Bailout bill gives Treasury wide leeway in buying bad assets

It won’t just be banks that will be eligible to sell bad mortgage assets to the Treasury under the proposed bailout plan.

The 110-page bill, as drafted by congressional leaders Sunday, gives the Treasury secretary wide leeway in deciding who to help.

The bill defines "financial institution" as "any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company established and regulated under the laws of the United States."

But there’s more: Section 103 of the bill (page 12) says the Treasury, in exercising its authority, can consider "the need to ensure stability for U.S. public instrumentalities, such as counties and cities, that may have suffered significant increased costs or losses in the current market turmoil."

The Treasury also is permitted to protect "the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan," obviously including pension funds.

Finally, on page 33, we find this passage: The Treasury "shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks."

And then this: "To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase" under the bill.

That sure sounds like an opening for the Treasury to take certain U.S. mortgage dreck from foreign central banks that may want out of the paper.

As for the kinds of troubled assets eligible for purchase, here, too, the Treasury has great latitude.

The bill says eligible assets are "residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages," as long as they were issued on or before March 14 of this year.

But the bill also grants the Treasury the ability to buy "any other financial instrument that the secretary, after consultation with the chairman of the Federal Reserve, determines the purchase of which is necessary to promote financial market stability."

So if things got bad enough in markets, the Treasury could pretty much buy anything.

The only limitation on that loophole is that Congress would be entitled to a letter explaining why the Treasury was going beyond the bill’s stated authority.

Photo: Treasury Secretary Henry M. Paulson with congressional leaders Sunday. Credit: Lauren Victoria Burke / Associated Press

Comments

[PNW Trojan]

Loopholes, the 2nd LifeBlood of politicians, after MONEY, of course. Prepare to get the Govt GREEN WEENIE! (We're screwed!) We remember you Pelosi, Feinstein, Boxer et al, come November.

[RamseySt]

Yeah! Right!
The government is going to make money off of this pig with lipstick!
Do they take us for fools?
Apparently so!?!?!?

Vote for anyone who does NOT support the bailout of the rich private bankers in NYC. McCain and Obama both think that the rich bankers should be saved from bankruptcy.
What the heck are they smoking?

I feel like the entire east coast from NYC to DC, including our elected leaders, has gone loony. Or maybe it is me?
Am I missing some logic for what is being proposed to help out the big banks?
The issue is giving $700 billion of taxpayer money to bail out big incompetent bankers and their foreign friends. Bankers who over the past 10 years have made hundreds of billions of dollars on these same credit vehicles (note they are NOT simple mortgages that will be purchased by the US government from the banks but wildly complicated, esoteric, $62 trillion leveraged insurance/hedging policies with unknowable values)
It will only directly help the banks not the rest of the economy. We will still get OUR recession but the big banks get to sit this one out! And if needed we will HAVE to give them more money or else the first $700 billion will have been wasted. And I assure you that $700 billion does not begin to cover the $5 trillion needed now for these credit vehicles.
We can not afford REALLY one tenth of $700 billion!
Have you seen the "IOUSA" movie put out by the Concord Coalition and Pete Peterson? We MUST start cutting US government spending NOW or the Republic is headed for bankruptcy or default on our commitments in Social Security and Medicare.
Let the 27 year old financial bubble collapse and the excesses work their way out.
Let the free market work.
All the big banks went broke in 1907 and WE were fine in a couple years. This bailout will only prolong a two year down turn and convert it into a two decade recession/depression ala the GREAT depression or more recently in Japan.
I repeat we are going to give $700 billion of our money to incompetent business men.
Why?
Because they asked for it.
And who will help decide who gets the money, why the Treasury Secretary, of course, who just happened at one time to work for one of the big banks getting bailed out AND who will likely in January end up working there again!
I mean I have head of chutzpah but this may take the cake!!
Is this a great country or what?

You know it might actually be cheaper to pay off the mortgages (or at least the upside down part) of ALL the delinquent and foreclosed homes rather than to bail out the big banks.

How about giving money to the banks holding the mortgage to pay down the principle so that NO houses are upside down any more? And adjust the interest rate so that people can afford the payments. That way people can stay in their homes.

Let's see 5 million homes (10% of total) - $100,000 on average each for the upside down portion of the mortgages AND we come up with $500 billion dollars.

Now after the principle and interest adjustments the credit instruments are not upside down. And people get to stay in their homes and not be evicted.

Of course, we can not afford the $500 billion for direct mortgage principle readjustments but it is cheaper than the mad $700 billion being proposed that we give directly to the big banks while screwing the homeowners being evicted!!

Interesting times don't you think!

On second thought, how about letting the housing bubble collapse and bring houses down in value such that real middle class families making a realistic wage could actually afford them. What a concept!

Naw. Letting the free market work would be too easy and too American. We need to regulate and control the heck out of this so that housing prices do not become sane again. We must keep the housing prices up as high as possible....maybe even higher. Let's work harder to manipulate the markets. After all we MUST make sure that the big banks continue to make even more money at our expense!

Please call your Senators and Congressman and TELL them to stop the insanity or else you will not vote for them again.

[LA / Michael]

You realize this will set a new precedent for Wall Street and financial markets around the world. Congress just gave a $700,000,000,000 open line of credit to the very same people that got us into this mess.... And you the Public (main street) will gain nothing (I promise). And in just a few months, you will have forgotten all about this, as accountability has been swept under the carpet. Your homes will still be foreclosed on, inflation will still make most of you bankrupt and the global economy will be in full swing for just a little while longer.

[bleugene]

According to secretary Paulson, he plans to buy mortgage-backed securities at a price HIGHER than their current market value. Here's an alternate approach: Instead of purchasing securities at some artificially and arbitrarily inflated prices, the government (aka we) SHOULD PURCHASE THEM AT THE LOWEST PRICE POSSIBLE, but also provide low interest loans (eg 0.0% for first 5 yrs, followed by gradual increases).

In the current plan, if a security is to be purchased for $100 whose current market value is, say, $20, the difference of $80 is essentially a free gift (Can you say "rip-off"?). In the alternate plan, the $80 would be provided as a very cheap loan.

The alternative plan has the following benefits: 1) It is just as effective as the current plan in providing liquidity to the financial system by taking "toxic loans" off the market. 2) It does NOT reward bad business behaviors with free tax payer money. As a result, the alternate plan discourages future imprudent business behaviors more effectively than the current plan. 3) It significantly increases our future profit potential.

The current situation is a business opportunity for us tax payers. There is demand for something that only we can provide, liquidity for mortgage-backed securities. Yes, we need to quickly unfreeze the credit market. But we also can and should leverage our position to maximize profit by extracting absolute lowest prices for the securities.

[Irritated]

This has got to be the dumbest solution to what really isn't a problem as far as I'm concerned. Homes in this area where just starting to come down. Now all we have done is prop up the the inflated high prices in the home market for a little longer. No one's loan will get cheaper. No one's home will be saved. What it will do is allow the fat cats to sink their teeth further into the average working American who can't get a loan or much less afford the to pay the piper when the next balloon loan scam comes around the corner.

Imagine, If you are a hard working person and you make a mistake you pay for it dearly. If you own a bank that made a whole crap load of bad loans and investments, no problem. The American tax payer, who you will not give a loan, will bail you out to the tune of $700 Billion. Most certainly, against our will.

Who actually thinks this is a good idea?

[James Monachino]

American Taxpayer May Profit from this Plan -- Smile--

If the Government purchase troubled securities at market it wouldn't be a bailout. The troubled institutions don't need government help to sell their eroding assets at market. They could do that themselves and at a better price. Besides, do you think anyone plans to sell troubled assets to the government that they consider might eventually be a profitable.

The real question is where are we going as a nation with this approach? The $700 billion dollar package won't solve the global credit crunch problems and follow up will be needed. Are we setting a dangerous precedent that will come to haunt us after this crisis eventually passes.

Folks, keep talking to your Senator and Congress. Ask questions and tell them what you think. Nobody really has a handle on all the problems being considered and your input is important for all of us.

James Monachino

[LA / Michael]

James Said: "The real question is where are we going as a nation with this approach? The $700 billion dollar package won't solve the global credit crunch problems and follow up will be needed. Are we setting a dangerous precedent that will come to haunt us after this crisis eventually passes".

Yes.... The economy is still going to continue to Tank!!!! IMO the Banks can not and will not loan money to the vast majority of over-extended Americans. They will take the bail-out and simply due their business overseas. If you were a banker, would you extend even more credit to borrowers who have already proven they are maxed-out and over-leveraged???? The housing market will continue to decline, as it should, and foreclosures will continue to mount. There is really no new over-sight being established at Fannie Mae or Freddie Mac. After their bail-out, you have the same old players who were negligent in the first place, making the new regulations and policies going forward, they should all be fired. Also look at what the Attorney General from the State of New York (Andrew Coumo) is putting into play and you will see that there is still massive corruption. Everyone wants to get their hands in this for political reasons. This bail-out may actually end up doing more harm than good in the long run. As the (once) richest nation in the world, we should have only the brightest minds in world making our financial decisions and setting policy. Lets see... Write now we have Paulson, Bernanke, Pelosi, Lockhart and now Coumo??? Can there be a better team????

[Todd]

The term "troubled assets" requires more clarification. Part of the problem right now as I understand it is financial institutions have traded all these financial instruments that have risky loans along with good paper. Risky loans were originally bundled with safe loans to mitigate the risk.

Many of these instruments may be 95% good (the % of mortgage loans in threat of being in default is about 4% according to theconomist.com) but since they aren't itemized and no one trusts the rating agencies anymore, the banks really don't know what they've got. Consequently, banks don't trust eachother, and are hesitant to loan money to one another, and a lot of these instruments are under-valued.

So the question is, if the government is buying financial instruments associated with troubled assets, does this mean they'd be buying all the 'good paper' along with the risky loans that borrowers are having difficulty paying? Basically, they'd be buying the instruments and unraveling them to separate the good from the bad and figuring out a way to work with the borrowers on the bad? If that's the case, the government would be getting a lot of good assets at a very good price.

[Nancy]

This is bad dope....just say NO!