http://www.nakedcapitalism.com/2008/09/mussolini-style-corporatism-in-action.htmlMonday, September 29, 2008
Mussolini-Style Corporatism in Action: Treasury Conference Call on Bailout Bill to Analysts (Updated)
Various readers wrote us, and it was confirmed by a detailed report on the call at DealBreaker, that the Treasury Department held a conference call this evening for analysts on the bailout bill. A memo was evidently sent to SIFMA members; others may have been contacted by other means. But the report I got from one person who was on the call was the the questions came from financial services industry members. In other words, this was most assuredly not intended to be a call open to the public at large. If anyone from the media or other member of the great unwashed was listening in, it was by accident.
This is simply scandalous. To have a group of interested parties get a privileged briefing by government officials on a matter of keen public interest flies in the face of what a democracy is supposed to be about. The proper method would either be a published FAQ on the Treasury website or a briefing with the media included. But why should I be surprised? Favoritism has been a staple of the Bush Administration.
There is a live blogging recap at DealBreaker. Someone who was on the call is going over his notes and other recaps on the Web and sending me his version, which I hope will add some color. Check back for that update.
Update: Here are the notes promised. Calculated Risk had put up the conference call number. so some of this is the listener's notes, some are hoisted from CR. They are admittedly skeletal at points, but track and enhance the live blogging report at DealBreaker. You can download a torrent for the call here, which I intend to do post haste and will amend the post accordingly. I've included the long form notes below, but some items jump out:
1. The tranching is a mere formality, and the Treasury boys as much as said so. They could take the $700 billion max as soon as the bill has passed,
2. However, they do not plan any action immediately, will wait a couple of weeks. They want to focus their efforts on stronger companies but also made noise about protecting the financial system. This, by the way, is the Japanese convoy system all over.
3. There seemed to be a lot of tap dancing about what price they will pay for assets and no straight answer about their policy on warrants. They did say that if the amount sold was greater than $100 million, they would take warrants. FYI, the current draft allows them to pay up to the price at which the assets were initially booked (yikes) . I wonder if this is obfuscation, if they have an idea of what the plan to do but will not admit it in any public forum.
4. As the person who listened to the call stressed, DealBreaker wasn't clear on the bifurcated process. If you come to the Treasury and you are in trouble, you get reamed. Bear/AIG style treatment, execs probably fired. But if you participate on a voluntary basis, the intent is to make it very user friendly. That is consistent with Paulson's position during the negotiations.
5. The exec comp provisions sound like a joke, They DO NOT affect existing contracts, they affect only contracts entered into during the two years of the authority of this program and then affect only golden parachutes. More detail on that point, but I don't need more detail to get the drift of the gist.
Further below are the notes, admittedly somewhat cryptic at points, but hopefully helpful. But if you have time, listen to the download. Be warned I may revise and add to the post once I have done so.
Update 12:30 AM: Have queued up recording of conference call but not yet listened to it. But reader and sometime contributor Lune provides a useful take. Hoisted from comments:
1) If even the Treasury is saying tranching is a formality, then it really is nothing. Not sure why Dems fought so hard for a fig leaf.
2) Waiting a couple of weeks because no one has any idea when or where the next bomb will blow up. In other words, all their doomsday scenarios about Black Monday were B.S. They screamed the check had to be written by Monday, but now they're saying they actually have a few weeks before they need to cash it. Plus, this will allow them to "seek guidance" from GS, JPM, and other selfless public servants about where the money should be funneled.
3. The tap dancing is because they don't want it to get out that they'll be giving a sweetheart deal. The public won't be following each individual transaction to see exactly what price is being paid. So ridiculously overpriced asset sales can be hidden in the details, and by the time some reporter (or blogger :-) combs through and analyzes the transactions, the deed will have been done. But if Paulson makes a statement that assets will be bought at par before the bailout's even begun, that will be reported and might kill the deal.
4. In other words, we need to sweeten the pot to encourage banks to come "voluntarily". Pardon my ignorance, but why the hell should we be begging banks to borrow from us? I thought a bailout should be the absolute last option for a bank. I.e., it should be so unpalatable, so unprofitable for a bank and its executives that they exhaust every private means of survival before coming for their public "reaming". I wonder if foreclosed homeowners would rate their foreclosure process as "user friendly".
5. Of course the exec comp provisions are a joke. Who do you think is going to be hiring all those banking cmte staffers and newly retired congresspeople next year during the inevitable post-election turnover? Do you really think they're going to vote to limit their salaries? Remember that for lots of people on the Hill (including elected reps), govt work is merely time you spend accumulating credentials in preparation for your real life's work in the vastly richer private world.
Taxpayer losses: "golly, let's just pray to Jesus and hope he'll make sure that in a few years our country won't be bankrupt."
Oversight: "let's appoint a committee which will file toothless reports that no one will ever read".
I'm glad to see that while much time was spent in Exec comp. and tranching kabuki theater, the real points of protection of taxpayer losses and implementation of new regulation seem to be afterthoughts.
The notes on the call per our helpful anonymous reader (and former investment banker, it turns out):
"Draft bill is very positive for both markets and our companies"
Much explanation of Executive Comp
Residential and commercial mortgages. But very importantly, it can be any asset.
Excited about ability to guarantee assets in exchange for a guarantee fee.
Sought as much authority and as much flexibility as possible.
Eligibility: as broad participation by institutions as possible. The
more participation, the more effective it will be. Want banks of all
sizes or any financial institution that has a meaningful presence in
the US to be interested and enthusiastic.
Purpose is to help private sector clean up their balance sheets.
Highest priority: make sure it works, will attract companies to
participate. Warrants and exec comp. were very highly negotiated.
still listening ...
some1 | 09.28.08 - 9:14 pm | #
Warrants:
Direct purchases from failing institution e.g. Bear Stearns, AIG, F&F: will do the same thing, take maybe 79.9% equity.
Market mechanism: Congress wanted taxpayer benefit in upside. Sell
warrants for assets over $100M , but the amount of warrants is still
TBD. WE want healthy institutions to participate so it should not be
punitive.
some1 | 09.28.08 - 9:17 pm | #
Exec comp.
Most difficult part of negotiation.
Direct deal: fire the management, like AIG etc.
Market mechanism: if sell over $300M into fund, some exec comp limits
come with it. For 2 years, the firm could not enter into NEW contracts
including golden parachute, for involuntary departure. And lose some
deductibility.
We feel really good that we have encouraged healthy institutions to participate, not just bailouts of sick institutions.
some1 | 09.28.08 - 9:22 pm | #
Clawback of taxpayer losses:
1. it's a long way out, "a lot can happen in that time"
2. it's targeted at all financial institutions, not just participants! (that means it will never happen)
3. would need more congressional and presidential action to implement this.
some1 | 09.28.08 - 9:24 pm | #
Oversight (Bob Hoyt)
1. Financial Stability Oversight Board
2. General Accountability Office and Comptroller General managing purchase auctions
3. Special Inspector General
4. Congressional Oversight Panel
5. Reporting provisions
some1 | 09.28.08 - 9:27 pm | #
Tranching of $700B (I didn't know that was a limit)
Entire 700B is appropriated entirely by the act, no further appropriation necessary.
Tranching: first $250B
Then Secretary determines that more is needed and tells Congress, another $100B
Then Secretary determines that more is needed and Congress has 15 days to refuse, the remaining $350B
No time limits. Can request all the tranches at once, no need for delays.
some1 | 09.28.08 - 9:29 pm | #
More about tranching:
To block the last $350B, Congress has to say no. Then the President can
veto that. To override that veto, Congress needs 2/3 majority.
ALL of that must happen within 15 days, otherwise the money goes out.
Can't the President wait and veto it with one minute left in the 15 days?
RTC had to go back to Congress. Kudos for making this program much EASIER!
some1 | 09.28.08 - 9:32 pm | #
Price: not a fire-sale price, not an outrageous price, a "fair" price. Firms might get a price higher than their current mark.
(Congress will be voting on this, with this aspect totally undetermined.)
some1 | 09.28.08 - 9:35 pm | #
Not trying to maximize return to the taxpayer, but to provide liquidity to the system as a whole.
some1 | 09.28.08 - 9:39 pm | #
They will prefer to help healthy banks become even healthier, as
opposed to rescuing a failing bank, because the healthy bank is more
likely to relend into the system.
They expect that the exec. comp. limits won't constrain the healthy banks, since they are so light.
artichoke | 09.28.08 - 9:43 pm | #
xIt will take several weeks, before any assets can be bought, to hire asset managers and get systems up and running.
(They're going to let the weak banks fail, then help the rest.)
artichoke | 09.28.08 - 9:45 pm | #
No provision to mandate re-lending.
Stuff that is still to be determined, will be issued as "guidelines" therefore exempt from discussion and comment period.
About 800 people on the call.
some1 (oops;) | 09.28.08 - 9:47 pm | #
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