The Melodrama Continues
By: Dr. Charles Lieberman
Date: 9/29/2008
Failure of the House to pass the rescue bill leaves everything hanging in mid-air. Leadership understands that a rescue bill is needed to help restore liquidity to the markets. It is very likely that politicians will resume negotiating very soon to work out a new deal that they think they will be able to pass. The market is sending them a message that a rescue deal is needed. In the meantime, the Fed and the FDIC will deal with the situation through the instruments available to them.
Treasury will be unable to funnel money to the credit markets and take illiquid mortgage assets off the hands of financial institutions until some legislation gets passed. In the meantime, Treasury will be able to channel cash through Fannie Mae and Freddie Mac into the mortgage market. At the same time, the Fed increased considerably its auction of funding to the credit markets. If banks wont lend to each other, they can do so using the Fed as a middleman, which can provide as much credit to each bank, as needed. Still, this doesnt do much to make banks more comfortable about lending to potential borrowers. So, credit availability will remain limited until a more comprehensive rescue bill is approved.
FDIC has proven it can help somewhat more than expected. The sale of Wachovias retail operations to Citigroup, while keeping the securities firm within the old Wachovia, all without destroying the debt, the preferred stock, or even the common stock of Wachovia was deftly done. (Paulson could take a lesson or two.) More such deals may occur, orchestrated by FDIC, if there are other banks around that require financial assistance. (A few come to mind as candidates for acquisition, most with Wells Fargo, U.S. Bankcorp., HSBC and a few others as the potential acquirers.) FDIC might revert to the Washington Mutual model, where more losses are inflicted on a case by case basis. That is likely to depend on the potential losses in the portfolio of each bank in question. Download this article in PDF Format
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