September 9, 2008

SAFE AS HOUSES:

We'll Protect Taxpayers From More Bailouts (JOHN MCCAIN and SARAH PALIN, September 9, 2008, Wall Street Journal)

Treasury has broadly followed the McCain plan, outlined months ago, and gets at the short-term heart of the problem. That plan reinforces the federal commitment to meet our obligations and get this mess behind us. It replaces management and board members. It requires that shareholders take losses first. It puts taxpayers first in line for any repayments. And it terminates future lobbying, which was one of the primary contributors to this great debacle.

Along with the commitment of taxpayers' dollars, we should make market reforms to help ensure that we do not face this problem again. We will make sure the marketplace understands its obligations. Homeowners must be able to understand the terms and obligations of their mortgages. In return, they have an obligation to provide truthful financial information, and should be subject to penalty if they do not. Policies must be in place to ensure that homeowners provide a responsible down payment of equity in the initial purchase of a loan. In the future, Fannie, Freddie or any government organization should never insure a loan when the homeowner doesn't have enough of his or her own capital in the investment.

Lenders who initiate loans will be held accountable for the quality and performance of those loans, and strict standards must be required in the lending process. Every lender must be required to meet the highest standards of ethical behavior, with recourse if they do not perform.

Reforms are necessary now to make mortgage lending and banking organizations more transparent. We will require greater disclosure, so that complex derivative instruments and excessive leverage can't put the marketplace, and the financial security of your home, at risk.


Fannie And Freddie: What Next? (Steve Forbes, 09.08.08, Forbes)
Treasury Secretary Hank Paulson should finally do to these two corrupt, mismanaged monsters what he should have done months ago and unveil a plan to break them up into 12 new companies. They should be recapitalized, which will require an initial outlay of more than $300 billion. Current shareholders should be able to exchange their existing paper for shares in these new companies. They won’t likely recover what they lost on Fonie’s and Fraudie’s common stock, but they’ll end up with a lot more than what these shares were worth before the government takeover. Preferred shareholders should be able to exchange their paper for similar securities in these new entities, with warrants attached for conversion into common shares.

To help beleaguered regional banks, which owned much of this stuff, these preferred shares should be called in at par in, say, 20 years or so. That way banks and other financial institutions shouldn’t have to take a massive write-down. The federal government should also have warrants in these new outfits so that taxpayers can ultimately get a part or all of their money back. In this way you could have a dozen competitive companies with no ties to Washington.

These vigorous new entities would help revive the housing market.

Posted by Orrin Judd at September 9, 2008 8:00 AM
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