House Republicans alternative hybrid insurance bailout idea accepted by Democrats

House Republicans have created an option to offer government insurance for “troubled” aka dangerous, loans, as an alternative to a buyout. That was the delay. There was/is a need for speed, but this has some real potential benefits for the bailout.

The $700+ billion price tag has generated a lot of heat, with reason. But it’s not as if all this money is going to be spent in one hit. However, as an unspecified, open ended hit on revenue, it leaves a taste in the mouth. The New York Times

Democrats said that they had accepted a Republican proposal that would create a hybrid plan, allowing the Treasury to choose on a case-by-case basis between directly purchasing mortgage-backed securities, or offering government insurance for those troubled debts, the option pressed by the rebellious Republicans because it would keep the securities in private hands.

Henry M. Paulson Jr., the Treasury secretary, has dismissed the idea of an insurance program as inadequate, and has shown no indication that he would employ it, meaning that the concession appeared mostly symbolic. Initial reaction among House Republicans suggested that an optional insurance program would not be enough to win their support.

There’s a further issue in terms of cash availability for financial sector corporations. The Republican plan would mean outlays of cash. However- This is a potential strategic option, a way of having the cake on selective assets and eating it too. It keeps some assets on the books. It’s also not a revenue drainer. In theory, it’s a revenue maker. It needs to be understood that some of the delay on the bailout is based on hard nosed considerations, even if the delay itself is irritating.

The administration’s original proposal asked for virtually unfettered authority for the Treasury secretary, but Congressional leaders and Mr. Paulson had already agreed to a number of changes, including an independent oversight board; limits on pay for executives of firms that seek government assistance; and a mechanism that would allow taxpayers to profit should the rescue plan help companies prosper in the future.

The insurance program promoted by the House Republicans as an alternative to the government buy-up of troubled assets would require financial firms to pay premiums, and House Republicans appeared reluctant to explain on Friday exactly how it would work. A major problem on Wall Street is that many of the firms are short on cash. Even Representative Eric Cantor, Republican of Virginia, and a main proponent of the insurance idea, conceded that it could only work in conjunction with a direct purchase of troubled debt by the Treasury.

The Republicans’ idea obviously came out without the customary media polish, but it’s not really a vague concept. It has some real mileage in terms of asset and risk management. It allows flexibility, as opposed to a straight buyout. If the hybrid bailout/insurance idea reduces cost to revenue in any way, it’s not that bad an option. The real tripwire for the bailout is actual cost. Blank cheques are always expensive, and there’s not too many pointers about future revenue requirements. Both candidates said during the first debate that they wanted to get spending under control. That does have to happen, and the bailout, in whatever form it takes, does have to work.