After several days of 400 point swings on the Dow Jones industrial average, the failure of Lehman Brothers and the bailout of Bear Stearns and AIG, to describe the recent financial market situation as tumultuous is an understatement. In response to the situation the Treasury Department and the Federal Reserve have asked Congress to act.
Following a meeting last evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke regarding the Administration’s preliminary proposal to address the economic crisis Senate Majority Leader Reid announced of the Congress “we have all committed to working with the Administration, and we are all anxious to see their proposal within a matter of hours, not days.” Capitol Hill is already altering its calendar to begin considering this legislation as early at Tuesday.
Initial reports indicate that a body similar to the Resolution Trust Corporation which was created during the Savings and Loan bailout may be under consideration as the heart of the government’s plan. This body would use government cash to purchase illiquid assets from financial institutions. Depending on your position, there is likely opportunity or danger in the structure of the law that is about to be crafted.
Things to consider:
· Early indications point to a desire by the Treasury to hold financial instruments in this body “to maturity.” However, the legislation could provide for circumstances where private sector groups are able to purchase highly undervalued assets from the new government in entity.
· Provisions are already being considered that have traditionally been blocked due to the objections of the financial industry. Certain bankruptcy, consumer protection, and regulatory provisions may be added to this bill that the financial industry will not block or fight.
· Due to the long term financial implications of the bailout, certain targeted “revenue raisers” could be added to the legislation. Industry sectors seen as insulated from the turmoil or benefiting from windfall profits (e.g. oil and gas companies, certain government or military contractors, “raider” funds) could be singled out for tax increases.
· Some talk is being heard of additional or floundering legislative items being added to this fast track bill. Certain “stimulus” items, infrastructure, and energy provisions could find their way on to the bill.
The federal government affairs group is following these developments closely.