In another breathtaking display of government intervention, top officials at the Treasury Department and Federal Reserve began discussing with congressional leaders a plan to buy up vast numbers of distressed mortgages held by ailing financial institutions.
While the details of the plan remain to be hammered out, the discussions could result in the biggest bailout in U.S. history, and the most direct commitment of taxpayer funds so far in the worst financial crisis that Fed and Treasury officials say they have ever seen.
“What we are working on now is an approach to deal with systemic risks and stresses in our capital markets,” said Treasury Secretary Henry M. Paulson Jr. It would be “a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions’ balance sheets,” he added.
The essence of the new plan is expected to be loosely modeled on the Resolution Trust Corp. that bought up and eventually sold hundreds of billions of dollars worth of real estate in the 1990s from failed savings-and-loan companies.
In this case, however, the government is expected to take over only distressed assets, not entire institutions. It came on a day when the Federal Reserve poured almost $300 billion into global credit markets and barely dented the panic. The Fed stunned investors before dawn on Thursday by announcing a plan to provide $180 billion to financial markets through lending programs operated by several foreign central banks.
But after an initial sense of relief swept markets in Asia and Europe, the fear quickly returned. The anxiety remained so high that the Fed had to inject an extra $100 billion, in two waves of $50 billion each.
None of those actions, however, brought much catharsis or relief, with banks around the world remaining too frightened to lend to each other, much less to their customers. This forced Paulson and Fed Chairman Ben Bernanke to think the unthinkable — committing taxpayer money to buy hundreds of billions of dollars in distressed assets from struggling institutions.
A growing number of Democratic leaders, as well as many banking executives, have been pushing for a sweeping bargain in which the government would buy up billions of dollars in bad mortgages.
As part of the bargain, lenders would negotiate easier loan terms with distressed homeowners. But the scale and complexity of the project are almost certain to create huge philosophical differences among the parties that could make negotiations difficult.
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For more than a year, investors around the world have watched with growing alarm as the U.S. economy, the world’s largest, has struggled to right itself before being tipped over the edge by massive foreclosures, shrinking consumer spending and rising inflation.
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Stocks surge
Wall Street rallied in a stunning late-session turnaround Thursday, hurtling the Dow Jones industrials up 410 points following a report that the federal government may create an entity that will take over banks’ bad debt.