Following an emergency Capitol meeting Thursday night attended by Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and top leaders in Congress, the Federal Reserve announced a new plan for a $180 billion cash line to help keep the financial system running—and more details about the new bailout plan are continuing to emerge this morning.
Even as the rate of return on Treasury bills has declined dramatically, the rate banks charge each other to borrow money has shot up, leaving even healthy banks with limited access to capital. The new money from the Fed is intended to "provide dollar funding for both term and overnight liquidity operations by other central banks" in order to counteract "continued elevated pressures in US dollar short-term funding markets," according to a statement issued by the body.
The Treasury Department this morning announced that it will set aside $50 billion to insure many money market mutual funds, traditionally considered one of the safest investments, against any losses over the next year.
In an additional effort to stabilize the market, the Securities and Exchange Commission has temporarily banned short selling, in which a market player bets that the price of a given stock will decline.
"The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets," said Christopher Cox, chairman of the Securities and Exchange Commission, in a statement.
But the primary focus has been on the Federal Reserve's dramatic cash infusion.
it's unclear whether Congress will delay its scheduled adjournment next Friday to complete legislation.
Coming just weeks before the November election, the more than hour-long meeting was followed by a remarkable joint appearance of top Democrats and Republicans. And for a moment at least, the wrangling of recent days dissolved in the face of the crisis outlined by Paulson and Bernanke.
“This is a very serious moment, very serious. It was a very sober gathering.” said Senate Banking Committee Chairman Chris Dodd (D- Conn.). “I’ve been in the Senate for 28 years; Congress 34. There has never been a moment as serious as this one.”
“We have an unprecedented crisis,” said Boehner. And Paulson, who is very aware of how the crisis is viewed in financial markets overseas, said of the meeting: “I think we saw the best of the United States of America….This country is able to come together and do things quickly.”
But given the potential costs, there is sure to be some bargaining still ahead. Frank has already talked of imposing some conditions whereby the government might share in some of the future profits of companies helped by the intervention now. Democrats are pressing for more relief for homeowners facing foreclosures. And the White House may be forced to ease its resistance to new emergency spending sought by Democrats for the auto industry and domestic needs in a year-end appropriations bill.
Following the meeting Thursday night, Frank was cautious about discussing any details of the Treasury plan. But he has been at the forefront in pushing for a “one-time intervention” by the government through a new entity with buying authority.
In an interview Wednesday with Politico, Frank outlined his ideas in more conceptual form and envisioned holding a hearing next week. Wall Street rallied Thursday afternoon after reports that Treasury was showing new interest in the approach, and the Republican presidential nominee, Sen. John McCain, also signaled potential support.
“More and more people are thinking that we’ve come to it and have to do it,” Frank. “Exactly what form it will take, if it takes a form, is still unclear.”
After meeting with Paulson, Frank said: "It will be the power -- it may not be a new etity. It will be the power to buy up illiquid assets. There is this concern that if you had to wait to set up an entity, it could take too long."
The discussions this week have sometimes been confused by comparisons to the Resolution Trust Corp. created to address the savings and loan crisis in the late 80s and early 90s. Sen. Charles Schumer (D-N.Y.) took the Senate floor Thursday to propose an alternative modeled on a Depression-era entity designed not to buy up bad assets but to invest in companies to give them needed capital to work their way out of debt.
Frank said both options should be available to the new entity, but the central principal is that only the government is big enough to step into the markets effectively and also have the staying power to hold the assets until the market stabilizes and they regain value.
“We need someone big enough, strong enough, stable enough to buy them and see some more value in them,” Frank said. And this approach appears to have gained strength not just because of the deteriorating markets but the possibility that the long-term risk to the government may be less at the current prices.
“We hope to structure this so a lot of it would get repaid,” Frank said. “I think you have undervalued assets out there…but the costs of not doing anything are enormous.”
“The deterioration has been rapid ….We know real value hasn’t dropped that much in two days, so there’s clearly been more panic.”
“We’re the only bargain hunter in town,” Frank told Politico before going into the meeting Thursday night.