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We need a Main Street bailout too

Robert Reich

TEXT OF COMMENTARY

KAI RYSSDAL: Commentator Robert Reich has been watching all the hearings and statements and posturing of the past couple of days. He says Congress and the White House might have missed some economic fundamentals. And that could put the whole plan in trouble.


ROBERT REICH: The giant bailout of Wall Street assumes only a certain amount of bad debt is left over from the days of lax mortgage lending. And once removed from Wall Street's books, credit will flow again.

Wrong. Bad debts are growing, and they're coming even among people recently considered good credit risks. At the end of August, 6.6 percent of mortgages were at least 30 days past due. That's up from 5.8 percent at the end of June. We're also seeing a growing amount of credit card and auto payments past due.

The culprit isn't just those subprime loans. With jobs and wages dropping across America, many people who had been able to pay their bills, no longer can.

It's no coincidence that states where mortgage delinquencies are highest are also states with the highest rates of job losses. The official rate of unemployment in California, for example, last month was 7.7 percent. That's up from 5.5 percent a year ago. No surprise that bad debts are mounting fastest in California and elsewhere around the country where jobs are evaporating fastest.

These are just the official rates. Some 600,000 fewer jobs are listed on the nation's payrolls than were there last year. Millions more Americans are too discouraged even to look for work. And as employers squeeze their payrolls, even people with jobs are putting in fewer hours.

Bailing out Wall Street's bad debts when millions more Americans can't pay their bills is like bailing out a rowboat springing more leaks when the ocean is rising. Many of the average taxpayers being asked to take on Wall Street's bad loans are the same people whose incomes are dropping, which means they're struggling to pay their debts and potentially creating even more bad loans.

Congress should drive the hardest deal it can with Wall Street, but also needs to pay attention to Main Street. Extend unemployment insurance, freeze mortgage rates, and pass a stimulus package that generates more jobs.

Unless Americans on Main Street have more money in their pockets, Wall Street's bad debts will continue to rise.

RYSSDAL: Robert Reich is a professor of public policy at the University of California, Berkely. His most recent book is called "Supercapitalism."

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After reviewing the 110-page plan the following issues jump out any anyone familiar with such deals:

1. The new Act allows financial institutions to acquire troubled assets from distressed companies and "flip" them to the government at a profit. pp 9, lines 18-22. Financial institutions can sell their troubled assets to the government AND MAKE A PROFIT if such assets were purchased from Fannie Mae, Freddie Mac or companies in receivership like Bear Sterns and Lehman Brothers etc.

2. The total exposure of government is possibly $3.131-TRILLION - well in excess of $700 bn since this is simply an upper ceiling on the maximum outstanding at any one time (per notes on page 40 of the Act). The plan is designed to absorb substantially more troubled assets - as government sells such assets the proceeds from sale can then be used by the Secretary to buy more troubled assets. This establishes a “revolving” loan facility which can be used over and over again to buy troubled assets and then sell such assets. The true exposure of government debt is illustrated by the requested increase in the statutory limits of total debt allowed. This new bill requests to increase the allowed debt by $3.131-trilion (from $8.184-trillion to $11.315-trillion, per pp. 68, line 8). See http://www4.law.cornell.edu/uscode/html/uscode31/usc_sec_31_00003101----... for current wording and limit on government debt.

3. Credit card loans and car loans that are secured by a home loan (very common in USA) are included in the bail out package. See pp. 14, line 18. Any type of purchase on a credit line secured by a home can be acquired or guaranteed by the government. Since such loans are very common this means virtually any type of debt can be taken over by the Secretary. This package goes well beyond subprime mortgage loans.

4. There is practically no cap on what a financial institution can sell to the government. The cap has been set at $100,000,000 (pp 38, line 24). Thus a small number of big-time offenders can dump their bad debts onto government. If it is only a small number of firms that hold large amounts of such paper then the government should consider allowing them to fail. Government intervention is appropriate to stop systematic broadly-based risk. Not a handful of firms. The private sector could easily buy up a handful of firms with such troubled assets (e.g. JP Morgan easily absorbed WaMu and other institutions like Barclays are seeking opportunistic acquisitions)

5. There is no clarity on the type of deals the Secretary can structure. He has a free hand to deem what is appropriate - even if such deals are not at fair market value. pp 35 line 10 outlines the mechanism for how government takes an equity or debt position in the selling financial institution. Importantly, there is no mention or requirement for the Secretary to use fair market value in determining the value of debt bought by the government. As mentioned earlier the selling financial institutions can flip debt acquired from other struggling financial institutions to the government. There is no consent requirement for the Secretary from any oversight committee. Suggested improvements:
(a) Have Secretary establish fair market value for consideration paid when buying, insuring or guaranteeing troubled assets.
(b) Have Selling/insured financial institution indemnify government against any and all losses resulting from the troubled assets bought, insured or guaranteed. Thus the downside risk of loss will be mitigated.
(c) Have government receive equity participation IN ADDITION to the indemnification.

6. NO LIMITATION ON DISTRIBUTIONS OR USE OF GOVERNMENT PAYMENTS. Financial institutions who receive government support are under no obligation whatsoever to use such funds to provide liquidity to the financial markets. Thus this aid package fundamentally misses the real problem and may not provide liquidity of trading we need. Instead, such financial institutions could simply distribute the cash to shareholders and partners, and provide no further help to the economy. There is no limitation on dividends and other distributions to partners/shareholders from the financial institutions. Repayment of government obligations should rank ahead of dividends and other partner/shareholder distributions until the government loans have been fully repaid with interest. Otherwise the financial institutions may simply use the government's capital to repay shareholders and then cease operations - making the equity value of such firms (or subsidiaries) useless.

7. NO PARENT COMPANY GUARANTEE. Guarantees of payment should be received from parent companies of firms and entities that have actual value/substance. In many cases the mortgage operating companies of major financial institutions are worthless as a result of poor loans thus equity in such subsidiary loan firms is worthless. Guarantees from the parent company have far more meaning and value. As seen in the Lehman melt-down – the mortgage arm of the bank was let go but the investment banking arm and equity trading arms were purchased almost immediately – they have value while the loan desk was dropped like a rock.

8. THE BROADER FINANCIAL COMMUNITY WILL BE TAXED IN 5 YEARS FOR TODAY'S LOSSES BY A SAMLL NUMEBR OF WALL STREET FIRMS. Per Page 90, line 4. After 5 years the President may submit a new legislative proposal (tax act) to recoup losses in this program. Such legislative proposal is to be applied to the entire "financial industry". Thus losses from this round of debt acquisitions/insurance (from a small number of financial institutions) is to be passed on to the broader financial industry in 5 years (after the 2012 presidential election).

9. TAX LOSS CARRYFORWARDS WILL MEAN THEY DO NOT ACTUALLY PAY TAXES. Importantly, any tax levy in 5 years on troubled financial institutions will be avoided by such bailed out firms. Financial institutions holding troubled assets will incur TAX LOSSES today from the sale of such assets to government and thus will be except from paying taxes for very long periods of time as a result of tax loss caryforward rules (the amount of such tax losses will depend upon how they originally accounted for the assets in their financial statements - some firms may record massive tax write downs). In fact in 5 years they may still have sufficient tax shelter from the sale of these troubled assets that they will not be subject to the special tax on financial institutions. Ironically, the financial institutions that avoided these troubled assets and thus did not incur tax losses will be the ones who carry the burden of the new tax since they will not have tax shield available.

Any bailout has to REVERSE the philosophical biases which ignore individuals and their economic constraints in favor of capitalistic free for all by financial institutional leaders. Every economic system has its (religious) philosophical enemies, but to meet peoples basic existence needs should be compassion instead of a response to some religious or philosophical conjecture.

Big Bail Out For Banks is a Very Unbalanced Equation!
By Karim Carnegie - Sep 24th, 2008 at 7:16 pm EDT
If this credit crunch is tied to the ablity of the market user the American taxpayer to have effective use of day to day banking instruments such as the ability to obtain credit... We should include in our "Bail-Out" the provision to indemnify the the taxpayer as well... Let us consider the effectiveness of the unbalanced equation we are creating with variables untold by this administration without such considerations... Banks are afraid to lend to the very customers that they have exploited with these risky investment banking products... They have the end user's "credit crunched" between these hedge funds sold on Wall Street to local municipal governments and global Markets! They must know that by cleaning up their bottom line with 700 Billion in American Taxpayer Goodwill as Cashflow, they must restore to the consumer and businesses positive credit ratings due to credit's tightening affect which resulted in late payments, poor credit scores, business closings, foreclosures, bankruptcies and hardships faced during the housing surge and resulting Bubble Burst. Congress should bring home the "Promise of Clear Credit for the America" We all should share in the Bail Out if we ultimately have to foot the bill.
Personal Credit Scores Must be Part of a Bailout Equation

Big Bail Out For Banks is a Very Unbalanced Equation!
By Karim Carnegie - Sep 24th, 2008 at 7:16 pm EDT

If this credit crunch is tied to the ablity of the market user the American taxpayer to have effective use of day to day banking instruments such as the ability to obtain credit... We should include in our "Bail-Out" the provision to indemnify the the taxpayer as well... Let us consider the effectiveness of the unbalanced equation we are creating with variables untold by this administration without such considerations... Banks are afraid to lend to the very customers that they have exploited with these risky investment banking products... They have the end user's "credit crunched" between these hedge funds sold on Wall Street to local municipal governments and global Markets! They must know that by cleaning up their bottom line with 700 Billion in American Taxpayer Goodwill as Cashflow, they must restore to the consumer and businesses positive credit ratings due to credit's tightening affect which resulted in late payments, poor credit scores, business closings, foreclosures, bankruptcies and hardships faced during the housing surge and resulting Bubble Burst. Congress should bring home the "Promise of Clear Credit for the America" We all should share in the Bail Out if we ultimately have to foot the bill.
Personal Credit Scores Must be Part of a Bailout Equation
By Karim Carnegie - Sep 26th, 2008 at 10:21 am EDT

A 720 credit score is needed right now to even be considered for buying homes on the Must Sell bank foreclosure lists during this economic crisis. Considering that consumers bad debt is being purchased from these lending institutions obsolving them of their greed to make profits in windfall abundance by packaging them into mortgage-backed securities in which individual consumers of these instruments, which were designed to draw them in with the promise of easy financing at predatory low adjustable rates that re-adjust at higher unaffordable interest payments in a few years... consumers are left with low or Bad Credit ratings as a result of missed payments or default. Congress must an will decide that "We the American Taxpayer" are to blame if they ultimately don't 'Clear America's Credit' going forward. '720 is the score' needed going forward..this will allow us to 'check banks that will initially scrutinize their customers once they reap the benefit of the very same taxpayers' 700 Bailout!' 720 is a variable that must be added to the equation going forward.., Not to say that anyone will be obsolved of current debts in good standing, but those very write-offs, late payments, and foreclosures that the banking institution is asking the American taxpayer to give a bridge loan for will alone act as a virus to future lending. Not enough Good Credit will be the resulting virus left inflicting America's economy with tightening lending practices in a 'Post 700Bil Bailout' world. They will surely include the affects of the last few years of bad financial decisions as our fault while considering individually credit worthiness using our credit histories. Is that fair going forward? I say wipe clean the derogatory results of these economic failures from both sides of the equation.. I am calling for Obama to act on this issue! Creating a automatic enrollment in credit counseling for BOTH SIDES! If we all share the burden of paying for this, we all should in theory at least, benefit from the "potential of using this 700 Billion Bridge Loan through an increased ability to borrow on the otherside of the bank counter... Get it?

Hmm. How about this: instead of pilfering the additional $10,000. from every American household, let's cancel our wars, bailout packages, subsidies, etc. and refund $10,000. in taxes to every American household.

Funny the President, Congress, candidates and fat cats didn't think of that one.

Wouldn't that stimulate the economy? That is their stated goal, right?

Where does market place find these commentrators? This guy wants speculators and irresponsible borrowers on main street to be bailed out. What about responsible citizens. where is the reward for being prudent.

I am a middle class guy, who being prudent did not participate in the real estate bubble knowing that it was bubble. I am staying in apartment. I dont have any debts. Where is my reward. Why am i being punished in form of low savings interest rate, so that all these irreponsible people can be bailed out.

If the American public and American corporations have borrowed too much in the past, buying up this bad debt so the banks can lend us more money that we cannot pay back does not seem like a solution. Unfortunately I think we need a huge depression to bring us back to reality on economics. This plan just buys us a few more months or years.

The best solution for homeowners is to re-structure government-purchased mortgages as a new hybrid financial instrument (an "Equity Mortgage"), consisting of two key elements:(i) a reduced payment restructured mortgage; and (ii) a shared-equity account, with the equity split between the government mortgagee and the homeowner mortgagor in proportion to the debt written off. This is the only solution that would forestall further decline in property values and enhance the prospects that the homeowner/mortgagor remains a productive and incented member of the economy.

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