Senate First Strategy May Not Get the House in Order to Pass Financial Bill

First, on the “step forward” front recalcitrant US House Democrats yesterday proposed an alternative that included additional powers to the FDIC, raising FDIC limits, a ban on naked “short selling”, reinstitution of the “uptick rule”, and either a suspension of mark to market accounting rules or a rewrite. Other than the “mark to market” rules, I fully support as part of a package the House Progressive proposal – several of which the SEC can and will do.

On “mark to market” the core bill reiterates that the SEC can suspend that rule and it mandates a study. The SEC sent out a clarification on “mark to market” that should help. The FDIC change requires a statute and the FDIC change will be added as an amendment to the core bill. The FDIC change probably picks up 14 to 20 House votes. There may also have to be something in terms of commitments on foreclosure relief as well to pick up some Black and Latino Caucus members – which I discuss below.

While the Progressives proposal helps on depositor confidence in the banks, it does not solve the issue of toxicity of assets or bank confidence in each other or the overall liquidity issue which is why the core bill tweaked is necessary.

This was emphasized last night on both Charlie Rose and Nightline. On both shows there were pieces devoted to the real estate. It was clear that: (i) there will be one last great wave of foreclosures next year when the final round of resets occurs; and (ii) trying to convert adjustable rate mortgages into fixed rate affordable mortgages is not going to happen unless the size of the overall rewritten mortgage is substantially reduced.

Mort Zuckerman noted on Charlie Rose that simply turning mortgages from ARM’s into fixed mortgages was not going to do the trick to stop the further devaluation of real-estate if people could not qualify for loans. Professor Martin Feldstein who I am not a fan of but under the rubric a “stopped clock is right twice a day” suggested that a substantial reduction in the size of the mortgage should occur but only if the borrower on the reduced mortgage is subject to a deficiency judgment. What Feldstein is concerned about is what I alluded to in a prior posting which is that in a number of states – there is a website devoted to what each state’s rules are - that in a purchase money foreclosure there is no deficiency judgment.

Feldstein in effect endorsed the purchase of the assets and a write down of the loans if coupled with a right to a deficiency judgment – with my addendum that it all is done judicially. But in order to do this the Treasury [as it is the only entity with the cash] has to be able to purchase the loan which is why a bill is needed. I asked the question as to whether a “refi” results in the change in character in this state of a loan being turned into a non-purchase money loan and the answer was mixed.

I do not have a problem with a modified Feldstein proposal. If you do get a lower more beneficial mortgage than as part of the deal there should be a judicial foreclosure proceeding with a deficiency judgment component. The core bill may allow for that now and if it does not that is a worthy amendment. Congress under the Supremacy Clause of the Constitution could override state anti-deficiency rules as part of a federal mortgage loan.

If you are going to do a Zuckerman-Feldstein type proposal then the value of the assets [the mortgages and mortgage backed securities] that the Treasury is paying for has to be reduced. If the asset is worth 60% of its face value for the taxpayers to become whole then to do a downsized fixed mortgage requires that the Treasury pay something on the magnitude of 35% of the assets value. This is so that taxpayers are not on the hook for a loss.

That suggests further give on mortgage relief so that Members can get a “bankruptcy lite” relief which would probably be (i) more Main Street with tough love; and (ii) make economic sense.

However, instead of focusing on the mechanics of the situation to pick up votes in the House by “going left-right” the leaders in the Senate are trying to pick up Republican votes relying on Minority Leader John Boehner’s advice on how to get votes. They are doing this by adding in FDIC provisions which is addition but also by MAJOR subtraction by proposing tax changes [which I happen to agree with] that will piss off Blue Dogs in the House and other Friends of the Speaker. There are 47 House Democratic “Blue Dogs” with 24 voting for the House bill on Monday. They are part of Speaker Pelosi’s base.

The Senate strategy is to amend into a House tax bill the core rescue bill defeated on Monday plus the FDIC change. This is to comply with the “origination clause” of the US Constitution requiring revenue bills to originate in the House – this was part of the Connecticut Compromise as the core bill includes certain tax offsets.

However, to pickup Republican votes Plan B includes is a two-year extension of tax breaks that will save individuals and corporations about $149 billion over the next decade. The problem with the extenders is that the Blue Dogs are opposed to the extenders because they are not paid for with revenue offsets – that is why a discrete extension bill is in limbo. The House extender was paid for. Senate leaders refused to consider the House extension bill, saying it would never pass in the Senate.

If the 24 Blue Dogs go south on Plan B – and this stunt could be viewed as an attack on Speaker Pelosi who is not happy about being cut out of this - that means that Plan B requires the addition of 36 votes. It means that you have to pick up 36 Republican votes which is a stretch. However, the Speaker might not even let the bill come up for a vote on constitutional grounds because of the origination clause. Moreover, if she lets it come up for a vote to send a message maybe 50 Democrats go south – 24 Blue Dogs and 30 other friends of the Speaker and it still crashes and burns.

In fact, House Majority Leader Steny Hoyer said on Today that the tax extenders may cause a loss of some Democratic support. Hoyer said “We're going to have to be talking to them.” Hoyer said of the Blue Dogs. “I'm not particularly pleased with that addition myself, very frankly.”

To quote Speaker Rayburn and Speaker Brown, you never want to try to challenge or roll the ELH [Existing Leadership of the House] in that body. Hopefully, before there is a Senate vote cooler heads will prevail.

Since the mid 1980's Irwin Nowick has worked for the California State Assembly and State Senate on a plethora of policy issues, most notably firearms legislation. He has been described as "The Assembly's resident genius" by a former Speaker of the Assembly and is seen frequently in the Capitol hallways and offices assisting legislators in drafting and amending pending legislation.