WASHINGTON (AP) - Faced with rising economic anxiety and the high-profile
rescue of a major investment bank, lawmakers are considering sweeping changes to
the financial system and a massive effort to buy up troubled home loans.
While they debate the best thing to do, frustrations are building that
Congress, which is halfway through a two-week recess, and the Bush
administration haven't done enough to combat the economic impact of falling home
prices, banks' unwillingness to lend freely and a seized-up market for
mortgage-linked investments.
"These people have to get past stepping on each other's toes and kicking
each other in the shins and get out and start providing some leadership," said
James Cox, a Duke University law professor and securities law expert.
Housing industry groups are preparing to lobby hard for help when Congress
returns from recess March 31. Arguing that the stimulus package signed by
President Bush last month didn't do enough to aid the housing sector, builders
want a second boost -- including a new tax credit for people who buy homes.
"The housing economy has been the root cause of this recession," said Jerry
Howard, chief executive of the National Association of Home Builders. "Unless
you do something to shore up the housing markets, we're not going to be able to
get out of this situation."
Rep. Barney Frank, D-Mass., chairman of the House Financial Services
Committee, and Sen. Christopher Dodd, D-Conn., who heads the Senate Banking
Committee, are crafting a plan in which the Federal Housing Administration would
guarantee up to $300 billion in refinanced mortgages in exchange for agreements
from investors to take a loss on those loans.
That proposal is getting a warm reception from the mortgage industry, which
desperately seeks a way to set a value for mortgage securities that have become
nearly impossible to sell. Fixing that problem is crucial, said Francis
Creighton, vice president for legislative affairs at the Mortgage Bankers
Association.
"When you don't know where the bottom (of the market) is, you just hold off
and you invest in something else," he said.
Regulators are taking urgent steps to shore up the market for mortgage
investments. The Federal Reserve earlier this month allowed investment firms to
borrow up to $200 billion in safe Treasury securities and put up mortgage-backed
securities as collateral. On Monday, regulators authorized the 12 regional banks
in the Federal Home Loan Bank system to increase purchases of Fannie Mae and
Freddie Mac mortgage securities by $100 billion.
Democrats and Republicans did compromise last month on an economic stimulus
package that sends checks of up to $1,200 to 130 million households later this
year.
However, replicating that cooperation on thornier issues, such as whether
the government should do more to aid homeowners or tighten investment bank
regulation will be tough, especially in a politically charged presidential
election year.
Democrats are trying mightily to cast the Bush administration as more
sensitive to the concerns of Wall Street bankers than Main Street homeowners,
hoping to build momentum for their own proposals. Already under the microscope
on Capital Hill: the near-collapse of Bear Stearns Cos., whose market cap of
some $14 billion nearly evaporated over a weekend and the questions it raises
about the Fed's role in an 11th-hour rescue by JP Morgan.
In a Sunday scramble earlier this month, the central bank provided $30
billion in backing for a deal, raising concerns that the Fed, and ultimately
U.S. taxpayers, could wind up on the hook.
Rep. Henry Waxman, D-Calif., who heads the House Oversight and Government
Reform Committee, is collecting information for an inquiry, a committee aide
said. A key question is whether the Fed set an inappropriate precedent with
Bear. In the Senate, Max Baucus, D-Mont., has trained his finance committee's
oversight on the transaction's impact on taxpayers.
JPMorgan on Monday boosted its offer for Bear Stearns to $10 per share from
$2, aiming to soothe angry Bear Stearns shareholders who are convinced the
company is being undersold.
The Bear Stearns meltdown has led for calls for tighter controls over
investment banks -- including stricter cushions against losses -- and brings up
issues not tackled since Congress and the Clinton administration tore down the
walls separating banks, securities firms and insurers in 1999.
An ineffective and unwieldy patchwork is how critics see the current
regulatory system, in which the Fed, divisions of the Treasury Department and
the Securities and Exchange Commission each have jurisdiction, often
overlapping, over different types of financial institutions.
Frank last week unveiled a proposal to give the Fed or a new regulator the
power to supervise the operations of major financial players, whether they be
banks, investment firms or hedge funds.
The Bush administration has its own ideas and is expected to put its
"blueprint" for financial regulation reform into legislative form soon. It too,
is expected to propose a broader role for the Fed as an "umbrella" regulator,
but its thrust is toward easing what are considered onerous regulatory burdens.
Rep. Vito Fossella, R-N.Y., hopes the collapse of Bear Stearns provides an
opportunity to examine the sometimes-overlapping powers of bank regulators, but
cautions against overreaction. "We have to renovate the house and not just slap
a coat of paint on it and say we've solved the problem," he said.
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