Fortune
 by Nina Easton

Lawmakers: Subprime plan is no 'moral hazard'

At Thursday's House banking panel legislators on both sides of the aisle were actually in accord when it came to how to fix the subprime mess, reports Fortune's Nina Easton.

By Nina Easton

(Fortune) -- Barney Frank and Hank Paulson and Ben Bernanke want everyone to know this: They are not engaging in morally hazardous behavior.

"Nothing being contemplated rises to the level," said Frank, Democratic chairman of the House Financial Services Committee.

"I don't see a moral hazard," said Paulson, Republican secretary of the Treasury.

"I see no problem," said Bernanke, independent chairman of the Federal Reserve Board.

All this moralizing was coming not from a pulpit but from a room on Capitol Hill on Thursday morning, where everyone was straining to ward off concerns that the Federal Reserve's emergency relief for borrowers was not going to foster reckless behavior or inflation down the line.

Two days after the Fed's decision to cut the federal funds rate by a dramatic half point, the House banking panel had convened for a hearing on how the federal government should further confront the credit crunch sparked by out-of-control lending on subprime home loans -- a crisis that has already rocked Wall Street and now threatens to slow the economy.

As political pressure mounts on Washington to act, both parties are eager to demonstrate their plans to "do something" -- but not too much. No one wants to be accused of bailing out greedy lenders or irresponsible borrowers.

"Fiscal subsidies to lenders would be a moral hazard. I see no problem in helping people refinance," Bernanke said in answer to Barney Frank's determined questioning to prove that this threesome -- lawmaker, policy maker, central banker -- was not "encouraging misbehavior."

This was an important moment because it showed that beneath the predictable Democrat-Republican sparring over the subprime mortgage mess, there is a rarely seen (these days) coming-together of both parties toward a fairly muscular but limited federal response to complement the Fed's recent actions.

At the agency level, it consists of a P.R. campaign to get borrowers and lenders talking to each other, in the hopes they can reach refinancing deals rather than defaults. "Fifty percent of foreclosures occur without the borrower ever talking to the lender," said Paulson. "The most crucial message we can send to borrowers is to call your lender or mortgage counselor today."

The Administration is also broadening the role of the Federal Housing Administration (FHA), which insures mortgages for low- and middle-income borrowers. And the Democratic House acted quickly on the White House request for further reform.

Sure, there remains disagreement. The Democrats want Fannie Mae and Freddie Mac to ride to the rescue, while Republicans worry that these twin behemoths, operating under a perceived government seal of approval, could reduce market discipline.

More broadly, Frank opened his hearing extolling the benefits of "sensible regulation," while Paulson fretted that impulse going too far: "Today's solutions should not create tomorrow's problems."

But a promising give-and-take has already started. Paulson made it clear he was willing to accept a temporary increase in the dollar value of mortgages Freddie and Fannie can purchase -- letting them operate in the "jumbo loan" market to improve liquidity -- but only until that segment settles down. He also called on Congress to enact reform legislation aimed improving oversight of both agencies in the wake of accounting scandals.

Earlier this week, the House, by an overwhelming 348-72 vote, passed legislation to allow the FHA to back refinanced loans from borrowers who had bought mortgages with low "teaser rates" that had converted to financially crippling interest-rate levels.

While the White House raised objections to a portion of the bill that would dramatically increase the value of mortgages the FHA can insure, HUD Secretary Alphonso Jackson on Thursday praised the House action. Frank, meanwhile, went out of his way to make clear that the differences "can be negotiated."

SEC probes Wall Street on subprime mess

Frank repeatedly signaled that he wants to broker a solution. The only finger-pointing he did during the hearing was aimed at the Senate, where a slower acting banking committee has passed a more limited response. Frank wants a broader approach -- fast -- so he can begin House-Senate-Administration negotiations on a final bill.

But the politics in the Senate are complicated by its hefty pool of '08 presidential candidates -- not just Hillary Clinton and Barack Obama, but also banking committee chairman Chris Dodd, all eager to score political points with primary voters. That could slow down the process.

Lucky for Frank, there was only one Presidential candidate at his hearing Thursday, though this '08 prospect wasn't buying into the morality play Frank was eager to sketch. Libertarian Republican Ron Paul of Texas complained that "abnormally low interest rates" -- including the Fed's rate cut this week -- led to a morally questionable bailout of Wall Street.

"We talk about market discipline, but there's no possibility to have market discipline," the candidate declared. "What moral justification do we have to deliberately devalue the dollar?"

In response, the cautious Bernanke left his own moral high ground for the safer moorings of policy commentary on the ills of inflation: "I agree with you that an economy cannot grow in a healthy stable way when inflation is out of control." Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.