Hold It - The Public Hasn't Seen Any Rescue Plan Yet

Patrick Casey
While the irony of watching the Democrats (approval level - 9%) support and force through a President Bush (approval level - 34%) crafted economic bailout bill that Gallup just announced has public approval of only 22% is wonderful, the fact of the matter is that something has to be done -- and quite soon.

The only focus of this rescue should be action to restore liquidity to the credit markets. That's the problem -- the economy is freezing up. Anything else should addressed in separate legislation.

The most alarming thing about the current (Friday 9/26/08 - 11:45AM) situation is that with all of this talk about a "deal in place", the public has not been allowed to see the specifics of any of it. The only thing even remotely close to a clear explanation of what Chris Dodd and Barney Frank are doing is the following set of agreed upon principles, which should scare the living daylights out of the public (and which is why conservatives in the House popped a gasket yesterday afternoon). This was released, by the way, yesterday afternoon after 4:00PM - when Dodd and Frank thought it was a done deal.

Agreement on Principles

1. Taxpayer Protection

a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

c. Requires most profits to be used to reduce the national debt

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

b. Establishes strong oversight board with cease and desist authority

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary's authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary's authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation

a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

b. Requires loan modifications for mortgages owned or controlled by the Federal Government

c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America's housing needs

4. Funding Authority

a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

b. final $350 billion is subject to a Congressional joint resolution of disapproval

This is garbage, written solely to give Congress political cover (and buy a few votes). This ‘legislation' doesn't solve anything. It nationalizes the nation's financial industry. And it rewards the individuals responsible for this crisis in the first place -- the borrowers who had no business getting loans and the lenders who enabled them. I repeat -- it doesn't effectively deal with the underlying issue causing this mess: bad and non-performing mortgages.

Something similar to the Paulson part of the plan is necessary, and quickly. It would admittedly only deal with the securitized assets part of the problem -- the so-called toxic assets. But it is important for Treasury to establish a market where none exists right now, for the frozen mortgage-backed securities now clogging up the world's economy.

As for the financial institutions themselves, we already have in place an entity that can take over and liquidate troubled banks: the FDIC. We should throw public money into that and allow the banks that made bad decisions go out of business. As the problem with the failing banks are not deposit related, but bad loans and bad asset management, FDIC deposit insurance should be expanded to cover most, if not all cash deposits by individuals. That would prevent bank runs and panic.

What about the banks that are teetering on the brink of collapse? Well, the Wall Street Journal reminds us that under a 1991 law, the FDIC has the authority to assist struggling banks by providing them with public capital. That should be triggered at once, with conditions (no free hand outs).

Propping up failed borrowers, as Congress is attempting to legislate, is populist clap-trap and will only make any attempt to price the securitized "toxic assets" more difficult. The 94% of responsible, mortgage paying taxpayers are already on the hook for the 6% who are not. It is wrong for the taxpayers to essentially take over paying insolvent borrowers' mortgages, allowing them live in their homes tax-free. That's the underlying truth behind "a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure". We're just delaying the inevitable.

Let the foreclosures proceed. If necessary, create another temporary public entity that would purchase foreclosed assets at some reasonable discount in order to re-capitalize financial institutions. Then sell the houses when the market improves. That is the only way that the housing market will truly bottom out, and economic expansion can begin. Because of aggressive sub-prime lending, the housing market (prices, etc.) became artificially inflated. We can't allow that to continue, or to happen all over again.

As for the argument that more foreclosures will only make things worse? For some individuals, of course. But as it affects the main cause of our current credit freeze, that's simply not true. The market is already assuming that the cash flow (which the mortgage-backed securities are based on) from the sub-prime market loans are zero, and the asset value is not much better. That's why the credit market is frozen. Setting a very real "mark to market" asset cost via foreclosure with eventual resale is the way to go. Cash-flow on the non-performing assets will cease, of course, but as I've said that's already been factored in.

Knowing that Treasury authorized, funded, and is standing by to be that mortgage-backed securities "buyer of last resort" should, in of itself, start credit flowing again. To support the re-stabilization of the credit market for the rest of us, the Fed should be willing to pump substantial cash into the market, as it is already doing.

More specificity about what's currently on the table and solutions to our crisis would be nice. But neither we, nor the general public, have seen it yet - which is the most frightening part of this whole entire process. We're trusting the people who created this mess in the first place - Congress - to get us out of it.

Anyone feel secure about that? Thank God for the conservatives in the House.

While the irony of watching the Democrats (approval level - 9%) support and force through a President Bush (approval level - 34%) crafted economic bailout bill that Gallup just announced has public approval of only 22% is wonderful, the fact of the matter is that something has to be done -- and quite soon.

The only focus of this rescue should be action to restore liquidity to the credit markets. That's the problem -- the economy is freezing up. Anything else should addressed in separate legislation.

The most alarming thing about the current (Friday 9/26/08 - 11:45AM) situation is that with all of this talk about a "deal in place", the public has not been allowed to see the specifics of any of it. The only thing even remotely close to a clear explanation of what Chris Dodd and Barney Frank are doing is the following set of agreed upon principles, which should scare the living daylights out of the public (and which is why conservatives in the House popped a gasket yesterday afternoon). This was released, by the way, yesterday afternoon after 4:00PM - when Dodd and Frank thought it was a done deal.

Agreement on Principles

1. Taxpayer Protection

a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

c. Requires most profits to be used to reduce the national debt

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

b. Establishes strong oversight board with cease and desist authority

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary's authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary's authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation

a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

b. Requires loan modifications for mortgages owned or controlled by the Federal Government

c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America's housing needs

4. Funding Authority

a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

b. final $350 billion is subject to a Congressional joint resolution of disapproval

This is garbage, written solely to give Congress political cover (and buy a few votes). This ‘legislation' doesn't solve anything. It nationalizes the nation's financial industry. And it rewards the individuals responsible for this crisis in the first place -- the borrowers who had no business getting loans and the lenders who enabled them. I repeat -- it doesn't effectively deal with the underlying issue causing this mess: bad and non-performing mortgages.

Something similar to the Paulson part of the plan is necessary, and quickly. It would admittedly only deal with the securitized assets part of the problem -- the so-called toxic assets. But it is important for Treasury to establish a market where none exists right now, for the frozen mortgage-backed securities now clogging up the world's economy.

As for the financial institutions themselves, we already have in place an entity that can take over and liquidate troubled banks: the FDIC. We should throw public money into that and allow the banks that made bad decisions go out of business. As the problem with the failing banks are not deposit related, but bad loans and bad asset management, FDIC deposit insurance should be expanded to cover most, if not all cash deposits by individuals. That would prevent bank runs and panic.

What about the banks that are teetering on the brink of collapse? Well, the Wall Street Journal reminds us that under a 1991 law, the FDIC has the authority to assist struggling banks by providing them with public capital. That should be triggered at once, with conditions (no free hand outs).

Propping up failed borrowers, as Congress is attempting to legislate, is populist clap-trap and will only make any attempt to price the securitized "toxic assets" more difficult. The 94% of responsible, mortgage paying taxpayers are already on the hook for the 6% who are not. It is wrong for the taxpayers to essentially take over paying insolvent borrowers' mortgages, allowing them live in their homes tax-free. That's the underlying truth behind "a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure". We're just delaying the inevitable.

Let the foreclosures proceed. If necessary, create another temporary public entity that would purchase foreclosed assets at some reasonable discount in order to re-capitalize financial institutions. Then sell the houses when the market improves. That is the only way that the housing market will truly bottom out, and economic expansion can begin. Because of aggressive sub-prime lending, the housing market (prices, etc.) became artificially inflated. We can't allow that to continue, or to happen all over again.

As for the argument that more foreclosures will only make things worse? For some individuals, of course. But as it affects the main cause of our current credit freeze, that's simply not true. The market is already assuming that the cash flow (which the mortgage-backed securities are based on) from the sub-prime market loans are zero, and the asset value is not much better. That's why the credit market is frozen. Setting a very real "mark to market" asset cost via foreclosure with eventual resale is the way to go. Cash-flow on the non-performing assets will cease, of course, but as I've said that's already been factored in.

Knowing that Treasury authorized, funded, and is standing by to be that mortgage-backed securities "buyer of last resort" should, in of itself, start credit flowing again. To support the re-stabilization of the credit market for the rest of us, the Fed should be willing to pump substantial cash into the market, as it is already doing.

More specificity about what's currently on the table and solutions to our crisis would be nice. But neither we, nor the general public, have seen it yet - which is the most frightening part of this whole entire process. We're trusting the people who created this mess in the first place - Congress - to get us out of it.

Anyone feel secure about that? Thank God for the conservatives in the House.