Bailout: Who gains, who pays?

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We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Tuesday, September 23rd, 2008

What do you get for $700 billion? Banks don’t go under? What about those empty houses in so many neighborhoods? Consumers Union says that any bailout should be designed to stabilize neighborhoods, not just banks, by stopping the foreclosures. We think that the way to do that is both with new powers in bankruptcy courts and with special rules to make it easier to restructure a mortgage whenever the federal government has bought any interest in that mortgage. We say taxpayers should share in the benefits of any increase in stock price of bailed out investment houses and banks, and that there must be limits on big bonuses and severance packages for the executives who led their companies, and our country, into this mess. We want strong oversight of any bailout process, and real long-term mortgage reform. We also want rules for how the federal government later sells the “troubled assets” it buys back into the market, so that the bailout doesn’t leave us a few years from now with a new form of “zombie debt.” Zombie debt is outdated debt that shows up much later.
Read Consumers Union’s statement: http://www.consumersunion.org/pub/core_financial_services/006177.html

Treasury’s plan for the $700 billion bailout now being discussed in Congress is short on protections for anyone except the banks. Consumers Union has proposed that consumers, neighborhoods, and taxpayers be protected in the structuring of any bailout. Here are the key points we think must be included:

Help homeowners at risk of foreclosure: Prevent people from losing their homes due to foreclosures. Any financial institution that benefits from the bailout, and any mortgage in which the federal government purchases an interest with taxpayer dollars, must be subject to a mandatory, fast, effective restructuring process. These loans should be designed to keep consumers in their homes and help strengthen neighborhoods.

Give bankruptcy courts power to prevent foreclosures: Give bankruptcy courts the power to alter all mortgages that are in bankruptcy to help people keep their homes.

Stop Excessive Executive Compensation: Executives whose actions have caused the bailout should not reap the benefit of bad decisions. There should be strict limits placed on the severance, bonuses, and stock options and grants these executives receive.

Protect neighborhoods hit by foreclosures: Help stabilize neighborhoods already hard hit by foreclosures by rehabilitating vacant homes and revitalizing communities.

Prevent Bailout Abuse: Grant the government warrants to purchase stock in companies taking advantage of the bailout. This would let taxpayers share in the benefit if companies participating in the bailout turn profitable.

Be sure we aren’t just postponing the problem: When the government sells these assets back into the market, there should be restrictions on how the debt can be collected, so it doesn’t become a new form of outdated debt.

Make everyone who profits responsible: We have to change the way mortgages are made and sold so that everyone who gets a fee also keeps some of the risk of future nonpayment. Everyone getting a fee and passing the buck to the investor was a big part of the current crisis.

Require greater transparency: For businesses that benefit from the bailout, Congress should require greater transparency of financial firms’ risk management and other business practices.

Oversight: Ensure that there is strong oversight of this bailout process but we also need a more long-term plan that provides strong and effective regulations to avoid future mortgage and credit meltdowns.

Curb abusive credit card practices: Give taxpayers a break too by including credit card reform. Cash-strapped consumers shouldn’t continue to be gouged by excessive credit card rates and fees by the same financial institutions that will benefit from this bailout.

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