Proposal Uses Private Equity to Keep Government from Buying Mortgage Assets, Assures Wall Street Won’t Get Rich While Taxpayers Get Stuck with Trillion Dollar Bill
September 27, 2008
Washington, DC – Rep. Darrell Issa, a businessman and entrepreneur before coming to Congress, today offered a new proposal to protect the economy without a taxpayer-funded bail out of Wall Street. Under Rep. Issa’s plan, private investors would provide the capital for a Rescue Fund through the purchase of government issued Guaranteed Recovery Bonds. The Rescue Fund would be managed by the Treasury Department and would offer troubled financial firms interest accruing loans based upon their holdings of at-risk mortgage assets.
“My plan uses private investment and gives Wall Street the same liquidity as the Paulson plan and guarantees that investment firms don’t just dump rotting assets on taxpayers and go on to reap huge profits,” said Issa.
Under the plan, Congress authorizes the Treasury to issue up to $700 billion dollars in unique callable T-Bills (Guaranteed Recovery Bonds) to be purchased by private investors to capitalize a Rescue Fund that will be managed by the Treasury Department. Financial institutions borrow from the fund at a rate that fully covers the interest paid to investors in the Recovery Bonds plus an insurance premium to protect taxpayers.
Under the Issa plan, Financial institutions holding at-risk mortgage-backed securities would be able to borrow from the $700 billion rescue fund established through the special Guaranteed Recovery Bonds. The amount each firm could borrow would be set by the Treasury Department using Secretary Paulson’s mark-to-market to maturity valuation of the mortgage backed securities they hold. Financial institutions would continue to hold their mortgage assets and be responsible for liquidating them over time, so taxpayers would not be saddled with the liability or cost of disposing of troubled assets. As firms pay-back loans to Treasury, the revenue is used to pay-off the Guaranteed Recovery Bonds. The insurance premium paid by borrowers will protect taxpayers from default.
A point by point summary of Rep. Issa’s proposal and a comparison with the Paulson plan can be found below.
Issa Guaranteed Recovery Bonds vs. Paulson Bailout
The Benefits of Making Wall Street an Emergency Loan instead of Buying Troubled Mortgage Assets
Less Risk/Reward for Taxpayers:
Wall Street Can't Profit while Taxpayers take Huge Losses:
- Under the $700 billion Paulson plan, the Treasury buys at-risk mortgage assets and taxpayers own the investment — if taxpayers overpay for risky assets they lose money while Wall Street firms are free to profit after dumping bad investments on taxpayers.
- Under the Issa Guaranteed Recovery Bonds plan, Wall Street firms get liquidity from bonds but retain ownership of at-risk mortgage assets. Taxpayers can't get stuck holding the bill while Wall Street firms profit — taxpayers can only lose money if firms fail.
Keeping the Federal Government from Owning Troubled Mortgages:
- Under the Paulson plan, Wall Street firms get to wash their hands of business decisions and hand the risk to taxpayers. They're free to make enormous profits while taxpayers get stuck with results of bad investment.
- The Issa Bonds plan means that if Wall Street firms succeed, taxpayers make a profit. Wall Street can't make huge profits while taxpayers lose billions.
- The Paulson plan makes the government the owners of $700 billion in mortgage assets. We're the landlord and the Federal government will be under constant pressure to cut special deals for tenants that cost taxpayers even more.
- The Issa plan means the government doesn't get itself into the mortgage management business. Wall Street firms are still in charge of business decisions and stilI have a financial stake.