Idea men

Money | Conservative leaders look to not-so-free market solutions to the financial crisis
by Emily Belz
Posted 9/19/08, 12:00 am

WASHINGTON, D.C.-Neel Kashkari, assistant secretary for international economics and development at the U.S. Treasury, cleared his throat as he tried to speak Friday in Washington, D.C.

"When I don't get much sleep, it's hard to speak in the morning," he said.

He is one of many losing sleep at the Treasury, as the federal government puts together some of the biggest bailouts in its history. Thursday night Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Christopher Cox worked on a plan unveiled Friday for the federal government to finance the removal of illiquid assets, a plan Paulson said could cost taxpayers hundreds of billions of dollars.

"The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars," Paulson said in a briefing Friday morning. "I am convinced that this bold approach will cost American families far less than the alternative-a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion."

Later at the White House, President Bush, who called the action "a pivotal moment for America's economy," agreed with his Treasury secretary, saying, "The risk of not acting would be far higher."

While Paulson and the president talked about saving financial institutions with federal dollars on one side of D.C., Kashkari spoke on the other side of the city about a recently announced idea to save the mortgage market, also with some federal help.

"The federal government might end up being the only lender out there," said Rep. Scott Garrett (R-N.J) at the meeting, jokingly.

The idea: covered bonds.

Covered bonds are a tool used mainly in Europe to help finance mortgages and would be an alternative to Fannie Mae and Freddie Mac in the United States. Broadly speaking, banks provide bonds to investors, backed by mortgages, providing banks additional cash. Meanwhile, investors get a secure return on their investment for many years. A pool of assets back the bonds even in the case of a bank failure, giving the bonds a high rating.

American investors haven't shown much interest in the idea until recently. Kashkari said major U.S. banks like Bank of America could issue bonds within months.

"There's a need for more mortgage finance," Kashkari said. However, he acknowledged, "This is a tough environment to launch a new financial product."

"We want to create a diversification of funding," said Tim Skeet, managing director of Merrill Lynch's covered bond practice. Skeet worked with covered bonds in the European market, where they are more of an institution. "This particular instrument has well withstood the pressures of the market."

But the ironic part about the morning was that free-market Republicans were pushing the idea of government intervention in the market. Garrett, a Republican, has put forward legislation to provide government regulation for the bonds, with the possibility of government funding if the banks fail. Kashkari and Paulson, also behind the plan involving federal regulation, are both Republicans, and are appointees of President Bush.

"It's hard being a conservative and not just saying, 'Let the free market prevail,'" Garrett said.

The Associated Press contributed to this report.

Emily Belz

Emily is a senior reporter for WORLD Magazine based in New York City. Follow Emily on Twitter @emlybelz.

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