Bush's mortgage bailout just might work

By Jon Markman

With his stunning decision last week to let a federal housing agency guarantee mortgages of distressed homeowners, President Bush appears to have launched a "surge" in the financial markets to match the Pentagon's efforts in Iraq.

His plan seems straightforward: First, use winks and nods to convince his top Federal Reserve appointee, Ben Bernanke, that it would be in the best interest of both men to slash interest-rate targets by as much as a percentage point, and to do it quickly so the move has time to work its magic before the next election.

Second, use every lever available in the executive branch to provide a direct, emphatic bailout to overstretched mortgage holders at risk of foreclosure.

And third, dump as much of the financial burden for paying for the rescue of voters, aka homeowners, on the nation's banks, rather than on taxpayers.

If the market comes to believe his plan will succeed -- and the plan just might -- you can expect a rally in the shares of financial-services providers and home builders that will stun even the bulls, with big-cap banks such as Wells Fargo (WFC, news, msgs)and SunTrust Banks (STI, news, msgs)rising as much as 25% over the next 12 months and some beaten-down home builders doubling in value.

Bush bailout No. 2

Bush's surge solution for homeowners would, ironically, take a page from his father's rescue of Latin American governments and bankers in 1989 with a set of financial instruments that came to be known as Brady bonds. In that case, U.S. banks had lent billions of dollars to Latin American companies for use in economy building without obtaining sufficient collateral.

After thousands of loans went into default, it became clear that the money had been siphoned off by kleptocrats and crooks, and there was therefore no cash flow available for repayments. When U.S. banks clamored to be made whole, Latin American governments took over their citizens' obligations but did not have the ability to make payments, either.

Richard Bove, a banking analyst at brokerage Punk Ziegel, points out that the first Bush administration then had two choices: support U.S. banks and demand that the countries tax their people to pay back the loans, or blame the U.S. banks for making idiotic loans in the first place, force them to forgive the debts and let the crooks keep their booty.

President George H.W. Bush chose the latter in the interest of hemispheric amity and stability, and some creative geniuses in a Treasury Department headed by former Wall Street banker Nicholas Brady figured out a way for the governments of Mexico, Argentina and Brazil to convert the bad loans into dollar-denominated bonds that could be sold elsewhere. In effect, Bush 41 whisked bad credits off balance sheets south of the border with a stroke of a pen.

• Video: The housing market's outlook

Now Bush 43 faces the same dilemma, only this time the bad loans are right here at home. His choices: He can thumb his nose at lenders who made stupid loans, castigate brainless homeowners who took out mortgages they could not repay, jail fraudster mortgage brokers who exploited a loosey-goosey system to generate exorbitant fees -- and stand smugly by as families in Republican strongholds across the West and South lose their homes. Or he could follow his dad's Brady bonds solution and basically forgive and forget by launching a mortgage bailout of unprecedented scope.

Continued: A previous bailout

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