Barney Frank On The Rescue Package

Barney Frank appeared on CNBC following Bush's speech and said that he believes the votes are there for a rescue deal.  On timing, he seemed to think that passage would be early next week at the latest - he emphasized that they are drafting a law, "not an essay" (nor a blog post) so there are complexities.

On executive compensation - his gist was that the bill would bar "golden parachutes" and require a specific shareholder vote to approve large executive pay packages.  That is surely a lot less than the "shoot 'em all" Dems were looking for, but has the apparent virtue of being within the scope of Congressional power.  Oh, well - it would have been fun to watch a bunch of the top execs quit and join hedge funds so they could keep on making the big bucks, but this will do.

On equity stakes - Frank said that the government would have warrants in "some" companies and "if they become profitable we have a chance to make our money back".  That sounds like very conventional warrants, which makes a lot more sense than the arcane, de-stabilizing Dodd proposal that neither provided new capital to participating firms nor transfered the price risk of the troubled assets away from the selling firms.  In addition, *IF* Frank's use of "some" is meaningful, not every participating firm will be obliged to give up, or sell, warrants. 

My guess - this is some sort of fig-leaf allowing Dems to declare victory combined with a fairly generic authorization allowing/exhorting Treasury to buy warrants in some under-capitalized firms.  If anyone sees draft legislation flicker buy, keep us in mind.

MORE:  There was a now-you-see-it-now-you-don't draft of the Franks bill provided by TPM.  A hint of the contents is provided by a Firedog:

There's a summary copy of Frank's bailout bill up at TPM.  It's essentially a Wall Street giveaway plan, with only some fig leaves to try and pretend that it isn't.

Why? Because the language about taking warrants in exchange for buying up toxic assets is only for direct purchases and not for reverse auction puchases, which will be the majority of the purchases. As Soros points out, in any reverse auction, the government will get stuck with the most toxic of toxic waste because of information asymetries. In exchange they should at least get stock, equal not to what they paid, but to the face of the crap they are buying.

Does "get" mean "given", or does the government buy the shares?  "Given" stock equal to the face value of the securities they purchase can't be a serious proposal.  Only a firm with a stock price roughly equal to zero would sell securities and give away equity on those terms.

And if the government is buying the shares, well, why oblige them to buy shares they may not want?  Daft.

However, I can see where warrants could be included in any negotiated, one-off sale.

Comments

[Wind Rider]

I heard Barney being interviewed on NPR earlier today - sounds like he repeated a lot of the same this evening.

One thing I did notice from his remarks this morning - he was still pressing hard trying to 'watch out for the less fortunate' angle - which, if I've read correctly elsewhere, is the same thing that led him to press for the changes that created the conditions for this mess to erupt in the first place.

Of all the members of congress, Dodd and Frank should be the LAST people making substantive inputs to whatever is cobbled together.

[Ned Fillmore]

From watching CNBC earlier today, it sounds like the warrants only enter the picture if the Treasury buys the assets directly from a company (as opposed to through an auction process).

[Thomas Collins]

The Internal Revenue Code already has limits on the ability of public companies to deduct excessive employee remuneration under certain circumstances. In addition, the IRC in certain cases imposes excise taxes on parachute payments to employees, and denies the employer the deduction. Companies have lived with these provisions, and I suspect they will live with the additional compensation restrictions that come out of this bill. Let's face it, a lot of people think financial types are worthless greedy chiselers. The truth is that Main Street thrives in part because of the big commercial republic Alexander Hamilton wrought, and people who work in finance are no more moral or immoral than the population at large. But sometimes vengeance must be exacted, and I would say this is a pretty mild form of vengeance.

[Cecil Turner]

Is this the same Barney Frank who predicted this crisis? You know, way back in 2003:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

ISTM he's willing to overlook little issues like insolvency as long as he can beat the drum on the populist bandwagon . . . so I'm guessin' he's the right man for this job.

[Thomas Collins]

The Internal Revenue Code already has limits on the ability of public companies to deduct excessive employee remuneration under certain circumstances. In addition, the IRC in certain cases imposes excise taxes on parachute payments to employees, and denies the employer the deduction. Companies have lived with these provisions, and I suspect they will live with the additional compensation restrictions that come out of this bill. Let's face it, a lot of people think financial types are worthless greedy chiselers. The truth is that Main Street thrives in part because of the big commercial republic Alexander Hamilton wrought, and people who work in finance are no more moral or immoral than the population at large. But sometimes vengeance must be exacted, and I would say this is a pretty mild form of vengeance.

[Cecil Turner]

Okay Wind Rider, ya beat me to it. But I managed to cloak it in sarcasm, which is about 3 minutes harder. I'm scorin' it a tie (and stickin' with my story).

[Charlie (Colorado)]

Okay, so what we have is that Buffet likes it enough to put $5 billion into Goldman, the WSJ likes it, Kudlow likes it, Rick and I like it, Barney Frank can live wih it and FDL hates it.

Sounds like a done deal then.

[inloworbit]

Barney Frank is an a$$. The diarrhea and partisan crap was dribbling from his mouth after the President's remarks. The next not-so great society is going to be trusted upon us and we can all thank the press. Let's bury the cause of the problem (Frank and Dodd) and allow more great society thinking. Alternate thought: Can we throw Massachusetts out of the United States of America.

[clarice]

Cool idea,inlo. I remember during a big garbage strike in NYC, rich folks disposed of their trash by giftwrapping it and leaving it outside the front door of their brownstones.
Maybe if we tart up the state with some fancy wreaths or something a foolish Canadian Province will steal her.

[Thomas Collins]

Inloworbit suggested:

Can we throw Massachusetts out of the United States of America.

Jane, where are you? HELP!!! Tell Inlo we're not all like BF.

[Jane]

I'm here Thomas, hold steady.

Inloworbit,

Thomas and I are doing the best we can. There are only a few of us doing this work. Please at least provide a little warning before you delete us entirely.

Or maybe it's a good time to move to Perth.

[Sara (Pal2Pal)]

Okay, so what we have is that Buffet likes it enough to put $5 billion into Goldman, the WSJ likes it, Kudlow likes it, Rick and I like it, Barney Frank can live wih it and FDL hates it.

And like clockwork, the president everyone loves to hate, lays a full house on the table to Obama's straight and takes McCain up on his suggestion to call a high level meeting of Congressional leadership and the two candidates and summoned the O-man to Washington for an afternoon get it done or else meeting whether he wants to be there or not.

McCain owes him for this one.

[clarice]

You two will LOVE Newfoundland!

[Sean]

Hopefully there will be enough displeasure from both the left and right that this bill won't have a chance in hell.

I fear, however, that folks are just too complacent to vote out the hobos that support bailing out the incompetent.

[Thomas Collins]

Inlo, last Thursday the UMass Amherst Republican Club had conservative Star Parker as a guest lecturer. Almost a hundred students showed up, and she was well received. Noone walked out or held up dumb signs (perhaps a first at a lecture by a conservative at one of the Pioneer Valley colleges). So there's hope!

[Topsecretk9]

Watch (LUN) Barney Frank in his OWN words dismiss any need way back when to rein in FM/FMac...email this one people.

[Annoying Old Guy]

Just get that income tax repeal voted in, and we'll keep Massachusetts for a while longer.

[Charlie (Colorado)]

Sean, see the earlier comment about being unwilling to drown to make sure the navigator is punished.

[Thomas Collins]

See LUN for the proof, Inlo.

OK, the article says 80 people showed up, not 100. But it's a start!

[Rick Ballard]

Thomas Collins,

Sacrificing an investment banker or two (or twenty) isn't necessarily a bad thing but thinking that they won't figure out loophole Z26a within about 30 seconds of passage of the legislation doesn't seem reasonable to me. It would just be unnatural if they didn't.

The clowns who decided to take a stab at social engineering through mandating that X percent of all loans made had to go to Bozo the Clown and his merry band are the ones that I would like to see tracked down and figuratively dragged behind chariots from Bangor, ME to San Diego, CA.

I know they had the very best of intentions and the highest of hopes and for those reasons I believe that after the chariots get to San Diego they ought to be turned around and sent back to Bangor with what's left of the "best intention" boys behind them all the way.

[belle]

Charlie: sounds like a done deal then.

FWIW: Someone thinks it is, apparently. SIL who is a commodities trader had to go into work tonight there was so much activity. My daughter assumed the bailout bill had passed.

[Thomas Collins]

Rick Ballard,

I agree that tax planning will take much of the sting out of whatever compensation restrictions pass. That's the beauty of it. The Dems get to bloviate about how they held those fatcat financiers accountable, but when the dust clears, businesses won't be too hamstrung.

I also agree with you on who the real culprits are. But, unfortunately, the real culprits are going to be around whether or not decent legislation gets passed. Let them do their war dance about sticking it to the greedy capitalists, and then let our financial markets folks get on with what they do (which has benefitted folks far more than what statist Senators, Representatives and bureaucrats have done).

[cathyf]

Hey, don't worry, Jane and TC -- if Mass gets thrown out of the Union I bet clarice would feed ya. And we'll take you in here, too, although the food at clarice's is gonna be better!

[Neo]

I wonder if taxpayers can get warrants on the retirement plans of the legislators that kept the Fannie and Freddie Mac pyramid scheme going when it was obvious that they were undermining the financial system.

[srp]

There may be a tad of groupthink occurring here. A huge list of prominent economists of varying political orientation is opposed to the Paulson plan (and have signed a petition against it). Less dirigiste lternatives such as loosening capital requirements for new loans by banks or requiring a sector-wide holiday on dividends have also been proposed, but have not been debated or discussed by the do-something-right-now crowd.

I understand the logic behind the Paulson proposal, but it does exacerbate moral hazard and slow the recognition of any insolvencies in the financial sector. I am also concerned that the mere prospect of this plan is deterring private transactions (at low prices) for the shaky assets. According to the NYT (buried in a huge article in their business section last week) private rescuers of AIG were deterred from injecting equity into the company because of the threat of government takeover and concomitant loss of investment. The mere suggestion of these kinds of federal interventions paralyzes private transactions--the illness is partly iatrogenic.

Ben Bernanke made his bones showing how financial contagion in the banking sector caused much of the carnage in the Great Depression. He is determined not to let the same thing happen on his watch, which is laudable. But it is not 1929 now. We have avoided the monetary contraction of that time and a more judicious process for reconnecting borrowers and lenders is possible.

[Verner]

Jane and Clarice,

I think you should all come down here.

I just went to a lovely concert at the Ryman, with an Irish band whose name I will not mention. It was great, until the end when, as predicted by me, the lead just had to insert his anti-american euro self into our political process. Good lord in heaven, would these people just shut up and sing!

To shorten this already long story, he gave a plea to all of us to get out there and vote--and when one of the young bot in the audience yelled out the O man's name, many in the crowd responded with very loud boos and hisses.

Now tell me that would ever happpen in NY LA or Barney's Boston.

There's no danger of this red state flipping any time too soon. With the exception of the nutcases in Memphis and Al Gore, even the democrats are relatively conservative.

And when the democrats finally have their way and screw things up, and everything has gone to hell, it's not going to be a pretty seeing all those rich elite blue staters--with their Ivy League degrees- meeting the poor people they've championed all these years up close and personal.

Reign of Terror, October Revolution, Cultural Revolution--the thought of it brings an evil little grin to my face knowing that they'll get it first!

[pagar]

Good Morning to All!
Looks like another beautiful day. But just the thought of Obama flying into Washington to put his 2 cents in about a economic plan, when he can't even figure out the economics of buying a house without aid from Rezko causes me heartburn.

[Thomas Collins]

Srp noted that:

Less dirigiste lternatives such as loosening capital requirements for new loans by banks or requiring a sector-wide holiday on dividends have also been proposed, but have not been debated or discussed by the do-something-right-now crowd.

Srp, the plan that is evolving may be the one that results in the least amount of governmental control and has a realistic expectation of getting passed. In addition, if money (these days, I guess it's electronic impulses) stops circulating, the damage to Main Street might take a long time to be undone. I appreciate your concern about groupthink (which may especially impact those of us who spend our workdays (and often nights and early mornings) in financial districts). But I really think this is an emergency. The plan developing will give everybody breathing space to consider other reforms (or at least that's my hope).

[clarice]

Ah but cathy the conversation at yoour house would be non pareil and the fresh air and beautiful countryside at Verner's more healthful.

[Thomas Collins]

See LUN for an article analyzing why the plan may work out. Note that even in this optimistic article, it is acknowledged that a significant risk of this is that the Feds may be tempted to prime the pump of the economy a little too much to enhance the value of the acquired portfolio.

[Thomas Collins]

Whoops! Wrong LUN. Let's try again.

[DebinNC]

Any thoughts on the $25B automaker bailout to be signed into law today? Would they do this if MI's electoral votes weren't pivotal right now?

[clarice]

Yes, it stinks.
No, they wouldn't.

[Lily]

After failing to take action several years ago to rein in Fannie Mae, and lecuturing us about overstating the project and causing fear, Barney Frank should be required to step down from this chairmanship as part of the 'bail out' deal

[Lily]

Project = problem (sorry)

[Neo]

KROFT: Why you? I mean, why do you think you would be a good president?

OBAMA: Well, I was going to get to that.

KROFT: Go ahead.

OBAMA: You know, I’m a, I’m a practical person. One of the things I’m good at is getting people in a room with a bunch of different ideas who sometimes violently disagree with each other and finding common ground and a sense of common direction. And that’s the kind of approach that I think prevents you from making some of the enormous mistakes that we’ve seen over the last eight years.

Isn't this exactly what John McCain is doing ?

So it now takes an invitation from the President to get Obama to join in the discussions .. LOL

[RichatUF]

DebinDC-

Any thoughts on the $25B automaker bailout to be signed into law today? Would they do this if MI's electoral votes weren't pivotal right now?

That is a federally insured bond, the language of which was inserted in the 2007 DOE spending bill. The total cost from what I read is supposed to be around 3-5 billion and its for ramping up the sorts of cars DC wants Detroit to make. Moral Hazard-well, it would start by not telling Detroit what sorts of cars they should and shouldn't build.

[Thomas Collins]

Any updates, Jane? Are we still US citizens? Do I need a passport when I barrel down Route 95 South to sample the Italian cuisine in the Federal Hill section of Providence? :-))

[M. Simon]

Re: auto bailout:

The Government is on the hook for the automaker's pensions.

[bad]

Obama's teleprompter must be malfuntioning.

[Tom Maguire]

That is a federally insured bond, the language of which was inserted in the 2007 DOE spending bill. The total cost from what I read is supposed to be around 3-5 billion and its for ramping up the sorts of cars DC wants Detroit to make.

IIRC, the initial GAE estimate was $3-5 billion but they recently doubled it to about $7 B.

Oh, here we go:

The budget resolution includes $7.5 billion to pay for the estimated costs of the program, double the original estimate.

I would say the auto loans are sort of absurd but easily predicted. As Lincoln might have said, a market can not long endure have socialized and half free. Detroit is so tied in to Federal programs to build roads (or not) and subsidize gasoline (or not) that of of course they have their hands out when the Feds swerve off in a new direction.

[Thomas Collins]

Looks like it's McCain, not Obama or Barney Frank, who knows how to get moving after the 3 am call.

LUN

[GMax]

No I think the UAW took over the pension obligations from the automakers. Was it to pull a Jimmy Hoffa and help yourself and then ultimately drop the pensions on the Pension Benefits Guarantee Board? Well lets say there is a playbook there if someone wants to read it.

[M. Simon]

GMax,

Pension Benefits Guarantee Board was what I meant. Thanks!