Perhaps the Skimpiest Proposal for the Most Extensive Grant of Authority I Have Ever Seen

More expansive than the National Industrial Recovery Act of 1933. The only thing that comes close is the Marshall Plan--and the Marshall Plan was run by an independent agency, the ECA; the ECA had to get its funding appropriated every year; and Dean Acheson turned down the job of Marshall Plan head on the grounds that with a Republican majority congress they needed a Republican administrator (they got Studebaker head Paul Hoffman).

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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.

(b) 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.

(b) 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.

(c) 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(b)(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 (b) 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.

Comments

[jim]

"They want to make their own, original mistakes."

I can't believe that Congress can possibly pass anything even remotely like this.

[jim]

Section 8, Section 2(b)(3) and the last clause of 2(b)(2) are particularly egregious. If I were in Congress, I'd be insulted by this proposal. Have they done no work at all on it?

[Charles]

This is what national socialism (the real thing) looks like.

This makes the Congress irrelevant and vestigial.

It concentrates power in the hands of one man, the President, at whose pleasure the Secretary of the Treasury serves.

Without a vote of the American people, it burdens them with a debt larger than any item in the budget.

I've written my delegation with the subject line No on the Paulson plan. I hope all DeLong readers will do as well.

[sglover]

So the same weasels who signed off (right now!) on the "Patriot" Act and our glorious adventure in Iraq (can't wait!) are going to give this their studious and considered attention, eh?

As the saying goes, what could possibly go wrong?

[raft]

insane.

[Ginger Yellow]

This is the AUMF all over again. I'm not against some kind of RFC with the way things have been going recently, but a blank cheque for $700bn is not the way to do it.

[El Cid]

Over at Atrios someone called it the Authorization to Use Monetary Force.

[Linkmeister]

DO NOT WANT. Particularly Section 8.

[Blissex]

I hope everybody realizes that Section 8 gives total immunity from criminal law and prosecution; Paulson could order any "financial terrorist" shorting USA stocks to be snatched and brought to Guantanamo, and get away with it. or just use any excuse (and I guess that "pursuant to the authority" is much wider than "under the authority"). Section 8 even voids "habeas corpus". It is not just a blank check, it is a blank warrant. Also thinks of what the bill means in terms of electoral politics. Scary.

[AAustin]

The initial capitalization for the Resolution Trust Corporation (RTC) was $50 billion -- which now seems like chump change. Like the RTC, it may well be that the federal government may make some money on some assets it buys. The risks, however, seem enormous when compared to other bailouts (Chrysler, America West Airlines, RTC).

Some questions and comments for economists and finance people:

1) Some of the typical justifications for government assumption of risk just don't apply here. The Arrow-Lind theorem only applies when projects are essentially small and risks are i.i.d., not when risks are systemic. Thus, risks may be distributed over wider set of taxpayers (or those affected by spending cuts or spending on foregone programs), but the government can't make those risks vanish.

2) Given that the Treasury Secretary can do whatever he wants with minimal oversight, accounting for the basic costs, let alone risk-adjusted costs, seems difficult.

3) Not at all clear how Treasury would set prices for assets or derivatives that the market can't seem to value. Some of this may be due to pure liquidity concerns, but not clear how to separate solvency and liquidity. Furthermore, figuring how to put a risk-adjusted price on assets without real market prices will be a challenge.

4) For RTC, the argument was made that the government needs a big pot of money because otherwise savings&loan institutions would stumble along zombie-like, piling up additional losses. The argument for letting RTC get so much was that doing nothing would either lead to a default on the deposit insurance promise, or would lead to larger costs in the future. Now, the complexity and nontransparency of structured finance products is much greater. Treasury seems about to get a much larger pot of money, because it's not just about S&Ls rolling the dice to try to survive, but a much more dire short-run liquidity problem.

5) In recent months, Treasury has been militant about imposing haircuts. Exhibit A would be the $85bn line of credit to AIG at LIBOR plus 850 basis points, plus taking over just under 80% of the firm. What assurances do we have that Treasury will remain militant about imposing militant haircuts on those holding mortgage-backed securities? There is no shortage of examples from government agencies holding large portfolios (German Treuhand, Czech mutual funds holding privatized former state firms, the Berlin Sparkasse (i.e., S&L)) that have acted badly.

[Blissex]

«Treasury has been militant about imposing haircuts. Exhibit A would be the $85bn line of credit to AIG at LIBOR plus 850 basis points, plus taking over just under 80% of the firm.» The 8.5%+LIBOR is pure smoke and mirrors, it is Treasury, the owner, paying interest to Treasury, the creditor. That previous shareholders retain 20.01% is also pure smoke and mirrors, it is to work around some accounting rules for listed companies. In any case the bailouts are not about shareholders, who have already have lost everything, fleeced by their management (the other Hank...) who are going to keep capital gains and bonuses already cashed in. It is about bailing out creditors and counterparties.

[AAustin]

Blissex: ok, so educate me. Can you be more specific about "some accounting rules for listed companies" and the 20.1% threshhold?

While the NY Times a few days ago claimed that the US couldn't own 80% or more "because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency."

http:// www.thecorporatecounsel.net/blog/archive/2008_09.html

There's nothing in federal budget enforcement legislation that I know of that has an 80% rule, nor anything in OMB circulars to that effect. There is a section of the IRS code defining a controlling interest, but it's not clear to me why that should apply to how the federal government keeps its books. I've asked knowledgeable people about this and have had no answer so far.

Is there something on the corporate accounting side that would require this?

Second point: so given the new structure of AIG, how should one evaluate the cost of federal intervention from the point of view of the Federal Credit Reform Act (FCRA)? And, if one included a reasonable adjustment for the risk premium, which FCRA doesn't include, how would one think about costing the bailout?

[redpill8]

This is a great example of why you don't want to centralize functions of the economy or government. Since the elites have colluding to defraud taxpayers and investors of their monies over the years by lunatic Chicago School economic schemes, and then claim that they need more control when these schemes collapse, they will just continue to use the system to continue to defraud us and ruin the economy if you give them more power.

We need to get off the grid that they have set up for us. What they are doing is putting a straight jacket on the peoples of the world and asking us to live in their demented cuckoos nest. People need set up local banking systems not tied to Wall Street of the Fed, but accountable to real people and their interests.

You might want to check out Dr. Michel Chossodovsky's latest piece on www.globalresearch.ca to understand what these fraudsters are doing to you and the planet.