Meet the New Most Powerful Person in the World

For the next twelve to eighteen months, whoever is the United States Secretary of the Treasury will now be the most powerful person in the world. The bailout is passed and while politicians on both sides will claim that they made improvements, oversights, and and made sure to put in enough safeguards and checks so that this isn't a blank check to the Secretary of the Treasury.

The check isn't blank but it sure is close. Whatever so called safeguards, oversight, and checks the Congress put in, it is almost entirely inconsequential. For instance, here is one provision Andrew Busch pointed out yesterday.

From the portion of the bill addressing TARP: "PREVENTING UNJUST ENRICHMENT.—In making purchases under the authority of this Act, the Secretary will take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of as sets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings 3 under title 11, United States Code." This should mean that anyone who has taken over a troubled US financial institution with MBS that has been written down can sell those securities to the US Treasury at a profit. I wonder how much this has come into play during the recent rash of takeovers or forced mergers has occurred?

So, it appears the only restriction on Paulsen is not to pay more for the asset than the original financial institution paid. Of course, this is asinine. The assets he is buying, he is buying because they have lost enormous value. There was no chance he would pay more than the original instution paid anyway. Furthermore, that restriction is lifted anyway if he happens to buy an asset from a newly merged company anyway.

So, really this is pretty much a $700 billion blank check for Paulsen and whoever follows him. He will decide what assets to buy, for how much, and from what institution. Of course, the potential for abuse, fraud and corruption is enormous. For the most part, what is bought and what isn't is up to the discretion of the Treasury Secretary. Sure, he has to keep Congress abreast of developments however does anyone really think anyone in Congress will have the first clue what he is doing either way?

So, now, Paulsen will once again take on the role of investment banker, one he had for a long time as head of Goldman Sachs. Only this time he will represent the U.S. Treasury and he will have buying power well beyond anything he could ever have dreamed of when he worked for Goldman. How he treats his former employer will be a good first test as to whether or not any fears of corruption are warranted. Also, unanswered is the question of whether or not foreign companies, or at least their U.S. subsidiaries, can sell their troubled assets to the Treasury.

What is clear is that about $700 billion along with the fate of the entire world financial system is now in the hands of Hank Paulsen and whoever follows him as the U.S. Secretary of Treasury. Like I said, meet the new most powerful person in the world.