Stu­dent, car debt qui­etly added to bailout plan

The Washington Times Weekly - - Politics - BY PA­TRICE HILL

In the dark of night over the Sept. 2021 week­end when most peo­ple were snooz­ing, the Trea­sury dra­mat­i­cally ex­panded its bailout plan to in­clude buy­ing stu­dent loans, car loans, credit card debt and any other “trou­bled” as­sets held by banks.

The changes, which were in­cluded in draft lan­guage that also opened the bailout pro­gram to for­eign banks with ex­ten­sive loan op­er­a­tions in the United States, po­ten­tially added tens of bil­lions of dol­lars to the cost of the pro­gram.

Al­though it was a ma­jor ad­di­tion to what was al­ready the na­tion’s largest-ever bailout, it did not be­come part of the de­bate be­tween Democrats and the Trea­sury over de­tails of the pro­gram. A Sept. 22 coun­ter­pro­posal by Se­nate bank­ing com­mit­tee Chair­man Christo­pher J. Dodd in­cluded such con­sumer loans as well as mortgages, just as the Trea­sury’s draft did on Sept. 20.

“The costs of the bailout will be sig­nif­i­cantly higher than orig­i­nally con­sid­ered or ac­knowl­edged,” said Joshua Ros­ner, manag­ing di­rec­tor of Gra­ham Fisher & Co., who charged that the Trea­sury and Fed­eral Re­serve have not been “forth­right” about the ul­ti­mate cost to the pub­lic. The plan gives Trea­sury the dis­cre­tion to buy the non-mort­gage loans and se­cu­ri­ties in con­sul­ta­tion with the Fed.

Con­ser­va­tives cited the move as a sign that the mas­sive plan to take over bad mort­gage debt al­ready is open­ing the door to fur­ther gov­ern­ment bailouts.

“Such a large takeover by the gov­ern­ment will surely be ac­com­pa­nied by ad­verse, un­in­tended conse- quences,” said Pat Toomey, pres­i­dent of the Club for Growth, a con­ser­va­tive ad­vo­cacy group. “Al­ready, other com­pa­nies and in­dus­tries are lin­ing up at gov­ern­ment’s door ask­ing for their own bailout.”

Trea­sury Sec­re­tary Henry M. Paul­son Jr. stressed that the ad­di­tions were needed to en­sure that stu­dent loans and credit cards — which have be­come in­dis­pens­able to the spending habits and ca­reer plans of many Amer­i­cans — do not be­come vic­tims of the widen­ing credit crunch.

Stu­dent loans, which Wall Street firms pack­aged and sold to in­vestors just like mortgages, al­ready were hit hard in the widen­ing credit cri­sis ear­lier this year, with much of the pri­vate loan mar­ket dis­ap­pear­ing. That forced the gov­ern­ment to step in and beef up its di­rect loan pro­grams for col­lege stu­dents.

Many fi­nan­cial an­a­lysts feared that the credit card mar­ket would be the next domino to fall. Credit card debt also is pack­aged and sold to in­vestors in com­pli­cated “de­riv­a­tive” se­cu­ri­ties that have be­come dif­fi­cult or im­pos­si­ble to sell in re­cent months.

In­vestors are spurn­ing the com­plex se­cu­ri­ties be­cause they are wor­ried about ris­ing de­faults in nearly ev­ery cat­e­gory of con­sumer loans, which re­duce the value of in­di­vid­ual loans and have made it hard to de­ter­mine the value of pools of loans that back the se­cu­ri­ties.

Many of the un­sellable loans have been sit­ting on the bal­ance sheets of banks, forc­ing them to take losses and pre­vent­ing them from mak­ing fur­ther loans.

Richard Berner, chief econ­o­mist at Mor­gan Stan­ley, one of the in­vest- ment banks that stands to ben­e­fit from the loan buy­back plan, said the pro­gram will help ease frozen loan mar­kets and en­sure con­sumers con­tinue to have ac­cess to credit.

“The Trea­sury pro­posal is cru­cial to the credit and risk-tak­ing re­pair process,” he said, pre­dict­ing that plan will have “dra­matic con­se­quences” in help­ing to “renor­mal­ize” loan mar­kets.

But some fi­nan­cial an­a­lysts were not sure whether the mas­sive bailout plan will ac­com­plish its goal of calm­ing mar­kets.

“The credit squeeze grip­ping the fi­nan­cial mar­ket won’t dis­ap­pear soon as a re­sult of this pro­gram. Fi­nan­cial in­sti­tu­tions will con­tinue to hoard cash, raise credit stan­dards and in­crease risk pre­mi­ums” on loans, said Sung Won Sohn, eco­nomics pro­fes­sor at Cal­i­for­nia State Uni­ver­sity.

Sen. Jim DeMint, a South Carolina Repub­li­can who an­nounced his op­po­si­tion to the bailout on Sept. 22, said he sim­ply doesn’t be­lieve Mr. Paul­son when he says it will solve the mar­ket prob­lems.

“His pre­dic­tions have been con­sis­tently wrong in the last year,” he said. “It’s a sad fact, but Amer­i­cans can no longer trust the eco­nomic in­for­ma­tion they are get­ting from this ad­min­is­tra­tion. [. . . ] There are much bet­ter ways of deal­ing with this prob­lem than forc­ing Amer­i­can tax­pay­ers to pay for ev­ery as­set some in­vestor doesn’t want any­more.”

UNITED PRESS IN­TER­NA­TIONAL

Fed­eral Re­serve Board Chair­man Ben Ber­nanke, Trea­sur y Sec­re­tary Henry Paul­son and Christo­pher Cox, chair­man of the Se­cu­ri­ties and Ex­change Com­mis­sion, (L to R) ar­rive Sept. 23 to tes­tify be­fore the Se­nate Bank­ing, Hous­ing and Ur­ban Af­fairs Com­mit­tee on the crises fac­ing in­vest­ment banks and other fi­nan­cial in­sti­tu­tions.

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