Taxpayers' Role In Bailout Examined

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The Bush administration's proposed bailout is estimated at $700 billion. The actual cost may be a lot less or even more. On Capitol Hill, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke tried to reassure skeptics that taxpayers will be protected.


Much of the talk and confrontation at today's hearing focused on how best to protect taxpayers. NPR's John Ydstie has a closer examination of that question.

JOHN YDSTIE: Both Democrats and Republicans challenged Secretary Paulson and Chairman Bernanke on how to best fashion this rescue program to protect taxpayers or even give them a chance to profit. First of all, they question the assertion from Paulson and Bernanke that acting quickly would benefit taxpayers. We called two eminent economists to help us analyze those arguments, and in this issue of urgency, they disagree. Robert Litan of the Brookings Institution says that by warning the Congress last Thursday that the economy could collapse if something weren't done within days, Paulson and Bernanke made it imperative that Congress act by the end of the week. But Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School, disagrees.

YDSTIE: I think, actually, when you say that - does it have to be done by this Friday? I don't think so, as long as there's progress going forward. The markets are still volatile, but I detect not the same panicky type of reaction that we had in the middle of last week.

YDSTIE: Siegel says taking time to get things right will help taxpayers. Litan and Siegel also disagree on the prices the government should pay for the distressed mortgage securities it plans to buy from financial firms. Siegel says the government should pay the lowest possible price. He says as the housing sector recovers, these securities will increase in value, and taxpayers will likely profit as the Treasury sells them back into the market. Litan disagrees. He takes the position articulated by Fed Chairman Bernanke in today's hearing, that the price paid should be above the current distressed price and closer to the real long-term value of the mortgage-based securities.

YDSTIE: There are conflicting objectives here. If Treasury buys the stuff at very low prices, then it's true they may lose less going forward. On the other hand, if they buy it at a very low price, they could accentuate the whole financial problem to begin with, and we could end up many more institutions in trouble than would otherwise occur. And that would be bad for the economy. And that's also bad for Treasury.

YDSTIE: And bad for taxpayers, ultimately.

YDSTIE: Yeah, certainly. Taxpayers are hurt if the economy goes south.

YDSTIE: Both Democrats and Republicans argued that another way to protect taxpayers would be to force companies who sell troubled assets to the Treasury to give warrants - basically, stock options - to the government. That way, if the companies thrive, taxpayers could benefit as shareholders. Professor Siegel thinks that a good idea.

YDSTIE: Especially if they start buying these distressed assets above the market price, then I would be more motivated by saying, all right, let's take now a position that we're giving a little more than what they could get in the market. Let's take a position, if they recover, to actually get some gain.

YDSTIE: But Litan says that negotiating over stock options could get complicated. He worries that could undermine the main goal, which is to get credit flowing again. Finally, senators differed with Bernanke and Paulson over whether the government should limit the compensation of executives and firms who participate in the program. Professor Siegel says no. It will take very talented people to nurse these companies back to health, he says. And limiting compensation could mean they won't stick around. Litan thinks there's a potential compromise.

YDSTIE: I think the way to solve this problem is to have Congress give some very general language or some very broad authority to Treasury that it can exercise, if it wants to, to apply limits on executive compensation.

YDSTIE: That would allow Treasury to limit compensation for firms where executives have been especially irresponsible. Finally, Litan and Siegel disagree on the ultimate outcome for taxpayers. Litan says this crisis will almost certainly cost taxpayers money, though nowhere near the $700 billion the Treasury is asking for. Siegel says he thinks in the end, taxpayers could come out ahead. John Ydstie, NPR News, Washington.

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