Senate Minority Leader Mitch McConnell led the battle Wednesday to pass a $700 billion Wall Street bailout package, in which taxpayers would buy the failing financial sector's toxic assets.
But only three years ago, McConnell, R-Ky., stood in the same chamber and argued that America's free-market economy requires people to clean up their own financial messes rather than pass them along to others.
After he pushed a tougher bankruptcy law through Congress, making it harder for citizens to escape debt, McConnell said the law "ushers in a new emphasis on personal responsibility."
This week, critics of the Bankruptcy Abuse Prevention Act of 2005 said recent studies suggest that it contributed to the fiscal crisis by encouraging more Americans to walk away from their homes and accept foreclosure rather than try to rebuild their lives under bankruptcy protection.
Either way, they said, it's curious that McConnell — who has taken more than $4.3 million in campaign money from the financial sector — isn't talking about personal responsibility now.
"Clearly, we have two sets of rules: one for individuals who run into hard times and one for corporations that practice irresponsible lending," said Travis Plunkett, legislative director of the Consumer Federation of America.
McConnell's office refused to respond to questions Wednesday about the bankruptcy and bailout measures, other than to say both were necessary and some Democrats supported them alongside McConnell.
"The question is not how we got here, but how we get out," McConnell said of the bailout in the Senate.
McConnell stands for re-election Nov. 4 against Democratic businessman Bruce Lunsford.
Credit card debt
McConnell tried for years to pass a tougher bankruptcy law, which was sought by the credit card industry. Under the previous law, people could run up debts, file for bankruptcy and keep many of their assets while their creditors had to swallow the losses, McConnell said.
"Bankruptcy was created as a ladder to greater economic responsibility," McConnell said at the time. "It should not be an escape hatch to avoid responsibility."
He finally succeeded in 2005 — President Bush credited McConnell by name when he signed the bill into law — and the financial sector held fund-raisers for him. Banks that offer credit cards are among his biggest donors this election cycle, including UBS ($95,900), Citigroup ($49,900) and JPMorgan Chase ($38,375), according to the Center for Responsive Politics.
Among other things, the law imposes a means test on debtors to determine who can pay their debts. Those who make above their state's median income must develop a repayment plan; individual states decide how much of a home's value is protected from seizure.
Senate Republicans, for whom McConnell then was majority whip, defeated Democratic amendments that would have exempted members of the military, single mothers, long-term caregivers and identity-theft victims.
U.S. Bankruptcy Judge Joe Lee of Lexington, one of the nation's foremost experts on the bankruptcy code, on Wednesday said the pre-2005 law already was tough on those who did not pay their bills.
But the problem wasn't immoral debtors, he said; it was a credit card industry that promoted high-interest loans to people who obviously could not handle so much debt. The industry then pressured Congress to help it collect, he said.
Although bankruptcy filings rose by an impressive 443 percent from 1980 to 2004, the amount of consumer credit made available climbed even higher, by 501 percent, Lee said.
Similarly, the current financial crisis is largely due to banks making loans they should have realized they could not collect, Lee said.
"The situation that we're in now is as much the responsibility of a lack of morality on the part of commercial lenders as it is any alleged lack of morality on the part of borrowers," Lee said.
"But they (in Congress) are not exactly chastising the lenders, are they?" he added. "We're not hearing about personal responsibility this time. This time, we're being told that we're all in it together."
In fairness, nobody thinks the financial sector will escape without punishment, even if the bailout package succeeds, said University of Kentucky banking professor Donald Mullineaux.
"They're going to take some losses when they sell these assets" to the government, Mullineaux said. "They've already taken some losses. And some of those institutions aren't with us anymore."
"This isn't an effort to save any one institution, it's an effort to get the financial system going again," he said.
Making it worse
Two studies released last summer indicate that the 2005 law — although it boosted bank profits in the short term — aggravated the housing and credit markets, which is where the financial crisis started.
"By making it more difficult and costly for marginal homeowners to utilize the bankruptcy code, restructure their debts, and maintain mortgage payments, (the new law) increased foreclosures and the number of homes for sale," wrote David Bernstein, a U.S. Treasury researcher, in his study.
The law "was intended to help creditors at the expense of debtors," Bernstein wrote. "However, the negative impact of (the law) on real estate markets appears to have damaged the balance sheets of both debtors and creditors."
Consumer advocates pushed this week for the House and Senate to add a provision to the bailout package that would grant bankruptcy judges more flexibility in individual cases, said Plunkett of the Consumer Federation of America. If major banks can be lifted out of their debt, he said, American families should get the same chance.
But lawmakers in both chambers blocked the proposal, he said.
"So I can understand why this bailout sticks in the craw of so many Americans," said Plunkett, whose group considers the bailout a necessary evil. "Not only are the major financial corporations that created this mess going to receive a great deal of public aid, but struggling homeowners will receive little to no assistance."