A group of politicians, led by Barney Frank, is calling for the formation of a government body that would take the riskiest assets off the hands of troubled banks and ease them into the market over time reports the New York Times.
This won’t happen quickly, as Congress will be adjourning in a few weeks, not to mention the impending change in the executive administration.
Another problem with this idea is that the government is already doing what these politicians want. The exact idea “centres on the creation of a new agency that would buy troubled assets from hobbled companies.” While there is no precise agency right now, the Times points out Hank Paulson has been doing this in parts:
- The Fed took $29 billion of Bear Stearn’s mortgage-related assets as collateral for a Fed loan to JPMorgan Chase.
- The Treasury Department placed Fannie and Freddie in a conservatorship and explicitly backed the $5.3 trillion of mortgages they own or guarantee.
- Treasury also agreed to buy an unspecified amount of Fannie’s and Freddie’s mortgage-backed securities on the open market, starting with a $5 billion purchase this month. Those securities are to be managed and ultimately sold for the government by an investment house on Wall Street.
- And now the government is taking on AIG, owning 79.9% of its stock.
Frank recognises the ad hoc manner in which the government is trying to cope with implosion of the global financial system and believes there needs to be a more orderly structure in place. While it is likely too late to stave off the current doom, looking ahead to cleaning up the mess, a powerful federal agency backed by strict regulations might be necessary:
The issue is whether Congress, after the election, should create a more formal and accountable mechanism, such as a federal agency, that would provide a relief valve for the troubled assets now causing havoc on Wall Street.
“The question is, and it’s just a question, is, ‘Are we at the point where the private market has made so many bad decisions and is so depressed that it can’t get out from under?’ ” said Mr. Frank, who is planning to hold a hearing next week to explore whether Congress should create an agency to help the markets dispose of hard-to-sell assets.
“The question we have to address is, ‘Is it the case that market psychology has so depressed assets that no entity has capacity to buy and hold these assets except for the government?’ “
Mr. Frank said it would be more appropriate for a new agency, rather than the central bank, to be relieving the markets of the troubled assets.
“It is not appropriate for the Federal Reserve either in a financial sense or in a democratic sense to take on this role,” Mr. Frank said in an interview.
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