Below are the reasons Congress should reject the package unless there are major changes to the bill. Simply put, as it stands the bill will grant far too much power and authority to the Treasury and will screw the US taxpayer while rewarding companies for incredibly bad decisions.
Let's go through all the arguments against this package.
Let's start with the text of the deal:
(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.
Note all of the authority given to the Treasury secretary. He buys and sells securities at terms he deems necessary. He appoints firms to be "financial agents of the government." He creates any vehicles used to deal with this mess. In short, he is given a huge swath of power to handle this mess.
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.
He makes literally no reports to Congress. After three months and then "semi-annually thereafter." That is way too much time between reports. Also note there is no mention of what information he is supposed to present to Congress. The Treasury Secretary could come into Congress with nothing -- no reports, not facts, no stories to tell -- and be in compliance with this act.
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
Did you catch that? There's a great little language shift. The Treasury Secretary's authority is limited to $700 billion outstanding at any time. That means he could buy $700 billion -- then sell some at a loss -- and then buy more to get back to $700 billion. This is a revolving credit line, not a firm upper limit. It's conceivable the Treasury could but and sell trillions of dollars under this authority.
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.
Excuse me? What country are we living in? Paulson could grant total authority to, say, Goldman Sachs (his former employer) and we the taxpayer would have nothing to say about it.
Folks, this is a boondoggle for several reasons.
1.) There is no oversight. Period. No one should be given this amount of power without any check and/or balance.
2.) Why this huge dollar figure?
"One of you mentioned that you will use about $50 billion dollars a month. If that’s the case, and you’re certainly not going to use all $700 billion immediately, and as you can see there are a lot of questions about whether this will work, we understand you’ve done your best and you think this will work best, but it’s clear we’re in uncharted waters. But what about doing this in tranches? Why couldn’t you ask us for $150 billion, and on January 15th or January 20th we would come back, we would assess how this worked and grant some more money if it’s really working?"
He's asking for 25% of the 2007 federal budget in one fell swoop. That's a ton of cash.
3.) Bernanke's statement regarding purchase prices yesterday is pure crap:
``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''
Really? I've been involved with finance for 15 years, and I have never heard this distinction before. When I was a bond trader, I do remember getting calls at the end of the month asking for bids on bonds because clients had to mark their portfolios to market. But I don't remember anybody every saying, "let's mark this to "hold-to-maturity." This distinction is bullshit, plain and simple.
This is a huge boondoggle waiting to happen. If we give all of this authority to the Paulson we will live to regret it in a big way. And so will our children.
A friend of mine (New Deal Democrat over at Economic Populist) made an observation. Over the weekend we saw people in Congress "shocked" by what was happening. Paulsona and bernanke also qualify as the "deer in the headlights" for this mess. In other words -- everybody who should have seen this coming is now shocked we're in this mess. The only people to get this right were the bloggers -- or as NDD says, the "dirty hippies." Now, these same people who have gotten nothing right over the last year are desperately seeking money to help stave off a disaster. These people have no credibility on this issue. None. Nada. Zip. Zero.
Please call your Senator and Representatives and tell them to vote no on this piece of legislation unless there are major revisions.
Update [2008-9-24 9:59:5 by bonddad]:: Here is a link to committee members.
Please contact them and let them know how you feel about the bill.
Update [2008-9-24 10:33:3 by bonddad]:: My own mea culpa in this mess.
So -- why is Bonddad now urging his readers to call Congress critters and ask them to vote against this terrible bill?
Let me back up a bit. I have really attempted to keep partisan politics out of my analysis. I hope I have succeeded but have probably not done as good a job as I would have liked. While I am a conservative Democrat (socially liberal, fiscally conservative) I really come down more in the Lewis Black mold. Towards the end his last special he stated (and I'm paraphrasing here), "In September, I'm hoping the Democrats and Republicans simply decide to not show up. I've been doing this for 30 years. I keep thinking it won't get worse, and it does." That's exactly how I feel about the last 8 years of, well, bullshit. Everybody who is even remotely involved should be kicked out and exiled to the most remote part of the planet possible. They should also be forced to listen to months straight of the worst televangelist on the planet (Robert Tilton comes to mind).
Here's the basic problem. For the last 8 years this country has become a fiscal train wreck. I say this over and over again, but it's worth repeating. According to the Bureau of Public Debt, the US has issued over $500 billion dollars of net new debt per year since 2003. During the good times -- that is, the times when the economy was expanding -- Congress acted more than recklessly with the nation's finances.
On top of that, the remarkable lack of regulatory enforcement is horrendous. How many food recalls have we had? Or toy recalls? Does anyone remember the FBI is investigating literally every major mortgage lender in the US? How about all of the mea culpa's regarding the auction rate securities market? Now everyone is acting like "it wasn't me -- it was the other guy." Bullshit. Everybody who was in Washington watching and participating in this crap is guilty. Plain and simple.
And let's not forget Alan "bubbles" Greenspan who has yet to meet an asset class he cannot inflate into the stratosphere. Mister "I had no idea 0% interest rates and lack of regulatory enforcement would lead to this" who stands as the architect of a failed Ayn Rand policy perspective that is ruining the country fast should be beheaded, his head bronzed and placed on a pike sitting outside the NYSE with a sign below it that reads, "Asset inflation does not equal real GDP growth". Anyone entering the NYSE must ponder this thought for 5 minutes each day and submit a 100 word essay each month on its meaning.
Let me quote a friend who goes by the screen name of New Deal Democrat:
And so, they have finally done it. Washington has finally bet every dollar of earnings and wealth you and I and every other taxpayer has ever made in our entire lives; every dollar that will ever be made by our children's generation; and every dollar that will ever be made by our grandchildren's generation; in an attempt -- that is by no means guaranteed to succeed -- to prop up the reckless and malign neoliberal "shadow banking system" of Wall Street.
This was a crisis that wasn't just foreseeable. It wasn't just foreseen. It was shouted about from the rooftops for almost half a decade. And yet Washington refused to hear, because the shouters were the Dirty Unwashed Hippies who live outside the zone of neoliberal economic consensus that is elective Washington, D.C.
And they will not hear now, either. Awash in their elective sinecures and their corporate campaign contributions, all that remains is the Rendering of the Bill to the suckers and the chumps. That's us.
Pray tell, exactly why did Congressional leaders sit in "stunned silence" on September 18, 2008 as it was explained to them that the collective unpayable $ TRILLIONS of debt of millions of ridiculous mortgages for houses and condos bought at unsustainable values, debt that was packaged and sold and then borrowed against at rates of 30 or 40 to 1 by a shadow banking system that they and the Administration birthed and nurtured, debt that had been booked as ficitious profits by that system, debt that in the real world represented money that was never ever going to be paid back, was in danger of bringing down the entire financial system?
This crisis was not just foreseeable, it was not just foreseen, it was shouted about from the rooftops since 2004, on blogs like Ben Jones' housing bubble blog, by Calculated Risk, by Mike Shedlock, by Russ Winter, by Barry Ritholtz, by Robert Reich, by Paul Krugman, by Joseph Stiglitz, by James Kunstler, by Stirling Newberry -- in short by just about every housing or economic blogger right, center, and left, from bonddad at Daily Kos to blackhedd on Red State, not to mention myself.
And yet two nights ago, Pelosi, Schumer, Frank, Reid, and everybody else in the Capital sat in "stunned silence" as Bernanke and Paulson spelled out the situation for them. Where were they all these years? Protected from the noise of the Dirty Unwashed Hippies beyond the beltway, by their cocktail party neoliberal free market cone of silence in Washington, that's where.
And so, panic-stricken, they will hurriedly and without reading carefully enact into law what will undoubtedly be the "Economic Patriot Act" of the Bush Administration, with all of the corruption and hidden destruction of rights that conveys, an act that has been estimated at costing up to $1,000,000,000,000 (that's $1 TRILLION) of taxpayer moneys. And still may not succeed.
Truer words about the current situation could not be spoken. This was bound to happen. But now collective Washington is now acting as though it's some kind of shock they have to do something. Folks, this has been on the horizon for years. Those of us who talked about it were called chicken littles (or worse). And no -- I take no pleasure in being right.
However, there is one way to prevent this nightmare from happening again. And it is not in bailing out stupid decision makers with yours and my money, or giving this money to Hank Paulson and Ben Bernanke hoping their magnificence and true humility will help them act in the country's best interest. The way to prevent this from happening is to let the idiots who got us in this mess feel the pain from their decisions. And that means let these bastards rot.
Or -- if the government really wants to do it's job like enforce the rules that are existing and then creating a new regulatory framework that works with the current financial industry -- then please do so. But that means growing a spine and saying, "we aren't doing x unless we get y." Period.