A group of conservative Republicans in the House on Thursday proposed a financial rescue package of tax breaks and a new government-sponsored insurance program for mortgage-backed securities as an alternative to President Bush’s proposed $700 billion bailout of Wall Street.
Instead of the government buying the toxic mortgage securities, banks, financial firms and other investors holding them would pay premiums to the Treasury to finance the insurance coverage.
The idea is that the insurance would give investors enough confidence to buy the illiquid securities and establish a market for them.
Rep Eric Cantor, R-Va., said the plan would be to remove the burden of the bailout from taxpayers and instead place it, over time, on Wall Street.
“Instead of a purchase scenario where you have the government injecting $700 billion right up front into the markets, what you have here is an insurance plan,” Cantor told reporters. “In order to get this insurance, the banks with these failed assets would have to pay for the government backing, pay for the insurance.”
The plan emerged after it became clear that House Republicans in large numbers weren’t coming around to the approach favored by Treasury Secretary Henry Paulson, which is to have the government buy up the troubled securities, hold them, and eventually sell them off.
Under the House conservatives’ plan, institutions holding stronger assets would pay lower premiums for the government backing; higher-risk securities would require higher premiums.
Robert Litan, an expert on banking and finance at the Brookings Institution, called the framework unworkable, saying it would not achieve the basic goal of creating a market — and establishing prices — for mortgage securities no one’s willing to buy.
“Everything depends on how you value the security,” Litan said. “If you do the deposit insurance scheme, there’s nobody out there to know what the right price is.”
The House conservatives’ plan also would:
- Offer temporary tax relief to free up capital for companies to lend one another.
- Temporarily suspend dividend payments by financial institutions.
- Require participating firms to disclose to the Treasury Department the value of mortgage assets on their books, private bids on them in the past year and their last audit reports.
- Forbid government-sponsored mortgage giants Fannie Mae and Freddie Mac from issuing securities on unsound mortgages.
- Require the Securities and Exchange Commission to investigate the performance of credit-rating agencies.