Stiffening Spines on the Bailout

If banks want the government to bail them out, they will probably have to put something on the table. The New York Times reports that Senate Democrats are not rolling over when it comes to Henry Paulson's plan to assume almost total authority to spend or invest $700 billion in taxpayer funds:

The Senate Democrats' proposals includes two bold provisions. One would grant the Treasury "contingent shares" of stock in any financial institution that wants to sell bad debt to the government; the other would grant bankruptcy judges the authority to modify the terms of primary mortgages, a step aimed at helping homeowners at risk of foreclosure.

Senator Chris Dodd has put forward a proposal that fills in some of the accountability left out of Paulson's plan, and would give the federal government a stake in any company it provides capital to:

(c) LIMITATION ON AUTHORITY.—
(1) IN GENERAL.—The Secretary may not purchase, or make any commitment to purchase, any troubled asset unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased.

This is just what happened with AIG. You want our capital? Fine, we own you. As the Times reports, this is how Sweden bailed its banking industry in 1992:

But Sweden took a very different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.
Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.
That strategy kept banks on the hook and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

If the prospect of turning over the equivalent of five percent of GDP to one man wasn't hard enough to swallow, Republican recalcitrance is stiffening Democratic spines. Democrats don't want to be left holding the bag if GOP lawmakers don't line up behind the bailout. ABC News reports that Republicans won't line up without John McCain:

ABC News' George Stephanopoulos reports: If Republican presidential candidate Sen. John McCain doesn't vote for the Bush administration's $700 billion economic bailout plan, some Republican and Democratic congressional leaders tell ABC News the plan won't pass. "If McCain doesn't come out for this, it's over," a Top House Republican tells ABC News.

McCain's position isn't made easier by the disclosure that his campaign manager's firm was paid $15,000 a month through last month by Freddie Mac. The New York Times reports that Davis's firm (he owns an equity stake) "had been kept on the payroll because of his close ties to Mr. McCain."
The Hill reports that even Newt Gingrich is blasting the bailout:

Gingrich said he came out against Paulson's plan after looking at the absence of specifics and the focus the plan puts on giving such an enormous amount of money to the federal bureaucracy. "I thought if [Russian Prime Minister Vladimir] Putin had written that, I’d understand it," Gingrich said.

If Bush, Paulson and Bernanke want the money, they are going to have to put some oversight and some upside on the table.