Holy Cow! Only Half A Trillion?

Yes, that's the estimates on how much this new 'rescue' package would cost.

• By Steve Liesman
  CNBC
  updated 11:24 p.m. ET Sept. 18, 2008
  
  WASHINGTON - Treasury Secretary Hank Paulson briefed congressional leaders Thursday night on plans to address the "illiquid assets" on U.S. financial institutions' balance sheets, possibly including the creation of a government facility to take on financial firms' bad debts.
  
  The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion dollars and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.
  
  The plan would have two parts. The largest part would be the purchase of private-label (those underwritten by Wall Street) mortgages by some as-yet unnamed vehicle. Financing would occur through the sale of treasuries, the official said. That part of the plan would require congressional approval. The idea is to hold the securities to maturity. The average mortgage has a life of about 7 years.
  
  A second part of the plan would involve the purchase by Treasury of additional government-backed (Fannie Mae and Freddie Mac) mortgages under a plan it announced several weeks ago to rescue the two government-sponsored entities. Back then, it said it would purchase $5 billion initially. The idea is to ramp up those purchases more quickly. It does not require approval by Congress.
  
  The administration is contemplating hiring a private investment manager to run the mortgage vehicle. Yet to be worked out with Congress are the amount of mortgage securities the government would buy and from whom the government would accept them.
  
  The price to be set on those purchases and the process for setting it was also unknown.
  
  CNBC first reported the creation of a Treasury plan, similar to the Resolution Trust Corp., that would take mortgage backed securities off the market.....

read rest of article here on msnbc http://www.msnbc.msn.com/id/26780312/

Kathy explains it better on her write-up, Resolution Trust Corp: What is it and Will it Help the Markets?.

• Resolution Trust Corp (RTC) sent the stock market surging and gold prices plunging. New traders may wonder what the RTC is and how it can help the markets.
  
  The RTC is essentially a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets. It was first created as a result of the Savings and Loans crisis of the 1980s. For the readers of the Wall Street Journal, former Fed Governor Paul Volcker, former US Treasury Secretary Brady and former US Comptroller Ludwig wrote an opinion piece on Wednesday calling for the current Administration to resurrect the RTC.
  
  The idea was then floated around by current US Treasury Secretary Paulson this afternoon, triggering the sharp reversal across the financial markets. USD/JPY traded as low as 104.00 just a few hours before talk of the RTC hit the newswires and afterwards, it rallied up to 105.78. However the more important question to ask is whether or not an RTC will help. The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for a months or even years before liquidating so as not to flood the markets with bad assets, it can help. According to the opinion letter in the WSJ, if the RTC buys the bad debts, it accomplishes the following:
  
  1. Restores Liquidity
  2. Orderly Liquidation of Troubled Paper
  3. Reduces Foreclosures because the Agency Would Manage Mortgage
  4. Can Help to Revive Banks Stuck with Troubled Paper
  
  Is the US at Risk of Losing its AAA Rating?
  
  However the big danger of inundating the US government with bad debt at a time when they have spent a tremendous amount of public funds to bailout companies like AIG is the risk of the US losing its AAA credit rating. On Wednesday, S&P said that “there’s no God-given gift of a AAA rating, and the US has to earn it like everyone else.” Although the S&P followed that statement up by saying that they are not at risk of losing their rating, we certainly believe that with the US, they will be more reactive than proactive of downgrading the government’s debt if needed. The consequences would be catastrophic if the US gets downgraded, but Americans cannot have their cake and eat it too. Not only will US tax payers have to pay for this eventually, but 15 years down the line, Medicare obligations will balloon and if the US government doesn’t get its balance sheet into shape by then, the consequences could be even more severe.
  
  Fire up the Printing Presses?
  
  This is perhaps the reason why the Federal Reserve may consider firing up the printing presses. Along with major central banks from around the world, the Fed has added $247B in a coordinated liquidity injection this morning. To pay for this, they are selling an additional $100B in short term debt, which in essence sterilizes their efforts. If that doesn’t work in stabilizing liquidity, the Federal Reserve can always print money. Printing money has its problems as well, since accelerates inflationary pressures and with inflation just beginning to trickle lower, the Fed may not want to take this gamble yet.