Sunday, September 28, 2008

There's A Little Problem With The Bailout Plan....

The bailout plan, though it may be modified during the week, was originally written to include some very disturbing language.

As the bailout bill was originally written, it authorizes the Secretary of the Treasury "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," and "to take such actions as the Secretary deems necessary to carry out the authorities in this Act".

"Mortgage related assets" are defined as "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."

Finally, near the end of the bill, one section reads "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."

The biggest concerns I see here are threefold: The proposed legislation, in its original wording would (a) put a huge some of money (nearly three quarters of a trillion dollars) under the control of one person, who (b) is answerable to no one except the President, and (c) who could, with a good team of lawyers, twist the meaning of "other instruments that are based on or related to such mortgages" to mean things as far removed as stock in a global fast-food franchise owning many retail outlets, or shares in a real estate investment trust owned by the President's favorite lobbyist. With no recourse to regulatory agencies or the courts, the Secretary need not be concerned about consequences of ineffective or even corrupt decision making.

This strikes me as a really bad idea.

Maybe, before the members of Congress adjourn at the end of this week, they'll pass a version of this bill that has some safeguards and constraints. Maybe they'll go with a smaller-scale interim bill for now, to buy some time until they can design a more suitable long-term solution. Less likely but still possible is a decision to let the markets control things from here on out, with the chips falling where they may.

But given the history of the Presidency and the Congress over the last two years, I will not be a bit surprised if after a lot of steam and rhetoric, the Paulson/Bernanke bill passes in essentially its original form. And then Henry Paulsen will become the most powerful man in America. That's Henry Paulsen, Secretary of the Treasury, former CEO of Goldman Sachs, and the man who just this past July said "It's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."

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