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Paul Kiesel
Paul Kiesel
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What's Missing From Bush's Bailout Plan? For Starters, the Word Bailout…

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It’s finally happened. The federal government, much to the chagrin and support of Congressional leaders, stepped in this morning and has written a blank check for Wall Street’s blunders.

In his speech, President Bush did not use the word “bailout” once to describe a plan that is nothing short of a bailout. Treasury Secretary Paulson, Fed Chairman Bernanke and SEC Chairman Cox briefed leaders on Capital Hill, and urged Congress to pass legislation approving the federal government’s purchase of illiquid assets, such as troubled mortgages (bad loans, like subprime and option ARM loans; the latter loans are about to reset early next year and cause more financial tumult, but now it will be at the expense of taxpayers instead of Wall Street CEOs and investors), from banks and other financial institutions.

CNBC has reported that, “The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion-dollars (this figure does not include the more than $200 billion already at stake from Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, etc., etc.) and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.

The copious amount of illiquid assets (which is likely to be a buzz word for sometime) on many of these firms’ balance sheets — firms that will benefit and not be held responsible BECAUSE of Bush’s bailout — was due to the practice of lending mortgages with ambiguous, misleading and fraudulent language in the Truth in Lending forms. The problem is that these types of loans are still out in the market, they will have interest rate resets (ballooned payments on loans that were negatively amortizing) and cause borrowers much financial stress in the coming months, and now the government will assume the responsibility of them (illiquid assets), while Wall Street, without any regulation reform passed by Congress, will be able to go back out and lend some more.

What about homeowners? What about Main Street in general? Just because Wall Street’s trash was being carried out to the curb by the Treasury and Fed, doesn’t mean “Bush’s Bailout” automatically smells good for the rest of America. Why wasn’t mortgage modification for troubled borrowers a provision added to the bailout? Then, lenders would have had to modify mortgages (that had no business being written in the first place) in order to dump their garbage assets onto the government. Bush wasn’t vague about this issue, he just omitted it all together.

Bush said today, “[M]y administration looks forward to working with Congress on measures to bring greater long-term transparency and reliability to the financial system, including those in the regulatory blueprint submitted by Secretary Paulson earlier this year.”

One has to be dubious of the president’s claim of restoring transparency. Not only was it Republican-led legislation (Phil Gramm: Commodity Futures Modernization Act of 2000 and Gramm-Leach-Bliley Act, which repealed part of the Glass-Steagall Act, allowing commercial and investment banks to consolidate) that enabled today’s bailout, but the fact that Bush doesn’t even use the word bailout is troublesome and lacks transparency.

Again, as I’ve said in many other blogs, we’ll have to wait for the next administration to come in and do its best to try and straighten out the last eight years of missed opportunities. Not extending an olive branch to average citizens, as Obama suggested today, is another missed opportunity by the Bush Administration.