TBO.com - TBO is Tampa Bay Online

Highlands Today

What's Your Wall Street Crisis I.Q.?

ADVERTISEMENT

Highlands Today Staff

Published: September 26, 2008

Highlands Today staff compiled this Q&A on a proposed multi-billion rescue package Congress is deliberating to shore up the financial markets, and the $500 billion the government has pledged to help some troubled financial institutions.

What is this bailout for?

It is to allow the federal government to buy risky or bad debt from any financial firm for the next two years. The hope is that if the government absorbs this bad debt, more financial institutions will not go under because of them. The bailout has also come about due to grave concerns that the credit markets are close to freezing due to a distrust of these financial companies, making it hard for consumers and businesses to borrow money, and threatening the whole U.S. economy in general.

How did the situation become this bad?

Many lenders sold their home and commercial mortgages to Wall Street companies, which sliced them up and packaged them as mortgage-based securities. As homeowners began to face difficulties making their mortgage payments, the value of these securities began to fall, affecting the balance sheets and the credit rating of these companies. As the domino effects of all this hit Wall Street, investor confidence nosedived and lending became restricted as lenders became wary of giving out loans.

When will the bailout become official?

After Congress passes it and the president signs it. Right now, Congress is considering and negotiating a draft proposal presented by the Bush administration. It is expected that the final proposal will have new provisions.

If this bailout passes, what could the feds do?

In an Associated Press story, it was reported that U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke outlined a plan to House Democrats, explaining that the government would in essence set up reserve auctions, putting up money for a class of distressed assets, such as loans that are delinquent but not in default. In a reserve auction, the sellers offer their items for bidding and compete for a price which a buyer will accept. It's not clear if the government will hang on to these securities or resell them at an opportune time.

Is this bailout separate from the government move to take Freddie Mae and Freddie Mac and AIG?

Yes. The federal government has pledged another $500 billion to bail out these companies that include the two mortgage giants, investment bank Bear Stearns and AIG or American International Group. Earlier, troubled investment company Lehman Brothers failed due to the crisis and Merrill Lynch & Co. agreed to be sold.

What other bailouts have we had in the past?

In the late 1980s, the government created the Resolution Trust Corporation to tackle the savings and loan crisis. It acquired the defaulted mortgages, foreclosed real estate and other assets of nearly a 1,000 failed S&Ls. Resolving that crisis took six years and $125 billion in taxpayer money.

There was also the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Herbert Hoover that tried to revive the market by giving out loans to banks and other businesses.

What are the key events from the last few weeks?

March 16: Bear Stearns Cos. is bought by JPMorgan Chase & Co. in a deal orchestrated by and backed by the government after a sharp decline in shares.

Sept. 7: In a bid to stabilize the nation's troubled housing market, the government seizes control of Fannie Mae and Freddie Mac.

Sept. 10: Lehman Brothers puts itself up for sale after reporting a $4 billion loss and says it will spin off its troubled commercial real estate assets.

Sept. 14: In a weekend of furious negotiations, U.S. regulators make it clear there will be no government bailout for Lehman Brothers. Fearful of fallout from a Lehman failure, Merrill Lynch & Co. arranges a hasty deal to be bought by Bank of America Corp.

Sept. 15: Lehman Brothers declares bankruptcy, the largest ever in the United States.

Sept. 16: The U.S. government announces an $85 billion emergency loan to rescue AIG, saying a disorderly failure of the company could further disrupt delicate financial markets and the economy.

Sept. 17: The Securities and Exchange Commission bans some aggressive forms of short-selling.

Sept. 18: The Federal Reserve and central banks in Europe and Asia pump up to $180 billion into money markets in a bid to free up a lending freeze between banks. Markets rally on hopes for a broader government rescue package.

Sept. 19: Following a series of ad hoc measures, the U.S. government announces a broad rescue plan for the financial system.

The Fed and Treasury Department shore up money-market funds, and the SEC temporarily bans short selling against shares in 799 financial stocks. (Courtesy: Associated Press)

Sept. 25: A tentative agreement on a multi-billion bailout package proposal fails.

Tell us what you think. Post your comments here or mail them to us at 315 U.S. 27 N., Sebring, FL 33870. Your comments may be published in future stories.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT