Senate passes $700bn bailout plan

The US Senate has passed the Troubled Asset Relief Program, the $700 billion bailout plan set forth by the US government to rescue the country’s financial system. Its move follows on the US House of Representatives’ rejection of the bill earlier this week.

The amended rescue plan was voted through 74 to 25 votes after changes including a temporary increase in the amount of bank deposits covered by the Federal Deposit Insurance Corporation from $100,000 to $250,000. The bill also set forth $150 billion of individual and corporate tax breaks. 

Under the plan, the US Treasury would be allowed to buy distressed assets, mostly securities backed by home mortgages. Among other points in the bill, taxpayers would get equity stakes in companies that benefited and the bill would also limit the pay of executives of companies that benefit. The US House of Representatives is expected to vote on the bill Friday.

Despite stock exchanges rallying on the news today, there were warnings over the adequacy and complexities of the plan. “The transfer process from bank to Treasury of bad assets is far from clear, nor is the mechanism for valuing these assets,” said Paul Niven, head of asset allocation at F&C Asset Management. “Overpaying for the assets is unattractive politically but would enable capital injections from the state. Underpaying will force further write-downs and further undermine the financial system.”

Last week, David Rubenstein, co-founder of The Carlyle Group, said he and other private equity players would be among the biggest buyers of the distressed mortgage and real estate assets set to be acquired by the US governments. Speaking on CNBC, Rubenstein said private equity would play a “significant” part in buying the troubled assets from the government.

The $700 billion bailout is being seen as a rescue similar to the creation of the Resolution Trust Corporation in 1989 in response to the savings and loans crisis.

Goldman Sachs’ Whitehall funds, JER Companies and Colony Capital were among firms that capitalized on assets subsequently sold at heavily discounted prices.