Here is the plan being offered by the House Republicans. From Politico.com:
* Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.
* Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.
* Have Private Capital Injection to the Financial Markets, Not Tax Dollars. Instead of injecting taxpayer capital into the market to produce liquidity, private capital can be drawn into the market by removing regulatory and tax barriers that are currently blocking private capital formation. Too much private capital is sitting on the sidelines during this crisis.
* Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, we should allow for a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.
*Immediate Transparency, Oversight, and Market Reform. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.
* Wall Street Executives should not benefit from taxpayer funding. Call on the SEC to review the performance of the Credit Rating Agencies and their ability to accurately reflect the risks of these failed investment securities.
*Create a blue ribbon panel with representatives of Treasury, SEC, and the Fed to make recommendations to Congress for reforms of the financial sector by January 1, 2009.
My gut reaction:
Insurance – OK but what are the rates and do the companies have the cash to pay for the insurance? Liquidity has been a huge issue so how does making them pay more $ help that problem?
Private Capital – Yeah, motherhood, apple pie, “God bless America!” Capital isn’t coming into these markets until they see opportunity. You can’t just say “do it” and expect seriously spooked investors to hop back in.
Tax relief – I don’t get this one at all. These companies are writing off these loans and creating significant tax losses. I can’t imagine that many of them will have much net income that this even matters.
Transparency – Amen
Executives not benefiting – Amen
Blue Ribbon Panel – haven’t seen one yet that really helped but OK
My gut is that while this probably protects the taxpayer more, I don’t know that it would provide the enema that these markets seem to need.
Your thoughts?
Revisions/extensions (4:15 pm 9/26/2008, steveegg) – There’s a couple of bullet points not mentioned by Politico in the release from Paul Ryan, my Congresscritter and main sponsor of the House Republican plan:
– Limit Federal Exposure for High Risk Loans: Mandate that the GSEs no longer
securitize any unsound mortgages
– Call on the SEC to audit reports of failed companies to ensure that the financial
standing of these troubled companies was accurately portrayed.
I haven’t seen the specifics of the tax and regulatory relief, but I strongly suspect that relief will extend beyond the financial sector. Additional cash would allow companies to rely less on the non-existent credit market to function.
Revisions/extensions (4:15 pm 9/26/2008, shoebox) – One thing I haven’t seen in any of the information being debated is an elimination or a set aside of the requirement to “mark to market.” As I understand the issue, the “liquidity crunch” is being largely caused by two issues 1. banks are afraid that lending to another institution could leave them exposed as the perception is that any institution could file bankruptcy at any time, therefore, no inter institution loans. 2. the bankruptcy scenario is being created because the institutions have insufficient capital as they continue to write down loans each time someone else has a fire sale. The point being that much of this problem is not a liquidity issue in the sense of their not being enough money floating around but liquidity in the sense that they cannot lend anymore because the the capital they have remaining is already “pledged” for their existing loans
