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Principles for a Patriotic Bailout Plan
The three-page, $700 billion bailout plan presented to Congress by the Bush
Administration last Friday is an appallingly superficial response to years of
bad decisions and greed of Wall Street firms empowered by a long-standing,
bipartisan federal policy of deregulation and deliberate neglect.
There are many questions that have yet to be answered about the basics of the
bailout: Who will be entitled to get the taxpayers’ money, and on what basis?
How was the $700 billion calculated? What criteria should be met to determine
what the government will pay for “troubled assets”? Why cover all financial
companies – not just those involved in bad mortgages – as well as foreign
companies? We don’t have the answers to these most basic questions. And,
perhaps most important: Why should the hundreds of millions of Americans who did
nothing wrong be required to pay $10,000 per family in this country? These are
questions that must be answered to the satisfaction of the nation before
Congress authorizes any taxpayer relief. Finally, any economic rescue package
that bails out Wall Street must include new rules and protections for average
Americans in exchange for the unprecedented taxpayer support.
1. Cap Interest Rates on Credit Cards and Mortgages from Bailed Out
Companies
Any company that receives taxpayer funds should be prohibited from charging
an interest rate higher than the Federal Reserve’s Discount Window rate, at
which these companies are borrowing taxpayer money (currently 2.25%), plus a
small markup – 3 percentage points would be generous – for consumer credit or
mortgage and home loan debt. Taxpayers should not have to pay interest rates of
7% to 25% to bailed-out institutions that borrow our money from the Federal
Reserve at a 2.25% rate.
There should also be a national moratorium on foreclosures by any bank on
loans with an interest rate in excess of the Discount Rate +3% cap so long as
homeowners maintain payments reset to the interest rate cap. And judges should
be authorized to reduce mortgage payments to homeowners about to be foreclosed
upon.
The plan should restore the states’ power to protect their citizens from
abuses in the lending industry. The federal government not only failed to curb
the abusive lending practices that helped create this crisis, but also blocked
the states from policing them. Reversing this policy is a necessary component of
any fix to the broken model of “anything goes” that created the current
crisis.
2. Give Taxpayers a Stake in Bailed-Out Companies With Creation of
America’s Mutual Fund
In exchange for purchasing companies’
bad debt and “troubled” assets, the government shall be given an ownership stake
in the firms in proportion to the amount of taxpayer risk. Company warrants
will be held and managed by a publicly run office to be known as “America’s
Mutual Fund,” which will also gain a seat on the board of any company receiving
a bailout. America’s Mutual Fund’s goal will be to liquidate these assets as
companies’ stock values rise enough to compensate taxpayers, with interest, for
the bailout.
3. Restore Corporate Accountability
Both federal bailout officials and the banking industry itself must be
subjected to oversight and regulation to effectively carry out this bailout and
to prevent another economic debacle in the future. But there are also measures
that Congress should take right now to ensure corporate accountability in any
bailout scheme.
Recipients of bailouts should be prohibited from applying for or receiving a
contract to manage any of the government’s newly held assets. This would create
a gross conflict of interest. Additionally, companies that receive taxpayer
assistance must agree to a ban on lobbying Congress or bank regulators until the
taxpayers have been repaid. The bill also should block revolving doors by
prohibiting federal employees who work on any aspect of the government bailout
from going to work for any recipient of taxpayer assistance until two years
after the expiration of the Treasury Department’s program. And bailout company
executives should have a similar two-year cooling off before any government
service on financial programs.
Wall Street executives who violated existing law should be prosecuted by the
Justice Department.
The financial services industry must be subjected to new regulatory
standards, such as greater transparency and disclosure requirements, increased
regulation of investment banks and hedge funds, stringent limitations on
leveraged investments and offshore financial instruments to avoid scrutiny and
taxes, and prohibitions against the riskiest investment practices. The program
should make bailouts contingent on executives of participating companies
accepting strict salary caps and standards for compensation packages that guard
against bad incentives.
4. Ensure Government Accountability and Transparency
There is no place for secrecy and immunity from accountability in
extraordinary legislation giving the Treasury Department $700 billion to bail
out Wall Street. Congress must give the Treasury Department guidance on how to
exercise its authority or it risks having the entire scheme struck down as
unconstitutional. The private asset management companies Treasury wants to hire
should not be paid at usual Wall Street rates for each asset purchased, but at a
fire sale rate.
Moreover, all Treasury actions must be subject to ordinary judicial review,
not immune from review as the Bush Administration requests, and any new program
or authority must be subject to ordinary open-government laws such as the
Freedom of Information Act and the Sunshine Act.
The program also must provide for extensive reporting by the Government
Accountability Office, whistleblower protections to ensure the free flow of
information from insiders who can call public attention to waste, mismanagement,
or corruption, and oversight by the Congress and the Inspector General of the
Treasury Department, who should have subpoena power to ensure adequate
investigations in the event of any stonewalling by government or industry
officials.
These provisions will help ensure effective oversight by the courts, the
Congress and –most important – the general public.
5. Take the Time to Do it Right
Wall Street is threatening Congress and the nation with global economic ruin
if a $700 billion blank check is not legislated within days. At the same time,
members of Congress have campaign plans all over the country next week. The
pressure to get things done quickly can only result in the poor management of a
massive pot of taxpayer money. At this point, no one even knows if $700 billion
is the right number or if we can ensure that the “distressed” loans and other
financial instruments will be valued appropriately when bought with the bailout
money. No justification or criteria has been offered by the Treasury
Department. Congress should put the interests of the public ahead of rushing to
respond to Wall Street’s threats or adjourn for the campaign. At $700 billion,
these decisions need to be made with a level head, not a gun to the country’s
head. Congress must not be blackmailed into hasty action by Wall Street and the
Bush Administration. Poorly drafted and ill-considered congressional action
could result in irrevocable damage.