Despite Bailouts, Few Immediate Results
MELISSA BLOCK, host:
As for the government's efforts to rescue financial firms, it's becoming clear just how difficult that task is. Yesterday, we reported that the government is giving even more money to the insurance giant AIG and reworking its rescue effort at a greater cost to taxpayers. Fannie Mae and Freddie Mac continue to struggle after the government took them over in September and the $700 billion bailout? It has yet to buy a single one of those famous toxic assets. Well, NPR's John Ydstie is here to help us work out what's going on. And John, there are a lot of people from Congress, the financial markets, expressing concerns about the governments efforts here. What's the problem?
JOHN YDSTIE: Well, first of all, let's take Fannie and Freddie. Their big problem is that the housing market continues to deteriorate and they're stuck paying off bad mortgages. Fannie Mae said yesterday it lost $29 billion in the last quarter and within a few months, it could be tapping the hundred billion dollar credit line that government has for it.
BLOCK: Let's talk also about AIG. The government initially had put up $85 billion, then another $38 billion and now, the total is up to over 150 billion. Why the escalation?
YDSTIE: Well, the problem is that AIG has been running through its original loan very fast, largely because of credit default swaps, essentially, insurance policies it wrote guaranteeing payment of debt insured by other companies. As the companies that issued the debt have become shakier, their ability to pay back is more questionable. And AIG has had to put up collateral to prove it could pay off the credit default swaps. And putting up the collateral has burned through a big chunk of the government's initial loan.
BLOCK: So, does the government putting up now over a $150 billion, does that solve AIG's problem?
YDSTIE: Basically, it does it by going out and buying the questionable debt that AIG has been insuring with the credit default swaps. Actually, they would be the first troubled assets purchased by the Troubled Asset Relief Program. But that's going to put taxpayers directly on the hook if the companies that issued the debt can't pay it off, the tax payers will lose.
BLOCK: You mentioned the Troubled Asset Relief Program, the TARP, this is the $700 billion program, and the administration had initially asked for that money to buy up mortgage backed securities gone bad. So far, they haven't bought a single one. Why not?
YDSTIE: Well, they haven't because they've been trying to figure out how to do it through an auction process, but the Treasury has discovered it would be a very complicated thing to do. So, it seems like this original idea is now way, way on the back burner.
BLOCK: And so far, the main thing they've done with the money is what?
YDSTIE: They've given it to banks, injected capital into banks. A $125 billion was committed to nine of the nation's largest financial institutions, like Citigroup and Wells Fargo. An equal amount will go to smaller regional banks, so far 46 institutions. All of the money hasn't gone to the banks, yet, but there's already concern that they're not being quick enough to increase their lending to businesses and consumers, which, after all, is the point. Now, if you add the $250 billion for the banks to the $40 billion committed yesterday to the new AIG rescue package, it leaves the government close to halfway through the $700 billion the Congress authorized for the TARP program.
BLOCK: And they could be going back to Congress and asking for more.
YDSTIE: They could, absolutely.
BLOCK: One of the problems, John, that the government is facing, is that firms are lining up to get a chunk of this money. I have this image of people standing with their hands out stretched, and most notably, it's the US auto companies who are saying, hey, we need a chunk.
YDSTIE: That's absolutely right. The auto companies are in serious distress, and they want $25 billion fast. Democratic leadership in Congress wants to give it to them, so does President-elect Obama. But the Bush administration says it doesn't believe that the auto companies qualify under the TARP. As Vincent Reinhart, a former Federal Reserve official says, the problem is the Treasury didn't have a set of principals by which to guide its decision about who gets money under the TARP. They just sort of drifted, so, now, it's hard to draw the line on who's actually eligible.
BLOCK: OK. NPR economics correspondent John Ydstie, thanks very much.
YDSTIE: You're very welcome.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.