Recklessness on Wall Street and fecklessness in Washington have brought the American economy to the brink of disaster. Mounting corporate debts and collapsing real estate markets have all-but frozen the flow of credit that is the life-blood of our system.
It is now clear that without immediate and dramatic action, we face an economic calamity – not just for Wall Street, but for small businesses, communities, and families around the country.
But while I agree that quick action is necessary, the Treasury Department’s original 3-page proposal – in essence “Dear Congress, please send a $700 billion blank check, love, Hank.” – was a nonstarter.
We have come a long way in the past week, thanks mostly to tough negotiations by Democrats and the inclusion of improvements demanded by Senator Obama, my constituents, and others. The result is legislation that I can support.
The bill addresses the concerns of three important groups: families who are struggling to stay in their homes; small businesses and their employees; and taxpayers.
First, the legislation requires that the government renegotiate the terms (including principal, interest rates, or duration) of any mortgage owned in whole or in part by the federal government to prevent foreclosures and keep people in their homes. These provisions are vitally important.
The government now controls Fannie Mae and Freddie Mac, which together own or back nearly 50% of the mortgages in America, and will be purchasing many thousands of new mortgages or shares of mortgages under this bill. The bill requires that the government use its new market power to rework many of the flawed mortgages that are at the heart of this crisis. Done right, this effort can help families avoid the wrenching experiences of foreclosure and bankruptcy.
Second, it will allow all financial entities – big banks, regional banks, and local community banks – to sell off the toxic assets that have crippled the credit markets.
It also allows a one-year write-off of losses stemming from the government takeover of Fannie Mae and Freddie Mac, removing a major burden from the financial hubs of our communities.
This means capital that breathes life into our economy will flow not just to Wall Street, but to Artesia, Sepulveda, and Rosecrans Boulevards. As one of my constituents, a former auto mechanic, puts it: “if there’s no oil in the engine, the car won’t run. You have to put the oil in from the top and clean the parts from the bottom.”
Third, the bill includes a number of provisions intended to minimize the costs to taxpayers. It requires that the government buy assets, rather than merely cover corporate losses. These assets give the government an equity stake in the companies it helps – like the stake Warren Buffett just bought in Goldman Sachs. Just like Buffett, taxpayers will profit from increases in these companies’ stock prices when the economy recovers.
The bill includes tough new oversight and transparency provisions, including an oversight board appointed by Congress. It provides funding in installments – $250 billion at first; $100 billion after the President certifies that it’s necessary; and the final $350 billion only if Congress allows funding to continue. It limits executive compensation and bans so-called “golden parachutes” for companies participating in the program.
And, if after five years the program has resulted in a loss to the federal government, the President must propose a fee on financial services companies to recoup the costs of the program. This means that those whose greed caused the problem will pay for it.
The bill is by no means perfect. Among other things, my preference would have been to include provisions that allow bankruptcy judges to rewrite mortgages of primary homes. But as a mother of four and now grandmother of three, I know life requires compromise.
Our action today does not mark the end of America’s financial peril. Critical next steps must include substantial reform of the financial regulatory system, a task that will be a priority for a Democratic President and a larger Democratic majority in Congress.
But passage of this bill, I am now convinced, is urgent and necessary to reassure the American people and global financial markets that our economy is secure and major reforms are coming.