This is a rush transcript from "The Journal Editorial Report," March 7, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: Up next, on "The Journal Editorial Report," the administration officially launches its foreclosure prevention program. Will the $275 billion plan finally put a floor under sinking home prices?

Unemployment continues to rise, stocks continue to fall. After five week in office, has President Obama's policies become part of the problem.

Democrats in Congress have a nasty surprise for two of first daughter's Sidwell schoolmates. We'll have the latest in the battle over school choice.

"The Journal Editorial Report" begins right now.

Welcome to "The Journal Editorial Report," I'm Paul Gigot.

The Obama administration officially launched the Homeowner Affordability and Stability Plan this week, issuing guidelines to lenders and mortgage servicers on how to modify the loans on as many as nine million struggling homeowners. Will it stem the wave of foreclosures drowning the U.S. real estate market?

Sheila Bair is the chairman of the FDIC and joins me from Washington.

Chairman Bair, welcome.


GIGOT: The foreclosure mitigation plan, announced this week. Judging by the mail we get at the "Journal," a lot of Americans fear this may reward people who just borrowed too much money, more than they could afford or didn't even make honest claims on their mortgage, original mortgages. How can you assure viewers this plan won't reward that kind of behavior?

BAIR: Right. It is restricted to owner-occupied property. It has to be the primary residence. The loan does — the borrowers, to qualify for the mortgage, have to document income. They have to provide information about their household budgets.

So I think, as part of the modification process, the borrowers need to be validated as good faith home buyers who are using their home to live in not as an a leveraged investment.

Clearly, no one wants to reward fraudulent behavior, so if there's a red flag, there might have been a fraudulent situation before, that would be taken into account under the program.

But, I think it is difficult to try to go back. Some have suggested you have to go back several years and try to determine what the circumstances were when the loan was originally originated. I don't think that is practical.

GIGOT: Why isn't that practical? Because some people did lie on their loans.

BAIR: Well, some people did. If there's — I think a lot of it was brokers telling them, don't worry, we'll fill it out, or it doesn't matter, just put whatever you want. A lot of people didn't. I think there is — the certainly is the low-doc, no-doc loans. That was an open invitation for inappropriate behavior. Not everybody did that too. I think to paint everybody with the same brush and say all of you, we are going to make you rejustify yourself three years ago when this loan was originated, I don't think it is practical.

So nobody wants to reward fraudulent behavior. And the FDIC is moving aggressively against mortgage fraud, especially third-party providers, some mortgage brokers, appraisers. There's been problems here, and our I.G. and our legal authorities we have as receivers for failed banks, we're very aggressively pursuing that kind of conduct. But to try to got back and rejustify every single loan in trouble now, I don't think is practical.

GIGOT: What about those who scrimped and saved and paid their mortgage on time, and now they may not qualify under this program and say, hey, what about me, why shouldn't I get a reduction in my mortgage payments?

BAIR: I think is a program that is going to help everybody in the sense that it is going to reduce the number of unnecessary foreclosures, putting downward pressure on home prices, which is hurting us all, contributing to the recession we are in. So there's an indirect benefit for everyone.

The president did try to be all inclusive in terms of the reach of the program. So even for current borrowers with relatively safe mortgages, who are not able to finance into lower rates because homes may be underwater, they have sufficient home equity, if their loans are guaranteed by Fannie Mae or Freddie Mac, there's an opportunity to refinance into a lower rate to help that category of borrowers who are current but can't take advantage of the lower interest rates. So I think the administration has tried to reach out more broadly to a group of borrowers.

You and I have had this discussion before. At the end of the day, I think we need to determine what is in our economic best interests to do. To punish people, who got a loan they couldn't afford, and put another house on the housing market right now, which is overburdened with inventory already, really doesn't make any sense.

I would also add that there has to be a net present value analysis, so the moderation has to be worth more than the foreclosure values. So it needs to be an economically rational decision before the modification.

GIGOT: Let me ask you about another issue, which is redefault. You've got — John Dugan, the controller of the currency, said recently, after six months, something like 37 percent of mortgage refinancing are in redefault, and as many as 55 percent are thirty days delinquent. What is your expectation about redefaults here. and that will put taxpayers on the hook?

BAIR: First of all, regarding those numbers, that 37 percent number was the 60-day delinquency rate. Our experience is 60-day delinquent loans, 10 to 20 percent of those cure. That is also statistics for anything that is called a loan mod. A lot of those loan modifications that the OTC and OTS report count are payment increases. They define a loan mod as broadly, anything that changes contract terms. We are finding a lot of these that were called modifications were just recapitalizing late principle and interest back into the mortgage. So I think you need to look...

GIGOT: What's your experience — I'm sorry. What is your experience at IndyMac? You have been doing that now for several months. You must have a certain expectations of the number of redefaults. Is it as high as 30 percent?

BAIR: We do. No, at the end of December, it was 4 percent, but I'm sure those numbers will go up it is still early in the program.

GIGOT: Right.

BAIR: There will be significant redefaults. I think we've always said that. The deteriorating economy is going to contribute to that. And some borrowers in distress, even with the remodified loans, may not make it.

It is important to look at economics of the loan modification. Our experience at IndyMac is that we save, on average, about $65,000 per loan, even assuming a redefault rate of 40 percent, which is higher than we think we will experience.

The reason it makes economic sense is because we can get a delinquent loan to perform again. The value of that over foreclosure value is significantly greater than any incremental loss you may have for waiting a period of time to see if the loan performs. Redefault, in and of itself, really isn't a problem unless the housing market continues to go down. Then it does cost money because you foreclose later at a lower price.

GIGOT: That's the big risk for taxpayers going forward because nobody knows how far the housing prices are going to fall. If they keep falling, the taxpayers are going to be on the hook.

BAIR: Actually, the president's programs are payments only for as long as the loan performs. There is an insurance component, but it is the investors that will take the lion's share of the loss on a redefault. The payments are correlated to where the loan continues to perform heavily. There's an insurance program that is designed to cover just that sliver of loss that may be able attributable to a further home price decline. But the estimates of that cost are about $10 billion of the total $275. But that is important to investors. To get investor support for this program, you need to address the redefault risk.

All right, Chairman Bair, thanks so much for coming in.

BAIR: Sure. My pleasure.

GIGOT: When we come back, the Obama economy. Rising unemployment, falling stock, after five weeks in office, are the president's policies making things better or worse?



GIGOT: Five weeks into the Obama presidency and things are not exactly looking up. The Dow Jones industrial average plunged to its lowest level more than a decade this week, and overall decline of more than 25 percent since early January. So just how much are the new administration's policies contributing to the continuing economic turmoil?

Joining the panel this week, "Wall Street Journal" columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; editorial board member, Jason Riley; and columnist, William McGurn.

Mary, I'm going to list some things the administration this week announced, a trillion dollar new Federal Reserve program for securitized lending on consumer and auto loans and other details of its mortgage plan, $275 billion, another rescue for AIG and another rescue in the late — last week for Citigroup. Is any of this working?

MARY ANASTASIA O'GRADY, COLUMNIST: Have you seen the stock market?


If only we knew when he was going to open his mouth, we could make a fortune shorting the market.

GIGOT: It isn't that bad, now come on.


O'GRADY: It is pretty bad, Paul. I think what's happening here is the higher government spending, which is implied in the stimulus, people know instinctively that that has to be paid for. And they see the tax propositions of Obama, and that is, you put those two things together, it is not good for risk taking.

GIGOT: The implicit tax increases built into all of this spending, the stimulus, nearly $800 billion dollars, the $410 billion ominous spending bill for 2009, are you saying that is weighing on investor minds?

O'GRADY: It is weighing on investor minds. The broader public, as a whole, understands all of this is going to have to be paid for. they know it is not money that is going to fall from the sky.

JASON RILEY, EDITORIAL BOARD MEMBER: It is interesting to contrast the market response with public opinion polls. "Wall Street Journal" had a poll out this week that said two-thirds of Americans are hopeful about Obama's plan, even though 70 percent are dissatisfied with the economy. So at least not yet...

GIGOT: But why shouldn't they?

RILEY: The public isn't blaming this administration for the economy. Now, if six months or a year, if the market is still in the tank, if unemployment is high and so forth, that could change. But right now, it doesn't seem to be Obama's economy. It is still Bush's economy.

GIGOT: There's a lot of common sense to that. Obviously, he inherited a recession. It is not his recession. But the reason the stock market prices are important is they look to the future, and they say this is future earnings, this is what we expect. And it is a little disconcerting that, since early January, with all the hope and expectation build-up about this presidency, the stock prices are down 25 percent.

BILL MCGURN, COLUMNIST: It is not the measure of the economy, but it's an important measure and it's ongoing measure. It's not just spite. The editorial said it is going down.

I live in a town with a lot of Wall Streeters. On the main street, you see all these little businesses, and they are all affected, restaurants, handy men, all sorts of people that have enterprises. I don't think they really — in this real economy, they don't see what this is going to do for them. And they are really hurting out there.

GIGOT: What about the sources of potential recovery, Dan? They exist out there. Some credit spreads seem to be narrowing. Oil has come down $100 a barrel, equivalent of a tax cut. You are seeing, you know, housing prices fall by two-thirds, from their peak, according to one index. People think they'll fall 10 percent, 12 percent. But eventually, they will find a bottom, right? When they do, you may begin to get a recovery. Are we exaggerating, are investors exaggerating about potential dangers here?

DAN HENNINGER, COLUMNIST AND DEPUTY EDITOR: No, I think both are happening. The market is probably reflecting a reality about prospects. Nonetheless, the U.S. economy is not going to drop to zero. It is going to come back. All recessions stop under their own steam and then they begin to come back.

I think there really is a political calculation on the part of the White House, people keep asking, why don't they — aren't they afraid the market is going to destroy their standing? No, if the economy comes back in the middle of next year, at least begins to rise again — and the "Wall Street Journal" poll suggested that something like 50 percent of the electorate thinks that Obama will not be responsible for it until two or three years from now — they will pocket the recovery of the economy and say the stimulus created that.

O'GRADY: There's something interesting that happened here a couple of weeks ago. Peter Orszag, the president's point man on the budget, was asked several times, aren't you worried that higher taxes can damage the economy, and he said, oh, no, don't worry they are not going to kick in until after 2010. Now the market sees that and a lot of people, who might be committing capital now or in 2010, are going to know that, OK, as soon as I start doing better, they are going to tax me. I think that's...

HENNINGER: The tax rate goes up to 20 percent.

O'GRADY: ... that's being built in here.

GIGOT: Let me put another thing on the table, which is the health care market. Health care stocks, insurance plans, drug makers, have been slaughtered in the last weeks since the Obama budget, because of, I think, the uncertainty with what happens with national health care. You introduce that kind of uncertainty and nobody is going to invest a dime, are they, Bill?

MCGURN: No. I think, as you say, uncertainty is the greatest poison. That's what I think the market is reacting to. A month in, we still don't know the details a lot. We know one detail that they think. We know it is going to cost a lot more, but we don't know how much or when it is going to end.

The thing I worry about, the two lessons they seem to have taken from previous Democratic administrations, from Clinton, you can raise taxes and self growth, from FDR, he didn't spend enough money. I mean...

GIGOT: You think those are the two lessons?

MCGURN: I think those are the two lessons.

GIGOT: That sounds like the worst of both worlds.

MCGURN: It is.

GIGOT: Clinton turned it around in 1994.


GIGOT: ... and the change in Congress?

MCGURN: Right, and Clinton had some things that off set, like trade and so forth. And I don't see those offsetting growth aspects of it. You hardly ever hear the word "growth."

GIGOT: You see the bottom of the market, Bill? Let me make you a market timer.

MCGURN: No, I'm not going to — I'm not going to...

GIGOT: Anybody here? Anybody here?

O'GRADY: I think the market will bottom by the end of this year.

GIGOT: All right. That's a long way to go, Mary. Oh, hold on.


Still ahead, Democratic Senator Dick Durbin has a nasty surprise for two of Sasha and Malia Obama's new schoolmates, and it's putting the president in an awkward position. When we come back, the latest in the battle over school choice.


GIGOT: If Democrats in Congress have their way, Malia and Sasha Obama could soon lose two classmates at the elite Sidwell Friends School in Washington. Buried in the omnibus spending bill, making its way through Capital Hill, is language that would kill the scholarship program that allows Sarah and James Parker and many children like them to afford the private school tuition.

Created into 2004, the Opportunity Scholarship Program provides vouchers to some 1700 low-income children in the District of Columbia, so they can attend religious or other private schools, giving parents an alternative to a public school system that is consistently ranked among the worst in the nation.

Bill, your editorials in 2004 played a big role in getting this passed. Why do Democrats want to kill it?

MCGURN: They hate it. They people are for the teachers unions hate it. They can't abide even a fraction of people getting a chance to escape from these schools. It looked like the language was going to go through with no problems. Last night, we had an 11th-hour reprieve when the omnibus didn't go through. We'll see if an amendment comes up. I'll say one thing. President Obama's silence has been thundering across the district on this.

GIGOT: Jason?

RILEY: And in stark contrast with the secretary of education, who gave an interview earlier this week to the Associated Press where Arne Duncan, the secretary of education, said he doesn't think these kids should be yanked out of schools if they are satisfied with the program, if they're getting an education. So it is in contrast with Obama, who has been silent on it.

GIGOT: That's a question I want to raise. But how bad, Jason, are Washington, D.C.'s public schools?


Are they as bad as Newark's? Are they as bad as Detroit's?

RILEY: They are awful. In 2007, D.C. ranked last in reading, second to last in math scores. And this is despite the fact that they spend something like $14,000 per student.

GIGOT: One of the highest levels in the country.

RILEY: One of the highest levels.

MCGURN: And doubt, about double the voucher.

GIGOT: Which is $7500.

RILEY: Which makes the voucher program a bargain for taxpayers.

GIGOT: The other thing is the public schools, do they lose money here if somebody takes their voucher and goes to a private school? Does the public school lose any cash?


GIGOT: They don't lose any cash?

RILEY: This is not about finance though.

MCGURN: In fact, the original deal was three-party. It gave the traditional public schools money. It gave charter schools money. And it gave the voucher program money. so there was nothing taken from anyone.

RILEY: But the real shame here is this program is working. And it is hugely popular, something like four or five applicants for every scholarship available. Parents are satisfied. The evaluations that have come out so far about the program have been good. Another one is due later this month, which is one of the reasons some Democrats, like Dianne Feinstein, are hesitant to pull the plug.

GIGOT: That's what I want to ask about because this passed, in part, because Senator Feinstein, of California, broke ranks when Republicans ran Congress, and she supported it. I think Mary Landrieu, of Louisiana, also supported it.

A lot of Democrats must know this doesn't look good politically. You are going to take these kids and yank them out of schools that their parents like, the kids like. Why would the leadership decide this is a good idea? Or why wouldn't other Democrats rebel and say, we don't need this fight, we got enough?

MCGURN: Because an omnibus is a great way, sneak it in there.

GIGOT: An omnibus is everything — the kitchen sink bill.

MCGURN: Everything, and so people are voting on other stuff and so it is hidden. there's not a direct vote on the vouchers. That's why this reprieve is interesting. If Senator's amendment gets through — he has an amendment to remove the Durbin ambush.

GIGOT: Nevada senator, Republican senator.

MCGURN: Senator — if his amendment is voted on, it would have to go on the record. This is a great way to do it if you want to take it from these people. You tuck it in this thing. The death knell is now, but people won't feel it for a year and a half.

GIGOT: Jason, what's the evidence from around the country and other experiments, Milwaukee, Cleveland, some other parts of the country about vouchers? How well — how well are they working?

RILEY: It is clear that the kids receiving the vouchers are doing better than their peers who do not receive vouchers. It's also clear that the programs are popular with parents. Once low-income people get a taste of school choice, they like it and want it to continue. It is also true these programs put pressure on the surrounding public school systems to improve, because those systems don't want to lose students to the voucher program. so competition is working.

HENNINGER: There's a lot of social policy in the stimulus bill. And I looked to see if there was anything related to this subject, and there is. They want to do a study to see whether performance pay for teachers and principals work. Right? This is a good idea. They are going to undermine that. Then there's a provision to ensure that no low-income students are taught by inexperienced, unqualified or out-of-field teachers, meaning people who come in, alternative certification, like accountants and so forth.

GIGOT: Is the bottom line here that unless Barack Obama speaks up and says to his fellow Democrats, privately or publicly, don't do this, this language killing that program is getting in?

MCGURN: It's likely to get through. I think he needs to stand up. He can do it privately, but tell them he does not want this thing.

GIGOT: All right, Bill.

We have to take one more break. When we come back, our "Hits and Misses" of the week.


GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worse of the week.

Dan, first to you.

HENNINGER: Paul, remember all those college lectures you fell asleep in? Don't worry about that anymore. San Juan College in New Mexico has the solution. It is called the microlecture. They've reduced online lectures to 60 seconds. One minute lectures. They introduced this and I, of course, called occupation safety. Enrollment shot up to 450 students. Who can doubt it? An administrator there said, "You know, you get bored with talking heads. These are more like snapshots of learning." Now I can go on and on about this, but my time is up.


This is a big hit for students, but a miss for Western civilization.

GIGOT: And a history of Western civilization in 60 seconds.

All right, Mary?

O'GRADY: This is a miss for toymaker Mattel. In case parents are worried their daughters are not exposed enough to our declining culture, Mattel is bringing out a Barbie doll called Totally Styling Tattoos Barbie. She comes with butterfly tattoos that you can stick anywhere on the doll's body.


Now, there's no question that parents want to put this kind of an idea into their daughters head at a very young age. I'll be interesting to see how many of these dolls sell.

GIGOT: All right, Jason?

RILEY: This is another miss for the Supreme Court decision against Wyeth Pharmaceuticals this week. The court essentially said that a drug company can be held liable for the use of its medicines, even if those medicines are administered improperly by health professionals and even if they contain warning labels approved by the Food and Drug Administration. Now if that's the case, that means that it's basically open season on drug companies, which is great for trial lawyers, but bad news for drug innovation and public health.

GIGOT: All right.

That's it for this week's edition of "The Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week!

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