Frustration growing
Congress weighs sweeping finance, regulatory fixes
Congress weighs sweeping finance, regulatory fixes

By Alan Zibel and Marcy Gordon

Published: March 25, 2008

WASHINGTON — Faced with rising economic anxiety and the high-profile rescue of a major investment bank, lawmakers are considering sweeping changes to financial regulation and a massive effort to buy troubled home loans.

While they debate what if anything more should be done, frustrations are building that Congress, which is halfway through a two-week recess, and the Bush administration aren't doing enough to combat the economic impact of falling home prices, banks' unwillingness to lend freely and a seized-up market for mortgage-linked investments.

"These people have to get past stepping on each other's toes and kicking each other in the shins and get out and start providing some leadership,” said James Cox, a Duke University law professor and securities law expert.

Housing industry groups are preparing to lobby hard for help when Congress returns from recess March 31. Arguing that the stimulus package signed by President Bush last month doesn't aid the housing sector enough, builders want more— including a new tax credit for people who buy homes.

"The housing economy has been the root cause of this recession,” said Jerry Howard, chief executive of the National Association of Home Builders. "Unless you do something to shore up the housing markets, we're not going to be able to get out of this situation.”

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and Sen. Christopher Dodd, D-Conn., who heads the Senate Banking Committee, are crafting a plan in which the Federal Housing Administration would guarantee up to $300 billion in refinanced mortgages in exchange for agreements from investors to take a loss on those loans.

That proposal gets a warm reception from the mortgage industry, which desperately seeks a way to set a value for mortgage securities that have become nearly impossible to sell. Fixing that is crucial, said Francis Creighton, vice president for legislative affairs at the Mortgage Bankers Association.

"When you don't know where the bottom (of the market) is, you just hold off and you invest in something else,” he said.

Regulators are taking urgent steps to shore up the market for mortgage investments. The Federal Reserve earlier this month allowed investment firms to borrow up to $200 billion in safe Treasury securities and put up mortgage-backed securities as collateral. On Monday, regulators authorized the 12 regional banks in the Federal Home Loan Bank system to increase purchases of Fannie Mae and Freddie Mac mortgage securities by $100 billion.

Democrats and Republicans did compromise last month on an economic stimulus package that sends checks of up to $1,200 to 130 million households later this year.

However, replicating that cooperation on thornier issues, such as whether the government should do more to aid homeowners or tighten investment bank regulation will be tough, especially in a politically charged presidential election year.

Democrats are trying mightily to cast the Bush administration as more sensitive to the concerns of bankers than homeowners, hoping to build momentum for their own proposals. Already under the microscope on Capitol Hill: the near-collapse of Bear Stearns Cos., which saw billions of dollars in market value nearly evaporate over three days, and the questions it raises about the Fed's role in an 11th-hour rescue by JPMorgan Chase & Co.

In a weekend scramble earlier this month, the central bank provided $30 billion in backing for that deal, raising concerns that the Fed, and ultimately U.S. taxpayers, could wind up on the hook.

The new agreement calls for the Fed to assume control of $30 billion of Bear Stearns' assets, which will be managed by New York-based investment firm BlackRock Inc.

Going forward, if there are losses on those assets, JPMorgan will take responsibility for the first $1 billion, with the Fed responsible for further losses. The arrangement, and the potential risks it poses to taxpayers, is sure to bring scrutiny from lawmakers.

A key question is whether the Fed is setting an inappropriate precedent with Bear. In the Senate, Max Baucus, D-Mont., has trained his finance committee's oversight on the transaction's impact on taxpayers. Rep. Henry Waxman, D-Calif., who heads the House Oversight and Government Reform Committee, is collecting information for an inquiry, a committee aide said last week.

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