To begin, I would like to thank all of you who contacted me recently regarding the Economic Stabilization Act, or the Bailout Bill, H.R. 1424. Our offices in Washington, Boston, and Brockton received over 1,700 calls on this issue.
As you may be aware, I strongly opposed both the White House and Senate versions of the Bailout Bill.
Before I explain my reasons for my vote, I want to say that in searching for a solution to this crisis I approached this problem with two basic conditions:
• Doing nothing was not an option; however, neither was spending $700 billion to make things worse.
• We need a rescue plan that is targeted, effective, and fair.
In the end I truly believe that this was not the best plan. Not even close. Rather, this is the best plan the White House could come up with in 10 days.
Now for my reasons: first, I opposed the bailout because it required that you, the taxpayer, pay the entire cost of $700 billion. Conversely, Wall Street and the financial services industry are required to make no such contribution.
To be clear, there are some aspects of the bill with which I agreed. However, this one simple fact, that the firms who led us into this mess and those who most directly benefit from this bailout are not being asked to pay any of the cost of their own rescue, is totally unfair and unacceptable. In fact, it is this unfair one-sided burden on the taxpayer that truly makes the bill a bailout.
It is worth noting that after the stock market crashed back in 1929, Congress, in the Securities Exchange Act of 1934, required that Wall Street and the financial services industry make a meaningful contribution toward the task of repairing the damage that had been done. Specifically, Congress required that Wall Street firms pay transaction fees based on the volume of stocks traded each day. And for the past 75 years, those transaction fees contributed to the stabilization of the stock market.
I supported the inclusion of an increase in these transaction fees in the Bailout Bill. Unfortunately, neither Treasury Secretary Paulson nor Senate sponsors included such a requirement in the current bill, and the uphill efforts to do so by my friend and colleague Congressman Barney Frank were defeated. Therefore, I could not support this bill.
Secondly, I also opposed the bill because it allows Secretary Paulson to purchase so-called Collateral Debt Obligations or CDO's as part of the bailout plan. Many of these CDO'S are very complex and speculative instruments that should not be eligible for purchase as troubled assets under the bailout plan.
And thirdly, I refused to vote for this bill because I am very doubtful that this bailout will work as advertised.
It is important to remember that the underlying premise of the bailout is that Secretary Paulson will use your $700 billion in taxpayer money to purchase bad mortgages and toxic mortgage-backed securities and other distressed instruments from banks in order to remove them from the banks' balance sheets. Theoretically, this will cause the banks to resume writing new mortgages and loans, thus boosting the economy.
However, what is less widely known is that:
• The market value for many of those abandoned properties that are attached to those bad mortgages has plummeted to the point that many have very little value in the current market and;
• In order to help the banks' financial positions, Secretary Paulson will be forced to overpay for those distressed securities. Otherwise, the banks would realize the true losses on those properties and remain illiquid or in some cases may become insolvent.
In recent hearings, Secretary Paulson conceded this point.
However, by overpaying for tens of thousands of abandoned and distressed properties, your $700 billion dollars will be spent more quickly, and the impact of the bailout will reach fewer banks and properties.
Meanwhile, the process of evaluating, buying, maintaining, and finally re-selling these properties is a massive and complicated undertaking.
This is not a quick shot in the arm. It is not a panacea. I believe we are in for a longer and more difficult road ahead than the proponents of the bailout have described.
I am also concerned that eventually, as the Government begins to sell these abandoned properties into weak regional housing markets, it will further depress prices which reduces the equity that nearby homeowners have in their homes, creating further downward pressure on the economy.
Recalling that the goal of the bailout plan is to free up the balance sheets of the banks in order to induce them to write additional mortgages and loans, I am doubtful that banks would increase lending under these circumstances.
In closing, I remain honored to represent you in the United States Congress. I know there are many of you who disagreed with my vote. I deeply respect your opinions, and I continue to welcome your views. I will continue to try to make the best decisions on your behalf in these challenging times. As always, I will strive to meet your highest expectations.
Stephen F. Lynch