Financial bailout bill: Still a blank check?

Washington – Wow. Calling him “King Henry” may be a little much, but Treasury Secretary Henry Paulson would still gain unprecedented powers under the financial rescue legislation the Senate passed Oct. 1.

This bill is different from the one rejected by the House on Sept. 29. Congressional leaders have added tax breaks and an increase in deposit insurance in an effort to make it more palatable to nervous lawmakers.

But at heart the authority it would invest in the Treasury chief is little changed.

“He’s still getting a blank check,” said Thomas Mann, Brookings Institution senior fellow in governance studies, at an Oct. 1 seminar. “Just with some whistles and bells on it."

To see what this means, look at the language in the bill. It’s apparent from the start. Here’s a good excerpt from page 6:

“The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘TARP’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.”

So ... in other words, Mr. Paulson (and his successor) gets to buy stuff pretty much any way he wants. Reverse auction, forward auction, Statue-of-Liberty auction, church raffle – Lehman Brothers, come on down!

But it has got to be from financial institutions, right? There’s that restriction.

Except, here’s the definition of “financial institution.” It’s on page 4.

“The term ‘financial institution’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States...."

See? That one can sneak by you. The important part is “any institution, including, but not limited to." So, the Treasury secretary can buy troubled assets from anything! True, the end of that sentence, which is very long, excludes things owned by foreign governments, or their central banks. And the institution in question has to at least have operations in the US.

But if Taco Bell has any bad assets it wants to unload, it looks to me as if it qualifies.

The bill goes on to say that the Treasury secretary has to make purchases at the “lowest price that the Secretary determines to be consistent with the purposes of this Act...." He or she is also supposed to “maximize the efficiency of the use of taxpayer resources by using market mechanisms ... where appropriate.”

Again, who is making the decisions there? You guessed it. That’s not what you’d call binding legislative language.

At least we all know what the the Treasury will be buying. It will be those much-discussed toxic assets – mortgage-based securities that have gone bad because real estate prices have fallen.

Except when they aren’t. Here’s the bill’s secondary definition of troubled assets: “Any other financial instrument that the Secretary ... determines the purchase of which is necessary to promote financial market stability.”

To be fair, the depth of the credit crisis and the need for quick action may call for a rescue program that allows its overseer maximum flexibility. And the Senate-passed bill keeps tighter control over the nation’s purse strings. It only allots the Treasury a first tranche of $250 billion for the program, toward a cap of $700 billion.

And there will be a number of oversight boards to check Treasury’s actions, including a congressional panel of five lawmakers.

Still, to call the whole thing a “plan” is something of a misnomer, according to the panel at Brookings’ Oct. 1 event.

“It’s important to understand there’s no plan. What the legislation would do, would say to Paulson, you deal with this, we don’t know how you’re going to do it, but we’re giving you some money to deal with it,” said William Gale, Brookings director of economic studies.