Taxes: Who’s Paying for All These Bailouts

In the middle of an already turbulent year for America's financial markets, the Federal Reserve announced late Tuesday the details of an $85 billion bailout package for floundering insurance giant AIG. The fund package, which will give the government control of almost 80 percent of the company's future activities, comes after a $100 billion rescue of government-sponsored banks Fannie Mae and Freddie Mac in July and a $30 billion loan package offered to Bear Stearns earlier in February before its sale to JPMorgan Chase. 

The federal government will foot much of the bill, leading taxpayer groups to wonder how much blame for the collapses falls on the Washington and how much federal regulators can do to avoid similar problems in the future. Some market analysts have speculated that tighter regulation of lending practices could have prevented many of the foreclosures currently straining the financial markets. Treasury Secretary Henry Paulson denied personal responsibility Monday, telling reporters that he was simply "playing the hand that was dealt me." NEWSWEEK's Daniel Stone spoke with Deborah Goldstein, an executive vice president for the Center for Responsible Lending, about the cause of the newest collapses and the eventual impact on taxpayers. Excerpts:

NEWSWEEK: How responsible are federal regulators for the collapse of these financial institutions?
Deborah Goldstein: I think the important thing to remember is that the crisis started when unfair and deceptive loans were made to borrowers--and in particular how the underwriting on a lot of these loans was reckless. They didn't look at borrowers' ability to repay loans and pushed borrowers toward dangerous products when in fact many of the borrowers could have afforded or qualified for conventional loans. If you look at it from that vantage point, regulators really missed an opportunity to put in place basic consumer protections that would have required sound underwriting by financial institutions to make sure that all of these loans didn't get made in the first place.

So much of the burden gets transferred to the taxpayer. Is that fair?
The taxpayers are already feeling the pain from being put in these loans in the first place, many of them losing their homes to foreclosure because they were in these loans. There's also the larger impact: it's not always just the borrower that is affected, but also all of his neighbors. Even people who are not experiencing foreclosure experience a decline in their home value because of the foreclosures next door. So the taxpayers are really bearing the burden twice because of the initial failures of the market regulators.

Is it at all hypocritical that the government is funding these bailouts for corporate shareholders when, as you said, taxpayers are suffering on multiple fronts?
What's really frustrating is to see that we continue to rely on voluntary options to obtain [mortgage] modifications that would help borrowers [who] are actually losing their homes and [thereby] help stabilize home values for everyone. That continues to be voluntary. There's no strategy to ensure modifications are made on behalf of borrowers, and yet we're seeing assistance go to the institutions that got us into these problems in the first place.

What's the solution to ensure other lenders don't require future bailouts funded by taxpayers?
At its core, we need to think about looking at the regulators and how to make sure that they take supervision of institutions more seriously. Then we need to put holds in place to make sure loans like this aren't made in the future. We also need to take opportunities as this crisis unfolds to think about how to ensure there are modifications made on behalf of borrowers who got into abusive loans. Because if we stop the foreclosures, that can really lead to benefits for everyone--stabilizing home values and stabilizing the market.
 
Some of these financial institutions, like Washington Mutual, show some signs of weakness. What's to come for them?
Some of those lenders were involved in making subprime loans. Something we need to look at is the regulators and whether they were making sure these lenders were doing proper underwriting, making sure the regulators were doing their job.

What's the impact here on the average taxpayer?
I don't think we know yet. Credit Suisse has estimated that there will be more than 6.5 million foreclosures in the next three to four years. That's just the foreclosures themselves. Additionally, 46 million homeowners are estimated to see their home value drop by $356 billion. So really, it really goes beyond the financial markets.