Bank bailout commentary: Not so fast!


Haste makes waste. Any time 535 people reach an agreement this quickly, you know most of them did not even read it before signing off. That, sports fans, is how we got into this mess to begin with.

What remains to be seen is whether the measure will pass (probably) and whether the markets will be fooled (possibly). Early signs are not good with the Dow off 300 points, as I write. However, one should never overestimate the intelligence of investors who, after all, bought all of those mortgage-backed securities in the first place.

From a starting point of three pages last week, what appears to be the agreed bank bailout legislation runs to 109 pages of text that will generate millions if not billions in legal fees over the next five or ten years. My preliminary observations are as follows:

1. The bill does nothing to address the primary cause of the current mortgage crisis: the deliberate relaxation of lending and disclosure standards superimposed by the Clinton administration on the Community Reinvestment Act, back in 1992.  Their widely advertised aim was to make it easier for otherwise non-credit worthy borrowers to “buy” homes anyway. This means that the same cycle of irresponsibility that began in 1992 is merely reset for another round. That is, unless, by some miracle, auditors and accountants can somehow expose the junk before too many people, especially taxpayers, buy.

2. Sections 109 and 110, which seem redundant, will most likely result in a massive transfer of wealth from taxpayers to banks and, indirectly, to financially distressed “homeowner” mortgagors who are incapable of paying off their mortgages as they were originally negotiated and signed. This should make Barney Frank and Maxine Waters happy since this is what they had in mind, back in 2003, when they loudly protested that Franklin Raines was doing a marvelous job running Fannie Mae.

3. The judicial review defects in the original proposal — which granted the Treasury Secretary an unreviewable right to do whatever he chose — appears to be remedied in this draft in only a very limited fashion. Section 119(a)(2)(A) precludes any injunctive relief actions by the Secretary under Sections 101, 102, 106 and 109 — the substantive core of the legislation — except where the Secretary’s action violates the constitution.

Further, for any plaintiff so incredibly fortunate to get an injunction against the Secretary, the injunction is automatically stayed for three days by Section 115(c). The stay is then lifted unless the Secretary seeks a stay from a higher court during those three days.

In other words, the Secretary can escape the impact of an injunction merely by filing for the stay with an appeals court. Practically speaking, this means that there is no way to prevent the Secretary for doing whatever the Secretary chooses to do. Ergo, the judicial review promised in this draft is, like so many of the underlying mortgages, a sham.

4. Section 107 of the bill perpetuates discriminatory minority set asides in the guts of the bailout program. Arguably, the subprime mess itself was created by a huge financial minority set aside requiring banks to issue mortgages on the basis of skin color rather than financial ability to repay mortgages. In this sense, the bill is just more of the same.

5. For those who believe that the Constitution actually means anything, the bill suffers from significant constitutional defects in relation to congressional delegation of power and the commerce clause. Congress should not, under the Constitution, be able to delegate such sweeping powers to a cabinet officer like the Treasury Secretary. Nor should the federal government be empowered to renegotiate individual mortgage terms as this bill purports to do.

Developing . . .