Will the $700 billion government bailout work?

• Author: Heffes, Ellen M.
• Position: ECONOMY

The credit crunch and volatile stock markets haven't abated by press time, albeit the historic Congressional and presidential actions on Oct. 3 in passing the Emergency Economic Stabilization Act of 2008, which itself had sparked debate.

By way of explanation of why the bailout was needed, Christopher G. Brown, with the Westport, Conn, law firm Begos Horgan & Brown LLP, says it was needed because credit had all but dried up with evaporation of the market for residential and commercial mortgages and the securities backed by them. Institutions that held mortgages or mortgage-backed securities had no buyers for their inventory and thus could not convert the assets into cash to lend.

The bailout enabled the federal government to make a $700 billion market for these assets. The act gives the Secretary of the Treasury broad discretion to determine which mortgages and mortgage-related instruments to buy and which institutions to deal with. The assets may be purchased through an auction, reverse-auction or direct purchase.

It also authorizes the Secretary, upon the request of any institutions, to guarantee mortgages and mortgage-backed securities, perhaps to provide an incentive for others to bid at any auction of the guaranteed assets. The Secretary may also buy mortgages and mortgage-related securities from retirement plans.

Also, the act increased the Federal Deposit Insurance Corp. insurance for deposits from $100,000 to $250,000 per account to encourage depositors to increase their deposits, or to leave cash that had exceeded the previously lower insurance limit. The intended result was an increase in the deposit base in those banks and therefore the capital...