The Paulson Bailout Plan, Version 4.0

There was the initial, 3-page proposal; the 6-page version of last Sunday; the grand compromise of Thursday, which lasted only a few hours; and now, as of this morning, a tentative agreement on a proposal that should be brought to a vote tomorrow. House Speaker Pelosi’s office issued a summary entitled “Reinvest, Reimburse, Reform: Improving the Financial Rescue Legislation,” which reads more like a set of talking points than a legislative proposal. But some of the major differences from the original proposal that have been reported on include:

1. Division of the $700 billion into effectively two tranches, with Congressional review of the second
2. Warrants on stock in firms participating in the bailout
3. Tax provisions intended to limit compensation for senior executives of participating firms
4. The ability for Treasury to use its power as the owner of mortgages and mortgage-backed securities to modify those mortgages on behalf of homeowners
5. An unspecified commitment that, if the taxpayers lose money on the deal, the losses will be made up from the financial services industry
6. Strengthened oversight, including an Inspector General, transparency of financial transactions, and some form of judicial review
7. An option for Treasury to offer mortgage insurance to financial institutions

#5 and #7 seem to be the main provisions added since Thursday.

It goes without saying that it is the details that matter. At a high level, the current proposal improves over the original in two main areas: oversight (#6), which was absent in the original, and taxpayer protection (#2 and #5), which was brushed off with the optimistic assumption that the government would buy assets at their long-term fair market value (whatever that is). #3 and #7 are sideshows; #1 probably is as well, although there is a small risk that this will reinforce the sentiment that the bailout is not big and decisive enough.

But that still leaves two huge open issues. First, as Simon and I discussed in an op-ed on Wednesday, there is the issue of the price: too low and no bank will want to sell; too high and the taxpayers will not get the warrants they deserve. Second, although the proposal will exhort Treasury to modify mortgages, it’s not clear how, or whether Treasury has to do anything at all. We’ll see what the final legislation looks like, but this could be a grand gesture intended for the electorate. If so, even after the current crisis of confidence is averted, the problem of repairing the direct damage of mortgage delinquencies and foreclosures will remain.

So, our provisional grades (pending the full bill):

• Restoring confidence in financial sector: B
• Recapitalizing financial sector: C
• Addressing underlying mortgage problems:D
• Preserving value for taxpayers: too vague to tell