Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

21 September 2008

The Bailout Act, Amended

The Wall Street Journal has published [subscription required] the text, as proposed by the Department of the Treasury, of a new law to implement the proposed $700 billion bailout of distressed mortgage assets.

As proposed, the law would give the Secretary of the Treasury absolute, unreviewable discretion to buy, hold, and sell those assets for our government for two years. It would make Henry M. “Hank” Paulson, Jr. and his successors at Treasury mortgage-meltdown “czars,” with absolute power to spend nearly three-quarters of a trillion dollars of the taxpayers’ money on mortgage-related instruments (including mortgages, mortgage loans, mortgage-backed securities, mortgage-related derivatives and credit-default swaps, etc.) as they see fit. The effect of this new law would extend far into the next presidential administration.

The proposed act appears below. As proposed, it makes no provision for transparency, public information, renegotiation of predatory loans, or cleaning up any of the mess on Main Street. As one might expect from Paulson’s experience as former Chairman of Goldman Sachs, its aim is solely to clean up the mess on Wall Street.

I have taken the liberty of adding my own proposed language to correct these omissions, which appears in boldface. Other language that I have added (also in boldface) shortens the time for periodic reporting to Congress, requires re-authorization every six months, or if Secretary Paulson or Fed Chief Bernanke leave for any reason, and requires consultation with the Federal Reserve Chief and the Secretary of HUD. Deleted original language (mostly for the sake of conformity with my proposed amendments) appears in [bracketed italics]. My previous post explains the reasons for these changes.

I would hope that at least a few daring members of Congress would take the gravest financial crisis in nearly a century seriously enough to demand these or similar amendments.

The proposed amendments won’t force our czars to do anything. Most of them expand, not restrict, Treasury’s power to deal with the crisis. But they do require that our czars at least think about suffering neighborhoods and foreclosed homeowners. Maybe some good will come of that.

Section 1. Short Title.

This Act may be cited as The Government Trading in Mortgage-Related Assets Act of 2008.

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) causing the terms and conditions of mortgage-related assets, including commercial and residential mortgages and related loans, to be renegotiated as the Secretary in his or her discretion may order, as a condition of the Government’s or its agents purchase, holding or sale thereof, or otherwise;

(6) demanding, collecting and receiving, from any person under the jurisdiction of the United States, under subpoena or otherwise, and holding, analyzing, providing to Congress and making public, such information relating to mortgage-related assets as the Secretary may require; and

[(5)] (7) 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 consult with the Chairman of the Federal Reserve Board and the Secretary of Housing and Urban Development and shall take into consideration means for–

(1) providing stability or preventing disruption to the financial markets or banking system; [and]

(2) protecting mortgage-loan borrowers, including homeowners and former homeowners, and neighborhoods within the United States from the consequences of non-standard lending practices; and

[(2)] (3) 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] every 120 days 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. The Secretary shall make such reports available to the public over the Internet, except for such portions as the Secretary may require to be kept confidential for the public welfare. The Secretary shall justify in writing keeping any such portions confidential and shall make public over the Internet the justification and the general nature of any information withheld from the public.

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 and may cause the terms and conditions of any mortgage-related asset to be renegotiated by the parties thereto, as a condition of the Government’s or its agents’ purchase, holding, or sale thereof, or otherwise.

(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, the Government or its agents 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, subject to reauthorization by Congress: (a) [two years] six months from the date of enactment of this Act or from the date of any reauthorization by Congress; and (b) absent reauthorization by Congress, immediately upon any change, for any reason, in the identity of the individual holding the office of Secretary of the Treasury or Chairman of the Federal Reserve Board.

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) Non-Standard Lending Practices. The term “non-standard lending practices” means practices in making, or terms or conditions in, residential or commercial mortgages or related loans that, in the Secretary’s judgment, were not generally accepted and in common use throughout the United States prior to January 1, 2004. The Secretary may by regulation declare any practice, term or condition not reflected in the regulations of, or in standard forms prepared, approved or accepted by, the Department of Housing and Urban Development to be a non-standard lending practice.

[(2)] (3) Secretary.–The term “Secretary” means the Secretary of the Treasury.

[(3)] (4) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.


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