If the Bailout Doesn't Pass . . .
$700 Billion Is Nothing Compared With the Cost of Inaction

By Joseph E. Robert
Friday, October 3, 2008; A23

What if, after the House vote today, Americans learn that 3,000 banks will fail? That's what happened during the last U.S. financial crisis -- and today's credit crisis is much greater than the thrift and banking debacle of the late 1980s and early '90s. Inaction has already caused enormous damage to our economy. If the House fails to act, the costs will make $700 billion pale in comparison.

The Treasury's proposed Troubled Assets Relief Program (TARP) has been mischaracterized as "overreaching socialism," a "bailout of Wall Street fat cats" and "penalizing all taxpayers for the actions of a few." Such descriptions serve only the narrow interests of the politicians and pundits who use them.

The Senate passed a larded version of TARP that includes necessary measures to purge "toxic" assets from the banking system and restore financial liquidity. Today the House must do its part. Our country's economic livelihood is in greater danger than many people realize. Consider the effects on:

· Working families. Lack of financing has already hurt existing-home sales, which are down 10 percent from a year earlier, and auto sales, which fell 30 percent last month. Manufacturing output is at its lowest level in seven years. New unemployment claims rose to nearly 500,000 last week -- the highest since the aftermath of Sept. 11, 2001.

· Those nearing retirement. Monday's 777-point drop in the Dow -- caused directly by the House's rejection of an earlier version of TARP -- wiped out a trillion dollars' worth of market value, affecting pension funds, 401(k) plans and IRAs.

· American businesses. It's not just failing businesses but also healthy businesses that can't access capital. Manufacturers, farmers and small-business owners who rely on short-term financing to move inventories, invest in new equipment or meet payrolls cannot get loans. The problem will come to a head as businesses try to roll over hundreds of billions of dollars in loans later this year. Layoffs and bankruptcies will follow -- driving down tax receipts and adding to a mushrooming deficit.

The problem doesn't stop here. In today's global financial system, capital can cross borders in seconds looking for a safe haven. Financing capital is disappearing from businesses and banks in Europe and emerging markets.

· Investors. The deepening crisis is breeding fear and mistrust. Some established counterparties no longer deal with each other. There is a flight to safety, pricing Treasury securities so high that they offer no real return. These trends will get worse.

If nothing else, surely we all can agree that TARP isn't perfect. It may not even be enough. But passing it now will help us do three vital things to revive our economy.

First, restore liquidity. The FDIC will raise deposit insurance limits from $100,000 to $250,000. This defensive move may give banks protection from cash withdrawals by fearful depositors. Wisely, the Federal Reserve has already increased liquidity through expanded credit facilities for financial institutions.

Second, suspend fair-value accounting, or mark-to-market requirements for long-term securities, which artificially lowers the amount of capital that banks have to lend. During market extremes, fair-value accounting -- instituted after the S&L crisis -- actually exacerbates problems it was intended to correct. Something is terribly wrong when more than 99 percent of commercial property loans are in good standing yet almost no bank is willing or able to refinance them. The values of those loans, if they are sold in today's market, would be but a fraction of their face values.

Third, recapitalize the banking system. This must occur before banks begin to lend again. Banks need help removing troubled assets from their balance sheets before they launch an ill-fated distress sale to clean up their books. The private sector will have to participate in restoring these assets to health. The securities in question are far more numerous, complex and harder to price than the packaged mortgages that the Resolution Trust Corp. helped failing S&Ls deal with.

Our nation has effectively suffered a fiscal heart attack. As with any patient, emergency technicians must restart the heart quickly before vital organs are irreversibly damaged. If enough time passes, it won't matter what measures are taken -- and our leaders have already waited too long. Everyone involved in this crisis -- financial executives, lobbyists, legislators, regulators and irresponsible borrowers -- bears some blame. But it is citizens who will suffer the effects of inaction.

Legislators should weigh the $700 billion initial outlay against the far greater cost of doing nothing. If handled well, TARP should recover every penny. The House should seize its opportunity to defend America's threatened financial system. Approve this proposal, even though some constituents do not grasp the implications of inaction. The consequences of failure are too chilling to contemplate.

The writer founded J.E. Robert Cos., a global private equity real estate investment company. During the savings-and-loan crisis, the firm was the largest independent contractor acquiring, managing and selling assets held by the Resolution Trust Corp.