Paulson Rescue Plan: What’s In It & What Dissenters Want In It


We all know by now about the $700 Billion Paulson rescue plan he’s been attempting to stampede through Congress for the last week. But do you really know what’s in it? Do you know what those against it want in the plan before they sign on?

What Hank Wants

Let’s take a look at the three most important measures in the Paulson Plan:

(1)The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets [Sec. 6].

Let’s look at this more closely. This measure will allow him to purchase the mortgage “related” securities. The verbiage is really important here. Notice the plan doesn’t say “mortgage-back securities or whole mortgage, but mortgage “related” securities. The reason for this is the truly underwater investments crippling the balance sheets of investment institutions and banks, is the mortgage derivative investments.

A mortgage derivative is an investment product that really increase returns when things go well, and REALLY rack up loses when things don’t. Racks up losses so quickly and so large it freezes the whole secondary market function for mortgage capital…at least that’s what Paulson is contending. These investments are then sliced and diced into sub-products many of which are worthless now with no hope of recovery.

Can buying worthless investments make the banks whole again and by proxy then free up the secondary mortgage market? If you were contemplating bankruptcy due to some bad “investment/purchase” decisions and decided to have a garage sale to unload all your bad choices. Do you think selling me your 50 inch Plasma TV for $100 is going to make you whole again?

It won’t…but I digress. I’ll discuss whether the plan “works” or not next week.

(2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [Sec. 10];

Pretty self-expalinatory…the Fed lends the US the money and in order to allow the Fed to print the money, the national debt ceiling must be raised. This is what puts taxpayers on the line for the payment of this rescue plan.

(3) best of all: “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” [Sec. 8].

This proviso is what I call the “Hank as King” measure allowing the Treasury Secretary to act without impunity, supervision, or regulation with his decisions on what to buy, what to pay, and what to ask for in return.

Isn’t it the lack of oversight, regulation, and prudent financial choices that created this mess in the first place. Now we are being asked to allow it again?

Wow! Paulson has no shame adding that power in to Section 8. It’s funny a “Section 8” is also the code which allows for a military discharge for being crazy…and I think Hank is a little crazy if he thinks anyone is going to sign on to this!

Want Dissenters Want

The Congressional leaders who are currently voicing opposition to the rescue plan say they won’t pass anything that doesn’t contain provisions that have some accountability, require the government to negotiate an equity position in exchange for their investment (ala AIG), limit corporate executive compensation and/or the paying of dividends to stockholders, and mandate loan modifications to help home owners in foreclosure on mortgage assets the government buys.

Time will tell if this is more grand-standing than real objections.

Would this Paulson rescue plan work even if it passed? Could it make things worse?

That’s the topic for next week…so stay tuned…

About Author

Rob K. Blake, a 15 year veteran of the mortgage industry, is a renowned public speaker, author, and former radio talk show host. His blog,, is dedicated to educating mortgage consumers, mortgage providers, and investors about both mortgage and housing markets.

1 Comment

  1. You are correct,The Commerce Clause was raised and substantially discussed during oral arguments. Its “absence” from the briefs was explained as a background for the tactic of the suit, i.e., they assumed the Act was constitutional under the Commerce Clause to attack it on other bases. In other words, Act was conceded to be constitutional under the Commerce Clause for the purposes of the suit and the court assumed as much, for the sake of argument, in its ruling. I doubt Justice Kennedy is trying to make a sub silentio ruling and Scalia and Thomas are simply making that clear (in a concurrence that praises the majority’s proper application of Casey, no doubt, without overruling Stenberg).

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