Politics Threaten Federal Rescue Plan

The outrage on the part of Congress– not to mention the constituents – is understandable, given the size of the bill taxpayers are being asked to foot, Seth Weinstein, principal of Stamford, CT-based Hannah Real Estate Investors, tells GlobeSt.com.

Furthermore, the proposed plan doesn't address the fundamental problem of accountability or of a financial system that has gotten seriously out of whack, he says. "Today, financial engineers that package and repackage derivative products stand to earn 10 times as much as the original developers or manufacturers of these products," he says, citing what he says is just one example.

Unfortunately – or not, depending on one's view – it appears that the sizable detractors to the plan proposed by Secretary of Treasury Henry Paulson last week may ultimately get their wish, either by blocking it outright or by weighing it with unpalatable requirements. Some of the suggested additions to the plan are counter-intuitive, David Webb, senior managing director – principal, with Cassidy & Pinkard Colliers in Washington DC, tells GlobeSt.com. Capping CEOs pay of companies participating in the plan is an example. "There is no point of having a program that discourages lenders from participating." Other proposals, though, do make sense – such as requiring the firms to share their profits when the economy and their fortunes do rebound. "If the government overpays for these assets that are now under water, it makes sense there should be some kind of compensation."

While politics is a backdrop to the negotiations, many Hill watchers attribute the struggle over the plan more to a sense of accountability by Congress. "This is not a partisan thing," Elizabeth Holtzman, a former Democrat member of Congress, former New York City comptroller, and now co-chair of the government relations practice group at the New York City-based law firm Herrick, tells GlobeSt.com.

"There will be a new Treasury secretary [after the inauguration], and many Democrats think it'll be a Democrat. Requiring transparency, requiring the possibility of judicial review, and requiring appropriate checks on the Secretary of the Treasury is not a partisan move on the part of Democrats. When you talk about the expenditure and management of $700 billion, nobody should get a blank check, regardless of what party they belong to." There are some Republicans who feel there ought to be appropriate checks on the Secretary of the Treasury as well, she notes. "The bottom line is that nobody should be that unaccountable or have that kind of absolute power. The idea of checks and balances is that two heads are better than one."

Even if the plan does go forward, it is unclear whether it will succeed or not, "Even a perfectly constructed plan can fail if it is not well executed," Don Henry, chief real estate officer of the Atlanta-based Wells Real Estate Funds, tells GlobeSt.com. "And unfortunately, we don't have that many details about how this would work just yet."

One factor that will likely push the rescue toward the finish line is that the government has used just about all of the economic tools at its disposal – and still financial calamity is a distinct possibility. For instance, although the Federal Reserve Bank declined to cut the federal funds rate last week, there have been published reports of rumors that it may reverse itself.

But at this point, lowering rates is unlikely to help, Hugh Finnegan, a partner with Sullivan & Worcester LLP, tells GlobeSt.com. "The issue now is two-fold. One, lenders need to maintain their own capital in order to shore up their balance sheet. This means that they are not lending money, including to each other. Until the inter-bank market stabilizes, there will not be a lot of activity. Secondly, right now, no one knows what properties are worth. As a result, banks do not want to lend unless there is a huge amount of equity in the deal. The residential market needs to bottom-out before that will happen."