Here’s an update by Michael Steinberg – Click Broker – on the changes Senator Dodd and Congressman Frank would like to see in the Bailout Plan. 
Senator Dodd Radically Restructures Paulson’s $700B Plan
The New York Times columnist Floyd Norris provided the best critique of Treasury Secretary Paulson’s mortgage related security bailout plan: "Will a Crisis Create a Scandal?" Some of Floyd Norris’ issues are being addressed by the team of Senator Dodd and Congressman Frank. Bloomberg’s "Dodd Proposes Giving U.S. Equity Stake for Bad Debt" reports that the Democrats are insisting on creating a controlled framework around bazooka 2.
It appears that unlimited authority is a non-starter this time around. Dodd wants a five member oversight board consisting of the chairpersons of the Federal Reserve, FDIC and the SEC, as well as two financial industry representatives designated by Congress. This should not be much of a problem since Paulson already controls Bernanke, and the FDIC and SEC have not acted independently despite their rhetoric. Dodd also wants weekly reporting of the amount of purchases and sales. How much detail to be revealed is not clear.
Here’s the real kicker: Dodd is totally redefining the structure and objective of Paulson’s plan. Instead of selling toxic waste for cash, the banks (and almost anyone else) would be selling equity and giving the Treasury toxic waste for free as the transaction fee. Dodd wants the Treasury to receive an equity stake equal to the value of its toxic purchase, or senior debt in the case of non-public companies. This amounts to nothing more than the sale of equity to the government.
Adding to the punishment, Senator McCain wants executive compensation limited to the President’s salary ($400K) for firms that participate. I’m sure Paulson is worried that if the punishment is too tough, no banks will participate. My how Paulson’s concern for moral hazard has changed since Morgan Stanley (MS) and Goldman Sachs (GS) began being targeted by the wolves.
I fully agree with Dodd’s call for tight oversight and frequent reporting, and McCain’s salary cap. I would like the reporting by type of asset and counter party. The context of selling equity to the government could work if the toxic waste transaction fee is lowered to 20% to 50% of the deal.
In "Can Paulson Add $700B Worth of Value to the Mortgage Market?", I discussed the need for mortgage modifications to be an integral part of the Treasury adding value to the toxic waste it acquires. I hope the Democrats do not cave in on this.
Updates:
Since I originally posted, I obtained a link to Dodd’s “Discussion Draft” through Politico. The equity that the government would receive is in the form of contingent shares. The contingent shares vest when the government sells a bank’s mortgages or related securities at a loss. The vesting rate is 125% of the dollar value of the loss.
The contingent shares could present an accounting and legal nightmare. The vesting period is indefinite, so companies would have to estimate dilution, vesting and retirement. The Treasury would also have quite a job of tracking individual lots back to sources, and insuring fair treatment.
The draft also states the securitization pools shall be purchased with sufficient ownership to modify the underlying mortgages (to the extent practical).
No disclosures.
