Sep 23, 2008 @ 03:58 pm
NEW YORK - If the U.S. government wants to use taxpayer dollars to get financial markets functioning smoothly again, then it better be prepared to let Americans see exactly how this effort is going to work.
At the center of the mega-bailout presented by the Treasury Department and Federal Reserve is a proposal to buy $700 billion of toxic mortgage debt and other risky assets , which is considered the root cause of the current credit storm.
This plan puts our money at stake, and that's why we deserve to know what assets the government intends to buy, from whom and for how much. Without that, forget about rebuilding anyone's confidence in the financial system.
This bailout plan was rushed out as financial markets essentially failed to function in the wake of a tumultuous week in financial markets, fed by Lehman Brothers' bankruptcy filing and the government's $85 billion bailout of insurance giant American International Group.
Stocks tumbled and credit markets froze as fear raged among investors. That forced federal officials--namely U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke--to race to develop a fix-it plan, which they hope to get passed by Congress in the coming days.
The target will primarily be the billions of dollars of bad mortgage debt sitting on the books of major financial companies. As home prices have tumbled, those assets have become worth much less than they were before, and the market turmoil over the last year has made it increasingly difficult to determine the value of such assets.
The new plan would give the government the ability to buy up the bad loans, taking them off the books of financial firms. The hope is this will allow those companies to resume normal lending operations.
What's worrisome is how those asset purchases will work. What's certain is that nothing should be hidden from public view.
The government won't likely buy these distressed assets at par, meaning their face value. The Treasury has stated that the "price of the assets purchased will be established through market mechanisms where possible."
But that doesn't shed much light on how the government will come up with appropriate prices for the troubled assets.
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