Friday, September 19, 2008
Massive federal bailout of bad loans proposed: what woud be the downstream consequences for individuals?
The media has multiple reports this morning of a massive bailout by Congress, involving the government’s somehow taking over “toxic loans”. It was unclear if this involved setting up something like a Resolution Trust Corporation of the 1990s, and the government’s buying bad loans. This sounds like Jim Cramer’s (“Mad Money”) proposal that the government pick up failed loans at 30 cents on the dollar.
The latest fear, as noted yesterday, was a “run” on uninsured money market funds, and the unwillingness of financial institutions to lend to one another and to consumers.
It sounds as though government worldwide may do the same.
Short selling is likely to be reformed and much of it slowed or curtailed considerably. (One would wonder about the tricky technique of “shorting against the box,” which is short selling stocks that one already owns).
Some stories suggested that the government would need to act quickly, within a week.
This sounds like “getting something for nothing” and it probably will not turn out that way. Individual borrowers may have to meet higher credit score minimums and down payment requirements could increase. On NBC, one financial advisor said that one needs a credit score of 740 today to have the equivalent of 700 last week. There could be a other changes in what is expected of individuals in a lot of circumstances.