Drawing a Line in the Sand on Bailouts
I'm one of those crazy people who have read all 451 pages of the Emergency Economic Stabilization Act, which President Bush signed into law on Oct. 3. For all you novices out there that would be the $700 billion bailout whose core was designed (more or less) by now departed Treasury secretary Henry Paulson and rubber-stamped - with little debate - by Congress.
I read the legislation not because I'm a masochist (after the first 120 pages it's all about extending tax breaks) but because a publisher asked me to write a book that explains "what the heck it all means" to Joe Sixpack and his wife Mary. The book is called "The $700 Billion Bailout, What It Means to You" courtesy of John Wiley & Sons.
The book will make you laugh (I crack a few jokes) and cry ($700 billion is a whole lot of lettuce) but here's my simple take on ESSA which most of you know as "TARP": Uncle Sam can bail out whatever industry or governing body (states, towns, cities) it likes as long as it has the money in hand. (TARP stands for Troubled Asset Relief Program.)
In this case, the entity spending the TARP money is the Treasury Department. As you all know, Mr. Paulson already spent the first $350 billion and before Treasury gets the rest it must mutter these words to Congress, "Mother may I?" Obama's new Treasury secretary is Timothy Franz Geither, president of the Federal Reserve Bank of New York and he and his new bosses in the White House have some ideas about what to do with the rest.
But the basic question policymakers should be asking (as well as we, the taxpayer) is this: Where do we draw the line in the sand on bailouts? Originally, the whole idea was to buy troubled mortgages (presumably subprime and alt-A) from lenders which would turn around and use that fresh cash to make new loans or unclog their balance sheets by taking the cash and dumping the assets to some bottom-feeder.
But Paulson and his TARP crew at Treasury quickly realized that creating a department to buy crap loans and MBS was both a monumental headache and nightmare. (Duh!) So instead, to get cash into the financial system quickly they decided to use the first $300 billion or so to buy stakes in banks, believing these standup citizens of commerce would take that money and lend it out to businesses and consumers.
Depending on whom you believe, banks have done just that - or banks haven't done just that. But there are plenty of critics on Capitol Hill and at the consumer advocacy groups saying (1) the whole bailout is a mess, (2) has been mismanaged, (3) not enough has been done to help consumers via loan modifications (4) that Treasury doesn't have a clue, and so on.
In short, the jury is still out. But we can ask this question: Who deserves the remaining $350 billion? The Democrats and new White House want to help struggling homeowners pay their mortgages via the loan modification route. Others have talked about bailing out certain states, California being at the top of the list. And yet, others have talked about bailing out homebuilding companies. That's right, homebuilding companies. And the Republicans? Suddenly, they've rediscovered their roots as fiscal conservatives. They want to spend as little as possible unless the word "tax relief" is involved. And, of course, no one cares about the federal budget deficit but don't get me started on that issue.
But where do we draw the line in the sand on bailouts? Who's deserving and who isn't? Automakers? Blueblood investment bankers with Harvard MBAs? Homebuilders? Yikes. Before deciding we should keep in mind that this whole financial meltdown started with home mortgages, that subprime of the species. Crazy loans like the payment option ARMs allowed people who should not have had that power to buy homes. In turn, too much liquidity from Wall Street drove up values and allowed consumers to tap equity that proved ephemeral. Joe and Mary Sixpack used their abodes as personal ATMs, spending that money on such things as SUVs, big screen TVs and trips to Vegas.
Homes went up in value - when in reality (and looking back) they should not have. Now housing values are deflating to their true (new) economic value. What that value ultimately will be will be decided by time and the employment picture.
The bailout money would be best spent concentrating on the core mortgage asset. The goal should be to stabilize home values and ease the payment burden on consumers. There are three ways to get there: reduce the loan amount, reduce the interest rate, give the mortgagor a job. Once we create a "floor" on values then and only then can we begin to climb out of the hole.
Keep in mind this one long forgotten fact: the house is the largest asset that most Americans own. Once we get the mortgage piece of this mess fixed, the rest of the economy should follow. But what we will see when the housing landscape is normalized may not be to the liking of businesses that play in the residential space. We may be facing a decade of meager home price appreciation, one where values only rise a point or two a year. But better up then down, I always say.
Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at Paul.Muolo@SourceMedia.com.