Where We Go From Here on the Bailout—AKA “Financial Rescue Bill”

Star 1 was Barack Obama who made the calls reminding members that there was explicit mortgage relief in this bill and a law passed in July. If you look at the vote switches it were members of the Congressional Black Caucus who made up approximately half of the switches.

Star 2 was the key behind the scenes role was played by Maxine Waters who was able to explain the mortgage relief role.

Star 3 was Treasurer Bill Lockyer who made calls explaining how serious this matter was. In, fact, Governor Schwarzenegger sent a letter Thursday to Treasury Secretary Hank Paulson warning that the state needs $7 billion and may be forced to turn to the Federal Treasury for short-term financing because of the liquidity crisis. The state could be $1.5 billion in the red by October 29th unless a short-term revenue source is found per State Controller John Chiang.

Star 4 was Dr. Cavala who reassured several former Assembly and State Senate Members who were yes on Monday to stay yes.

Three, the House Republicans again showed that their leadership is inept. On a bill that in reality saves their small business base a Majority of House Republicans went No which was also a digital salute to John McCain.

Four, the salesmanship on the financial rewrite-rescue-whatever you call it program has been atrocious. Hank Paulsen may be a smart financial guy but his salesmanship is a joke. On a TV show I heard Congressman Ray LaHood of Illinois remark that a Congressman has to know how to persuade people because they need to do that to get elected.

The roll out was terrible, the picking of $700 Billion based on whatever was atrocious, the 3 pager was ridiculous, the failure to explain that there was substantial and mandatory mortgage relief authority in this bill and a bill passed in July, and the list could go on.

However, if you ask people what they think of the basic components as rewritten 6 or 7 times, there is a lot more support for this package then people think. One thing that also did not help in the House was the Tax Extender add-ons that were not real estate related. Whatever the merits of these proposals, it did not add any luster to the Senate for doing this and only antagonized the Members of the House.

Five, while the overall bill passed easily, the key vote in these matters is often the procedural vote or the Rule on the bill and this bill almost crashed again. I say that as the Rules Committee rejected allowing votes on proposed amendments which would have sent the bill back to the Senate which if passed – and they probably would - would have stripped out the extenders, included a bankruptcy provision, and done some other things.

Normally, a Rule vote is a straight party line vote. The Rule passed 223-205. Democrats break 203-29 and Republicans 20-176, with 3 non-voters on either side. As Ohio Republican Steve LaTourette noted, had those 20 Republicans switched the vote would have been 203 to 225 and a new Rule would have had to been allowed which would have made these votes in order and sent the bill back to Senate. LaTourette made certain acerbic comments as to these Republicans which Barney Frank shot back was really a comment about John McCain.

Six, if you listened to the floor debate, I think what made the difference were three things: (i) the reaction to Monday’s vote which resulted in gyrations in Wall Street – and the permanent loss of at least $2.5 trillion in wealth for average Americans - but more importantly what happened in the credit markets in terms of liquidity; (ii) the addition of the FDIC provisions to the bill; and (iii) a little noticed breakthrough on the foreclosure issue in terms of direct relief which was and is in the bill. This was alluded to in several Barney Frank “colloquies” with several members including Donna Edwards who was just elected from Maryland and voted for the bill.

In Section 109 of this new law, for mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs enacted in July. It also allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. It also requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.

Section 110 of the new law requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. And, it requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.

As I noted in several blogs, the bankruptcy issue was and is a sideshow because to get to that position you have to hire a lawyer and file a Chapter 13. Even with changing mores in this country, filing for bankruptcy is still a wrenching moral decision. People do not want to file bankruptcy, they want an affordable refinance.

On the foreclosure issue, apparently in a meeting with House Progressives arranged by the Whip Team, Hank Paulsen personally stated the obvious. These sections of the bill were pointed out. Since the Treasury will own directly [and through various means indirectly as I noted in prior blogs force TARP participants] doing the Zuckerman-Feldstein proposal is in effect mandated and should be done. That is the end of story. The problem is that this was never stated to be the case. Rule 1 in the Legislature is: Read the Bill.

Seven, in terms of implementation, because of the taxpayer protections in TARP, it will take at least 5 week before there are any d asset purchases. Also, the mortgage insurance program that complements TARP has to be done contemporaneously so that takes time. And, there is a discreet Inspector General for these programs who has to be consulted. The firms will be evaluated based on the cost and scope of services they offer. The Treasury is still working out a conflict-of-interest policy and details for guidelines on compensation for people who are hired to do the work.

The first step is for the Treasury to raise the cash via issuance of Treasury notes which is not quickly done. The first money – or tranches – will be at most $50 billion and that will probably happen sometime in early November.

As such, the first immediate implementation steps we will see are next week and they will come from the FDIC and the Federal Reserve. I would suspect by Monday the FDIC will announce the implementation of the FDIC limits increase and by Wednesday they will state how much FDIC fees need to be raised to pay for the program because of prior takeovers.

However before that the FDIC will have to step in to determine who agreed to what vis-à-vis Wachovia being bought – or parts bought. Wells Fargo has offered $15 billion for Wachovia which Citigroup claims breaches an agreement reached earlier this week in which Citigroup agreed to buy Wachovia's banking operations for $2.16 billion with government help. Citigroup provided a copy of an exclusivity agreement dated Sept. 29 that it says Wachovia won't seek or help new bidders. The document is signed by a Wachovia officer, though the name and title weren't included. The FDIC helped put the initial deal together.

FDIC Chair Sheila Bair said in a statement today that the FDIC will be reviewing all proposals and working with the primary regulators of all three institutions. Other bank regulators said they haven't evaluated Wells Fargo's offer including the Federal Reserve and the Office of the Comptroller of the Currency.

Wells Fargo biggest shareholder is Warren Buffett's Berkshire Hathaway Inc. It may have been helped in its bid by the issuance of an IRS notice Tuesday that makes Wachovia's loan losses more valuable as tax deductions. That in effect allows Wells Fargo to deduct, without limitation, the loan losses and bad debt deductions that Wachovia sustains following the acquisition. Given Wells healthy balance sheet it is likely that the cost of the deal to Wells will be entirely offset with tax savings. What we do know is that Wells is in much better shape than Citi Group.

I suspect given my experience in these matters that Buffet-Wells will make an arrangement with Citigroup which will have the effect of buying Citigroup off.

Also, next week I would suspect that the Federal Reserve will announce its overnight reserve interest rate program will work. The interest rate on reserve implementation will be very interesting to watch in terms of its effects.

I also want to make three final points. One, the Community Reinvestment Act will not and should not be gutted. Two, in terms of sub-prime abuses, Ben Bernanke implemented the regulations that Alan Greenspan refused to which has ended the abuses. And, last but not least, as to Freddie Mae and Fannie Mac, these have long been federally chartered government enterprises with the express mission of creating liquidity and a secondary market in mortgages. There are a lot of people who own homes with affordable rates because of them.

Where they went astray – and Republicans wing nuts blocked sensible reforms in 2005 - is when they got involved in exotic instruments and strayed away from their core mission.

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.