‘Fundamental’ agreement reached on bailout
The power brokers in Washington just met for a photo shoot and gave some brief comments about the pending bailout that has dominated the news in recent days. After negotiations between both parties, Sen. Chris Dodd announced that they have agreed, in principle, to the principal amount. Got it? Here are the vague details that Dodd, among others, provided.
- Congress will give Paulson the money he needs (assumption: $700 billion)
- They have agreed on protecting home ownership (how?)
- They have agreed on executive compensation limits (this will be part of the terms of the bailout)
- There will be taxpayer protection (likely story)
- The federal government will get equity stakes in the form of warrants from the companies that participate in this bailout. (exactly how much, how this will happen has not been disclosed, nor agreed upon as of yet)
Thus far, there has not been consensus reached regarding who exactly will be covered under executive compensation limits (not giving golden parachutes to executives). Is it only the top officials from these companies, or will it encompass all executive officers, of which there are hundreds in the large Wall Street firms.
When will Wall Street get this money? Most likely the money will be paid out in installments. The mortgages and associated securities will be sold via reverse auction to the government. Pricing these assets is the tricky thing. Companies will need to write off these assets and most likely raise new equity (here comes…. shareholder dilution!).
Whether you think this bailout needs to happen or not, your opinion does not really matter. It will happen, and they will most likely be voting on the bill Friday or Saturday, according to many reports.There are still many items to negotiate and iron out, but things are progressing at a fairly rapid rate.