Financial Reform Watch

Another Link Between Recovery Bill and Financial Sector Regulation

As President-elect Obama made the case yesterday for an expensive economic recovery plan, Democrats on Capitol Hill announced a renewed effort to empower bankruptcy judges to restructure home mortgages. This change to bankruptcy law could be attached to the economic recovery package as it moves through Congress.

The Obama announcement yesterday was designed to state the need for a large package of tax cuts and investment in order to halt the momentum of the recession and to save and create jobs. He offered few specifics. Because he has yet to specify how he plans to spend the funds, more and more advocates for different programs are coming forward to seek inclusion in the plan. In just the last week, a group of governors initiated a push for an education block grant and other education advocates stepped-up a push for Head Start funding for early childhood education. This kind of pressure will continue to build until the President-elect outlines his own plans. The only part of the plan on which the Obama team has committed itself is $300 billion in tax cuts and incentives. The overall size of the program—widely rumored to be $ 775 billion—has yet to be confirmed.

As we indicated in Financial Reform Watch on Monday, there are several connections from a policy and political standpoint between the economic recovery plan in formation and the financial industry rescue program already underway. However, the connection between the two issues became even more concrete yesterday with the announcement by Senators Dick Durbin (D-IL) and Chuck Schumer (D-NY) of their intention to include the bankruptcy law changes relating to mortgages—referred to as "cramdown"— in the economic recovery bill (S.1) that Congress will take up in the next few weeks.

Durbin and Schumer said they had obtained the support of Citibank for the cramdown provision provided it relates only to mortgages initiated prior to enactment of the legislation. Given how strongly the banking industry has opposed the concept of bankruptcy judges altering the terms of primary mortgages over the objections of mortgage issuers, the support of a bank as large as Citibank is an important breakthrough for Senators and House Members—largely Democrats—who have been pushing for it. It remains to be seen whether other banks or groups representing them will swing in behind this provision. But with the foreclosure problem continuing to build and with the economy continuing to slide, there is a potential others in the industry will relent on the cramdown issue and acquiesce to the changes.

In other news this week, the Obama team has begun talking about some of the strings they might attach to the release of the second half of the funds from the $700 billion Troubled Asset Relief Program (TARP). According to reports we are seeing, the Obama team will seek to spell out authority for Treasury to assist in providing greater liquidity for lenders in the consumer loan, auto loan, and student loan arenas. There will also be a focus on trying to free-up the municipal credit markets and small business lending. While the mechanisms for doing this have not been spelled out, one potential is that further capital purchase program assistance to banks might be based on commitments that they lend in certain areas. There may even be an opportunity to renegotiate some assistance agreements already in place to the extent funds have not yet been released to the institutions.

House Financial Services Committee Chairman Barney Frank (D-MA) released today his legislative proposal for the release of the TARP’s remaining $350 billion. His legislation would make extensive changes and clarifications to the TARP program.

The details can be downloaded here:

Summary of TARP Reform and Accountability Act (PDF)

HR 384 TARP Reform and Accountability Act (Chairman Barney Frank) (PDF) 

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