Bailouts A Necessary Evil--Just Wish A Little More "Punishment"


I've been barraged by phone calls and emails all day from community activists screaming that troubled borrowers should be bailed out before any Wall Street bailout.

From the Boston-based Neighborhood Assistance Corporation of America: "Stop the Bailout: It's the Foreclosures Stupid!" From the National Community Reinvestment Coalition: "$700 Billion Wall Street Bailout Inequitable and Fails to Address the Core Problem: The Foreclosure Crisis."

From mortgage consultant Howard Glaser: "This financial crisis began with a housing crisis and we’re not going to end it unless we deal with housing. The plan really does relatively little on the housing front. Nothing to stem foreclosures. Nothing to encourage loan modifications. So the deterioration of the housing market which really sparked the financial problems really goes unaddressed."

I'm guessing leadership on the Hill are getting the same calls because they are demanding foreclosure relief in their legislative response to the Treasury bailout plan. But here's the rub. Folks in Washington claim that while the upfront costs could be as high as $700b or more, that would not be the net result.

Much like previous bailout plans, including the airlines post 9-11, the government can actually make money. Some are estimating that in the end, once all the securities are bought and resold, the government could start making some money on the assets and the whole thing would probably "only" be a net cost of $100-200 billion to the taxpayers.

But if a core value of this plan is to maximize taxpayer return, then loan modification isn't exactly working toward that goal. I asked House Financial Services Committee Chairman Barney Frank (D) about the disconnect there, and he was, well, frank: "That's a fair point," he began. "There is a tension because modifying the loans diminishes taxpayer return." But he concludes, "That is a tradeoff we're ready to make."


Others voice concern that a massive, bulk-scale modification and/or loan restructuring mandate would inevitably raise mortgage rates (because this puts all mortgage values in question and therefore raises risk and risk-related costs) and in turn lower home prices further to take into account higher mortgage rates.

Lets face it, there's no easy answer to all of this. I don't like Wall Street getting bailed out, greedy investors who turned a blind-eye to realty as they raked in ridiculous profits on the back of my home's tenuous equity, and I don't like borrowers getting bailed out because a lot of them knowingly took risks to try to flip a quick buck or to live beyond their means, again, pumping up the cost of a home for responsible borrowers like myself.

But in order to keep the credit markets working and in order to keep the housing market afloat, the bailouts are a necessary evil. I honestly just wish there were a little more punishment and a little less clemency.

Questions? Comments?