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The GOP's alternative plan: private sector involvement

Debate is still raging on the hill over what to do with the bailout, though everyone says a package will get passed by early next week. While all looked hopeless on Monday, capitalism is putting up a fight against the socialist leaning Bush White House and Congressional Democrats.

The Treasury's plan basically asked for $700 billion and a lot of trust. The Democrats want to add Congressional oversight, cut CEO pay, and firmly establish redistribution policy in American law.

The GOP has finally put forth their own plan, and though it's still a bailout, this compromise gets the private sector involved in an operations and management role. It is estimated to be between $100 billion and $500 billion (significantly less than the Treasury/Democratic solution):

According to Republican Rep. John Campbell, a member of the GOP negotiating team, the Republican plan would require a new government entity, modeled after the Federal Deposit Insurance Corp., that charges premiums to insure risky mortgages.

The more toxic the mortgage, the higher the premium, Campbell said, but the mortgages would then have government-backed guarantees against future losses, which in theory would draw private investors to purchase it from the institutions and get new liquidity into the mortgage-backed securities market. This would be paid by the mortgage industry, not taxpayer dollars, according to the GOP vision.

Any institution that participates would have to suspend dividend payments temporarily to free up funds to pay the insurance premiums, which Campbell acknowledged could be steep. If necessary, institutions could borrow from the Federal Reserve to pay the premiums.

The Republican alternative would also provide new capital by allowing recent operating losses to be carried back for up to 10 years and to provide immediate, giant tax refunds to all the institutions. However, Republicans acknowledge that a capital gains tax cut proposal has been dropped due to cost factors and Democratic push back.

If a private/public sector solution is at hand, Republicans will get a mechanism they prefer and the political cover they need to vote for the finished package.

Anthony Randazzo is Director of Economic Research


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