EESA Does It

The Senate voted yes, the House voted yes and finally, President Bush signed the Emergency Economic Stabilization Act of 2008 (“EESA”) into law on Friday. While there were a bunch of now-famous additions to the original proposal, the core remains the same. EESA establishes the Troubled Asset Relief Program (“TARP”), through which the Treasury will have up to $700 billion to purchase toxic mortgages, securities and related assets from financial institutions with significant operations in the US.

The variations on the original theme include: the government will take equity stakes in companies participating in the rescue; those firms participating in the program will agree to limited compensation for executives, barring golden parachutes; the administration must develop a plan to ease the wave of foreclosures through modifying loans acquired by the government, with the goal of preventing more foreclosures; Paulson’s spending decisions will be subject to strong oversight and judicial review; FDIC limits will increase to $250,000 from $100,000; and the law calls for a study of mark-to-market accounting for financial assets and invites the SEC to suspend the rule if it deems prudent to do so.

Apart from EESA, the omnibus financial recovery legislation includes the provisions from a bill known as the “Renewable Energy and Job Creation Act of 2008” that the Senate, but not the House had previously passed. The addition of these provisions to the legislation is widely perceived as ultimately having aided its passage by Congress. Highlights include: approximately $18 billion in tax incentives for clean energy; an increase of the AMT threshold; tax relief measures for those affected by recent natural disasters; extension of several business and individual tax credits and deductions that had or were set to expire at the end of the year; amendment of ERISA to establish parity for mental health treatment in the US health care system.

OK, that’s a lot of extra stuff, but many in Congress finally were knocked over the head with the severity of the problem when stock markets tumbled and credit spreads widened. As Republican Representative Paul Ryan of Wisconsin noted, many lawmakers realized that this could be a "Herbert Hoover moment, where he sat by and let a Wall Street crash turn into a Great Depression . . . There are times when free-markets stop and rational thinking goes out the window. It then isn't enough to be a laissez-faire conservative and let Rome burn . . . This bill is not perfect, but doing nothing is far worse than passing this bill."

At the end of the day, the economy can’t function when credit ceases to flow. If this bill helps that process, then we will all be better served. For those who seek revenge on that ubiquitous “greedy Wall Street fat cat”, it might be worth considering the following: if the crisis persisted and his net worth dropped from $25 million to $5 million, he still has $5 million and will be just fine. You on the other hand, could lose your job, watch your home equity erode, lose basic services from your town and if you are lucky enough to have a retirement account, you may see the value erode. Enough said? Now let’s get going and remember, EESA does it along the way.