bank run blog

Treasury Secretary Henry Paulson made the rounds of the television talk shows on Sunday to discuss the federal bailout plan for Fannie Mae and Freddie Mac and to proclaim that the US banking system is sound, capping another extraordinary week for Washington’s top economic policy makers. Intervention on behalf of the Government Sponsored Enterprises was necessitated after a sudden institutional run depressed their share prices and fueled rumors of insolvency at the quasi-governmental agencies that together hold or guarantee more than 80 percent of US home mortgage loans. Also last week, the Securities and Exchange Commission announced an emergency measure prohibiting the short selling of stocks in the GSEs and 17 other financial institutions, prompting confusion on Wall Street and giving rise to fears that troubled banks not protected by the SEC order may soon fail.

Referring to the FDIC list of institutions that may be in jeopardy of failure, which currently numbers about 90 banks and thrifts, Paulson told CBS News, “Of course the list is going to grow longer given the stresses we have in the marketplace, given the housing correction. But again, it’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.” With regard to the recent failure of California-based IndyMac, that led to long lines of tense depositors at several branches, the Treasury Secretary reiterated that no one has ever lost money on a federally insured deposit.

Paulson denied that the rescue package devised for Fannie and Freddie amounts to a government bailout, even as he urged Congress to quickly approve the plan to provide essentially unlimited liquidity to the GSEs. Some analysts have predicted that the immediate cost of salvaging the GSEs will exceed a trillion dollars. New York University economics professor Nouriel Roubini has argued that the government will ultimately be forced to nationalize home mortgages to stabilize the banking and financial services sectors.

The American Bankers Association called on the SEC to broaden its order to protect all US banks, writing in a letter to the commission, “The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country’s banking industry.”

cross posted at

redstateupdate.net