Given the state of the capital markets and the heretofore limited success of prior initiatives aimed at stabilizing these markets, the Bush administration has proposed legislation to grant the Treasury Secretary broad authority to purchase up to $700 billion of non-performing, hard to value real estate and mortgage related assets and securities from financial institutions in order to strengthen their financial position and allow for additional liquidity in the financial system.
In addition, in response to announcements by certain money market funds that have experienced losses threatening their ability to return investor funds based on a net asset value of $1.00, the Treasury has indicated it will begin to guaranty, on a temporary basis certain U.S. money market funds.
The Treasury Mortgage Related Asset Purchase Plan
According to a Fact Sheet (the “Fact Sheet”) issued by the U.S. Department of the Treasury (the “Treasury”), the Bush administration is seeking to authorize the issuance of up to $700 billion in new Treasury securities to finance the purchase of mortgage related assets. For additional information, please see the Fact Sheet issued by the Treasury on September 20, 2008 http://www.ustreas.gov/press/releases/hp1150.htm. However, given the fluid nature of the discussions surrounding this proposed legislation, virtually all aspects of the proposed legislation remain subject to change.
Politicians and pundits alike are already commenting on the streamlined proposed legislation that would potentially repose significant authority in the hands of Secretary Paulson. It is expected that members of Congress will attempt to modify the proposed legislation by seeking relief for homeowners and by providing for stricter Treasury oversight.
While the Fact Sheet released by the Treasury anticipates the Treasury purchasing mortgage related assets from financial firms with significant U.S. operations, in an interview today, Secretary Paulson indicated that a broader group of non-U.S. financial firms may be eligible given the global nature of the credit crisis and of the international financial system.
Given the lack of liquidity for many mortgage-related instruments, it remains unclear how these assets will be priced and how Treasury will make determinations regarding disposition of the assets. Indeed, many commentators have noted that, in order for the legislation to have a meaningful effect, notwithstanding the massive scale of requested funds, assets and loans will have to be bought at significant premiums to their current values.