by David Epstein and Sharyn O'Halloran
The great bailout of ’08—the proposed $700 billion taxpayer loan to Wall Street—is not just a step but a leap into uncharted waters. The administration wants to transform the Treasury into a Super Regulator with the authority to purchase and dispose of toxic mortgage-related assets (in a singly unbounded manner). Supporters of the bailout are seeking to calm our worries by emphasizing its similarities to the 1989 creation of the Resolution Trust Corporation (RTC) that helped end the savings and loan crisis. They are also pressing for legislation that is as “clean” as possible, by which they mean that the Treasury will have little or no oversight, and extraordinary discretionary powers while performing its financial feats of derring-do.
These arguments, however, conflict with each other. The 1989 Financial Institutions Reform Recovery and Enforcement Act that created the RTC was indeed successful, but it was anything but “clean.” That bill was 321 pages long, as compared with the Treasury’s draft legislation, reported out over the weekend, which is all of two pages, despite the fact that the RTC bought and sold assets of only $18.8 billion, 1/40th the value of the current mortgage mess.
A close comparison of the two bills reveals more differences in their approach to financial rescues. We used the same coding scheme as in our book, Delegating Powers, and came up with the following findings. Of the 15 provisions in the current draft legislation, 8 delegated authority to the executive branch. This 53% “delegation ratio” is 49% higher than the comparable ratio for the RTC bill. And 22 of the 42 major provisions in the RTC bill constrained delegated authority—through such devices as time limits, spending limits, rulemaking requirements and appeals procedures—as opposed to only 5 out of 15 in the proposed mortgage bailout. So the current bill both delegates more and constrains less than its predecessor, in an environment where even the experts are less sure of the correct course of action.
As to the form of the bailout, we should recall that the RTC bought failed institutions, not just their assets, so any savings and loan receiving federal aid became wholly owned by the government. Furthermore, the law directed the RTC to pay fair market value for any assets it purchased, which allowed it to be funded by the sale of bonds in the open market.
Here, the Treasury is thinking of buying only certain assets of troubled financial institutions, possibly leaving them still insolvent if their remaining assets are insufficient to cover their debts. And so far there is no requirement for the government to pay fair market value, raising the possibility that the very financial institutions which caused this crisis to begin with may end up actually staying in business and profiting from the government’s actions. Given the large possibilities of favoritism in this process, public oversight, a la the RTC’s governing board, seem all the more necessary.
Not only is there historical precedent, then, for congressional oversight of the bailout, it is also the appropriate thing to do, for both tactical and ethical reasons. Tactically, oversight confers legitimacy on the Treasury’s exercise of its extraordinary powers. One of the reasons that the Fed’s bailout of Bear Stearns, salubrious though it might have been to the health of the markets, nonetheless left a bad taste in many people’s mouth, is that the Fed acted without any pretense of consultation; no one in that frenzied weekend of deal making even bothered to notify congressional committees as to what was transpiring. Here, the imposition of oversight at the beginning of the process would mean that the Treasury will have fewer questions to answer at the end.
Morally, we should recall that it is not the Treasury or the US government bailing out these storied financial institutions; it is we, the people. It is our homes that are being foreclosed on, and we have every right, acting through our elected representatives, to monitor and advise the acquisition and disposition of these assets.
Comments