Why The Bush Paulsen Proposal Is Something To Fear.

This is not intended to be an analysis of the financial or economic merits of the rescue package published by the Bush administration yesterday afternoon.

Bush Proposal is a text provided by the New York Times.

I believe this proposal should be either stopped or drastically modified, and I would hope that the reasons I identify will prompt people to contact their Representatives and Senators to contribute to that purpose.

This proposal is in the long line of unconstitutional "faits accomplis" which the Bush administration has adopted as its preferred tactic in confronting any kind of emergency. The practices and tactics which have been advocated and pursued on behalf of the conception of the unitary Presidency and the supra-legal doctrine of the spurious powers of the Commander-in-Chief are now being applied to the field of financial and economic policy making.

The unacceptable proposals, in my view, are these following. What is objectionable about them ought to be enough to stall the whole package pending serious discussion.

1) there is a grant of absolute power to the Treasury Secretary
2) the Treasury Secretary’s decisions are exempt from review
3) the proposal attempts to forbid judicial system review of the initiative.

These powers are more far-reaching than those claimed in the original enabling act used to take the country to war in Iraq. They attempt to enshrine the principle of absolute power, shielded from legal and political review that has been the feature of this administration.

I am not aware of any precedent for the kind of powers claimed in this document from any stage in US history, be it Lincoln’s war against the slave interest, or World War II. If anyone does have access to precedent they should make it available. In both these life and death conflicts Congress and the Judiciary continued to review Executive Branch decisions and actions (Harry Truman's investigations of contractor malfeasance). What is there about this crisis which requires the scrapping of the constitution when this has been sacrosanct and unthinkable, even in war time.

There are political and economic issues to be discussed about the financial and economic situation. The US way has always been to discuss openly, weigh merits, consider both the informed opinion of experts as well as general opinion of electorate and population before making reasoned decisions on the merits, bearing in mind circumstances and conditions, unknowns, consequences and contingencies. This kind of deliberative process produces prudent chooses of action not rash leaps into the unknown. This kind of procedure is typically identified as “democratic”.

What has been put on the table would outlaw that approach. What goes into decisions would be the province of the executive branch, there would be no recourse against the decisions made, nor the people involved in making them. Neither would there be opportunity to challenge, discuss, and rebut the evidence or arguments mustered in support of such decisions.

Where such ideas come from is anybody’s guess, but for sure they are not American. Congress should not be stampeded into passing this kind of enabling legislation which appears to be based on retreading claims to supreme unchecked power and contentions that unprecedented emergency conditions require that proven and tested methods (Constitutional system) be scrapped in favor of the arbitrary, the willful, and mostly likely the unchecked and the incompetent because people with their agenda to push have decided it is now out of date.

The links below provide some commentary and analysis on both the aspects of the proposal addressed here, and the financial side of it.

Krugman: No Deal

Nakedcapitalism: Why You Should Hate This Proposal

Calculated Risk: Some Thoughts on Bail Out

Luigi Zingales: Why Paulson is Wrong

Robert Reich: What Wall Street Has To Do...

Obama 7 Points From Charlotte NC 9/21/08 -- No Blank Checks

John Hussman: Bankruptcy Reorganization, Not Bail-Out

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Tell me again why the preferred method here is a trillion-dollar transfer of losses to the public, rather than simply shutting down trading in the markets/companies directly involved in creating this mess in the first place.

If the frozen credit environment has been caused by a lack of transparency, the remedy is *full disclosure*, not bailout.

I'm sorry to be obtuse but I don't understand either what you are asking or who you are asking it of.

What do you mean by "the preferred method?" Whose? Of What?

This thing from Paulsen et al is about a way of dealing with issues which is in itself neither preferred nor acceptable in my view.

In the nakedcapitalism link, and other places, you will find discussion about Bushco likely intending to use these unconstitutional powers to buy what are still called assets from US-headquartered, and now other companies, at higher prices than they are worth (in my view nothing, bearing in mind leverage and the ongoing decline in housing prices)and selling them for less than they are worth, with Paulsen's cronies pocketing the difference out of your tax payer dollars.

At this point that seems to me to be secondary to the procedures they have asked for to make such a hypothesized robbery and fraud possible. The scrapping of the constitution is here now, the robbery is down the road a bit. Save the constitution to stop the robbery.

I hope I am addressing what you raise. If not let's discuss some more. Thanks for the comment.

by Paulson, et. al.

While I think I've finally begun to understand how the market reached the point of credit 'freeze', I obviously don't understand why the remedy should be a bailout. If the underlying cause is the lack of accurate information concerning losses, then why not simply suspend trading on affected companies pending audits to determine the actual market value of the 'toxic paper'?

Those actions are within SEC power, neither should affect a market already on the verge of complete panic, and it should definitely cost less than a trillion dollars in taxpayer money.

I don't believe the remedy is a bail out. Nor do I think it is a matter of individual companies. I think the underlying cause is the losses, not the lack of accurate information. It is clear that the 'toxic paper' has no value at present mainly because house prices (the security for the paper) keep on falling, with no end in sight, and because the paper is also not tradeable. There is still a hope that if they hold on, house prices will bottom or turn and the crap will come good.
As is well known there have been a series of bubbles. Asset prices, such as houses, were artificially inflated, loans made against those properties, securitized and sold on in packages of loans which were subject to all the wondrous things derivatives could be devised to do. Leverage was employed massively to increase the returns. When the house prices stopped going up the debt pyramid began to come down.
The bad paper spread globally.
The banks will not right down their own paper. An agency needs to be created to oversee a bankruptcy reorganization. See the posts on Robert Reich's blog, and the proposal from Volcker, Brady, and Ludwig which uses the phrase "fair market price". The fair market price is nothing. As Reich says these institutions should pay the rest of us to reorganize them.

...but I don't understand this comment:

"Where such ideas come from is anybody’s guess, but for sure they are not American"

It seems to me peculiarly American. The practice in Europe has varied according to each case, free of idealogical constraint. One has been to take over full or part ownership if a company needs and justifies government support. For example, the government will take over the stock, clean up the financial mess, re-float the company whilst retaining 49 or 51% of the stock, return it to private sector management, and hope to sell its stock at a later date at a profit to recover the initial costs to the taxpayer.

Having said that, the sheer scale of the number of finance companies at risk has generated an interest in the RTC concept in the UK at the moment but it would always be open to constant Parliamentary and legal scrutiny and some means to potentially recover taxpayer investment would be explicitly stated.

The problem is that the proposal in front of you in the US is probably a good one - it is the lack of definition and oversight that is the problem. Given the urgency of the situation, it is all leading to a hell of a mess.

with you one the problem which begs the question, why do they not want oversight? Really, why do they not want a court to have the ability to review their actions? And I hope their answer isn't what we have heard too many times....trust us. My trust is lost.

...I am waiting to learn more about the apparent extraordinary requirement for legal immunity. This may be just badly worded and may simply be to avoid maverick shareholder action in the court that prevents immediate urgent action being taken, rather than the way the blogs are currently reading it.

For example, if the Treasury deems that a company is among those many that require RTC type support to quieten the whole market, it would be open at the moment for any shareholder to challenge and thereby delay the decision. This may be an ideologically based (i.e. "free market") objection rather than a realistic finance based one but the net effect would be to prevent the swift and comprehensive action that this legislation is intended to take and which the current crisis demands.

Whatever, it seems inadequately worded and should not be accompanied by any lack of proper and constant oversight.

The nakedcapitalism link has a growing discussion, and in that there is a back and forth on this very question you are raising. Some are saying it is standard practice to give immunity to government agencies, and others that there is no agency proposed here, only an empowerment of the Secretary to do what he deems fit. Similarly on judicial review.

One tends to get dubious about the intentions and motives of those who want such powers explicitly adopted before they will concretize their intent beyond scaring the beejeezus out of people.

Maybe I'm understanding this a bit better than I thought.

On the thread below this one, I outline my understanding as to how RTCs normally do and should operate. I also include the homeowner in my discussion.

Obama has now come out with the necessary requirements to support the plan. From DKos:

"Obama's speech included six specific stipulations for any bailout that happens.

1.) No blank check: Americans are going to be on the hook for almost $1,000,000,000,000. It's taxation without representation to just write blank checks without being accountable to taxpayers.

2.) Taxpayer money should not be paid to reward CEOs. Period.

3.) Taxpayers are incurring a great amount of cost and risk. The investments should be protected, and they should be able to eventually recoup the losses.


5.) Obama pointed out that this is a global crisis, and that other nations need to step in to help secure the financial market.


Of course, I should not have published my commentary about how you guys could let us Brits get a free ride. Obama has it covered in item 5. He is a bit clever this guy :)

Welshman, Thank you for posting this from Dkos. I've put a link to the candidate's speech at noon today in Charlotte NC at the end of the text with the others. I think the differentiation from Paulsen is quite clear, and that the "no blank check" may refer to this kind of administrative approach under discussion.

Robert Reich's blog, reached via the link above, contains a couple of entries from last week on what he calls "The Bailout of All Bailouts." He offers his views on what should be done, they are general, but provide a framework. In the top entry he says that Wall Street should be providing a blank check to the tax payers, not the other way round.

Your determination to follow these local folkways to their ultimate destination is truly admirable. A history professor friend from when I was first in graduate school was Welsh. I think his wife was from the Basque country. They were a miniature coal and steel community. He used to insist that "everything is tribal don't you know, positively tribal." It is probably as useful a way of looking a things as anything is.


I forgot: I counted 7 points in the Obama speech.

I just want people to get in the habit of asking the very obvious questions. Why do you want a special license and why should we give you one? Too many times in the past our biggest regret was not asking questions.

Now, if as you suggest, they have sound reasons that can be expressed as a response to the question, why not just take the necessary steps of including the same in the bill. As I said, not interested in trusting them again. If they know what needs to happen, what could be used to derail a successful plan, address it within the bill. Otherwise, we will be left to hope they do the right thing by us.

And Obama (or McCain for that matter) can say whatever they want in public speech but it will be up to the full Congress to decide this one. I want to hear the same from Pelosi, Reid and others in the Democratic legislative leadership.

I think I agree with this. I think there should be hearings or something like that. This crisis process has been unfolding for a year and a half from its apparent "beginning" with the Bear Sterns hedge funds in the early summer of 2007. Everything these jokers have done has made it worse.

They do not seem to include themselves as part of the process but somewhere out there above it all.

I'm sure there we are in an economic collapse rivalling the Great Depression; however I also have an uncanny feeling of deja vu. To me it this very reminiscent of the post 9/11 situation when the terror card was played again and again and again to justify Bush's overriding the Congress and assumming executive authority by manipulating the fears of the population. I can easily envisage a scenario in which constitutional oversight of the financial sector, and budget responsibilities would be systematically eroded.

I know that we still likely disagree on the potentials of an Obama/Biden administration, but leaving these differences aside, important as they are, The passage of the proposed measure now would put enormous pressure on a new Administration coming in. For instance, supposing a Democratic victory, I can envisage the demand that the new economic Tsar Paulson be left in place as Treasury secretary along with whatever apparatus he will have set in place.

Also in the fine print, from something I read today, is a section that would allow bailing out any foreign banks headquartered in the United States... and possibly others as well by extension. I can't imagine the implications of this, just thought I'd pass on the information.


"Also in the fine print, from something I read today, is a section that would allow bailing out any foreign banks headquartered in the United States... and possibly others as well by extension. I can't imagine the implications of this, just thought I'd pass on the information."

The overseas investment in US banks during the last year or two has been substantial. This has been particularly from the Middle East, China and Europe. It has been aided by the weak dollar and the long-term shortage of liquidity in the market, as well as countries like China having a surplus of US dollars and having no where to put them.

Overseas state-run investment funds have sought to avoid regulatory scrutiny in Washington by taking small stakes in US companies. Prior to the current crisis it was beginning to cause concern. In the last two months of 2007, for example five deals worth over $30 billion were being reported.

Much of this has been not made visible until the current crisis. At least six Chinese commercial banks have reportedly disclosed their holdings of bonds issued by US investment bank Lehman Brothers in the last week.

On the more welcome and visible side, in the past week you have seen the UK Barclays Bank take over completely some key trading arms of Lehman Brothers as well as some of their physical assets such as their head office and main IT processing facilities.

Similarly, Morgan Stanley is hoping to close an unspecified deal with the Chinese Investment Corp to prevent its collapse.

The original draft of the Paulson proposal leaked yesterday did not mention overseas banks. The latest does and it probably results from urgent representations being made about the intertwined global financial sector and the potential damage that exclusion of overseas banks might have to current and future deals deemed necessary to bolster certain US banks.

Fortunately, the proposal excludes those overseas banks that have made carefully constructed limited investments in US financial entities in order to avoid previously unwanted regulatory scrutiny. They may now regret this strategy if the Paulson proposal goes through.

I think you are bang on with this observation. Paulsen mentioned it on TV this morning apparently. And I think that point from Obama about working with other countries is a way of saying he doesn't want to have the US tax payer involved with non-domestic institutions. I'm just saying that because that point seems to be quite carefully phrased.

US companies tend to get a better deal in US bankruptcy proceedings than foreign companies or creditors.

You are also, I think, pointing at one of the really major issues, since the US is broke, and gets so much from abroad, why should abroad be so generous as to finance Paulsen's purchase plan given what can be expected to happen to the money? Fool me once, fool me twice, but three or more times?

I'm not sure when, but Congress recesses soon. They will also have to finish with the appropriations bills for the next fiscal year which starts October 1st. This package is not a done deal at all. And it can always be stalled out.

Paulsen's "threats" to act on Fannie and Freddie in the middle of July lasted "worked" till the end of August. Perhaps there is an element now that the "threat" of $700 billion coming available can keep things in line just a tad longer again.

I think though that by now the Good Ship Lollipop is probably springing leaks elsewhere (Russia? Latin America? South East Asia?) and that more will be needed.

This does not refer to anything other than the demand that Congress empower, eliminate review of the principal and his agents, and legislate against referring what this proposed agency does to the judicial system for review. This is a bizarre departure, but probably reflects more than lack of sleep and too many diet cokes.

It does not refer to anything this proposed agency might do once Paulsen and co have the $700 billion they are asking for. An amount which, by the way, is only a ceiling on holdings. There is no limit on how much could be put through the accounting fiction of $700 billion. But that's another story.

Actually I think US bankruptcy law has been (Chapter XI for example) much in advance of what Europe has on the books.

I don't think such a sweeping suspension of Constitutional law has ever been put forward for Congress to adopt.

I think the usual practice here is to maintain the language of conformity to Constitutional law and go off the ranch in practice, (Iran-Contra for example). Bushco's practice on Executive Privilege might be argued to conform to what is outlined in this short proposal. But the language seems to have been within constitutional conventions of protecyion of privilege and office.

Poking my head up out of the weeds to offer the video of a market commentator who calls Paulson's discussion "Financial Terrorism" @ The Mother Of All Frauds.

I'm sure there's a substantial agreement among the major opposing threads of discussion, on this.

But for him to step in after SEC excused his bank and four others (three now gone) of heeding the law necessarily obeyed by the rest of us and their industry, lower capital reserves, there're just way too many things wrong with what they want Americans to swallow.

"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson