September 07, 2008
Can the Treasury Department Bail Out Fannie and Freddie?
Posted by David Zaring

The Treasury Department announced a centibillion dollar bailout of Fannie Mae and Freddie Mac today.  Can it do that?  Your baseline presumption should be that the statutory bases of emergency bailouts are usually quite underspecified.  On July 30, however, Congress did give Treasury (or the Fannie and Freddie regulator) the authority to do the following, in Public Law 110-289:

The Director is authorized,... to make such determinations, take such actions, and perform such functions as the Director determines necessary regarding ... decisions to appoint conservators for the enterprises

This power is explicit, but it was bolstered by other conservator-like powers, viz:

the Director may, by order, require an enterprise, under such terms and conditions as the Director determines to be appropriate, to dispose of or acquire any asset, if the Director determines that such action is consistent with the purposes of this Act or any of the authorizing statutes.

Finally,

the Secretary of the Treasury is authorized to purchase any obligations and other securities issued by the corporation under any section of this Act, on such terms and conditions as the Secretary may determine and in such amounts as the Secretary may determine.

And it sounds like these sorts of purchases will be part of the bailout.

So for one thing, Congress and Treasury saw this coming, and so, presumably, did investors.  Worth thinking about when you're thinking about how much shareholders should get out of the takeover (and why sell after July 30, anyway?  Your stake had lost 90% of its value already - better to wait for the government, no?).  For another, this recently-given authority is much more explicit than were the powers invoked by the Fed to sell Bear Stearns and provide loans to investment banks.  We wondered what authority the Fed had for its actions back then, and speculated that the Fed would talk about section 13 of the Federal Reserve Act if it had to.  (The Board later noted in its minutes that that section was what it had in mind, at least with regard to operning the discount window to investment banks.)

I'm still not sure how the Fed concluded that it could engineer a sale of Bear, btw, and my FOIA request to the central bank (we always look to offer our readers the in-depth content you can't get elsewhere, after all) didn't really answer the question, but the Fed does have broad safety and soundness powers, and anyway, here they were jawboning and facilitating rather than, say, passing a reg, over which you could file suit. 

Last thing: it is strange that the government's authority to bail out business is quite so underspecified, or given at the last minute, given that it has been forced to act this way time and again.  If bailouts are going to be a fact of the life of financial crises, Congress really ought to specify the precise authority that government agencies have to engage in them.

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