An early draft of the Dodd proposal is published on Politco
It provides for equity warrants that are intended to protect the taxpayer against losses.
There is a potential loophole because the early draft doesn't define how losses are calculated. Let me explain.
Let's take Washington Mutual as an example.
Let's say Washington Mutual needs to unload 10 times this quarter's loss in trash for cash to the Feds.
That's 40 billion. Let's say the feds pay the current "book value" and the stuff on average is trash mortgages that will lose 50%. This gives us nice round numbers, we pay 40 billion, we get back 20 billion.
We do as Bush said and hold to maturity . 28 years down the road the Fed closes out the transaction and is going to cash in those warrants for the losses. By golly just like Bernanke thought, we're going to make a profit because Wells Fargo acquired Washington Mutual and we get to buy stock in an amount a little bigger than our loss for the price the stock was 28 years ago.
Ah but not so fast main street. Because guess what...over 28 years, the half of the mortgages that paid off, paid off with interest. And as anyone who has a mortgage can tell you, the interest received by the government over 28 years more than made up for the 20 billion that we lost in 2009.
So the weak link in the bill was that it never explained how interest and principle payments expected over time for a security relate to the following section in the bill:
If, after the purchase of troubled assets from a financial institution,
3 the amount the Secretary receives in disposing of
4 such assets is less than the amount that the Sec5
retary paid for such assets
Maybe this is all obvious, but I can't help thinking of the gulf of mexico oil leases that accidently lost a section specifying larger royalties if the price of oil went above a certain price.