Congress Plans Financial Fix, Markets Rally

The Treasury, the Federal Reserve Bank and Congress are working on a deal to take over many of the bad bank loans in a workout arrangement.

Top U.S. financial officials emerged from a briefing with congressional leaders Thursday night with an agreement to work quickly toward a broad-ranging fix for the crisis roiling U.S. and world financial markets. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke briefed House and Senate leaders to hash out a solution to the massive downturn in global markets and the failure of several financial firms. Treasury spokeswoman Brookly McLaughlin said in a prepared statement that Paulson, Bernanke and congressional leaders "began a discussion ... on a comprehensive approach to address the illiquid assets on bank balance sheets that are .... the underlying source of the current stresses in our financial institutions and financial markets." The talks are expected to continue through the weekend, McLaughlin said. She offered no additional details.

The issue is that the mortgage backed securities are nearly impossible to value at this time cause the value of the underlying mortgages is changing all the time. This risk factor then makes these securities untradeable, no one will buy them. Actually, most of the securities are probably still good, but it will take a long time to figure out their true worth, time the banks and the financial houses do not have. So the logic is to create a Federal loan work out mechanism to take on these securities and work through the detail to determine a true worth, while at the same time relieving the financial sector from the paralyzing unknown risk of all this.

The jump in the market this afternoon as word of this plan tells you that the market looks very favorably on this. Right now banks are holding onto all their cash cause they are afraid of the future, so the credit market has dried up. That has to stop.

If this plan is not worked out, look for another massive drop in the market next week.

Meanwhile this morning the markets are soaring.