Corporate & Securities Law

May Treasury Buy Newly Issued Securities of Ailing Financial Firms?

Last week I posted about Lucian Bebchuk’s thoughtful bailout plan, which would have expanded Treasury’s powers to include the ability to make direct investments in ailing financial firms (as opposed to just buying their distressed assets). I was under the impression the bailout legislation didn’t provide Treasury with such authority. An article in today’s WSJ, though, suggests otherwise.

The article reports:

The Treasury Department is under pressure to show meaningful results from its newfound authority to buy $700 billion of distressed assets, which Congress approved last week. Treasury is expected to begin buying assets within a few weeks through the use of auctions. But if market conditions continue to deteriorate, it could make use of another tool at its disposal: investing directly in troubled companies.

Treasury has the power to directly inject capital into a failing firm by taking a significant equity stake. In an unusual statement issued Monday, the President’s Working Group on Financial Markets, noting that “conditions in the U.S. and global financial markets remain extremely strained,” said Treasury could “directly strengthen the balance sheet of individual institutions.”

Such a move, however, is likely only to occur if a firm is teetering on the brink of collapse and poses a systemic risk to the financial sector, according to people familiar with the matter.

What gives? Did the ultimately enacted bailout legislation permit the sort of direct investment Prof. Bebchuk advocated? Or does Treasury possess independent authority to purchase securities issued by ailing financial firms? Or is Treasury just exaggerating the scope of its authorization?

Full post as published by Truth on the Market on October 07, 2008 (boomark / email).