Wednesday, November 12, 2008

Paulson Shelves TARP Plan for “Household” Bailout Plan

Sources: Washington Post, The Foreclosure Fight Gets Streamlined; Financial Times, Paulson Scraps Plan to Buy Toxic Assets; Washington Post, Federal Bailout May Include Credit Card, Loan Companies

In an effort to alleviate the trickle-down of the credit crisis and continue shifting the focus of the bailout plan from Wall Street to Main Street, Secretary of the Treasury Paulson announced a revised bailout plan that facilitates household and business access to “a broad of borrowing options.” According to Sec. Paulson, there is $350 billion left of Congress’s original $700 billion bailout package—and some of that will go to recharging the credit and student loan market (which accounts for more than 40% of the consumer credit market in the U.S.), as supporting consumer lending has become one of his top priorities. The bailout plan that began as TARP (Troubled Asset Relief Program) and allowed the government to buy banks’ troubled assets to save them from failure has been shelved in favor of getting capital markets moving again.

While consumers and policymakers may welcome this change of plan, others in the financial sector are not. They criticize the change for causing confusion and exacerbating the liquidity problem in the markets. Officials from financial institutions say that troubled assets are what are causing the financial crisis and growing uncertainty whether the government will actually buy them is making the problem worse. They claim that if TARP had been implemented as soon as it was passed, the huge losses that companies have incurred since then would not have happened.

Meanwhile, mortgage-lending industry leaders, including Fannie Mae and Freddie Mac, announced a new plan to help keep people in their homes through the Streamlined Modification Program (SMP). The SMP changes the way that the lending institutions can modify a mortgage when the borrower is on the brink of default. The SMP focuses on the borrower’s income and how much he or she can pay, given his or her financial situation. A borrower who is 90 days delinquent on his or her mortgage payments will be eligible for a new loan that does not exceed 38% of his or her income, but must prove that he or she experienced a hardship (such as losing his or her job) and could be subject to interest rate increase down the line.

While the SMP applies only to borrowers who have loans owned or guaranteed by Fannie Mae or Freddie Mac, other major lending institutions, such as Bank of America, Wells Fargo, and Citigroup will extend it to the loans they administer for Fannie/Freddie and are expected to extend it to their own loans. The program will begin Dec. 15, 2008.

Questions for Discussion:

(1) What should the government do with the last $350 billion? Should it go towards carrying out the original TARP plan? Should “Main Street” assistance be the focus of a separate stimulus package?

(2) This difference in opinion seems to be a theoretical difference—should change come from the bottom up or top down?

No comments: