27
WASHINGTON — The U.S. government plans to buy up hundreds of billions of dollars worth of bad loans as part of a sweeping plan to save the U.S. banking system from total collapse.
U.S. Treasury Secretary Henry Paulson, who announced the plan in Washington Friday, said the massive bailout is necessary to protect the financial security of all Americans.
“I am convinced that this bold approach will cost American families far less than the alternative, a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.” Mr. Paulson told reporters.
Mr. Paulson said officials of the Treasury Department, the U.S. Federal Reserve Board and key members of Congress would huddle over the weekend to “flesh out” the details. He said he expects Congress to pass legislation as early next week to put the plan into effect.
U.S. Treasury Secretary Henry Paulson unveils financial rescue measures in Washington Friday (Jason Reed /Reuters)
Morgan Stanley
Goldman Sachs
Freddie Mac
Fannie Mae
Wachovia Capital Trust
Videos
Treasury Secretary says mortgage giants Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities
Related Articles
In addition to the bailout, U.S. authorities unveiled a series of immediate measures to stabilize rattled financial markets, which have been on a roller-coaster ride all week on fears of a wave of bank failures.
Those measures include a co-ordinated international ban on short-selling of shares of financial institutions, a plan to guarantee money market funds and an expanded plan to purchase mortgage-backed securities through mortgage lenders Fannie Mae, Freddie Mac and directly by the Treasury.
Mr. Paulson called these initial measures “powerful tactical steps.”
The announcement sent stocks soaring today, led by embattled investment banks Goldman Sachs, Morgan Stanley and Wachovia Corp.
Mr. Paulson said doing nothing simply wasn't an option because soured mortgage loans have paralyzed the banking system, choking off funds to businesses and consumers alike.
“These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions,” Mr. Paulson said. “As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.”
Speaking later, President George Bush said that federal intervention in financial markets was not only warranted but “it is essential” to halt the worst financial crisis in decades.
“America's economy is facing unprecedented challenges. We're responding with unprecedented measures,” Mr. Bush declared, standing in the White House Rose Garden with Mr. Paulson, Federal Reserve Chairman Ben Bernanke and Christopher Cox, chairman of the Securities and Exchange Commission.
“This is a pivotal moment for America's economy,” Mr. Bush said. He said that a financial contagion that began with low-quality home mortgages had “spread throughout our financial system” and “led to an erosion of confidence that has frozen many financial transactions,” including those of countless consumers and small businesses.
“We must act now to protect our nation's health from serious risk,” he said.
He said steps being envisioned by the administration were not without risk.
“Significant amounts of taxpayer dollars are on the line,” Mr. Bush said. Even so, he added, “We expect this money will eventually be paid back.”
It was the third time this week that Mr. Bush had spoken on the financial crisis in an effort to calm jittery consumers and markets.
He pledged to work with the Democratic-controlled Congress on a system-wide proposal to improve the health of U.S. financial institutions.
He spoke after the administration said it would safeguard assets in money market mutual funds and temporarily banned short-selling of financial company stocks, a trading technique that bets on stocks declining in value. The Treasury Department has asked Congress to give it sweeping power to buy up toxic debt that has unhinged Wall Street.
Mr. Bush also has authorized Treasury to tap up to $50-billion (U.S.) from a Depression-era fund to insure the holdings of eligible money market mutual funds. And the Federal Reserve announced it will expand its emergency lending program to help support the $2-trillion in assets of the funds.
Pimco chief executive Mohamed El-Erian said the latest U.S. government plan to arrest the crisis on Wall Street may be too late to repair the extensive damage suffered by the U.S. economy and financial system.
“We need to monitor the design and execution of the policy announcements; and we need to remember that while they will have a highly significant and very broad impact, they may be too late to repair all the damage that has been suffered by the economy and the financial system,” El-Erian told Reuters. Pimco manages the world's largest bond fund.
House Speaker Nancy Pelosi said lawmakers “are committed to quick, bipartisan action” on legislation rescuing Wall Street.
In a statement, the California Democrat also said “Congress stands ready beyond the targeted adjournment date next week to consider legislative solutions and conduct necessary investigations to address this historic crisis.”
Congress was trying to leave by the end of next week so lawmakers can campaign for re-election in the Nov. 4 elections. But with Mr. Paulson trying to give Congress details of a massive financial industry bailout package in coming days, that recess could slip.
- With files from the Associated Press and Reuters
