GROWING PANIC IN
"MOTHER OF ALL BAILOUTS"
September 20, 2008
(NEW YORK, N.Y.) -- The fall out this past week from Wall Street’s mortgage crisis has shaken America’s financial system to its core and has lead to what some now call the “mother of all bailouts.”
The New York Stock Exchange: shaken to the core by trouble in financial markets
Amidst widespread fears of a near total economic “meltdown” in the U.S., leaders of Congress and Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met in an extraordinary meeting this past Thursday night to come up with a strategy to calm market fears and stop any more large financial institutions from going under.
After the meeting Treasury Secretary Henry Paulson announced he was preparing a wide reaching bail out program - on a scale rarely seen in U.S. history - to intervene in the shaky financial markets and bring order to what is now widely viewed as growing fear and chaos.
Paulson gave few details of the plan, preferring to sketch a broad outline saying that the federal government plans to purchase hundreds of billions of dollars' worth of mortgage assets now held by commercial banks, Wall Street firms and other financial institutions.
The Bush administration sent its extraordinary proposal to members of Congress late Friday, according White House spokesman, Tony Fratto. "Secretary Paulson and his team will continue their discussions with Congress and staff throughout the weekend, and we're hopeful that good progress will be made," Fratto said.
And in a surprising public show of unity by lawmakers from both sides of the aisle, they pledged cooperation to work on a solution with Bush administration officials with whom they often disagree.
How serious and potentially dangerous the collapse of the financial markets had become for the American economy was heard in the voice of Senate Banking Committee Chairman Christopher Dodd, D-Connecticut when he told reporters on Friday, “I've never been in a more sobering moment in my 28 years with the language that was used - careful language - by the financial leaders of the ... country," referring to the Thursday night meeting to come up with a plan to stop further blood loss in the markets.
In an interview broadcast on the cable TV channel C-SPAN House Financial Services Chairman Barney Frank, D-Massachusetts said, "We're not just talking about somebody on Wall Street losing money. ... We were in danger of there being enormous damage to the financial system."
One major concern of the week was that some Wall Street firms were in danger of not being able to meet requests for redemptions from normally safe money market funds in which investors expect to get back at least as much as they paid in.
This past week, investors took some $210 Billion dollars out of those money market funds with the bulk of withdrawals coming on the heels of news that one fund had, in the parlance of the industry, “broke the buck” which means its shares fell below $1.00.
On Friday morning, the U.S. Treasury said it would insure up to $50 Billion dollars in money-market fund investments at financial companies that pay them a fee to participate.
And on Friday, a conference call in which Paulson and Bernanke briefed House GOP members also took on a similar, dire tone according to GOP aides who were on the call.
"The call was very sober, very strong on seriousness and very vague on details," one aide was quoted as saying.
The potential cost to taxpayers of the government’s bail out plan could run as high as $500 Billion dollars according to leading Republican Senator Richard Shelby,
However the projected cost of doing nothing about the crisis has injected fear into the hearts of congressional leaders. "Chairman Bernanke made all too clear the cost of inaction. When I heard his description of what might happen to our economy if we failed to act, I gulped," said Sen. Charles Schumer, D-N.Y.
Many feared that with no such broad action plan in the place to calm fear in the markets the American economy could have come unraveled in a manner not seen in over a half a century. One former Federal Reserve governor, Lyle Gramley, was quoted as saying "The economy is slowly being strangled."
The chief culprit in the crisis has been described as the massive amount of bad home mortgage debt on the books of banks and other institutions, a situation that has not resolved itself with the Bush administration's case-by-case handling of the crisis so far.
Banks for example are having a hard time raising capital because no one knows how to value the questionable mortgage assets on their books so lenders are reluctant to lend money. As a result the flow of credit to consumers and businesses fell 40% in the first quarter of the year and another 35% in the second quarter.
All in all it was one of the most stunning ten days on Wall Street in American history. News that the huge investment bank Lehman Brothers was on the verge of collapse and scrambling to find a buyer first surfaced on Friday September 12th. By Sunday there reportedly were no buyers for the 158-year old firm and bankruptcy seemed inevitable.
And just after midnight on Monday September 15th in the early hours of the morning, the bank announced its intention to file for Chapter 11.
Then in the next stunning blow, just hours after reports surfaced that Bank of America had broken off talks to buy Lehman, Bank of America then announced it would pay $50 Billion dollars to purchase Merrill Lynch, another legendary Wall Street investment firm.
Following that news, American International Group, the nation's largest insurer, said that it planned to sell some of its assets to raise cash and boost investor confidence.
Concerns about the credit crisis then seemed to grow exponentially even though the federal government had already pledged to shore up Fannie Mae and Freddie Mac to the tune of up to $200 Billion dollars and months earlier brokered JP Morgan's purchase of Bear Stearns with a $29 Billion dollar guarantee.
However the markets still remained cautious and nervous and it quickly appeared those approaches would not be enough to douse the flames of a growing financial fire so Sunday afternoon the Federal Reserve, along with 10 banks, announced a $70 billion pool of funds to aid troubled financial firms. The U.S. central bank also agreed to loosen its lending restrictions.