Brooklyn Law School
From the SelectedWorks of David J Reiss

Fall September 29, 2008

Hail, PaulsonDavid J Reiss, Brooklyn Law School

Available at: https://works.bepress.com/david_reiss/20/

WEEK OF September 29, 2008 • VOL. XXXI, NO. 39

Hail, Paulson

We the people beseech you to remember us.
BY DAVID REISSThe Roman Republic had an effective response toextreme crisis. The Senate would authorize theselection of an individual to serve as the magister
populi. He would have extraordinary powers over the threebranches of government to respond to the crisis (a rebellion perhaps) and was the only officer who was exceptedfrom legal accountability for his official actions.
The magister populi (the “people’s master”) was known colloquially in the Roman Republic as the dictator, the one who dictates to everyone else. The office served that Republic well forabout 450 years—until the last dictator, Julius Caesar, decided
he’d rather have an empire (and be declared a god, to boot).
We do not have a similar crisis-management tradition in ourRepublic, but we grant the executive branch wide latitude intimes of emergency. Secretary of the Treasury Henry Paulson Jr.
has asked Congress to grant him the power to spend $700 billionof the public’s money to respond to what may be the greatest
American financial crisis since the Great Crash of 1929.
And, though as of press time the situation remains
unsettled, our Senate and House of Representatives seem
prepared to go along, at least in significant part. Sure,Congress is reportedly insisting that Paulson have an oversight board, and the money may be handed out in installments, but in the end, $700 billion speaks for itself.
Just about everyone, myself included, agrees that bold
action is needed—no one thinks we should be fiddling around
while Wall Street burns. Yet, beyond whatever specific bill
may pass initially, it behooves the citizens of our Republic
to think carefully about Paulson’s initial request and what itmeans for how this financial crisis will ultimately be handled.

NONREVIEWABLE
Paulson’s initial proposal of Sept. 20 shows the tendency
to find an unfettered savior to handle the crisis. The pro-posal would authorize him to purchase for a period of twoyears and “on such terms and conditions as determined by”
himself as Treasury secretary, “mortgage-related assets
from any financial institution having its headquarters inthe United States.” Paulson would be authorized to takeany actions that he “deems necessary to” execute this task,
including owning up to $700 billion worth of mortgagerelated obligations.
Paulson’s decisions would have been “non-reviewable andcommitted to agency discretion, and may not be reviewed
by any court of law or any administrative agency.”
This proposal builds on the broad authority that theTreasury successfully sought to address the problems withFannie Mae and Freddie Mac. That bailout provides aprecedent for legislation that the Treasury was able to pushthrough Congress in what seems to be record time, measured in days and not months.
Paulson’s decision to place Fannie and Freddie in conservatorship soon after he had the authority to do so also
shows that he is a man of decisive action: He came, hesaw, he conquered the threat posed by the two companies.
Although clearly contemplating a narrower grant ofpower than that given to a magister populi, Paulson’sproposal was as extraordinary in terms of the unfettereddiscretion it would vest in him, its budgetary implications,and the absence of any legal accountability for the actions
Paulson takes to further his proposal.

SPECIAL INTERESTS
Nonetheless, Paulson’s proposal had its attractions.
Paulson can act faster than Congress, and unlike elected
senators and representatives, he can act to address the acutesystemic risk without being overwhelmed by the agendas of
every interest group hurt by the slow-motion meltdown of
the financial sector over the last year and a half.
We all know what can happen in Congress. As professor Cass
Sunstein has noted, one of the main criticisms of regulation

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is that it is “only purportedly in the public interest.” Instead, it“turns out on inspection to be interest-group transfers designed toprotect well-organized private groups—such as business interests
or unions—at the expense of the rest of the citizenry.”
Indeed, immediately after the bailout was made public,lobbyists for a broad range of constituencies descended on
Congress to make the case for the special circumstances of
their clients.
When Congress listens to these lobbyists, as it often
does, the result can be that a new regulatory regime ends
up functioning largely as a trough from which certain
favored interests get to feed. Here, the very financial services firms and professionals who helped to bring about
this crisis are salivating over the possibility of profitingfrom its solution.

ABOVE SUSPICION
It is not easy to choose between a Treasury dictatorand a lobbyist feeding frenzy. To go with the first option,Paulson himself must be above suspicion.
There is general agreement that his personal motives are
pure and that he is acting in what he sees as the best interests of the financial system (even though he let Lehman
Brothers, a competitor of his former employer, Goldman
Sachs, fail and acted just in time to save Goldman fromthe worsening crisis).
Nonetheless, Paulson is a product of and clearly identifies with the financial services sector. He has no historyof addressing the concerns of taxpayers, consumers, orhomeowners except to the extent that their concerns are
met as a byproduct of a well-functioning financial system.
Congress, which is justly maligned for taking steps thathave exacerbated this crisis (eviscerating consumer protections on the Republican side; running interference for theFannie and Freddie duopoly on the Democratic side), iscurrently focusing on the concerns of the long-suffering
taxpayer, consumer, and homeowner. These are three over-lapping groups that are more blameless than not in this crisis. Their concerns were in the backseat before the crisis,
as the mortgage industry sold them a bill of goods.
Paulson wants to keep them in the backseat during
the crisis to ensure that the focus remains on systemicrisk. But that will certainly mean that they remain in thebackseat after the crisis subsides. If their interests are notaddressed now, it is unlikely they will ever be.

ORDINARY AMERICANS
And their concerns should be consistently addressed as
the government responds to this unfolding crisis. And so,
the Democratic response, tempered by the very real fearof a spiraling systemic risk, is the right one under thesecircumstances. Although mightily imperfect, it is the best
way to go in all but the most threatening circumstances.
The times don’t call for a people’s master, but rather aman of the people, one who will lead everyone through tosafety from the whirlwind confronting us.
Paulson and Congress should supplement his initial proposal with provisions that ensure accountability and transparency. Paulson should also address the legitimate concerns of his current employers, the citizens of the UnitedStates, and provide explicit and appropriate relief for homeowners through widely available programs of workouts,
loan modifications, and bankruptcy reforms.
Such a response, though open to the all-too-typicalabuses of our system of government, is the right one fortoday’s crisis. If he can both restore faith in the financial
system and address the needs of the citizenry, history will
hail Paulson as one of our Republic’s greatest Treasury
secretaries and cover him, figuratively at least, in the laurel garlands that will be his due.
David Reiss is an associate professor of law at Brooklyn
Law School. His research focuses on the secondary mortgage market.

Reprinted with permission from Legal Times. © 2008 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.
For information, call (800) 933-4317 or ltreprints@incisivemedia.com. ALM is now Incisive Media, www.incisivemedia.com.