The good news? The current administration now appears to understand the gravity of the financial situation. But that may be the only clear good news so far to come out of an unprecedented power grab by Treasury secretary Henry Paulson and administration officials, including an intrusion into free markets unlike any other in history. Saying that the American economy may fail if Congress fails to act on his proposal, Treasury secretary Henry Paulson is pushing for powers that have little historical precedent in our country, a sort of blank check that he says will help end this crisis. In various published reports, Paulson is quoted as saying that “it pains me tremendously to have the American taxpayer put in this position but it is better than the alternative.” That alternative, adminstration officials have repeatedly asserted, is the collapse of much of the American financial system; it’s an approach that has certainly shocked Congressional officials into considering the proposal. Many, however, are now beginning to come to grips with the sort of absolute power that’s really being sought by administration officials. “He’s asking for a huge amount of power,” said Nouriel Roubini, an well-known economist at New York University, in a Bloomberg report on Sunday. “He’s saying, ‘Trust me, I’m going to do it right if you give me absolute control.’ This is not a monarchy.” Indeed, Paulson is reaching for unchecked power here — the proposal sent to Congress on Saturday stipulates that “decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Read the full text of the proposal. The Treasury is seeking authority to buy up to $700 billion in bad assets — mortgages, residential mortgage-backed securities, commercial mortgage-backed securities — although the total amount may end up being much higher. According to the proposal, the Treasury wants authority to buy up to $700 billion “outstanding at any one time,” meaning the total amount purchased may be much, much greater. ‘A catch-22’ on pricing While market participants conveyed to HW just how close much of the nation’s debt markets came to collapse last week, many were increasingly uncomfortable with the Treasury’s response after having time to consider it. Others were downright apocalyptic in their assessment of the bailout proposal. And still others were convinced it would work. “Buying bad assets from solvent institutions is a really bad idea. I think they need to wait for them to go bankrupt,” said one equity fund manager, who asked not to be named. “They had a liquidity crisis on their hands, but that was not the way to fix it.” A senior bank executive told HW that he thought the plan would work. “Everyone’s going to pick it apart, and it’s going to cost a lot, but I think this gets banks lending again,” he said, under condition of anonymity. Most key trade organizations agreed. “While we only have the outline of a program, with many details sure to be debated and filled in in the coming days, this is a good start – a program created within the current government infrastructure than can be implemented quickly,” said John Courson, COO of the Washington-based Mortgage Bankers Association, in a statement Saturday. Managers of distressed mortgage funds that focus on buying bad mortgages from institutional sellers were focused on the issue of pricing: one fund manager told HW that Treasury officials will “run into the same pricing buzzsaw that everyone else has.” “I don’t know how this plan solves the pricing issue, or how the Treasury plans to acquire these assets,” said the manager, whose fund is targeting the purchase of roughly $1 billion in distressed mortgages. “And even if they can overcome pricing hurdles, and learn the due diligence side of the business, they’re still in a catch-22 over pricing.” That catch-22, various sources said, may be the most critical part of the Treasury’s plan. Should the Treasury buy low, in the interest of protecting taxpayers? Such an approach would leave selling institutions in the undesirable position of taking huge losses; one bank executive suggested to HW that “if the Treasury wants to buy everything up at 20 cents, they’d better be ready for a whole lot of bank failures.” Or should the government buy high, a move that would protect bank capital but put taxpayers in the position of absorbing enormous losses? Neither option is a good one, HW’s sources say. Buy low, and make the credit crisis worse than it already was; buy high, and put the economy on a crash course with Japanese-style inflation. Another source waxed darkly philosophic about the proposal’s broader import. “It’s amazing to me that in 8 years, one administration can so thoroughly undo over 200 years of work laid by our founding fathers, and can do it while looking straight into a camera and saying ‘we’re talking billions of dollars’ without saying ‘we’re talking about mortgaging America’s future, combined with causing a mild bout of hyperinflation’,” said the source, an attorney representing mortgage creditors, who asked not to be named in this story. All of which merely underscores the broad range of strong sentiment existing around the plan. Main Street versus Wall Street As HW reported on Friday, Congressional Democrats have their own misgivings about writing a blank check for Wall Street, while leaving Main Street largely in the lurch. While administration officials have said that a bailout of the financial markets will help everyday borowers, it’s clear that Democrats so far remain unconvinced. Senate Banking Committee Chairman Christopher Dodd (D-CT), appearing on ABC’s “This Week,” reiterated his position that if help was being directed to Wall Street there was also a need to provide help for people on Main Street. “Bad lending practices and lax oversight are the root cause of this crisis,” Dodd said in a statement on Friday. “As such, a comprehensive and constructive proposal must include relief for millions of American homeowners facing foreclosure.” “Democrats will work with the administration to ensure that our response to events in the financial markets is swift,” House Speaker Nancy Pelosi said in a statement on Saturday. But she also said that Democrats would look to reduce foreclosures directly with the move, alluding to a desire to add measures for borrower relief to the Treasury proposal. While Senator Charles Schumer (D-NY) said that a failure to act would risk putting the country into a depression, he also signaled a belief that borrower provisions could be added in within the week timeframe being targeted. “I have told [Paulson that] we need changes related to housing, we need to put the taxpayer first ahead of bondholders, shareholders,” Schumer said on “Fox News Sunday,” according to a report by the Associated Press. Democrats have also signaled that they will push to gut executive pay for firms bailed out by the Treasury, a move that has received pushback from some Republicans as complicating what they want to be a simple proposal to give the government unprecedented power. “We need this to be clean and to be quick,” said Paulson in a television interview on Saturday.