The grandmother of all bail-outs

In its 19 Sep daily, Eurointelligence had called the anticipated Treasury support mother of all bailouts.

Looking at the amount involved (around USD 700 billion) it has added Grand to its daily on 22 sep, 2008 – Grandmother of all bailouts.  This 22 Sep 2008 daily has a lot of expert views on the step.

The official statement is here. The purpose:

This program is intended to fundamentally and comprehensively address the root cause of our financial system’s stresses by removing distressed assets from the financial system. ….As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth

What will it include:

Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets.  

The statement is not very clear and it is best kept to the state of the markets when this is enacted. Looking at the current developments, every asset looks distressed and will have to be covered under the program.

The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.Cash received from liquidating the assets, including any additional returns, will be returned to Treasury’s general fund for the benefit of American taxpayers.

This is really dubious stuff. How will they be broght through market mechanisms when markets themselves have collapsed. And how will the prices be arrived? Ideally, a distressed asset is sold at a discount. But here, if the prices are kept low, the banks remain undercapitalised and the problem continues. And it cant be sold at a high price as Congress will not pass it as it leads to higher deficit.

Funding for the program will be provided directly by Treasury from its general fund.  Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly.  As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement. ..Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program. 

One good thing about all these mishaps is learning so many concepts. For instance, Treasury’s General Fund is the main account of the US Government. I just checked the recent statement (19 sep 2008) and it says the public debt limit at present is USD 10.6 trillion (actual debt stands at USD 9.6 trillion). So, if this is new USD 700 billion fund is passed the limit will increase to USD 11.3 trillion. Likewise, MMMF funding was done by The Exchange Stabilization Fund. So, Treasury has to now dip into all the funds it is running.

Let us now see whether Congress approves this and modifications if any.

One Response to “The grandmother of all bail-outs”

  1. Next to go..Wachovia « Mostly Economics Says:

    […] of corporate finance and financial structuring going around. I postedon similar transactions to bailout MMMF. Does anybody even understand what is going on? Who is […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: