Washington Tries to Wrap Up the Bailout

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• OWNERSHIP STAKES: Congress would give Treasury the ability to acquire ownership stakes in larger companies that sell it assets under the program, but the draft legislation indicates these will be nonvoting stakes, removing one objection raised by corporate lobbies. The bill would let the Treasury exempt from such ownership companies that sell it $100 million or less in securities.

• ELIGIBILITY: The bill also left the Treasury with a fair amount of flexibility in determining just which assets it will buy up, a subject of intensive lobbying throughout the week. For now, the Treasury is authorized to buy up mortgages and mortgage-related assets. That could include mortgage-backed securities, as well as the complex derivatives created on top of them, and the whole home loans that have not been securitized. Efforts by lobbyists to include securities based on credit-card, auto, and other types of loans were not successful, for now. However, Treasury officials say that they won the ability to ask for the authority to include nonmortgage related assets if the Secretary determines that doing so is necessary to ensure financial stability.

Also, financial institutions not headquartered in the U.S., including foreign central banks and other official holders such as sovereign wealth funds, will in some instances be eligible to participate in the program.

• OVERSIGHT: In addition to establishing an oversight board made up of Administration officials and congressional appointees, the bill would set up an inspector general's office and provide for regular public reports from the Treasury as well as regular audits—all measures designed to address concerns that Treasury's original proposal let it operate unchecked. Treasury would also be required to establish rules to minimize conflicts of interest, a specter raised by the prospects that the agency could hire Wall Street and commercial banks to help it value, manage, and sell assets held by similar and competing institutions.

But the legislation is still likely to give Treasury broad protections against litigation, allowing its actions to be set aside only if it has violated the law arbitrarily, capriciously, or through abuse of its discretion. Injunctions for non-Constitutional claims would be restricted in many cases.

• MODIFYING MORTGAGES: A measure strongly advocated by Democrats, which would allow judges to modify the terms of residential mortgages in bankruptcy proceedings, has been dropped. Fiercely opposed by business groups, the provision had persisted through some versions Saturday, but many believed it was kept on the table as a bargaining chip by Democrats.

Other elements, intended to help homeowners who face foreclosure or have trouble making mortgage payments, remained in place. But they are relatively vague. Much of that language boils down to requiring Treasury to do what it can to modify loans for struggling homeowners, or, in the case of mortgages controlled by the private sector, to do what it can to encourage relief for homeowners. The agency can also offer loan guarantees and credit enhancements to prevent foreclosures. Treasury officials say that the large ownership positions they will take in pools of mortgage-backed securities will give them much more leverage to push mortgage servicers to modify troubled loans than has existed so far. Under the voluntary programs that Treasury has backed to date, many homeowner advocates have complained that servicers have been far too slow to work with borrowers to help them renegotiate more affordable home loans.

"We'll have a lot of influence over securitizers and we'll encourage them to work through loans" to avoid unnecessary foreclosures, said one Treasury official.

• ACCOUNTING CHANGES: The bill also contained language that Treasury officials said "reaffirmed the Securities & Exchange Commission's authority" to suspend a key accounting rule, should the agency decide it is necessary, and directing the Government Accountability Office to study the proposal. The rule in question requires companies to "mark to market" many assets on their balance sheet, or to reflect changing market values regularly, rather than say, carrying them at the purchase price until sale.

Industry trade groups argue that this rule makes corporate balance sheets too volatile, obscuring the true value of companies and contributing to the shaky financial markets. The financial services industry had lobbied heavily to require the SEC to temporarily suspend the rule, but negotiators rejected going that far. Most accounting experts argue that the rule simply requires companies to reflect reality, and that eliminating it would leave investors in the dark as to the true worth of many companies.

Scott Talbott, senior vice-president of government affairs for the Financial Service Roundtable, said his industry would have preferred that the rule be suspended, but was encouraged by the call for further study. "This keeps the possibility alive," he said.