22 September 2008 20:56 [Source: ICIS news]
Lawrence Yun, chief economist at the National Association of Realtors (NAR), expressed worries on Monday that the underlying plan articulated by Treasury Secretary Henry Paulson might not work.
In addition to concerns that the fundamental Paulson plan might not work, investors also appear worried that the Bush administration’s rescue plan will get bogged down in Congress amid efforts to graft additional measures on to the basic recovery proposal.
One amendment being discussed on Capitol Hill would limit the salaries of top executives of firms that sold non-performing loans or related securities to Treasury.
Congress is set to adjourn at the end of this week so that House members and many in the Senate can get busy with their re-election campaigns in advance of the 4 November US national polls.
The Paulson plan would use $700bn worth of federal funds to buy up non-performing home mortgage loans and related securities from US banks.
As Yun put it, the Paulson proposal seeks to “unclog the system by buying up certain mortgage-backed securities” that burden the books of financial firms.
That Treasury intervention, Yun said, “will help restore the proper valuation of these illiquid assets”.
However, essential to the plan is the expectation that Treasury will be able to acquire those distressed mortgage-based securities at a significant discount from their face value.
“Buying at a deeply discounted price could potentially lead to huge revenue benefits for Treasury on the behalf of taxpayers once the housing market and mortgage debt valuation recovers”, when Treasury could begin to sell those assets back to the private sector for more than Treasury paid.
However, Yun said, “the financial firms may be unwilling to sell at unreasonably low prices”. And leaders at some financial companies might be further deterred from selling if the final rescue plan approved by Congress requires that they take big pay cuts.
If Treasury cannot make the acquisitions needed to restore balance and calm to the financial system, “we are back to square one”, Yun said.
Still, Yun contends that Congress is likely to approve reasonable terms for the massive bailout and do so this week - or risk the ire of voters on
“If the bill does not pass,” Yun said, referring to the $700bn bailout package, “the acute financial pain will quickly trickle down to
($1 = €0.69)
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