The so called “Bailout Bill” has been reported as the solution to the credit crisis and the answer to deteriorating financial markets. More accurately, it should be characterized as a financial fix for troubled banks, which addresses an aspect of the problem but clearly does not address fundamental structural problems with our financial system.

Some of the unanswered questions surrounding the Bailout Bill are:

  • Is $700 billion enough? The IndyMac rescue was projected to cost $6-$8 billion; it will probably surpass $9 billion. The original estimate for AIG was $85 billion; the number now approaches $123 billion. Some industry experts believe that banks have overvalued their troubled assets and that the cost to cure may exceed original estimates.
  • What structural changes to the financial system are needed? Among the systemic changes being proposed is the creation of one bank regulator with expanded authority and scope of supervision to include all players involved in delivering financial products and services.
  • Will the Bailout restore consumer and investor confidence?
  • What will be the global responses?

The biggest problem facing our economy is the deterioration of consumer and investor confidence, which is negatively impacting spending and the availability of cash. Robert Zoellick, President of the World Bank, said as the current crisis has unfolded, people in the United States and Europe reacted first with confusion, then anger, then fear. The anger derived from the fact that many view the Bailout as a financial rescue of institutions and individuals that profited from risky activities, while consumers experience shrinking stock and property values. The fear is generated by bank failures, dire messages from the government and uncertainty and distrust caused by the fact that financial markets are in constant flux, the rules of investment are changing and by concern that the economy has not bottomed out.

Also, it may be misguided to believe that the Bailout will immediately facilitate the availability of credit. Instead of making new loans, some bankers will hold the cash proceeds from the sale of assets or from governmental capital infusions because of concerns about the strength of the economy and their bank balance sheets.

Unfortunately, the financial crisis has created an environment of fear that has precipitated a rush to put in place a patch work of solutions and negated the opportunity for diverse input and comprehensive solutions. What this means for nonprofits and their constituencies is that they have not been included in the decision process and thus the financial impacts for their constituencies are unknown and may not have been considered.

For example, in an effort to address the complaints of homeowners, Congress directed the Treasury to aggressively seek loan modifications to relieve the financial burden on homeowners. The problem is that because of the complexity of the mortgage instruments and the competing interests of banks, investors and homeowners, there is no guarantee that Treasury will be able to re-write enough home mortgages to stabilize property values and restore consumer confidence. Nor was a role delineated for nonprofits to represent the interests of borrowers and general consumer protections.

The Bailout Bill created a role for Wall Street to select, evaluate and market bank assets, but there is no identified role for nonprofits to represent the interests of homeowners or to facilitate the availability of credit. As an industry, the importance ofnonprofits to the economy is undervalued and often ignored.

Nonprofits must demand a seat at the decision making table and call for comprehensive restructuring of our financial system to promote job opportunity and wealth creation and insist on increased oversight and regulation, because the poorest and must vulnerable groups risk the most serious, and in some cases, permanent damage.

Nonprofits should adopt as part of a comprehensive solution the following actions to address the underlying problems.

  • Comprehensive restructuring and expansion of federal regulation of financial markets. Unregulated financial markets allow predatory practices that ignore fairness and safety, and promote the creation of financially incented products that foster conflicts of interest and ignore basic risk reward principles.
  • Reallocation of federal resources toward job creation. After the November election, Congress will consider a $150 billion stimulus package that would extend jobless benefits, provide more money for food stamps and finance public works projects, such as rebuilding bridges and roads.

Finally, a return to financial stability will rely heavily on calm reasoned responses from public leaders that provide honest answers to consumers and comprehensive strategies for change. Zoellick stated the need for “…new architecture, new norms, and new oversight to ensure that this crisis never happens again.” Nonprofit leadership must be an integral part of the process of change and be a vehicle for information exchange and advocacy.

Paul Hudson is the Chief Executive Officer of Broadway Financial Corporation and its wholly owned subsidiary Broadway Federal Bank with assets exceeding $400 million. He is past Chairman of the Los Angeles NAACP and Los Angeles City Community Redevelopment Agency and is a member of the Los Angeles County Employees Retirement Association Board of Investments. He also serves on the boards of Los Angeles Universal Preschool and chairs the board of Community Build, a community economic development nonprofit serving South Central Los Angeles. He earned B.A. and J.D. degrees from the University of California, Berkeley and is a member of the California and District of Columbia bars.