Bailout Plan Update

Despite the previous announcement that an “in principle” agreement had been reached, it appears that talks on the bailout plan stalled last night:

From the WSJ:

WASHINGTON — Wrangling among the nation’s top political leaders threw the Bush administration’s $700 billion bailout plan into disarray late Thursday, despite a dramatic day of negotiations on Capitol Hill that seemed to promise a deal.

Negotiators broke off talks Thursday night with no agreement and with plans to reconvene in the morning, without House Republicans. It was the Republicans’ surprise championing of a competing plan late Thursday that derailed a carefully crafted compromise previously taking shape.

Also raising the stakes: The demise of Washington Mutual Inc., the largest banking failure in U.S. history, sent a fresh message to Washington of the fragility of the financial system…

…Earlier in the day, congressional leaders had hammered together the outline of a compromise that involved allotting the bailout money in installments. It was widely expected to result in a deal. However a pivotal afternoon meeting at the White House, attended by President George W. Bush, congressional leaders and the two presidential candidates, broke with no agreement.

One cause of the delay: opposition from House Republicans who have tried to fashion an alternative plan that, instead of relying heavily on taxpayer money, could let banks buy insurance for the troubled assets weighing down their books.

I hope the opponents to the program prevail and succeed in crafting an alternative solution because at the end of the day the current one is STILL an Enron style SPE for the financial sector; the question is whether or not they will have the political muscle to do it and/or if they’ll change course and rush to a solution in the wake of the WAMU (NYSE:WM) failure.

Perhaps the bigger question is whether not they’re capable of even drafting a viable solution, after all consider the solution that’s currently on the table!

Here is a quick look at the current proposal as it stood last night:

Graphics courtesy of the WSJ

Looking at the plan I’m not especially keen on the treasury secretary being the one who will set standards/limits on executive pay, after all won’t these executives be his former Wall St. friends AND wasn’t he the one insisting that no penalties should be in the plan because it will discourage banks from participating? But hey, at least the provision is currently in the plan.

I’m on the fence about loan modification because a significant % of the people that are facing foreclosure simply bought homes they couldn’t afford, however if their tax dollars are going to be used to bailout the banks it’s not entirely unfair for them to see some benefit. However at the end of the day if you can’t afford you can’t afford it, and a better solution is to help those people get into an sustainable housing situation instead of just delaying the inevitable.

I do like the oversight board because the initial proposal that gave the treasury secretary unlimited power over $700 billion was patently absurd; I also like the idea of parceling out the funds ($250 billion initially, $100 billion by request and $350 billion via congressional approval) as it allows for the opportunity to scale things back, shift gears or cancel the program all together.

However at the end of the day the bailout (as currently envisioned) is an ill-conceived solution to a singular symptom that won’t be able to solve the real problem, so while I’m encouraged by certain aspects of it I would rather the whole thing is scrapped and an alternative solution crafted.

You can read more here, and articles around the talks resuming here and here.

Sources:

The WSJ: “Bailout Negotiations in Disarray” — Greg Hitt, Damian Paletta and Deborah Salomon, September 26, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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