The Bailout Talks: What Remains On The Table

Complex negotiations over the Treasury Department’s proposed $700 billion rescue package for the financial sector intensified late Saturday afternoon, as Secretary Henry Paulson and top Congressional leaders met starting a little after 3 PM in hopes of hammering out the final details of the package by Sunday. Though the Democratic leaders participating –- including House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, Rep. Barney Frank and Senators Chuck Dodd and Charles Schumer — heavily outnumbered the main Republican negotiators, Rep. Roy Blunt and Sen. Judd Gregg, there was renewed optimism that a deal could be reached despite the disarray that surrounded the talks following a contentious White House meeting late Thursday. Speaking on the Senate floor before the Saturday afternoon meeting, Reid said an “agreement in principal” was within reach.

Sources close to the talks say that staffers who worked late into Friday night to prepare the groundwork for the final talks identified 16 core issues that the principal negotiators must still resolve. The full list is below, following the jump.

Most are the key issues that have been at the center of the talks for a week. Whether or not bankruptcy courts will be allowed to reduce the value of mortgage debt owed by bankrupt homeowners remains on the table, for example, though few believe it will survive into the final package.

But a few new items have taken on more prominence as negotiators have approached the end game. For the first time, the issue of whether financial institutions will be forced to mark down the value of all their mortgage-backed assets to whatever price the Treasury agrees to pay for the toxic tranches that it buys has emerged as a key issue. Financial institutions have fought heavily against being forced to “mark-to-market” the value of all their mortgage assets, which could essentially force even those institutions that don’t participate in the program to treat whatever fire-sale price the Treasury pays as the new market value for other troubled mortgage assets. Lobbyists for the financial services industry argue that doing so would exacerbate the institutions’ ability to meet regulatory capital requirements and weaken their balance sheets overall, thus defeating the whole purpose of the rescue plan. They want accounting rules requiring firms to “mark-to-market” such assets temporarily suspended as a result.

Following the rebellion on Thursday by conservative Republicans, who put forth a proposal that the government should relieve troubled banks by insuring their bad assets rather than buying them outright, negotiators are now considering giving the Treasury the option of providing loans or guarantees to troubled banks. That’s unlikely to change the direction of the bailout much however; after all, it is unclear why any bank wishing to reduce the toxic assets on its balance sheet would want to replace them with a loan rather than cash from the Treasury. “It’s window dressing,” says one source closely following the talks.

And negotiators are still wrangling over how much of the funding to approve right away. On Friday, Congressional leaders had proposed authorizing $350 billion in spending initially, with another $100 billion upon certification by the Administration that it was needed, and the final $250 billion tranche subject to further Congressional review. But Paulson is fighting back to increase the size of the initial cash layout to $500 billion.

On executive pay, negotiators appear to have agreed to limit severance and “golden parachutes” for executives at companies which participate in the plan. But they continue to fight over two issues:

First, Democrats are trying to include actual dollar limits on the amount of compensation that a participating firm can pay to its executives. But Paulson is arguing that specific limits should not be included; instead, he argues the bill should simply give the Treasury discretion to review the pay packages at firms taking advantage of the program.

One source close to the talks says a second measure is gaining traction among Democrats: an effort to limit the tax deductibility of executive compensation, which currently stands at $1 million. Rep. Charlie Rangel, (D-NY) the powerful chairman of the House Ways and Means Committee has proposed limiting that to $400,000 – the amount the President earns. While it’s unclear whether this will ultimately remain, there is no longer any question that some limits on executive compensation will pass. Democrats and Republicans alike need to be able to point out to constituents angry about a package widely perceived to be a bailout for Wall Street that they have whacked down executive pay.

Here’s the full text of the memo that staffers presented to the Congressional leaders for what all concerned hope will be the final round of negotiations:

Issue: Whether to expand authority to explicitly permit Treasury to provide guarantees or loans. Issue: Add full guarantee program framework and reporting.

Use of Profits for affordable housing Issue: Whether 20% of profits on ultimate disposition of assets should be used for Affordable Housing Fund

Foreclosure mitigation Issue: Whether to include a requirement that Treasury adopt a systematic program for reduction in foreclosures.

Assistance to homeowners Issue: Whether to require the FHA, Federal Reserve, and FDIC to: (1) adopted systematic approach to preventing foreclosure; (2) make foreclosured properties available at a discount to state and local governments receiving emergency assistance; and (3) encouraging loan servicers to engage in loan modifications and make properties available to state and local governments.

Warrants from auction participants Issue: Whether to require that Treasury obtain warrants from financial institutions that purchase assets through auctions (additional language being considered).

Executive compensation policies for auction participants Issue: Whether to require auction participants to adopt certain executive compensation policies (additional language being considered).

Corporate Governance requirements for direct transactions with individual institutions Issue: Whether individual institutions that engage in direct transactions with the Treasury (i.e., not through auction) should be required to adopt certain corporate governance policies related to proxy access and advisory votes on executive compensation (additional language to be considered).

$700 billion availability and amount Issue: Size of authority. Issue: Whether there should be a mechanism to permit Congress to act in an expeditious manner prior to use of Treasury authority over certain limits. Issue: Whether the $700 billion authority should be "revolving" such that the proceeds of sales of assets can be used for additional purchases.

Bankruptcy Issue: Whether there should be any provision concerning reformation of mortgage contracts by bankruptcy judge in connection with a primary residence. Issue: If bankruptcy provisions are to be included, should it be retrospective or prospective?

Authority of the Executive Committee - the Oversight Board composed of three heads of agencies (currently Federal Reserve Board, SEC, and FDIC) and two Congressionally appointed members. [replacements?] Issue: Whether the Oversight Board should have an Executive Committee and whether it should have operational authority to "direct, limit, or prohibit" activities of the Secretary.

Special Inspector General Issue: Whether there should be a new Special IG established within Treasury with respect to the operation of the Treasury facility.

Composition and ratio of Congressional Oversight Panel Issue: Size of panel and ratio of appointees: 2-1 from both House and Senate, with members to select a chair for a total of 7 members; or 1-1 from both House and Senate, for a total of 5.

Money market mutual fund provisions Issue: Whether to require immediate replenishment of Exchange Stabilization Fund by reconstitution the recently established money market fund guarantee program within the new facility approved by this bill.

Definition of "Financial Institution" - current definition covers financial institutions that are organized, regulated and have substantial operations in the United States. Issue: Whether to permit financial institutions that are "licensed," but not organized, in the United States.

Eligibility of assets held as collateral for loans to failed banks by foreign authorities Issue: Whether foreign authorities that have provided support to financial institutions against collateral will be permitted to participate.

Suspension of "mark-to-market" accounting Issue: Whether to include a provision stating that the SEC has the authority to suspend the application of mark-to-market accounting rules with respect to any category of issues.

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