UPDATE: House Approves $700 Billion Buyout: Congress Reaches Agreement for Bailout Deal

10/03/08 Categories: Economy

Nancy Pelosi, Henry Paulson, Bailout Plan

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UPDATE: The House of Representatives has approved a modified $700 billion government assistance plan. One major difference is to raise the FDIC insurance for banks from $100,000 to $250,000. Also, the middle class will get a tax delay on the so-called Alternative Minimum Tax. Other tax breaks including alternative energy provisions are included in the bill.

Through the long hours of Saturday night and early Sunday morning, US Congress reached a tentative agreement on the proposed bailout deal led by Secretary of Treasury Henry Paulson. The $700 billion deal has not yet been finalized, but the essentials of the bailout have been outlined. But how will this affect us, as taxpayers?

The agreement so far says that taxpayers would:

Get an ownership stake in companies that receive bailout help.
If any of those companies fail, taxpayers would be first in line to recover assets.
There would also be possible profit-making opportunities for taxpayers if the troubled assets render profitable down the line.

The plan will also allow small community banks, pension plans, and local governments to sell troubled assets to the US Government. Executives of companies that seek the aid of the government will have closely-monitored compensation and will not be able to walk away with giant severance packages that some CEOs have enjoyed while being ousted from their suffering firms.

The Wall Street Journal reported that both McCain and Obama showed their support for the bailout plan. The Wall Street Journal also reported Nancy Pelosi's (Speaker of the House of Representatives) summary of the deal. The summary includes:

"3 Phases of a Financial Rescue with Strong Taxpayer Protections

* Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
* Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
* Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes"
-Office of Speaker Nancy Pelosi

Now I am not a huge proponent of bailing out large firms that took on too much risk, nor do I believe homeowners that took on a home mortgage that they couldn't afford should be saved from foreclosure, but you have to allow for some leeway. The government is who pressured mortgage bankers to underwrite unqualified loans in the first place (to increase home ownership), and the mortgage brokers took advantage of people they knew would not be able to afford the house they wanted (they get paid when the contract is signed). It comes full circle; it is too difficult to blame one party.

I doubt the Treasury Secretary, Hank Paulson, would push this deal so hard if he didn't believe that our country's economy might completely collapse if something is not done.

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