The big news today is that Henry Paulson claims to have found, in the $700 billion TARP package passed last Friday, the power to invest some of that money directly in banks to shore up their capital. As one of the people who actually read the bill (OK, I skimmed most of it), I was puzzled by this, because my reading (like everyone else’s) was that Treasury would only be allowed to take equity stakes in companies who participated in the sale of troubled assets to Congress. However, if you look at the comments by Congressmen in the Time article and on Calculated Risk, you’ll see that there are statements in the Congressional record saying that the intent of the bill is to allow direct equity purchases. A curious fact that you learn in law school is that, in interpreting a bill, it is not just the words of the bill that matter; the record of committee and floor discussions can also be used in interpreting a bill. So it seems like, in this case, Congress consciously inserted language into the discussion in order to give Treasury this power, or Treasury is seizing on some passages in the discussion to claim that power.
At this point this is unlikely to generate too much controversy, because most people involved, including the authors of this blog, think it would be a good thing for Treasury to take some of the $700 billion and invest it directly in recapitalizing banks (which is what the UK is doing). Of course there will be issues of detail to be worked out, and the Treasury Secretary has an awful lot of discretion in this matter, but this is definitely a step forward.
Oh, and I should mention: Planet Money broke this story first.
The Baseline Scenario 
dear baseline, small point. the graphical layout of your blog is slightly confusing. you put your author and dateline at the bottom of the post. however, the thin dark line at the top border of the author field serves to separate the text from the author. wouldn’t putting this thin dark line under the blue field do a better job of boxing the info together? i know it sounds idiotic, but i find my mind troubled by this constantly as i scroll thru your stuff. sorry to trouble you with such a small matter…first time visitor
Y’know, I was not at all excited about the government buying worthless securities, but actually investing the banks themselves is a much better idea. Frankly, earlier in the week I’d have said that the best we could hope for out of all of this was a one-way trip for Paulson to the Federal Prison System in honor of his many obvious conflicts-of-interest, but now I actually have a little hope for the future. I mean, why in Hell would anyone sign taxpayers up to buy assets above market price? And if the taxpayers WEREN’T going to pay more than market price, then obviously the market would have already cleared the assets without the gov’t’s involvement. Heh. At least recapitalization through prefered equity purchase is a touch more ethical.
It is not too hard to find the provision that Paulson “claimed” to have found. Section 113(d) of the bill provides for purchases of “a warrant giving the right to the Secretary to receive nonvoting common
stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate”. Moreover, section 3 of the bill defines “troubled assets” which may be purchased as including “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.”
113(d) does not provide authority. The passage you cite is a condition that must be met in order for the Secretary to “purchase, or make any commitment to purchase, any troubled asset under the authority of this Act.” It says the Secretary cannot purchase any such assets unless he is given warrants; it doesn’t say he can buy warrants.
You’re right that 3(9)(B) is where Paulson gets the authority. At the time of the debate, virtually everyone thought that this was likely to mean other asset-backed securities, like securities backed by credit cards or auto loans.
Well, section 113(d) sort of bootstraps the authority to obtain ownership interests. Section 113 gives authority to buy troubled assets, and 113(d) requires that if troubled assets are purchased, warrants *should* accompany them. I say “should” because it is less that clear whether Treasury can purchase “troubled assets” without obtaining warrants; it may also be very significant that the warrants for future stock involve *non*-voting stock. So while Uncle Sam may get a preferential position, that ownership interest might not come with control.
That’s also a good point. The issue of the government actually voting with its shares and in some cases appointing the Board and CEO is a controversial one I think Treasury wanted to avoid. Some people think it’s only fair. Other people think that the specter of government interference will discourage private capital. Still others think it is socialism.