Michael Barone does yeoman's work explaining the "insurance" idea being mooted by House Republicans:
What do House Republicans want? A senior House Republican gave me and some other reporters a look yesterday at what a working group headed by Assistant Minority Whip Eric Cantor is demanding. The senior House Republican (hereinafter SHR) has what sounded to me like an ingenious approach. He cited Ginnie Mae loans to low-income borrowers, which the government can insure. He proposed that the government (presumably through the entity envisioned by the Paulson plan) offer to sell insurance to financial institutions that hold mortgage-backed securities (hereinafter MBS). Premiums would be determined by the rates of foreclosure on each class of securities so far. Under this plan, the government would be taking in money, not paying it out. Of course, if the premiums are not enough to cover losses, the government might eventually take losses, as it did when the savings and loan industry collapsed. But losses don't seem inevitable and in any case will mostly occur in out-years, not now.
OK, we all know the devil is in the details (so is God, and perhaps He will help).
However, there are all sorts of mortgage-backed securities. In one very common structure, there are senior claimants who get first rights to interest and principal payments (including principal payments as a result of a sale or re-financing of an underlying mortgage). Earning a higher rate are investors on the "back-end" tranches who get paid only after the senior claimants have been satisfied.
The senior tranches are designed to be, and so far have been, pretty safe. An unexpectedly high level of defaults and foreclosures (as is currently happening) reduces the cash flow and inflicts pain on the holders of the back-end tranches.
So who is going to pay this insurance premium? Senior holders consider themselves to be protected by the structure of the MBS and are unlikely to pay much to insure the back-end tranches. OTOH, the cash flow available to the back-end investors is probably not sufficient to make meaningful insurance payments - the current level of defaults is already well above expectations, so this would be something like buying insurance on a burning house.
That doesn't mean it couldn't be done - surely there are investors in intermediate tranches who would be intrigued by insurance that could reduce their default risk at a reasonable price and currently are receiving sufficient cash flows to make payments. But my guess is that such a program would only get at a small part of the problem.
TO BE FAIR: A comment on the Dem obsession with executive pay - eventually there will be a Congressman with both (a) someone from his district connected to financial services who made a bundle on the Fed rescue and (b) a homeowner from the district who lost his home to foreclosure. Political opponents of that Congressman will seize on this and the resulting headlines will drive the fool from office.
Does it make sense? Well, it makes political sense to libs.