Bush bailout for Dummies

[mongon]

Gentleman: here is the text of the Bush proposal sent to congress on friday night. They have since been working on modifying it to suit everyone's needs, whatever they may be. It would be very routine for the Dems who control congress to add many of their pet projects to the bill because they know Bush needs this bailout and won't veto.

 

 

 

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

 

Section 1. Short Title.

 

This Act may be cited as ____________________.

 

Sec. 2. Purchases of Mortgage-Related Assets.

 

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

 

( Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

 

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

 

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

 

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

 

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

 

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

 

Sec. 3. Considerations.

 

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

 

(1) providing stability or preventing disruption to the financial markets or banking system; and

 

(2) protecting the taxpayer.

 

Sec. 4. Reports to Congress.

 

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

 

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

 

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

 

( Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

 

© Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

 

(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

 

Sec. 6. Maximum Amount of Authorized Purchases.

 

The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

 

Sec. 7. Funding.

 

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

 

Sec. 8. Review.

 

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

 

Sec. 9. Termination of Authority.

 

The authorities under this Act, with the exception of authorities granted in sections 2((5), 5 and 7, shall terminate two years from the date of enactment of this Act.

 

Sec. 10. Increase in Statutory Limit on the Public Debt.

 

Subsection ( of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

 

Sec. 11. Credit Reform.

 

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

 

Sec. 12. Definitions.

 

For purposes of this section, the following definitions shall apply:

 

(1) Mortgage-Related Assets.--The term "mortgage-related assets" means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

 

(2) Secretary.--The term "Secretary" means the Secretary of the Treasury.

 

(3) United States.--The term "United States" means the States, territories, and possessions of the United States and the District of Columbia.

 

Source

 

 

 

[..]

From the Mallaby article I linkd above:

 

[color:purple]Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don't do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don't want to signal weakness and they don't want to dilute existing shareholders. A government order could cut through these obstacles.

 

Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks' bad loans but by buying equity stakes in the banks themselves. Whereas it's horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.

 

Congress and the administration may not like the sound of these ideas. Taking bad loans off the shoulders of the banks seems like a merciful rescue; ordering banks to raise capital or buying equity stakes in them sounds like big-government meddling. But we are in the midst of a crisis, and it shouldn't matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward. [/color]

 

Cheers,

SD

[..]

McCain issued an order that no one shall work as a lobbyist that is working on his campaign. Has Bambi done the same?

 

As McCain keeps pointing out, Bambi was the second largest recipient of Fannie/Freddie cash in all of Congress. Me thinks trying to tag only one side as beholden to lobbyists is not going to fly.

Dude, you can't be serious!!!!! A Google will show you that most of McSame's top campaign dogs are/were lobbyists. The above is just breath-taking in it's ignorance, which is not normal from you.

 

Cheers,

SD

[mongon]

I notice that the proposal says the limit of the Treasury's authority to hold mortgages at any one time is $700 billion. Se we can rest easy that our tax payer liability is limited to that amount :smirk:

 

But the proposal also says:

 

"© Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

 

Seems to me that Paulson could buy $700b worth of securities, then turn around and sell them with a U.S. gov guarantee that if there is a default by the borrower, the gov will pay. All in compliance with his stated authority. Since the securities are off the gov's books, Paulson could then buy up another $700b in securities. Now the gov owns $700b in new securities and is on the hook for $700b in guarantees of the old securities. And he could do the same thing again and so on.

 

So really there is no limit on what taxpayers will be on the hook for.

 

Could be I'm just paranoid.

 

 

[mongon]

SD: the key being they "were" lobbyists per McCain's order. Now I'm not one to argue that since they cancelled their lobbying licenses that means McCain is free from lobbyists. The point here is that Bambi is beholden to lobbyists no less than anyone else. McCain at least prohibited anyone from lobbying while working on his campaign.

[..]

Hugh, Dean Baker takes the question of the bailout to an even more elementary level, having remembered that there is a market and therefore a "market value:"

 

[color:purple]The most obvious question: is how will paying market price for near worthless assets prevent the collapse of zombie institutions like Bear Stearns, Lehman Brothers and AIG? These institutions needed money. They won't get it from selling mortgage backed securities, that are chock full of bad mortgages, at the market price. We already know this, because they already had the option to do so.

 

The Bush proposal to throw out hundreds of billions of taxpayer dollars to buy up this debt will do little if anything to prevent another round of collapsing banks. We will again see desperate weekends with Treasury and Fed honchos running around trying to save the next major basket case.

 

The other big question is: how will we get the banks to honestly describe the assets they throw into the auction?[/color]

 

Unless the Fed is planning to buy assets at above market value â??- that is, to directly subsidize those same bankers and firms with taxpayer dollars to make those risky assets "less" risky in the market and still providing no route or incentive to return to the "good" equilibrium -â?? the "bailout" as discussed with have no positive effect on the health of the firm(s).

 

So what Henry Paulson is proposing has to be a direct subsidy to have any effect.

 

As an isolated plan, it is simply a reward for bad behaviour. Only if it were combined with those items for which we "don't have time" could it possibly be an economically viable plan. Like, in return for taking toxic assets off of a firm's books at a price that is higher than the market rate, the government would get a share of any future profits the firm makes for some time period, say 10% for ten years, something like that. Administratively, it could come as an increased tax rate on profits and, if it helps politically, it could be earmarked for a particular cause. The government pays the firm a fair value for the assets plus an additional amount to help with recapitalization, and in return gets a claim on future profits for a period of time. I would also tie executive compensation at the bailed out companies directly to profits to help prevent gaming.

 

Cheers,

SD

[Bangkoktraveler]

Somebody is going to oversea this project. Will GWB get the position or will it more likely be some of his buds?

[mongon]

According to the proposal, Treasury will run this show. So its Hank Paulson's baby until the new Prez is sworn in.

[mongon]

Letting the treasury handle it is alot different from setting up something like the RTC. Treasury is run by the Prez.

[..]

And the legislation will provide that the actions of the secretary are not subject to court review.

 

Article III of the Constitution gives Congress the power to determine the jurisdiction of the SCOTUS and other federal courts, so yes they can do this -- reference Marbury v Madison.

 

So we give a blank check to Paulson and hope it all works out? Kinda the same risk level as giving your ATM card and PIN to a bargirl you just met IMHO.

 

Cheers,

SD