Several recent diaries and front page posts have focused on the problems of the changes in the bailout program: Ian Welsh, Dean Baker, and Scarecrow have pointed out that Paulson followed the ruts of the Bush administration in picking out a proposed course of action and mulishly insisting on it in the face of the facts on the ground, and using all sorts of trickery to evade statutory duties. A central criticism has been the delay in getting the program up and running.

I think this delay gave activists a chance to get Paulson to do something right, in shifting to direct investment, and offers us further chances to get more done right.

There are two areas where we can have an effect. First, Paulson can’t do the cash injection without first reporting to the “appropriate committees”. This appears in the definitions section, Section 3(9)(B) of the bailout bill (the first section 3) defines troubled assets to include:

any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.


The “appropriate committees” are defined in Section 3(1) to be the Committee on Banking, Housing, and Urban Affairs, the Committee on Finance, the Committee on the Budget, and the Committee on Appropriations of the Senate; and the Committee on Financial Services, the Committee on Ways and Means, the Committee on the Budget, and the Committee on Appropriations of the House of Representatives.

This gives all of us an opportunity to influence the members of these committees to take action on matters we think are important.

The second chance arises from the requirement that Paulson publish his policies for implementing the program, contained in Section 101(A):

The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘‘TARP’’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.

Subsection (b) says that the requirement for publishing policies is not intended to slow down implementation of the bill, and it won’t, but it will give everyone an opportunity to influence the policies rather quickly. The policies should come quickly, because they will insulate the Treasury from the possibility of being sued, or really screwing up on the conflict of interest problems, ably summarized by Alan Blinder in today’s NYT.

Here’s my list of important items.

1. Major equity stakes. If a lender has to get protection, the Treasury should insist on a huge stake. This is crucial to insuring that the institution has seriously sought private investment. If the private sector won’t invest, it is likely because the institution is sicker than we think, and if we are going to bail it out, we should get serious protection. Equally important, if the institution knows it will have to give a serious stake to the public investor, it won’t be shy about trying to give up a bit less to the private sector investor.

2. Real restrictions on compensation. Paulson, ever anxious to protect his buddies, seems to think he can avoid imposing real restrictions on compensation through direct injection of capital, but that looks wrong on two counts. First, the statute imposes compensation restrictions on any institution that sells any troubled asset. Look at Section 111(B):

(1) IN GENERAL.—Where the Secretary determines that the purposes of this Act are best met through direct purchases of troubled assets from an individual financial institution where no bidding process or market prices are available, and the Secretary receives a meaningful equity or debt position in the financial institution as a result of the transaction, the Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance. The standards required under this subsection shall be effective for the duration of the period that the Secretary holds an equity or debt position in the financial institution.

This section will also require rules. We can influence the rules by raising the issues with the appropriate committees.

The second reason Paulson should impose special limits is that he is required to protect the taxpayer. It is silly to argue that people relying on public money should get huge salaries that come directly out of our pockets. And there is no reason to think he is limited to the weak provisions of the Bailout Bill. He can impose whatever conditions he thinks necessary to protect taxpayers.

3. Strong Financial Covenants. Ian Welsh and Dean Baker think we should get voting stock. I don’t disagree, but I worry about the possibility of myocardial infarction among republicans if we got voting stock at the outset. We can achieve whatever we want by use of strong financial covenants in the instrument defining the rights of the instrument the Treasury is buying. Our securities should get voting rights if specified conditions about performance of the institutions are not met. We could limit cash compensation to the executive class. We could bar dividends until we are out. We could insist on a preferential return. We can require reports. We can set minimum financial ratios, like debt to equity, cash on hand, limits on investments in credit default swaps and other new toxic waste, and so on. There is no limit on this, and we should insist that Paulson take aggressive action to do it. We have lots of oversight in place to move this forward.

This is no time to give up. This is a time to redouble our calls and e-mails to insist on full protection of our interests.