Monday is going to be a really big big big day. There's a lot going on in the House and Senate, and Wall Street is going to have some huge reactions to what's going on in the government sector. The big one is the Bush administration's "Bailout Bill" - if you have not heard about it, here it is in a nutshell: the Bill would allow the government to buy the crappiest of mortgages from banks, hold them for a while, then slowly return those debt-backed assets back into the marketplace. The plan is that this will serve two purposes: one, to remove those toxic waste (a real industry term) mortgages from bank's balance sheets and free up the capitol currently being set aside to recover the monetary loss those assets are causing, thereby returning some consumer/market confidence to those institutions. Two, to allow the market in general to recover until such a time where those high-risk assets are no longer quite as scary - part of the current problem is that there are more toxic waste assets than there are buyers. Supply and demand says the price falls, and people get scared.
Now, I was going to post a link to the bill itself, but in case you don't use a tabbed browser I'll post it here so you can refer back to it while reading. Here it is in full:
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.
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.
Now, let's break it down a bit because chances are you have no idea what that means. Here are some of my initial thoughts about this bill. Be aware the the Secretary listed in the bill is the Secretary of the Treasury: one dude. His name (right now) is Paulson.
Section 2.a - That just says what my intro gave you: the government will buy those mortgages from banks so the banks don't have to own them anymore.
Section 2.b.2 - or as I call it, Scary Item Number One. The last line is what worries me: "without regard to any other provision of law regarding public contracts." So the standing contracts laws (that arguably make contracts fair to all parties, or at least disclose the risks in a given contract) do not apply to anything covered by this bill. Total control outside existing law. Hmmm....
Section 2.b.5 - or Scary Item Number Two. "issuing such regulations and other guidance as may be necessary or appropriate..." That alone isn't too scary, but wait until we get into sections 4, 6, and 8. Just remember this point for now and call it up later.
Section 4 - Okay, so within 3 months of the first action under this bill, the Secretary must report to all those government groups in the Senate and House. What's wrong with that? Keep reading.
Section 6 - The Money. The Secretary has access to $700 billion dollars to work with under this bill. That looks like this: $700,000,000,000.00 and that's a lot of money.
Section 8 - The Very, Very Scary Section. Go back and read section 8 again. Go ahead, I'll wait. Decisions are non-reviewable and at the Secretary's discretion. No court of law or administrative agency may review them. No court of law. Ho. Lee. Crap. Bush to Paulson: "Here's seven hundred billion dollars. Go buy some really crappy mortgages that no one else is buying right now and if anyone asks what you are doing, tell them I said they can't stop you." So ask yourselves this question - if his actions are non-reviewable, why does section 4 say the Secretary must tell the House and Senate what they have done so far within 30 days of the first purchase? The House and Senate can't do anything about it if they want to! Paulson can say "so, here's what we have done. We now own $700 billion dollars worth of toxic waste investments, and I'm going to sit on them. Thank you and goodnight." and walk the hell out the door. Now, the argument that the Bush Admin is making is that if there is too much "politics" mixed into this bill or the actions of the Secretary, the whole proces will take months and we don't have months. That I tend to agree with. But making the actions non-reviewable by any law in the country is just scary. We might as well change Paulson's title to Mortgage God and let it go at that. I could go on here, but let's keep moving.
Section 11 - This section basically says that Paulson can name his price on these assets. On one hand, no one is currently buying them so that's sort of his right. On the other hand, what good is buying them from banks if they get to pay pennies on the dollar for assets that may (in theroy) be worth quite a bit later on down the road and/or when a few of these risky assets are packaged into an investment vehicle that includes more low-risk assets than high-risk assets? Sure, it restores market confidence, but would that short-change banks in the the future?
If you've stuck with me this long, you have realized that I only have tiny bits of information. I'm not an economist, and I don't clam to fully understand what's going on. But I have done some pretty extensive research and heard some pretty insitefull opions from actual economists, and it does raise some pretty important questions. All in all, we are living major history. The actions of and reactions to the government and Wall Street decisions tomorrow can have a huge impact on the global economy. I don't know if I'm so excited I want to barf, so scared I want to barf, or so sickened I want to barf. In any case, stay tuned!
PS: If this interests you at all, check out NPR's Money Blog to see/hear some really cool info, and subscribe to NPR's Planet Money Podcast on their site or at the iTunes Store (it's free). Adam Davidson has some AWESOME info broken down so it's easy to understand even without a Harvard Business degree. Goodnight......and good financial luck.