As the press goes, last week Fed Chairman Ben Bernanke told ‘congressional leaders’ that the US faced an imminent meltdown. We heard from the horses’ mouths that this was scary. It couldn’t have been written any better for a movie. Surprise – now we have yet another bailout plan.
You can find the full proposal (for now) at the end of this post. The first thing you’ll notice is that it is pretty short, and the second thing you’ll notice are some of the egregious terms. The press and the blogosphere were quick to point out the latter, and various conspiracy theories were quickly generated around Section 8, which deals with the Treasury’s unilateral and unobservable authority, included protection from litigation. Amateurs, each and every one of them.
You don’t go to the negotiating table with a proposal, particular one that outlines to a country full of people how weak they’ve become without a game plan. And you especially don’t bring such a proposal to a band of lawmakers that you know have a penchant for changing things to directly benefit themselves, and who, while complicit in the problem to begin with, will do everything in their power to try and convince said country’s people that they are there to help them. The sticking points in the proposal are nothing more than “throwaways” – terms purposely put there only to create a little unrest and be caved on later – terms designed specifically to make those on the far side of the negotiating table think they won something.
Will it work?
I’m going out on a limb here…no. First and foremost, we are talking about the purchase of fairly complex mortgage instruments, including but not limited to the over-the-counter insurance which backs them in case of default. It’s that insurance that is causing most of the problems – a market of many 100’s of trillions of dollars – and if it collapses at one point it sets off a ripple of defaults elsewhere in the transaction chain. So while this move is probably quite necessary, the problem has been known for years. The Treasury really doesn’t have a clear idea of how much these assets are worth because the bankers that presently own them don’t – the market for these assets has become extremely inefficient, with few buyers asking very low prices, and the bankers demanding higher because they paid much more just a few years back. Sound familiar?
Now a new buyer steps into the fray – this buyer has well-publicized, deep pockets, and has publicly stated it is willing to pay more. How do you expect these sales are going to go? The Treasury is going to wind up paying entirely too much for these assets, and when the obligations finally sell taxpayers are going to be looking at a loss. The cap on purchases has been initially set at $700 billion, but I say that’s a drop in the bucket – the Fed injected roughly $150 billion into the system just last week to prevent a money market meltdown. As a result of this cap, the Treasury will be forced to liquidate positions prematurely in order to buy additional product. The result – more losses. They’ll be back at the national debt trough in no time, which brings up the second problem, borrowing capacity.
It isn’t just the US markets that are roiling – this is a worldwide financial crisis. Even China, who until now has had an unquenchable thirst for US Treasury securities, is getting tired. And with the US economy slowing, even they are going to see their need for dollar-denominated government securities wane. Either they (and every other foreign creditor still standing) starts getting bonds at deeper discounts, or interest rates have to rise – either way yield is headed up. If the former happens, Congress is going to be mighty busy raising that debt ceiling. If the latter, nobody is going to be able to afford domestic credit.
This is all a temporary fix just like the last three (or is that four) bailout proposals presented over the last year, including the one which laughably sought to have Fannie Mae and Freddie Mac doing the bailing (those GSEs are now being bailed out themselves, in case you’re just joining). It’s just that this one is bigger.
Regardless of its merits (or lack thereof), I suspect this proposal will pass. There will be oversight, and there will be further help for struggling homeowners.
And there will be more proposals.
UPDATE: It looks like the proposal may now include auto loans, student loans, revolving credit lines, and other ‘troubled assets’. The price tag is getting bigger already.
UPDATE 2: Congress seems to be biting on the wrong stuff.
LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.
Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.–The term “mortgage-related assets” means 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 September 17, 2008.
(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.
(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia