Treasury given significant leeway in creating plan to buy toxic debt

— -- It will be up to the Treasury Department to figure out how to spend the money to execute the biggest financial rescue since the Great Depression.

Now that Congress has voted approval on the $700 billion financial rescue package, the legislation gives Treasury significant leeway over how it is to run the program under which it will bid in auctions on troubled assets.

Although it will likely be weeks before the government has a formal plan in place, the administration isn't starting from scratch. Staffers from Treasury and the Federal Reserve have been meeting for months to come up with such a plan to deal with toxic mortgage debt in case such an emergency were to come up. And Treasury Secretary Henry Paulson convened experts to devise a strategy.

The legislation specifies that Treasury present a plan within 45 days of passage of the bill. It's unclear if Treasury will need the full 45 days, or when the first auction would be held once it announces a plan.

Treasury will have a new division to set up the program — the Office of Financial Stability. Leaders at the Federal Reserve, Federal Deposit Insurance Corporation, Comptroller of the Currency, Office of Thrift Supervision and Housing and Urban Development will have consulting roles.

Treasury also will have to keep a close eye on conflict-of-interest issues as it hires asset managers — many of whom likely will come from Wall Street — to execute the auction program. Paulson has said the administration has to rely on outside help because it doesn't have the expertise to devise and execute a program. But some are concerned that Paulson is himself a creature of Wall Street.

"The language in this bill is vague enough that it could be implemented as a well-conceived stabilization plan or a huge transfer from taxpayers to Wall Street," says Stephen Shore, assistant professor of economics at Johns Hopkins University. "Worryingly, that decision is in the hands of the former head of Goldman Sachs."

Shore says Congress should have waited for the program to be designed first and then voted rather than give the government free rein to devise its own plan.

Treasury also must now figure out how it is going to enter into the insurance business.

Included in the legislation is a measure establishing a program that would allow financial institutions to insure their mortgage-backed securities against default. Like when drivers insure their cars, banks would pay Treasury a premium to cover their mortgage-related assets. If homeowners default on their mortgages, Treasury would pay face value of the security.

Treasury will have to establish a system to determine the premium prices and needs to decide if there will be deductibles and how big they will be. All of that is left up to the government's discretion in the bill.