Finance Globe

U.S. financial and economic topics from several finance writers.
2 minutes reading time (440 words)

U.S. Government Talks of a Broad Rescue From Bad Mortgage Investments

U.S. Government considering a broad rescue.
There's talk of a historic move by the federal government to control the ensuing credit crisis by rescuing financial institutions from their bad investment decisions. Though details of the plan have not been finalized, the government is considering forming a government entity to absorb the bad loans that are responsible for the failures of huge companies and the uncertainty of the economy. This move is reported to be similar to the actions of the government during the savings and loan crisis of the 80's and 90's.

Bad mortgage investments have been responsible for the fire-sale of Bear Sterns to JP Morgan, the Chapter 11 bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America, the begging and receiving of an $85 billion government loan to AIG, and the government seizure of Fannie Mae and Freddie Mac. Morgan Stanley and Washington Mutual are the next financial institutions to fear what their futures may hold.

The collapse of major corporations in this financial crisis leaves many to wonder which giant will be the next to fall. With many Americans worried of what will happen to their life savings, their retirement investments, and their job security if companies keep going under, the government is working hard on finding a solution to control the damage to the broader economy and the financial markets.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have already met with members of Congress to discuss the possibilities, and expect to have the details of the rescue plan by later this weekend.

SEC bans short selling practices.
In the meantime, the Security and Exchange Commission has temporarily banned the practice of short selling in financial stocks. Short selling is betting that the price of a stock will fall, and selling borrowed shares at the current price. Hopefully, the price of the stock will drop, and the investor can then pay back the loan by buying the borrowed shares at the lower price. The difference between the borrowed price and the sale price is the profit.

Also banned is the practice of "naked" short selling in general. Abusive naked short-selling differs because the investor doesn't actually borrow the stock, and fails to deliver it to the buyer. This practice allows manipulators to force down the price of the stock by much more than would be possible in a legitimate short-selling conditions, and has dramatically contributed to the volatility in the already shaky market.

Stock markets around the world have rallied in response to the restrictions on short selling and news of the rescue.



Sources:
Security and Exchange Commission
ABC News

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Saturday, 19 October 2019

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