Update: Here are the principles that the House Republicans are putting forth as an outline of their plan:

Economic Rescue Principles

Common Sense Plan to Have Wall Street Fund the Recovery, Not Taxpayers

* Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.

* Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.

Have Private Capital Injection to the Financial Markets, Not Tax Dollars

* Instead of injecting taxpayer capital into the market to produce liquidity, private capital can be drawn into the market by removing regulatory and tax barriers that are currently blocking private capital formation. Too much private capital is sitting on the sidelines during this crisis.

* Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, we should allow for a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.

Immediate Transparency, Oversight, and Market Reform

* Increase Transparency. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.

* Limit Federal Exposure for High Risk Loans: Mandate that the GSEs no longer securitize any unsound mortgages.

* Call on the SEC to audit reports of failed companies to ensure that the financial standing of these troubled companies was accurately portrayed.

* Wall Street Executives should not benefit from taxpayer funding.

* Call on the SEC to review the performance of the Credit Rating Agencies and their ability to accurately reflect the risks of these failed investment securities.

* Create a blue ribbon panel with representatives of Treasury, SEC, and the Fed to make recommendations to Congress for reforms of the financial sector by January 1, 2009.

Some of this is good, but I don’t think the market will think its enough. We need more details on the regulatory and tax relief they mention. I still think that combining this with the Paulson plan is what makes sense. Give Paulson enough cash to make a difference but a lot less than $700 billion and see if we can find other ways to free up the credit markets. Private capital is certainly preferable to taxpayer capital so if there is a way to make that more palatable, we should try it.

Republicans in the House of Representatives have derailed the Mother of All Bailouts. John McCain is taking the heat, but House Minority Leader John Boehner has said that while Senate Republicans may have come to a deal, House Republicans were never on board. Pelosi has said that Democrats will not pass this alone and take the heat, so unless some Republicans come on board, this thing is dead in its current form.

House Republicans have put forth an alternative plan that includes a plan to insure MBS but banks will have to pay a premium to get the insurance. There’s also some provisions to “remove regulatory and other barriers that they say block private investors from pumping capital into ailing financial institutions.” That would probably allow stronger banks that take over weaker ones some forebearance on writing down bad asssets. It could also refer to a possible suspension of mark to market accounting rules.

Despite the likelihood that the market will be down on this news, I’m glad to see that there is some thinking going on up on Capitol Hill. It seems to me that if they could incorporate some or all of these items into a bill that also gives Paulson some money to buy mortgages (say $250 billion), we might be able to avoid spending so much up front. Why not include several options for the Treasury Secretary in his bailout arsenal?

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