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Bailouts Hurt Taxpayers

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Bailouts Hurt Taxpayers and Set a Dangerous Precedent

By U.S. Senator Kay Bailey Hutchison

While many Texans spent the weekend hunkered down in shelters as Hurricane Ike swept over the Gulf Coast, U.S. financial leaders huddled in New York to contemplate another storm: the intensifying financial crisis.

On Sept. 14, Wall Street was rocked by news that Merrill Lynch, a Wall Street fixture since 1915, was sold to the Bank of America to prevent the New York firm’s collapse. The next day, one of Wall Street’s oldest and most renowned institutions, Lehman Brothers, filed for bankruptcy. In business since 1850, Lehman weathered the Great Depression, but it could not withstand the burst of the housing bubble and the subsequent credit crisis. Listing $613 billion in debts, Lehman’s bankruptcy is the largest in U.S. history.

During the turbulent days leading up to Lehman’s announcement, the U.S. Treasury and the Federal Reserve faced the choice of throwing yet another government lifeline to financial institutions drowning in the credit crisis. Government officials spearheaded private sector efforts to mitigate fallout, but stopped short of bailing out Lehman.

Days later, the American taxpaying public was stunned to learn that imperiled American International Group (AIG), a broad-reaching insurance firm operating in more than 100 countries, would be granted an $85 billion emergency bridge loan by the federal government.

The American taxpayer is already burdened by a $250 billion rescue of ailing mortgage giants Fannie Mae and Freddie Mac. On Sept. 7, the Secretary of the Treasury, Henry Paulson, led federal efforts to seize control of these government sponsored entities (GSEs) that together own or back half of the nation’s mortgages.

Fannie Mae and Freddie Mac’s CEOs, who led their institutions into the risky subprime market, have been ousted. The firms are now under federal conservatorship. Some economists estimate that a $250 billion bailout could increase each American household’s part of the national debt by $2,300. Increasing the national debt by this amount is a bitter pill for American families to take because of the poor corporate management and reckless spending these enterprises practiced.

            In July, Congress gave Secretary Paulson the authority to rescue Fannie Mae and Freddie Mac as part of a housing bill intended to alleviate market pressure. Millions of Americans are understandably anxious that the equity they’ve paid into their homes may not provide the financial security that homeownership once guaranteed. Many homeowners, burdened by soaring food and energy costs, are at risk of losing their homes altogether. The reason I could not support the legislation is because the bill asked those taxpayers already burdened by the housing crunch to foot the bill for corporate irresponsibility. There were not enough safeguards against million dollar executive compensation packages, and there were insufficient deterrents for overuse of the U.S. Treasury.

            The housing bill did contain some long overdue GSE reforms, like authorizing an independent regulator to ensure Fannie Mae, Freddie Mac, and other GSEs are running their enterprises in an ethical and financially responsible manner. Unfortunately, these long overdue reforms did not go far enough and came too late to prevent the damage leveled on the U.S. housing and credit markets by Fannie Mae and Freddie Mac chief executives, who together raked in nearly $30 million in personal earnings last year.

            But the crisis does not lie at the feet of financial executives alone. Many in the federal government have pressured Fannie Mae and Freddie Mac to ease lending standards for those with inadequate credit in order to promote homeownership.

It is clear that the situation is worsening and will continue to affect the broader economy. We must focus our efforts on rebuilding our arcane and ineffective regulatory system. A balance of improved regulation and greater market discipline will help solve the financial crisis, rather than patch it, one bailout at a time.

With every bailout, each American taxpayer becomes more invested in these markets. And we all have the right to ask the question, why is one firm rescued, when another must face the consequences of its actions? In a capitalist system, some risks will yield big rewards and some will lead to failure. When possible, it is better to let free market economics pick the winners and losers, not the federal government. Corporate bailouts set a dangerous precedent and stand to negatively impact market dynamics over the long-term. The expectation of a bailout is an incentive for other private financial institutions to ignore risk in the future.

High-powered meetings around boardroom tables on Wall Street may seem distant and immaterial to Americans struggling to put food on their kitchen tables. But the decisions financial leaders make governing financial markets affect American families in a very tangible way.

            Kay Bailey Hutchison is the senior Senator from Texas and is the Ranking Member on the Senate Commerce, Science & Transportation Committee.

 


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Nelson Propane

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