In a surprise, the Fed said it would begin to temporarily lend major banks and brokerages as much as $200 billion in U.S. Treasury securities it owns, in exchange for mortgage-backed securities that in many cases have slumped in value because of market anxiety over soaring loan defaults.
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Earlier Monday, Wall Street had been rocked by rumors that Bear Stearns Cos., one of the country's largest brokerages, was running short on cash because other financial giants wouldn't lend to it. The company's shares plunged 11% even though the firm said there was "absolutely no truth" to the rumors.
Also Monday, shares of Fannie Mae and Freddie Mac -- the two government-sponsored lending giants that are supposed to help lead a housing-market rescue -- dived to their lowest levels since 1995 after a weekend story in Barron's, a financial magazine, questioned whether Fannie Mae itself could become insolvent.
When the mortgage-finance crisis began last summer, it was centered in the so-called sub-prime loan market for mortgages made to people with dicey credit. As delinquency rates on those loans surged, the value of bonds backed by the mortgages crumbled, causing massive losses for banks, brokerages and investment firms that owned the bonds.
http://www.latimes.com/business/investing/la-fi-econ12mar12,1,4491163.storySo, our almighty dollar is now secured by the very bad mortgages that are threatening the solvency of the banks and brokerage houses. That's robbing Peter to pay Paul.
The Bush administration is doing anything to maintain the facade of economic wellbeing until November. I doubt that this will work. They are really desperate. I've never heard of a post-depression U.S. government taking such measures. Maybe I'm just uninformed.