Prelim Rescue Plan Info

Congress Debates Rescue Plan, appears a tentative deal has been reached.

Credit markets are dragging down the economy, and the basic problem is clear. Many financial institutions hold large quantities of complex mortgage securities which have declined in value. The precise value of these securities is difficult to determine, since there are few buyers and the market is not functioning efficiently. Amid the uncertainty, it's very difficult and costly to raise additional capital, so financial institutions are conserving their remaining capital. These institutions are very reluctant to make new loans of any kind. If businesses have no capital to grow and consumers have trouble purchasing homes and cars, the economy suffers and jobs are lost.

Fed Chief Bernanke and Treasury Secretary Paulson spent two long days this week presenting a $700 billion rescue plan to Congress. Much of the testimony noted that the rescue plan would be an acquisition of assets. Mortgages and mortgage backed securities will be purchased at a significant discount to the face amount of the underlying mortgages. Many of the mortgages will be performing, while some will not, and they will have houses as collateral. Ultimately, the orderly liquidation of the acquired assets should recover most, if not all, of the purchase price, and the taxpayer might come out ahead. The plan would provide much needed capital to institutions, which is expected to be used to make more loans.

Heading into the weekend, lawmakers have been meeting on the details of the plan and exploring alternatives, such as an insurance solution. For mortgage markets, expectations that funding a rescue plan will increase the supply of debt pushed mortgage rates a little higher during the week. On late Saturday, it appears the Congressional Leaders and the Bush Administration reached a tentative deal and now will be brought to the House for vote, followed by the Senate. If all goes as planned, should be on the President’s desk for signature this week. We will be watching closing the world wide financial markets reactions to the weekend’s legislation progress.

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