Troubling Aspects to the GSE Bailout Bill

According to draft legislation being debated on Capitol Hill, the Congress would grant sweeping authority to the Secretary of the Treasury to purchase obligations and securities of FNMA, Freddie Mac, as well as those of the Federal Home Loan System. It imposes no restrictions on the Secretary of the Treasury and says that he will determine the terms and conditions of the transactions as well as the amounts. The draft language contains an analytical section (brief) which specifically states that the authorizations of the section extend to purchases of equity.The draft authorizes sales of Treasury debt to fund the purchases. It goes one step farther and excludes those sales from the debt ceiling.

The legislative grant of authority would expire on December 31 2009.

I think that there are two interesting features to this story. First, there are no rules, restrictions or constraints on the Secretary of the Treasury. In this instance he has absolute and unlimited authority. I understand that he wants to fit the bazooka into his pocket but I think that it would be appropriate for Congress to at least offer some guidelines regarding when he could exercise the power. The draft language does nothing of the sort and leaves that decision to Mr Paulson and whomever President elect Obama appoints to succeed him.

It is also troubling that the legislation will exclude from the debt ceiling those Treasury sales made to fund these purchases. I am not an expert on the arcane provisions of the public debt but I believe that would be an unusual departure for the Congress. It would truly be a carte blanche.

Comments

[whidbey:]

Absolutely realistic, but you did not say what the risks are. The Treasury might very well fall in the hands of a plutocrat who desires to single-handedly resurrect the housing market. The unknown future person would then buy a controlling share in the GSE and run them as an adjunct to the Treasury Department, presumably as a public service that would keep the economy going, not to mention exploit the easy morals of the public when given things it believes someone else is paying for. It is termed a moral hazard. That is the risk and it is real.

2008 Jul 17 04:41 PM

[HARM:]

"Troubling Aspects"

Are you trying to use gross-understatement-a... here? The very concept of bailing out these supposedly "private" institutions (ha!), which have a proven track record of systemic dishonesty and fraud, is nuts. Of course Con-gress wants to give the Treasury and Fed a blank check to bail them out. The GSEs, Wall Street and other assorted banksters OWN Con-gress. Why is this the least bit surprising to amyone paying attention?

Perhaps our great-grandkids can look forward to the day when reckless institutions that commit wholesale fraud and encourage insane levels of speculation with O.P.M. actually have to reap the consequences of their *own* actions. Y'know, after the revolution comes 'n all. That's what they used to call "free market capitalism". For those who are unfamiliar with such a thing (it hasn't existed in this country to any degree for a good 50+ years), "free market capitalism" is an economic system where people risk their *own money* on productive enterprises that have some realistic chance of paying off. But here in Uh-merika, we have a different economic system: It's called "Privatize profits, Socialize losses". A.k.a., "socialism for the rich".

2008 Jul 17 06:10 PM

[Amerlafrance:]

I think I will need a bailout to pay my future taxes. Do you think Treasury will provide low interest loans to provide me with the funds I need to pay the taxes? I think this whole system has tipped over now that a majority of Americans no longer pay income taxes; voting cannot work to restrain a free lunch when half the people do not pay for the lunches being handed out.

2008 Jul 17 06:27 PM

[ardano:]

Once again, with feeling, FNM and FRE debt will be protected at all costs. Think about who holds that paper...Paulson and Bernanke seemed to have flipped a coin to see who is going to backstop the GSE's. Bernanke's a little busy right now propping up banks, brokers and other institutional investors. I think he said, "hey Hank, why don't you take this one." After all we're only talking $5Trillion. Due to longstanding accounting problems it was only dumb luck that Fannie and Freddie didn't have more bad paper on their books. They could not originate subprime, only acquire suspect paper through other procedures. Unfortunately, due to the implicit backing of the Treasury, soon to be explicit, Fannie and Freddie lack the cushion that is keeping other traditional banks barely solvent. However, if the backing of the Treasury has meaning, and I think it does, what's the difference? Oh that's right, there's the question about morals and banking. People will say all that money was paid out through Fannie and Freddie and now the taxpayers are caught holding the bag.

Trade of the day, buy Fannie and Freddie debt, not the equity, and short the long Treasury and US Dollar as more paper will have to be floated to make implicit explicit

2008 Jul 17 09:06 PM

[Jason Rines...:]

Your correct Ardano. The taxpayer will feel the wonderful effects of taxation without representation for the next few years in the form of inflation and then Bush tax cuts expire in 2011. A good number of boomers reach retirement then too. The boomers promised the moon either get Obama to add further taxes to pay for it, or the boomers get benefits cut. I am emotional about this disgusting government but my outrage has subsided some since June of 2007.

At that time I crunched the numbers and figured out we're we were headed. I estimated the total REAL wealth vaporization to be 9 trillion over a four year period. This of course didn't factor in $145 oil and productivity loss from accelerated drops in discretionary spending we are seeing today.

This behavior was treason folks. Some guy gets 10 years in prison for stealing a car. Gee, I wonder what will happen to these white collar criminals, the handful that is that are the scapegoats? Probably the same sentence for destroying the entire American economy deeply effecting 250 million lives.

2008 Jul 17 11:04 PM

[Chris White:]

Thank you for posting this information in the way you did. It seems, like the Resolution on Iraq which Congress voted for, to be an Enabling Act broad enough to permit anticipated and unanticipated further problems to be addressed without further recourse to Congress for approval. Perhaps the USG, through the shells of Fannie and Freddie will be taking in the mortgage portfolios of the banks which are too big and too interconnected to fail.

It about time someone in the tech world figured out how to digitally disintermediate the country from the mess made of its finances.

2008 Jul 18 07:27 AM

[chistletoe:]

all they are doing is legitimizing the ppt ...

2008 Jul 17 03:46 PM