Across the Curve

GSE Bailout Bill

According to draft legislation being debated on Capitol Hill, the Congress would grant sweeping authority to the Secretary of the Treasury to purchase obligations and securities of FNMA, Freddie Mac, as well as those of the Federal Home Loan System. It imposes no restrictions on the Secretary of the Treasury and says that he will determine the terms and conditions of the transactions as well as the amounts. The draft language contains an analytical section (brief) which specifically states that the authorizations of the section extend to purchases of equity.The draft authorizes sales of Treasury debt to fund the purchases. It goes one step farther and excludes those sales from the debt ceiling.

The legislative grant of authority would expire on December 31 2009.

I think that there are two interesting features to this story. First, there are no rules, restrictions or constraints on the Secretary of the Treasury. In this instance he has absolute and unlimited authority. I understand that he wants to fit the bazooka into his pocket but I think that it would be appropriate for Congress to at least offer some guidelines regarding when he could exercise the power. The draft language does nothing of the sort and leaves that decision to Mr Paulson and whomever President elect Obama appoints to succeed him.

It is also troubling that the legislation will exclude from the debt ceiling those Treasury sales made to fund these purchases. I am not an expert on the arcane provisions of the public debt but I believe that would be an unusual departure for the Congress. It would truly be a carte blanche.