Delaware County Daily Times - Sestak: Voting Yes for Bailout Was Right

Op-Ed

Delaware County Daily Times - Sestak: Voting Yes for Bailout Was Right

On Sept. 29, the House failed to pass the Emergency Economic Stabilization Act, 205-228.

On Oct. 4, the bill, together with a number of tax-cut extensions, passed 263-171, and became law.

I voted yes both times because I believe we needed to take decisive action to stop the bank-lending freeze and ensure my constituents do not face the non-availability of affordable car, education, and small business loans, and a stock market crash where life savings, pensions, and 401(k)s lose great value.

Not acting has already harmed our economy, risking a deep, protracted recession. If small businesses cannot get loans and are forced to layoff employees, unemployment rises and, with less household income, the downward spiral of foreclosures continues.

I have been focused on the financial crisis since February when the Pennsylvania Higher Education Assistance Agency alerted me it had to stop making student loans because of credit market problems.

I wrote the secretary of the treasury and chairman of the Federal Reserve Board, asking for direct intervention. Chairman Ben Bernanke responded that the "most important contribution that the Federal Reserve can make … is to foster the restoration of more normal functioning in financial markets more generally."

Unfortunately, that proved wrong. Instead, what began with foreclosures in sub-prime mortgages, has devastated a growing number of financial institutions, causing a widespread credit freeze, where lending has stopped because of the fear that mortgage-related securities held by banks may soon make these banks insolvent. During a call, Secretary Henry Paulson and Chairman Bernanke admitted this was the worst financial crisis since World War II — that means the Great Depression.

We must remove the dead weights that are pulling down our economy, contributing to 605,000 recent job losses, 20 percent declines in house and new car sales and foreclosures for 1 million families, with millions more expected.

For example, a family laundry business closed in my district because it could not get a loan to repair equipment.

A 68-year old woman lost more than $100,000 in retirement savings when the market crashed recently. And a father with a strong credit history could not get a mortgage for his family. It is clear that, over the years, there was no proper market oversight to prevent this.

A congressional bipartisan group took Secretary Paulson's original three-page proposal — clearly inadequate — and constructed an effective and accountable plan. Its key points are:

The primary objective was to protect the taxpayers from an impact on their jobs, personal savings and pensions. Stability and confidence must be restored to the financial markets and banking system by giving the U.S.

Treasury the authority to purchase — and ultimately sell for the taxpayers' profit — the mortgage and mortgage-related securities of questionable value. Only the U.S. Treasury has the capital to begin removing these securities from banks, restoring confidence to lend again.

To protect the taxpayers' money, the bill ensures they take back a profit when the firms recover through "warrants," which provide shares of company stock to the government.

The bill requires that after five years, if the taxpayers have not recovered all of their investment in profits, taxpayers are repaid in full by having the financial industry cover any shortfall.

There are four independent entities to provide oversight, reporting, and public transparency of transactions and prevent conflicts of interest. And the Secretary must publish details of any transaction within two days.

The money is provided in "installments" — $250 billion upon enactment of the bill; another $100 billion, if necessary, with presidential notification; and the final $350 billion submitted to Congress for its review.

Criminals will be punished, with the FBI already investigating 26 cases of potential fraud at Fannie Mae, Freddie Mac, and Lehman Brothers, with the number expected to rise.

The bill's provisions break the cycle of mortgage foreclosures — the root of the problem. If homes in our neighborhoods suddenly go empty, and property taxes go unpaid, and no one has the credit to purchase the vacant houses, everyone's property values are diminished, with a devastating effect on our schools and community protection services.

Therefore, the bill provides for government to restructure loans.

For example, a recent law lets the lender and the homeowner agree to take losses down to 87 percent of the house's current market value, but the homeowner gets an affordable fixed-rate loan backed by the government — but the taxpayer gets at least 50 percent of any gain when the house is resold.

This helps reduce the 2 million foreclosures that would otherwise drag down the economy.

There are executive compensation restrictions, including prohibiting/limiting "golden parachutes" and no tax deductibility of excessive compensation.

If the government takes an ownership stake in a firm, the government will recover any bonus previously paid to an executive if statements are later found to be inaccurate.

The bill included provisions to quickly develop a comprehensive restructuring of the financial regulatory system.

I voted for this bill for one primary reason: If action were not taken, it will be exponentially worse. If banks are unable to lend to small businesses at affordable rates, unemployment — now at 6.1 percent — will rise as people are laid off; family incomes will decrease; and they will be unable to afford mortgages, or the increasing cost of car, education and other loans.

This action, while regrettable, is necessary, as the trillion dollar loss in pensions, savings, and 401 (k) plans showed when the stock market recently collapsed.

I believe the adage of the ancient mariner who said of a natural storm "woe be the seaman who does not take precautions, lest they might prove unnecessary."

I strongly believe it would have been unwise not to take this precaution for this man-made financial storm.

U.S. Rep. Joe Sestak of Edgmont, a Democrat, represents the 7th Congressional District of Pennsylvania.

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