Verbal Deal Reached on Bailout
John McCain returned to his Arlington, VA campaign headquarters after about a twelve hour stay in Mississippi to debate Barack Obama on Friday night. By suspending his campaign and returning to DC on Thursday, McCain provided the House GOP an opening to curb some of the more undesirable aspects of the bailout package negotiated between Treasury Secretary Paulson and congressional Democrats. Blunt laid out the most pressing objections on Saturday afternoon, and it appears the Democrats have caved on several of the demands.
Most importantly, Democratic giveaways to leftist public interest groups, such as ACORN and La Raza, were removed from the bill. The Dodd-Paulson bill, which was heralded as a completed bipartisan deal on Thursday afternoon (notwithstanding the lack of House GOP approval), contained a provision which provided for 20% of any profits realized on the sale of any asset purchased via the bailout to be funneled to the Housing Trust Fund and the Capital Magnet Fund. These two Funds would then hand out grants to service organizations, such as ACORN Housing, an offshoot of ACORN. Amazingly, the provision did not require an overall profit on the 700 Billion dollar investment – just profit on any individual transaction.
Instead of funnelling such potential profits to service organizations, the deal reached tonight will dedicate any and all profits directly to deficit reduction – a priority applauded by moderate and centrist Americans. Another provision inserted by Democrats which favored unionization was also watered down. Further, another provision to ensure that the federal government receives a piece of the selling banks, in the form of a stock warrant, is part of the new deal.
The other major change brought by the House GOP was the insertion of a program that would encourage banks to hold onto their mortgage backed securities by providing federal default insurance for a fee. It is hoped that this insurance provision will reduce the dollar amount of taxpayer funded loans that are required to purchase assets.
Certain bipartisan alternations to the original Paulson proposal were included in tonight’s deal as well, such as limits on executive compensation and significant oversight over the Treasury Department. The entity to be created as now envisioned by the bailout bill in some respects is similar to the Mortgage and Financial Institutions (MFI) Trust proposed by McCain about 10 days ago. Democrats were mainly responsible for the inclusion of increased assistance to defaulting homeowners, which a major change to bankruptcy law to allow reduction of mortgage balances in bankruptcy did not make the final package.
Of course, the heart of the bailout deal remains the authorization of borrowing by the Treasury Department to purchase “toxic” mortgage backed securities. The deal tonight allows for $350 Billion in authority immediately, with the potential for 350 Billion more unless a joint resolution of Congress is signed by the President disallowing the additional funding. It is hoped that the bailout package will calm markets, starting with Asia’s opening on Sunday night, and free up some liquidity in the U.S. Economy to allow normal business operations to continue.
With the bailout package now in its final form and all sides in agreement that something must be passed in the next few days to avoid a market selloff, the focus now turns to how McCain and Obama will present their position and responsibility for the package. Both candidates are well aware of the deep unpopularity of the bailout bill, with the public opposing the bailout 50%-24%.
Politically, the effect of the bailout deal is up in the air. John McCain will certainly attempt to claim credit for the improved bailout package that resulted from the inclusion of the House GOP in the negotiations. It remains to be seen whether McCain will assert that Congress followed suggestion of the MFI Trust in part with the new package. Obama will probably continue to assert that McCain’s presence was only counterproductive. After the Sunday talk shows and many surrogate appearances tomorrow, a picture of the political battleground on the bailout package should become clear.