Information on the Economic Stabilization Package

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008. The law authorizes the government to spend up to $700 billion to purchase troubled assets from financial institutions. Below is a summary of the Act’s provisions.

Economic Stabilization Provisions

• Purchase of troubled assets from financial institutions. The secretary of the Treasury can purchase "troubled assets" from financial institutions. The law does not mandate how the asset purchase program will operate; instead, the secretary has 45 days from enactment of the law to issue criteria for choosing troubled assets and guidelines for pricing and purchasing them as well as selecting asset managers. Also, the secretary must buy the assets at the lowest price available and maximize return on assets to the government.
  
  
• Funding limits. The law authorizes a total of $700 billion for the asset-purchase program, subject to additional reviews and approvals, with an initial outlay of $250 billion. Another $100 billion will be made available if the President certifies that it's needed. For any funds beyond $350 billion, the President must notify Congress, and Congress has 15 days to disapprove by enacting a Joint Resolution.
  
  
• Recoupment. Five years after enactment the President must submit to Congress a proposal for recouping any losses incurred under the asset purchase program from those institutions that benefited from the program. This could take the form of some sort of tax or fee on the financial industry as a whole.
  
  
• Insurance program. If the Treasury purchases troubled assets, it must establish a program to guarantee mortgage-backed securities issued before March 18, 2008 — but it does not have to guarantee any assets directly. Instead, financial institutions that participate in this insurance program would pay risk-based premiums into a Troubled Assets Insurance Fund.
  
  
• Ownership stake for taxpayers. Financial firms that take advantage of government rescue funds would have to grant the government warrants for shares of stock, so that taxpayers could benefit if the companies return to profitability. If the government has not recovered its money through asset sales within five years, the President would have to submit a legislative proposal to impose a fee on the financial industry.
  
  
• Oversight. The law employs several ways to oversee the Treasury secretary's actions, including an Oversight Board (comprising the heads of the Federal Reserve, Federal Housing Finance Administration, Securities and Exchange Commission, Department of Housing and Urban Development, as well as the Treasury secretary); the inspector general; a Congressional oversight panel; and judicial review.
  
  
• Homeowner assistance. As part of the asset-purchase program, the Treasury secretary must develop a plan to maximize assistance to homeowners and minimize foreclosures. This plan must also encourage mortgage servicers, or companies that service large mortgage pools, to participate in the federal Hope for Homeowners program, which assists homeowners who can no longer make their mortgage payments.
  
  
• Limits on executive compensation. The law establishes standards on executive compensation that apply to financial firms that participate in the program. The standards: (1) Seek to prevent compensation that encourages or rewards excessive risk taking; (2) require the recovery of incentive compensation based on meeting certain measures, if such measures are later found to have not been met; and (3) prohibit "golden parachutes" for top executives at a financial institution that participates in the program while the Treasury holds an equity interest in the institution.

Other Provisions of the Economic Stabilization Act

• Temporary increase in deposit insurance coverage. The law temporarily increases FDIC protection for bank, savings and loan and federally insured credit union deposits from $100,000 to $250,000 on insured deposits. The increased coverage ends on Dec. 31, 2009.
  
  
• Alternative minimum tax (AMT) adjustments. The AMT, an extra tax some people have to pay on top of the regular income tax, was originally intended to prevent those with very high incomes from using special benefits to pay little or no tax. Since then, the AMT has gradually applied to a greater number of taxpayers at lower income levels and who don't claim numerous deductions or special tax benefits. The law increases the income threshold and exemption amounts at which people are affected by the AMT. It will also allow personal credits against the AMT.
  
  
• Qualified tuition deduction. The Economic Growth and Tax Relief Reconciliation Act of 2001 created a tax deduction for qualified higher education expenses for people within certain limits of adjusted gross income (AGI), but it expired on Dec. 31, 2007. The law now extends it through 2009.
  
  
• Midwestern disaster area tax relief. The law provides tax relief for victims of severe weather-related disasters in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin. These include FEMA-declared disasters involving floods, severe storms, and tornadoes that happened between May 20 and Aug. 1, 2008. Of particular interest to TIAA-CREF institutional clients are provisions in the law that affect both home purchases and loans involving withdrawals from qualified 401(k) and 403(b) plans or an IRA.
  
  
• IRA rollovers. The Pension Protection Act of 2006 allowed taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations. This tax benefit expired on Dec. 31, 2007, but the new law extends it through 2009. (It affects only distributions made after Dec. 31, 2007.)