An e-mail from my Congressman

Today I received a response to an e-mail I wrote to my Congressman, the Honorable Todd Akin, during the time of the economic bailout discussions in Washington. My e-mail encouraged Congressman Akin to vote against the bailout plan of Secretary Paulson which he did. I thought you may be interested in the Congressman’s response to my original correspondence.

Dear Reverend Walker:

Thank you for contacting me regarding my vote on Secretary Paulson's proposed $700 billion bailout plan. My office has received more correspondence on this question then on any issue in the past 8 years.

For this reason, and because of the technical nature of the issue, I have prepared a more lengthy response than I would for most issues. The bottom line is that I voted "NO" on the proposal. A more detailed explanation follows.

In mid-September, U.S. Treasury Secretary Henry Paulson came to Congress with an unprecedented demand. He told us that the American economy was on the brink of catastrophe. Our only hope was to give him $700 billion, immediately, with no strings attached. Seven hundred billion dollars amounts to an indirect tax of $7,551 per taxpayer. It is the cost of the war in Iraq for five-plus years, and it is close to what America spends on foreign oil in a year. Paulson's plan was to use the money to buy "toxic assets" from banks and other financial institutions. These assets were considered "toxic" because their value was so uncertain that there was no market for them.

Paulson's demand placed Congress on the horns of a dilemma. One was financial Armageddon. The other was a $700 billion indirect tax on American taxpayers. Common sense dictates that when two bad alternatives are proposed, one should look for a better alternative. Unfortunately, Secretary Paulson was not interested in discussing any alternatives.

Over the next few days, Congressmen of all political stripes scrutinized the nature of the problem and possible solutions. Conservatives were concerned about the massive increase in deficit spending and what precedent would be set if the Federal Government purchased bundles of private loans. Many Members of Congress were skeptical that the government could be trusted to come up with a satisfactory pricing mechanism for the toxic securities because there was no way to establish a value. Some Democratic Members of Congress also had serious concerns regarding the Wall Street bailout.

There is no doubt that we need to insure the soundness of the American dual banking system and our markets with:

1)The least amount of bad government regulation, - Fannie & Freddie along with suspension of the Mark-to-Market rule when no market exists.

2)The most amount of disclosure, - no naked short selling without the "up-tick rule."

3)More accountability for bad actors - if they make bad loans, poor investments or borrow what they cannot repay - then they should pay the price.

4)Rewards for those who behaved responsibly and penalties for those who didn't - no golden parachutes.

Early in the last decade, Congress mandated that Fannie Mae and Freddie Mac increase the number of purchases of mortgages made to lower-income borrowers. Under President Clinton, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie even higher numeric goals for low-income borrowers. At the same time, banks were also forced to implement loan quotas for lower income households through the Community Reinvestment Act (CRA).

Additionally, early in 2001, as the economy headed into recession, the Federal Reserve began a series of interest rate cuts, bringing the interest rate down to 1% and holding it there for a year. These actions drastically expanded lending; particularly in the real estate market. However, because housing prices were rising, the defaults stayed relatively low. In the meantime, mortgages and loans were being made, sold, and bundled without regard to the likelihood that the borrowers would be able to repay. The bundled securities, called "mortgage backed securities," were incorrectly given AAA ratings and sold all over the world.

In 2003, an article in the New York Times reported, "The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." Unfortunately, many Democrats argued that there was no impended crisis. In fact, at the time, the current Democratic Chairman of the House Financial Services Committee, Barney Frank ,stated, "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis."

By 2004 and 2005, the Republican-controlled Congress saw the danger and passed legislation to tighten regulation of Freddie and Fannie. I voted in favor of this legislation. Unfortunately, Senate Democrats blocked any effort to improve the law.

Over the past year, increasingly more homes came onto the market than buyers and the homebuilding industry began to show signs of stress. Home values started to drop and builders could not find buyers for their new homes. Before long, the value of homes was dropping below the cost of loans. As a result, some consumers who were overextended on their credit started defaulting on their mortgages. Investors began to lose confidence in Freddie and Fannie, causing their stock prices to tumble (down about 80%) over last year. Because so many banks and financial institutions were invested so heavily in these securities, it resulted in the need to bailout Fannie and Freddie. Furthermore, these same banks and investment firms that had bet on mortgage backed securities began to be in serious trouble - and so were their customers. Banks that were rumored to be in trouble began to see an increase in withdrawals by their customers - triggering fears of bank runs. With so much money tied up in bad investments, even healthier banks were reluctant to make new loans.

When banks stopped buying mortgage backed securities because they could no longer determine their real value, this placed the banks that owned these securities at risk.. Federal accounting rules state that a capital asset on a bank's books must be daily "marked to market." However, when there is no market, law requires these assets to be shown as "zero" in value. This causes problems for banks by depressing their capital reserves value. For example, if a bank owns 1 million dollars of mortgages on houses that used to sell for a total of $1 million but now are worth $800,000, then the bank has a manageable problem. However, if under the "mark to market" rule, that value is artificially re-set at zero, the rule can actually cause a bank failure. If a bank's capital gets too low, the bank must be closed or sold as we saw in the case of Wachovia Bank.

Secretary Paulson proposed a $700 billion taxpayer funded "solution" to this problem. I and about one hundred other conservative Members of Congress sought other alternatives. We met former FDIC Chairman Bill Isaacs who was in charge of handling the Savings and Loan crash under President Ronald Reagan. He explained that we did have tools to solve the banking problem without this massive public bailout.

One of Chairman Isaacs' suggestions included changing the current accounting rules (mark-to-market) so that assets owned by the banks could be more reasonably valued. This would help the banks' capital problems, preventing unnecessary tightening of the credit markets. This approach also meant that owners of riskier assets would be responsible for their own financial decisions.

Much to my disappointment, this approach to dealing with the financial crisis was largely ignored. The first high profile bailout vote took place on Monday September 29th. Surprising Republican and Democrat leadership, the bailout package failed, rejected by over two-thirds Republicans and over a hundred Democrats. This vote reflected the tenor of what a majority of Congressional offices were hearing from their constituencies including my own.

Over the next few days, the Senate approved the bailout and added a bunch of tax extenders - authorizing the extension of various tax breaks that were set to expire The House voted to approve this package on Friday, October 3rd, after an unprecedented level of lobbying by financial groups and the White House. Once again, I voted against the bailout.

Our economy is in critical condition, and the price tag on the "bailout" could add nearly a trillion dollars to our national debt. During these tough votes, I try to set politics aside and consider what is best for my constituents and the country. In this case, I asked myself if the legislation would:

 solve the problem it was meant to address? Doubtful

 prevent the types of investment practices that had caused the problem in the first place? No

 solve the problem using the simplest and least expensive solutions first and only spending billions in public money as a last resort? No

 punish those who made financially responsible decisions? Yes

 reward those who made poor financial choices? Yes

 represent a major intrusion by the Federal Government into private markets? Yes

 increase the national debt? Yes

 set a pattern for future public bailouts of private losses? Yes, I believe it would.

Based on these questions, a "NO" vote was the principled position for a conservative. Like other high profile votes I have taken since being in Congress -- including the 2005Medicare Modernization Act - this vote placed me at odds with President Bush and leadership in my own party.

I appreciate the serious nature of our economic situation. However, it is dangerous to abdicate principles under pressure. For that reason, I co-sponsored H.R. 7223 which represents a reasoned response to our economic challenge. H.R. 7223 would have reformed the financial market regulatory system and empowered private investors to fund the financial market's recovery. I believe this plan represented a "workout" rather than a bailout by leveraging limited tax dollars to encourage private investment and stabilize our markets.

I hope this information is helpful in understanding my perspective on this important legislation. Once again, I appreciate the time you took to contact my office.

It is a privilege to represent you and I hope that you will not hesitate to contact me regarding any matter where I might be of assistance. If you would like more information on issues, or would like to share further thoughts with me via e-mail, you may visit my website.

Sincerely,W. Todd Akin
Member of Congress