From the people who brought you such recent brilliant decisions as:
- 9/11 "Bin Laden Determined To Attack in the US"
- Tax cuts during a time of war
- The Patriot Act after Dick Cheney says, "work the Dark Side"
- The Iraq War because Saddam Hussein had Weapons of Mass Destruction
- Clean Skies because global warming was just a theory
- Doubling the National Debt because our economy is liquid and sound
- Cheap credit leading to the largest consolidation of corporations in recent memory
- Missle defense in eastern Europe leading to another cold war level of distrust
- Pimping Iran as an immediate nuclear threat
Comes:Paulson, Bernanke Expand U.S. Power to Rescue Markets (Update1)
By Rebecca Christie and John Brinsley
Sept. 19 (Bloomberg) -- The U.S. government moved to cleanse banks of troubled assets and halt an exodus of investors from money markets in the biggest expansion of federal power over the financial system since the Great Depression.
``We're talking hundreds of billions,'' Treasury Secretary Henry Paulson said in a press conference. ``This needs to be big enough to make a real difference and get to the heart of the problem.''
The Treasury tapped all $50 billion in the country's Exchange Stabilization Fund to insure money-market mutual fund holdings, and the Federal Reserve expanded lending to commercial banks. The measures were aimed at credit markets teetering on the edge of collapse, as investors pulled a record $89.2 billion from money-market funds Sept. 17.
Paulson and Fed Chairman Ben S. Bernanke's plans, which include the removal of illiquid mortgage securities from companies' balance sheets, sent stocks from the U.K. to China soaring. The dollar gained, while two-year Treasury notes fell the most in 23 years, sending the yield up from the lowest level since mid-March.
``This is taking a giant step toward a cure and a giant step toward creating some clarity in the market,'' said Alan Blinder, a professor at Princeton University and a former Fed vice chairman. ``This needs to be drafted very carefully. What's needed is something large and systemic.''
Short-Selling Ban
The effort is a recognition that Paulson and Bernanke's earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.
Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the 1930s.
Securities and Exchange Commission Chairman Christopher Cox, who attended the gathering with lawmakers, said the SEC planned to consider more rules to guarantee market liquidity. Today, the SEC temporarily banned short-selling of financial companies' shares until Oct. 2 after Morgan Stanley fell 39 percent earlier this week. The U.K. took a similar step yesterday.
Stocks surged around the world after a three-day slide earlier this week wiped about $1.9 trillion in market value from the MSCI World Index. The U.K.'s benchmark FTSE 100 index rose 7.9 percent, the most since it started in 1984. The Standard & Poor's 500 Index climbed 4.4 percent and Japan's Nikkei 225 Stock Average climbed 5 percent.
`Fairly Quickly'
Two-year note yields climbed 44 basis points, or 0.44 percentage point, the most since February 1985, to 2.14 percent at 9:03 a.m. in New York, according to BGCantor Market Data. The 2.375 percent security due August 2010 tumbled 3/4, or $7.50 per $1,000 face amount, to 100 1/2. Yields on 10-year notes increased 22 basis points to 3.76 percent.
Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change.
Another possibility is using Fannie and Freddie, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said.
No Specifics
``We will try to put a bill together and do it fairly quickly,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said after the meeting. ``We are not in a position to give you any specifics right now'' on the proposals, he said when asked about the potential cost.
The likelihood of the government taking on yet more devalued assets, after the seizures of Fannie, Freddie and AIG and the earlier assumption by the Fed of $29 billion of Bear Stearns Cos. investments, may spur concern about its own balance sheet.
The Treasury has pledged to buy up to $200 billion of Fannie and Freddie stock to keep them solvent, while the Fed agreed Sept. 16 to an $85 billion bridge loan to AIG. The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program.
``It sounds like there's going to be a giant dumpster for illiquid assets,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. ``It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative'' to the size of the American economy, he said.
Opposition
Senator Richard Shelby of Alabama and some other Republicans have criticized the takeovers of AIG, Fannie and Freddie for imposing a potentially high cost on taxpayers.
``We cannot protect all risk in the market, and we shouldn't do it at the risk of the taxpayer,'' Shelby, the ranking Republican on the Senate Banking Committee, said in an interview with Bloomberg Television this week.
Still, Representative John Boehner, the head of the Republicans in the House, told reporters after the meeting with Paulson and Bernanke that he was ``hopeful that in the coming days we'll have a proposal that will pass this Congress.''
Senator Charles Schumer of New York, a Democrat who chairs the congressional Joint Economic Committee, warned yesterday against leaving the Fed with an expanding role for addressing the credit crisis.
``It's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' Schumer said yesterday in Washington.
Replenishing Fed
The Treasury the past two days announced $200 billion in special bill sales to help the Fed expand its balance sheet. The U.S. central bank extended a record $59.8 billion in loans to investment banks and $33.4 billion to commercial banks as of Sept. 17. The Fed yesterday also joined its counterparts from around the world to pump $180 billion into global money markets.
An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults.
Schumer proposed an agency to inject capital into troubled financial companies in exchange for rewriting mortgages to make them more affordable. It would be modeled on the Great Depression-era Reconstruction Finance Corp., he said. Others have floated a type of Resolution Trust Corp., which was a 1990s fund to manage devalued assets from failed savings and loans.
Citigroup Inc., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers alone had more than $500 billion of so-called Level 3 assets as of June 30, according to data in a Sept. 15 report from New York-based bond research firm CreditSights Inc. The holders of these assets say their values can only be determined through internal models because of illiquid markets.
Senator Christopher Dodd, who chairs the Senate Banking Committee, said it was a ``sober'' gathering. The plan would likely come from the Treasury and Fed this weekend and ``nothing is more important than this,'' Dodd said.
To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.netJohn Brinsley in Washington at jbrinsley@bloomberg.net
Last Updated: September 19, 2008 10:33 EDT
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