Fool Me Twice

For what it’s worth, I never thought limiting executive pay was tremendously important component of the TARP (ultimately, it seemed mostly symbolic, and the need for a bailout was certainly not), but that doesn’t mean the Bush Administration didn’t completely snooker Congressional Democrats:

But at the last minute, the Bush administration insisted on a one-sentence change to the [limits to executive pay] provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.

Say it ain’t so? Verily, as the Washington Post describes, “the modification reflects how the rapidly shifting nature of the crisis and the government’s response led to unexpected results.” Oh wait, as the Washington Post later reports in the same exact article:

Meanwhile, [Treasury Secretary] Paulson repeatedly told lawmakers that he did not plan to use bailout funds to inject capital directly into financial institutions. Privately, however, his staff was developing plans to do just that, Paulson acknowledged in an interview.

I’m not sure which is more stunning, the Washington Post’s willingness to just chalk it up to the “rapidly shifting nature of the crisis” while simultaneously reporting Paulson had no intention of using auctions, or the fact that the Bush Administration so capably hoodwinked Congress yet again.

As Steve Benen quips, “The relationship between Lucy and Charlie Brown keeps coming to mind.”

Correct Me If I’m Wrong, But..

Wasn’t this the original idea behind the TARP?

Meanwhile, Federal Reserve Board Chairman Ben Bernanke is finally taking a step that Paulson won’t, and spending $600 billion to revive the U.S. housing market. $100 billion will be designated to buy the debt of Fannie Mae and Freddie Mac and another $500 billion to buy mortgage-backed securities that are guaranteed by Fannie, Freddie and Ginnie Mae. According to the Fed, the program will be conducted “through a series of competitive auctions,” thereby establishing a price for some of the unpriced toxic assets kicking around those institutions alongside their more credit-worthy holdings.


As I’ve thought a lot about the specifics of the Paulson/Bernanke plan, and it’s far more responsible and sensible cousin, the Dodd plan, it would be easy for readers of this blog to interpret that I believe these to be only way forward. A whole host of other types of proposals have been floated, some of which unquestionably have merit. That being said, the general structure of these two plans seem to signal the general shape of the package, and thus, it’s probably most productive to focus on these.

The Difference Between Literally and Practically

So In response to my post explaining why executive compensation provisions are a bad idea, “Christianliberal” asks:

Yeah, don’t you get the feeling we are being hoodwinked? Bush ran up our nations credit card to the tune of $1 TRILLION for the war in Iraq, and now, in an emergency fashion, he wants to do the same thing for Wall Street. I smell a rat.

The notion that the American taxpayer would be “hoodwinked” betrays a common misconception about the crisis: namely, that mortgage backed securities are literally worthless. In reality though, mortgage backed securities are supported either by the value of a home or the cash stream collected on that mortgage. The problem is that a) home values were tremendously inflated and b) a number of recent homeowners can’t actually afford their mortgages. As a result, nobody is particularly sure of the actual value of these securities, which has had the unfortunate effect of rendering these debts practically worthless. But this distinction between literally worthless and practically worthless makes all the difference in the world.

In purchasing these debts, the government will be entitled to whatever value they might have, and unlike a bank, will not be burdened by the need to immediately liquidate them. As the true value of these debts emerges and the markets stabilize, the government will in turn be able to resell these debts, likely at a loss, but possibly at a profit. Fortunately, the Dodd plan protects taxpayers from this likely loss by a) entitling the government to a share of the bailed out companies and b) its ability to restructure mortgages to enhance value. Of course, neither one of these guarantees taxpayer’s full remuneration, but they do provide sensible steps to minimize any impact or possibility of “hoodwinking”. Finally, if these securities do prove to be virtually worthless, then the bailout will have totally necessary and nobody will have been fooled.

I will add though that the success of this plan hinges on the government’s ability to buy enough debt to stabilize the market. Now, I think it’s safe to say nobody has any clue how much this will require, but that’s why it’s important not to discourage participation in the bailout by adopting disincentives to participation (like executive salary limits).

Bush Goes Retro

George Bush, defending Henry Paulson’s sweeping bailout plan, offers this sure to prove sagacious claim:

“Failure to act would have broad consequences far beyond Wall Street. It would threaten small business owners and homeowners on Main Street.”

Bush, October, 2002:

“Failure to act would embolden other tyrants, allow terrorists access to new weapons and new resources, and make blackmail a permanent feature of world events.”

Forget recondite economic theory, this has got to be most persuasive argument against passing Paulson’s plan as proposed.

Authorization For Use of Monetary Force?

I’m no economist, but I read a number of them, and it seems like consensus deems Paulson’s plan a pretty bad idea. For more here’s Krugman, Kristol (?), Mallaby, and CAP. There are many more quoted in the first article.

The basic thrust though, for those undesirious of reading, is that Paulson’s plan calls for the essentially accountable use of an unprecedented sum of taxpayer dollars to purchase bad, impossible to value debt, which may or may or not solve the problem and will almost guarantee no taxpayer remuneration. In addition, the plan does nothing to address the root cause of the problem, namely that 1 in 10 Americans are facing foreclosure. This makes the plan not only misdirected, but also inequitable in its narrow aim to help only shareholders and those who made bad investments and not homeowners who made similar mistakes. But of course, it’s more complicated than that, so read the links.

And also, dare I mention the how previous Bush Administration calls for broad and an unaccountable uses of executive force have turned out?