Opinion: The bailout: Still dead
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I know what you’re thinking -- the big rebound for the Dow today is a sign that the Wall Street bailout bill is a sham! But that’s the wrong indicator, folks. You need to be watching the credit markets, not the stock indices. Start with LIBOR, an index of what banks charge one another for loans. As Investopedia put it, LIBOR is ‘the rate at which the world’s most preferred borrowers are able to borrow money’ (emphasis added). It hit an all-time high today, at 6.88 percent for an overnight loan. Ponder that for a bit -- nearly 7% interest on an extremely short-term loan to a blue-ribbon borrower. Ouch.
Anyway, the stock market’s steady climb today may have been buoyed by hopes that Congress would take another stab at the bill. Lawmakers have done plenty of that today, floating alternatives on the left and the right. They’re pretty similar, actually -- both revolve around a new self-insurance effort. There’s also a renewed effort by some Democrats to provide more help to borrowers, and a push by Republicans to eliminate a provision that would steer a portion of any profits realized from the sale of assets acquired during the bailout to an affordable housing trust fund controlled by state and local governments. The GOP’s concern is that the money would actually go to a low-income housing and community organizing group, ACORN, that Republicans despise. See this CBS News blog post, which seems a bit hastily written but gets to the heart of the matter. I’m with the GOP on this, not because of the shadow of ACORN, but because it’s ridiculous to parcel out profits from some asset sales when taxpayers could take a beating on others.
Meanwhile, back in sunny California, supporters of AB 1830 are still licking their wounds over Gov. Arnold Schwarzenegger’s veto. You can’t blame the Gubernator for the subprime mortgage meltdown, but you can certainly fault him for not doing his part to prevent the next one. AB 1830 would have gone further than the Federal Reserve’s new Truth in Lending Act rules (‘Reg Z’) to crack down on the excesses that fueled the housing bubble, particularly the damn-the-torpedoes, full-speed-ahead tactics by mortgage brokers and specialized lenders that proliferated as the market lost steam. Among the provisions of 1830 were a ban on loans that allowed subprime borrowers to grow more deeply in debt over time, and a prohibition on financial incentives that induced brokers to steer borrowers into more expensive or riskier loans.
In his veto message, Schwarzenegger said the measure would put state-licensed brokers at a disadvantage when competing with federally chartered banks that made subprime loans. A disadvantage in what respect -- having less ability to mislead gullible consumers, or to steer them into products that aren’t in their best interests? Yup, that’s a problem. The governor also complained that the bill would allow consumers to enforce its provisions through lawsuits, and would allow them to recover their legal fees if they won -- but wouldn’t allow lenders and other defendants to recover their fees if they prevailed. ‘This provision will likely lead to increased litigation based on de minimis violations as plaintiffs attorneys will have much to gain and little to lose,’ Schwarzenegger wrote in his veto measure. The California Supreme Court disagrees on that point -- see Ketchum v. Moses (‘Because a prevailing party will receive attorney fees only if the case is successful, there is little or no incentive to pursue nonmeritorious cases.’) Besides, the Truth in Lending Act has a similar benefit for prevailing plaintiffs, as does the California covered loan law and numerous other consumer-protection laws here. Sounds like the governor was searching for a pretext, rather than finding legitimate flaws in the bill. (Full disclosure -- the editorial board pushed hard for the measure.)