It is a testament to how quickly events are moving in Washington that in the time it takes to review either the Senate plan or the House plan currently offered in response to Paulson's bailout proposal, the status of the negotiations changes significantly -- or at least so we are told. Capitol Hill must be a madhouse right now, with significant numbers of both Republicans and Democrats opposed to any bailout, while Democratic congressional leaders strive to seize the moment to gain some long-sought policy goals.
According to Barney Frank, chairman of the House Financial Services Committee, not only is the White House giving in on executive compensation and the principle that the government should get a dollar's worth of equity in return for every dollar it spends buying "toxic" assets from ailing financial institutions, but the Bush administration is also giving ground on a critical issue -- the pressing need to give homeowners help, and not just Wall Street.
So far, we haven't heard the White House publicly make such concessions. But the homeowner-help issue is crucial. Until the pressures on the housing market are relieved, the root causes of the liquidity crunch will not be addressed. Right now, a wave of foreclosures is continuing to depress housing prices, which in turn force additional defaults on home mortgage loans. Stop the foreclosures, say some observers, and the housing market will finally reach bottom, the number of mortgage defaults will start to shrink, and all those toxic mortgage-backed securities weighing down balance sheets will start to get a little less deadly.
But to stop foreclosures you need to be able to break the terms of current mortgage contracts, and that has long been a deal-breaker for Wall Street.
Democrats have made repeated attempts to allow bankruptcy judges to modify the terms of mortgages to help cash-strapped borrowers, a position opposed by Republicans and the banking industry ... Mr. Frank said that an agreement in principle had been reached on additional assistance for borrowers facing foreclosure, but he didn't offer any specifics.
Both the banking and the securities industry oppose any "weakening" of bankruptcy law that would undermine the legal status of existing contracts. But how much moral ground do the banking and securities industries have to stand on, as they wait, hats in hand, for the biggest bailout in at least 75 years?
Still, we've got to wonder just how much smoke Frank is blowing. For every confident statement made by a Democrat, there is an equally blustery Republican demanding that Democrats not get in the way of a rescue plan -- the New York Times quoted Republican Sen. Mitch McConnell saying, "When there's a fire in your kitchen threatening to burn down your home, you don't want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement." Meanwhile, John McCain gets to enjoy the strategic position of opposing a bailout that, in one form or another, is certain to be passed, without ever running any danger of having to face the consequences of the economic crash that could happen without a bailout. Some Republican strategists are already chortling over their good fortune.
The politicians will be working late in Washington on Monday tonight. If market conditions continue to sour on Tuesday, the pressure will only grow. In the meantime, I'll leave you for today with the first three paragraphs of the Frank bill, which, to my mind, eloquently convey the seriousness of our current plight.
(1) The current United States financial crisis necessitates immediate action to stabilize the financial system, restore liquidity to financial institutions and the capital markets, protect savings and pensions, and preserve the availability of credit for individuals and businesses;
(2) actions taken to protect consumers and minimize mortgage foreclosures are equally important objectives in promoting a resolution to this crisis and will minimize any losses and maximize the ultimate return to the taxpayer on assets purchased under this program; and
(3) existing financial regulatory structures have clearly failed either to prevent the current crisis or to protect United States consumers and investors, and comprehensive regulatory reform is required to restore confidence in financial markets and institutions going forward.