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FINANCIAL CRISIS: OVERSEEING THE PLAN / NEWS ANALYSIS

Paulson will have no peer

The Treasury chief will gain sweeping, even unparalleled power under Congress' compromise plan.

September 29, 2008|Peter G. Gosselin | Times Staff Writer

WASHINGTON — Despite all the constraints Congress supposedly wrapped around him, Treasury Secretary Henry M. Paulson is about to become the most powerful mortgage financier of the modern era -- most likely of any era.

Buried beneath the 100-plus pages of detail that Paulson's financial rescue plan has picked up during its 10-day journey from a Bush administration wish list to a bipartisan congressional compromise is the striking fact that the Treasury secretary got almost everything he sought -- an eventual $700 billion and the authority to spend it largely as he sees fit.

To be sure, congressional bargainers did make one huge change.

And in the process, they created a potential stumbling block as the Treasury tries to stabilize the deeply damaged financial system by acquiring toxic mortgage-backed securities.

Under terms of the compromise announced Sunday, any firm selling troubled assets to the government would have to give Washington the right to take an ownership stake in the firm -- a more sweeping requirement than had been expected. While the aim is to let taxpayers profit when the financial system eventually recovers, administration officials worry that generally healthy companies may be discouraged from getting involved -- thereby reducing the effectiveness of the rescue effort.

Whether that turns out to be a big problem remains to be seen, however, and for the rest, Paulson's new powers will be almost breathtaking in their scope.

He and his successor will have the right to buy not just mortgage-related securities at the heart of the crisis, according to the language of the bill, but under some conditions could buy any financial instrument "the purchase of which is necessary to promote financial market stability."

Moreover, the legislation encourages him -- in fact, requires him -- to combat the nationwide wave of home foreclosures by pushing mortgage service companies to rewrite some loans and to cut the interest rates or even the principal for financially strapped homeowners.

It even gives him the politically explosive power to cut deals with foreign, not just U.S., banks in some cases.

"This is unquestionably the biggest bailout in American history," said Wesleyan University economist Richard S. Grossman, a scholar of financial crises. "I'm as nervous as everybody else about Paulson having all this power, but who else are you going to give it to?

"This isn't something that can be done by committee," he said.

Congressional leaders sought to drive home the idea that they have added so many protections to the original 2 1/2 -page blueprint Paulson sent to Capitol Hill on Sept. 20 that the final plan is no longer an undeserved sop to a mismanaged financial industry. Instead, proponents say, it now represents ordinary Americans' best bet for preserving their savings, jobs and economic well-being.

And indeed, the compromise language of what's now called the Emergency Economic Stabilization Act does include huge changes from Treasury's original proposal.

Among them: breaking the $700 billion into three installments, with only the first $350 billion quickly available; establishing no fewer than four oversight bodies to keep an eye on the Treasury secretary; and the addition of a limited right for people to sue over the program -- something Paulson initially sought to prohibit.

"This is not about a bailout of Wall Street," declared House Speaker Nancy Pelosi (D-San Francisco). "It's a 'buy-in' so we can turn our economy around."

"This is about Main Street. It's about America. It's really about the fabric of American life," echoed Sen. Judd Gregg (R-N.H.), the ranking GOP member of the Senate Budge Committee.

Despite all of the added protections, a late Sunday draft of the measure was replete with delegations of all sorts of powers to Paulson, even in areas where lawmakers said they had made their biggest mark.

For example, in setting up the measure's centerpiece -- its "troubled asset relief program" -- Paulson "is authorized to take such actions as the secretary deems necessary" to carry out the effort, including hiring, contracting and assigning companies to act as agents of the government, as well as buying, holding and selling assets.

Or again, in splitting up the $700 billion, the measure makes the first $250 billion immediately available and simply requires President Bush or his successor to declare that additional sums are needed in order to get the next $100 billion. When it comes to the final $350 billion, it doesn't require congressional approval, but instead gives lawmakers 15 days to vote their disapproval or the money starts flowing.

Still another example: House Republicans nearly derailed the whole effort late last week, claiming they had uncovered a cheaper alternative, a plan to have Washington offer companies a kind of insurance for their troubled mortgage-backed securities. By Sunday night, proponents of the scheme were saying that they had scored a major victory.

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