Who Will Bail Out American Families?

Professor Elizabeth Warren
Chicago Tribune, Sept. 22, 2008

“Lost in the headlines are the families who signed their names to subprime mortgages, not knowing or caring that the pieces of paper they signed would become one of the cards in the house of cards that now threatens the U.S. economy. No less visible are the people who have lost jobs as the economy reverses, the students who can’t pay for college without taking on ruinous loans and the millions of families who turned to credit cards and payday loans as they have been caught in the squeeze between declining wages and skyrocketing costs. They are casualties of a financial system that saw them not as customers, but as prey.

“The secretary of the Treasury and the chairman of the Federal Reserve have told us that now is not the time to assign blame and that we must concentrate on preserving the bedrock institutions of our economy. But the real bedrock of that economy is the American family, countless thousands now in or facing foreclosure, families falling further behind on credit cards or paying 400 percent interest to payday lenders just to keep groceries on the table. …

“The Bush administration is intent on rebuilding a financial system that has been devastated by mindless deregulation and unchecked greed. So far, the plan is to increase the costs imposed on the very families that were victims of unconscionable practices that produced this crisis.”

Let’s Get the Bank Rescue Right

Professor Hal Scott, with Columbia Business School Dean R. Glenn Hubbard and University of Chicago Graduate School of Business Professor Luigi Zingales
The Wall Street Journal, Sept. 24

“Any solution [to the current economic crisis] should observe three guiding principles: It should (1) restore the stability of the financial system quickly and at the lowest possible cost to the taxpayer; (2) punish those who are responsible for losses; and (3) address the root cause of the crisis—the price collapse in the residential real-estate market. In doing so, the solution should respect the rule of law by spelling out the proposal in sufficient detail for the Congress and the electorate to pass judgment. To the extent possible, it should follow proven precedents. …

“Efficient institutional design can reduce the share of costs borne by taxpayers, while repairing the financial system’s ability to match borrowers and lenders and provide risk-sharing, liquidity and information services. Keeping costs down is important, as such a large increase in taxpayer support will constrain significantly, if not overwhelmingly, the fiscal initiatives of the next president.”

Build a Better Bailout

Professor Howell Jackson ’82
The Christian Science Monitor, Sept. 25

“At the heart of this crisis lie two sides of the same coin: Heads are the bad home loans. Tails are the toxic securities that financed these mortgages. The former is what’s pushing many homeowners into foreclosure. The latter is what’s sinking Wall Street. …

“The Treasury Department’s chief strategy is to buy back large quantities of toxic mortgage-backed securities. These purchases would remove troubled assets from the balance sheets of selling institutions, and (hopefully) clarify the prices of similar securities held by other investors. …

“A more effective strategy would be for the government to target the source of the toxicity by buying actual loans, not the securities that back them. It could do so by taking ownership of entire mortgage pools, starting first with the lowest quality (and most toxic) ones.”

How to Pay Less for Distressed
Financial Assets

Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84
The Wall Street Journal, Sept. 26

“[T]he best way to infuse additional capital where needed is not by giving gifts to the firms’ shareholders and bondholders. Rather, the provision of such additional capital should be done directly, aboveboard. While the draft legislation permits only the purchase of pre-existing assets, the final legislation should permit the Treasury to purchase new securities issued by financial firms needing additional capital. With the Treasury required to purchase securities at fair market value, taxpayers will not lose money also on these purchases.

“Furthermore, this direct approach would do a better job in providing capital where it is most useful. Why? Because simply buying existing distressed assets won’t necessarily channel the capital where it needs to go. Allowing the infusion of capital directly for consideration in new securities can do so.”

In Crisis, Beware Illusion of Reform

Professor Jon Hanson
The Providence Journal, Oct. 2

“The reforms that we see will be largely procedural, not substantive—check this, sign that, certify here, jump a hoop there—and they will not fundamentally change the situation that produced this crisis. The reform will look sweeping, because it will be broad-based and ballyhooed as ‘tough.’ Soon enough, the business elite will complain that, indeed, it is too tough. We will learn that small-business owners and entrepreneurs, not to mention Fortune 500 firms, are being tangled and tripped up in overregulation and needless compliance costs.

“The mantra of ‘markets good, regulation bad’ and the primacy of shareholders will return. Erstwhile concerns about third parties—such as the taxpayers who are bailing out companies—will gradually be eclipsed by claims that those very groups are the most harmed by the new regime. After all, these burdensome regulations go too far and ‘hurt American competitiveness,’ ‘drive business, jobs and tax revenues overseas,’ ‘increase costs for consumers’ and so forth.

“Such is the ‘law of unintended consequences,’ which apparently applies to only regulations and regulators, never markets.

“The reform, which might look promising initially, will be rolled back, whittled away and watered down (corporate lobbyists are already positioning themselves to grab a piece of the $700 billion bailout).”

Fight for the Family Home

Eric S. Nguyen ’09
The New York Times, Oct. 9

“Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments—to keep the children in the same school and stay in the same neighborhood.

“Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.”

Protect Financial Consumers

Professor Elizabeth Warren, with
Amelia Warren Tyagi

From “How to Save Capitalism,” a forum in Harper’s Magazine, Nov. 7

“Go into any appliance store in America and look for a toaster with a one-in-five chance of exploding. You won’t find one. But at any mortgage brokerage in the country it has been possible to purchase a loan with a one-in-five foreclosure rate. …

“It is time we created the equivalent of a Consumer Product Safety Commission for financial products, an agency whose purpose would be to protect homebuyers and investors from the finance industry’s most dangerous offerings. The Financial Product Safety Commission could model itself after the best from the consumer regulatory agencies. For instance, the head of the new agency would be appointed by the president, and its staff of professionals would have civil-service protection and thereby be immune to changing political winds. Although the FPSC would have no hand in setting prices, it would be able to require that companies reveal the true cost of credit. This seemingly small requirement would force into public view essential information about terms and risks that has long been masked and withheld. To achieve this end, the agency could do something as basic as reviewing product disclosures, making sure they were easily comprehensible to the average reader.”

Copyright ©2008 Harper’s Magazine. All rights reserved. Reproduced by special permission