The Treasury and Federal Reserve to date have doused financial fires at Bear Stearns, Fannie Mae, Freddie Mac and AIG, taking a tough line in every case to protect taxpayers. In the case of AIG, for example, the government has the right to acquire a major equity interest in the firm as a quid pro quo for a loan of $80 billion, and the CEO was forced out. But now the government has decided that rather than wait for new fires to arise, which could easily swamp their ability to respond, they will wet down the forest. Their plan for doing this would spread assistance through the market with no quid pro quo at all. Their thinking is that the tinder underlying the fires is the overhang of nonperforming mortgages and mortgage securities in the portfolios of institutions, and that the way...
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