UPDATE 2: It’s raining! Roll out the TARP!

… and I don’t even follow baseball anymore.

(WSJ article can be found here and I comment on it later in this post.  It sounds like the outline provided by Chris Dodd, more or less, days ago, based on the original Paulson proposal with some balances to protect taxpayer where the original only had the intention of protecting Paulson from any and all oversight.  The bill will be voted on by the House on Monday and the Senate later on in the week — I’ve heard Wednesday — but an agreement has been apparently reached over its contents)

I have been toying with writing a post about what I thought the purpose of the horrendous original Paulson proposal was, but all along I assumed some iteration of his proposal would be adopted at any moment so further criticism would be moot (skip the coming section if you feel it is moot at this point).

Now that I know there are a few hours until this becomes law, I guess this is my last chance to say anything.

The Paulson Plan!

I honestly believe it is far more likely that Paulson advanced a horrible proposal knowing it would be defeated more than expecting that Congress would be so shell-shocked and fearful that they would pass anything he advanced to them.  I believe it was expected to be rejected, but to set an extremely favourable starting point for negotations.

The wink-wink admission that losses would be accepted and expected over the few days since the proposal was advanced (up to the Bernanke “mark to maturity” pricing bit of marketing and rebranding) was probably known to be politically untenable.  Paulson should know that a better disguise would have to be put on a giveaway for elected representatives to be able to vote for it.

The conceit that Treasury should receive formal acknowledgement that it can not have ANY oversight was a clear impossibility, and Paulson attempted to retract it by saying he intended for the plan to have some oversight, it’s just that every single person in the world somehow mis-read his “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” (also known as the “God calls me God” clause).

I believe he expected those tenets of the plan to be defeated, but that the languid body of Congress in limited time (especially limited by his, Bernanke’s, and Bush’s continual admonitions that the financial world is liable to collapse within hours if Henry Paulson’s hands remain tied) and with limited acumen to deal with the crisis (this has been officially a catastrophe for over a month, or far longer, depending on where you wish to set the criterion, and there apparently was no action by Congress except to say yes to anything the Fed or Treasury asked for, or just turn a blind eye when the Fed took actions that would appear to exceed their authority), that Congress would proceed from Paulson’s plan towards a somewhat less regal, but still clearly the progeny of, his brazen grab for control over the nation’s finances to benefit those he chooses.

Paulson reminds me of a car salesman who tells the potential buyer that the car’s sticker price is $700 billion.  And Congress responds “well, I’ll only pay $6.5!”

Of course, we can be relieved in the fact that this new bill does contain some measure of Congressional oversight.  Of course, Congress has had the authority to conduct oversight since day one (minus the flirtation with the original Paulson plan) and either opted not to use it, or was just incompetent in its exercise.  But Congress appears to know that, so:

“The bill leaves many mechanics of the operation up to the Treasury.”

UPDATE: Floyd Norris in the NYT has an article entitled “Treasury Would Emerge With Vast New Power”.  The ‘improved’ TARP only paid lip service to oversight.  It was up to Henry Paulson how much oversight he would like them to exercise.

And how about the dollar amount?  He doesn’t get $700 billion.  Right away.  But is pretty much gauranteed to receive as much as he wants (which has famously been stated as just a big number with no math behind it) for a number of reasons.  So the splitting of the funds is entirely for show.  You can bet that even if Goldman Sachs is trading at $280 and JP Morgan is trading at $60 at the start of 2009, another $350 billion will be ‘absolutely necessary’ to stop the ‘reversal of gains we’ve made in the past few months’.  Remember how the surge wasn’t really a surge but a permanent troop escalation?  Ya…  It takes a lot more balls to mess with something that appears to be working than Congress ever had.  Better yet:

“The Treasury wouldn’t get the entire $700 billion for purchasing such assets upfront. Just $350 billion would be immediately available. But the other $350 billion would be available unless Congress specifically holds it back.”

Sounds like they are writing it with the specific intent of not holding back the second $350 billion.  Why even bother pretending?  So Paulson got his $700 billion.  I guess we should be glad Congress didn’t throw another $7 billion of earmarks in there (yet).

Now: The ACTUAL plan! Diet Paulson!

Having said that I think Paulson just successfully manipulated Congress into providing him with powers and funds beyond what he would have had access to even back when he was heading Goldman Sachs, and allowed him fairly free reign over how to spend it and upon whom to show favour, here are a few responses about the contents of the WSJ article:

“One likely method of purchasing and pricing assets is a reverse auction. In this, firms would offer to sell securities at given prices, and the Treasury could buy the least expensive on offer. Institutions would presumably offer to sell at prices high enough to alleviate their woes but not so high they’d be passed over in favor of lower-priced offers.”

Since we’re trying to use Treasury razzmatazz to add luster to the securities and increase their value beyond what the market has discerned their value to be at the moment, doesn’t that encourage all institutions to introduce very high starting prices?  There doesn’t need to be a conspiracy if it serves all their best interests to sell at prices a bit higher than they’d really be willing to.  Otherwise the whole auction could perform a negative function to its stated purpose if the auction revealed exactly how desperate the institutions are and how lowly they value their assets.  The plan doesn’t function unless the Treasury overpays, and any oversight is cosmetic as “hold to maturity” pricing will guarantee the true value of the assets (and the amount of the handout) isn’t revealed until years later, after Paulson has returned to Goldman Sachs.  Seems like both seller and buyer have an interest in maintaining high auction prices.  The best way to increase investor confidence in assets would be pretend that market forces were at work to ascertain a price for them.  So the Treasury and the financial institutions will have to pretend they both don’t want the exact same thing as they both try to encourage high prices on the assets.

“I’m doing this for you as much as for me,” Mr. Paulson shot back [to Senator Charles Schumer (D-NY)]. “If we don’t do this, it’s coming down on all our heads.”

Oh, this plan isn’t just for Paulson, it’s for Schumer as well?  Then this all makes a lot of sense.  I imagine a number of grateful New York-based financial institutions and their employees will want to ensure Schumer is re-elected (or provided a high-paying post-Senate lobbying position).

“Passage is seen as likely, despite the measure’s unpopularity.”

Popularity isn’t really the best indicator of what is best for the country, but I’d say there are very legitimate reasons to hate this bill, beyond even the longterm market imbalance and moral hazard questions that arise with it.  Hopefully we’ll do better in the next “Bailout to End All Bailouts” (yes, I do expect more).

“I’m pleased that we’ve come to a result,” the Connecticut Democrat [Chris Dodd] said. “I think it’s dreadful that we had to come to this result.”

I think we can all sympathize.  Glad to hear that one of the most important figures in this plan thinks the bill he will vote in favour for this week is ‘dreadful’.

“The Treasury secretary, growing agitated at times, continually told members they needed to design a program that would work and that it made no sense to create a program if financial firms didn’t want to participate in it. “The situation is fragile,” he said repeatedly.”

He sure seems to be in a rush.  Then why is it every administration official (I’ll include Ben Bernanke in there) seemed to be so eager to downplay the threat until about two weeks ago?  I don’t know if I’d attribute this to Paulson’s intent, but it certainly seems like neglect at least.

“Democratic Sen. Max Baucus of Montana, chairman of the Senate Finance Committee, became frustrated that Mr. Paulson appeared to be arguing for softer language on the executive-pay rules, arguing loudly that executives at these companies shouldn’t be handsomely paid.”

He certainly cares a lot about this executive compensation bit…  Doesn’t that show what’s wrong with the current arrangement?  That apparently executives would rather see their companies fail then give up their golden parachutes?  And we’re trying to … PROTECT… this policy?

“They agreed to a compromise under which any firm that sells more than $300 million of assets to Treasury wouldn’t be able to create new golden-parachute provisions for executives for the duration of the program.”

… How long is this program supposed to last???  Is anyone expected to be provided a golden-parachute provision and then leave the job all while this program is in effect?  Is this more cosmetics to act as if Congress actually has any problem with overpaid Wall Street executives (as opposed to just acknowledging the electorate has understandable distaste for it) [UPDATE 2: Looks like Naked Capitalism has a post agreeing with me that the changes are 'cosmetic']?  Not that I have a perfect understanding, or even close to that, but it sure sounds like there will be a lot of re-negotiating of contracts the day after the program is tapped out of money and closed if the program is only in effect for a short to medium term.  Which would mean the plan would have no impact on outrageous Alan-Fishman-like compensation.  Or the plan will be in effect for years and years, in which case the Treasury’s willingness to absorb the costs of holding illiquid assets and pay for them based on hypothetical future value will become a permanent fixture in banking profits.  Delightful.

“Mr. Paulson objected to language that would give a new oversight board power to control how the new program would be run. “All we’re talking about is having Groucho, Harpo, and Chico watching over Zeppo,” said Rep. Frank, before Democrats backed off.”

Well put, Mr. Frank. Some honesty remains in Congress.

… and the cow goes moo (if it please God-King Paulson)