Should U.S. Create Agency to Buy Bad Debt?

From Realtor Magazine Online, Daily Real Estate News September 16, 2008

House Financial Services Committee Chairman Barney Frank said financial market turmoil is likely to force Congress and the Bush administration to consider whether the U.S. government should buy distressed debt and mortgages, according to a Bloomberg news report on Tuesday.

Frank (D-Mass.) says lawmakers and the Bush administration will have to consider whether Congress should create an agency like the Resolution Trust Corp., which took over the assets of failed savings and loan associations almost two decades ago.

Some investors say the government should take on a bigger role in resolving the credit crunch. Worldwide, financial institutions have reported more than $500 billion in losses and writedowns stemming from the collapse of the subprime-mortgage market.

Lehman Brothers became the latest casualty on Wall Street of the subprime mortgage crisis yesterday. Barclays Plc and Bank of America Corp. abandoned takeover talks, forcing Lehman Brothers, the fourth-largest U.S. investment bank, into bankruptcy.

"I wouldn't have said this a week ago,'' Frank said in the Bloomberg news report. ``We just had this test'' with Lehman Brothers and ``there was no self-help capacity in the market.''

He continued: "The question is what are the consequences of the federal government taking the risk of holding those assets."

Some lawmakers say it's a risk that the government shouldn't take on. Creating an agency to buy distressed debt is not the best solution, said House Republican leader John Boehner. "We need this issue to resolve itself, and having more federal involvement or having a new Resolution Trust Corp. is probably not the answer,'' Boehner said.

Source: Bloomberg News