Big Bailout (3): Government Fixing the Crisis Government Caused

The Senate held hearings to grill Treasury Secretary

Paulson and Federal Reserve Chairman Bernanke.

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The Administration’s position, presented by  Secretary Paulson, is that Congress must immediately provide a way for institutions that hold poor quality mortgage backed securities to dump them.  The alternative, say Secretary Paulson and  Chairman Bernanke, would be an unthinkable “meltdown” resulting in the loss credit lines routinely accessed by small, medium and large businesses, leading to layoffs and widespread economic misery.   They warned that mortgages, car loans and student loans would all become unavailable if Congress failed to pass the big bailout this week.

So far, reaction from the House members and Senators who must pass the legislation that empowers the Administration to buy the toxic securities has been muted, without the typical partisan hysteria, but largely negative.   We have a contact inside The House of Representatives who believes the bailout has the support of fewer than half of Democrats and fewer than half of Republicans, adding up to significantly less than the majority needed to pass the legislation.

he Senators expressed great concern and anxiety over the language of the proposal that grants virtually unlimited authority to The Secretary of the Treasury to spend $700 Billion Dollars. The Proposed legislation, less than two pages, looks like an action plan in a private sector business and thus clashes with the long-winded culture of Washington.  If the Administration had found a way to say the same thing in 250 pages, there would likely have been less opposition.  T

Having spent many years  toiling within the belly of the bureaucratic beast, I can read between the lines of  Secretary Paulson’s legislative proposal.

Below are excerpts from the Administration’s proposed legislation in black print and my comments in blue print:

Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.–The Secretary [Treasury Secretary Paulson, and his successor in the next administration] 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.  In the culture of Washington this much authority and discretion vested in one individual is unheard of.  But the Secretary obviously believes he needs the authority to make decisions quickly without waiting months for a typical bureaucratic approval process for each transaction.

(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; Things just aren’t done this way in government.  Employees are hired via a lengthy civil service application process.  It usually takes several months to fill one open position.  And one person doesn’t get to set forth the duties of any job, all by himself.  Clearly, the Secretary hopes to avoid protracted processes and make this endeavor lean and efficient, unlike anything else in government.

(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; The Secretary wants to contract with financial experts without the typical government bid process that takes at least six months.  He wants to be able to hire competent people and not be pressured to accept the low bid.

(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;  Paulson wants to use Wall Street Brokerages and banks to perform some of the work, and he wants to pick the ones he’s comfortable with – no bureaucratic veto.

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; Secretary Paulson wants to set up the whole program himself without any “help” from any politicians or bureaucrats.

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.  Paulson will issue his own regulations, thank you.  No need for Congress or the thousands of beltway bureaucrats to get involved.

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.
It’s unlikely that Congress has ever set forth such considerations in fewer than fifty pages.  The government way is to add thousands of words of detail to something like this, detail that later provides the openings for debate, litigation, and supreme court decisions, continuing years into the future, long after the transactions have been completed.  Since there’s no detail, there’s no opening.  Nobody could ever make a case that the Secretary didn’t “consider” stability and protecting the taxpayer, no matter how this all ends up.

The remainder of the proposed legislation is just as lean and direct as these excerpts.

We’re against government bailouts.  But we’re also against the bone-headed regulations and government intervention and government corruption that contributed to this crisis.  If government wasn’t so deeply involved there would be no justification for any sort of bailout.  Nor would there be a pending crisis threatening significant harm to tens of millions of innocent businesses and individuals who had no role in creating the toxic mortgage securities, don’t work on Wall Street, and never made a penny in the mortgage business.

We certainly agree with the reluctance of Congress to grant such unfettered authority to the one person.  But Congress faces two unacceptable alternatives:

  1. Give the Secretary the authority he asks to conduct a lean, efficient operation, but without any checks and balances, or,
  2. Burden this enterprise with bureaucratic process, political interference and litigation, causing it to fail.

Reluctantly, we pick #1.

2 Comments so far

  1. aaa again on September 24th, 2008

    “Scandalous.” “Outrageous.” “Breaking the rules.” “A miscarriage of justice.” “Neglecting the victims.”

    Comments on the banking bailout? No. Reactions here in Illinois to the early release of a woman who killed three motorists. Several years ago a depressed woman tried to commit sucide. So she drove her car at 100mph into a car with three men…….and killed them. She lived, with only a broken ankle. Sentenced to 8 years, she was just released after only 3.

    What does this have to do with the bank bailout? Everything. We have become a society with no accountability. None. The origins of the current financial debacle lie squarely with the government and its regulations and oversight. Today? Well, we hear its all private enterprise’s fault…….and the Bush administration of course.

    Barney Frank, Chris Dodd, and yes, Barack Obama are knee deep in this. Knee deep.

    McCain? He warned against this.

    But now the coverup begins. And partisan voters will feign outrage………and vote on party lines. No accountability when there is an election to win you see!!

    And tomorrow another person who committed manslaughter will go free. People will complain. Nothing will be done.

    Society: go look in the mirror, and stop with your fake outrage.

  2. aaa again on September 24th, 2008

    I wish I could take credit for original research. But no. This is from the blog “Powerline.” But any honest peron should understand what is going on, Barney Frank’s blatent dishonesty, and the MSM air cover. Shameful.

    A 2003 NYT article:

    The New York Times ran this article on proposed reforms to Fannie Mae and Freddy Mac:

    The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
    Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

    The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

    The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. …

    The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session. …

    ”The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,” Mr. Oxley said at the hearing. ”We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,” the independent agency that now regulates the companies. …

    Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

    ”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

    Maybe it’s too much to expect anyone to remember the distant past–2003–but still, it seems remarkable that Barney Frank can make the rounds of the television talk shows, pontificating on the current crisis, without being reminded of his own role.