The big news today was that the White House is pushing for a so-called “Rescue Package” for the economy. While details are still being fleshed out, the Treasury Department will apparently seek authority to spend “hundreds of billions” of taxpayer dollars to purchase illiquid assets from U.S. financial institutions.
These buybacks will be managed by a new entity that will run “reverse auctions” in which the federal government will buy securities from those that offer them up at the lowest price. As costly as this sounds, Treasury Secretary Henry Paulson is 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.”
It won’t be simple, though. The Wall Street Journal asks:
Does [the government] pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar? The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets.
This line of thinking has led former Treasury official Douglas Elmendorf to argue that “This approach saddles taxpayers with significant downside risk but limited potential upside gain.”
In other news, the Treasury is temporarily insuring money market mutual funds to (hopefully) head off a stampede of withdrawals. Meanwhile, the SEC banned short-selling on 799 financial stocks for at least the next ten days. The Treasury, along with Fannie Mae and Freddie Mac, will apparently also step up efforts to buy mortgage-back securities to keep the housing market afloat.