Hi David,

Thanks so much for following this. It's a great public service.

On the statute, what's the administrative law standard for interpreting the discretion built into the limit of "$700 billion outstanding at any one time"? In particular, is this to be measured at cost or at FMV? To my contracts-oriented eye, this seems like a gaping hole to me if there is any room for an FMV argument. Frankly, it seems more than a little ironic that the valuation difficulty that got us into this mess seems to have been overlooked by the drafters (or might this be intentional?).

Good question ... didn't think about it because of my administrative law perspective, under which, not that this is reviewable, Treasury would have the discretion to make reasonable interpretations of what $700 billion means. Does it mean $700 billion cost? The rest of the statute doesn't suggest a particular metric, I think. But the fact that valuing this upper limit is not specified, is, I agree, completely ironic.

Make no mistake about David ... we're looking at WAY more than $1.5 trillion.

Pay attention to how the Treasury funding is worded: "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."

The key phrase is " ... at any one time." This means the Treasury will have a revolving line of funding. As it sells off old debts it acquires, it can purchase new bad debts.

In this way, the total pricetag can far exceed $700 billion ... essentially there is no legislated cap on how much the cost can be.

Now, imagine you're a banker with your own greed as your only moral compass. Wouldn't you stuff as much or your questionable debt off onto the government as you possibly could?

That's exactly what's going to happen. Debt that was never envisioned to be funded by this bailout will be purchased by the government.

It is the biggest payday ever for the banking industry in America. They must be just heady with glee over how this is shaking out, and absolutely further convinced that the way to keep the profits rolling in is to lend irresponsbily and make damn sure you have bribed every politician you can find with campaign contributions up the yazoo.

If you can do that, and just remember the rules, you'll never go bankrupt.

Lend hand over fist to any schmuck you can dredge up and bribe as many politicians as you can find! That's the plan.

It's a nice point - it's not $700 billion max, just $700 billion at a snapshot. And I agree - Wall Street wins ... with the exception of Bear, Lehman, and AIG.

I wouldn't be too certain about that "no judicial review" part. There are all too many lawyers with agendas who are willing to search all 90+ federal districts for the one judge who might exercise judicial review over the issue of the day.

Not being a lawyer, I'm sure I'm just not aware of the case law in which the judiciary agreed to abdicate their responsibility on demand, but doesn't congress making laws that include provisions that the execution of such laws is not reviewable by the judiciary sort of fly in the face of separation of powers? I mean, we might as well just dispense with that whole constitutional charade and have ourselves a king!

We have a King.

His name is Ben Bernanke.

It does not strike me that bankers are going to behave as fedgovernor suggests. The statute says that mortgage related assets can be purchased by the Treasury on whatever terms it sees fit. That won't be face value. And whether the Treasury makes money and whether the "bankers" get such a great benefit that they will want to dump all their underperforming assets depends upon whether Treasury makes a good deal, and on whether Treasury simply buys whatever the bankers want to sell or is selective. Remember that the purchasers from the RTC were felt to have made out like bandits, and the S&Ls themselves felt that they had been robbed.

While we have some data on how and when Treasury Secretary Paulson might use the powers delegated to him by this bill, we have no idea who the Treasury Secretary will be come Jan. 20, 2009 and how he will use such authority. The vast majority of the two year term for these powers will not be under Paulson but under some unknown quantity. I am not certain that it is wise to give such unfettered powers to whomever McCain or Obama select to be the Treasury Secretary, particularly after the bumbling comments that both campaigns have made this past week regarding the current crisis.

"... S&Ls themselves felt that they had been robbed."

They felt that way because their S&Ls were taken over by the government, closed, and the management fired. That's how the RTC got S&L assets.

Under this bailout however, things will be different. The financial institution isn't going to be put out of business. It's just going to be able to package up all of its non-performing inventory and sell it to the government, at whatever terms they can get. They'll love to get any money for these worthless instruments.

Let's restate the problem: Financial institutions today can't get ANY TERMS from ANYBODY at ANY PRICE because EVERYBODY understands that the value of what's being offered by these firms is 0. (It's probably less than $0.00).

There is no value. That's the "illiquidity" of which Paulson speaks. These securities can find no market. If financial institutions were to be forced to admit this, they would have to restate their balance sheets in such a way that would guarantee massive bank failures.

Right now, it is only the fiction of value that is supporting banking institutions' representations to their owners and keeping them from having to either find vast new sources of capital, or be forced from the banking industry.

Solution: The government is going to create liquidity and value for things that have no value. It will create a market, by buying things that have no value in the market except for the value that's created by the governmen now being willing to purchase things nobody was willing to purchase before.

To the bankers, this is a payday. To the bankers, that which yesterday was worth less than 0 is today worth more than 0. They are ecstatic. You would be too if you could sell thin air to the government and there was a law that said the government must purchase your thin air.

There are bankers far smarter than the Treasury Secretary that got us into this mess by his own stupidity, who are, at this very moment, gaming the new system to their advantage.

They are masters of the universe and the smartest men on the planet. They figured out how to get the government to buy up all their bad loans when nobody else would, so they must be pretty smart.

Right.

To say that nonperforming loans systematically and consistently have zero value is irrational and ignores ample evidence of persons who have grown wealthy buying "worthless" loans and managing them astutely.

This is all the more reason why the federal government should not intervene.

The massive government interventions in the market to date suggest that our bankruptcy system does an inadequate job of liquidating assets and settling debts.

Quite true. Bankruptcy court proceedings are notoriously corrupt.

I don't think the bankers are "far smarter than the Treasury Secretary who got us into this." He was head of the premier investment banking firm of our time. You may not agree with what he wants, but he ain't dumb. And he didn't get us into this -- he hasn't been in the position long enough to get us into this. So wrong on two counts. And Jake is clearly correct -- many of the "underperforming" assets are worth something. Sorting out what is worthless and what is not and getting the correct price is what the game is all about. It may be correct that all other things equal, it is preferable to have private market participants sort this out. But all other things are not equal. The fear factor is threatening the market as a whole and justifies government intervention. The fear factor is making assets that are worth something if you can hold them to maturity, worth nothing on a valuation basis because there is no willing buyer. The guy who has liquidity and can buy and hold the assets til the fear is out of the market makes money. And it may well be that the Treasury well be that "guy."

To illustrate the point, many of the assets for which there is no buyer are performing -- that is, they are not in default. There is no buyer because of fear. The asset may not be worth par, but it is hard to believe that all the these assets will be worth 0.

Just to clarify: When I say certain assets are worth $0, I mean that since nobody is willing to purchase them today, they are worth nothing ... today.

An asset is only worth what someone will pay for it; and today, because people cannot determine a way to value certain mortgage-backed securities, nobody is willing to pay anything for them.

If nobody is willing to pay anything for them today, then today they are worthless today, even if tomorrow they might or might not be worthless.

Banks have to report earnings, today. Why? So we can see if they're healthy. One of the ways we judge that is to determine the assets they have on their balance sheets.

Since banks are now allowed to hold securities, these are one of the assets that must be calculated. The value of some of these mortgage-backed securities, is today, $0.

Why is it $0? Because nobody, today, will buy them. So, today, they're worth $0.

However, if a bank reports they are worth $0, then there would be repercussions because banks are required to meet capital requirements. If, just to cite one example, 25% of Washington Mutual's securities are unsellable because nobody will buy them, then they are, today, worthless.

They might not be worthless tomorrow, but they are today, and WaMu has to meet capital requirements today and report earnings today.

This is the reason that banks were forbidden from owning securities after the crash of the market in 1929 when the exact same liquidity crisis occurred.

So, while these assets might one day find a buyer, today they're worthless.

Well, fedgovernor, the statement that certain assets are worth zero, and the statement that certain assets have zero potential buyers, are two ways of making the exact same absolute assertion that cannot withstand empirical scrutiny.

Speaking as a dumb old trial lawyer, if you were an expert witness who tried to peddle this sort of analysis on a witness stand, you would get skinned alive.

Check around. Plenty of "nonexistent" buyers are out there picking up these so-called "worthless" assets on negotiated, arm's length terms. There is a market out there for this kind of financial junk.

"There is a market out there for this kind of financial junk."

No there isn't. That's what the crisis is: a crisis of liquidity.

That's why the government is stepping in ... to create the market.

Fedgovernor, I might agree there is not an organized, systematic market out there for this financial junk. But there is a market. Bottom feeders are always present.

I'm at a loss to figure out why our federal government should be a bottom feeder in the present situation.

Hello,

I think the government should give each US American one million dollars. Break it down to $100,000 ea. for 10 years.

And they need to put caps on everything...fuel, health, etc.

The first thing eveyone would do is run out and pay off everything +/- buy new.

This will jump start everything...