Saturday, September 20, 2008

Bailout Plan - What's in store?

Scanned the news this AM - A few links of interest on the MASSIVE Bailout Plan:

Financial Crisis: Washington Pulls Out the Stops

The federal government is embarking on a sweeping approach to fixing the country's rapidly unraveling financial system, offering few details but warning that failing to act could further endanger the economy. At the same time, regulators unveiled several narrower measures on Sept. 19 that are intended to reassure investors and protect financial stocks from being driven down by short-selling, coordinating their actions with governments overseas.

Paulson said: "We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses." He acknowledged the plan would likely prove costly. "We're talking hundreds of billions of dollars—this needs to be big enough to make a real difference," Paulson said. "Until we get stability in the housing market, we're not going to get stability in the financial markets."

In the meantime, to keep the financial markets fluid, Fannie Mae and Freddie Mac would begin buying more mortgage-backed securities, the investments underlying much of the current turmoil. The Treasury would do the same. When the government assumed control of the two mortgage giants, it said both would continue increasing their portfolios for a time, and it announced a program by the Treasury to buy up securities directly from the market.

The Treasury also said it would insure money-market mutual funds—low-risk funds that many consumers and businesses view as equivalent to cash—making available up to $50 billion to prevent losses in the funds in return for fees from the funds. Investors in one prominent fund saw their investments decline this week after Lehman Brothers failed, and at least one other fund's investment manager said it would provide cash to prevent similar losses.

Atop those developments, the Securities & Exchange Commission said it would completely ban short sales—or bets that share prices will fall—of 799 financial companies, following a similar move by British financial regulators on Thursday. The move goes well beyond restrictions adopted Thursday to limit a kind of abusive short-selling called "naked shorting," and some securities experts had warned that such a move could actually harm the market.

In recent days, policymakers have increasingly debated the need for a government-run entity—perhaps modeled on the Resolution Trust Corp. established amid the savings-and-loan crisis of the 1980s—that would take problem securities out of the market to improve liquidity, restore confidence, and prevent a wave of corporate collapses that could have far-reaching effects on the U.S. and world economy. "Lesson No. 1 from that era is: move quickly," says Richard Breeden, the RTC's architect and a former SEC chairman. "Troubled assets don't become more valuable over time; they become less valuable."

Paulson sends mortgage plan to Capitol Hill, Bush calls crisis 'pivotal moment' for America's economy

WASHINGTON (MarketWatch) -- Treasury Secretary Henry Paulson has presented his historic mortgage rescue plan to Congress and the two sides will meet throughout the day on Saturday on the details.

Treasury presented the plan to Congress late Friday, a Treasury spokesman said.
In an unprecedented action, Paulson said Friday that he wants to spend "hundreds of billions" of dollars take unsellable mortgage assets off the balance sheets of financial firms. The hope is that this will unclog the financial system and allow banks to lend funds to each other and clients.

The failure of banks to lend is considered a big risk to the economic outlook. Without access to funds, businesses and consumers will cut back spending. On Saturday, President Bush called the crisis "a pivotal moment for America's economy," in his weekly radio address.

The measures being taken by the administration, the Treasury and the Securities Exchange Commission "require us to put a significant amount of taxpayer dollars on the line," Bush said. "But I'm convinced that this bold approach will cost American families far less than the alternative. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars, and college tuitions," he said.

The New York Times reported that Federal Reserve chairman Ben Bernanke warned members of Congress of the risk of a deep and extended recession unless action was taken to clear the toxic mortgage assets from bank balance sheets.

Few details of Paulson's plan have emerged.

Treasury Sends to Congress Proposal to Buy Assets

Sept. 20 (Bloomberg) -- The Bush administration has sent to Congress a $700 billion proposal that gives broad power to the U.S. Treasury Department to acquire troubled assets now on the balance sheets of U.S.-based financial companies.

The legislation gives Treasury Secretary Henry Paulson authority to own as much as $700 billion in mortgage-related assets at one time. The bill would raise the nation's debt ceiling to $11.315 trillion from its current $10.615 limit.

The legislation was forwarded to congressional leaders in both political parties early this morning. The move comes as Paulson and Federal Reserve Chairman Ben S. Bernanke are pressing for action from Congress to help stop a contagion of credit risk that has toppled four financial giants and forced two into mergers as capital flight squeezes Wall Street.

``This is going to be a big package because it's a big problem,'' President George W. Bush said following a meeting with Colombian president Alvaro Uribe at the White House. ``We need to get this done quickly, and the cleaner the better.''

The proposal requires the Treasury secretary to report back to Congress three months after the government first uses its new powers, and then semiannually after that.

Bush said he called leaders in both chambers of Congress and ``found a common understanding of how severe the problem is and how necessary it is to get something done quickly.''

Wide Berth

Under the proposal, the Treasury secretary is given wide berth to take action ``as the Secretary deems necessary'' to hire people, enter into contracts, and issue regulations. The proposal requires the Treasury to simultaneously consider market stability and protecting the taxpayer.

The Treasury plans to hire asset managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, a person briefed on the proposal said yesterday. The proposal specifies that only assets from U.S.-based financial institutions issued or originated on or before Sept. 17 can be purchased.

The authority expires two years after it is enacted.

Bush today said he's unconcerned that the price tag on the package may seem high.

``I'm sure there are some of my friends out there that are saying, I thought this guy was a market guy, what happened to him,'' the president said. ``My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''

Bush said the financial crisis is putting ``hundreds of billions of dollars at risk,'' but ``over time, we're going to get a lot of the money back.''

Crisis On Wall Street; Paulson: Plan Aimed At Solving 'Heart Of Financial Crisis'


FOFOA said...

Here's a warning issued to our politicians by Itulip:

Politicians forget that a short seller is a buyer albeit at a lower price. Take him away and in a market panic there are no buyers at all. A market can in theory then fall to zero. You've been warned.

FOFOA said...

Peter Schiff on CNN talking about it.

Dave said...

"Without access to funds, businesses and consumers will cut back spending."

They still don't get it. They think that if they print it, people will come. We're in a recession, so people and businesses don't want to spend, no matter how cheap money is. And individuals are so deeply in debt that most of them can't qualify for a loan anyway.

No matter how cheap you make money in such a climate, it's not going to get borrowed.