Emergency Economic Stabilization Act of 2008

There are just so may discussions over the +ves and -ves of the Treasury plan to purchase USD 700 bn of distressed assets from US Banking system. Krugmandoes not like it, Mankiw is ok with it (see this as well). Robert Shimer doesnt like it and so do Douglas Diamond, Steve Kaplan, Anil Kashyap, Raghuram Rajan, and Richard Thaler. Mankiw also points to numerous other views and Bush’s reason. Rodrik points to another suggestion from Harvard Law Professor Lucian Bebchuk.

Amidst all these discussions, the draft of the plan is out. It is pretty nicely titled as Emergency Economic Stabilization Act of 2008. It has both summary and a skeletal draft of the Act. The summary says, apart from the USD 700 bail out the US Congress is trying to ensure that the funds result in some benefits for taxpayers. Plus there is a penalty if executives are given a golden parachute. They are also setting up an overseer of this plan.

Reading the draft gives some more interesting stuff:

Section 112. Coordination With Foreign Authorities and Central Banks.
Requires the Secretary to coordinate with foreign authorities and
central banks to establish programs similar to TARP.

I didn’t really get this. Have some economies asked for such a plan. Or is US Congress expecting such demand to come and is acting in advance? Time will tell. Then after a ban on short-selling (see this as well), they are considering suspensions on mark to market as well:

Section 132. Authority to Suspend Mark-to-Market Accounting.
Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.

Section 133. Study on Mark-to-Market Accounting.
Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.

Actually, I had made this suggestion partly in a report written on 5 Feb 2008:

In order to solve the valuation issues, may be the central bankers of the G-20 countries together with FASB, IFRS and BIS should work out a solution whereby the valuation should be frozen as on a particular date for these instruments and a lock-in period given for such valuations. The Central bankers should lend against these securities for a sufficiently longer period that will enable the affected banks to tide over their liquidity problems and start inter-bank and corporate lendings. This will in turn enable the bankers to have sufficient capital adequacy and will not force the bankers to shed their assets or restrict them from fresh lending.

The problem with mark to market was visual long back and why it took so much time to evaluate is a question mark. The problem has largely been lookig for market solutions when the market itself has collpased.

Now this is just the draft. Let us wait for the final release.

Addendum:

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One Response to “Emergency Economic Stabilization Act of 2008”

  1. Jason Says:

    Even the Financial Accounting Standards Board’s couldn’t figure out how to deal with the mark-to-market accounting shortly after the Enron debacle. Even the Arthur Andersen accounting firm had problems with it which led to its failure too. Enron filed for bankruptcy 2001. The Financial Accounting Standards Board’s has had 7 years and they did nothing. nomedals.blogspot.com

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