FDIC chair speaks out against bailout

FDIC Chairwoman Sheila Bair


Kai Ryssdal: Popular anger over the government giving more help to big banks than to homeowners has gone public inside the Bush administration. The chairman of the Federal Deposit Insurance Corporation is publicly criticizing the bailout package. Sheila Blair says it doesn't do enough to help Americans about to lose their homes. As Marketplace's Sarah Gardner has that story.

Sarah Gardner:
FDIC chairman Sheila Blair told the Wall Street Journal she's frustrated with the bailout package. She said defaulting borrowers were at the root of the crisis. "So why not tackle the borrower problem?" she argues. Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson, on the other hand, have been focused on saving banks. John Taylor, president of the National Community Reinvestment Coalition, says Paulson and Bernanke aren't thinking outside their box.

John Taylor: I think they're from that club. Their club is Wall Street. That's where they come from. Their orientation is that. That's how they see the world working. And they just thought they had a lot more time to deal with the homeowners problem. And they don't.

We're talking about potentially helping millions of struggling homeowners. Taylor says the country's facing 300,000 home foreclosure filings a month. But backers of the bailout plan, including the Financial Services Roundtable, a Wall Street lobbying group, say there is help for homeowners through programs like the Hope for Homeowners program. Spokesman Scott Talbott defends the bailout plans' "banks first" approach.

Scott Talbott: The financial institutions are the engine of the economy. They are the oil in the system. If they cannot lend, then all other services shut down. So, it's better to do a wholesale approach with the economy that benefits everybody, than work from the reverse.

But one mortgage consultant who wants more in the bailout package for homeowners says housing was the catalyst for the economic crisis. Housing got us in, he says. Housing's got to get us out.

I'm Sarah Gardner for Marketplace.

About the author

Andrea Gardner is a journalism professor and writer in Pasadena, Calif.
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With all the problems in the real-estate market affecting our homes, I would like to propose the Federal Government to:
A.) allow a 100% deduction on partial payment or payment in full of our home mortgage.
B.) People who do not have the money to pay down their mortgage, can deduct from their income 100% of the equity loss from the value of their home without having to actually sell the home.
C.)If the home is sold after 2 years, they can keep the value of the sale of their home 100%.

1.) Will motivate people to stay in their homes when in an upside down status with their mortgage and pay down the mortgage balance amount.
2.) Will funnel money back to lenders faster on repaid mortgages for more lending.
3.) It is a fair way to help all people who invested optimistically by buying their home.

Hope these suggestions can help all of us find a way through the terrible problems we all face with the real-estate bubble.

First I would like to criticize Mr. Scott Talbott’s position about the financial industry being the oil of the economy. To back up what Mr. Timberlake stated (I am American by the way just working in Germany) the American consumer no matter where they're at is the oil of the economy. Part of the reason we have $7E+11 going to banks is because of that same mentality. Wall Street has forgot and still can't seem to realize the American consumer is the backbone of this economy, we are the ultimate source of funding for much of the world. The $7E+11 dollars to there aid, which I strongly disagree with, is coming from the American tax payer. The reason why Wall Street is going broke is because it has underestimated the American consumers "I don't give a darn" mentality. Millions of Americans have walked away from there homes thus again the American consumer is the key. So this philosophy about the banks being the oil of the economy is delusional. Maybe Mr. Talbott should learn more about cars. Financial institutions are the mechanics, the engineers but ultimately the engine and oil go to the consumer because we are the source of Wall Street's engineered financial plans and the banks are the mechanics for the American consumer. That being said, I would like to further back Mr. Timberlake and add to his statement. Why not pay the principal on 2000000 households, which is about how many foreclosures are out there, up to $150000 (that would come to $3E+11, still five hundred billion short of the $8E+11 that has been reserved). A short sale would reflect on these homeowners credit if they chose this option and there payments would be turned over to the federal government. They would then have to pay back the U.S Treasury at a renegotiated considerably smaller interest rate. This would allow the American taxpayer who was not caught in this debacle to regain his/her funds with interest. If they defaulted or decided not to pay, they're wages can be garnished by the IRS and the interest rate would go up. If they quit they're job they would not be eligible for any type of state or federal government assistance program until they paid they're amount back in full. Also, the ability to liquidate huge sums or move assets overseas would be frozen. To any who would argue it would take to long to see a return on such a plan may I remind them it will take years to see a return on the current plan; two Bill Clinton did something similar by opening up more college loan opportunities for students at lower interest rates (which can still be adjusted to this day as the Bush administration has done); three it's easier to get money back from a single consumer than from Wall Street, investment and even commercial banks who have connections to Congress and the Senate (take the Clinton's and Wal-Mart, Henry Paulson and Goldman Sachs, Dick Chaney and Halliburton, etc...) and four; no one is using the $850000000000 set aside. What we have is the equivalent of the writers’ strike between Wall Street and the tax payer and the government, the Treasury, Fed and some of Congress, playing the negotiator. Right now the tax payer is the writer and if Congress, the Fed or the Treasury don't get a clue soon your really going to see a strike. God forbid the Treasury ask for more money or this $800 billion dollar plan doesn't work and you see bank CEO's like AIG's CEO take $400k vacations. It will be the strike of the century.

I listen to Marketplace often as I drive Home from work. I have taken particular notice of a few comments and brief stories scattered through the bailout and financial doom coverage that, like this one, recognize the fact that no matter how many banks or insurance firms or brokerages may be in trouble, this free enterprise economy of ours is ultimately fueled by the consumer. No matter how much money the fed wants to fling at the financial industry that money must ultimately get to the average person (I refuse to use the name Joe here) and be spent on some "thing" for the economy to work, move, grow and recover.

The only reason we have a crisis is that over the past year or so, millions of mortgage holders have hit a point where their static incomes can not meet the balloon payments that are coming due. A few years earlier these same millions of consumers bought into the standard unscrupulous mortgage broker fable that "given the way the economy is headed your income will rise well before the balloon payments kick in". Unfortunately that simply didn't happen. The myth of the trickle down economy with its implication that wages would expand with the wealth of the nation has been exposed in harsh light of the financial crisis. Rather than tricking down to the average person corporate wealth has been concentrated at the highest levels in inflated share prices and bloated executive salaries.

These excesses only demonstrate that the consumer wasn't the only victim of blind optimism. The banking and mortgage industries bought into the same type of mass-delusion that the economy could only continue to grow so long as money could be pumped into it. As things heated up the financial industry fanned the flames by taking advantage of de-regulation to create an anything-goes-loan-environment where more money was good money and the pyramid scheme of re-finance and inflated "flip that house" pricing would continue to spiral upward forever. Profits could continue to grow, share prices rise and everyone could live like their diety of choice.

Now that this system predicated on a myth and sustained by optimism and greed has fallen apart the fed has apparently fallen prey to another delusion. This new myth seems to be that the recent "good old days" can somehow be regained by throwing trillions of dollars at the same financial institutions that squandered the profits of the past few years. The Fed seems to think that so long as the banks, shareholders and CEO'S can be kept in the black the status quo will be maintained and the economy will continue on its happy "trickle-down" way. From the Fed's view any criticism of these actions simply indicates the inability of the critic to understand the intricacies of the financial system. They (the
Fed) are not simply rewarding the banks for their blatant disregard of prudent fiscal policy, they are saving the world (or at least their somewhat myopic view of the world as existing of Wall Street and the major banks).

If you can't tell by now, I have "reservations" about the direction the bailout is taking. If the consumer fuels the economy and if the economy is in trouble, then would it not make sense that help for the consumer would help the direction of the economy? Also if toxic mortgages were a major contributing factor in this mess, and the main reason for the mortages becoming toxic is that the homeowner cannot make the ballooning payments, would it not make sense to help the homeowner make the payment and continue to pay off the debt? However, if the government were to simply bail out the poor souls that got into an untenable position, other mortgage holders, like myself, that tried to keep things under control and are not necessarily in trouble, but are finding things more than tight, might not take to kindly to the situation.

I do think that someting must be done. However, rather than throwing money at the financial industry, I would like to propose a single, substantial monetary payment to every person with a mortgage in the country. In the terms of this payment, the monies could only be applied to the principle of one, and only one, mortgage held by the individual (to avoid rewarding speculators with multiple mortages on multiple properties). The amount of this payment would have to be large enough to substantially decrease the principle of any mortgage to which it is applied. However it could also not exceed the total principle of the mortgage, so the total amount would have to be structured as up to and no more than some maximum amount. In concert with this payment, mortgage holders would be instructed to adjust payment terms for the debtor to reflect the decreased principle and reduce the monthly payment amount for the homeowner.

In some instances mortgages might be payed in full. In others even a substantial reduction of the principle may not save the loan from default. However, in all instances both the debtor and mortgage holder would realize a substantial cash infusion. Overall indebtedness of the American consumer would be reduced in a very positive fashion and a huge amount of capital would be injected into the economy at the point where it would do the most good. At a bare minimum monthly payments by consumers would be reduced freeing collectively billions of dollars for the consumer/homeowner to use at their discretion. These monies in turn, given recent consumer spending patterns, would be quickly pumped into purchasing, re-stimulating all aspects of the economy.

I really don't know what the amount of this payment could be, but to be of much good i would anticipate that it would need to be at least $100,000 per mortgage debtor. Since I have no idea of the actual number of homeowners in the country I have no idea of what this sum would mean in terms of a total expenditure. However limiting the payment to one per person no matter how many actual mortgages held would provide some limitation and I think may not fall to much in excess of the $700 billion already slated for this mess.

I would expect that the argument will be made that any proposal like this is silly, frivolous and if it ever were to be attempted would simply lead to a situation where individuals would be tempted to "scam the system" and selfishly attempt to get more than they were entitled to. However I would rather rely on the overall trustworthiness of the average homeowner in this country, than countenance throwing trillions of dollars at an industry that has recently only proven an inability to act in any way other than a self-serving, self aggrandizing and highly over compensated fashion.

The government can influence liquidity, making it less risky for a bank to lend, but no process can artificially inflate the value of a home. A home is only worth what a buyer (who likely needs a loan) will pay for it. While I wish Uncle Sam would have consulted me first before investing my money in the banking industry, I am more likely to see a return on my investment with a bank versus buying a home (or several million homes) and hoping Joe the plumber keeps his house maintained and sells for a profit one day.

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