The Economic Rescue Plan

By now, it's likely that you've heard, almost daily, the term "Rescue Plan" bandied about. But, what is it, exactly? The Plan was initially devised by United States Treasury Secretary Henry Paulson. When initially presented before the U.S. House of Representatives, the entire document consisted of only three pages, requesting that $700 billion be given to the Secretary for utilization as he saw fit, without any conditions or judicial consequences. However, immediately thereafter, both the House and the U.S. Senate worked together to come up with an amended plan that would protect the taxpayers' dollars, impose conditions upon how the money could be spent by appointing an oversight committee, and ensure that corporate CEOs would not be the recipients of billions of dollars (euphemistically known as 'golden parachutes') while stockholders lost all of their holdings. Thus, the Emergency Economic Stabilization Act of 2008 (its official name) became a 400-page document that was voted on, approved and signed into law.

One of the main thrusts of the legislation was to address the critical state of the sub-prime-mortgage- and mortgage-backed securities markets and their ultimate meltdown. With the creation of the Federal Housing Finance Agency to be conservator over the ailing Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (commonly known as Fannie Mae and Freddie Mac, respectively), legislation is now in place to utilize bailout funds under strict governmental oversight. Some of the fundamental provisions include:

• The federal government stands ready to inject money into either company if it's found to have liabilities that exceed its assets, with an assessment to be made quarterly.
• Holders of debt in the companies, and of mortgages that they guarantee, are protected against losses.
• The companies will pay no dividends to owners of their stock; and the current shareholders, who now own 100 percent of each company, will have their stakes reduced to 20 percent, subject to further dilution if the government must inject additional money.
• The government receives $1 billion worth of a special class of stock in each company – stock that puts taxpayers' interests ahead of those of any other of the company's stockholders.
• The companies will be prohibited from lobbying and other political involvement, with past charitable contributions to be reviewed.
• Both companies will increase mortgage funding between conservatorship and the end of 2009 to help stabilize the troubled housing and mortgage markets.
• Starting in 2010, the companies will be forced to reduce the volume of mortgages they fund by 10 percent per year for about 10 years, to reduce the risk the companies pose to the financial system as a whole.
• Both companies are expected to be restructured by Congress before the year 2010.
• The government will also implement a program, to be operated at the Treasury Secretary's discretion, which will buy pools of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Initially, Secretary Paulson wanted to buy all of the toxic mortgages held by banks both in the United States and abroad. Instead, at a meeting with the seven major industrialized nations (the G-7), they devised a new plan to infuse money into financial institutions to afford them more liquidity. This action is hoped to have the effect of re-enabling banks to lend to other banks and, eventually, to begin again lending money to businesses and private individuals.