Countdown to a Meltdown - Congress has to act quickly but carefully to get financial rescue legislation right/Improving Paulson's Cure/Bailout temptat

Washington Post Editorial: Countdown to a Meltdown - Congress has to act quickly but carefully to get financial rescue legislation right.
Copyright by The Washington Post
Tuesday, September 23, 2008; Page A20

LAST THURSDAY, the top economic policymakers in the United States told congressional leaders that the financial system was only days away from a catastrophic failure -- and that the only hope was an immediate, massive government bailout. Congress agreed in principle, buoying financial markets. But five days later, the specifics of the rescue legislation remain undecided. Two of yesterday's market events -- a 372-point drop in the Dow Jones industrial average and a $16-per-barrel jump in the price of oil -- show just how rapidly the clock is ticking.

Congress and the Bush administration generally agree that the government should buy up the toxic mortgage-backed securities that are spreading losses and destroying the confidence essential for debtors and creditors to function. This taxpayer-funded bailout is not necessarily the only conceivable approach or even the most efficient one. Quite possibly, it would have been wiser instead to inject government capital directly into banks so they would be better able to work out problem assets on their own. But for better or worse, that option is off the table, and the question is how Uncle Sam can most effectively take on as much as $700 billion worth of bad debt. The basic tradeoff here is between speed and flexibility on one hand and oversight and accountability on the other.

Treasury Secretary Henry M. Paulson Jr. clearly believes that the way to get the maximum number of financial institutions to unload as much distressed paper as possible, as quickly as possible, is to keep it simple: announce that the U.S. Treasury is open for business and let the fire sale begin. That is essentially what he advocated when he asked Congress for the power to purchase troubled mortgage-backed assets from financial institutions at whatever price he and hired experts saw fit, with only minimal congressional supervision and complete immunity from lawsuits.

The problem, of course, is that this raises the risk that the government will get fleeced by the debt-sellers, raising the ultimate cost to taxpayers. It was also politically unrealistic, in that members of Congress were quite properly concerned that financial institutions accept limits on executive compensation in return for their federal lifeline. There was no provision in Mr. Paulson's proposal for taxpayers to enjoy any of the profits that financial institutions may enjoy once they have been restored to health. A new proposal by Senate Democrats seeks to correct this by requiring would-be asset-dumpers to give the government equity if Uncle Sam winds up having to sell the paper at a loss. Of course, at the margin, the proposal could deter some firms from ridding themselves of the bad loans in the first place. And that would slow the process. Democrats are also insisting on various forms of mortgage relief for the homeowners who are about to find themselves in debt to Uncle Sam. Mortgage relief might help stabilize home prices, but since the government would now own so many mortgages, taxpayers (most of whose mortgages are not in trouble) would have to foot the bill once again.

A little delay was both inevitable and desirable. Congress cannot write a $700 billion check with no questions asked. But speed and focus are still of the essence, and leaders in both parties must not use this crisis as an opportunity to refight all the political battles of the past year. They should treat it as what it is: a chance, possibly the last chance, to keep the U.S. financial system from collapsing.




Improving Paulson's Cure
By E. J. Dionne Jr.
Copyright by The Washington Post
Tuesday, September 23, 2008; Page A21

Liberal Democrats are in agony over bailing out Wall Street. Conservative Republicans are in agony over massive government intervention in what they like to call the free market. Yet neither side wants to be blamed if the financial system implodes.

It gets more complicated: An administration whose critics believe it abused the power it grabbed during a different kind of national emergency, after the Sept. 11 attacks, is asking for unprecedented authority over the financial system. Yet the man leading the charge this time, Treasury Secretary Henry Paulson, is one of the few administration officials trusted by Democrats.

All this is happening suddenly, and just six weeks before Election Day. Both presidential candidates are wary of getting on the wrong side of the public's justified populist fury or its desire for prudence in the face of potential catastrophe.

The broad outcome is already in view: Unless something very strange happens, Congress will pass a massive bailout of the financial system by week's end simply because every other option is worse.

Rep. Barney Frank, a Democrat who chairs the House Financial Services Committee, captured the prevailing mood in an interview Sunday night during a break in the negotiations. "What's the alternative?" he asked.

But the content of the bailout package matters enormously. To get what it needs, the administration will have to give taxpayers more protection and more accountability.

One core doubt about this bailout is whether taxpayers will be left holding a bag of dreadful investments that reckless financial mavens get to unload without having to part with their houses in the Hamptons. This isn't just rhetorical populism: There is a moral problem for capitalism itself if taxpayers take on a burden created by the foolishness of the privileged and get little compensation in return.

A related problem is how much new spending should be piled onto a federal budget that is already in the red.

Yes, a bailout is necessary, but several steps could limit the risks. Sen. Jack Reed (D-R.I.) has proposed granting the federal government warrants to acquire stock in financial firms that profit from the bailout. This way, taxpayers would share in the gain if the industry recovered -- which, of course, is the whole point of this exercise.

Socialism, you say? We're already into that. The administration's plan amounts to socialism for the rich only. And as Reed explained in an interview, his proposal is actually more in keeping with capitalism than a pure bailout. "If taxpayers take risks, they should be able to reap some of the rewards," he said. Frank is trying to get this provision into the final bill.

Moreover, as Reed notes, giving the government an option to have a share in companies if they succeed will protect taxpayers if the feds pay too much for a company's bad debt. If a company prospers because it receives more than what turns out to be a reasonable market price for its debt -- and the debt we're talking about will be very hard to price -- taxpayers get at least some of the money back when the company's stock goes up.

The bottom line should be: no potential upside for the taxpayers, no bailout.

Another question: Why bail out Wall Street and not help those who are losing their homes in the subprime mortgage fiasco? Frank believes that if the government comes to hold bad mortgages under the bailout plan, it will be able to halt foreclosures. Sen. Charles Schumer (D-N.Y.) wants to give bankruptcy courts the power to change mortgage provisions to keep people in their homes.

Almost everyone in both parties, including Barack Obama and John McCain, agrees that the final bailout bill should place real checks on the power of the Treasury secretary. Such accountability provisions were a key element in a proposal offered yesterday by Senate Banking Committee Chairman Chris Dodd (D-Conn.). Even if Paulson proves to be a sainted and savvy steward, what about the next secretary?

And if Congress can appropriate $700 billion for Wall Street, where is the help for everyone else hurting in this economy? Isn't it strange that an administration that could not come up with a comparatively modest sum to increase the number of children with health insurance could suddenly find all this cash for the financial industry?

Sadly, this bailout is inevitable. But it should be done right. Congress shouldn't be bullied into passing a flawed plan that will leave the next president in an even

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Chicago Tribune Editorial: Bailout temptations
Copyright © 2008, Chicago Tribune
September 23, 2008

A crisis can produce all sorts of reactions, some healthy and some not. Last week's Wall Street meltdown spurred a response from the Treasury Department and the Federal Reserve targeted to the real threat, which was an accelerating financial panic that would derail the U.S. economy. But now Congress gets its say, and the impulse there is quite different: using the opportunity to demand all sorts of things that were out of reach before.

The bailout package put together by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, though regrettably necessary, is worrisome enough on its own, because it would put the government on the hook for up to $700 billion in bad loans. The worst-case scenario is a huge new obligation on taxpayers of today and tomorrow. The best case is that once the current hysteria passes, those loans will turn out to be worth enough that the Treasury can get the lion's share of the money back.

In any case, the cost is probably less than Americans would pay if the credit marks froze up indefinitely, as they threatened to do last week. And the tough terms imposed on insurance giant AIG suggest that Paulson will be anything but a pushover in negotiations over the price to be paid for the toxic paper. A firm stance is the only way to keep the load on taxpayers within tolerable limits.

But containing the cost of this effort does not seem to be foremost among the goals of many people in Congress. There, the urge is not to do only what is strictly necessary but everything that is possible. Among the more politically appealing extras that have been proposed are extra help for floundering homeowners and punishment for executives in the form of curbs on their compensation. John McCain and Barack Obama have also joined the chorus.

Either step would be a mistake. Forcing lenders to modify existing mortgages would hurt future home buyers because it would increase the risk of making such loans, and financial institutions would protect themselves by raising the interest rates they charge to all of us. It's hard to envision law that would strip CEOs of earnings they were promised by contract. Holding a CEO responsible for poor performance is a job for the board of directors. And angry shareholders will be watching them.

That's not to say Congress is wrong to put any conditions on its cooperation. One of the most troublesome features of the bill offered by the administration is a provision exempting the Treasury secretary's decisions from review "by any court of law or any administrative agency." The point is to facilitate the rapid decision-making needed in a volatile market, which the threat of multiple lawsuits wouldn't help. But there's no reason Paulson and his successors shouldn't be answerable to a new oversight body set up to protect the public.

In the end, though, Congress ought to concentrate on letting the Fed and Treasury get on with a job that they have handled well so far. Despite charges that the deal favors Wall Street over Main Street, it's ordinary people who stand to lose the most from recent upheavals in the financial sector. Paulson and Bernanke were justifiably fearful of a collapse that would have spread throughout the broader economy, bankrupting Main Street companies and throwing their employees out of work.

The danger that loomed so large last week has subsided, but it has not disappeared. That's a good reason for Congress to ignore election-year temptations and keep its eyes on the prize.