Last week during Tuesday Tax Time, thriveal posted a primer on the problems behind the current economic crisis.  This week we’ll look at the main provisions behind the Emergency Economic Stabilization Act of 2008, the latest government answer to our economic woes.  Bless them.

Here goes:

1.  This bill creates the Troubled Assets Relief Program (TARP), where the Secretary of the Treasury will have the ability to use Federal funds to purchase up to $700 Billion of private company financial instruments.  Currently, the financial instruments of focus would be the junk commercial and residential mortgage assets (i.e. Troubled Assets) held by many of the nation’s largest banks.  This part of the Act is initially set to expire on December 31, 2009, but could be extended for two years if needed.  Secretary Paulson has mentioned stepping down as the Secretary after the elections, so the next President will have a lot of control over this area and it’s continued use.  Essentially, a new market for these assets will be created.  The Secretary could buy and sell these assets on some type of market and incur gains and losses as a result.  Should the government incur losses due to these purchases (duh), TARP allows the government to recoup these losses from the companies petitioning the government to buy their junk assets. 

2.  From all of the recent turmoil in the economy, it has become apparent that the chief executives and management team of some of the largest Wall Street investment firms have continued to receive unusually large bonuses and pay while their company was going down the toilet.  This Act would restrict the executive pay (that is, the top 5 executives) of those companies that petition the federal government to purchase their troubled assets.  The restrictions are lifted again when the federal government no longer holds troubled assets of a particular company. 

3.  Though set to expire December 31, 2009, the FDIC deposit insurance limits have been raised from $100,000 to $250,000 on all depository accounts.

4.  This Act requires the President of the United States to submit to Congress (within 5 years) a plan to recoup any losses to the taxpayer due to the institution of TARP.

5.  The AMT has been indexed again for inflation, thereby helping millions of middle-income taxpayers avoid this “tax on the rich.”

That sums up most of the relevant provisions.  There are a lot of ambiguities in this act, and many experts don’t actually know how a lot of this Act will be implemented.  Our economy didn’t necessarily react with great joy (the Dow is still going up and down) when the Act was passed.  I think the market still needs to “correct” itself from prior poor decisions by big companies, so we are yet to see if all is well. 

Let’s hang in there and do good business for the next year or year and a half, and see who’s standing after the smoke clears.

Thanks, Jason M. Blumer

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