Issa Offers Proposal for Guaranteed Recovery Bonds to Rescue Financial Markets (ALT TO BAILOUT)

Press Release ^ | 9/27/08 | Darrell Issa (Congressman)

[1curiousmind]

Proposal Uses Private Equity to Keep Government from Buying Mortgage Assets, Assures Wall Street Won’t Get Rich While Taxpayers Get Stuck with Trillion Dollar Bill

September 27, 2008

Washington, DC – Rep. Darrell Issa, a businessman and entrepreneur before coming to Congress, today offered a new proposal to protect the economy without a taxpayer-funded bail out of Wall Street. Under Rep. Issa’s plan, private investors would provide the capital for a Rescue Fund through the purchase of government issued Guaranteed Recovery Bonds. The Rescue Fund would be managed by the Treasury Department and would offer troubled financial firms interest accruing loans based upon their holdings of at-risk mortgage assets.

“My plan uses private investment and gives Wall Street the same liquidity as the Paulson plan and guarantees that investment firms don’t just dump rotting assets on taxpayers and go on to reap huge profits,” said Issa.

Under the plan, Congress authorizes the Treasury to issue up to $700 billion dollars in unique callable T-Bills (Guaranteed Recovery Bonds) to be purchased by private investors to capitalize a Rescue Fund that will be managed by the Treasury Department. Financial institutions borrow from the fund at a rate that fully covers the interest paid to investors in the Recovery Bonds plus an insurance premium to protect taxpayers.

Under the Issa plan, Financial institutions holding at-risk mortgage-backed securities would be able to borrow from the $700 billion rescue fund established through the special Guaranteed Recovery Bonds. The amount each firm could borrow would be set by the Treasury Department using Secretary Paulson’s mark-to-market to maturity valuation of the mortgage backed securities they hold. Financial institutions would continue to hold their mortgage assets and be responsible for liquidating them over time, so taxpayers would not be saddled with the liability or cost of disposing of troubled assets. As firms pay-back loans to Treasury, the revenue is used to pay-off the Guaranteed Recovery Bonds. The insurance premium paid by borrowers will protect taxpayers from default.

A point by point summary of Rep. Issa’s proposal and a comparison with the Paulson plan can be found below.

[counterpunch]

Issa Guaranteed Recovery Bonds vs. Paulson Bailout
The Benefits of Making Wall Street an Emergency Loan instead of Buying Troubled Mortgage Assets

Less Risk/Reward for Taxpayers:

• Under the $700 billion Paulson plan, the Treasury buys at-risk mortgage assets and taxpayers own the investment — if taxpayers overpay for risky assets they lose money while Wall Street firms are free to profit after dumping bad investments on taxpayers.
  
  
• Under the Issa Guaranteed Recovery Bonds plan, Wall Street firms get liquidity from bonds but retain ownership of at-risk mortgage assets. Taxpayers can't get stuck holding the bill while Wall Street firms profit — taxpayers can only lose money if firms fail.

Wall Street Can't Profit while Taxpayers take Huge Losses:

• Under the Paulson plan, Wall Street firms get to wash their hands of business decisions and hand the risk to taxpayers. They're free to make enormous profits while taxpayers get stuck with results of bad investment.
  
  
• The Issa Bonds plan means that if Wall Street firms succeed, taxpayers make a profit. Wall Street can't make huge profits while taxpayers lose billions.

Keeping the Federal Government from Owning Troubled Mortgages:

• The Paulson plan makes the government the owners of $700 billion in mortgage assets. We're the landlord and the Federal government will be under constant pressure to cut special deals for tenants that cost taxpayers even more.
  
  
• The Issa plan means the government doesn't get itself into the mortgage management business. Wall Street firms are still in charge of business decisions and stilI have a financial stake.

 

[davandbar]

“— taxpayers can only lose money if firms fail.”

Issa’s plan states: “Financial institutions borrow from the fund at a rate that fully covers the interest paid to investors in the Recovery Bonds plus an insurance premium to protect taxpayers.

It looks as if taxpayers are covered by insurance to protect against failure.

[LomanBill]

>>Right now, however, its a food fight in the House.

Should we bake Nancy a cake, so she can have some just dessert to go with her sandwich?

Does she have a poodle?  

[Paperdoll]

I throw this out for you all to dissect:

If banks are troubled, why not float Government Savings Bonds as a place for people to put their money, keep it safe and earn interest as well?

It worked to finance our military in the second world war. The public would, I think, be very interested in saving our economy in this way far more than writing a blank check to be administered without accountability. Of course the administration would have to be set up, not to bail out corrupt CEOs, but to insure the savings of the American people, by giving the banks the money to make loans. Let the free market operate.

There. now what do you think?

[staytrue]

How about this for a plan.

It is a huge tax rebate with conditions that the money can only be spent to pay down debt or invest in banks with new capital. Best wishes.

The US Financial system needs a bailout. Only the govt. aka the US taxpayers can do this. It needs to be done as fairly as possible.

The solution is to give $7000 (about 700 billion) to each taxpayer but with the following restrictions.

If you are in default on any debt (auto, home, credit card, student), then the 7000 will first go to repaying the loans. This helps keep people in their
homes, cars, schools, etc. and helps liquify the lenders with payments on loans.

If you are not in default, the money will be held in a self directed Government account for you by social security number. The money must be invested in NEWLY issued stock (common or preferred) and/or Mortgage backed
securities from a list of firms to be determined by the treasury department. These shares could not be sold for 5 years. Also, up to 2000 dollars could be used for a payment against a current home loan which would be deducted from
the $7000 balance. Again this would help keep people in their homes and still bail out the lenders.

Since everyone is getting the money, there is no moral hazzard in bailing out the idiots only. The lending institutions are liquified and most but not all
people are helped with their home mortgages. It also gets directly to the root of problem, home mortgages and banking illiquidity.

Bottom line. We need a bailout by the taxpayers. But this would do it in a way that would relatively fair, have some free market aspects to it and benefit
all taxpayers if it works. Any inflationary aspects of “printing” up 700 billion should be delayed by 5 years when we might be in a better situation.

[rampage8]

what are the odds that they’ll scrap everything and start over? highly doubtful unfortunately.

[kenavi]

giving the banks the money to make loans

That's what Issa's plan or any plan will do, the rub is how. There has to be a mechanism for determining the value of the bank's assets, for purchase by the gov't or lending against their value.

This should not be confused with gov't savings bonds, because there is a risk of loss in financing the bank's assets. However, it is only a small risk, as there are trillions of dollars of mortgages to cover billions of dollars of financing.

[Ben Reyes]

That’s my congressman (49th District, CA...North County of San Diego)!

Mustanger, army bomb disposal expert, got out as a Captain.

A good man.

[Ben Reyes]

That’s my congressman (49th District, CA...North County of San Diego)!

Mustanger, army bomb disposal expert, got out as a Captain.

A good man.

[nonsporting]

Certainly a better alternative than what has been proposed. However, without changes to the CRA and banking laws... without the rollback of the systemic incentives to issue at-risk loans.... without the rollback of the penalties and punitive regulations that force banks to make such loans .... we are only rearranging the deck chairs.

Yes. We need to remove the bullet, not put a band-aid on the wound.

[johncocktoasten]

This is a great idea, and would probably work.

However, the pigs up at the corner of wall and broad won’t be happy. This was going to be their Fitz-mas. Now they get nothing except accountability.

A couple questions for the forum though:

1. When will McCain pick this up and run with it? Should we call the bonds “Earmark Bonds” instead, so McCain will discuss it?

2. How will ACORN get their money? /sarc

[Revel]

This might be good. Any money given to any company should be loan based so that they have to pay it back as they return to profit.

[nuf said]

My two largest investments are my house and my gold. The stock market isn’t everything.

[EQAndyBuzz]

I would take this one step further.

If I understand this correctly, most of this mess was caused by subprime variable loans to people that went up several points and people couldn’t afford to pay the loan.

Force everyone with one of these loans to pay it at 1/2 point above the price they got the loan at. When they sell their home, they will pay the balance out of their profit.

This way the banks will continue to make money off the loan, their greed in these subprimes will be punished, the home owner will be able to pay off his loan, and the investors who tried to scam the system will have to pay for their loans, or sell their property.

Once that is done, close up freddy and fannie and prosecute the whole bunch.

[Gemsbok]

Issa is a very sharp and personable guy, he stands on principal.

[TomasUSMC]

Did you hear about the 630 billion the fed pumped into the banks today?

[Reagan Man]

Yes I did.

Treasury printing presses are working overtime.

[TomasUSMC]

Under the Issa Guaranteed Recovery Bonds plan, Wall Street firms get liquidity from bonds but retain ownership of at-risk mortgage assets. Taxpayers can’t get stuck holding the bill while Wall Street firms profit — >>>>>taxpayers can only lose money if firms fail.<<<<<<
//////////////
Ok, when will we stop this bailout bullsheet?

Taxpayers can only lose money if FIRMS FAIL? Is this a joke? Ah havn’t we seen Firms doing exactly that, every stinking week now?

WE DON’T NEED A BAILOUT ...WE NEED TO START SETTING BAIL.

[jokar]

Issa bump.