Proposals for US Bad-Debt Fund Begin to Emerge

Congressional Democrats have begun to weigh in on their wishes for the bad-debt fund that the Treasury Department plans to propose, and among them is that taxpayers get a cut of any upside to the fund, CNBC has learned.

Democrats want taxpayers to share in any potential returns from the fund, which the government hopes will help financial institutions mop up toxic mortgage-backed debt, a Congressional staffer said. Taxpayers would benefit through warrants in the firms that take advantage of the fund.

Democrats also seek limits on executive compensation on firms that use the bad-debt fund.

Among other early details on the fund, according to a Treasury official who spoke with CNBC:

  • Hedge funds will not have access to the bad-debt fund that the Treasury Department plans to propose to Congress.
  • The fund will also be accessible only by U.S.-based institutions, the official said.

The forthcoming proposal envisions that Treasury will have the authority to buy illiquid securities over a two-year period, the official said. After that point, Treasury will still be able to hold the securities, but not acquire them.

Specifically, Treasury will be able to buy mortgage-backed securities, collateralized debt obligations, and whole loans.

Sources said there could be contention in Congress over whether the government will ask financial institutions taking part in the fund to cede equity.