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OK, I'm getting ahead of myself. Nothing official has been announced just yet, but the market is absolutely rocking this morning on the news. In the coming hours and days, the Treasury and Federal Reserve are expected to introduce a sweeping bailout plan designed to finally pound a nail in the credit-crisis coffin for good.
The plan is likely to create somewhat of a government-sponsored dumping ground for bad assets on banks' balance sheets -- a place where loans can be sorted out and hopefully sold. The idea is to let banks jettison the trash on their books, so as to renew confidence in the financial system and let healthy lending resume.
The form this could take is still anyone's guess, but many assume the plan will look something like the Resolution Trust Corporation (RTC) that was created to kill the savings-and-loan crisis of the late '80s. And although the cost is also anyone's guess at this point, I'm willing to bet it'll cost somewhere between a gazillion and infinity dollars. Again, precisely zero details regarding what the plan will look like, or who exactly it'll cover, have been released. It'll all become clearer as the days go on.
Also making headlines this morning is that the Treasury is going to insure much of the $3.4 trillion in money market funds, the Fed will continue to add liquidity to the market, and the SEC has temporarily banned short-selling on 799 financial companies. These are all boons to the market.
What we do know about this new plan
Here's one interesting detail being reported in The Wall Street Journal: The RTC of the late '80s was designed to scoop up assets from failed savings-and-loan institutions. That seems fair. But this new proposal might actually be designed to inherit assets from solvent banks at steep discounts, in effect bailing out still-healthy banks such as Wells Fargo (NYSE: WFC ) , JPMorgan Chase (NYSE: JPM ) and Bank of America (NYSE: BAC ) .
Rest assured, such moves will create no shortage of grumblings from moral-hazard opponents -- and perhaps rightfully so. Sure, a wide-reaching bailout seems to be the last remaining hope of ending this crisis, but good luck trying to convince taxpayers that they'll be on the hook for a stupendous amount of money to get solvent banks back in working order.
Nevertheless, it became increasingly clear in recent days that something needed to be done, and quickly. Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) got annihilated all week over speculation that their days as independent investment banks were numbered. You're right: Volatility isn't an excuse to bail out the entire financial system. The problem was that it became ever more apparent that without intervention, there might not have been a financial system much longer.
OMG! OMG! OMG!
And, goodness, did the market ever react in a spectacle of chaos. Some of this week's more memorable moments include:
- The largest one-day loss since the 9/11 attacks. (Monday)
- The largest one-day gain in six years. (Thursday)
- A bizarre event in the bond market, in which investors were so eager to seek safety that demand for three-month Treasury notes pushed yields below zero. That means investors were willing to guarantee a small loss to ensure that they wouldn't endure a huge loss.
On Thursday, Morgan Stanley traded in a range from $11.70 to $24.72 per share. Bank of New York Mellon (NYSE: BK ) traded between $21.33 and $35 on essentially no news. State Street (NYSE: STT ) traded between $29 and about $69 on no significant news at all. The volatility was just a result of wild speculation, and of a market caught between a rock and a paranoid place.
So, will the new plans work? I've always thought Hank Paulson looks more like Lex Luthor than like Superman, but I'm going to give him the benefit of the doubt on this one. What we've learned this week is that the bailout of AIG did absolutely nothing to quell fears of systemic risk -- if anything, the surprise collapse solidified those fears. With any luck, the new plans should do a number to instill confidence in the market and get us back into position to finally find our way out of this unprecedented mess.
Stay tuned. We'll keep you updated on these historic moves as the news comes in.
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