Published September 22, 2008

Paulson seeks US$700b and a blank cheque

Bailout package moots total power for Treasury to buy assets unchecked by courts

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(WASHINGTON) The Bush administration has formally proposed to Congress what could become the largest financial bailout in US history, requesting virtually unfettered authority for the Treasury to buy up to US$700 billion in mortgage-related assets from financial institutions based in the United States.

The proposal was stunning for its stark simplicity: less than three pages, it would raise the national debt ceiling to US$11.3 trillion. And it would place no restrictions on the administration other than requiring semi-annual reports to Congress, allowing the Treasury to buy and resell mortgage debt as it sees fit.

Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The Bill would prevent courts from reviewing actions taken under its authority.

'He's asking for a huge amount of power,' said Nouriel Roubini, an economist at New York University. 'He's saying, 'Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.'

As congressional aides and officials scrutinised the proposal, the Treasury clarified the types of assets it would purchase. Mr Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage-related assets and, after consultation with the Federal Reserve chairman, 'other assets, as deemed necessary to effectively stabilise financial markets', the Treasury said in a statement.

'Paulson (above) is in effect becoming the dictator of the American financial system for a few months, subject to congressional oversight.'
- Wall Street historian John Steele Gordon,
author of a book about the US national debt

The Treasury would also have discretion, after discussions with the Fed, to make non-US financial institutions eligible under the programme.

In fact, Mr Paulson categorically said yesterday that foreign banks will be able to unload bad financial assets under the proposal.

'Yes, and they should. Because . . . if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution,' Mr Paulson said on ABC television's This Week with George Stephanopolous.

The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Mr Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.

But party politics could still come in the way of the Bill which Congress is expected to pass as early as Sept 26.

Congressional Democrats want to use the rescue plan for US financial companies to curb executive pay, spur the economy with infrastructure spending and help people avoid foreclosures.

Republicans object to adding extras to Mr Paulson's proposal, which would authorise the administration to spend an amount almost 50 per cent larger than the Pentagon's annual budget to buy banks' bad mortgage debt.

Mr Paulson himself resisted the Democratic push, saying that there is an urgent need for Congress to act quickly without adding other measures that could slow down passage. 'We need this to be clean and to be quick,' he said.

House Speaker Nancy Pelosi said, meanwhile, that Congress would ensure more accountability than in the Treasury plan by 'implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform'.

The Treasury may hire managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, it said. The document specifies that the Treasury may buy only assets issued or originated on or before Sept 17.

The ban on legal challenges of actions by the Treasury is 'distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act', said Jerry Markham, a law professor at Florida State University. 'What you don't want to happen is to have lawsuits that will slow things down and cause problems,' he said.

A US$700 billion expenditure represents more than US$2,000 for every man, woman and child in the United States.

Mr Paulson said that 'it pains me tremendously to have the American taxpayer put in this position, but it is better than the alternative'.

'It's a big-picture package because it's a big problem,' President George W Bush said on Saturday at a news conference, after meeting with President Alvaro Uribe of Colombia. 'The risk of doing nothing far outweighs the risk of the package.' But while the administration sent over a streamlined proposal, it is unlikely to stay at just two-and-a-half pages. -- NYT, Bloomberg, AP