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Congressional Update on "Bailout" Legislation

September 24, 2008

We are closely monitoring and evaluating developments related to the financial institution "bailout" legislation being debated on Capitol Hill. In addition to the high-profile hearings conducted over the last two days, Senate and House leadership have been involved in constant negotiations, most of which are out of the public eye, trying to craft a legislative proposal that will be acceptable to constituents and the Administration. Signals from leadership and the Administration suggest that passing legislation is a must and in the best interest of the United States. We expect this to be the theme of the President's address to the nation tonight at 9:00 P.M. ET, the success of which may influence the direction of the negotiations. As we have done with respect to the congressional hearings, we will closely monitor the President's comments and provide an analysis if appropriate.

Today, the congressional debate over the legislation focused on several key points.

1. "Selling" the $700 Billion.  The impact of constituent calls and critical media coverage on Capitol Hill cannot be overstated. A cadre of rank-and-file Members lined up before the House Committee on Financial Services to echo the confusion and frustration being voiced by constituents. The result is that an overwhelming majority of Members have become increasingly hostile to the Treasury proposal. Secretary Paulson began the process of winning the public relations battle today by assuring Congress that this is not a spending plan, but the purchase of assets that will have resale value and will be the single best thing the government can do for the American people. The clear signal from House and Senate leadership is that something must be done, meaning Members must coalesce around a legislative vehicle.

2. Movement on Executive Compensation and Other Protective Measures.  In the Senate Banking Committee hearing yesterday, Secretary Paulson was singularly focused on swift passage of his proposal. While this remains his primary objective, he noted in his testimony today that Congress and the Administration must find a way to address executive compensation in the legislation without jeopardizing the overall plan. Additionally, Secretary Paulson expressed the need for Congress and the Administration to work together over the next few days to get the right balance of congressional oversight and judicial review. Secretary Paulson, however, did push back on congressional pressure to include language that would allow bankruptcy judges to rewrite mortgages.

3. Enhanced Oversight.  Members - emboldened by constituent discontent - were vocal about including "protective" provisions in the Treasury proposal. Some of the proposals offered to strengthen the plan included broad oversight of the asset purchase plan and condensed reporting requirements to Congress; some degree of judicial review; eliminating Treasury's proposed carve-outs for contracting procedures; foreclosure avoidance and mitigation efforts; fast-track authority for future corporate governance reforms; and the inclusion of an equity program in companies from which Treasury makes a direct purchase.

4. Potential Alternatives?  Members noted that the Treasury plan is not the only viable option at this juncture. Congressional Budget Office Director Peter Orszag testified before the House Budget Committee today on the heels of a report released by his Office that implied that $150 billion of capital investments in financial institutions might be a viable alternative to the asset acquisition plan, though it noted numerous problems with the capital investment concept as well. Another widely proposed suggestion was a phase-in authorization for the Treasury whereby funds would be released in tranches. In the days ahead, Members not committed to the Treasury plan may begin to adopt and promote some of these alternative proposals.

5. Future Regulatory Reform.  Political support for regulatory reform is broad and deep. Virtually every Member—along with both Secretary Paulson and Chairman Bernanke— stressed the need for an immediate overhaul of financial markets to repair a broken system. Regardless of the timing and terms of the "bailout" legislation currently being negotiated, all must expect a serious and prolonged effort on the part of government to impose regulations on sectors of the financial industry, which just a few months ago would have seemed draconian. Although we expect that regulatory reform will be broad-based, a clear trend in the rhetoric has been a strong call for regulation of hedge funds and derivative/alternative investment strategies. Additionally, calls for SEC jurisdiction over the $62 trillion credit default swap market continue to be coupled with demands for significant disclosure obligations for money managers.