$1 Trillion Revised Bank Bailout & Housing Rescue Plan
[Updated Feb 09] - The revised financial sector rescue plan was formally announced by the Obama administration today and it could could cost upward of $1 trillion to implement. The plan involves a mix of government and private capital, aimed at stabilizing the U.S. financial system by injecting capital into banks (via a "bad bank"), helping to determine prices of toxic assets weighing on firms' balance sheets and stemming foreclosures
"We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion and expand it based on what works," said Treasury Secretary Geithner. "Together with the Fed, FDIC and private sector, we will establish a Public Private Investment Fund that will provide government capital and government financing to help leverage private capital to help get private markets working again for the legacy loans and assets that are now burdening the entire financial system."So in addition to the $1 Trillion dollar stimulus package, the Obama administration has now laid out it's plan to deal with the financial and economic crisis. Do you think it will work or is it just a rehash of ideas that have not worked in the past?
The Market's initial reaction to the plan has been very negative with the Dow falling over 300 points. Early comments from analysts criticize the revised plan as not providing any real new initiatives and being short on detail on the private-public partnership viability. It has clearly failed to provide the confidence factor that the market was looking for.
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Treasury Secretary Timothy Geithner is planning to expand the roles of bailed out Mortgage Giants - Fannie Mae & Freddie Mac - and the Federal Deposit Insurance Corp (FDIC) in the Obama administration's plan to refocus the $700 billion financial-sector bailout, known as the Troubled Asset Relief Program (TARP). The semi-nationalized mortgage companies would be used in helping homeowners avoid foreclosure and for implementing national loan modification standards. While the FDIC would guarantee a wider range of debt that banks issue to fund loans, which could help free up credit to companies and consumers."We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners," wrote Larry Summers, director of Obama's National Economic Council, to congressional leaders last month.
The government has already committed $350 billion of the $700 billion financial-sector bailout fund approved by Congress last fall, and it is expected that the Obama administration will ask Congress for the remaining funds and perhaps more under the revised plan.
Fannie and Freddie, who were bailed out last year have already had tens of billions of taxpayer funds (with much more committed) pumped into them in a bid to try and prevent the collapse of the entire mortgage market. Under the revised plan they will use their widespread network to implement national standards for loan modifications. This includes a mechanism to determine the value of homes facing foreclosure - something that has proven hard to do - which could speed negotiations with troubled borrowers. Geithner is also expected to express support for legislation that would allow judges to modify the terms of mortgages in bankruptcy court.
Using Fannie and Freddie would mean the government giving more taxpayer dollars to the companies as an incentive to modify loans. This includes a plan to set a government backed national mortgage rate of 4% for conforming loans that the companies purchase, and allowing people to refinance or get new loans at this rate. However, this assumes that people will meet the criteria to get this new rate.
Overall, the new administration had to revamp the TARP, especially if congress approval for the remaining funds was needed. Reducing foreclosures and setting a very low borrowing rate will alleviate some of the housing problems. In addition to the Stimulus package – which is aiming to tackle unemployment and economic growth - these are the strongest and probably final measures the government can take. For all our sakes, let’s hope both these rescue plans/packages work.
[Update]. From the WSJ, here is good graphic summarizing elements of the proposed plan:
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February 8, 2009 9:24 AM
We'll know a lot more on Monday when the plan gets announced, but so far it looks like the Obama administration is totally misreading both the economic problems and the political climate. What needs fixing first is the banking system, i.e. the creditor side not the debtors. And while the public may be unsure about bailing out Wall Street, every time it has been floated it has been made clear that there is no support at all for bailing out fools who bought more house than they could afford.
February 8, 2009 5:05 PM
From Reuters:
"Fannie Mae and Freddie Mac own or insure 31 million mortgages -- about 58 percent of all U.S. single-family home loans -- but only a fraction of their borrowers qualify for a refinancing program that was meant to save several hundred thousand. A similar initiative run by the Department of Housing and Urban Development that promised to help 400,000 borrowers has only reached a few hundred."
We have tried these programs before and the not work. Even it the new program saves a few thousand more homeowners it won't solve the unemployment and economic problems. By making freddie and fannie bigger, we are just creating a bigger time bomb to go off again in the future. Don't we ever learn!
February 8, 2009 6:19 PM
Frank/Anon - I agree, I think the revised plan may have limited effect if implemented in the way it is being proposed. Will wait for details (Tuesday). I also think that Obama et al, will ask for more than the remaining $350 bn.
February 8, 2009 11:33 PM
Fannie and Freddie should be shut down and any politician that continues to support them should be thrown out of office or impeached and thrown into jail.
Obama is not going to save the economy, he is going to destroy what we have left.
February 9, 2009 10:01 AM
New information suggest that the "Bad Bank" concept is back in. A deep dark hole where all the bad assest dissaper (and probably sold to China!)
February 11, 2009 11:46 AM
Four easy steps to solve the banking crisis
1. Perform a thorough “stress-test” on all major banks based on their current assets and liabilities (including the so-called “toxic assets). If any bank – regardless of size – falls below a certain threshold, close them down.
2. Sell the assets from step #1 to the “viable banks”. In other words, pick winners and losers then give the winners the right to the spoils (assets from weak banks).
3. Provide a capital infusion into the viable banks and take a equity stake; enough for them to begin making loans again.
4. To further help the viable banks prosper, facilitate a sale of the toxic assets to the private sector. Provide a reasonable guarantee. For Example: private equity takes the first 80% loss on any toxic assets purchased from banks, then the government would guarantee any loss beyond the 80%. This would “put a floor” under the toxic asset values and give them a “truer” market price (albeit, one that is slightly manipulated). This would free the viable banks of toxic assets and let the private sector take most of the risk (and with it, the potential for handsome returns). If the private sector bids “correctly” at these auctions, they will be able to absorb a significant number of losses and still make money.