During the debate on the housing bailout bill last week, Democrats consistently justified their “American Housing Rescue and Foreclosure Prevention Act” by citing the Treasury Department’s involvement in JP Morgan’s purchase of Bear Stearns. Bill sponsor Rep. Barney Frank (D-Mass.) was typical:
You didn’t get an answer on how the Bush administration, which strongly supported Bear Stearns through the Treasury Department and its appointees, how it’s OK to do $29 billion for Bear Stearns, but not $2.4 billion for homeowners.
Frank has, no doubt, hit upon a convincing rhetorical argument in favor of his bill: “If the government is going to bailout Wall Street they should also be willing to bailout Main Street.” Problem is, Frank’s bill is 10 times the bailout of irresponsible Wall Street financiers as the the Bear Stearns deal was.
In the Bear Stearns deal, the federal government induced JP Morgan to buy Bear Stearns by offering JP Morgan $29 billion in credit while taking hold of $30 billion in Bear Stearns’ mortgage related assets. Taxpayers could lose $29 billion if all of Bear Stearns’ mortgage related assets turn out to be worthless, but that is unlikely. The deal did prevent Bear Stearns from going through a lengthy bankruptcy proceeding, though, which would have significantly disrupted an already shaky financial system.
In contrast to the $29 billion at risk in the Bear Stearns deal, the Frank bill risks $300 billion in taxpayer money. Worse, the program is structured in such a way that it helps banks and the most irresponsible borrowers the most. The Wall Street Journal explains:
In the name of helping strapped home buyers, Mr. Frank is giving lenders a chance to pass their worst paper onto Uncle Sugar. If both borrower and lender agree to participate, lenders can accept 85% of the current appraised mortgage value and in return get to dump up to $300 billion of those loans on the Federal Housing Administration (FHA). Guess which loans they are likely to dump?
But don’t just take the word of the conservative WSJ. The liberal Center for Economic and Policy Research co-director Dean Baker offers very similar analysis:
This bill, the central feature of which is having the FHA guarantee new mortgages to replace one’s currently facing default, would first and foremost be helping the banks who hold bad mortgages. All the checks get written to banks, not homeowners. Banks get to decide which mortgages qualify for the program, not homeowners.
So to recap, the Frank bill:
- Bails out huge irresponsible banks like Countrywide Financial that are desperate to pass along their worst loans to the federal government.
- Bails out only the most irresponsible homeowners since banks will refuse to refinance those loans that have the best chance of being paid back
- Will do very little to actually help the economy.
Now that the House has passed its “Wall Street Bailout Enhancement Act,” it has to be reconciled with the Senate’s bill that nobody with any economics training anywhere actually likes. When does Congress go into recess again?
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