Holt Joins New Effort to Address Credit Crunch

Press Release

Rep. Holt has signed on to support legislation introduced by Peter DeFazio (OR-4) to address the current credit crunch by changing Securities Exchange Commission (SEC) and Federal Deposit Insurance Corporation (FDIC) rules. The plan that Holt is supporting could be implemented promptly to correct the capital shortfall shortfalls experienced by many financial institutions and help protect the integrity and quality of the securities market.

"Before and after the vote on the Bush-Paulson plan, I have been working on legislation to address the financial crisis more directly and effectively," Holt said. "I previously have called on the Administration to take these actions, regardless of the bailout. Steps like increasing insurance levels for bank accounts could and should have been done by now - they shouldn't require Congressional action. I hope this proposal receives bipartisan support and that the Administration acts on these proposals even as we try to pass a financial rescue package."

In addition, Holt is preparing legislation that he believes would go to the root of the current financial crisis by allowing the government to work with homeowners and mortgage holders to repair troubled mortgages. The legislation would be similar to the Home Owners Loan Corporation (HOLC), which the Federal Government created in 1933 in that mortgage crisis. This program, which lasted 20 years, shored up a collapsing market by purchasing delinquent mortgages at a discount and working with homeowners to restructure the mortgages into more manageable terms. Congress and President Roosevelt authorized HOLC for $4.75 billion - or $76 billion in today's dollars. With this investment, in its first two years, HOLC helped more than 1 million homeowners. When the HOLC finally ended, it showed a net $14 million surplus for taxpayers.

A summary of the DeFazio legislation is below.

Require the SEC to require an economic value standard to measure the capital of financial institutions.

This bill would require the SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as banks have traditionally done will immediately correct the capital shortfalls experienced by many institutions.

2) Require the SEC to restrict naked short sells permanently

This bill would require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices often harm the companies represented in the sales and hurt their efforts to raise capital.

3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill would require the SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies "to protect the integrity and quality of the securities market and strengthen investor confidence." This rule prevents market crashes brought on by irrational short term market behavior.

4) Create an emergency Net Worth Certificate Program

This bill would require the FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC could purchase net worth certificates in these institutions. In exchange, these institutions would issue promissory notes to repay the FDIC, counting the amount "borrowed" as capital on their balance sheets. This exchange would provide short term capital, with no cash outlay. Interest rates on the certificates and the FDIC notes would be identical so no subsidy is necessary.

Participating banks would be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans would be subject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75 percent, required no further assistance beyond the certificate program.

5) Increase the FDIC Insurance limit from $100,000 to $250,000.

The bill would require the FDIC to raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.

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