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Thursday, September 18, 2008


by Calculated Risk on 9/18/2008 05:12:00 PM

Here is the story that apparently sparked the stock market rally today.

From CNBC: US Weighing Plan to Set Up Facility to Hold Bad Debts

Treasury Secretary Henry Paulson is working on a plan that would set up a government facility to take on bad debts from financial institutions, preventing a worsening of the global credit crisis, Wall Street sources have told CNBC.

The facility would be similar to the Resolution Trust Corporation, which was set up in 1989 to take on all the failed thrift assets during the savings and loan crisis, these sources said.

Paulson is consulting with Congress on the proposal and will brief House Speaker Nancy Pelosi this afternoon, CNBC has learned.
A number of people have been pushing this plan, including Paul Volcker and others in a WSJ opinion piece yesterday: Resurrect the Resolution Trust Corp.
We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.
This seemed like something that would be considered after the electon in November, but the Wall Street crisis - and WaMu attracting no bids - might push the Government to act sooner.

UPDATE: Here is a Bloomberg story: Paulson, Bernanke Weighing New Plan, Schumer Says. Schumer is calling for someting different than RTC II.

Note: the joke in Washington is that the most dangerous place to stand is between Schumer and a microphone.