Emergency Economic Stabilization Act of 2008
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 -- (House of Representatives - September 29, 2008)
Ms. KAPTUR. I thank the able Chairman BARNEY FRANK for yielding me this time, and say America needs the right deal, not a fast deal.
This Congress must step up to its constitutional responsibilities as a deliberative body to craft that right deal, not an insider trade. Actually, this bill is the wrong medicine. It concentrates financial power even more in the hands of Wall Street's mega banks and its buddies at the U.S. Treasury.
It bails out their bad behavior with no reform to prevent further abuse, and it ignores Main Street's real housing challenges. There is a much better way. The Bush administration says we are facing the worst financial crisis in modern history. That is not true.
The market problems of the 1980s were much worse than today. Then, over 3,000 banks failed, interest rates were 21 percent, and all the banks in Texas went down. The economic instability was resolved by the financial system in a much more disciplined and rigorous way than taxpayers printing money for Wall Street.
In those days the FDIC, not through a taxpayer bailout, but through careful use of FDIC's considerable power, resolved thousands of problem situations. No cash changed hands. The FDIC used its powers, its regular powers to regulate transactions with banks through a system of subordinated debentures and promissory notes. Even curbs on executive salaries and controlled dividends were exacted through that process. The cost of the entire enterprise was $1.8 billion, resolving over $100 billion in problem institutions from the FDIC insurance fund, paid for by the banks, not the taxpayers.
Today's economic challenge is a credit and housing crisis, not a liquidity crisis, precipitated by SEC accounting rules that are rewarding high-risk speculators and penalizing sound banks.
Mr. Chairman, I say we go back to the drawing board. This bill does not do it for the American people. Draft the right deal, not the fast deal. Draft the best deal.
[From moneynews.newsmax.com, June 3, 2008]
Isaac: Banking Crisis? What Banking Crisis?
The former chairman of the Federal Deposit Insurance Corp., William M. Isaac, says the current turmoil in financial markets is not remotely comparable to the Great Depression.
He disputes even the notion of a crisis.
``If there is a banking crisis, I have seen no evidence of it. I can count on my fingers and toes every sizeable bank about which I have had any concern during the past year,'' Isaac wrote recently in The Wall Street Journal.
By comparison, Isaac says, during the 1980s and early 1990s, the U.S. suffered from 4,000 bank and savings and loan failures. There were still more than 1,430 banks on the FDIC's ``problem list'' by the end of 1991.
``I'm sure the problem banks list will grow during the next year, but it totaled only 76 at last count,'' Isaac says.
``Banks continue to have incredible access to the capital markets and over 99 percent of banks are considered well-capitalized by regulators.''
Additionally, Isaac says, a 20 percent decline in housing prices was not really all that big of a deal economically for the U.S.
The widely cited S&P/Case-Shiller home-price index declined 14.4 percent in March from a year earlier. The gauge has fallen every month since January 2007.
Isaac notes that in Sarasota, Fla., where he resides, housing prices increased by 35 percent in one year alone, in 2005.
Isaac argues that such a rate of increase is ``unsustainable'' and was ``pushing housing prices beyond the reach of most people.''
Why is all this happening now? Politics, says Isaac.
Americans have been ``spoiled'' by 25 consecutive years of prosperity and, during this year's election cycle, one in which a Democrat has a chance to take over the White House, ``roughly half of the population wants us to feel angst,'' he writes.
Some economic experts agree with Isaac's assessment of the banking industry.
``Asset bubbles result in the misallocation of capital, which adversely affects economic growth,'' Donald P. Gould, president of Gould Asset Management, tells Moneynews.
``Probably it is safer to let the market undo its own bubble.''
Federal intervention in the market could result in a deflationary period just like that seen in Japan during the 1990s.
``Witness what happened when the Bank of Japan pierced the Japanese real estate bubble,'' says Gould. ``A decade-plus of recession.''
Ken Kamen, president of Mercadien Asset Management, tells Moneynews that an overreaction is not needed, as, ultimately, ``market forces will decide where money needs to be.''
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BAILOUT FEVER: RUSH TO JUDGMENT
(By William M. Isaac)
It is disheartening that Congressional leaders are on the verge of enacting the largest bailout program in history--a $700 billion real estate loan purchase from Wall Street proposed by Treasury.
The current crisis in our financial system can be handled effectively without any expenditure of any taxpayer funds. A time tested model is already in place.
We handled far more credit problems in a far harsher economic environment in the 1980s than we are facing today. Three thousand bank and thrift failures were handled without producing depositor panics and massive instability in the financial system.
One explanation proffered for the urgency of this program is that money market funds were under a great deal of pressure last week as investors were losing confidence and withdrawing their money. If this is Treasury's primary concern, putting the government's guarantee behind money market funds--as Treasury did last week--should have taken care of the problem.
The other rationale I have heard for acting immediately on the $700 billion bailout is that bank depositors are getting panicky--mostly in reaction to the failure of IndyMac in which uninsured depositors were exposed to loss.
Does this fear mean that we need to enact an emergency program to purchase $700 billion of real estate loans? If the problem is depositor confidence, perhaps we need to be clearer about the fact that the FDIC fund is backed by the full faith and credit of the government.
If we want to take stronger action, the FDIC should announce that it will handle all bank failures, except those involving significant fraudulent activities, as assisted mergers that will protect all depositors and other general creditors. The FDIC should do this in
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the current climate anyway, so why not announce it as a temporary program and calm depositors?
An additional benefit of this approach is that community banks would be put on a par with the largest banks because depositors are less convinced that the government will protect uninsured depositors in a small bank than a large bank.
The potential instability of funding for money market funds (and perhaps banks) is the primary justification I have heard for acting urgently on the bailout program. There are clearly more efficient and less expensive ways to handle this problem.
If we enact the $700 billion bailout, will it work--will banks be willing to part with the loans and will the government be able to sell them in the marketplace on terms the taxpayers would find acceptable? I have my doubts.
To get the banks to sell the loans, the government will need to buy them at an inflated price compared to what the private sector would pay for the loans today. There are lots of investors who would only be too happy to purchase the loans today, but the financial institutions and investors cannot agree on a price. The money is sitting on the sidelines until there is clear evidence we are at the bottom in real estate.
Having financial institutions sell the loans to the government at inflated prices so the government can turn around and sell the loans to well-heeled investors at lower prices strikes me as a very good deal for everyone but U.S. taxpayers.
Surely we can do better. One alternative is a ``net worth certificate'' program along the lines of the program Congress enacted in the 1980s for the deeply troubled savings bank industry. It was a big success and could work in the current climate. The FDIC resolved a $100 billion insolvency in the savings banks (had they been marked to market) for a total cost of $1.8 billion.
The net worth certificate program was designed to shore up the capital of weak banks to give them more time to resolve their problems. The program involved no subsidy and no cash outlay.
The FDIC purchased net worth certificates (subordinated debentures) in troubled savings banks that the FDIC determined could be viable if they were given more time. Banks entering the program had to agree to strict oversight from the FDIC, including oversight of compensation of top executives and removal of poor management.
The FDIC paid for the net worth certificates by issuing FDIC senior notes to the banks so there was no cash outlay. The interest rate on the net worth certificates and the FDIC notes was identical so there was no subsidy.
If we were to enact this program today, the capital position of banks with real estate holdings would be bolstered, which would give those banks the ability to sell and restructure assets and get on with their rehabilitation. No taxpayer money would be spent, and the asset sale transactions would remain in the private sector where they belong.
If we were to (i) implement a program to ease the fears of depositors and other general creditors of banks, (ii) keep tight restrictions on short sellers of financial stocks, (iii) suspend fair value accounting (which has contributed mightily to our current problems by marking assets to unrealistic fire-sale prices), and (iv) authorize a net worth certificate program, I believe we would settle the financial markets without significant expense to taxpayers.
If Congress spends $700 billion of taxpayer money on the loan purchase proposal, what do we do next? If we implement the program suggested above, we will have $700 billion of dry powder we can put to work in targeted tax incentives to get the economy moving again.
The banks do not need taxpayers to carry their loans, they need proper accounting and regulatory policies that will allow them time to work through their problems.
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BRANCH BANKING & TRUST CO.,
Winston-Salem, NC, September 23, 2008.
Hon. (Name),
Senate Building,
Washington, DC.
Or
Hon. (Name),
House of Representatives,
Washington, DC.
DEAR SENATOR/CONGRESSMAN/REPRESENTATIVE: BB&T is a $136 billion multi-state banking company. We have 1,500 branches throughout the mid-Atlantic and southeast states. While we have been impacted by the real estate markets, we continue to have healthy profitability and a strong capital position.
We think it is important that Congress hear from the well run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.
Attached are the issues that we believe are relevant from the perspective of healthy banks. Your consideration of these issues is greatly appreciated.
Sincerely,
John Allison,
Chairman and Chief Executive Officer.
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Key Points on ``Rescue'' Plan From A Healthy Bank's Perspective
1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.
2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post ``rescue'' punish the poorly run institutions and not punish the well run companies.
5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed ``rescue'' plan.
6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.
7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, ``out of the blue'' guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.
8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bail out insurance companies, investment banks, hedge funds and foreign companies.
9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
10, The proposed bankruptcy ``cram down'' will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.
11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990's the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.
12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.
13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.
14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the ``rescue,'' effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?
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