R.I. congressional leaders on bailout: ‘This can’t end at Wall Street’
Source: Providence Journal
September 20, 2008
Members of Rhode Island's congressional delegation yesterday agreed that a federal government rescue is unavoidable to stave off a global financial crisis, but insisted they could not support any plan without assurances that help is on the way for the growing number of Americans who are losing their homes to foreclosure.
But in this crisis atmosphere, it remains unclear what that help will look like - or when it will arrive.
"This can't end at Wall Street," said U.S. Sen. Sheldon Whitehouse. "You can't end with [fixing] the machinery of the economy without going down and making everybody else in the economy healthy."
Whitehouse, the lawyer who helped former Governor Sundlun draft a taxpayer-financed bailout for depositors during the state banking crisis in 1991, said that given the speed at which the administration is moving, he doubts there will be time to enact a broad-based rescue plan for American homeowners immediately. But in return for supporting any rescue plan, he said, he will need "stern commitments" from the administration that they will not "just walk away once they solve the Wall Street problems."
That sentiment was echoed among other members, who participated in conference calls yesterday with top officials in the Treasury Department and Federal Reserve who are crafting a plan to stabilize the markets that includes using taxpayer funds to buy the distressed mortgages that are sinking some of the nation's major financial institutions.
"This proposal cannot specifically be a rescue of Wall Street," Sen. Jack Reed said. "It's important to reassure Americans that we can help them also."
Support for the federal bailout effort is a tough sell in Rhode Island, especially now. The state unemployment rate is among the highest in the nation (8.5 percent in August), and one in four house sales in July were foreclosures or "short sales" designed to avoid foreclosure. Rhode Island has the highest mortgage default rate in New England.
"I cannot go home to Rhode Island and say I'm going to vote for something to bail out AIG, Bear Stearns, Merrill Lynch," said U.S. Rep. Patrick J. Kennedy. "I can't go home and see middle-class families paying double-digit rates on credit cards to these very banks we're bailing out. ... They're not going to buy that."
The voters may not buy that. But is there a choice?
"We are trying to avoid - or they're trying to avoid - catastrophic consequences if there's not action," Reed said. "Credit seizing up globally. Mutual funds finding themselves under water. ... A lot of what everyone takes for granted, including pension funds, are under water. ... The ability to get commercial credit for expansion of businesses. Even operating credit for companies large and small. These could be the consequences."
Senator Reed, who serves on the Senate Banking Committee, was speaking just moments after getting off the phone yesterday afternoon with Treasury Secretary Henry M. Paulson Jr. and Fed Chairman Ben S. Bernanke. "They're still trying to pull together a specific plan," he said. "We're available throughout the weekend to react and respond to proposals" before the hearing scheduled for Tuesday morning with Paulson and Bernanke.
President Bush has warned that a "significant" amount of taxpayer money will be put at risk with the government's plan, but that intervention is needed to keep the financial system from freezing up, according to reports in The Wall Street Journal.
The ultimate cost of the rescue plan is not known, said Whitehouse, but the initial costs could run in the "hundreds of billions" of dollars.
Meanwhile, American households with parents under age 55 have seen their mean income drop, on average, $2,000 and their cost of living increase by $4,600, for a net loss of $6,000 to the family budget, said Whitehouse, quoting data he'd gathered from a Senate briefing earlier this week.
"The financial system is in great crisis right now," said U.S. Rep. James Langevin. "This has only turned around in the last 24 hours because of word that there's a rescue plan being put together ... "
Meanwhile, Governor Carcieri yesterday took to the airwaves to reassure Rhode Island residents they "should not be panicking" in the face of the events on Wall Street or the closer-to-home close-out of a major investment fund run by Putnam Investments.
"We are limited in what we can do at the state level right now," Carcieri said. The federal rescue effort is expected to include the government's purchase of bad debts from ailing financial companies at a huge discount.
The hope is that over time, the government would be able to sort out those debts, and eventually they would appreciate in value enough to be sold for a "reasonable price" on the open market, said Langevin. "Ultimately," he said, "the hope is there would be a profit from the sale of these assets." In that way, taxpayers - who essentially are investing in these bad debts - could be repaid.
Langevin likened the situation to the Rhode Island banking crisis, when the government bought up the bad assets of banks and credit unions when their private insurer failed. Eventually all Rhode Island depositors got their money back - but not right away. Some of the money came from Rhode Island taxpayers.
This national credit crisis, though, is infinitely more complex and, lawmakers agreed, there are no guarantees.
"With time, conceivably we'll get some [of the money] back for taxpayers," said Whitehouse, "but to expect that now goes against the evidence. The notion that we'll break even is, at this point, just happy talk."