WASHINGTON — After a grueling two weeks of debate and a near breakdown in the political system, a bill to help stabilize the financial markets was enacted Friday — but the hardest work is just beginning.
The Treasury Department is expected within a few weeks to begin buying illiquid assets in order to send a signal to the marketplace. To do so, it plans to quickly hire asset managers, identify appropriate assets, determine a way to value them, and establish an auction system for financial institutions.
"They are like a kid in a candy shop with a new 10-dollar bill: There is so much to buy, and they have so much money," said Laurence E. Platt, a lawyer at K&L Gates. "The first step is, they have to turn chaos into structure; they have to take the ambiguous language and turn it into eligibility criteria."
Under the law, approved by the House Friday on a 263-to-171 vote and signed shortly afterward by President Bush, the Treasury must first set up an Office of Financial Stabilization to buy troubled assets. But the law gives the Treasury power to move on an interim basis — and most observers expect fast action.
"The first thing they are going to do is some kind of direct purchase from a bank of some sort," said Brian Gardner, an analyst with KBW Inc. "We may see something like this in the next couple of weeks to send a message to the markets: 'We have this up and running; we're serious about this; and we are going to use it.' "
Sources said Friday that the Treasury would start by hiring five to 10 asset managers and hold its first auction in four weeks. The agency is expected to hire roughly two dozen bankers, accountants, and lawyers as employees and contractors. It is still settling on a pay scale and conflict of interest criteria required by the new law.
The law gives the Treasury broad running room to start buying $250 billion of illiquid assets immediately from banks and other companies so long as it consults with the federal banking agencies and the Housing and Urban Development Department. It can ask the president to release an additional $350 billion without any further congressional action.
Mr. Platt said that the Treasury must better define eligible types of institutions, troubled assets, and asset managers but that, most importantly, it must decide "where they first should deploy capital."
Instead of going through a formal rulemaking process, the agency only has to put forth loosely defined policies and procedures explaining its system for identifying, purchasing, and pricing troubled assets and its criteria for hiring asset managers to help make such decisions.
Such policies need to be made public within two business days of buying a troubled asset, or 45 days after the law's enactment.
"I assume they are going to start moving pretty quickly," said Oliver Ireland, a partner in the Morrison & Foerster law firm.
He said his firm is trying to assess how far along the Treasury is in devising policies.
"It takes a little while to get organized... If you were really fast-tracking it, you would have an implementation team working before the thing passed to try and hit the ground running and come out with something," he said.
The most crucial moment will come once the markets know the program is operational, he said.
"It's the message it sends to the market: that it's safe to go back in the water, that the kind of disruptions that you've seen in the market are going to come to an end," Mr. Ireland said.
Though the Treasury must detail its policies, it has wide latitude to create them.
"Unlike typical statutes there's not this specific delegation of authority to engage in rulemaking; they are basically told, 'Just do it'; they really will have a lot of discretion," said Mr. Platt, though he added that the department would probably act prudently.
Treasury Secretary Henry Paulson is "not going to just take a bundle of cash and stand out on the street corner and say, 'Who wants to sell me their loans?' " he said.
In a speech on Friday, President Bush said his administration would get to work quickly but carefully.
"This will be done as expeditiously as possible, but it cannot be accomplished overnight. We'll take the time necessary to design an effective program that achieves its objectives — and does not waste taxpayer dollars," he said.
Mr. Paulson took a similar tack, hinting that some details could emerge this week.
"In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs," he said in a statement. "Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy."
The law comes with a host of deadlines, requirements, and details.
Buying assets is divided into two categories. The Treasury can make direct purchases through a no-bid process, or it can buy assets through a reverse auction program that accepts bids from companies willing to take the biggest haircuts.
The Treasury is expected to buy simpler securities first. Mr. Paulson has told lawmakers that the agency can probably handle roughly $50 billion of purchases per month; the agency must issue a detailed report disclosing its purchases within seven days of spending the money.
To use the program, institutions must submit to guidelines on executive compensation, which the Treasury is required to spell out within two months. It must submit a broader report on regulatory restructuring by April 30.
The law says that a financial stability oversight board comprising the heads of the Securities and Exchange Commission, Fed, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Department of Housing and Urban Development, and Treasury must meet within two weeks of the first use of purchase authority.
Within 60 days, the Treasury also must clarify its process for expanding foreclosure prevention efforts on the loans that underlie the securities it buys and any whole-loan purchases. This includes an explanation of how it plans to use its authority to set up loan guarantees and credit enhancements — a provision lauded by FDIC Chairman Sheila Bair as a potential way to speed up loan modifications.
The Treasury is also tasked with using, and encouraging servicers to use, a refinancing program that took effect Oct. 1, insuring reduced-cost mortgages under the Federal Housing Administration.
Besides buying assets, the Treasury also must set up an insurance program to cover uninsured mortgage-backed securities.
The Treasury has 90 days to report to Congress details including assessing risk-base premiums, but it is not required to actually use it.
