With the Republican expertise for framing issues in terms that appeal to the voters, we should be shocked that they selected the term bailout rather than rescue to present their case. Had they made that one simple change, the vote may well have succeeded on Monday. But with the majority of Americans opposed to the program, it was wisely defeated. Likewise, as is their usual response, the Democrats accepted this as being a bailout. They would have put themselves in a much better position if they renamed Paulson's solution a loan.
All of us are familiar with loans. From the richest to the poorest of Americans we understand the principals of borrowing money. For the privilege of getting someone else's money, we have to promise to pay it back with interest. Further, we usually have to offer collateral to the lender. When a marginal business loan is accepted, it also comes with terms such as limitations on company expenditures. Banks aren't in business to lose money. Yet they insist on conditions almost guaranteed to cause American taxpayers a monstrous financial loss.
If Congress uses guidelines well established to draw up the loan, what might it look like? First, the Treasury will take an ownership position in any company with insufficient collateral to guarantee payback including interest. That can be in the form of common, preferred or special stock. And, until the loan is fully repaid, all executives will have their salaries and benefits scaled back to represent a company teetering on bankruptcy. Also, all execs will be required to forego any golden parachutes or pay increases greater than the CPI just as senior citizens are limited.
The Republicans have introduced a concept to have the banks buy insurance to guarantee the failing mortgage packages. However, they omit a major limitation to that approach. These mortgage packs are in trouble because no one knows what their ultimate worth is in the market. That being the case, how can they expect the Treasury to put a rate on the insurance? Are they worth 10% or 80 % of what the stated cost was to the banks? And, since each package is different, how will it be possible to establish a correct insurance rate for each?
Another oversimplification the conservative Republicans are suggesting is that the packages be revalued. Currently they are carried on the books at market value. Since the market is depressed, the bankers are forced to have these assets on their balance sheets at depressed values. The Republicans want the banks to be able to restate the value at a model value that the company determines. It's like saying your home which would sell for $100,000 can be valued at $150,000 or even higher. For those who remember the Enron tragedy, we can expect a similar result if this becomes law.
Finally, many of us remember the rush to war in Iraq. Americans were told unless we acted immediately, nuclear war was a distinct possibility. The Bush administration is up to the same tricks. If our Congress acts imprudently, they will be signing a $700B check written on the American taxpayers and administered by the same people who initiated this tragedy.