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US government needs to mirror RTC in bailout plans

Following the defeat of the White House’s $700bn financial rescue package, economist and LECG director, Alan Madian, has argued the proposed legislation should only buy mortgage securities backed by real assets and provide for direct infusions of capital.

The US government should mirror more closely the structures of the RTC in its attempt to provide a $700 billion rescue package for the financial industry, economist Alan Madian has told PERE.

Following the shocking defeat of the legislation in the House of Representatives yesterday, Madian – a director at consulting firm LECG – said the US Treasury and Federal Reserve should develop a scheme whereby the government only bought securities backed directly by the real estate asset, and also provided capital infusions to institutions that needed support.

The law that went before Congress yesterday would have given the government wide authority to buy the mortgages, securities and other financial assets that are currently clogging up the balance sheets of institutions. Opponents, however, argued there were too few protections for taxpayers, with one person familiar with the situation saying thousands of voters telephoned Congress in the run-up to the vote to voice their objections.

Madian said the RTC, created to resolve the savings and loans crisis of the late 1980s and early 1990s, was generally supported by the public because it took over the failing institutions, which had deposits backed by government guarantees, including its assets and liabilities. Pools of loans to firms such as Goldman Sachs' Whitehall Street funds, Colony Capital and JER Companies prompting the birth of the private equity real estate opportunity fund.

“The RTC was seen as the price that had to be paid because of the insurance on savings and was similar to what we’ve seen recently with Fannie Mae and Freddie Mac,” Madian, who has also advised the US Senate anti-trust sub-committee, added. “This package of measures doesn’t involve the public as directly and so we’ve seen vocal opposition and a very, very aroused public.”

Republicans in the House of Representatives voted roughly two-to-one against the bail-out, while the Democrats split three-to-two in favor. The legislation is expected to be brought back this week in a slightly amended form. “We don't intend to leave here without the job being done,'' Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told Bloomberg.

The defeat prompted the worst single-day decline in the S&P 500 since 1987 and the largest intraday fall on the Dow Jones Industrial Average.