This just in, Treasury Secretary Paulson now confirming that the government is pursuing a plan similar to what happened to the savings and loan.
While the exact details haven't been released. I will be updating this as more news comes out. For those who aren't aware of what a Resolution Trust Corporation or RTC is, basically it's an outfit that buys the bad loans from failing banks to supply capital. Well, it's a lot more complicated than that. I will be posting a primer on this tonight. Anyways, below is an excerpt from CNBC's site.
Treasury Secretary Henry Paulson is working on a plan that would set up a government facility to take on bad debts from financial institutions, preventing a worsening of the global credit crisis, Wall Street sources have told CNBC.
The facility would be similar to the Resolution Trust Corporation, which was set up in the late 1980s to take on all the failed thrift assets during the savings and loan crisis, these sources said.
Paulson is said to be shopping the proposal to lawmakers in Congress, a congressional aide told Reuters.- excerpt from "US Weighing Plan to Set Up Facility to Hold Bad Debts", CNBC, 2008.
It should be noted that Representative Barney Frank had been calling on the government to come in and just this months ago. Back then, financial companies like Lehman were trading near $100 giving off reassurances, and Barney Frank was laughed at. Guess who was correct?
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Below is a link of CNBC's video announcing this. Sorry, not sure how to post the actual video on here. Anways, take a look.
Senator Schumer's proposes establishing a different organization than the Resolution Trust Corporation. Along the same lines of the Depression age Reconstruction Finance Corp. Under Schumer's plan, the RFC would infuse new capital into the ailing instution, BUT would hold preferred stock becoming part owner of the bank or financial company, along assuming the debt. Secondly, mortgages would be renegotiated to give more breathing room to homeowners.
``The series of ad-hoc interventions in the market over the past 10 days were important to avoid a systemic disaster,'' Schumer said. ``But we cannot continue to act in such an uncoordinated and ad-hoc fashion.''
Under Schumer's RFC plan, ``the government would come first,'' he said. ``The government would get repaid before the others in the financial chain.''- excerpt from Bloomberg's talk with Senator Schumer.
There are now two competing plans. One, by Senator Charles Schumer, establishing a Reconstruction Finance Corp. And the yet-announced/still formulating Treasury Secretary Paulson's Resolution Trust Corp type plan.
Update 4: Wall Street Journal is reporting that the Treasury is now not looking at duplicating the old Resolution Trust Corporation. As I am typing this, officials are meeting at the White House. Details to come forth shortly!
Paulson claims any new plan must be approved by Congress. The new details coming out are that we will see a hybrid of the Resolution Trust Corp and the Reconstruction Finance Corporation. That this new RTC/RFC will be there to provide capital for banks who are not at death's door but would soon be. For those who are almost dead, they would not only buy the bad debt, but take stock into the financial company in question. Several questions remain. Will this new RTC/RFC agency also take stock into financials that it will inject capital into? At what price will this new hybrid purchase this bad debt?
Also, this new government plan, would introduce a new FDIC program for Money Market Funds. This comes in the light of the closures of one major retail MMF this week and today's Institutional Money Market Fund.