Leaders from the Treasury, the Federal Reserve and Congress are planning to introduce what may be the largest financial bailout in U.S. history. Legislation may be completed by the end of next week, when Congress will adjourn.
A centerpiece of the taxpayer-funded plan is likely to be government authorization to buy distressed mortgages from banks and other firms at steep discounts, according to a New York Times article.
‘What we are working on now is an approach to deal with systemic risks and stresses in our capital markets,’ Treasury Secretary Henry Paulson told the newspaper. ‘And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions' balance sheets.’
Unlike after the savings-and-loan crisis during the early 1990s, when the government bought and sold billions in real estate, the government purchases associated with this new plan are expected to involve only distressed assets themselves, rather than entire institutions. A new agency tasked with asset management and disposal may be created, or the Federal Reserve or Treasury Department may assume these duties.
Asset valuation remains another question mark, notes a Wall Street Journal article. The government may opt for an auction facility in order to avoid negotiating asset values with individual firms, which are expected to absorb significant losses.
As officials continue to solidify bailout specifics, the news of the plan led to immediate gains on Wall Street. Thursday, Sept. 18, was the market's best day in six years, according to a Reuters report, and early signs on Friday indicated further gains were likely.
Sources: New York Times, Wall Street Journal, Reuters