Standing up for responsible businesses and homeowners, Congressman Michael McCaul (R-TX 10) voted against the largest bailout in U.S. history that puts $700 billion of taxpayer money in the hands of the Treasury Secretary to bail out irresponsible lenders on Wall Street. The efforts of Rep. McCaul and a bipartisan front prevented the passage of a flawed plan that would have increased the national debt by $1 trillion, and it produces an opportunity for debate on an economic rescue package that is fair to taxpayers.
"This is our Constitution at work. This is an opportunity to fix the economy in a responsible way that will ultimately be less of a burden on the American people, and we will continue to work day and night until we reach that solution," Rep. McCaul assured. "Fundamentally I have deep concerns about government intervention into the private sector. We cannot allow responsible taxpayers on Main Street to bail out irresponsible banks on Wall Street. Even with some of the conservative principles drafted into the bill that we hoped would provide greater oversight, I cannot ask the people who have placed their trust in me to cover $700 billion in bad debt incurred by private firms. In a capitalist system people are held responsible for their decisions. They don't dump bad debt on the public.
"I believe there is a way to rescue our economy without placing the bulk of the burden on home owners and businesses who struggle to meet their own bottom line," Rep. McCaul added. "Instead, we have rushed into a rescue plan that taxpayers may very well need to be rescued from. If this Congress doesn't get this right this could result in the largest sub-prime loan ever issued. If we don't make the necessary reforms to fix the fundamental problems with our economy we are throwing good money after bad. It will be on the backs of the taxpayers and the debt will be passed down to our children. That's the result we want to avoid."
Congressman McCaul has stood up to the Bush-Paulson plan since it was released and has worked to incorporate better oversight and accountability. As a result, the bill that was defeated was much improved. Even so, this legislation is like an insider trade deal that was shoved through Congress outside the deliberative process with the use of scare tactics. More than 200 leading economists from across the country agree that Congress can't be rushed to judgment and should take its time to do this right. They also agree that the bill still forces taxpayers to make a significant sacrifice, with little evidence to suggest that the troubled markets will be settled.
The Bush-Paulson bailout gives control of $700 billion to the U.S. Treasury Secretary to buy failed loans from American banks that have dropped in value and have become stagnant on their books. Buying the bad loans will give the banks the liquidity they need
to continue to make loans to responsible customers. The hope is that the government would later sell the properties for a higher price and replenish the taxpayers' money.
However, the plan fails to require Wall Street to invest a financial stake in its own recovery and leaves taxpayers vulnerable to unprecedented financial losses if the government cannot recoup its investment.
Quoting William M. Isaac, FDIC Chairman (1981-1985), Rep. McCaul said, "Having financial institutions sell the loans to the government at inflated prices so the government can turn around and sell the loans to well-heeled investors at lower prices strikes me as a very good deal for everyone but the U.S. taxpayers. Surely we can do better."
Sponsors Alternative Legislation
Instead of using taxpayer money for the bailout, Congressman McCaul supports raising the limit on the amount of deposits insured by the Federal Deposit Insurance Corporation (FDIC), which would prevent runs on our financial institutions, and has co-sponsored an alternative economic rescue package to have Wall Street fund the recovery.
A Work-OutNot a Bail-Out
Stabilizing Financial Markets: Require the Treasury Department to guarantee losses up to 100%, resulting from the failure of timely payment and interest from mortgage-backed securities (MBS) originated prior to the date of enactment. Such insurance would provide immediate value to the MBS and a foundation for which they could then be sold.
Risk-Based Premiums: Direct the Treasury Department to assess a premium on outstanding MBS to finance this insurance. Participation in the program would be mandatory for all holders of such MBS in order to guard against adverse selection where only the holders of troubled assets participate. A risk-based premium would be assessed on those with troubled MBS. The premium would expire when the Treasury Secretary determines the fund has sufficient resources to meet any projected losses.
Private-Capital Off the Sidelines by Empowering Private Investors
Net Operating Losses: Allow companies to carry-back losses arising in tax years ending in 2007, 2008, or 2009 back 5 years, generating a tax refund and immediate capital. Despite the presence of willing buyers, many firms with MBS are not willing to sell at such a huge loss. Such a carry-back provides a cushion for any such loss, making firms more willing sellers.
Repatriation Infusion: Allow a repatriation window for profits earned by U.S. firms overseas. Such repatriation amounts would be taxed at 0% if invested in distressed debt (as defined by Treasury) for at least one year.
Bank Losses on GSE Stock: Allow banks to treat losses on shares of preferred stock in Fannie Mae and Freddie Mac as ordinary losses, not as capital losses.
Two-Year Suspension of the Capital Gains: Immediately suspend the capital gains rate from 15% for individuals and 35% for corporations. By encouraging corporations to sell unwanted assets, this provision would unleash funds and materials with which to create jobs and grow the economy. After the two-year suspension, capital gains rates would return to present levels but assets would be indexed permanently for any inflationary gains.
Reforming a Failure in Government Institutions
Limit Federal Backing for High Risk Loans: Mandate that GSEs no longer securitize any unsound mortgage that is: (1) not fully documented to meet minimum requirements for work, assets, and income; (2) written to comply with any law or regulation that would otherwise violate a firm's lending rules.
Schedule the GSEs for Privatization: Transition Fannie and Freddie over a reasonable time period to truly private companies without special government privileges and open them up to real market competition. This reform would 1) establish commonsense limits for their capital requirements and portfolio holdings relative their size, 2) focus their mission on affordable housing only, not profit making, 3) require them to pay an appropriate risk-based amount for the government guarantee they enjoy, 4) subject them to state and local taxes and accurate SEC filings like every other private for-profit corporation, and 5) ultimately provide for the phase out their GSE charters once their conservatorship has ended.
Suspend "Mark to Market" Accounting: Direct the SEC to suspend the mark-to-market regulatory rules until the agency can issue new guidelines that will allow firms to mark these assets to their true economic value. The current rules contribute to a downward spiral as firms have to evaluate their assets not on the basis of their long-term investment but rather on a short-term mania.
Stabilize the Dollar: Repeal the Humphrey-Hawkins Full Employment Act which diverts the Federal Reserve's attention from long-term price stability to short-term economic growth. In an effort to fuel the economy, this additional mandate has encouraged the Fed to keep rates artificially low, fueling economic boom and busts, and now a strong up-tick in inflation and the decline of the dollar (as investors free dollars for hard assets). This reform would require the Fed to establish a numerical definition for price stability and maintain a policy that promotes it over the long-term.
Oversight and Corporate Accountability
Executive Compensation Limits: Require the Treasury to write rules prohibiting excessive compensation or golden parachutes to executives of failed companies at the expense of taxpayers.
Strict Enforcement of Laws Designed to Protect Investors: Task the SEC with reviewing the annual audit reports of entities the federal government has brought under conservatorship or now owns, and determine if those annual audit reports from years 2005 to present accurately reflected the financial health of those businesses.