Grading Paulson's Bailout Plan

Nov. 13, 2008 — -- Treasury Secretary Henry Paulson makes no apologies for changing the focus of the $700 billion bailout bill.

On Wednesday Paulson said the government will abandon the initial strategy of buying up bad mortgages from banks and instead target consumers by purchasing vast amounts of stock in financial institutions. The hope is that consumers will have an easier time getting credit cards and auto loans from banks flush with cash.

Opinion was mixed on whether Paulson's move was sound. Many applauded the Treasury Department's willingness to adjust on the fly.

But some questioned whether the new course would boost anemic economic markets or squander taxpayer dollars.

"What they've been doing is shifting from one horse to the other one and to try to figure out what works and nobody's really clear what is going to work," said Steve Ellis, of Taxpayers for Common Sense.

Of the $350 billion that has been authorized by Congress to spend so far, only $60 billion is left.

$125 billion will be going to big banks

Another $125 billion has been set aside for regional banks.

$40 billion has been promised to insurance giant AIG.

With the remaining $350 billion still waiting to be authorized, that leaves $410 billion left, which some people think might not be enough.

"Seven-hundred billion [dollars] sounded like a lot when it started, but they've gone through a lot of it pretty fast," said Yale University economics professor John Geanakoplos.

Grading Paulson

Still, three financial experts gave Paulson's plan good marks. "Good Morning America" financial contributor Mellody Hobson and New York Times reporter Andrew Ross Sorkin gave the new plan an A, while Charles Schwab investment strategist Lizann Sonders gave the plan an A-minus.

"We're in uncharted waters and I think given that Paulson is the captain of the ship, it's important to be flexible. To dig your heels in when things are moving so rapidly and say, 'this is the plan,' I think you have to adapt to what is changing," Sonders said.

But Paulson fared worse when it came to how effectively the money was spent and whether it succeeded on preventing a total market meltdown. Hobson gave a C, while Sonders and Ross opted for a C-plus. "With room for improvement," Sorkin said.

"I think what happened here was it was misadvertised as a package. He didn't have the right idea of what he was trying to do, but more importantly, the public didn't either. This was a package that was aimed to try to keep the patient from dying, but it wasn't about rehabilitating the patient. And that's what we need to do now," Sorkin said.

On Mortgages and Foreclosures

The nation's foreclosure crisis is intertwined intimately with the financial bailout and its success. But when it came to grading the state of mortgages and foreclosures, the panel differed vastly.

Hobson said the foreclosure front has improved and gave the government aid a B-minus.

"I have a B-minus for one reason. Clearly, we haven't done enough to stop the foreclosures and they're up 70 percent in the last 12 months. But, I give [the] Treasury credit for standing behind Fannie Mae and Freddie Mac. That was a really big deal. They stand for six out of every 10 mortgages in this country," she said. "We'd be in bigger trouble than we are even today."

And while Sonders said she had elevated her grade, it still left the government actions with an average rating of C.

"If you look at the statistics on a month-over-month basis, they're starting to improve a little. We're getting a little bit of traction. Some has helped by what's happened. Some is the nature of the beast," she said.

But Sorkin was less enthused about the plan's approach in this area and gave it a D.

"I would have given an F if I could have," he said. "The underlying [problem] of the economy is the mortgage mess. And we need to figure out a way to get at that."

And while the majority of the focus is on homeowners struggling to make payments and those who already have fallen behind, the vast majority of the country, homeowners who paid their mortgages on time, are asking themselves what it means for them.

"The basic sense of fairness is if you did the right thing, you're out of luck this time. That's probably the sad thing. Life isn't fair, unfortunately," Sorkin said.

Hobson said the government already is making strides to reach out toward other homeowners.

"I'm very hopeful that we're starting to see this issue addressed head-on. Congress has passed a plan called Hope for Homeowners, which is a $300 billion plan, that directly addresses people whose homes are underwater, meaning their mortgage is now greater than what their house is worth. And they're using some measures," she said.

"For example, if you're currently paying more than 30 percent of your income, for your mortgage, then you may apply for a change in your mortgage terms. That could mean a new mortgage rate. It could mean an extended mortgage. Maybe 40 years instead of 30 years, to lower those payments. For now, it hasn't happened, but I think we're starting to see a big move and a big shift."

Sonders added the efforts to save struggling homeowners benefit everyone because they improve the market overall.

"Everybody is going to benefit by virtue of the impact this has on the economy — even if the individual homeowners, who are still paying their mortgage. They're not getting the same kind of direct help, immediately," she said.