Bailout deal reached; Update: ACORN, other pork removed

posted at 10:24 am on September 28, 2008 by Ed Morrissey

Negotiators on Capitol Hill finally reached an agreement on a sweeping bailout of the financial sector by the Treasury early this morning, attempting to head off bank runs and panics around the world when the Asian markets open tonight.  The plan includes options for asset insurance that House Republicans demanded, as well as broad accountability for actions taken by Treasury in purchasing assets.  The deal also allows a wider group of banks to rid themselves of the toxic assets, created in large part by Congress over the last ten years:

A summary of the tentative agreement released by Ms. Pelosi’s office said the plan “gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full — if other protections have not actually produced a profit.” (See Ms. Pelosi’s summary.)

Additionally, the summary said the legislation will expand the range of firms that can sell troubled assets to the government to include pension plans, local governments and community banks serving “low- and middle-income families.” …

The summary issued by Ms. Pelosi’s office said the legislation will include provisions giving Treasury the ability to work with cash-strapped homeowners whose mortgages are purchased by the federal government to refinance into a more affordable mortgage. Other foreclosure-prevention measures included in the agreement are an extension of the tax holiday for homeowners who face foreclosure, as well as a tax break for community banks who held shares of Fannie Mae and Freddie Mac. The rescue plan will allow affected banks to take an immediate tax deduction on losses from investments in the two firms, which were taken over by the federal government earlier this month.

Lawmakers also included provisions allowing them to keep a close eye on the Treasury program, including a bipartisan oversight board appointed by members of both parties in Congress, an inspector general to monitor Treasury decisions, and regular audits from the Government Accountability Office. Additionally, Treasury will be required to make transactions made through the troubled asset program available publicly online. Unlike the original Treasury proposal, which would have given the department legal immunity in the program, the tentative agreement reached late Saturday allows for judicial review of Treasury decisions.

This looks like the rare occasion when Congress manages to improve an idea.  The original Paulson plan would have imposed immunity from legal action on any moves made by the Treasury, exactly the wrong direction for a crisis already caused by unchecked government manipulation.  In the new plan, Treasury officials have accountability for their management of the $700 billion plan.

The new agreement may have made the plan larger, but the politics of this probably required it.  In the original Paulson plan, the bailout focused solely on the institutions choking on the government-mandated Mortgage Backed Securities (MBS) and credit swaps based on them.  Congress broadened this to give more direct relief to homeowners facing foreclosure and eviction.  While more painful in the short run, it will probably make the economy more stable in the long run, and give the securities the Treasury buys more value, as foreclosures are a severe loss for the lenders.  If we can keep people in the homes and help them to pay back the mortgages, we may not lose much money at all over the next 25 years.

Some will complain that this will bail out foreign institutions as well as American banks.  That is the result of the government’s creation and sale of MBSs as investment products to people around the world.  Fannie Mae and Freddie Mac sold MBSs to anyone who would buy them, and both Americans and foreigners bought them with the implicit backing of the US government.  Congress made that grave error in the 1990s and created an entire class of junk bonds worse than anything seen in the 1980s, although with some handholding, we may get to see value out of them yet.

This will still be a painful lesson for us about government manipulation of markets.  We will have to tighten belts and cut spending to pay for the initial outlay from this bailout, and we still have another financial crisis coming on entitlements to resolve.  However, this agreement — as painful as it is — will probably make the difference between a recession and a global collapse.  Those of us with market assets will almost certainly not have to worry about Monday, and the possibility of watching them get wiped them out in a panic.

After this, we need to demand humility from Congress on economic policy.  Government-imposed “fairness” led to this catastrophe, and we’ll pay the price for the Community Reinvestment Act and the manipulations of Fannie Mae and Freddie Mac for a generation.  Had we allowed the market to work normally, this never would have happened.

Update: The funding of the Housing Trust Fund, the slush fund that feeds ACORN and La Raza, is out.  You can thank House Republicans for enough obstructionism to get that result.  Other changes made to the final version of the bailout, according to a source on the Hill, were the removal of several provisions:

  • Provision to provide unions and other activist groups with proxy access for corporate boards
  • Provision to mandate shareholder votes on compensation issues (union priority)
  • Diversion of funds into a housing fund to support left-wing activist groups like ACORN
  • A provision to allow trial judges to arbitrarily adjust mortgages, creating bonanza for trial lawyers
  • A provision to require the government to sell to state and local governments at a discount homes the government acquires as a result of foreclosure

It also suspends mark-to-market rules and requires a study on their effects on the collapse.

Update II: Just to clarify, the bullet points are items removed from the plan.  Sorry; it was very unclear.


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I found this over on FR…

If you have an extra couple of minutes I would suggest taking a look at it.

Obama & ACORN

Great for those trying to get into the mood for Halloween, it’s positively frightening.

Dorvillian on September 28, 2008 at 11:20 PM

If you have an extra couple of minutes I would suggest taking a look at it.

Obama & ACORN

Great for those trying to get into the mood for Halloween, it’s positively frightening.

Dorvillian on September 28, 2008 at 11:20 PM

Heh. I’ve just been posting that same link around. I finally read it about an hour ago and was astounded. All the pieces fell right into place, didn’t they?

This news needs to get out there.

techno_barbarian on September 28, 2008 at 11:27 PM

techno_barbarian on September 28, 2008 at 11:27 PM

I already sent it out in emails.

ManlyRash on September 28, 2008 at 11:39 PM

I already sent it out in emails.

ManlyRash on September 28, 2008 at 11:39 PM

Excellent. Much appreciated.

techno_barbarian on September 29, 2008 at 12:00 AM

Hmm. Here’s a connection to FannieMae to David Gregory at MSNBC…from atlas:

http://www.typepad.com/t/trackback/343429/33924003“>

nyrofan on September 29, 2008 at 12:13 AM

oops ..

http://atlasshrugs2000.typepad.com/atlas_shrugs/2008/09/cnnd-dick-grego.html

small world

nyrofan on September 29, 2008 at 12:16 AM

http://www.americanthinker.com/blog/2008/09/memory_lane_lynching_franklin.html

reshas1 on September 28, 2008 at 6:30 PM

Is that the Woman that wants to “Socialize” our Oil Industry?

http://www.youtube.com/watch?v=GqjFBiPMmBE

Chakra Hammer on September 29, 2008 at 12:57 AM

The provisions allowing the government to give relief to homeowners whose mortgages are purchased may be dead letter, because the government is not purchasing whole mortgages, they are purchasing securities backed by streams of payment from part of a pool of mortgages. Those mortgages are held in special trusts, governed by pooling and servicing agreements that PROHOBIT mortgage modification, since mortgage modification such as reducing the payment and/or reducing the principal would be considered unfair to those who bought the bottom tranches (e.g., those who bought securities backed by the payments between the bottom 50% to 60%, or 80% to 90%, of the payment stream). It is very unlikely that the government will wind up with 100% of a given mortgage, given how they were sliced and diced. And any attempt to violate the pooling and servicing agreements that prohibit modification would plunge the whole enterprise into years of litigation, which would prevent the very un-freezing of the market that the government seeks.

The complex mortgage backed securities were always based on blind trust in the institutions that issued them, and the assumption that real estate never goes down. Since both of those assumptions were wrong, there will be unavoidable losses.

What the government should do is focus on buying the tranches backed by the top 50% of payments, and then pass a law stating that if a homeowner facing foreclosure so desires, they can rent the foreclosed property for 50% of what the 30-year fully amortized mortgage payment would have been, plus taxes and insurance and a payment into a maintenance reserve account in the amount of 1 month’s rent every year. The person could stay as long as they wanted, and to the extent they treated the property well, they would get money back when they move. Provisions could be added giving them an option to buy at a slight discount to market after a time, or giving them a portion of profits if, after a time, the government wants to sell the property and the new owner wants to occupy.

This would give relief to people who honestly wanted to live in the house they bought, but just got caught up in the (Fed-Fannie-Freddie induced) bubble and overpaid. Extra provisions could be added which would limit new non-housing debts as a percentage of income, and a requirement that if the rent dropped below 3/8ths of income, the difference between rent and 3/8ths would have to go into a 401(K) or be used to pay down other debts still outstanding.

This is the economic equivalent of a bankruptcy mortgage modification, without having to amend pooling and servicing agreements, and without poisoning the entire financing market for primary residences with Obama’s bankruptcy provision, which, if adopted broadly, would instantly raise interest rates for all homeowners and reduce the value of their homes accordingly.

This solution also creates desirable and stable investment properties for small investors who have been starved for product during the entire boom. And to the extent the newly rented houses sell as investments, the government would recover nicely, as the foreclosure proceeds came in and paid off the first tranches of the mortgage backed securities. Of course, the people holding MBSs know that, and are going to try to dump the worthless lower tranche MBSs on the Treasury, while keeping the upper tranches for themselves.

davidcherr on September 29, 2008 at 1:02 AM

Is that the Woman that wants to “Socialize” our Oil Industry?

http://www.youtube.com/watch?v=GqjFBiPMmBE

Chakra Hammer on September 29, 2008 at 12:57 AM

Why yes. Yes it is.

techno_barbarian on September 29, 2008 at 1:07 AM

I found this over on FR…

If you have an extra couple of minutes I would suggest taking a look at it.

Obama & ACORN

Great for those trying to get into the mood for Halloween, it’s positively frightening.

Dorvillian on September 28, 2008 at 11:20 PM

Wow. That’ll get you in a panic.

Is there not a single honorable journalist in the mainstream? Is there not one??

capitalist piglet on September 29, 2008 at 1:51 AM

Does anyone know which politician had inserted these dumb slush fund languages into the bill?

Kaitian on September 29, 2008 at 2:32 AM

Does anyone know which politician had inserted these dumb slush fund languages into the bill?

Kaitian on September 29, 2008 at 2:32 AM

That person needs to go to tried for treason or at least go to jail.

Chakra Hammer on September 29, 2008 at 5:22 AM

As I said earlier, ACORN, mortgage modifications, tax items and a number of other things where just dressing for the Dems to “negotiate” away to get Republicans on board. They were never seriously part of the bill. See this.

As far as someone getting tried for treason… never happen. As a matter of fact, I’m very sure that Dodd, Frank, Pelosi and Reid will all be reelected quite handily.

Here in southwest Florida; we occasionally have phenomena known as “Red Tide”. It makes the water toxic to fish… it kills the bait in your bait well. The only way to deal with it is to avoid it completely until is dissipates. Our “Red Tide” is the $60 trillion of credit default swaps. From the indications of Asian and European markets this morning, they know the “Red Tide” still exists.

CC

CapedConservative on September 29, 2008 at 5:51 AM

As I said earlier, ACORN, mortgage modifications, tax items and a number of other things where just dressing for the Dems to “negotiate” away to get Republicans on board. They were never seriously part of the bill. See this.

As far as someone getting tried for treason… never happen. As a matter of fact, I’m very sure that Dodd, Frank, Pelosi and Reid will all be reelected quite handily.

Here in southwest Florida; we occasionally have phenomena known as “Red Tide”. It makes the water toxic to fish… it kills the bait in your bait well. The only way to deal with it is to avoid it completely until is dissipates. Our “Red Tide” is the $60 trillion of credit default swaps. From the indications of Asian and European markets this morning, they know the “Red Tide” still exists.

CC

CapedConservative on September 29, 2008 at 5:51 AM

How can you not make the case for a conspiracy on this?

Economic terrorism against the United States.

Chakra Hammer on September 29, 2008 at 6:33 AM

How can you not make the case for a conspiracy on this?

Economic terrorism against the United States.

Chakra Hammer on September 29, 2008 at 6:33 AM

On this? How about this:

Oppose oil exploration
Oppose drilling
Oppose nuclear
Oppose dam construction
Oppose military
Oppose business (taxed to be non-competitive in the world)
Oppose business (regulated to be non-competeitve)
Oppose rational and fair taxes for citizens
Oppose treatment of war prisoners as war prisoners
Oppose regulation of their ATM (Fannie/Freddie)
Oppose rational credit standards for mortgage companies
Oppose free markets
Oppose free speech

Name ANY other country on the planet that has an internal political party that seems to be working so hard to destroy their own country.

Funding sources:
Soros ($811 million invested in offshore drilling in Brazil)
Sanders (sold Golden West to Wachovia… which is sinking it)
Wall Street (getting their credit default swaps bailed out)

Voting sources:
The 40% of the population that pays no taxes

What conspiracy would you be referring to?

CC

CapedConservative on September 29, 2008 at 7:14 AM

Rep. Thaddeus McCotter, who gave you how to speak Democrat, now gives you his opinion on the bailout.

Xiphos on September 29, 2008 at 9:33 AM

It also suspends mark-to-market rules and requires a study on their effects on the collapse.

That represents the bulk of the liquidity problem. How about suspending that rule, and waiting a few weeks before pushing the rest.

Vashta.Nerada on September 29, 2008 at 10:13 AM

Um… what about the rider to ban tapping the interior shale formations for oil?

Beo on September 29, 2008 at 10:57 AM

Are republicans too stupid to find a way to tar and feather these democrat criminals? Sounds like a job for Rudy.

Calm Before the Storm on September 29, 2008 at 11:05 AM

They need another update on this thread…Look at section 106 of the new bill. They deleted Acorn and La Raza BUT kept the 20% of profits provision alive, route the cash to two unknown agency’s, and make no provision or protection at all to keep those agencies from then rerouting the money to…ACORN and La Raza. It’s heads I win tails you lose.

I found today that my senator was not even aware of this. He was told the language had been removed from the new draft. Just who ate the ‘Housing trust fund’ and ‘Capital Magnet Fund’?

I smell scam

JIMV on September 29, 2008 at 12:34 PM

The Housing Trust fund is a new low income housing scheme that launders money from this program to the states where they in turn can distribute it to:

Eligible recipients of grants from the states are organizations and agencies (for-profit and non-profit) that demonstrate 1) the experience and capacity to produce the kind of housing the program calls for, 2) the financial capacity to undertake the eligible activity, and 3) familiarity with federal, state, and local housing programs.

Although the program prohibits money going for political purposes, it does not prohibit organizations with a political leaning from getting the loot.ie; if the money goes to housing the organization can use other funds to do its political work….ie; La Raza or ACORN

JIMV on September 29, 2008 at 12:40 PM

Anybody seen a depression around here? I’ve been told there would be one daily if there was no bailout. Nothing signed yet and I still can’t find my depression.

CC

CapedConservative on September 29, 2008 at 1:22 PM

Plan is dying in the house…

roxer on September 29, 2008 at 1:45 PM

Comment pages: 1 3 4 5