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Memo From Democrats Blasts House GOP Plan

Saturday, 27 Sep 2008 | 12:41 PM ET

A strongly worded memo from Democrats obtained by CNBC blasts an alternative bailout proposal from House Republicans, saying it would amount to "a true bailout of Wall Street fat cats."

The memo is a response to an eleventh-hour Republican proposal to create a privately-funded insurance program for mortgages and use private capital instead of government money to solve the financial crisis. But the sharp language in the response suggests the Republican plan is unlikely to be a major part of the compromise bill that emerges from ongoing talks this weekend.

The memo says the program is like "offering insurance to people after a devastating hurricane has already hit." The result would be an insurance program that either puts taxpayers on the hook for tremendous losses or charges premiums so high that no one could afford coverage. The Republican plan "shows a gross misunderstanding of the way insurance works [and] it would likely be much more expensive than the Paulson plan."

Objections by a group of conservative House Republicans to the $700 billion bailout package surfaced on Thursday and threatened to derail the entire bailout. The outlines of their alternative proposal, which includes a series of tax breaks and further deregulation, began to circulate that evening. Congressman Paul Ryan, in a CNBC interview, said the purpose was to unlock private capital that is sitting on the sidelines to solve the problem and minimize government involvement in the market. He said the idea came from Wall Street.

But details of the plan have been hard to obtain. CNBC made several calls to Republicans on the Hill but did not receive a response.

Still, a senior congressional staffer said it was possible that, in order to obtain support of the House Republicans, some mention of the insurance proposal could find its way into the compromise bill. For example, the bill could authorize the Treasury Secretary to study the proposal or mention it as an alternative solution available to the Secretary. It is unlikely, however, to be the centerpiece of the solution.

The memo also criticizes the tax breaks sought by Republicans, saying "the lack of private capital is not a result of tax or regulatory barriers, but because of illiquidity and troubled assets and financial institutions."

It said tax and regulatory changes would result in further losses to the Treasury.

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