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Navigating the Wall Street plan

MONDAY, SEPT. 29, 2008

WASHINGTON – Few actions taken by Congress have been as complicated as the proposed $700 billion rescue of Wall Street. Here’s a closer look at how it would work.

Q: How will Treasury determine what these bad assets are worth?

A: It will be done through a reverse auction process, meaning the government asks holders of these bad assets to determine what price they want for these distressed mortgage bonds and other similar esoteric debt instruments. The idea is that companies will compete with each other to dump these assets at a low price, effectively bidding each other down. Treasury will likely have the authority to buy some of these problem assets directly from companies that have been taken over by the government, like American International Group, Fannie Mae and Freddie Mac.

Q: What will this do to our national debt?

A: The rescue plan is being portrayed as an investment, not a traditional expenditure such as funding the Iraq war. The government is purchasing bonds that carry a hold-to-maturity value. Assuming the country doesn’t fall into a depression that completely wipes out home values, these assets could see their value grow, lessening the ultimate cost to the taxpayers. As the assets are sold off, there is more revenue coming back to federal coffers and would reduce the need for government borrowing. But over a shorter horizon, these loans do add to the nation’s debt.

Q: Will Wall Street executives be able to collect big paychecks and taxpayer help?

A: The final proposal stipulates that there will be no golden parachute for executives whose companies are taken over by the government. The Treasury secretary has a free hand to limit CEO pay. Companies that tender $300 million in their bad debt to the government in the reverse auction process would lose their ability to deduct from taxes the executive compensation they pay above the $500,000 to their five highest-ranking executives.

Q: Do Americans have a financial stake in the outcome?

A: The proposed legislation provides for stock warrants in those cases where the government has taken over a troubled financial institution. These warrants are designed to put taxpayers at the front of the line if there’s a windfall from the intervention.

Treasury will have discretion to seek similar warrants from companies in the reverse auction process.


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