RGE - How authorization to recapitalize banks via public capital injections ("partial nationalization") was introduced - indirectly through the back door - into the TARP legislation
The reality is that the TARP legislation passed by Congress (formally the Emergency Economic Stabilization Act) does not in any explicit way allow for such recapitalization of banks via injection of public capital. The US Treasury has initially resisted including explicitly such authority in the Act for several reasons: the banking industry that helped drafting the legislation was against it; there was ideological resistance to the idea of the government taking equity - however preferred - in financial institutions; there was concern that being explicit about public recap of banks would lead to banks' resistance to participate in the toxic asset purchase program. That is why the Treasury formally resisted putting any explicit wording of public recapitalization of banks into the legislation. So how come Treasury now says that its first priority is to inject public capital in banks? And where is Paulson getting such authority since there is nothing formally explicit in the Act to allow such recapitalization? This is a fascinating story that is worth telling in full detail. Here are below those details...
The reality is that the TARP legislation passed by Congress (formally the Emergency Economic Stabilization Act) does not in any explicit way allow for such recapitalization of banks via injection of public capital. The US Treasury has initially resisted including explicitly such authority in the Act for several reasons: the banking industry that helped drafting the legislation was against it; there was ideological resistance to the idea of the government taking equity - however preferred - in financial institutions; there was concern that being explicit about public recap of banks would lead to banks' resistance to participate in the toxic asset purchase program. That is why the Treasury formally resisted putting any explicit wording of public recapitalization of banks into the legislation.
So how come Treasury now says that its first priority is to inject public capital in banks? And where is Paulson getting such authority since there is nothing formally explicit in the Act to allow such recapitalization?
This is a fascinating story that is worth telling in full detail. Here are below those details...
I expect it will prove geezer in paris right, but it would be nice to read it directly. Truth unfolds in time through a communal process.
... So where did Paulson get the authority to do such capital injection when there was no such authority in the wording of the legislation? Several of us had been explicitly and feverishly talking to Congress and the Fed and other senior officials (last week before the passage of the legislation) to include such explicit wording in the legislation; such campaign included the October 1st column by George Soros in the FT where he strongly argued - as many of us had recommended - to design legislation that explicitly allowed for public capital injection in banks. At first, Congressional aides we contacted were confused on whether the wording in the legislation did allow such public recapitalization was permitted or not. They pointed out to us that several sections of the legislation could be interpreted as allowing such public capital injection.... But we pointed out that this interpretation of "assets" as including preferred shares, left to itself, was a real stretch of the meaning of the legislation as preferred shares and common shares and sub debt are liabilities - rather than assets - of the bank. Thus, it was important to clarify that "any other financial instrument" was not limited to assets but also included institution's liabilities such as stock, preferred stock, subordinated debt, senior debt....Since it was too late - by Wednesday last week - to explicitly modify the legislation to allow for explicit wording on this matter and since Treasury was resisting such late explicit changes (that would have jolted the banking industry) the tool that was used (in full agreement with the House and Senate leadership) to allow for such interpretation was to have Representative Jim Moran use the October 3rd House floor debate right before the final vote to put on the legislative record such interpretation. See the following important exchange between Jim Moran and Barney Frank that is now on the legislative record of the House: Mr. MORAN of Virginia. Thank you, Madam Speaker. I won't take that much time. I do want to thank the chairman for his masterful leadership on this bill, and I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways: By buying their stock, debt, or other capital instruments; and, two, by purchasing bad assets from the institutions, in coordination with existing regulatory agencies and their responsibilities under this legislation, as well as under already existing authorization for prompt, corrective action and leastcost resolution. Mr. FRANK of Massachusetts. Will the gentleman yield? Mr. MORAN of Virginia. I'd be happy to yield. Mr. FRANK of Massachusetts. I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this, and we should be clear, this is one of the things that this House and the Senate added to the bill, the authority to buy equity. It is not simply buying up the assets, it is to buy equity, and to buy equity in a way that the Federal Government will able to benefit if there is an appreciation. ... So, all is well that ends well. A totally flawed and ineffective legislation that did not explicitly allow to do the right thing - recapitalize banks with public capital injections - and was rather aimed to do the wrong thing (wasting $700 bn of taxpayers' money to buy only toxic assets at an inflated price) was rescued at the last moment right before the House vote via an interpretation of the wording of the legislation in the record of the House that allowed such recapitalization. ...They effectively and rightly allowed for a partial nationalization of the US financial system (the only solution that will prevent a systemic financial meltdown) without even exactly knowing that they were voting for this. So a huge plan that was sold as spending $700 bn to buy toxic waste of banks - and where the public discussion was all and only about this purchase of toxic assets - was finally and luckily rectified (with the hard and explicit efforts of many of us) to allow for a partial government takeover of such financial institutions.
...
So where did Paulson get the authority to do such capital injection when there was no such authority in the wording of the legislation? Several of us had been explicitly and feverishly talking to Congress and the Fed and other senior officials (last week before the passage of the legislation) to include such explicit wording in the legislation; such campaign included the October 1st column by George Soros in the FT where he strongly argued - as many of us had recommended - to design legislation that explicitly allowed for public capital injection in banks.
At first, Congressional aides we contacted were confused on whether the wording in the legislation did allow such public recapitalization was permitted or not. They pointed out to us that several sections of the legislation could be interpreted as allowing such public capital injection.
But we pointed out that this interpretation of "assets" as including preferred shares, left to itself, was a real stretch of the meaning of the legislation as preferred shares and common shares and sub debt are liabilities - rather than assets - of the bank. Thus, it was important to clarify that "any other financial instrument" was not limited to assets but also included institution's liabilities such as stock, preferred stock, subordinated debt, senior debt.
Since it was too late - by Wednesday last week - to explicitly modify the legislation to allow for explicit wording on this matter and since Treasury was resisting such late explicit changes (that would have jolted the banking industry) the tool that was used (in full agreement with the House and Senate leadership) to allow for such interpretation was to have Representative Jim Moran use the October 3rd House floor debate right before the final vote to put on the legislative record such interpretation. See the following important exchange between Jim Moran and Barney Frank that is now on the legislative record of the House:
Mr. MORAN of Virginia. Thank you, Madam Speaker. I won't take that much time. I do want to thank the chairman for his masterful leadership on this bill, and I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways: By buying their stock, debt, or other capital instruments; and, two, by purchasing bad assets from the institutions, in coordination with existing regulatory agencies and their responsibilities under this legislation, as well as under already existing authorization for prompt, corrective action and leastcost resolution.
Mr. FRANK of Massachusetts. Will the gentleman yield?
Mr. MORAN of Virginia. I'd be happy to yield.
Mr. FRANK of Massachusetts. I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this, and we should be clear, this is one of the things that this House and the Senate added to the bill, the authority to buy equity. It is not simply buying up the assets, it is to buy equity, and to buy equity in a way that the Federal Government will able to benefit if there is an appreciation.
So, all is well that ends well. A totally flawed and ineffective legislation that did not explicitly allow to do the right thing - recapitalize banks with public capital injections - and was rather aimed to do the wrong thing (wasting $700 bn of taxpayers' money to buy only toxic assets at an inflated price) was rescued at the last moment right before the House vote via an interpretation of the wording of the legislation in the record of the House that allowed such recapitalization.
They effectively and rightly allowed for a partial nationalization of the US financial system (the only solution that will prevent a systemic financial meltdown) without even exactly knowing that they were voting for this. So a huge plan that was sold as spending $700 bn to buy toxic waste of banks - and where the public discussion was all and only about this purchase of toxic assets - was finally and luckily rectified (with the hard and explicit efforts of many of us) to allow for a partial government takeover of such financial institutions.
However, I think Roubini is wrong on one point: I am sure Barney Frank and Jim Moran knew exactly what they were doing, and they coordinated deliberately to make those statements on the House floor precisely in order to get this critical option on the record as being covered in the bill.
Thank you, Melanchthon, for posting this. Truth unfolds in time through a communal process.
I would like all laws to be well written, appropriately and unambiguously. But I am more interested in the spirit of the law than in its wording alone. I don't want executive power abusing the letter of the law by deliberately promoting an understanding that, while it might be defended semantically, clearly goes against what the law was trying to say.
That's what a signing statement does. It says "I deliberately choose to misunderstand, and F you by the way".
Whereas an exchange on the House floor is pretty much saying: do we all understand that this is what we mean? Far better to have it in the text of the law, but if it's not possible for timing reasons, it at least comes before the vote and cannot be compared to a Bush signing statement. "The womb that spawned that thing is fertile yet"
Legislative intent - Wikipedia, the free encyclopedia
In law, the legislative intent of the legislature in enacting legislation may sometimes be considered by the judiciary when interpreting the law (see judicial interpretation). The judiciary may attempt to assess legislative intent where legislation is ambiguous, or does not appear to directly or adequately address a particular issue. When a statute is clear and unambiguous, the courts have said, repeatedly, that the inquiry into legislative intent ends at that point. It is only when a statute could be interpreted in more than one fashion that legislative intent must be inferred from sources other than the actual text of the statute.
In law, the legislative intent of the legislature in enacting legislation may sometimes be considered by the judiciary when interpreting the law (see judicial interpretation). The judiciary may attempt to assess legislative intent where legislation is ambiguous, or does not appear to directly or adequately address a particular issue.
When a statute is clear and unambiguous, the courts have said, repeatedly, that the inquiry into legislative intent ends at that point. It is only when a statute could be interpreted in more than one fashion that legislative intent must be inferred from sources other than the actual text of the statute.
German jurisprudence seems to allow a comparable approach.
By the same token, a signing statement might also be considered a legitimate attempt to resolve an ambiguity.
The problem, of course, comes when these instruments are abused (as when unambiguous provisions are voided by a signing statement) or used beyond their appropriate scope (i.e. the Franks exchange would seem to be a very tenuous basis on which to establish legislative intent). "Ideas or the lack of them can cause disease." - Kurt Vonnegut
Legislative languages seem to have evolved intentionally more obscure, so that full understanding (even reading through) would be beyond capabilities of legislators. A very convenient way to pass or interpret laws "as needed".
Legislative language is by nature obscure because it is both old and has evolved a highly complex structure - the purpose being to minimize ambiguity.
I suspect that laws that at first glance seem readily comprehensible are those most subject to sweeping and arbitrary interpretation: "simple" terms like "antisocial behavior" can be (and was, under National Socialism) stretched to cover almost anything.
So I'll take the law framed in obscure language to one couched in accessible terms any day. "Ideas or the lack of them can cause disease." - Kurt Vonnegut
A particular phenomenon is absurd length of some law acts, up to over thousand pages. You heard of the Patriot Act, numerous pork-barrel projects and "hidden" details in US lawmaking. Can we compare obscurity and length of laws in various countries, or of different times?
As a concrete example, ponder by what intentions The Second Ammendment is formulated like this:
A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.
What is "Militia", why it is stressed first? How a right can be "well regulated"? Is "necessary to the security" a declaration or a condition?
'A well regulated Militia' meant (then) the temporary deputizing of citizens to train and fight to defend the state/territory - under military command and under military rules.
The right to keep and bear arms was to fulfill that duty of serving in the militia, not for any other reason - according to the amendment as it was understood at the time it was written.
Sentence construction changes. Vocabulary changes. ;-) You can't be me, I'm taken
Later in the 19th century, a 'posse' of deputized sheriffs would be formed under the same principles - they brought their own horses too.
The military draft is a form of deputizing, except you are not allowed to bring anything of your own ;-) You can't be me, I'm taken
Frank Delaney ~ Ireland
horses with bears arms would be very scary though Life should consist in at least fifty percent pure waste of time, and the rest doing what you please.
Does this apply to the phrase "any other financial instrument" as used in the TARP bill? Truth unfolds in time through a communal process.
"Instrument" solves the problem of using the word "Asset" since the same instrument looks like an "Asset" or a "Liability" depending on which side of the transaction you sit.
Generality removes ambiguity. It also gives greater discretion. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Do you think the striking vagueness/generality of "any other financial instrument" was intentional to start out with (i.e. in order to sneak the stock injection plan past the pack of resistant legislators)? Truth unfolds in time through a communal process.
