Update 5: Newsflash: No real plan, just "ideas" for Congress
by johnny venom, Fri Sep 19, 2008 at 06:52:35 AM EDT
This is actually a continuation or sequel to yesterday's updates on the proposed plan to clean the bad debt. As news comes forward, I will update ASAP. I've been up most of the night, considering that Washington has been as well, attempting to nail something out.
Here's what we know so far, for sure. There are now two rival plans on the table. One plan put forth by New York Senator, Charles "Chuck" Schumer, and another by Treasury Secretary, Hank Paulson. The former is based on the old New Deal era Reconstruction Finance Corporation (RFC), though with a few minor changes (Which keep changing!). The latter is sorta based on the 1980's Resolution Trust Corporation (RTC), which dealt with the previous disaster in the Savings & Loan industry. In addition to this, there is now a plan to introduce an FDIC-like agency, or have the FDIC itself come to protect money market funds.
CNBC and others are saying that Secretary Paulson is saying that whatever is formulated, ultimately Congress will have to approve it. This will be done, like the RTC, to give political cover and most of all legislative support. As the title of this article suggest, Secretary Paulson has hinted that the clean up will cost half a trillion dollars. Where this money will come from, I'm assuming the Fed, but also Congress (hence the legislation). Lastly, it seems as if what we will see is a combination of what Schumer proposed and what the Treasury has in mind.
Quick Recap of what we know of both plans:
1) Supply capital for firms that are not dead but extremely sick.
2) Purchase bad loans at a steep discount
3) This hybrid RTC/RFC will obtain preferred shares and/or majority share in those who wish to unload this bad debt
4) New plans to re-adjust problem mortgages to help homeowners
5) Possible hold to maturity for many of these mortgages or security packages
6) Resale of these mortgage-backed securities at a higher price once that market rebounds
7) Possible establishment of a new FDIC for Money Market Funds OR expansion of FDIC into MMFs.
Also, currently, it looks as if the Securities & Exchange Commission (SEC) will be imposing a temporary ban on shorting of stocks, particularly financial shares. Naked short selling activities will be watched for, and enforcement of prosecution. Already the State of New York is looking to prosecute several violators.
Keep in mind, so far, nothing official has been announced. Congress has yet to approve of anything, there is speculation that they may hold of until after the election. Still, the market (from looking at futures currently trading up big time) is expecting some sort of action proclaimed either today or this coming week.
I promise to update this as soon as something comes about. Expect updates soon!
Cross posted on The Economic Populist - A Community Site for Economics Freaks and Geeks
Ok, it's official, there will be a new FDIC for Money Market Funds
The Treasury will supply new capital to initiate new loans or refinance existing ones. Paulson is now calling on a new regulatory structure, a complete overall that he says should reflect our modern economy.
Ok, no official packaged plan except for that new FDIC for Money Markets Funds. He just has "ideas" which he will meet with Congressional leaders to put together this weekend. He is now saying he expecting Congress to pass their own plan based on his advice by next week.
Bottomline: The government is going to eventually create a new entity to buy off all the bad debt. In the meantime, it will loan cash to buy assets of ailing Money Market Funds. Not sure the exact mechanics, especially the financing, and I guess this is why Treasury Secretary Paulson is going to Congress today for their big-time weekend meeting.
Forgive me, I forgot something. The Treasury will use $50 billion to buy up shares of Money Market Mutual Funds that are now trading under $1.
Treasury will only have a 2-year window to buy Mortgage-backed Securities. Also only US-based companies will have access to capital infusion. Lastly, hedge funds will be prohibited from having access to the bad loan fund.