Emergency Economic Stabilization Act of 2008 by Sean Maloney ECN 339 Professor Ross
Introduction: The Emergency Economic Stabilization Act (EESA) is a law enacted in response to the subprime mortgage crisis and is commonly referred to as a bailout of the U.S. financial system. The law, which was enacted on October 3, 2008, gave the U.S. Treasury the right to spend up to $700 billion to purchase mortgaged-back securities and other distressed assets, as well as make capital injections into banks (both foreign and domestic banks were included in this stimulus attempt). American Express, whose bank holding application had just been approved, also received aid by the Federal Reserve as part of this act. EESA, proposed by Treasury Secretary Henry Paulson, was originally submitted to the U.S. House of Representatives to restore confidence in the credit markets. It was eventually voted in as an amendment to Public Law 110-343. Description of the Legislation: As the financial crises rolled on, the government realized it needed a plan in the fall of 2008. At that time, the government had been engaging in activities to save failing financial institutions. Attempts were made with Bear Sterns in 2008, Fannie Mae and Freddie Mac in early September, 2008, and American International Group (AIG) in late September, 2008. After realizing the extent of these dramatic events, U.S. Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and SEC Chairman Christopher Cox sought out an approach to ease the strain on financial markets and institutions. By September 20, 2008, the Treasury Department proposed legislation that would allow itself to purchase up to $700 billion in troubled mortgage related assets. On September 24, 2008, Rep. Barney Frank announced that Senate and the House of Representatives had agreed
to a common set of principles to execute this rescue. President George W. Bush, Sec. Paulson, and congressional leaders of both parties met on September 25, 2008 to review these principles. The next day, Republican representatives produced an alternative rescue plan with several revisions to the original docket. On Sunday, September 28, 2008, the Emergency Economic Stabilization Act of 2008 was born, consisting of 110 pages. The House of Representatives rejected the act by a vote of 205 to 228 on September 29, 2008. However, the Senate passed the bill on October 1, 2008, and, after some modifications, the House of Representatives passed the bill on Friday, October 3, 2008. On that same day, President Bush signed the EESA into law. The main elements of the EESA are broken down as follows: 1) Authority of the Secretary of the Treasury, 2) Consequences to Participating Financial Institutions, 3) FDIC Insurance, 4) Mark-to-Market Accounting, 5) Other Reports and Future Regulatory Changes, and 6) Oversight. 1) Authority of the Secretary of the Treasury Under this element, the Secretary of the Treasury is able to purchase residential and commercial mortgages from financial institutions issued on or before March 18, 2008 with the amount of $250 billion. An additional $100 billion may be requested from the President and may then request the final $350 billion after 15 days. The scope of financial institutions participating is broad. This includes any bank, security broker or dealer, saving association, credit union, or insurance company. The purchase of residential mortgages or related securities should be purchased with the intent of minimizing foreclosures and evictions, and will be administered by the Secretary of the
Treasury. Guidelines for the program must also be made by the Secretary of the Treasury, including identifying assets, valuing assets, purchasing assets, and selecting asset managers. Finally, private entities must be encouraged to invest in troubled assets and financial institutions. 2) Consequences to Participating Financial Institutions If any assets are purchased from financial institutions by the Secretary of Treasury where no bidding process or market prices are available, the Treasury must receive a meaningful equity or debt position in the seller. Financial institutions participating will also suffer executive compensation restrictions. Lastly, the Secretary of the Treasury is instructed to avoid unjust compensation. The Secretary must not purchase assets at a higher price than that paid by the financial institution unless these assets were acquired in an acquisition or merger. 3) FDIC Insurance The FDIC-insured limit for deposit accounts increased from $100,000 to $250,000. The FDIC is forbidden to take this increase into consideration when setting assessments for insured institutions. 4) Mark-to-Market Accounting The power to suspend mark-to-market accounting is given to the Securities and Exchange Commission (SEC). The SEC, along with the Federal Reserve and the Secretary of the Treasury, is required to conduct a mark-to-market accounting study. 5) Other Reports and Future Regulatory Changes
A report of the effectiveness of current regulation of the financial markets will be prepared by the Secretary of the Treasury by April 30, 2009. Five years after its implementation, the Director of the Office of Management and Budget will determine whether the Treasury has incurred a loss from this plan. 6) Oversight The Secretary of the Treasury must collaborate with the Federal Reserve, the Comptroller of the Currency, the Secretary of Housing and Urban Development, the FDIC, and the Director of the Office of Thrift Supervision. Furthermore, the establishment of a Financial Stability Oversight Board will manage the execution of the program. The bill itself is divided into three titles: Title I – Troubled Assets Relief, Title II – BudgetRelated Provisions, and Title III Tax – Provisions. Title I includes sections on the purchase of troubled assets, insurance of troubled assets, market transparency, credit reform, and recoupment. These are essentially summed up by elements 1-4 above. Title II includes sections on information for congressional support agencies and reports by the Office of Management. These are essentially summed up by elements 5 and 6 above. Title III includes sections on gain or loss from sale or exchange of certain preferred stock, special rules for tax treatment of executive compensation, and extension of exclusion of income from discharge of qualified principal residence indebtedness. These are essentially summed up by elements 1-4 above. Review of the Arguments: Pro and Con: Those who supported this plan argued that the market intervention that EESA offered was vital to the prevention of further dismay with the economy and especially within U.S. credit
markets. They contend that the only way to solve the problem was to, in effect, prime the pump. In order to raise confidence, supporters argued that you had to invest money in the problem; that for the good of the economy these financial institutions could not fail. The increase in FDIC limits was also viewed by most as a good thing. The Federal Reserve had not increased these limits since 1980, even with the affects of inflation. Raising this limit from $100,000 - $250,000 pays more insurance to more people, which increases income and spending. There was also a lot of support for the various Energy Tax Incentives that this bill provided. Namely the Extension and Modification of Credit for Energy-Efficiency Improvements to Existing Homes, Long Term Extension of Energy Investment Tax Credits, Extension of Biodiesel and Renewable Diesel Tax Credit, and the introduction of Qualified Energy Conservation Bonds. Opponents of the bill argued that since most of the economyâ€™s problems were created by debt and excess credit, this bill, which they claimed would created an infusion of credit and debt, would only add to the problem. Others argued that not enough emphasis was used in questioning executive bonuses or other similar matters. People on this side also opposed the cost of this plan, and pointed out that polls showed little public interest in bailing out Wall Street investment banks. There was also a great apprehension for the American taxpayer. Many viewed this bill as detrimental to the average taxpayer, who did not understand the extent of the bill to begin with. There was also concern that this bill would increase the size of government and the role it played in personal finance. Many believed that this bill would only reward greedy Wall Street and Government executives.
Analysis and Conclusions: Individually, Banks were given a portion of the $350 billion from the Troubled Asset Relief Program (TARP). Most banks that received the money were relatively small, and far smaller than Citigroup, Bank of America, and AIG, who had much of the troubles in the first place. The problem was that these banks were not required to disclose how they spent the money. A review by the New York Times found that â€œfew [banks] cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest in the futureâ€? (McIntire, 1). Many of these banks worried that if the loans went bad, they would be in worse shape if the economy crumbled. Since there was no direction, the result of stimulating banks was not as effective. The Emergency Economic Stabilization Act of 2008 gave the government complete discretion in how they spent a very large sum of money. Even though $700 billion was a lot to throw at the problem, EESA was not the final solution in response to the financial crises and the failing economy. Through new and better information gathered by EESA, however, Congress was better able to make decisions in drafting legislation that would reflect the future financial needs of American citizens.
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