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Congress continued wrangling throughout the week over the terms of a massive bailout of major banks, as the U.S. faces the biggest financial crises in nearly 80 years. The crisis apparently has its roots in sub-prime mortgages – high-dollar home loans with low-interest initially that jumped after a couple of years. The original loans were for a low interest for a year or two, and the loans often were for an amount higher than the appraised value of the house. When the low-interest agreement expired and interest rates increased, homeowners defaulted. When the house payments stopped arriving, banks that “held the loans” had trouble paying their bills. One thing led to another. There has been a chain of failures of investment banks, which typically make riskier loans than conventional banks. JP Morgan bought the nation’s largest savings and loan bank -- Washington Mutual -- Friday. The Federal Deposit Insurance Corporation will cover the losses. To bail out the banks, U.S. Treasury Secretary Henry Paulson wants as much as $700 billion to get the gulping economy back on solid ground. The money will allow banks to dump bad loans into a federal fund controlled by the Treasury department, thereby making the loans worth something. British banks that have significant operations in the US would also be able to take part.
What caused the crisis? See our opinion page.
But prompted in part by a public outcry that the bankers who created the problem would suffer little pain while the taxpayer foots the bill, both Republican and Democrat members of Congress want conditions on the bailout. That has made for a stimulating debate. Bailout terms under discussion include: -- Limits on pay for Chief Operating Officers of the banks that get bailed out. Many of those CEOs make tens of millions a year, but could be limited in the future to $400,000 a year – the same pay as the President of the United States. -- Allowing the government to buy shares in the companies with the bailout money, so the government will get income if the firms recover. -- Allowing bankruptcy judges to re-establish a fair market value for the homes, instead of the Treasury officials or bankers setting an new, adjusted value. -- Establishing an independent agency to oversee the government bailout, instead of letting the Treasury department do so. -- Limiting the amount of money to $250 billion, instead of $700 billion, at least for now. More would have to be approved by Congress. -- Selling insurance to the banks, instead of buying up their bad loans. Congress has agreed on some of the provisions but not others. President Bush predicted Friday that an agreement will be reached. "There are disagreements over aspects of the rescue plan, but there is no disagreement that something substantial must be done. We are going to get a package passed," Bush said. "We will rise to the occasion." The list of troubled banks is relatively extensive. Last month the FDIC said it had a "watch list" of 117 potentially troubled banks, holding a total of $78 billion in assets. Apparently, the list is growing as the financial crisis deepens. Investment banks, which are relatively un-regulated and therefore take on more risky loans, are by far the hardest hit. State and national chartered banks, with familiar names like Nebraskaland National Bank and Farmer’s State Bank, are more regulated and sound. Mike Jacobson, the president of Nebraskaland National Bank and the chairman elect of the Nebraska Bankers Association, told the Bulletin Tuesday that Nebraska banks – most of which are state and national charters – are in relatively good shape. Jacobson wants the government to set up the federal fund, so bad mortgages can be bought and sold again, re-establishing a value for the homes. Without that, the flow of financing for all kinds of things is backed up behind what he called a logjam.
To read about our discussion with Jacobson, pick up a copy of the print edition of the North Platte Bulletin, on sale at convenience stores across Lincoln County.
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