Paulson Plan

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The "Paulson Plan", named after the US Treasury Secretary, Henry M. Paulson Jr., was introduced by the US administration as a response to the 2007-2008 financial crisis. It was passed into law as part of the "Emergency Economic Stabilisation Act 2008" [1]. The Act enables the United States Treasury to purchase "toxic" mortgage-related assets from banks, and provides for the assistance of houseowners who are threatened with foreclosure. The proposal to purchase toxic was abandoned on November 12th.

Background

On 24th September 2008 the President of the United States warned of the risk that, without immediate action by the Congress, the country could slip into financial panic leading to the closure of major sectors of the economy and to a "long and painful recession" [2].

The Plan

The Act authorised the phased introduction of a 'Troubled Assets Relief Program' (TARP) with the following provisions:

  • the authorisation of the purchase and management of "troubled assets" from US banks (in return for equity-related warrants);
  • the requirement to propose an insurance scheme to guarantee troubled assets;
  • the required introduction of a plan to mitigate foreclosures;
  • the establishment of a Treasury Office of Financial Stability, an interdepartmental Financial Stability Oversight Panel, and a Congressional Oversight Panel; and,
  • The authorisation of the expenditure of $700 billion of which $350 billion is subject to further congressional authorisation.

The Act also includes provisions to set limits on executive remumeration and generally to prevent the unjust enrichment of participants.

On October 14th 2008, in a departure from the US government's initial intentions, President Bush announced plans to purchase equity in US banks and guarantee their loans [3] and details were later released by the Treasury Department[4].

Congressional approval

Critics of the initial version of the plan came from both the left and the right of the political spectrum. Senator (and Democratic Presidential candidate) Barack Obama criticised it on the grounds that it did not provide adequate protection for those facing foreclosure, that it would reward Wall Street executives for failure, and that it needed better oversight as well as provisions for repayments to the taxpayer [5]. Left-wing critics argued that it had been hypocritical of Wall Street to have preached the free market ideology and then to have demanded government help when things got tough. Libertarians and free-market economists were also critical, arguing that the bail-out would create a precedent that would lead investors to believe that investment is risk-free, and that it would greatly increase taxation. [6].

Those arguments prevailed when the Bill was first placed before the House of Representatives but when, after massive stock exchange losses throughout the world, a modified version was put forward, it was passed into law by the Senate and the House.

Second thoughts

On 12th November Secretary Paulson announced that it had been decided that the purchase of troubled assets was "not the most effective way to use TARP funds [7].

Execution

An account of the support to American banks provided as a result of the execution of the remainder of the plan is to appear in the article on bank failures and rescues

References

  1. Emergency Economic Stabilisation Act 2008
  2. Presidential Address to the Nation 24 September 2008
  3. Presidential statement on the economy 14th October 2008
  4. US Government Action to Strengthen Market Stability Treasury Department press release 14th October 2008
  5. Patrick Healy, Obama Says Bailout Should Include 4 Conditions, The Caucus Blog, New York Times, September 23, 2008
  6. Reason Magazine, The Great Bailout Brouhaha, September 25, 2008
  7. Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update US Department of the Treasury, November 12 the 2008