U.S. Treasury Secretary Henry Paulson and the Bush administration have formally introduced a plan designed to address the current stresses in the financial markets.
‘The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,’ Paulson notes. ‘These illiquid assets are choking off the flow of credit that is so vitally important to our economy.’
The plan calls for Fannie Mae and Freddie Mac to increase their purchases of mortgage-backed securities (MBS) and for expansion of the Treasury's existing MBS purchase program, but the component drawing the most attention is a request to Congress for authority for the Treasury to purchase troubled assets from financial institutions.
According to the proposal, under the plan, the Treasury would have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets – including both residential and commercial mortgage-related assets – in the form of both MBS and whole loans. Qualified assets must have been originated on or before Sept. 17, and participating institutions must have significant operations in the U.S.
The assets will be managed by private asset managers at the direction of the Treasury to meet program objectives, and the Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets. Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to the Treasury's general fund for the benefit of American taxpayers.
Funding for the program will be provided directly by the Treasury from its general fund. Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly.
Within three months of the first asset purchases under the program, and semi-annually thereafter, the Treasury will provide the appropriate Congressional committees with regular updates on the program, the Department notes.
Source: U.S. Treasury Department