Update: On Thursday afternoon, leaders of the Democratic-controlled Congress announced an agreement in principle for a modified version of the initial rescue proposal.
Not a passing grade yet.
That’s Andy Winton‘s view of the plan Treasury Secretary Henry Paulson has been pushing to get the credit markets functioning well again — at a cost to taxpayers of up to $700 billion. Winton chairs the Finance Department at the University of Minnesota’s Carlson School of Management.
Winton, interviewed Wednesday afternoon, says the plan needs more congressional oversight. He also says taxpayers should be given a stake in the financial institutions that will be rescued by the plan. Such a provision would reflect the strategies legendary investor Warren Buffett employs in taking positions in companies.
Paulson unveiled the plan and promoted it aggressively in a lightning round of television appearances last weekend and, with Federal Reserve Chairman Ben Bernanke, pushed hard for it at congressional hearings over the last two days. President Bush went on television Wednesday night to urge Congress to pass some version of Paulson’s plan and asked all Americans to support it.
Bush pushes for quick approval
Bush warned of dire consequences for the U.S. economy if the plan doesn’t win prompt approval. On Wednesday, the credit markets again seized up as uneasy investors and traders demonstrated a renewed lack of confidence in the values of the toxic debt instruments that enabled mortgage lenders to finance the now-deflated housing boom.
Members of Congress are being swamped with protests from angry constituents, who see the proposal as a taxpayer-financed bailout for financial institutions and their often highly paid top officers. The plan that was outlined by Paulson contains this statement, seen as breathtaking in scope by its critics: “Decisions by the Secretary pursuant to the Act are non-reviewable and may not be reviewed by any court of law or any administrative agency.”
Congressional leaders of both parties say they are nearing an agreement on a modified version of the initial rescue plan. It could pass both the U.S. Senate and the House by this weekend, though many of those voting for it likely will be holding their noses.
In his address to the nation, Bush backed an added provision calling for limits on the pay of top executives at the financial institutions to be rescued. He also supported more oversight than had been proposed initially.
A major sticking point has been the Democrats’ insistence that bankruptcy judges be given the power to rewrite home mortgage terms in order to reduce foreclosures and enable more people to stay in their homes. Many Republicans are concerned about outright intervention in the market.
Some have proposed reducing the size of the $700 billion kitty to be set aside for the rescue, which would set up an agency to buy questionable debt from troubled financial institutions and then sell it to new buyers.
More than year ago, Winton warned of trouble
In July 2007, shortly before a series of intermittent malfunctions of global credit markets began, Winton warned that the trouble in the credit markets could compound a recession if a downturn came to pass.
At that time, Winton noted that a global market saturated with derivatives — various forms of the mortgages packaged up by Wall Street loan syndicators — had not been tested in an economic downturn. These instruments are far more prevalent today than they were during the last recession, in 2001.
Winton said Wednesday that to some extent, his fears of more than a year ago have been realized. He said the performance of the parts of the derivatives markets “has not been very good” since then. Now, he added, the current downturn looks likely to be at least as serious as the 1990-91 recession, as the credit problems that have plagued the subprime mortgage market spread to auto, consumer and business loans.
Some form of a bailout is probably necessary, Winton said.
He said the biggest part of the problem is not the difficulties financed by Fannie Mae and Freddie Mac, the two dominant mortgage players taken over this month by the federal government. Rather, the difficulties center on trying to value the complex loan securitization packages that contain toxic debt.
He also said events in the financial markets will fuel continuing consolidation in the financial sector. “I think you’re going to see a lot of downsizing,” he said.
Asked about what will happen to the environment for continued deregulation of the financial sector, Winton said events will swing toward more regulation.
“I think it’s a huge shift. It’s going counter to a trend of the last 30 years.”
Dave Beal, a former business editor and columnist for the Pioneer Press, writes about business and the economy. He can be reached at dbeal [at] minnpost [dot] com.