Update8: It’s done, both chambers have approved the updated bailout bill that contains a ton of other stuff… House Republicans got what they wanted. Bush just signed it.

Update7: The Senate will vote today, after sundown in observance of Rosh Hashanah, on a tweaked version of the bailout bill that the House rejected on Monday. There are a couple changes to it, none of which really affect the terms of the bailout itself but could sweeten the pot for House Republicans:

• The FDIC insurance limit to be raised from $100,000 to $250,000.
• Renewable energy tax incentives for individuals and businesses - this is something the Senate hopes will help get some House Republicans on board. (details)
• Alternative Minimum Tax relief.

Update6: The bill didn’t pass the House. Back to the drawing table, lawmakers are working on a new bill.

Update5: The details of the agreed bailout bill have been released and they are:

• As mentioned earlier, the $700 billion would be disbursed in stages with $250 billion made available immediately.
• If the Treasury pays fair market value and if they overpay, the President would have to propose legislation to recoup the loss from the financial industry. The Treasury could also take ownership stakes in bailed out companies.
• The government can adjust the mortgages that it takes over.
• Executive compensation for firms that participate will be capped and companies can’t deduct any pay above half a million dollars. No golden parachutes for the top 5 executives of a company that goes into bankruptcy or if they fire those executives.
• There will be two oversight board. The Financial Stability Oversight Board would protect taxpayers and the economic interests of the company. It will include the Fed chairman, the SEC chairman, the Federal Home Finance Agency director, the HUD secretary and the Treasury secretary. The second board is a congressional oversight panel that would review the state of the market, regulatory system, and the Treasury’s use of the funds. That panel would consist of 5 experts appointed by House and Senate leaders.
• The Treasury must also establish an insurance program, with premiums paid by the industry, to guarantee the assets that were purchased before March 14th, 2008.

All that remains is the vote in both chambers and the President signing the bill. Whew.

Update4: A deal has been reached and all that remains is to put it on paper. The plan, according to a release by Speaker Pelosi’s office, stated that the plan “gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full — if other protections have not actually produced a profit.”

The $700B would be broken up into three phases: $250B available immediately, $100B “upon report to Congress,” and the last $250B available upon Congressional action. There are additional details in the WSJ article.

Update3: It appears as though the once 3-page bailout bill has now gotten up to 102 pages but progress is being made and now the ETA appears to be Sunday. I don’t know about you but for once I’m glad a bill swelled in size, the thought of $700B in spending passed in a mere three pages was a little disconcerting (not to mention there was no oversight!).

Update2: Uh oh, looks like there have been some problems. From the front page of CNN: “Sen. Richard Shelby, ranking Republican on the Senate Banking Comittee, emerged from the White House to declare of the bailout plan: ‘It will not solve problems, it will create more problems.’” Yikes! But it sounds like only the House Republicans are having problems with it…

Update1: Reports are coming in that an agreement in principle has been reached. According to the Wall Street Journal, the $700B package would come in installments with $250B available immediately with $100B to follow as necessary. The balance would be doled out as needed and Congress can block it. Word is that executive pay for bailed out firms would be limited, the government would get a stake in the companies, and most other major issues are resolved.

Original: If you’ve been watching the news, you’ve probably heard of this massive $700B bailout bill that Henry Paulson, the White House, and Congress have been arguing over for the last week. Republican presidential hopeful John McCain suspended his campaign yesterday and threatened to cancel Friday’s debate unless a bailout bill agreement was reached. Both candidates will be heading to Washington today to get in the way and take photographs.

Last night, President Bush gave an address in which he proposed “that the federal government reduce the risk posed by the troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending.” and that “Our entire economy is in danger.”

My eyes have popped out of my head for the fourth time in two weeks at the numbers being thrown around… it’s like each bailout is trying to top the prior bailout. This time it’s seven hundred billion dollars.

What’s In The $700B Bailout Bill?

The Treasury wants the authority to buy up to $700 billion in “troubled assets.” In reality, the proposal wasn’t much more than that and took up a mere three pages. At first, that proposal included language that gave the Treasury complete authority with no oversight from anyone (for the first time in history, I’m happy Congress was designed to move “deliberately”). Fortunately that was scrapped and oversight was included in future versions. Here are other provisions the Democrat Congress wanted included:

• Curb executive pay at companies that sell assets to the Treasury (something the White House agrees to),
• Let the government have the option of taking an equity stake in companies that participate (news reports say this has been incorporated into the final bill),
• Require the government to encourage foreclosure prevention for the troubled loans it purchases.
• Allow bankruptcy judges to rewrite mortgages for consumers nearing foreclosure (this is a “nonstarter” for Republicans and unlikely to make it into the final bill).
• Proceeds the government gets from the bailout to to a fund to pay for housing for poor families (Republicans don’t like it, they see it as a backdoor means of funneling money to liberal political groups, so it likely won’t make it either).

As of this morning, they’d gotten close to reaching an agreement. This page will update as more details emerge.

Why Do We Need This?

Why is this bill necessary? Our financial system depends heavily on financial institutions being able to lend money to one to one another. When you deposit $100 into a savings account, the bank can lend 90% of it away to borrowers (car loans, mortgages), to other banks, and to the government (Treasuries). If they lend it to another bank, that bank can in turn lend around 90% of it and if it lends it to another bank, that bank can lend 90% of that. So your $100 turns into far more when it flies around in the economy and that has fueled our tremendous growth.

What role does bad mortgage debt play and why do we need a $700B+ package to buy up this bad debt? The simple explanation is that financial institutions no longer trust one another. Let’s say I lend you money and you put your house up as collateral. If you default, we could always sell your house and I can get some of my money back. If we’re suddenly in an economic environment where your house could be worth far less than what your appraisal says… I’m going to slow down and maybe not lend you as much money (or none at all). That’s kind of what’s going on now. With all the bad debt rolled up in good debt, financial institutions don’t trust one another and that’s why it could cripple our economy.

Why is it better to shift the debt off a company’s shoulders and put them on MY shoulders? That’s an excellent question and I don’t have a good answer for you. We will have to see how the plan goes forward to really know but I believe the reasoning is that the bad debt can improve in the long run, much like how housing prices will go up in the long run, and the U.S. Government can wait that long. Ultimately, the belief is that this bill will infuse life in the same financial markets that have fueled prosperity in the last few decades and I think that helps everyone (but we’ll have to see!).

This is similar to the logic behind the AIG bailout. AIG had its credit rating reduced, forcing it to raise collateral in a short period of time. The government swooped in to keep AIG solvent and took an 80% piece. From what I’ve read, AIG’s subsidiaries were all profitable, it was just a short term liquidity issue. Is that the whole story? Who knows, that’s just what I, and everyone else, read in the newspapers.

As news breaks, I’ll keep this post updated.

Please watch this video.

If you haven’t registered to vote, please register to vote. It really takes only a few minutes to register and you’ll only have to do it this once. Either go to MTV’s Rock The Vote or Voter Information via Google Maps (or your state’s election website) and register right now. The deadline is coming up soon (in some places, it’s as soon as October 4th) and you can always change your mind about actually voting. If you don’t register, you cannot vote and not even having the option is a sad thing.

Unlike all the emails you write to your friends or the arguments you have with co-workers around the water cooler, you actually get heard when you cast your vote.

One of my friends has been asked to be on a jury multiple times in the last few years (I don’t know the exact details) and was wondering how she could potentially be legitimately excused. Turns out, it’s not as difficult as it sounds (neither is fulfilling your duty, as most people don’t get selected for juries).

Rule #1: Never lie. Don’t be a fool, the odds say you’ll just have to sit in a room and waste a day watching news, don’t make things worse by lying. Plus, most places will let you bring a computer into that waiting room so bring one or a book or something semi-productive to do instead of watch TV. It’s not that bad, plus you get lunch.

So, still want out?

Exclusion Rules

Each jurisdiction has its own rules for exclusion (here is a list of links to all the Jury Plans for counties in Maryland), and in Baltimore City, where my friend lives, the potential exemptions are:

• aged 70+,
• elected official of the federal legislative branch,
• active military, or,
• organized militia.

There are also potential disqualifications (the potential pool is taken from voter registration, MD Driver’s Licenses, and MD ID cards):

• not a US Citizen,
• not an adult (less than 18),
• not a City resident,
• cannot comprehend spoken English or cannot speak English,
• cannot comprehend written English, read English, or write English well enough to fill out forms,
• disabled with documentation by a health care provider,
• convicted of a crime and imprisoned for more than 6 months (w/o pardon),
• pending criminal charge with the potential for a sentance of 6 months+,
• dead.

Other Tactics

If none of those exclusions or disqualifications is true, there are other ways to try to get out of jury duty (or at least avoid being selected).

Economic Hardship: In some jurisdictions, you can be excluded from jury duty if you can show economic hardship using proof of employment, wages and tax returns. If you own and operate a business or derive a significant amount of your income as a contractor, you could claim that you are losing income by virtue of not working. It’s harder for those on a salary but you could show how closely your income is to the your expenses and try to convince the judge that way.

Change of Date: Request a change of date if you are sick, going out of town (vacation, anyone?), have children and can’t get daycare, or some other compelling reason. If you can’t get out of it, at least try to get it rescheduled at a time that’s a little more convenient for you. Some sites recommend postponing it until December, when trials are more likely to be delayed or moved.

Act Smart: I don’t like the advice of some to pretend to have preconceived or racist notions in an attempt to get disqualified, but I do like the idea of acting smart or analytical. Lawyers like people they can persuade and people who are too attached to the facts and not easily persuaded are dangerous to both sides.

Jury Veto: This is sort of the nuclear option… a jury veto (also known as ‘jury nullification of law’) is where you can vote guilty/not guilty on the basis of your belief that a law is wrong or improperly applied. So the person could be guilty of the crime in your mind but you could vote not guilty on grounds of jury nullification. Neither the defense nor the prosecution will tell you about this right, as they don’t want you to know, but if you mention it you will probably get excused.

Some more resources:

• Mental Floss’ How to Get Out of Jury Duty
• Wicked HowTo’s How To Get Out Of Jury Duty: My Story, How I Did It.
• Ask Men’s How To Get Out of Jury Duty

Hope those tips help!

(Photo: jasonunbound)

What do you think about paying your kids to get good grades? How’s fifty bones for an A sound? That’s right, fifty dollars seems to be the going rate for an A. B’s will cost you $35 and a C forces you to give up that portrait of Mr. Andrew Jackson in your wallet or purse.

Now, what do you think about the state or school district paying kids for good grades? A Chicago public schools pilot program is doing just that. And the pilot program has a clever name too - Green for Grade$:

Up to 5,000 freshmen at 20 Chicago public high schools will get cash for good—and even average—grades as part of a new, Harvard-designed test program that city education leaders are rolling out Thursday.

Students will be measured every five weeks in math, English, social sciences, science and physical education. An A nets $50, a B equals $35 and a C still brings in $20. Students will get half the money upfront, with the remainder paid upon graduation. A straight-A student could earn up to $4,000 by the end of his or her sophomore year.

I think it’s an idea worth investigating and a pilot plan is a good way to do it. The $2M in funds come from private sources, so it’s not taxpayer money, and this is the type of plan that you can’t dismiss or accept without testing it out.

Some don’t like the idea of paying students for performing well in school because it sends the wrong message. I think it sends the right message. Many student work hard in high school because they see it as a stepping stone for college or a vocational school. They work hard in college or a vocational school because those good grades and skills will get them a job. That job will pay them. That pay is in part dependent on their grades in school. This simply shifts the incentive earlier and gets students engaged at a point where a difference can be made. They will work hard to get better grades so they can get paid for it today, perhaps those grades will translate to a pay day when they graduate.

I agree that it’s not ideal. The ideal would be for a student to want good grades because it’s implicitly important to them, not because they can get $50 for an A. We must face the realities of the situation. The reality is that many of these students are disengaged, they are there because they are required to be there. They do just enough to move through the system until they’re old enough to leave it.

This will also help teachers because it will turn a percentage of disengaged students into engaged ones and those teachers will be more effective at their jobs. Rather than trying to get someone’s attention or battling with a student that’s actively disruptive, they can focus on teaching - this benefits all the other students.

What do you think about this program? Love it? Hate it? Curious to see what happens? I’m very curious to see what happens but this isn’t the type of program that will yield results immediately so we’ll all have to be patient, regardless of our feelings. In the end, I think the test will be well worth it.

(photo: dospaz)

The estimated cost of the bailout of Freddie Mac and Fannie Mae is $300 billion, that’s if their loan books only suffer 5% loss. For some, that 5% guess is a little low, for others it’s on target.

When Freddie Mac (FRE) and Fannie Mae (FNM) were taken into conservatorship, their common stock was essentially rendered valueless. The numbers you see are their 52-week stock price ranges as of Wednesday (9/10/08) and it’s a pretty grisly sight isn’t it? Why are people buying the stock? You never know what can happen. Bear Stearns was sold for $2 a share yet people kept buying it, a week later the price was revised to $10 a share. You never know!

Want to get fired up about something? How much do you think you can get to run Freddie Mac into the ground? What about Fannie Mae? Exiting CEO Syron of Freddie Mac may get between $12m and $14m. Exiting CEO Mudd of Fannie Mae could get anywhere from $7m to $9m. [Newsday] It’s hard work getting the “sponsored” out of “government sponsored entities.” (apparently it was harder at Freddie Mac!)

And, to put all these numbers in this perspective, the mortgage market is about $12 trillion a year.

In Howard County, Maryland, the county has decided to give out over 71,000 recycling bins to the residents. The size of your home will dictate the size of the bin you’ll be receiving. Single family homes will receive a 65-gallon wheeled cart, townhomes with a garage will get a 35 gallon bin, and townhomes without a garage (like mine) will receive an 18 gallon bin.

Giving out these recycling bins has been proven, in earlier testing, to increase recycling when coupled with “one binning,” that’s my term for when you can mix all types of recycling in one bin. The official term appears to be “single-stream recycling” but “one binning” sounds so much better, don’t you think?

Anyway, here’s the stat that blows my mind… it costs our county $33 per ton to dispose of trash, a negotiated fee that is secured under contract until 2013. Our County Executive estimates that the price could double or triple when our county renegotiates, a fact that makes this next stat even more poignant. Our county receives $54 per ton of recycling. That’s right, the county earns money on recycling.

That’s an $87 swing per ton for something that we should be doing because it’s better for the environment.

For every ton of recycling Howard County recycles, that’s more money in the county coffers which, hopefully, means taxes will stand pat or perhaps go down. At a time when property values are going down and property tax revenues are dwindling, it’s a good idea to help your county out so they don’t help themselves to higher taxes.

(Photo: mukluk)

It’s no longer imminent, Freddie Mac and Fannie Mae have been assumed by the Federal Housing Finance Agency.

It seems extremely likely that the government will be taking over Freddie Mac and Fannie Mae.

Experts believe that this weekend, a mere two months after Treasury Secretary Henry Paulson secured permission from Congress, the government will put the two mortgage giants into conservatorship. It’s the same thing that the FDIC does to banks when they fail (another one, Silver State Bank in Nevada, went under on Friday, they are now under the management of the Treasury. The FDIC often tries to find a buyer, but in this case that probably won’t happen (Silver State Bank was taken over by Nevada State Bank of Las Vegas and branches are expected to be open on Monday for business).

Why is government rescuing these two companies? It’s because they own a ton of mortgages and need time to weather the storm. By putting the organizations into conservatorship, they prevent the company’s leadership from taking any risky gambles to try to get out of this mess. They also improve both organizations’ ability to borrow money and it calms down the housing market. Much of the liquidity in the housing market comes from the fact that Freddie and Fannie are willing to buy loans from smaller lenders. That’s the reason why jumbo loans often have much higher interest rates, you can’t sell a jumbo loan to Freddie or Fannie (the loan amount is above their limits). If that liquidity goes away, the housing problems we’ve been seeing will get much much worse.

How does this affect you? It probably won’t. Fortune estimates it would cost tens of billions to bail out these two organizations, which isn’t too bad considering they have $5 trillion on their books (and most of those are for loans that won’t default). If you were a common shareholder, your shares are likely worth nothing now. If you had any of their bonds, you’re still perfectly fine.

We live in interesting times!

Paulson readies the ‘bazooka’ [Fortune]
U.S. Rescue Seen at Hand for 2 Mortgage Giants [New York Times]

Anyone can propose anything.

As the Presidential race heats up, you’re hearing more and more about the tax proposals of both candidates. There’s talk about working class relief, of taxing the rich, of helping the poor and underinsured. There are a lot of campaign promises and proposals designed to get you to vote for one candidate or another. The problem is that the President is only one of three branches of the United States Government. It has no power to legislate and before any of these promises can become a reality… they need to work with the branch that can pass laws, our fine bi-cameral Congress.

The problem is that the Democrats control both chambers of Congress and it’s a lead many experts expect to extend. That means anything proposed by a Republican President is going to face greater scrutiny and require more favors if it wants to be passed. Something proposed by a Democrat President will not face that same level of scrutiny simply because it doesn’t require bi-partisan support. I’m not saying anything McCain promises won’t happen if he’s elected or that anything Obama promises will come to fruition without incident, but the reality is crossing party lines is difficult. I’m not a political experts but that’s how it always seemed to me. (Democratic President Clinton, for the most part, achieved quite a bit working with a Republican Congress)

The best analogy would be a family with kids, where the children because they would represent the electorate. Dad could promise all these toys and trips and candy and ice cream, but unless Mom agrees… it’s not happening. The kids could decide that their Dad is the best Dad in the world because he promises toys and trips and candy and ice cream but if Mom is firmly anti-candy, Dad is going to have a tough time getting it. It also doesn’t help if the price of candy and ice cream has skyrocketed and Mommy’s Ex-husband racked up a huge credit card debt.

Speaking of debt and deficits, as if we need more headwinds, it will be difficult and dangerous to pass any tax cuts that are not revenue neutral (that is, aren’t offset by decreased spending elsewhere) because we can’t afford to dig our hole any deeper.

Ahhh politics!

One of the big pieces of the housing rescue bill, passed and signed into law in July, was a $7,500 “tax credit” for first time homebuyers. While experts aren’t sure whether it’s “going to work,” these types of tax credits have been used in the past so they do have some history.

There is one aspect of this bill that is surprising and it has to do with one of the qualification rules. You can own a vacation home or a rental property and still qualify for this tax credit. I don’t know if it’s an oversight because of the strict determination of “primary residence” or if it was an intended rule. I don’t think individuals who own rental property or vacation homes necessarily need assistance on buying a primary residence.

First Time Homebuyer Tax Credit Rules

To qualify, you must satisfy these conditions:

• The home much be purchased as a primary residence.
• You must not have owned a primary residence in the last three years. For couples, both individuals must not have owned a primary residence in the last three years. Vacation homes and rental properties don’t affect this (you aren’t DQ’d if you have a vacation home or rental property).
• Must not be a non-resident alien as defined by the IRS in Publication 519.
• Individuals must have a modified adjusted gross income of less than $75,000 annually and couples MAGI of less than $150,000 to qualify for the full amount.
• The phaseout range begins at $75,000 and ends at $95,000 for individuals, $150,000 and $170,000 respectively for couples.
• The home must be closed between April 9th, 2008 and July 1st, 2009.
• No mention of a credit score or history requirement, but knowing that will help when it comes to getting a mortgage. I recommend checking out myFICO.com, a service of Fair Isaac, the people who invented the FICO credit score.

How the “tax credit” works:

• The tax credit is 10% of the home’s sale price with a maximum of $7500.
• You can claim the credit on taxes filed in 2008 or 2009.
• It’s a credit and not a deduction (difference between tax credit and tax deduction).
• “Tax credit” is a misnomer because it’s really a zero percent loan with some qualifications.

Tax Credit Loan Repayment Terms

The tax credit isn’t really a tax credit, it’s really just a tax free loan with some qualifications. You have to start paying back this loan within two years and you make equal payments over 15 years. When you sell your home, any profits will go first into paying off that loan. If you sell at a loss, the difference will be forgiven… meaning you will not owe any money on the loan (though it should be recorded as income as is typical with most loan forgiveness agreements, so you will owe taxes on it).

Should You Do It?

I would, why wouldn’t you take an interest free loan?

In early June, Democratic Presidential hopeful Barack Obama’s mentioned a need for another stimulus check. Then, in late July, there were rumblings in Congress that Democrats were looking to put together another stimulus package that may or may not include a check to families. There was a move by Democrats to try to pass the aspects of the first stimulus package, which included a check, that were struck down in the name of expediency.

Senator Obama released this six-page policy paper that outlines a two-part stimulus package.

Part 1: Emergency Energy Rebate Checks: The first part would include an “emergency energy rebate.” Individuals would receive $500 and married couples would receive $1000. The checks would be paid for over five years by a windfall tax on oil company profits. The six-page document explains the nature of the checks but doesn’t illustrate how the windfall profits might be taxed (granted, given the political nature of the document, it might be out of scope).

Part 2: $25B State Growth Fund & $25B Jobs and Growth Fund. The second part has itself two parts. The State Growth Fund would help prevent state and local cuts in services like education and housing assistance as well as alleviate the need to increase taxes, tolls, and fees. Many states are feeling the pinch as housing prices fall, foreclosures rise, and real estate tax revenue falling. The Jobs and Growth Fund is really an infrastructure bill that would support maintenance of highways, roads, and bridges; as well as fast-track school repair projects. There is no mention of how this would be funded.

My Thoughts: I didn’t like the stimulus checks but having listened to their use in the 70s in Greenspan’s anecdotal Age of Turbulence, I’m not wholly against them as a mechanism for thwarting an economic slowdown. However, it’s becoming increasingly evident that the checks are as much about politics as they are about prevent a slowdown. While I would imagine the economic policy advisors on Obama’s staff are well versed in macr- and microeconomics, I wonder how much of it is influenced by a desire to win in November.

That being said, people are getting pinched. Not everyone is getting pinched, but a lot of people are and additional funds would help some remain solvent. My concern is that with a deficit nearing half a trillion dollars, we’re sacrificing our future prosperity for relief today. This is exactly the same thinking that gets many people into deep credit card debt. “Just a little more relief…”

Finally, what are the chances this actually happens? Democrats had difficulty extending unemployment benefits and those go only to those who have already lost their jobs. You can argue that some people getting the first stimulus checks didn’t need them, but unemployment benefits only go to those who are unemployed! It’s difficult to say if this plan would even fly, but it makes for an interesting discussion. So, what do you think?

(Photo: chadwho1ders)