Please calm down folks. The bailout is not a "power grab". [View All]

[HamdenRice]

If you're reading this, Larissa, you know I usually love your writing and analysis and consider you a hero.

But I think you and Adam Davidson have fundamentally misread this bill. That's not to say that the bill doesn't have flaws (I'll get to that), but it is not the unprecedented power grab you have described it to be -- or at least I don't yet think it was intended to be.

First, I think we have to understand the "non-reviewable" clause. We have to keep in mind that the federal government has been pushed into the position of nationalizing big chunks of the finance industry -- Fannie, Freddie and AIG. Conservative and liberal commentators alike are calling these moves, "nationalizations."

It seems to me that the Treasury is worried that their purchase of mortgage backed securities (mbs) from surviving financial institutions, in the context of widespread nationalizations, looks a lot like forced sales -- almost like the exercise of eminent domain.

Moreover, we've seen reports that the Treasury plans to drive very hard bargains with the financial institutions, and will not pay the face value of the mbs they purchase. That's why some commentators think that in the long run, they might actually make money from the bailout.

In eminent domain and in the course of certain other transactions between private actors and the federal government, the private actor can seek a higher price by suing in court to get a "fair" (ie higher) price.

But we know that this buy out of mbs has to happen fast if it's going to have any positive effect. The Treasury's decision to purchase a series of mbs with a face value of (hypothetically) $10 million for $8 million cannot be tied up in court with (hypothetically) Citibank bringing an army of corporate lawyers to federal court to get the price jacked up to $9 million. (You can read a bit of my explanation about the pricing, and scale of the bailout, and why the Treasury will seek discounts, along with helpful comments by DUer, alcibiades_mystery, here, from posts 8 down.)

All this provision is saying is that in this particular context -- the purchase of mbs -- courts and administrative agencies will not be able to review the price or terms that the Treasury sets for the purchase. It's saying to Citibank, Goldman, or whoever, "take it or leave it."

I don't see why any progressive who wants this bailout to be as cheap as possible would want the financial industry to have the right to go to court to tie up the process of buying out their mbs to extort a higher price.

I think that as a bill drafting matter, Congress should insert some language like this:

Decisions by the Secretary pursuant to the authority of this Act <insert: with respect to the purchase, pricing or management of mortgage backed securities> are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

It's really a simple drafting error, not a coup de etat.

As for the ability of the Treasury Department to write its own regulations, that's pretty standard in the administrative system. Usually, the public has the right to comment on agency regulations that are proposed by a federal agency, and they appear to be dispensing with this given the time constraints. Also, Congress has the power to change or abolish administrative regulations (because regulation writing power is delegated from Congress to the agencies), and nowhere in this short bill does it say that Congress would not have the power to do so here.

My biggest gripe with the bill is that it clearly intends for Treasury to farm a lot of this work out to financial firms. Paulson already turned to Morgan Stanley to advise it on the AIG takeover.

These firms charge exhorbitant fees (thousands per hour!), and the "advisors" will be part of the old boys network that got us into this mess in the first place. I sincerely doubt that Morgan Stanley is going to drive a hard bargain with Goldman or Citibank. On the other hand, Treasury may have in mind the catastrophic S&L bailout, in which the Resolution Trust Corporation virtually gave away real estate all over the country until they turned the disposal of assets over to private players who were given incentives (through profit sharing) to drive harder bargains.

Either way, it would be a giveaway to the private sector that shouldn't be happening with up to a trillion dollars of taxpayer money.

It would be much better for them to do what FDR did when he created the SEC -- hire a bunch of bright young accountants and lawyers right out of university and recruit them into some appropriate parts of federal bureaucracy.

So please folks, let's all calm down. It's not a coup; it's a drafting error.

ON EDIT: I just read Krugman's editorial, concluding "No Deal". I think he nailed it, in that there is another big error in the bill -- namely it doesn't specify what valuation method for the mbs to be purchased the Treasury will use. Only if Congress specifies that Treasury will purchase at a discount and how that discount will be calculated (I would say based on how many mortgages are non-performing) should the Treasury be given non-reviewable power.

To get a back of the envelope sense of what that valuation, which must be in the bill, should look like, go here, from post 8 down.