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News : International Last Updated: Apr 24, 2009 - 5:31:05 PM


US Treasury and Federal Reserve to propose sweeping plan to stem the worst financial crisis since the 1930's
By Finfacts Team
Sep 19, 2008 - 7:27:51 AM

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US Treasury, 1500 Pennsylvania Avenue, Washington, DC

In the latest dramatic move to stem the worst financial crisis since the 1930's, the heads of the US Treasury and Federal Reserve on Thursday night, outlined a sweeping plan to take toxic assets off the balance sheets of financial companies, at a meeting with lawmakers on Capitol Hill. Earlier, the Speaker of Congress Nancy Pelosi, said in a letter to President Bush that the Congress would delay its planned adjournment on September 26th, to consider legislative proposals and conduct necessary investigations.

A Treasury spokeswoman said after the Thursday night meeting : "Treasury Secretary Paulson joined Federal Reserve Chairman Bernanke in a meeting with House and Senate Republicans and Democrats to discuss current market conditions. They began a discussion with them on a comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets. They are exploring all options, legislative and administrative, and expect to work through the weekend with Congressional leaders to finalize a way forward."

The main component of the plan, that is currently a work-in-progress, is a mechanism that would take the bad assets off the balance sheets of financial companies through purchases of distressed mortgages at deep discounts, by a public agency. The proposal would involve a commitment of a significant level of taxpayer funds to try and resolve the crisis.

Officials are also considering creating federal insurance for investors in money-market funds, similar to the deposit insurance for regular bank accounts, as funds have experienced big customer withdrawals this week.

The Securities and Exchange Commission plans to propose a temporary ban on short-selling.

Also on Thursday, in response to fears that the troubles of Wall Street were spreading to Main Street because of the worsening credit freeze in the inter-bank markets, the Federal Reserve pumped almost $300 billion into global credit markets.

In coordinated central bank action, $180 billion was provided to financial markets via the Fed, the European Central Bank and the central banks of Canada, Japan, Britain and Switzerland.

Later, the Federal Reserve had to inject an extra $100 billion, in two tranches of $50 billion each, to keep the benchmark federal funds rate at the Fed’s target of 2%.

Treasury and Fed officials had in recent weeks discussed the idea of creating a public agency to ring-fence the distressed assets but the Treasury Secretary is reported to have been reluctant to put a plan forward unless he was confident it would have support in Congress, as he feared a stalemate would have further dented public confidence.

“What we are working on now is an approach to deal with systemic risks and stresses in our capital markets,”Treasury Secretary Paulson said. “And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions’ balance sheets,” he added.

With the elections looming, Democrats are likely to use support for a second stimulus package, as a bargaining chip for backing the Paulson/Bernanke plan.

Speaker Pelosi, signalling that the public was probably not willing to wait until 2009 for a Congressional fix, said lawmakers first had to explore the causes of the problems and potential solutions in hearings.

“Let’s hear from the Bernankes and the Paulsons and the rest what their view of it is,”she said. “Let’s hear from the private sector. How these captains of the financial world could make millions of dollars in salary, and yet their companies fail and then we have to step in to bail them out.”

President George W. Bush delivers a statement on the economy Thursday, Sept. 18, 2008, in the Oval Colonnade of the White House. Said the President, "Our financial markets continue to deal with serious challenges. As our recent actions demonstrate, my administration is focused on meeting these challenges. The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence." White House photo by Joyce N. Boghosian

In her letter to Bush, Pelosi said:

"Thus far, we have seen a reactive, case-by-case approach to a severe crisis – a crisis attributable in part to a history of indifference to responsible regulation of the financial markets.  We need to hear from you about a comprehensive and effective systemic response to ongoing market turmoil — one that will restore stability, grow our economy, create jobs, and insulate hardworking, middle-class Americans on Main Street from Wall Street’s crisis.

The worsening economy demands another bipartisan economic recovery effort.  This effort must address:

  • investment in infrastructure for economic growth and job creation here at home,

  • home heating assistance at a time of record energy costs,

  • extended Unemployment Insurance for the growing number of Americans looking for work,

  • Food Stamps that will help ensure we feed hungry families in a time of crisis, and

  • assistance to maintain critical health care coverage jeopardized by state budget cuts."

The New York Times reports today that as the rest of the financial community was scrambling to get its money out, a government-owned German lender gave Lehman Brothers what might be called a parting shot in the arm, transferring €300 million to the investment bank on the same day it filed for bankruptcy.

The $426 million payment, described by the bank, KfW Bankengruppe, as an “automated transfer,” provoked an outcry across the political spectrum. The largest-circulation German newspaper, Bild, splashed a headline across its front page Thursday calling KfW “Germany’s dumbest bank.”

The bank’s administrative board, made up of politicians and business leaders, met in Berlin amid calls for dismissals and resignations.

Two of the bank’s managing directors and the head of the risk-control department were suspended, the economy minister, Michael Glos, who heads the board, announced after the meeting.

The German finance minister, Peer Steinbrück, said of the suspensions, “That’s not the final word.”

KfW is 80% owned by the national government and 20 percent by German states. It was established in 1948 to finance reconstruction projects.

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