UPDATE: The agreement has fallen apart. After meeting with the President for hours, both sides stormed out of the room. Paulson and Bernanke now hustling back to the hill to try to salvage the deal. Some are blaming McCain.

EARLIER: Congressional Republican and Democrat leaders reached an agreement this afternoon for the Treasury’s Troubled Asset Relief Program—also known as the Hanke-Panke bailout. The provisions of the agreement are vague but differ in surprising ways from what we’d been led to expect.



Here’s a rundown of the highlights and lowlights.



Compensation Cap: “Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies.” This is broader than the “golden parachute” limit reported an hour ago because it applies to all executive compensation for any company participating in the program. The discretion it gives to the Treasury Secretary will make him a kind of compensation czar for Wall Street, which is a very strange role for the Treasury Secretary. Fortunately, it may give the Treasury Secretary enough discretion to make this provision toothless enough that financial executives won’t have to avoid participation just to preserve their income.



Equity Sharing: “To minimize risk to the American taxpayer, requires that any transaction include equity sharing.” This is more or less a hedge against firms selling their worst junk at inflated prices to the Treasury or otherwise exploiting the bailout for a windfall. If the firms rake in huge profits from the bailout, the government will get a share of the upside.



Debt Payments: “Requires most profits to be used to reduce the national debt.” Entirely nonsense. Congress will continue to accumulate budget deficits and the government will increase its debt. Even if the government spends every dime of the alleged profit from this deal on earmarks, it can claim that it is reducing debt because otherwise it would have to borrow the money for the program.



Weak Judicial Review: “Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law.” Hank Paulson had sought unreviewable power to spend the TARP. This was meant to reduce uncertainty in the markets, which could know that a judge wouldn’t be able to prevent the Treasury from spending the funds. The new standard will allow a very weak form of judicial review. “Arbitrary or capricious” is legal mumbo-jumbo for a standard that approves almost every government action.



Meet The New Bosses: “Establishes strong oversight board with cease and desist authority.” How do we get on this ‘oversight board?’



Congressional Oversight: “Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority.” This seems straight forward. We imagine these things will look just like the Fed chief’s testimony before Congress—expect vague answers from a condescending Treasury secretary and awkward, self-serving, constituent pleasing questions from Congressmen.



A Bureaucracy To Watch The Bureaucracy: “Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority” and “Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse.” But who will monitor the independent Inspector General and the GAO? It’s bureaucrats all the way down.



More Mortgage Losses Ahead: “Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure.” Doesn’t anyone see the irony that modifying mortgages that are causing the trouble will only increase impairment rates, drive down the prices of mortgage backed securities and dig us deeper into the credit abyss? Apparently not.



Profit Elimination for Government Owned Mortgages: “Requires loan modifications for mortgages owned or controlled by the Federal Government.” Whoosh! There go those profits. If the government buys assets at their expected returns based on their terms, then modifies them, it guarantees a loss.



Blow The Bubble Again: “Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs.” Get ready for the Revenge of The Housing Bubble: This Time It’s Personal!



Create Chaos In the Markets: “Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed.” It’s not like we want to end this awesome volatility right? Let’s keep the markets hanging around, nervously waiting on every incremental piece of that. That will totally help the economy.



Government Rent Seeking: “Final $350 billion is subject to a Congressional joint resolution of disapproval.” Because, you see, congressmen and senators have fiscal needs too. If they lose their authority to control spending, why are the lobbyists going to raise campaign contributions for them. Everyone would just lobby the Treasury officials. This part is the bailout for lawmakers.



So it turns out congressman Paul Kanjorski was right when he said the agreement woud contain “most everything everyone is asking for as a condition to put this together has already been agreed to and is in the bill.” Ain’t democracy grand?