The Bankwatch

Tracking the consumer evolution of financial services

Europe act smartly, but some additional information on the US bailout raises questions

The Euro governments have agreed on what appears a sensible plan to re-assure depositors, yet keep the pressure on Banks to sort themselves out.  Included are measures to ‘sanction’ institutions that need help, something the Americans had trouble with.

Europe agrees bank crisis action

Europe’s biggest economies have agreed to work together to support financial institutions – but without forming a joint bail-out fund.

French President Nicolas Sarkozy hosted the meeting of the leaders of Britain, Germany and Italy in Paris.

… …

Mr Sarkozy announced a series of allied measures – including unspecified action against the executives of failed banks.

He said the four had agreed that the leaders of a financial institution that had to be rescued should be “sanctioned”.

Speaking of the US supposed bailout, I think bailout is the wrong term.  It turns out the Troubled Asset Relief Programme (TARP) will be managed as a dutch auction.  The feds will offer cents on the dollar, and Banks will have the opportunity to accept.  This from Bloggingstocks.  Note who is involved and who gets $7 Bn in fees.

How will W’s Wall Street WPA (WSWPA) program work? It will hire firms such as Bill Gross’s PIMCO and Blackrock (NYSE: BLK) to manage a reverse auction to buy that toxic waste. Bill Gross bought $500 billion of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) bonds at distressed prices, “advised” the administration on its $200 billion program to nationalize Fannie and Freddie, and then profited handily when the bailout boosted the value of Gross’s bonds. Blackrock is already enjoying our tax dollars as the manager of the $29 billion in Bear Stearns assets which the Fed took on back in March. In total, WSWPA could generate $7 billion in fees (1% of the $700 billion to be spent) for Wall Street.

This is not a bailout of Banks – its a windfall for Wall St investment houses.

Here is an overview of the entire bill from ABC.  Its an astonishing list that has no focus at all.  Note that the all important tax break for rum makers in Puerto Rico and Virgin Islands which expired in 2007 has been successfully restored.

Here is an overview of some of the basics of the bill:

Buying Mortgages

The bill gives the Treasury secretary up to $700 billion to buy mortgages and other troubled assets owned by financial institutions under a new Troubled Asset Relief Program or TARP.

The Treasury Department will immediately receive $250 billion to begin the program.

An additional $100 billion will be provided if the president certifies that the money is necessary.

An additional $350 billion will be provided if the president certifies that the money is necessary and if the Congress approves of funding.

The bill also establishes a program to allow the government to insure, instead of buying, some troubled assets held by banks.

The bill establishes an oversight board to monitor the Treasury’s use of the funds.

Limiting CEO Compensation

The bill allows the Treasury to establish rules limiting executive compensation, bonuses, “golden parachutes” and other incentives at institutions participating in TARP.

Participating institutions will also lose certain tax benefits related to compensation.

General Tax Breaks

The Alternative Minimum Tax was originally intended to prevent America’s richest residents from using loopholes to avoid all taxes. Because the tax wasn’t indexed to inflation, Congress must regularly pass legislation that amends the AMT so it won’t snag some middle class Americans. The “AMT Patch” included in this bill will keep the AMT from hitting 20 million Americans.

There will be $8 billion in tax relief for Americans affected by natural disasters in the Midwest and Gulf Coast.

An extension until 2009 of an above-the-line tax deduction for college tuition. The deduction originally expired in December 2007.

An extension until 2009 of a property tax deduction for taxpayers who do not itemize. The deduction is currently due to expire at the end this year.

Tax benefits for businesses including the extension of a research and development tax credit that originally expired in December 2007 and tax breaks related to the production and use of renewable fuel.

Greater FDIC Insurance

The bill raises the Federal Deposit Insurance Commission limits from $100,000 per account to $250,000 account until Dec. 31, 2009. Supporters of the measure say it will prove especially comforting to small-business bank customers.

The same insurance increase applies to the National Credit Union Share Insurance Fund, which backs accounts at most of the country’s credit unions.

Other Provisions

The provision of $3.3 billion in funding for rural schools between 2009 and 2012.

The requirement that private insurance plans that offer mental health benefits fund those benefits to the same extent that they fund other medical services.

Tax benefits for commercial fishermen and others who received court settlements related to the 1989 Exxon Valdez oil spill.

An excise tax exemption for producers and importers of certain types of wooden arrows used by children.

The extension of a tax break for makers of rum in Puerto Rico and the Virgin Islands. The tax measure initially expired in December 2007.

Written by Colin Henderson

October 4, 2008 at 14:01

Posted in US

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