Despite all the constraints Congress wrapped around him, Treasury Secretary Henry Paulson is about to become the most powerful mortgage financier of the modern era.
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 to his proposal. 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 recovers, administration officials worry that generally healthy companies may be discouraged from getting involved – thereby reducing the effectiveness of the rescue effort.
Whether that will be a big problem remains to be seen, however, and for the rest, Paulson's 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 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 home owners.
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 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?”