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I'm delighted to report that my departmental colleague Kevin Werbach has been named to the Obama administration's communications transition team.  I predict a number of Amtrak ten ride passes in his future.  And though we cannot claim that he got the position by guest blogging for the Conglomerate, he, as any modern communications leader should be, is a blogger in his own right (as is his colleague on the transition team and fellow professor Susan Crawford). 

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You can recapitalize banks with the sturm und drang of a legislated bailout, or you can try something that doesn't involve Congress at all.  The Fed shows us how it is done today with this rejiggering of interest rates designed to increase the amount of capital that banks may loan out.

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The Washington Post's big Sunday story is on how badly the American pushed international terrorism financing prevention regime has done in courts in Europe.  That regime is designed to freeze the assets of people associated with terrorism, at least in the view of Treasury bureaucrats, before they can move those assets somewhere sinister.

Who could be against that?  Not me, in theory, but terrorism is something that you want your law enforcement officials to stop.  That's why the FBI and CIA spend considerable time on the issue.  The banking regulators who have also gotten involved have frozen the assets of an exceptionally wide array of people, and they've done it on the administrative quick.  They've been wrong a lot, and it still isn't clear how often they've been right.  The high error rate hasn't apparently bothered the Treasury Department - the upside of the asset freeze is that it is an extremely onerous sanction (imagine if you found yourself suddenly unable to use your credit or debit cards, house, phone, computer, car, or office - it's all freezable property) that can be put in place without any procedural protections.  Listings, both at the UN and the US, have continued apace.

A lot of people think the risk is worth the cost in error.  I've written a piece with Elena Baylis that begs to differ given the civil structure of the regime, and it's here, if you want a look.

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Felix Salmon makes the case for Morgan Stanley, which has been getting notably hammered since the shorts were unleashed.  If accurate, expect bitter tears to roll down the cheeks of all former Lehman employees at the announcement.  Morgan Stanley is unlikely to be alone, though - the financial sector is getting so beat up that the bailout means that Treasury can buy 55% of it - and that percentage gets better every day.

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Today Paulson announced that although he would purchase some of the so-called toxic assets on bank balance sheets, he may also, like Britain, take equity in banks.  Can he do that?  Paulson said:

the EESA adds broad, flexible authorities for Treasury to buy or insure troubled assets, provide guarantees, and inject capital. We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size. We will design programs that encourage healthy institutions to participate.

The "strengthening ... capital[]" phrase - or partly nationalizing banks, if you want to be statist about it - is the key move in the speech.  That's not what the TARP was all about - it is a "Troubled Assets Relief Program," and, based on the debate that happened when the statute was passed, we may have thought that the assets at issue were the mortgage backed securities that no one can sell.  But it was a program passed in a hurry, with plenty of flexibility given to Treasury.  Here's the relevant general grant of authority:

The Secretary is authorized to ... make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary....
[including] establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase, hold, and sell troubled assets and issue obligations.

So the plain language move that Treasury must make to change its toxic assets program into a nationalization program is to interpret the stock of ailing banks as "troubled assets."  Or, put another way, the question would be whether taking equity in an ailing bank could reasonably be interpreted as taking a troubled asset (that is this case).  And I don't see why that interpretation wouldn't fly.

But moreover, the statute has some explicit guidance for the Secretary if he does decide to take equity (or warrants, anyway), viz encouraging him in some cases to take for the troubled assets:

a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate

So Congress contemplated that the Secretary could end up with some equity under the program (and I don't think this means only non-voting equity, I think the Secretary has discretion to take voting or non-voting as he likes). 

UPDATE: It's even easier than I thought, because "troubled assets" are defined as, in part (Eric Posner has analysis here):

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

A comment: this is why congressmen give up their jobs to run the DEA or the Department of Transportation.  The executive branch has flexibility in how it interprets congressional directives, and though Congress probably wouldn't mind, changing the TARP from a toxic asset program to a bank nationalization program is a pretty big change.  But the statute doesn't preclude it, so that appears to be what the Secretary may do.

Finally: how do we know, based on that speech, where injecting capital is just one of a number of options Treasury is entertaining, that it will probably go the equity route?  We don't, but the journalists think they know.  It's Washington inside baseball, but if the Times headlined its story about the speech "US May Take Ownership Stake in Banks," the odds aren't bad that Treasury is telling it off the record that that's precisely what it is planning on doing.

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The Fed cut rates by half a percent today, and at this point, it must be running out of new ideas to try on the economy.  But it is worth underscoring how that rate cut happened.  It was coordinated with rate cuts by most of the central banks in the world's largest economies.

This sort of global solution could not have happened two decades ago, but in the past two decades, central banks have been coordinating their policy, especially their supervisory policy, through a completely informal institution called the Basle Committee for Banking Supervision.  Now the world's big banking supervisors impose the same capital adequacy standards on their big banks, and enforce those standards, in theory, in the same way.  They coordinate it through Basle and have often waxed about the value of face to face meetings.  I suspect the regulators would tell you that the regular interaction of Basle made the sort of cooperation marked by today's coordinated rate cuts possible.

I think institutions like Basle are paradigmatic responses to globalization, and the committee is one of the most effective examples of what people like Anne-Marie Slaughter call a regulatory network.  These networks aren't very open or transparent, but in a time when other international institutions like the international criminal court are accused of being ineffective, perhaps the mere fact that central banks network and coordinate - not just on questions of supervision, but, as today's rate cut makes clear, on questions of monetary policy - makes them real drivers of the internationalization of law.  Or law-like institutions, at least.  Anyway, I'll be presenting papers on this in New York, Dallas, and Minneapolis in the next month, it all builds on stuff I've written here and here.

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On a busy day for regulators, don't miss the FDIC's proposal to raise insurance premiums on banks.  Pursuant the bailout, which increased deposit insurance limits to $250,000, it isn't supposed to raise rates at all.  But the limit raise isn't the only tax on the FDIC's resources.  The fund is projecting a decline in reserves (there's a shocker), and, as the WSJ notes, has put 14 banks, with $29 billion of assets in its riskiest category.  All of this is to be sold with the "we're not just raising rates, we're doing better risk weighting!" line that banks are probably tired of hearing at this point.

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Expect to read the caption to this post hundreds of times in the next few days.  Anyway:

• The Fed did a quickie approval of Mitsubishi's investment in Morgan Stanley.  CFIUS, which is chaired by Treasury could in theory block the deal later.  But don't bet on it
• The Fed did that interest-paying thing on depositary reserves - another subsidy to domestic banks (but not foreign ones - I wouldn't expect the WTO to get involved, though).
• The SEC did nothing.
• Lots of action from Treasury.  It picked a head of the bailout relief team, which, in classic GOP fashion, is a 35 year old.
• Treasury also started the somewhat tedious (to you maybe, not to me) wheels of government.  It issued quick procurement rules, conflict of interest rules, and it is hiring.  Jonathan Macey helpfully discusses the implications on NPR's Planet Money.
• But no first bailout yet.  Who will be the first institition to benefit?  We can short those stocks now, you know.....

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As we've told you, currently the bailout bill, now passed by the Senate, and looking better in the House, provides:

• "Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title 5, United States Code [that's the Administrative Procedure Act], including that such actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law."
• But "No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101 [that's the power granting section] ... other than to remedy a violation of the Constitution."
• The section by section notes prepared by the drafters for the House say only that the section "[p]rovides standards for judicial review, including injunctive and other relief, to ensure that the actions of the Secretary are not arbitrary, capricious, or not in accordance with law."

The problem here is that arbitrary and capricious review is equitable relief.  Indeed, the Supreme Court said this in Doe v. Chao, 540 U.S. 614, 619 n.1 (2004) (referring to the "the general provisions for equitable relief within the Administrative Procedure Act" and citing a section of the same Title 5, Chapter 7 referenced in the bailout bill's judicial review provisions).  And so it looks a bit like the bill provides for A&C in one section, and then takes it away, by taking away equitable relief, in the other section.

It's worth puzzling through this because judicial review could be the most substantial limitation of the Secretary's authority to administer the bailout, which is not subject to a great deal of constraint elsewhere in the bill.  Can someone who thought that that Paulson underpaid for a particular mortgage backed security sue?  Remember, Treasury may make literally millions of these purchases.

I tentatively posit that the bill does appear to give plaintiffs that right, though probably the only remedy available would be a declaratory judgment (saying that a particular purchase was inconsistent with the bailout law), rather than an injunction stopping the sale.  Sometimes courts distinguish between declaratory relief and other equitable remedies.  And APA relief is usually described as declaratory, in that you get a declaration that what the Secretary did was illegal, with an implicit direction that the Secretary should go do it again in a legal way.  If the Secretary's actions under section 101 aren't subject to A&C review, then the first section of judicial review would be largely superfluous.   

But I don't think the case is closed.  I suspect the government could argue that A&C review isn't permitted for every purchase decision, based on the statute and on the unmanageability of that project.  It'd have to come up with a good account of what judicial review would do, though. 

At any rate, Treasury might want to use its broad powers to set up a mandatory administrative appeals process, which, under Darby v. Cisneros, would keep plaintiffs out of the courts until they had exhausted their administrative remedies, and which would give the courts an adjudicated process to look at (and, hopefully for Treasury, rubber stamp).

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The bill is here, what does it do differently than the rejected House bill?

Very little, and what little it does change enhances the Secretary's discretion.  A line by line comparison reveals these differences:

• The Senate bill sort of encourages the Secretary to take non-voting equity, if he takes equity (permitting the acquisition of "voting stock with respect to which, the Secretary agrees not to exercise voting")
• It gives the Secretary flexibility on what to do about equity shares of companies that fail ("such warrants shall convert to senior debt, or contain appropriate protections for the Secretary to ensure that the Treasury is appropriately compensated for the in an amount determined by the Secretary")
• Surely that more than doubling of the FDIC limit comes with some new oversight details?  Literally no ("$250,000" substituted for "$100,000"), and no assessment increase - and that's it.  It is one of the few mechanisms that isn't administered by the Secretary, though (the FDIC or its credit union analog "may request from the Secretary, and the Secretary must approve, a loan or loans in an amount or amounts necessary to carry out this subsection, without regard to the limitations on such borrowing")

The Senate bill includes a few  bits of pork - or at least legislation unrelated to the housing bailout.  Political types can speculate as to whether these additions are meant to appeal to wayward Democrats or Republicans in the House, but the statute devotes even more pages to alternative energy credits, a series of tax amendments, and, as the Senate says, an effort "to require equity in the provision of mental health and substance-related disorder benefits under group health plans, to prohibit discrimination on the basis of genetic information with respect to health insurance," than it does to the bailout plan itself.

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Well, let's look at what else it did today:

• Increase the number of Term Availability Facilities ("By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk.");
• expand the size of foreign exchange swap lines ("The increase in the amount of foreign exchange swap authorization limits will enable many central banks to increase the amount of dollar funding that they can provide in their home markets.  This should help to improve the distribution of dollar liquidity around the globe.");
• support the acquisition of Wachovia's consumer banking services by Citi ("In support of this transition, the Federal Reserve Bank of Richmond stands ready to provide liquidity as needed.").

These efforts come with big dollar values attached ("the total size of outstanding swap lines is $620 billion") ... but liquidity alone will not, apparently, be enough.  The crisis is internationalizing, though, and it is worth noting the Fed has rallied the foreign central banks to pump money into the system - and perhaps they did so as a hedge against Congress deciding not to legislate.

It's worth looking at what the Fed is doing, not least because it would be nice to figure out whether the Fed's discount window powers would be sufficient to bail out the financiers without legislation.  Based on the way that window has been used so far, the answer to that question is yes (or at least the Fed thinks it is yes - I'm not so sure).  The problem, I assumed, was that the Fed didn't have enough money to do to everyone what it did to AIG and Bear.

Anyway, Felix Salmon is thinking along similar lines:

the obvious next step is for the government to do something on its own -- something which doesn't require legislative approval. My best guess is that Treasury and the Fed are now going to try to come up with some kind of debt-for-equity swap: a recapitalization proposal which can be implemented through the Fed's existing powers.

UPDATE: What am I, psychic?

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As Eric Posner says, a quick skim offers few surprises:

• As an exercise in the development of legislation, note what has happened to the bill, drafted to be three pages long, with absolutely no attention paid to the fact that the program would have to be implemented (and so maximum discretion given to the Treasury Secretary, who was to decide how to implement it later), to something 110 pages long, with savings clauses, detail, compromises, and many fewer obvious legal problems.  Those interested in parsimony might dub this a triumph of legalese.  But lawyers have always told themselves that they solve problems with their contributions.
• I don't claim that all problems are solved here.  The secretary has the power to hire, fire, contract, issue regulations, "establish vehicles" to hold assets (a new one to me - I suppose it's true what they say, this really is a sovereign wealth fund) and so on - and his powers under this section are only subject to limited judicial review.
• The Secretary is directed, however, to consult with various agencies (a weak constraint), to issue regulations (though that can come after he starts bailing out whomever), and that he "shall take such steps as may be necessary to prevent "unjust enrichment," which is sorta specified as meaning the Secretary can't pay more for the asset than the financial institution did when it bought it.  The bill also says that the Secretary "shall take into consideration" nine worthy factors (serving the underserved, protecting families, saving money, ensuring stability, &c) when implementing the program - it's going to be easy for Paulson to pay lip service to these, and there are just too many of them to have much bite.  Rather than cabining flexibility, sometimes multi-factor tests enhance it.
• Some of the new additions only make sense, and haven't been talked about much - the Secretary probably should set conflict of interest regs, for example, and under the bill, he must.
• Clawbacks and golden parachute bans on executive compensation are in there, and in there in a difficult to ignore way (the Secretary shall promulgate regs, which must do these things).  Lucian Bebchuk must be pleased.
• And the oversight board - though sorta strange - it's Treasury, the SEC, the Fed, an obscure federal housing regulator ... and the Secretary of HUD? -  is free of obvious constitutional problem.  UPDATE:  Andrew Grossman of the Heritage Foundation is pondering the fact that three of these five officials can only be fired for cause ... which does limit the President's ability to oversee the overseers, which is not without constitutional moment.  See this case for more on that. 
• The joint resolution disapproving of the second half for the $700 billion is kept, and fast-tracked (that is, little debate, no amendments) through both houses.
• Judicial review is done APA style, though the statute doesn't direct the review to the courts of appeals (as it does for APA rulemakings - which would be tough).  The powers given the Secretary under section 101 are not subject to injunctive or equitable relief, and yet the statute carefully limits injunctive relief in some cases ... and I can't figure out what Congress is worried about there.  I still think that APA style review is injunctive and equitable relief - at least, it's not damages relief - and a clear statement about whether individual purchasing decisions by the Secretary are subject to judicial review or not might be useful.  Currently:
  • "Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title 5, United States Code [that's the APA linked to above], including that such actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law."
  • But "No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101 [that's the power granting section] ... other than to remedy a violation of the Constitution."
  • The section by section notes prepared by the drafters say only that the section"[p]rovides standards for judicial review, including injunctive and other relief, to ensure that the actions of the Secretary are not arbitrary, capricious, or not in accordance with law." You tell me, dear reader, whether the Secretary's run of the mill decisions will or will not be subject to arbitrary and capricious judicial review under the statute.

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Politico has a leaked internal Democratic memo with some deal terms.  One of perhaps a little Sunday afternoon note:

Composition and ratio of Congressional Oversight Panel
Issue: Size of panel and ratio of appointees: 2-1 from both House and
Senate, with members to select a chair for a total of 7 members; or
1-1 from both House and Senate, for a total of 5.

If this oversight panel is simply meant to be the way Congress will organize itself when getting reports from Tresury, fine.  But if this panel (and the bailout oversight mechanism more generally) is vested with particular statutory responsibilities, then it is possible to run into trouble.  Congress probably can't appoint its own members to an independent oversight panel created by the statute.  That's this case. Moreover, Congress can overstep its authority if, as the DC Circuit has said, it sets up a review commission that would be essentially controlled by the legislature and could overturn or overly interfere with executive power.  The mere appointment by Congress of officials to such a board might not transgress that prohibition.  But in another context:

Congress has here encroached “beyond the legislative sphere” because the Board of Review has been vested with a range of powers ..., [and] it sets forth requirements that both in principle and in practice continue to ensure congressional domination of the Board.

Hechinger v. Metro. Wash. Airports Auth., 36 F.3d 97 (D.C. Cir. 1994)

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The big winner has been JP Morgan, which got both Bear and Washington Mutual for fire sale prices.  Bank of America isn't doing badly either; it got Countrywide and Merrill Lynch for not very much.  But also doing well: Goldman Sachs, which has seen competitors disappear, is getting money from Warren Buffett, and as a big counterparty to AIG and others, is getting bailed out, essentially, at 100 cents on the dollar.  I've wondered when the muttering about Goldman would start.  Why are the counterparties going to make out so well in all this?  Hey, where was Paulson before he came to Washington?  Well, I need wonder no longer.  Gretchen Morgenson starts the inquiry.

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