More Details Emerge on the Bailout Proposal

Here's the summary of the Bailout Proposal from Nancy Peloisi's office.

It's now a $350 billion bailout, at least up front. I'm not seeing anything that prevents home foreclosures or that helps those who underwent foreclosures in the past year.

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

There's tax relief -- for banks. [More...]

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

Is there tax relief for consumers? Can they deduct the interest they paid on the credit card debt they accumulated trying to stay afloat?

The non-economist in me wonders if they considered funding all $700 billion now but using $350 billion to bailout banks and mortgage companies and the other $350 to help consumers get out of debt? Seems to me that would be money consumers could put back into the economy.

I'm not saying this isn't a good proposal or an improvement, I have no idea. I'm just passing on the information as more details come out.

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    Keeping the community banks (5.00 / 1) (#2)
    by inclusiveheart on Sun Sep 28, 2008 at 10:24:42 AM EST
    out of trouble is a good thing.  At the rate the big banks are merging - we could end up with one mega bank and community banks - or no community banks and one mega bank - for the most part the community banks have played much more conservatively than the others have - if I understoon Barney Frank correctly during the hearings this week, the problem that the community banks face has to do with their dealings with Fannie Mae and Freddie Mac and that is why they are getting a break.  

    But what few people have talked about in this economy are anti-trust principles that might have at least helped to limit to some degree the massive failure that people claim is looming.  So, I'd rather try to keep the community banks reasonably healthy for the time being.

    On foreclosures (5.00 / 1) (#3)
    by lambert on Sun Sep 28, 2008 at 10:27:10 AM EST
    I'll need to wait for the actual text of the bill, if indeed Pelosi keeps her promise to put it up on the Internet, but I'm betting that after Obama signalled mortage relief wasn't important to him ("probably something that we shouldn't try to do in this piece of legislation") whatever is in there is just a sop. Note that Obama wasn't even talking about a real solution, but HOLC, which isn't even near the table, let alone on it, but about a proposal to allow bankruptcy judges to rewrite mortgage terms, which is an ineffective onesies and twosies solution to begin with, that doesn't even help the bank clean up their balance sheets.

    Wasn't there already $80B in mortgage (none / 0) (#10)
    by MoveThatBus on Sun Sep 28, 2008 at 11:12:41 AM EST
    relief months ago? Can they add to that as a separate issue?

    I am not a money managing type either, (none / 0) (#14)
    by hairspray on Sun Sep 28, 2008 at 02:34:11 PM EST
    but I was under the impresseion that there were two ways to help the homeowners who are going to be in trouble quite soon: 1) modify the bankruptcy bill to allow these loans to be crammed down by a bankruptcy judge and/or 2) Create a holding company like HOLC where the government would work with main street to stay in their homes. I didn't see anything like that in my newspaper this morning and they had a two page spread on the bailout.

    I've been looking for analysis of this (5.00 / 1) (#5)
    by ruffian on Sun Sep 28, 2008 at 10:29:53 AM EST
    Is there tax relief for consumers? Can they deduct the interest they paid on the credit card debt they accumulated trying to stay afloat?

    In my view, from watching this play out over the last 20 or so years since those deductions were eliminated in the Reagan admin, people turned to HELOCs instead, putting their homes at risk. I've been wondering if that was an intended consequence of the removal of those deductions.

    I'm glad that they've at least released... (5.00 / 1) (#8)
    by EL seattle on Sun Sep 28, 2008 at 10:45:25 AM EST
    ... something. It reads to me like they sent this statement through a "warm and fuzzy" filter before sending it out though.

    For instance -

    If the government loses money, the financial industry will pay back the taxpayers.

    ...sounds nice, but was the entire financial industry responsible for this problem?  Or will the "good" companies have to pay more-than-their-share to cover the actions of the "bad" companies?

    Guarantees taxpayers are repaid in full -- if other protections have not actually produced a profit

    ...doesn't exactly flesh out any details here.

    More data is needed here, I think. (But this statement is better than nothing.)  I hope the senate and house get a bit more info about the bill before they have to vote.

    Interesting articles in the press this morning (5.00 / 1) (#12)
    by Christy1947 on Sun Sep 28, 2008 at 12:48:48 PM EST
    which might be relevant here.

    1. NYT had a big article on AIG. According to that, if correct, AIG went under in significant degree because of the practices of one small office in London, of all places, which put them in the business of credit default swaps. A conceptual issue but not an AIG wide one perhaps. And the shareholders lost the whole mess for it.

    I wonder if this suggests a flexible position rather than a cookie cutter in fact might work better, because the cause for various institutions might vary.

    2. An article in what I think as I type was the Times which talked about what happened when the City of Philadelphia put in a mandatory mediation series into its foreclosure proceedings, in which some though probably not all loans were in fact reworked so that, if the compromise held, the foreclosure stopped and the homeowner stayed in the home. There was also a horrible article on Kos a day or so ago about what happened after the savings and load debacle wherein the writer, who lived in a coop in the Bronx argued that since the sole goal of the bailout there was for the bureaucrats to liquidate the ugly s and l portfolio, they were completely unwilling to work with the individual unit holders, no flexibility at all, since that was not the standard, only liquidation of bad loans. And a third on Kos as well about the poster's  own experience with add on fees which appear in foreclosure and bankruptcy proceedings which increase the debt, which fees are sometimes reviewed and chucked out in mediations and bankruptcy proceedings.

    I understand why some posters are frustrated by providing 'onesie and twosie' resolutions for individual homeowners, but it is better than nothing and offers them a way to have their own  loans reworked through mediation or a change in the bankruptcy code allowing a bankruptcy judge to do it, without waiting for some policy based on regulation to filter down through this process, and keep those who are confronted with actual foreclosure from losing their homes while regulation writers dither. And to have the extra fees and other problems with their own loans looked at and dealt with, which may not be common to all loans. Some individuals have been able to recover and the flexibile individual proceedings allow them to do that for themselves. Some cannot be saved no matter what because they can't afford even the sensible version of a mortgage, through loss of job, medical bills, divorce or other personal tragedies which would equally have cost them their mortgages, subprime scandal or not. I'm not sure anything will help those who have alredy lost their homes in  completed foreclosures.

    There may be something to the requirement being put in this initial enabling legislation requiring aggressive attempts to help homeowners in particular, since that sets the legislative goal of the program, rather than the RTC 'liquidate the portfolio any way you can where the liquidation itself and not the fate of the borrower is the goal' method.

    Just thoughts.

    Mediation and Bankrutpcy (none / 0) (#15)
    by santarita on Sun Sep 28, 2008 at 02:52:15 PM EST
    I don't know if it is still the case but in some midwestern states there was a mandatory mediation provision before a foreclosure could occur.

    Mediation can save money and borrowers from foreclosure, assuming that the borrower is acting in good faith and has a reasonable chance of performing on the loan as modified.

    Bankruptcy itself can be structured to perform in the same way as a mediation and might actually be a better forum for dealing with the large volumes of problem loan workouts.  Congress could come up with a uniform approach to these residential foreclosures that would eliminate a lot of the adversarial nature (which is what costs a lot) and could provide for some reduced fee structure.


    From Today's Newark Star Ledger: (5.00 / 1) (#13)
    by Mshepnj on Sun Sep 28, 2008 at 01:20:15 PM EST
    I accidently posted this on the other bailout thread but I think it belongs here.

    Today's Newark Star Ledger has an article by Sam Ali entitled "Instruments of Finance - and Confusion",  in which the writer explains some of the causes the of this current financial crisis that really opened my eyes to what is happening.  Here is the link to the online version of the article: http://www.nj.com/news/ledger/index.ssf?/base/news-14/1222575934326640.xml&coll=1
    Here are some relevant excerpts:

    "...take collateralized mortgage obligations (CMOs)... banks take subprime loans and bundle them together. These loan bundles are then sliced, usually in six ... tranches that have been sorted and packaged by degree of risk. These... are then sold to various investment groups such as hedge funds, insurance companies and mutual funds.

    The highest rated slice is typically AAA rated. The lowest possible tranch, known as the "equity" portion... is unrated and often referred to as "toxic waste," because it is so high-risk. In the past, investment banks kept these...on their own books.

    But Wall Street ... [took] unrated equity slices from...different CMOs and pool them together to create a brand new security.

    That pool ... was sliced into another six pieces and sorted by varying degrees of risk... into... a ...new security called a collateralized debt obligation or (CDO). The highest rated CDO would typically be stamped AAA, and the lowest was again referred to as the equity tranch and was unrated.

    So now you an equity tranch of a CDO already made up of junky tranches of a subprime mortgage-backed security..."

    The article goes on to explain credit default swaps (CDS), and the whole thing just sounds unbelievable.

    If all this is true then what I want to know is, why should we taxpayers bailout these Wall Street frauds and crooks? How did the rating agencies fail to do due diligence by giving AAA ratings to junk and "toxic waste" because of fancy packaging?   How did the government fail to provide regulatory oversight to prevent such abuses?

    Why is there no talk in this deal about bailing out the borrowers so those that can are able to stay in their homes and pay something, rather than being foreclosed out and exacerbating the problem? My Congressman, Rush Holt, is fighting for a HOLC solution as are Senator Clinton and a few others.  

    If I'm going to pay to bail someone out, I'd rather it be borrowers, because keeping those people who can pay something in their homes by refinancing seems to be the way out, long term. Without this, I don't think Congress should approve any bailout deal that doesn't include this.

    God, what a mess.

    Too clever for their own good... (none / 0) (#16)
    by santarita on Sun Sep 28, 2008 at 02:55:46 PM EST
    I think that might sum up what happened with these financial products.  Some of the products are good tools for managing risk and improving liquidity.  But tools can be dangerous in the hands of people who don't know how to understand them.

    The text of thr bill willbe available at noon (none / 0) (#1)
    by Big Tent Democrat on Sun Sep 28, 2008 at 10:24:33 AM EST

    Ok, will you write it up? (none / 0) (#4)
    by Jeralyn on Sun Sep 28, 2008 at 10:27:25 AM EST
    This really is outside my expertise. I look at it like a consumer, not a lawyer or economist.

    If I can. (none / 0) (#7)
    by Big Tent Democrat on Sun Sep 28, 2008 at 10:40:26 AM EST
    I will at least link it.

    Extends Tax Relief Also For Homeowners ... (none / 0) (#6)
    by santarita on Sun Sep 28, 2008 at 10:39:04 AM EST
    who have been foreclosed.  As was written in the thread above, the provision for the community banks was actually a good step.  

    The Nancy Pelosi summary is so vague that it is hard to know for what purposes the deductions are allowed.  

    Proposed Name of The Bill... (none / 0) (#9)
    by santarita on Sun Sep 28, 2008 at 10:50:10 AM EST
    "Emergency Spending Authorization Giving Paulson  Authority to Do Whatever He Sees Fit Until The New President Takes Office".

    Perhaps the actual language of the bill will clarify but right now it looks like what it does is give Paulson a range of authorities (like requiring equity kickers in some transactions (like AIG?) and implementing the stupid Republican ex post facto insurance) subject to Congressional oversight.  The strong oversight and limitation of the initial line of credit are ok additions.  

    I'll be interested to see the language of the bill instead of summaries.