What do House Republicans want?

Michael Barone:

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... A senior House Republican gave me and some other reporters a look yesterday at what a working group headed by Assistant Minority Whip Eric Cantor is demanding. The senior House Republican (hereinafter SHR) has what sounded to me like an ingenious approach. He cited Ginnie Mae loans to low-income borrowers, which the government can insure. He proposed that the government (presumably through the entity envisioned by the Paulson plan) offer to sell insurance to financial institutions that hold mortgage-backed securities (hereinafter MBS). Premiums would be determined by the rates of foreclosure on each class of securities so far. Under this plan, the government would be taking in money, not paying it out. Of course, if the premiums are not enough to cover losses, the government might eventually take losses, as it did when the savings and loan industry collapsed. But losses don't seem inevitable and in any case will mostly occur in out-years, not now.

One of the big problems of the Paulson plan is determining the price the government would pay for MBS. If it pays too little, it doesn't help financial institutions very much; if it pays too much, the government will be shelling out a lot of money and won't get back nearly as much when the MBS become liquid and it sells them. And who is qualified to make such evaluations? Many of them are people who have been working for the very financial institutions that are in trouble (although I should think the Treasury Department and Federal Reserve have some people who are very sophisticated in this, too).

The SHR calls this an insurance program and the original Paulson plan a purchase program. He says Treasury Department people have told him that they considered an insurance program but decided that a purchase program would be better. But he also added that in the draft legislation Paulson has advanced, the Treasury would have the authority to set up such an insurance plan without congressional authorization. From what he said, it struck me that both courses could be followed. After all, neither purchases nor insurance is contemplated to take place unless and until a financial institution comes forward and requests one or the other.

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Here is the problem with this plan. While it does not require the immediate outlay of funds the potential loss is still there in the same amount, but the upside is limited to the insurance fees collected rather than the huge potential profit to the government from reselling the mortgages once they have been cleaned up. While they claim to be limiting the risk, the reality is that they do not and they lose control of the asset and the upside.