U.S. could buy bad assets in massive bailout
WASHINGTON – In what is expected to be the biggest bailout since the Great Depression, top government officials and congressional leaders agreed late Thursday to develop a comprehensive plan to break the back of the nation’s roiling financial crisis.
The plan would relieve financial institutions of the mortgage-backed securities and other bad assets that are threatening the nation’s economic health.
Under the proposal, details of which were not announced, the government would buy the distressed assets from banks and other institutions in an attempt to break the logjam that has choked the financial system, according to people familiar with the briefing.
The hope is that firms could resume their usual borrowing and lending practices once they were freed from the burden of troubled mortgage-back securities, calming the markets and reviving the economy.
Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke suggested that, once the financial system is rebooted, the government would be able to sell off the assets for enough money to recover the taxpayers’ money and perhaps even turn a profit, according to these people, who spoke on condition of anonymity because they were not authorized to discuss the issue publicly.
The plan could be announced as early as today and voted on by Congress by next week.
One person familiar with the discussions said the program would be “very large” – larger than anything the government has done to date.
Lawmakers emerging from a 90-minute session in the offices of House Speaker Nancy Pelosi, D-Calif., late Thursday, said they expected to receive a detailed proposal from Bernanke and Paulson overnight and work through the weekend in an effort to pass it quickly into law. Members of both political parties pledged to work cooperatively despite the fast-approaching presidential election.
To ease the credit crisis Thursday, the Fed announced that it would boost to nearly $250 billion the funds available for major foreign central banks to ease the credit crisis. Meanwhile, the Securities and Exchange Commission signaled its intention to follow its British counterpart in issuing a temporary ban on short selling.
Short selling is a means of betting that a stock’s price will fall by selling borrowed shares in hopes they can be repurchased at a lower price. The practice has been increasingly blamed for causing sudden drops in companies’ stock values, frightening away lenders and leaving the firms financially beached.
Early reports that a comprehensive rescue was in the works caused U.S. stock prices to reverse course from Wednesday and roar upward Thursday.
Traders on the New York Stock Exchange broke into cheers as the bellwether Dow Jones industrial average switched from a 200-point loss to a better than 400-point gain by day’s end.
The Dow ended up 410.03 points, or 3.9 percent, at 11,019.69. The Nasdaq composite gained 100.25 points, or 4.8 percent, ending at 2,199.10, and the S&P 500 Index climbed 50.12 points, or 4.3 percent, to close at 1206.33, its largest one-day percentage gain in nearly six years.
Paulson and Bernanke acted on their new plan after a two-week period during which policymakers caromed from one debacle to another, responding to each with ad hoc steps that failed to reassure panicky investors. They seized mortgage giants Fannie Mae and Freddie as well as insurance behemoth American International Group Inc. and effectively pulled the plug on investment banks Lehman Brothers Holdings Co. and Merrill Lynch Cos. They also coaxed a group of 10 big financial institutions to kick into a $70 billion self-insurance pool and pumped out billions of dollars more to try to reverse a new and dangerous credit market freeze-up.
The full dimensions of what Washington has already done began to come into focus late Thursday when the Fed issued figures showing that it has made nearly $100 billion in special loans to financial firms around the world in the last week alone.
Separately, Treasury announced that it would expand a program to help bolster the Fed’s finances to $200 billion, from the $40 billion that it announced Wednesday.
According to those familiar with Bernanke and Paulson’s thinking, both of these efforts would be dwarfed by the new plan – the price of which could run into the hundreds of billions of dollars, or perhaps more.