House Progressives Introduce Their Own Bail Out Bill

The Progressives have joined up and introduced a new bill, THE NO BAIL OUT ACT. Here is the video of their press conference.

 

 

Introduced by Congressman Peter DeFazio, the full Press release is reprinted below:

DeFazio Introduces the No BAILOUTS Act

The following is a Dear Colleague sent by Representative DeFazio introducing his No BAILOUTS Act, which would Address the current financial crisis without putting the American taxpayer on the hook for billions of dollars.

Dear Democratic Colleague:

The House of Representatives rejected the $700 bailout yesterday.  Distinguished economists across the world have stated it would not have solved the problem at hand.

However, we can potentially solve this liquidity problem at little cost to the taxpayer. I am proposing that Congress drop the Paulson Plan, and instead pass the No BAILOUTS Act.

The No BAILOUTS Act provides an alternative to the Paulson Proposal to address the current credit crunch.   Once Congress addresses the liquidity shortfalls in our financial markets, a Democratic Congress can turn to Democratic solutions to address the broader economic crises we face today.  Specifically, Congress can work to resolve the housing crisis across the country and pass effective job stimulus, which is the response Main Street America expects and deserves.

While Democrats and Republicans may disagree on the underlying solutions to solve the economic crises we face, the No BAILOUTS Act - a regulatory based proposal - has the potential for significant bipartisan support.

The Paulson Premise Flawed

Simon Johnson, a former chief economist as the International Monetary Fund, stated today in the New York Times of Paulson’s plan:

It’s our view that this package, in a fundamental sense, will not solve the problem.

Other economic analysts noted yesterday that the credit markets around the world were almost entirely dysfunctional even when political leaders and investors assumed that Congress had reached a deal and would easily approve the bailout.  There is no reason to believe Paulson’s plan will work.

Alternatives

We have credible alternatives to the Paulson/Bush $700 billion gamble. William Isaac, the chairman of the FDIC during the previous worst financial crisis in the United States during the 1980s, believes Congress can address the current crisis with simple changes to Securities and Exchange Commission (SEC) rules. Mr. Isaac points out that while we face serious financial challenges today, many banks are still in good shape. This allows Congress to take swift, uncomplicated steps to ensure the financial markets return to working order. After that, we can work to resolve the housing crisis and pass effective job stimulus.

Today I am offering an alternative to the Wall Street bailout that will correct the capital shortfalls experienced by many financial institutions and help protect the integrity and quality of the securities market. My plan could be implemented promptly meeting the demands of the Bush Administration to act immediately without putting the American taxpayer on the hook for billions of dollars.

No BAILOUTS Act

Bringing Accounting, Increased Liquidity, Oversight and Upholding Taxpayer Security

1.   Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.

This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.

2.   Require the Securities and Exchange Commission to restricting naked short sells permanently

This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.

3.    Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies “to protect the integrity and quality of the securities market and strengthen investor confidence.” This rule prevents market crashes brought on by irrational short term market behavior.

4.    “Net Worth Certificate Program”

This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC should purchase net worth certificates in these institutions. In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount “borrowed” as capital on their balance sheets. This exchange provides short term capital, with not cash outlay. Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.

Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans should be subject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.

5.   Increase the FDIC Insurance limit from $100,000 to $250,000

The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.

Sincerely,

Peter DeFazio
Member of Congress


 

Thank you Peter DeFazio and Marcy Kaptur for leading the fight!

Bill Sponsors:

Rep. DeFazio (OR-04), Rep. Kaptur (OH-09),  Rep. Scott (VA-03),  Rep. Cummings (MD-07),  Rep. Doggett (TX-25),  Rep. Holt (NJ-12),  Rep. Edwards (MD-04) and  Rep. Hirono (HI-02).

 

Co-Sponsors are currently Democrats, yet there is an overlapping bill introduced by Conservatives.   It appears the the Progressive and Conservatives are already working together;  John Shadegg and Peter DeFazio wrote a letter to the SEC on the mark-to-market rule change and Shadegg also introduced legislation based on a net worth certificates.

So, now one must stop the $700B Paulson plan railroading by calling your Senator and demand they vote no.  Capital Switchboard:  202-224-3121.

 

On DeFazio's Bill, the cost  to the taxpayer is 0.  It appears they have listened to experts and are following a RTC (Resolution Trust Corporation) model or Special "Housing Trust Corporation".   

The subtitle of the bill is: Bringing Accountability, Increased Liquidity, Oversight, and Upholding Taxpayer Security

The plan is based on proposal made last week by former FDIC chair William Isaac.  Issac in a Washington Post Op-Ed:

One alternative is a "net worth certificate" program along the lines of what Congress enacted in the 1980s for the savings and loan industry. It was a big success and could work in the current climate. The FDIC resolved a $100 billion insolvency in the savings banks for a total cost of less than $2 billion. The net worth certificate program was designed to shore up the capital of weak banks to give them more time to resolve their problems. The program involved no subsidy and no cash outlay. The FDIC purchased net worth certificates (subordinated debentures, a commonly used form of capital in banks) in troubled banks that the agency determined could be viable if they were given more time. Banks entering the program had to agree to strict supervision from the FDIC, including oversight of compensation of top executives and removal of poor management. The FDIC paid for the net worth certificates by issuing FDIC senior notes to the banks; there was no cash outlay. The interest rate on the net worth certificates and the FDIC notes was identical, so there was no subsidy. If such a program were enacted today, the capital position of banks with real estate holdings would be bolstered, giving those banks the ability to sell and restructure assets and get on with their rehabilitation. No taxpayer money would be spent, and the asset sale transactions would remain in the private sector where they belong. If we were to (1) implement a program to ease the fears of depositors and other general creditors of banks; (2) keep tight restrictions on short sellers of financial stocks; (3) suspend fair-value accounting (which has contributed mightily to our problems by marking assets to unrealistic fire-sale prices); and (4) authorize a net worth certificate program, we could settle the financial markets without significant expense to taxpayers.

 

What is most interesting is DeFazio has also taken suggestions from conservatives, which I mentioned previously.

Congresswoman Kaptur on the Accounting issues:

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Lou Dobbs Interview with DeFazio and Kaptur on their bill:

Update: H.R. 7240: No Bail Out Act Bill text. The certificates program is more spelled out.

Meta: 

Comments

House Progressives Introduce

I suppose the net worth certificate program might be useful, and it might be good to raise the FDIC insurance limit, but I don't really see the point of the rest of it. Why should financial institutions be able to avoid mark-to-market accounting? That risks insolvency, which can force a large FDIC bailout. Why are they attacking short sellers? Short sellers are just the scapegoat in all of this.

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naked shorts, not "shorts"

Naked shorts are supposed to be illegal as it is...but they are not attacking shorts generally. So they are saying you cannot sit there and not buy the underlying stock you're shorting, thus allowing more shorts than shares out there...

Then, they are saying to restore the uptick rule, which they removed due to the super fast trades coming from multiple places...but hey, I can fix this just thinking about it so not reinstating the rule is important.

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Why is it allowed

To sell what you don't own to begin with? It seems to me that would be a basic error checking on any broker's server. Are we saying our computer programmers are stupid enough to allow this?

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Maximum jobs, not maximum profits.

shorts are part of any trading system

Shorting a stock is basically betting the value will go down.

Shorts have been in existence for ever along with puts in options.

It's not a programming error but in terms of the uptick rule, there are timing issues due to so many trading systems and the conflict when trades come in at the exact same timestamp. Uptick and so they were claiming the differential of time was really zero plus clogged up execution times thus not needed (ha ha ha).

Think about trillions of packets with trades coming in from all over the world and there are also delays in the network...

they have to deal with the timing of those execution arrivals and it's not like regular stocks these have pricing effects, the purchase had a backwards verification on a trade.

But that can be solved easily, more they wanted the ability to stop any limits on short selling. (institutions).

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A very interesting turn here

Hot damn, I go and get outpatient surgery, and my pal Robert Oak has to start an economic reformation movement! Kudos, RO, glad to see at least one politician listen to us. It looks like a good bill, though I still have to examine it further. Nothing on exec comps or the establishment of a mortgage exchange? Mark-to-market only works when there's a viable exchange medium, like say for corn or stocks or oil. There already is a futures product, well not exactly, but one that could offset risk as well.

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Mark-to-Market rule

Hopefully the video is working. Cspan man, they are just not with the program but at least they are working on making streams more available...(it's only our government!)

definition: Mark to market: The act of placing a fixed price on an asset, even if no sale is imminent. Businesses are required to employ "fair value" accounting, but in recent months some banks affixed fire-sale prices to their assets.

From Congress should suspend the mark-to-market rule:

Congress should also suspend the mark-to-market accounting rules that have deceptively devalued the assets of many financial institutions. The rule requires companies to value the assets on their balance sheets based on what those assets can be sold for today, even if the companies have no intention of selling them and can reasonably expect the values to rise again

My understanding is currently they must value the asset at what it is worth today. If they do a 3 year rolling average that would immediately boost their assets because currently as we know house values have plummeted.

don't start the revolution without me.

It appears lobbyists are now trying to get people to call to say "oh pass the Paulson plan" trying to claim the public outrage is just a few "loud voices in the minority".

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dissenting view on mark-to-market

here (pdf). I don't know who this group is, although clearly working in corporate accounting methods.

They have a very good point on transparency but I think they should temporarily lift them simply to unfreeze the credit markets but not permanently at all.

Maybe study it after the fact and see what kind of adjustments can be made to ensure transparency yet not cause this sudden decline spike in asset values.

It does look like it would work for the moment and something like a home, a 3 yr. rolling average normally doesn't sound that bad to me or maybe a 24 month one.

The accounting body who overseas accounting methods is meeting tomorrow to consider these.

I hope they plain do it. Somehow I don't think Enron cost the US taxpayer $1 trillion bucks and if it's temporary lift...no way can it.

I'm by no means an accounting expert of course but that's the real issue it appears the credit markets are frozen.

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the problem is

mark to market only works if there is a "market". These toxic assets are all level 3 stuff for the most part. There is no true market for these, and so the prices reflected on a mortgage-backed security is completely out of whack to what they are worth. You have essentially good mortages being slapped with the same price as the bad ones. Now for a bargain hunter, who doesn't mind gobbling up some of the bad loans, this may seem like a great thing. But to the holder this is a nightmare.
Perhaps these banks should get together, look at what they have in terms of securities and see if they can standardize them. Once this is done, they can try and setup an exchange. At least this way, we could have price discovery.

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I think this is for everything

I also thought it's per asset. There are so many saying this will work, if you know corporate accounting methods to a level you could write a blog post on it...please do...
talk about being out of my depth!

I'm going off of what other experts are saying.

The main point is to just unfreeze the credit markets that's the immediate goal.

If they can value each asset on a 3 yr rolling average instead of immediately today I think that gives them more assets on the books in order to loan against.

That's how I understand it but if you know corporate accounting that is one topic I'll bet 0.00005% of the population understand in the least.

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Are their prices out of whack?

What if those mortgages are indeed only worth 20 cents on the dollar? I'm much more incline to believe the market over these bankers.
Another reason I don't like it is that it makes it impossible to actually know how much these securities, and banks, are worth. It's the uncertainty that is killing the market more than anything, and this "bailout" only perpetuates the problem.

I don't like this proposal at all. It looks like Enron accounting to me.

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well

you can argue for or against but the real point is to pass something is place of the Paulson plan, loosen up the credit markets immediately and not give away $1 trillion dollars.

I mean what is the difference is you have an over-inflated asset on the banks balance sheet versus Paulson going on a shopping spree with taxpayer money handing over our money for a way over-inflated asset?

Sure it's potential Enron 2 but if it's temporary could any Enron equal $1 trillion dollars?

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Yes, it can

Especially if we're fooling ourselves by trying to keep a bankrupt currency alive with more fake money.

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Maximum jobs, not maximum profits.

I'm no longer willing to believe either

I personally think the mortgages are fake money- with no real value behind them at all. As in, worth 0 cents on the dollar.

They're worth nothing, the banks are worth nothing, is the safest way to treat *ANYTHING* that comes out of the corporate propaganda machine right now.

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Maximum jobs, not maximum profits.

Mark-to-Market "Instead of" not "With" Paulson bail out

I just noted that the quick fix suspension of the mark-to-market was proposed in place of the Paulson bail out, not with it.

Yes, now I realize what everyone is talking about how bad this is....

It's supposed to be a temporary "either/or" not together as a proposal.

I think this will make Paulson dumping on the US taxpayer worthless assets even worse for I suspect banks can now claim they are worth way more than they have any potential to be.

God. What s corporate lobbyist wet dream this all is.

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"Over inflated assets"

That is hitting the nail on the head squarely! The housing market due to flipping of properties has over-inflated the market values beyond belief, creating a bubble that was destined to burst. No consideration was given to the effects this greed would have when it did!
I like this proposal! At least it is a starting place to address the mammoth problem that will hurt all of us in some way regardless of what it done....but let's not act in haste!

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