Insurance idea a problematic one
House Republicans brought bargaining over the $700-billion rescue plan to a screeching halt Thursday, trumpeting an alternative that they said would avoid a huge taxpayer bill and prevent Washington from meddling in the economy.
Their idea: Instead of the government buying the troubled mortgage-backed securities at the center of the crisis, financial firms would get insurance against the assets’ losing value -- paid for by Wall Street.
According to a one-page summary of the proposal issued by House Republican leader John A. Boehner of Ohio, Washington could extend such insurance to the trillions of dollars of mortgage-backed securities in circulation.
But government officials and outside experts said the idea would be every bit as hard to pull off as the administration’s proposed buying binge -- without sparing taxpayers.
“This is deceptively simple but probably unworkable,” said Brookings Institution economist Robert E. Litan. “It’s like trying to sell homeowners coverage to someone whose house is already on fire.”
Said Assistant Treasury Secretary Michele Davis, “We looked at the insurance option and we concluded that purchasing mortgage-backed assets is more effective.”
By late Friday, the proposal’s chief author appeared to be in retreat. Rep. Eric Cantor (R-Va.) acknowledged that the insurance scheme could not cover the most troubled securities. “What . . . we should do is look at those assets out there that are insurable,” Cantor told CNN, adding that “there are plenty of these assets that are so beyond assessing their risk that we’re going to have to purchase” them.
Nonetheless, House Republicans continued to press Friday for insurance to be included in any rescue plan. Congressional Democrats and administration officials said they were open to the idea.
But the GOP lawmakers have coupled the insurance approach with a demand that the size of the rescue be cut, and that has met fierce opposition.
The insurance approach is fraught with problems. First, it would be necessary to figure out how much the many different kinds of troubled assets are now worth and what value the government would guarantee.
In the current economic environment, nobody wants to buy the kind of mortgage-backed securities that a government insurance program would cover, so there’s no way to determine their worth.
“If you don’t know what their value is, you can’t decide what value you’re going to insure them for,” Litan said.
Then there’s the issue of when the insurance would kick in. If it did so when owners sold securities for less than their insured value, that would create an immense cost for taxpayers. Because the decision to trigger the insurance would be in the hands of the securities’ holders, Washington could face a flood of claims at any time and could be forced into expensive emergency borrowing.
Pricing the insurance could also be tricky. If the price is high enough that Washington could pay all claims out of premiums, analysts said, it’s likely the firms that own troubled assets wouldn’t buy coverage. If the price was low enough to draw purchasers, the pool of money backing up the insurance could be consumed by the first wave of claims, and further claims would end up on taxpayers’ shoulders.
In weighing which option would be more costly for taxpayers, one official acquainted with the Treasury Department’s thinking put it this way: “When you own something, you own both the upside and the downside risk.” In other words, you can make money if the asset rises in value, but you can lose money if the value falls.
On the other hand, when you insure something, “you only own the downside.”
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