Friday, September 26, 2008

Bank Handout Plan is NOT limited to $700 Billion

"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."

This statement is taken directly from Henry Paulson's original proposal. Whether it survives the bipartisan consensus I cannot predict, but it is a scary, scary authority.

Keep in mind that Secretary Paulson and Fed chairman Bernanke have already testified under oath that they intend to drastically overpay the banks for their "troubled assets."

One may me tempted to focus on the $700,000,000,000, but the real devil lies in the words "outstanding at any one time."

If this provision passes, Paulson will have the freedom to allocate much more than $700 billion of our money to this so-called crisis. For example, he could buy $100 billion of assets from Goldman Sachs, then sell it to Morgan Stanley for $5 billion. He could buy $700 billion of assets, then write the value down close to 0, then buy another $700 billion. He could even continue a buy high - sell low scheme infinitely or until he judges that banks are "adequately capitalized."

Would Henry Paulson abuse this power in such a way? I don't know. But he would be able to do it . And let us not be naive. There is a reason behind Paulson's inclusion of this other provision in his proposal:

"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."

1 comment:

Scott said...

The way I read it, it IS limited to no more than $700 Billion in LOSSES. If they buy $700B of garbage and write it off to 0, there is no cash left (and no headroom in the debt ceiling so nowhere for them to go get it).

HOWEVER, if they wind up writing everything down 50 cents for instance, then they could lose $700 Billion while recycling $1.4 Trillion worth of assets (700 + 700 *.5 + 700 *.25 + 700*.125 ...etc). Or if they were resold at 10c it would be up to 700 + 700*.1 + 700*.01 + ... = $777 Billion of unwinding to get to the $700 Billion loss.

They are virtually assured of losing $700 Billion, the question is just how much cleaning up and writing down can they do on the government's dime. Of course that is entirely determined by the prices paid, which for structural reasons, will undoubtedly be "too high"

And speaking of "too high" anyone who thinks there is a snowball's chance in hell of this amounting to anything other than a $700BB writeoff is, themselves, too high.

At least that's how I understand it.