Watchdogging the Bailout
Get Involved!
Support our efforts to hold Congress and the Administration accountable for how it spends our money on the economic bailout and insist that more of it be used to help local communities rather than investment banks and insurance companies.
As part of our campaign to watchdog the economic bailout, we will be:
- Urging Congress to step up its efforts to monitor the bailout spending to ensure that it is having the desired effect on the economy and not going into multi-million dollar compensation packages for executives who helped create this mess.
- Watching for any contracting abuses and conflict of interest abuses like those that occurred during the reconstruction of Iraq and the disaster relief efforts in New Orleans after Hurricane Katrina
- Pushing for more direct assistance to families and communities facing foreclosures instead of pouring money into Wall Street
Send a message to Congress asking for more transparency and accountability.
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Watchdogging the Bailout
Background | How We Got Here | Impact on States and Municipalities
Background
On October 3, President Bush signed The Emergency Economic Stabilization Act of 2008 into law, authorizing the United States Secretary of the Treasury to spend up to $700 billion in an effort to restore confidence in the credit markets after the subprime mortgage crisis and the collapse of the housing market.
Several weeks before Congress passed the bailout legislation, a group of 100 economists from universities all over the world wrote a letter with their concerns about the plan:
1) Fairness. The plan is a subsidy to investors at taxpayers’ expense.
2) Ambiguity. Neither the mission of the new agency nor its oversight is clear.
3) Long-term effects. If the plan is enacted, its effects will be with us for a generation.
So far, about $350 billion tax dollars have been spent or committed to private institutions under the government’s bailout plan. Virtually none of the money has been earmarked for families facing foreclosure. The Government Accountability Office has reported that the program lacks ways to ensure that banks are properly using the money or that they are complying with limits on executive compensation. It seems their concerns were well-founded.
The Bush Administration and Congress failed to oversee government contracting in Iraq and in New Orleans after Hurricane Katrina. Congress needs to get more engaged in the process of spending our tax dollars on contractors and recovery efforts than it has been in the past – and it needs to make sure the bailout is helping ordinary Americans who are being hurt by the recession.
The original problem that caused this economic collapse – housing foreclosures – is getting worse, not better. Foreclosures on all types of mortgages are still occurring at an annual rate of 2.3 million. These losses, in turn, are draining local resources for services from police and fire protection to education. Unless the government focuses more attention on these communities, many of the Americans who are feeling the pain from the recession will not see any relief from the historic amounts the government is spending.
Common Cause is launching a nationwide campaign to make sure the economic bailout has better oversight than past government plans have had – and that the bailout is being used to help real communities all over the country that are being devastated by this economic crisis.
How We Got Here
Subprime Loans
The current economic crisis originated in the collapse of the housing market and the widespread foreclosures on mortgages to people who could not afford them. About 100,000 homes went into foreclosure in August 2008, and analysts are still predicting another wave of foreclosures. There are more than 2 million vacant homes on the market – the most ever recorded. Estimates of total foreclosures run as high as 3 million for 2007 and 2008.
As the housing market took off several years ago, so did the more questionable lending practices of financial services companies.
Many subprime loans to people with poor or no credit were designed to “reset” after an introductory period, sometimes doubling the borrower’s monthly payments. This, combined with the decrease in value of the borrower’s home, has driven many families into default and foreclosure. Although consumer groups have protested the sale and resale of these loans for years, the financial industry has used its political power, measured in the millions of dollars spent in campaign contributions and lobbying, to hold government regulators at bay.
Many investment banks and other financial institutions had acquired huge portfolios of securities backed by subprime mortgages because they were so lucrative. So when the housing market collapsed and mortgages went into default, these companies took a direct hit.
Troubled Assets Relief Program
As the fallout from the housing collapse spread through the market, it became clear the government had to step in with significant, even historic, sums of money to prevent the entire economy from collapsing. This took the form of The Emergency Economic Stabilization Act of 2008, which authorizes the United States Secretary of the Treasury to spend up to $700 billion in an effort to restore confidence in the credit markets through the creation of the Troubled Assets Relief Program (TARP).
TARP was originally intended as a way for the United States government to purchase bad assets (subprime mortgages) from struggling financial institutions. The goal was to give banks some breathing room to increase investor confidence in the institutions and convince banks to begin lending again, both to each other and to consumers and businesses.
Instead, the Treasury Department opted to inject capital directly into banks rather than purchase their worthless assets. So far, the plan has done little to loosen up lending. Banks are hording the money or using it for other purposes. In fact, the Government Accountability Office says the program lacks oversight and proper controls, making it impossible for the government to control how recipients use the money.
The bailout law approved in October gave the Treasury Department immediate access to $350 billion of the funding, but it requires its secretary to submit a plan to access the remaining $350 billion.
Impact on States and Municipalities
Ohio has been among the hardest-hit states in the mortgage meltdown. According to Jim Rokakis, the county treasurer of Cuyahoga County, which includes Cleveland and surrounding suburbs, roughly 30 percent of subprime mortgages in their communities were either delinquent or in foreclosure. In early 2007, Rokakis delivered the following testimony to the Committee on Oversight and Government Reform in the U.S. House of Representatives:
For at least the past seven years urban leaders in cities like Cleveland, Dayton, Toledo, Cincinnati, and other older, more mature cities throughout America have been decrying the explosion in foreclosure filings in their communities. They have complained of abandonment, of property flipping and of a lending industry that was behaving so irresponsibly that we were convinced that someday that a segment of that industry—the subprime sector—would implode. … We pleaded for help at the State level Mr. Chairman but were no match for the lobbying team assembled by the mortgage brokers, the mortgage bankers and financial services industry … (emphasis added)
As a result of the high rate of foreclosures around Cleveland, some communities have reportedly cut the ranks of police officers and firefighters and eliminated services like free plowing for senior citizens with snow-covered driveways.
There is a ripple effect when homes go into foreclosure. Research shows that houses in foreclosure lower the property value of other homes in the neighborhood. Also, poor neighborhoods and African-American and Latino neighborhoods have seen the highest incidence of subprime loans and housing foreclosures. When municipalities see an extraordinary rate of foreclosures in their communities it begins to affect the overall tax base used to support the local police and fire departments. Education and other public services are hurt as well.
Unless the government’s economic bailout extends aid to families facing foreclosure and addresses the ability of states and municipalities reeling from the foreclosure crisis to provide basic services, communities across the country could see dramatic consequences on the local level as the housing crisis deepens.
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