2008/2009 Investment Review & Preview : Bailout Fever
Thursday, January 01, 2009SUSIE GHARIB: One legacy of 2008 is the government's unprecedented role in the rescue of failing companies, especially in the financial sector. As Erika Miller reports, Federal bailouts in that industry centered on institutions that were deemed too big to fail, fearing their collapse might have a domino effect.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The government's first big move to prop up a financial company came in March. Faced with the impending collapse of Bear Stearns, the Treasury arranged for JPMorgan Chase to buy the investment bank in a fire sale. To sweeten the deal, the Federal Reserve gave JPMorgan a $30 billion line of credit and agreed to pick up most losses on Bear's assets. Vanguard founder Jack Bogle was critical of the government's role.
JACK BOGLE, FOUNDER, THE VANGUARD GROUP: It is to me remarkable that all these capitalists who say just keep the government out of the way and we'll do fine are the first ones in line when they're coming to search for help. You know, go to the government whenever you get in trouble.
MILLER: And that was just the tip of the iceberg. Two months later, financial giants Fannie Mae and Freddie Mac, which together back half the nation's mortgages were on the ropes. After massive sell-offs of their stock, the government decided to take over the two firms. Treasury official Jeremiah Norton said the move would assure foreign investors of the safety of Fannie Mae and Freddie Mac securities.
JEREMIAH NORTON, DEPUTY ASSISTANT SECRETARY, TREASURY DEPT.: This announcement will help show the world that invests in the U.S. mortgage market that the U.S. government stands with the mortgage market with these entities.
MILLER: Nevertheless Treasury Secretary Henry Paulson warned that the government would not prevent the failure of every big financial institution. That policy shift proved fatal for Lehman Brothers, which filed for bankruptcy protection on September 15. But just a day later, Paulson had to change course. Insurance giant American International Group was on the line for billions in credit default swaps on mortgage securities and there was real concern that an AIG failure could threaten the entire financial system. So the government announced an initial $85 billion bailout of the insurer. Then in a bid to replace the stopgap rescues of individual firms, Treasury Secretary Paulson outlined a new approach: buying up billions of dollars of toxic mortgage assets.
HENRY PAULSON, TREASURY SECRETARY: I am convinced that this bold approach will cost American families far less than the alternative, a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.
MILLER: But many on Capitol Hill, including Representative John Boehner, were skeptical of the plan and its $700 billion price tag.
REP. JOHN BOEHNER, MINORITY LEADER: We will not agree to a bill that sells taxpayers out to bail out Wall Street.
MILLER: The House rejected the Paulson plan by a vote of 228 to 205. Only after making some serious revisions did Congress pass a new plan, now known as the Troubled Asset Relief Program or TARP. But as volatility in financial markets continued, The Treasury did another about-face. It decided that it would be better to use the TARP money to inject money directly into banks by purchasing bank stock. As TARP Director Neel Kashkari explained.
NEEL KASHKARI, INTERIM ASST. SECRETARY, FINANCIAL STABILITY: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.
MILLER: But even that wasn't enough. On November 23, the government had to shore up Citigroup with a rescue package worth more than $300 billion. And the following day, the Federal Reserve unveiled an $800 billion plan to buy mortgage-related debt and back consumer loans. The big question now is what actions the Obama administration will take. So far, it has indicated it would like to see more moves to help individual homeowners, and just financial institutions. Erika Miller, NIGHTLY BUSINESS REPORT, New York
