The Economic Policy Institute Proposes A Workable Bailout Plan

September 22, 2008 | EPI Policy Memorandum #128

Financial industry bailout plan needs to protect taxpayers

The turmoil in financial markets is clearly deep and threatening. The economy, especially the job market, is already facing recessionary conditions, and a further meltdown in credit markets could absolutely deepen this crisis. Piecemeal attempts to repair the damage created by years of inadequate oversight, over-leveraging, and reckless lending and borrowing standards have not worked.

Thus, we support a systematic intervention, but believe that the one proposed by Secretary Paulson is fundamentally flawed. Most important, by committing the government to the purchase of vast amounts of failing debt without any compensation, it fails to protect taxpayers from exposure to significant losses. The way the Paulson plan is structured, taxpayers are likely to pay a premium for “toxic” debt (i.e., more than the underlying value) with little likelihood that they will ever recoup the expense. Moreover, this shortcoming can be easily fixed in such a way that does not threaten to derail the process, given the urgency of the situation.

To do so, the government should follow the lead offered by Congressional Democrats and demand equity for the debt it purchases. We elaborate on this below, but the idea is for the government to act like a private investor—lending money in exchange for a share of the firm. If the loans are effective, and the company once again prospers, the government sells its shares at a premium. If the firm fails, the government has the right to claim the value of any remaining assets.

This is but one condition we believe should be part of the deal—we note others below. While we recognize the urgency of the crisis and the need for quick action, we do not believe that it requires acceding to every aspect of the Paulson plan—and we are relieved to see that some key members of Congress agree. These times call for bipartisan negotiations that protect the taxpayer, offset the government’s expense, and re-regulate markets to reduce the distortions that gave rise to this unfortunate situation in the first place.

With $700 billion of taxpayer money at stake, Congress, the administration, and Secretary Paulson must represent all of us, not just the financial markets. This means paying attention to distressed mortgage holders and to job seekers facing an unemployment rate of 6.1% (more than 10% for African Americans). To offset whatever costs emerge from this bailout, we will need to raise revenues—we suggest levying a tax on financial transactions and raising the tax on income from capital gains and dividends to the same rate as wages. Otherwise, the nation’s needs for expanded health care and investments in infrastructure, renewable energy, and education will be curtailed. We also must make sure that those who are bailed out do not enrich themselves further with excessive salaries and benefits.

Specifically, Congress needs to ensure that there are adequate safeguards for taxpayers included in any bailout package. These measures include:

Equity stakes. Federal assistance must be accompanied by steps to minimize the costs to taxpayers and to ensure that taxpayers participate in any future market gains. The bailout cannot simply be a giveaway to companies that made poor decisions.

Federal purchases of mortgage or related assets should result in taxpayers receiving a share of those companies that participate. The preferred equity stake should be proportional to the size of aid the firms receive. In particular, if assets are purchased by the government at a level above fair value, the equity stake must reflect at least that inflated value. In addition, any injections of capital by the government should be secured by an equity stake at least as large as the cash infusion. Consequently, shareholders and taxpayers will share in both the cost and potential benefits of the bailout.

Further, a "clawback" provision would hold companies responsible for the future performance of the assets they sell to the government. If a given firm's assets perform significantly worse than others in the same asset class in the wider market over a period of five years, the difference should be paid by the companies to the government. This will blunt incentives for firms to swap only their worst assets for equity stakes with the government.

Transparency. If private companies are allowed to participate, they must be subject to the same regulatory and reporting requirements as public firms, including the reporting of all liabilities. Off-the-books accounting should not be allowed.

Compensation. Firms that participate in the program must agree to freeze executives’ compensation at or below a reasonable level—say the salary of the President of the United States—for as long as the government holds an equity stake in the firm. Congress should also include a requirement that compensation packages for public companies be approved by a majority of those shareholders—including government shareholders.

Regulation. Federal legislation must include a timeline for the Treasury and Congressional committees to propose new financial-industry regulations that would significantly reduce systemic risk. Congressional leaders on a bi-partisan basis should publicly commit now to a set of principles that will guide systemic reform in the next Congress. These principles should include tighter and more broadly applied asset reserve requirements, the elimination of off-balance sheet entities and liabilities, tighter control of conflicts of interest, and a crackdown on predatory mortgage lending and lax underwriting standards. Any congressional deal must include a commitment from both parties in Congress to take up legislation to reform the regulatory structure.

Home owner relief. Bankruptcy judges should be allowed to modify the terms of mortgages when the appraised value of a home falls below the mortgage value. Further, home owners whose loans are modified, either through the court or through a "workout" with a bank, should not be penalized on their credit scores.

Process. The program to purchase certain kinds of financial securities should be reviewed frequently by the administration, and the Treasury Secretary should be required to report to Congress on the program at least every 90 days.

Beyond the immediate crisis

Congress needs to act soon to address structural problems to ensure that this kind of crisis cannot reoccur. These measures include:

Reform financial regulations. Publicly traded companies should have financial books that fully reveal the extent of all liabilities and assets. There is no justification for hiding liabilities from lenders or investors, or the government. Off-balance sheet entities or transactions should be prohibited.

Any institution that assumes a role of insuring financial transactions must have reserves adequate to pay off its reasonably anticipated obligations, and much of current finance involves credit derivative swaps and other transactions that hedge or insure against financial events. Yet non-depositary financial institutions like Bear Sterns are permitted to operate with debt-to-capital ratios in excess of 30-1, grossly inadequate to cover potential losses. Regulators should set and enforce asset responsible reserve requirements for investment banks, hedge funds, and other financial institutions.

Mortgage brokers were at the heart of the financial crisis. The natural restraint on lending to people unable to repay has been undermined by the securitization of mortgages. Once brokers could sell a mortgage to an investment bank without concern for the borrower’s ability to repay, the number of bad loans skyrocketed, and foreclosures followed. Tough underwriting standards must be enacted, and brokers must be prohibited from writing loans that they do not reasonably expect can be repaid.

Conflicts of interest, such as those that permitted rating agencies to accept payment from the investment banks whose securities were being rated, must be rooted out and prohibited.

Address the fundamentals of the economy. While it is important to ensure that financial markets continue to function properly, we should also bear in mind that the broader economy continues to struggle with rising unemployment, stagnating wages and incomes, and increasing prices for energy and food.

Home owners should not be left out. This assistance should include, at a minimum, backing for state efforts to provide counseling and temporary relief, and an expansion of judges’ ability to coordinate adjustments in mortgage terms to allow more people to stay in their houses.

Congress should pass an economic stimulus package that includes infrastructure investments, aid to states, and additional payments for low- and moderate-income families. Such a bill, if large enough, would provide a needed spark to complement the efforts on Wall Street. To have a significant impact, a job creation package must be at least as large as the $162 billion package passed earlier this year (though the outlays might be spread over the next 18 months.)

Shared sacrifice. While it may be necessary to provide a backstop to the broader market, it is also clear that many of those on Wall Street have benefited greatly from the excesses of the last few years. The costs of this bailout are unknown since the value of the assets that will be taken over by the federal government is unknowable at this time. It is important, however, that the costs of this bailout not prevent our nation from addressing its many needs, such as health care, education, investments in energy renewables, etc.

We must demand that the costs of the bailout are shared equitably. That means raising taxes on those with high incomes and setting capital gains and dividends tax rates at the same level as ordinary income. Also, a financial transactions tax should be implemented starting in 2009; this tax alone could yield from $50 to $100 billion to meet the costs of the bailout and other needs.

For more information and discussion go to: http://www.epi.org/

Will Race Decide the Upcoming Presidential Election?

Following is a piece on white privilege and the current election written by Tim Wise for www.buzzflash.com a "pro-Democracy web site."

For those who still can't grasp the concept of white privilege, or who are constantly looking for some easy-to-understand examples of it, perhaps this list will help.

White privilege is when you can get pregnant at seventeen like Bristol Palin and everyone is quick to insist that your life and that of your family is a personal matter, and that no one has a right to judge you or your parents, because 'every family has challenges,' even as black and Latino families with similar 'challenges'are regularly typified as irresponsible, pathological and arbiters of social decay.

White privilege is when you can call yourself a 'fuckin' redneck,' like Bristol Palin's boyfriend does, and talk about how if anyone messes with you, you'll 'kick their fuckin' ass,' and talk about how you like to 'shoot shit' for fun, and still be viewed as a responsible, all-American boy (and a great son-in-law to be) rather than a thug.

White privilege is when you can attend four different colleges in six years like Sarah Palin did (one of which you basically failed out of, then returned to after making up some coursework at a community college), and no one questions your intelligence or commitment to achievement, whereas a person of color who did this would be viewed as unfit for college, and probably someone who only got in - in the first place because of affirmative action.

White privilege is when you can claim that being mayor of a town smaller than most medium-sized colleges, and then Governor of a state with about the same number of people as the lower fifth of the island of Manhattan, makes you ready to potentially be president, and people don't all piss on themselves with laughter, while being a black U.S. Senator, two-term state Senator, and constitutional law scholar, means you're 'untested.'

White privilege is being able to say that you support the words 'under God' in the pledge of allegiance because 'if it was good enough for the founding fathers, it's good enough for me,' and not be immediately disqualified from holding office--since, after all, the pledge was written in the late 1800s and the 'under God' part wasn't added until the 1950s--while believing that reading accused criminals and terrorists their rights (because, ya know, the Constitution, which you used to teach at a prestigious law school requires it), is a dangerous and silly idea only supported by mushy liberals.

White privilege is being able to be a gun enthusiast and not make people immediately scared of you.

White privilege is being able to have a husband who was a member of an extremist political party that wants your state to secede from the Union, and whose motto was 'Alaska first,' and no one questions your patriotism or that of your family, while if you're black and your spouse merely fails to come to a 9/11 memorial so she can be home with her kids on the first day of school, people immediately think she's being disrespectful. White privilege is being able to make fun of community organizers and the work they do--like, among other things, fight for the right of women to vote, or for civil rights, or the 8-hour workday, or an end to child labor--and people think you're being pithy and tough, but if you merely question the experience of a small town mayor and 18-month governor with no foreign policy expertise beyond a class she took in college--you're somehow being mean, or even sexist.

White privilege is being able to convince white women who don't even agree with you on any substantive issue to vote for you and your running mate anyway, because all of a sudden your presence on the ticket has inspired confidence in these same white women, and made them give your party a 'second look.'

White privilege is being able to fire people who didn't support your political campaigns and not be accused of abusing your power or being a typical politician who engages in favoritism, while being black and merely knowing some folks from the old-line political machines in Chicago means you must be corrupt.

White privilege is being able to attend churches over the years whose pastors say that people who voted for John Kerry or merely criticize George W. Bush are going to hell, and that the U.S. is an explicitly Christian nation and the job of Christians is to bring Christian theological principles into government, and who bring in speakers who say the conflict in the Middle East is God's punishment on Jews for rejecting Jesus, and everyone can still think you're just a good church-going Christian, but if you're black and friends with a black pastor who has noted (as have Colin Powell and the U.S. Department of Defense) that terrorist attacks are often the result of U.S. foreign policy and who talks about the history of racism and its effect on black people, you're an extremist who probably hates America.

White privilege is not knowing what the Bush Doctrine is when asked by a reporter, and then people get angry at the reporter for asking you such a 'trick question,' while being black and merely refusing to give one-word answers to the queries of Bill O'Reilly means you're dodging the question, or trying to seem overly intellectual and nuanced.

White privilege is being able to claim your experience as a POW has anything at all to do with your fitness for president, while being black and experiencing racism is, as Sarah Palin has referred to it, a 'light' burden.

And finally, white privilege is the only thing that could possibly allow someone to become president when he has voted with George W. Bush 90 percent of the time, even as unemployment is skyrocketing, people are losing their homes, inflation is rising, and the U.S. is increasingly isolated from world opinion, just because white voters aren't sure about that whole 'change' thing.

Ya know, it's just too vague and ill-defined, unlike, say, four more years of the same, which is very concrete and certain.

White privilege is, in short, the problem.

Annenberg Pubic Policy Center Websites Cut Through the Political Rhetoric

Factcheck.org & factchecked.org
Useful web sites to get to the heart of public policy, with lesson plans to help students develop critical thinking skills while exploring timely issues.

Here is a description of the web sites, in their own words.

You may think there are already plenty of Web sites devoted to teaching kids one thing or another, from elementary to obscure. Our goal is a little different. We believe that truth is an elusive commodity in our world of ceaseless communication, a world in which information is transmitted in huge helpings and in a virtual instant. All of us are overwhelmed with messages, many of them attempts to persuade us to do or buy something.

Our aim is to help students learn to be smart consumers of these messages, not to accept them at face value; to dig for facts using the Internet, not to stop looking once they get to Wikipedia; and to weigh evidence logically, not to draw conclusions based on their own biases.

The materials on this site, then, are meant to help students acquire the skills to see through the spin. Under the heading Tools of the Trade we’ve outlined a five-step framework for analyzing information and avoiding deception. That process is the essence of what we do at FactCheck.org, where we have been debunking false and misleading claims in politics since 2003.

Some of our Lesson Plans present students with a message, such as an advertisement, and guide them through a process of discovery leading to the facts. All of the ads are real, and students probably have encountered some of them already. For example, many students and teachers will have seen ads on the Internet and television for a dietary supplement called Hoodia, which supposedly helps users lose weight by suppressing their appetites. Our lesson plan encourages students to ask such questions as, “Is there any scientific evidence that Hoodia works?” and to hunt for some answers.

Political messages are at the hub of a number of our lessons. We are strictly nonpartisan. We found long ago that misleading statements aren’t the purview of Democrats or Republicans alone. So, for example, you’ll find a lesson dealing with misleading claims made by Republican presidential candidates during a debate, as well as one framed around out-of-context assertions in an ad by a group opposing the Iraq war. We’ll post these topical lesson plans on an ongoing basis to keep up with current events.

Another group of lessons teaches some of the basic concepts of reasoning, giving students the building blocks that will help them parse others’ arguments and strengthen their own. Using Monty Python skits and clips from other popular television programs and films, we’ve created engaging lessons on deductive versus inductive reasoning, picking out logical fallacies and similar subjects. These are our core lesson plans.

Straight from the Source is our go-to list of Web sites, the places we visit when we’re looking for information, along with our synopses of what they offer. Official government sites can be terrific fonts of facts, like the U.S. Senate’s Office of Public Records, which identifies companies that have hired lobbyists trying to influence government policy on, say, offshore oil drilling, and the FBI’s Uniform Crime Reports site is a reliable source for finding out something like how many murders occurred in Chicago last year. We also include a number of think tanks and issue advocacy groups with rundowns on their political leanings and reliability.

Our Dictionary helps decode bureaucratese as well as legal, political, economic and other terms of art that often plague discussions of policy and politics.

Click on Ask FactCheck to see our answers to commonly asked questions about politics, government and current affairs, which we select from queries submitted by users of this site and FactCheck.org. You may also e-mail us directly at Editor@FactCheckEd.org.

The techniques we use at FactCheck.org, and those we try to convey here at FactCheckED.org, are essentially those used by any good investigative reporter, researcher or logician (all of which we have on staff). We try to be skeptical but not cynical. When we review a new claim, we neither accept it at face value nor do we assume it is false. We listen carefully, look for evidence and weigh that against what’s being said or implied. We think those are good habits to teach anybody. We hope you agree.

Viveca Novak
Project Director, FactCheckEd.org
Deputy Director, FactCheck.org

Brooks Jackson
Director, FactCheck.org