By William Patalon III
Executive Editor
Money Morning/The Money Map Report
The U.S. Treasury Department plans to borrow a record $550 billion in the current quarter, and another $368 billion in the first three months of the New Year – money needed to fund the $700 billion bailout plan the government is using to battle the worst financial crisis since the Great Depression.
Wall Street bond traders estimate that the U.S. government will have to borrow a record $1.4 trillion during the current fiscal year – an unprecedented amount of debt that’s nevertheless needed to cover a federal budget deficit that’s expected to approach $1 trillion for the fiscal year, CNNMoney.com reported.
(The government’s fiscal year differs from the calendar year, and actually began Oct. 1. The $700 billion bailout plan was approved by the U.S. House of Representatives on Oct. 3, and was signed into law the same day by President George W. Bush.)
Experts predict that the government’s budget deficit will reach $988 billion for the current fiscal year – more than double the $482 billion estimate that the Bush Administration made in July. However, that estimate was made before the U.S. credit crisis worsened to the point that government leaders felt they had to take action. The controversial bailout plan was form that initiative has taken.
A deficit of $988 billion would be more than twice the record deficit of $454.8 billion, which was achieved during the budget year that ended Sept. 30.
Bolstering Banks
The main element of the bailout package – labeled a “rescue package” by the Bush Administration – was devised to bolster the balance sheets of banks, enabling them to resume lending. To that end, the Treasury Department is investing $250 billion into U.S. banks, a recapitalization strategy that U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke have billed as being the best way to jump-start lending.
So far, the federal government already has used about $125 billion to buy stock in the largest U.S. financial institutions, including Citigroup Inc. (C) JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), The Bank of New York Mellon Corp. (BK) and State Street Corp. (STT).
The remainder of the $250 billion that was allocated for financial institutions – between $124 billion and $131 billion – will be dispersed among smaller banks and thrifts, according to the rescue plan.
However, as a Money Morning investigative story revealed on Friday, much of that money is being used to finance takeovers of weaker banks, enabling big banks to get bigger, using taxpayer money to do so. [Editor’s Note: For a full report on this taxpayer-financed takeover binge – including which banks may be next on suitors’ shopping lists – check out this Money Morning investigative report, which includes commentary by Takeover Trader Editor Louis Basenese. This report is free of charge.]
Housing and Auto Woes
Of the remaining $450 billion, the government is looking to allocate between $40 billion and $50 billion to a tentative Bush Administration plan aimed at keeping as many as 3 million homeowners who are behind on their mortgages from losing their houses. Under that plan, which has been delayed by a series of legal snags and internal political debates, the money would be used to cover future losses on loans that are deemed eligible for federal support.
As currently conceived, the federal government would incur half the loss on a home loan if the mortgage company that controls the loan agrees to lower the borrower’s monthly payment for at least five years. On any given loan, the mortgage company would reduce the payment borne by the homeowner by writing off part of the loan balance, reducing the loan’s interest rate or changing other loan terms, sources told The New York Times.
While the Treasury Department is game to help U.S. homeowners, it’s been reluctant to extend direct support to U.S. automakers, which have also been hit hard by the financial crisis.
For instance, the government rejected General Motors Corp.’s (GM) request for $10 billion in assistance for its potential merger with Chrysler LLC after the Bush Administration decided it didn’t want to broaden its $700 billion financial rescue program to include industrial companies. President Bush also didn’t want to play a role in a GM-Chrysler merger that could cost the U.S. economy tens of thousands of jobs, The Times reported in a separate story earlier this week.
Instead of direct financing assistance, it looks like the Bush Administration will speed up the development of a $25 billion Department of Energy loan program that’s aimed at helping U.S. automakers develop more-fuel-efficient vehicles. The administration is also believed to have asked the U.S. Commerce Department to explore other ways that aid could be brought to the automakers – without expanding the scope of the bailout package.
The so-called "Big Three" automakers – GM, Chrysler, and Ford Motor Co. (F) – are in need of government assistance after being pushed to the brink of bankruptcy: Foreign competition and a slumping economy have combined to push vehicle sales down to their lowest level in 15 years.
GM has been in talks with Cerberus Capital Management LP about buying Chrysler since September. But potential investors in the deal have been hesitant to back the merger without the safety net of federal assistance, or a government guarantee of some sort. GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left the No. 1 U.S. automaker with few options other than appealing to the government.
GM spokesman Greg Martin said in late October that the company had asked the Treasury Department to broaden recently enacted legislation – aimed at bolstering banks and financial institutions – to include auto companies.
In fact, General Motors Chairman G. Richard "Rick" Wagoner Jr. reportedly went right to Treasury Secretary Paulson Jr. and lobbied for the government to provide emergency financial aid to the Big Three via the $700 billion bailout plan.
News and Related Story Links:
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CNNMoney.com:
Government to borrow a record $550 billion. -
Money Morning News Analysis:
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis. -
Money Morning News Analysis:
Banking Bailout Becomes Law With House Vote, Bush Signing. -
Money Morning Investigative Report:
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis. -
Money Morning News Analysis:
Paulson Announces New Plans to Buy Equity Stakes in Banks and Revive Credit Markets. -
Money Morning News Analysis:
Credit Crisis Expert Says Proposed Plan to Bail Out Delinquent Homeowners May Face Too Many Problems to Succeed.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.