Paulson becomes most powerful man in the world

Below is the $700 Billion proposal to authorize the US Treasury to begin buying troubled MBS assets. There are some huge numbers involved here. Most notably is that this proposal bumps up the limit on public debt by approximately 16%... from $9.7 Trillion to $11.3 Trillion. Additionally it provides the Treasury Secretary with discretionary authority to buy and sell these assets at times and prices of his choosing, and provides that decisions made by the Treasury are “non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency” …there will be NO second guessing Paulson. That’s probably a good way to keep all of these congressmen and senators that claim they didn’t realize they got a zero-interest home loan from a mortgage company that gave heavily to their campaign from inserting themselves into this for political gain.

The Treasury Secretary will have to provide testimony semi-annually on the program to various government oversight committees.

All powers granted in this legislation shall terminate two-years from the start date. Additionally it looks like the Treasury can HOLD the securities longer than the 2-year window during which he has discretionary authority to buy and sell. I’m no lawyer, nor did I stay in a Holiday Inn last night, but that’s the way I interpret the proposal below. So Paulson has a two year window to buy, he reports every six months, and at the end of two years Congress reviews.

There’s a short sentence about protecting the taxpayer included but it reads like it’s an afterthought.

I’ve not seen ANY talk yet about how these assets will be valued. There are hundreds of billions of dollars of “Level 3” assets sitting on the books of financial institutions right now. These are the infamous “mark to model” securities. In a normal market there is information conveyed in prices...there is no market in which these “Level 3” assets trade so you have to use assumptions and models to determine a price. This led to some wildly optimistic prices for assets on the books of many firms. Picture a guy that gets millions of dollars in bonuses for creating and trading these new and esoteric securities that are rich with nuance (read that as nobody else in the firm understands) and that are the envy of the Street for the returns they generate. One risk of carrying this paper is that if it gets impaired the firm will have to write-down billions of dollars and his bonuses and his job will go away. Now the interesting part is that the firm relies on this same guy for the prices to use for evaluating impairments because there is no market they can look to for such information. This guy creates the assumptions and runs the model that kicks out the price that essentially determines whether or not he keeps his high paying job and huge bonuses. I can’t be the only one seeing a conflict of interest here. At any rate, there will have to be a reckoning on the prices of these Level 3 securities, and this is a big issue for the taxpayer.

If the Treasury buys them at above fair value prices, the tax payers take the hit. If the Treasury buys them below fair value prices the firm takes the hit but this will put them in a spot that the Treasury is desperately attempting to avoid with this whole “Bail out the whole world” plan. That in my mind is the central issue to how this whole thing works out…HOW do they determine fair value, and who takes the hit from the write down?

This proposal doesn’t address those issues and they are the ones most in need of an answer.

The proposal is below I’ve highlighted some sections of importance and inserted a note or two where I thought . If any questions let me know.


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U.S. Treasury Proposal to Buy Mortgage-Related Assets: Text

Sept. 20 (Bloomberg) -- Following is the text of a legislative proposal by the U.S. Treasury to buy mortgage- related assets from financial institutions:

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ____________________.

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) 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 take into consideration means for--

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

(2) 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 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.

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.

(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 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 two years from the date of enactment of this Act.

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.
(My Note: THE OLD LIMIT WAS ROUGHLY 9 TRILLION)

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.

(Note: That is a WIDE OPEN definition…they can buy the worst of the worst if they chose)

(2) Secretary.--The term Secretary means the Secretary of the Treasury.
(3) United States.--The term United States means the States, territories, and possessions of the United States and the District of Columbia.
For Related News: For news on the credit crisis: NI CRUNCH BN For finance news: NI FIN