Government Bailout Plan

Sept. 19 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank said Congress will quickly pass legislation authorizing the Treasury to take on financial companies' troubled assets to help stabilize markets.
"I'm pretty sure this will be Treasury being the one that executes it because you don't have time to create a new agency,'' Frank said today in an interview to be broadcast this weekend on Bloomberg Television's "Political Capital with Al Hunt.'' Congress will act on the plan "within two weeks'' and will consider broader regulation of Wall Street next year, the Massachusetts Democrat said.
Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox met with Frank and other congressional leaders in Washington late yesterday to propose a plan to calm financial markets roiled by the biggest housing slump since the Great Depression.
The initiative would remove devalued mortgage-linked assets from financial companies' balance sheets. Frank said Bernanke and Paulson told him the implications of not acting would mean "disaster, the financial system going into a mode of very little activity.''
"The Treasury will buy selectively,'' and the plan will cost taxpayers "ultimately not a great deal,'' Frank said. The bad debt will cost "maybe double-figure billions over a few years,'' he said.
Second Stimulus
The U.S. House of Representatives will pass legislation to implement the plan by the end of next week and the Senate will act soon after, Frank said. The measure should include a second stimulus package with funding for infrastructure, he said. It will not contain rebates for U.S. families.
Frank said Congress next year will move to apply rules similar to those governing commercial banks to hedge funds, private-equity firms and investment banks. This will include capital requirements and limiting leverage, he added.
He endorsed the SEC's decision to temporarily ban short- selling in the shares of financial companies. The prohibition, which affects the shares of 799 companies, is effective immediately and will be in place through Oct. 2, the SEC said today.
"They banned it some, they should go even further,'' Frank said.
After the interview, Frank said he and Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, have directed members of their staffs to develop a plan for using the initiative to "maximize the beneficial effects here on foreclosures.''
"This is clearly an opportunity for us, while we are responding to the economic problems'' to also reduce foreclosures, Frank said. "Our staffs are already working on making sure that we have that piece done.''

Thoughts:
Immediately, Fannie, Freddie and the Treasury will increase their purchases of Mortgage Backed Securities (MBS) to provide more liquidity in the mortgage markets and stimulate the home sales market. Over the weekend the Congress and Treasury will hammer out the details of a plan to remove the poison assets (read bad subprime loans and securities) from Institutional balance sheets so they can get back in the business of providing the money markets that keep the country running and improve liquidity that way. Look for this to be an RTC style program to manage the bad assets to conclusion without them taking down the institutions that own them.

Short sales of financial institutions are immediately forbidden. Going to stay that way for a while.

Stock Market loves it as does the MBS market. Could be a rare case of Stocks and Bonds BOTH going well.

Regardless of your views on such things-it is good news for us. Rates will be better for your typical buyer, more programs will be available, regulatory oversight is going to be tight and will never go back to where it was, so get ready for the rules to get more like 10 years ago. No Doc lending in ANY form is gone and is going to stay gone. If you have been operating with clients who have to have that kind of financing, they are going to have to find another way to fund their deals. Those kinds of loans are exactly what brought down Lehman this week. (There was a local angle to that. Aurora Lending, a local company, was the firm that made those loans nationwide. They were owned by Lehman)

Clearing up the bad assets choking the pipelines throughout the industry may have one positive effect-Jumbo money may get easier to find once those securities have been separated from the junk they have been lumped in with to date. Not overnight, but I can see that helping a lot down the road.

President Bush is speaking now calling for bipartisan action to pass legislation approve the purchase of these illiquid assets from the market. He is reiterating a lot of what Paulson said. My guess is there will be legislation next week.

This is a strong plan. It’s going to cost the taxpayers a bundle, but the alternative might cost us everything.