Washington, D.C. – U.S. Senator Sheldon Whitehouse (D-RI) has urged Senate leaders to provide assistance to homeowners as they craft legislation to rescue the nation’s ailing financial markets in the wake of last week’s turmoil on Wall Street.
In a letter Monday to Senate Majority Leader Harry Reid (D-NV) and Senate Banking Committee Chairman Christopher Dodd (D-CT), Whitehouse raised concerns about a Bush Administration proposal giving Treasury Secretary Henry Paulson broad and unchecked power to spend $700 billion to shore up major financial institutions.
“The Treasury proposal, as currently drafted, is laudable in its efforts to restore stability and confidence in financial markets,” Whitehouse wrote. “However, it does nothing to directly help homeowners trapped in upside-down or subprime mortgages. This process must assure that benefits flow not only to the bailed out institutions, but to average Americans caught in this crisis.”
One way to support homeowners, Whitehouse argued, would be to incorporate into the bailout plan a measure he cosponsored, Senator Dick Durbin (D-IL)’s Helping Families Save Their Homes in Bankruptcy Act (S. 2136), which would give bankruptcy judges the authority to adjust mortgage terms to meet the market. Whitehouse also pushed for stronger oversight of the bailout plan through a commission or advisory board, and for a separate entity, along the lines of Rhode Island’s RISDIC (Rhode Island Share and Deposit Indemnity Corporation) Commission during the state’s 1991 credit union crisis, to investigate what led to the financial turmoil and determine if specific individuals or firms can be held accountable. Whitehouse helped formulate the taxpayer-financed plan that addressed the RISDIC collapse.
Separately today, Whitehouse commented on additional steps Congress and the Administration should consider that would protect taxpayers. “We need to think about how any securities purchased through a bailout plan would be valued, to see whether we can assure taxpayers that they won’t have just spent hundreds of billions of dollars on investments that will lose money. I also support Jack Reed’s efforts to require the banks assisted under this program to give the government warrants, exercisable for the purchase of their stock, to further ensure that taxpayers don’t lose their shirts on this plan.”
Whitehouse warned of a potential “new financial meltdown” stemming from abusive credit industry practices, as credit card companies raise rates and fees for families already struggling under high-interest debt. He is the author of the Consumer Credit Fairness Act (S. 3259), which would set claims relating to credit arrangements with excessive interest rates and fees at a lower priority in bankruptcy than all other claims, meaning abusive lenders will risk no recovery of high-interest debt. The bill would also exempt consumers who declare bankruptcy as the result of high-interest debt from the bankruptcy means test requirement.
The full text of the letter is below:
September 22, 2008
The Honorable Harry Reid
Senate Majority Leader
S-221 Capitol Building
Washington, D.C. 20510
The Honorable Christopher Dodd
Chairman, Senate Committee on Banking, Housing, and Urban Affairs
448 Russell Senate Office Building
Washington, D.C. 20510
Dear Senators Reid and Dodd:
I very much appreciate the work you are putting in as you consider legislation giving the Secretary of the Treasury the authority to bail out financial institutions. I would like to bring several thoughts to your attention, with the understanding that some or all of these proposals are already on the negotiating table.
First, I think there is unanimity within our caucus that we must aid homeowners in addition to the banks. The Treasury proposal, as currently drafted, is laudable in its efforts to restore stability and confidence in financial markets. However, it does nothing to directly help homeowners trapped in upside-down or subprime mortgages. This process must assure that benefits flow not only to the bailed out institutions, but to average Americans caught in this crisis.
There are a number of possible means to this end. Our caucus has strongly supported giving bankruptcy judges the authority to adjust mortgage terms to meet the market, and I strongly support including this language in the legislation. If we can’t get that, another alternative would be to give the Secretary of the Treasury the authority to cram down the principal and readjust the rate of the mortgages purchased pursuant to the proposed legislation. (This is commonplace for all kinds of debt, with home mortgages the unjustified exception). Mortgage-backed securities are complex instruments, and the “strips” in which they were sold, and the fact that some are held by overseas banks, create legitimate practical issues in establishing this kind of authority. Despite these complexities, I believe that Government stands on a different footing from the financial institutions that previously held these mortgages, and we cannot ourselves perpetuate and enforce the abusive rates and excessive values that precipitated this crisis in the first place. The government owes an obligation of decency and example that private lenders do not, and I strongly urge that we allow government the authority to reset terms in a fair and reasonable manner, so that people may stay in their homes.
If we repair the financial markets but don’t shore up the economy sinking under them, we will only postpone the reckoning.
Second, I am concerned that the Treasury proposal would give far too much unchecked authority to the Secretary and amounts to a $700 billion blank check, with the Secretary deciding which banks to bail out and what price to pay for mortgages and related securities. This is too much authority for one person and one executive branch agency. Please consider creating a commission to oversee the program. At minimum, the legislation should provide for an advisory board with which the Secretary must consult and obtain approval regarding matters such as from which institutions to purchase assets, and at what prices. The commission should include members of both parties and from a variety of financial and economic backgrounds.
Third, we should assure adequate investigative resources to look into civil and criminal liability in the financial meltdown, and establish an investigative commission to hold public hearings and subpoena people in to testify. When we had our banking collapse in Rhode Island, I helped our governor establish the “RISDIC Commission” (named after the deposit insurer whose failure precipitated the collapse). The Commission held public hearings that led to legislative, regulatory and policy recommendations, and a lengthy report explaining what went wrong. We could establish a strong commission to tear into this mess, with crack legal counsel to assist them. As a legislative advisory body without executive authority, the commission would not need executive concurrence and our leadership could appoint the members.
Finally, we need to focus not just on the problems of the past, but also on preventing the problems of the future. I believe that a new financial meltdown stemming from abusive credit card practices might be looming. There are approximately 1.2 billion credit cards in circulation, and the total value of revolving credit card debt will soon reach a trillion dollars. Credit cards with costly terms are one of the greatest handicaps that families face in trying to put their financial houses in order. As families suffer in this economy, credit cards raise rates and fees to abusive and usurious levels on them, driving them into deeper trouble in a vicious cycle. Each issuing bank must chase the others down the road of these bad practices in order to stay competitive, so no one has an incentive to back off on their own: Government has to break the cycle. I believe we should seize on the current attention to the economy to pass meaningful credit card reform.
United States Senator
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