Broad Authority, Lots of Money And Uncertainty
Monday, September 29, 2008
Congress is on the verge of granting Treasury Secretary Henry M. Paulson Jr. sweeping powers to stabilize the nation's financial system. He would stand largely unfettered by traditional rules, largely unrestricted in his ability to spend $700 billion of federal money.
The Treasury Department would decide what kind of assets to buy, and which financial firms could sell them. It would decide how much to pay. And it would hire firms to manage its acquisitions, without having to obey the normal rules for hiring contractors. These decisions would take several weeks, Paulson said.
The results will determine whether $700 billion is enough to end the financial crisis.
"This is really an unusual situation, a highly unusual situation. And we need flexibility, we need a variety of tools, we need to figure out how to get out there in weeks," Paulson said in an interview last night.
It is not clear how patiently investors and depositors in troubled institutions will wait. Nor is it clear whether, in the meantime, the banking system itself will begin to recover from the uncertainty that is freezing the flow of loans to major corporations, small businesses and individuals.
Two European banks moved toward failure over the weekend: Bradford & Bingley, a British mortgage lender, and Fortis, a giant banking and insurance company based in Belgium. Several American institutions continue to teeter.
The legislation, which the House is expected to vote on today, is the latest in a series of government efforts to stem the wave of financial failures, which started with large numbers of Americans losing their homes to foreclosure. The bill allows the Treasury Department to buy mortgage-related securities devalued by those foreclosures in hopes of leaving troubled financial institutions with fewer problems and more cash.
With the political process nearly complete, the work of helping the financial markets has only just begun. The most critical decision facing the Treasury is how to go about buying troubled assets. Officials say the department may well use different approaches for different kinds of assets, rather than pursuing a uniform strategy.
The goal is not to vacuum all the industry's troubled assets into a federal holding tank. Rather, the government wants to determine credible prices for the assets held by banks, through the mechanism of buying some of those assets. If the plan succeeds, the prices paid by the government will become a new market standard, bridging the current gap between the higher prices sought by banks and the lower prices offered by investors.
"We need confidence, and this is about confidence," Paulson said.
In a practical sense, the government is trying to revive the markets because buying up all the troubled assets would require far more than $700 billion.
Twenty of the nation's largest financial institutions owned a combined total of $2.3 trillion in mortgages as of June 30. They owned another $1.2 trillion of mortgage-backed securities. And they reported selling another $1.2 trillion in mortgage-related investments on which they retained hundreds of billions of dollars in potential liability, according to filings the firms made with regulatory agencies. The numbers do not include investments derived from mortgages in more complicated ways, such as collateralized debt obligations.