Hopes Fade for ‘Clean’ Bailout Bill
Image has not been found. URL: http://www.washingtonindependent.com/wp-content/uploads/2008/09/paulson.jpgSec. Henry Paulson (WDCpix)
The ‘clean’ bailout bill that Treasury Secretary Henry Paulson Jr. sent to Congress over the weekend, is anything but ‘clean.’ It would allow the Treasury to pay up to $700 billion for whatever “troubled assets” — in the bill’s first draft “mortgage-related assets” — from whatever banks at whatever price it sees fit. And it has to be passed by Friday or the world will end. The truth is that it will make an unholy mess even worse.
In any case, the hopes for a ‘clean’ bill were gone by Monday morning, and it wasn’t because congressional Democrats were lining up to put in sweetheart provisions. Wall Street’s suits smell a goldmine and are clamoring for position to get the hundreds of millions in fees at stake. Even foreign banks – and foreign finance ministers – are lobbying hard to be part of the bailout. It could be another Marshall Plan
Illustration by: Matt Mahurin
Paulson, or course, will be out of office in a few months, and can walk away a hero to Wall Street. But the rest of us will have to clean up the mess.
Let’s take a deep breath. This $700 billion would cover at least three million homes, plus thousands of commercial developments. All of them, presumably, in various stages of delinquency or default.
Who sets the prices that the Treasury pays for this toxic brew?
Most banks are carrying their residential mortgage paper at something like 65 cents on the dollar. But when Merrill Lynch recently decided to sell off a big chunk of “super senior” triple-A rated mortgage-backed assets — like the ones the Treasury is planning to buy, it got 22 cents on the dollar. And Merrill had to provide 75 percent financing on a non-recourse basis. In other words, the real price was about a nickel on the dollar.
What army of collection and administrative agents will the Treasury hire? (Listen to the chorus of ‘Me!, Me! Me!’ coming from Wall Street.) Which mortgages will it forgive, which ones foreclose?
When the Resolution Trust Corp. took over the commercial mortgages inherited from the savings and loan crash of the 1980s, the administration was an utter horror. I once tried to work through the cost of the operation, but was told that the records were such a mess that it wasn’t possible.
The RTC decided – quite sensibly – just to dump everything, bundling it up into giant pools and selling it to vulture funds. The Bass Bros., KKR, Ronald Perelman, all jumped in, making profits of 100 percent or more a year.
If Paulson really wants a clean bill, the Treasury can just create a $700-billion, U.S. government-owned “sovereign wealth fund” to invest in troubled banks at market prices. A sophisticated board of ex-bankers and accountants could oversee the pricing of individual deals. The equity could even be contributed to the Social Security Trust Funds, under supervision of an investment panel, perhaps with reasonable rules regarding buy-backs or other dispositions.
That will re-liquefy the financial system, while leaving each bank to manage down its own bad assets as it sees fit. No huge transfer of assets, no windfall rake-offs for the bad guys, no administrative scandals. That is the definition of a “clean” bill.
*Update: The original version of this story was updated to note a new draft of the bailout bill has circulated. *
Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”