Even with the new measures added by the Senate version of the bill, the underlying concept of the bill is still intact; the U.S. Treasury is seeking authority to buy up to $700 Billion of toxic securities, and resell them when the economy is in better shape– using taxpayer funds to do so.

Plan A, the first bill in the House, succumbed to defeat in a 228 against to 205 for vote on Monday. A Wednesday afternoon vote in the Senate is expected to be scheduled with a House vote the following Friday.

Just In Case, Plan C is in action

As the House debated, revised, and reconstructed the Bush administration’s bailout bill– ultimately a failed effort– the Treasury Department reportedly resolved itself to the setback, and set in motion a series of maneuvers to bolster the U.S. economic situation. Firstly, the Treasury Department is flooding the economy with money. The Federal Reserve announced that it is printing $150 billion through an emergency lending program for banks. This project is designed to address the world money markets, which are feared to be lacking liquidity. The foreign banks of Europe and Asia are also reportedly involved in a $350 billion “swap lines” deal to help money markets via their central banks. The influx from central foreign banks show, to some degree, their long term confidence in the U.S. market and economy. Widely reported over the past few months have been previous efforts in the form of takeovers, loan guarantees, and seizures by the Treasury Department of Fannie Mae, Freddie Mac, IndyMac Corp, Bear Stearns, AIG, and Washington Mutual. Essentially, the Treasury Department is printing money like there is no tomorrow and without approval from Congress. Under its monetary policy authority, the Treasury is creating and selling Treasury Security Notes to finance its activities. To date, their efforts in propping up the financial markets have had not shown significant success. The markets have given proof of this; a three month yield on treasury bills dropped to just .29 cents a few days ago– indicating that a very conservative mindset exists with investors that want little or no part of risk, with or without the backing of the U.S. Government.

Another negative sign is the trend of inter-bank lending. Banks are reluctant to lend to one another due to the severe liquidly issues, and tightening of credit terms, and essentially insolvency issues. The rates among them continue to rise, ultimately driving up the cost of consumer and business loans. Both result in little or no economic activity. A undeniable observation is that if a commercial bank cannot lend, it cannot survive, and the business operations of many of the country’s banks and thrifts are interwoven.

Although the Treasury’s plan of its original $700 billion proposal was to make one big sweep of the bad mortgage securities and remove them from the credit system, in the absense of a bailout plan, it may have to resort to its prior approach before its proposal, of dealing with failing institutions on a one-by-one crisis basis. It is not clear if additional Congressional approval is needed or how it would go about it. What officials have stated is that the Federal Reserve has significant financial resources at hand– reportedly anywhere from $300 billion to $800 billion– in addition to the FDIC’s reserves of $55.2 billion that can be used as needed.

Matchmaker Role

As the investment and commercial banks have tilted towards failure, the Treasury Department has been working behind the scenes in the matchmaking role. It has arranged mergers and partnerships for the AIG, Lehman Brothers, and Washington Mutual deals, amongst others. By the time the Feds made their move and exercised their authority, other institutions had already been examining and bidding on the assets, debt, deposits and operations of the failed institutions– JP Morgan, Citibank, and Warren Buffett to name a few. This may come as a surprise to individuals on Main Street and the public, but it is indicative of how the ‘clubs’ of Wall Street, the Federal Reserve Bank of NY, and the Treasury Department operate.

Regardless of Congressional approval, and the Treasury’s general ability to maneuver and inject money into markets, the Feds’ power is indeed not limitless, and is secured by the amount and time span of its source of supply, largely, from foreign investors and governments that still have confidence for now in the U.S. economy.