The AIG Bonuses, Part 3:
H.R. 1586 and the Obama Administration's "toxic" asset liquidation program
23 Mar 2009 in Regulatory Economics, Regulatory Policy
This morning, Treasury Secretary Timothy Geithner announced the Obama Administration's plan for public-private partnerships to liquidate so-called "toxic" assets from bank balance sheets.
The proposal runs head-on into H.R. 1586, the bill recently passed by the House of Representatives that would impose confiscatory taxes on employees who are entitled to receive bonus payments in 2009.
The press release announcing the "Legacy Loans Program" notes that it will be funded by $75 to $100 billion in TARP funds. H.R. 1586 targets the employees of firms receiving more than $5 billion in cumulative TARP funds who have more than $250,000 in adjudged gross income. Both thresholds are arbitrary and could be lowered, either by the Senate, in conference with the House, or in future legislation.
Would firms participating in the Treasury's public-private partnership be covered by H.R. 1586? It is prudent for prospective participants to assume so.
Treasury says "private managers will retain control," but government oversight is promised to be "rigorous." Banks would identify the assets the want to sell. The Federal Deposit Insurance Corporation will review the asset to determine the amount of funding it is willing to guarantee. The asset then would be auctioned off to the highest bidder, meaning that private investors will set prices rather than the Treasury. Banks apparently have the option of refusing to sell at the market price. Banks might decline if, for example, they believe the market price is too low or the fee for the FDIC guarantee is too large. If the bank agrees to sell, private investors and the Treasury will each put up 50% of the capital.
If a sale is consummated, then the private buyer would "control and manage the assets until final liquidation, subject to strict FDIC oversight." How this would work in practice is not explained. It appears that any decision to liquidate assets would require FDIC approval. If this is true, it means the buyer can "manage" the assets but it cannot "control" them. The power of "control" is jointly held with the government.
The idea of the program is to enlist the private sector in price discovery. However, if the investment proves to be more profitable than expected, Congress may later decide that the price offered was too low. H.R. 1586 sets the precedent that Congress may hold employees financially liable for these decisions. In addition, Congress might decide (as the House proposes to do in H.R. 1586) to use the tax code to limit employee compensation or redistribute their income.
