Gene Cunningham, a Detroit Realtor, cheers during the rally in Lansing, Michigan on Sept. 17, 2008. The demonstration demanded the passage of SB 1306, which would halt foreclosures for two years. (Photo: Alan Pollock).
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U.S. Drafts Sweeping Plan to Fight Crisis
Treasury Announces Plan to Buy Troubled Mortgage Assets
By DEBORAH SOLOMON and DAMIAN PALETTA
Wall Street Journal
WASHINGTON -- The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.
Treasury Secretary Henry Paulson announced plans Friday to quickly set up a "bold" government program to take over troubled mortgage assets from financial institutions, along with other efforts to step up the purchase of mortgage-backed securities.
"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," Mr. Paulson said in prepared remarks for a press conference.
He plans to work with Congress over the weekend to get legislation in place next week, he said, calling for "prompt, bipartisan action." The program must be big enough to have "maximum impact," while protecting taxpayers, said Mr. Paulson.
"The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars," he said.
More immediately, Fannie Mae and Freddie Mac -- which were taken over by the government earlier this month -- will increase their purchases of mortgage-backed debt, he said. To facilitate that effort, Treasury will also expand the MBS purchase program it announced earlier this month.
The details weren't released for a mechanism that would take bad assets off the balance sheets of financial companies, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, Mr. Paulson said at a press conference.
President George W. Bush will make a statement at 10:45 a.m. to discuss "decisive actions" the federal government is taking to address "the severe disruptions in our financial markets," Press Secretary Dana Perino said.
Earlier, the Treasury announced a massive program Friday to shore up the nation's money-market mutual-fund sector, responding to concerns that the global financial crisis is starting to affect those historically safe assets. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.
In addition, the Federal Reserve is expanding its liquidity programs, which should help money funds meet redemption demand. The initiative includes purchasing certain short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The Fed said it will also extend so-called non-recourse loans at the primary credit rate to U.S. banks to finance their purchases of high-quality asset-backed commercial paper from money-market mutual funds.
Meanwhile, the Securities and Exchange Commission proposed a temporary ban on short-selling on 799 financial stocks. The ban, which is effective immediately, is set to last for 10 days, but could be extended for up to 30 days.
Under the Treasury program, the government will insure the holdings of any eligible publicly offered money-market fund.
The funds must pay a fee to participate in the program.
"The program provides support to investors in funds that participate in the program and those funds will not 'break the buck,'" Treasury said in a statement, referring to the concern that arises when the net asset value of money-market funds falls below $1 per share.
The insurance program will be financed with up to $50 billion from the Treasury's Exchange Stabilization Fund, which was created in 1934. President Bush had to sign off on Treasury's use of the fund.
"Concerns about the net asset value of money-market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets," Treasury said in a statement.
The administration had been taking a patchwork approach to the financial crisis, putting out fires as they ignited. The new moves represent an effort to take a more systematic approach, after a spiral of bad debts, credit downgrades and tumbling stocks brought down venerable names from investment bank Lehman Brothers Holdings Inc. to insurance giant American International Group Inc. Banks have grown unwilling to lend to one another, a sign of extreme stress, because financial markets work only when institutions have faith in each other's ability to meet their obligations.
Word of a coordinated government plan came first came Thursday, a day when the Federal Reserve and other major central banks offered hundreds of billions of dollars in loans to commercial banks to alleviate a deepening freeze in the world's credit markets. That step appeared to have moderate impact on lending among banks. Meanwhile, a wave of redemptions continued hitting money-market funds, causing a second large fund to shut to investors.
In Russia, officials suspended stock-market trading for the second-straight day as the Russian government promised to inject $20 billion to halt a collapse in share prices. In China, government officials directed purchases of bank shares and encouraged companies to buy their own shares in
efforts to prop up a falling market.
Stocks Rallied Thursday, Early Friday
Still, word of a possible U.S. plan to address the crisis sent the stock market soaring on Thursday, in one of its sharpest reversals in recent memory. The Dow Jones Industrial Average ended up 3.9%, the index's biggest percentage gain in nearly six years, on record New York Stock Exchange volume.
The blue-chip index finished more than 560 points above its intraday low and reclaimed about 90% of its Wednesday losses. Nasdaq composite trading also saw trading volume set a new single-day high at 3.89 billion shares. All 30 Dow component stocks closed higher, but financial companies were the biggest winners, racking up double-digit percentage gains after weeks of selling off.
Early Friday, the Dow Jones Industrial Average soared by 400 points at the start of trading, as financial stocks surged.
The flurry of moves under discussion may bring the markets some breathing room, but it isn't clear whether they will amount to a long-term solution to the complex financial problems sweeping the market.
"The market wants to see a more systemic solution that doesn't leave us wondering day after day about the next institution that's the weakest link in the chain," said former Fed Board member Laurence Meyer, vice chairman of Macroeconomic Advisers, an economic research firm.
Treasury Department officials have studied a structure to buy up distressed assets for weeks, but have been reluctant to ask Congress for such authority unless they were certain it could get approved. The intensified market turmoil may have changed that political calculus, even with less than two months left until the November elections.
A big question still to be answered is how the government will value the assets it takes onto its books. One possible avenue could be some sort of auction facility, so that the government would not have to be involved in negotiating asset values with companies. Financial companies would likely take big losses.
President Bush met with Treasury Secretary Paulson, Securities and Exchange Commission Chairman Christopher Cox and Federal Reserve Chairman Ben Bernanke for 45 minutes Thursday to discuss "the serious conditions in our financial markets," said White House spokesman Tony Fratto.
Messrs. Paulson, Cox and Bernanke later addressed congressional leaders Thursday evening on their proposals.
At the meeting, Mr. Bernanke began by laying out the severity of the crisis. Mr. Paulson "made the sale," said a top congressional aide.
House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat, said his panel could hold a vote on the package as soon as Wednesday.
"They said they would like legislation to do it, and there was virtually unanimous agreement that there would be legislation to do it," said Mr. Frank.
In a news conference after the meeting, Mr. Paulson described his effort as "an approach to deal with the systemic risk and the stresses in our capital markets."
The "comprehensive" solution would deal with the souring real-estate and other illiquid assets at the heart of the financial crisis, he said.
Exactly how such an entity might be structured isn't yet clear. The possible plan isn't expected to mirror the Resolution Trust Corp., which was used from 1989 to 1995 during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and eventually sell them back into the market.
The program may look more like the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to inject liquidity into the market by giving loans to banks and other businesses.
According to a top congressional aide, the Treasury department wants authority to either control the program or have it be a separate division of the government.
A series of veteran policy makers, including former Treasury Secretary Lawrence Summers and former Fed Chief Paul Volcker, has pushed in recent weeks for such a government agency that would attempt a comprehensive solution to the markets crisis.
The idea would be to steady the market so that investors regain confidence in financial institutions and resume conducting business normally with them.
"By stepping in here and getting the markets to function again, the government could deliver the Sunday punch to this financial turmoil," said former Comptroller of the Currency Eugene Ludwig, who is now chief executive of Promontory Financial Group, and a big proponent for the idea. "By taking the first step and making a market the new government entity could take fear out of marketplace," he added.
Thursday, Republican nominee Sen. John McCain sought a broad expansion of government regulation over financial institutions, including the formation of a body to both assume distressed mortgages and help failing investment banks.
Saying the government cannot "wait until the system fails," Sen. McCain called for the creation of an entity that would essentially help companies sell off bad loans and other impaired assets. It is unclear how the body, dubbed the Mortgage and Financial Institutions trust, would operate, including whether or not institutions would seek help or whether the government would intervene on its own behalf.
His rival, Democratic Sen. Barack Obama of Illinois was less specific about what steps he would take, offering broader outlines of policy proposals that included a "Homeowner and Financial Support Act." The measure, which would inject capital and liquidity in the financial system, is designed to provide a more coordinated response than "the daily improvisations that have characterized policy-making over the last year."
—Tom Barkley, Brian Blackstone, Maya Jackson Randall, Joellen Perry, Laura Meckler, Nick Timiraos, Elizabeth Holmes, Michael M. Phillips and Craig Karmin contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com and Damian Paletta at damian.paletta@wsj.com
Paulson plan could cost $1 trillion
By Mike Allen
September 19, 2008 10:27 AM EST
Congressional leaders said after meeting Thursday evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke that as much as $1 trillion could be needed to avoid an imminent meltdown of the U.S. financial system.
Paulson announced plans Friday morning for a "bold approach" that will cost hundreds of billions of dollars. At a news conference at Treasury headquarters, he called for a "temporary asset relief program" to take bad mortgages off the books of the nation's financial institutions. Congressional leaders had left Washington on Friday, but Paulson planned to confer with them over the weekend.
"We're talking hundreds of billions," Paulson told reporters. "This needs to be big enough to make a real difference and get to the heart of the problem."
Stock markets soared around the world in anticipation of the rescue, with British and Chinese indexes recording their biggest gains ever.
Senate Banking Committee Chairman Chris Dodd (D-Conn.) said on ABC’s “Good Morning America” said lawmakers were told last night “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications, here at home and globally.”
“What you heard last evening is one of those rare moments — certainly rare in my experience here — was that Democrats and Republicans decided we needed to work together, quickly,” Dodd said.
The solution being proposed by the Bush administration is the most expensive bailout in the nation’s history, sharply curtailing the ability of the next president to push for tax cuts or new spending.
Congressional leaders tell Politico that to expedite the rescue, Treasury plans to seek additional authority rather than creating a new entity. The plan involves buying up hundreds of billions of dollars in bad mortgages to take them off the books of financial institutions that otherwise might fail.
Sen. Richard Shelby of Alabama, the ranking Republican on the Banking Committee, told “Good Morning America”: “I figure it will be at least half a trillion. But if you look at what the Fed has already done [by rescuing insurance giant AIG], and the extension of power to Treasury to deal with Fannie Mae and Freddie Mac, I believe we're talking about a trillion dollars.”
Some Republicans are expressing concerns about writing essentially a blank check to the Bush administration.
“They're lurching from one crisis to another,” Shelby said. “They don't seem to have a superplan to deal with this. ... We want to see the plan. This is not a done deal yet. But we know there's crisis, there's stress, in the financial markets that we haven't seen in, say, 70 years.”
Some conservatives are balking even more bluntly.
Sen. Jim DeMint (R-S.C.), a member of the Joint Economic Committee, told the Los Angeles Times: “What is missing from it and from the recent string of bailouts is a commitment to return to a free enterprise economy. ... What we need now is not what could be nearly a trillion dollars in new taxpayer bailouts but pro-growth policies that allow our markets to correct and start growing again.”
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