Q & A: What's the US rescue package all about?

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The Independent US

Everyone from the person on the street to the US president is talking about a 700 billion dollar rescue package for the troubled US economy.

Q. But what is it all about, and what does it all mean?

A. The United States is experiencing a "serious financial crisis" and faces a "long and painful recession" unless something can be done "immediately", President George Bush said last night.

Under the rescue plan, which needs to be passed by the US Congress, the government would buy up troubled assets from Wall Street banks so that credit can start flowing again and the economy will have a chance to rebound.

But it would hand the US Treasury significant power, both Democrats and Republicans are concerned that it has not been thought through adequately, both presidential candidates have called it "flawed" and conservatives are wary of the sheer amount of taxpayers' money involved and the unprecedented private sector intervention.

Q. Why is there a problem?

A. Greed and corruption on Wall Street are being blamed and many fear that banks and other financial institutions still hold too many "toxic assets" based on mortgages which are going bad.

The financial crisis has already seen a 200 billion dollar government bail-out of US mortgage lenders Fannie Mae and Freddie Mac, an 85 billion dollar loan to US insurance giant AIG and guaranteed 29 billion dollars to support the bail-out of investment bank Bear Stearns.

Q. What's the plan?

A. Details are sketchy. But US Treasury Secretary Hank Paulson wants unlimited authority to buy the "troubled assets" in order to remove the "illiquid mortgage assets" that are clogging the financial markets.

Banks would then be able to "resume the flow of credit to American families and businesses".

But the aim is to help the country, not individual companies.

The Treasury would purchase any "residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans" as well as "any other assets as deemed necessary to stabilise the financial system".

It would take place over the next two years.

The president said "the government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal".

As the economy improves, it would then theoretically sell them so that "much, if not all, of the tax dollars we invest will be paid back". But there are no guarantees.

Q. How would it work and will the Wall Street banks that are at the centre of the problem end up benefiting?

A. The US government would appoint agents, likely to be Wall Street firms, to manage the purchases.

But the president told the nation the plan "should make certain that failed executives do not receive a windfall from your tax dollars".

The Treasury would have "full discretion over the management of assets" which it could "sell at its discretion or may hold assets to maturity".

Any cash received by liquidating the assets "will be returned to the Treasury's general fund for the benefit of US taxpayers".

Q. And how much will it cost?

A. No one knows, and that's a serious problem. Mr Paulson has asked Congress for 700 billion dollars, but it is possible that it would not cost as much as that.

Either way, both the Treasury Secretary and Federal Reserve Chairman Ben Bernanke agree that the cost of doing nothing would be much more.

The price of the assets will be determined "by market mechanisms where possible, such as reverse auctions" but no real market exists for many of these complex financial instruments, so finding a true value will be challenging.

If the government prices them too low, some banks will significantly revalue their assets, increasing the credit crunch and making the situation worse.

Too high, and it will hand a windfall profit to Wall Street firms that speculated on a bail-out - leaving the government open to accusations that it is taking money from tax-payers to bail out rich banks which caused the problem.

Q. How would the US pay for it?

A. It would borrow money from world financial markets and use up to 700 billion dollars of taxpayers' money.

The Treasury has asked Congress to raise the national debt limit to 11.315 trillion dollars - that's 11,315,000,000,000 dollars.

Q. So what does Congress think, is it behind the plan?

No. President Bush has said the plan would be a "tough vote" for Congress and both presidential candidates Barack Obama and John McCain have called it "flawed", while agreeing that something needs to be done.

They want independent oversight and accountability "every step of the way" and assurances that the salaries of the bank chiefs benefiting would be restricted.

Mr Paulson has faced tough questioning by the Senate Banking Committee over his plan, which was worked out over last weekend.

Chris Dodd, its chairman, said the proposals were "not acceptable" and would not work in its current form.

Former President Bill Clinton said Congress must avoid any bill that effectively rewards bad judgments and dangerous risk-taking among financiers.

But many in both parties said they were open to legislation, although on different terms than proposed.

Republicans have complained about federal intervention in private business and Democrats want to add more conditions and help for beleaguered homeowners.

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