Bailout Blues

Ideas and Issues Personal Writings

Sydney        The price tags when past ordinary organizing math over the weekend.   Add the proposed $700 billion to create a “toxic waste” dump for Wall Street, and we are now going to be near a trillion dollars to the tax payers for what Bush called Wall Street’s “drunken” spree.  Rightly, there should be some huge quid pro quos in exchange for anything done here.

    Dan Cantor, head of the Working Families Party of New York, had a good grip on a laundry list:

1.    The whole thing is the fruit of deregulation
2.    We must demand that strings be attached to the bailout. Right now, Treasury wants a check for $700 billion to prop up the financial sector.
3.    There are two conditions that must be attached to the bailout by the Democrats. First, it can’t just be a bail-out for the big guys. It must include:

i.    Bankruptcy shelter for homeowners
ii.    Restructured mortgages for people in danger of losing their homes.
iii.   CRA requirements on investment banks and insurance companies
iv.   Outlaw – period! – predatory lending and cap usurious payday lending rates.
v.    Expand Unemployment Insurance and Home Heating Oil for people who are about to lose their jobs.

Second, every executive at every firm that accepts the public’s money must ALSO agree to a salary cap. Make it no more than ten times what the lowest paid person in their firm earns, to a maximum of $1 million per year. That’s $20,000 per week. If they can’t live on that, then we’ll find executives who can.

    Let’s start there and ban foreclosures while we are getting our arms around this too.

    We might want to borrow a page from what they are doing here in Australia and ban short sales for 30 days as dictated by Labor Party Prime Minister Rudd.

    And, looking forward here was an interesting idea from Professor Robert Shiller about how create something he calls, continuous-workout mortgages.  Worth a look:

Mortgages could be structured differently, so that adjustments in payments would be made as a matter of routine — systematically, automatically and continuously — starting even before any distress is perceived by borrower or lender. By avoiding thousands and even millions of individual family crises, we might also make institutional crises, like the collapse of Lehman Brothers and Bear Stearns, less likely.

We need to innovate, with the creation of “continuous-workout mortgages.” Such mortgage contracts, when originally signed, would specify a program for steady adjustment of the balance and payment schedule over the life of the mortgage, enabling most homeowners to continue to afford to make payments and maintain some home equity, even in harsh economic circumstances. These contracts might become the standard, with automatic adjustments based on shifts in national housing-cost indexes and futures markets (I’ve been involved in creating both), as well as economic indexes like the unemployment rate.

Continuous-workout mortgages would be privately offered. They would not be bailouts; the cost of workouts would be priced into the original mortgage rate. This transparency has a great advantage: when the actual risk to the investor is explicit from the beginning, mortgages are less likely to be initially overvalued in the market, and so the kind of financial crisis we are experiencing now would be less likely. It is, after all, the rapid decline in value of subprime mortgages, and of derivative financial instruments based on them, that has wreaked such havoc in the global financial system.

The cost to mortgage lenders of providing continuous-workout mortgages may actually be negative. That’s because the workout provisions would help prevent the costs of forced sales of homes, associated litigation, inadequate home maintenance and damage to the properties, and associated neighborhood collapse, which can create serious losses for mortgage lenders. Anticipating lower costs on these fronts, originators of continuous-workout mortgages may be willing to offer more attractive terms to borrowers from the beginning.