WHY THE FEDERAL BAILOUT PLAN?
The Bush Administration has proposed a $700 billion fix for the mortgage loan crisis (see here). The plan basically gives the Treasury Secretary the authority he thinks he needs to buy up a lot of bad debt. Here is how the Wall Street Journal puts it.
The Treasury Department sent Congress legislative language last night asking for broad authority to buy assets from U.S. financial institutions. The request is just two-and-a-half pages and contains a broad outline of how this new entity would function. The government wanted to keep the plan simple, in part because it wants the flexibility to adjust what its doing as market conditions change, a person familiar with the matter said. (from here)
Just two-and-a-half pages? Given it is a $700 billion scheme, any taxpayer might want to read that. Of course, there is no telling how long the document will be after Congress gets hold of it.
Why the continuing mess? With Fannie Mae and Freddie Mac taken over, why do we have a continuing crisis? Well, in addition to the aforementioned, there are other government sponsored loan agencies. Fannie Mae and Freddie Mac even have a “competitor”, the Federal Home Loan Bank System (FHLB). Here is how Investopedia describes FHLB.
An organization created by the Federal Home Loan Bank Act of 1932 to increase the amount of funds available for lending institutions who provide mortgages and similar loan agreements to individuals. This system was created in response to the depressive economic conditions of the era, which had impaired the U.S. banking system.
Also referred to as the “FHL Bank System”.
Having served its original objectives well, the FHLB system now primarily focuses on increasing the amount of loanable funds available for affordable housing and community development projects. It continues to have a material impact on housing and development financing, offering funds to member institutions at rates that are usually lower than commercially competitive prices. (from here)
How does FHLB describe itself? Here is what FHLB puts at the top of its home page.
The Federal Home Loan Banks (FHLBanks) are an essential source of stable, low-cost funds to financial institutions for home mortgage, small business, rural and agricultural loans. With their members, the FHLBanks represent the largest source of home mortgage and community credit. (from here)
Banking institutions, even government sponsored banking institutions like that word “stable”, but what is the status on FHLB? To find out, I did a scan of news stories on the Internet. Here is the first of several excerpts.
Washington Mutual may face increased costs to keep the confidence of depositors, say analysts, after the largest US savings and loan institution was downgraded to junk by both Standard & Poor’s and Moody’s.
“This week and next will be the moment of truth for WaMu,” said Fred Cannon, an analyst at Keefe Bruyette & Woods. “Their primary sources of liquidity are retail deposits and advances from the Federal Home Loan Banks [FHLB] but, now they are junk-rated, WaMu may have to pay more to encourage depositors.” (from here)
Here is the second excerpt. It is from an interview with the Chief Economist for FTN Financial in New York.
On the catalyst for the bailout plan:
“What is too big to fail? It was Lehman.”
The Primary Reserve fund “broke the buck because of the Lehman bankruptcy. Institutions started withdrawing money from money market funds. The money market froze up. Businesses can’t finance inventories because they can’t sell their commercial paper. The FHLB (Federal Home Loan Bank), which was selling $50 billion in discount notes a month, couldn’t sell those notes.”
“On top of that, institutions pulled money from their prime brokerage accounts at Morgan Stanley and Goldman Sachs. They didn’t have any more securities to lend out. That drop in liquidity was a wake-up call.” (from here)
The best we save for last. Here is a third excerpt from a Morningstar report.
At the height of the turmoil in financial markets on Thursday, the Federal Home Loan Banks canceled its auction of discount notes due to the dislocation in the short-term funding markets.
However, the FHLB said it was able to raise $41 billion through negotiations with clients outside of the auction process.
“We elected not to have the discount note auction yesterday because we negotiated more than $41 billion in discount notes during the first two hours after the open,” said Mike Ciota, a spokesman for the agency, confirmed on Friday.
Ciota said he would not comment on speculation that the FHLB was forced to cancel the auction due to lack of interest as many money market funds flooded into Treasury bills.
The spokesman did say, however, that the company’s ability to place the $41 billion of notes demonstrated investor demand was still intact.
The system of 12 regional banks typically uses these notes to raise money for its operations, and these are of maturities one year and less. (from here)
FHLB is shaky, but it is apparently not quite yet down for the count. Apparently, the Bush administration wants make certain FHLB does not collapse too.
Other Views
The SkepticalObserver reviews the overall financial picture (see here).
Dogwood Pundit blames the Democrats (see here).
Below the Beltway derides the Bush administration for not adhering to free market principles (see here)
The right-wing liberal reviews the failure of the AIG bailout (here) and financial insanity (here).
MB demonstrates that he does not understand the degree to which we have ALREADY implemented socialism (here).
Loudoun Insider blames Wall Street, not Congress (here). He too apparently does not understand how many GOVERNMENT SPONSORED loan companies we have. Admittedly, until all hell broke loose, I too did not appreciate how much the government had involved itself in lending. We let this stupid nonsense sneak up on us.
And what did Raising Kaine think of the financial mess? Well, back in March Raising Kaine wanted us to watch a cartoon. I kid you not. See here. Is it any wonder the Skeptical Observer calls them Ranting Kids? Raising Kaine also tells us that Obama stands for “No “blank check” to American taxpayers on Wall Street bailout” (see here). Unfortunately, we are bailing out GOVERNMENT SPONSORED loan companies, not Wall Street.
The Oath tells us how politicians can be persuaded to hold their tongues (see here).
Waldo Jaquith (here) and Below the Beltway (here) both tell us “It’s the economy stupid”.
ShaunKenney prices the bailouts (here).
Deo Vindice connects the energy crisis with the financial crisis (here).
Check out this article in the Washington Times. Excerpt:
In the dark of night over the weekend when most people were snoozing, the Treasury dramatically expanded its bailout plan to include buying student loans, car loans, credit card debt and any other “troubled” assets held by banks.
The changes, which were included in draft language that also opened the bailout program to foreign banks with extensive loan operations in the United States, potentially added tens of billions of dollars to the cost of the program.
[...]
“The costs of the bailout will be significantly higher than originally considered or acknowledged,” said Joshua Rosner, managing director of Graham Fisher & Co., who charged that the Treasury and Federal Reserve have not been “forthright” about the ultimate cost to the public….