The men who hold high places must be the ones to start, to mold a new reality, closer to the heart. - Rush, Closer To The Heart
And so Reality now sets in...
Markets rallied last week on the announcement the Treasury and the Fed had developed a plan address the problems at U.S. financial institutions.
Now, the reality of how things are done in Washington takes over and the momentum is bound to slow. If there was complete agreement on the Paulson plan, perhaps we could be hopeful for a quick adoption of the legislation required to put it into law. As we see below, there may be agreement on the broad necessity of doing something but there is anything but agreement on the details.
We will look at the major groups of protagonists and list the issues that will be points of contention. By our count there are 16 issues that will have to be resolved before the plan becomes law.
The legislators --
The Wall Street Journal reports that legislators are working to put their own stamps on the rescue bill, probably complicating the process of it being passed this week. Following are seven examples of the WSJ is talking about:
1. Democrats are pressing for oversight through the Government Accountability Office. Even some Republicans are expressing concerns about writing essentially a blank check to the Bush administration. These proposals attempt to address concerns that the plan would be an unconstitutional delegation of congressional spending power. "We totally understand the gravity of the moment ... but you cannot just turn over $700 billion of taxpayer money and not insist that the taxpayer is going to be protected," Senate Banking Committee Chairman Christopher Dodd told reporters.
2. Democrats are questioning the legality of an important provision in the Bush administration's financial rescue plan: a proposal to bar judicial scrutiny of the U.S. Treasury Department's acquisition of up to $700 billion in troubled assets.
3. Since the bill was sent up to Capitol Hill as the weekend began, members of Congress have asked that individual mortgages be propped up under the legislation.
4. Democratic demands to broaden the rescue plan also include a stimulus package for the economy.
5. Some representatives and senators want executive compensation at bailout targets curtailed, especially golden parachutes.
6. Some conservatives are balking at the plan as well. Sen. Jim DeMint (R-S.C.), a member of the Joint Economic Committee, told the Los Angeles Times: "What is missing from it and from the recent string of bailouts is a commitment to return to a free enterprise economy. ... What we need now is not what could be nearly a trillion dollars in new taxpayer bailouts but pro-growth policies that allow our markets to correct and start growing again."
7. On the other side of the coin, Dodd and New York Sen. Charles Schumer, a member of the Senate Democratic leadership, both said having the government receive warrants to buy equity in companies selling off assets could protect taxpayers.
The administration --
The administration has also taken some actions to complicate the proceedings. The following three items will not make it any easier to get the bill through Congress:
8. Bloomberg reports that a plan to include purchases of instruments such as car loans, credit-card debt and other devalued assets to the rescue may force an increase in the size of the package as the legislation proceeds through Congress. Treasury officials propose buying what they term "troubled assets", without specifying the type. The administration's plan would even let the Treasury acquire assets from non-financial firms if needed to promote market stability.
9. The New York Times says that Paulson has requested that foreign banks with US operations be included. Some Democrats oppose have U.S. taxpayers bail out foreign firms.
10. The Treasury department adjusted its plan to insure money-market funds to limit protection to balances as of Sept. 19, after complaints from bank lobbyists.
The lobbyists --
It seems that there is no shortage of companies trying to line up at the feeding trough and so we have their proxies in Washington, the lobbyists. We have a few items from them too:
11. The Wall Street Journal reports that many financial companies are lobbying to be included in the government's $700 billion bailout. That will be a siren call for populist Democrats to define restrictions or guidelines.
12. Lobbyists are vehemently opposing the Democrats suggestion of mortgage reductions for homeowners facing foreclosure or bankruptcy as are some conservative Republicans.
13. The NY Times reports that small banks are pushing the government to buy loans they made to home builders and commercial developers.
14. Wall Street banks are lobbying to temporarily suspend certain accounting rules to avoid taking big losses on the assets they sell to Treasury, which would weaken them further.
15. Investment firms are jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.
16. Some bankers are pushing for government support of municipal securities as part of a broader effort to restore investor confidence in money market funds.
In conclusion --
To drive this plan through an unruly Congress with any kind of expeditiousness will take strong leadership from the top. Who do we have in the bully pulpit today? The most unpopular president in history and a lame duck, to boot.
With the economy a top issue in a presidential election that is less than six weeks away, Congress wants to show it can take action but will be unable to resist the temptation of using the debate for making political hay while the sun shines.
So we have the administration, the Democrats, the bankers and the lobbyists all trying to expand the scope of the bailout.
As Democrats and Republicans voice their opinions and push their favorite agendas, the plan will go through multiple versions, debate, vitriol and disagreement. All the while, the clock will be ticking.
Investors should hunker down and prepare to watch the drama unfold in Washington. If you can't afford a ticket to the movies, at least the ensuing political show will be free entertainment.
Sources: thanks to Bloomberg, the Wall Street Journal and the New York Times for information and various quotes.