November 17, 2008

Has Hank Paulson Ever Read The U.S. Constitution?

In October, we raised the issue of what it means for American democracy having a Treasury Secretary who uses public money as he pleases (here and here). And we have followed up with several posts in November. Now, the Center for American Progress has published an interesting comment on the last “Hank” Paulson's press conference, and we think it's worth reading part of it (see the full text here).
Treasury Secretary Paulson yesterday made it absolutely clear that he had no intention of using the authority granted to him by Congress under the $700 billion Troubled Asset Relief Program, or TARP, to purchase troubled mortgage-related assets or to provide relief to struggling homeowners facing foreclosures. The message was clear to homeowners facing foreclosure and their neighbors watching the value of their homes plummet—drop dead.
Having already spent $250 billion to recapitalize banks with no strings attached and an additional $40 billion to restructure and sweeten the now $150 billion bailout of U.S. insurance giant American International Group Inc., there remains only $60 billion available to Treasury to spend before having to go back to Congress to request the second $350 billion tranche appropriated by Congress for TARP. But Paulson told Congress none of that money will be used to purchase mortgage-related assets—despite that being the premise under which the staggering sums of money were granted.
Paulson was quite open in his about-face: “In crafting the financial rescue package, we and the Congress agreed that Treasury would use its leverage as a major purchaser of troubled mortgages to work with servicers and achieve more aggressive mortgage modification standards. Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.”
Translation: Having foreclosed making an investment in mortgages for the purpose of restructuring them, we now need to scramble to find an alternative.
The Center for American Progress has long advocated for the transfer of troubled mortgages out of the hands of the current holders of these assets because they are either unable or unwilling to modify the loans so that families can pay their mortgages, shifting these mortgages into the hands of an entity able and willing to make the necessary modifications to provide benefits to homeowners and investors alike. With simple modifications to the so-called Real Estate Mortgage Investment Conduit, or REMIC rules, barriers to participation by mortgage servicers in mortgage restructurings would be eliminated, and Treasury could purchase the mortgages.
The discount at which mortgage-backed securities are currently valued in the secondary market by institutional investors provides ample room for modifications to be made while still offering Treasury—and by extension the taxpayers—a reasonable return on these investments. But given that Treasury is not using the money to deal with the housing crisis, what are they going to use the money for?

We should only add that Article I, Section 8, of the U.S. Constitution clearly prescribes (among other things): "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law, and a regular Staement and Account of the Receipts and Expenditures of all public Money shall be published".