Congress is back for the week, but we do not expect much to get done. House and Senate Democrats support allocating $25 billion from the Troubled Asset Relief Program to bailout the Big Three automakers, while the White House, Treasury and Congressional Republicans oppose expanding the program.

The auto bailout could be considered as part of a set of a broader economic stimulus package introduced by Senate Majority Leader Harry Reid (D-NV). We expect the Senate to take up some or all of the Reid Economic Recovery Act in the next couple days, with the House of Representatives stepping aside to see how the Senate debate proceeds. Combined, the Reid package includes:

  • An extension of unemployment benefits for seven weeks;
  • $38 billion in Medicaid assistance to states;
  • $25 billion in loans from the TARP to the Detroit Three;
  • An above the line deduction for families who purchase new cars;
  • Increased Food Stamp, WIC, and food bank funding;
  • Weatherization assistance and subsidies for clean car technologies;
  • $5 billion for environmental cleanup;
  • $13 billion for highways and other transportation;
  • $4 billion or so for housing programs;
  • $250 million for military housing;
  • $2.5 billion for education and job training;
  • $2 billion for NIH, CDC, and pandemic preparedness;
  • An expansion of the SBA small business loan program;
  • $1 billion for border security and homeland security;
  • $675 million for federal science programs;
  • Disaster assistance for farmers and communities; and
  • Increased funding for consumer protection.

In addition to this long list, Senate Finance Committee Chairman Max Baucus would like to add several tax provisions, including extending bonus depreciation, suspending required IRA dispersals for account holders over 70 years old, and easing pension funding requirements for companies.

While there’s a small chance something might get passed, we believe the stalemate over the auto bailout as well as other funding items is unlikely to get resolved in the next couple days and, as a result, readers should view this broad package as a precursor to Congressional action early next year.

TARP and S Corp Banks

As readers know, Treasury has now officially focused the entire $700 billion TARP fund to be used to inject capital directly into financial institutions under its voluntary Capital Purchase Program. Secretary Paulson has made clear the previously announced Whole Loan and Distressed Asset purchase programs will not be pursued.

For financial institutions organized as S corporations, this new focus presents a particular challenge. As structured, S corporation banks do not qualify for the CPP. According to our friends at the Independent Community Bankers of America, the terms of the CPP require the bank to issue special “preferred” shares in exchange for Treasury’s direct investment. But S corporations are precluded by the tax code from issuing preferred shares and thus are unable to access the CCP.

The Treasury is aware of this issue and is working on new rules that would apply to S corporation and other non-public banks. Part of this failure is simply the result of Treasury’s need to move quickly to restore confidence in the banking system. With 2,500 S corporation banks out there, however, it is an oversight that needs to be fixed.