Yay! Paulson--no purchase of bad assets

iVillage Member
Registered: 10-25-2006
Yay! Paulson--no purchase of bad assets
11
Wed, 11-12-2008 - 12:23pm

There will be a lot of disappointment among the stockholders of financial instututions, but capital injection rather than buying the firms' bad assets is the right way to fix things. What a relief!

Treasury backs away from plan to buy bad assets
Wed Nov 12, 2008 11:51am EST

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson on Wednesday said he was backing away from buying troubled mortgage assets using a $700 billion bailout fund, instead favoring a second round of capital injections into financial institutions that would match private funds.

Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program.

"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources," Paulson told a news conference.

When Treasury was selling the $700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses.

But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock. The Treasury has allocated $250 billion of the fund to such purchases so far.

Paulson said the Treasury is evaluating a second program that would provide government investments that would match private investments in capital raisings.

"In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program," Paulson said.

He also said support was needed for the markets that securitize credit outside the banking system for products such as car loans, credit cards and student loans. The Treasury and Federal Reserve are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.

"We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment," Paulson said.

(Reporting by David Lawder, Editing by Chizu Nomiyama)

http://www.reuters.com/article/ousiv/idUSTRE4AB5EB20081112

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Good analysis from a blog:

"The key is to recognize that for nearly all of the institutions currently at risk of failure, there exists a cushion of bondholder capital sufficient to absorb all probable losses, without any need for the public to bear the cost.

The stockholders and bondholders of the company itself should be the first to bear losses, not the public. That is the essence of what a free and fair market, and a responsible government would enforce. The investors in the companies that produced the losses should be accountable for them, and the customers and counterparties should be protected."

http://hussmanfunds.com/wmc/wmc080922.htm

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http://www.pnhp.org/news/2009/october/meet_the_new_health_.php

http://www.youtube.com/watch?v=DQTBYQlQ7yM

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iVillage Member
Registered: 03-18-2000
Wed, 11-12-2008 - 1:43pm

What do you think of this? Credit card debt has

 


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iVillage Member
Registered: 10-25-2006
Wed, 11-12-2008 - 2:41pm

Paulson says he wants to support consumer lending--credit cards, auto loans, student loans--to stimulate the economy.

I have to say that I haven't seen signs that consumer lending is coming to a halt, as he claims it has been. There have been stories of consumers being shocked to find that their credit limits were lowered, but we continue to receive plenty of credit card promos/apps in the mail, and the newspapers are full of 0% financing ads for autos. Then again, we have no need to borrow so we haven't actually tried to get a loan. Maybe only those with 850+ credit scores could get the 0% financing.

The details of the type of consumer support Paulson intends to provide have not been laid out. One thing I do NOT want to see is increased availability of credit to those individuals who are already buried in debt. As a nation we were overextended in the credit department and we consumers, and the banks, do need to rein things in to reduce the risk of default. The type of student loan deals Obama spoke of during his campaign, where students would repay their debt in community service if they could not repay in dollars, is something I could support.

We know the consumer credit defaults are the next big hit the banks are going to take, and I believe Paulson is right in reserving some of the TARP help for the institutions that will suffer. The help should come through the purchase of senior equity stakes, though, so that the current shareholders and debt holders are the ones stuck with the downside risk. Just as erasing the mark-to-market rule will impart a false sense of security and delay our recovery, so will extending too much credit to consumers who cannot handle their current debt payments.

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http://www.pnhp.org/news/2009/october/meet_the_new_health_.php

http://www.youtube.com/watch?v=DQTBYQlQ7yM

iVillage Member
Registered: 04-02-2008
Wed, 11-12-2008 - 9:13pm
Credit card debt should not be bailed out, isn't that why we have bankruptcy?
iVillage Member
Registered: 03-26-2003
Wed, 11-12-2008 - 9:29pm

We have collectively lost our ability to understand the limits of spending, to make distinctions between "needs" and "wants". Other nations, such as China, own a significant amount of our debt and only a blithering idiot would not see that as ominous.

Nobody in this administration seems to know how to rectify the downward turn of investors, markets, and businesses. "Bailout" and "rescue" and "thaw frozen credit" are all pat phrases which remind me of the Iraq war--it was something to do in the wake of 9/11 when we all felt angry and scared. Here we are again--angry and scared with more witless wonders endorsing plans of action which fail to discriminate between intelligent spending and debt; and reckless consumption beyond our means, personal and national.

Gettingahandle


Ignorance is Nature's most abundant fuel for decision making.


Facts stifle the will, hobble conviction.

Gettingahandle

Ignorance is Nature's most abundant fuel for decision making.

iVillage Member
Registered: 04-02-2008
Wed, 11-12-2008 - 9:37pm
Amen!
iVillage Member
Registered: 03-18-2000
Thu, 11-13-2008 - 11:28am

"I have to say that I haven't seen signs that consumer lending is coming to a halt, as he claims it has been."


Me neither. The two credit cards I use have both lowered their interest rates to 8.5%

 


Photobucket&nbs

iVillage Member
Registered: 03-18-2000
Thu, 11-13-2008 - 11:48am

"We have collectively lost our ability to understand the limits of spending, to make distinctions between "needs" and "wants"."


The message after 9/11 was to spend instead of sacrifice & save. It's been a spend-fest.


"...fail to discriminate between intelligent spending and debt; and reckless consumption beyond our means, personal and national."


Well said.

 


Photobucket&nbs

iVillage Member
Registered: 10-25-2006
Thu, 11-13-2008 - 1:12pm

<>

Yes, they definitely reacted too quickly without giving careful consideration to many economists' recommendations. I thought the purchase of the junk assets was wrong to begin with, and I am so glad Paulson changed direction.

I also agree with tootired that we should not be bailing out those who are unable to pay off their credit card debt, but I don't think that's exactly what Paulson intends to do. There are other ways to prop up the credit markets.

Paulson is right in thinking that consumer credit availability is vital to the economy. In today's Washington Post there is an article explaining the reasoning behind his support for consumer lending to CREDITWORTHY consumers, which is reassuring. It makes a lot of sense. It's kind of scary to think that the lack of a $2000 down payment is all it takes to prevent many from being able to buy a new car--shows just how far off the deep end we've gone.

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/12/AR2008111201124.html

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http://www.pnhp.org/news/2009/october/meet_the_new_health_.php

http://www.youtube.com/watch?v=DQTBYQlQ7yM

iVillage Member
Registered: 03-18-2000
Thu, 11-13-2008 - 3:53pm

The original intent of the $700 bil. was to buy "troubled assets". Not that I'm thrilled in the least with the idea of the bailout/rescue program. I

 


Photobucket&nbs

iVillage Member
Registered: 10-25-2006
Thu, 11-13-2008 - 9:20pm

<>

The bailout plan was never intended to do that, and that is one of the reasons I was opposed to it. The troubled assets the Treasury would have purchased under its original plan were things like CDOs--shares in pools of mortgages or corporate debt backed by accounts receivable or by other assets. There would be no way to identify the specific assets backing each share the Treasury would purchase and, therefore, there would be no way to renegotiate the terms of any mortgage. Homeowners facing foreclosure would be no better off. Senator Schumer (you can Google his youtube videos) did a good job explaining how we'd be bailing out the Saudis and the Chinese, and of course Wall Street--nothing in the bill was written to protect us on main street.

Khanacademy.org has a series of youtube videos that do a good job explaining all of that. One of them, the CNN video, suggests that the only way to solve the whole crisis would be to create a new financial system (totally new banks) with the Treasury's money. Khan explains that because the banks are in survival mode, any injection of cash, whether by puchase of bad assets or through purchase of shares of stock of the existing banks, will result in hoarding because the financial institutions are too afraid that more of their currently good assets will go bad.

We've got one helluva mess, that's all I know.




Edited 11/13/2008 9:22 pm ET by janetlz

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http://www.pnhp.org/news/2009/october/meet_the_new_health_.php

http://www.youtube.com/watch?v=DQTBYQlQ7yM

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