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Banks await details of rescue plan

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and Securities and Exchange Commission Chairman Christopher Cox join leaders from the House and Senate for a meeting at the U.S. Capitol on Thursday.

TEXT OF STORY

TESS VIGELAND: Many of us were either in bed or watching Leno and Letterman trying to find the funny in this money morass when Congressional leaders held a dramatic meeting on Capitol Hill with the Treasury secretary and Fed chairman.

At that meeting, yesterday's rumors became fact. The federal government is considering the creation of a new agency that would take onto itself all of the toxic debt that has swamped and overwhelmed the financial system.

So next week could end up being the most expensive week in the history of the U.S. government. Hundreds of billions of dollars of taxpayer money -- possibly more. Where, exactly, would it all go?

Marketplace Jeremy Hobson reports we won't know until the legislation is in place.


JEREMY HOBSON: First of all, it's worth noting that Treasury Secretary Paulson thinks this is the cheap option.

HENRY PAULSON: 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 says Fannie Mae and Freddie Mac will buy more unwanted mortgage-backed securities. But it'll take an act of Congress to get some of the really bad debt off the market. As for how much toxic debt the government will buy, a source at the House Financial Services Committee says it's not yet clear -- but everything is on the table.

Susan Wachter is a real estate and finance professor at the Wharton School. She says buying up all the bad debt is the only way the scheme will work. Otherwise, she says, home prices will continue to fall, leading to more foreclosures and round and round.

SUSAN WACHTER: We're in the midst of this downward spiral. And it isn't as though if you buy up a small portion -- 10, 20, 30 percent -- that spiral is going to be stopped.

There's talk the government will buy the debt at auction, and at severely discounted prices. But then what, says Wachter:

WACHTER: What happens to these mortgages next? Because if they are all forced to foreclosure, for example, that will cause prices to fall further and will cause the securities themselves' value to be undermined.

That would mean a big loss for the government, which means us taxpayers. Because, remember, we're all homeowners now.

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.
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I wonder how many of us there are out there who realise that the fundamental cause of all this mass is the huge legalised gambeling casino called WALLSTREET which engineered/created it.

Excellent assessment gb, you are the person that is making more sense that these idi… in Washington DC and Wall Street. This is just deferring the inevitable doom. Home prices must correct. This is a bubble and now we are all in the soup. Mr Paulson has managed to drag us all into this ugly crazy mess. Socialism for the rich.

Where does market place get people like "SUSAN WACHTER" to comment. The downward spiral in house prices is NOT the problem. The realestate BUBBLE where there was UPWARD spiral in prices WAS the problem. Would people in US who did not know about the real estate bubble please rise hands, please (Other than Greenspan/Bernanke and walstreet folks of course. they claim they did not know it was bubble).

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