Congress is expected to pass the Paulson financial rescue plan that is now been converted from a hazy three pages to over 100 pages in the new bill called the Emergency Economic Stabilization Act of 2008 sometime today.

Emergency Economic Stabilization Act of 2008

Why do we need this bank bailout bill?

We’ll undoubtedly you’ve heard by now it calls for authorization for the Secretary of the Treasury to spend $700 Billion propping up financial institutions by offer to purchase their bad mortgage related securities in the hopes this will quell fears in the market, lessen the number of bank failures, and re-start bank-to-bank lending.

When banks are worried (so the story goes) about lending to each other, they certainly can’t stay afloat long since all the world’s fractional banking systems depend on interbank lending. Once a tipping point is reached, it’s only a matter of time before a lack of credit confidence seeps into the consumer and commercial sectors destroying the banking system entirely.

It’s kind of a domino effect…supposedly. Unlike a depositor ‘run on a bank’ which we remember caused the Depression Era banking crisis, today’s crisis comes from banks not trusting (and not lending to) other banks.

What’s in this bill?

You can see the bill yourself here.

Let’s see what the CBO…the Congressional Budget Office…says in their review,

“The legislation would, among other provisions, create a Troubled Assets Relief Program (TARP), under which the Secretary of the Treasury would be authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages issued prior to March 14, 2008. Under the legislation, the authority to enter into agreements to purchase such troubled assets would initially be set to expire on December 31, 2009, but could be extended through two years from the date of enactment upon certification by the Secretary that such an extension is necessary.

The bill would appropriate such sums as are necessary, for as many years as necessary, to enable the Secretary to purchase or insure troubled assets and to cover all administrative expenses of purchasing, insuring, holding, and selling those assets. The purchase price of all such assets outstanding at any one time could not exceed $700 billion (though cumulative gross purchases could exceed $700 billion as previously purchased assets are sold). Purchases would be limited as follows:

- Authority for purchases of $250 billion in assets would be available upon enactment;

- The authority would increase to $350 billion if the President submits to the Congress a written notification that the Secretary is exercising authority to purchase an additional $100 billion of assets; and

- The authority would increase to $700 billion if the President submits a report detailing a plan to use the remaining $350 billion in purchase authority; that expansion would be subject to a 15-day Congressional review for potential disapproval of the plan.

The bill would also enable the federal government, under terms and conditions to be developed by the Secretary of the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. The $700 billion limit would be reduced by the excess of obligations to net premiums, if any, under this insurance program.

To facilitate these activities, the federal debt limit would be increased by $700 billion. If, five years after enactment of the bill, the Director of the Office of Management and Budget in consultation with the Director of the Congressional Budget Office determines that the TARP has incurred a net loss, the President would be required to submit a legislative proposal to recoup that shortfall from entities benefiting from the TARP.”

Will Enacting the Emergency Economic Stabilization Act of 2008 work?

When I saw the TED spread ballooning out of control on the 17th…I knew we had a problem. Paulson saw this too and immediately began talking about a rescue plan. Would the TED spread have stabilized without Paulson opening his big yapper?

Maybe…but we’ll never know now since all the banks around the world are counting on the bailout. Why take a risk when the US Treasury will enter the market in a few days.

So now we do need it…like it or not…and it better work or things could get ugly in a hurry.

Good Luck!

UPDATE:The bank bailout vote today did NOT pass. The House Republicans blame Speaker Pelosi for coming to the floor earlier today with a bitter partisan speech. This blame game is why the Republicans could not muster enough votes to pass the measure. What was also interesting with this financial bailout vote was the huge number of Democrat that didn’t show up either.

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