• Prospects for the student loan industry have dramatically improved, counsel John Dean confirmed during an 11 a.m. Capital Alpha conference call this morning. [For an MP3 File playback, click here.]
• Most importantly, odds are now above a tossup that either the White House and majority Hill Democrats will have to agree to substantially modify the administration’s Federal Family Education Loan Program (FFELP) repeal proposal (to incorporate continued loan originations and other elements of the Sallie Mae/”Community” plan) or otherwise watch as at least $60 billion in assumed multi-year savings are foregone.  In other words, the tethering of the administration’s student loan plans to healthcare, and other factors, have now put notional FFELP repeal at substantial risk of resulting in a “nothing done.”
• Nevertheless, a tradeoff involving White House acquiescence on ECASLA extension in exchange for FFELP repeal modified by the Community plan may now rank as the most likely outcome, although it may take weeks or even months before the pieces of such a deal come together.

Additional Points/Discussion: While House Ed & Labor Chairman George Miller (D-CA) and Senate HELP Committee Chairman Tom Harkin (D-IA) were scheduled to host an 11:45 a.m. press conference this morning, reiterating their intention to continue pressing for inclusion of FFELP repeal proposals within evolving, health-reform-dominated “reconciliation” legislation, White House counselor Rahm Emanuel has been said to have already decided to strip the student loan package from the bill in order to reduce friction and ensure passage (of health reform).

Senate Democrats will be given the chance to decide on the issue during a mid-day caucus, Majority Leader Harry Reid (D-NV) told reporters this morning.

This leaves a still-confusing environment wherein the administration and Democratic Hill leaders remain committed to trying to achieve savings from FFELP repeal (to be redirected back toward additional education spending) but the primary vehicle for doing so has been essentially hijacked.

Beyond the fact that revised CBO budget scoring (which Senate Budget Chairman Kent Conrad has pledged to adhere to) has created “a new political dynamic” – putting at risk many new-spending promises made to key constituencies in earlier efforts to piece together voting support for the House-passed SAFRA [Student Aid and Fiscal Responsibility Act] – another unheralded threat is that promised Direct Loan servicing set-asides for state non-profit associations may now be at risk to GOP members’ Byrd Rule protests, which could knock them out of any reconciliation bill.  As a result, and with at least 14 Democratic senators expressing concerns of varying kinds (Webb-VA, Warner-VA, Nelson-FL, Nelson-NE, Carper-DE, Lincoln-AR, Kauffman-DE, Casey-PA, Bayh-IN, Dorgan-ND, Udall-CO, Bennet-CO, Bingaman-NM and Begich-AK), it is increasingly difficult to see how the student loan package that House Speaker Nancy Pelosi and Miller had reportedly helped to engineer could possibly be enacted without major modifications.  (Per The Washington Post, the package retained enough pricy benefits included in the earlier-House passed SAFRA bill to now threaten to add a net $5 billion to the deficit, under CBO’s revised scoring – exposing it to additional Byrd Rule protests.)

Meanwhile, if the student loan package is stripped from the emerging reconciliation bill (or if that bill otherwise fails), the story will not be over: a game of chicken will ensue, with the administration retaining leverage to resist extension of the expiring Ensuring Continued Access to Student Loans Act, or ECASLA ( the threat of which is already prompting FFELP schools to exit to Direct loans in droves), but, in doing so, might run the risk of seeing displacement among students, lenders, schools and universities during the crucial loan commitment period ahead.  As a result, the administration will “probably blink,” albeit perhaps not before it has exhausted attempts to forge a deal that might allow it to achieve most of the savings it  has sought, and still repeal FFELP, while nevertheless leaving room for continued school choice of loan originators and perhaps incorporating lender risk-sharing in DL servicing – two predominant features of the SLM/Community alternative plan.

What it Means to Investors:

• This is a risky gambit by Dodd to outmaneuver his Republican counterparts, in the sense that he cannot allow them to prolong the negotiations on a bipartisan compromise for too long.  However, by forcing a committee vote before the April recess, he is now taking the risk of having the bill die in Committee if he can’t keep his own Democratic colleagues together at the committee level.
• And even if the Banking Committee passes a bill on a purely partisan 13-10 vote, he still has to try and find at least one (or two) Republicans to prevent a filibuster on the Senate floor.   For this reason, Dodd emphasized that he continues to negotiate with Corker, who as late as yesterday was saying that he was close to reaching a bipartisan agreement with Dodd.
• Dodd has long felt that he must reach a full Senate vote before the August recess because after that point election politics will likely prevent any reasonable bipartisan agreement.  With the health care reconciliation vote widely expected to shut down any hopes of bipartisanship in the Senate for some time, he apparently has calculated that it is more risky to go into that vote without at least a committee-passed version of financial reform.
• Cap Alpha views this risky move as slightly lowering the chances of reaching at least the narrow bipartisan majority (at least one or two Republicans) needed on the Senate floor to pass a bill this year, but we remain convinced that there is a slightly higher than fifty percent chance that Corker or others may agree in the end to support financial regulatory reform this year.  This point was emphasized by Corker in his press conference today where he said that while very disappointed by today’s announcement, that he would continue to negotiate with Dodd and that he felt it was important for the markets to receive some certainty on the regulatory front so that markets could fully recover.

What Else You Should Know: Dodd’s chief of staff has been out sick all this week, which some lobbyists have said may have raised Dodd’s level of frustration during a week in which the more liberal Democratic Senators began attacking the idea of compromises on consumer financial protection and on the Volcker rule that were being made with Corker.  House Financial Services Chairman Barney Frank (D-MA) also made some critical comments about consumer financial protection compromise, so there is a feeling that Dodd became worried that prolonged negotiations were doomed to fail.  With only a few months left in office, Dodd knows that he has to keep moving forward if there is any chance a bill will be passed this year, so from this perspective a decision to move forward is more understandable, even though it is a high-risk strategy.

What It Means to Investors:

• While three other Democratic Senators (Ted Kaufman, DE; Sherrod Brown, OH; and Jeanne Shaheen, NH) joined Merkley and Levin in introducing The Protect our Recovery through Oversight of Proprietary Trading Act (”PROP Trading Act”), not a single Republican Senator has joined as a cosponsor so far.  This makes the bill more of a headline risk, though it should also add pressure for Dodd to toughen the related language in his comprehensive financial reform bill.
• Section 3 of the PROP Trading Act would prohibit an underwriter or sponsor of an asset-backed security from taking any action that would give rise of a conflict of interest or “undermine the value, risk, or performance of the asset-backed security.”  This provision would expose any underwriter to potential legal liability for the life of the ABS if any trade or advice offered by the firm could be shown to have negatively affected the value of the ABS.
• While we do not view an outright prop trading ban or Section 3 as having a great chance of being incorporated into the financial sector reform bill, it may make it harder to eliminate the fiduciary duty provisions that were included in the House version.  Even a weaker version of the Section 3 language may possibly have to be included for Dodd to retain the support of Merkley and Brown, both members of the Senate Banking Committee.  It will also add pressure to make the language authorizing the regulators to ban proprietary trading seem as tough as possible, while still leaving them sufficient flexibility to exercise these new controls as warranted by the circumstances.
• Capital Alpha still expects the Dodd/Corker bill to contain more of a case-by-case authorization for financial regulators to impose a variety of regulatory tools – from additional capital all the way to an outright prop trading ban under limited circumstances upon banks.  But that would be based on the regulators’ judgment that a firm has undertaken excessive risk, has insufficient risk management practices, or is in danger of failing.

What Else You Should Know: The PROP Trading Act would generally restrict banks, bank holding companies, or their subsidiaries from proprietary trading, with five exceptions that are close to but not exactly the same as the administration’s Volcker Rule language, namely:

1. Trading in treasuries or GSEs
2. Risk-mitigating hedging activity
3. Investments in small businesses “designed primarily to protect the public welfare”
4. Market-making or underwriting “to serve clients, customers or counterparties”
5. Prop trading that occurs outside of the United States where the counterparty is not from the US

The backers of the PROP Trading Act claim the bill “is intended to reduce high-risk speculation at our nation’s critical financial institutions, encouraging them instead to focus on lower-risk, client-oriented services.”

The PROP Trading Act would also bar the same entities from investing in or sponsoring a hedge fund or private equity fund.

Finally, large nonbank financial institutions would be also be required to have additional capital reserves for activities deemed by the regulators as engaging in “high-risk speculation and investing or sponsoring hedge funds or private equity funds.”   Quantitative limits on the amount of such speculation would also be imposed.

The sponsors list the following persons as having endorsed their bill:

• John Reed, the former Chair and CEO of Citibank
• Bill Hambrecht, Chairman and CEO of WR Hambrecht + Co
• Jeremy Grantham, Chairman of Grantham, Mayo, Van Otterloo & Co
• Joseph Stiglitz
• Robert Reich
• Robert Johnson, Director of Economic Policy for the Roosevelt Institute
• The Independent Community Bankers of America
• Americans for Financial Reform
• AFL-CIO

Click here to read the one-page summary or here for the legislative text.

• The primary challenge Democrats face in using the reconciliation process to enact major health reform is convincing House Democrats to pass the Senate bill.  Wary House Democrats are seeking a guarantee that the Senate will pass a reconciliation package that modifies key provisions in the Senate bill to make it more palatable.
• This demand raises serious process and sequencing problems that we have outlined previously.  In this note we discuss the most current and likely strategy for ushering the legislation through the House.
• We also provide a breakdown of the key House voting blocks and expect to update it frequently over the next few days/weeks (linked chart pasted below).  Democrats need 216 votes, and we are hearing that they currently have 200 or fewer.  Key voting blocks, such as the Stupak 12ish, could make or break the vote.
• For now, we maintain our 35-40 percent odds that Democrats will be successful in passing their large health reform package using the reconciliation process.  Even though Rep. Bart Stupak (D-MI) today said he wants to find a solution to the abortion coverage issue, new problems seem to be outpacing solutions at this juncture.

Discussion
All eyes are on the House this week as Speaker Pelosi tries to amass the 216 votes Democrats need to pass their two-pronged reconciliation and Senate bill health reform package. The Speaker faces an uphill task and must forge an agreement among a diverse group of nervous liberals who don’t trust that the Senate will pass a reconciliation bill, pro-life Dems who don’t like what they see as lax restrictions on public funding for abortion in the Senate bill, and moderates whose yes votes could very well send them packing in November.

The 216 Challenge: The House health reform bill passed in November 2009 with 220 votes.  Thirty-nine Democrats voted no.  Since then, Democrats have lost three votes to vacancies, and the one Republican yes vote, Rep. Cao (R-LA), has said he will vote against the Senate bill.   Thus, Pelosi now needs a minimum 216 votes assuming no additional deaths or retirements.  While the House and Senate bills differ significantly, the original House vote gives a good indicator of where members stand.  From there, it becomes a complicated addition and subtraction problem as Pelosi tries to keep her 216.

Although Pelosi has a proven vote-getting ability with her past track record on big-ticket items like cap and trade, the stimulus, and the original House health reform bill, she now faces a more politically treacherous environment, and vulnerable members are much more inclined to put their own survival over party interests in an election year.

Process

House Rule: By most accounts, Pelosi will not be able to marshal the 216 votes she needs unless she is able to somehow guarantee that the Senate will approve a reconciliation package.  This is an impossible promise to make given unprecedented nature of this strategy, unified Republican opposition, and the numerous parliamentary and procedural hurdles the package is likely to face in the Senate.  Moreover, the reconciliation bill is likely to lose priority in the Senate the second the Senate bill becomes law and especially following a two week spring recess (we assume that the Senate won’t move a reconciliation package prior to the Easter recess).  Therefore, it appears that the current strategy for getting around this dilemma is to manipulate the House rules to ensure that the Senate bill does not become law without the corrections package.

We’ve heard from a number of sources that the House leadership is planning to use its rule-making powers to pass the Senate bill and reconciliation simultaneously with one vote.  They would then pull the Senate bill from the rule, hold it at the desk (i.e. prevent it from going to the President for his signature), and send the reconciliation bill to the Senate for consideration.  If the Senate passes the reconciliation bill, the House and Senate would send both bills to the President for signature.  The reconciliation bill amends the Senate bill, so the President signs the Senate bill into law first.

This process is sure to raise a number of parliamentary questions, but there are rumblings that the leadership believes they have precedence to do it.  We’d caution investors that all of this could easily change as Democrats have to answer some obvious parliamentary questions on whether the House can hold a bill at the desk, and whether the House can bring up a reconciliation bill that amends legislation that isn’t law.  We also question how CBO and the Joint Committee on Taxation will score the reconciliation bill under these unusual circumstances.  We’ll continue to update this section as more details emerge.

Vote Count

Potential Yes to No Votes

Abortion Coverage: This issue probably has the most potential to derail reform.  There are 12 Democrats who voted for the House bill who feel that the Senate’s restrictions on public funding for abortion under the exchange are not stringent enough, and the Senate’s language is most likely locked-in under the budget reconciliation rules.  According to the group’s leader, Rep. Stupak (D-MI), these members are ready to vote against the Senate bill, which would bring the vote down to 204.  It’s worth noting that most of these members are strong supporters of reform itself and likely don’t want to be blamed for its failure to pass.  We doubt all 12 of the anti-abortion Democrats would vote no.  However, even a handful would be enough to bring the bill down if Pelosi can’t pick up Democrats who voted against the House legislation the first time. Three pro-life members – Stupak, Lipinski (D-IL) and Oberstar (D-MN) – have stated they will vote against a bill containing the Senate abortion provisions.

In an interview today, Rep. Stupak indicated that he felt “encouraged” by the prospects for a compromise.  This could be a signal that he and his group are ready to make a deal, but the way forward is far from clear on both policy and process.  There have been some discussions around introducing a third bill to address the Stupak group’s concerns, but the House abortion language was soundly defeated when it was brought up as an amendment during the Senate reform debate, and Democrats are having a hard enough time with two bills.

Moderate Yes Votes: Over the past month, several anti-reform groups have mounted an ad blitz against 18 moderate Democrats who voted for the House reform bill.  Most of these members will be under intense election year pressure in traditionally conservative districts where health reform has been consistently polling negative.  Switching positions may seem wishy-washy, as President Obama reportedly noted in meetings with the Democratic caucus last week, but members will do almost anything to defend their seats.  Holding moderates’ votes will become increasingly more difficult as election day draws closer.

Other: So far, we know of only one member has publicly signaled she will switch her yes vote to no and that is Rep. Shelley Berkley (NV).  Although Berkley is not considered a moderate, new polling numbers in Nevada show very low voter support for the big health reform package.

Potential No to Yes Votes

Freshmen: Twelve freshmen House members voted against reform in November and will be strongly pressured to cross over.  Although some may find it more politically advantageous to vote against the Senate bill, freshmen members are typically the most vulnerable type of incumbent and often rely heavily on the national party for fundraising and organizational support, which will provide Obama and Pelosi significant leverage when the arm-twisting begins in earnest.

Moderate No Votes: An Associated Press survey released last week identified nine moderates who voted against the House bill who may be willing to support the Senate-reconciliation package.  We expect the White House and leadership will heavily target this group to make up for votes they may lose on abortion.

What It Means to Investors:

• Comprehensive derivatives regulation is one of the central components of the financial reform legislation that has already passed the House and will be an important part of the Senate version that is likely to be unveiled within days.
• Sens. Jack Reed (D-RI) and Judd Gregg (R-NH) have reached agreement on a wide range of recommended changes, particularly those narrowing the discretion of the regulators (the CFTC for swaps, the SEC for securities-based swaps) when determining which swaps must be cleared and under what circumstances swap participants can be prudentially regulated for capital and other risk requirements.
• The CCMR letter argues for a number of significant changes to the House-passed version and the prior Dodd draft, namely:

1. The Federal Reserve should be the exclusive regulator of clearinghouses due to their expertise in regulating payment systems and systemic risk. (Unlikely at this point.)
2. Mandatory clearing should be limited to standardized and liquid derivative contracts between clearinghouse members.   All institutions that exceed “defined net exposure thresholds” should be required to become clearing members, or if they fail to meet “reasonable and non-discriminatory” standards, they should be required to obtain a clearing member’s guarantee. (Possible.)
3. While a smaller number of clearinghouses would result in greater netting and less costly margining, there are benefits to multiple, well-capitalized clearinghouses as long as they are adequately regulated to insure against systemic risk. (Likely.)
4. There should be no regulatory limitations on who can own clearinghouses, though strict regulatory oversight is important to avoid potential conflicts. (Likely)
5. Due to the cost of continuous reporting of live trades, a modest delay should be allowed in reporting normal trades, with a longer delay for large transactions (similar to the case of large equity block trades). (Possible.)
6. While exchange trading would further reduce systemic risk compared to central clearing due to better price formation and more liquidity, exchange trading should not be required, but only encouraged where appropriate. (Likely.)
7. More discretion should be allowed to regulators to set capital requirements for cleared and non-cleared derivatives based on criteria regarding the type of activity and type of firm involved, with the goal of discouraging arbitrage and harmonizing international agreements regarding the appropriate capital levels appropriate for the specific underlying assets involved. (Possible.)

• Even though this letter was sent after significant progress has already been made in the Senate negotiations, the key members and their staff are reviewing CCMR’s recommendations and a few of their recommendations may eventually be included in the final version.

What Else You Should Know:

For a complete copy of the CCMR letter, click here.

Student Loans: The Health In (and Of) Sallie Mae’s Reconciliation Equation
What’s New: As Democrats hurtle toward success or failure on a health reform bill strategy now designed to employ budget reconciliation on the Senate floor in March, the fate of the Federal Family Education Loan Program (FFELP)  and student loan industry also seems to hang in the balance.  Indeed, with FFELP repeal  also expected to be added to the reconciliation measure, recently volatile Intrade political futures contracts depicting odds of health reform’s passing by June could serve as a proxy for the student loan outcome.  Meanwhile, Republicans have begun to call attention to what they call “two takeovers in one bill,” and The Hill newspaper and other media sources have cited Democratic leaders’ seeming willingness to shed the student loan component if necessary to assemble the 51-plus votes needed for reconciliation-bill passage and completion of the party’s health reform strategy by spring.

What It Means for Investors: While we still expect enactment of FFELP repeal legislation this year, the net of these factors reflect two potentially important filters that could positively modify or even deflect that outcome.

• While Intrade contracts betting on health bill passage have spiked up from below a 50% probability just yesterday (Monday, March 8) to 62.5% today – perhaps due to comments from pro-life Michigan Democrat Bart Stupak (to the effect that he is “encouraged” that a deal could be worked out on compromise abortion language, perhaps clearing a path for as many as 12 House Dems to remain committed to passage and aligned with the leadership’s strategy) – they nevertheless have signaled a healthy (i.e., 40% plus) chance that the legislation and complex strategy (requiring House votes on as many as three separate bills) might fail.
• To be sure, should health reform’s passage and reconciliation-bill enactment appear increasingly likely (i.e., with more than enough votes to become law), the leverage otherwise to be brought to bear by pro-FFELP moderate Senate Democrats could prove less meaningful.  Thus, the more steadily that Intrade “passage-by-June” contracts cross at higher prices in coming days the more likely they might be seen an indicator of bad tidings in store for Sallie Mae, Nelnet, and other FFELP lenders.
• Conversely, however, should investors be confronted with headlines suggesting that House Speaker Nancy Pelosi (D-CA) will fall short of corralling the 216 votes needed for House passage of the reform bill earlier passed in the Senate (as part of the leadership/White House strategy), the odds of FFELP repeal by July will be seen as dropping.  This might still allow passage of a FY 2011 reconciliation bill extinguishing FFELP lender subsidies after next summer, but nevertheless give the industry not only one more year of origination income but fresh ammunition to fight for additional concessions or to even block the effort entirely – perhaps amid wind-at-the-back market expectations of a more industry-friendly political alignment possibly to emerge after the November elections.
• In addition, there are viable scenarios wherein health reform might pass but with FY 2010 FFELP repeal jettisoned from reconciliation legislation along the way.  In this regard, Intrade predictions hovering stubbornly near a toss-up (foretelling a close and potentially suspenseful final vote) could give FFELP stakeholders even more cause for hope.

What Else You Should Know: Capital Alpha continues to expect enactment of FFELP repeal during 2010, albeit with the delayed action due to linkage with health reform and signs of support from pro-FFELP lawmakers resulting in either a one-year delay or otherwise important concessions.  This cautious forecast has been fed by our constant pulse-taking communications with industry sources and representatives in Washington (which seem to reflect continued resignation re likely FFELP repeal and little hope of future FFELP-lender originations).

Nevertheless, the back-in-vogue notion of health reform’s enactment begetting such a tough and close vote as to give leverage to  pro-FFELP Democratic moderates on the Senate floor largely confirms our predictions of last October.

As our “Thesis” at that time read:

Thesis: While we expect President Obama to succeed in his plan to repeal the private-lender-dominated FFEL student loan program (using assumed savings to fund higher Pell grants), we nevertheless see Sallie Mae and other lenders ultimately being afforded key roles in the shift to full Direct lending.

Important in this forecast, is our assumption that, even if Hill Democrats choose to pair student aid changes with healthcare reform to allow passage through the Senate with a simple-majority 51 votes (i.e., employing budget reconciliation), the majority’s desire to lock up support of Dem moderates – and perhaps gain a measure of bipartisan support from Republicans – could give college loan companies, state guarantee agencies, and other FFELP participants (with their 35,000 related jobs) traction to gain at least some concessions in a House-Senate conference committee.

With private sector loan originations still a potentially elusive “Plan B” target for Sallie, Nelnet, and other key lenders, Direct loan servicing and a partial delay in FFELP repeal might prove important elements of a Sallie Mae resurrection story, along with eventual reinvigoration of the private (non-federal) student loan markets.

Industry lobbyists have conversely expressed concerns that the pairing of healthcare legislation with student aid reforms might drown out their arguments, raise the stakes, and ultimately lead to FFELP repeal getting ram-rodded through the Congress.   All of which could make the (recently rising) noise levels the industry is able to raise in its defense, and the closeness of the coming healthcare votes, potentially all the more crucial.

For Profit Higher Ed: Prop Schools Shift to Offense
As prop school stakeholders breathe easier in the wake of comments from Education Secretary Arne Duncan, the industry’s lobbying organization, the Career College Association (CCA), has gone on offense by lobbying in the Hill-prominent newspaper Politico.  Wrapping themselves in the mantle of supporting nursing and healthcare (see page 27 here) the for-profits are said to be seeking to align themselves with other initiatives advanced by the administration (such as SAFRA/student loan and health reform) while raising serious questions about the ED’s “gainful employment” proposals.

Keywords: Healthcare, EPA, Climate, Coal Ash, Jobs, Extenders, Natural Gas, Renewables

Healthcare Update
The things you need to know about healthcare are that there is no bill and there is no score from the CBO, says Capital Alpha healthcare analyst Kim Monk. That makes it very hard to gauge whether a healthcare bill can pass the House by March 18 or not.

Business As Usual
In the meantime, Washington is conducting business as usual, as if energy and climate were to be on the agenda soon after healthcare is completed.

Yesterday, EPA Administrator Lisa Jackson outlined her regulatory agenda for the coming year and warned Congress that trimming the EPA’s climate regulatory powers would undermine job growth in renewable energy industries.

This morning, Republican Senator Richard Lugar said he was working on a clean energy plan that would eschew carbon caps but encourage renewables, nuclear, and cleaner coal while also incentivizing older power plants to shut down.

This afternoon, President Obama will welcome Lugar and other moderates to the White House to talk energy and climate.

Sometime today, the Senate may finally pass a $138 billion jobs bills (H.R. 4213) that extends various social safety net befits and about $31 billion in tax extenders. The House and Senate have still not yet agreedt on how to pay for the bill, but any little step is progress.

We have been asking for news on fly ash but there is none to be had. There is not much news on Nat Gas Act either.

The Senate EPW committee took testimony this morning from representatives of the refining and chemical industry to seek input on Sen. Frank Lautenberg’s (D-N.J.) upcoming rewrite of the Toxic Substances Control Act (TSCA).

Colorado Re-Powers With Gas
The big news is something we see as the wave of the future. On Friday last week, Colorado Governor Bill Ritter announced a deal between state legislators, green groups, and the states largest utility, Xcel Energy, by which Xcel would retire or retrofit 900 MW of its Colorado-based coal-fired capacity and replace it with gas or renewables.

Three plants among those most likely to go: the 186 MW Valmont Station in Boulder, the 717 MW Cherokee Station near Denver, and the 505 MW Pawnee Station near Brush, Colorado.

Its being billed as a green jobs and a local jobs plan, where gas is an especially important local employer. But we think there is probably more to the story which will emerge over time.

We suspect there are some attractive rate base implications to closing plants that are fully depreciated, if these are, and replacing them with new gear. We also think that gas offers better operational flexibility to complement Colorado’s aggressive renewable mandate.

But above all, we think we are seeing a clear signal from federal and state regulators that regardless of whether they can impose an explicit carbon price or not, they want to see coal-fired power plants retired.

The best topic comments, as usual, are on the FT Energy Source blog.

The local Colorado takes are here and here.

Last week, we offered comments about the EPA seeking to offer positive incentives to utilities to phase-out power plants older than 45 years. These would be carrots to show the “good cop” side of the EPA while its “bad cop” doppelganger wields the twin sticks of climate regulation and stepped-up enforcement of air and water regs that squeeze coal in every conceivable way.

Recent Notes

Rick and the Rock

The Bull Case for Climate Regulation

Gas for Clunkers Lives — EPA Seeks Ways to Incentivize Fuel Switching

Early Response to Kerry-Graham Lieberman is Tepid, Cautious

Charlie Rangel on the Way Out–Complicates Tax and Dividend Story

Kerry Climate Plan Has Big New Ideas

Other notes today from Capital Alpha…

• Still Lacking House Votes, Democrats Hurtle Towards Reconciliation
• FDA Drug Safety Hearing
• Energy Legislation Still Hostage to Healthcare
• No Breakthrough Yet on Kerry-Graham-Lieberman
• House and Senate Still Can’t Get Extenders Done
• Universal Service Fund on the Chopping Block; 3G for Everyone?
• EPA Tailoring Rule, Motor Vehicles Rules out March 31
• Senate, House Hearings Put Efficiency in the News This Week

Financial Regulatory Reform: The Clock Starts Ticking While the Senate Keeps Wheeling and Dealing
Over the weekend, Senate Banking Chairman Chris Dodd (D-CT) continued his marathon negotiations with Sen. Bob Corker (R-TN), Ranking Member Richard Shelby (R-AL) and other committee members in his quest to cement his legacy by passing the most comprehensive financial regulatory reform bill since the banking reforms during the Great Depression.  As has been the case for several weeks now, compromise on a few key issues such as consumer financial protection and the role of the Federal Reserve in banking supervision, are complicating Dodd’s goal of achieving bipartisan support (i.e. obtaining at least 16 votes with three Republicans and all Democrats on board) at a Banking Committee mark-up of the legislation before the Senate begins a two week break on March 29th.  If this key deadline is missed, then the legislative clock will begin to impact the likelihood of passing comprehensive reform this year.  Some progress was made on allowing the Federal Reserve to maintain supervision of bank holding companies with assets over $100 billion, but more concessions will have to be made as the Fed and Treasury Secretary Geithner press for a greater continued role for the Fed.  Finally, the key issue remains to what extent the new consumer financial protection agency (or division) will have independent power to write its own rules or whether the prudential regulators will have a veto.

Payments Companies: House Hearing
Biding time as it awaits a regulatory reform bill counter-volley from the Senate – and ahead of a rescheduled and much-telegraphed Tuesday, March 23, full committee hearing on housing finance – the House Financial Institutions and Consumer Credit Subcommittee will host a  Wednesday, March 10, 2010, 10:00 a.m., hearing on “Regulation of Money Service Businesses.”  While the MSB classification itself dates back to the anti-money-laundering provisions of the 1970 Bank Secrecy Act as amended by the 2001 Patriot Act – and broadly refers to currency dealers or exchangers; check cashiers; issuers, sellers or redeemers of traveler’s checks; purveyors of money orders or stored value instruments; and money
transmitters – the panel’s discussion might nevertheless provide a forum for discussion of payday lenders or, perhaps more interestingly, Western Union and other payments companies.  While the payday industry has had to fight off higher profile criticisms, the latter have gained off-and-on scrutiny amid Hill debates over whether they should be regulated by a proposed new consumer financial protection agency and their role in transmitting to Mexico and other countries remittances from illegal aliens working in the U.S.

Student Loans: What’s the Score on Reconciliation?
In contrast to the widely-reported scorn and indignation the GOP has mustered in anticipation of Democrats’ attempted use of budget reconciliation to move health care legislation, Education committee Republicans’ complaints about the parallel prospect of reconciliation’s use to repeal the private-lender-dominated FFEL student loan program – complete with a huge measure of controversial accounting legerdemain – has yet to earn a peep in national media.  As we wrote Friday, despite a fresh analysis from the Congressional Budget Office (CBO) asserting that the Obama administration’s FFELP repeal proposals will save $20 billion less than the $87 billion-over-10-years previously forecasted, the majority apparently will continue assuming the $87 billion figure, or the savings associated with shifting from 70% FFEL lending to full Direct lending – based upon a CBO score now a year old – when the official budget scorekeeper now acknowledges that only between one half and sixty percent of schools are still in the FFEL program.

Frank Statements about GSEs
House Financial Services Chairman Barney Frank’s (D-MA) seemingly provocative/rending-of-the-cloth comments last Friday (March 5) – to the effect that Fannie and Freddie debt did not have the same legal standing as Treasury debt, and that investors shouldn’t take government backing for the GSEs for granted going forward – seems to reflect how frustrated traditional Hill supporters have become as the the two companies remain stuck in purgatory (i.e., being run as agents of the state to help finesse the housing crisis but otherwise of little use to Hill liberals as agents of low income housing, and still serving as an embarrassing tool for Dem bashing by Republicans).  With this dynamic set to last for at least another full year, Frank seemed to want to belie any notions that he and other Democrats will invest political capital to save the GSEs’ past structure going forward.  Debt markets being what they are, however, a reaction and counter-reaction ensued, with Frank ultimately compelled to issue a “clarification,” decrying any intention to conflict with statements Treasury officials made (in announcing the equivalent of an “effective” federal guarantee of GSE debt) last Christmas Eve.   As a Treasury announcement of expanded lines of credit to the GSEs at that time read:  “The amendments to these agreements announced today should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.”

Derivatives Legislation: A Late Breaking Issue Threatens Derivatives Business with 23A Limitations
When the House passed the Over-the-Counter Derivatives Markets Act of 2009 in December of 2009, very few noticed that a supposedly “technical” change to Section 23A of the Federal Reserve Act may result in restrictions on derivatives trading for bank holding companies with significant links via affiliate operations.  Under current law derivatives transactions with an affiliate are not treated as a credit exposure, but the House passed version would require such affiliate derivative transactions to be counted towards a bank’s credit exposure.  This change would trigger the Section 23A affiliate restrictions that limit the amount of exposure that a bank may have to 10% for any single affiliate and 20% aggregate for all affiliates.  While it is not clear how much of an impact that may have, there is no question that the issue has now been raised as a public policy concern and there is a good chance that this issue may be addressed differently by the Senate.

Other notes today from Capital Alpha…

Still Lacking House Votes, Democrats Hurtle Towards Reconciliation
Democrats face a number of challenges this week as they scramble to advance a reconciliation strategy that would require the House to pass the Senate bill.  To meet their self-imposed Easter deadline, the reconciliation “sidecar” bill would likely have to be drafted this week, and the House would have to begin votes on reconciliation and the Senate-passed reform bill by March 18.   Given the all-in push by Democrats, we give 35 – 40 percent odds that health reform will pass under the sidecar strategy, but we can’t over emphasize how heavy a lift this will be.

The primary hurdle Democrats face is convincing the House to vote on the Senate bill with no guarantee that the package of modifications will survive the reconciliation process.  The House bill passed last November with 220 votes, but several vacancies and the defection of the sole Republican yes vote mean Democrats need 216 votes to pass the bill.   Twelve House freshmen members who voted against the House bill last November will be under immense pressure from the White House and Leadership to switch their votes.  Abortion coverage remains a major obstacle with as many as 12 House members ready to switch their “aye” votes to “no” due to the less restrictive abortion language in the Senate bill, which likely cannot be fixed under the reconciliation budget rules.  Finally, Democrats face huge timing problems given that they have yet to lock-in legislative language and a CBO score.  It is impossible to whip the vote without those things.   Democratic leadership is nervous that support will only erode when members return home for a two week recess beginning March 26, so they will push hard to reach the March 18 deadline. -Kim Monk

FDA Drug Safety Hearing
FDA Deputy Commissioner Joshua Sharfstein will testify Wednesday at a House Energy and Commerce Committee’s Subcommittee on Health hearing on the FDA’s drug safety programs.  Congress’s already intense scrutiny of the FDA spiked last week with the release of a Senate Finance Committee report on irregularities in the agency’s handling of safety concerns regarding Avandia, a diabetes drug that has been linked to heart attacks in some patients.  Congress’s drug safety efforts have stalled under the weight of health reform over the past year, but it could gain traction if health reform fails or is approved over the next month or so.  The March 10 hearing will begin at 2pm EST and will be available via webcast here. -Kim Monk

Energy Legislation Still Hostage to Healthcare
Healthcare continues to dominate the spotlight in Washington, pushing everything energy far into the background.  We continue to believe that the longer healthcare takes to finish, the poorer are the prospects for any substantial energy legislation.  We think that any more than a token effort to pursue passage of healthcare legislation in the Senate under reconciliation rules would kill all prospect of healthcare and energy legislation.  End of story.  On the other hand, a “pivot” on healthcare that would abandon the current legislation for a smaller bill and open the calendar for new proposals might mean that energy and climate have a chance after all. -James Lucier

No Breakthrough Yet on Kerry-Graham-Lieberman
Sens. Kerry, Graham, and Lieberman have spent the last week attempting to build support for their new climate proposal, but lack of detail remains a critical problem.  Senate Majority Leader Harry Reid (D-Nev.) has given the Senators until March 26, the beginning of the Easter-Passover recess, to present a draft.  That is literally about as long as Reid can possibly give them.  The reception so far has been polite but skeptical due to the lack of finished proposal.  Many constituencies that opposed economy-wide cap and trade are praising the the sector specific plan;  but it remains to be seen whether this praise signals true support or rather a strategic intent to kill cap and trade definitively by supporting something else. -James Lucier

House and Senate Still Can’t Get Extenders Done
Another week, another set of reasons why extenders isn’t moving.  The Senate looks like it is ready to sign off the House version of a $17.6 billion jobs bill, but a much larger package of about $140 billon remains to be done.  Once again, the House and Senate are at odds over payfors.  The Senate wants to use black liquor and another pay-for that the House and White House wish to reserve for the President’s healthcare plan;  House proposes taxing carried interest intead, and possibly a bank tax, both of which are no-gos in the Senate. -James Lucier

Universal Service Fund on the Chopping Block; 3G for Everyone?
The soft roll-out of the FCC’s Congressionally-mandated National Broadband Plan continues. Ahead of its March 17 deadline (actual delivery is said to be planned for the 16th), reform of the Universal Service Fund is the latest in a series of announcements of proposals from the Plan.

The FCC will propose to eliminate within ten years the $4.6 billion program of subsidies to telecom service operators providing basic voice to high cost areas. The Commission intends to replace this portion of the Universal Service Fund with a program to subsidize broadband internet and voice, dubbed “Connect America.”  Also being proposed is a “Mobility Fund” to provide ubiquitous 3G wireless service.

While the FCC claims they can make the changes to USF on their own, the switch-over will require Congress to appropriate $9 billion over three years. This will not be an easy ask.  There are other USF reform proposals in both chambers and large price tags attached to other FCC broadband proposals announced from the Plan.  If the FCC expects any money from Congress, they may need to rank-order their wish list. -Robert Kaminski

EPA Tailoring Rule, Motor Vehicles Rules out March 31
We’re expecting the EPA to release three long awaited final rules on climate at the very end of March.  Perhaps most significant is the Tailoring Rule:  This begins the process by which the EPA begins to regulate carbon emissions from stationery sources such as power plants. Of all the EPA rules, we feel this one faces the most litigation risk;  we have not met a single lawyer who thinks the EPA has a slam-dunk;  virtually all believe the case is tenuous to some significant degree.  The EPA appears to think so as well.  In addition to pushing out the effective dates, EPA Administrator Lisa Jackson now says the threshold level of emissions that will trigger regulation in the near term will be 75,000 tons per year instead of the 25,000 tpy in the draft rule.  The two mobile source rules, by contrast, face little risk. But we find it interesting that the effective date will still be pushed beyond the 2011 model year.  The EPA seems to be raising thresholds and extending timetables to give itself as much leeway as possible. -James Lucier

Senate, House Hearings Put Efficiency in the News This Week
The Senate Energy Committee and the House Energy & Environment Subcommittee this week will hold hearings on proposed energy efficiency incentives such as the Homestar (“Cash for Caulkers”) and Buildingstar programs.  These hearings should drive positive headlines and on the whole they are encouraging signs of programs.  But there remains little visibility into when legislation may eventually pass.  Supposedly they will go into a third-round jobs bill, which we we hope will move more expeditiously than the first two efforts. -James Lucier

• Energy Legislation Still Hostage to Healthcare
• No Breakthrough Yet on Kerry-Graham-Lieberman
• EPA Tailoring Rule, Motor Vehicles Rules out March 31
• EPA’s Accomplishments and Outlook for 2010
• Senate, House Hearings Put Efficiency in the News This Week
• House and Senate Still Can’t Get Extenders Done

Healthcare
Kim Monk

• Still Lacking House Votes, Democrats Hurtle Towards Reconciliation
• FDA Drug Safety HearingFinancials

Financials
Charles Gabriel and Joseph Engelhard

• Financial Regulatory Reform: The Clock Starts Ticking While the Senate Keeps Wheeling and Dealing
• Payments Companies: House Hearing
• Student Loans: What’s the Score on Reconciliation?
• Frank Statements about GSEs

Telecom
Robert Kaminski

• Universal Service Fund on the Chopping Block; 3G for Everyone?

Energy, Tax
James Lucier

Energy Legislation Still Hostage to Healthcare
Healthcare continues to dominate the spotlight in Washington, pushing everything energy far into the background. We continue to believe that the longer healthcare takes to finish, the poorer are the prospects for any substantial energy legislation. We think that any more than a token effort to pursue passage of healthcare legislation in the Senate under reconciliation rules would kill all prospect of healthcare and energy legislation. End of story. On the other hand, a “pivot” on healthcare that would abandon the current legislation for a smaller bill and open the calendar for new proposals might mean that energy and climate have a chance after all. -James Lucier

No Breakthrough Yet on Kerry-Graham-Lieberman
Sens. Kerry, Graham, and Lieberman have spent the last week attempting to build support for their new climate proposal, but lack of detail remains a critical problem. Senate Majority Leader Harry Reid (D-Nev.) has given the Senators until March 26, the beginning of the Easter-Passover recess, to present a draft. That is literally about as long as Reid can possibly give them. The reception so far has been polite but skeptical due to the lack of finished proposal. Many constituencies that opposed economy-wide cap and trade are praising the the sector specific plan; but it remains to be seen whether this praise signals true support or rather a strategic intent to kill cap and trade definitively by supporting something else. -James Lucier
EPA Tailoring Rule, Motor Vehicles Rules out March 31
We’re expecting the EPA to release three long awaited final rules on climate at the very end of March. Perhaps most significant is the Tailoring Rule: This begins the process by which the EPA begins to regulate carbon emissions from stationery sources such as power plants. Of all the EPA rules, we feel this one faces the most litigation risk; we have not met a single lawyer who thinks the EPA has a slam-dunk; virtually all believe the case is tenuous to some significant degree. The EPA appears to think so as well. In addition to pushing out the effective dates, EPA Administrator Lisa Jackson now says the threshold level of emissions that will trigger regulation in the near term will be 75,000 tons per year instead of the 25,000 tpy in the draft rule. The two mobile source rules, by contrast, face little risk. But we find it interesting that the effective date will still be pushed beyond the 2011 model year. The EPA seems to be raising thresholds and extending timetables to give itself as much leeway as possible. -James Lucier.

EPA’s Accomplishments and Outlook for 2010
EPA Administrator Lisa Jackson will address the National Press Club today at noon about the EPA’s accomplishments in the last year and the agency’s outlook for 2010.

Senate, House Hearings Put Efficiency in the News This Week
The Senate Energy Committee and the House Energy & Environment Subcommittee this week will hold hearings on proposed energy efficiency incentives such as the Homestar (“Cash for Caulkers”) and Buildingstar programs. These hearings should drive positive headlines and on the whole they are encouraging signs of programs. But there remains little visibility into when legislation may eventually pass. Supposedly they will go into a third-round jobs bill, which we we hope will move more expeditiously than the first two efforts. -James Lucier

House and Senate Still Can’t Get Extenders Done
Another week, another set of reasons why extenders isn’t moving. The Senate looks like it is ready to sign off the House version of a $17.6 billion jobs bill, but a much larger package of about $140 billon remains to be done. Once again, the House and Senate are at odds over payfors. The Senate wants to use black liquor and another pay-for that the House and White House wish to reserve for the President’s healthcare plan; House proposes taxing carried interest intead, and possibly a bank tax, both of which are no-gos in the Senate. -James Lucier

Healthcare
Kim Monk

Still Lacking House Votes, Democrats Hurtle Towards Reconciliation
Democrats face a number of challenges this week as they scramble to advance a reconciliation strategy that would require the House to pass the Senate bill. To meet their self-imposed Easter deadline, the reconciliation “sidecar” bill would likely have to be drafted this week, and the House would have to begin votes on reconciliation and the Senate-passed reform bill by March 18. Given the all-in push by Democrats, we give 35 – 40 percent odds that health reform will pass under the sidecar strategy, but we can’t over emphasize how heavy a lift this will be.

The primary hurdle Democrats face is convincing the House to vote on the Senate bill with no guarantee that the package of modifications will survive the reconciliation process. The House bill passed last November with 220 votes, but several vacancies and the defection of the sole Republican yes vote mean Democrats need 216 votes to pass the bill. Twelve House freshmen members who voted against the House bill last November will be under immense pressure from the White House and Leadership to switch their votes. Abortion coverage remains a major obstacle with as many as 12 House members ready to switch their “aye” votes to “no” due to the less restrictive abortion language in the Senate bill, which likely cannot be fixed under the reconciliation budget rules. Finally, Democrats face huge timing problems given that they have yet to lock-in legislative language and a CBO score. It is impossible to whip the vote without those things. Democratic leadership is nervous that support will only erode when members return home for a two week recess beginning March 26, so they will push hard to reach the March 18 deadline. -Kim Monk

FDA Drug Safety Hearing
FDA Deputy Commissioner Joshua Sharfstein will testify Wednesday at a House Energy and Commerce Committee’s Subcommittee on Health hearing on the FDA’s drug safety programs. Congress’s already intense scrutiny of the FDA spiked last week with the release of a Senate Finance Committee report on irregularities in the agency’s handling of safety concerns regarding Avandia, a diabetes drug that has been linked to heart attacks in some patients. Congress’s drug safety efforts have stalled under the weight of health reform over the past year, but it could gain traction if health reform fails or is approved over the next month or so. The March 10 hearing will begin at 2pm EST and will be available via webcast here. -Kim Monk

Financials
Charles Gabriel and Joseph Engelhard

Financial Regulatory Reform: The Clock Starts Ticking While the Senate Keeps Wheeling and Dealing
Over the weekend, Senate Banking Chairman Chris Dodd (D-CT) continued his marathon negotiations with Sen. Bob Corker (R-TN), Ranking Member Richard Shelby (R-AL) and other committee members in his quest to cement his legacy by passing the most comprehensive financial regulatory reform bill since the banking reforms during the Great Depression. As has been the case for several weeks now, compromise on a few key issues such as consumer financial protection and the role of the Federal Reserve in banking supervision, are complicating Dodd’s goal of achieving bipartisan support (i.e. obtaining at least 16 votes with three Republicans and all Democrats on board) at a Banking Committee mark-up of the legislation before the Senate begins a two week break on March 29th. If this key deadline is missed, then the legislative clock will begin to impact the likelihood of passing comprehensive reform this year. Some progress was made on allowing the Federal Reserve to maintain supervision of bank holding companies with assets over $100 billion, but more concessions will have to be made as the Fed and Treasury Secretary Geithner press for a greater continued role for the Fed. Finally, the key issue remains to what extent the new consumer financial protection agency (or division) will have independent power to write its own rules or whether the prudential regulators will have a veto. -Joseph Engelhard

Payments Companies: House Hearing
Biding time as it awaits a regulatory reform bill counter-volley from the Senate – and ahead of a rescheduled and much-telegraphed Tuesday, March 23, full committee hearing on housing finance – the House Financial Institutions and Consumer Credit Subcommittee will host a Wednesday, March 10, 2010, 10:00 a.m., hearing on “Regulation of Money Service Businesses.” While the full House Financial Services Committee, last fall, discussed the issue of whether such companies should be regulated by a proposed new consumer financial protection agency, the state of such proposals and the future regulatory environment for payments companies in general remains up in the air. -Charles Gabriel

Student Loans: What’s the Score on Reconciliation?
In contrast to the widely-reported scorn and indignation the GOP has mustered in anticipation of Democrats’ attempted use of budget reconciliation to move health care legislation, Education committee Republicans’ complaints about the parallel prospect of reconciliation’s use to repeal the private-lender-dominated FFEL student loan program – complete with a huge measure of controversial accounting legerdemain – has yet to earn a peep in national media. As we wrote Friday, despite a fresh analysis from the Congressional Budget Office (CBO) asserting that the Obama administration’s FFELP repeal proposals will save $20 billion less than the $87 billion-over-10-years previously forecasted, the majority apparently will continue assuming the $87 billion figure, or the savings associated with shifting from 70% FFEL lending to full Direct lending – based upon a CBO score now a year old – when the official budget scorekeeper now acknowledges that only between one half and sixty percent of schools are still in the FFEL program. -Charles Gabriel

Frank Statements about GSEs
House Financial Services Chairman Barney Frank’s (D-MA) seemingly provocative/ rending-of-the-cloth comments last Friday (March 5) – to the effect that Fannie and Freddie debt did not have the same legal standing as Treasury debt, and that investors shouldn’t take government backing for the GSEs for granted going forward – seems to reflect how frustrated the two companies’ traditional Hill supporters have become as they remain stuck in purgatory (i.e., being run as agents of the state to help finesse the housing crisis but no good to Hill liberals as agents of low income housing and still serving as an embarrassing tool for Dem bashing by Republicans). With this dynamic seemingly set to last for at least another full year, Frank seemed to want to belie any notions that he and other Democrats will invest political capital to save the GSEs’ past structure going forward. Debt markets being what they are, however, a reaction and counter-reaction ensued, with Frank ultimately compelled to issue a “clarification,” decrying any intention to conflict with statements Treasury officials made (in announcing the equivalent of an “effective” federal guarantee of GSE debt) last Christmas Eve. As a Treasury announcement of expanded lines of credit to the GSEs at that time read: “The amendments to these agreements announced today should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.” -Charles Gabriel

Telecom
Robert Kaminski

Universal Service Fund on the Chopping Block; 3G for Everyone?
The soft roll-out of the FCC’s Congressionally-mandated National Broadband Plan continues. Ahead of its March 17 deadline (actual delivery is said to be planned for the 16th), reform of the Universal Service Fund is the latest in a series of announcements of proposals from the Plan.

The FCC will propose to eliminate within ten years the $4.6 billion program of subsidies to telecom service operators providing basic voice to high cost areas. The Commission intends to replace this portion of the Universal Service Fund with a program to subsidize broadband internet and voice, dubbed “Connect America.” Also being proposed is a “Mobility Fund” to provide ubiquitous 3G wireless service.

While the FCC claims they can make the changes to USF on their own, the switch-over will require Congress to appropriate $9 billion over three years. This will not be an easy ask. There are other USF reform proposals in both chambers and large price tags attached to other FCC broadband proposals announced from the Plan. If the FCC expects any money from Congress, they may need to rank-order their wish list. -Robert Kaminski

Key Takeaways:

• The development would seem good news for Sallie Mae and the FFEL student loan community, in that adoption of the new estimates could necessitate the dropping of several new spending initiatives in the House-passed Student Aid and Fiscal Responsibility Act (SAFRA), reducing its luster for potentially-swing-vote Democratic legislators.
• Nevertheless, we’re hearing that Democratic leaders may insist upon retaining CBO’s previous score, which, while giving fresh ammunition to GOP and FFELP-friendly critics, might leave the current dynamic in place.

Outlook/Conclusion: While we have yet to fully assess the significance of this news, we doubt that it will knock the Democratic majority and Obama administration off their course in repealing FFELP in coming weeks or months (barring evidence that the new CBO numbers will now be applied and that they might change the score of the Obama/SAFRA proposal relative to the Sallie/Community plan).  Nevertheless, the potential disruption of the Direct lending advocates’ talking points, and new parameters with regard to meeting the “bid” and “ask” of the more-than-ten moderate Democrats seen in play in the industry’s attempts to stave off unfiltered enactment of SAFRA, could yet help lead to FFELP-friendly concessions before the final bell sounds.

Discussion: Separately, there is conjecture that the House Budget Committee may consider a reconciliation bill, including amendments relating to health care reform and SAFRA, as early as March 10, 2010.  After discussions with key budget experts last week, Capital Alpha believes that such a measure (designed primarily to address House members’ concerns about already-Senate-passed health reform legislation, but also to carry FFELP repeal provisions) will likely have to pass on the Senate floor first.  [This would be in order to ease the distrust of House Democrats, who fear passing the Senate's earlier measure but then seeing pledged modifications (that Senate leaders have promised to move separately via a reconciliation bill) subsequently fall on the cutting room floor].  The dynamic suggests that any House Budget bill would essentially provide guidance to the Senate, which would then have to forge its own healthcare- and SAFRA-related package while being mindful of likely “Byrd rule” objections from Republicans, as well as CBO scoring that might delay the process or upend the direction of a final deal.

In any event, the net of these factors likely portend new and stripped-down versions of SAFRA emerging, from both the House and Senate Education committees, in coming days.

The text in the new CBO analysis relating to Pell and student loans follows below:

Most of the President’s proposals for education fall into two areas. The first would replace the existing discretionary funding for Pell grants with new mandatory spending, index the maximum award for inflation for future years beginning in 2011, and make changes to the formulas that determine eligibility for grants. Under current law, the program is funded with a combination of annual discretionary appropriations and mandatory funds. The proposed changes would boost mandatory spending by $374 billion over the 2011–2020 period, of which $177 billion would replace discretionary spending in CBO’s baseline; thus, the net effect of the proposal would be an increase of $197 billion in outlays over the next 10 years.

The second major proposal for education would eliminate the federal program providing guarantees for student loans, replacing guaranteed loans with direct loans made by the Department of Education. Under the Federal Credit Reform Act, the budgetary cost of guaranteed loans and direct loans is the estimated present value of the total cash flows over the life of each loan, with such cash flows discounted to the time of loan disbursement using the rates on U.S. Treasury securities of comparable maturity.

The direct loan program is estimated to have a lower cost per dollar loaned than the guaranteed loan program has. Therefore, replacing the guaranteed loan program by providing additional direct loans would, by CBO’s estimates, yield budgetary savings totaling $67 billion over the 2011–2020 period.

The full document is available here.