The Economic Stabilization Act of 2008 is a government bailout plan to help struggling financial institutions. It authorizes the purchase of Troubled Assets worth up to $250 billion immediately and up to $350 billion after congressional certification. It would create an Asset Purchase Program overseen by Congress, the Comptroller General, an oversight board, and an independent Inspector General. It would also require the Treasury to take an equity position in participating financial institutions.
Financial crisis in 2008
The 2008 financial crisis is a global phenomenon that caused the collapse of the United States housing market and resulted in the loss of many jobs. It was caused by the failure of subprime mortgages and the over-leveraging of banks. These factors combined with a lack of oversight in the lending system caused the crisis to spread quickly and cause widespread damage.
The financial crisis has changed the way that banks are regulated. In the past, bank regulations focused on the health of a single institution. However, the current system of risk-based regulation fails to recognize the fact that multiple banks’ financial condition was at risk at once. As a result, the potential losses were severely underestimated.
The economic consequences of a financial crisis are very large and can affect a country for many years. A study by Cerra and Saxena (2008) using a panel of 190 countries found that peak output losses from financial crises are between 8% and 10% of annual GDP. However, this study was criticized for some of its statistical assumptions and did not take into account differences in length of the crisis across countries.
The Federal Reserve responded to the crisis by reducing interest rates to zero and launching a quantitative easing program that involved purchasing financial assets to stimulate the economy. This program, also known as the Troubled Asset Relief Program, was instrumental in stabilizing the economy. Its goal was to restore confidence in the commercial paper markets, which are critical to the functioning of the financial system.
Banks still need massive amounts of wholesale funding. For example, JP Morgan had commercial paper debts worth US$18m in 2006, and a US$133,000m long-term debt that rose to about PS177,000m by 2012. The same is true for Barclays, where PS177,000m in repurchase agreements were recorded in 2006.
Purpose of bailout plan
The Emergency Economic Stabilization Act of 2008, also known as EESA, authorized the Treasury secretary to purchase $700 billion in troubled assets to help restore financial stability. Originally proposed by Henry Paulson, this plan was a response to the financial crisis and was a step toward restoring investor confidence. It required the Treasury Department to buy troubled assets from banks and financial institutions and establish an auction system for private investors to purchase them.
The bill passed the House by a margin of 263 to 171, while the Senate version received a vote of 71 to 29. The Senate version was favored by small businesses and investors, as it added more protections for these groups. While many in Congress opposed the plan, most argued that it was necessary to act quickly to avoid further damage to the credit markets. In September 2008, financial markets around the world were severely contracted and many institutions were facing insolvency.
The EESA was enacted to help the United States counter the effects of the mortgage meltdown and prevent a complete financial collapse. However, the bill was criticized by some as a bailout for Wall Street. It was designed to provide assistance to struggling businesses and to restore investor confidence, but it was also criticised for being too vague, giving too much power to the treasury secretary, and not dealing with the immediate crisis and long-term effects.
Despite this growing consensus, the EESA still has a number of problems. The most glaring concern is that it is a subsidy to investors at taxpayer expense. Those who took risks to make profits are now bearing the costs of the losses as well. However, while the government cannot prevent the financial crisis, it can ensure that the financial industry continues to function properly.
Tax implications
The Stabilization Act is expected to affect the tax code in several ways. First, it would permit certain financial institutions to deduct losses from their investments in Fannie Mae and Freddie Mac. Second, it would allow certain financial institutions to opt out of certain accounting regimes and limit the amount of executive compensation they pay. Third, it would require the Secretary to carry out a program involving asset purchases.
The Emergency Economic Stabilization Act of 2008 includes many provisions aimed at helping the financial system and restoring liquidity. The Act also contains a number of important tax provisions. Foley’s Tax & Employee Benefits Practice has summarized some of the most important ones. The Act will affect tax returns for both the year 2008 and 2009, so it is imperative to understand how it may affect your financial situation.
In addition to the above tax changes, the Stabilization Act also requires the establishment of an opt-in insurance pool for financial institutions. In exchange for government guarantees of timely payment, these Financial Institutions will pay a risk-based premium. This will reduce the amount of income tax they owe.
The Act also changes the definition of “covered executive” under the Internal Revenue Code. The Act disallows deductions from covered executives of financial institutions whose remuneration is more than $500k. Additionally, it expands the definition of “golden parachute” to include payments to departing executives from troubled financial institutions.
CBO’s analysis
The CBO has released its analysis of the Emergency Economic Stabilization Act of 2008, which would establish a Troubled Asset Relief Program. It would give the Secretary of the Treasury the authority to buy, hold, and sell financial instruments to help stabilize the economy. The CBO report is available in pdf format.
The CBO warns that the nation is headed down an unsustainable path. The federal debt is currently at its highest level since 1950, and under current law it will reach an all-time high by 2034. Had the CBO not incorporated tax cuts and higher spending, the outlook would be even more dire. This is due to a structural imbalance between spending and revenues. Rising healthcare costs, an aging population, and interest costs all fuel spending growth.
While the Emergency Economic Stabilization Act of 2008 has been criticized as a bailout for Wall Street, the bill was designed to minimize the damage caused by the mortgage meltdown. It was designed to rebalance the economy and avoid a recession. Its main component, the Troubled Assets Relief Program, was intended to alleviate some of the economic damage that was caused by the mortgage meltdown.
House of Representatives vote on bailout plan
The House of Representatives is set to vote on the $700 billion bailout plan on Monday, a day before the Senate is scheduled to take up the plan. The measure, sponsored by President Bush, gave the Treasury wide authority to purchase mortgages and securities and other financial assets. It was hoped that this would stabilize the financial markets, and would help troubled banks, investment firms, pension plans, and local governments. However, Republicans and Democrats added conditions and restrictions to the bill.
The bailout plan’s aim is to get financial institutions lending again and free the market of toxic mortgage-backed securities that could cause borrowers to default on their loans. But if the credit markets lock up, it could have far-reaching effects on businesses and consumers alike. A credit crunch could lead to a slump in spending and investment. Economists expect increased layoffs in the U.S., and a steep rate cut by the Federal Reserve.
If Congress rejects the bailout plan, the Treasury Department will likely move to an institution-by-institution approach. This will allow it to take incremental steps to combat the financial crisis. However, this plan will not deal with the problems at the core of the financial system. The government is not prepared to take on all the risk associated with failed banks.
The $700 billion bailout plan has received strong opposition from lawmakers. While the proposal helped to stabilize the financial markets, it also sparked deep unease among lawmakers. It was an unprecedented government intervention in the private sector, and lawmakers were wary of its viability. As a result, the bill failed to pass in Congress.
