Last Thursday, President Bush and Treasury Secretary Hank Paulson unveiled their much-rumored plan to "freeze" interest rates on certain subprime mortgages for up to five years. Treasury Secretary Paulson said that the plan involves no government money, and that he expects companies that service loans to abide by guidelines for refinancing and modifying subprime mortgages for able borrowers. Speaking at the White House, President Bush said that the plan was not a bailout. Under the plan, negotiated by the Treasury and White House, along with representatives from the private sector, borrowers will be able to refinance an existing loan into a new private mortgage or be shifted into a loan from the Federal Housing Administration.

In 2008 and 2009, about 1.8 million subprime mortgages are due to be reset at higher interest rates, according to Treasury Secretary Paulson. Many foreclosures are expected to follow in the wake of these subprime resets. Treasury Secretary Paulson emphasized that his proposed plan is estimated to help as many as 1.2 million homeowners avoid foreclosure. Although, the White House plan was severely criticized (for "not going far enough") by House Financial Services Committee Chairman Barney Frank and Chairman of the Joint Economic Committee Senator Chuck Schumer, there was also criticism that the federal government should not be interfering with valid mortgage contracts. However, since the plan required no federal money and was negotiated with major banks and mortgage lenders, it is misleading to label the plan a bailout.

The other big news from Washington last week was Treasury Secretary Paulson's proposed "super fund" for Structured Investment Vehicles (SIVs), the financial vehicles that have been causing so much havoc in institutional money markets. Bank of America, Citigroup and J.P. Morgan have been working since September to find a way to provide liquidity for off-balance-sheet entities, especially SIVs. The big banks that proposed this super fund at the Treasury Secretary's urging are now scaling back the size of the fund, which was at one time envisioned to be $100 billion in size. People familiar with these banks' plans say they are proceeding with the fund despite the smaller size. These banks, which have also been seeking informal participation from other financial institutions, expect to start a formal syndication process shortly.

One reason that the proposed superfund is shrinking is that other solutions to the SIV problem have emerged. For example, Britain's HSBC Holdings became the first bank to bail out its own funds. The bank said it planned to transfer two SIVs and take $45 billion in mortgage-backed securities and other fund assets onto its own balance sheet. In the U.S., money managers like SEI and Legg Mason have offered to buy SIVs for their money market funds, if necessary. The State of Florida has enlisted money manager BlackRock to help with its SIV holdings. Specifically, the Florida money market pool for municipalities will be split in two. Fund "A" will contain roughly 86% of the assets, which BlackRock said are higher-quality money-market investments, while Fund "B" will hold about $2 billion of riskier assets, including some lower-quality SIVs.

This action by key money managers, selected banks, Treasury Secretary Paulson and the White House is a key step in helping to resolve the ongoing credit crisis. The truth of the matter is that these steps are really just Band-Aids, designed to postpone the crisis until the Fed slashes key interest rates and overall liquidity improves. Tomorrow's interest rate cut by the Fed will be the third in a series of key interest rate cuts that should continue well into 2008. The Fed is the lender of last resort and must continue to lower the Fed Funds rate (currently at 4.5%), since it is well above market rates, such as the 3-month Treasury Bill, which is now yielding only 3.04%. Since the Fed cannot fight market rates for too long, I expect that the Fed will cut the Federal Funds rate at least another full 1% in all, with a hefty 0.5% cut occurring at tomorrow's FOMC meeting.

You might think that with the Fed aggressively cutting key interest rates that the U.S. dollar might weaken further against other currencies. However, with other central banks now cutting their key interest rates, the Fed and other central banks are now moving in tandem. Additionally, since crude oil prices are falling, despite OPEC's decision last week to keep production levels unchanged, there is rising optimism that inflation may decline. As a result, the dollar may be more stable. The dollar was fairly flat last week, so our currency tailwind appears to be stalling.