Tuesday, October 7, 2008

Feds to the Rescue

But who will rescue us from the Feds?

The passage of HR 1424, known by various names including the unintended ironical Emergency Economic Stabilization Act of 2008, prompted me to expand this 7-part series to eight. I promised a Mystery Guest, and I'll cover that one after this unpleasant interlude on "the bailout bill."

Normally it takes months or even years to pass major legislation. HR1424 and the Senate bill which gave birth to all glorious 451 pages of it was cobbled together (in part from pre-existing floated bills) in under a week.

I hate to lean on tired clich├ęs in such parlous times, but I can't help bringing to mind the one about "Act in haste, repent at leisure." The actions of the stock market since the passage of the bill last Friday seem to be validating the truth of that hoary bromide.

However, it's here. What does it direct the government to do now?

I honestly don't know and the reason is simple. Try as I might, I can't find anywhere in the bill itself that details — or even sketches — how Paulson and his legions of helpers are supposed to actually solve the problem.

The basic idea, of course, is to buy up assets (in particular, mortgages and MBSs, but extending to credit debt, school loans, and anything else the Secretary deems fit) that the present owners no longer want. Some of the assets are unwanted because they're 'under water' as the saying goes or, at best, no one knows what they're worth and therefore there is no active market for them.

How the Treasury is supposed to divine what they're worth without that market is anybody's guess. The idea of having a reverse auction — in which sellers offer goods that the government then buys (in theory, for later resale) — on items which no one knows how to price is beyond absurd. It is more Marxist fantasy of the sort that envisions the government possessing magical powers somehow denied to the accumulated intelligence of individuals in the private sector.

If, instead, somehow buyers and sellers in the marketplace could arrive at a price, what need for the government? It's not as if there isn't $700 billion in private capital floating around. B of A swallowed up Countrywide and Merrill Lynch with no problem, and there is something of a bidding war going on for Wachovia.

Then there is the problem of how the government is to pay for the "toxic assets." Even apart from an $11 trillion debt, a $400-$500 billion deficit this year alone, and falling tax revenues due to an economic slump, it's inescapable that the U.S. government has no money of its own. All it has is gained either through taxation or created out of thin air by the official printing press.

So, common sense forces one to ask: how is spending money it doesn't have, for assets that are worth who knows what, going to solve the current problem without creating an even larger one down the road? I daresay, though it be blasphemy in an election year, no one in the government or the major news outlets egging them on knows the answer to that question.

Still, if you think that inescapable chaos is as bad as it can get, think again. It takes no financial savvy whatever to realize that — in the absence of at least an outline of how the TARP (Trouble Asset Relief Program) is supposed to be carried out — the situation presents the perfect storm for political corruption.

Somehow the existence of the FOSB, created by the bill to oversee the Treasury and its actions during this period, brings shallow comfort. After all, the Treasury Secretary openly acknowledges that he has neither the expertise on staff nor the resources to carry out the program alone. He will outsource as much as possible.

Even those most resistant to cynicism can't help but think this will attract hoards of eager beavers ready to make a taxpayer buck. These are not the sort who typically care much about making sure that much-put upon character gets his money's worth. But even if they were saints, how can they do what they have to do when they are making it up as they go along?

Lest I appear to be exaggerating, consider this passage from Sec. 101
AUTHORITY.—The Secretary is authorized to establish the Troubled Asset Relief Program ("TARP") to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.
In other words, Paulson (or whoever replaces him after the election) can do anything he wants. Period. So much for the rule of law.

Exaggeration? Here's more.
TROUBLED ASSETS.—The term "troubled assets" means—
  • (A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

  • (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
About as close as the bill comes to constraining the Secretary's actions is a list of "considerations" in Sec. 103, only one of which is even meaningful:
(4) in determining whether to engage in a direct purchase from an individual financial institution, the long-term viability of the financial institution in determining whether the purchase represents the most efficient use of funds under this Act;
But it lays out no criteria for determining that, obviously leaving it up to the experts the Treasury will hire. (Sec. 105 does require the Secretary to report to Congress and provide "a description of the pricing mechanism for the transactions." But Congress has no authority, in the bill or otherwise, to do anything but complain or pass yet more legislation after the fact if they dislike what's provided.)

Unlike Paulson's original 3-page grab for unlimited power, the bill does contain one paragraph addressing the subject of legal review.
(1) STANDARD.—Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title 5, United States Code, including that such final actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law.
Somehow, though, I'm not relieved. How any court would determine objectively that his actions had not been arbitrary or capricious, I leave to the legal scholars in the audience to inform me. Looking at the relevant passage in the Code, which includes: "(B) contrary to constitutional right, power, privilege, or immunity;" I find no answer, the Constitution having been ignored in this Act.

Some may take comfort in the following, which might appear to head hustlers off at the pass.
PREVENTING UNJUST ENRICHMENT.—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 by preventing 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 under title 11, United States Code.
The Treasury taketh with one hand and giveth with the other. Care to imagine how many assets will be squeezed in through that loophole? Nothing in the bill even attempts to curtail the jockeying that will take place. On the contrary, it explicitly says,
(c) SALE OF TROUBLED ASSETS.—The Secretary may, at any time, upon terms and conditions and at a price determined by the Secretary, sell, or enter into securities loans, repurchase transactions, or other financial transactions in regard to, any troubled asset purchased under this Act.
That only underscores the Secretary's complete authority to do as he wishes.

There is a section that claims to deal with conflicts of interest.
(a) STANDARDS REQUIRED.—The Secretary shall issue regulations or guidelines necessary to address and manage or to prohibit conflicts of interest that may arise in connection with the administration and execution of the authorities provided under this Act, including—
(1) conflicts arising in the selection or hiring of contractors or advisors, including asset managers;
(2) the purchase of troubled assets;
(3) the management of the troubled assets held;
(4) post-employment restrictions on employees; and
(5) any other potential conflict of interest, as the Secretary deems necessary or appropriate in the public interest. [emphasis added]
How, one may ask, can one expect the Secretary to issue such guidelines when the major source of such conflicts of interest is the man himself? A frightening increase of Executive power in this country has been going on for some time. But who knew that power would devolve, not to the President, but one of his appointed officials?

Personally, the fact that the bill terminates the authority of the Secretary to carry out all this by Dec. 31, 2009 leaves me unsatisfied. How in hell he could possibly get all this done in little over a year beggars the imagination.

But we need not punish ourselves by reviewing any more of the bill. There is only so much insanity one has to examine before concluding that any further time spent is pointless.

We could fantasize that, in the end, some brave soul will inspire the Supreme Court to take a look at all this and insist on a re-boot. But knowing the actions of the Court for the past few generations, I'm doubtful there, too.

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