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Money | 09/19/2008 11:00 am

Will the Government's Cure for the Credit Crisis Save Us, or Cost Us? by Liz Peek

By Liz Peek
© Shutterstock

Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly With Liz Peek (Week of 9/15)

Editor’s Note: Liz Peek is a financial columnist.

Update 11:30 AM: Treasury Secretary Henry Paulson and President Bush have now spoken to the nation about the soon-to-be proposed mortgage rescue plan. Both spoke in broad terms, but the program may include the buying of mortgage-backed assets by Fannie Mae and Freddie Mac. Paulson, when pressed, said that the plan could cost taxpayers hundreds of millions of dollars, but that the cost of inaction could be far higher. 

The government is hoping to put a proposal before Congress very quickly, and is counting on bipartisan support to move the measure through. My guess is that they’ll get it. No one wants to be the guy that voted against saving the economy.

At the end of the day, much of the turmoil in recent months has been because of uncertainty about the mortgage-related assets weighing down the balance sheets of the financial institutions. The extent of the holdings has been unknown, and we have witnessed a death of a thousand cuts as one bank after another has written down assets. Maybe this program will allow financial institutions to get damaged goods off their books in one broad move. That would go a long way to reassuring investors.

Stay tuned.

***

We are coming to the end of an historic week on Wall Street. Never before has the stock market been as volatile; the swings in total share valuations have been as much as one trillion dollars in a single day. Surely, the underlying value of American businesses does not rise and fall in such measure.

Yesterday’s surge in stock prices looks likely to continue today because of moves taken by the Federal Reserve and the Treasury to guarantee money market funds, to ban short selling on 799 financial stocks and to institute a larger, overarching rescue plan for banks.

The problems in money market funds – considered cash equivalents by most investors – stemmed from the funds’ desire to boost returns by mixing in slightly gamey commercial paper or other short-term obligations that carried higher yields. Such securities in normal times would have been fine, and would not have threatened the integrity of a fund.

These are not normal times. The Reserve Primary Fund announced Tuesday that its holdings of Lehman Brothers paper would be written down to zero, and that the fund’s investors stood to lose a considerable portion of their investment. This is known as "breaking the buck," since money market funds’ net asset values always equal $1.00. It has happened only once to my knowledge – in 1994. Normally if a fund has a loss in a particular instrument, the parent organization steps in to make up the difference. Money market funds, unlike savings accounts, have not historically been guaranteed by the government. The threat of wholesale withdrawals from money market funds caused pandemonium in the markets yesterday, and the government pretty much had to step in or see the entire lending apparatus of the United States grind to a halt. And, that’s not an exaggeration.

191 Reader Comments (so far…) Sign In or Register to comment

Mugsy Peabody
Seriously, what a great job they did dealing with Katrina, and now, they’re going to deal with the economy? It’s like what I said about Iraq. They can’t even “secure” South-Central LA or Newark, but they say they can “secure” Baghdad….
By Mugsy Peabody on 09/20/2008 3:24 pm
Tee Zee
Not to mention they won’t let the press document how bad it is in Texas after Ike!
By Tee Zee on 09/20/2008 4:09 pm
Mugsy Peabody
That “imbedded thing” just amazes me, that the news organizations and journalists allowed that… Many of our best journalists just left the business after you couldn’t actually cover a story any more but just had to read the press releases and follow around the photo ops. The internet isn’t regulated journalism ala Edward R. Morrow, for sure, but at least the truth does get in sometimes.
By Mugsy Peabody on 09/20/2008 4:35 pm
HoBo Economy Thanks Bush-McSame
Oh yeah, the most expensive, most powerful, most technologically advanced military in the history of the universe….in a tiny country with 2/3’s the land and less than half the population of Califiornia….and there longer that WWII and defeated by homemade bombs launched from donkey carts. Mission Accomplished. What’s FlyBoy going to dress up in for this latest debacle? http://www.loc.gov/rr/print/swann/herblock/images/crook.jpg
By HoBo Economy Thanks Bush-McSame on 09/20/2008 6:01 pm
Mugsy Peabody
Love the avatar!
By Mugsy Peabody on 09/20/2008 6:08 pm
Tee Zee
John McCain, Rick Davis, and the Glass Housing Crisis September 19, 2008 05:50 PM ET | Permanent Link What do they say about stones and glass houses? John McCain today on the current financial crisis (emphasis mine): “The financial crisis we’re living through today started with the corruption and manipulation of our home mortgage system. At the center of the problem were the lobbyists, politicians, and bureaucrats who succeeded in persuading Congress and the administration to ignore the festering problems at Fannie Mae and Freddie Mac.” Rick Davis in 2000 talking about Fannie and Freddie: “You can say what you want about free-market distortions, but people like the system because it gets them into houses cheap.” Rick Davis was then in charge of the Homeownership Alliance, a Fannie/Freddie lobbying group that was aimed at stopping “unfounded fears about risks to the housing system,” according to its website. (Hat tip to my colleague Liz Wolgemuth for flagging this.) Rick Davis is now running the McCain campaign. (Oh and—at least 20 McCain fundraisers have lobbied on behalf of Freddie and Fannie in recent years.) From whence did the problem stem, Senator?
By Tee Zee on 09/20/2008 8:58 am
Deni G
What is that foul stench rising from the McCain campaign? Corruption.
By Deni G on 09/20/2008 10:08 am
HoBo Economy Thanks Bush-McSame
Even Time Magazine called McCain a total liar who has proved himself lacking in character and unfit for the presidency. Surprising coming from Time….always right leaning.
By HoBo Economy Thanks Bush-McSame on 09/20/2008 1:43 pm
Eliza Dodd
Many were skeptical that the criminal creeps in the White House could actually bankrupt the entire United States of America in a mere 8 years, and yet here we are, staring into the abyss of that “Mission Accomplished” right now. And deliberately lying the American people into a counterproductive and illegal two trillion dollar war was just another day’s treason for those occupants. Now, even WE do not expect action on impeachment this particular week. Congress is too preoccupied scrambling to try to salvage the disaster that has become our economy because of 8 years of corrupt Republicans hell bent on deregulation, and EQUALLY corrupt Democrats too cowardly to stop them, even when they had the actual power to do so. And unfortunately, the plan they are likely to present to us before the end of the weekend as a fait accompli looks like it will be the biggest theft from the American taxpayer in history. But at the same time, there is no assurance they will not start a full blown World War 3 on top of everything else, even before the next election, to try to swing that election to the new Armageddon Twins in the wings. Believe it, they are perfectly capable of something that evil, and will do it without a second thought for partisan political advantage. And that is why we must keep the heat on for impeachment, and do everything we can to educate our friends and neighbors about its constitutional imperative. And that is why we have made the DVD of the new Impeachment Play available for you and no donation is required. Impeachment Play DVD and Video: http://www.impeachplay.com So if you have not requested yours yet, please do so from the page above. Although there is an optional donation section on the page, that is not a requirement. Just remember, if you CAN make a donation of amount, that is what is making it possible for us to distribute so many thousands of free DVDs to those who cannot make a contribution right now, to pay our valiant actors through the union (which we are thrilled to be able to support) for their magnificent and deserving work, for the bandwidth on the free viewing site above where you can watch the whole production right now, and everything else. And when you get it, throw parties for your friends to show it, put on screenings in your community at libraries and community centers as so many are already doing. And encourage everyone you know to get their own copies, just as you got yours, and do the same thing. There is a very simple solution to the mortgage-based financial crisis. Ease the terms on the hardworking homeowners who are struggling to make their payments, and thereby help them directly. We remember when we fought against the hideously cruel new bankruptcy bill a couple year ago, rammed through without a serious attempt at a filibuster. If only we had been able to get more people to speak out then. But instead, Congress will probably fall over itself, in a sickly show of staged bipartisanship, to hand hundreds of billions dollars to the very reckless shysters who drove us off this cliff in the first place. For the partially inflated punching bags which pass for most members of Congress, in case of fire, pour on more gasoline. Just remember, as long as there are 15 minutes left, even for a president and vice president supposed to leave office anyway, there is PLENTY of time left to impeach, for that is how long a vote in the House takes, and any talk to the contrary is just silly, defeatist babble. And all we have to do to make it happen is get MORE people to speak out and DEMAND it. It may be the only thing that can deter future presidents from doing the same and worse. In case anybody is not paying attention, an impeachment movement against the president of Pakistan just developed so fast, from the talk of initially doing it until the “done deal”, it was only a matter of a couple days. So while some here are WASTING time talking about “not enough time”, Pakistan just went ahead about doing it, and forced the instant resignation of Musharraf Is Pakistan a better democracy that the good ole United States of America? Does Pakistan have a better and more effective Constitution? There is enough time to impeach ten presidents and vice presidents if only we rally the people to speak out. And anybody who tries to tell you different is just a right wing tool whether they know it or not. But to actually make life imitate art, we need millions of people to watch the impeachment play video, to really bring home the issues involved, and to inspire them to raise their voices too. Request your own copy of the DVD at the site below. Impeachment Play DVD and Video: http://www.impeachplay.com Please take action NOW, so we can win all victories that are supposed to be ours, and forward this alert as widely as possible. If you would like to get alerts like these, you can do so at http://www.impeachplay.com/in.htm Or if you want to cease receiving our messages, just use the function at http://www.impeachplay.com/out.htm usalone268b:65097 Powered by The People’s Email Network Copyright 2008, Patent pending, All rights reserved
By Eliza Dodd on 09/20/2008 4:10 pm
HoBo Economy Thanks Bush-McSame
Good one, Eliza: “Armageddon Twins in the wings.” That’s for sure. Palin’s choosing off Russia while McSame rough’s up Spain in a speech. Two Rubes can’t make it right!!
By HoBo Economy Thanks Bush-McSame on 09/20/2008 6:06 pm
Eliza Dodd
America has went to HELL in Bush’s Mama’s hand-bag !
By Eliza Dodd on 09/20/2008 4:13 pm
Jay Valentine
Wish we still had the $$ we have spent on our disastrous wars…that might help a bit.
By Jay Valentine on 09/20/2008 4:52 pm
HoBo Economy Thanks Bush-McSame
Wish we still had the $$ we have spent on our disastrous wars…that might help a bit.” Yes, or even the $72M spent to investigate Clinton’s BJ. Think McSame/Palin need a campaign theme song. “I Got R-U-B-E Babe.” http://www.youtube.com/watch?v=5xMhWd7mf0M&feature=related Oh…I need some editing software…and YouTube Vids here I come!!!!
By HoBo Economy Thanks Bush-McSame on 09/20/2008 6:10 pm
RoseMerry Hoffman
You have to ask? Certainly, if you are among the +$5million/year group (is there enough for a crowd?), the Emperor will take care of you. By screwing the working people. By starving the poor or sending them to war. The Trillionaires have spoken, so it shall be.
By RoseMerry Hoffman on 09/20/2008 6:13 pm