Hank Paulson’s bailout plan is experiencing a bit of a trip-up.
The Treasury Secretary is wrangling with Congress over details of the $700bn bailout, the centrepiece of which involves buying up mortgage-related (i.e. toxic) assets from banks. All well and good in theory, except that no one really knows their value.
Paulson wants to use hold-to-maturity prices to buy the assets instead of current (fire sale) market values. That would mean he’d probably end up paying higher prices - and irk taxpayers in the process. This was his explanation, via Seeking Alpha:
Paulson and Bernanke made it clear that the $700B plan should not be designed to punish the participants, unlike the Bear Stearns (JPM) and American International Group (AIG) efforts. Purchases need to be priced high enough to attract participation by healthy (not just desperate) institutions, so that lending will be reinvigorated.
In other words Paulson needs to recapitalise and re-liquidise the banks and he’s willing to pay a bit more to do so sufficiently. As pointed out earlier this week, he was also willing to avoid legal oversight to do it expediently as well:
Section 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.
Of course, this didn’t go down very well with senators, nearly all of whom criticised Paulson’s omission of an “oversight” function to police the prices and auctions. Cue Paulson’s about-face at the Senate Banking Committee yesterday:
We gave you a simple, three-page legislative outline and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism. That’s the role of Congress, that’s something we’re going to work on together. So if any of you felt that I didn’t believe that we needed oversight: I believe we need oversight. We need oversight.
Disregarding the rather patronising tone of that statement (patronise means to talk down to someone), this was Paulson’s own, major oversight, so to speak. As the WSJ notes, popular opinion has turned so anti-Wall Street that the very semblance of evil bankers getting away with a bit more money (even with the albeit small prospect the US could book a future gain) was never going to go down well with politicians:
Mr. Paulson has to understand this will never fly politically. Unless Treasury buys assets at the market price and in a transparent way, Congress will bludgeon him or his successor for every transaction that looks like a steal for Wall Street.
Essentially Paulson has to recapitalise the banks without being seen to be giving them money, if he’s to keep the politicians and “the average American” on side.
Let’s hope he finds a way and doesn’t cave in to political pressures, as above. That could well produce the worst of both worlds - a higher tax burden for Americans with not much to show for it in the way of a recovered financial sector. Eep.
