U.S. Financial Bailout Could Cost $2 Tln

The U.S. government could spend up to two trillion U.S. dollars to bail out troubled financial institutions teetering on the verge of collapse unless financial markets swiftly recover, Reuters said yesterday.

Washington announced that it has spent 700 billion dollars to buy assets from struggling institutions; 200 billion dollars for Fannie Mae and Freddie Mac; 85 billion dollars to help AIG with a loan; and 29 billion dollars to rescue Bear Stearns.

In July, another 300 billion dollars in state funds went to refinance failing mortgages as new loans.

The New York Times said that despite the U.S. plan to buy up to 700 billion dollars in distressed mortgage-related assets from private companies, certain experts say the amount will exceed one trillion dollars.

Nouriel Roubini, an economics professor at New York University, estimated financial institutions that have written off around 400 billion dollars have an additional 1.1 trillion dollars worth of distressed mortgage-related assets.

U.S. Treasury Secretary Henry Paulson said Saturday, “If a financial institution has business operations in the U.S., hires people in the U.S., if they are clogged with liquid assets, they have the same impact on the American people as any other institution. The U.S. government will also purchase troubled assets of those firms.”

The decision is expected to benefit UBS of Switzerland and Barclays Bank of Britain.

○ No blank check for Wall Street

To set up a new bill to purchase troubled assets from financial institutions, a growing number of lawmakers are raising their voices, saying measures should be made to protect not only Wall Street but also “Main Street (general Americans including taxpayers and homeowners).”

As the U.S. Congress will end Sept. 26th in the run-up to the Nov. 4 presidential election, the ruling and opposition parties are likely to see conflict.

In a statement, House Speaker Nancy Pelosi said, “Congress will respond to the financial markets crisis by taking action in a bipartisan manner. But we will not simply hand over a 700 billion dollar blank check to Wall Street.”

The New York Times said the Democrats will demand that the government’s program to buy burdensome securities must restrict CEO compensation in companies benefiting from the program.

Paulson, however, warned that imposing limits on CEO compensation could discourage companies from participating in the program.

Also, many Democrats and Republicans in the House say the new bill should protect homeowners who stand to lose their homes due to failure to pay principal and interest.

The Bush administration, however, wants the bill swiftly approved without changes.

higgledy@donga.com