GOP's Wall Street insurance idea fraught with problems
Figuring out the worth of troubled assets and establishing a structure that wouldn't leave taxpayers holding the bag would be hard to pull off.
WASHINGTON — House Republicans brought bargaining over the $700-billion rescue plan to a screeching halt Thursday, trumpeting an alternative that they said would avoid a huge taxpayer bill and prevent Washington from meddling in the economy.
Their idea: Instead of the government buying the troubled mortgage-backed securities at the center of the crisis, financial firms would get insurance against the assets' losing value -- paid for by Wall Street.
According to a one-page summary of the proposal issued by House Republican leader John A. Boehner of Ohio, Washington could extend such insurance to the trillions of dollars of mortgage-backed securities in circulation.
But government officials and outside experts said the idea would be every bit as hard to pull off as the administration's proposed buying binge -- without sparing taxpayers.
"This is deceptively simple but probably unworkable," said Brookings Institution economist Robert E. Litan. "It's like trying to sell homeowners coverage to someone whose house is already on fire."
Said Assistant Treasury Secretary Michele Davis, "We looked at the insurance option and we concluded that purchasing mortgage-backed assets is more effective."
By late Friday, the proposal's chief author appeared to be in retreat. Rep. Eric Cantor (R-Va.) acknowledged that the insurance scheme could not cover the most troubled securities. "What . . . we should do is look at those assets out there that are insurable," Cantor told CNN, adding that "there are plenty of these assets that are so beyond assessing their risk that we're going to have to purchase" them.
Nonetheless, House Republicans continued to press Friday for insurance to be included in any rescue plan. Congressional Democrats and administration officials said they were open to the idea.
But the GOP lawmakers have coupled the insurance approach with a demand that the size of the rescue be cut, and that has met fierce opposition.
The insurance approach is fraught with problems. First, it would be necessary to figure out how much the many different kinds of troubled assets are now worth and what value the government would guarantee.
In the current economic environment, nobody wants to buy the kind of mortgage-backed securities that a government insurance program would cover, so there's no way to determine their worth.
