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Alternatives to the Big Bailout

September 24th, 2008

As Congress continues to debate the $700 billion bank bailout plan, I’m hearing much opposition to it from friends and other authorities. There are people like my friend Kim White, an entrepreneur who says she worked hard to save for her 20% down payment when she bought a house two years ago. She continues to work hard to pay it off and doesn’t like the idea that other folks, including Wall Street firms, get bailed out. Here’s what some other smart folks are saying:

The California Reinvestment Coalition, a non-profit representing low income families, suggests a six-month moratorium on foreclosures to allow families to remain in their homes while working with housing counseling agencies and loan servicers to negotiate affordable workout plans. The group also suggests reforming the Bankruptcy Code to allow judges to modify all home loans. They presently can modify second home loans.

Congressman Charles E. Schumer, opened an economic outlook hearing today saying he supports a bailout, but “let us be clear – Americans are furious. Even on Wall Street, $700 billion is a lot of money, and none of the thousands of money managers would invest that sum without appropriate due diligence. I think we must seriously consider putting this program in place in installments – so that we do not limit the Secretary’s ability to act as necessary, but are able to evaluate the effectiveness of these expenditures over time."

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Another idea Schumer proposed is insurance fund modeled on the FDIC and paid for by the financial industry that can defray some of the long-term costs of the bailout plan. Schumer said he remained "puzzled by the resistance to equity being part of the process. It seems only fair that we reward taxpayers if, as we all hope, this plan succeeds."

Kenneth T. Rosen Chairman, Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley: “Whether or not Treasury purchases these securities, the only way to treat the mortgage problem is a massive loan modification at the consumer level. I propose an immediate 90-day moratorium on foreclosures to allow the modification plan to be put in place. Directly address the problem by the Treasury buying Preferred Stock at a high interest rate. (The high interest rate will encourage companies to refinance as soon as possible.) Suspend "Mark to Market Accounting" for illiquid but performing loans. This will break the death spiral of asset value mark downs that require companies to raise more capital as they report mark to market losses. Aggressively use Fannie Mae, Freddie Mac, and the Federal Housing Administration to return the capital flow to the residential mortgage and housing sector.”

And here’s voice in favor of the bailout from my friend Paul Schlosberg, a former securities firm president. “It took years to build up these abuses and it will take years to work them out. We have to stem the paranoia and just offer comfort that that system won’t melt down. If we fail, it will be a global failure. If you get panic overseas, then it’s a tidal wave. We have to get out a plan out that stops the bleeding. Then we’ll figure out if it needs to be changed later.”

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