Treasury Secretary Hank Paulson briefed Congressional leaders on plans to address the "illiquid assets" on U.S. financial institutions' balance sheets, possibly including the creation of a government facility to take on financial firms' bad debts.
The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion-dollars and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.
The plan would have two parts. The largest part would be the purchase of private-label (those underwritten by Wall Street) mortgages by some as-yet unnamed vehicle. Financing would occur through the sale of treasuries, the official said. That part of the plan would require congressional approval. The idea is to hold the securities to maturity. The average mortgage has a life of about 7 years.
A second part of the plan would involve the purchase by Treasury of additional government-backed (Fannie Mae and Freddie Mac) under a plan it announced several weeks ago to rescue the two government-sponsored entities. Back then, it said it would purchase $5 billion initially. The idea is to ramp up those purchases more quickly. It does not require approval by Congress.
The administration is contemplating hiring a private investment manager to run the mortgage vehicle. Yet to be worked out with Congress are the amount of mortgage securities the government would buy and from whom the government would accept them.
The price to be set on those purchases and the process for setting it was also unknown.
CNBC first reported the creation of a Treasury plan, similar to the Resolution Trust Corp., that would take mortgage backed securities off the market.
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http://www.cnbc.com/id/26779080
