Friday, September 19, 2008

Brother Can You Spare A (Million) Dime(s)?

There are still displaced people from Hurricane Katrina and folks standing in line for food and water after Hurricane Ike, but look how quickly the Bush Administration rides to the rescue of Wall Street in an election year. Amazing how Government can work when it sees a real need. Anybody got a trillion dollars to help pay down the budget deficit?

Biggest Bailout Ever: Did the Government Go Too Far? (Yahoo Financial)

Posted Sep 19, 2008 10:39am EDT by Henry Blodget in Newsmakers, Recession, Banking
After a few weeks of trying to stand tough in the face of demands for a wholesale rescue, Hank Paulson apparently couldn't take it anymore. So now we'll have the biggest bailout in history, including:
A huge RTC-like government garbage can that banks can throw all their toxic balance-sheet waste into. (This time, the transfer will be made before they go bankrupt, unlike the case with the first RTC -a.k.a. the Resolution Trust Corp., a government agency created in the late 1980s to liquidate the assets of failed Savings & Loans)
A temporary ban on shortselling.

A federal guarantee on money-market accounts. (Including non-recourse loans to banks to buy high-quality commercial paper and meet money-market obligations.)
Not surprisingly, the market's up huge on this news. The moves should head off a run on money-market funds, restore liquidity to the financial system, and, create a general "time out" for the panic to recede.

So what are the costs? Almost certainly:

Higher taxes

Higher interest rates on government debt

Bigger government deficits

When the alternative is the entire financial system going bankrupt, we guess these costs are acceptable. But we're not convinced that that was the alternative.

Stocks Soar as Investors Look to Gov't Rescue Plan (Associated Press)
A plan to help financial companies excise bad mortgage debt from their ledgers likely would alleviate much of Wall Street's uncertainty about credit worthiness that has been sending the markets into tumult over the past week. Lending grinded to a virtual standstill in the wake of this week's bankruptcy of Lehman Brothers Holdings Inc. and the bailout of teetering insurer American International Group Inc.

The government took other steps Friday to restore stability to the financial system. The Federal Reserve said it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed injected another $20 billion in temporary reserves into the U.S. financial system. The central bank also will buy short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

And to help calm investors' anxieties, the Treasury Department has decided to use a Depression-era fund to provide guarantees for U.S. money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them due to worries about the funds' exposure to souring corporate debt.
To help limit the freefall in financial stocks, the Securities and Exchange Commission on Friday enacted a temporary ban on the short-selling of nearly 800 financial stocks.

"The federal government has been petitioned by Wall Street to take evasive action in the money markets, the stock and bond markets, to avoid a complete meltdown of the credit system," said Battipaglia. "Once the credit system melts down, the economy falls. We can hand-ring about if this is the proper thing for the government to do, or if Wall Street pulled the panic button too soon, but that's something for the historians to sort out."

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