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Fallout: The Financial Crisis

What’s happened to the bailout plan?

Marketplace Staff Nov 12, 2008
Fallout: The Financial Crisis

What’s happened to the bailout plan?

Marketplace Staff Nov 12, 2008


KAI RYSSDAL: This is one of those stories where a 90-second news spot just leaves you with more questions thaN when you started. So for some of the answers we’ve called Karen Shaw Petrou with the consulting firm Federal Financial Analytics.

Karen, good to have you with us.

Karen Shaw PETROU: Thanks very much.

RYSSDAL: I wanted to pick up on a couple of themes that John Dimsdale just laid out for us. First of all, why? Why didn’t the original plan to buy up those toxic assets work?

PETROU: Well, they’ve never tried it. But, in part, it didn’t work because it was always going to be hard. And not anticipating how hard it was going to be, Treasury was sideswiped when it figured that out and then had to quickly construct Plan B.

RYSSDAL: Was it the thing that we heard about as that plan was being floated — that you couldn’t figure out how to price these assets? You didn’t know what they were worth?

PETROU: Bingo. The assets are complicated. They’re hard to price. They’re held by thousands of investors around the world. This isn’t e-Bay here. This is tricky.

RYSSDAL: All right. Well, then, why is bank recapitalization better?

PETROU: In the long run I’m not sure it is. It’s just easier. I think in time in poses significant issues, most notably the question of combining troubled banks into huge, bigger troubled banks. Or handing problems that ought better to be resolved by the FDIC over to big banks that then get weaker. But it was easier. It was quicker to corral those nine big banks, put them in a room and force the capital on them than it turned out to be to run the asset disposition and purchase process.

RYSSDAL: Here we are, two months into this bailout program and still the secretary of the Treasury said this morning that he is worried about systemic failure in the economy. Did that catch your ear at all?

PETROU: Anytime he says that, it sure does. It’s pretty scary out there still.


PETROU: I think it is because we’ve taken the financial markets from a liquidity problem, which was where we were starting in August of 2007, and a very delayed recognition by the federal regulators and Treasury about how serious that was. Then we moved into a rapid collapse of the housing market, particularly prices and the residential market freezing up. Now we’re looking at a recessionary scenario — one thing building on the next, with a sharp drop-off in retail sales and the unemployment issues. So, that’s a lot of scary reality built on top of the liquidity and market-confidence issues. And that’s the problem Treasury Secretary Paulson was referencing this morning.

RYSSDAL: Let me ask you sort of a strategic question. It seems now the government’s attacking this problem two ways: One, sort of top-down with the Treasury and the bailout money, and also, especially, yesterday with some mortgage relief. How did that come to pass and is one better than the other?

PETROU: I think we need all of them. We need more mortgage relief. And the plan announced yesterday with Fannie Mae and Freddie Mac is a piece of the problem. As you all know, the FDIC is looking at another program that would involve guarantees. We’re going to need still more in the mortgage sector. But we’ve got problems throughout the financial sector — autos coming immediately to mind, commercial mortages. There are different tracks for each one of these asset sectors.

RYSSDAL: Where do the tracks all lead, then, Karen?

PETROU: Ah, to you and me and the rest of us as taxpayers! I hate to say it but that’s where, right now, all the tracks are coming into each one of our houses.

RYSSDAL: Karen Shaw Petrou is a managing partner at Federal Financial Analytics in Washington. Karen, thanks a lot.

PETROU: Thank you.

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