It probably isn't surprising that Wall Street initially focused on the figure rather than the text of The Bailout Plan (it being so large and broad in scope that proper noun capitals seem appropriate here). $700 billion looks almost comfortably close to the $1 trillion that everyone seems to think represents the amount of toxic mortgage garbage on the balance sheets of your favorite brand-name investment banks (or their acquirers). In addition, there isn't much more to look at. For such a massive plan, the succinct prose managed to fit into less than three full pages. Don't worry though, democratic legislators started working to correct that oversight immediately. Already efforts to "insulate Main Street from Wall Street" and enact "an economic recovery package that creates jobs and returns growth to our economy," (Pelosi) as well as something that "helps folks cope with rising prices, and sparks job creation" (Obama) are afoot.
Looking a little deeper at the original proposal, some questions do emerge, and certainly with all the weekend coverage, I expect we are not the first to ask them here.
Much More After The Jumptm
(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:
(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;
This effectively makes the Secretary the largest source of no-bid-contracts in the country for a while. To be expected, I suppose. Can't have a procuring process that drags on for months in cases like this. Make sure to look for the inevitable accusations of fraud and waste in the process in, oh, eighteen months or so, along with the actual fraud and waste.
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.
This is not entirely unprecedented, but it does suggest some rather thorny constitutional and separation of powers issues. For instance, several democratic congressmen and congresswomen want "windfall profits" (whatever that means) for executives of any firm participating in the bailout to be forfeited.
One could easily imagine a circumstance where bonuses or securities that were contractually guaranteed and earned prior to the crisis, are coming due in December and will be forfeited according to the bailout provisions. That sounds a lot like a "taking" without just compensation within the meaning of the takings clause of the Fifth Amendment. At the very least, it could present rather significant due process issues. But, as is typical with such cases, these sorts of plaintiffs are unlikely to evoke much sympathy. And, frankly, the argument is somewhat weak to the extent a firm participates voluntarily. That's unlikely to stop the executive's lawyers from suing, however.
These sorts of ex post salary restrictions are common in bankruptcy courts, and, occasionally, they might even be retroactive, but none of these firms have (yet) voluntarily submitted to the jurisdiction of a trustee in this case, and in a bankruptcy court one at least has direct resort to judicial due process. If firms want pay-for-performance terms out of their executive compensation packages, they should negotiate pay-for-performance terms up front. And if shareholders were willing to approve pay-for-attendance terms to get their favorite CEO instead, then it really shouldn't be up to the likes of Barney Frank to reach in and tear that asunder. But I digress.
Complicate all this by putting in the provisions Barney Frank would like to see passed and executives might have to repay already distributed bonuses, or already exercised options could be "clawed-back." How exactly this encourages potentially troubled firms to resort early and cleanly to the bailout mechanisms, rather than just free-ride on the buoying force the program might have on the broader market (a lift that may or may not endure for very long) is not explained.
These are actually probably smaller concerns than the wholesale grant of massive spending powers to the Treasury without any sort of review. Still, students of jurisprudence in the audience will recognize the non-delegation clause's wane as having begun, coincidentally, with the Great Depression, and continuing through the breadth of the 1930s. The fact is that non-delegation is rarely used to strike down legislation unless it is so over-the-top as to shock the sensibilities. (If that is even possible to do these days). The line item veto was probably the last big non-delegation trigger.
Of course, you just knew that the issue of broadened powers for bankruptcy judges, like the ability to revise mortgage terms would find its way back into the discussion as well. We sort of like this idea, in extreme cases, but it sets a bad precedent. It is not hard to see that future recovery in the mortgage security (and therefore real estate) market will be difficult if you now have to price the hard-to-quantify risk that some politically appointed judge might just decide that Mr. John Q. Deadbeat only has to pay 70% of the original mortgage amount.
Like a magnet through a scrapyard, there is little doubt that The Plan will tend to attract any old rusty hulk that happened to still be laying around the legislative scrapheap before the bubble burst. How much it actually ends up dragging along to the crusher of the President's desk will depend on how dire Paulson's description of the consequences has been during his whirlwind tour of the talk circuits and legislative offices, and what panic induced credibility his dire predictions have after today's open. A 1.4% spike on the Nikkei today suggests two rusted out Chevy Novas and a barely recognizable Cadillac will attach themselves to the plan before the week is over. (Update: But lower stock futures suggest otherwise).
One provision that manages to capture our positive attention is Senator Jack Reed's proposal to grant the Treasury warrants in companies participating in the bailout and so participate in any recovery after the crisis. Sure, you don't really want the Treasury's role as a market actor expanded much more than it already is, but to the extent you like aligned incentives, this should seem like a good idea.
Though the text hasn't yet been out for three days, Paulson has already proposed to expand the scope of securities the Treasury is authorized to buy beyond mortgage backed securities. He's also wondered aloud if foreign banks rather then just "any financial institution having its headquarters in the United States."
I, for one, welcome our new Financial Overlord.
Song to the tune of Glenn Frey's "Smuggler's Blues":
There's trouble on The Street tonight,
I can feel it in my bones.
I had a premonition,
That he'd even lose his home.
I knew the debt was toxic,
But I didn't think he'd bite.
And the volatility began to spike.
So baby, here's your bailout,
Put those loan docs in the till.
Here's a little money now,
Your stock might rally still.
You be cool for twenty months
And I'll pay you twenty bil.
I'm sorry it went down like this,
And someone had to lose,
It's the nature of the business,
It's the bailout blues.
Best reader submitted second verse gets a commemorative AIG keychain.* Here's the original:
The sailors and pilots,
The soldiers and the law,
The pay offs and the rip offs,
And the things nobody saw.
No matter if it's heroin, cocaine, or hash,
You've got to carry weapons
Cause you always carry cash.
There's lots of shady characters,
Lots of dirty deals.
Ev'ry name's an alias
In case somebody squeals.
It's the lure of easy money,
It's gotta very strong appeal.
Perhaps you'd understand it better
Standin' in my shoes,
It's the ultimate enticement,
It's the smuggler's blues,
*Supplies may be limited.