Dirty Secret Of The Bailout: Thirty-Two Words That None Dare Utter

By Jason Linkins for Huffington Post


A critical – and radical – component of the bailout package proposed by the Bush administration has thus far failed to garner the serious attention of anyone in the press. Section 8 (which ironically reminds one of the popular name of the portion of the 1937 Housing Act that paved the way for subsidized affordable housing ) of this legislation is just a single sentence of thirty-two words, but it represents a significant consolidation of power and an abdication of oversight authority that’s so flat-out astounding that it ought to set one’s hair on fire. It reads, in its entirety:

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.

In short, the so-called “mother of all bailouts,” which will transfer $700 billion taxpayer dollars to purchase the distressed assets of several failed financial institutions, will be conducted in a manner unchallengeable by courts and ungovernable by the People’s duly sworn representatives. All decision-making power will be consolidated into the Executive Branch – who, we remind you, will have the incentive to act upon this privilege as quickly as possible, before they leave office. The measure will run up the budget deficit by a significant amount, with no guarantee of recouping the outlay, and no fundamental means of holding those who fail to do so accountable.

Is this starting to sound familiar? Robert Kuttner cuts through much of the gloss in an article in today’s American Prospect:

The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc. He plans to retain Wall Street firms as advisors to decide just how to cut deals to value and mop up Wall Street’s dubious paper. There are to be no limits on executive compensation for the firms that get relief, and no equity share for the government in exchange for this massive infusion of capital. Both Obama and McCain have opposed the provision denying any judicial review of decisions made by Paulson — a provision that evokes the Bush administration’s suspension of normal constitutional safeguards in its conduct of foreign policy and national security. […]
The differences between this proposed bailout and the three closest historical equivalents are immense. When the Reconstruction Finance Corporation of the 1930s pumped a total of $35 billion into U.S. corporations and financial institutions, there was close government supervision and quid pro quos at every step of the way. Much of the time, the RFC became a preferred shareholder, and often appointed board members. The Home Owners Loan Corporation, which eventually refinanced one in five mortgage loans, did not operate to bail out banks but to save homeowners. And the Resolution Trust Corporation of the 1980s, created to mop up the damage of the first speculative mortgage meltdown, the S&L collapse, did not pump in money to rescue bad investments; it sorted out good assets from bad after the fact, and made sure to purge bad executives as well as bad loans. And all three of these historic cases of public recapitalization were done without suspending judicial review.


Kuttner’s opposition here is perhaps the strongest language I’ve seen used, pushing back on this piece of legislation, in any publication of repute, and even here, Section 8 is not cited by name or by content. McClatchy Newspapers also alludes to Section 8 with concern, citing the “unfettered authority” that Paulson would be granted, and noting that the “law also would preclude court review of steps Paulson might take, something Joshua Rosner, managing director of economic researcher Graham Fisher & Co. in New York, said could be used to mask previous illegal activity.” Jack Balkin also gives the matter the sort of attention it deserves on his blog, Balkinization.

But elsewhere, the conversation is muted. The debate over whether Congress is going to pass the Paulson bailout package, or pass the Paulson bailout package really hard seems to have boiled down to a discussion of time and concessions. The White House has made it clear that they want this package passed yesterday. Congressional Democrats seem to be of different minds on the matter, with some pushing back hard, and others content to demand a small dollop of turd polish to make the package seem more aesthetically pleasing, at which point, they’ll likely roll over and pass the bill. Neither candidate, John McCain or Barack Obama, seem all that amenable toward the bailout, but neither have either demonstrated that they are willing to risk their candidacies to do much more than exploit the issue for electoral purposes.

Sunday morning came and went, with Paulson traipsing dutifully from studio to studio, facing nary a question on Section 8. Front page articles in the New York Times, Washington Post, and the Wall Street Journal detail the wranglings, but make no mention of this section of the legislation. On TV, cable news networks are stuck in the fog of the ongoing presidential campaign.

Throughout the coverage, one catches a whiff of what seems like substantive pushback on this power grab, but it largely amounts to a facsimile of journalistic diligence. Most note, in general terms, that the bailout represents a set of “broad powers” that will be granted to the Department of the Treasury. Yet the coverage offsets these concerns through the constant hyping of the White House’s overall message of “urgency.”

But one cannot overstate this: Section 8 is a singularly transformative sentence of economic policy. It transfers a significant amount of power to the Executive Branch, while walling off any avenue for oversight, and offering no guarantees in return. And if the Democrats end up content with winning a few slight concessions, they risk not putting a stop-payment on the real “blank check” – the one in which they allow the erosion of their own powers.

Over in the Senate, Christopher Dodd has proposed a bailout legislation of his own, which critically calls for “an oversight board that not only includes the chairman of the Federal Reserve and the SEC, but congressionally appointed, non-governmental officials” and would require the President to appoint an “independent inspector general to investigate the Treasury asset program.” In Dodd’s legislation, Section 8 is effectively stripped from the bill.

Nevertheless, the fact that Section 8 of the Paulson plan seems to strike few as a de facto dealbreaker can and should astound. The failure of Congress to hold the line on this point would be truly embarrassing. But if we make it through this week with nobody in the press specifically informing the public about the implications of this single sentence – in the middle of a complicated bill, in the middle of a complicated time – then right there, you have the single largest media failure of this year.


~ by Eric Harrington on September 22, 2008.

3 Responses to “Dirty Secret Of The Bailout: Thirty-Two Words That None Dare Utter”

  1. 100% correct. What can you expect from a pig but a grunt? I don’t care what shade of lipstick the pig is wearing. Paulson, Brenanke, and Bush, the three little piggies are trying to stick it to us as a parting shot.

    These guys are nothing but war profiteers. They must be held accountable.

  2. The bailout as currently proposed (9-24-08) likely will not “cost” the taxpayers $700b, but will be a $700b capitalization of a system, which through reverse auctions buys at the current depressed market value assets that others will not buy (ie lack of liquidity). By buying these troubled and depressed assets, the government would be allowing the companies to book their true and current market losses and will at the same time free up the tied up capital in these non-liquid assets for the subject companies to put back to work elsewhere. Almost all the companies were not “heavily” into CDO’s, but the leverage of them amplified the risks and losses.

    LIKELY, the government will make a profit on some of the assets purchased and resold, which will pay for losses on some of the others which never recover to liquidity.

    Let’s call this episode RTC2 (Resolution Trust Corp 2, in reference to the early 1990s S&L crisis).

    Using RTC1 as an example, back then the government “put into play” $115b, which in the early 1990s was a chunk of change, to buy illiquid assets.

    By the time the RTC (1) closed its books, the net loss, all in, was more like $15 bil.

    If the same thing happens with RTC2 (current crisis), the net loss would be more like $70b, which is a bad, but tolerable loss to not have us thrown into a worldwide depression. It’s not that the government couldn’t make a profit over time, but hey, they ARE the government, and will lose money SOMEhow.

    It’s not that the assets do not have value (which, as per above, is currently depressed). They are just not currently liquid.

    I had 3 conversations with multi millionaires yesterday who are not going to be able to make their payments on debts, ruining their credit, as they cannot get operating capital even by pledging assets. This is happening over and over in the US and abroad right now. The unraveling of wealth spent years in accumulation due to a short term liquidity crunch would be devastating not only to the wealthy, but to all.

    Remember that people, companies and countries don’t go broke because they aren’t profitable over time. It’s because they run out of cash for a longer period than they can sustain until the profits come in. This is why the bailout is not so bad, and necessary.

  3. So why the lack of review, or outside input, even by the courts? That WASN’T the case in the SNL crash.

    Just floating this will not stop it from happening again. There has to be more oversite and real penalties to the players at the top. I doubt the CEO’s of these corrupt companies will even loose their bonuses.

    Personally I think it is all a big scam. Thats always the excuse for letting the big players get bailed out. They will loose too many jobs, etc. etc. But the bottom line is Republicans love corporate welfare about as much as they hate private welfare..

    This was caused by greed, nothing else, and everyone who was responsible for creating No-down loans should do time. That was the fatal mistake. And all those investment banks and mortgage banks who caused this should go down. We need to let wall street know there is a new sheriff in town..

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