Separated in time, the bailout actions taken by the U.S. Treasury Secretary and European
Union (EU) have something in common: due to large amounts of debts that was rolling
into future months, the U.S. government and the EU had to put money to 1) bring down
the yield spread that these bailout entities must pay to borrow funds and 2) to provide
confidence in this entities and bring investors back.
Paulson’s “bazooka” for GSE; Geithner pledges unlimited blank checks
In 2008, the former U.S. Treasury Secretary Henry Paulson had to bring a “bazooka”
to the table to silence market unrest fueled by Fannie Mae and Freddie Mac vast sums
of debt and their solvency. The proposed federal backstop infused money in these
government-sponsored enterprises (GSEs). Eighteen months ago, Fannie Mae and Freddie
Mac were taken over by the government. As a result the U.S. taxpayers have tossed
$127 billion into these companies to keep them solvent.
The current U.S. Treasury Secretary Timothy Geithner also supports the prop for these
two enterprises, pledging unlimited aid removing the $400 billion financial cap on
the money. Mr. Geithner justification for issuing the “blank check” for Fannie and
Freddie bailout is that is crucial in helping to stabilize the housing market and
the overall economy.
EU brought the pistol to the table: EU, IMF Bailout
Similarly, the jump in Greece’s financing costs prompted EU finance ministers to
infuse money to bailout Greece. Under the plan, the EU will put up €30 billion in
the first year and the IMF as much as €15 billion. There is some concern that even
these sums will be insufficient.
Greece has raised enough funds to cover more than €10 billion in debt maturing in
April, but still needs to sell more bonds to finance the deficit. Greek officials
plan a presentation to U.S. investors this month before a possible dollar-denominated
Greece is a small part of the Eurozone and is the first state to hit market turbulence.
There are far bigger states in a similar position making the potential bailout cost