The Volokh Conspiracy - The Loophole the Size of the Universe.

There have been many stories like this:

[I]f market conditions continue to deteriorate, [Treasury] could make use of another tool at its disposal: investing directly in troubled companies.

Treasury has the power to directly inject capital into a failing firm by taking a significant equity stake. In an unusual statement issued Monday, the President's Working Group on Financial Markets, noting that "conditions in the U.S. and global financial markets remain extremely strained," said Treasury could "directly strengthen the balance sheet of individual institutions."

The article, however, does not tell us where Treasury's authority comes from. Thom Lambert asks, "What gives? Did the ultimately enacted bailout legislation permit the sort of direct investment Prof. Bebchuk advocated? Or does Treasury possess independent authority to purchase securities issued by ailing financial firms? Or is Treasury just exaggerating the scope of its authorization?" A good question: the main objection to the bill among critics was that it failed to give Treasury this authority, instead authorizing it buy up mortgage-related securities, a more indirect approach to the crisis.

Let's look at the statute.

True, section 101(a)(1) seems to authorize Treasure merely "to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution…." But, as always, the work is done in the definitions. Look at section 3(9):

The term ''troubled assets'' means—

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) 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.

Only section (A) refers to mortgage-related assets. Section (B) refers to any other financial instrument -- more or less full stop. That would presumably include preferred stock issued by a distressed firm in return for a capital infusion from Treasury. It sounds odd to call the purchase of newly issued equity the purchase of a "troubled asset," but there you go.

So while commentators were complaining that the bill did not give Treasury sufficient authority to make equity infusions, it did so right under their noses.

	[Eric Posner, October 8, 2008 at 9:03am] Trackbacks The Loophole the Size of the Universe. There have been many stories like this: [I]f market conditions continue to deteriorate, [Treasury] could make use of another tool at its disposal: investing directly in troubled companies. Treasury has the power to directly inject capital into a failing firm by taking a significant equity stake. In an unusual statement issued Monday, the President's Working Group on Financial Markets, noting that "conditions in the U.S. and global financial markets remain extremely strained," said Treasury could "directly strengthen the balance sheet of individual institutions." The article, however, does not tell us where Treasury's authority comes from. Thom Lambert asks, "What gives? Did the ultimately enacted bailout legislation permit the sort of direct investment Prof. Bebchuk advocated? Or does Treasury possess independent authority to purchase securities issued by ailing financial firms? Or is Treasury just exaggerating the scope of its authorization?" A good question: the main objection to the bill among critics was that it failed to give Treasury this authority, instead authorizing it buy up mortgage-related securities, a more indirect approach to the crisis. Let's look at the statute. True, section 101(a)(1) seems to authorize Treasure merely "to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution…." But, as always, the work is done in the definitions. Look at section 3(9): The term ''troubled assets'' means— (A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) 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. Only section (A) refers to mortgage-related assets. Section (B) refers to any other financial instrument -- more or less full stop. That would presumably include preferred stock issued by a distressed firm in return for a capital infusion from Treasury. It sounds odd to call the purchase of newly issued equity the purchase of a "troubled asset," but there you go. So while commentators were complaining that the bill did not give Treasury sufficient authority to make equity infusions, it did so right under their noses.