ALERT: Discussion Draft of the Bailout Bill

This post refers to the Client Alert produced by Public Law and Policy. Read the full alert here.

For questions regarding this alert, please contact—

• David Carlin, 202.887.4133, Washington DC

What follows is a summary of the alert:

On September 28, 2008, congressional leaders began circulating a new draft of the proposal to grant the Treasury secretary broad authority to purchase up to $700 billion in mortgages, mortgage-backed securities, and other troubled financial instruments from financial institutions.  The draft bill, which is titled the Emergency Economic Stabilization Act of 2008, includes many of the key provisions contained in draft proposals circulated last week by Senator Christopher Dodd (D-Conn.) and Representative Barney Frank (D-Mass.), Chairmen of the Senate Banking and House Financial Services committees.  For example, the new draft requires the Secretary to receive stock warrants or senior debt instruments in return for direct purchases of troubled assets of a financial institution; mandates limits on executive compensation for participating financial institutions; and includes numerous oversight mechanisms.

There are also key differences between the new draft proposal and prior versions.  For example, the new proposal permits Congress to decline to authorize the final $350 billion of the plan; grants the Secretary authority not only to purchase troubled assets but also to guarantee assets held by financial institutions; and omits a key provision included in earlier proposals that would have granted bankruptcy judges authority to alter the terms of residential mortgages.  As these recent modifications illustrate, the situation remains fluid as Congress and the Bush administration continue to negotiate the terms of the bailout legislation.  Therefore, the final version of the legislation may contain yet further changes.