After a few weeks of trying to stand tough in the face of demands for a wholesale rescue, Hank Paulson apparently couldn’t take it anymore. So now we’ll have the biggest bailout in history, including:
- A huge RTC-like government garbage can that banks can throw all their toxic balance-sheet waste into. (This time, the transfer will be made before they go bankrupt, unlike the case with the first RTC)
- A temporary ban on shortselling. (With the unfortunate implication that shorts are the cause of all this)
- A federal guarantee on money-market accounts. (Including non-recourse loans to banks to buy high-quality commercial paper and meet money-market obligations.)
Not surprisingly, the market’s up huge on this news. The moves should head off a run on money-market funds, restore liquidity to the financial system, and, as bank analyst Tom Brown put it on TechTicker this morning, create a general “time out” for the panic to recede.
So what are the costs? Almost certainly:
- Higher taxes
- Higher interest rates on government debt
- Bigger government deficits
When the alternative is the entire financial system going bankrupt, we guess these costs are acceptable. (We’re not convinced that that was the alternative, but early yesterday, we certainly seemed to be heading that way).
Numerous questions do remain, with the most pressing is “What price will the government buy the toxic waste for?” (This price will determine how much additional capital the banks have to raise to offset any losses.) Merrill Lynch shareholders are probably also wondering whether they can cancel the Bank of America (BAC) deal. And Lehman would probably like to un-declare bankruptcy.
We also doubt that this move will prove the final bottom in the stock market. Unless the government makes a similar move on housing (which certainly seems more plausible, given this news), the housing problem won’t up and go away. And until the housing problem works itself through the system, the consumer will still be under pressure. But the future certainly looks brighter than it did yesterday.
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