700 billion bailout plan on track after last minute alarums, amendments

Based on an AP story dated September 28, the New York Times has reported that Congressional leaders and the Bush administration reached a tentative deal early Sunday on Henry PaulsonHenry Paulson’s controversial plan to save the country’s financial markets from collapsing and plunging the economy into a depression.

While announcing the $700 billion accord just after midnight House Speaker Nancy PelosiNancy Pelosi said it still had to be put in writing for the different parties to give the final nod.

Treasury Secretary Henry Paulson has confirmed that an agreement has been reached, subject to fleshing out some details. Senate Republican leader Judd Greg has said that everything had been worked out and it ought to be possible to have the House vote on the measure on Monday. A Senate vote would come later.

Under the plan, the Treasury Department would buy the eroded mortgage-backed securities and other bad debts held by banks and other investors. Lenders would be able to make new loans and keep credit lines open. The government may be able to sell the discounted loan packages later to recoup its investments.

The House Republicans, who had revolted against the original Bush-Paulson plan, are expected to support the revised plan, which includes funds for a program that would encourage holders of depreciated mortgage-backed securities to keep them and buy government insurance to cover defaults. Paulson had earlier said that this was unworkable.

The legislation also limits severance packages for executives of companies that benefit from the rescue plan. Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a share in future profits, if any. Paulson had originally not supported this. The Swedish government had insisted, however, on a similar provision during the Swedish financial crisis of 1992.

Homeowners may benefit from the revised plan if the government successfully renegotiates the bad mortgages to lower monthly payments so that they can keep their homes.

To sum up, to some extent the Democrats have managed to add greater congressional oversight, more taxpayer protections, help for homeowners facing possible foreclosure, and restrictions on executives' compensation.

Conservative House Republicans, who had angrily revolted against the Bush-Paulson plan earlier, are now apparently mollified to some extent because they think the revised plan will require less taxpayer spending for the bailout.

An inbuilt safeguard is that only half the money, $350 billion, would be made available as soon as the president requested it. Congress could try to block later amounts if it believed the program was not working. The president could veto such a move, however, requiring extra large margins in the House and Senate to override.