I passionately believe that this financial emergency is exactly the kind of story we all should be pouring our resources into. People need us now. They need good information on this very fluid story. I am so frustrated by the repeated statements of "this is so complex, nobody understands it." Well, we have to try. The public is smart enough to absorb the story if we do a good job telling it.
The networks should produce clear and easy-to-understand hourlong programs that explain what we know and what it means to each of us.
Congress should allow C-SPAN cameras into these negotiations. Now is exactly when the public needs to see the business of its government. Forget the closed-door negotiations. I understand that cameras might invite grandstanding, but it can't really get much worse, can it?
Below I include links to the original proposal from the Treasury Department and the leading proposal from Sen. Chris Dodd (D-Conn.) so you can see where the conversation began and where it stands now. I think we should put these texts in front of the people.
Let's get started.
How did we get here?Forbes' Investopedia takes a nice swing at explaining what fueled the subprime meltdown. Truly, if your readers/viewers/listeners just understood what was in this piece, they would be pretty well informed.
What will be done with the $700 billion?The plan forwarded by President Bush and some congressional leaders is for the Treasury Department to buy up billions of dollars in so-called "toxic" debts, which would allow the banks that are on the hook for those loans to loan their money elsewhere.
The idea behind this is that the federal government would make deals on those currently bad loans to either get the debtors paying again or sell off the assets that the borrowers bought with the loans. So, the money is going to buy loans and lift the burden from the banks and their shareholders. So yes, taxpayers are being asked to bail out publicly traded companies that made bad loans.
How did we arrive at $700 billion? Will that be enough to fix things or will we need more?
Forbes addresses these questions. The Treasury Secretary says there is about $14 trillion outstanding in mortgage debt now. Take about 5 percent of that and call it bad debt and you have $700 billion. In other words, it is just a guess.
But new data may show it is about right. Look at
this from The Wall Street Journal:
In a research note Thursday, Goldman Sachs estimated that there are probably about $1.15 trillion in distressed assets in the market. To arrive at this conclusion, the economists Jan Hatzius, Andrew Tilton and Kent Michels looked at the percentage of commercial and residential mortgages in foreclosure or delinquency and compared it to the total value if U.S. mortgages. They estimate that approximately 9.16 percent of $11.3 trillion in residential loans are at risk of not being repaid, and 4.24 percent of commercial loans are in the same boat.
That number is higher than the figure proposed by the Treasury, but it represents the face value of the mortgages. Since the discussion focuses on delinquent or foreclosed loans, the government should be getting a discount. Paying as high as 70 cents on the dollar would translate into $1 trillion in buying power for $700 billion. However, Goldman noted that its numbers should be taken with a grain of salt. "They could either be too optimistic or too pessimistic."
The New York Times added up what taxpayers are in for with this bailout and the ones that have already occurred:
But the $700 billion is in addition to an $85 billion agreement on a bailout of the insurance giant American International Group, plus $29 billion in support that the government pledged in the marriage of Bear Stearns and JPMorgan Chase. On top of all that, the Congressional Budget Office says the federal bailout of the mortgage finance companies Fannie Mae and Freddie Mac could cost $25 billion.
The Bush administration's proposal also includes a frightening clause that would allow the public debt to rise to more than $11.3 trillion.
The Treasury Department's ProposalThe specifics of the bailout are still being negotiated. But here's the
Treasury Department's original proposal, which is where things started this week.
The buyout, as proposed by the Treasury Department, would authorize the Treasury Secretary to purchase mortgage assets from any American financial institution. Specifically, it authorizes the Secretary to do these five things:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
What is a mortgage-related asset? The proposal uses this definition:
The term "mortgage-related assets" means residential or 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 on or before September 17, 2008.
The proposal requires regular reports to Congress, but members of Congress want more oversight, which is still in negotiations.
The counter-proposalSen. Dodd suggests something similar to the bailout of Freddie Mac and Fannie Mae, which would involve government participation in the banks but also,
Forbes points out, may scare off the weakest banks from even participating in the program. But there are big questions about whether this approach would create enough of a boost to right the system. Dodd's proposal would also add a lot of oversight and accountability. It would include an oversight board and audits from the GAO.
Read Dodd's proposal here, which is being kicked around. It is often referred to as the "44-page proposal."
How could the bailout help homeowners in trouble?Forbes explains that it might include language that allows people to refinance their high-cost mortgages through, say, FHA and overseen by the FDIC:
Ideas floated in Congress include expanding the eligibility for people who can refinance into Federal Housing Administration loans, and putting many of the mortgages under the management of the Federal Deposit Insurance Corp., which has moved aggressively to modify mortgages. By lowering the amount owed, homeowners are more likely to pay off mortgages, and mortgage-backed assets become more valuable.
Can the system right itself without the federal government?Nobody can answer that right now because we don't know how bad the situation really is.
As
The Wall Street Journal (subscriber-only content) points out:
Many financial firms are holding assets on their books at unrealistic prices, in part to avoid taking necessary write-downs that accounting rules require when an asset becomes impaired. Because the market has frozen for these assets, companies have been able to avoid reflecting their real value on their books.
One of the most important factors in evaluating the rescue plan has been one of the least clear in negotiations until now: What price would Treasury, and taxpayers, wind up paying?
It has to be pointed out that JP Morgan is buying up troubled WaMu in the largest bank failure in American history. Yes, this is a private buyout, not a government bailout. In other words, smart investors are still putting their money into investments. Clearly they are thinking the world is not about to end.
The
Journal (in the article linked above)
also makes two important points about the rescue idea:
Is the rescue aimed at the wrong target?
From the
Journal:
But Robert Shapiro, a former Clinton economic advisor and the chairman of the globalization program at NDN, a Washington think tank, said the program outlined by the administration aimed at the wrong target. Rather than buying assets, he says, the government should provide money to people facing foreclosure, which would prevent the assets from going sour in the first place.
"This crisis will continue until the housing market stabilizes and as increasing foreclosures reduce the value of more mortgage-based securities," Mr. Shapiro said.
There is even a suggestion that instead of a bailout, maybe an investment in the troubled banks might work better.
Why should big banks get so much help when they took the biggest risks? Won't this put them at a competitive advantage over smaller/healthier banks that didn't make risky loans?
The
Journal said:
Another potentially thorny issue is whether the plan will offer as much help to small banks, which typically didn't buy the kinds of exotic mortgage securities at the center of the market mess. Big banks that are relatively healthy would also have more leeway than small banks to dump troubled assets in a government sale.
Poynter People, I realize you've got a lot on your...
