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This is what was submitted:

Treasury fact sheet on asset plan

Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth.

While this won’t alter bank capital, bank asset sales shrink balance sheets and ‘make room’ for new lending.

In fact, that was the ‘originate to sell’ model.

This will support output and employment only to the extent it has been constrained by limited capability of banks to lend.

The major effect of having these problematic assets on the books has been in the secondary markets, including interbank lending, which have lesser and only indirect consequence for output and employment.

Supporting the housing agencies ability to lend at lower rates to any credit worthy borrowers directly supports housing and other sectors.

What banks need most is an increase in aggregate demand sufficient enough to increase employment and output.

This proposal for the Treasury to buy bank assists will have little direct effect on aggregate demand.

The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions.

The question of price is problematic.

This is vague as the Treasury doesn’t have clarity on how this might work. It is doubtful that Congress will either. Reverse auctions can result in gross overpricing, which they do not want to happen.

And note the congressional discussion on salary caps for institutions that sell assets to the Treasury – no telling how that will shake out!

The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment. Asset and Institutional Eligibility for the Program. To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.


30 Responses

  1. Sorry that was so long.

    Pay special attention to the language here. This bill gives the sec. unbelievable, nearly dictatorial powers. It gives the treasury secretary:

    1) The power to purchase at discretion ANY assets for a total holding amount of 700 billion at any time for a two year period. This means the true amount is much higher than 700 billion because it is only limited to how fast the fed. can move the assets back off the books.

    2) The power to “designate” any financial institutions as “financial agents of the Government” and to force them to “perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them”. This means the fed can essentially nationalize any institution and force that institution to perform whatever duties the treasury sec. may deem to be appropriate, as the power to make these regulatory decisions is also granted by this act.

    3) No review or oversight! This act makes all such actions and decisions by the treasury sec. completely “non-reviewable” because they have been “committed to agency discretion”. As a result, they “may not be reviewed by any court of law or any administrative agency.” This is the most gross, sweeping concatenation of power in a single person in our nation’s history. Not only does it vest the office of the sec. with almost complete control over the financial system, it also gives that office the ability to create regulations, to force compliance, and to mandate service… without legal recourse of any kind.

    If that isn’t a dictatorship, i’d like to know what is.

  2. Not sure why that would inspire the sentiment that registration ought to be required.

    Anyone can go to the NY Times and read the text of the bill that has been submitted. Read it yourself right here: http://www.nytimes.com/2008/09/21/business/21draftcnd.html?_r=1&ref=business&oref=slogin

    I would think that most reasonable people would object to the ideas embedded in the draft proposal. The points above are taken directly from the text of the actual bill, so why would this be seen as some offense that ought to spur talk of “registration required”? I’ve seen people post all sorts of content here, much of which fails to qualify for anything resembling civilized discourse.

    I would suggest that you read the proposed legislation, then come back and we can discuss it. If you think these provisions are logical and sound, explain why. If not, explain why you reacted with a “registration required” comment.

  3. Socrates said censorship was good, while he drank the hemlock, everyone wants control, everyone wants to silence dissenting voices, sadly for you I will not be so easily duped into drinking poison 😉

    You can’t hush the souls of the downtrodden, no matter how much you want them to just SHUT UP!!

  4. What if the new marks vis-a-vis reverse auction result in lower capital levels at banks. Is it feasable for the fed/treasury to infuse capital into banks, if private money isn’t willing?

  5. How much does the budget deficit widen given the large number of bills getting tacked on to this TARP bill in order to get it passed quickly?

  6. The Senate Discussion Draft of the TARP has the following requirement:

    “The Secretary may not purchase, or make any commitment to purchase, any troubled asset unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased.”

  7. The attidude is to do whatever it takes to sustain growth and employment.

    As i’ve stated, i don’t think this does much more than maybe prevent some deterioration of growth and employment. It doesn’t address agg demand at any level.

    The tsy will be taking on assets as it spends and issues tsy secs. so at the macro level the private sector gives up it’s ‘problem’ assets in exchange for tsy securities. while for accounting purposes this may add to ‘the deficit’ functionally it’s a wash and doesn’t alter agg demand.

    rather than a registration process, some posts may be takend off after a few days.

  8. Tt92618,

    My post was not directed at you.

    Immediately prior to my post was a somewhat pornographic post directed toward someone that has since been removed.

    Just don’t want an excellent forum to deteriorate.


    Rob K.

  9. Looks like an uphill battle for this in Congress, though this could change in an instant. I was disturbed by statements like one from Rep. Frank today noting that the tsy had agreed to oversight, though to my eyes what was agreed to could hardly be considered to be oversight, as the overseers would not, under current plans, have any power to veto tsy decisions.

    To be absolutely blunt, I personally feel this is simply too much power to vest in any single office to not also provide for serious oversight. The probability for abuse is simply too high, and oversight that is advisory in nature is not actual oversight.

    I have a tremendous issue with how Bush approaches these things; he tends to try and write the judicial and legislative branches of our government out of the picture whenever these things come up; by now this is an obvious pattern. Maybe he has a distate for the political morass that frequently develops, and a get it done attitude… I don’t know. But I do very strongly believe that this kind of power simply cannot be weilded safely by a small cadre of individuals. There is too much history to show us where these things lead. If we imbue the office of the tsy sec. with as much power as this bill provides, we will be altering the balance of power in a way that is almost unprecedented. Two years is a lot of time to have carte blanche with respect to regulation and “reform.” It’s a long time to have a stack of checks with “Pay to order of distressed asset X holder” stamped on them. This bill provides instruments that will allow the tsy. to exert enormous pressure, influence, and control over financial institutions, and without recourse or oversight I think it’s an absurdly dangerous piece of legislation.

  10. Yes, it’s a lot of concentrated power to exchange tsy secs for mbs and other bank assets at a price selected by tsy.

    Seems to me the much larger issue is the power to demand corportate equity when offering government assistance. I’ll be doing a post on that later today

  11. “Seems to me the much larger issue is the power to demand corportate equity when offering government assistance.”…

    Warren, I think that this actually makes the “ISSUE” larger! again, the secretary has non reviewable power to price how much equity he needs in order to “help” an institution by buying their bad loans???

    Maybe they should just go ahead and nationalize the Banks.

  12. agreed!

    banks are already ‘public/private’ constructions, and yes, this will likely swing the pendulum more towards ‘public’

  13. I would suggest that the bill actually does go some distance towards a de-facto nationalization of the banks.

    Because the bill contains no language in its present state to limit what distressed assets can be purchased (scope was changed from only MBS), the purchases could in essence be corporate stock or anything else for that mater. And, because the bill calls for a 700B cap at any given time, there is effectively no upper limit to these purchases so long as they can be moved out of the pool with an effective speed. That is, this is like a barrel with a hole in the bottom. As long as the water drains from the bottom, more can be poured from the top and still not exceed capacity. So, the effective size of this pool, for the purposes of acquiring these “distressed assets”, is far larger than the 700B number people are throwing around.

    What happens when the federal government can own a sizable chunk of a corporations’ stock, can designate that institution as a financial agent of the government, and can be the holder of much of that institution’s debt all at the same time? That institution has effectively been nationalized. So, my opinion is that this is, in its present form, exactly that: nationalization of the banks without actually calling it nationalization.

    One of the provisions of the current legislation that bothers me most of all, aside from the no recourse provisions, is the power of the tsy to appoint institutions to be agents of the US government. The legislation does not specify under what conditions these kinds of designations can be made, so while in theory one would expect that they would create institutions for specific purposes (such as procuring distressed assets or offloading same), and to then designate these institution as agents, the power the bill vests could theoretically be used to designate any financial institution to be an agent, whether it wants to be an agent of the government or not. The other provisions of the bill support this outcome as well, because they give the tsy. the power to issue so much regulatory oversight that the institution would be forced to cooperate irrespective of value to the principals and shareholders.

    So again, what is a bank that has been designated as a financial agent of the government, and which under that rule has no choice but to carry out whatever duties are “reasonable” in order to perform it’s “duties”? I suggest that bank is clearly a nationalized entity, irrespective of the particular language used.

  14. We also heard that purchases are not limited to U.S. banks. So can he demand equity in those foreign banks as well? This coupled with the fact that the EU bank ( or the individual countries) can’t deficit spend in order to “stabilize” their system with an equally empowered agency leads me to believe that this new agency could become….

    The United States WORLD BANK!!!

  15. I myself wouldn’t mind some sort of nationalization of large parts of the banking sector. (As Warren says, Banks are quasipublic institutions anyway…) But this sort of backdoor nationalization, with no provisions for effective oversight, makes be more than a little uneasy. Not to mention the fact that these sorts of unilateral seizures of equity look a lot like taking private property with no compensation…

  16. good points of discussion.

    nationalized to me means the govt owns the majority of the stock, which may happen. we don’t know what terms congress is going to set to ‘protect taxpayer money’ but i would think it would be far less than 50% as these are all institutions deemed solvent, vs AIG where govt took 79.9% (nationalized it) for a line of credit necessary to keep the doors open and allow an orderly liquidation.

    we’ll soon know either way

  17. If you have the authority to price both the equity being “taken” as well as the price paid for the bad loans. Why not get 51% or higher…
    It’s a great deal for the tax payer, you get the stock and make the solvent bank more profitable!

    The power given to Paulson is too great…Dracula in charge of the Blood Bank!!!

  18. It seems that there’s no way this is going to pass without what amounts to full nationalization. You can explain that this really isn’t “taxpayer money” until you’re blue in the face, the average man on the street isn’t going to see it that way. (And if supposedly “sophisticated” economists like Krugman don’t understand the nuances of monetary operations – see, oh, anything he’s ever published) how is the average congressman going to? I thinkn the Dodd plan, with warrents, is the only one with a chance of passing at this point. Then the question is, are the banks in dire enough straits that they won’t have any choice but to take it?

    So it looks like in the middle of the last weeks of a presidential campaign, we have the Treasury secretary of a lame-duck president supervising the conversion of most of the world’s banking industry into a wholly owned and managed subsidiary of the U.S. Treasury Dept. What a country!

  19. i don’t disagree with what may happen

    i do suggest that knowing govt help means loss of shareholder value doesn’t add a reason for investors to buy stocks, for better or for worse.

    also, the way i see it, this program doesn’t spend any taxpayer money to speak of. the govt trades gov secs for highly discounted mtg paper. the question longer term is whether the cash flow from the discounted mtgs is sufficient to ‘retire’ the tsy secs. if not, the difference is ‘taxpayer money’ but it’s probably not a big number either way

  20. From the Concord Coalition:

    “$700 Billion Market Bailout: Piling on more Debt
    The Administration released over the weekend proposed legislation that would give the Secretary of the Treasury sweeping authority to purchase “on such terms and conditions as determined by the Secretary” up to $700 billion of “mortgage-related assets from any financial institution having its headquarters in the United States.”

    The Treasury would issue new Treasury debt to finance the purchases. In order to accommodate the new debt, the bill would increase the statutory limit on the public debt to $11.3 trillion. When the Bush Administration took office in 2001, the public debt was half that amount, at $5.7 trillion.

    There is ongoing discussion among congressional staff, and the Congressional Budget Office (CBO) and the Office of Management Budget (OMB), about how to “score” the Treasury purchases. The draft legislation states that the “cost of mortgage-related assets…shall be determined as provided under the Federal Credit Reform Act….” However, this would be an odd formulation, since the Credit Reform Act applies to direct loans and loan guarantees originated by the government — not the purchase of market assets.

    Regardless of how the “scoring” issues are resolved, the bottom line is that the Treasury would be borrowing up to $700 billion in order to purchase mortgage-related assets–and this borrowing would add substantially to the public debt, and U.S. indebtedness to foreign lenders.

    Of particular importance, the ballooning debt would add substantially to annual interest payments by the Federal government. Net interest payments, already nearly $250 billion per year, consume more than one in five income tax dollars. The new Treasury borrowing would take an increasing bite out of income tax revenues–and leave future generations with the tab for this generation’s market meltdown.

    Key congressional Democrats have already signaled changes they would like to see in the Treasury proposal:

    –Senate Banking Committee Chairman Chris Dodd (D-CT) said he would like to add provisions that set tough limits on executive compensation for companies participating in the program, allow the government to take shares in those firms, and create an Emergency Oversight Board;

    –House Financial Services Committee Chairman Barney Frank (D-MA) said he agrees with the Senate approach and would also lilke to allow bankruptcy judges to reduce the principal and terms on primary residence mortgages; and

    –Senate Judiciary Committee Chairman Pat Leahy (D-VT) wants to add a provision allowing for court review of the Treasury bailout, which is specifically barred by the Administration bill.

    The bailout legislation is likely to be added to a Continuing Resolution that Congress must pass by September 30, 2008 in order to keep the government functioning when the new fiscal year begins on October 1.

  21. Seems to me that the ” concord coalition” has some reading to do with regards to “indebtedness to foreign nations and future generations stuff”.

    I think shareholders do better with the Govt. as a co-owner, would they rather get diluted and be govt. assisted or wiped out?, Again it depends on how much equity and at what price they get the “help”.

  22. Jorge R L Says:
    September 23rd, 2008 at 11:56 pm
    Ok, thanks warren, weird.

    Warren, someone is playing games , this was not me either…

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