As most expected, the bailout provision did pass and is now law. And now the fun begins as our government is about to engage in an outsourcing binge with a $700 billion kitty.
The stated intention of the Treasury Department is to employ a small internal staff (about two dozen people) to orchestrate and oversee the purchase of mortgages and mortgage securities. As to the actual mechanics of pricing securities, running auctions, managing and/or selling these assets, the intent is apparently to hire 5 - 10 asset management firms. These firms will, of course, all make fees.
In 1990, when banks and S & L's were failing all over the United States, the FDIC and Resolution Trust Corporation hired many private companies to facilitate the sale of assets the U.S. "inherited" from failed institutions. Notwithstanding regulations as to the management and sale of government assets, these companies made lots of money.
The Bible (Matthew 6:24) argues against the service of two masters: "No one can serve two masters, because either he will hate one and love the other, or be loyal to one and despise the other." Notwithstanding this sage advice, it appears that the Treasury is going to put 99% of the execution of the bailout law into the hands of private contractors.
Our economy runs because individuals and companies, acting in self-interest, make products and provide services that someone else, acting in self-interest, wants to procure. For that reason, I fear that putting a significant part of the implementation of the bailout provision in the hands of private contractors - all with the DNA to make lots of money for themselves - is asking for trouble.
I am not questioning the integrity of any of the individuals working for the companies to which the government will outsource. The problem is that the Treasury is asking these people to serve two masters: the profit-making institutions for whom they work and, the U.S. taxpayer who is hiring them on a temporary assignment.
If we learned nothing else from the Fannie Mae and Freddie Mac implosion, we should have learned that when we try to effect social policy (facilitating the purchase of homes with highly available debt) with profit-making entities, trouble ensues.
My proposal is that whereas the government definitely needs the assistance of outside firms, it form a much larger task force to run the acquisition, management and sale of mortgage-related products. A 20 or 30 person team seems ludicrous to me. We are talking about $700 billion for gosh sakes. Do we not think that kind of money just might juice the creativity of private enterprises that exist to make money for themselves?
The fact is that there are plenty of people with expertise in financial services out of work right now. What's more, the job of acquiring, managing and selling mortgage assets will not end quickly. The government could guarantee a five-year assignment to qualified individuals.
The Treasury has an enormously tough job ahead: to buy assets in a way that meets the goals of lubricating lenders and yet does not overspend, to minimize the end-of-the-day loss to the American taxpayer, to keep a very skeptical populace and Congress happy that private executives and industries are not experiencing windfalls, and to do what it can to reduce foreclosures and help homeowners. It is respectfully suggested that the Treasury is not going to accomplish its tasks with a 20 - 30 person staff of even the most knowledgeable, experienced and honorable individuals.
Jim Randel is the author of the just-released book, The Skinny on the Housing Crisis.