Response from Senator Isakson

My comments are indicated by brackets in the body of the letter and footnoted at the bottom so as not to break the flow of Sen. Isakson's letter.

Thank you for your letter regarding the economy, the financial markets and the proposal from the Treasury Secretary to the Congress.

We are in difficult financial times, and I am committed to protecting the savings and jobs of the people of Georgia by making sound decisions on both immediate actions as well as long-term actions.

First, our economic stress is rooted in the decline of the housing market. The cause of the decline was the funding of marginal credit mortgages (subprime) through the creation of mortgage-backed securities that were sold around the world. As the default and foreclosure rate on these mortgages increased, the value of the securities declined. As the values declined, the balance sheet of the financial institutions that bought them deteriorated. The market for these securities declined and ultimately evaporated, thus causing a liquidity problem for the financial institutions and a credit crisis for American consumers and small businesses.

In the immediate term, we must address the credit and liquidity crisis. In the long term, we must put in place the oversight and safeguards to ensure the transparency and accountability necessary to prevent this from happening again. The Treasury has proposed using up to $700 billion dollars to purchase, at a discount, these mortgage-backed securities. This would provide liquidity to the financial institutions and improve their balance sheets. The important question is this: "Is the taxpayer of Georgia protected?" If the Treasury properly discounts the securities to, say, 50 or 60 cents on the dollar, and holds the securities to maturity there should be little or no cost to the Treasury.[1] More importantly, investors will return to the market and will compete with the Treasury to by [sic] these discounted securities and the market will be reestablished.[2] I am working to ensure the safeguards necessary for maximum security for the taxpayer.

In the long term, we must bring transparency and accountability to Wall Street. While I am not a big government regulator, if the investment bankers on Wall Street were held to the same standards of transparency and accountability as our national banking system, this would not have happened. The security rating agencies such as Moody's and Standard and Poor also share some of the blame for the way they rated the subprime mortgage-backed securities, and they should be held accountable. I will work hard for the right reform of Wall Street.

The term bailout has been used a lot in this debate. Not a dollar of the $700 billion will go to the brokers who created the securities. Instead, they will go to the investors who bought them[3], and then only after they take a significant discount or loss. Properly executed, the Secretary of the Treasury and the Chairman of the Federal Reserve believe this proposal will restore liquidity to the credit markets and return confidence in the financial system. [4]

I will continue to work for the best interest of our economy and the safety of the savings of the citizens of Georgia.

Thank you again for contacting me.

[1] This is incorrect. Secretary Paulson has already said that he wants to buy these securities at their "hold to maturity" value. That means that even if the Treasury pays 50c or 60c on the dollar it is still paying the theoretically maximum value that the security will ever be worth. Under a best case scenario taxpayers break even. Bad experience would mean that the taxpayer takes a bath.

[2] This claim is absurd in the extreme. I cannot believe he even said this. Why would these folks come forward to compete AFTER a competing buyer appears and drives prices up? Wouldn't those buyers if they existed have come forward now BEFORE a competing buyer appears when they can make whatever lowball offer they want? This is ridiculous on the face of it.

[3] This is not relevant. The banks all bought and sold these securities to each other. The investors who bought MBSs on deal A are the same companies who served as brokers on deal B. And why do I need to bail them out anyway? These investors employ Harvard mathematicians and MIT rocket scientists to figure out what price to pay for these things. If they made a mistake, too bad. As I've said before, boo freakin' hoo.

[4] Who really cares what Paulson and Bernanke think? Just a month ago they were telling us that FNM and FRE would not need to be taken over. A couple of months before they were telling us that the economy was sound and the subprime crisis was contained. Before that they were telling us there was no housing crisis at all. They are either fools or liars. Either way I am not inclined to trust them with $700 billion of taxpayer money.