Biggest bank bail out in decades
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The fed is working on, what amounts to the biggest bail out for banks in over a decade. With AIG, Lehman Brothers, Merrill Lynch, Morgan Stanley, Washington Mutual all falling prey to their own practices and a panic stricken economy, the fed and treasury have come together with separate measures to help struggling banks.
The Treasury will tap into a Depression-era fund to provide guarantees for the money market mutual funds. The Fed said it will expand its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. Over $2 trillion of assets is in money market funds and these funds play an important role as a savings and investment vehicle for many Americans; they are also a fundamental source of financing for our capital markets and financial institutions.
Meanwhile, the Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, took temporary emergency action to prohibit short selling in financial companies to prevent financial stocks from sliding further.
This is a monumental move from the fed in the most capitalist among capitalist economies in the world. Tax payer money will fund all the plans and taxpayers are sure to question the wisdom in bailing out banks who, through their own negligence and greed have invited the trouble upon themselves.
In response to these recent steps from the Fed, the US treasury and the SEC, markets have rallied and shrugged of their losses. The DOW Jones was up 350 points or 3.0% in morning trading.
The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy - US Treasury press release
Lax lending practices which have led to irresponsible lending and irresponsible borrowing as largely to blame for the mess the economy is in right now. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.
According to a report issued by the FDIC last month, banks have had a rough 2nd quarter and 27 more banks have joined the problem list that the FDIC maintains and monitors.
Here’s the current list of big name financial companies who have been hit due to significant exposure to bad asset-backed securities and lack of credit availability in the economy
- Freddie Mac
- Fannie Mae
- Lehman Brothers
- Washington Mutual
- AIG
- Merrill Lynch
- Washington Mutual
