Bailout Negotiations

Fortunately it looks like the Democratic leadership in Congress (particularly Chris Dodd and Barney Frank) are showing some much-needed backbone in standing up to the administration and demanding that the bailout not turn into a handout to Wall Street.

The Senate Democrats’ proposals includes two bold provisions. One would grant the Treasury "contingent shares" of stock in any financial institution that wants to sell bad debt to the government; the other would grant bankruptcy judges the authority to modify the terms of primary mortgages, a step aimed at helping homeowners at risk of foreclosure.

The bankruptcy provision is staunchly opposed by the banking, lending and securities industries and by many Republicans in Congress, but Democrats insist that it is one of the few mechanisms to provide direct assistance to homeowners caught in the foreclosure crisis.

The contingent shares would give taxpayers an equity stake in companies seeking help through the rescue program, potentially allowing the government not only to recoup however much of the $700 billion it spends on bad debt, but also to profit should the financial firms prosper in years ahead. The legislation would require the value of the contingent shares to equal the value of the assets purchased by the government.

I'm glad the Dems are forcing Paulson and co. to get some equity in the companies whose distressed assets we're looking at coughing up $700 billion to acquire. Given that the Federal Government doesn't run into liquidity crises, we should ideally be able to hold onto the equity until the companies are healthy again, and then at least have the chance to break even.

I'm less encouraged by the proposed changes to the bankruptcy law that would force lenders to allow delinquent homeowners to refinance. While these changes would allow some homeowners to keep houses they otherwise couldn't afford, it will make lending more risky, and thus more costly for future borrowers. This will basically mean that people who have been financially prudent and have waited on purchasing a home will face higher costs in order to save the financially foolish. I can imagine this playing less well with the voters than Democrats may think... my guess is there are a lot fewer people facing foreclosure than there are people who want to take out a loan at some point in the future.