“I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated.”

—Henry Paulson

“This is taking a giant step toward a cure and a giant step toward creating some clarity in the market. This needs to be drafted very carefully. What’s needed is something large and systemic”

—Alan Blinder

Recent Fed & Treasury Programs

Earlier in September, they took over Fannie & Freddie

14 – Sep – 2008 :: Fed & Treasury refuse to bail out Lehman and leave AIG to their own devices.

15 – Sep – 2008 :: Term Auction Facility availability to Investment Banks is continued and widened to accept additional, riskier securities, outside of the initial mandate, including equities and distressed securities.

15 – Sep – 2008 :: Treasury provides $85b to AIG, wipes out 80% of the equity and essentially nationalizes the company. $28b is drawn down by Wednesday, the 17th.

17 – Sep – 2008 :: Treasury expands Fed’s balance sheet by $200b, from their starting point of $800b. Essentially, the Treasury put $200b on deposit with the Fed, which allows the Fed’s balance sheet to support more lending. This is different than “printing money,” which is regarded as a consequence of what happens when Fed lowers rates and increases available credit. Instead, the Fed is re-allocating capital acquired by the Treasury through auctions of government bonds or their deposits. More than half of the $800b on their balance sheet at the start of the crisis had been exchanged for riskier securities through the increasingly generous term auction facilities.

18 – Sep – 2008 :: The Fed agreed to provide $247b in dollars in exchange for Pounds, Euros and Yen from the respective central banks. This satisfies the need for dollars from local commercial banks.

18 – Sep – 2008 :: The Treasury announces their intention to auction $100b of additional government bonds. Given the overwhelming demand for US government securities, these will likely be well received and modestly financed.

18 – Sep – 2008 :: Treasury temporarily guarantees $50b of money market funds from the Exchange Stabilization Fund, following the breaking of the buck at Reserve, BNY Mellon and Putnam. Investors already have pulled a record $89.2 billion from money-market funds 17 – Sep.

19 – Sep – 2008 :: SEC temporarily stops short selling of financial stocks and limits naked shorting

19 – Sep – 2008 :: The Primary Dealer Credit Facility (PDCF) already passed $60b outstaning for the week by Wednesday.

On the table:

  • Fed to provide interest to depositors, such as commercial banks. Congress has agreed to do so, but not until 2011. This could cost the Treasury $1.4b over 5 years, but it would encourage commercial banks to increase their deposits at the Fed
  • GSEs to increase their purchases of mortgage-backed securities (MBS). “These two enterprises must carry out their mission to support the mortgage market.”

  • Treasury to expand the MBS purchase program announced earlier this month, a complement to the efforts of GSEs to facilitate mortgage availability and affordability

“We’re talking hundreds of billions. This needs to be big enough to make a real difference and get to the heart of the problem.”