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Does Congress think that Paulson asked for not enough power?

You might think so from reading the Dodd bill and the news accounts (including this very helpful discussion by Steven Davidoff):

1. Under the Paulson bill, Treasury will have the power to purchase mortgage-related assets. Under the Dodd bill, Treasury will have the power to purchase these assets and "any other financial instrument, as the secretary determines necessary to promote financial market stability." In Davidoff's words, the Dodd bill "could allow this program to expand to credit card debt, student loan debt, market purchases of equity and even the debt of the big automakers. Basically, the entire financial system."

2. Under the Paulson bill, Treasury would buy assets with cash. Under the Dodd bill, Treasury would be required to obtain equity warrants as well; Sorkin says that this provision will probably end up being discretionary. So Treasury will be able to obtain equity stakes whenever it believes that doing so makes sense (presumably, so as to obtain a portion of the upside if Treasury overpays for the securities), and will have to exercise whatever control its equity interest gives it, including possibly a say in the management of the firm (think of AIG).

3. Under the Paulson bill, Treasury has no power to determine executive compensation. Under the Dodd bill, the executive compensation provision, in Davidoff's words, "basically puts the Treasury Department in the business of setting compensation and disclosure policies for much of financial America."

4. Under the Paulson bill, Treasury has no power to adjust mortgages that go into foreclosure. Under the Dodd bill, Treasury is supposed to figure out some way to help homeowners whose property is subject to the securities it obtains, including reducing interest rates and principal.

5. Finally, with respect to the most important discretionary item of them all -- negotiating a price of the mortgage-related assets and most of the other terms of the deal -- the Paulson bill and the Dodd bill identically leave it up to Paulson and his successors.

The Dodd bill does do three things to confine the discretion of the Treasury Secretary. It provides for (1) limited judicial review (however, it is hard to imagine judges second-guessing pricing decisions); (b) more reporting to Congress; and (c) an oversight committee consisting of various notables that, however, has little power.

In sum, compared to the Paulson bill, the Dodd bill vastly extends the Treasury Secretary's powers, while putting in place very modest oversight mechanisms. Dodd, and apparently many of his colleagues, want Treasury to do more, not less.

ReaderY:
One could argue that there should be no bailout at all. But if there is going to be a bailout, the terms should be stiff: we should act like an investor who demands a return for their cash rather than a free welfare handout. We should buy these things up a discount, get an equity stake, demand management changes, show grossly unproductive management the door, end the featherbedding and fleecing, reduce labor costs to non-stratospheric levels and demand a return to honest-to-goodness capitalism -- not the crony kind but the real kind with productivity-based decision-making where unproductive executives and investment bankers get summarily shown the door and replaced by people from China or India who will do the same work, and as good a job, at a tenth the price, just like for everyone else in the economy.

We gotta bust the union here. It's breaking our backs, destroying our productivity. We gotta get rid of the whiners and the losers who are looking to welfare handouts, people who have no useful skills for the modern economy, who know only how to run a casy eno (take that, spam guard) and have no clue how to run a real business. We gotta get the losers out and put real people in management and investment positions.
9.23.2008 9:19pm
Asher (mail):
3. Under the Paulson bill, Treasury has no power to determine executive compensation. Under the Dodd bill, the executive compensation provision, in Davidoff's words, "basically puts the Treasury Department in the business of setting compensation and disclosure policies for much of financial America."

Why do you think Dodd gave that power to the Treasury instead of just writing some kind of cap into the bill? I can think of two possibilities:

1. It's in there as a sop to voters and crazy liberal bloggers; Dodd knows full well that Paulson won't exercise the power in any meaningful way.

2. They figure Obama will win the election and his Treasury Secretary will use the power.
9.23.2008 9:32pm
Sagar (mail):
More pigs are trying to get to the trough!
9.23.2008 10:23pm
MarkField (mail):
WRT #1, it was my understanding (I could be wrong) that it was the Administration which expanded the asset classes available for purchase. If I'm right, the Dodd's bill simply incorporates the Administration's language.

As to the rest, yes in some sense it gives the Administration more power. But it does so with the goal of providing some minimal protection to the public. The issue is not "amount of power" like hit points in D&D, it's a question of "power to do what?".
9.23.2008 10:38pm
stevesturm:
however, it is hard to imagine judges second-guessing pricing decisions
that was written in jest, right? Where exactly have you seen instances of judges restraining themselves from second guessing executive and legislative branch decisions? Why would they start restraining themselves now?
9.23.2008 11:23pm
SFBurke (mail):
Demanding equity compensation definitely makes sense; its the only way that this thing won't end up deep into the red. Any private investor would demand it, why shouldn't the government? (I really don't care if existing stockholders get dilluted way down -- that is always the risk of being a stockholder).

As a general matter, I am not a big fan of government regulation of executive comp. I think it is a matter between investors and the company. But now that the government is an investor, it is certainly reasonable for it to have a say (even if it is to just to address political concerns). Of course, such regulation must be reasonable. Most of these executives have the option of just retiring so offering to pay them minimum wage (or even $200K per year) will just cause a mass exodus of talent.

As stevesturm said, no judicial review. Oversight by sages or the comptroller is essential for some sembelance of accountability, but don't let this get into our court systems.
9.24.2008 1:02am
byomtov (mail):
Mark Field has it right.

After all, you could just pass a bill requiring the Treasury to buy all the MBS at par. That would give it no power whatsoever, but be galactically stupid. The idea is to give the Treasury the ability to make a good deal. If that includes insisting on equity, and I think it does, then so be it.

As for setting compensation, can anyone say with a straight face that, evaluating the executives' performance, the compensation set by private mechanisms was rational? The Treasury may get it wrong, certainly, but can it do worse?
9.24.2008 11:13am
Andy Freeman (mail):
If we're going to demand compensation clawbacks and restrictions on future compensation, shouldn't campaign contributions also be returned and there be a ban on future contributions?
9.24.2008 12:09pm
Andy Freeman (mail):
> As for setting compensation, can anyone say with a straight face that, evaluating the executives' performance, the compensation set by private mechanisms was rational?

In what universe is there a "rational" standard?

Shareholders pick companies with these compensation packages and said compensation is paid for by said shareholders, so it's unclear why anyone else has a legit beef.
9.24.2008 2:42pm
AST (mail):
Sorry to nitpick, but the last paragraph lists the three things the Dodd Bill does do as (1), (b) and (c).

I don't think I really understood how bad the situation was until I realized that all these bad loans were being valued as solid assets merely because Fannie/Freddy had been willing to buy them. Maybe what we should be doing is making that sort of accounting illegal. The value should be based on the basic soundness not the assurance that the government will bail out any defaulters.
9.24.2008 7:48pm

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