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The Bailout Game Plan

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The Bailout Game Plan Federal Reserve Chairman Ben Bernanke may have given away the Bush Administration game plan when he declared that government should not purchase distressed financial instruments at “fire-sale” prices but at the “hold-to-maturity” value of the instrument.  To understand the game plan, one must examine the bill that Treasury Secretary Henry Paulson proposed last Sunday.

Paulson (aka, George Bush) demanded absolute authority to buy and sell any financial instrument at any price he determines: Section 4 (c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

Paulson demanded unlimited authority: Section 2 (b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation: Section 2 (3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them

The Paulson Game Plan: Paulson could legally pay the “hold-to-maturity” value to purchase the financial instruments from an investment company.  Let’s say $10 billion.  Hire that investment company to review and examine the financial instruments before the government sells those financial instruments back to the firm that had sold the government the $10 billion in the first place. This is the point where Bernack’s comment affects the equation. Imagine that Paulson discovers that the $10 billion financial instrument that he purchased is only worth $8 billion or the “fire-sale” price.  That is whatever assets or collateral that were used to secure the loan have decreased in value, typically real estate. Paulson would still be free to sell the $10 billion for $8 billion to the company that originally sold him the instruments for $10 billion.

The company would “make” $2 billion in profit and could own the same mortgage-related assets free and clear of the debt that caused the problems. The U.S. taxpayer would loose $2 billion of borrowed money because Bush will not raise taxes to pay for this bailout. The kick in the teeth would be if Senator John McCain wins the presidency because he would extend Bush’s tax-cuts for the rich.  The people who run the investment companies that perform this legerdemain would undoubtedly pay themselves huge bonuses for their feat.

The kick to the groin is that no one could challenge any of Paulson’s actions in a court of law: he would be above the law or, actually, no laws would apply to his actions.  Remember Bush’s efforts to secure immunity for telecoms for illegally spying on Americans?  Sec. 8. Review. 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. Reasonable people would agree that buying something from someone for $10 and then immediately turning around and selling him that article back for $8 and letting the government absorb the loss is corruption.

However, Paulson’s proposed bill would make such corruption legal, and no one could challenge Paulson/Bush in a law court or anywhere. Summarizing the Paulson/Bush Bill: The bill seeks unlimited, unchecked, non-reviewable and unchallengeable authority. These traits are the traits of a dictatorship.  Paulson/Bush’s proposed bill is antithetical to the rule of law, a transparent and open democracy, and our federal republican form of government.

This proposed bill is the harbinger of totalitarian government, and that may be the real Game Plan.  Sources (not to be included): Bernanke Urges Against U.S. Buying Assets at 'Fire-Sale' Prices By Craig Torres and Scott Lanman Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the Treasury Department should buy illiquid assets at ''hold-to-maturity'' values under its $700 billion rescue plan instead of at discounted ''fire-sale'' prices.
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The comments by the Fed chairman came in the form of an unusual break from his prepared testimony before the Senate Banking Committee today and are likely to feed the debate about what price the government should pay banks for bad mortgage- related loans. ''I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets,'' Bernanke said. There are ''substantial benefits'' to buying assets at a cost close to the ''hold-to-maturity'' price, he said. Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time.

That is different from the mark-to-market model used by investment banks that prices assets at what they are worth on a given day. Merrill Lynch & Co. in July sold more than half of its mortgage-linked collateralized debt obligations for about a fifth of their original price, setting a price for those securities at that time. ''They are basically saying, 'Let's take a best-case scenario, let's assume we don't have losses,''' said Julian Mann, vice president at First Pacific Advisors LLC in Los Angeles. ''Home prices continue to deteriorate. There are real losses here.'' To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net.

Last Updated: September 23, 2008 12:12 EDT

Treasury's bailout proposalThe legislative proposal was sent by the White House overnight to lawmakers.Last Updated: September 20, 2008: 11:47 AM EDTNEW YORK (CNNMoney.com) --

Here's the text of the legislative proposal sent by the White House overnight to lawmakers:LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETSSection 1. Short Title.This Act may be cited as ____________________.Sec. 2. Purchases of Mortgage-Related Assets.(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
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Sec. 3. Considerations.In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--(1) providing stability or preventing disruption to the financial markets or banking system; and (2) protecting the taxpayer.

Sec. 4. Reports to Congress.Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

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