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Fallout: The Financial Crisis

Banks await details of rescue plan

Jeremy Hobson Sep 19, 2008
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Fallout: The Financial Crisis

Banks await details of rescue plan

Jeremy Hobson Sep 19, 2008
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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.

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