From the November 01, 2008 issue of Futures Magazine • Subscribe!

Rescuing the bailout

To say the first iteration of Treasury Secretary Henry M. Paulson’s $700 billion bailout plan was poorly received understates the case. In a closed-door meeting, House Minority Leader John A. Boehner (R-Ohio) reportedly referred to the bill as a “crap sandwich.” Even after President George W. Bush addressed the nation to explain the looming catastrophe and the potential effects of the credit crisis on Main Street, the House of Representatives rejected the bill, sending the Dow Jones Industrial Average into a 774-point nosedive. Days later, another version of the bill was passed by the Senate and the House and signed by the president, and the Dow dropped 342 points.

The bill authorizes a total of $700 billion for the Treasury secretary to purchase troubled assets, with an initial outlay of $250 billion. The president could then certify the next $100 billion, and thereafter, funds will be made available by joint resolution in the Congress. Treasury will buy troubled assets and attempt to maximize the return on assets to the government. It also includes a temporary increase in FDIC protection for insured deposits to $250,000 from $100,000; adjustments to the alternative minimum tax; requirements for Treasury to create a homeowners assistance plan to limit foreclosures; and limits on executive compensation.

Perhaps most surprising is that the bill does include provisions for an ownership stake for taxpayers: “The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives… a warrant giving the right to the Secretary to receive non- voting common stock or preferred stock in such financial institution, as the Secretary determines appropriate; or … a senior debt instrument from such financial institution.”

Despite the bill’s passage, enthusiasm remains muted and the success of the plan is uncertain. “The bailout retards the potential for price discovery in this environment and it does not give us any indication of where value is,” says Kevin Hubbell, partner at Bear Brokerage in the CME’s Eurodollar options pit.

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