Jon Stewart offered much better plan than Fed, Bush or Obama

Jon Stewart repeatedly said bailout money should not go directly to banks but to the people to pay off their bank debt. I recall Jon also saying the government could pay off all subprime mortgages for far less money than it was handing banks.

For Main Street, Stewart’s plan was far superior. Banks loans would be repaid, but taxpayers would receive the windfall. Instead, government gave banks the money directly — and no relief to citizens whose house values had plunged — because Wall Street is far more powerful in Washington than Main Street.

One reason Stewart’s plan was much smarter is that the problem was far worse than borrowers' inability to pay off mortgage debt that in many cases now exceeded their homes' value. The real problem was that gamblers investors had placed massive side bets on those mortgages, so that $10 or $100 could be bet for every dollar in actual mortgage debt:

The mortgage investment that is the focus of the S.E.C.’s civil lawsuit against Goldman, Abacus 2007-AC1, didn’t contain any actual mortgage bonds. Rather, it was made up of credit default swaps that “referenced” such bonds. Thus the investors weren’t truly “investing” — they were gambling on the success or failure of the bonds that actually did own mortgages. Some parties bet that the mortgage bonds would pay off; others (notably the hedge fund manager John Paulson) bet that they would fail. But no actual bonds — and no actual mortgages — were created or owned by the parties involved….

While such investments added nothing of value to the mortgage industry, they weren’t harmless. They were one reason the housing bust turned out to be more destructive than anyone predicted. Initially, remember, the Federal Reserve chairman, Ben Bernanke, and others insisted that the damage would be confined largely to subprime loans, which made up only a small part of the mortgage market. But credit default swaps greatly multiplied the subprime bet. In some cases, a single mortgage bond was referenced in dozens of synthetic securities. The net effect: investments like Abacus raised society’s risk for no productive gain….

Congress should take up the question of whether parties with no stake in the underlying instrument should be allowed to buy or sell credit default swaps. If it doesn’t ban the practice, it should at least mandate that regulators set stiff capital requirements on swaps for such parties so that they will not overleverage themselves again to society’s detriment.

By paying off the underlying mortgages, Stewart’s plan would have helped Main Street while eliminating the need to make hundreds of billions in credit default swap payments… the very same credit default swap payments that bankrupted AIG and others, necessitating massive taxpayer bailouts.

No wonder investors who stood to earn billions from credit default swap payments — including Goldman Sachs, which gave Obama nearly $1 million during his presidential campaign and John Paulson, who raised money for both Democrats and Republicans — contributed so heavily in 2008. Their political “generosity” ensured they could collect on their billions in anticipated gambling profits that would have vanished had the government acted in the people’s interest.

Posted by James on Tuesday, April 20, 2010