Feds Need to Start Buying Troubled Assets -- Fast

All talk, no action. The bureaucrats fiddle while Rome burns.

It's been a week since Congress passed the Emergency Economic Stabilization Act of 2008 -- the so-called Wall Street bailout bill. All that's happened since then is that stocks have made new lows, and the banking crisis the bill was supposed to address has worsened and spread around the globe.

Great. Now what?

Well, let's see. We could introduce a program for the Federal Reserve to buy commercial paper directly from corporate issuers that face ruin if they can't roll over their short-term financing.

Or we could have a coordinated global rate cut. All the central banks of the world could slash interest rates at the same time. Surely that would restore confidence.

Or not.

The Fed announced a new Commercial Paper Financing Facility on Tuesday. Nothing but new lows. And we tried a coordinated rate cut in the middle of the night on Wednesday while global stock markets were crashing. It helped for about four hours. Then new lows again.

The reason none of this stuff is working is because it's all just words. The markets need money, not yakking.

It's been a week now since the Treasury got a $700 billion authority to buy illiquid assets from struggling banks, and to issue insurance on those trouble assets. Has it made a single purchase? Has it written a single insurance policy? No. It hasn't even explained how these processes will work.

Oh, but wait. Treasury has posted on its web site procurement guidelines to be sure that all the contractors who help out in the process (if we live long enough) will meet the high standards of the federal government. I'm certainly relieved. Aren't you?

And has the Fed actually bought any commercial paper from anyone? I don't believe they have.

Oh, but they cut rates. Sure they did. That's the one thing they can do by just moving their lips. All that other stuff takes real work.

Unfortunately, it's all that other stuff that matters.

Rates don't matter. Does anyone seriously believe that the financial crisis is going to be solved, or even slightly affected one way or the other, by lowing interest rates from an already low 2% to an even lower 1.5%? Just how will that help anybody, in any way?

Maybe if people were willing and able to borrow or lend it would make some difference. But they're not. So, hey, why not set rates at zero? Or at 10%? Who cares at this point?

Only real action will do. If the Fed is going to buy commercial paper, then buy it. If the Treasury is going to invest in troubled assets, or insure those assets, then let's get on with it already.

What are the Treasury and the Fed waiting for? In selling the bailout to the American public, we heard nothing from them but how this will be the end of the world unless they immediately get new authorities to invest money in private markets. They have those authorities now. So where is the money?

That's all markets want right now. Show me the money!

But wait, it gets worse. On Wednesday, while stocks were lamely trying to recover a bit, Treasury Secretary Henry Paulson made a public statement.  In a list of the new rescue powers Treasury now has, you know what he listed first: "…to inject capital into financial institutions."

Huh? I thought he was going to buy troubled assets? Didn't he promise that would make all our problems go away?

Now that he has $700 billion of our money to play with, turns out he had something else in mind: to invest the government's money directly in banks. That is, to become a shareholder -- an owner -- of banks.

So no wonder Treasury hasn't done anything yet. Treasury doesn't know what it even wants to do.

Buy troubled assets? That's what they said they wanted to do. But no. Now they want to just buy the banks themselves.

Maybe they think the banks themselves are troubled assets. Maybe that's right. Maybe buying a piece of the banks is just the right thing to do. But let's make up our minds -- and do something.

The real trouble is the Treasury, the Fed and the FDIC: the troika of federal agencies that has been charging around like a bull in a china shop -- or should I say bear? -- for the last three months, ruining great but troubled companies in the process of rescuing them.

It's like the My Lai massacre, moved from Vietnam to Wall Street. "We had to destroy the village in order to save it."

Bear Stearns. Fannie Mae (FNM). Freddie Mac (FRE). American International Group (AIG). Merrill Lynch (MER). Washington Mutual. Wachovia (WB). All troubled to be sure. But the people who were supposed to rescue them murdered them.

Look at what's happened with Wachovia, if you don't believe me. Two weeks ago the Fed and the FDIC virtually destroyed the company, handing it over at pennies on the dollar to Citigroup (C) in a merger negotiated in panic over a weekend.

Now it turns out that there's so much value in Wachovia that Citi and Wells Fargo (WFC) have been engaged in an immense legal battle to get control of it, with Well Fargo offers billion of dollars more than Citi for the bank. Late Thursday Citi abandoned talks aimed at splitting Wachovia between the two.

Hey, if Wachovia is worth so much to Citi and Wells, then maybe it didn't need to be saved in the first place!

At this point stocks are insanely cheap, with the Dow down nearly 6,000 points from the high it set a year ago. It's hard for me to think there's much more downside. But who's willing to buy when the Treasury, the Fed and the FDIC are making it up as they go along, threatening to wipe out over a weekend the company you just decided courageously to invest in?

This thing will settle down when the feds start putting some real money into markets. They need to stop talking. They need to stop destroying. When they do, suddenly stocks are going to look like the bargain of a lifetime. Until then, all bets are off.