The government's historic $700 billion plan to rescue the creaking financial system, signed into law by President Bush on Friday, has prompted a flood of questions. More than a few readers are wondering, why can't we just find the executives responsible for this mess, round them all up and throw them in jail?
What about consequences faced by the CEOs of these companies? This did not happen overnight and there should be criminal charges faced by these high-paid CEOs. If I had not done my job right, I would no longer have one, and if I mismanaged company funds, I would face charges.
— Rita L., Maryland
That chapter of the story is still being written.
As we wrote back in June, the FBI has assigned hundreds of agents around the country to look into possible lending and securities fraud. The initial round of hundreds of low-level arrests will likely help amass the evidence required to bring criminal charges against the bigger fish in these lending schemes gone bad.
The FBI has confirmed that about two dozen companies and their top executives have been targeted by the investigation. The list reportedly includes Fannie Mae, Freddie Mac, and insurer AIG and Lehman Brothers.
It may be awhile before these cases are brought to trial. For one thing, the investment schemes at the heart of the financial meltdown reached a level of complexity that is now confounding the same rocket scientists who created these pools of mortgage-backed bonds. Trillions of dollars worth of these investments were sold based on intricate computer models that turned out to be fatally flawed. Unwinding this mess will take time. So will piecing together the lengthy paper trail to show a jury just how these schemes worked.
The problem is compounded by the legal standard required to prove guilt in a financial crime. You have to show, essentially, that the people who created this mess knew at the time what they were doing was wrong, and that they knew they were taking other people’s money through deceptive means.
In some cases, the people who created these now-worthless investments sincerely believed they were smart enough to turn a risky, sub-prime mortgage into a perfectly safe investment. It was all right there in the computer.
Unfortunately, stupidity is not a crime.
What's in the bailout deal for those suffering foreclosure on their homes?
— John N.,New York, N.Y.
Not much.
Many Democrats who balked at approving the plan the first time around cited this as one of their biggest concerns. Both sides have been arguing for over a year about what — if anything — the government should offer in the way of direct relief to homeowners. So far the best they’ve come up with is a program to help homeowners get in touch with lenders in the hope that those lenders will voluntarily agree to take losses and renegotiate more affordable monthly payments.
But it hasn’t worked very well. The pace of defaults and foreclosures is still rising. Several million more homeowners will likely lose their homes. The estimates are only best guesses at this point; much depends on how much further the economy slides before it begins to recover.
The latest data aren’t encouraging. Friday’s report on unemployment showed the pace of job losses picking up in September. Until that number peaks and begins falling, the outlook for housing will only get worse. Lost jobs mean lost paychecks — which makes it a lot harder to make a mortgage payment.
Why can’t the government just divide that $700 billion up amongst the American taxpaying citizens, tax it and let us pay off our mortgages, cars, etc., open businesses and help the economy?
— Karen C., Etoile, Texas
A number of readers have asked the same question. At first glance, it makes a lot of sense.
In fact, the government just did this — on a somewhat smaller scale. This summer’s tax rebate checks flooded the economy with $100 billion in extra spending money for consumers. With budgets stretched and wages stalled, the extra money gave a noticeable lift to spending, and helped the economy avoid — or more likely postpone — a deeper downturn.
But as we’ve seen from that stimulus program, the effect of this kind of government handout is only temporary. With most of those checks spent, consumer spending took a dive in September.
Another $700 billion might help, but handing it over to consumers wouldn’t address the problem Congress is trying to attack: the rapid slowdown in lending. If credit continues to dry up, consumers will have an even harder time getting mortgages and car loans, and businesses will have to lay off even more workers.
Keep in mind that these hundreds of billions we’re talking about are borrowed dollars. We have to pay them back at some point. The architects of the financial rescue plan are hoping to do that by buying up worthless investments backed by mortgages — what they’re calling “troubled assets” — and then sell them later at a profit when the housing market and the economy recover. It might even work.
The alternative — borrowing money from the rest of the world’s savings and handing it out to U.S. taxpayers — would only perpetuate the unsustainable borrowing spree that got us into this mess in the first place.
Unfortunately, all this comes at a time when we’re going to have to figure out how to start repaying the big chunk of money we’ve been borrowing for decades to fund the increased demands on Social Security and Medicare as the baby boomer generation hits retirement.
Unless the government starts getting serious about not spending more money than it takes in, Uncles Sam is going to have a harder time getting credit from the rest of the world.
Just like consumers who went overboard with credit cards and mortgages they now can’t afford to pay back.
Real estate prices are still higher than the long-term trend. Shouldn't the government let them fall rather than supporting current price levels?
— Michael K.,Glen Burnie, Md.
There’s nothing in the government financial rescue plan that works directly to put a floor under house prices. The plan is designed to try to establish minimum prices for investments backed by mortgages. Those have become essentially worthless — in part because no one knows the true “floor” price of the houses securing those mortgages.
That’s the vicious cycle the government is trying to break. Rising foreclosures dump more houses on the market at fire sale prices, which eats into the value of investment backed by all mortgages, which forces lenders to pull back on making new loans. That hurts the economy and brings more layoffs, which leads to more foreclosures. Go back to step one.
At some point we’ll reach the bottom; there are early signs that the decline in house prices is slowing in many parts of the country.
Demand is still there for houses that are priced right. That demand will continue to grow the further prices fall. True, there’s a large inventory of unsold homes to work through. But the sharp drop in construction of new homes this year will help work off that inventory more quickly.
And don’t forget there are roughly a million new households formed every year in the U.S. Those people have to live somewhere.