"

NCSL and NGA officials also wondered about whether state pension funds were invested in the troubled companies to be included in the bailout.

Keith Brainard, director of research for the National Association of State Retirement Administrators, said a "small percentage" of pension funds are invested there, and that pension contributions comprise less than 3% of state and local spending.

"The near-term and long-term effects on state government finances as a result of declining pension fund values are likely to be negligible," he said.

At the local level, the bailout's ripple effects are likely to be less pronounced than at the state level, said Chris Hoene, director of policy and research for the National League of Cities.

Hoene said there could be a more "immediate impact in places where the financial industry is located" and where local governments have become accustomed to getting revenue from business income taxes, such as New York City, Philadelphia, or Kansas City.

Although the effect would be seen anywhere from a year to 18 months after a bailout, in the long-term, market recovery would benefit local governments, groups said. If housing values bounce back, and the economy stabilizes, state governments would see relief from what they have expected to be a three-year downturn, Scheppach said. But he worried that in the process, the bailout could lead to increased competition for business for local banks.

"Does this put state-chartered and regional, community banks at a disadvantage relative to commercial banks?" Scheppach asked. "If you take all of the bad debt off of [commercial bank] charters, does that mean they're going to be in a stronger position to compete for deposits and other things, relative to state and community banks?"

Over the weekend, the presidential candidates gave mixed reactions to the bailout plan. Democratic presidential hopeful Sen. Barack Obama, D-Ill., released a statement on Sunday calling the Treasury proposal "a concept with a staggering price tag, not a plan." He said the Treasury should not be given a blank check and that the plan should be structured to return taxpayer investment.

On CNBC Sunday, Obama said: "We can set up a system where there's an independent overseer, maybe the chairman of the Federal Reserve Bank and the Democrats and the Republicans each appoint somebody to oversee the system. But we have to make sure ... there's some accountability mechanism in it.'

Meanwhile, the Republican presidential candidate, Sen. John S. McCain, R-Ariz., outlined a plan of his own in Wisconsin on Friday, that in some respects mirrors the administration's proposal. He called for the formation of a Mortgage and Financial Institutions Trust that would be a part of the Department of the Treasury, with a board of directors consisting of the Treasury secretary, Federal Reserve chairman, FDIC chairman and two public members.

Under his plan, "troubled institutions" would voluntarily seek liquidity loans at "reasonable" interest rates from the trust, and would be allowed to continue operating as private companies. The MFI trust program would supervise the sale of loan assets at market prices, purchase them as necessary, sell loans to the private sector and return all profits to the Treasury and taxpayers.

McCain said last Tuesday in Tampa, Fla., that he believed regulatory oversight was "scattered, unfocused, and ineffective," and called for only "the best federal agencies to do the job right."

He would also reduce the debt and risk that any bank could take on, he said.

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