Radical bailout plan has a jawdropping price tag

[Martrae]

Sep 19, 11:32 PM (ET)
By TOM RAUM and JEANNINE AVERSA

WASHINGTON (AP) - Struggling to stave off financial catastrophe, the Bush administration on Friday laid out a radical bailout plan with a jawdropping price tag - a takeover of a half-trillion dollars or more in worthless mortgages and other bad debt held by tottering institutions.

Relieved investors sent stocks soaring on Wall Street and around the globe. The Dow-Jones industrials average rose 368 points after surging 410 points the day before on rumors the federal action was afoot.

A grim-faced President Bush acknowledged risks to taxpayers in what would be the most sweeping government intervention to rescue failing financial institutions since the Great Depression. But he declared, "The risk of not acting would be far higher."

The administration is asking Congress for far-reaching new powers to take over troubled mortgages from banks and other companies, including purchasing sour mortgage-backed securities. Administration officials and congressional leaders are to work out details over the weekend.

Congressional officials said they expected a request for legal authority to buy up the bad loans, at a cost in excess of $500 billion to the government. Democrats were discussing whether to try to attach middle class assistance to the legislation, despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.

In other major steps, the Treasury Department and Federal Reserve moved to give money-market mutual funds the same kind of federal protection, at least temporarily, that now applies to savings and checking accounts and certificates of deposit at banks. Money-market accounts sold through retail banks are already FDIC insured.

The spreading global selling panic had started to threaten some money-market funds, usually thought of as rock-solid investments. Administration officials feared a run on these funds, held by millions of Americans.

"Every American should know that the federal government continues to enforce laws and regulations protecting your money," Bush said at the White House. The 75-year-old Federal Deposit Insurance Corporation now insures savings and checking accounts and certificates of deposit up to $100,000.

Separately, the Securities and Exchange Commission acted to block short-selling in financial securities. That is a trading method that bets the value of stocks will go down. It has been blamed for accelerating the plunge in stock prices of banks and other financial institutions.

"This is a pivotal moment for America's economy," Bush said. "In our nation's history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment."

Congressional leaders of both parties welcomed the administration's bold moves, after a series of ad hoc rescues.

The talk on the presidential campaign trail, barely six weeks before the election, was of bipartisanship, too.

Democrat Barack Obama said it was critical that leaders in both parties work in concert. "Truly, we are all in this together," he said.

GOP presidential nominee John McCain said leaders should put aside partisan differences and "any action should be designed to keep people in their homes and safeguard the life savings of all Americans."

The federal government already has pledged more than $600 billion in the past year to bail out, or help bail out, some of the biggest names in American finance. That includes the rescue of investment bank Bear Stearns in March, the takeover of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) earlier this month and the takeover of the world's largest insurance company, American International Group, just this week.

But the contagion continued to spread, bringing political consensus that drastic and comprehensive federal action was needed.

There are precedents for such a federal takeover.

In the late 1980s, the government created the Resolution Trust Corporation to tackle the savings and loan crisis. It acquired the defaulted mortgages, foreclosed real estate and other assets of nearly a thousand failed S&Ls, restoring order and stability to the system. Resolving that crisis took six years and $125 billion in taxpayer money - roughly equal to $200 billion in today's dollars.

And there was the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to revive the market by giving loans to banks and other businesses.

On Friday, Treasury Secretary Henry Paulson gave few details about the structure of the new program. Asked about an overall price tag, he said, "hundreds of billions" of dollars.

Congressional leaders said they were ready to move quickly but still needed details of the administration plan. For instance, there was no indication of what the government would get in return from financial companies for the federal assistance.

Paulson and Federal Reserve Chairman Ben Bernanke briefed lawmakers in both parties on the idea by conference call Friday.

In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets - such as loans that are delinquent but not in default - and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the call.

"You give them good cash; they give you the worst of the worst," Sherman said of the plan, which he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping.

Paulson rejected Democrats' calls to include tighter regulations, corporate reforms or limits on executive compensation as part of the measure, Sherman said. "He's doing his best to paint a picture of the sky falling, and then he says, because the sky's falling, you have to do it my way."

Paulson said the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary impact while protecting taxpayers as much as possible.

"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 unable to fund economic expansion," Paulson. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

Bush said simply, "We must act now."

"America's economy is facing unprecedented challenges. We're responding with unprecedented measures," Bush declared, standing in the White House Rose Garden with Paulson, Bernanke and Christopher Cox, chairman of the Securities and Exchange Commission.

Shortly after his remarks, Bush called congressional leaders with whom the administration will be working on the final plan. He spoke to Senate Majority Leader Harry Reid, D-Nev., House Speaker Nancy Pelosi, D-Calif., Senate Republican leader Mitch McConnell of Kentucky and House GOP leader John Boehner of Ohio.

The administration wants to see a package emerge from the weekend, to lend calm to Monday morning's market openings, said Keith Hennessey, the director of the president's economic council. The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.

Paulson said Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market. He also said the Treasury Department will expand a program, announced earlier this month, to buy mortgage-backed securities, which have been badly hurt by the housing and credit crises.

"As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford," Paulson said.

Bush authorized Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money-market mutual funds. And the Federal Reserve announced it would expand its emergency lending program to help support the $3.4 trillion in total assets of the funds.

On Wednesday alone, investors had pulled more than $89 billion from money-market funds, according to iMoneyNet, publisher of the newsletter Money Fund Report.

The government's actions could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has come to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings Inc. (LEH)

European Central Bank, Swiss National Bank and Bank of England also offered up more cash Friday. The three banks put a combined $90 billion into money markets.

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Horrible horrible idea. All this is going to do is make things worse by devaluing the dollar more.

Did you guys know that 5 years ago Ron Paul warned of the danger in the housing market and made a simple suggestion to avoid it but was ignored?

[Arlos]

Warren Buffet warned about what was going on in 2003 as well.

While I'm not exactly thrilled with bailing out the companies either, the simple fact is that things have gotten too interconnected right now for many of them to be allowed to fail, lets we end up with another Great Depression, or worse.

Now, if you ask me, any company that gets that big means it has gotten TOO big, and should get broken up into component parts. Sure, profits might not be quite as good for the components as for the agglomerate, but it's MUCH safer for the economy, and actually would result in there being more jobs.

The issue is that SOMETHING does need to happen, or the dominoes are going to keep collapsing. The criminal lack of regulation and oversight (which McCain has supported for all 26 years he's been in office, BTW), has let us get into this mess, and we cannot simply let it run its course, or the economy would just about collapse.

Now, if the Democrats really CAN get some middle class protections in there, that will be awesome, but I kind of doubt they will.

Anyway, here's some articles I've been reading on the whole situation that have been very good:
http://www.time.com/time/business/artic ... 23,00.html
http://www.time.com/time/business/artic ... 67,00.html

And one from a Nobel-winning Economist:
http://www.cnn.com/2008/POLITICS/09/17/ ... index.html

-Arlos

[Tikker]

the part that's the most frustrating is that the american economy going to shit based on foolish mortgages/investments/etc fux with everyone in north america hugely, and the rest of the world to a fair extent

[KaiineTN]

The good news is that lenders are going to be less willing to give out loans, which will have an impact on the money supply and offset the immediate devaluing that this bailout bullshit will cause. The dollar will be fine for a while, in fact, I suspect it will go up in value. Who knows when it will drop off the deep end...

[Martrae]

Actually, no, because you know how they will pay for this? They will issue some treasury bonds which the Federal Reserve will just print more money to cover. The more money in circulation, the less it's worth. The impact of half-trillion freshly minted cash hitting the open market will sink us even faster than letting the businesses fail.

They should stick to shoring up the dollar and stabilizing things that way...unfortunately, I don't think Bernanke has the first clue about things and definitely shouldn't be in the position he's in.

And I TOTALLY agree about these businesses getting TOO big. Talk about putting all your eggs in one basket.

[Martrae]

http://www.usnews.com/blogs/the-home-fr ... -last.html

[Arlos]

Well, one thing this does is make it kind of obvious that there's GOING to be SOME kind of tax increase to pay for this. It would be incredibly irresponsible NOT to at this point.

Still, it may well not come out of any of our pocket books though. Guy I saw on the news last evening was talking about how they might start looking at some non-traditional means of raising cash. The example he gave sounds pretty reasonable to me, actually, and is done right now in England, apparently without collapsing their market system. heh.

Basically, what it is, is every time a stock is sold, there's a tax of 1/4 of 1% on the sale. From what the guy was saying, this would generate at least 100 billion a year in new revenue, and as he said, it's already done in England, and they seem to be doing just fine.

Honestly, I think it's somewhat brilliant. One, it encourages long-term stock purchases, rather than frenzied day-trader type buying, and we NEED to get investors back to looking at the long view rather than at maximizing short-term profits, as that's what got us INTO this mess. Second, it's so small, that the average person buying or selling stocks isn't even going to notice it. Spend even $10,000 on a stock purchase, and the tax is $25.

So yeah, put that tax in, and require it to go directly only towards paying off the debt generated by the bailout until it's paid, and we could have the debt paid off in less than a decade.

-Arlos

[KaiineTN]

I know they're just printing the money, but I still stand by what I said. The dollar will retain value, if not increase, due to lenders not lending (in the short term). That has a larger impact on the money supply.

Time will tell!

[Evermore]

sigh

[Evermore]

bah double post

[Phlegm]

I know they're just printing the money, but I still stand by what I said. The dollar will retain value, if not increase, due to lenders not lending (in the short term). That has a larger impact on the money supply.

Time will tell!

If the bail out goes through, the increase in the supply of the dollar, along with the low prime rate, will cause the value of the dollar to drop.

Oil prices will increase since they are based on the dollar.

[ClakarEQ]

And they've already responded with a jump in barrel price, up $25 so far, I wouldn't expect it to go down any time soon.

[Evermore]

so we should just bend over then and hope they use a lube?

[ClakarEQ]

lube is for pussies, we're american, take it like a man

[brinstar]

govporations? corpernment? USA Inc?

the lines, they blur

[Evermore]

Great article on the AIG bailout


http://www.lewrockwell.com/orig6/schembrie9.html

[Martrae]

Anyone else think Bernanke has absolutely no idea what he's doing or how the economy really works?

[Martrae]

http://www.cnn.com/2008/POLITICS/09/23/ ... index.html

Funny how everyone is listening to him now, eh?

[leah]

i need your teeth for the federal reserve, spencer!

[Phlegm]

i need your teeth for the federal reserve, spencer!

Who's Spencer?

[leah]

ohhh it's from that video i posted in cap's alehouse that no one else thought was funny hehe . . . the guy talking was supposed to be ben bernanke and that's one of the things he says.




admittedly, the video is not that funny . . . but the lines are so damn quotable! you sexy little rattlesnake.

[Arlos]

Heh, just got this in my email, thought it was pretty damn funny and appropriate for the thread...

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TOWALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

-Arlos

[Tossica]

http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html

Funny how everyone is listening to him now, eh?

Who's listening to him?

[Martrae]

I wonder















CNN ran that editorial on their front page, too, btw.

[Tossica]

Oh, he's definitely still talking, that's for sure. I'm just not sure how many are listening.