Foreclosures are key element missing in plan

John W. Schoen Senior producer • Profile • E-mail

Hard as it is to believe, even a $700 billion bailout may not be enough to dig the economy and financial markets out of the hole they're in.

By committing such a staggering sum to end the widening financial crisis, Congress and the White House are hoping to deliver a swift knockout punch to the fear gripping the global markets and economy. But to win bipartisan support, key provisions have been watered down or left vague — including any efforts to stop the wave of foreclosures at the heart of the meltdown.

Much of the debate — and opposition to the plan — centered on Treasury Secretary Henry Paulson’s original request for sweeping powers to spend hundreds of billions of taxpayer dollars on mortgage-backed securities that are unable to attract other buyers.

Opponents of the Treasury's original three-page proposal who balked at the lack of oversight have won provisions that place controls over the purchase process.  The plan involves creation of a Financial Stability Oversight Board that includes Federal Reserve Chairman Ben Bernanke, which will report regularly to a newly created congressional committee. Details of individual transactions involving taxpayer dollars will be disclosed.

The hope is that after the government jump-starts the market with massive purchases of the riskiest paper, private investors will follow, unfreezing trillions of dollars in capital that has fled to safety until the full scope of the crisis can be determined.

Interactive Winners and losers A look at who is benefiting and who is suffering from the economic mess.

But it's not clear exactly how the mechanics of the plan will work; some of those details are still being finalized. Too much oversight could slow the government response — market panics don’t wait for government hearings. Treasury officials on a conference call with reporters Sunday deflected questions on “implementation.”

As the government begins to buy distressed investments, the hope is that a market price will allow banks and other financial firms to get a better idea of the value of bad paper on their books. But if the new “market” price is lower than the value already assigned these assets, another round of bank losses could follow.

So the bailout bill includes a safety valve. The Securities and Exchange Commission has the authority to suspend so-called “mark to market” accounting rules, so banks would not necessarily have to recognize those losses immediately.

Other provisions — left over from the yearlong debate over this summer’s housing relief bill — were also revived in the current plan. With taxpayer money in harm's way, Congress succeeded in putting a cap on pay packages for executives at companies that take advantage of the bailout.

That has plenty of loopholes. Existing contracts on pay packages can’t be changed, and executives in charge of financial companies that get help from the bailout can only have their pay docked if they get fired or the company fails.

But the biggest unknown is whether the government’s pledge to help homeowners at risk of losing their homes will be any more effective than past efforts to slow the pace of defaults and foreclosures. Until that tide begins to turn, the housing market will continue to be bloated with big inventories of bank-owned houses put back on the market at fire-sale prices. That puts downward pressure on all home prices. And until home prices stabilize, it’s impossible to assign a value to the troubled investments at the heart of Wall Street's problems.

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