Bailout bill gives Treasury wide leeway in buying bad assets

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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.