[Congressional Record (Bound Edition), Volume 154 (2008), Part 13]
[Extensions of Remarks]
[Pages 18643-18644]
[From the U.S. Government Publishing Office, www.gpo.gov]




                    STEVEN PEARLSTEIN TO THE RESCUE

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                      Thursday, September 11, 2008

  Mr. FRANK of Massachusetts. Madam Speaker, a great deal has been 
written and spoken, understandably, about various efforts by the Bush 
administration--with and without Congressional authorization--to rescue 
major financial institutions. Unfortunately, a great deal of that 
analysis has been distorted, inaccurate, and ill-informed. In the 
Washington Post, Wednesday, September 10th, Steven Pearlstein once 
again provides a thoughtful, balanced analysis of the public policy 
issues involved here. I urge all Members, Madam Speaker, to read Mr. 
Pearlstein's analysis and keep it in mind as we deliberate going 
forward on these issues. As he very sensibly puts it, ``In the end, the 
right way to think about these rescues is not to simply ask how much 
they are likely to cost, but how the rescue compares to the cost of 
doing nothing.'' Mr. Pearlstein's insightful approach to the current 
economic crisis is one of the most important assets we now have, and it 
is one that is not being impaired by current trends.

               [From the Washington Post, Sept. 10, 2008]

             Don't Like Bailouts? Consider the Alternatives

                          (Steven Pearlstein)

       First came the rescue of Bear Stearns and the Fed loans to 
     cash-strapped investment banks. Then the government stepped 
     in to fill the financing gap left when private lenders 
     retreated from the college loan business. Last weekend 
     brought the takeover of Fannie Mae and Freddie Mac. And now 
     the Not-So-Big Three are headed our way looking for $50 
     billion in retooling loans.
       When is this going to end?
       The honest answer: With stock markets swinging 300 points a 
     day and the economy diving into recession, not anytime soon.
       Indeed, the chances are pretty good that by year's end, 
     Washington will have to bail out another big bank or 
     investment house along with a bond insurer or two. And 
     taxpayers will be called on to replenish the coffers of the 
     federal agencies that insure private bank deposits and 
     private pensions.
       Already, there's been plenty of grumbling from editorial 
     writers and market-oriented conservatives that the country is 
     on a slippery slope toward socialism. They also fear that 
     these rescues will encourage reckless risk-taking in the 
     future, creating the expectation that if bets go bad, Uncle 
     Sam will always be there with a bailout.
       From the left, meanwhile, come populist complaints that 
     government has committed enormous amounts of taxpayer money 
     to bail out corporate fat cats and rich investors while 
     ignoring the plight of millions of Americans facing personal 
     bankruptcy and foreclosure.
       While there is validity to these concerns, they are also 
     based on a number of false assumptions, chief among them that 
     vast sums are expended on these rescues.
       History shows that rather than costing taxpayers, the 
     rescues have often wound up making money.

[[Page 18644]]

       That was the case with the Home Owners Loan Corp., a New 
     Deal agency that bought mortgages from banks and wound up 
     with a small profit by the time all the loans were paid up in 
     the early 1950s. The same was true of the controversial loan 
     guarantees made to Lockheed and Chrysler in the 1970s. More 
     recently, following the Sept. 11 terrorist attacks, the 
     government set up an Air Transportation Stabilization Board 
     that offered loans and loan guarantees to a handful of cash-
     strapped airlines. The agency now expects to close out its 
     books in the black.
       In the case of the $29 billion that the Federal Reserve 
     loaned J.P. Morgan Chase to take over Bear Stearns, the final 
     cost won't be known until the Fed sells the asset-backed 
     securities it took as collateral for the loan. So far, so 
     good: As of June 30, those assets had an estimated market 
     value of $29 billion.
       It's anyone's guess what the Fannie and Freddie rescue will 
     cost, but at this point it looks to have been structured on 
     terms quite favorable to the government. Although the 
     government is yet to put a dime into the companies, it has 
     received $1 billion worth of preferred stock and warrants for 
     80 percent of both companies' common stock simply for 
     agreeing to provide backstop financing.
       Over the next few years, however, the Treasury will almost 
     surely have to invest tens of billions of dollars to keep 
     Fannie and Freddie adequately capitalized, and how much of 
     that money will ultimately be recovered depends on how things 
     turn out with the millions of mortgages the companies hold or 
     have guaranteed. But if it is willing to wait until housing 
     markets finally recover, there's a good chance the government 
     will recoup most of its investment, along with a 10 percent 
     annual dividend and a hefty guarantee fee.
        In the end, the right way to think about these rescues is 
     not to simply ask how much they are likely to cost, but how 
     the rescue compares to the cost of doing nothing.
       It's not hard to imagine, for example, that if nothing had 
     been done, Fannie and Freddie would have been forced by 
     nervous bondholders to hunker down and throttle back its 
     housing-finance activities, further destabilizing financial 
     markets and accelerating the housing market's downward 
     spiral. Those, in turn, could have easily turned a short 
     recession into one that was longer and deeper--one that cost 
     Americans an extra $200 billion in lost income, several 
     hundred thousand additional lost jobs and a net loss to the 
     Treasury of $80 billion. Suddenly, a Fannie/Freddie rescue 
     begins to look like a bargain.
       Aside from the money, of course, there is also the problem 
     of moral hazard--the concept that unless markets are allowed 
     to inflict the full measure of punishment on investors and 
     executives for their bad judgments and undue risk-taking, it 
     will only invite bad judgment and undue risk in the future. 
     But using moral hazard to argue against the carefully 
     structured rescues of Bear Stearns or Fannie and Freddie is a 
     bit likely arguing that any sentence short of capital 
     punishment is insufficient to deter bank robbery.
       Remember that even with the rescues, top executives at Bear 
     Stearns, Fannie Mae and Freddie Mac lost their jobs, their 
     reputations and most of their net worth, while long-term 
     investors lost all but a tiny fraction of their money. It's 
     hard to imagine that anyone will look back on those 
     experiences and see anything but a cautionary tale.

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