Gingrich Calls on Obama to End Bailouts

/PRNewswire-USNewswire/ -- Former Speaker of the House Newt Gingrich today called on the Obama administration to abandon the strategy of bailing out failing companies, and instead insist that companies choose bankruptcy or receivership as the only way to restore a sense of order and fairness to the economic system.

This includes AIG, who recent reports suggest is going to need another bailout even while rewarding its executives $165 million in bonuses.

In his weekly newsletter for HumanEvents.com, The Newt Gingrich Letter, Gingrich writes about the outrage over the bonuses being paid to AIG executives:

"The cure for our outrage is not merely, as President Obama is demanding, that AIG be prevented from paying its executives... Nor is it acceptable to ask Americans to keep throwing their tax dollars at failed companies and their leaders.

The answer is an old fashioned one: AIG should choose between receivership or bankruptcy. It should not be allowed to choose more bailouts from the taxpayer."

Gingrich continues:

"Thanks to the Bush-Obama-Geithner policy of bailing out failing companies, we now have the worst of all possible scenarios: A taxpayer subsidized, government supervised private company; an unsustainable public/private hybrid that is too public to make its own decisions and too private to be responsible to the taxpayers that are keeping it alive.

"Outrages like the fat cat bonuses currently dominating the headlines will only continue as long as the rule of politicians supplants the rule of law on Wall Street.

"Bankruptcy would replace the rule of politicians over U.S. financial institutions with the rule of law."

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Auto Bailout Leaves Taxpayers on the Hook

U.S. Rep. Lynn Westmoreland on Wednesday voted against the $14 billion bailout package that would provide loans to the Big Three automakers. The bill passed the House 237-170.

“The Detroit automakers maintained an outdated business model, bowing to union demands for bloated salaries and benefits and falling behind their competitors in meeting consumer demands,” Westmoreland said. “I don’t see how my constituents should be asked to pay for those decisions when so many small businesses in my district are facing very tough times and many are going into bankruptcy. There’s no federal bailout for them.

“There’s a Kia plant opening in my district in west Georgia and thousands are applying for the 2,500 jobs that will come there. Why should U.S. taxpayers who work in plants of foreign-based automakers pay to bail out Detroit, their competition? The Big Three’s workers cost their companies, on average, $20 to $30 an hour more than workers of foreign-based automakers.

“It’s good that the bill is designed to prevent huge payouts to executives and golden parachutes, but this still leaves taxpayers on the hook if the Big Three continue to unravel. I also have a problem with the creation of a federal “car czar.” Perhaps the only thing guaranteed to be less responsive to the market than the management of the Big Three is a new federal bureaucracy. Washington politicians and bureaucrats can’t credibly lecture anyone on how to balance the books.

“Congress doesn’t have the best record of late with bailouts. The $700 billion bailout for the financial services industry has not worked. The money has not filtered down to the small businesses and individuals to get loans. The construction industry especially is being hit hard, with banks refusing to restructure loans and allow liquidity. Banks are using the money to buy other banks rather than freeing up the credit market. I’m afraid this auto bailout won’t fulfill its intentions either.”

The bill now goes to the Senate.

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Consumer Reports Survey: 56 Percent of Americans Think U.S. Needs to Help Citizens More in Tough Economy

/PRNewswire-USNewswire/ -- Consumer Reports' latest national survey finds that more than half (56%) of respondents think that government hasn't done enough for them in these tough economic times.

Only 17 percent of those polled said the government needs to do more for banks and financial institutions. In the poll, 29 percent said the government went too far in bailing out the financial industry. Thirty-nine percent were unsure.

The Consumer Reports National Research center calculated results based on a nationally representative telephone survey of 2000 adults, conducted in late October 2008. The full report is available in the January issue of Consumer Reports on sale December 2 or at www.ConsumerReports.org.

"The results show that people largely think the bailout won't help average citizens," said Noreen Perrotta, Consumer Reports money editor. "We took a look at the responses and came up with dos and don'ts for consumers dealing with financial distress."

When asked which reforms could help Main Street the most, respondents to CR's poll cited these top actions:

-- Ensuring the financial health of the Social Security system. (88 %)
-- Reducing the national debt. (87%)
-- Protecting pensions and other retirement accounts when companies or
financial institutions go under. (85%)
-- Increase spending on energy exploration, energy efficiency, and
alternative energy sources. (84%)
-- Ensure affordable health care for all Americans. (82%)
-- Increase regulation of financial institutions to ensure responsible
practices. (78%)
-- Extend federal insurance to all deposits in savings and money market
accounts. (78%)
-- Cut taxes for working Americans. (77%)


The rescue plan enacted in October gave broad authority to the Secretary of the Treasury to use as much as $700 billion to shore up the ailing financial industry. Economists say that it will ultimately help millions of people of who are falling victim to the souring economy.

But back on Main Street, the rescue plan may seem like a bitter pill because the money is going to the financial institutions that many see as the cause of the problem. The people CR polled blamed several factors for the economic crisis, including poor lending practices by banks and mortgage companies (27 percent), lack of government oversight (26 percent), Wall Street greed (19 percent), and excessive borrowing by consumers (15 percent).

Lost jobs, lost health care

The top worry of poll respondents was the health of Social Security; 88 percent called the issue important or very important. It most likely looms large because of the increasing fragility of other sources of retirement income. Only about half of working Americans are enrolled in a pension or 401(k) plan. Americans have lost as much as $2 trillion in retirement savings over the past year and a half.

While retirees cope with diminished nest eggs, younger workers worry about unemployment increasing. It could reach 8 percent nationally, according to some estimates. With the loss of jobs comes the loss of health-care coverage. Twenty percent of respondents in CR's survey said they're unable to afford medical bills or drugs; 15 percent said they lost coverage or their benefits were reduced because of the downturn.

Seventy percent of poll respondents would like to see government regulation of mortgage lenders. Only 4 percent said they've missed a mortgage payment, but families stuck with subprime loans are at risk of falling behind.

Some economists fear that the credit-card defaults could be the next shoe to drop in the economy, as overextended borrowers can't meet their payments. Defaults are expected to reach record highs as unemployment increases. Fifty-seven percent of poll respondents said they've reduced their credit-card spending; Eighteen percent said they have had their interest rates increased, been hit with penalty fees, or had their credit lines reduced.

CR's Dos and Don'ts of Dealing with Financial Distress

DO contact your lender immediately if you can't pay your mortgage. You might be able to restructure your loan or get your lender to agree to a lesser amount to pay it off.

DON'T borrow against your 401(k). You'll probably need to repay the loan within five years or it will count as a withdrawal. If you leave your job before then, you'll owe federal and state income taxes on the outstanding loan, plus a ten percent penalty if you're younger than 59 1/2.

DO take advantage of your employer contribution to your 401(k). Put away at least as much as you need to get the maximum matching amount.

DON'T take a refund anticipation loan. They are short-term loans that you pay back with your tax refund. Interest rates can run into the triple digits on an annualized basis. Filing your taxes online and having the refund direct-deposited can get cash to you almost as fast.

DO consider raising your insurance deductibles. That will reduce your premiums. Home-insurance policies, for instance, typically carry a $250 deductible. If you're willing to bear more risk, you can save upward of 15 percent per year in premiums with a $500 deductible.

DON'T take cash advances. Credit-card advances can come with up-front charges of 2 to 4 percent and have a higher interest rate than regular card purchases. Payday loans, which are cash advances on your wages, can cost you $15 to $30 for every $100 you borrow.

DO cut what you can from your budget. You can save a lot on groceries by taking advantage of sales and buying less-expensive store brands. Look at your other monthly expenses to see what you can trim, including premium cable service or pricey coffee drinks.

The Consumer Reports National Research Center calculated results based on a telephone survey of a nationally representative probability of 2,000 adults, 18 years or older in the month of October 2008. The margin of error is +/- 2.2% among a 95% confidence level.

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Prepackaged Bankruptcy Wouldn't Help Big Three Automakers, Says Bankruptcy Expert

If the Big Three automakers can't come up with a plan for Congress by Dec. 2 on how they'll use $25 billion in federal funds, one proposed alternative is for the companies to undergo a so-called "prepackaged" bankruptcy. But bankruptcy expert Frederick Tung of Emory University School of Law says he finds it hard to see how a prepackaged bankruptcy could help.

"With a prepackaged bankruptcy, the management of the company has already worked out details of the restructuring with constituencies, which includes bondholders, banks, suppliers, unions and employees, and other interested parties" says Tung. "But it doesn’t look like automakers have worked out anything with anyone; all they've done is gone to Capitol Hill and asked for $25 billion."

Under a prepackaged bankruptcy, says Tung, the automakers would have two questions to work out before they file for bankruptcy: What operational fixes will they make, if any? How will they reduce their debts?

"The latter process is simply a negotiation among all the debt holders to try to get them to take less than full payment," Tung says. "On the operational side, it doesn't sound like the management of these companies think they need to make any changes to the path they're on. It doesn't seem like they've talked to any of their creditors to make any adjustments on their debt. So if they don't have a deal beforehand, they can't do a prepackaged bankruptcy."

The other major question, says Tung, is how are automakers going to get the cash to run the business going forward? "Without that piece, bankruptcy is not only not helpful, but in my opinion would likely put the company into a free fall."

Are they playing chicken?

“I would have thought that automakers would have taken a more constructive tone with Congress," says Tung. In his blog entry on theconglomerate.org, Tung says automakers "seem to be playing chicken with Congress, on the 'too-big-to-fail' theory." Congress apparently didn't buy it.

"Needless to say, that's a dangerous game," Tung writes. "Especially during the interregnum, the specter of political gridlock looms large."

Tung teaches and writes in the areas of corporate and securities law and bankruptcy, both domestic and international. Professor Tung has served as a lecturer in law at Peking University. He also practiced corporate and bankruptcy law with Gibson, Dunn & Crutcher in Los Angeles and San Francisco.

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Wall Street's Collapse May Boost Private Equity Markets

The collapse of the housing and credit markets that has crippled some Wall Street giants is likely to have a variety of effects on private equity, say faculty at Emory University and its Goizueta Business School.

The fall of Lehman Brothers, the sale of Merrill Lynch to Bank of America, and the decision by Goldman Sachs and J.P. Morgan to be placed under the purview of the Federal Reserve are driving big changes in financial markets, note faculty members.

One likely shift is a larger role for private equity providers in financing big-ticket deals. But liquidity concerns are likely to rein in their appetite for risk, despite the just-passed $700 billion bailout package, add faculty.

"The consolidation taking place in the financial markets means the playing field is getting a bit smaller," says Thomas More Smith, an assistant professor in the practice of finance. "With fewer investment banking giants available to service big-company deals, we may see smaller private-equity firms swoop in to fill the empty spots."

In fact U.S. private equity firms have picked up the pace of their fund-raising, says the Private Equity Analyst newsletter, published by Dow Jones.

Domestic private equity firms raised $222.6 billion in 264 funds during the first three quarters of 2008, 11% ahead of the $200.4 billion raised by 298 funds in the same time last year, according to Dow Jones.

Distressed firms are seeing strong interest from investors with 18 funds raising $37.9 billion this year, up 28% from $29.5 billion raised by 16 funds at this point last year, according to the Dow Jones analysis.

The newsletter also reports that mezzanine, or layered financing funds attracted $36.9 billion across 13 funds, compared to $3 billion across nine funds through the third quarter last year.

But if the distressed and mezzanine-financing segments were excluded, private equity fund-raising would have been weaker compared to last year, says Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst.

"Buyout fund-raising continues to lag," she notes. "And fresh concerns about the availability of debt won't help."

The credit crunch has still spooked investors and is likely to dampen their enthusiasm for some time, according to Goizueta’s Smith.

"Despite the bank bailout, we’re likely to see reduced capacity," says Smith. "The fact that there are fewer players remaining may also mean a pullback in the variety of services and niche activity that is offered."

Small businesses are finding it tougher to access credit, and that could spur a shift in the direction of venture capital, adds Smith.

"For the most part, VC firms have targeted ‘sexy’ businesses with high-growth potential, like technology companies," says Smith. "That’s in line with their traditional exit strategies that often envision a five-year exit with high returns."

But lately, venture capital providers have been shunning startups and have instead been targeting later-stage companies with a proven track record. That could open the door for more staid firms to catch VC’s eye, says Smith.

"A small but growing advertising company, say, may not offer the same potential as a high-tech business, but it may offer more security," he notes. "As their credit gets choked off, more small traditional businesses may begin to approach venture capitalists. And according to anecdotal evidence, some VCs are paying more attention to them. It’s too early to call it a trend, because we don’t have the data yet. But the potential is there."

A Shift in How Deals are Done

In fact Wall Street’s woes are likely to drive a big shift in the way deals are done, observes Lawrence M. Benveniste, a chaired professor of finance and dean of Goizueta Business School.

"The changes we’re seeing in the investment banking landscape are opening up huge opportunities for private-equity firms," he says. "I expect they will move in to fill the underwriting and other voids that are left as investment banks retreat. Amid the turmoil for example, Blackstone [a global corporate private equity group] has hired some high-level Lehman professionals."

On October 2, the Blackstone Group announced it took on a partner and two managing directors who formerly worked with Lehman Brothers.

Private equity already has a substantial presence in the world market, but as it expands its footprint, companies are likely to see significant changes in the way that deals are financed, says Benveniste.

"Many of the recent transactions have been driven by access to credit and the potential to increase returns through leverage. Leverage ratios of 80% were not uncommon," he explains. "Debt financing has not exactly disappeared, but it is a lot tougher to obtain it. Private equity is available, but I believe that the price-EBITDA multiples on deals will shrink considerably and opportunities for Leverage driven deals will disappear. Instead, deals will be driven more by the potential to add value to the purchased company. This is the traditional model of private equity."

Relating leveraged transactions to the current crisis in the markets, Benveniste remarks that the "The devaluation of much of this leverage debt has contributed significantly to the current weakness in financial institutions."

Klaas Baks, an assistant professor of finance at Goizueta and head of the Emory Center for Private Equity and Hedge Funds, agrees that private equity players may score some gains in today’s financial crisis.

"Many PE firms that rely on leverage to generate returns will need debt financing, but the tight credit markets will put pressure on them," he says. "In this type of market, successful PE firms will add value through channels other than leverage such as improved corporate governance or operational efficiencies."

He says that as investment banks like Morgan Stanley and Goldman Sachs take on the attributes of commercial banks, private equity firms and hedge funds will likely fill some of the void. "We may see private equity and hedge funds start to perform functions traditionally performed by investment banks," Baks predicts. "But if government regulation is expanded to private equity and hedge funds, such a move may be inhibited."

He expresses some concern about the bailout plan, noting that "at this point we just don’t know the true level of toxic debt."

Baks also questions whether a $700 billion taxpayer-financed bailout will lead to a "moral hazard," or more reckless behavior on the part of financial institutions that believe they are "too big to fail and will be bailed out by the federal government if they get into trouble."

Ray Hill, an adjunct professor of finance at Goizueta Business School, also believes that the problems on Wall Street may drive more activity to private equity firms.

"Private equity firms will be able to attract talent from investment banks," he says. "Also, some private equity firms that did not become overleveraged are already moving segments that were traditionally handled by investment banking firms."

But that does not mean that the investment banking segment is about to disappear from the landscape, adds Hill.

"Goldman Sachs is not about to go under," he says. "Instead the group is likely to retreat from its historical risk taking model. I expect Goldman will still engage in merger and acquisition, advisory and underwriting functions, but will probably limit its maximum leverage to 10x, instead of 25x. The company will make its money through smarter investments instead of just riskier ones."

Looking at a broader issue, Hill worries that the financial crisis is now infecting the real economy.

"The argument made for the bailout by [U.S. Treasury Secretary] Henry Paulson and [Federal Reserve Chairman] Ben Bernanke is that we have a crisis in part of the financial system that may spread to the general economy," says Hill. "At the time they proposed the rescue plan, you could say that the real economy was slowing down, but probably not headed to recession. In the last two weeks, the leading economic indicators have become more pessimistic and the current freeze in short-term credit is likely to do further damage."

He notes that the bailout plan is still a few weeks away from being implemented. "It is no surprise that we don't see the benefits of the plan yet, but some of the adverse consequences of the credit freeze will not be reversible."

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News to Use in Fayetteville, Atlanta, Columbus, Augusta, Peachtree City and all of Georgia

Only the First of Many Future Bailouts

PRNewswire-USNewswire/ -- For those who think the U.S. Treasury's bailout of the banking industry is bad, here's some news for you -- this mortgage bailout is only the first, and the smallest, of a series of bailouts that are going to be necessary in the future, warns the Institute for Policy Innovation (IPI). And taxpayers who have made responsible financial decisions are going to be on the hook for those as well.

Americans are rightly concerned not only about the cost of the bailout, but of the precedent of letting actors in the market make enormous profits while having the risk backstopped by taxpayers. And taxpayers are disturbed by the fact that elected officials were repeatedly warned about these risks and problems, but did nothing.

The bailout will affect regulatory policy, tax policy and the funds available for any number of other programs, to say nothing of affecting our ability to deal with any future crisis that might arise.

Medicare and Social Security are both going broke, and everyone knows it. The combined unfunded obligations of Medicare Part A and Social Security are in the neighborhood of $48 trillion -- 48 trillion dollars that the federal government has promised to retirees but has no way to pay -- and knows it has no way to pay.

But it's worse than that -- taking into account the three major components of Medicare, its unfunded liability alone is $85 trillion. Combined with Social Security, that results in about $100 trillion in promises the federal government has made that it has no plan to fulfill.

Medicare went into deficit this year -- 2008. That means that this year Medicare began paying out more than the program takes in. And Social Security will go into deficit in 2017 -- less than nine years from now.

As far as bailouts go, you ain't seen nuthin' yet.

It's time for voters and taxpayers to start holding elected officials accountable for heeding the warnings they are given and solving problems BEFORE gigantic taxpayer bailouts are required. Any fool can go to Washington, collect campaign contributions and stand in front of the TV cameras. But we can't afford that luxury anymore.

Voters must hold the next Congress and the next President accountable to take action to prevent the need for a massive taxpayer bailout of Social Security and Medicare. That's the bad news. The good news is that, in the weeks before an election, we all get to choose who makes those decisions.

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Georgia State Panel Discussion to Focus on Economic Crisis October 8

Crisis in the Economy: Multidisciplinary Perspectives
2 to 4 p.m. Wednesday (Oct. 8)
Senate Salon at the Georgia State University Student Center, 44 Courtland St.

With bank bailouts, plunging overseas markets and high unemployment dominating the headlines, Americans have lots of questions about the economy.

To make sense of the current economic landscape, Georgia State University’s College of Arts and Sciences and the Andrew Young School of Policy Studies will hold a panel discussion and Q & A session from 2 to 4 p.m. Wednesday (Oct. 8) in the Senate Salon at the Georgia State University Student Center, 44 Courtland St. Panelists at “Crisis in the Economy: Multidisciplinary Perspectives,” will include assistant professor of economics Carter Doyle, associate chair of history Michelle Brattain and assistant professor of political science Jeff Lazarus.

For more information about the panel, visit www.cas.gsu.edu or call 404-413-5114.

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'Hope for Homeowners' Program Offers Faster Relief than Wall Street Bailout

GFP Note: We thought our readers would find this story of interest as we all sit and listen to the disturbing economic news.

By Broderick Perkins
October 5, 2008

Although it didn't receive nearly as much press coverage, the $300 billion "Housing and Economic Recovery Act of 2008" (H.R. 3221) may provide more immediate relief for struggling homeowners than the recently signed $700 billion economic bailout, "Emergency Economic Stabilization Act of 2008," (H.R. 1424).....

Click here to read the story.

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Although $700 Billion Bail-Out is Only 'First Step' on Long Road to Repair Financial Markets, CornerCap Sees Opportunities for Smart Investors

PRNewswire/ -- Although the $700 billion bail-out legislation signed into law earlier this afternoon by President Bush should help set an orderly process for disposing mortgage assets, it is at best a first step to allow for stability and recovery of the nation's financial markets says Atlanta-based CornerCap Investment Counsel's chief investment officer, J. Cannon Carr, Jr.

Writing for the firm's quarterly newsletter, Carr says that even with the government's plan, credit markets are likely to remain tight until home prices and debt levels fall to rational levels.

"That will take time," Carr says. "Only the market can stabilize home prices." Moreover, with extreme risk aversion among lenders, Carr still anticipates a difficult year ahead for the economy.

"Despite the uncertain market, this is not a time for broad selling," Carr notes. "In fact, there are real opportunities available for the patient and disciplined investor."

The full text of Carr's commentary is available online and may be downloaded at no cost from www.cornercap.com/library/Newsletters/n2008fall.pdf .

Carr points out that the nation has experienced 10 recessions since 1945. In all but the most recent recession (2001) stocks slid as the economy slowed, but began their assent before the recession ended.

"Recognizing that it is impossible to call a market bottom, we believe the probabilities are in our favor and now is the time to take advantage of some increasingly attractive opportunities to make selective buys," Carr said.

His firm began increasing its exposure to consumer stocks earlier in the year, and now sees opportunities in Industrials and Basic Materials stocks, which are among the hardest hit on recession fears.

"While there are still potential land mines out there, a healthy balance sheet and flexible cost structure are keys to helping determine which stocks can weather the storm," Carr said.

According to Carr the nation's financial system cracked due to two issues: too much debt and falling housing prices. "Once the housing process stabilizes, the financial system can more accurately price transactions, and more importantly, evaluate asset risk and debt obligations," Carr said.

What started as "apparently" isolated problems in subprime mortgages over a year ago has mounted to a crescendo of scary news about the health of the U.S. financial system and the global economy Carr writes.

Even if the government successfully plugs the holes in the nation's financial dam, the pressure causing the fissures must still drop before the dam can truly hold, Carr says.

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Revised Bailout Bill Passed by the House

The announcement has just been made that the Revised Bailout Bill has been passed by the House of Representatives.

What remains to be seen is exactly how that affects main street America.

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Bailout Mess Echoes S&L Crisis of the 1990's

Taxpayers may be howling about the price tag of the $700 billion bailout plan that Congress is considering, but according to Emory University economist Hashem Dezhbakhsh, the current crisis is reminiscent of another huge financial disaster in the not-so-distant past: the savings and loan bailout of the early 1990s.

"Savings and loans took a lot of risks in 1980s, which left a lot of institutions insolvent. Government had to come to rescue." The overall cost to taxpayers then? "Half a trillion," says Dezhbakhsh. "It is, in fact, déjà vu."

The cause of the current bailout is the same now as then, he says. "If you have a financial system with incentives that are not set properly, then the system lends itself to excessive risk taking at the expense of someone else."

The most unfortunate aspect of the current bail out effort is that it is so close to the election, says Dezhbakhsh. "That's why it's really hard to have a real debate about the plan. Both Democrats and Republicans are afraid that if noting were done, there would be a disaster, and they'd be responsible for it--even if they don't believe in bailing out institutions making bad choices."

One other unfortunate aspect is fear. "The public thinks this is subsidy for the rich and Wall Street," says Dezhbakhsh. "That's unfortunate because it shows total lack of trust in what politicians and Fed officials say. There is no doubt that special interests are at work here. One cannot deny that the treasury secretary (Henry M. Paulson Jr.) is a veteran of Wall Street.

"At the same time, no one can deny the psychological impact of a passive approach to the crisis that will be very dangerous," adds Dezhbakhsh. "If there is fear of banks collapsing, then there will be run on banks, you can have a severe credit crunch that spreads from the financial side to the rest of the economy. Then, no one can conduct business. That's the fear."

Dezhbakhsh, a professor of economics, is chair of Emory's Department of Economics. His areas of interest include applied econometrics, the oil market, financial markets and volatility, and economics of crime.

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Emory's Alexander Asked to Weigh in on Defeated Bailout Bill

As Congress wrestled over the weekend with the now defeated financial bailout bill, Emory University housing expert Frank Alexander was asked to look at the impact of the proposed legislation on easing the crisis in the residential real estate market. Would this bill help ease this country's mortgage and home ownership crisis?

Alexander says the answer is no, but the reason is complex.

"The proposed legislation has two purposes," says Alexander. "One is to deal with the liquidity and credit crisis; the other is to deal with the mortgage crisis and homeownership preservation concerns. If this legislation is passed and Secretary [Henry L.] Paulson acquires large investments in mortgage-backed securities, he most likely would not have the authority to address the home ownership preservation activities contemplated by the statutes."

"The reason this bill wouldn't help the mortgage crisis is not the wording of the statute, but the nature of the product that would be acquired by the Secretary of the Treasury," Alexander explained in a letter dated Sunday, Sept. 28, to Rep. Dennis Kucinich, chairman of the House Domestic Policy Subcommittee.

"When and if the Secretary elects to acquire the mortgage related asset of any single financial institution, the Secretary will not be acquiring a portfolio of whole loans, or even a controlling interest in a securitization of loans," wrote Alexander.

And that is the heart of the problem:

"When the Secretary buys a fractional interest in large pools of mortgage backed securities, he is not acquiring controlling interest of the mortgages themselves," Alexander explains. "So he may be purchasing a five, 20 or 30 percent interest in a mortgage backed security, but that minority interest is not necessarily sufficient authority to modify the loans."

Or as Alexander said in his letter: "The Secretary will lack the authority to authorize, require or even permit a program designed to encourage or facilitate home ownership preservation or foreclosure avoidance actions."

The bill in its most recent form, says Alexander, "has many provisions that make it far superior to the bill that was submitted on behalf of Secretary Paulson eight days ago. I probably would have voted for the bill today (September 29, 2008)."

But in order to address home ownership preservation, says Alexander, the Troubled Asset Relief Program outlined in the legislation should have as one of its goals the acquisition of Troubled Assets, "which will provide the Secretary with a controlling or majority interest in the underlying pool of whole mortgage loans. In such a context the Secretary will be in a position to implement the Homeownership Preservation goals of this legislation."

Alexander, founding director of Emory's Center for the Study of Law and Religion (CSLR), earlier this spring gave testimony before a congressional subcommittee on how federal funds could be targeted to neighborhoods most affected by rising rates of vacant and abandoned properties.

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Duke University: A Rescue Plan for Main Street, not Just Wall Street

By Andrew Foster
Duke University
Associate Clinical Professor of Law

Amid the headlines about huge stock market losses and collapses in the financial services sector, it can be easy to forget the human face of the problem that our nation now confronts.

As the federal government debates whether to give the U.S. Treasury Department unprecedented authority to spend up to $700 billion to bailout big banks, sophisticated investors and giant insurers, it is critical that a more strategic intervention be employed to address the housing and credit crises comprehensively and with fundamental fairness.

There is no question that a rescue plan is needed to strengthen many U.S. financial institutions and to shore up the economy. At the same time, policymakers cannot ignore the nearly five million American families who are either delinquent on their mortgages or are in foreclosure. Certainly, some of these consumers may have been irresponsible in taking on more debt than they could handle. The vast majority, however, were simply trying to buy a piece of the American Dream. Instead of building wealth and enjoying the security of homeownership, they now find themselves trapped in a nightmare of predatory debt and foreclosure.

Before Congress authorizes hundreds of billions of taxpayer dollars to save Wall Street from the crisis it created, steps need to be taken to rescue American homeowners, as well as the communities across the country being devastated by high rates of foreclosures. To achieve these goals, any final rescue plan should incorporate three basic elements that are now absent from the bill under consideration.

First, it must create mechanisms through which problem loans can be modified so that homeowners can stay in their homes. This can be achieved, in part, through federal intervention similar to the Home Owners Loan Corporation in the 1930s to help our country through a similar crisis. That corporation acquired problem mortgages directly from banks, and then modified them so that people who were in default could keep their homes. To achieve a similar goal today, the government will need to purchase whole loan pools -- not just the “slices” of loans typically incorporated into mortgage-backed securities -- so it can modify the terms of predatory mortgage loans and stave off another wave of defaults and foreclosures.

Federal bankruptcy law also must be revised so that, where appropriate, judges have limited authority to modify mortgage loans through the Chapter 13 bankruptcy process.

By taking these steps, the government can prevent an estimated additional 600,000 foreclosures. In addition to bringing needed relief to millions of Americans, this should help stop the devaluation of home prices.

Second, the plan needs to begin to re-establish effective regulation of the financial services industry. Though more will need to be done over time, two immediate steps can be taken. The Homeownership Preservation and Prevention Act of 2007, which has been before Congress for more than a year, should be immediately passed to address the pervasive problem of predatory lending. Drafted by Sen. Christopher Dodd, the legislation will help eliminate many of the abusive lending practices that led to this crisis.

Additionally, the Community Reinvestment Act (CRA), a federal law that requires commercial banks to make credit broadly available in a manner consistent with safety and soundness guidelines, should be extended to mortgage brokers, investment banks and insurance companies. This will enable government regulators to ensure that credit continues to flow to low- and moderate-income communities, but in a responsible manner.

Third, the rescue needs to be structured so as not to create a windfall for Wall Street. At a minimum, this will require that Treasury establish clear maximum prices that it will pay for the mortgage-backed securities clogging the system, that these purchases be conducted through a transparent process and that Congress maintain oversight of Treasury’s actions in this area. In no event should taxpayer funds be used to overpay for these devalued assets.

Finally, it should be beyond debate that any rescue plan must include provisions that limit the compensation of the managers of firms that receive governmental assistance.

There are no easy answers to the economic problems we now face as a country. In order to begin to address these systemic challenges fairly, however, we must ensure that any plan coming out of Washington puts as much focus on rescuing those of us living on Main Street as it does on helping those of us working on Wall Street. It is only by addressing both ends of the crisis that we have any hope of solving it.

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