(CNSNews.com) – House Minority Leader John Boehner (R-Ohio) told CNSNews.com on Tuesday that he understood from the beginning that part of the $700 billion granted to the U.S. Treasury Department by the bailout bill he supported earlier this month could be used to purchase bank stocks despite ambiguity in the bill’s language.
An economist and multiple sources on Capitol Hill, however, told CNSNews.com that the language in the bill appeared to limit the Treasury’s purchases to “troubled assets” rather than stocks, and that not all lawmakers understood that a small subsection of the bill authorized Secretary of the Treasury Henry Paulson to make purchases at his own discretion.
“Under the plan, everyone was well aware that the Treasury had broad authority to invest in our economy,” Boehner told CNSNews.com. “There were suggestions as early as the first meeting that we had in Speaker’s Pelosi office with Chairman of the Federal Reserve Bernanke and Treasury Secretary Paulson about investing in the banks in order to get more capital in the system.”
“I was not at all surprised or shocked that the Treasury decided that moving capital into banks was in their best interest and could help this problem quickly,” Boehner said.
Secretary Paulson announced on Oct. 10, that the Treasury Department planned to use part of the first $250 billion installment from the bailout money to purchase bank stocks instead of “troubled assets” as suggested by much of the bill’s language.
"We are working to develop a standardized program that is open to a broad array of financial institutions," Paulson said on Oct. 10.
The official summary of the bailout describes the bill’s authority to purchase assets: “A bill to provide authority for the Federal Government to purchase and insure certain types of troubled assets.”
Within Wall Street and the financial community, the term asset would almost never be used to refer to stocks, which are considered by banks to be liabilities because they must pay dividends on them, Christian Menegatti, lead economic analyst at RGE Monitor, told CNSNews.com.
“Almost anyone in finance would be surprised to discover that the word asset actually refers to stocks in this case,” Menegatti said. “They used the wrong word by talking about assets throughout the whole bill without ever mentioning the word liability. For banks, stocks are not assets but liabilities. They are not the same thing.”
But the 451-page bailout bill, also known as the Troubled Asset Relief Program (TARP), apparently redefines the word asset in a five-line subsection, granting Paulson broad discretion on how he spends the bailout money.
A troubled asset, according to TARP, is “any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.”
This distinction was not clear even to all the congressmen voting on the bill, a senior House Republican aide who participated in negotiations on the bailout package, told CNSNews.com.
“From the very beginning, we didn’t know exactly what these assets were,” another Republican aide told CNSNews.com. “We knew that the bailout would allow the Treasury to buy mortgages from banks but there was some debate about what else they could buy.”
The staffer said that many congressmen were caught in the “whirlwind urgency” of the emergency stabilization program and did not fully understand the legislation before voting for it.
“The vast majority of people didn’t understand this [redefinition of asset] was in the bill,” another Republican aide told CNSNews.com. “You could say we were negatively surprised when Paulson made this announcement, because we thought the bill’s intent was to purchase troubled assets.”
“At a certain level it’s not really surprising that the bailout has morphed into this – this is what happens when you pass a bill that at its core was big government principle,” the aide said.
The Wall Street Journal reported on Oct. 15 that the Treasury had “essentially forced” nine major U.S. banks into selling a total of $125 billion in stocks to the federal government, a move that marked the first time since the Great Depression that the United States government had purchased equity ownership in banks.