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Sec. Paulson Outlines New Financial Strategy

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Sec. Paulson Outlines New Financial Strategy

Economy

Sec. Paulson Outlines New Financial Strategy

Sec. Paulson Outlines New Financial Strategy

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Treasury Sec. Henry Paulson has announced that next week the government will release a massive new plan to control the financial crisis. The new strategy will involve hundreds of billions of taxpayer dollars so the government can buy up the bad mortgages and other illiquid assets clogging up the financial system.

Detailing The Government's Financial Rescue Plan

Detailing The Government's Financial Rescue Plan

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Working on the problem: Treasury Secretary Henry Paulson is flanked by Federal Reserve Chairman Ben Bernanke (left) and SEC Chairman Christopher Cox (right). Chris Dodd, chairman of the Senate Banking Committee, is at the far right of the photo. Chip Somodevilla/Getty Images hide caption

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Chip Somodevilla/Getty Images

Working on the problem: Treasury Secretary Henry Paulson is flanked by Federal Reserve Chairman Ben Bernanke (left) and SEC Chairman Christopher Cox (right). Chris Dodd, chairman of the Senate Banking Committee, is at the far right of the photo.

Chip Somodevilla/Getty Images

STEVE INSKEEP, host:

It's Morning Edition from NPR News. Good morning. I'm Steve Inskeep. We're waking up to news of a government bailout of the financial industry. Something like this has happened before, but rarely has the government intervened on such a gigantic scale. The Treasury Department and the Federal Reserve will draft a plan to take some of the assets of companies with billions of dollars in bad debt. Treasury Secretary Henry Paulson told Congress about it last night.

(Soundbite of speech)

Secretary HENRY PAULSON (U.S. Department of the Treasury, George W. Bush Administration): We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions of the United States on their balance sheet.

INSKEEP: That may require a bit of translation. In fact, much of today's program is about translating what's happening on Wall Street, so we've asked NPR's John Ydstie to help us figure this out. John, good morning.

JOHN YDSTIE: Good morning, Steve.

INSKEEP: Dealing with illiquid assets, what does this mean?

YDSTIE: Well, we don't know the details of this plan. They're going to be worked out over the weekend, but what Secretary Paulson wants is authority from the Congress for the government to acquire the bad assets that are at the heart of this financial crisis, , these mortgage-backed securities owned by financial institutions which they can't sell and which have already brought down AIG, Bear Stearns, and Fannie and Freddie, and made the whole world afraid to lend, because no one knows who will be next to fail.

INSKEEP: And that means that the government takes these over, which means if they're an asset, if there's income, the government gets it, but if there's a liability, the government taxpayers end up paying. Is that right?

YDSTIE: Correct.

INSKEEP: And will this be similar to the effort to bail out savings and loans which took place almost 20 years ago now?

YDSTIE: Well, yes, in a sense, it will be likely to involve a government entity like the RTC, which would acquire bad assets from companies at a deep discount, hold them...

INSKEEP: Resolution Trust Corporation.

YDSTIE: Right - back into the market that - at later time, but there would be some big differences from the original Resolution Trust Corporation. It was disposing of the assets of dead S&Ls that the government had taken over. In this case, the government would be trying to save firms and the financial system by removing these toxic assets. Also, the original RTC was a big organization, and given the urgent nature of the current crisis, officials may not have time to set up a separate organization. So, the government may have to figure out another way to administrate, maybe inside the Treasury Department. It could also resemble the S&L bailout in terms of the potential huge costs to taxpayers.