President Bush signed the bailout bill shortly after it was passed by the House today (it passed the Senate yesterday). Below is Treasury Secretary Henry Paulson’s statement today on the bailout bill. Feels Palin-like in its generalized tone, but that’s because he’s already doing the real work behind the scenes. Under the bill, Treasury has immediate authority to purchase up to $250b in troubled assets from financial firms (plus $100b more with White House approval, and $350b more with Congressional approval). Treasury will hire as many 30 staffers and 10 outside money managers to identify, value, and manage reverse auction bidding for illiquid mortgage backed securities. Bloomberg reports that PIMCO, Blackrock and Legg Mason are so far likely to be hired because of their role in advising Treasury on the bailout so far.
As for staff, Paulson hired Goldman Sachs exec Ed Forst last week to play a key role in staffing and also establish the new Office of Financial Stability, which is ostensibly the infrastructure being created to monitor this after Paulson is gone—if he doesn’t stay on after the new President takes office in January. More from the Bloomberg report:
While the [Treasury] department will bypass some government contracting rules, as the legislation allows, it says it plans to put a formal and transparent process in place to hire the private-sector help. The department may also tap the Federal Deposit Insurance Corp. to manage the mortgage portfolio.
…While the new law gives the Treasury power to inject capital directly into the banking system, department officials say their focus will be to help banks get rid of illiquid assets.
…[Vincent] Reinhart [of the American enterprise institute] says Paulson will take his time setting up asset- buying competitions such as reverse auctions, in which the government would accept the lowest price offered by banks selling a type of asset. “Auctions are complicated,” Reinhart said. “If you’re talking about mortgages, there is a very significant information disadvantage to the government relative to the private sector, so they have to be really careful about the way they structure those auctions.”
…The plan sets up a Troubled Asset Relief Program, or TARP, available to “any financial institution” that meets the Treasury’s conditions. Residential and commercial mortgages and mortgage-backed securities are the primary targets, although the Treasury and the Fed are able to add other asset classes as needed. The Treasury also will set up an insurance fund for mortgage securities that will charge premiums.
…Banks won’t be allowed to sell assets to the Treasury for more than what they paid, unless they purchased the assets from another bank already in bankruptcy or conservatorship. Congress instructed the Treasury to issue conflict-of-interest guidelines, so banks don’t take unfair advantage of the new program.
Paulson Statement on Emergency Economic Stabilization Act
Washington- By acting this week, Congress has proven that our Nation’s leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans.
The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans.
This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy.
There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.
We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.
For more coverage of this issue, click the TARP tag below—the bill was officially called the Emergency Economic Stabilization Act of 2008, and includes broad economic provisions but as for the purchasing of illiquid mortgage securities, Paulson calls this the Troubled Asset Relief Program—we’ve tagged our content TARP accordingly.