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by Free Internet
Press
9/20/08
The Bush
administration Saturday sent lawmakers a historic $700 billion emergency
rescue plan that allows the Treasury to buy the troubled mortgage
securities that have been toppling major financial firms and are at the
heart of Wall Street's turmoil.
The package, the
most sweeping government intervention in the markets since the Great
Depression, was $200 billion higher than lawmakers had been told Friday
to expect. It also does not include the $200
billion that officials said earlier this month the government will spend
on the rescue of Fannie Mae and Freddie Mac.
To accommodate the
spending, the package also would also raise the federal debt limit to
$11.3 trillion from the current $10.6 trillion. The debt now stands at
$9.6 trillion.
President Bush,
speaking to reporters Saturday during a White House appearance with
Colombia President Alvaro Uribe, said drastic action was needed because
of the scope of the financial crisis.
"It is a big package
because it's a big problem," said Bush. "The risk of doing nothing far
outweighs the risk of the package."
Bush said that in
talks with congressional leaders he "found a common understanding of how
severe the problem is" and the need for urgent action.
"We need to get this
done quickly, and the cleaner the better,'' he said.
Bush, who campaigned
for office as the nation's first MBA president and a free-market
advocate, also appeared to address complaints from conservatives that
the plan is too costly and inserts the government too heavily into the
economy. He suggested he was persuaded by Paulson and other senior aides
of the need for drastic intervention.
"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?' '' said Bush. "My first instinct was
to let the market work, until I realized, while being briefed by the
experts, how significant this problem became.''
Bush acknowledged
that the plans would put "hundreds of billions of dollars at risk," but
said he was confident would get most of their money back in the end.
Under the proposed
plan, the government would purchase only mortgage-backed securities from
troubled firms and only those issued before Friday. The government
authority would expire in two years.
The Treasury
secretary would be required to report to Congress on the plan within
three months.
The plan would allow
the government rather than the cold judgment of the marketplace decide
the winners and losers from the crisis that has shaken the U.S. economy
for the past year.
Millions of
Americans could also benefit from other dramatic stopgap measures.
Regulators announced efforts to stabilize the mortgage market; curb
stock speculation; and insure money-market mutual funds with government
money, seeking to protect ordinary investors and preserve a vital source
of corporate finance.
The initiatives were
precipitated in part by concern that scared investors would race to
withdraw their holdings from money-market funds, which hold $3.5
trillion in investments, depleting a major source of short-term funding
for corporations.
Bush, who had
remained largely silent as the crisis broadened this week, said
yesterday it is a "pivotal moment for America's economy." In a Rose
Garden speech remarkable for its grim language and ominous tone, Bush
said: "This action does entail risk. But we expect that this money will
eventually be paid back. ... The risk of not acting would be far
higher."
Treasury Secretary
Henry M. Paulson, Jr., acknowledged Friday that the federal government's
previous policy of addressing corporate failures on a case-by-case basis
had not stemmed the accelerating crisis. He said the new comprehensive
strategy has a better chance of calming the turmoil that froze critical
segments of the credit markets and sent stock markets into a tailspin
earlier this week.
"I am convinced that
this bold approach will cost American families far less than the
alternative - a continuing series of financial institution failures and
frozen credit markets," Paulson said in a speech at the Treasury
Department.
The Bush
administration, Federal Reserve Chairman Ben S. Bernanke and
congressional allies launched a major offensive yesterday to persuade
lawmakers to support Paulson's proposal. Because the plan needs the
approval of Congress, officials from the Treasury and the Fed are
worried that delay by lawmakers would spark fresh anxiety in the
markets. They are working with congressional leaders to pass the plan by
the end of next week, which would be extraordinarily quick for Capitol
Hill.
"I am very
optimistic that we can pass a balanced and comprehensive plan within a
week," said Sen. Charles E. Schumer (D-New York), who chairs the Joint
Economic Committee. "Chairman Bernanke made all too clear the cost of
inaction."
Some lawmakers,
including Sen. Richard C. Shelby (Alabama), the ranking Republican on
the Senate Banking Committee, have expressed concerns about the plan's
cost, chance of success and possible unintended consequences. Such
opposition could delay passage. "We are being asked to go 'all in' with
taxpayer dollars, and once our government and the taxpayer is on the
hook, there is no fallback option," said Rep. Jeb Hensarling (R-Texas),
a leading conservative. "At the moment I remain skeptical, fearful
and unconvinced that this is the proper remedy for our nation."
Paulson and Bernanke
held a morning conference call with more than 100 House Republicans,
making the case for their plan and describing in "strong and serious"
terms the dire situation facing the financial system, according to a
participant on the call.
Hours later, the
House Republican leadership met with members and lobbyists to warn
against cluttering the legislation with amendments or trying to delay
its passage. The message, according to a person at the meeting: We want
a clean bill.
The Dow Jones
industrial average, which jumped between massive losses and gains this
week, rose 3.3 percent yesterday to close at 11,388.44. Combined with a
410-point gain Thursday, the index ended near break-even for the week --
sweeping away Monday's 504-point loss. The Standard & Poor's 500-stock
index, a broader measure, rose 4 percent yesterday and actually posted a
gain for the week.
"It's a massive
relief rally on the back of the comprehensive plan," said Joseph
Brusuelas, chief economist for Merk Investment. "If you have hundreds
of millions of mortgage-backed securities on your books that you cannot
value, much less sell, you can now unload them to the U.S. government."
Investors also
moved out of the safety of Treasury and back into the broader market. On
the expectation that the economy will now recover, the price of light,
sweet crude oil jumped $6.67, to $104.55 a barrel, on the New York
Mercantile Exchange.
The proposals
unveiled yesterday capped a dizzying two weeks in which the government
seized the mortgage-finance giants Fannie Mae and Freddie Mac; allowed
the 158-year-old Lehman Brothers to collapse; and taken over American
International Group, the largest insurer in the world.
In his speech
yesterday, Paulson identified the mortgage securities that the
government would buy as the "underlying weakness in our financial
system."
Mortgage securities
provide the financing for most home loans sold in the United States and
were widely held by big financial firms and banks. When home values
started dropping, traditional buyers of these securities ran for the
exits, and the value of the securities also plummeted. Those left
holding the bag -- mainly mortgage firms, big Wall Street banks and
hedge funds -- started to suffer vast losses, and some collapsed
altogether.
Under the
administration's plan, the Treasury would offer to buy the troubled
mortgages from U.S. financial institutions. The Fed has been talking to
its counterparts around the world to set up similar programs for other
countries' banks.
The Treasury would
hold several rounds of buying, first purchasing securities from the
banks that request the lowest prices, in order to limit the cost to
taxpayers. The plan could be broadened to include securities based on
other kinds of loans, such as student loans and commercial real estate.
The U.S. government
could end up holding the securities for years or even decades, depending
on whether they recover value.
The troubled
mortgage securities "are clogging up our financial system and
undermining the strength of our otherwise sound financial institutions,"
Paulson said. "As a result, Americans' personal savings are threatened,
and the ability of consumers and businesses to borrow and finance
spending, investment and job creation has been disrupted."
Some Democrats said
yesterday that they are pushing for the Treasury to help the homeowners
whose mortgages the securities finance avoid foreclosure, a debate that
is expected to play out next week.
The timing of the
administration's plan reflected in part mounting concern about
money-market mutual funds, which were widely regarded as safe havens
until the bankruptcy of Lehman Brothers caused a major fund to post a
loss this week. Officials feared a massive run as investors withdrew
about $200 billion during the week, including $50 billion on Thursday,
according to Crane Data, which tracks the industry.
The problems
accelerated as the massive withdrawals forced funds to sell assets at
fire-sale prices. The Federal Reserve, trying to stanch the bleeding,
said it would offer funding for banks to buy assets from the funds at
normal prices.
The Treasury
Department also announced that it would offer an insurance program for
the funds that is similar to the long-standing government guarantee of
bank deposits. Funds would pay a fee in exchange; if they collapse, the
government repays investors.
Yet the Treasury
intervention threatens to drain deposits from already troubled banks
because money-market funds offer higher interest rates and now will
feature the same federal protection. People familiar with the matter
said banking regulators were not consulted on the plan and were
considering how best to limit the impact on banks.
The American
Bankers Association released a letter to Bernanke and Paulson that said
the government had acted in "great haste" and should reconsider.
"The program
announced this morning runs the risk in the long run of profoundly
changing the nature of our financial system and, specifically,
undermining the nation's banking system," wrote ABA President Edward
Yingling.
The Treasury further
announced that Fannie Mae and Freddie Mac will increase their purchases
of mortgage-backed securities. By buying more of these securities, the
two firms will provide more money to fund mortgages and should decrease
the interest rate on those mortgages.
The Federal
Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie
Mac, said it had directed the companies to begin buying more mortgages
but declined to say how much more they would buy. Although this
could expose the companies to greater risks, FHFA Director Joseph B.
Lockhart III said government "examiners will continue to oversee that
such activities are done in a safe and sound manner."
Paulson also said
the Treasury would expand its plan to buy mortgage-backed securities to
supply additional money to Fannie Mae, Freddie Mac and the overall
mortgage market. The government plans to buy $10 billion in mortgage
securities in the next month, up from $5 billion earlier this year.
Intellpuke: Talk
about inflation! When Bush & Co. first announced this bailout two days
ago the price tag for taxpayers was $400 billion. By Friday evening it
was $500 billion and today (Saturday) it is $700 billion and will bring
the national debt to $11.3 trillion. That's a lot of U.S. taxpayers'
money being poured into this crap shoot and, worse, it is betting on the
come -- namely, that there will be profit returned on this bailout,
which is dubious at best. I hope the American people's representatives
in Congress study this bailout plan thoroughly and do not -- as they did
with Patriot Acts I and II, the creation of the Homeland Security Dept.,
and warrantless wiretapping of American citizens -- pass this sucker
without even reading it. The prevailing theory here seems to be that
it's okay to bankrupt America, just don't let the big special interests
on Wall Street go bankrupt. Personally, I think the Bush Administration
has its priorities backwards.
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