Paulson, Bernanke Push Plan to Cleanse Balance Sheets

[Purveyor]

Source: Bloomberg

Sept. 18 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke met with lawmakers to push a plan that would move troubled assets from the balance sheets of American financial companies into a new institution.

Congressional leaders meeting with Paulson and Bernanke late today in Washington said they will work to pass legislation soon. The initiative, which may also insure money-market funds, is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.

``Absolutely, this is good news,'' said Marilyn Cohen, who manages $185 million in bonds as president and chief executive of Envision Capital Management in Los Angeles. ``Hopefully, this will give the trading desks the confidence to start making markets again.''

The Treasury and Fed chiefs, after months of trying to aid failing financial companies case by case, want to prevent the crisis that has led to $518 billion in global losses and writedowns from further weakening the U.S. economy.

``What we are working on now is an approach to deal with the systemic risk and the stresses in our capital markets,'' Paulson said after the meeting. ``We're coming together to work for an expeditious solution which is aimed right at the heart of this problem, which is illiquid assets on financial institutions' balance sheets.''

Read more: http://www.bloomberg.com/apps/news?pid=20601068&sid=auI5M5F3uYmE&refer=home

[DuaneBidoux]

1. The Republicans: Bringing us closer to socialism than all the Democrats in history combined.

This is absolutely stunning. I don't know if it will get any attention on DU but this is truly (and there is no other way to put it) stunning.

This is what happens to capitalism when it is allowed to run amok and eats its young. As Khrushchev said (to paraphrase) capitalism will sell the rope needed for its enemies to hang them. The Republicans have put good and honorable capitalism in real danger by letting the extremes run rampent in a jungle capitalism that is suicidal.

[olddad56]

2. wake up and smell the tax dollars burning...

Your choices are the socialism that the Democrats have to offer, or the Fascism that the republicans have been moving us into since the Reagan era. Right now, the quasi socialism that the Dem's are pushing as an alternative to the 'New World Order' fascism of the Republicans are pushing looks pretty good to me. Maybe because I an in the middle class and for fascism to prevail, the middle class will have to cease to exist. Just my opinion.

[DuaneBidoux]

9. Well actually I don't consider myself a socialist, and I don't believe you can call what the 'Pukes

have given us as complete fascism they have given us socialism in reverse.

The basic republican 8 year economic plan has been: lower taxes on wealthy in preparation for the big haul to come. Deregulate completely the financial markets leaving them completely unregulated and unguarded. Allow all the rich Republican buddies to rape and pillage for 5 or 6 years and then quietly look the other way while they slip out of town. Now for the coup de gras: the bill is left, and the regular folks who still pay taxes get left holding the check. In the mean time, I suppose the criminals are sipping margaritas in the Caribbean, and of course, continuing to contribute to their Republican servants.

[cliffordu]

3. It's unfortunate that the BETTER kind of socialism, the kind where a great education

and free medical care are provided will NOT be on the menu so the happy campers out in the Hamptons can keep driving their Bentleys.

There should be bodies burning in the streets over this.


The greedsters just guaranteed that we will be a second class nation for the forseeable future.

[Nihil]

4. And just WTF are they going to use for money?

> a plan that would move troubled assets from the balance sheets
> of American financial companies into a new institution.

Are they just going to draw a line and say "Tough titty boys, we're
outta dough" or are they going to magic up the money for this
"new institution" from the bottomless pit of taxpayer debt?

> "Hopefully, this will give the trading desks the confidence
> to start making markets again."

= "Shit guys, I'm bustin' for another fix at the casino so hurry up!"

:grr:

[dasmarianDemuth]

5. Why this is bad

For anyone wondering "why is this bad?" Here is why, and my understanding of the mess, more or less.

Large financial companies wrote risky loans just to have the loan "asset" on their balance sheet. They then turned around, leveraged the asset into a loan to themselves from another bank (so for your 150k mortgage on their sheets maybe they borrowed $1.5 mil), then they used that money to buy options and futures, and other risky stuff which was also leveraged, so for the $1.5 million of borrowed capital, they buy maybe $10mil worth of futures.

When the loans started to go bad, the second stage lenders realized that the asset backing the $1.5 mil loan wasn't worth $150k anymore. Oops. Now they kinda want some money back. But the stock market was in decline, so that $10mil in futures that the company had leveraged is now worth less, and there isn't any money to pay back the second stage lender.

That in a nutshell is why the banks are failing, from my rudimentary understanding of the situation.

So now the govt wants to basically tell the financial companies it will bail them out. So your tax dollars go to save these companies that operated under risky and greedy these practices. Had they been making money, you wouldn't be rewarded, but now that they all failed, the govt is writing checks of immense proportions to save single companies. And you are footed with the bill.

The Fed can afford to do this simply by printing money. This newly minted money is adding billions to the pool of US dollars in circulation. This makes all US currency less valuable as the supply is greater.This is problem one.

Problem two is that the govt is stepping in with tax dollars to bail out private firms. This is a socialist concept which goes completely against the notion of capitalism upon which our markets are based. This also adds to our national debt, by billions and billions of dollars.

So we can't find $40bil to bail out SS, but can find $85 bil to bail out AIG. Interesting, huh?

[joeglow3]

6. Is this as bad as it seems?

I was watching CNBC yesterday and someone said that of all the times the government has done this in the past, they have never lost money. How can this be true? I know that they are assuming real assets so we will not see a complete write-down of all assets, but will the government actually be able to make money?

I also know the government is charging AIG the 3 Month T-Bill rate plus 850 basis points, so if the debt is paid, there is money that the government will make there. Additionally, the government jumps to number 1 in the list of creditors.

Basically, is there anything discussing the real potential cost to the government, compared to when this was done in the past?

[ramapo]

7. Just a do over

Reckless CEOs, unrestrained greed, and misguided politicians following the wishes of their big donors, have brought us to the edge of the cliff.

It is clear that our economic system was poised to fall off the cliff with out drastic action.
So the government, over the space of two days, has moved to essentially wipe the slate clean for the tottering big financial houses. Somehow I don't think this will trickle down to the middle class.

CEOs will still get their millions in bonuses and packages. Taxpayers left holding the bag.

[Javaman]

8. And out come the second set of books...nt