What Is the Rescue Plan?

What Is the Rescue Plan?
The Rescue Plan was devised and implemented by Treasury Secretary Paulson. However, when it was first presented at the televised Senate hearings it was only a three-page document requesting $700 billion dollars to be given to Secretary Paulson to be utilized as he saw fit, and without any conditions or judicial consequences.

Subsequently, both the House of Representatives and the Senate worked together to come up with a plan that (1) protected the taxpayers’ dollars; (2) imposed conditions on how the money would be spent by appointing an oversight committee, and (3) ensured that the CEOs would not be the recipients of billions of dollars while shareholders and stockholders lost everything.

Thus, the Rescue Plan became a 400-page document that was voted on, approved, and signed into law. The tenets of the plan, as presented by Congress, include:

* The Federal Housing Finance Agency, the firms’ direct regulator, appoints senior managers and oversees all operations. Chief executives have been dismissed and replaced with outsiders, who are to be paid significantly less.

* The federal government stands ready to inject money if either company is found to have liabilities that exceed its assets, an assessment to be made quarterly.

* Holders of debt in the companies, and of mortgages that they guarantee, are protected against losses.

* The companies will pay no dividends to owners of their stock, and the current shareholders, who now own 100 percent of each company, will have their stakes reduced to 20 percent, subject to further dilution if the government injects money.

* The government receives $1 billion worth of a special class of stock in each company that puts taxpayers’ interests ahead of those of any other shareholders.

* The companies will be prohibited from lobbying and other political involvement. Their charitable giving is being reviewed.

* Fannie Mae and Freddie Mac will increase mortgage funding between now and the end of 2009 to help stabilize the troubled housing and mortgage markets.

* Starting in 2010, they will be forced to reduce the volume of mortgages they fund by 10 percent per year for about 10 years, to reduce the risk the companies pose to the financial system as a whole.

* Officials expect Congress to restructure the firms before 2010.

* The government will also start a program to buy pools of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. The program is to be operated at the Treasury secretary’s discretion and an initial $5 billion worth of such purchases will be made in the coming days. That is likely to reduce the interest rates Americans pay on a new home loan.

Keep in mind that initially, Secretary Paulson wanted to buy all of the toxic mortgages held by banks here and abroad. Instead, at a meeting with the seven major countries (the G-7), they devised a new plan to infuse money into banks to afford them more liquidity. This would enable banks to lend to other banks and eventually lend money to businesses and individuals.

Since the plan’s execution, the market has still shown varying degrees of volatility. Globally, however, governments are working to restore their banking institutions by infusing billions of dollars into their banks in exchange for stocks.

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