The Senate-approved $700 billion asset-purchase plan – or should it be called The Bailout by now? – may be on its way to shortly becoming a reality, depending on the outcome of the House of Representatives' scheduled vote on Friday.
During (potentially) the program's last couple days as a mere proposal rather than a done deal, let's take a last-minute look at some of the most compelling arguments against The Bailout – and an interesting alternative proposed by some members of Congress.
Now do these opponents have the right idea? Or, in these extraordinary and fragile economic times, should they instead be supporting The Bailout – a measure that has been accepted by most of their colleagues as, at the very least, a necessary evil?
I'm not sure anyone not equipped with a first-rate crystal ball can answer that question with much certainty, given the unprecedented nature of our current financial tribulations. Therefore, these lawmakers' anti-bailout views and proposals for different plans are presented here with neither endorsement nor denouncement (my crystal ball seems second-rate at best).
First, Rep. Peter DeFazio, D-Ore., has emerged as one of The Bailout's most vocal adversaries, insisting that – to borrow the current trendy terminology – what's good for Wall Street isn't necessarily what's good for Main Street.
Despite new polls and informal word-on-the-street local news segments suggesting that many initially reluctant taxpayers have given grudging approval to The Bailout, DeFazio believes these citizens should take a tougher stance.
‘Secretary Paulson wants to set up [the bailout] so that the taxpayers, at best – and in all likelihood, this wouldn't happen – might break even someday,’ he said during a speech on the House floor. ‘No.’
‘We need to take an equity assurance in these firms, or we need to extend them loans, have them marked down as junk to market,’ he continued. ‘There's a market for it. It's about 22 cents on the dollar. Make them mark it down.’
DeFazio also believes the portions of the legislation designed to eliminate golden parachutes for disgraced/disappointed executives at the big firms is riddled with loopholes – from a provision that waives new limits on corporate deductions for executive salaries if assets acquired from the corporation are under $300 million, to a provision that restricts the ban on excessive incentives and bonuses to corporations whose assets are directly purchased and linked to an equity stake.
So what does he want to do instead?
Along with several other members of Congress, the Oregon lawmaker has introduced what he calls The No BAILOUTS Act. (If BAILOUTS is supposed to be a cleverly convenient acronym, its full title does not appear anywhere).
‘Instead of throwing taxpayer dollars at the program and crossing our fingers that the plan works, the measure will direct the administration to take five simple steps, suggested by noted economist and former head of the Federal Deposit insurance Corp. (FDIC) William Isaac, to re-regulate the markets and move America towards a healthy financial future,’ DeFazio says in his introductory statement attached to the plan.
The No BAILOUTS Act would introduce several regulatory measures and implement a new program. Specifically, the Securities and Exchange Commission (SEC) would first be required to institute an economic value standard to measure the capital of financial institutions. (The SEC has subsequently begun to address fair-value accounting concerns.)
In addition, the SEC would be required to permanently ban naked short sales and block short sales without an uptick in the market. ‘This rule prevents market crashes brought on my irrational short-term market behavior,’ DeFazio says.
The Net Worth Certificate Program, to be implemented by the FDIC, would involve purchases by the FDIC of net worth certificates from banks determined to have ‘short-term capital needs and the ability to financially recover in the foreseeable future.’
The institutions would then issue promissory notes to repay the FDIC, and the borrowed sums would be noted on balanced sheets as capital.
Finally, the No BAILOUTS Act calls for raising the FDIC's limit on depositor insurance from $100,00 to $250,000 – a measure that the Senate wound up including in its final version of The Bailout's legislation.
In the anti-bailout ranks, there's also Rep. Marcy Kaptur, D-Ohio, a co-sponsor of the DeFazio plan who has become a YouTube and blogosphere sensation in recent days with her spirited attack of The Bailout on the Congress floor.
‘Congress is being pushed to pass a Bush administration plan to write a blank check to white collar criminals of the highest order,’ she stated. ‘Instead of prosecuting those who stole from us, Secretary Paulson wants us to reward his former colleagues for their bad decisions, abusive and unlawful practices.’
She goes on to directly address the figures on Wall Street, including former Goldman Sachs executive and current Treasury Secretary Henry Paulson. ‘America doesn't need to bail you out. It needs to secure the real assets and property, not your paper,’ she said.
‘That means the homes and properties of hardworking Americans who are about to lose their homes because of your mortgage greed,’ Kaptur continued. ‘There should be a new job for regional Federal Reserve Banks. We want no home foreclosed if a serious workout agreement can be put into place. And if you don't do it, we want a notarized statement by a Federal Reserve official that they tried and failed.’
In her speech, Kaptur also points out that regulatory bodies such as the Judiciary Committee, the Ways and Means Committee, the Energy and Commerce Committee, the Budget Committee, the Financial Services Committee and others have been ‘strangely silent’ lately and should investigate the behaviors that led to the financial crisis.
She proposes that these groups go beyond ‘perfunctory hearings’ to get answers – and suggests their efforts would prove fruitful. ‘The crimes of Wall Street will make Watergate look like penny-ante thieves,’ she predicted.
– Jessica Lillian, Commercial Mortgage Insight
