Treasury Secretary Henry Paulson revealed plans today to develop a government facility that would deal with clearing bad debt. Paulson’s plan would allow financial institutions to clear bad assets off of company balance sheets. The facility would be designed to overtake bad assets, and dispose of them in an orderly fashion. “A government move to help pull bad assets off the books may be the next step,” said HSH Vice President Keith Gumbinger.

Although it may sound like another bailout, the government may be willing to take, or buy, the bad debt no investor is interested in buying. “This would prevent another Merrill Lynch situation from developing — a dumping of assets into an already glutted marketplace,” said Gumbinger. “There are simply no buyers for some assets in this market.”

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Bailouts have left the Fed seeking for more cash. The Treasury Department will begin a program today that will sell more debt in order to expand the Fed’s balance sheet. They will begin with a $40 billion auction of 35-day bills, and then will continue with a series of treasury bill auctions. Offers of billion of dollars in backing have left the government a little short on cash. Despite being a natural course of action, this could become a cause for concern of interest rates.

As new treasuries begin to flood the market, we wonder what happens if buyers don’t begin to line up. It all comes back to supply and demand; in order to attract investors, yields will have to increase. Unfortunately, mortgage rates are based on those yields, and therefore are likely to rise.

The bailout of Bear Stearns occurred on a Sunday evening. The takeover of Fannie Mae and Freddie Mac was announced late last Sunday morning. The latest news about a potential buyer of Lehman Brothers said it could happen as early as this weekend. Why are most of the major financial developments announced over the weekend?

The simple answer is you never want to risk panicking the markets on a Monday. It’s much easier for regulators to strategize and plan when the stock market is closed and quiet. Developments that formulate over the weekend have more time to be planned out without the potential flux of the stock market to worry about.

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The Federal Reserve and the Treasury Department are “actively helping” Lehman Brothers search for a buyer, a deal that the government hopes will happen this weekend, according to the Washington Post. Before you get too worked up, the Fed and the Treasury Department are searching for a private buyer for Lehman, one that does not involve taxpayer support. One possible scenario could involve multiple buyers which would take control of different parts of the company.

Unlike Bear Stearns, which suffered heavy losses when investors stopped investing in them, Lehman has been the victim of their own investments in real estate and mortgage backed securities. Although the government fully participated in the acquisition of Bear Stearns as well as the takeover of Fannie and Freddie, the same will be highly unlikely for Lehman Brothers: Read the rest of this entry »

Treasury Secretary Henry Paulson announced on Sunday that the US Government will take over struggling mortgage giants Fannie Mae and Freddie Mac. Managerial control of the two mortgage companies will transfer to their new regulator, the Federal Housing Finance Agency (FHFA). As predicted, the companies will enter into a conservatorship, where essentially the structure of the company will remain intact, but top management will change. At Fannie Mae, Herb Allison will replace former company head Daniel Mudd, while Freddie Mac Chief Executive Richard Syron will be replaced by David Moffett.

Despite any dark clouds that have been hanging over Fannie and Freddie, this shake up has at least instilled a new confidence into the market that the two mortgage companies will not fail. The Treasury Department will acquire $1 billion of preferred stock from each company. The government will get the companies’ most profitable stock options in exchange for offering the former Government Sponsored Enterprises a line of credit worth up to $200 billion.

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Rep. Barney Frank (D., Mass) confirmed the Treasury Department is planning a government intervention of GSEs Fannie Mae and Freddie Mac. From the Wall Street Journal as of 3:52 pm:

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Various news outlets have published stories this evening that claim the Treasury Department is close to a deal with mortgage giants Fannie Mae and Freddie Mac. From The Wall Street Journal:

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