Just Enrichment?

October 2nd, 2008 by Phil Mattera

Buried inside the Big Bailout bill that the Senate just approved and the House will vote on tomorrow is a section that has received insufficient attention. Titled “Preventing Unjust Enrichment,” Section 101(e) states that the Treasury Secretary, when spending his $700 billion bank roll, “shall take such steps as may be necessary to prevent unjust enrichment of financial institutions.”

This is one of the numerous safeguards added to the original bare-bones proposal submitted to Congress by Secretary Paulson. But what exactly does it mean? One might argue that the whole bailout is a way of unjustly enriching Wall Street and the big banks.

The language of the bill provides a very narrow definition: The Treasury is not supposed to pay more for an asset than the financial institution paid for it in the first place.

Isn’t this superfluous? The point of the bailout is to allow banks and others to unload “troubled” assets – in other words, ones that have been sinking in value. Unless Paulson intends to spend like a drunken sailor, there would no reason to pay more than the original price. The real issue is whether the feds will pay the depressed market price for those assets or something a bit higher.

It’s not unusual for legislation to have redundant safeguards, but if you keep on reading in the bill you will see that there is a big exception to the seemingly unnecessary provision: It “does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings.”

As E. Scott Reckard pointed out in the Los Angeles Times earlier this week, this seems to open the door for banks that have bought weaker competitors during the crisis – such as JPMorgan Chase, which swallowed Washington Mutual last week – to sell the toxic assets they inherited in those deals to the federal government at a big profit. Is the sky the limit in how much Paulson can pay for their junk?

Much was made of the fact that the shotgun marriage meant that the Federal Deposit Insurance Corporation did not have to pay out anything to WaMu depositors, but JPMorgan may make out like a bandit when it comes time to play “let’s make a deal” with Treasury’s asset managers.

One Response to “Just Enrichment?”

  1. Joe says:

    American Look for yourself Facts; Columbia Encyclopedia: Federal National Mortgage Association The price usually soars when interest rates fall and plummets when interest rates rise, since the mortgage business is so dependent on the direction of interest rates. Fannie Mae’s corporate credibility was damaged by revelations (2004) that it manipulated its earnings from 1998 to 2004, in part to maximize bonus payments to its corporate executives. Americans As a US bond and note futures trader at the CBOT for 20 years. Also CME seat holder trader I can surely say that ever since Greenspan left the fed has become corrupt or stupid. To move interest rate the way they have was to keep the corruption from being easly discovered. Why has it now hit the fan? Easy the interest rate is at 1% and they want to lower it to 0%. That is what America is worth 0. We must demand enforcement of law and make them repay ever last cent. They have been unjustly enrichend. Look for your self. The fed has moved rates ever time Freddy and Fannie needed the books to look good. More in one year than Greenspan in ten.

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