Treasury Launches Big New Initiatives to Quell Financial Crisis

Treasury Secretary Henry Paulson obviously recognizes that huge problems require huge solutions. This morning, he announced that in contrast to the federal government’s piecemeal approach to the growing financial crisis of the past couple of weeks, “We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system’s stresses,” that root cause being illiquid mortgage assets.“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” Paulson said. He acknowledged that the plan, to be hashed out in rough form over the weekend by Treasury officials and Congress, will have to include “a significant investment of taxpayer dollars.”Paulson added, however, “I am convinced that this bold approach will cost American families far less than the alternative: a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.”Unconfirmed reports have pegged the dollar amount of a comprehensive rescue plan at $1.2 trillion, comprising an $800 billion fund to purchase “failed assets” and a $400 billion FDIC pool to insure money-market fund investors. During this morning’s press conference, however, Paulson only said, “We’re talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem.” Paulson also announced two specific measures that are going into effect immediately. Fannie Mae and Freddie Mac have been instructed to increase their purchases of mortgage-backed securities, and the Treasury Department will expand the MBS purchase program it announced earlier this month.Finally, calling the current financial regulatory structure “sub-optimal, duplicative and outdated,” Paulson pledged to work with Congress “to improve the financial regulatory structure so that these past excesses do not recur.”  Reacting to the Treasury intervention, Dan Fasulo, managing director at Real Capital Analytics, New York, told CPN that “Being a pure capitalist myself, honestly it’s hard to digest.” That said, he conceded, the plan is a good thing under the circumstances, a “responsible move” in the face of what he calls “an old-fashioned run on the bank, but in 21st-century terms.” Fasulo added that the next six months will present “a tremendous opportunity for savvy investors to pick up assets on the cheap…. There’s a lot of good stuff out there” among CMBS. He noted, however, that finding the solid ones could be difficult, as would convincing one’s own investment committee to move on them.Bob Bach, senior vp and chief economist at Grubb & Ellis Inc., told CPN, “ There will be Ph.D. dissertations written about the past few days a hundred years from now.” With the market starting to resemble a runaway nuclear reactor, he said, the federal intervention “had to be done.” Further, he said, “I think it can work.” Bach compared the situation to that in 1989 when the Resolution Trust Corp. tackled the fallout from the savings and loan crisis. “It really did work,” he said, noting that the RTC “set commercial real esate back on a firm footing by the mid-1990s.” He pointed out that the Japanese government at that time failed to do what the U.S. government did, with the result that Japan’s economy stagnated for a decade or more. In contrast, the RTC helped clear the way for commercial real estate in the U.S. to flourish during most of the 1990s.