Showing posts with label the present crisis. Show all posts
Showing posts with label the present crisis. Show all posts

Tuesday, November 18, 2008

Secretary Paulson's enabling act (9)

The Bush administration says it won't ask for the rest of the $700bn TARP moneys; says Hank Paulson, "I want to preserve the firepower, the flexibility we have now and those that come after us will have."

The Republican strategy on the TARP so far has been clever: first, make sure as few Republicans as possible voted for the bill (while still guaranteeing its passage), so that Congressmen in contested districts could make a show of opposing it -- a strategy which worked so well that it forced a second vote on the bill and put Nancy Pelosi and Harry Reid in the very public and unfortunate position of shilling for an ill-conceived plan out of Bush's treasury.

Now that blame for the largest expansion of government in American history can be shared with the party traditionally considered to be in favor of big government -- and facing an incredible temptation to use funds that have "already" been appropriated in order to bail out its core constituencies (like auto workers). An Obama Treasury will be put in the position of demanding the next $350bn, and will be showered with blame when it is misspent -- key Republicans, like Richard Shelby, are already setting themselves up to be stringent critics (and rightfully so) of the TARP, in a move that elides the origins of the program.

Meanwhile Paulson as much as admits there was never any possibility the TARP -- $700bn of leeway for Treasury to selectively capitalize American corporations, with no oversight -- would be used in the way he told Congress it would be. The emergency operation needed to inject liquidity into illiquid markets -- remember that Congressmen were threatened with the spectre of martial law to get them behind the bill -- is just the biggest slush fund in history:
A troubled-asset purchase program, to be effective, would require a huge commitment of money. In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn’t enough firepower.

If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract. We decided it was prudent to reserve our TARP money, maintaining not only our flexibility, but also that of the next administration.
Paulson's future is secure: every banker in the country owes him one. Is what he leaves behind enough money to address a critical economic situation, the right tools for the right job in the right hands? Or is it "simply not enough firepower"? Is it a huge cock-up for which no one will ever be held accountable? Or a poison pill for Obama's economic policy?

Monday, November 17, 2008

Action plans (1)

This weekend's G20 meeting has produced a surprisingly long statement which departs somewhat from the usual anodyne assurances. Whether its bullet points and action plan will actually lead to any real coordinated efforts is anyone's guess, but it's hard to see much progress on any of these fronts being made before Obama is sworn in and the EU Presidency rotates.

Root causes?

Quasi-illiterate and question-begging, the statement's language on the root causes of the present crisis leaves much to be desired.
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.
From thirty thousand feet, the crisis is an "excess" created by a few market participants out of conditions of "prolonged stability" -- an anomaly, an outlier. Regulators failed to "keep pace" (it wasn't that they were incapable of doing so). Market participants sought higher yields (it wasn't that they were compelled to do so). The Pyrrhonism that has come to be associated with Nicholas Taleb -- the idea that the crisis was a "black swan" which no one could have anticipated, a reminder perhaps of eternal human frailty and the limits of cognition, but one without any more determinate consequences -- and the pensée unique reveal a hidden filiation: absent from either is any sense of structure.

In this world of mere phenomena, nothing concrete can be named. So "unsustainable global macroeconomic outcomes" -- but not the great actually existing polarities structuring the international economic system, the US as debtor of last resort and currency hegemon, the Chinese willingness to lend -- and inability to do otherwise. Nor the national policies in the advanced industrial countries which, whether nominally driven by the state (Britain, France) or the private sector (US), or transparently a result of rent-extraction (Norway), prop the standard of living of white people far above the global average in a futile attempt to postpone the equilibration of the most important economic disparity of our century, the vast concentration of capital in a few countries and labor in the rest.

Throw more money at it

On the way up, financialization is a necessary, virtuous symptom of industrial growth -- indeed, our great thinkers held not so very long ago, finance and other tertiary or even "quaternary" sector activities can replace manufacturing and agriculture as the roots of national wealth (thus the disastrous specialization of cities like London and New York in catering to the whims of transnational elites). On the way down, monetary disintermediation and debt deflation are perverse, unintended, unnecessary, and to be halted at all costs. Money and finance as essential social functions when they yield rents for politicians; as inessential mere appearances when they inconveniently refuse to extend more credit to the bankrupt.

Which is when government steps in.
* Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.
* Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.
* Help emerging and developing economies gain access to finance in current difficult financial conditions, including through liquidity facilities and program support. We stress the International Monetary Fund's (IMF) important role in crisis response, welcome its new short-term liquidity facility, and urge the ongoing review of its instruments and facilities to ensure flexibility.
The ongoing coordinated bailout is likely the largest single government intervention in economic affairs in history. No surprise that it's likely to continue until either markets yield before it (certainly possible) or a genuine catastrophe ensues (sterling crisis, a sustained run on the dollar, sovereign debt crisis of an EMU member, revolution in China).

In the mean time, the temptations of beggar-thy-neighbor policies will only grow. Here that will mean fiscal stimulus that supports national champions -- like automakers -- in a deadly race to the bottom to subsidize global overcapacity, legacy costs, and inefficient production methods. So too the risk of unintended consequences from uncoordinated policy interventions -- as market participants learn the structure of bank recapitalization programs and new lending facilities and their quirks, and start to arbitrage one monetary authority against another. The spectre of the IMF as a global monetary authority is a hopeful one -- but relies on commitments to fund its operations which may well be withdrawn in the face of bigger problems at home.

Globalization tested
We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.
Leave aside the unhappy word "modalities" (it's a technical term of WTO negotiation). This is the strongest statement yet from a global or quasi-global body on governments' commitments to free trade and a globally interconnected economy -- even recognizing that those commitments will entail near-term costs for at least some of their domestic economies. And it is the strongest and most important single pledge in the G20 document. Unfortunately it is strong just because it is testable -- and whether new trade barriers are erected in the next year will be the biggest test of whether governments understand the importance of their interconnections. A Detroit bailout would be an inauspicious start to meeting this commitment.
Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace.
All true -- and nothing is weaker than truisms. Informed observers agree that this language is thanks to the US's unwillingness to tie its regulatory hands in any way -- a repetition in another key of our Queen of the May behavior towards other international institutions (the International Criminal Court, the Kyoto Protocol, and, oh, just fill in your favorite example). Whether the SEC, which has trouble implementing the XML standards it writes itself, is even capable of doing much in the way of "international cooperation," is another question.

The reality is that the current state of international financial regulation is the result of an ugly race to the bottom, the pigheadedness of individual regulatory bodies, and the galvanic reflex-arc of politicians stuck with scandals they don't understand. So Sarbanes-Oxley in the United States (because of "Enron"), even as the key provisions of Glass-Steagall are repealed; landgrabs for new regulatory territory (the NY State insurance regulators announcing unilaterally that they would regulate CDS) when old rules aren't being enforced. Or individual nations with strong traditions of securities regulation that refused to bow to trends -- and find themselves back in fashion (Canada). The blatant example of Britain, whose Labour governments rode on the back of a booming financial services business attracted by deliberately low taxes and lax regulation, designed to suck financial business away from other countries: the Gulf States hoping to follow the example of London. Within the EU, no one is clear on jurisdiction or on the Byzantine (and seemingly unwarranted) complexities of individual countries' securities law: witness the Volkswagen debacle, which caught investors from all over the world who didn't realize that in Germany it was possible to take vast stakes in a company through cash-settled swaps without ever announcing it.

Is there any regulator willing to take the lead? Which means not only to set out a clear, efficient, professional system of market regulation -- and then to enforce it, with all the costs (including the recruitment of talent) that entails -- but also to show the markets a path forward where financial "competition, dynamism and innovation" means something aside from tax evasion (sorry, "optimization"), regulatory and legal arbitrage, and structured obfuscation?

The innovation required is on the scale of the original invention of 1933 and 1934 -- the creation of the SEC. We may be excused for failing to see where the personal authority and the political will of a Franklin Roosevelt or a Joseph Kennedy (or even, in a much more muted key, a Carter Glass or a Henry Steagall) is to be found.

Friday, October 10, 2008

Readings: Paulson (1)

"The FASB should begin by looking at the prevailing “historical cost” accounting model, which is hopelessly antiquated for companies principally engaged in the business of financial services or for companies that have become as heavily involved in financial instruments as Enron was.

Instead of requiring such companies to record the current, fair market value of all financial assets and liabilities in their financial statements, historical cost accounting allows them to record certain financial assets and liabilities at their historic cost. Of course, the value of financial instruments varies greatly with the fluctuations of the market. Unless companies account for those fluctuations, their financial statements can conceal tremendous losses.

In today’s world, a corporation’s creditworthiness can deteriorate rapidly—witness Enron, where some of the nation’s largest banks were forced to fulfill billion-dollar commitments just weeks before it collapsed. Yet banks are not required to recognize the fair market value of loan commitments or outstanding loans in their financial statements, even when there has been a major erosion of economic value. Consequently, the economic cost of these outstanding liabilities is unknown to investors, regulators, or the media.

I say this with the recognition that a transition to a system of fair value accounting is not without its difficulties. I also recognize that such a transition will take time. These considerations should not, however, paralyze efforts to move toward accounting practices that will best approximate economic reality."

Hank Paulson, Speech to the National Press Club, June 5, 2002

Friday, October 3, 2008

Readings: Palin (1)

"One thing that Americans do at this time, also, though, is let's
commit ourselves just every day American people, Joe Six Pack, hockey moms across the nation, I think we need to band together and say never again. Never will we be exploited and taken advantage of again by those who are managing our money and loaning us these dollars. We need to make sure that we demand from the federal government strict oversight of those entities in charge of our investments and our savings and we need also to not get ourselves in debt. Let's do what our parents told us before we probably even got that first credit card. Don't live outside of our means. We need to make sure that as individuals we're taking personal responsibility through all of this. It's not the American peoples fault that the economy is hurting like it is, but we have an opportunity to learn a heck of a lot of good lessons through this and say never again will we be taken advantage of."
Sarah Palin, October 2, 2008

Thursday, October 2, 2008

Readings: Volcker (1)

"Under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.

"We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

"What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.

"The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

"I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

"A wise observer of the economic scene once commented that 'what can be left to later, usually is -- and then, alas, it's too late.' I don't want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large."

Paul Volcker, "An Economy on Thin Ice" 2005

Wednesday, October 1, 2008

Secretary Paulson's enabling act (8)

The Senate will vote on a revised bailout bill at 7:30pm. The draft is now 451 pages and contains tacked-on provisions, including the "Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008," which would require insurers to treat mental illness equivalently to physical sicknesses for certain purposes. (And, to be fair, the tax credits for alternative energy.)

The relevant portions of the bill are 113 pages long. The bill would require Treasury to publish guidelines related to the execution of the TARP, including:
(1) Mechanisms for purchasing troubled assets.
(2) Methods for pricing and valuing troubled assets.
(3) Procedures for selecting asset managers.
(4) Criteria for identifying troubled assets for purchase.
The talking heads all seem to think that mechanism design should be left up to Treasury -- but of course it is just in that mechanism design that all the key decisions about moral hazard and the proper expenditure of tax dollars will be taken. (The Secretary is to buy assets "at the lowest price that the Secretary determines to be consistent with the purposes of this Act.") As long as this is a black box, the bill is completely indeterminate as between a simple transfer of cash to banks -- an underhanded and expensive recapitalization -- and a legitimate (although perhaps more fundamentally wrongheaded) attempt to relieve liquidity pressures. The bill's provision against unjust enrichment is a lame duck, forbidding the purchase of assets above their original purchase price, but not above their current fair value.

Sec. 102 of the bill is the House Republicans' Mad Hatter insurance plan, which grants Treasury authority to insure assets up to par (!) and again in no way specifies how they are to do so:
In establishing any program under this subsection, the Secretary may develop guarantees of troubled assets and the associated premiums for such guarantees. Such guarantees and premiums may be determined by category or class of the troubled assets to be guaranteed.
Leave aside the ludicrous reality that the people who wrote this section claim to be protecting us from state socialism. They ask Treasury to set premiums in the insurance program
at a level necessary to create reserves sufficient to meet anticipated claims, based on an actuarial analysis, and to ensure that taxpayers are fully protected.
It is harder to insure assets than it is to price them -- you need more data -- even when those assets are straightforward. Many of the structured assets under consideration are singular and do not belong to an obvious class of similar assets -- how, for instance, to measure the risk of default of some particular equity tranche of some particular pool of mortgages from Wisconsin in the first half of 2006? Even if we accept the imperfection of the needed comparisons, the market in these assets that could provide price data for an insurance estimate is shut down -- and the same agency that will be insuring the assets is the one that will be granted $700bn to distort or substitute that market. It's hard to see how Treasury could even begin to make good-faith efforts to implement the insurance program.

The mandate of the program has expanded ungraspably, with Treasury instructed to take 9 factors (not obviously reconcilable, e.g. numbers 4 and 5, etc.) into consideration in its implementation:
(1) protecting the interests of taxpayers by maximizing overall returns and minimizing the impact on the national debt;

(2) providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security;

(3) the need to help families keep their homes and to stabilize communities;

(4) in determining whether to engage in a direct purchase from an individual financial institution, the long-term viability of the financial institution in determining whether the purchase represents the most efficient use of funds under this Act;

(5) ensuring that all financial institutions are eligible to participate in the program, without discrimination based on size, geography, form of organization, or the size, type, and number of assets eligible for purchase under this Act;

(6) providing financial assistance to financial institutions, including those serving low- and moderate-income populations and other underserved communities, and that have assets less than $1,000,000,000, that were well or adequately capitalized as of June 30, 2008, and that as a result of the devaluation of the preferred government-sponsored enterprises stock will drop one or more capital levels, in a manner sufficient to restore the financial institutions to at least an adequately capitalized level;

(7) the need to ensure stability for United States public instrumentalities, such as counties and cities, that may have suffered significant increased costs or losses in the current market turmoil;

(8) protecting the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B) of the Internal Revenue Code of 1986, except that such authority shall not extend to any compensation arrangements subject to section 409A of such Code; and

(9) the utility of purchasing other real estate owned and instruments backed by mortgages on multifamily properties.
Again, a good faith effort to follow these instructions would result in the failure of the bill to accomplish any of its objectives.

Toothless provisions on corporate governance apply only in the case when assets are purchased directly from institutions in exchange for debt and equity; they
exclude incentives for senior executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution
as well as providing for clawback of bonuses in cases of material inaccuracy in the statement of relevant criteria, and the elimination of golden parachutes -- but only for the five highest-paid executives, and only at public companies.

On the plus side, in exchange for asset purchases, Treasury will receive non-dilutable senior debt or equity warrants convertible to senior debt -- but "the exercise price for any warrant issued pursuant to this subsection shall be set by the Secretary, in the interest of the taxpayer."

And then there's the FDIC insurance limit -- raised to $250k from $100k. By any prudent ("actuarial," not to put words into our representatives' mouths) standard, the FDIC insurance fund is now underfunded by two and a half times. And the corporation is forbidden to fund itself adequately!
The temporary increase in the standard maximum deposit insurance amount made under paragraph (1) shall not be taken into account by the Board of Directors of the Corporation for purposes of setting assessments under section 7(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1817(b)(2)).
But never fear -- to pay for this largesse, the FDIC's borrowing limits at the Fed will be lifted.

This would be a terrible bill even in the relatively competent hands of Hank Paulson -- what about Phil Gramm or John Corzine? It will stall the failure of insolvent banks and cast a veil of uncertainty over all those markets into which it intervenes. Cowardice, ignorance, and political expediency will ensure its passage into law.

Monday, September 29, 2008

Bailout roundup for September 29

The TARP failed to pass in the House today. We review below last-minute responses to the plan.

HSBC analysts say that there are $3tr of troubled assets which might be bought under the TARP.

Nouriel Roubini's critique of the bailout is on point. Steven Davidoff is his usual judicious and skeptical delight. Naked Capitalism and Clusterstock say the changes in the bailout bill are "cosmetic" (and they are).

Interfluidity says at least Paulson was honest about what he wanted. And no financial legerdemain can solve the problems the country faces -- if the TARP passes and the depression still comes, what then?

Brad DeLong argues in favor of straightforward nationalizations. And Carl Icahn argues for more restrictions on executive compensation and corporate governance.

The Economist carries a mealy-mouthed article on the TARP, lamely arguing that it is better to pass a flawed plan now than to force Congress to stay in session for another week. We would underscore the extent to which panic around the TARP has been generated, self-servingly, by Congress and the Administration.

The FEI Financial Reporting Blog looks at the consequences for mark-to-market accounting.

Becker and Posner have lost the thread.

Secretary Paulson's enabling act (7)

Nancy Pelosi's news release on the draft bailout bill:


Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets -- including cutting in half the Administration's initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers' funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street

Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets

Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes


Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable -- protecting American taxpayers and Main Street -- and these elements will be included in the legislation

Protection for taxpayers, ensuring THEY share IN ANY profits

Cuts the payment of $700 billion in half and conditions future payments on Congressional review

Gives taxpayers an ownership stake and profit-making opportunities with participating companies

Puts taxpayers first in line to recover assets if participating company fails

Guarantees taxpayers are repaid in full -- if other protections have not actually produced a profit

Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families

Limits on excessive compensation for CEOs and executives

New restrictions on CEO and executive compensation for participating companies:

No multi-million dollar golden parachutes

Limits CEO compensation that encourages unnecessary risk-taking

Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate

Strong independent oversight and transparency

Four separate independent oversight entities or processes to protect the taxpayer

A strong oversight board appointed by bipartisan leaders of Congress

A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse

An independent Inspector General to monitor the Treasury Secretary's decisions
Transparency -- requiring posting of transactions online -- to help jumpstart private sector demand

Meaningful judicial review of the Treasury Secretary's actions

Help to prevent home foreclosures crippling the American economy

The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year

Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures

Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks

Friday, September 26, 2008

Secretary Paulson's enabling act (6)

There are reports this morning that John McCain was the sticking point in yesterday's bailout talks. Below is the text of a draft agreement on principles published by the WSJ's economics blog. Everything rests on the specific provisions of 1.b., of course; and yet it's 1.a. that is likely to get the drums beating.

1. Taxpayer Protection
a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies
b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing
c. Requires most profits to be used to reduce the national debt

2. Oversight and Transparency
a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law
b. Establishes strong oversight board with cease and desist authority
c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority
d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority
e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation
a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure
b. Requires loan modifications for mortgages owned or controlled by the Federal Government
c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs

4. Funding Authority
a. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed
b. final $350 billion is subject to a Congressional joint resolution of disapproval

Thursday, September 25, 2008

Secretary Paulson's enabling act (5)

With his characteristic lucidity, Lucian Bebchuk has written a very short paper (13pp) which says (almost) everything that needs to be said about the Paulson bailout proposal from a policy perspective. If you read only one thing this week about the bailout, make it this.

Edit: Bebchuk makes his case in Friday's WSJ.

Bebchuk limits himself to the premises and scope of the action proposed this week by Treasury: given, in other words, that the plan is proposed in good faith (i.e., it is not an attempt to distribute largesse to selected firms or actors, it is not a power-grab by Treasury or Paulson personally, it is not an attempt to buy the election for McCain, etc.), how ought it to be designed?

The pricing problem
Bebchuk states plainly the fundamental hypothesis about the state of the financial markets that underlies the policy proposal:
Because of the substantial presence of these illiquid troubled assets on the balance sheets of financial firms, the Treasury believes, financial firms have difficulty raising capital, are subject to risks of creditor runs, and are reluctant to carry out fully their role in financing the real economy....

The Treasury believes… that financial firms cannot currently sell these assets even at their reduced fundamental value… money managers that would otherwise be willing to purchase financial assets at any price below their fundamental value do not have sufficient liquidity to keep prices at fundamental values.
Given this premise, the problem is then, straightforwardly, a) whether government should introduce the needed liquidity into the markets (as opposed to private actors), and, b) how the assets to be purchased are to be priced.
The current plan gives Treasury the “freedom to confer massive gifts on private parties,” and so Bebchuk suggests at a minimum that the statute be altered to require Treasury to pay no more than fair value for troubled assets.

That begs the practical question, though, how fair value is to be assessed. “A situation in which a Treasury in-house official bargained one-on-one with a financial firm over the value of an asset would raise serious concerns.” It is nearly impossible to imagine how Treasury could assess the hold-to-maturity value of $700bn in complex securities under the time constraints supposed to be operative — Paulson has in his testimony to Congress suggested that Treasury might need to exercise the full $700bn of authority during the Congressional recess — even were the distribution of the performance of the underlying assets known. In this case, to value the underlying requires an additional prospective judgment about the macroeconomy (and in the case of individual mortgage pools, of particular market segments or regions) at a time of profound uncertainty: that is, at a time when Bush is going before the American people to warn, essentially, of the Great Depression. And exercising any effective oversight over those judgments would be difficult or impossible.

Nor do the sellers of these assets need to misrepresent their value in order to game an auction process. Even if Treasury bids as often overestimate as underestimate the value of assets for sale, sellers need only accept the high bids and reject the low.
And, realistically, the feasibility of and incentives for collusion are high: these assets are concentrated in the hands of relatively few actors, who are capable of coordinating their auction behavior.

Bebchuk therefore proposes dividing the pool of liquidity to be injected into the market among perhaps twenty managers: that is, rather than Treasury acting as a single buyer, funding an artificial market for the assets to be purchased. Competition amongst the managers could serve as a check on the price of the assets; and each manager could be incentivized based on the final profits of their fund. Bebchuk even suggests that qualified managers be asked to bid the profit cut they would be willing to accept for the privilege. Since Bill Gross has said in public he would manage Treasury’s fund for free, it shouldn’t be hard to find qualified people.
The point, of course, is that it’s possible to write stronger — much stronger — protections of taxpayers into legislation that accomplishes Paulson’s stated aims.

The capital problem
Bebchuk asks us to separate the asset-pricing question — a question, if Treasury is correct, of liquidity — from the question whether, independent of the illiquidity of asset markets, financial firms are undercapitalized. Providing capital to those that are is a legitimate aim of policy, but should be done “directly, aboveboard, and for consideration.” Capital infusions, in other words, should be and can be priced separately from asset purchases.

Bebchuk therefore proposes allowing Treasury to purchase newly issued securities from financial firms. This is superior to providing capital by overpaying for assets because it would compensate taxpayers for their transfers to banks; but also because the capital firms require may not be in proportion to their holdings of illiquid assets.

Bebchuk appears not to have read the Dodd proposal — since the equity participation granted to government under that plan would vest after the final asset sales, in a proportion of 125% of the shortfall, it is not subject to his criticism that under plans which give government equity, “government would still need to assess how much it is overpaying for the purchased troubled assets and what new equity tickets would provide adequate consideration for the amount overpaid.” But other problems (like the consequences of outstanding, hard-to-value, undilutable Dodd obligations on the books of financial corporations that might wish to undertake corporate actions) make his plan to untie equity from asset purchases preferable.

The problem is, of course, that while it is true that “some financial firms would need a capital infusion but would not wish to make significant use of the government’s willingness to purchase troubled assets,” this is precisely what Paulson’s plan is designed to obfuscate. Which is why Bebchuk does a third, greater service in setting things out so plainly.

Persecution and the art of writing
Hobbes writes:
Feare, without the apprehension of why, or what, PANIQUE TERROR; called so from the fables that make Pan the author of them; whereas in truth there is always in him that so feareth, first, some apprehension of the cause, though the rest run away by example; every one supposing his fellow to know why. And therefore this Passion happens to none but in a throng, or multitude of people.
Bebchuk’s criticism is constructive, in that his plan is designed to Treasury’s stated objectives better than Paulson’s. But it is also illustrative: of the hasty and unclear thinking which is dominating a hasty and unclear legislative effort; of the disparity between the rhetoric of crisis employed by the administration and the actual shape of their plan.

That is, in times of panic it can be useful to write as if panic were not a factor in human affairs: because it is only then that one can begin to ask how, and to what ends, that panic has been fostered and turned. Make no mistake that President Bush’s address to the nation was on the order of shouting fire in a crowded theater; as the old Leninists used to say, it was an attempt to “sharpen the contradictions:” and railroad Paulson’s plan through Congress.

Qui bono?

Secretary Paulson's enabling act (4)

We continue our review of Sen. Dodd's competing bailout proposal.

Dodd would establish a Special Inspector General for the TARP
It shall be the duty of the Special Inspector General for the Troubled Asset Program to conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets by the Secretary of the Treasury
He would require the Fed to report on any use of its discounting authority under 12 USC 343
(1) the justification for exercising the authority; and
(2) the specific terms of the actions of the Board, including the size and duration of the lending, the value of any collateral held with respect to such a loan, the recipient of warrants or any other potential equity in exchange for the loan, and any expected cost to the taxpayer for such exercise.
Provides for a study of financial leverage
(A) an analysis of the roles and responsibilities of the Board, the Securities and Exchange Commission, the Secretary of the Treasury, and banking regulators with respect to monitoring leverage and acting to curtail excessive leveraging;
(B) an analysis of the authority of the Board to regulate leverage, including by setting margin requirements, and what process the Board used to decide whether or not use its authority; and
(C) recommendations for the Board and Congress with respect to the existing authority of the Board.
And an impact assessment of the TARP
The Comptroller General shall conduct a study to assess the impact of the program authorized by this Act, including—
(A) whether it has—
(i) provided stability or prevented disruption to the financial markets or the banking system; and
(ii) protected taxpayers;
Dodd sets (gentle) executive compensation limits
(1) limits on compensation to exclude incentives for executives to take risks that the Secretary deems to be inappropriate or excessive;
(2) a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate; and
(3) such limitations on the entity paying severance compensation to its senior executives as are determined to be appropriate in the public interest in light of the assistance being given to the entity.
Funds money-market fund insurance out of the TARP (and forbids the use of the Exchange Stabilization Fund)
And makes slight changes to the mortgage modification code

Wednesday, September 24, 2008

Secretary Paulson's enabling act (3)

Sen. Dodd's competing proposal is now available. We review the terms of his proposal in two posts.

Dodd retains the wide grant of authority
The Secretary is authorized to establish a program to purchase, and 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 policies and procedures developed by the Secretary
And even extends it
designating appropriate entities as financial agents of the Federal Government, authorized to perform in such capacity all such reasonable duties related to this Act as may be required;
But sets up an office to administer the program
The Secretary shall implement any program under paragraph (1) through an Office of Financial Stability... which office shall be headed by an Assistant Secretary of the Treasury.
Subject to the oversight of an Emergency Oversight Board to include the Fed, FDIC, and SEC chairmen
(A) reviewing the exercise of authority under a program developed in accordance with this Act, including—
(i) all actions taken by the Secretary and the office created under section 2, including the appointment of financial agents, the designation of asset classes to be purchased, and plans for the structure of vehicles used to purchase troubled assets; and
(ii) the effect of such actions in assisting American families in preserving home ownership, stabilizing financial markets, and protecting taxpayers; and
(B) making recommendations, as appropriate, to the Secretary regarding use of the authority under this Act.
Treasury will receive a contingent equity (or senior debt) stake when it makes a loss
In the event that the equity of the financial institution from which such troubled assets were purchased is not publicly traded on a national securities exchange, the Secretary shall acquire a senior contingent debt instrument in lieu of contingent shares, which shall automatically vest to the Secretary on behalf of the United States Treasury in an amount equal to 125 per cent of the dollar amount of the difference between the amount the Secretary paid for the troubled assets and the disposition price of such assets. The Secretary may demand payment of such contingent debt instrument under such terms and conditions as determined appropriate by the Secretary....
In the event that the equity of the financial institution from which such troubled assets were purchased is not publicly traded on a national securities exchange, the Secretary shall acquire a senior contingent debt instrument in lieu of contingent shares.
And will be immune to dilution
The instrument representing the contingent shares shall contain anti-dilution provisions of the type employed in capital market transactions, as determined by the Secretary, to protect the Secretary from transactions such as stock splits, stock distributions, dividends, and other distributions, mergers, and other reorganizations and recapitalizations.
The FDIC will manage mortgages and RMBS to limit foreclosures and will modify the underlying mortgages
the Corporation shall utilize a systematic approach for preventing foreclosures and ensuring long-term, sustainable homeownership through loan modifications and use of the HOPE for Homeowners Program established under section 257 of the National Housing Act and any other programs that may be available for such purposes.
And acquisitions of pooled MBS will be geared to acquire control over the underlying
The Secretary shall, to the
extent practicable, acquire—
(A) sufficient ownership or control of pooled residential mortgage loans, or a securitization vehicle for such loans so that the Corporation has authority to modify the underlying residential mortgage loans, either directly or through a designee; and
(B) whole residential mortgage loans, so that the Corporation may use its authority to modify the underlying residential mortgage loans, either directly or through a designee.
With foreclosed houses being made available to local government
Each Federal property manager shall make available to any State or local government that is receiving emergency assistance under section 2301 of the Foreclosure Prevention Act of 2008 (Public Law 110-289) for purchase at a discount, any properties that it owns through foreclosure in that State or locality, in order to facilitate the sale of such properties and to stabilize neighborhoods affected by foreclosures.
And 20% of the profits from asset sales going to fund the GSEs
(A) 65 percent shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act of 1992 (12 U.S.C. 4568); and
(B) 35 percent shall be deposited into the Capital Magnet Fund established under section 1339 of that Act (12 U.S.C. 4569).

Tuesday, September 23, 2008

Accounting arbitrage

Why is it so urgent that Goldman Sachs and Morgan Stanley become banks that even the normal five-day waiting period was waived? They were already well enough capitalized to meet the bank holding company requirements, so what's the added benefit? It might have something to do with a rushed bailout coming soon.

Sept. 22 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.

"Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment," Jeffrey Rosenberg, Bank of America's head of credit strategy research, wrote in a report dated yesterday, without identifying particular banks.

Many banks may not participate in the Troubled Asset Relief Program because they haven't had to write down as much assets under accounting rules, meaning decisions to sell into the program would cause them to lose capital, Rosenberg wrote. Investment banks operate "under a mark-to-market accounting model while commercial banks hold assets at cost until realizing a loss (or until they reasonably expect one)," he wrote.

Essentially, because of the differences in accounting standards for commercial banks and investment banks, the investment banks have been forced to write down the value of their holdings aggressively, where the commercial banks have held on to the assets without taking the paper losses and the attendant capital impairment.

Since BofA and the rest of the commercial banks are carrying these securities at higher prices on their books, in order for them to exchange their assets at the same prices as Goldman or Morgan they would have to take another series of massive writedowns.

What's the bottom line? If Goldman and Morgan can participate in the TARP, then they may be able to exchange these under-performing illiquid assets for the US Treasury's cash at the same prices at which they are already valuing these securities.

Bloomberg points out the difficulties Japan had in trying to force viable banks to sell off their illiquid assets in the 1990s:

In the 1990s, a Japanese government effort to buy troubled assets from banks to free up lending failed because sellers weren't willing to accept the prices offered, said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. He said that wasn't a problem he had as chairman of the Resolution Trust Corp. in the U.S., which sold off failed lenders' assets after the savings-and-loan crisis of the 1980s.

"If you're talking about institutions that haven't failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital," Seidman said in a telephone interview today.

"In Japan, we did all kinds of things, trying to have a mediator who would set a price and other kinds of methods to get around that," he added. "It never really got done, so it was not successful, but here we probably have a more urgent need for more institutions to do something."

As BHCs, Morgan and Goldman will be able to raise money more easily while selling their illiquid paper to the Fed at no further discount. It's an accounting arbitrage.

The mother of all short squeezes (3)

Broc Romanek's blog was the first to point out the importance of companies' Standard Industrial Classification (SIC) codes in determining which stocks were and were not subject to the SEC's emergency order. His post is well worth reading for a sense of the contingencies involved in this kind of emergency, ad hoc action.
I received a number of emails from panicky members whose financial service companies were not part on the SEC's list. Some of these companies have SIC codes covered by the SEC's emergency order, but they were not listed by name in the SEC's order. For example, this situation applies to AllianceBernstein Holding, Invesco and Legg Mason. They've all filed Form 8-Ks stating that they believe they should be on the list since they were covered by the SIC code used by the SEC...

Others believe their companies are financial services companies and should be on the list, but their companies don't have SIC codes - at least, as they show up in the SEC's database (however, EDGAR shows their SIC code) - that correspond to the range of SIC codes covered by the SEC's "No Short List." To illustrate, CNBC reported that several companies - like General Electric - may be added to the list because their financial services businesses are substantial. GE's SIC code in the EDGAR database shows up as "SIC: 3600 - Electronic & Other Electrical Equipment (No Computer Equip)."
The SEC has since formally recognized the inadequacy of its first "best efforts" and has assigned responsibility for preparing an appropriate list to the exchanges. From yesterday's revised order:
In light of the familiarity of the exchanges listing financial institutions with the nature of their respective businesses, the Commission has determined to amend this Order to provide that the listing markets shall select the individual financial institutions with securities covered by the Order. The Commission expects each national securities exchange listing financial institutions to immediately publish a list, on its internet Web site, of individual listed companies with common equity that will be covered by the Order’s prohibition on short sales. The Commission expects these lists to cover banks, savings associations, broker-dealers, investment advisers, and insurance companies, whether domestic or foreign, and the owners of any of these entities.

To the extent an issuer chooses not to be covered by the Order’s prohibition on short sales, we have authorized the applicable national securities exchange to exclude that issuer from its list of covered financial firms.
Will this voluntary opt-out position separate the wheat from the chaff? If enough companies opt out of the SEC's protection, the ones left will be the obvious targets for speculative attacks.

The mother of all short squeezes (2)

One of the remaining prime brokers sent the following out yesterday to its clients:
The SEC has imposed emergency rules for short sale and economically similar dealing in approximately 800 financial services companies. Part of the new rules impact options trading strategies that can lead to a short sale, even if temporarily. The following limitations on option trading have been put in place to conform to the SEC regulations.

(A1) purchase of call options and exercise of long call positions
(A2) sale of call options against an existing long stock position in a ratio less than or equal to 1 call per 100 shares
(A3) purchase and sale of put options
(A4) purchase of single stock futures

Not Allowed:
(NA1) exercise of puts that would lead to a short stock position
(NA2) selling uncovered calls or uncovered single stock futures (coverage via stock)
(NA3) selling long stock if so doing will expose an uncovered short call position

Please be aware that the actual rules and interpretations on the rule are being refined by the SEC on an ongoing basis.
In our original commentary on the short-selling restrictions Friday, we pointed out the impact the order would have on the market-making ability of ETF issuers. By the end of the day, the SEC had issued "technical amendments" to its original order (see the full text of theamended order). These include a specific exemption for ETF and ETN market-makers:
bona fide market making and hedging activity related directly to bona fide market making in exchange traded funds and exchange traded notes of which Covered Securities are a component.
The SEC has also extended the exemption for options market-makers for the duration of the emergency order, but included as a condition a virtually unenforceable requirement that market-makers not contribute to increasing their customers' net short positions in financial stocks..

What we saw yesterday in the markets -- a slow but deep slump, including in financial stocks, after Friday's manic short-covering rally, but with option implied volatility collapsing and thin volumes -- was a consequence of removing liquidity from a market in which an artificial price floor was set without inducing any real confidence or conviction in market participants. As long as no one is permitted to short financials, it will be hard to find real, committed buyers for them, confident that a bottom has been marked in their prices.

And with uncertainty around the nature of the hedging activities that are (or will remain) permissible, a host of ordinary -- that is, non-manipulative, bona fide -- trading practices will remain severely constrained.

In situations where options issuers are constrained, where prime brokers are limiting or banning options transactions, and where transactions costs for short sales of whatever kind (even as part of net long positions) are increased -- even if only because of the added time it takes to confirm that the sales are permissible -- we should expect strategies involving algorithmic and portfolio trading and hedging to be hit especially hard. And those strategies are major sources of liquidity.

Monday, September 22, 2008

Secretary Paulson's enabling act (2)

G7 statement

Krugman slams the bailout plan

Interfluidity calls the plan "breathtakingly awful"

Willem Buiter says everything turns on the details of the plan -- and the details are awful

SCOTUS Blog says without the prohibition against judicial review, the plan would likely be unconstitutional

George Bush is urging Congress to pass the enabling act without asking questions

The Democrats are playing populist - going after executive compensation!

Paulson thinks his plan's so good that other countries will follow; so does Bloomberg

Bloomberg on the consequences for the dollar

Calculated Risk on what Congress should ask of Paulson

American Prospect describes "Paulson's Folly"

Alea supports a bailout, but doesn't think it'll help

The grapes of wrath (1)

Interfluidity carried a seminal piece last week on the current financial crisis, arguing that the root cause of the current crisis is neither financial innovation, nor subprime mortgages, nor any of the other paper tigers that have come forward in the past year.

Rather, the financial history of the past fifteen years belongs to a longer, twofold process, in which the inherent weakness of the American economy after the breakdown of manufacturing was masked by a wild growth in credit created in myriad unsustainable forms and fed by the insatiable demand of foreign central banks for US dollar-denominated obligations.

We see this insight as the first step towards the United States realizing not only that its economy is on the verge of collapse, but that the much-lauded gains of the past years have been illusory.

One notable contribution to the masking of economic weakness in the US has been the complicity of government. We have changed our methodology for calculating inflation twice since the 1970s, leading to structurally lower numbers for inflation -- lower by 5% or more. In this light, the growth numbers (which use the GDP deflator, not the CPI –- but they have crucial similar flaws) of past years look much worse.

Hank Paulson has argued the current crisis is only a crisis of liquidity, with no implications for the solvency of American financial institutions or the US consumer -- either willful or crafty, but in either case ignorance. Meanwhile, President Bush is in Cloud-Cuckoo-Land.

Beware of calls for concerted action across party lines. Roosevelt's actions in the Hundred Days enjoyed far from bipartisan support; however we go about it, fixing the situation the United States is in will not be good for everyone.

The mother of all short squeezes (1)

Last Friday, September 19, was triple witch, the day index futures, index options, and stock options all expire. Friday morning's round of market manipulation from the federal government was cleverly timed to hit at a moment of maximum volatility: the idea being, presumably, to create the mother of all short squeezes.

The SEC temporarily banned the short selling of 799 financial stocks and eased conditions on the repurchase of shares by issuers. Additionally, large market participants will now have to report their short positions as well as their long positions.

Aside from the obvious question why we didn't ban the buying of tech stocks in 1999-2000, there is good reason to think this action will have paradoxical and unintended results. The move (along with the nontrivial interventions announced by the Fed) will set an artificial floor under the prices of financial stocks. Now, among the effects of a successful intervention to save the American financial system will be to set an eventual floor to the valuation of financials. We say artificial because the ban on short-selling will restrict the ability of the market to signal its perception of downside to the current valuation -- denying the government its best signal as to the adequacy of its interventions.

In the short term, we saw a rush of money into financials (all up astonishingly on the day – XLF, the ETF which tracks the financial stocks in the S&P 500, was up almost 21% at Friday's open) driven by forced buying and exacerbated by triple witch. But when the dust settles and everyone is long, the restriction on short-selling will no longer provide active support for valuations.

Worse, as long as it is in place, the ban on short-selling serves as a signal of the weakness of the financial sector: anything you aren't allowed to say bad things about must be bad. Dealbreaker posts a picture of the Pakistani stock market post the introduction of restrictions on short-selling to demonstrate the worst-case scenario for a short squeeze.

Those with negative views on financials will find other ways to operationalize their views: they will try to buy puts (artificially inflating the implied volatility of financial stocks, which removes another important source of information from the market and plays havoc with risk management), or they will short other instruments like the XLF (forcing the index issuers to sell their long positions in financial stocks, adding to the post-short squeeze long selling pressure), or they will short stocks not on the list.

Ultimately, while stocks will have to recover if there is a wider economic recovery, their very visibility –- and the ease with which moves like this are 'understood' and picked up by the media –- argues against support for stock prices as a first measure. Credit markets, and the underlying performance of the real economy, are far more important; and they are easily lost in the fray.

For what it's worth, research done on July's temporary rules, which banned naked shorting of the primary dealers, shows that it contributed an extra $22bn of aggregate borrow demand for those stocks, as prime brokers scrambled to make sure they had inventory of the stocks should their hedge fund clients wish to short them. Now that naked short selling of all stocks has been banned, should we expect a proportional rise in the aggregate quantity of all equities on loan?

Naked Capitalism point out that the cash reserves the broker-dealers receive when they loan out stock – and unavailable to them if there is no short-selling – are unlikely to be replaced by short-term funding.

Secretary Paulson's enabling act (1)

Treasury to buy up to $700bn of distressed assets at discretion
"The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, Troubled Assets from any Financial Institution, as those terms are defined in section 12 of the Act."

"The term “Troubled Assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008; and, upon the determination of the Secretary in consultation with the Chairman of the Board of Governors of the Federal Reserve, any other financial instrument, as he determines necessary to promote financial market stability.
From a wide variety of institutions
The term “Financial Institutions” means any institution including, but not limited to, banks, thrifts, credit unions, broker-dealers, and insurance companies, having significant operations in the United States; and, upon the Secretary’s determination in consultation with the Chairman of the Board of Governors of the Federal Reserve, any other institution he determines necessary to promote financial market stability.
Treasury may appoint agents
(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations
And will control and may hold to maturity the assets it purchases
(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
With minimal oversight
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.
The draft text of the bill as published in Saturday's New York Times. Alea has the updated text.