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Government Bails Out Wall Street

On October 3, 2008, President Bush signed the bail out plan that enables the administration to buy up the bad debts of failing banks. It was designed to kick-start the flow of credit through the economy. U.S. taxpayers blame Wall Street greed for the economic downturn and had pressured their congressmen to reject the bail out bill. This is why it took so long to pass.

In a radio address to the nation, Mr Bush hailed the historic deal, the largest in US history, for providing "the necessary tools to address the underlying problem in our financial system" and "put our economy on the road to recovery". But he warned, "While these efforts will be effective, they will also take time to implement. The benefits of this package will not all be felt immediately."

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The $700 billion is in addition to an $85 billion agreement on a bailout of the insurance giant American International Group, plus $29 billion in support that the government pledged in the marriage of Bear Stearns and JPMorgan Chase. On top of all that, the Congressional Budget Office says the federal bailout of the mortgage finance companies Fannie Mae and Freddie Mac could cost $25 billion. On Monday, the Fed made an additional $300 billion available to banks in return for a range of damaged assets, on top of another $300 billion already available. The Fed could expand that to $900 billion by the end of the year.

And now, many questions are being raised about this bail out because the markets are still in shambles and credit is tightening down even further. Plus, there are now claims of conflict of interest because Wall Street financiers are cashing in on the crisis.

Doubts about the package were fueled when financial experts warned that conflicts of interest could arise because Wall Street financiers, many of whom have been blamed for causing the financial meltdown in the first place, will have a hand in spending the $700 billion of taxpayers' money.

Because the U.S. Treasury does not have the staff to make the decisions about which banks and which debts to buy up, they are hiring Wall Street experts to do the buying for them. As a result these companies will be tasked with identifying and buying the debts. The problem is, they are making decisions that will affect the same firms whose shares they own, which means they could effectively be buying up their own bad debts.

Treasury Secretary Paulson has revealed that it will be several weeks before the first bad debts are bought up, almost certainly after the presidential and congressional elections on November 4. That means voters will have no chance to see the benefits of the deal before they pass judgment on those who approved it.

To top that off, between 10 and 12 American states may need their own bailouts because they cannot borrow the money they need to pay government workers. California Governor Arnold Schwarzenegger last week asked Mr Paulson for $7bn in short term loans to allay a financial crisis in America 's largest state.

House Speaker Nancy Pelosi said the bail out was "only the beginning". Barney Frank, chairman of the House Financial Services Committee said: "We will be back next year to do some serious surgery to the financial structure. It would be highly irresponsible, a betrayal of our oath, if we were to stop now."

Investors are increasingly nervous about the paralysis in the credit markets that has started to affect companies trying to borrow for acquisitions or just to conduct their daily operations. So now, the federal government plans to buy massive amounts of corporate debt to jump-start lending in the markets where many companies turn for short-term loans. So, the government is still trying to stop the bleeding and infuse confidence into the lending markets.

"The Treasury stepping into the commercial paper market is good news," said Peter Cardillo, chief market economist for Avalon Partners. "The Fed is doing everything they can to have confidence return to the markets, and maybe an interest rate cut is next. The central bank is doing what it should be doing as a lender of last resort."

 

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