Sticking points in bailout talks

Congress needs to act immediately. We are all going to have to pay. But this is nothing new; our political and financial systems were created on a model of shared responsibility. Regardless of how one feels about a "big business bailout", all of us will suffer if this fails to quickly materialize. The Bush plan needs greater oversight. None of the executives should be allowed Golden parachutes. None of the employees should be given "retention bonuses" to stay with their companies. But, overall It makes the most sense.

The foreclosure issues affect relatively fewer Americans, and most of us pay our mortgages on time. Most if us are not preparing to sell our homes. Housing does not need an immediate crisis type fix and can be addressed after stabilization of the financial services sector. This should not be linked to the financial services assistance package.

The patient is hemorrhaging and needs to be stabilized immediately. But Congress is insisting on including the housing issue, a "rehabilitation" issue, in the package. If we do not quickly bail out these companies, and if Congress digresses into partisan wrangling, then every person with a pension fund, ira, mutual fund investment, or other savings plan will suffer ( a majority of Americans). Then, nobody will be buying homes.

I generally prefer the democrats version. We do need a bailout, I'm sadly forced to agree. But in order for our system to work, the bailout has to hurt the people bailed out. The pure Paulson version does not.

In fact, in the pure version the incentive is for everyone to dump their trash on the Feds. Partly this is necessary to return liquidity to the market - the Feds have to pay above market prices for the junk by definition in order for this process to work.

But taxpayers should also get their money back. It seems to me that warrants or some other equity/profit participation by the federal govt, ala the swedish crash model, AIG and the GSEs would be the way to go.

The hard part is making the proposals punitive enough, while still making them attractive enough for banks to use. Something too punitve is counter productive.

That makes the compensation part tough, even though I personally don't think those responsible deserve to earn much - it makes a mockery pf pay for performance

I really appreciate the Democrats' additional changes to the bill. I think those
changes are necessary to prevent more abuses that taxpayers will have to pay
for. It would also be good for a non-partisan review board to monitor the activities
of the Treasury Secretary regarding this bailout and report their findings to the
taxpayers. If we are paying for this bailout, we should be updated on a quarterly basis as to how effective it is or not.

oh, the democratic proposal to

"Require that the government draft a plan to renegotiate the mortgages it purchases to help homeowners avoid foreclosure."

Shows amazing stupidity and financial ignorance. This proposal has little to do with buying mortgages, its mainly about buying mortgage backed securities. Buying the latter gives you no underlying control over the former, as anyone with basic knowledge should know. For those without, there's a good description in todays NY Times

The mortgage cramdown proposals could be helpful for underwater homeowners, and hence housing prices. Yes, they will inhibit mortgage financing in the future, but I'd guess by not that much. And they would help people stay in their houses far more than the current workout process, which frankly seems dysfunctional. I'd love to hear arguments for and against cramdowns.

Let me get this straight. The government wants to also bail out the people who were irresponsible and bought homes they could not afford based on irrational speculation by rewriting their mortgage that will eventually trickle down to me paying more tax dollars. They are the real reason why we are in this mess. Don't just blame the folks or corporations who sold them the mortgages. Most of the blame should fall on the irresponsible folks who bought at hyper inflated prices with the idea that home prices would continue to appreciate YOY at irrational levels. Oh...and by the way, how come nobody is pointing any fingers at the real estate industry who continually tried to hype up the real estate market by telling folks "it's always a good time to buy" or "that buying a home is the best investment they would ever make"? The realtors were also pushing people to buy homes so they could make a buck as well. They deserve just as much blame as the brokers who gave people these loans.

Plan #2 is superior to the Bush proposal. It can be passed rapidly, and the details filled in afterwards. A blank check in the hands of the very idiots who have put us into this mess is surely not the way to go!!!

Its funny that the very people who could have avoided this problem by working with homeowners to work out reasonable solutions to prevent foreclosures, but refused to, are now asking these very homeowners who have lost their homes, to bail them out of their bad debt , while the Bush administration does not want a provision to allow the courts to assist homeowners to keep their homes but wants to allow companies to dump off all types of bad debts using tax payers dollars.

Is no one shocked by the current national debt "ceiling" of 10.6 TRILLION? How much of that is owed to China, Russia, etc. ? Have the countries that are financing our spending on Iraq approved our request for this most recent bailout? The crisis is here, it is real and it is not going away soon even if the bail out goes forward. In fact, commentators have been hyping the new bailout on the theory that it will allow financial institutions to get back to business as usual which is illustrative of the depth of this problem.

I cant belieive i'm saying this but I prefer the bush plan. I didnt buy a house 3 years ago because i wasnt stupid and realized my income to price ratio was very high compared to historic comparisons.
I cant believe i might have to pay to subsidize someone else who got into a home.
Prices in Massachusetts are still very high compared to incomes.

I think its not unreasonable to restructure mortgages to avoid foreclosure, but it is unreasonable to just forgive the debt in the restructuring. A restructured first mortgage that is within the home-owners ability to pay along with a non-amortizing accrued interest second mortgage that has claim on any sale proceeds if the home-owner ever sells the house. The second does not have to be paid off in full at a sale, but it does limit the home-owners ability to get another second or home equity loan as well as assures that the home-owner is not rewarded down the road when they sell the house.

I think the same rule can be applied to the $700 billion fund that the government is setting up to buy securities. For every $1 of assets that they buy from financial institutions there should be a similar loan structure to the second mortgage above, limiting companies ability to access more debt. If the government is actually able to turn a profit (which I sincerely doubt) on the purchase of these securities, then they can forgive the debt that they issued to these financial institutions. Can even set it up that as the securities are liquidated from the portfolio the company's loan can be decreased pro-rata. If the companies ever want to get rid of that debt, they can take back the securities or wait until the fund is liquidated.

This is typical jump-on-the-meat-wagon politics. I agree with granting greater oversight, but the issue here is Wall Street, not foreclosures. Fix one thing at a time, or you end up with a bailout that will not be effective.

The Bush Administration shouldn't expect action on its proposed bailout for Wall Street to be any faster than its own action in the wake of Katrina.
Sterling Greenwood
Aspen Free Press

First, way to go Stacey for a cogent and succinct blog entry on this important topic!

There are parts of both bills that are terrible, generally I prefer the Dems version better. Some degree of transparency is required and some oversight. I don't like the bailout of the foreclosures, that only prolongs the downturn. I dont want my tax dollars going to keep someone in a home they cannot afford. Let them rent, its not the end of the world. When they talk about "people losing their homes" it sounds like they will go to live in a cardboard box on a heating grate. In reality they will go to live in a nice rental next to the people renting who were prudent with their money and are waiting to buy a home they can afford.
I also like the idea of taking an equity stake in a company that comes for a bailout. The whole point is to provide a "buyer of last resort". THat should mean that the bailout will be a painful option that is better than going bankrupt. I think thats what last resort means. As Bob Herbert in the times said, the banks are hopping up and down like children waiting to get candy from a piniata. Getting a bailout should be very painful to the firms.

The Paulson proposal isn't designed to help anyone except the banks and their CEOs, hence his insistence that they be allowed to walk off with, say, $2.5 billion in bonuses. This is just Patriot Act: The Sequel, using a "crisis" to pass every wish list item submitted by the corporate overlords who actually run this country. It will be hilarious to watch the financial system fail anyway after this cataclysmic ripoff is enacted.

Oh, and charles, cramdowns were a part of US bankruptcy law for years before lobbyists paid to have them banned, an event that did not, in fact, coincide with any reduction in mortgage rates. It boggles my mind anyone could object to them, except that most people don't know what they actually are. In a cramdown, mortgage principal is crammed down to the actual current value of the collateral. Well, no s--- Sherlock. You can't have a loan secured by collateral worth less than the borrowed amount in reality, so why should you have such a thing in legal fiction? The rest of the amount isn't "forgiven," it's simply recognized as being unsecured, and it goes into the pile with all the other creditors. Best part about cramdowns, they reduce moral hazard for lenders by giving a vigorous sigmoidoscopy to any idiot who lends more than the collateral is worth. They also reduce moral hazard for borrowers because, well, they only happen in bankruptcy, which always leaves a long-lasting impression on its victims.

I'm sure in the breathless rush to "save the system," this abomination will be passed with even more lipstick than Sarah Palin. If so, we will have blown the wad and no longer be able to afford real solutions. I give the US government about two years before the end, and by no means am I exaggerating for effect. It would behoove people to remember that most revolutions in history were in fact financial crises.

Makes sense Marcus, I hadnt known that cramdowns had been in place previously. Are they mandated to be the actual value of the collateral? If so, and there are no opportunities to game the system, cramdowns seem like a good thing - just pretty much doing what the banks workout depts should be doing.

Plan #2- It's a no brainer. Not only that, if Plan #1 goes through I may switch my party to Democrat. I think the USA could survive even with no bailout. And next time lets not let these companies get so large that their failure has this much impact on global economy. Work the problem, people!

No parachutes
No executive pay
No windfall for companies
No windfall for those that can't afford their homes already
No earmarks of other stinky inserts
Oversight committies
All proffits returned to the general fund
All assetts of bailed out companies held as collateral
Get it over with so we can get to the next financial crisis after the election.
Raise the FDIC protection to $250,000.00 on personal accounts