What the latest bailout plan means
Now that the details are out, we can safely state that the US political
and financial leadership has completely sold out the taxpayers and has
done so in a manner that is startling, both in its recklessness and its
The reckless part I will spell out in the details below.
The brazen part is in how this is being spun
out, as if the entire plan were hatched in a hurried rush, at the last
minute, after events forced the issue. This is the spin, but it is
Because many financial commentators, ranging from Roubini to Roach to Calculated Risk to myself, foresaw these events, we can be completely confident that these events were both anticipated and planned for long in advance. The only question left was how they were going to be 'sold' to the public. What better way than in the midst of a "massive financial panic" that required urgent action?
And now that the details are out, the plan is even more insidious than I ever dreamed.
On Friday the news started to leak out that perhaps $500 billion was the, uh, 'floor' for the bailout, and that it might be up to 60% larger than that:
The sources said the government would acquire residential and commercial mortgages and mortgage-backed securities under the proposal, which needs Congressional approval.
A Treasury spokeswoman declined to comment.
So it looks like we are being 'softened' up by Extremely Large Numbers coming in quick succession so that we'll be too numb to argue when the real plan comes out. For the record, my solution would have been very different.
Instead of buying these failed assets off of the banks for $500 billion, I would have preferred to see the banks receive $500 billion in loans, which they'd have to pay back from profits over time, while they retained the failed loans on THEIR books as a reminder to be more careful next time. Same cost to the government, but a very different message sent to reckless lending institutions.
And here are the critical elements from the real plan released yesterday (Sat., 9/20) (hat tip to Lemonyellowschwin for posting this in the comments yesterday). Full details are all the way at the bottom.
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.
OK, this starts out kind of like I expected. The definition is a little vague, unfortunately, having stalled at "mortgage-related assets." I would have preferred that they spelled this out, because then we could have assessed which institutions were going to be helped out the most. Certainly these could have and should have been spelled out. This is vague enough to leave open the prospect that practically anything could be defined as "mortgage-related", and I am certain we will see this provision abused. 100% certain.
The Secretary’s authority to purchase mortgage-related assets under
this Act shall be limited to $700,000,000,000 outstanding at any one
Whoa! Stop! What is this "at any one time" language?? This means that $700 billion is NOT the cost of this dangerous legislation, it is only the amount that can be outstanding at any one time. After, say, $100 billion of bad mortgages are disposed of, another $100 billion can be bought. In short, these four little words assure that there is NO LIMIT to the potential size of this bailout. This means that $700 billion is a rolling amount, not a ceiling.
So what happens when you have vague language and an unlimited budget? Fraud and self-dealing. Mark my words, this is the largest looting operation ever in the history of the US, and it's all spelled out right in this delightfully brief document that is about to be rammed through a scared Congress and made into law.
But, certainly, if the combination of vague language and and unlimited budget will create the conditions for further fraud and abuse, at least we live in a nation of "checks and balances," right?
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.
This language literally took my breath away when I read it. I am now beyond shocked at what is openly transpiring before our very eyes. I can think of NO legitimate reasons(s) for the right of review to be stripped away right from the outset. The illegitimate reason I can think of pertains to the vast riches that are going to flow into the pockets of the well-connected as a result of this act of piracy.
Many such people became fabulously wealthy as a result of picking up real estate assets for pennies on the dollar during the S&L crisis, and that model has being reproduced here.
You can count on it.
This is just another straw, thrown onto an already-collapsed camel, that confirms the fact that the US political system is broken and that the rule of law no longer applies within the US.
My final comment: If it looks like a looting operation, smells like a looting operation, and behaves suspiciously like a looting operation, it might just be a looting operation.
Full language of the act:
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.