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Bush Bail-out Plan: Treating the Symptoms and not Curing the Disease

On September 20, 2008, the Bush Administration submitted proposed legislation to address our current economic crisis.  The proposal gives the Treasury Secretary unprecedented authority and at least $700 billion to spend.  But why are we addressing symptoms: troubled mortgage-backed securities and not treating the underlying problem: subprime mortgages.

Unprecedented Authority

President Bush’s proposed legislation gives complete control over the purchasing of “troubled assets” to Treasury Secretary Henry Paulson.  One major problem with the proposal is that there is no oversight of the Treasury Secretary’s actions:

Sec. 8. Review.

Decision by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

So, Secretary Paulson can do what he wants with $700 billion.  This is an incredible amount of authority for one person especially given the extent of the supposed problem.  The lack of accountability is one reason why the mortgage crisis began and the Bush Administration wants to continue the lack of accountability with this proposal.

Where is the Transparency?

Why are the Bush Administration and Congress keeping this a secret?  If we are going to leverage the future of our children then we need to know the extent of the problem.  We have the technology put a presentation or Adobe Acrobat file online for all to see including independent economists.  We are being blackmailed into paying for a problem or crisis that we don’t know the full extent of and we are giving the former CEO of Goldman Sachs, Secretary Paulson, absolute authority to spend at least $700 billion.  We must demand to know the extent of the problem.

The Devil is in the Details

If you want to know the truth about a proposed law you have to read the language.  Check this out:

Sec. 6.  Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

What does “at any one time” mean?  This does not sound like a hard set limit.  This can be interpreted to mean that Secretary Paulson could spend $700 billion immediately upon passage then a couple of months later if the $700 billion is paid down then spend some more.  If interpreted this way Paulson could spend more than $700 billion.

The definition of “mortgage-related assets” is what should make this proposal a non-starter.  This proposal gives Secretary Paulson the authority to purchase any “mortgage-related assets” from a financial institution.  Here is the definition of “mortgage-related assets”:

The term “mortgage-related assets” means residential and commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued before September 17, 2008.

Wait “commercial mortgages”!!!  So, the U.S. government can conceivably be bailing out real estate development loans or other commercial loan that Secretary Paulson wants to buy.  I thought this supposed mortgage crisis began with home mortgages or residential mortgages.  This definition could cover any financial scheme that was conjured up by an investment banking firm to further spread risk but may have little connection to actual home mortgages.  Could it be that credit default swaps are actually threatening the stability of the markets?  That is just speculation because, again, we don’t know the extent of the problem.

Focus on the Real Problem

The real problem started with home mortgage market particularly subprime mortgages.  Why not shore up this problem first?  According to the Center for Responsible Lending, in 2007, there was $1.3 trillion of subprime mortgages outstanding.  Most these mortgages are adjustable rate mortgages (ARM) that have reset or are scheduled to reset within the next year to much higher interest rates.

Restructure all outstanding subprime mortgages to fixed rate mortgages and eliminate any existing prepay penalty provisions from them.  The new fixed rate could be based on the cost of living in a certain area.  Don’t lower the principal of the loan just the interest rate.

A HUD-approved Housing Counselor can review the financial situation of a subprime borrower to determine if the borrower can afford the new mortgage loan.  If they cannot afford the mortgage loan then they must forfeit the house.  If approved, the borrower should be given the option of agreeing to the new terms or forfeit the house.  This would be a one-time offer and a subprime borrower has a limited time to decide what to do.

All forfeited houses can be purchased by the U.S. government at fair market value.  Any outstanding mortgage balance would be paid by the U.S. government to the mortgage lender/owner.  These forfeited homes then would be listed with a HUD-approved real estate brokers for resale.

This proposal would go to the heart of the problem and may end up costing less than $700 billion.  It would provide some structure and certainty to jittery financial markets.  It would preserve some home ownership for people.  This proposal would not be an overnight fix like the Bush Administration’s proposal, but so what.  Maybe, the credit markets need to slow down until the markets can clear out the mess created by financial institutions using mortgage-backed securities and complex derivative schemes.

Any legislative proposal regarding our current economic situation must define the problem, limit the scope of authority of the Treasury Secretary and specifically define what assets will be purchased.  If we are to bail out financial institutions then we must demand some form of restitution that could take the form of ownership or other claim to future earnings of the financial institution taking advantage of this corporate welfare.  President Bush’s current legislative proposal is a blank check that we cannot cash.

Please let your senator and congressperson know that we need accountability in any bail-out proposal.