The Eclectic One

…Because labels are a poor substitute for thinking

Bailout: The text released

Posted by Bill Nance on September 29, 2008

The text of the proposed legislation which would enable a government bailout of Wall Street has been released.

My opinion? It stinks only slightly less than the original proposed plan.

The fundamental problem I had with the original plan was that it was a giant transfer of authority to the Executive Branch under the auspices of the Department of the Treasury. The text of the proposed bill doesn’t change that fundamental. The program will still be managed by fiat of the Secretary of the Treasury. The legislation calls for the secretary to “consult” with HUD, the Federal Reserve Board and other federal agencies, but “consulting” means whatever the secretary wants it to mean. There is no binding requirement to abide by advice.

As for oversight, it’s there, but it’s very weak.

It also contains a provision for acquisition of mortgage-based assets which would allow some companies to sell them to the government for more than they paid for them. Granted this is limited to assets acquired by mergers and acquisitions, but it still potentially leaves taxpayers holding the bag while rescuing wall street companies from suffering the consequences their own poor judgment.

This paragraph is what I’m talking about:

In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including bypreventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings 22 under title 11, United States Code. (emphasis mine)

The one very good part of the bill is that it specifically addresses loan servicing for acquired assets. As I wrote here, quality loan servicing can prevent a lot of mortgages from ever going to foreclosure, and I’m very pleased to see congress stuck in this provision.

But with the above exception, the bill is essentially what Paulson originally asked for. It has a little more oversight (though not a lot), some provisions protecting taxpayers (though not enough) and some various fig-leafs behind which congress will try to hide this November.

In case you’ve read about the Republican provision for government insurance for banks, let me assure you that provision is a crock. It does nothing to protect taxpayers and frankly was a political stunt that probably hurt everyone by distracting from more important things which could have been included in the bill.

Don’t fall for this Republican fig-leaf, because that’s exactly what it is.

The insurance provision basically offers government insurance to asset-holders which would guarantee against mortgage defaults or “other events” which would cause the associated assets to fail to pay. Unfortunately, the premiums necessary for such a program would be so high that no one is going to take advantage of it. Companies like AIG already offered such insurance, but did so at premiums well below what proper actuarial analysis would have demanded. Had they been charging a fair-market rate for these premiums, they would have never sold a policy. The government program won’t improve this.

So what we’re left with is a bill that still transfers massive power to the execitive, still spends about the same amount of money (if in smaller chunks), and provides questionable oversight. I think congress can and should do better.

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