The Dodd alternative

THE DODD ALTERNATIVE…. Over the weekend, Paul Glastris had an interesting item, explaining the temptation on the part of some in Washington to line up behind the Paulson bailout plan, not necessarily because it’s wise or prudent, but because it seems like the only idea on the table to prevent the complete meltdown of the financial world.

To that end, the Washington Post’s Sebastian Mallaby explored some competing approaches to the Bush’s administration’s no-strings, no-questions, no-oversight $700 billion proposal, and this morning, Sen. Chris Dodd (D) of Connecticut, chairman of the Senate Banking Committee, took a big step in the right direction with a competing plan of his own.

The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn’t publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.

Dodd’s proposal also would create a five-member oversight board to supervise the Treasury secretary’s purchase and sale of distressed mortgage debt.

It would consist of the chairmen of the Federal Reserve, Federal Deposit Insurance Corp. and the Securities and Exchange Commission as well as two members from the financial industry designated by congressional leaders.

The board would be authorized to set up a so-called credit review company consisting of Treasury employees to study the soundness of the purchases. Under the plan, the government would be required to obtain an equity stake equal to the value of the debt that is purchased from the companies, including those whose shares are not publicly traded. The Treasury secretary would also be required to issue weekly public reports on the amount of assets bought and sold by the U.S.

Dodd is proposing to penalize executives who take “inappropriate or excessive” risks. The executive compensation and severance packages could be reduced if that is “in the public interest,” the proposal says. It would also force executives to give back profits they earned that were based on company accounting measures that are later found to be inaccurate.

The Politico has more on Dodd’s provisions, including extending authority to bankruptcy judges to restructure mortgages for homeowners facing foreclosure.

Paul Krugman described the Dodd proposal as a “major challenge” to the Paulson plan, adding, “Treasury should now be required to explain why this isn’t a much, much better way to do this rescue.”

Atrios added that “no proposal matters as long as the plan is to surrender when Mr. 24% stamps his feet,” which is certainly correct. Stay tuned.

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