I’ve been thinking about this for the last few days, but today’s article in the Los Angeles Times has prompted me to right down my thoughts.
First, I think the notion of establishing a government agency, ala the Resolution Trust Company, to transfer the problematic mortgage assets off the books of troubled banks is a good one. This new agency, which for purposes of discussion we’ll call the Troubled Loan Agenda (TLA), could purchase these loans at a discount, moving cash back to banks to loan out again (providing the credit the country needs to run). Being a government agency, and not required to turn a short-turn profit, TLA could take a long-term view of how to turn the non-performing assets into performing ones. The TLA would have the incentive to renegotiate the loans that the banks didn’t have, and could restructure them so that they still brought in money but were affordable by lengthening the terms of the loans or lowering interest rates to something approaching the Federal rates. The TLA would also make profit from the sales of the foreclosed properties, for the discount paid when purchasing the loans would take the drop of property values into account.
Of course, all this would require appropriate oversight to ensure it was run in a reasonable and responsible manner. It would require accountability. It would need to be done timely to ensure that no more faith would be lost in the markets. It would need to have appropriate regulations to ensure that only loans that were the cause of the current crisis were covered; that responsible lending standards were in place for the future; that the willingness to take the long term view and work with homeowners was part of the mission; to ensure that the TLA couldn’t just be used as a tool for profit for failed corporate leaders, but would stabilize the market for American homeowners and American small business.
So, as I said, the notion, if done right, is a good one… and one that could be good for the nation.
Now, what about the current proposal? According to the LA Times article, the plan would allow the Treasury to act unilaterally: Its decisions could not be reviewed by any court or administrative body and, once the emergency legislation was approved, the administration could raise the $700 billion through government borrowing and would not be subject to Congress’ traditional power of the purse. It goes beyond the powers even granted to FDR during the depression. According to the article, the measure contains no measures to help homeowners facing foreclosure. The plan gives the Treasury secretary spectacularly wide leeway to buy, manage and sell mortgages and mortgage-related securities with the aim, in the words of the proposal, of “providing stability or preventing disruption to the financial markets or banking system” and “protecting the taxpayer.” The only limitations would be that Treasury’s stock of troubled assets could not total more than $700 billion at any one time, that the buying program would end after two years, and that Paulson or his successor would regularly report to Congress.
So, I hope Congress is smart (I know, wishful thinking… but as former President Jed Bartlett said to Obama Barack, perhaps we need to reclaim the word “elite”: it means well above average. What is the problem with electing candidates with excellence)… (oops, I digressed). I hope Congress is smart and ensures there is appropriate oversight in this proposal, that we focus the authority and take the long-term view (which is something a for-profit company cannot do). Alas, I fear this will be like the Patriot Act, reasonable in the overall idea, implemented wrong and rushed through Congress in an environment of fear and a push for speed. Let’s do it right this time.
