Paulson, Bernanke & Co. are learning just how diabolical the legislative process can be. Their $700 billion financial rescue program is meant to buy toxic assets from US banks and financial companies.

Since the bill was sent up to Capitol Hill as the weekend began, members of Congress have asked that individual mortgages be propped up under the legislation. Paulson has requested that foreign banks with US operations be included. Some representatives and senators want executive compensation at bailout targets curtailed

In a move which could push the value of the assistance program well above $1 trillion, Paulson is considering casting an extremely wide net of salvation. According to Bloomberg, "The change to potentially allow purchases of instruments such as car loans, credit-card debt and other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress."

The terms "increase in size" lacks the hyperbole to describe the size of the tent that will be erected if everyone’s interests are included.

The sad part of this mess, is that the money required today to fix this system, which has too many moving and broken parts will still be inadequate.

One of the most obvious and frequently mentioned problems with the new the Paulson-Bernanke reconstruction is that as banks sell mortgage-backed paper below market, they will be forced to write down the assets and take new, and perhaps significant charges. That will cause losses, probably into the tens of billions of dollars. To offset this, the financial firms will have to raise more money, dilute shareholders, and drive down their stock prices further. What was meant to save the system could undermine it, especially if banks cannot find the new investment they need. Sovereign funds have sworn off investing in US banks.

If the mortgages of every man, woman, and child are to be saved along with their credit card debt and car loans, and new bank losses are to be financed as well, the size of the pool of capital required could move closer to $2 trillion. 

If housing prices, at the core of the disintegration of the system, do not rise, even this amount of medicine won’t save the patient.

Douglas A. McIntyre

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