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The Dodd Bailout Proposal

posted by Adam Levitin

Senator Christopher Dodd is apparently circulating an alternative bailout proposal to the Treasury's. I haven't found a link to the draft legislation, but purportedly it A link to the bill can be found here. It would require financial institutions to give up $1 in equity for every $1 in Treasury funds they take to ship off MBS. In other words, the price for the bailout will be dilution of shareholders (which will function as an economic penalty on many employees and especially executives of the financial institutions). The Dodd proposal would also create a much needed oversight mechanism and would allow qualified homeowners to modify mortgages in bankruptcy. (A separate blog about that later, perhaps).

We've already established that the cost of a federal bailout is dilution (Fannie/Freddie, AIG), so dilution shouldn't raise a lot of eyebrows at this point. Having not seen the full proposal, it's hard to say a lot, but if that is the only difference from the Treasury's plan, that is a huge improvement. It imposes a real price on institutions that want government assistance, and that price is commensurate with the scope of the assistance in dollar amounts, although not necessarily in value to the institution. Personally, I think a $1/$1 across the board dilution could be strengthened--why not $2 of stock for every $1 of Treasury funds for more hard pressed institutions, and something like $5 to $1 for the most troubled ones. These are the institutions, after all, that are most in need of equity capital.

The oversight mechanism in the Dodd proposal strikes me as rather weak, but compared to the Treasury proposal, it is the very model of a modern inspector general.
Now that I've seen the oversight details of the Dodd bill, they look reasonable at first glance.

Here's a link to a House version of the (not yet introduced?) bill.

Comments

That's not working for me, but this is a link to the draft House bill:

http://www.politico.com/static/PPM111_080922_treas_grim.html

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