Update: Stocks rally on hopes for massive bank bailout

Update: Numerous reports this afternoon indicate the Bush administration is considering a massive bailout to take bad assets off the books of financial institutions. If this comes to pass, this is the Big One, the mother of all bailouts:

CNBC's Charlie Gasparino:

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.

Let's be clear here: the main reason for the afternoon rally was Gasparino's report on CNBC. Here's how the Wall Street Journal wrote it:

A series of news reports about various forms of government intervention in Wall Street's latest crisis bolstered investors' mood. The cable network CNBC reported that Washington is considering formation of a body to accept soured credit bets, something akin to the Resolution Trust Corp., which was a key tool to liquidating holdings of failed savings and loans in the late 1980s and early 1990s.

Earlier, from A.P.: Dow soars 300 on a report that the government may create a repository for banks' bad debt.

Bloomberg, on the bailout talks fueling the rally:

U.S. Treasury and Federal Reserve officials are considering a "permanent'' plan to address the financial crisis, said Sen. Charles Schumber, who proposed a new agency to pump capital into troubled financial companies.           

"The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. "I've been talking to them about it.''

Schumer proposed an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages to make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

--Peter Viles

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Photo credit: Associated Press

Comments

[Uncle Billy Loves Naomi Klein]

I think I already nicknamed it Dissolution Bust Conflagration (DBC).

I sure use the word "I" a lot, don't I. Well that's the end of that.

[anon113]

The FDSL, Federal Dept. of Socialized Losses.

[Giacomo]

If true, will that mean that upside-down homeowners can just mail their keys directly to Washington?

[Rational Renter]

This is certainly good news for the stock market, but maybe just temporarily. I don't seeing it having an effect on the housing market. The affordability correction still needs to happen - this may just bring it in for a softer (more prolonged) landing.

Unless banks start handing out exploding mortgages again, housing prices are still falling back to fundamentals.

[LA-renter]

I stand corrected...

My smart prediction that our two-party monolith would have to wait until after the election to institutionalize the bailout of lenders and investors has proven wrong.

Just how bad is the situation?... Do you suppose Paulson was not convinced by his own propaganda?... I guess the worst isn't behind us after all.

...I want to be really angry. But, unlike Lou Barnes, I saw something like this coming back in 2005. This fate was foreseeable... not to the smarties, just to the stupid smucks like me!

[MyLessThanPrimeBeef]

One day, your kids will ask you, 'Dammie' - that's a Post-Modern, unisex, nobody gets offended, catch all term for daddie and mommie, and not to be confused with dummie - so, they will ask you, 'Dammie, where were you the day Congress drag Capialism onto the Endangered Species List?'

[JKaflauski]

NOOOOOOOOOOOOOOOOO!!!!!

[g o]

govt housing & insurance & cars for everyone

[BargainHunter]

Is that different from printing a whole lot of money? Can anyone explain what that might do to the value of the dollar?

[Laker]

yessssssssssssssss, JKaflauski .

Now the dude that bought a million dollar house on a $40K income in 2006, could stay in his home, get his mortgage reduced to $250,000 and be happy ever after. The new RTC will buy his mortgage or MBS from WAMU.

Screw the rest.

[annonyed]

Disgusting!!!!

If a company was poorly managed, it fails. Simple. If people got themselves into ridiculous debt, they fail. Simple.

This has been happening in our country for decades. The only difference is that in the last few years it happened to more people and more companies. Simple. (It didn't really happen to them, they caused it themselves. )

What the government should do if anything is perhaps teach a course on debt/savings/money management. Of course who is going to teach the government.

Where is the government going to get the money?
How much longer before we no longer have property right? I'm serious, how much longer before the government owns our homes and we pay rent/mortgage to the government? This is very scary, very scary indeed!!! Eminent Domain is right around the corner...actually if the government stops foreclosures and modifies contracts between lenders and borrowers, it is a form of eminent domain. The only question is who holds title??

It is unfortunate that nobody is asking these questions. Nobody.

This is really dangerous. A very dangerous slippery slope.

I normally don't go to extremes, but this is not the free market operating. If the shareholders feel that the CEO and the guys on Wall Street defrauded them, then SUE!! Same goes for the pension holders. And they should. There is recourse in our system for fraud, misrepresentation. The FBI could seize assets of some of these hedge fund guys, countryside's CEO, there is a paper trail of fraud. These bailouts by the government are unnecessary. The government is lazy and stupid!!

Who exactly do these bailouts help? Most of the employees will lose their jobs anyway, shareholders lose money, (presumably including pension holders) they all lose money and they aren't going to get their money from the government.

Who gets the $85 Billion that AIG got yesterday? Who exactly? Someone explain in detail? Name names if you have to???

[MyLessThanPrimeBeef]

Uncle Billy, just remember, there is no 'I' in team.

But know this also. There is no 'I' in running, as in running a country.

If you put 'I' in running a country, you'dl be 'RUINNING' the country.

BTW, make that dragged, not drag.

[TakeFive]

My God. The Democrats are on a mission to turn us into a third world debtor nation. This is no longer hyperbole, honestly. These people finally have a seen real chance to undermine this country. Fannie, Freddie, IndyMac, and AIG have effectively been nationalized. Can the rest of the banking system be far behind?

Bin Laden stressed the importance of hitting economic targets, threatening the United States with financial ruin. Well he could have just sat back in his cave for a few more years and let events take their course.

And the biggest irony? Our likely next president is not only on the take from these failed institutions, but seeks council from the folks that steered them onto the rocks.

Now before you all start flaming me with Democrat talking points, please read about the seeds of this crisis, written about way back in 2000 :

http://www.city-journal.org/html/10_1_the_trillion_dollar.html

And an effort at reform in 2003:

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0
A9659C8B63&sec=&spon=&pagewanted=print

[150 multiple choice questions]

They may buy bad debts but they can't and won't reset mortgages. And even if they did, it won't matter because the price you pay for the property next door will still be subject to fundamentals. That's why this, the fourth or fifth or eight attempt to SOLVE the problem will just be another in the string of failures for people who couldn't manage a hotdog cart like Schumer.

the USA isn't such a great country today.

[Rational Renter]

CNBC's Fast Money just pointed out that no matter what the details of this plan are, it will inevitably mean a world with less credit and a higher price to borrow money, which will mean a slowdown in economic activity. The length of such a slowdown is debatable.

Not really sure the correlation between an RTC and the availability of credit, but I expect we'll all be learning a lot over the next day or two.

[Mary C.]

Why blame the Democrats? The Republican presidential administration is the instigator, with the cabinet officers of the executive branch (yes, that would be President Bush) taking the leads on these decisions. It's like an act of war not authorized by Congress. But Congress has encouraged it, with Democrats and Republicans going along. The Democrats think it's pro-consumer, the Republicans pro-business. It's not even representational democracy, because no one is even voting on it, it's just happening. However, if these bail-outs didn't happen, what would be the result. I keep reading this is not like the Great Depression, because the economy is still functioning and there is still prosperity for some and at least comfort for many, but if the credit markets seized up, how long would that last? It would result in a depression. It's still possible, because no one knows what's going to happen next. All this may not be enough. What's odd is that there are still many people with tons of money to invest to provide capital, but they're now stuffing it in their mattresses or buying gold. So the government is doing it instead, to be shouldered by not so wealthy people.

[David Raether]

The next time a Republican tells you he's against Big Government, don't believe him...

[Rational Renter]

TakeFive, I think you could make an argument that the Republicans are responsible for this mess. I think you could make an argument that the Democrats are responsible with this mess ALONG WITH the Republicans. But how can you honestly claim that this is all the Democrats' fault?

[LA-renter]

TakeFive... I'm not going to flame you --sounds cool, though.

Let me get this...

Low-income, urban people and their "community organizers" --like you-know-who-- cowed Wall Street investment bankers into being irresponsible! And against their will too! God, we're screwed now!... Unless... Unless, McCain beats the community organizer!

Pst... maybe they read this blog. We should start communicating in code, so they don't know we're onto them.

[amir]

Very good for my stocks, but very bad long term for this economy.

Tax payers should not save the mortgage industry. Enough has already been done.

Congressmen are destroying the basic principles of this country.

[g o]

according to forbes article,
back then,
including initial and subsequent cash injections from taxpayers,
rtc spend $100 billion taxpayer cash.

[annoyed]

There really isn't a two party system anymore.

The Republicans became the Democrats and the Democrats became Liberals/Socialists. In the end they all become a bunch of lazy spending dumb politicians.

Bush really isn't a Republican.

The Republican party became to concerned with Religion and Abortion and ignored everything else.

Oh I forgot about the Neo-Cons(Bush) which are really globalists, against America, against our sovereignty, against borders. Oligarchs, power in the hands of the few.

Make no mistake this "financial mess" was planned. It's too perfect not to have been planned. First our civil rights (9/11, patriot act), now our financial rights, if you will.

This election is bogus!

[TakeFive]

Rational Renter wrote:

"But how can you honestly claim that this is all the Democrats' fault?"

I ask that you read the articles at the links above. One is from City Journal, the other New York Times - hardly right wing propagand machines.

Misguided Dem policies are at the root of this. Further, look at all the recent news about the democrats that were running the show or receiving the lions share of the campain donations from Fannie/Freddie.

Are Republican hands clean in this mess? Hardly. But the press will spin this as being caused by those Republican Fat Cat bankers. And the public will largely buy it.

[TakeFive]

LA-renter wrote:

“Low-income, urban people and their "community organizers" … cowed Wall Street investment bankers into being irresponsible!”

Yes.

“The Clinton administration's get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers… Regulatory approval of such mergers depended, in part, on positive CRA ratings.

By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN…”

http://www.city-journal.org/html/10_1_the_trillion_dollar.html

[ckomel]

Take Five,

If your argument -Democrats are responsible for the mortgage mess- was correct, if the Community Reinvestment Act (CRA) which passed in 1977 and which encourages banks to give credit to minorities and inner city WHEN IT IS PROFITABLE TO DO SO, was to blame most mortgages that would go under would be the ones taken 20-25 years ago. Why don't you see that just like in Enron case, accountability is the problem. It is recently reported that Fannie kept the bad loans under the rug for at least two years. If a teenager knows that the parents will not show up for a week, s/he will party. If s/he knows that parents won't be mad and clean up the mess she'll party harder.