House Passes Financial Relief Bill

The House passed the Financial Relief Bill today on a vote of 263-171. Now what???

Supporters of the bill pointed to provisions aimed at protecting the taxpayers. Companies that sell mortgages and mortgage-back securities to the government will be required to provide warrants to the government so taxpayers will benefit if the companies’ earnings improve. The bill also includes limits on golden parachutes and executive compensation for companies that participate in the program.

The bill also creates a government insurance program to guarantee troubled assets, an alternative sought by House Republicans.

The Senate added additional provisions, including a temporary increase from $100,000 to $250,000 in Federal Deposit Insurance Corp. coverage of bank deposits.

Most experts don’t expect there to be much of an instantaneous reaction in the credit markets, like there usually is for such things as a Fed rate cut. The passage of the package should provide some near-term stability in financial markets, but a good deal of uncertainty remains about the longer-term impact. There is a great deal of uncertainty relating to this program, including:

1) Due to the restrictions placed in the new bill, how many banks will choose to participate?

2) Since the distressed loan assets are going to be difficult to value, it may be quite awhile before purchaes of these distressed loans will actually take place.

3) Even if banks do participate, how willing will they be to make new loans into the economy if they can get rid of the bad ones

It is amazing to me the confusion as to what the soc-alled bail-out plan proposes to do. The assets which will be purchased are the distressed loans on the books of lending institutions. The loans are to be bought at their distressed values, which are much lower than their actual amount owed. The purpose of this is to provide fresh capital to the lending industry so that they can use it to make new loans.

The plan does nothing to relieve the lenders of their losses on these loans, as they will be paid only the low distressed value of the loans. They are not “bailing out” these institutions, as they will have to recognize the losses on their books when they sell them to the government.

The problem that this is designed to alleviate is the fact that money is simply not flowing within the financial system. Banks are not lending to each other, and are hoarding cash because of concerns about being able to remain liquid, because they can not get these old distressed loans off of their books.

I believe that passage of this bill was absolutely essential to provide stability to the credit markets.