Under a proposal to bail out the financial industry, announced Thursday by Treasury Secretary Henry Paulson, the Treasury Department and the Federal Reserve will draft a plan to take over some of the assets of companies with billions of dollars of bad debt. The approach is similar to the savings and loan bailout of the 1980s, but rarely has the government intervened on such a gigantic scale. Congressional approval is required, and leaders in Washington appear ready to work quickly to cement the deal.
Paulson and President Bush both spoke Friday morning, describing the plan and asking for quick action from Congress.
In two other significant moves aimed at improving investor confidence, the SEC issued a temporary ban on short selling of stocks and the Treasury Department announced it would guarantee money market accounts.
Economics correspondent John Ydstie explains the developments in a conversation with Steve Inskeep:
Inskeep: What would the plan do?
Ydstie: We don't know all the details yet. Paulson said this morning he and Federal Reserve Chairman Ben Bernanke would work out details with Congress this weekend. But the government wants authority from Congress to acquire the bad assets that are at the heart of this financial crisis — these mortgage-backed securities owned by financial institutions, which they can't sell and which have already brought down AIG, Bear Stearns and Fannie and Freddie. They've also made the whole world afraid to lend, because no one knows who will be the next to fail.
Will this be similar to the effort to bail out savings and loans, which took place almost 20 years ago?
There are similarities. This is likely to involve a government entity like the Resolution Trust Corp., which would acquire bad assets from companies at a deep discount. It would presumably hold them for a time and sell them back into the market at a later date. But there's a big difference from the original RTC. It was disposing of the assets of dead S&Ls that the government had taken over. In this case, the government would be trying to save firms and the financial system by removing these "toxic" assets. Also, the original RTC was a big organization, and given the urgent nature of the current crisis, officials may not have time to set up a separate organization.
Is Congress going to go along?
Members of Congress involved in the meeting Thursday night seemed very open to this approach and aware of the urgency of the situation. Democrat Chris Dodd, chairman of the Senate Banking Committee, said he expected to receive a formal proposal from Paulson and Bernanke at a committee meeting on Tuesday. He said he would make Senate staffers available to work with the administration over the weekend. Democrat Barney Frank, chairman of the House Financial Services Committee, seemed to be on board, too. Frank said he thought his committee could take the administration's plan up by Wednesday and have it done by the end of the week.
Banning short selling of financial stocks. What is that about?
There has been concern that the short selling of financial stocks — that is, investors betting against these financial companies — has been driving down their stocks and pushing them to the brink of failure. The SEC has announced that there will be a temporary (though renewable) ban on short selling. It's being put in place to stop this short selling and stop this hemorrhaging.
Money market funds, insuring them. That means money is guaranteed if it's in one of these funds?
That's right. The financial meltdown has meant that people are even pulling money out of money market funds, which have been seen as the safest places for your money. The Treasury Department has announced it will insure deposits in regulated money market accounts.
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