The Bailout Plan's Modifications Spell Disaster For The U.S. Economy

In looking at the statement from House Speaker Pelosi which outlines the bailout plan as it will be passed, the first impression of it is that the politicians have eviscerated the Treasury's original proposal to the point which makes the plan destined to fail.

Failure of the plan to work means that the U.S. will enter a much deeper and longer lasting recession than it otherwise would have.

The following is the statment released by Speaker of The House Nancy Pelosi. Further analysis and opinion follows.

Office of Speaker Nancy Pelosi -- Sept. 28, 2008

REINVEST, REIMBURSE, REFORM

IMPROVING THE FINANCIAL RESCUE LEGISLATION

Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets -- including cutting in half the Administration's initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers' funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

• Reinvest in the troubled financial markets ... to stabilize our economy and insulate Main Street from Wall Street
• Reimburse the taxpayer ... through ownership of shares and appreciation in the value of purchased assets
• Reform business-as-usual on Wall Street ... strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN

Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable -- protecting American taxpayers and Main Street -- and these elements will be included in the legislation

Protection for taxpayers, ensuring THEY share IN ANY profits

• Cuts the payment of $700 billion in half and conditions future payments on Congressional review
• Gives taxpayers an ownership stake and profit-making opportunities with participating companies
• Puts taxpayers first in line to recover assets if participating company fails
• Guarantees taxpayers are repaid in full -- if other protections have not actually produced a profit
• Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families

Limits on excessive compensation for CEOs and executives

New restrictions on CEO and executive compensation for participating companies:

• No multi-million dollar golden parachutes
• Limits CEO compensation that encourages unnecessary risk-taking
• Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate

Strong independent oversight and transparency

Four separate independent oversight entities or processes to protect the taxpayer

• strong oversight board appointed by bipartisan leaders of Congress
• A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse
• An independent Inspector General to monitor the Treasury Secretary's decisions
• Transparency -- requiring posting of transactions online -- to help jumpstart private sector demand

Meaningful judicial review of the Treasury Secretary's actions

Help to prevent home foreclosures crippling the American economy

• The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year
• Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures
• Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis - allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks

Commentary

First, they've cut the amount of money that is immediately available in half. That in itself means the plan-at best-can only be half as effective as it would have been otherwise.

Second, the new plan requires the government to get ownership in any companies that participate. That will only serve as a disincentive on the part of the more sound financial firms to take part in the plan and anything that reduces participation reduces the market (or liquidity) for these assets and that serves to defeat its purpose.

Third, the plan guarantees that taxpayers will get repaid in full if the government loses money on the deal. Paid by whom? The firms that participated in bailout? All financial firms? The whole idea of repayment in full is beyond absurd anyway because if the plan fails, there won't be any financial firms left to pay for any losses.

Fourth, the plan "puts taxpayers first in line to recover assets if participating company fails." That means the cost for financial firms to issue debt is going to skyrocket, because any bondholder of a firm that participates is subordinate to the government. Who in their right mind is going to purchase the debt of a participating financial firm in that case unless they are getting an astronomical rate of interest as compensation?

Fifth, the plan as written makes no provisions for elected officials to pay back any of the money they received from two of the firms most responsible for the housing bubble-Fannie Mae and Freddie Mac. If the GSE's weren't in the market buying up every scrap of mortgage paper they could lay their hands on, the housing bubble would have been much smaller. The GSE's had many of these politicians in their pocket via lobbying, etc. The politicians had their chance to rein in these government sponsored excretments, but didn't because they were too busy counting the donations that were being made to their PACS. Let Nancy Pelosi, and Barnet Frank and every other politician who ever received ONE DIME from Fannie and Freddie pay EVERY CENT of it back to the taxpayers.

To further prove how this is nothing more than politicians bowing to their constituents in an election year, check out the provision for helping troubled homeowners stay in their homes. On the face of it, the idea sounds good. But what if you are a taxpayer who has been paying their mortgage for the last 20 years. Do you want your tax dollars being used to prop up some deadbeat who never should have had a mortgage in the first place? Where is this taxpayer’s protection when Congress bails out someone that goes belly up? Why should the deadbeats have the amount they owe on their mortgage reduced and not everyone? Talk about oversight, who exactly will be making the decisions regarding which homeowners get bailed out, or is it just that all who cannot pay get bailed out?

If I'm working two jobs to pay the mortgage, I might as well just quit one of them. If I can't pay, the government's going to bail me out anyway! And lower the amount that I owe! But that's only going to happen if I get in trouble and stop paying, so I better stop paying right now!

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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