Early this morning, Congress finally agreed on the wording of the bailout. CNNMoney.com reported the following provisions attached to the way the money is spent:
*The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury’s use. (After the initial $250 million, an additional $100 million can be released by the President. If after that more money is needed, Congress can re-vote on release of the remaining $350 million.)
*Curbs will be placed on the compensation of executives at companies that sell mortgage assets to Treasury. Among them, companies that participate will not be allowed to offer golden parachutes to executives; they will not be able to deduct the salary they pay to executives above $500,000.
*An oversight board will be created. The board will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director and the Housing and Urban Development secretary.
*Allow for the Treasury to receive the option to take ownership stakes in participating companies under certain circumstances.
*Treasury may establish an insurance program – with risk-based premiums paid by the industry – to guarantee companies’ troubled assets, including mortgage-backed securities, purchased before March 18, 2008.
Congress wanted to get the bill together before the opening of the Asian markets tonight. The Nikkei 225 opened $10 lower than Friday’s close, but then began a slightly hesitant ascent. How the bill’s finalization will affect our market’s opening tomorrow, or if anymore bankruptcies or downgrades will occur, is still up in the air. My guess is that there will be a sigh of relief across all sectors tomorrow but any real change will only happen after the bill is signed, sealed and the money is delivered.
Will Ambac (ABK) avoid a Moody’s downgrade before the relief comes through, and when the relief comes through, will it help ABK? Message boarders seem to think the price of ABK will skyrocket tomorrow, and the very late-day increase in ABK’s share price on Friday may have hinted belief that a weekend deal would in fact help ABK come Monday. But the “Moody Monster” is still lurking in the woods. Analysts are blaming a lot of the financial crisis on these ratings agencies for rating companies way higher than they deserved, therefore needing to make drastic corrective downgrades. On March 20, 2001, Frank Raiter, Standard & Poor’s former top mortgage official, said he was asked by S&P to rate a real estate investment he had never even reviewed. He told Bloomberg that he was told to “just guess” because the S&P was in competition with other ratings companies (possibly Moody’s?) for fees on a $484 million deal. It’s good that ratings are being revealed as little more than smoke and mirrors, but people still take ratings seriously, and a Moody’s downgrade of Ambac would devastate the company and its stock price.
And will the news of consensus on Capitol Hill save Wachovia (WB) from going bust before another bank picks up its fractions? Or will we remember Wachovia as the last big victim of the “credit crunch”? We’ll have to wait to see…
