(pdf version)

Letter Regarding The Bailout

September 24, 2008

The Honorable Chris Dodd, Chairman
The Honorable Richard Shelby
Banking Committee
United States Senate
Washington, DC 20510

The Honorable Barney Frank, Chairman
The Honorable Spencer Bachus
Financial Services Committee
United States House of Representatives
Washington, DC 20515

Dear Chairmen Dodd and Frank, Senator Shelby and Representative Bachus:

Public Citizen is a national non-profit organization that represents consumer interests in the courts, executive branch agencies, and Congress. We are grateful for your commitment to protecting the American public in this time of economic crisis. We write because we are deeply concerned with the Bush Administration’s proposed $700 billion purchase of mortgage-backed securities.

Any plan of this kind must include specific provisions to ensure that it advances the best interests of the American public and is not simply a massive giveaway of taxpayer funds to private industry. Such protections are missing from the Bush Administration proposal. Any bill to remedy the current financial crisis should include four types of provisions:

1. Consumer Protections and Assistance. Any plan must protect and provide relief to consumers, not just industry titans. At a minimum, it should provide

• relief for distressed homeowners in by authorizing loan modifications;
• a cap on the level of interest that firms can charge to consumers; and
• restoration of states’ authority to protect their citizens from abuses in the lending industry.

2. Government Accountability and Transparency. This crisis was caused in large measure by a lack of oversight and accountability. Now the Bush Administration proposes more of the same. The Administration’s proposal authorizes the Secretary of the Treasury to “take such actions as it deems necessary” to carry out its responsibilities. This is an unacceptably broad delegation of congressional power. If the Congress fails to give the Treasury Department real guidance on how to exercise its authority, it will risk having the entire scheme struck down as unconstitutional.

Under the Administration’s proposal, decisions by the Secretary of the Treasury would also be “non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” There is no justification for granting one government official the authority to dispose of $700 billion in taxpayer funds with no accountability. Rather than justifying a lack of accountability and transparency, the magnitude and urgency of the crisis and the scale of the proposed government intervention only counsel in favor of ensuring accountability for decisions made. Indeed, in the most analogous historical circumstance, the savings and loan crisis, Congress explicitly established that the Resolution Trust Corporation would be subject to the Administrative Procedures Act. Similarly, none of the unprecedented, massive New Deal programs enacted during the Great Depression was immune from judicial review.

The plan should include the following provisions to improve decision making and ensure transparency and accountability in the Treasury Department:

• criteria by which the Treasury Department will decide whether to purchase assets and make other major decisions under the authority granted;
• ordinary judicial review under the Administrative Procedures Act;
• quarterly analyses and reports by the Government Accountability Office on the Treasury Department’s administration of the plan;
• the provision of an Inspector General with subpoena power to certify at regular intervals that the Treasury Department and plan participants are carrying out their responsibilities properly;
• application of ordinary open-government laws such as the Freedom of Information Act and the Sunshine Act to any new program or authority; and
• whistleblower protections for government and private-sector employees.

3. Taxpayer Protections. It is unacceptable that the Bush Administration proposes to spend $700 billion to bail out the owners of mortgage backed securities without requiring any assurance that taxpayer money will be protected. The plan must include some form of protection for this taxpayer investment, for example by giving the United States equity in participating organizations. This too has strong precedent. The United States acquired equity in bailouts of Chrysler Corporation, the airline industry after the attacks of September 11, 2001, and in the recent bailout of American International Group. If the American public must rescue market speculators, then its investment should be protected with securities warrants strictly related to the amount of taxpayer risk.

Each participating firm also should be required to appoint an individual who will be responsible for ensuring compliance with the plan and will report regularly to the Treasury Department on the firm’s financial condition.

4. Corporate Accountability and Responsibility. The plan also must ensure corporate accountability and responsibility. Seven hundred billion dollars in taxpayer funds should not end up lining the pockets of the very corporate executives responsible for creating the current crisis. Nor should taxpayer money be used to lobby the government for more broken policies. Any plan should include the following:

• strict salary and bonus caps for executives of participating firms;
• conflict-of-interest protections and fee caps for private firms that assist the Treasury Department in carrying out the plan; and
• a prohibition on using bailout funds to hire lobbyists to influence the Congress and banking regulators.

National crises are precisely the times that demand rigorous checks and balances between the three branches of our government—not a short-circuiting of the core principles of our democracy. We encourage you to exercise Congress’s constitutional role thoroughly, debating and considering this issue carefully before adopting any plan. We also encourage you not to simply respond to the current crisis with a bailout plan, but to overhaul federal regulation of the financial system as soon as possible. To that end, we urge you to set an expiration date of March 1, 2009, and to provide only partial funding for any plan, thereby ensuring that the Congress will return to the issue promptly. We know that you are working diligently on behalf of American consumers, and we thank you for your efforts.


Joan Claybrook, President
Public Citizen

David Arkush, Director
Public Citizen’s Congress Watch division

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