(Washington, D.C. ; Right Commentary): To the American Public, the current financial crisis has many villains but none upon whom clearly to pin the blame. Taxpayers are angry at the notion of having to bail out banks, headed by millionaires, whom they believe cheated them out of values in their homes, and in some cases, resulted in their homelessness (or foreclosure). Many taxpayers, rightly in my view, ask why the Federal Government is responsible to underwrite the financial decisions of unscrupulous actors who have, in effect, extorted money from the financial system in a highly complex system of lies, deceit, and manipulation. As a Republican, one who believes in the market, it is hard for me to fathom the events of the last few months; the federal government now “owns” two brokerages, two GSE’s, and a multinational insurance company. This is on top of close to a trillion dollars of lending and funds that the Federal Reserve has pumped into the US banking system for the last 14 months, on top of massive rate cuts (that many felt ultimately came too late). For a party that proclaims its faith in the market, and personal accountability, the actions of intervention in the markets of the last few months is at best puzzling.And now Congress, like the sleeping behemoth that has finally awaken, is beginning to ask the questions of who, what when, why, and most important, how can we fix it. With less than week to the end of the 110th Congressional term - the phrase, “better late than never,” has almost a fatalistic feel to it.

But do what - exactly - seems to be the question Congress is asking.

In many respects, the current situation is reminiscent of the Savings and Loan (S&L) industry implosion that lead to the government bailout of almost all S&L institutions and eliminated the S&L banking system. Perhaps as a result of “institutional learning” from that crisis, some in Congress are contemplating rejuvenating the same model of bailout that oversaw the dissolution of the mortgage market in the 1980’s, namely, creating a new version of the Resolution Trust Corporation (RTC).

The S&L debacle cost the taxpayers close to $500 billion (about half of what has been expended to date in the current financial crisis) - with much of the government issued debt by the Resolution Funding Corporation to fund the bailout only now - almost 20+ years later - finally being retired. In some respects, it is ironic (and a painful history lesson) that just as Uncle Sam finished paying for one financial crisis - the same type of crisis occurs anew.

Because there are so many players responsible for solving the crisis, and because nearly all those involved - the White House, the Congress, the Federal Reserve, the Treasury, the Banks and financial institutions, are so deeply entangled in the ongoing mess (much of it their creation), the problems of accountability that existed in the S&L crisis are intensified in the current global credit crunch. With the exception of McCain, a man I feel is treading on dangerously thin ice on this issue given his own involvement in the S&L crisis, hardly anyone is trying to make this a partisan issue. Republican and Democrat alike - there is more than enough blame for everyone.

Barney Frank (D-NY) has proposed essentially revitalizing and adapting the solutions of the 1990’s to the S&L crisis to solve the current debacle. Congress has several ideas on the table to consider (H.R. 5830, H.R. 3915, H.R. 5818, S. 2338, S. 2636, just to name a few). Is setting up a new RTC to deal with the current crisis a good idea? To my Congressional readers - of whom there are several - I offer a cautionary tale. It might be a good idea - it might not be.

The real devil is going to be in the details and what commitments Congress is going to make to the taxpayer and to the US financial system. A rescue plan may not work for one simple reason - the scope of the write downs may be too much for anyone but the taxpayers to absorb. Thus, revisiting the S&L approach may be both politically and economically impossible to achieve absent a complete commitment of Uncle Sam’s coffers to unwind the mess around the world. The S&L solution hinged upon a commitment of the federal taxpayer’s money that at the time was unprecedented - 500 billion dollars. The scope of this crisis, the depth to which the US Government may have to assume and unwind the debts, may not be able to be solved absent an almost open-ended commitment by the US Treasury. The Treasury and the Fed have already expended more than the S&L crisis cost the American taxpayers. How much more money is required, and when, are two questions that have to be answered - neither of which lends itself to good political outcomes.

On the other hand, if Congress did act, and set up a federal entity to focus on unwinding all of these accounts, that process could work for two clear reasons: One, it would force the United States to deal with the crisis in a logical and strategic way, as opposed to the current ad hoc approach of the Fed and the Treasury - saving one institution, like Bear Stearns and AIG, but letting others, like Lehman fail. This would bring calm and stability to the world wide markets who are quite frankly completely baffled by how we’re making decisions. Two, I think it could bring an end to the uncertainty of just where all this debt is, what its value truly is, and in the end, is it all going to be worthless (undoubtedly, some of it will be). This might stop the fire-sale of assets and placing bank after bank on the block merely because Wall Street’s perceptions turn against it (like Wachovia and Washington Mutual face now).

A brief History Lesson (For my non-Economic readers):

In 1989, Congress passed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA). This law set up two entities that were designed to solve the S&L crisis and unwind (liquidate) the bad mortgage and credit loans that were being held by S&L banks - the Resolution Funding Corporation (REFCORP), and the Resolution Trust Corporation (RTC). The approach was to use the REFCORP activities to raise capital, primarily through the sale of government debt, to obtain money necessary to buy-out the assets of the S&L’s that were declared to be “insolvent” by the Office of Thrift Supervision (an organization within the Treasury Department charged with the management of federal thrift banks and other holding companies). The Resolution Trust Corporation was the primary liquidator of assets - taking banks into receivership and attempting to squeeze out of them the maximum value of their remaining assets by selling them to other banks.

While there were problems throughout - especially in the budgeting of the RTC (which cost considerably more than was initially anticipated) - the RTC was able to resolve the balance sheets of the failed S&L’s that were placed in its receivership. It stopped the run on S&L’s and kept their assets from devaluating to zero because of liquidity problems.

Even if we commit the funds, will the solution work?:

There is an obvious argument against forming an RTC-like entity by Congress… it just may not work. The problem that lawmakers and the financial institutions may face this round, compared to the S&L crisis of the 1990’s, is that of scope and the depth of the credit crunch that exist in the current crisis. The RTC liquidated real estate and financial assets which it inherited from insolvent thrift institutions primarily by using “equity partnerships.” This process involved obtaining private sector partner capital that acquired all or a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest.

In the current crisis, given the history of the last four months, it is has been extremely difficult for the Fed and the Treasury to find “White Knights” to buy institutions. JP Morgan’s purchase of Bear Stearns might be a unique case where Morgan’s reputation as a market-maker (and backstop to the Fed), combined with its limited exposure to the mortgage market in March of this year, made it a good pairing. However, in contrast, looking at Lehman Brothers, despite considerable arm-bending by the Fed, it could not induce Barclays or Bank of America to assume the debts of Lehman. For both Bank of America and Barclays, the deal needed federal taxpayer backing - something the Fed and the Treasury was unable to give. Moreover, the implosion of AIG, the collapse of The Reserve Primary Fund, and other Bell-weathers, show the interconnected nature of how these assets, and their derivatives, have permeated the financial system to the point that it is nearly impossible to figure out exactly where all the “bad mortgage paper” is in the financial system. During the S&L crisis - the crisis (while politically was national) really was a regionally based issue for Texas, California, and Louisiana. It was considerably easier, when compared to the current situation, to figure out the scope of the problem and identify the bad debt. This time, the challenge is unprecedented, thanks in part to the “wonders of globalization” of the credit markets of the past 20 years.

The 110th Congress should take up this matter quickly and work closely with the White House to take the next steps required. Congress should have foreseen this eventuality with its passage of the Housing and Economic Recovery Act of 2008. We own Freddie Mac and Fannie Mae. We now own AIG. Shortly, we may have to act even further to stop the implosion of banks like Washington Mutual and Wachovia. A consolidated approach that works with the banking industry, and takes an honest and transparent tact with the American Taxpayer, is required. The Public wants confidence restored in their banking system. The Public wants the home markets to recover. Everyone understands that none of this can happen until the patient stops bleeding. Congress needs to act to make the risks more transparent, work with industry to develop a plan to navigate our way out of bad loans, and then ultimately develop an environment that will allow the US financial system to recapitalize the markets so that they will function normally again. The only way out of the credit crunch is to resolve the ambiguity of US actions and make the markets functional again. While a FIRREA bill could do that - it needs to be done in a way that ensures full accountability to the tax payer.

While this may fly in the face of conservatism - the heart of conservatism is preserving the quality of life that we all enjoy. As the saying goes, if you owe the bank a thousand dollars, and you can’t pay, you have a problem; if you owe the bank a hundred million (or a billion as in the case here) dollars, and you can’t pay, the bank has a problem. Banks have real problems - and the market is largely failing to resolve them. Republicans need to ensure that a government bailout doesn’t result in a new socialization of the housing market, however, we need to intervene to get the markets stabilized, recapitalized, and moving again.

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