Okay. Let's leave no room for ambiguity here. The Treasury's draft plan for saving the world is breathtakingly awful. It would give the Secretary of the Treasury entirely unchecked discretion over up to 700B dollars. Even that "limit" has a loophole big enough that you could drive a truck through it, so the Secretary could in effect spend up to 1.8T dollars, right up to the newly raised Federal debt ceiling, without further Congressional action. This act would be such a wholesale delegation of the power of the purse that I wonder whether it is even constitutional. Of course, the act explicitly puts the Secretary's actions beyond any judicial review, so perhaps questions of legality or constitutionality are merely academic. (Paul Campos shares these concerns.)

As Paul Krugman has pointed out, for the plan to help insolvent institutions, the Treasury would have to overpay for these assets. Yves Smith unearths an account that Secretary Paulson has acknowledged this fact in private, although he won't cop to it on the Sunday talk shows. It is almost old-fashioned to raise questions about whether or not the former Wall Street banker will offer sweetheart deals to his industry (an industry that has harmed the American economy more deeply than most people realize). Just as big lies boldly asserted can trump plausible untruths nervously defended, overt corruption on a massive scale (but "in the public interest") might leave a lot of naysayers dumbstruck. It becomes the way we do business. Of course, none of Dean Baker's progressive conditions, none of Brad DeLong's dealbreakers, not even my plea for a little transparency are incorporated into the proposal.

The oldest technique for the usurpation of power by the executive from the legislative is the manufacture of a state of emergency. That is not to say the present financial crisis is not actually an emergency. But the how the crisis is understood by legislators and the range of options by which it might be addressed have been set by Messrs Paulson and Bernanke. They have presented a single option, one more radical than seemed reasonable even at the height of the depression. (ht Brad DeLong)

It is worth noting that Paulson and Bernanke have thus far proven themselves to be capable technocrats. (Although, as Dean Baker points out, they've been awful prognosticators.) There's a lot to disagree with in how the dynamic duo have handled the torrent of crises that began last August. But they have acted aggressively and creatively, and in their ad hoc interventions so far, they've gone to some lengths to create upside for taxpayers and to squeeze miscreants at least a bit. Until reading the text of the Treasury's proposal and stewing on it overnight, I was inclined not to fight too hard. I saw things as I'm sure legislators see things: Something must be done, a megabailout is disagreeable and imperfect, but it's something that we can do quickly, and it's what our experts, whom we trust, recommend. Let's fiddle at the margins to get it done as best we can.

But the proposed text flipped a switch in my brain. This is not, as Senator Schumer put it, "a good foundation of a plan that can stabilize markets quicklyā€¯. It is a raw arrogation of power. My trust, my willingness to extend the benefit of the doubt, has evaporated.

This is overreach. This is bad.

See also... Glenn Greenwald, John Hempton, Sebastian Mallaby, David Merkel, Robert Reich, among many, many others, I am sure.

For a contrary view, check out the always thoughtful knzn. I disagree pretty strongly, but he's always worth reading.

FD: I am short broad stock indices, which seem to like the prospect of a bailout, so opposing the plan might seem self-interested. But I am longer precious metals and I'm short long-maturity Treasuries. My guess (and of course it is only a guess) is that those positions would do well under the plan.

Update History:
  • 21-Sept-2008, 9:15 p.m. EDT: Removed some ungrammatical excess words, an "on" and a "be do", doo-be-doo-wah.
Steve Randy Waldman — Sunday September 21, 2008 at 3:18pm permalink
RueTheDay (mail):
I can understand (though not necessarily agree with) the desire not to tack on measures like a fiscal stimulus plan, a bailout for homeowners, infrastructure investments, and other contentious components that could derail passage. However, to not add in BASIC CONTROLS, like limiting the amount that can be purchased from any institution, freezing executive comp at participating firms to prevent outright looting, making the tender of some amount of equity warrants required for participation, transparency by requiring the publication of all transactions, more frequent reporting to Congress (3 months from the first transaction and every 6 months thereafter is ridiculous), and specifying exactly what category of securities can be purchased (this was slackened at the last minute) is just an outright dereliction of duty.
9.21.2008 3:45pm
RueTheDay (mail):
It gets worse.

WSJ reporting:

"The Financial Services Roundtable is pushing for key refinements to the Treasury's market rescue proposal. It's calling for the Securities and Exchange Commission to suspend mark-to-market accounting rules for all mortgage related assets, even if temporarily. It wants to ensure the government bid for assets does not count broadly for accounting purposes, so that auditors cannot force banks to mark down their mortgage-related assets to the government-set price. It also wants home equity loans, construction loans and securities issued by Fannie Mae and Freddie Mac included in the deal."

I had been wondering about whether Treasury purchases under this plan would negatively impact other institutions carrying similar assets with regard to capital adequacy requirements and mark to market accounting.

Guess we just suspend that rule too.

I'm sensing desperation.
9.21.2008 5:13pm
Steve Randy Waldman (mail) (www):
RTD — I agree, it was really shocking not that there weren't side deals, but that there weren't prudential controls, checks, balances, and transparency. The Treasury plan is outrageous, unbelievable... hyperbolic comparisons to parliamentary abdications of democracy sprang unbidden to mind.

RE mark-to-market rules, a couple of points: 1) if the market is the state, MTM is just mark-to-Paulson... it's hard to know how much credence to give. The fact is, these assets have no "true" value, and the effect of that on the financial position of the institutions that own them is wholly dependent on the government support institutions do or do not receive. It's hard for me to mourn an indicator that is already blinking randomly. 2) Longer term, we need to rethink MTM accounting. If you believe (as I do) that instantaneous market dynamics can be chaotic, then a one price or even one day sample of prices may not be especially informative. On the other hand, historical cost or estimates of "fair value" are obviously bullshit. In calmer times, we might rethink using some kind of weighted average, that overweights current market but includes recent past pricing as well in continuously valuing balance sheet assets.

Of course as a retail investor, it pisses me off to no end that big players find ways around MTM accounting, while any day of the week I can get margined out of my wealth by an ephemeral violent transition. The ability to hold a portfolio in definitely is almost tantamount to the certain ability to profit, as a random walk will eventually get anywhere you want it to be, regardless of how far underwater it might be at the moment. The fact that the big commercial banks are sitting on black holes waiting to be made whole, while ordinary mortals get sucked into those same black holes, is galling.

Your senses are acute, but they didn't need to be to sense desperation. The air is thick with it. I can hardly breathe. It was really reckless on the part of Paulson to make offer such an incredibly provocative proposal. On Friday, when markets rallied, there was a political consensus in the US for a megabailout. Even people like me and probably you too who didn't like were gonna go along without too much of a fight. It was a pull together and hope for the best kind of moment. Then Paulson offered but financial dictatorship, unalloyed even by appearances of democratic accountability, justice, or equity, and shattered that consensus completely. I didn't like AIG, F&F, or Bear, but I had to concede they were reasonably well done under the circumstances, at leat genuflections were made in all the right directions. Paulson abandoned all of that here.
9.21.2008 9:05pm
RueTheDay (mail):
Steve says: "Even people like me and probably you too who didn't like were gonna go along without too much of a fight."

Sure. I was expecting some sort of agency would be created ala RTC2 to dispose of the assets of insolvent firms in an orderly manner. I was expecting some sort of plan to recapitalize the banks via equity injections. I was expecting some sort of mechanism to make note mods more efficient. I would have supported all of that. Instead we gave a $700 billion check to Paulson and told him to go buy distressed assets to try and prop up the market. I'm still in a state of shock over it.
9.21.2008 9:35pm
Who's BAD?:

Was MJ singing about hanky panky?

The word is out
Youre doin wrong
Gonna lock you up
Before too long,
Your lyin eyes
Gonna take you right
So listen up
Dont make a fight,
Your talk is cheap
Youre not a man
Youre throwin stones
To hide your hands

But they say the skys the limit
And to me thats really true
And my friends you have seen nothin
Just wait til I get through . . .

Because Im bad, Im bad-come on
(bad bad-really, really bad)
You know Im bad, Im bad-you know it
(bad bad-really, really bad)
You know Im bad, Im bad-you know it, you know
(bad bad-really, really bad)
And the whole world has to answer right now
(and the whole world has to answer right now)
Just to tell you once again,
(just to tell you once again)
Whos bad . . .
9.21.2008 10:57pm
Nakul (mail):
I have to disagree with you comment that Bernanke and Paulson have proved themselves to be decent technocrats. I was apalled that the Fed didn't have a plan in place to deal with Bear Sterns - after all it was only in severe trouble for a whole year. Instead of negotiating a restructuring of the CDS contracts involving Bear, working out contingencies, they apparently waited for the call on that fateful Thursday that the worst was on them.

And Paulson's takeover of Fannie and Freddie was in quite simply the worst way possible. The key benefit to taking over F&F is to reduce credit spreads on mortgages which in turn helps to stimulate whatever little demand there is for real estate. He took them over with the promise of injecting a total of $200 billion in equity for entities that have a total of $5 trillion in debt each - a fig leaf. He also promised to purchase the debt of the 2 companies so that the credit spreads to Treasuries would be eliminated. Each has approximately 80% of their debt in MBS, and MBS have embedded options that we learn about from observing their behavior in changing economic circumstances - which now means daily. But of course Paulson knows the true price so that he can purchase the right amount of their securities. The easier solution was of course to convert them back to being government agencies like Fannie was before '68 - they would explicitly carry the weight of the US Government behind them then.

But that is nothing of course compared to the new facilities they have made available to financial services companies without getting them to materially raise equity to reasonable levels. (Just wanted to point out that Paulson was apparently not in favor of the Goldman IPO which has given them the equity to survive this crisis, Corzine was.)
9.22.2008 12:23am
Steve Randy Waldman (mail) (www):
Nakul — I won't argue much. There've certainly been things I've liked and disliked about the various interventions. I was appalled the Fed / gov't didn't ave a plan for Lehman: Bear was a first, but by now we should have some bank-like insolvency management scheme for anything that moves. I have mixed feelings about the F&F approach -- I can understand why they didn't quite consolidate them with the Treasury from an expedience, don't spook the debt perspective, but it does keep up the spreads a bit, and is a bit of dissembling when you get down to it. And yeah, I think they've been much to easy on just about everybody re the Fed's liquidity facilities.

All that said, I was surprised that they were as punitive to equity as they were in the earlier interventions (as opposed to this proposal, which bails equity), and that they'be insisted on capturing taxpayer upsides (doing so put Bernanke at legal risk re Bear). My expectations were very low, and each time the bailouts were a bit better than I'd expected. So, while I share a lot of your dissatisfaction in an absolute sense, the glass has sometimes seemed half-full with B &P.

Maybe I'm cutting them too much slack. I'm certainly not willing to cut them as much slack as they're asking for now.
9.22.2008 1:08am
Derick Jones (mail):
I don't believe Paulson/Bernake. Reminds me of Bush using Colin Powell to convince the world that unless we go to war against Iraq, world would be anahiliated. Bush using Paulson in same manner to scare the world of financial meltdown. The administration should be truthful and just impose a special tax on everyone to raise 2 trillion dollars and give it to Wall Street so that they can continue their crap game. It's all fuddy duddy money anyway.
9.22.2008 7:58am
In addition to many of the concerns listed here and elsewhere, I have three concerns that have not received much, if any, attention.

First, if anyone at a securitizing firm, let's call the fictitious firm Silverman, knew of fraudulent activity anywhere in the pipeline, would the investor that purchased the security have legal recourse against Silverman? Could the hedge funds and other investors that purchased Silverman mortgage backed securities force them to purchase the securities back at par because they had knowledge of fraudulent activities? Would this problem disappear if Treasury purchased these securities at inflated prices from everyone?

Second, did Silverman market these securities to investors while taking opposite positions for the institution? As we saw with auction rate securities, some investment banks were selling the securities to customers while the banks liquidated their own positions. Once that was apparent, the investment banks were forced to buy the securities back due to the misrepresentation. So, did Silverman sell these securities to investors at the same time as they were shorting, liquidating, or purchasing CDSs on these same securities? If so, would the investor have legal recourse?

Third, would banks and other financial institutions be allowed to act as conduits to hedge funds selling these securities? If the bill had an equity position or limits on executive compensation, the conduit scenario would be less likely and would therefore be opposed if the intention was to include hedge funds (or any investor anywhere).

It seems like Paulson could have chosen a much more efficient path to achieve the same result. This inefficient path may produce the same result at the end of the day but cost the taxpayer three times as much. Could there be any motivation to choose the inefficient path?
9.23.2008 10:43pm
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