- Jun 6, 2007
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The Emergency Economic Stabilization legislation currently in Congress is a great piece of legislation and displays an extraordinary and responsible effort on the part of government officials and should have passed the House. It offered an optimally prudent and responsible effort to fix the problems in the mortgage backed bond market and the overall credit markets and at the same time made significant effort to help American families. Congress, the White House and the American people cant give up here because as the widespread consensus amongst experts and ordinary Americans has made clear and rightfully so that inaction on Congresss part in this matter is not an option.
The Senates plan to vote on the Compromise Rescue legislation with additional provisions increasing FDIC protection on bank loans from $100,000 to $250,000 is a bad idea for two reasons. First, if the Senate thinks this sole addition is going to save the day when the house re-votes on the legislation they are making a miscalculation, since the House vote there has been a lot of Americans that have that have expressed it is not so bad it didnt pass, Congress still has work to do to persuade the American people that the legislation they are proposing is legislation the American people should support. If the Senate wants this bill to pass in an election season they are going to have to add better sweeteners than this FDIC insurance provision. Secondly, this FDIC increased insurance protection provision is too expensive and although well intentioned because it will lessen the likelihood of runs on banks it is extremely imprudent. The FDIC insurance on bank accounts is paid for by charging a fee to participating banks. There has been a major issue amongst experts over the last eighteen months which has entailed should the FDIC increase their fee they charge banks to make sure there is sufficient funding to pay all the bank account holders whose banks fail in the next few years. The expert consensus is that America wants to avoid as much as possible increasing this fee because banks at this time dont need added expenses because overall financially their not in great shape. Increasing FDIC protection on bank accounts from $100,000 to $250,000 is going to break the delicate balance here the FDIC has been displaying in restraining increasing bank fees. Even if there is no immediate increase in such bank fees over the long-term common sense indicates there will be and it will be dramatique which makes this Congressional action foolish. Also, this is a little bit of a red herring issue because the majority of people that have $100,000 plus to put in a bank have financial advisors or are financially savvy and know to just divide up their money and put it in separate banks keeping in each bank a balance below $100,000 so their money is insured. Nevertheless, if the FDIC says it is doable without an onerous increase on fees to member banks, the Congress should lift up the protection on bank deposits from $100,000 to $150,000 because the cost to the FDIC will not be as high as a ceiling lift to $250,000 and FDIC protection should be made current (this $100,000 ceiling has been the ceiling for a very long time) and it will help reduce run on bank scenarios.
Part One
If Congress wants this bill to pass improve some of the current elements of this bill.
The bill currently creates this Financial Stability Oversight Board (FSO Board) whose function is primarily to provide oversight on this Troubled Asset Relief Program (TARP) and this bill also creates this Congressional Oversight Panel (CO Panel) whose primary functions are twofold provide oversight on TARP and produce a report on needed changes to the regulatory system America has for its financial industries. Some of the problems that exist with this proposal is that the FSO Board isnt really independent and is not charged with strong oversight duties. Three of the five members of the FSO Board work directly for the President you think they are going to say anything much that undermines the Treasury Secretary, fat chance. The FSO Board provisions say the FSO Board may appoint a credit review committee to evaluate TARP purchasing of hundreds of billions of dollars of assets thats really looking out for the U.S. taxpayer. With respect to CO Panel the plan is to have the Congress which currently does not conduct any in-depth front line monitoring and evaluation of the credit and financial industries create from scratch an oversight entity for TARP which in days will be spending billions of dollars of taxpayer monies buying assets is a pipe dream it is impossible for them to provide adequate timely oversight. What the Congress should do is create this FSO Board and have the Chairmen of the Federal Reserve Board appoint the director of this FSO Board and the Director is boss of this entity, board members only provide an advisory role. The legislation should authorize the Director to be independent and have his or her own staff and procure the services of experts and consultants as he or she sees fit, nevertheless, the Director can utilize the Federal Reserve Board staff as the Director sees fit and as the Federal Reserve Board can spare the use of its resources. The Speaker of the House, Senate President and the President of the U.S. would have veto power over the appointment of this Director. The essence here is that the Federal Reserve Board is the most independent authority in our Financial System and has the expertise to monitor and make all the evaluations that need to be made to provide oversight for TARP so the most prudent step our nation can take to provide optimal oversight on TARP is to have the new independent oversight entity come out of Federal Reserve Board. This legislation should require the FSO Board to issue written reports to Congress every six months evaluating TARP, identifying its failings and shortcomings if any and suggesting action items for Congress to take on TARP and any other action that is needed to aid our nations Financial and Credit industries. The legislation should scrap the CO Panel as an oversight entity for TARP. However, the CO Panels function to recommend changes to Americas financial regulatory system is a good goal and one the American People have widespread support for. So, to this end Congress in this legislation should create a 9-11 type of Commission to study and investigate this problem and recommend changes to Americas regulatory system here. The important things to consider are that this work will take six to nine months and now isnt the time to do a comprehensive evaluation because the markets are unstable and many elements of Americans Financial and Credit industries are in flux whether it be Hedge Funds, Credit Default Swaps, etc.. Moreover, this panel or Commission should not be a sole Congressional creation it should be a joint executive and legislative branch initiative that way it will have optimal credibility and optimal impact in bringing about change. The best thing Congress could do for the American people is design this Commission and the plan for this Commission to carry out its mission and put it in the legislation but let the next Congress and President make the appointments, currently there is too much finger pointing and raw emotions about the disastrous state of things to be initiating studies on the problem.
The legislation should firm up provisions restricting what TARP fund managers pay for assets they purchase so that taxpayer monies arent wasted. Specifically, more restrictions could be added to better protect the public on some bonds financed with sub-prime mortgages. What transpired with these sub-prime mortgages is that investment banks bought these sub-prime loans bundled them up and sold bonds based on them with certain bonds getting higher priority for payment than other bonds in terms of monies coming from the burrowers of these sub-prime mortgages. The bottom line is that low priority bondholders are going to see poor payment of monies owed on these bonds, the legislation should require these fund managers to factor in expert estimates of sub-prime burrowers default rates so they dont over pay on these bonds. The legislation should limit exposure by the TARP fund managers to these lethal credit-default swaps that cost some financial institutions billions and billions of dollars. A maximum exposure of ten-percent of the TARPs overall spending authority should be prescribed for credit-default swap exposure. Moreover, these credit-default swaps are so poisonous that the treasury should be restricted to not buy them through auction or reverse auction but only through direct purchases and only if there is a compelling reason to buy them like an important financial institution needs financial help and this is the best option available.
This legislation should give the Treasury the authority to look into any businesses books or depose any individual that will provided needed information to accurately value these illiquid assets this legislation authorizes the Treasury to purchase through TARP. It has been reported in the media that part of the problem with the freeze up in these securities markets is that certain entities know the true fair value of these assets but are not disclosing it. Such provisions will make it clear that the time for games is over.
The legislations foreclosure mitigation efforts are great however with one slight exception, that being, the last sentence in subsection (a) Section 109, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. This sentence gives the Secretary to much discretion to much power to put the taxpayer on the hook for defaulting home loan burrowers, theoretically, this sentence authorizes the Secretary to block foreclosures on defaulting home loan burrowers whose aggregate amount of loans total $ 700 billion dollars, this is preposterous. The Secretary should be bound by the restrictions in the National Housing Act and other federal laws in helping distressed home loan burrowers. This sentence should be stricken from the legislation.
The legislation should not include the provision Sec.131 (b) which prohibits the Secretary in the future from using the Exchange Stabilization Fund from propping up the Money Market Fund industry in the future. Why remove a tool from the tool box of the Treasury and the Federal Reserve Board to aid and protect the American economy, which the use of this fund in this matter essentially acts as. This prohibition doesnt further the interests of the American people, it doesnt strengthen America, it should be discarded.
The legislation should add a proviso to Sec. 132 in the legislation. Section 132 essentially says that the Security & Exchange Commission can change the accounting rules to not require companies to mark down the value of assets when the value of those assets drop in the asset or securities markets. This authority to the SEC is good and fair because the asset and security markets are not working properly, but once they are working properly than Mark-to-Market Accounting rules should be reinstated because otherwise it is misleading to investors and other people that have a legitimate need to know the accurate financial condition of a company. The legislation should add a five year limit on the SECs authority authorized by Section 132.
Part Two
If Congress wants this bill to pass improve the bipartisan appeal of this bill. For the Democrats, there has been a call amongst Democrats to do something for homeowners in bankruptcy, provide help so more of these homeowners can keep their home. Congress should comply. The idea here is to give bankruptcy judges power to amend these home mortgage loans. The contrary argument is that giving bankruptcy judges this power will result in all buyers of homes paying more for their home loans because lenders will have to factor in these losses from bankruptcy court actions when determining the terms they will offer home buyers for loans. Congress should consider two things here. First, put a time limit on any such home loan changing authority for bankruptcy judges like five years; therefore, any burden on future home buyers should dissipate after five years. Secondly, put limits on the power of bankruptcy judges to change the terms of home loans to mitigate the loss to lenders. Such as the bankruptcy judge does not have the power to reduce the principle owed on the loan only the power to bifurcate the loan principle and only to reduce the principle on the monthly payment portion of the loan to no lower than eighty-five percent of the market value of the property and he or she is required to make the balance of the principle a balloon payment loan payable when the home is sold, refinanced or an additional home equity loan is taken out on the property. The bankruptcy judge would also be limited in how much he or she could reduce the interest rate on the loan to the current rate paid on a FHA 30- year fixed rate loan. Empowering Bankruptcy judges this way should have a lot of bi-partisan appeal from the following standpoint. The whole success of this Emergency Economic Stabilization action hinges on the floor being found quickly on home sale prices so lenders can have confidence that the value of the collateral for these home loans, the homes themselves, wont drop below the principle of these loans otherwise lenders are exposed to incur economic losses which they dont like. To this end, the more Congress can do to stop the flooding of homes for sale on the market, which this bankruptcy initiative would bring about, the quicker the market can find this floor and the whole home loan industry can get back to operating in a good and proper manner. In addition, it is not that unusual for entities that are not homeowners who have a fiduciary interest in home properties to have to wait for the sale of a property before they get the monies rightfully due them from a home property, the Housing Act just signed into law this past July requires some homeowners getting Federal Government assistance in staying in their homes to give the Federal Government a certain percentage of the profit when they sell their homes. Congress should also keep in mind the consideration of what are they protecting from the lenders standpoint on this bankruptcy issue, by that it is meant if a homeowner goes into bankruptcy and eventually loses his home and the lender who owns the loan sells the property what does the lender end up with lenders usually get below market prices for these foreclosure sales and incur added expenses in carrying and selling the property; it would seem that such bankruptcy assistance provisions in this legislation would not turn out so terrible for lenders.
For the Republicans, many Republicans opposed to this legislation are saying Republicans must stay true to Republican ideals, specifically, the ideal that government should be frugal stewards of taxpayer monies which means in the present circumstances they would like to see the market pay for more of this financial and credit industries rescue program and lessen the cost to the American taxpayer. The answer to this dilemma lies in the program implemented to protect against runs on money market funds. The treasury is using $50 billion from the exchange stabilization fund to insure deposits in money market funds; a fund who wants to participate and whose value equals .995 and .9975 of share values has to pay .015 % of the funds value to the treasury department the logic being that this low percentage is not real onerous on the financial institution it is de minimus, the financial institution can live with this fee. Why not expand this logic to the whole financial and credit industries to raise monies to pay for this rescue legislation. When banks burrow money from other banks tack on a .015% fee to pay for this legislation, when banks issue commercial paper to businesses so businesses can pay for operating expenses tack on a .015% fee to pay for this legislation, when corporations or banks issue bonds to raise capital .015% goes to pay for this rescue legislation, etc.. For all business credit and capital raising transactions tack on a .015 % fee to pay for the rescue legislation, the rescue legislation should adopt this initiative. The percentage is so low it shouldnt make a material difference in the welfare and well-being of any business. Moreover, this fee will only be added on until all monies burrowed under this legislation are paid back or for fifteen years whichever is a shorter time-period and such a length of time is not that long all things considered. Lastly, the interest rates banks charge each other for short term loans has recently jumped from 2 to over 4 percent, commercial paper interest rates have jumped over one percent, interest rates on corporate bonds have jumped plus two percent, the financial and business community should be very receptive to a solution to the credit and capital raising industries problems which involves only a .015% increase in costs over ordinary costs.
The Senates plan to vote on the Compromise Rescue legislation with additional provisions increasing FDIC protection on bank loans from $100,000 to $250,000 is a bad idea for two reasons. First, if the Senate thinks this sole addition is going to save the day when the house re-votes on the legislation they are making a miscalculation, since the House vote there has been a lot of Americans that have that have expressed it is not so bad it didnt pass, Congress still has work to do to persuade the American people that the legislation they are proposing is legislation the American people should support. If the Senate wants this bill to pass in an election season they are going to have to add better sweeteners than this FDIC insurance provision. Secondly, this FDIC increased insurance protection provision is too expensive and although well intentioned because it will lessen the likelihood of runs on banks it is extremely imprudent. The FDIC insurance on bank accounts is paid for by charging a fee to participating banks. There has been a major issue amongst experts over the last eighteen months which has entailed should the FDIC increase their fee they charge banks to make sure there is sufficient funding to pay all the bank account holders whose banks fail in the next few years. The expert consensus is that America wants to avoid as much as possible increasing this fee because banks at this time dont need added expenses because overall financially their not in great shape. Increasing FDIC protection on bank accounts from $100,000 to $250,000 is going to break the delicate balance here the FDIC has been displaying in restraining increasing bank fees. Even if there is no immediate increase in such bank fees over the long-term common sense indicates there will be and it will be dramatique which makes this Congressional action foolish. Also, this is a little bit of a red herring issue because the majority of people that have $100,000 plus to put in a bank have financial advisors or are financially savvy and know to just divide up their money and put it in separate banks keeping in each bank a balance below $100,000 so their money is insured. Nevertheless, if the FDIC says it is doable without an onerous increase on fees to member banks, the Congress should lift up the protection on bank deposits from $100,000 to $150,000 because the cost to the FDIC will not be as high as a ceiling lift to $250,000 and FDIC protection should be made current (this $100,000 ceiling has been the ceiling for a very long time) and it will help reduce run on bank scenarios.
Part One
If Congress wants this bill to pass improve some of the current elements of this bill.
The bill currently creates this Financial Stability Oversight Board (FSO Board) whose function is primarily to provide oversight on this Troubled Asset Relief Program (TARP) and this bill also creates this Congressional Oversight Panel (CO Panel) whose primary functions are twofold provide oversight on TARP and produce a report on needed changes to the regulatory system America has for its financial industries. Some of the problems that exist with this proposal is that the FSO Board isnt really independent and is not charged with strong oversight duties. Three of the five members of the FSO Board work directly for the President you think they are going to say anything much that undermines the Treasury Secretary, fat chance. The FSO Board provisions say the FSO Board may appoint a credit review committee to evaluate TARP purchasing of hundreds of billions of dollars of assets thats really looking out for the U.S. taxpayer. With respect to CO Panel the plan is to have the Congress which currently does not conduct any in-depth front line monitoring and evaluation of the credit and financial industries create from scratch an oversight entity for TARP which in days will be spending billions of dollars of taxpayer monies buying assets is a pipe dream it is impossible for them to provide adequate timely oversight. What the Congress should do is create this FSO Board and have the Chairmen of the Federal Reserve Board appoint the director of this FSO Board and the Director is boss of this entity, board members only provide an advisory role. The legislation should authorize the Director to be independent and have his or her own staff and procure the services of experts and consultants as he or she sees fit, nevertheless, the Director can utilize the Federal Reserve Board staff as the Director sees fit and as the Federal Reserve Board can spare the use of its resources. The Speaker of the House, Senate President and the President of the U.S. would have veto power over the appointment of this Director. The essence here is that the Federal Reserve Board is the most independent authority in our Financial System and has the expertise to monitor and make all the evaluations that need to be made to provide oversight for TARP so the most prudent step our nation can take to provide optimal oversight on TARP is to have the new independent oversight entity come out of Federal Reserve Board. This legislation should require the FSO Board to issue written reports to Congress every six months evaluating TARP, identifying its failings and shortcomings if any and suggesting action items for Congress to take on TARP and any other action that is needed to aid our nations Financial and Credit industries. The legislation should scrap the CO Panel as an oversight entity for TARP. However, the CO Panels function to recommend changes to Americas financial regulatory system is a good goal and one the American People have widespread support for. So, to this end Congress in this legislation should create a 9-11 type of Commission to study and investigate this problem and recommend changes to Americas regulatory system here. The important things to consider are that this work will take six to nine months and now isnt the time to do a comprehensive evaluation because the markets are unstable and many elements of Americans Financial and Credit industries are in flux whether it be Hedge Funds, Credit Default Swaps, etc.. Moreover, this panel or Commission should not be a sole Congressional creation it should be a joint executive and legislative branch initiative that way it will have optimal credibility and optimal impact in bringing about change. The best thing Congress could do for the American people is design this Commission and the plan for this Commission to carry out its mission and put it in the legislation but let the next Congress and President make the appointments, currently there is too much finger pointing and raw emotions about the disastrous state of things to be initiating studies on the problem.
The legislation should firm up provisions restricting what TARP fund managers pay for assets they purchase so that taxpayer monies arent wasted. Specifically, more restrictions could be added to better protect the public on some bonds financed with sub-prime mortgages. What transpired with these sub-prime mortgages is that investment banks bought these sub-prime loans bundled them up and sold bonds based on them with certain bonds getting higher priority for payment than other bonds in terms of monies coming from the burrowers of these sub-prime mortgages. The bottom line is that low priority bondholders are going to see poor payment of monies owed on these bonds, the legislation should require these fund managers to factor in expert estimates of sub-prime burrowers default rates so they dont over pay on these bonds. The legislation should limit exposure by the TARP fund managers to these lethal credit-default swaps that cost some financial institutions billions and billions of dollars. A maximum exposure of ten-percent of the TARPs overall spending authority should be prescribed for credit-default swap exposure. Moreover, these credit-default swaps are so poisonous that the treasury should be restricted to not buy them through auction or reverse auction but only through direct purchases and only if there is a compelling reason to buy them like an important financial institution needs financial help and this is the best option available.
This legislation should give the Treasury the authority to look into any businesses books or depose any individual that will provided needed information to accurately value these illiquid assets this legislation authorizes the Treasury to purchase through TARP. It has been reported in the media that part of the problem with the freeze up in these securities markets is that certain entities know the true fair value of these assets but are not disclosing it. Such provisions will make it clear that the time for games is over.
The legislations foreclosure mitigation efforts are great however with one slight exception, that being, the last sentence in subsection (a) Section 109, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. This sentence gives the Secretary to much discretion to much power to put the taxpayer on the hook for defaulting home loan burrowers, theoretically, this sentence authorizes the Secretary to block foreclosures on defaulting home loan burrowers whose aggregate amount of loans total $ 700 billion dollars, this is preposterous. The Secretary should be bound by the restrictions in the National Housing Act and other federal laws in helping distressed home loan burrowers. This sentence should be stricken from the legislation.
The legislation should not include the provision Sec.131 (b) which prohibits the Secretary in the future from using the Exchange Stabilization Fund from propping up the Money Market Fund industry in the future. Why remove a tool from the tool box of the Treasury and the Federal Reserve Board to aid and protect the American economy, which the use of this fund in this matter essentially acts as. This prohibition doesnt further the interests of the American people, it doesnt strengthen America, it should be discarded.
The legislation should add a proviso to Sec. 132 in the legislation. Section 132 essentially says that the Security & Exchange Commission can change the accounting rules to not require companies to mark down the value of assets when the value of those assets drop in the asset or securities markets. This authority to the SEC is good and fair because the asset and security markets are not working properly, but once they are working properly than Mark-to-Market Accounting rules should be reinstated because otherwise it is misleading to investors and other people that have a legitimate need to know the accurate financial condition of a company. The legislation should add a five year limit on the SECs authority authorized by Section 132.
Part Two
If Congress wants this bill to pass improve the bipartisan appeal of this bill. For the Democrats, there has been a call amongst Democrats to do something for homeowners in bankruptcy, provide help so more of these homeowners can keep their home. Congress should comply. The idea here is to give bankruptcy judges power to amend these home mortgage loans. The contrary argument is that giving bankruptcy judges this power will result in all buyers of homes paying more for their home loans because lenders will have to factor in these losses from bankruptcy court actions when determining the terms they will offer home buyers for loans. Congress should consider two things here. First, put a time limit on any such home loan changing authority for bankruptcy judges like five years; therefore, any burden on future home buyers should dissipate after five years. Secondly, put limits on the power of bankruptcy judges to change the terms of home loans to mitigate the loss to lenders. Such as the bankruptcy judge does not have the power to reduce the principle owed on the loan only the power to bifurcate the loan principle and only to reduce the principle on the monthly payment portion of the loan to no lower than eighty-five percent of the market value of the property and he or she is required to make the balance of the principle a balloon payment loan payable when the home is sold, refinanced or an additional home equity loan is taken out on the property. The bankruptcy judge would also be limited in how much he or she could reduce the interest rate on the loan to the current rate paid on a FHA 30- year fixed rate loan. Empowering Bankruptcy judges this way should have a lot of bi-partisan appeal from the following standpoint. The whole success of this Emergency Economic Stabilization action hinges on the floor being found quickly on home sale prices so lenders can have confidence that the value of the collateral for these home loans, the homes themselves, wont drop below the principle of these loans otherwise lenders are exposed to incur economic losses which they dont like. To this end, the more Congress can do to stop the flooding of homes for sale on the market, which this bankruptcy initiative would bring about, the quicker the market can find this floor and the whole home loan industry can get back to operating in a good and proper manner. In addition, it is not that unusual for entities that are not homeowners who have a fiduciary interest in home properties to have to wait for the sale of a property before they get the monies rightfully due them from a home property, the Housing Act just signed into law this past July requires some homeowners getting Federal Government assistance in staying in their homes to give the Federal Government a certain percentage of the profit when they sell their homes. Congress should also keep in mind the consideration of what are they protecting from the lenders standpoint on this bankruptcy issue, by that it is meant if a homeowner goes into bankruptcy and eventually loses his home and the lender who owns the loan sells the property what does the lender end up with lenders usually get below market prices for these foreclosure sales and incur added expenses in carrying and selling the property; it would seem that such bankruptcy assistance provisions in this legislation would not turn out so terrible for lenders.
For the Republicans, many Republicans opposed to this legislation are saying Republicans must stay true to Republican ideals, specifically, the ideal that government should be frugal stewards of taxpayer monies which means in the present circumstances they would like to see the market pay for more of this financial and credit industries rescue program and lessen the cost to the American taxpayer. The answer to this dilemma lies in the program implemented to protect against runs on money market funds. The treasury is using $50 billion from the exchange stabilization fund to insure deposits in money market funds; a fund who wants to participate and whose value equals .995 and .9975 of share values has to pay .015 % of the funds value to the treasury department the logic being that this low percentage is not real onerous on the financial institution it is de minimus, the financial institution can live with this fee. Why not expand this logic to the whole financial and credit industries to raise monies to pay for this rescue legislation. When banks burrow money from other banks tack on a .015% fee to pay for this legislation, when banks issue commercial paper to businesses so businesses can pay for operating expenses tack on a .015% fee to pay for this legislation, when corporations or banks issue bonds to raise capital .015% goes to pay for this rescue legislation, etc.. For all business credit and capital raising transactions tack on a .015 % fee to pay for the rescue legislation, the rescue legislation should adopt this initiative. The percentage is so low it shouldnt make a material difference in the welfare and well-being of any business. Moreover, this fee will only be added on until all monies burrowed under this legislation are paid back or for fifteen years whichever is a shorter time-period and such a length of time is not that long all things considered. Lastly, the interest rates banks charge each other for short term loans has recently jumped from 2 to over 4 percent, commercial paper interest rates have jumped over one percent, interest rates on corporate bonds have jumped plus two percent, the financial and business community should be very receptive to a solution to the credit and capital raising industries problems which involves only a .015% increase in costs over ordinary costs.
