How not to sell toxic mortgages

The Geithner plan relies on some secrecy to force banks to sell. Congress must back off.

The spark that began America's economic bonfire still glows: uncertainty over the prices of mortgages held by banks. After months of hand-wringing by two presidents, the first official attempt to price those assets and sell them begins in a few weeks. Will it work? Or, more important, will Congress let it?

Last week's uproar over AIG bonuses shows just how quickly charges of "unfairness" or "greed" can disrupt the government's tight-rope task of using public money and public authority to fix a broken private market.

That kind of harsh spotlight may end up keeping investors from participating in the US Treasury's plan to coax banks into selling their "toxic" mortgages at auction. The plan relies on government guarantees and loans to investors who buy the risky loans – and who also accept the scrutiny that comes with it.

The plan, announced Monday by Treasury Secretary Timothy Geithner, strikes a Goldilocks balance: not too private and not too public. Mr. Geithner decided not to simply take over troubled banks in part to avoid too much scrutiny from Congress in how he would run them.

Still, questions about the Public-Private Investment Program (PPIP) will be raised: Were mortgage securities sold at a "fair" price? Did buyers use any bailout money? Might taxpayers lose money if home prices fall further? And so on.

As Federal Reserve chief Ben Bernanke told Congress this week, sometimes the nexus between government and business is best left secret. He explained how the central bank cannot release the names of banks that daily borrow money from the Fed – its main role in setting interest rates – because a bank's reliance on the Fed might be perceived as a weakness. Banks would be "stigmatized." Credit markets would clam up.

But now, with public anger reaching the pitch of a lynch mob over lost investments and jobs, Congress is demanding transparency. Lawmakers are hunting for both villains and solutions.

But they can't always find the villains without harming the solutions. The villains are many – including Congress itself, for pushing inexpensive mortgages through Fannie Mae. But solutions require care, sometimes secrecy. As President Obama said at his press conference Tuesday when asked why he sat on information about AIG's bonuses: "It took me a couple of days because I like to know what I'm talking about before I speak." Half of wisdom is knowing when to hold your tongue.

Congress has a duty to make sure taxpayer money is well spent. But it also has a duty to recognize its own culpability in encouraging the loose credit that created the housing bubble – and its limits in trying to run the executive branch as it tries to rev up Wall Street.

Firms like AIG were simply the riskiest of risk-takers in a system set up on the fantasy of ever-rising home prices. Even now, wobbly banks sitting on bad mortgages might not want to sell them at the Treasury auctions, hoping home prices rise. Behind closed doors, regulators may need to twist their arms. Does Congress want all that public, subject to demagoguery?

Private markets rely on privacy. Let the Treasury secretary find the right mix between public interest and private gain.

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