Financial and Mortgage Market Bailout-Dissecting the Paulson Plan

$700 Billion Bailout

Paulson hustled in a brief proposal for legislation this weekend. This proposal will give the Treasury broad rights to purchase up to $700 billion in troubled mortgage assets. Unfortunately, the proposal may raise more questions than it answers.

The proposal put in front of Congress gives the Secretary of Treasury unprecedented powers. In summary, these powers include the authority to hire, enter into contracts, designate financial institutions as agents, purchase mortgage assets, and issue obligations.

Many of these powers are typical to a federal agency; however, peculiar is the apparent exemption of the Secretary's action to review by "any court of law or any administrative agency." This makes many legislators nervous, as they are asked for their signature on this very large "check."

Bailout Bills Adding Up

Another subtle undertone in this emerging story is the cumulative bailout bill being amassed. This single proposal is only the latest in a rapid series of government financial crisis "checks."AIG was issued a $85 billion guarantee, Bear Stearns and JP Morgan were given a $29 billion guarantee, and $25 billion for Fannie Mae and Freddie Mac by Congressional Budget Office estimates.

The mounting concern is that this may not be the end.

Broad and Getting Broader

An additional concern was raised Saturday in the Treasury's Fact Sheet on the proposal. This fact sheet seemed to broaden the assumed asset and institutional eligibility beyond the US.

Secretary Paulson confirmed and explained this broadening in his Sunday interview on "The Week with George Stephanopolous" stating, "Yes, and they should. Because...if a financial institution has business operation in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution."

Adjustments Expected

As one might expect, changes are anticipated prior to Congressional acceptance.

Democrats are advocating an additional stimulus package to be tacked on for homeowners.

Unlike many similar agency-type solutions to crisis, this one is notably without oversight. Outside of a three month update and thereafter a semi-annual report to Congress there is no provision for any oversight.

McCain's campaign is expected to recommend a bipartisan oversight committee later today.

The operative theme in all of Paulson's statements are best summarized in another statement made in this interview, "We need this to be clean and quick." The urgency of paralyzed credit markets, Monday's opening Bell, and antsy politicians needing to campaign is likely to getPaulson his "clean and quick" solution.