Government Rescue Plan Explained

By Anastacia Mott Austin

It looks as if the final snags in the government's financial rescue of the American economy have been hammered out, and the plan will head to the House of Representatives, then the Senate. Congressional leaders who have been negotiating the details have high hopes that the "Emergency Economic Stabilization Act of 2008" will pass both the House and the Senate.

House Speaker Nancy Pelosi emphasized that it is a "buy-in," not a bailout of the economy. "This isn't about a bailout of Wall Street, it's a buy-in so we can turn our economy around," said the Speaker at a press conference announcing the deal.

The purpose of the plan is to unfreeze the credit market and enable it to function (close to) as it normally would, to prevent a collapse of the U.S. economy.

"We begin with a very important task, a task to stabilize the markets, to protect all Americans, and do it in a way that protects the taxpayer to the maximum extent possible," said Treasury Secretary Henry Paulson to reporters.

The plan will contain the following components:

Authorizes $250 billion to be released immediately, and another $100 million authorized by Presidential certification. It allows for an additional $350 million to be released, pending approval by Congress. The authority to use the money will expire on December 31st, 2009, unless a one-year extension is certified by Congress.

Government takes a stake in the companies being bailed out, so that taxpayers can recoup funds if the companies improve their status and make future profits. If a net loss results, then the President would need to propose new legislation (five years after this plan goes into effect) making the banking institutions responsible for paying back the loss to taxpayers.

Puts oversight provisions in place, such as a congressional oversight panel, and an inspector general to oversee the process. The Financial Stability Oversight Board would be responsible for making sure that taxpayers are protected and that the policies serve the best interest of the U.S. This committee would be made up of the Federal Reserve chairman, Housing and Urban Development secretary, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, and the Treasury secretary. In addition, the Secretary of the Treasury must report to Congress periodically.

Will "encourage services of mortgages to modify loans," in order to help struggling families with failing mortgages. Doesn't guarantee help, but will put pressure on lending institutions by allowing the Treasury to guarantee loans. A representative of the Treasury spoke with reporters, saying "[The] Treasury will be buying many of the securities in volume. We will have a lot of influence on the services and we will work aggressively to ... prevent foreclosures."

The Treasury Department can employ a number of measures to buy up failed loans, primarily mortgage-backed securities, either through direct buys or via an auction process.

Companies can choose to participate in an insurance program through which the Treasury would guarantee assets by charging a premium that is judged sufficient to cover claims.

Will prevent companies from signing so-called "golden parachute" deals with top executives after the bailout plan goes into effect, but will not change existing contracts. "Those are contractual obligations between a company and their employees," said the Treasury official. "We're not abrogating contracts."

"I appreciate the leadership shown by members on both sides of the aisle, who came together to write a very good bill," said President Bush in a released statement. "This bill provides the necessary tools and funding to help protect our economy against a system-wide breakdown."

House Republicans who stalled the process earlier in the week told the press they were satisfied with the revisions that had been made and would support the bill, even as they made sure to emphasize that no one is happy that the situation has gotten to where it is today. "Nobody wants to have to support this bill," said House Minority Leader John Boehner (R-Ohio) to the press. "But it's a bill that we believe will avert the crisis that's out there."

Both Presidential candidates have said they would probably vote for it, after reviewing all the details. McCain told reporters, "I'd like to see the details, but hopefully yes [I would vote for it]. This is something we'll all swallow hard and go forward with."

Agreed Obama on Face the Nation, "We have to get something done. My inclination would be to vote for it, understanding that I'm not happy about it. We should have never gotten to this place."