US to launch massive mortgage bailout plan

19 September 2008 16:59  [Source: ICIS news]

WASHINGTON (ICIS news)--The US is crafting a massive financial rescue plan to absorb “hundreds of billions of dollars” worth of dead mortgage loans that are choking off the economic lifeblood of credit, Treasury Secretary Henry Paulson said on Friday.

 

Paulson told a press conference that the federal government must act or face the alternative, “a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion”.

 

He said that if left unresolved by federal intervention, the financial crisis threatens “Americans’ personal savings and the ability of consumers and businesses to borrow and finance spending, investment and job creation”.

Citing the intervention measures already taken by the federal government – the takeover of secondary mortgage market giants Freddie Mac and Fannie Mae and the $85bn (€60bn) bailout of global insurer AIG – Paulson said the government cannot continue to act on a case-by-case basis and must produce “a comprehensive approach to relieving the stresses on our financial institutions and markets”.

He said the Treasury Department must act quickly with Congress to craft a programme that will remove what he termed the illiquid assets of nonperforming mortgage loans that are at the root of the financial crisis.

Paulson noted that he had met late on Thursday with Federal Reserve Board Chairman Ben Bernanke, Securities and Exchange Commission (SEC) Chairman Chris Cox and congressional leadership as a first step toward “prompt, bipartisan action” to resolve the crisis.

He also announced that the SEC has placed a temporary ban on short-selling of financial institution shares, and that Treasury has temporarily established a guaranty programme for US money market mutual funds.

Treasury also is expanding its acquisition of mortgage-backed securities (MBS) and has authorized Freddie Mac and Fannie Mae to increase their purchases of those securities as well. Paulson said both measures will provide immediate short-term help to facilitate mortgage loans availability and affordability.

He cautioned that the federal bailout programme may have to absorb “hundreds of billions of dollars” worth of nonperforming mortgage securities at taxpayer expense, but he said that expensive resolution “will cost American families far less than the alternative” – financial and economic gridlock.

Paulson expressed confidence that the federal bailout plan will work.

“We will get through this difficult period,” he said.  When the immediate crisis is past, he said federal officials and Congress must work to modernise the US financial regulatory structure that is “sub-optimal, duplicative and outdated”.

But that effort, he said, is “a critical debate for another day”.

“Right now, our focus is restoring the strength of our financial system so it can again finance economic growth,” Paulson said.

“The financial security of all Americans – their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs – depends on our ability to restore our financial institutions to a sound footing,” he said.

($1 = €.70)

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By: Joe Kamalick
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