Dodd Offers Counterpoint to Treasury Proposal

The Democrats’ response to a request from Bush administration officials to speed historic authority for the Treasury to buy up bad financial assets is taking shape, and as expected, the Democratic response is looking to tack on a few key measures. A 44-page draft of a proposal offered by Senate Banking Committee chairman Chris Dodd (D-CT) would expand the Treasury’s proposal by adding in a provision that would allow the government to take equity positions in the companies it bails out, according to a Monday report in the Wall Street Journal. The proposal also would seek to limit executive compensation for firms involved in selling their bad assets to the Treasury vehicle, tentatively named TARP, for the term “troubled asset resolution program” used by Treasury secretary Henry Paulson in introducing the plan on Friday. Read more about the Treasury proposal. Dodd’s draft would prevent Treasury from purchasing assets “unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased,” the Journal quoted from the proposal. Perhaps most importantly, Dodd’s counter-proposal contain language introduced by Judiciary Committee chairman Patrick J. Leahy (D-VT), that would restore the possibility of court review of a Treasury bailout; the original version submitted by Paulson sought to give the Treasury secretary unchecked ability to bail out financial institutions. House Financial Services Committee chairman Barney Frank (D-MA) signaled his support for the proposal being circulated by Dodd staffers Monday, according to a report by CQ Politics. ‘Lobbying hard’ HW’s sources on Capitol Hill suggested that industry lobbyists were pushing for provisions to be added to the bill that would protect financial institutions from the fallout of holding preferred shares in Fannie Mae (FNM) and Freddie Mac (FRE), which were seized by the government three weeks ago. “Essentially, if anyone can make an argument that something is going to prevent a bank from lending, they’re making it,” said the source, a lobbyist who asked not to be named in this story. “Everyone knows there is a short window to get anything added in, and they’re lobbying hard.” The American Bankers Association is clearly among those lobbying for members on behalf of preferred share exposure to the GSEs: the industry group said on Monday that nearly 27 percent of banks held preferred stock of Fannie and Freddie, while another 3.4 percent of banks hold auction-rate securities backed by the preferred stock. The average exposure to banks’ core capital was 11 percent, according to an ABA survey. “The negative impact on banks — particularly Main Street community banks — is far greater than the regulators first thought,” said ABA president and CEO Edward Yingling in a letter to the Treasury’s Henry Paulson and the four federal banking regulators. “The impact on capital from the Fannie and Freddie preferred stock write-downs will restrain even the best banks in this country from making new loans,” Yingling added. The lobbyist that spoke with HW also suggested that it was likely that Congress would seek to add a proposal that would allow bankruptcy judges to”cram-down” borrower debt in a bankruptcy case, as well. No such provision was in the Dodd proposal put forth on Monday. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.