This afternoon Charlie Gasparino reported on CNBC that Treasury was thinking about creating a fund to buy junky mortgage debt from banks and Wall Street firms, and the Dow shot up 400 points. I thought that seemed like an overreaction–of course Treasury was thinking about it. But this evening Hank Paulson and Ben Bernanke are headed to Capitol Hill to brief lawmakers on their plans, so I guess it’s gotten beyond the thinking stage.
The idea is generally described as a rebirth of the Resolution Trust Corp., the agency set up by Congress in 1989 to buy up and dispose of the assets of failed savings and loans. This one (“Bailie Mae,” Arnold Kling has already dubbed it) would buy toxic mortgage securities, hold on to them for a few years, and in the meantime possibly be more willing to renegotiate with homeowners facing foreclosure than the current owners of those mortgage securities are.
One complication is that the assets everybody’s worried about now are on the books of still-alive banks, investment banks and other firms. To avoid bestowing a wholly unearned windfall on the shareholders of the companies ditching the toxic securities, Treasury’s is going to have to devise some kind of very fancy way of doing this. It’s also gonna take some serious up-front taxpayer dollars. Hundreds and hundreds of billions, I would imagine.
Another big complication is that they presumably need Congressional approval, and Congress was planning to adjourn at the end of next week so members could go home and get re-elected. There’s just not enough time to get it done, Chris Dodd was saying yesterday. We’ll see about that.