Will Rescue Package Stabilize The Markets?

After a weekend of tense negotiations, lawmakers produced a $700 billion rescue package for Wall Street. The legislation includes limits on executive pay, oversight and a deal-sealing plan for eventually recouping losses. However, no one knows for sure whether that will be enough to stabilize the markets.

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STEVE INSKEEP, host:

One reason lawmakers negotiated all weekend was to say that leaders at least agreed on a plan before another trading week began. The news did not seem to impressed Asian markets which fell today. To answer some questions about how American investors might respond, we go to NPR's Jim Zarroli who is in New York. Jim, good morning.

JIM ZARROLI: Good morning, Steve.

INSKEEP: We just heard Congressman Nadler say the plan may or may not work. Do Wall Street investors think this is going to work?

ZARROLI: I think a lot of people in Wall Street have been watching the situation spin out of control for months, and they're just so scared at this point that they're glad that Washington has been able to agree on something. You know, over and over again they've seen the Federal Reserve and the Treasury Department come up with solutions, you know, like the bailout of Bear Stearns, solutions that were never really able to do what they were supposed to do, which is calm down the markets. But this plan is sort of a whole another magnitude and I think people hope, you know, it's finally of a scope and size to do something really serious.

INSKEEP: Well, does that mean that $700 billion might be enough money?

ZARROLI: Nobody knows because no one knows how much these securities are really worth. And you have to remember we have all these mortgage backed securities out there. They're really at the root of the crisis and what they really are is just a collection of pieces of lots of different people's mortgages. Some of those people have defaulted, some are going to default. The process of figuring out how much one of these securities is worth is very complicated. They are lots and lots and lots of them so, you know, is 700 billion enough to cover them, you know, some people say it's not. No one can really know for sure.

INSKEEP: I'm sorry, Jim. If you are saying no one knows how big the problem is, does that mean Henry Paulson, who threw out the $700 billion figure, doesn't know, that President Bush doesn't know, that congressional leaders don't know, that Ben Bernanke doesn't know?

ZARROLI: I think it's Henry Paulson's best guess as to what will be needed to stabilize the situation right away.

INSKEEP: Meaning that the government is going into this with their- as you say, the best guess, so what do they hope to accomplish?

ZARROLI: I think they're hoping it restores confidence in the markets, which is really the game right now. The problem is that, you know, the credit markets are frozen up. Nobody wants to lend anybody else because nobody really knows how big the other guy's losses are. I mean, would you want to lend to somebody if you didn't know if they could pay you back? But if there's this government entity that's taking people's bad securities off their books then you might feel like, well, the guy, this guy has problems but he's also- he has a place he can go to to get rid of his bad debts. So maybe he's a safe bet after all.

INSKEEP: OK. So is there really any chance that the government might actually make money rather than losing it on this plan, as has been suggested?

ZARROLI: Yeah, it's possible. I know probably that sounds kind of crazy, but you have to keep in mind that these securities that I've talked about, they're not worthless. Because as I said, they're basically pieces of people's mortgages and most of these mortgage holders are going to be their monthly payments so, these securities are worth something. Again, the question is just how much, nobody knows. They may lose money individually but they still have some value. So the government can get them at the right price and resell them later it could make money or at least it won't lose the entire $700 billion.

INSKEEP: So the government will spend $700 billion, some of it will come back, we just don't know how much.

ZARROLI: I think that's the hope.

INSKEEP: Now how much of this money is going to end up in the pockets of Wall Street executives?

ZARROLI: Well, I- that's a good question. I mean, you know, one of the things that this plan does of course, is to address the question of golden parachutes on Wall Street. They're very common in industries as a whole and they are very common on Wall Street. A lot of the CEOs of companies that have been at the center of this crisis, like Merrill Lynch and Countrywide, Fannie Mae and Freddie Mac, have walked away with a lot of millions. Their companies failed and yet they walked away with a lot of money personally. So I think that the hope is that that won't take place anymore.

INSKEEP: There are restrictions then on the bill that is being voted on today.

ZARROLI: Yes.

INSKEEP: OK. Jim, thanks very much.

ZARROLI: You're welcome.

INSKEEP: Jim Zarroli. NPR's Jim Zarroli covers business from New York. COST: $00.00

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