Aaron S. Edlin holds the Richard W. Jennings Endowed Chair and is Professor of Economics and of Law at the University of California, Berkeley, and a Research Associate at the National Bureau of Economic Research. He is co-author with Phillip Areeda and Lewis Kaplow of a leading antitrust casebook. He was formerly the senior economist covering regulation, antitrust, and industrial organization at the President’s Council of Economic Advisers, and he has taught or held research positions at Yale, Stanford, and Columbia.
DEAR SECRETARY PAULSON,
Today, I read the U.S. Treasury’s humble request for the authority to spend 700 billion taxpayer-owned dollars. This taxpayer’s answer: “No.”
Sorry, Mr. Paulson, for the vote of no confidence, but consider the terms you propose. The only hard restriction on this gift certificate is that it must be redeemed at “a financial institution having its headquarters in the United States” and used to buy “mortgage-related assets.” You will have little trouble spending this bounty, probably all before Election Day.
I did notice the soft restriction, with the two “Considerations” that you are intended to “consider” in your purchases: “(1) providing stability or preventing disruption to the financial markets or banking system; and (2) protecting the taxpayer.”
It is kind of you to remember the taxpayer, but will you forgive me for being a little concerned when your proposed legislation provides no clue how you are to balance these two considerations nor what constitutes adequate protection of the taxpayer?
Just as I am wondering whether you are allowed by chance to pay inflated prices for assets if you should so choose and if you judge it to promote “stability,” I come upon the fact that your decisions will be “non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
I stopped dead on reading this. You, the Treasury Secretary, are really asking for a $700 billion blank check.
The legislation does not even suggest that you should try to get a fair price, not, anyway, if “stability” is at stake. And if you decide to give twice the fair price to an old friend from your Goldman Sachs days and think this contributes to stability, that decision is non-reviewable. What a job you have! To think that only last week I felt sorry for you.
You could, under this legislation, pay $700 billion for “paper” having a face value of $800 billion, even though the paper’s market value has sunk to $100 billion or even though the paper has no market, so long as you think the purchase promotes stability sufficiently. You could do so with no review and no appeal. I suppose, taking the words of your legislation literally, you could spend the entire $700 billion buying a single mortgage owned by Goldman Sachs if you thought such a cash injection was just the trick.
To be sure, you might be successfully challenged in court on the more ludicrous hypothetical purchase, despite the no-judicial review clause. On the other hand, I can well imagine Justice Scalia’s opinion scolding Congress for not drafting better and telling the plaintiff to pound sand.
Regardless of such far-fetched possibilities it is clear that the proposed legislation gives you nearly complete authority to make bad deals in the name of stability—bad deals for taxpayers and good for your brethren on Wall Street.
And here is a disturbing thought: If the initial tab is $700 billion, is it possible you may wind up coming back for much more? Could the administration that brought us the $2 trillion war bring us a $2 trillion bailout?
Finally, would it be over-the-top cynical to worry that after you give some investment bank a particularly sweet deal that the bank or its employees would later decide to spend some of that money in campaign contributions or political action committees?
I dearly hope this legislation is not passed as it stands. If anything like this bailout must be done, I propose putting Warren Buffett, and not Henry Paulson, in charge. Warren Buffett and Charlie Munger have a strong history of getting assets at a discount when sellers need liquidity. The goal should be stated in the legislation: buy assets at a bargain in cases where the purchase will improve the stability of the financial markets or the banking system. The alternative to selling should be a quick trip to a special panel of bankruptcy judges ready to impose a debt for equity swap, as proposed by Luigi Zingales.
The government made a profit on the Chrysler bailout, and I see no reason why that shouldn’t happen here. No reason, that is, except the proposed legislation.
Appendix: Treasury Department Proposed Legislation
The following is the legislative proposal from the Treasury Department for authority to buy mortgage-related assets:
Sec. 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 ser vices 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 Bud get, Financial Ser vices, and Ways and Means of the House of Representatives and the Committees on the Bud get, 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.
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.
(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.
REFERENCES AND FURTHER READING