Paulson crafts his new role

Wall Street now runs through Washington.

Well, maybe not literally. But the Oct. 3 enactment of a massive rescue bill, plus the government bailouts that preceded it, may have changed fundamentally the relationship between the US capital and the nation's financial markets – and perhaps free-wheeling capitalism itself.

Treasury Secretary Henry Paulson will be the cartographer of a coming age of constraint, with vast powers to buy and sell bad assets, and hundreds of billions of taxpayer dollars at his disposal. Decades of deregulation appear to be at an end, with US agencies eager to impose new constraints on Wall Street's remaining firms.

"We can look forward to a new wave of financial regulation in the months and years ahead," says Richard Sylla, a historian of financial institutions and markets at New York University in an e-mail exchange. "Paulson put that on the agenda last winter, and it seems even more pressing after what has occurred from then to now."

So far regulators don't seem to be wasting time. The Treasury Department did not wait for the House's final approval of the bailout bill before beginning to plan for its implementation, according to US officials.

Secretary Paulson has already begun lining up outside advisers to help the government figure out how to price, buy, and manage bad mortgage-based assets. Paulson, and his immediate successors, won't exactly be kings of all the markets they survey.

Congress added significant oversight provisions to the bailout bill.

Among those intended to watch Treasury's actions closely will be a special Inspector General, and a five-lawmaker Congressional Oversight panel.

Still, the powers invested in the Treasury chief by the just-passed legislation remain unprecedented. Paulson can set up the new TARP (Troubled Asset Relief Program) in whatever manner he chooses. He gets to determine what institutions qualify for help.

As to what the US should pay for these assets, the new bill says only that the head of Treasury has to make purchases at the "lowest price that the Secretary determines to be consistent with the purposes of this Act ...."

At least we all know what the Treasury will be buying. It will be those much-discussed toxic loans – mortgage-based securities that have gone bad because real estate prices have fallen.

Except when they aren't. Here's the bill's secondary definition of troubled assets: "Any other financial instrument that the Secretary ... determines the purchase of which is necessary to promote financial market stability."

The revised bailout bill does keep a tighter hold on the nation's purse strings. It only allots the Treasury a first installment of $250 billion for the program, toward a cap of $700 billion.

But in essence Congress is still telling Paulson to create his own plan, implement it, and then get back to them with the results, said experts at an Oct. 1 Brookings Institution seminar.

"He's still getting a blank check," said Thomas Mann, Brookings senior fellow in governance studies. "Just with some whistles and bells on it."

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