Updated: May 3, 2013 12:14PM
Suddenly the markets turned around. What did the government really do?
It took unprecedented steps to confront a $1 trillion problem that threatened to bring down not only the entire U.S. financial system, but destroy the interconnected global markets ranging from England to Japan, and from Russia to Canada. It's a very small financial world, after all.
The announcement succeeded in buying time -- time for markets to return to a rational state of mind, time to revalue the mortgage-backed securities and all the derivatives contracts based on those packages of mortgages, and time for the dollars that are sloshing around in the central banks of the world to find a home in our financial institutions, which desperately need capital.
Although the deal isn't finalized yet, and few details are available, Congress is being asked to create a new federal agency that resembles a giant waste landfill. Into it they will dump all of the toxic securities now being held on the books of banks and financial services companies -- holding them until they either mature or can be sold in calmer times.
Getting the bad loans off their books will give the banks the freedom to move forward with their regular business of lending and financing their good customers, helping the economy to grow.
Fannie and Freddie, now controlled by the government, will increase their purchases of healthy mortgage-backed securities, and the Treasury will also be supporting the mortgage market.
What's behind this part of the plan? Once the housing market gets going again, the economy will improve, pushing home prices higher, helping to solve the problem that started it all.
In addition, the Fed will give very low interest (2.25 percent) loans to the banks to buy commercial paper -- short-term corporate IOUs -- that are now sitting in money market funds, along with using $50 billion to temporarily protect investors in money-market funds.
And to calm bank depositors, the FDIC reserve fund was given a big boost, so now depositors can stop worrying about which bank is "safest."
All of that concentrated attention from the Fed, the Treasury, the president and Congress gave the market a ray of hope. But questions remain.
Valuing the junk: No one knows how the government will value the bad assets they put into this new agency, or when and if they'll be able to sell these securities. If they price them low enough, maybe eventually they'll sell at a profit!
Whose junk is included: In addition to the banks, there are pension funds, hedge funds and foreign banks that own these questionable mortgage securities. Will those be purchased, too?
Where to get the money: The federal government will have to borrow this money, with the entire situation, including Fannie, Freddie, Bear Stearns and AIG plus these promises, now totaling nearly $1 trillion. Will foreigners lend us this money -- at the current low rates?
But the market isn't quibbling about the details because the plan does one thing that can't be valued in dollars and cents: It instills confidence in the financial markets -- confidence that the entire weight of the United States is standing behind the banking system and the financial markets. That, as the commercial says, is priceless! And that's the Savage Truth.