Morning Brief: Feds prepare massive bailout plan

Top Story

Chip Somodevilla/Getty Images

In what the New York Times predicts could become “the biggest bailout in United States history,” Treasury Department and Federal Reserve officials are working on a plan to take bad mortgages and related securities off the balance sheets of financial institutions and stem a crisis that has, in the words of IMF No. 2 John Lipsky, “expanded suddenly to historic proportions.”

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke briefed “grim-faced” congressional leaders Thursday evening on the idea, which would need to pass Congress before it recesses next week. “The root cause of distress in capital markets is the real estate correction and what’s going on in terms of the price declines in real estate,” Paulson said after the meeting. He’ll hold a press conference at 10 a.m. today to explain further.

“It sounds like there’s going to be a giant dumpster for illiquid assets,” Mirko Mikelic, a senior portfolio manager in Grand Rapids, Mich., told Bloomberg News. “This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them,” says Anthony Sabino, professor at St. John’s University.

The details aren’t yet clear, but the Washington Post‘s Steven Pearlstein contemplates what the new entity might look like. “As for funding levels,” he writes, “you can figure it could be anywhere from $200 billion to $500 billion, on top of the money already committed for Fannie Mae, Freddie Mac, AIG and Bear Stearns.”

The move comes after the Fed rained down financial “shock and awe” Wednesday, injecting nearly $300 billion into the credit markets with little discernable effect. The SEC also took action, banning the short-selling of nearly 800 financial stocks that could become a target for speculators.

World markets surged as news of the rescue plan trickled out.

Decision ’08

Joe Biden appears to be loving every minute of his vice presidential run.

Has Sarah Palin peaked too early?

The FBI is investigating the hacking of Palin’s e-mail account.

Americas

A new report by Human Rights Watch details how Hugo Chávez has undermined democracy in Venezuela.

Expelled U.S. Amb. Philip Goldberg repeated Thursday that he had nothing to do with the violence in Bolivia.

The Mexican military seized $26 million in alleged drug cash.

Asia

North Korea again denied that Kim Jong Il is sick and said it had begun rebuilding its Yongbyon reactor.

China initiated a massive recall of milk products after melamine was found in batches of regular milk, not just powder.

Japan’s farm minister has resigned over a scandal involving pesticide and rice.

Middle East and Africa

Israeli Transportation Minister Shaul Mofaz, who lost Kadima’s intraparty elections to Foreign Minister Tzipi Livni, is quitting politics.

Iranian President Mahmoud Ahmadinejad says he doesn’t hate Israelis.

The death toll in the Yemen embassy attack has risen to 11 and now includes an American.

Europe

Russia test-fired a new missile with a range of more than 4,000 miles and sold military technology to Iran and Venezuela.

Meanwhile, Russia’s once-mighty stock market has become the world’s cheapest.

Britain may send 4,000 troops from Iraq to Afghanistan, according to U.S. Defense Secretary Robert Gates. The United States is also seeking three more combat brigades and $20 billion in aid.

Weekend Agenda

Crisis talks are underway in Bolivia.

South Africa’s ruling party decides whether to oust Thabo Mbeki as the country’s president.

John McCain and Sarah Palin are in Wisconsin and Minnesota; Barack Obama is in Florida and Joe Biden is campaigning in Virginia.

McCain is slated to give a policy speech on the economy in Green Bay this morning.

Britain’s Labor Party Conference, a make-or-break event for PM Gordon Brown, begins Saturday.