P-51 Mustangs of the 332nd Fighter Group (Tuskegee Airmen). Ramitelli, Italy.
Ilargi: Ben Bernanke, in his statement before Congress this morning:
The Fed chairman said a collapse of AIG would have "severely threatened global financial stability" and U.S. growth.Growth, what growth? Where? What on earth are you talking about? US homeowners lost over $5 trillion in equity ln the past year, banks wrote down hundreds of billions of dollars in losses, the government piled in perhaps a full $1 trillion in bail-outs, with another $1 trillion+ plan on the way, and the Fed talks about growth?
Let’s see, the 2007 US GDP was $13.5 trillion. That means that, to make up for what's been lost, either the 2008 GDP must be well over $20 trillion (and I don’t think I would have missed that one), or there is no growth anywhere in sight. Oh wait, how did we measure growth again? Here’s a hint for you:
Bank lobbying groups today asked Congress and the U.S. Securities and Exchange Commission to suspend a rule that forces companies to put a price on difficult-to-value assets such as subprime mortgages.Difficult-to-value, right? The only thing that’s difficult about those assets is that they make bankers look like losers, and what’s more, until the Paulson plan is shoved down our throats, they will make them feel like losers too. They risk losing everything they have. And that’s why this insane plan exists. Until the plan is adopted, the losses will remain hidden.
The plan will not save the US economy, and it won’t solve the problems that require a salvation plan in the first place today. Instead, it seeks to re-insert virtual fantasy credit into the economy, taken straight out of the public trough, so that same public can continue to buy homes. But is that in the interest of the people? Home prices are far too high, when set against historical levels. The reason why they are so high is because of cheap easy lying virtual fantasy credit. And that needs to be restored, even though it is the very core of the problem. How is it in the interest of the taxpayer to pay far too much for a home?
The US government needs to get out of the mortgage market, once and for all. All this talk about the American dream of owning one’s own home, with Fannie and Freddie providing cheap money for everyone, does and can only lead to one outcome. Home prices rise when there’s more credit available, and therefore more demand. This is not an unintended consequence, and it never has been, except for the clueless. The banking industry has understood this inevitable perverse consequence of "well-intented" policies all along, all the way back to Roosevelt’s New Deal and the founding of Fannie Mae.
By trying to prolong the Roosevelt crime, the American government, at best, plays double or nothing, with all the money you have, and that of multiple generations of your offspring, in a bet on the crap table that they very well know they can’t win. You know who will win the bet? The bank.
The only money left in the US is the $8-9 trillion in customer deposits at commercial banks, plus whatever is left in pension funds, money funds etc. And they’re coming for it. Just watch them.
That is the Paulson plan. What we see is that Goldman Sachs and Morgan Stanley are the by far biggest beneficiaries of the $700 billion plan, which will provide them with the credit space to buy up hundreds of smaller banks. Paulson will get the authority to let those banks fail, and he will do so. The customer deposits in those banks will subsequently be used to keep the game rolling.
Banks, in theory, can try to refuse to join the Treasury buy-out program, and claim their assets are worth an amount X. But they will be wiped out anyway as the plan sets floor prices for assets, the auction will buy from the "lowest" bidders first. A rich bank like Goldman can selectively sell some of their paper at 2 cents on the dollar, without being hammered by it. But that sets a new "value" for that asset, or even class of asset, and that will mean the end for many players. Goldman can then buy them for that 2 cents on the dollar.
Here’s a very simple question: What are the chances that the US government can sell the assets they now wish to buy, at a profit, on a later date? To achieve that, option 1 is for home prices to start rising again. And for Burger Flippers to be able to afford their new homes, they would have to make many times as much money. so that would mean a $100 Family Happy Meal.
Alternatively, option 2, prices would have to go down. Mr. and Mrs. Flipper could apply for a mortgage at their present income if home prices go down by 80%. The problem with that option is that the lending industry has sold houses to just about every Flipper family in the country already. So these familes would lose 80% of their equity, while the mortgage payments remain the same. Not good at all for them. Not good.
Prices go up: you lose. Prices go down: you lose.
I’d venture that it’s safe to say that the mortgage securities will simply never recover even a fraction of their value; I’d even venture that they are losing what virtual value they have left, on a daily basis. And that goes for all of the other toliet paper the US government, in the Paulson plan, wants to transfer from bank vaults to public pockets. I’d also venture to say that the elected and non-elected people in charge of handling trillions of dollars of public money are very much aware of this.
It’s over, really over, and what will happen is option 2: home prices will fall by 80% or more, because there will be no buyers left, partly because there are no loans available, and partly because too many people are going to lose their jobs to afford a home. Moreover, tens of millions of families will live in previously purchased homes they cannnot afford, from which most will be evicted.
What the government is doing now is making sure that the biggest losses will fall on the taxpayer, not on the banks. That is the plan. The misery unleashed on the American people is hard to oversee, but it will be horrendous. The American way of life is not negotiable, right? Just watch.
Morgan Stanley, Goldman Search for Deposits; Regional Banks Are 'Lunch'
Morgan Stanley and Goldman Sachs Group Inc., the two largest remaining independent U.S. securities firms, may add to the $81 billion of financial services deals unveiled during the past week as they morph into banks.
Morgan Stanley plans to sell as much as a 20 percent stake for $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank, to shore up capital. Goldman Sachs said that its new status as a bank will help it purchase assets. Stock market declines of the past 10 days helped push Lehman Brothers Holdings Inc. into bankruptcy and Merrill Lynch & Co. into a takeover by Bank of America Corp.
That's helped financial services leapfrog the mining sector to become the most active for mergers and acquisitions this year, data compiled by Bloomberg show. Regional banks probably will become "lunch" for larger institutions, JPMorgan Chase & Co. analyst Steven Alexopoulos told clients yesterday. "We are seeing deals that are highly opportunistic and speedily arranged, where targets are distressed," said Marco Boschetti, co-head of global mergers and acquisitions at the Towers Perrin consulting firm in London.
Goldman Sachs, granted permission Sept. 21 to transform into a bank holding company, may raise capital to buy assets assuming it finds the right opportunities, said company spokesman Lucas van Praag in New York. "If we see assets that are attractive, we might raise capital in order to be able to acquire them," he said yesterday, adding that Goldman has "no immediate plans to raise capital."
Washington Mutual Inc., the Seattle savings and loan that put itself up for sale this month, has at least five companies mulling takeover bids, said a person familiar with the matter yesterday. They include Toronto-Dominion Bank, JPMorgan in New York, Wells Fargo & Co. of San Francisco and New York-based Citigroup Inc., the second-, third- and fourth-biggest banks.
The next several weeks present a "window" for financial firms to issue new capital or merge, said Michael Mayo, a New York-based analyst at Deutsche Bank AG. The U.S. Treasury's plan to buy troubled assets, disclosed Sept. 18, and a temporary ban on short-selling make it easier to shore up capital, he said.
Morgan Stanley and Goldman probably will increase deposits by going after retail and corporate banking customers by selling products such as certificates of deposits, said Richard Bove, an analyst at Ladenberg Thalmann & Co. in Lutz, Florida. "There's a whole bunch of small banks in the United States that might be willing to sell out to them, but not big banks," Bove said. "Why would they want to link up with a company which is struggling to stay alive?"
Lloyds TSB Group Plc, the London-based bank that's acquiring HBOS Plc, Britain's biggest mortgage lender, may put about 9 billion pounds ($16.6 billion) of assets up for sale, including the Scottish Widows money management unit, analysts said. Lloyds TSB agreed to buy Edinburgh-based HBOS for 12.5 billion pounds last week after the bank lost almost half its market value on concern it was cut off from funds for loans.
"Whilst we anticipate higher levels of M&A activity in financial services than many other sectors, we expect a return to the fundamentals of how good deals get done," Towers Perrin's Boschetti said.
In Denmark, Ebh Bank A/S put itself up for sale yesterday as it cut its full-year pretax profit forecast to zero and removed Chief Executive Officer Finn Strier Poulsen after bad real-estate related loans were larger than expected. Two regional Danish lenders, Forstaedernes Bank A/S and Lokalbanken i Nordsjaelland A/S, also received bids last week from rival Scandinavian banks.
Russian billionaire Mikhail Prokhorov agreed yesterday to buy half of Renaissance Capital to inject funds into the Moscow- based investment bank. Prokhorov's Onexim Group holding company will pay $500 million for 50 percent minus one share of Renaissance Capital, he told reporters in Moscow.
Edward Eyerman, head of leveraged finance at Fitch Ratings in London, said J.C. Flowers & Co. and Lone Star Funds are among leveraged buyout firms that will scour the market for distressed financial services companies. "We may see the private equity guys coming into the market," said Frederick Lane, a former co-head of mergers at Donaldson, Lufkin & Jenrette, who now runs Boston-based Lane Berry & Co. in an interview.
CVC Capital Partners Ltd., Europe's biggest private equity firm by assets, started a team this month to scour for financial- services investments. Dallas-based Lone Star agreed last month to buy IKB Deutsche Industriebank AG, Germany's first casualty of the subprime mortgage crisis, for abut 150 million euros ($220 million). In the U.S., Bain Capital LLC and Hellman & Friedman LLC are jointly negotiating to acquire Lehman's asset-management unit, according to people familiar with the discussions.
Bernanke Says Failure to Pass Plan Threatens Economy
Federal Reserve Chairman Ben S. Bernanke warned lawmakers that failure to pass a rescue plan to take over troubled assets from financial firms would pose a threat to markets and the economy.
"Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy," Bernanke said in testimony prepared for delivery today to the Senate Banking Committee. "Global financial markets remain under extraordinary stress."
Bernanke and Treasury Secretary Henry Paulson are pushing Congress to quickly approve a $700 billion plan to remove illiquid assets from the banking system. Lawmakers have balked at rubber-stamping the proposal, with Democrats demanding it include support for homeowners and limits on executive pay and Republicans questioning the plan's reach and size.
"In light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand," Bernanke said. "The Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions." Bernanke pushed for the biggest federal intrusion into markets since the Great Depression after failing to stem the credit crisis by cutting the benchmark interest rate at the most aggressive pace in two decades. The Fed has also pumped billions of dollars into banks to try and restore liquidity, and invoked extraordinary powers to loan to securities firms.
"Bernanke is telling Congress they need to take action quickly," said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, and a former senior economist for the banking committee. "He is concerned that if this stays in limbo for a long period, the markets will say Congress is not serious and is not addressing the problem."
The decision by the Treasury this month to put Fannie Mae and Freddie Mac into federal conservatorship was "necessary and appropriate," Bernanke said in a review of government interventions in financial markets this month. Central bankers looked for private-sector solutions to avoid the collapse of Lehman Brothers Holdings Inc. and a potential failure of American International Group Inc., he said.
The Fed chairman said a collapse of AIG would have "severely threatened global financial stability" and U.S. growth. The Fed Board authorized the New York Fed this month to lend up to $85 billion to help AIG pay its creditors. The Fed ensured the loan involved "significant costs" to the firm to avoid the perception the central bank would continue bailouts.
Lehman Brothers also "posed risks," Bernanke said. "But the troubles at Lehman had been well known for some time" and Fed officials judged that investors and counterparties "had time to take precautionary measures." Still, Lehman's bankruptcy and AIG's troubles contributed to the "extraordinarily turbulent conditions in financial markets," Bernanke said.
Along with the government bailout, Bernanke supports a regulatory overhaul for a U.S. financial industry upended by $523 billion in losses from the collapse of mortgage credit. "The development of a comprehensive proposal for reform would require careful and extensive analysis," Bernanke said. The Fed approved this week bids by Goldman Sachs Group Inc. and Morgan Stanley to become commercial banks, ending an investment banking era. Merrill Lynch & Co. agreed to a merger with Bank of America Corp. earlier this month.
Investor concern that the Paulson rescue would inflate the U.S. budget deficit pushed the dollar down 2.3 percent yesterday in the biggest decline since creation of the euro in 1999. U.S. stocks and bonds also fell. U.S. economic growth may slow to 1.7 percent this year and 1.5 percent next year, the slowest since the last recession in 2001 and its aftermath in 2002, according to the median of 80 economist forecasts compiled by Bloomberg.
The flagging economy and tumbling commodity prices, including a 28 percent decline in the price of crude oil since July 11, have eased pressure on Bernanke and other policy makers to raise the benchmark interest rate from 2 percent. Government figures showed last week that consumer prices fell 0.1 percent in August, after jumping 0.8 percent the prior month, as fuel prices declined from record levels. Prices were up 5.4 percent from a year before.
"If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse," Bernanke said.
Mother of All Bail Outs Deserves Mother of all Convictions
Paulson Debt Plan To Benefit Mostly Goldman, Morgan
Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.
"Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment," Jeffrey Rosenberg, Bank of America's head of credit strategy research, wrote in a report dated yesterday, without identifying particular banks.
Many banks may not participate in the Troubled Asset Relief Program because they haven't had to write down as much assets under accounting rules, meaning decisions to sell into the program would cause them to lose capital, Rosenberg wrote. Investment banks operate "under a mark-to-market accounting model while commercial banks hold assets at cost until realizing a loss (or until they reasonably expect one)," he wrote.
Rosenberg assumed the government will use a reverse auction in which banks submit the lowest prices they are willing to sell certain types of assets for and then the government buys the cheapest ones, with the goal of "protecting the taxpayers," the report said.
Treasury Secretary Henry Paulson's push for the program, now considered by lawmakers, is designed to remove "illiquid assets" clogging the financial system, reverse declining asset values and prevent the freezing of lending for U.S. financial firms, companies and consumers.
The intervention into markets would be the broadest since at least the Great Depression. House Financial Services Committee Chairman Barney Frank, a Democrat from Massachusetts, said today lawmakers and Paulson narrowed differences on the plan.
In the 1990s, a Japanese government effort to buy troubled assets from banks to free up lending failed because sellers weren't willing to accept the prices offered, said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. He said that wasn't a problem he had as chairman of the Resolution Trust Corp. in the U.S., which sold off failed lenders' assets after the savings-and-loan crisis of the 1980s.
"If you're talking about institutions that haven't failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital," Seidman said in a telephone interview today. "In Japan, we did all kinds of things, trying to have a mediator who would set a price and other kinds of methods to get around that," he added. "It never really got done, so it was not successful, but here we probably have a more urgent need for more institutions to do something."
While Goldman and Morgan Stanley, both based in New York, were yesterday granted permission to transform themselves into bank holding companies, the companies so far have operated mostly under investment-bank accounting rules, logging almost $21 billion of asset writedowns and credit losses. Paulson is a former chairman and chief executive officer of Goldman.
Charlotte, North Carolina-based Bank of America, which has reported $21 billion of losses, is seeking to buy New York-based Merrill Lynch & Co., which has had $52.2 billion in losses. Even without sales by commercial banks and savings-and-loans under the program, the companies may be harmed as the disclosure of prices paid in the troubled-debt auctions force them to "hasten the pace" of their own losses, Rosenberg wrote in his report.
Banks and insurers mark down certain securities and derivatives to market prices in their earnings reports, avoiding losses on others unless they deem the declines to not be temporary and provisioning against loans as they go bad. Bank lobbying groups today asked Congress and the U.S. Securities and Exchange Commission to suspend a rule that forces companies to put a price on difficult-to-value assets such as subprime mortgages.
"We are suggesting that the SEC issue a temporary order to negate the negative impact" of the so-called fair-value rule when the economy slumps, Scott Talbott, senior vice president of government affairs at the Washington-based Financial Services Roundtable, said in an e-mail.
Companies including American International Group Inc., the insurer that accepted $85 billion in a U.S. takeover, have said the rule by the Financial Accounting Standards Board requires them to record losses they don't expect to incur. The world's largest banks and brokers have reported more than $520 billion in asset writedowns and credit losses since last year.
Freddie and Fannie stock losses for small banks much higher than projected
US regulators have underestimated potential bank losses on preferred stock issued by Fannie Mae and Freddie Mac, the American Bankers Association said on Monday.
Nearly a third of US banks hold preferred stock issued by the two mortgage financiers that were taken into conservatorship this month, according to an industry survey conducted by the ABA. The average bank exposure to such securities relative to core equity capital was 11 per cent.
“The negative impact on banks – particularly Main Street community banks – is far greater than regulators first thought,” wrote Edward Yingling, chief executive of the ABA in a letter to the Treasury, the Federal Reserve and other banking regulators. The government takeover of Fannie and Freddie all but wiped out the value of $36bn of their preferred shares. This would force exposed banks to take writedowns at the end of the third quarter that could impede future lending, the ABA warned.
“When the actions were contemplated to reduce dividends on Fannie Mae and Freddie Mac preferred stock, the bank regulators estimated that only a dozen banks would be affected by it,” Mr Yingling said. Regulators said this month only a small handful of banks had “significant” holdings in Fannie Mae and Freddie Mac relative to their capital bases and that they would help develop plans to restore capital at these banks.
However, the ABA survey suggests the impact of writedowns could be more widespread and more severe than regulators initially indicated, particularly among small community banks that engage in lending for small and medium-sized local businesses.
The ABA’s letter called for regulators to reconsider the suspension of dividend payments on Fannie and Freddie preferred stock to alleviate the capital impact on banks and avoid a multi-billion dollar decline in lending.
Fed Flow of Funds Report Reveals Another 'Wealth Contraction'
It looks like we're undergoing another one of those painful "wealth contractions" - similar to what we saw in 2001 when the last asset bubble burst. A short time ago, the Federal Reserve released their quarterly Z1 Flow of Funds Report and the news isn't good.
The value of real estate and equities owned by households has now shrunk for three consecutive quarters while traditional savings have increased modestly.
When it comes to households and their real estate assets and liabilities, the news is even worse. The home value seems to be going away much faster than the associated debt which, as of the second quarter, was still going up.
It's funny that, here in 2008, you don't hear any economists talking about how we don't need to pay attention to the pathetically low savings rate of recent years since asset prices continue to go up and we're all getting wealthier.
Maybe old fashioned savings are a good idea after all
Treasury seeks to expand definition of "troubled assets" covered by bailout
I know things are moving fast, but I object to retroactive editing of online articles without any indication that this has been done. I captured the quote (below) from this article in Bloomberg earlier, but it no longer exists in the linked article. You can still find this quote in the Google cache, but I don't know how long it will remain there either."The Treasury's thinking is to make it as big and wide as possible so they have the flexibility to act if need be," said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. "There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate."
Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
This quote caught my attention (and quick capture) because of its blunt honesty and potential implications. Let's think of all the types of debt that could reasonably be considered as "troubled" by the mortgage meltdown.
- Auto loans. Certainly anybody who is losing money on a house might be at risk of not paying off their auto loans, so these are clearly linked.
- Credit card loans. Ditto above.
- Corporate bonds. Well, certainly it can be argued that if we weren't in the midst of a gigantic housing bust, corporations would be doing better. So these are 'linked,' I guess.
- Municipal bonds. Who could argue that municipalities are not worse for the wear due to the housing bust?
- Etc. and so forth.
I think that the fact that this sort of statement/speculation even snuck through provides enough "smoke" that we have to consider it likely that the behind-the-scenes situation is far more grave than has been let on. Any expansion of the bailout to "troubled loans" will simply mean the end of the dollar as we know it. You can set an egg timer on it.
We Need This Money By The End Of The Week!
Rescue plan hits speed bump in Senate
The biggest financial bailout in American history hit a speed bump on Tuesday as members of the Senate began to balk at quick action to pass the measure, saying the massive bailout required more careful discussion and consideration.
While there was no sense that the plan, authored by Treasury Secretary Henry Paulson was yet in peril, Senators suggested at a hearing with Paulson, Federal Reserve chairman Ben Bernanke and other top regulatory officials that the measure would not be completed by the end of the week.
The legislators spoke at a Senate Banking Committee hearing on the measure, where Paulson and Bernanke urged senators to quickly approve the unprecedented $700 billion plan to prop up the shell-shocked U.S. financial system, saying failure to do so would risk the stability of financial markets and the American economy.
Lawmakers grilled the two financial chiefs about the huge package and pressed both men to include other elements including aid for homeowners and caps on executive pay. Notes of skepticism crept into the statements of Congressional leaders. But many legislators were walking a tightrope - complaining about the plan while promising to take action.
Sen. Chris Dodd, the chairman of the Senate Banking Committee, and Democrat of Connecticut said the Paulson proposal was "stunning" in its lack of detail. "It would do nothing in my view to let a single family save a home. It would do nothing to stop a CEO from dumping billion dollars of toxic assets on the back of American taxpayers," Dodd said. "It is not just our economy at risk but our Constitution as well," Dodd said, because it would allow Paulson to spend $700 billion "with impunity."
Sen. Richard Shelby, the ranking Republican on the banking committee, complained that there had been no time to consider alternatives. And opposition was clearly in evidence among the backbenchers. Sen. Mike Enzi, Republican of Wyoming, said the plan would cost $2,300 per taxpayer. "This committee would not be doing its job if that were allowed to happen," Enzi said.
At that point, spectators in the audience of the hearing broke out in applause.
Sen. Jim Bunning, Republican of Kentucky, called the Paulson plan "financial socialism" and "un-American." Sen. Evan Bayh, Democrat of Indiana, said the measure was so important that Congress should postpone its plan to leave town at the end of the week until "we get it right." Overseas leaders are clearly worried about the Paulson plan. President Bush said that he was peppered with questions about the measure in his meetings at the United Nations. He said he assured the foreign leaders that Congress would pass the plan in short order.
Paulson did not offer an olive branch to members. He said that his mortgage rescue plan must be designed to hit the ground running, a clear signal that he will oppose any changes that he believes would slow down implementation. The Treasury secretary said that he believes it has solid support from members of both parties. Paulson said that amendments to his package that would also cause controversy must be left out.
Paulson said approval of the plan would "avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy." In his testimony, Bernanke told senators that the Fed supports the Treasury's plan to buy bad assets off Wall Street's books.
With global markets under "extraordinary stress," there could be "very serious consequences for our financial markets and for our economy," Bernanke will say, according to prepared testimony. "Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions," according to Bernanke's prepared remarks.
Progress has been made on the massive plan to prop up financial markets, but there are also concerns about disagreements that could stall passage and possible additions to the Treasury proposal. Rep. Barney Frank, chairman of the House Financial Services Committee, said Monday that the Bush administration and Democrats have agreed to additions to the plan, including creating an independent oversight board and aid for homeowners facing foreclosure.
However, there is uncertainty over a proposal to allow the government to take an equity position in companies that participate in the U.S. program. Frank said that the Treasury had agreed, but reports later Monday afternoon said the Treasury hadn't.
Stocks were up slightly on Tuesday after a drop on Monday caused by concerns about the plan's implementation erased all of Friday's gains. Lawmakers and administration officials have aimed to finalize the U.S. plan by the end of the week but some lawmakers have suggested they could work beyond that.
Treasury Relents on Key Points
The Bush administration and the Democratic Congress inched closer to agreement on a $700 billion plan to rescue troubled financial firms, with the Treasury making most of the concessions amid an increasing backlash from a range of economists and lawmakers.
The administration agreed to allow tougher oversight over the cleanup and provide fresh assistance to homeowners facing foreclosure, two Democratic priorities. In addition, negotiators neared agreement on allowing the government to take equity stakes in certain companies that participate in the rescue.
But differences remain on two big items: possible limits on executive compensation at firms taking advantage of the bailout; and changes to bankruptcy law that would let judges adjust the terms of mortgages. And late Monday, negotiations were slowed -- but not derailed -- as Treasury was hit with congressional Republican concerns about the direction of talks, and as Democratic leaders heard a range of concerns from rank-and-file members of their party.
For both sides, the stakes are high. Treasury Secretary Henry Paulson has given Congress dire warnings of the consequences of inaction, and has no other plan that the Treasury thinks can address the magnitude of the problems. Congress, for its part, wants to reassert control over an increasingly expensive financial-system bailout in which, until now, it has played little part.
Investors, spooked by the lack of detail in the plan and the wrangling in Congress, sent the Dow Jones Industrial Average down 3.27%, or 372.75 points, erasing half the stock gains of late last week as the proposal was emerging.
The plan's reception -- from academics, politicians and commentators of varied stripes -- has been largely hostile, weakening the administration's negotiating position on the remaining issues. On executive pay, Republican presidential candidate Sen. John McCain has called for limits.
Sen. Richard C. Shelby, an Alabama Republican and the ranking Republican on the Senate Banking Committee, reiterated his distaste for the plan, calling it "neither workable nor comprehensive, despite its enormous price tag." Sen. Shelby, whose influential position makes his opposition a potential stumbling block, called for Congress to look for alternative solutions.
Even some business groups concede pay curbs might be unavoidable. "If we're talking huge infusions of your money and my money, there's going to be some limitations" on compensation, said Bruce Josten, executive vice president of government affairs at the U.S. Chamber of Commerce.
Mr. Paulson has argued that pay limits shouldn't be part of this plan because they could discourage firms from participating. Treasury is also arguing that it isn't feasible to expect thousands of companies to change their executive compensation structure just to participate in the program and says such a move would discourage small banks and credit unions from participating.
Some lawmakers are looking to call Mr. Paulson's bluff, thinking that many institutions would find the choice between limits on executive pay and bankruptcy an easy one. But Treasury is insisting that is a false choice and that the program isn't aimed at preventing firms from filing for bankruptcy but is instead supposed to help relieve pressure on firms that are being weighed down by a glut of assets they can't sell.
The Treasury is looking for a compromise, a structure that satisfies Congress yet doesn't punish firms that want to participate,
said people familiar with the matter. One potential option is for executive compensation curbs to apply in cases where Treasury structures a deal where it injects a significant amount of capital into a firm.
Under the plan, details of which are still being worked out, the Treasury would buy from financial firms as much as $700 billion of the souring mortgages and mortgage securities that lie at the heart of the financial crisis. House Financial Services Chairman Barney Frank (D., Mass.), who is leading negotiations in Congress, said Democratic leaders don't intend to stand in the way of the package.
"We do agree you should move quickly," he said. "We understand that bad market choices have put us in a situation where something has to happen." Democratic leaders are aiming for votes in the House and Senate late this week. Economists and commentators from both ends of the political spectrum, including former House Speaker Newt Gingrich, have heaped criticism on the plan. "Is there anyone who isn't a backlasher?" asked Jared Bernstein, senior economist at the Economic Policy Institute, a left-of-center think tank. "I haven't seen people saying, 'Good plan -- like it.'"
Mr. Bernstein noted that the government is in a bind: Paying rock-bottom prices for shaky mortgage-backed securities might hurt the firms that the bailout is supposed to rescue, but if the government pays a higher price, taxpayers might end up with securities it can't resell except at a big loss.
"I think it's awful," said Allen Meltzer, a former Reagan economic adviser now teaching at Carnegie Mellon University. "It puts private interests ahead of the public interest." Mr. Meltzer pointed to past occasions when, he said, doomsayers warned of financial panic, the government resisted the urge to bail out the markets, and nothing terrible ensued. Among those he cited was President Richard Nixon's decision not to rescue the commercial-paper market in the aftermath of the collapse of the Penn Central railroad.
Former St. Louis Federal Reserve Bank President William Poole, a senior fellow at the free-market Cato Institute, said, "The Treasury will be stuck with the least-attractive paper, and that means taxpayer losses will be large." C. Fred Bergsten, director of the Peterson Institute for International Economics, called the package essential, given the unusual circumstances. He predicted taxpayers would ultimately be on the hook for about $100 billion, once the government resells the securities it plans to take off financial firms' hands.
Discontent continued to simmer among rank-and-file Republicans and Democrats. In Republican ranks, especially among conservatives, there are concerns over the cost and over the scope of powers that would be concentrated with Secretary Paulson.
"Congress needs to slow down, take a breath," said Rep. Mike Pence, an Indiana Republican. He acknowledges the country faces a crisis but still intends to vote against the Treasury plan. House Minority Leader John Boehner, while he has pushed for some action, is not yet committed to voting for the legislation.
In some ways, Mr. Paulson isn't the ideal pitchman. A Wall Street titan, he spent 32 years at Goldman Sachs Group Inc. and has a personal fortune estimated at $500 million. A former deal maker, he is comfortable in the language of Wall Street, talking with ease about commercial paper, debt spreads and Treasury yields.
But Congress wants the plan to benefit Main Street, not Wall Street, and Mr. Paulson has tried to shift his language to emphasize how the plan will help ordinary citizens. At a news conference to announce the plan, he talked at length about the threats to the financial markets, ending with a passage about how it would affect ordinary Americans. U.S. purchases of distressed assets would help people, Mr. Paulson says, by enabling lenders to resume making loans for homes, cars and small businesses, and by keeping the economy from sliding into a deep decline that would cost jobs.
Mr. Paulson is scheduled to testify Tuesday and Wednesday before House and Senate committees, giving him a chance to speak to lawmakers' concerns. One broad area of agreement involves congressional oversight. Rep. Frank said the Treasury agreed to an independent board to monitor the bailout and report on its progress to Congress and the public. The board wouldn't have authority to veto Treasury investment decisions, and the bailout's launch wouldn't be delayed while a board was being put in place.
While details are still being worked out, both sides have also agreed to a measure that would allow -- but not require -- the Treasury to take an equity stake in a financial institution that sells assets to the government. Whether it did so might be dependent on the size of the capital injection the government makes when it buys the assets, according to a person familiar with the matter.
There are precedents for the government taking stakes in private companies, dating back to the bailout of Chrysler Corp. in 1979, when the government got warrants to buy Chrysler shares. Most recently, the Federal Reserve took warrants in American International Group Inc., representing a majority equity interest in the big insurer.
There has also been discussion among some Democratic leaders of breaking apart the package, with swift initial action on about a third of the borrowing authority, a senior congressional official said. Approval of the balance of the funding would come later this year or early next year, giving lawmakers a chance to assess the success of the bailout and consider additional long-term overhauls.
The plan would include help for distressed homeowners. Officials at the Federal Deposit Insurance Corp., the Federal Housing Administration and Fannie Mae and Freddie Mac would all be deployed to help adjust the loans of borrowers who were behind on payments but deemed creditworthy. The bill also includes tenant protections, to ensure that renters in homes headed for foreclosure aren't evicted.
Paulson is Stealing ALL THE CASH IN AMERICA
Please check my math on the "bailout".
$700,000,000,000 divided by United States Population: 301,139,947 (July 2007 est.) equals $2324.50 collected for every man woman and child.
How much is it for the average family? Average family (mother, father, 2.5 kids) = $10,460 stolen from the average family, and then handed to banks. It's reverse bank robbery!
But what is the "bailout's" percentage of total cash in circulation? According to Wikipedia, 700 billion is 100% of ALL THE CASH IN CIRCULATION used throughout the United States. (in 2007)
We are not required to pay other peoples debts! We are not obligated to pay any illegal fines fees or taxes! We are obligated to bring the corrupt to justice! Please post Hank Paulson's home address on your website.
It's time to get a pitchfork and a torch.
Home foreclosure aid reportedly added to bailout plan
As President Bush urged Congress today to act quickly on his $700-billion plan to rescue troubled financial institutions without adding new provisions, a key Democrat said the administration had agreed to include new help for homeowners facing the prospect of foreclosure on their mortgages.
Rep. Barney Frank, chairman of the House Financial Services Committee, who has been at the center of behind-the-scenes negotiations between congressional Democrats and Treasury Secretary Henry A. Paulson, reported that "the foreclosure piece is agreed on."
"There was Republican congressional opposition, but the administration accepted it," the Massachusetts Democrat told reporters this afternoon. The reported agreement would expand the president's plan beyond its focus on helping major financial institutions recover from the financial meltdown rumbling through global markets.
Democrats have insisted that, while emergency help for the financial system -- potentially the biggest government bailout in U.S. history -- must be approved quickly, the measure must also include help for ordinary Americans, including those threatened with loss of their homes. The Democrats also want more congressional oversight of the bailout and added protections for taxpayers, who are expected to be on the hook for the cost -- estimated at $700 billion or more.
Frank's report suggested that even as the administration called for quick approval of legislation close to what Bush and his top advisors advanced last week -- and the focus of negotiations between the Treasury Department and congressional leaders today -- the White House was willing to make adjustments.
Among the proposals still unresolved: A call by Frank and his Senate counterpart, Christopher Dodd (D-Conn.), to somehow force companies that were being rescued by the federal government to limit the compensation packages given to their top executives. As the financial markets were opening, Bush issued a written statement demanding quick action by Congress.
"It would not be understandable if members of Congress sought to use this emergency legislation to pass unrelated provisions, or to insist on provisions that would undermine the effectiveness of the plan," the president said.
He added: "Americans are watching to see if Democrats and Republicans, the Congress and the White House, can come together to solve this problem with the urgency it warrants. Indeed, the whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector, and retirement accounts."
Aboard Air Force One en route to New York, where Bush was spending three days at the start of the annual U.N. General Assembly meeting, White House Press Secretary Dana Perino said the administration's primary concern was that action be taken quickly. "The quickest way to get something done is to do it cleanly," she said, without commenting on any of the proposals that would alter Bush's original plan.
"What we're looking for is something that would help us immediately help stabilize the markets," Perino said. Shortly before 3:30 p.m. EDT, the Dow Jones Industrial Average was down nearly 320 points, or 2.79%, suggesting that the weekend's work by Treasury had not yet produced the stability Bush is seeking.
Credit-Default Swaps Move Closer to Regulation With N.Y. Plan
New York State's proposal to start regulating part of the credit-default swaps market may accelerate oversight of an industry blamed for helping to almost bring down the U.S. financial system.
New York Governor David Paterson said in a statement yesterday that the state will consider contracts sold to investors who own bonds they are trying to protect from default as insurance. The plan won't apply to contracts purchased by speculators who only want to bet on an increase or decrease in a borrower's creditworthiness and don't own bonds.
Calls for greater regulation of the $62 trillion market have grown after the U.S. had to take over American International Group Inc. and provide the New York-based insurer with an $85 billion loan to cover obligations at a unit that sold protection on securities through the credit-default swap market. The AIG subsidiary was required to post collateral against more than $400 billion of contracts after its credit rating was downgraded.
"I think it's clear to everyone that there's going to be more regulation coming" said Brad Golding, managing director at Christofferson Robb & Co., New York-based money management firm. "Is every swap dealer in the world going to have to apply to New York for an insurance license? The bottom line is: good luck with that."
Under Paterson's plan, the New York State Insurance Department would require entities selling credit-default swaps to bondholders to show they can actually pay the claims if there is a default. The new guidelines will become effective in January.
"The absence of regulatory oversight is the principal cause of the Wall Street meltdown we are currently witnessing," Paterson said. "I urge the federal government to follow New York's lead once again by regulating the rest of the credit- default swap market."
Credit-default swaps, which are traded between banks, hedge funds, insurers and other investors, are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements. The market has grown 100-fold over the past seven years to cover $62 trillion of debt, or more bonds than there are outstanding.
New York regulators threaten "to disrupt global derivatives markets" through this action, said Robert Pickel, chief executive officer of the International Swaps and Derivatives Association. The New York-based industry group represents dealers and investors, and sets standards for trading.
"The state of New York should proceed very cautiously and in consultation with federal regulators before acting in a way that may ultimately cause more harm than good," Pickel said in a statement. Until now, the state hasn't regulated the credit-default swap market even as bond insurance companies expanded into the business of guaranteeing securities through contracts rather than insurance policies.
Five of seven formerly AAA rated bond insurers, including Armonk, New York-based MBIA Inc. and Ambac Financial Group Inc. in New York, lost their top rankings after writing credit-default swap contracts on more than $100 billion of so-called collateralized debt obligations backed by subprime mortgages.
Insurance companies, which are prohibited from entering into derivative transactions directly, created special purpose vehicles to create credit-default swaps they could sell to investors. These SPVs were minimally capitalized because their obligations in the event of a security defaulting were guaranteed by the insurance company.
"We are concerned that this plan has not been well thought through," Tim Backshall, chief strategist at Credit Derivatives Research LLC, said in a note to clients about the New York state plan yesterday. "These ad hoc actions are more likely to cause further dislocation than help any realignment and normalcy."
Until New York State Insurance Department Chairman Eric Dinallo provides more details about the plan, the effort may obscure rather than clarify some of the regulatory obstacles, said Ed Grebeck, chief executive officer of Tempus Advisors, a debt consulting firm in Stamford, Connecticut.
"How is Dinallo going to say who is adequately capitalized?" Grebeck said. "I don't think this thing is clearly thought out. Parties buying protection in the credit default swap market are all international investors. I don't see how New York State can address what is an international issue."
The Federal Reserve Bank of New York has been the most involved in trying to reduce risks in the credit swaps market, starting with demands in 2005 from New York Fed President Timothy Geithner that banks reduce a backlog of unconfirmed trades that threatened to undermine the market.
After the collapse of Bear Stearns Cos. in March the Fed intensified its demands, engineering a list of efforts among the 17 largest dealers including creation of a clearinghouse overseen by the Fed that would absorb the failure of a market-maker.
Hedge funds suffer mass redemptions
Hedge funds could have an unprecedented level of cash pulled out by investors this quarter, according to insiders, just as they faced millions of pounds of losses from last week's shock regulation of short selling. It has been a tough year for the industry with high-profile funds blowing up, clients increasing redemptions, as well as public fury over short selling and increased threats of regulation.
One hedge fund expert pointed to The Hedge Fund Implode-O-Meter (HFI) as how he judges the state of the industry. The HFI was set up online in the wake of the credit crunch "to track as hedge funds learn the double-edged-sword nature of the often extreme leverage they use".
The group's "imploded funds" list has hit 51 companies since the sub-prime mortgage crisis in the United States kicked off a widespread downturn. That compares with its historical list, stretching back more than a decade to the end of 2006, of just 14, including the collapse of Long-Term Capital Management and Amaranth.
This year, big names including Peloton Capital Partners, Carlyle Capital Corporation and Dillon Read Capital Management are just some of the half century to collapse. "We think hedge funds have largely lost their way," HFI said. "Notably, most have abandoned capital-preservation for the goal of aggressive accumulation of capital gains, with the benefit of lax regulation and extreme leverage available to exploit."
It has 34 stocks on its "ailing/watch list" of those that have suffered significant value declines or temporarily halted redemptions. According to EuroHedge, a hedge fund data provider, 272 individual funds strategies were launched during the first six months of 2008, the lowest for nine years. In the same time, 243 funds have been liquidated, the highest in a six-month period.
Nouriel Roubini, the New York University economics professor, says worse is to come. He believes there will be an increase in client withdrawals and a shake-up of how funds are regulated. The redemptions seem to have started in earnest, although currently the evidence is mainly anecdotal.
One UK hedge fund manager confided that last week had the highest number of investors rushing to withdraw funds that he has known. The industry will know for sure whether it is a drip or a deluge when the data providers release their statistics for the third quarter, next month. One market analyst said: "I know even the good hedge funds have been suffering withdrawals recently. Investors are very nervous."
Performance numbers are also under pressure. Some have done well out of the market disturbance, but on average the performance numbers are at a low ebb. Andrew Baker, the deputy head of Aima, the hedge fund trade body, said: "The performance is undoubtedly soggy. There are not many strategies that stand out."
EuroHedge revealed that strategies that have done particularly badly this year include several run by Naissance Capital, once bankrolled by the Habsburg families, which are down a fifth and Pico Fund, which is down 32 per cent. At Endeavour Fund, set up by former Salomon Smith Barney traders, the second fund has fallen by 40 per cent, while its third fund is down 38.79 per cent in 2008. In the emerging markets, PharmaInvest Fund's investments in emerging markets are 38.16 per cent down.
Other funds have sought to lock in investors by halting redemptions. The latest example was RAB, with its flagship Special Situations Fund, as it was so desperate to prevent exits after a 22 per cent drop in performance that it offered vastly reduced fees in return for a lock-in period of three years.
One of the main problems experienced by hedge funds is the extent of leverage in the industry. The funds were able to take on huge amounts of debt, with little capital needed as security, to boost returns. One observer said some of the leveraged strategies were like "picking up pennies in front of a steamroller, and that only takes a turn in the market to cause severe problems".
Andrew Lodge, the managing director of fund of hedge funds Nedbank Investments, said: "Some funds have gone in for huge leverage-driven strategies, which can be a problem. The appetite for leverage is less." He added that some could be affected by increased margin calls, and could face issues over their covenants.
At the same time, hedge funds, like the banks, have had to write down exposures to investments in risky instruments including collateralised debt obligations and asset backed securities, and also been exposed to the huge swings in the market.
Another issue is the regulators sniffing around. There have been wider calls for transparency and official controls of the industry, which has already been stung by the shock short-selling rules. Mr Lodge said: "It's a myth to say hedge funds aren't regulated. There is a perception that they are running wild with no oversight, which isn't true. We would welcome some regulation, just as long as it doesn't strangle the industry."
On Friday, the FSA banned short selling in financial stocks, and forced hedge funds to disclose their positions. As the underlying shares rose as a result, the industry was looking at well over £1bn in paper losses on the day. Stuart McLaren, financial services partner at Deloitte, said: "When the dust has settled, I expect the regulators to look at the role that hedge funds have played in the current issues. I expect there will be increased calls for regulation, but I doubt much will come from it."
Mr Baker said: "Some hedge funds are doing well. However, the number of professionals feeling good about life will be dwindling. The health indicators are generally negative, while costs are up and performance is down. Many are feeling battered and bruised and feeling worried about the future."
Oil's jump makes history, but true test is yet to come
Crude-oil futures made history Monday with the biggest daily dollar gain ever seen on the New York Mercantile Exchange, but the true test for oil is yet to come.
The future of global oil demand is more uncertain than ever given the U.S. rescue plan for the financial market, and no one's sure about the impact and recovery pace of production and refinery activity in the Gulf of Mexico following the recent hurricanes, analysts said.
On Monday, a steep drop in the U.S. dollar, assumptions that the government rescue plan will help improve the economy and boost oil demand as well as short-covering related to the expiration of the October crude contract on Nymex all combined to pull oil prices to their highest intraday level in two months.
Oil's rally was "a mixture of short covering and the growing realization that the Fed [especially in an election year] is willing to be the ultimate backstop to the economy," said Neal Ryan, a managing partner at Ryan Oil & Gas Partners. "Throw in a worsening supply/demand dynamic on top of it and we're off to the races," he said.
It all just "underscores that energy is the only place to expect outsized profits these days and the money is flocking into that market," he said. U.S. stocks dropped Monday as traders digested the details of a $700 billion plan to rescue ailing financial firms. "Clearly the money out there needs a place to go, and oil is now a major safe haven," said Michael Lynch, president of Strategic Energy & Economic Research (SEER).
But some of what's going on really doesn't make any sense. A worrisome economy and financial market should translate into lower demand for oil, some analysts said. "The oil market is caught up in the same hysteria of the rest of the financial markets," said Anthony Sabino, a professor of law at St. John's University, whose legal practice includes oil and gas law.
"We can and will get through this" as the markets did back during the Great Depression in the 1930s, he said. "So oil traders getting caught up in the general panic is just plain dumb." "If the economy is so bad and uncertain and panicky, [the] price per barrel should be deflating like crazy because demand is cratering," Sabino said.
The same insane speculation that drove investors into "toxic investments" such as subprime lending and collateralized debt obligation has infected the oil market, "so for no good reason at all they are driving oil up to unsustainable prices," he said. It's a "wholly illogical disconnect," Sabino said. With the U.S. stock market down by so much and money tight, logic says oil demand will "continue to drop like a stone, so prices should be back at $90 and heading south to $80."
Complicating matters on Monday was trader short covering related to the expiration of the October crude contracts on Nymex, analysts said. "Some folks got caught short," said James Williams, an economist at WTRG Economics. "The stocks at Cushing [Okla.], which is the delivery point for Nymex, will be low because they have been drawn down because of the hurricane."
So "if you are short on the last day of trading you have to either buy back the contract or make physical delivery and it is probably difficult to get spot oil at Cushing to make physical delivery," he explained. Confidence in the commodities also climbed on the heels of the drop in U.S. stocks and as the dollar buckled against other major currencies.
"A weaker dollar on concern about the financial crisis and how Congress will handle it, as well as a flight to safety -- or at least the perception of safety in a commodity that has increased for five years," helped pull prices for oil higher Monday, said Williams. Longer term, however, oil should see pressure from the weaker economy worldwide, he said. "Even China is trying to stimulate its economy."
And don't forget: The Gulf of Mexico's still slowly recovering from Hurricane Gustav in August and Hurricane Ike in September.
About 76.6% of oil production and 65.5% of the natural-gas output in the Gulf are still shut in as of Monday, according to the U.S. Minerals Management Service.
The hurricanes and the energy facility shutdowns related to them didn't appear to contribute much support to oil prices. Historical prices for crude on Nymex actually fell about 10% between Aug. 19 and Sept. 19. Sure, oil seems to be a major safe haven now, but how the oil market reacts "when inventories go up as the effects of Gustav and Ike diminish will be the real test," said SEER's Lynch
More Pain at WaMu
The roller coaster ride for Washington Mutual investors continues. The stock hit a low of $1.50 a share on Sept. 16 before bouncing back to nearly $5 by week's end on rumors that the big Seattle-based thrift might get acquired.
Now investors are skittish again. WaMu shares fell 20% on Monday, Sept. 22, to $3, as big bank stocks got hit on fears that President George W. Bush's $700 billion bailout of troubled mortgage assets might not be a good thing for banks if they are forced to recognize even larger losses on their mortgage holdings.
Also, The Wall Street Journal reported on Sept. 22 that would-be buyers have been looking for the federal government to take over WaMu's bad loans before consummating a merger. CNBC reported the same day that the bank is waiting to see whether the proposed $700 billion bailout effort wins congressional approval before continuing with merger talks.
There's little doubt WaMu has valuable assets. With some $143 billion in customer deposits, it's the sixth-largest bank in the country. It's hard for banks to open new branches and seize a significant amount of market share in new markets. For that reason, many bankers would love to get their hands on WaMu's network of more than 2,000 branches.
The latest rumors of interested parties include Citigroup, Wells Fargo, and perennial white knight candidate JPMorgan Chase. JPMorgan Chief Executive Jamie Dimon has said he's interested in beefing up the firm's retail banking operation. JPMorgan lacks a strong presence on the West Coast, where WaMu is one of the top three players.
Once the status of the federal bailout is clearer, an acquirer could move fast. "Necessity leads to a lot of things," says Morton Pierce, a mergers and acquisitions specialist at law firm Dewey & LeBoeuf. "You just have to be big enough to absorb the risk of these things."
The stumbling block remains WaMu's loan portfolio. The bank is anticipating $19 billion in loan losses during this housing slump. Analysts say the losses could go as high as $28 billion. A Sept. 19 story in the Orange County Register shows what potential WaMu buyers may be up against. The story chronicled how WaMu loaned nearly $25 million to one family in Anaheim, Calif., which used the money to flip 22 properties, six of which are now in foreclosure.
The uncertain state of WaMu's future continues to put a strain on the bank's customers. Barak Zimmerman, a freelance Web editor who uses WaMu for both his personal and business banking, says he took out $10,000 and put it in another bank just to be safe. "I wanted to make sure I have operating expenses," he says.
On Sept. 11 the bank said its deposits from retail customers were unchanged from a year earlier. But the number was down nearly $6 billion from the end of June, even as the bank offered attractive rates to lure deposits. Lately, WaMu has been offering 13-month certificates of deposit paying 4.5%, at the high end of the industry's offerings
Citigroup, Canadian bank are latest rumored Washington Mutual suitors
Potential buyers for beleaguered Washington Mutual Inc. continued to emerge Monday with the latest media reports pegging a Canadian bank and Citigroup as the most likely suitors.
It’s unclear whether the federal government’s proposed $700 billion plan to purchase bad mortgages from ailing banks would help WaMu remain independent. The plan — which is expected to reach Congress later this week — is still evolving with many details to be hashed out.
A source familiar with WaMu said the federal bailout plan might help pave the way for a WaMu sale. Rather than helping the bank fix its own portfolio, the plan might put potential acquirers in a better position to buy the bank, said the source, who declined to be named. “They’re in better shape on their mortgages so they could afford to take on more of WaMu’s pain — at least U.S. buyers,” said the source.
Dustin Brumbaugh, a financial services analyst with Seattle-based Ragen Mackenzie Group, said “the power is all on the buyer’s side.” Brumbaugh doesn’t have a formal rating on WaMu and doesn’t own any shares of the company.
He said it’s possible WaMu could salvage itself by taking advantage of the Fed’s bailout plan to purchase bad loans, but the details of the plan are changing so quickly that it’s hard to say if that would be a viable option for the bank.
Another stumbling block that could hinder WaMu’s ability to accept the government’s help: It’s possible the plan would require a limit on executive compensation for participating banks. WaMu is paying new chief executive Alan Fishman a compensation package of about $20 million a year. “The financial landscape is being remade right now,” Brumbaugh said. “We’re witnessing a pretty historic shift in the financial industry and to see what will settle out will be interesting.”
Media reports on Monday pegged Citigroup, of New York, as the most interested buyer of WaMu and Toronto-Dominion Bank, of Toronto, was also rumored to be interested. At the same time, Moody’s rating agency downgraded WaMu’s preferred stock, saying in a statement: “WaMu’s troubled asset portfolios are sizable in relation to its capital base.”
Also on Monday, a Seattle-area branch employee confirmed rumors that the bank is facing a deposit drain from anxious consumers who are closing checking accounts and certificates of deposit. That’s something WaMu had attempted to stave off last week by scheduling media appearances with its head of retail banking and handing out letters to anxious consumers from Fishman and President Steve Rotella.
The employee said many elderly customers have pulled their money out of the bank “because they’re fearful of what’s going to happen,” the employee said. In a recent midquarter update, WaMu said its retail deposits of $143 billion at the end of August were largely unchanged from the end of 2007.
Fitch sends GM's rating deeper into junk status
Fitch Ratings downgraded General Motors Corp.'s credit rating deeper into junk status Monday, saying the automaker faces headwinds in almost every direction and its liquidity could drop to "minimum required levels" within the next year.
The credit ratings agency said it reduced GM's issuer default rating one notch to "CCC" from "B-." Both ratings are noninvestment, or junk, grade. Fitch analyst Mark Oline said GM faces pressures from tightening credit in the U.S., weakening overseas sales, rising raw materials prices, continued sales declines in North America and the need for a large amount of capital spending to transform its lineup from trucks and sport utility vehicles to smaller, more fuel-efficient models.
"If industry sales stay flat in 2009 with a deeply depressed 2008, we do think that the revenue pressures that GM and the industry will face will likely be in excess of their ability to reduce costs," Oline said in an interview. "So we do project that liquidity will continue to decrease, and the company's access to capital is severely limited by the conditions of the industry and the capital markets."
On Friday, GM said it was drawing down the last $3.5 billion of a $4.5 billion secured revolving credit facility to add liquidity during "uncertain times in the capital markets." The Detroit automaker has been profitable overseas but has lost $57.5 billion in the past year and a half as high gas prices and the weakened economy have sent domestic sales into a dive.
GM burned through $3.6 billion in cash during the second quarter, although it said that rate should slow for the rest of the year. Chief Financial Officer Ray Young has said GM had $21 billion in cash and $5 billion available through credit lines at the end of June for total liquidity of $26 billion, which he called a strong position.
Oline said GM needs a minimum of $11 billion to $14 billion to keep the confidence of parts suppliers and consumers. GM announced a liquidity plan in July that calls for cutting $10 billion in costs and raising another $5 billion through asset sales and borrowing over the next 15 months.
The company may have to cut more costs if the credit markets remain tight, Chief Operating Officer Fritz Henderson has said. While he expected GM to meet its liquidity targets, Henderson said last week that he could not predict what will happen in the credit markets, which affect consumer and corporate borrowing.
Tight capital market conditions also could spill into the market for asset-backed securities, affecting GM's ability to competitively finance car and truck deals, Oline said. At the same time, he said, there's a strong likelihood that the U.S. auto industry will get loans from the federal government to transform its factories and product lineup. The industry wants Congress to fund $25 billion in loans that were approved in last year's energy bill.
Oline said it's also likely that the United Auto Workers union will allow GM to delay making payments into a trust fund that is to take on GM's huge retiree health care costs starting in 2010. By then, the company also will see more benefits from its historic cost-cutting agreement with the UAW, Oline said. GM has pegged those savings at $3 billion per year.
Pickup truck sales, which had accounted for a huge chunk of GM's revenue, are likely to rebound when the housing industry starts to recover from its slump, Oline said. If truck sales rebound by 2010 when GM starts to see more benefits from the UAW contract, and if the economy improves by then, GM could recover, he said.
"You could see some significant improvement in cash flow," Oline said. said. "Clearly they need both time and liquidity, and the market is increasingly short on both." GM shares fell $1.50, or 11.5 percent, to $11.58 Monday.
GM slips after announcing $3.5B credit draw down
Shares of General Motors Corp. declined Monday as analysts questioned the automaker's cash position after it said it would draw down $3.5 billion of a credit facility. On Friday, GM said it planned to draw down $3.5 billion from a secured revolving credit facility to fund restructuring costs amid what it called "uncertain times in the capital markets."
In a note to investors, Buckingham analyst Joseph C. Amaturo said the announcement "reaffirm(s) our belief that GM has an increasingly challenged liquidity situation, particularly in the U.S." He maintained his "Underperform" rating and price target of $5, which implies he expects shares to fall 62 percent from Friday's close of $13.08.
Separately, Citigroup's Itay Michaeli said although the draw down "did not come as a surprise," it still raises questions about GM's liquidity. "While we do not view the draw down as a sign of imminent financial distress, it does suggest that (second-half) 2008 cash burn remains quite severe," he wrote.
"We continue to view mid-2009 as a quasi-deadline for GM to shore up its finances either through capital market raising, asset sales or other external efforts." Michaeli maintained his "Hold" position and $12 target price on the Detroit-based company.
GM itself has acknowledged its own rapid cash burn as it confronts a tough vehicle market brought on by high gasoline prices and a sluggish economy. When it reported its second-quarter results last month, the company said it had used up more than $7 billion in cash during the first half of the year, including $3.6 billion from April through June.
The company said at the time it had $26 billion in cash and credit lines available, and planned to raise another $15 billion through cost cuts, borrowing and asset sales for a total of $41 billion. GM needs at least $11 billion to $14 billion of cash to maintain its operations, it said then.
Life Imitates Farce
Occasionally, we offer a hyperbolic view – on the nature of man, his markets, or his government. Then, what do you know...some fool goes and makes a prophet of us! Long ago, we wrote that “Americans would gladly give up their liberties to anyone who could guarantee a rising housing market,” or words to that effect.
And here we have the latest news... Liberation , the French socialist newspaper, has a smug cartoon showing George Bush begging on the street: “Can you spare a trillion?” asks the American president.
Yes, the cost of the bailout is advertised at $700 billion. But it could reach much higher. We see the trillion-dollar figure in several places; it seems to have originated with Harvard economist Ken Rogoff, who figured the cost at about twice as much as the Resolution Trust Company. The RTC cost the nation 3% of GDP as it took over crumbling S&Ls in the ’90s. This debacle is much more serious, he guesses; it will cost at least twice in GDP terms...say, 7%...or about $1 trillion in round numbers.
Where do the feds get that kind of ready cash? Ah...they sell their souls...liquidate their rights...and wrap chains of debt around every American’s neck. The U.S. government deficit is already $490 billion. With the cost of the slump...and the bailout...it is expected to top $1 trillion...or more. Not since the ’30s has the United States seen such sweeping reorganization of its economic institutions. Not since Roosevelt...and the New Deal.
But wait, the United States was supposed to be a leader in freedom. We were so adamant about it we practically forced it upon the poor Arabs and Afghanis... But now that people are losing their houses and Wall Street bonuses are in jeopardy...freedom is the last thing we need.
Ban short selling! Nationalize the mortgage lenders! Nationalize the insurers! Take on the bad debts and bail out the bad investments of the whole financial industry! Spend a billion. Fifty billion. A thousand billion!
“How fabulous,” writes Brian Reade in the British tabloid The Mirror . “Thanks to the way it props up the USA’s two biggest mortgage firms, more than half of American homes are now effectively owned by the state... Who’d have imagined that when the most right-wing of neo-cons leaves office 50% of the Land of the Free will effectively be [public housing]”?
Yes, almost every imbecilic act we could imagine has become fact. No exaggeration is too extreme. Life imitates farce. A few years ago, in a moment of lighthearted hyperbole...we suggested that the War on Terror was such an absurdity... “Why not a War on Bear Markets?” we wrote. And now, we have one!
Yes, the Prime Minister of England, Gordon Brown, compared the U.S.-led, global fight against falling asset prices to the “war against terrorism.” And yes, it is similar in many respects. It will cost about the same amount – over $1 trillion. And it will produce the same general results: less freedom for everyone. Already, the dems and reps are warming up for a major battle against free markets.
Both parties seem to think that it would be shameful for prices of debt and equity to fall to what they are really worth – that is, to what willing buyers would pay for them. Over the weekend, the pols joined hands in trying to prevent it. The $700 billion program allows the feds to buy almost any piece of junk that investors don’t want. It says so right here in the Financial Times . The feds can buy “residential and commercial mortgage-backed securities, with discretion for the Treasury Secretary and Fed chairman to add others as needed.”
We’d put that last phrase in italics, if we knew how to do so. Because it leaves the door of the fed’s EZ lending bank open to anything...24-hours a day. The Treasury has a “blank check...to buy troubled assets,” says the FT . “This was very necessary,” said Hank Paulson. Then, slipping from farce into Dada or the theatre of the absurd: “We did this to protect the taxpayer,” (showing no confidence that American taxpayers can actually protect themselves .)
While writing a blank check, the politicians also limbered up for their election campaigns...each trying to come up with catchy new slogans and new ways to punish Wall Street publicly, (while actually trying to let them off the hook for billions of dollars worth of bad investments). “Greed,” said Obama, was the source of the problem. “Greed,” said McCain, was the real problem. Cap Wall Street salaries! Reregulate!
This was “not time for ideological purity,” suggested John Boehner, the Republican House majority leader, calling for unity. No, this was time for pandering...posturing...and promises. And so, principles were out the window. “I’m a free-market non-interventionist,” Boehner continued, “But we face a crisis, and if we don’t act, and quickly, we’re going to jeopardize our economy.” Principles are fine, in other words, until they get in the way of house prices!
*** Roosevelt is back. But which Roosevelt? Obama is positioning himself as the Franklin version: ranting against free markets and Wall Street. McCain prefers Teddy – an interventionist too, but one who preferred meddling in the affairs of foreign nations to meddling in the domestic economy. Which was worse? Teddy, with his bullying guns? Or Franklin with his greasy butter?
Hard to say which did more damage. The first set the United States on its imperial course... He was so worried that the vacillating Woodrow might not get the United States into WWI before it was over, he threatened to raise his own army and intervene on his own. The U.S. has bumbled into practically every important fight on the planet ever since.
Franklin, meanwhile, set up Fannie and Freddie to help solve the nation’s housing needs. He set up dozens of other agencies, subsidizers and regulators. Taking Bismarck’s example for his model, he turned the United States from a basically free-market economy...to a “mixed economy” – with heavy government influence and control. And now, we suffer both Roosevelts...both pay for both guns and butter. We bear the burdens of constant inflation and eternal war, in other words; and both will remain with us no matter which Roosevelt wins in November.
*** Niall Ferguson writes in today’s Financial Times . We like Ferguson. He usually comes to see the world the way we do; he is just a little slow: “On one side can be seen the chain reaction of deleveragings as banks, other companies and households all battle to stabilize balance sheets that became much too highly geared in the days of easy money; as the resulting credit contraction and forced asset sales create a vicious downward spiral; as the slowdown spreads to Main Street and from Main Street to the world.
“On the other side are the Fed and the Treasury, desperately manning the monetary and fiscal pumps while trying to decide who is too big to fail and who is not.” So, the war is on! The war on bear markets! The war against deflation! The war against good sense...
U.K. Housing Market 'on Its Knees,' Rightmove Says
U.K. house prices fell for a fourth month in September as the global credit crisis intensified, locking out homebuyers and forcing the sale of the country's biggest mortgage lender, a report by Rightmove Plc showed.
"The housing market is on its knees and will remain so until financial institutions address the disastrous state of the mortgage funding markets," said Miles Shipside, commercial director at Rightmove. "While this market provides a good opportunity to trade up, it requires a degree of bravery." The average asking price for a home fell 1 percent from August to 227,438 pounds ($414,000), Britain's most-used property Web site said today. From a year earlier, prices fell 3.3 percent.
The property market may face further weakness in coming months, provoking a "painful" adjustment for many families, Bank of England Chief Economist Spencer Dale said last week. HBOS Plc agreed to a takeover by Lloyds TSB Group Plc after plunging home values and the financial market crisis destroyed the value of the company and added to the threat of a recession.
Prices dropped the most in the East Midlands, where they fell 5.3 percent in the month, and values declined 3.9 percent in the southwest, Rightmove said. In London, house prices rose 4 percent in the month after a 5.3 percent drop in August.
U.S. Rescue Lenders are reeling from higher borrowing costs in interbank lending on concern about losses stemming from the collapse of the U.S. housing market.
The U.S. Treasury last week announced a $700 billion plan to buy troubled assets and avert a financial meltdown. The pound rose against the dollar today, trading at $1.8439 as of 8:49 a.m. in London. The currency has still fallen 7 percent since the beginning of August.
The U.K. economy entered a recession in July, forecasts by the Confederation of British Industry, the country's largest business lobby, show. Growth stalled in the second quarter, ending the longest period of uninterrupted economic expansion in more than a century.
Prime Minister Gordon Brown suspended the tax on home purchases of less than 175,000 pounds this month. Still, the number of new listings per estate agent fell to a record low, Rightmove said. "The changes in stamp duty are just tinkering at the edge of the system," Shipside said. "At best they will give slightly more choice to first-time buyers."
Derivatives prices suggest commercial property values will continue to fall until 2010 as concerns about the U.K. economy blunt demand, the Bank of England said in its quarterly bulletin published today. Other residential housing data also show the slump has deepened. Home sales plunged to a 30-year record low in August, the Royal Institution of Chartered Surveyors said Sept. 9. Prices fell by the most in a quarter century, HBOS said Sept. 4.
Bank of England policy makers said they are still concerned the fastest inflation in a decade will become embedded in the economy, making them more reluctant to lower interest rates, minutes of this month's meeting showed. They voted 8-1 to keep the rate at 5 percent, with David Blanchflower voting for the biggest reduction since the Sept. 11 attacks and Timothy Besley abandoning a push for higher rates.
Financial Head Loppings
Now that aggregate government spending is approximately half of all spending in the country, the major point of all the recent losses is the effect that Florida, like many states, is discovering to its horror that tax revenues are falling as the economy spirals down and down.
The governments are reacting as you would expect, initiating all kinds of tiny spending cuts, massive stealth tax hikes, freezing of new hiring, new borrowings (which has now reached 7% of annual tax revenue in Florida), and the raiding of trust funds to “plug” budget gaps, which only get worse and worse now that the predictable economic catastrophe of boom-turning-to-bust has, at long last, started.
The St. Petersburg Times reports that Amy Baker, the chief economist for Florida’s government, has discovered “a projected $3.5 billion hole in the state’s budget” and has now “sounded a series of alarm bells” that have “added a new term to Florida’s fiscal lexicon: a ‘structural imbalance’, the gap between the growth in the state’s revenues and its larger ongoing expenses”, which is, of course, wonderful news for those of us who desperately yearn for yet another term that means “A government spending more than it receives in the quest to give everyone a perpetual free lunch.”
But you will be glad to know that Florida, like many states, is determined not to let that happen, as the whole problem is immediately rendered insignificant when, as Ms. Baker is later quoted as saying, “The budget’s going to grow, independent of any revenue constraints.”
At this, I laughed in a tentative, nervous way – “Hahaha” – at the prospect of Ms. Baker finding a way to let the state’s budget grow forever, regardless of how much money comes in. Again, her words echoed in my brain; “The budget’s going to grow, independent of any revenue constraints.” I feel a cold chill.
Desperate for comic relief, I turn to the September 10 article in the Wall Street Journal titled “Budget Deficit Likely Doubled for Fiscal ’08”, mostly because I thought we WERE in fiscal 2008 already! Anyway, the new fiscal year begins on October 1, less than a month away, and the Congressional Budget Office’s new calculation of the “budget deficit” is a terrible, and yet a laughable, $407 billion.
Another reason that I am amused by the Journal article is that with all the talk of a budget deficit, and previous budget deficits, and how calculating it is such a difficulty, blah blah blah...not once does the article mention the size of the damned budget that produced the deficit! Not once! Therefore, I laugh “Hahaha!” to indicate comic bemusement tinged with horror.
I assume, as I always assume since I am such a paranoid, suspicious and very creepy little weirdo that correctly sees government as “goons with badges and guns who are all out to get me”, that the Journal is a co-conspirator with the government in down-playing anything that might upset anyone, such as revealing the gut-wrenching fact that the federal budget is now more than a staggering $3 trillion dollars, which is a hefty $10,000 for every man, woman and child in the country, and it’s equivalent to $30,000 being spent by everybody who has a non-government job!
Later on, we learn that the 2007 budget deficit is reported as being $161 billion, which makes me laugh again in derision and scorn, “Hahaha!” as my initial reaction, of course, was to loudly heap scorn and ridicule on the Congressional Budget Office, because I happen to know that the national debt is $9,669.9 billion, whereas last year at this time it was $9,006.0, meaning that in the last 12 months, the national debt increased $663 billion.
So, for the Congressional Budget Office to bring up the totally irrelevant 2007 fiscal budget deficit of $161 billion makes me yell, “Off with his head! Off with his head!” with every bit of imperious Red Queen arrogance I can muster.
But the point is not that I look ridiculous dressed up as the Red Queen from Alice in Wonderland , or that everybody is lying their heads off about the government’s spending deficits and ignoring the government’s intellectual deficits, but that all of this deficit spending means that more money has to be created, which will create more inflation in prices, which means more money must be created, which means more inflation in prices, around and around, which is why everyone should be buying gold and silver, but nobody is, making themselves look ridiculous, and then they turn around and say that I look ridiculous in my wig and crown!
Ha! I say, “Off with their heads, severed with a golden sword!”, which is so deliciously ironic that they should plotz from it, and even if they don’t, I can get my revenge by getting stinking rich by buying gold and silver at these lows, courtesy of them not driving the prices up by buying them, too. I hope revenge is as sweet as they say it is! Whee!