Since the burst of the housing bubble late last year, the credit markets, the finance industry, and the US economy in general, have gone on a constant and speedy downturn.
In an effort to stop the economy from completely reeling out of the control, leaving in its wake a slew of bad debts, failed banks, job losses, frozen consumer spending, and just recently, an auto industry on the brink of collapse, the US government has released wave after wave of rescue packages in the form of direct investment into banks, short-term loans to financial institutions, and guarantees of real-estate backed loans.
Washington D.C. is pouring out money like there’s no tomorrow. Since the start of this crisis, the government has already apportioned a jaw-dropping $7 trillion on pledges of financial backing and bailout commitments.
Putting this figure in perspective, just think that this amount represents about half of the nation’s economy and is way above the $700 billion bailout package that was officially given the green light by Congress.
Keeping track of all the money
The government’s direct and indirect financial obligations include $1.7 trillion in loans for companies who are using mortgage-backed securities as collateral, $3.0 trillion in stocks in direct investments, and about $3.1 trillion to guarantee corporate debts and money market funds.
Citing the need to secure the country’s financial industry first and foremost, it is a small wonder that a sizeable chunk of the bailout money has gone to the rescue of big banks and investment houses.
Some of the companies and projects that have made huge dents in the Treasury’s coffers are:
•Fannie Mae and Freddie Mac. These two largest mortgage finance companies went into government conservatorship in Sept. of this year, where the government assured some $200 billion ($100 billion each) to back their assets.
• American Insurance Group. On the same month, AIG, one of the world’s largest insurance groups was poised for a failure before the government injected $85 billion into it. In October, the Feds put in another $37.8 billion more, bringing the total amount to close to $123 billion.
• In a further development to the AIG rescue, on Nov. 10 the Treasury and Fed declare a replacement of the two previous loans handed out to the insurance group with a new $150 billion aid package, this time inclusive of an infusion of $40 billion from the government’s bailout fund.
•$700 billion economic bailout package. In a program called the Troubled Assets Relief Program (TARP), the original proposal of Treasury Secretary Henry M. Paulson, Jr. to Congress was designed for the bailout money to be used in buying distressed assets of banks which were either impossible to sell or whose values have steeply declined. The same program was later revised to simply put in more capital into banks, allowing them to stay afloat and resume lending activities. The bill for the bailout program was approved Oct. 3, 2008.
• Following the approval of the rescue package, $125 was immediately injected into the 9 largest banks namely: Citigroup Inc. – $25 billion; JPMorgan Chase & Co. – $25 billion; Wells Fargo & Co. – $25 billion; Bank of America® Corp. – $15 billion; Merrill Lynch – $10 billion; Goldman Sachs Bank USA Group Inc. – $10 billion; Morgan Stanley – $10 billion; Bank of New York Mellon Corp. – $3 billion; and State Street Corp. – $2 billion.
•The following month, another $33.6 billion from the bailout money was put into some 21 banks, with the largest stake of $6.6 billion given to US Bankcorp, a Minneapolis based bank. This brings to a total $158.6 billion in investments to 30 banks.
•Citigroup Inc. Rushing in to stave off the failure of the once-mighty Citigroup and the panic in the market that would definitely ensue, government injects an additional $20 billion into the bank and guarantees about $306 billion dollars of its real estate-related assets.
• This development was made known to the public on Nov. 23 jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., with the three agencies emphasizing that they will “continue to use all resources to preserve the strength of the banking institutions, and promote the process of repair and recovery, and to manage the risks.”
A Flailing Auto Industry
Another possible beneficiary of the $700 billion bailout money could be Detroit’s automakers. The executives of General Motors, Chrysler, and Ford, collectively known as the Big Three, are asking for a slice of the bailout pie, specifically about $25 billion of it.
While the plan has been on the agenda for several months already, it has somehow lost steam and wasn’t able to drum up enough support in Congress for its passage earlier this month. Critics are questioning why the government should come to the rescue of an industry that is non-competitive, high-paying, and has long since relinquished its leadership in the global market by letting itself get “run over” by the fuel-efficient vehicles that Japan currently produces.
Those who are supportive of the auto industry bailout on the other hand, think that this issue is a no-brainer. It accounts for at least 3% of U.S. employment, translating to about three million American jobs. The downfall of even one of these companies would spell doom for the industrial midwest.
The three auto companies have until December 2 to come up with a viable business plan before Congress puts the possible bailout into a vote.
More Bailouts in the Offing
Even while the Treasury is not quite done yet allocating its initial $700 rescue package, the administration and the Federal Reserve announced Tuesday (Nov. 25) of two more programs for rollout that would amount to $800 billion.
The aim this time is to let the government support trickle down to consumers and provide ease and more activity going in the banks’ credit departments, particularly in vital areas as mortgage lending, credit cards, auto loans, student loans, and small business loans. For this purpose, the government intends to purchase some $200 billion worth of securities backed by these types of debts.
The Fed also announced another program that would entail spending up to $600 billion buying mortgage-backed assets from government-sponsored entities such as Fannie Mae and Freddie Mac.