Reply from Senator Jim Inhofe

Dear Mr. Richards:

Thank you for your correspondence. As your voice in Washington, I appreciate knowing your concerns.

The U.S. economy is currently dominating headlines worldwide. Like you, I am concerned about the impact of recent events on Oklahomans and all Americans. Specifically, the U.S. housing market has been at the heart of current economic policy discussions, here in the Senate and nationwide.  Following the reset of a wave of subprime loans to higher rates in 2006 and 2007, several homeowners are facing imminent foreclosure. While recent reports indicate foreclosure rates in Oklahoma may be on the rise, our state remains below the national average.

The recent downturn began after money started pouring into the housing market and created what economists refer to as a "housing bubble." As more people purchased expensive houses, prices artificially inflated to levels beyond their true values. In 2007, a wave of mortgages reset to higher rates (predominantly subprime mortgages) and several individuals found themselves unable to afford higher monthly payments. Rising foreclosure rates drove down housing prices by 1.8% in 2007, the first year of decreasing prices since the Great Depression.

The trouble quickly spread to the financial markets. Most subprime mortgages are packaged into what are referred to as mortgage backed securities. These mortgage backed securities are sold to investors, transferring risk from individual banks to large institutions. Investors began pouring money into mortgage backed securities, but due to the industry's explosive growth and increasing complexity, few were able to accurately assign risk to their new holdings. When foreclosure rates skyrocketed, investors could not assess the value of mortgage backed securities. Consequently, much of the financial world stopped trading - not sure what their own holdings were worth and unwilling to purchase others' equally unclear holdings.

In the first quarter of 2008, there was only 0.6 percent GDP growth, a figure identical to GDP growth in the final quarter of 2007. Though not a recession (two or more quarters of negative GDP growth), these numbers indicate that trouble in the financial markets may begin to impact the broader U.S. economy.

In March of 2008, the Federal Reserve grew alarmed that Bear Stearns - the nation's fifth largest investment bank with financial contracts totaling $10 trillion - would collapse and harm the American economy. Breaking from precedent, the Federal Reserve intervened by agreeing to guarantee $30 billion worth of the company's riskiest assets and to broker a deal for JPMorgan Chase to buy Bear's stock at fire-sale prices.

Next, in response to concerns about the solvency of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and about the housing market in general, Congress passed housing relief legislation in the form of H.R. 3221, the "Housing and Economic Recovery Act of 2008." I did not support this legislation because I believe it bails out irresponsible banks at the expense of the American taxpayer. It allows these banks to dump their worst borrowers, up to $300 billion worth, on the Federal Housing Administration and increases the debt limit by $800 billion to a total of $10.6 trillion. Significant provisions in the bill gave regulatory control of Fannie and Freddie to the Federal Housing Finance Agency (FHFA) and gave the Department of the Treasury temporary authority to invest in the companies and to offer them an unlimited line of credit.

After being granted such authority, the Treasury Department quickly discovered the financial situation at Fannie and Freddie to be much worse than previously believed. On September 7, 2008, the FHFA and the Treasury Department found it necessary to place Fannie and Freddie in a conservatorship. They reasoned that a default by Fannie or Freddie would have severe repercussions by making home mortgages more challenging and expensive to obtain and even disrupting global financial markets. The main goal of the conservator, the FHFA, is to return the entities to a sound and solvent condition without any significant changes to the business models. When the FHFA believes Fannie Mae and Freddie Mac are sound and solvent the conservatorship will end. Under conservatorship, both CEO's have been replaced and stockholders' voting rights and dividends on common and preferred stock have all been suspended. This declared insolvency of Fannie and Freddie and their positioning at the core of the housing finance system spurred a rise in the cost of insuring against defaults and led to an even greater lack of trust in the banking system. The very next week we witnessed Bank of America's acquisition of Merrill Lynch, the bankruptcy of Lehman Brothers, and the $85 billion bailout of AIG.

On September 19, 2008, after several attempts to deal with these troubled institutions on a case-by-case basis, Treasury Secretary Hank Paulson proposed a plan for broad and direct government intervention in the economy. Paulson indicated the Treasury would buy $700 billion of illiquid assets from failing financial institutions and then dispose of them with the least amount of expense to the taxpayer as possible. Paulson argued that his plan would free the institutions from the bad assets on their balance sheets, ultimately allowing them to resume raising capital. In conjunction with Paulson's plan, the Securities and Exchange Commission (SEC) instituted a temporary ban on short selling. Paulson's plan was then defeated in the House of Representatives on September 29, 2008. After this defeat, the Senate passed the "Emergency Economic Stabilization Act of 2008" on October 1, 2008, and sent it back to the House. The House then passed the legislation on a second try, and the bill was signed into law by the President on October 3, 2008.

After examining the issue very closely and spending time with constituents, local business leaders, and elected officials, I felt compelled to vote against Secretary Paulson's proposal. In addition to addressing the financial situation in a timely manner, Congress needed to be mindful that such a massive proposal should have the support of the American people, because it is, after all, the taxpayer who is being asked to foot the bill. Constituents and business leaders continue to tell me they are hesitant to pay for the mistakes made by others. Their concerns are valid, and it is the duty of Congress to find a solution that takes them into account, something this bill failed to do.

Taking$700 billion worth of toxic Wall Street assets from financial firms' balance sheets and putting them onto the balance sheet of the federal government is problematic for a number of reasons. First, I think that this strategy runs the risk of increasing corruption in Washington . If Washington acquires for itself a greater role in the financial system, consultants and lobbyists will be lining up at the door seeking to influence the political process to their advantage, and they will have the deep pockets to be successful. Second, the plan is morally dubious since it directly rewards executives' poor choices. Third, it will encourage poor choices and excessive risk taking in the future because there's the possibility of a government rescue. Fourth, this plan will only work if asset managers from Wall Street are granted tremendous discretion with taxpayer dollars.

Providing capital to the banking system through government purchase of toxic assets will only work if the government overpays for them. That's a wealth transfer from taxpayers to financial firms. Even if a weak firm is successful in unloading its worst assets onto the public balance sheet, there's no guarantee that it could or should immediately go out and start making a lot of loans. The simple fact is that no one on Wall Street or in Washington really knows whether this is going to work.

Please know, my vote was against the Paulson plan - not against taking extraordinary action to provide necessary confidence to financial markets. I believe at this time in our dynamic economy when credit is beginning to tighten and financial institutions are failing, extraordinary action that can best help all Americans is necessary. In my opinion, Paulson's plan did not do this. From the outset, I have raised concerns about Paulson's $700 billion proposal, a proposal that is significantly larger than the defense budget. I've also questioned the mechanics of the program, and who would be making these huge financial decisions with taxpayer funds. From the very beginning, it was the Paulson plan or no plan. However, it is Congress's duty to examine its options, deliberate, come to a decision that has the support of America, and act. I regret that we were not allowed to do that.

Parts of the legislation I consider worthy of support are the increase of the cap on deposit insurance to $250,000 from $100,000 and the guidance provided by the SEC regarding mark-to-market accounting rules. It should also be noted that while Congress and the Administration have been fighting this enormous battle over the Paulson plan, few have noticed that the Federal Deposit Insurance Corporation (FDIC), in the capable hands of Sheila Bair, has managed the orderly resolution of the two biggest bank failures in American history at no expense to the taxpayer. Another issue that has gained a lot of popularity is the accounting principles of mark-to-market which records the value of a security, portfolio, or account at its current market price. This rule may have been adding to the problems in a financial crisis situation. These accounting standards have been heavily criticized as the key factor contributing to the failure of several financial institutions. Supporters of suspending the rules believe it will curtail the falling asset prices on banks' balance sheets. I supported the SEC's decision to offer additional guidance to firms on mark-to-market regulations.

Thank you again for contacting me with your concerns. Please do not hesitate to do so again in the future.

This is why I am voting for him back into office.