Stimulus bill or bailout; which gets your attention?
The stimulus bill is getting all of the press recently. The bailout, which is still moving ahead, has been moved to the back sections and off of page one. That doesn’t mean that the bailout has been swept under a rug. The bailout funds have a specific purpose. That purpose has changed, but its core purpose is to free up the frozen credit markets and that remains an important goal. The new stimulus bill is loaded with pork and special projects and does not do enough to increase employment, stimulate bank lending or return optimism to the general population.
In the meantime, sources say that the administration is asking Wall Street firms if they would be interested in participating in the bad bank proposal. At the same time, they are requiring those firms who are getting government money, to cap executive pay.
According to a Treasury department press release, senior executives are limited to $500,000 a year in total compensation. Any compensation above that amount has to be in restricted stock. The restricted stock does not allow the executive to claim any value from it until after the firm has repaid the government.
The bank bailout has not been forgotten
So, with all of the attention on the inflated stimulus bill, is there anything happening with the bailout?
A CNN Money article says that the new administration’s approach to the bank bailout will likely be three-pronged. The article says that; ‘The plans are likely to include a program that would relieve banks of troubled mortgage assets, and may also feature promises for additional capital infusions or an offer to guarantee the value of some bank holdings.’
This sounds like a return to Paulson’s original plan. If these approaches are implemented, then the goals of the bailout will be reinforced and live on.
What many taxpayers do not realize is that banks continue to close every week. Every failed bank is one less source of lending in a community. One less bank is lost jobs and even more burden on the FDIC. The FDIC’s burden is great today, with 7 bank failures already in 2009. (see my next post for more on this)
TARP funds and the three point solution
Remember that the Obama administration inherited $350 billion in TARP funds to tackle the banking and financial crisis. One of the first courses of action will be to get the troubled assets off of the balance sheets of distressed banks. The ‘bad bank’ concept I mentioned in a prior post is still a much-discussed option. The net effect of this action would be to improve their health and investors concerns and to stimulate lending again. (stay tuned for more on the other two options)
February 7th, 2009 at 1:50 pm
The Bad Bank, TALF, and the 2 Ton Elephant in the Room
Under the “Bad Bank” and TALF scenarios, the taxpayers will own these “Troubled Assets” which are comprised of “Toxic” mortgages. I believe that we must address another issue at the same time, in order to maximize the success and mitigate the losses of this approach
In effect, the US government (taxpayers) will be bearing the loss on these “toxic” mortgages. The growing concern is that these losses will continue to materialize as defaults increase with the projected 8 million foreclosures expected over the next four years. It seems that the key to this crisis IS THE BORROWER!
Everyone is ignoring the “2 Ton Elephant in the Room”. Many agree that the contributing factor to most of our problems is the consumer’s lack of financial understanding. He is like a “Boat without a Paddle” when it comes to managing money and making money choices. Everyone is betting that the Borrower will default and foreclosures will follow. The high rate of foreclosure and RE-DEFAULT should have been expected because the Borrower has no concept of managing money.
It can be argued that the Borrower’s lack of knowledge in financial management was the primary cause of the Subprime Mortgage Crisis which precipitated the Credit Crunch and our current economic woes.
Loan modifications on these Troubled mortgages will not save the Borrowers. The fact is that these measures will fail because the Borrower will fail unless he has guidance. The evidence is that Re-default is occurring anyway at a rate of 60% within 6-8 months.
Let’s finally address the real issue which requires developing a program of “Immediate and Specific Financial Guidance” to help the Borrower understand how to manage his financial affairs.
The Borrower is in desperate need of “Financial Guidance” in this complex economic environment that requires “informed” financial decision-making. The Subprime Mortgage Crisis, out-of-control consumer spending and credit card usage, and the spike in foreclosures and bankruptcies provide evidence of that fact.
We must develop a program of “Immediate and Specific Financial Guidance” that will help the Borrower “naturally” be able to make the monthly mortgage payment. This program is NOT the so-called Financial Literacy initiative that simply disseminates “information” and takes forever to complete, but rather it is a program that will help the Borrower “understand” how to manage money in the shortest possible time and avoid the pitfalls that have previously caused financial
distress.
As the Borrower is successfully guided to avoid default, the financial and housing markets will respond favorably. The result will be a reversal of the downward trend in the valuation of the “troubled assets”.
If we are successful, we can turn this crisis “all around” and stimulate the economy “naturally” rather than by “bailout” which does not guarantee success.
Instead of the expected losses, the US government (taxpayers) will benefit from the unexpected gains that will result as these investments grow in value.
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Tel: (732) 493 - 4799
Email: bornsteinsong@aol.com
February 9th, 2009 at 4:34 pm
Prof. Bornstein,
Thank you for your keen insights into a bailout alternative. For the clarification of our readers, I wanted to make one point.
You mentioned that ‘Loan modifications on these Troubled mortgages will not save the Borrowers’ and cited an example of a failure rate. (The evidence is that Re-default is occurring anyway at a rate of 60% within 6-8 months). That statistic refers to the governments failed foray into loan modification. While the government might have had the best of intentions, we know that the government trips over red tape in their zeal to tackle such issues.
There is no similar statistic for private loan modification that I am aware of. Private loan modification often attempts to educate the homeowner in the process. This achieves at least part of your argument, although after the fact.
February 19th, 2009 at 2:38 am
Hi, I can
March 20th, 2009 at 6:03 pm
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