BUILDING A BAILOUT

The Bush administration has presented Congress with an outline of a $700 billion bailout package for Wall Street and told lawmakers to pass it fast. While a quick resolution is necessary to stabilize financial markets around the world, lawmakers must take their time in assessing, and if necessary, changing, the package to ensure that help isn’t limited to investment banks and that taxpayers see some benefit from the Treasury’s largesse.

Late last week, President Bush urged Congress to quickly pass a bailout program and not to add to the plan, which was “detailed” in a three-page handout. Previously, when the Bush administration told lawmakers to quickly pass legislation without changing it, the results have been bad. Think of the Patriot Act, detainee torture and wiretapping.

As lawmakers begin consideration of the package, some words of wisdom come from an unlikely source, former House Speaker Newt Gingrich.

“Congress has an obligation to protect the taxpayer,” he wrote in the National Review Online. “Congress has an obligation to limit the executive branch to the rule of law. Congress has an obligation to perform oversight.”

Congress can do all these, but only if it does not lose track of its goal: to structure a package that rescues not only the companies that hold mortgage-backed securities, but also homeowners who can no longer afford their mortgages. Looked at another way, the bailout shouldn’t reward – at taxpayer expense – investment firms for making poor decisions or creating new investment schemes to avoid oversight.

Along these lines, Sen. Jack Reed, a Democrat from Rhode Island, has proposed allowing the government to buy stock in the companies that are bailed out. This way taxpayers would profit if the value of the companies rises after selling off their bad debts to the government. Lawmakers from both parties favor measures to ensure profits that result from the bailout are returned to the Treasury.

Before such provisions can be added to the legislation, lawmakers must first know who is being bailed out and if there is a prospect of some of the $700 billion being recouped. For example, much of the $85 billion the government pledged to loan to American International Group will likely flow to large financial institutions that engaged in credit default swaps with the insurance giant. Many of these swaps also involved foreign banks, so they, too, will likely get some of the U.S. money.

Determining how assets such as mortgage-backed securities are valued is critical to recouping some of the taxpayer funds. Banks have an incentive to overvalue such assets, while lower values would benefit taxpayers if the securities could be sold for more at a later date. Having an independent valuation would help balance the competing interests. Sen. Olympia Snowe has reintroduced legislation to do this.

In a letter to Senate leaders, Sen. Arlen Spector wrote, “we must take the necessary time to conduct hearings, analyze the administration’s proposed legislation, and demonstrate to the American people that any response is thoughtful, thoroughly considered and appropriate.”

Congress would be wise to follow that advice.