Entrance to the Manzanar Relocation Center, 230 miles north of Los Angeles
Ilargi: So, got the party hat still on? Lingering lightness in the brain from all the drinking and yelling and dancing? Probably not. That was one short party.
We’ve been through this before: the effects of the bail-outs get shorter-lived each time, even as the amounts grow like whale babies.
Now every single American is over $2000 poorer, and has signed away their constitutional rights to exert control over their elected -and non-elected- representatives, and it hasn’t helped anything, not one bleeding bit.
And that means that as early as Monday, the Dow will start tanking, and this time for real, and that the next series of bail-outs and bank failures will be around the corner, and with it panicked clamoring for the next ever bigger sums of other people’s money.
Putting aside all other criminal nonsense embedded in the Paulson coup d'état, here is why it cannot work, and don’t try telling me all of the coneheads in Washington have overlooked this.
The plan provides the SEC with the power to put a moratorium on mark-to-market valuations on "difficult-to-value" and "hard-to-price" (the new fad terms for "toxic") assets.
Which will lead to a situation in which banks will refuse to lend to each other, because they don’t trust the values their peers assign to their assets. And yes, that is exactly where we were before, and what has lead to the entire crunch to begin with.
This time around, though, Paulson can force any bank of his choice to sell these assets to him at any price he wants. He can bankrupt institutions at a single stroke of his pen, and they can’t take him to court for doing so.
$700 billion down the black drain hole, for an unconstitutional law that has ironclad provisions written in it which ensure and guarantee that it will not work as advertised.
We can but stop in our tracks and stare in awe at the incompetence of many, and the cunning of the few.
Meredith Whitney: Bailout doesn't make sense
Next: The Mother Of All Bank Runs?
It's plain that the current financial crisis is worsening in spite of--or perhaps because of--the Treasury rescue plan. The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package.
Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety; credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package.
Financial institutions in the U.S. and in advanced economies are going bust. In the U.S., the latest victims were Washington Mutual (the largest U.S. savings and loan) and Wachovia (the sixth largest U.S. bank). In the U.K., after Northern Rock and the acquisition of HBOS by Lloyds TSB, you now have the bust and rescue of Bradford & Bingley; in Belgium you had Fortis going bust and being rescued over the weekend; in Germany, Hypo Real Estate, a major financial institution near bust, has also needed rescue.
So, this is not just a U.S. financial crisis. It is a global crisis hitting institutions in the U.K., the Euro-zone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.). The strains in financial markets--especially short-term interbank markets--are becoming more severe in spite of the Fed and other central banks having injected $300 billion of liquidity in the financial system last week alone, including massive liquidity lending to Morgan Stanley and Goldman Sachs.
In a solvency and credit crisis that goes well beyond illiquidity, no one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker-dealers, the rest of the shadow banking system has no access to this liquidity as the credit transmission mechanisms are blocked.
After the bust of Bear and Lehman, and the merger of Merrill with Bank of America, I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnight liabilities. Instead, Morgan and Goldman took a cosmetic approach, converting themselves into bank holding companies as a way to get further liquidity support--and regulation as banks--from the Fed and as a way to acquire safe deposits.
But neither institution can create, in a short time, a franchise of branches, and neither one has the time and resources to acquire smaller banks. And the injection of $8 billion of Japanese capital into Morgan and $5 billion of capital from Warren Buffett into Goldman is a drop in the ocean, as both institutions need much more capital.
Thus, the gambit of converting into banks while not being banks yet hasn't worked, and the run against them has accelerated in the last week: Morgan's CDS spread went through the roof on Friday to over 1200, and the firm has already lost over a third of its hedge-fund clients together with the highly profitable prime brokering business (this is really a kiss of death for Morgan). And the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress: Most of its lines of business (including trading) are now losing money.
Both institutions should stop playing for time, as delay will be destructive: They should merge now with a large foreign financial institution, as no U.S. institution is sound enough and large enough to be a solid merger partner. If John Mack and Lloyd Blankfein don't want to end up like Richard Fuld, they should do a John Thain today and merge as fast as they can with other large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan.
The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way, Mack and Blankfein should sell at a major discount before they end up like Bear and are offered, in a few weeks, only a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up, as they are both much bigger than Bear or Lehman, and their collapse would have severe systemic effects.
When investors don't trust even venerable institutions like Morgan Stanley and Goldman Sachs, you know that the financial crisis is as severe as ever. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets, you know this is a global crisis of confidence in the financial system.
The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. And if this run accelerates--as it may now--a total meltdown of the U.S. financial system could occur.
The U.S. and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 basis points reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.
The law be damned
Word on the street is that the pols are about finished Christmas treeing the bailout bill. The House of Representatives prepares to cast its historic vote today. Here at The Daily Reckoning ...we stand back...aghast...agog...paralyzed by the whole spectacle... from the lunatic assumptions of the credit bubble...to the solemn farce now taking place in the U.S. Congress.
Yes, dear reader, we are suffering from senselessness overload...the absurdities are coming too fast for us now; we can’t keep up. We fear we are going into an irony-induced coma. Could any scriptwriter have come up with such a preposterous story? Could any director have found such a clownish cast of characters?
It was only a few months ago that all the leading men and women of this drama claimed to believe in free enterprise so fervently they were willing to spend hundreds of billions of dollars forcing it on others. It was free enterprise that separated us from the barbarians and made the country rich, they said. But now, they’re turning many of these free enterprises over to the bureaucrats to run...and desperately trying to make sure that the others don’t go broke.
It’s capitalism without the creative destruction. Capitalism with seatbelts, helmets, and airbags. Capitalism without bankruptcy. It’s like taking the crucifixion out of Christianity. What’s left is as empty and foolish as a Congressman’s head. And then, it was only a few months ago that they were telling us that there was nothing to worry about...the subprime problem was contained...property prices had hit bottom...everything was fine. Really.
Then, two weeks ago, Ben Bernanke and Hank Paulson appeared before Congress and warned that if Congress didn’t put up $700 billion of taxpayers’ money pronto, the whole world economy could meltdown. Ben Bernanke, former head of the economics department at Princeton, and now head of the world’s biggest banking cartel – the Fed – told the politicians: “If we don’t do this, we may not have an economy on Monday.”
Of course, this alarm turned out to be as silly as his previous assurances. Monday came. The economy still functioned. And Congress got to work – Christmas treeing the bailout bill. A colleague sends this handy inventory of a few of the gaudy balls so far, (as they appear in the actual bill):
Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits.
Sec. 102. Extension of increased alternative minimum tax exemption amount.
Sec. 201. Deduction for State and local sales taxes.
Sec. 202. Deduction of qualified tuition and related expenses.
Sec. 203. Deduction for certain expenses of elementary and secondary school teachers.
Sec. 204. Additional standard deduction for real property taxes for nonitemizers.
Sec. 205. Tax-free distributions from individual retirement plans for charitable purposes.
Sec. 304. Extension of look-thru rule for related controlled foreign corporations.
Sec. 305. Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space.
Sec. 307. Basis adjustment to stock of S corporations making charitable contributions of property.
Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands.
Sec. 309. Extension of economic development credit for American Samoa.
Sec. 310. Extension of mine rescue team training credit.
Sec. 311. Extension of election to expense advanced mine safety equipment.
Sec. 312. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
Sec. 314. Indian employment credit.
Sec. 315. Accelerated depreciation for business property on Indian reservations.
Sec. 316. Railroad track maintenance.
Sec. 317. Seven-year cost recovery period for motorsports racing track facility.
Sec. 318. Expensing of environmental remediation costs.
Sec. 319. Extension of work opportunity tax credit for Hurricane Katrina employees.
Sec. 320. Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone.
Sec. 321. Enhanced deduction for qualified computer contributions.
Sec. 322. Tax incentives for investment in the District of Columbia.
Sec. 323. Enhanced charitable deductions for contributions of food inventory.
Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory.
Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec. 401. Permanent authority for undercover operations. (as related to tax provisions)
Sec. 402. Permanent authority for disclosure of information relating to terrorist activities. (as related to tax provisions)
Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit.
Sec. 502. Provisions related to film and television productions.
Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children.
Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation.
Sec. 505. Certain farming business machinery and equipment treated as 5-year property.
Sec. 506. Modification of penalty on understatement of taxpayer’s liability by tax return preparer.
Subtitle B—Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008
Sec. 601. Secure rural schools and community self-determination program.
Sec. 602. Transfer to abandoned mine reclamation fund.
Sec. 702. Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding.
Sec. 704. Temporary tax-exempt bond financing and low-income housing tax relief for areas.
Sec. 709. Waiver of certain mortgage revenue bond requirements following federally declared disasters.
Sec. 710. Special depreciation allowance for qualified disaster property.
Sec. 711. Increased expensing for qualified disaster assistance property.
Bernanke and company didn’t want to wait for the lighting ceremony and the back patting. Nowhere in the U.S. Constitution does it give the Fed the power to put each and every taxpayer on the line for about $2,000. But who cares about that? The Fed, on its own initiative, began passing out the cash. $49 billion on last Wednesday alone went to the banks. That same day, the Fed lent $146 billion to investment firms. By the time people went home for the weekend, $410 billion had passed from the Fed to private firms.
The money was lent, says the Bloomberg report, at about 2.25% interest. By our calculation, that’s about half the rate of inflation...and precisely 1.4% less than the government’s cost of money, based on 10-year T-note yields. Two weeks ago, Bernanke was asked by Barney Frank how much money he had available for this kind of rescue operation. He said he had $800 billion. Last week, he was lending it out at an average daily rate of $44 billion. Let’s see, at that rate, the Fed is probably about 5 days from going broke itself. This should be interesting...when the Fed needs a bailout!
The stock market crashed a record-setting 777 points on Monday – and global markets took a tough tumble as well. But where does this leave the precious metals? Bryon King explains: “Yes, the prices of gold and silver rose on Monday. But gold mining shares declined along with all the other stocks. What was that all about? In my view, it was panic selling. In the wake of the failed bailout story out of Washington, D.C., big shareholders dumped everything over the side. Even the good stuff went into Davy Jones’s locker.
“Also, Monday was Sept. 29, the next-to-last day of the third quarter. So some last-minute actors were cleaning house. Better late than never? They sold anything that could show a profit (or get rid of a loss). “But sell the gold and silver? Let’s think this through. Have you tried to buy physical metal lately? Good luck. The U.S. Mint is all but sold out of coins. Indeed, the U.S. Mint has placed its dealers on allocation. The Royal Canadian Mint is working flat out to meet the demand for Maple Leafs. And South Africa’s Rand Refinery – which supplies the world’s most popular gold coin, the Krugerrand – is now running at full capacity seven days a week. Got gold?
“So what’s the story for physical gold? There’s strong demand for real metal. According to the Financial Times , ‘Investors in gold are demanding ‘unprecedented’ physical levels of bullion bars and coins and moving them into their own vaults as fears about the global financial system deepen.’ “What do these gold investors know? Evidently, the posted price for gold is low. It’s another way of saying that gold is underpriced relative to true demand. In fact, the posted price is clearing the market like a vacuum cleaner.” The price of gold isn’t going to stay at this level for long...Byron believes that it could still go much higher.
“I can’t believe what is going on...it’s unbelievable,” said a companion last night. We had a group of Americans for dinner. “I never thought I'd see the day...” We thought he was referring to the disappearance of investment banking....or to the bear market on Wall Street. Yesterday, the Dow lost a further 348 points, as investors awaited a bailout. Oil dropped $4.56. The euro slipped down to $1.38. And gold fell like a corpse – down $46.
De...de...de...de...flation. Unemployment is rising. House sellers are getting ‘desperate,’ says the Seattle Times, because buyers are stalling. Car dealers are closing down their lots. “Well, that’s what you get at the end of a credit expansion....” we replied. “No...I’m talking about politics. Have you seen that woman Palin? I liked her at first. At least she was refreshing. But they have to coach her on every question. She’d be out of her depth in a bathtub. It’s pathetic...
“And do you know that the odds that she would have to take over from McCain at his age are 1 in 4? What was he thinking? Imagine her at the head of the world’s biggest economy...and biggest military? It’s scary...what are they thinking?” We gave our theory: that people come to think what they must think when they must think it. For example, there was a time when the United States really was a nation governed by laws. The steady rule of law helped it grow into the world largest superpower. But now, it’s got more debtors than creditors...and more people beholden to the government than free men. Now, people just want a quick fix; the law be damned.
Treasury to Hire Asset Management Firms to Jumpstart Rescue
Treasury Secretary Henry Paulson is hiring as many as 10 asset-management companies to join the lawyers and bankers he is recruiting to kickstart the government's new $700 billion bank-rescue program.
The Treasury began implementing the plan within an hour of Congress yesterday giving Paulson the powers he sought to combat the U.S. financial crisis. Paulson is seeking to assemble a team to determine which toxic securities to target, how to value them and how to buy them. BlackRock Inc., Pacific Investment Management Co. and Legg Mason Inc. are seeking to become money managers for the program, people familiar with the matter said.
"This is something that, for a typical company, would take no less than five years," said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. "Anyone who thinks they can do this in two weeks is insane."
Ed Forst, the former Goldman Sachs Group Inc. executive Paulson hired to head the transition team, started work last week and is charged with helping establish the new Office of Financial Stability. "Paulson did not want to lose precious days waiting," said Howard Glaser, a former chief legal adviser of the Department of Housing and Urban Development.
Warren Buffett, the billionaire who spent $8 billion in the past two weeks to buy stakes in General Electric Co. and Goldman Sachs Group Inc., has also offered his views. "Any time I can be of help to the government, in terms of giving advice -- I've given a little advice, actually," Buffett said in an interview from San Diego with PBS's Charlie Rose on Oct. 1 Lobbyists say the Treasury wants to run the program as much as possible with outside contractors. Career Treasury staff would handle the administrative tasks.
While the department will bypass some government contracting rules, as the legislation allows, it says it plans to put a formal and transparent process in place to hire the private-sector help. The department may also tap the Federal Deposit Insurance Corp. to manage the mortgage portfolio. "We've been doing a lot of work getting ready for this," Paulson told reporters yesterday after the House voted. "We're going to be going out and lining up advisers from the private sector." President George W. Bush signed the measure shortly after Paulson spoke.
The Treasury plans to hire about two dozen employees along with five to 10 asset-management firms. The workers will be a mix of government employees and contractors, with a range of legal, financial and accounting skills. Financial companies that apply to Treasury will be evaluated based on the cost and scope of services they offer. The department is still working out a conflict-of-interest policy and details for guidelines on compensation.
Officials cautioned it will take at least four weeks to set up the first of the long-sought asset purchases. These purchases will start slowly with a series of pilot programs. The Emergency Economic Stabilization Act of 2008 gives Paulson, 62, immediate authority to buy as much as $250 billion in troubled assets from banks and other financial institutions. The White House may expand the program by another $100 billion, and the Treasury can access the remaining $350 billion with Congressional consultation.
The plan allows Treasury officials to "intervene very quickly if they want to," said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and former director of the Federal Reserve Board's Division of Monetary Affairs. He predicts the Treasury will "act in markets first," possibly by working through the Fed. While the new law gives the Treasury power to inject capital directly into the banking system, department officials say their focus will be to help banks get rid of illiquid assets.
Reinhart says Paulson will take his time setting up asset- buying competitions such as reverse auctions, in which the government would accept the lowest price offered by banks selling a type of asset. "Auctions are complicated," Reinhart said. "If you're talking about mortgages, there is a very significant information disadvantage to the government relative to the private sector, so they have to be really careful about the way they structure those auctions."
Paulson has an incentive to be deliberate: The next president, along with his new cabinet, takes office Jan. 20, and Paulson's reputation depends on his program's long-term track record. "No one will know if this works for several years," said Stuart Eizenstat, former deputy secretary of the Treasury and now a partner at Covington & Burling, a Washington-based law firm. "This is very much his plan; it will bear his name and his imprint for generations to come."
The plan sets up a Troubled Asset Relief Program, or TARP, available to "any financial institution" that meets the Treasury's conditions. Residential and commercial mortgages and mortgage-backed securities are the primary targets, although the Treasury and the Fed are able to add other asset classes as needed. The Treasury also will set up an insurance fund for mortgage securities that will charge premiums.
Banks won't be allowed to sell assets to the Treasury for more than what they paid, unless they purchased the assets from another bank already in bankruptcy or conservatorship. Congress instructed the Treasury to issue conflict-of-interest guidelines, so banks don't take unfair advantage of the new program.
Because the Treasury is able to buy whole mortgage loans under the plan, it may be able to encourage mortgage servicers to work out easier repayment arrangements for strapped homeowners, although the mechanics are likely to be very difficult, said Michael Carliner, a consultant and former economist for the National Association of Home Builders, a trade group in Washington.
The new program, combined with existing borrowing needs, could add up to a half-trillion dollars worth of debt the Treasury will have to sell before the end of December, said Ward McCarthy, a former Fed economist who is now a principal at Stone and McCarthy Research Associates in New Jersey. The department was already was weighing additional types of debt sales to finance this year's budget deficit. Fiscal year 2009 started on Oct. 1; in July the Bush administration projected a $482 billion shortfall.
As a result, markets should be prepared for the Treasury to move more suddenly than usual, McCarthy said. "Expect them to come out with six-guns blazing because Paulson wants to make an impression." The Treasury could add three- and seven-year notes, as its borrowing advisory committee has proposed. It also could reopen existing notes and bonds, or even hold a series of one-time medium- and long-term debt sales.
"Under normal circumstances, the Treasury's financing decisions are guided by its desire to be regular and predictable," said Louis Crandall, chief economist at Wrightson ICAP in New Jersey. "However, there is certainly nothing `regular' about this rescue package, so that approach is not relevant," he said
Accounting firms urge SEC to keep fair value rules
The chief executives of the Big Four accounting firms met with the head of the U.S. Securities and Exchange Commission on Friday to discuss their opposition to suspending fair value accounting rules, according to sources briefed on the meeting.
The meeting with SEC Chairman Christopher Cox occurred just after the U.S. House of Representatives approved a $700 billion financial industry bailout plan that included a provision giving the SEC explicit power to suspend fair value accounting. President George W. Bush quickly signed the bill into law.
The Big Four executives told Cox that dropping the accounting rule would negatively impact their businesses, one source told Reuters, speaking on condition of anonymity. Fair value, or mark-to-market, accounting has been maligned by the financial industry for forcing banks and others to post stunning write-downs as markets for their mortgage-related securities dried up.
The SEC declined comment. Earlier this week, the agency issued a clarification of the fair value accounting rules, telling banks they do not have to use fire sale prices when evaluating their hard-to-price assets. Some members of Congress have pushed the SEC to go further. A bipartisan group of more than 60 lawmakers asked the SEC to help the ailing financial sector by suspending the fair value accounting rule.
The bailout package signed into law on Friday is designed to help banks shed soured assets, many of them related to home loans. It also instructs the SEC to study the fair value accounting standard's effects on the balance sheets of financial institutions and the role it may have played in bank failures this year.
Fair value requires financial firms to value assets based on what they could fetch in a market transaction -- a requirement favored by most investors and accountants to give a true picture of companies' financial statements. When there is no market, the hardest-to-value assets are often based entirely on management's best estimate derived from mathematical models.
Don't call it a bailout
As Wall Street watched anxiously Friday afternoon, the nation learned exactly what the price of a few dozen votes in the House of Representatives is: about $1.2 trillion in stock market value, about $100 billion in new tax breaks and a big vote in the Senate. Oh, and also, a few wooden arrows. Congratulations -- besides some worthless mortgage-backed securities, you and every other taxpayer will also soon own about a 1/300-millionth share of the future of the domestic archery industry.
Given a chance at a do-over, on a bailout bill lawmakers said was much improved from the version they shot down Monday, the House voted easily to send the legislation on to the White House for President Bush to sign. (Which he did, barely two hours after the vote ended -- probably close to a new legislative speed record.) A combination of policy shifts to make the bill a little better for Main Street (as the cliché goes) instead of Wall Street and some good old-fashioned pork (the usual grease for the legislative process, this time in the form of targeted tax credits) did the trick.
So a 23-vote deficit Monday turned into a 92-vote majority by Friday. This time, leaders in both parties appeared to have done a better job counting votes; as on Monday, most Democrats backed it (172 to 63) and most Republicans opposed it (108 to 91), but the measure still passed easily, avoiding another unexpected failure, which could have crippled both the stock markets and the reelection bids of a lot of lawmakers. As it was, the Dow Jones average fell 157 points anyway.
Politics, both of the presidential and down-ballot variety, had more to do with the final result than anyone was quite willing to admit. Polls taken this week showed most voters wanted the bailout to pass, and blamed Republicans for holding it up earlier. Supporters realized they had to do a better job of selling it than just sending Treasury Secretary Hank Paulson out to talk about liquidity.
By Tuesday, after Monday's 777-point stock market plunge, politicians everywhere had stopped talking about "bailouts" and started talking about "rescue plans," and they started telling constituents less about financial services firms and more about companies having trouble making payroll or regular voters having trouble getting car loans due to the growing credit crunch. A flood of calls to Capitol Hill opposing the bailout slowed down, and more calls came in blasting lawmakers for dithering in the face of a crisis. Vulnerable lawmakers in both parties were more willing to vote yes.
Of course, John McCain's decision the week before to "suspend" his campaign, fly to Washington for an unproductive White House meeting, go on with a debate he first tried to cancel, and then watch his allies in the House mess the whole thing up, was only going to look worse if the House didn't follow the Senate's lead and approve the deal. McCain had come back to the Hill again on Wednesday to vote for the Senate legislation, as had Barack Obama.
Though it wasn't clear, despite all that, how much McCain did to push the bill along in the end. "They told me he was going to call," Rep. Sue Myrick, a North Carolina Republican, told reporters about McCain's lobbying. "He didn't." But she still switched her vote from a "no" on Monday to a "yes" on Friday, in a sign of how quickly the mood had shifted on the plan. (McCain did call Arizona conservative Jeff Flake, who wasn't voting for the bill, but Flake said McCain didn't push: "I think he knew it was going to be a tough sell.")
Democrats, for their part, attributed the increase in support among liberals to an intervention by Obama. "When he called me, he knew exactly what I was concerned about," said Rep. Elijah Cummings of Maryland, a member of the Congressional Black Caucus, many of whose members opposed the bill earlier in the week but switched on Friday. "I think he did exactly the right thing."
The debate wasn't without a few odd moments, even if it was mostly without suspense after the House passed a procedural measure earlier in the morning that allowed the bailout to come up. Republican hard-liners who opposed the bill on philosophical grounds stuck to their guns. "We should confront this crisis with resolute courage, with faith in God and with faith in free enterprise," said Indiana Rep. Mike Pence, who helped lead the failed charge against the bill, conjuring up visions of fearful bankers reaching for Bibles and the collected works of Adam Smith as their ability to borrow money slips away. That was a frequent refrain -- the bill will lead to socialism, or something even redder.
It took Rep. Barney Frank, the imp from Massachusetts who can go toe-to-toe with Bill O'Reilly and who probably did more than anyone except Paulson to write the legislation, to point out how preposterous that notion was. There are plenty of reasons to find fault with the bailout, but it ain't exactly the first step in a leftist revolution. "Ever mindful of the danger that George Bush will lead us down the road to socialism, we will be monitoring this closely," Frank told the House.
By the time Speaker Nancy Pelosi gathered the Democratic leadership in a room off the House floor to gloat about their victory, any sense of the moment as historic had vanished; like a lot of legislation, its finish seemed anticlimactic. The formal copy of the bill arrived in front of Pelosi as she was speaking to the press, and she quickly got to signing it so it could be dispatched to the other end of Pennsylvania Avenue. But instead of any hushed reverence, the room erupted into shouts -- an army of photographers, it turned out, was blocking the shot for an equally large army of TV camera operators in the back of the room.
"Stills!" the TV crews yelled out. "C-SPAN! Move that mic!" A couple of hours later, upstairs in Republican whip Roy Blunt's office suite (in the middle of which the House, for some reason, has nestled the workspace for magazine writers), staffers cracked open cans of Heineken and blasted "The Final Countdown" and "Cum On Feel the Noise" ('80s music being the natural soundtrack as $700 billion prepares to leave the U.S. Treasury). And a cloud of cigar smoke hung in the air. It was the smell of a victory for Wall Street -- but, if the dire predictions of economic collapse were right, maybe not a loss for the rest of us.
Ilargi: Meanwhile, JPMorgan's profoundly questionable role in Lehman's demise flows to the surface, while its part in the Wells Fargo bid for Wachovia demands scrutiny as well.
Lehman Cash Crunch Caused by Lender JPMorgan, Creditors Say
Lehman Brothers Holdings Inc.'s main lender and clearing agent, JPMorgan Chase & Co., caused the liquidity crisis that led to Lehman's collapse, creditors said. JPMorgan had more than $17 billion of Lehman's cash and securities three days before the investment bank filed the biggest bankruptcy in history on Sept. 15, the creditors committee said in a filing Oct. 2 in bankruptcy court in Manhattan. Denying Lehman access to the assets on Sept. 12, the bank "froze" Lehman's account, the creditors claimed.
JPMorgan, the biggest U.S. bank by deposits, financed Lehman's brokerage operations with daily advances, while money market funds and other short-term lenders provided overnight loans, according to bankruptcy court documents. When JPMorgan shut Lehman off from funds, Lehman "suffered an immediate liquidity crisis that could have been averted by any number of events, none of which transpired," according to the filing.
The creditors asked the judge in charge of the case to let them interview a witness and request relevant documents from JPMorgan and to pursue possible legal claims. U.S. Bankruptcy Judge James M. Peck is scheduled to hold a hearing Oct. 16 on that request, the creditors said.
Harold Novikoff, a lawyer for JPMorgan at Wachtell Lipton Rosen & Katz, declined to comment, saying he didn't see the filing until midnight. He previously said in court hearings that the bank continued to finance Lehman's brokerage after its parent went into Chapter 11 bankruptcy proceedings.
Brian Marchiony, a spokesman for New York-based JPMorgan, declined to comment. Creditors' lawyers at Quinn Emanuel Urquhart Oliver & Hedges didn't return calls seeking comment. Once the biggest U.S. underwriter of mortgage-backed securities, Lehman was stuck with the assets as their values fell and it searched unsuccessfully for a merger partner. Lehman had surplus cash of $15 billion when it announced preliminary third-quarter results on Sept. 10, even after taking an estimated net loss of $3.9 billion and marking down assets by $7.8 billion, the creditors said in the filing.
The stock of the investment bank was increasingly targeted by short sellers after Moody's Corp. said that same day it might lower its ratings for Lehman unless it reached a "strategic" merger with a stronger partner, according to the filing. Lehman seemed to have enough liquidity to meet its obligations on Sept. 12, the Friday before its bankruptcy filing, creditors said, referring to the cash and collateral at JPMorgan. In addition, the bank held "highly liquid" securities bought with secured financing amounting to $188 billion from banks and other lenders, they said.
The "freezing" of Lehman's account meant it no longer had funds to support its operations, they said. Explaining Lehman's collapse to the judge after the bankruptcy filing, company executives and lawyers said the $188 billion pool of loans mostly financed the bank's least liquid assets, subprime mortgages and structured financial instruments. "Secured financing fell out of reach" because of the devaluation of assets securing the loans, forcing Lehman to deplete its cash to continue trading, said lawyer Shai Waisman of Weil Gotshal & Manges in a Sept. 16 court hearing. "This began the stranglehold on Lehman," Waisman said.
JPMorgan is Lehman's largest secured creditor, with an estimated claim of $23 billion, according to a Sept. 25 court filing. Unsecured creditors have claims on Lehman that might be worth 15 cents on the dollar or less, according to analysts including Peter Plaut of Imperial Capital LLC.
$87 Billion Advance After Lehman's filing, JPMorgan advanced the company $87 billion on Sept.15 and $51 billion the next day to pay short- term lenders and settle trades, according to court documents.
"There was a great amount of concern, and that concern was expressed as well to us by the Federal Reserve Bank of New York" that "we would be creating market havoc had we not made an advance at that time," JPMorgan lawyer Novikoff said in court Sept. 16 as he asked for "comfort" that the bank's post- bankruptcy loans would continue to be secured. The bank's collateral was valued in court at $17 billion, including almost $7 billion in cash and a claim on the assets of Lehman's brokerage, by Weil Gotshal.
Lehman, once the fourth-largest U.S. investment bank, filed for bankruptcy with debt of $613 billion as of May 31. The creditor panel, reconfigured yesterday, includes Bank of New York Mellon Corp. and Wilmington Trust Co. as trustees for bondholders owed about $127.6 billion, according to court papers. Vanguard Group Inc., Shinsei Bank Ltd., Mizuho Corporate Bank Ltd. and MetLife Inc. also are members of the committee, which acts for thousands of unsecured stakeholders in the bankrupt securities firm.
Lehman Brothers Commodity Services Inc., sued by Bank of America Corp. last month for failing to return collateral provided for derivative transactions, filed yesterday for bankruptcy in New York, along with affiliated units. Bank of America was seeking the return of $500 million from three of the units.
Citi’s rivals play big part in Wells, Wachovia marriage
Don’t tell Citigroup CEO Vikram Pandit that Wall Street is just one big country club. Just four days after Citigroup negotiated the $2.16 billion acquisition of the portions of Wachovia and solidified its position as the biggest U.S. financial institution by assets, two of Mr. Pandit’s chief competitors helped North Carolina-based Wachovia negotiate a richer deal with Wells Fargo.
Goldman Sachs advised Wachovia, while J.P. Morgan Chase counseled Wells Fargo, according to a statement released by the companies after they announced their $15.1 billion all-stock deal today. Unlike Citi, which proposed to acquire only Wachovia’s banking assets—with help from the Federal Deposit Insurance Corp.—Wells said it wants to buy its target whole.
Five of the eight largest bank holding companies in the country were involved in the Wells/Wachovia tie-up. Goldman and Morgan Stanley transformed themselves from investment houses into bank holding companies last month. That made it easier for them to build up capital in the form of government-insured deposits and set off a scramble to acquire endangered or failing banks. But the move also put Goldman in more direct competition with Citi, which combines retail, commercial and investment banking businesses.
Measured by total assets at the end of the second quarter, Citigroup ranked as the biggest U.S. bank with $2.1 trillion in assets, followed by J.P. Morgan Chase (second, with $1.78 trillion), Goldman Sachs (fourth, $1.08 trillion), Wachovia (seventh, $812 billion) and Wells Fargo (eighth, $609 billion). Of the eight biggest banks, only Bank of America, Morgan Stanley and Taunus Corp. (a subsidiary of Deutsche Bank) have played no announced role in the deal.
If successful, Wells Fargo’s bid could leave Citi as the only banking giant not to undergo a recent metamorphosis, vanish or swallow a rival weakened by the financial crisis. Last month, J.P. Morgan bought Washington Mutual’s assets from the FDIC for $1.9 billion and Bank of America snapped up Merrill Lynch for $44 billion.
Citigroup Girds for Wachovia Takeover Battle With Wells Fargo
Citigroup Inc., hobbled by $61 billion of subprime-related losses, now faces its biggest takeover battle in a fight with Wells Fargo & Co. for control of Wachovia Corp. Citigroup fell as much as 21 percent yesterday in New York trading after Wells Fargo, the biggest U.S. bank on the West Coast, agreed to acquire all of Charlotte, North Carolina-based Wachovia for $15.1 billion.
The bid trumped Citigroup's government-backed offer of $2.16 billion for Wachovia's banking operations. "The taxpayer doesn't pay a penny" for the Wells Fargo deal, Wells Chairman Richard Kovacevich, 64, said yesterday in an interview. His company's bid is superior to Citigroup's also because it's a higher price and the combining banks "share similar cultures and values."
Vikram Pandit, Citigroup's chief executive officer, is counting on the Wachovia purchase to help rebuild after three quarters of losses totaling more than $17 billion. The bank's market value has dropped 38 percent this year to about $100 billion, leaving it below Wells Fargo. If Wells Fargo winds up with Wachovia, it would creep up on its New York rival with deposits of $787 billion, compared with Citigroup's $826 billion. Pandit insisted Citigroup will prevail, citing an exclusive agreement signed by Wachovia. Kovacevich told investors during a conference call the deal with Wachovia is "solid."
Citigroup dropped 18 percent to $18.35 yesterday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.
Citigroup demanded Wells Fargo abandon the takeover. Buying Wachovia would give Citigroup the third-biggest U.S. bank network and cement its status as the nation's largest lender by assets. "Any such agreement between Wachovia and Wells Fargo is illegal," Pandit, 51, said in the e-mail yesterday. "We continue to vigorously pursue Citigroup's interest and rights in completing this transaction." Citigroup may take legal action to block the deal, or may increase its offer, said a person with knowledge of the deliberations.
"I'm still not convinced that Citigroup can force this sale to happen," said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell. "Citigroup may be facing the chance to get themselves a small settlement, and that's a nice shot in the arm for a company that's struggling." A court challenge and a bidding war aren't the only possible roadblocks for Wells Fargo: Its offer may lead to a face-off with federal regulators.
The Federal Deposit Insurance Corp., helped broker Citigroup's purchase when Wachovia's health faltered. Chairman Sheila Bair said until a review of Wells Fargo's offer is completed, the agency will stand behind the Citigroup deal. "We wanted to make clear that until things are settled with what's going on with this Wells bid, that the Citi deal was still there," Bair said yesterday in an interview on Bloomberg Television's "Political Capital with Al Hunt," to be broadcast over the weekend. Bair said the FDIC is reviewing the offer, and she told Hunt: "You shouldn't" assume the U.S. opposes Wells's offer.
Other bank regulators said they haven't evaluated Wells Fargo's offer. "We have not yet reviewed the new Wells Fargo proposal and the issues that it raises," the Federal Reserve and Office of the Comptroller of the Currency said today in a statement. "The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability."
Wells Fargo, run by Chief Executive Officer John Stumpf, had avoided bets on the subprime-mortgage market that contributed to $588 billion in writedowns and credit losses for financial firms worldwide. Wachovia in 2006 purchased Oakland, California-based Golden West Financial Corp. for $24 billion, acquiring a portfolio of option-adjustable rate mortgages that helped lead to $9.6 billion in losses this year. Wells Fargo, in bidding for Wachovia, deviates from a strategy of seeking smaller acquisitions with less risk to fill gaps in its branch network.
After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. It would have 10,761 branches in 39 states. "Citi's purchase was too cheap for the assets and operations involved," said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania. "It's an excellent strategic deal for Wells Fargo given the geography of the branch network."
Bair Says Review of Wells, Wachovia Doesn't Signal Opposition
Federal Deposit Insurance Corp. Chairman Sheila Bair said until a review of Wells Fargo & Co.'s rival offer for Wachovia Corp. is completed, the agency needs to stand behind a deal made this week with Citigroup Inc. "We wanted to make clear that until things are settled with what's going on with this Wells bid, that the Citi deal was still there," Bair said this weekend on Bloomberg Television's "Political Capital with Al Hunt." Bair told Hunt: "You shouldn't assume" a review suggests opposition to Wells Fargo.
Wachovia and Wells Fargo announced a $15.1 billion takeover yesterday, less than a week after Citigroup agreed to pay $2.16 billion for Wachovia's banking operations, and the FDIC guaranteed any loan losses in excess of $42 billion in return for a stake in the bank. Bair, who aided Citigroup's purchase, said the FDIC review can be completed in a matter of days.
Bair, 54, a lifelong Republican who has been pressing banks to provide relief for homeowners facing foreclosure, said she would be "happy to stay" on as FDIC chairman if a Democrat is elected president next month. "It's important to have stability now," Bair said in the interview yesterday. "I think it's important for me as the chairman of the FDIC to signal that -- my willingness to see this out." The FDIC is a Washington-based agency that regulates banks and insures $4.5 trillion in deposits at 8,451 institutions with $13.3 trillion in assets, according to second-quarter data.
Bair predicted Congress likely will make permanent an increase in the amount of bank deposits her agency can insure, to $250,000 through the end of 2009, from $100,000. Congress included the higher coverage in a bank rescue package passed yesterday by the U.S. House. "It's Congress's call," Bair said. "They set our deposit insurance. There are some strong arguments for keeping it."
The legislation also gave the agency unlimited borrowing authority from the Treasury to insure against losses to the FDIC fund. "If we do have to borrow from Treasury we pay that money back" through fees on banks, she said. President George W. Bush signed the package implementing a Treasury program to buy impaired assets from financial companies, aiming to unfreeze credit markets after companies reported $588 billion in losses on assets linked to mortgage- backed securities.
Beyond buying bad assets, the U.S. should consider "direct-capital infusions" as part of "a menu of options that need to be in the government's arsenal to deal with this," Bair said. "But it may depend on the institution, on the issues that they're confronting," Bair said. Bair declined to predict whether there would be any more big-bank failures this year.
A week ago the agency helped sell the branches and assets of Washington Mutual Inc., the nation's largest thrift, to JPMorgan Chase & Co. after the biggest U.S. bank failure in history and the 13th failure this year. "We are in uncertain times," she said. "There will be bank failures, and certainly a number of smaller-bank failures, which is what we've seen, which is more typical." Overall, U.S. banks "have very strong reserves" and their balance sheets are "strong," Bair said. "They're in a good position to weather this."
The Trouble With Harry
Just as U.S. credit markets this week were close to the edge of the cliff, threatening capital-starved businesses large and small, Senate Majority Leader Harry Reid stepped in front of reporters and offhandedly announced:
"One of the individuals in the caucus today talked about a major insurance company. A major insurance company -- one with a name that everyone knows that's on the verge of going bankrupt. That's what this is all about." The next day, share prices fell sharply across the insurance industry.
Let us stipulate we do not think it necessary for even U.S. Senators to understand the internal mechanics of credit default swaps and collateralized debt obligations.
But if we have learned anything amid the panic over Bear, Lehman, Merrill and adventures in naked short-selling, it is that rumors can obliterate economic value, instantly. The SEC has been issuing subpoenas for an investigation into rumor-driven market manipulation. Of course, Harry Reid stood up in broad daylight to talk about a troubled insurer "with a name that everyone knows," so his contribution was merely obtuse. And predictably destructive. The steep drop in the share prices of insurance companies Thursday destroyed wealth for uncounted middle-class investors holding onto stock in companies still considered healthy.
Some analysts said Senator Reid's remark didn't produce the entire sell-off in insurance stocks, just some of it. Markets were also under downward pressure from uncertainty about the financial-markets legislation in Congress. Still, did Mom and Pop shareholders of Met Life, Hartford or Prudential need Senator Reid belly-slamming onto their already fragile assets?
It calls to mind Senator Chuck Schumer's public suggestion in July that troubled IndyMac Bank "could face collapse." It did, after a deposit run. Senator Schumer said criticizing his action was akin to blaming "the fire on the guy who called 911." The nation's shareholders would sleep better at night if some Members of Congress enrolled in Arsonists Anonymous.
Hartford, Prudential, MetLife Credit Swaps Widen to Records
The cost to protect against default by Hartford Financial Services Group Inc., Prudential Financial Inc. and MetLife Inc. soared to records and shares fell on speculation turmoil in financial markets may be spreading to insurers. Credit-default swap traders were demanding upfront payments to protect against a default by Hartford, Prudential and MetLife for five years. Shares of Hartford plunged 32 percent; MetLife by 15 percent; and Prudential by 11 percent on concern the companies face losses as the value of fixed-income assets plunge amid the worst financial crisis since the Great Depression.
"Insurance companies are known for buying really illiquid stuff, they're just looking for yield," said Michael Donelan, who manages $2 billion of bonds at Ryan Labs Inc., a money management and research firm in New York. "There's no bid for anything right now. Nothing. They have to mark to market for quarter end, so I'm sure there was some realization that a lot of these guys may take losses." U.S. Senator Harry Reid may have helped push the markets into a panic after saying yesterday that a "major" insurer may be on the brink of failure, Donelan said.
Credit-default swaps protecting against defaults by Prudential and MetLife were quoted at a mid-price of 9.5 percentage points upfront in addition to 5 percentage points a year, according to Credit Suisse Group AG. That means it would cost $950,000 initially and $500,000 a year to protect $10 million of the companies' bonds from default for five years. Yesterday, the cost for Newark, New Jersey-based Prudential was $500,000 a year with no upfront payment and $460,000 for MetLife.
The upfront cost for contracts on Hartford and Lincoln National Corp., the fourth-largest U.S. life insurer by assets, was quoted at 9 percentage points, Credit Suisse prices show. Contracts on XL Capital Ltd., the Bermuda-based business insurer, were quoted at 9.5 percentage points upfront. An increase in the contracts, used to hedge against losses or to speculate on creditworthiness, represents a decline in investor confidence.
"In this very skittish market everybody just piles on," said Jim Hannan, managing director for fixed income strategy at MTB Investment Advisors in Baltimore, which oversees $4 billion in fixed-income assets. "They hadn't moved wider and guess what? Today's their day." Investors are growing concerned that the insurers are holding investments that are sinking in value or face losses after the bankruptcies of Lehman Brothers Holdings Inc. and Washington Mutual Inc.
The government seizure of American International Group Inc. last month also sparked fears that even the industry's biggest companies aren't immune from failure, said Rob Haines, an analyst at independent fixed-income research firm CreditSights Inc. in New York. "Everyone's shell-shocked and has the mentality that if this can happen to AIG, it can happen to anybody," Haines said. "It's completely not reflective of fundamentals."
AIG, which used a subsidiary to sell credit-default swap protection on securities linked to U.S. home loans before much of the market collapsed, was seized after ratings downgrades triggered more than $13 billion in collateral calls. "As far as I know, and I'm pretty certain, none of the other major life insurers were doing what AIG was doing," Haines said.
Investment-grade corporate bonds posted their worst month since 1980 in September, losing 7.3 percent, and high-yield securities tumbled 8.3 percent, their worst performance in at least two decades, according to Merrill Lynch & Co. index data. Hartford shares dropped $12.20 to $25.91 in New York Stock Exchange trading. Prudential fell $7.15 to $57.65 and MetLife declined $7.19 to $40.96. Reid, in pressing for passage of a $700 billion financial system rescue plan, said that a "major" insurance company was about to go bankrupt if financial markets weren't calmed.
"We don't have a lot of leeway on time," Reid told reporters after a luncheon in Washington. "One of the individuals in the caucus today talked about a major insurance company -- a major insurance company -- one with a name that everyone knows that's on the verge of going bankrupt. That's what this is all about."
Reid's comments were "meant to refer to the conditions in the financial sector generally," spokesman Jim Manley said today in a written statement. "He has no special knowledge about nor has he talked to any insurance company officials." The Nevada Democrat "regrets any confusion his comments may have caused," Manley said. A Hartford spokeswoman, Shannon Lapierre, reiterated comments the company made yesterday in a statement. The company said it's "confident" in its financial strength and its ability to meet commitments to customers and is "living through a period of unprecedented market conditions."
Hartford's gross unrealized losses rose by $964 million in July, led by declines in the value of financial services holdings including $258 million from stock investments and $239 million from fixed income. Investments in Fannie Mae and Freddie Mac preferred stock accounted for about $135 million of the unrealized losses in July.
MetLife's realized investment losses after taxes rose 21 percent in the second quarter from the year-earlier period to $233 million, and included $175 million in credit-related writedowns. Unrealized losses on fixed-income securities rose by almost $1 billion to $9.74 billion in the three months ended June 30, while unrealized gains on debt holdings fell to $6.16 billion from $8.62 billion. "MetLife is fully able to meet all its obligations," the New York-based insurer said today in a statement distributed by Business Wire.
Broader gauges of corporate credit risk also rose today. A new version of the Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, rose 5 basis points to 165 in its first day of trading in New York, according to broker Phoenix Partners Group. In London, the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 4.5 basis points to 124, JPMorgan Chase & Co. prices show. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
AIG to Sell U.S., Overseas Life Units to Repay Loan
American International Group Inc., the insurer forced to peddle businesses to repay an $85 billion government loan, will sell its life insurance and retirement operations in the U.S., Europe, Latin America and Japan.
AIG, once the world's largest insurer, will refashion itself into a global property and casualty company with a stake in an overseas unit that sells life policies in China, Korea and India, Chief Executive Officer Edward Liddy said today in a conference call. AIG may also sell its plane-leasing unit, consumer finance division, U.S. auto insurer, a reinsurance business and asset manager, he said.
"We won't exactly be the AIG of old, but we'll have a very secure position," Liddy said today in a conference call. "This is going to be a formidable company that emerges from this." Selling life insurance operations is a reversal for Liddy, who previously said keeping that business was a priority. The firm has already borrowed about $61 billion on its credit line, two weeks after agreeing to the U.S. rescue that gives the government a majority stake. T
he loan went toward costs tied to credit-default swaps and securities lending and for cash needed because commercial paper markets froze, he said. Liddy said he prefers "brand-name" buyers of "large slices" of AIG to hasten transactions and benefit customers and employees. Blackstone Group LP and JPMorgan Chase & Co., both based in New York, are coordinating the sales, AIG said.
"He's trying to refocus AIG to be a true insurance company," said Rob Haines, a debt analyst at CreditSights Inc. "The question is, with current market conditions, will there be reasonable bids? If he doesn't generate enough cash to pay off the loan, then everything comes tumbling down."
Standard & Poor's said it may cut AIG's credit grades because the amount the insurer has drawn down on its credit line is "much larger" than anticipated and there's a risk Liddy doesn't execute his plan, the ratings firm said today in a statement. Moody's Investors Service downgraded the insurer's unsecured debt rating to A3 from A2. The ratings firm also reduced debt grades at AIG's International Lease Finance Corp., the largest lessor of planes to airlines, and the company's American General Finance Corp.
AIG's "business diversification will be significantly reduced" by the planned divestitures, Moody's said in a statement. AIG has borrowed "heavily" from the credit line, Moody's said. Liddy will also try to "monetize" assets in AIG's swaps portfolio. The derivatives, which provide protection for debt investors, plunged in value as the securities they guaranteed declined, saddling AIG with more than $25 billion in writedowns.
He also said he plans to sell AIG's remaining stake in Blackstone, manager of the world's largest buyout fund. AIG spent $150 million in 1998 for a 7 percent stake in Blackstone, which went public last year. The insurer recorded a $398 million gain last year from selling Blackstone shares. AIG wants to keep a majority stake "if at all possible" in its American International Assurance Co. life insurance unit, Liddy said. That business operates in fast-growing markets including China, Singapore, Malaysia, Thailand, Korea, Vietnam, Indonesia and India. AIG, founded in Shanghai in 1919, previously projected annual earnings growth from life insurance of more than 20 percent in developing countries.
"The businesses we are retaining could not be re-created today," Liddy said in a conference call today. The company's U.S. life insurance and retirement business was assembled by former CEO Maurice "Hank" Greenberg through acquisitions of SunAmerica Inc. in 1998 and American General in 2001. The other life subsidiary for sale, American Life Insurance Co., operates in parts of Europe, Latin America, the Caribbean, the Middle East, and Japan.
"We will look very favorably on preemptively priced offers, people who want to put in a very substantial offer on a property in order to move with us exclusively," Liddy said in a phone interview. The U.S. business may sell for about $25 billion, according to Credit Suisse Group AG analyst Thomas Gallagher. The overseas life insurance division, including parts that will be kept, is worth about $62 billion, he said in Sept. 23 note to investors. AIG's property-casualty units took in $40 billion in revenue last year, the company said.
"The values that we will receive from the assets we intend to dispose will be more than enough to repay the Fed facility," said Liddy, the former Allstate Corp. CEO appointed by the government to run AIG. Liddy has to reassure clients and employees of the insurer's long-term prospects while showing investors and the Treasury he can sell units to pay back debt. Liddy helped oversee the spinoffs of Allstate, Discover Financial Services, real estate broker Coldwell Banker Corp. and securities brokerage Dean Witter when he was at retailer Sears Roebuck & Co.
AIG almost collapsed last month from credit downgrades and writedowns tied to the U.S. housing slump. The insurer posted about $18.5 billion in net losses over three quarters, and its stock plunged more than 90 percent this year. AIG's property and casualty units insure planes, shipping, factories and luxury homes and protect commercial property owners against terrorist attacks.
The company also owns a home lender and reinsurer Transatlantic Holdings Inc. AIG got 4.3 percent of its revenue last year from airline leasing. Second-quarter operating income from the unit rose 85 percent to $352 million as the company expanded its fleet and charged more to rent planes. Competitors may want to buy units that remained profitable as AIG was overwhelmed by losses at units that originate, insure and invest in home loans. Billionaire Warren Buffett told CNBC Sept. 24 that his Berkshire Hathaway Inc. may consider buying some AIG businesses, without naming which ones. AIG operates in more than 100 countries.
Greenberg is also interested in buying assets from AIG. Greenberg controlled the largest block of AIG stock before the takeover through personal holdings and investment firms. Greenberg wrote a letter to Liddy this week saying he wasn't contacted about possible sales. Liddy said today that AIG will divest assets in an "open and transparent" process. AIG has already agreed to sell its 50 percent ownership of London City Airport.
The insurer may sell AIG Investments, which managed $758.2 billion as of June, and arrange for the new owner to oversee some of AIG's holdings, Liddy said. The unit handles investments that back customer policies, plus $137.1 billion in client money. "I'd like to get our investment activity back to simply investing our money," Liddy said. The insurer may also unwind private equity investments, he said. AIG had private equity and hedge fund holdings of about $30 billion as of June 30.
AIG's mortgage insurer, United Guaranty Corp., may stop selling new policies, be said. The unit, which reimburses lenders when borrowers don't pay their debts, had a second-quarter underwriting loss of $564 million, a fourfold increase from a year earlier.
"If something emerges and someone wants to buy it, we'd be delighted to entertain it, we just don't think that will happen," Liddy said.
AIG has two years to repay the U.S. loan. The insurer agreed to payments for borrowed amounts of 8.5 percent plus the 3-month London interbank offered rate. On the unused balance, AIG will pay 8.5 percent. Three-month Libor rose today to 4.33 percent from 2.88 percent the day the deal was announced. The company said the U.S. will get preferred stock worth 79.9 percent of AIG.
The $1 trillion-asset company has about $48.7 billion in hard-to-value holdings, and had 116,000 employees as of Dec. 31, compared with 97,000 two years earlier. In addition to selling life insurance and protecting property, AIG owns or manages about $25.7 billion of real estate including residential, industrial and retail properties.
Homeowners will still be paying off mortgages in retirement
More than a million people over 55 still have more than 10 years left to pay on their mortgage term. Even those over 55-year-olds who have less than 10 years to pay off their houses still have an average outstanding mortgage debt of £55,046, equating to repayments of around £725 every month.
Karen Barrett, from the mortgage adviser website Impartial.co.uk, which commissioned the research, said: "This study suggests that many baby boomers are facing up the reality of still having a mortgage debt close to, or even beyond, their retirement age." Meanwhile other research showed that growing numbers of people could be forced to delay their retirement after racking up crippling levels of unsecured debt.
The average person aged between 50 and 60 who has taken out a debt management plan owes £41,400 through credit cards, loans and other unsecured borrowing, according to debt solutions group Payplan. The figure is 25 per cent higher than the amount of debt accumulated by other age groups, which averages £32,700. Unsurprisingly, given the higher sums owed, those in the run up to retirement are also expected to take longer to clear their debts.
The average length of a debt management plans, an informal agreement with creditors under which debts are repaid at an affordable rate for someone aged between 50 and 60 is 11 years, compared with nine years for other age groups.
Money-Market Rates Climb to Records, Bank of England Relaxes Funding Rules
Money-market rates jumped to records, Treasury bill rates fell and the Bank of England relaxed borrowing rules for financial institutions as "extraordinary" strains deepened the credit freeze.
The London interbank offered rate, or Libor, that banks charge each other for three-month loans in euros increased to 5.33 percent, an all-time high, the British Bankers' Association said. The corresponding rate for dollars climbed to 4.33 percent, the highest since January. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record and Asian bank rates climbed to the highest levels in at least nine months.
"It feels like the financial-sector problems are snowballing, developing momentum that will be hard to stop," said Greg Gibbs, director of currency strategy at ABN Amro Holding NV in Sydney. "The further deterioration in term bank- funding costs and spread widening even as policy makers in the U.S. are poised to pass a rescue bill is worrying."
Central banks are stepping up efforts to revive lending by pumping money into the financial system. The U.S. House of Representatives will consider a package of measures today that would remove tainted assets from bank balance sheets. "In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity," Governor Mervyn King said in a statement in London today.
The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, climbed 20 basis points to 290 basis points today. It's the third consecutive day the spread has risen to an all-time high. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.
The Bank of England will widen the range of collateral it accepts at three-month operations to make it easier for banks in the U.K. to get funds. The central bank said it will now accept top-rated securities tied to "some" corporate and consumer loans as well as asset-backed commercial paper with the highest short-term ratings. "It's another thing that shows how serious the situation is," said Grant Lewis, an economist at Daiwa Securities SMBC Europe Ltd. in London. "Of the central banks, it's been perhaps the most resistant to providing help."
The Bank of England also offered $30 billion of one-week funds and $10 billion in overnight loans. The European Central Bank, which said today it will allow more institutions to participate in its unscheduled cash auctions, sold $50 billion of three-day loans. The Bank of Japan pumped in 800 billion yen ($7.6 billion) and the Reserve Bank of Australia added A$1.57 billion ($1.2 billion). "The Bank of Japan will have to continue injecting money into the market," said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets. "There is a limit to what the BOJ can do, as a lot of investors are avoiding foreign banks at the moment."
The U.S. Congress passed a $700 billion financial-market rescue plan today designed to unlock credit markets, reversing a rejection that sent global stock markets plunging and threatened to worsen an economic slowdown. The legislation, a bipartisan effort to restore confidence in the nation's banking system, authorizes the U.S. government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators' power to suspend asset-valuing rules that companies blame for fueling the crisis. Rates on three-month Treasury bills declined for a third day, dropping 11 basis points to 0.49 percent. They touched 0.02 percent on Sept. 17, the lowest since the start of World War II.
The likelihood that the squeeze will push the global economy into a recession has made it more probable central banks will cut interest rates. ECB President Jean-Claude Trichet said yesterday policy makers have already considered reducing borrowing costs. Economists at Citigroup Inc., BNP Paribas SA, JPMorgan Chase & Co. and Royal London Asset Management say the Bank of England will cut its rate 50 basis points next week.
The Libor for overnight dollars fell to 1.996 percent today, below the Federal Reserve's target rate for the first time since Sept. 14 last year. Futures on the Chicago Board of Trade showed a 100 percent chance the Fed will reduce the rate by at least 25 basis points at its Oct. 29 meeting, up from no chance a month ago. Hong Kong's three-month interbank rate rose 2 basis points to 3.81 percent today, and Tokyo's increased 1 basis point to 0.87 percent, both the highest since December. Singapore's rate for U.S. dollar loans climbed 11 basis points to 4.27 percent, the most expensive since Jan. 11.
"The interbank lending market remains clogged up as banks hoard cash," said Joshua Williamson, a senior strategist at TD Securities in Sydney. "Funding pressures look likely to remain high and the longer they stay up there the greater the chance banks will pass on those costs to clients." Libor, set before noon in London every day after a survey conducted by the British Bankers' Association on the cost of dollars, euros and eight other currencies, determines prices for financial contracts valued at $393 trillion as of Dec. 31, influencing consumer interest rates on everything from home loans to credit cards. Euribor, a survey of 37 banks solely on the cost of borrowing euros, is fixed by the European Banking Federation about two hours earlier.
Interbank rates have soared for a third week as governments in Europe and the U.S. rescued at least six financial institutions in the past five days. Writedowns and losses around the world have surpassed $588 billion since the start of last year, according to data compiled by Bloomberg.
The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 386 basis points today. The spread was 113 basis points a month ago.
European bank rescue plan in tatters amid savings stampede
Plans for a pan-European response to the global financial crisis lay in tatters last night as Greece followed Ireland in unilaterally guaranteeing all bank deposits. Amid reports that Greek depositors were rushing to withdraw their savings, Greece's Cabinet agreed to protect all deposits whatever their size. Previously the maximum guaranteed was €20,000 (£15,600).
A proposal by President Sarkozy of France to create a European €300 billion bailout fund also collapsed, leaving attempts on this side of the Atlantic to calm investor panic and lubricate the money markets in chaos. America's rejigged $700billion bank bailout still hangs in the balance, awaiting the approval of Congress today. But after days in which the surprises sprung by European governments had succeeded only in angering each other, the chances of a parallel joint plan from EU nations are, for now, slim to non-existent.
The latest chapter in the story of this piecemeal approach to stabilising the banking system began on Monday evening, when a group of Ireland's most senior bankers trooped into Government Buildings in Dublin. It had been a terrible day in markets worldwide and a catastrophic one locally. One bank, Anglo Irish, had seen its shares plummet by 46 per cent. There were rumours of large depositors demanding their money, including one German customer wanting an immediate €1.5billion. Then came the horrendous news that Congress had rejected the US bailout plan.
The shaken Irish bankers were grave as they poured out their story to the Taoiseach, Brian Cowen, and the Finance Minister, Brian Lenihan. Liquidity was drying up, they said, other banks were refusing to lend to them except for the shortest periods. According to one source: “They basically said, ‘Look, tomorrow two of our banks won't survive'.” Thus began the hatching of the explosive plan for a guarantee of all Irish bank deposits. Irish officials worked through the night to cobble together a credible plan.
There was no time to consult other governments, the European Commission or even the European Central Bank. A guarantee had to be in place before ordinary bank branches opened on Tuesday. At 4.15am the plan was completed. The promise would apply to six home-grown banks, and to no one else. A couple of hours later Alistair Darling rose from his slumbers to be told the bad news. The Chancellor had for once had a full night's sleep, having spent most of the weekend stitching together the Bradford & Bingley deal.
Mr Darling immediately spoke by phone to Mr Lenihan. Why hadn't he been told? Why was there no consultation with other EU states? Mr Lehinan explained that there had been no time. In Paris, President Sarkozy was already awake and grappling with his own crisis. Dexia, the Franco-Belgian bank, was in desperate trouble and short of liquidity after a 28 per cent plunge in its shares on Monday. A limousine whisked him to the Élysée Palace, where François Fillon, the Prime Minister, was on the telephone to Yves Leterme, his Belgian counterpart.
The previous day, Mr Leterme had given his backing to the partial nationalisation of Fortis, the Benelux bank, for €11.2 billion. He had no trouble convincing French leaders that they should now help him to salvage Dexia. Mr Sarkozy and Mr Leterme both agreed to chip in €3 billion, and Jean-Claude Juncker, the Luxembourg Prime Minister, contributed €376 million. The deal was cemented while the croissants were still warm.
The rescue helped to reinforce Mr Sarkozy's belief that Europe-wide action was needed. A banking watchdog, curbs on executives' and traders' pay and a change to accountancy rules for financial institutions were among his ideas. He was warming too to the idea of a European bank rescue fund - an idea first floated by JanPeter Balkenende, the Dutch Prime Minister, who suggested that each EU state should contribute 3 per cent of its national wealth.
Back in London, share markets were stabilising after the horrors of Monday, but not for HBOS and its prospective rescuer Lloyds TSB, whose shares were plunging on growing fears that Lloyds shareholders would not support the deal on its current terms. Any failure to complete it could be disastrous for HBOS, whose shares had collapsed just before the Lloyds rescue on fears that, alone, it would suffer funding problems and a possible run. A run of that magnitude would be unthinkable for Britain and deeply damaging personally for Gordon Brown, who two weeks earlier took the axe to normal anti-monopoly rules to wave through the deal.
Meanwhile Dublin's move was having awkward consequences. Depositors on both sides of the Irish Sea were beginning to vote with their feet. Allied Irish Bank reported a surge in new deposits, as did Bank of Ireland, as anxious savers rushed to pull their money from British-owned banks and put it in the six favoured institutions with a rock-solid guarantee. British bank leaders were furious. Dublin's move might be good for Irish banks but it was bad for British ones, for whom deposits were lifeblood in such difficult conditions. By Tuesday evening, several banking leaders were putting their concerns directly to Mr Brown, Mr Darling and Mervyn King, Governor of the Bank of England, in a conference call.
The freezing of the money markets was still worsening in spite of hopes that a revamped US bailout plan could be passed. They asked for more liquidity. Specifically they wanted the Bank of England to relax the rules of its Special Liquidity Scheme (SLS), a mechanism that is already thought to have injected more than £100 billion into the banking system. Mr Brown refused to follow Dublin's lead in guaranteeing all deposits.
By Wednesday, the fury over Ireland's unilateral guarantee was hardening in the City and across Europe. British banks were incandescent with their Irish counterparts, whom they accused of having deliberately exploited the situation to ring up corporate depositors and urge them to defect to “safer” Irish banks. The case for an ambitious, co-ordinated response across Europe seemed stronger than ever to some on the Continent. That evening one European government source disclosed that France wanted Britain, Germany and Italy to back a €300 billion bank rescue fund at Mr Sarkozy's planned summit this weekend.
Within minutes, however, a German government spokesman bluntly rejected the idea in comments echoed by Angela Merkel. Confusion set in as French officials accused Germany of leaking the scheme to kill it off. By late Wednesday evening French officials were changing tack to describe the €300billion fund as a Dutch idea, which they had always rejected. The Hague said it had no idea what France was talking about The Élysée announced that a meeting between Mr Sarkozy and Mr Balkenende, due that evening, had been postponed for a day because the Dutch Prime Minister “has a problem with his airplane”.
By yesterday lunchtime, Hendrieneke Bolhaar, a Dutch finance ministry spokesman, said that the idea for a bank rescue fund had come from The Hague after all. But farce then took over as Mr Balkenende emerged from his meeting with Mr Sarkozy - held after his aircraft started working again - to slap down the spokesman. There has “never been any question of a European fund”. It is all a “misunderstanding”, he said.
Instead, taking up a concept first mooted by Mr Balkenende, Mr Sarkozy is expected to float the idea that each EU country demonstrate that it has at least 3 per cent of its GDP at its disposal to help out in a financial crisis. One EU diplomat told The Times that early French thinking on co-ordinated national funds had probably been mistakenly conflated into the idea of an EU fund, given that 3 per cent of EU GDP amounts to around €300 billion.
With the fund off the agenda, Mr Sarkozy finally persuaded Mr Brown and Mrs Merkel to meet him, Silvio Berlusconi, Mr Juncker, José Manuel Barroso, the European Commission chairman, and Jean-Louis Trichet, the chairman of the European Central Bank, in Paris on Saturday afternoon.
The official aim is merely to agree on a European plan for tighter investment bank regulation to put to the next G8 summit. Unoffically, Mr Sarkozy would also like a decision on a EU response to the crisis and at the very least an agreement not to follow Ireland's - and now Greece's - go-it-alone example. But there has been little this week by the way of co-ordination to suggest that the plan has a chance.
Prospect Fades for Joint EU Bank Bailout
For a while earlier this week, it looked as though the European Union was preparing to come up with a bloc-wide response to the growing financial crisis. On the eve of a mini-summit in France to discuss a possible strategy, however, a consensus seems to be emerging that the piecemeal approach European countries have been using to confront specific threats may be good enough.
Indeed, with France and Germany both distancing themselves from an apparently Dutch plan to set up a €300 billion ($415 billion) EU rescue fund, it is unclear just what Saturday's meeting—which will see leaders from France, Germany, Italy and Britain meet in Paris along with European Central Bank head Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker—might accomplish.
Plus, according to a Thursday evening report published on the Web site of the Financial Times, EU countries not attending the meeting have said the select group has no authority to take decisions for the entire 27-member bloc. "It is right that individual countries would want to take their own decisions, particularly when national taxpayers' money is potentially at risk," a spokesman for British Prime Minister Gordon Brown said on Thursday.
It now looks as thought the much-touted meeting may devolve into little more than a sharing of ideas and national strategies. According to the Financial Times, one concrete idea left on the table is that of developing common standards on guaranteeing bank deposits. Some were displeased by Ireland's blanket guarantee of all bank deposits this week, a move that was mirrored by a similar political guarantee made by Greece on Thursday. Saying that Greece's banking system is "totally safe and reliable," Finance Minister George Alogoskoufis said, "I must also state that citizens' deposits in all banks that operate in Greece are absolutely guaranteed."
The idea of an EU rescue fund was apparently first proposed by the Netherlands and supported initially by France. Germany, however, quickly voiced its disapproval and on Thursday, French President Nicolas Sarkozy pulled the plug. "I deny the sum and the principle (of the proposed rescue scheme)," he said. Still, Europe continues to struggle as shockwaves from the crisis hit the continent. Late on Thursday night, a number of banking and insurance leaders in Germany agreed on the details of the €35 billion plan to save ailing mortgage bank Hypo Real Estate, first announced last week.
The European Union, which had taken a close look at the bailout, also gave it a green light on Thursday afternoon. In Switzerland, UBS, which has been hit hard by the US crisis due to its overexposure to the American subprime mortgage market, announced it was cutting 2,000 investment banking jobs. The cuts come in addition to the 4,100 other employees the bank has cut in the past year.
The European Central Bank meanwhile left interest rates steady at 4.25 percent on Thursday but opened the door to the possibility that the rate could be cut in November. In announcing the decision to hold steady, ECB head Trichet said bank officials had discussed lowering the rate, a comment which sent the euro plunging to its lowest rate against the dollar in 13 months. The ECB has been accused of ignoring darkening economic clouds in Europe and focusing too much on combating euro-zone inflation, which, at 3.6 percent, remains well above the bank's target of 2 percent.
Those economic fears were exacerbated on Friday with France announcing it expected negative growth in the third and fourth quarters of this year, meeting the commonly agreed definition of recession. A number of economists are predicting that the euro-zone economy will follow suit. The economy contracted in the second quarter and third quarter performance has not yet been announced.
Dutch media split over Fortis nationalization
The government decision to nationalize the Dutch banking and insurance units of Fortis after the financial services group hit an acute cash crunch divided the country's media on Saturday.
In a surprise announcement on Friday, the Dutch government said it would pay 16.8 billion euros ($23.3 billion) for assets including Fortis's interest in ABN AMRO, the Dutch bank it bought in a consortium with Royal Bank of Scotland Plc and Banco Santander SA last year. The second state rescue of the Belgian-Dutch group in less than a week, which replaced last weekend's Benelux rescue package, effectively breaks up the cross-border group along national lines.
Calling it a baffling move, leading financial daily Het Financieele Dagblad wrote: "The banking crisis by itself is not a justification for Friday's intervention." In an editorial, it said: "In one move, ABN AMRO and Fortis have become the most trustworthy banks in the market. This is an unfair competitive advantage during the current credit crisis."
Daily De Volkskrant took a more positive view, saying the Dutch intervention was unavoidable in view of the uncertainties swirling around ABN AMRO and as depositors withdrew their money. "The government has rightly brought an end to this process," it wrote in an editorial. It said the 16.8 billion euro price tag appeared to be sizeable but that it included substantial assets.
Newspaper AD also backed the deal, noting that the government took over the best parts of Fortis. De Telegraaf said the government has a lot of explaining to do in the coming days. "Taxpayers may gain in the future if the state can sell the bank at a profit but Fortis shareholders face uncertainty as to how much their holdings are still worth," it said.
Spain whistles 'no danger' as credit hazards loom
They need to wake up and smell the coffee. Liquidity problems and rising bad debts are set to put a hard squeeze on Spain's banking sector – and economy – over the next few months.
True, Spanish banks are overall stronger than many European or American peers. Spanish banks aren't in any imminent danger of imploding. They have most of their 2008 funding needs covered, according to analysts. More than half of their assets are funded through deposits. The rest is financed through various wholesale instruments, but with a reassuringly long average maturity.
Even so, the Spanish financial system will need to roll over $170bn (£96bn) in wholesale funds over the next two years, according to Credit Suisse. If the markets remain strained, that refunding will be expensive and difficult. True, in theory the banks can sell industrial stakes or other assets to raise cash. But there are few buyers. All this comes on top of the growing bad debts, which are increasing along with the country's unemployed. The Spanish unemployment rate rose from 8.3 pc to 11.3 pc in the last two months.
The thick level of generic provisions that Spanish banks were forced to store in the good times will help, but won't be enough to ward off all problems. If bad debt levels reach the levels seen in the last housing crisis of 1993, Morgan Stanley estimates 2009 earnings would be wiped out for the mid-sized banks.
In that scenario, banks would have to shore up their capital and consolidate to cut costs. None of this signals Armageddon. But the Spanish authorities should be anything but complacent. In the meantime, they should make the labour market more flexible – and start retraining unemployed construction workers.
Libor Mystifies Americans as Mayor Reads 'Doomsday'
Anisha Gupta, returning clothes to a Hugo Boss store on Rodeo Drive in Beverly Hills, shrugged when asked about Libor. She had heard the term. She wasn't sure she could define it. "I thought it was a pill," said Gupta, an unemployed 27- year-old who lives in downtown Los Angeles.
Americans are getting a crash course as a once obscure acronym weighs on the economy. In interviews across the country, oil workers, ministers, bank managers and politicians said they were baffled by the London interbank offered rate or fearful of its surge this week. They agreed Libor was important, even if they couldn't put their finger on why. "Without getting real specific, I think I'm probably not competent to be talking about what is happening overseas," said Senator Jon Kyl, an Arizona Republican who helped shepherd passage of a $700 billion bank bailout as his party's No. 2 official. "It's all happening very rapidly."
Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards.
In the past week, as governments in Europe rescued five banks and the U.S. debated a bailout, the cost of one-month bank loans in euros and overnight dollar loans soared to records. In practice, that means banks are hoarding cash, raising borrowing costs and slowing economies worldwide. Today's three-month Libor for loans in dollars jumped to 4.33 percent. Still, explaining Libor can be a challenge.
"What you have been seeing in the destruction of Libor in the last months, I cannot really point to that point and say this has impact on car sales," said Fritz Henderson, the chief operating officer of General Motors Corp., in a TV interview. "But certainly it is very destructive."
The complexities showed during the bailout debate in Congress.
"Very few Americans have ever heard of something called the Libor," said Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, on Oct. 1. He defined the term, then said, "Libor jumped over 400 percent in just one day." Actually, overnight dollar loans rose 168 percent on Sept. 30, to a record 6.8 percent from 2.6 percent. Dodd was probably referring to the increase in basis points, or hundredths of a percent, which was 431. A spokesman at Dodd's office in Washington who didn't identify himself said when asked about that: "I'm sorry. Libor?"
In New York, parishioners at Christ Church on Park Avenue are on a "fast learning curve" about Libor and the economy, said Stephen Bauman, 56, the senior minister. "I think many people have never questioned certain fundamental aspects of our institutional existence," he said. Hits on the Internet search engine Google show interest is increasing. In 2007, the U.S. wasn't in the top 10 countries where people searched for the term. Over the past 7 days, the U.S. has surged to No. 2, behind the Czech Republic, where Libor is a common first name. Worldwide, the number of hits rose tenfold from Sept. 7 to Sept. 30. Google Inc., based in Mountain View, California, won't disclose the total. White House spokesman Tony Fratto said at a press briefing this week that officials closely watch Libor, then paused. "Raise your hand if you're familiar with the Libor rate," he said to two dozen reporters. Only one did, drawing nervous chuckles.
Asked about Libor in Houston, Mike Heider, a 28-year-old drilling engineer, took a long drag on his cigarette, closed his eyes and after 10 seconds said he wasn't exactly sure. As for Libor's effect on the economy, he said, "Couldn't tell you right now." An assistant bank branch manager in Seattle was equally mystified. "I won't know the answer directly to that," said Clayton Larsen, 30, in a Wells Fargo & Co. branch.
Libor is actually a set of rates, calculated for several currencies on periods ranging from overnight to 12 months. The British Bankers' Association compiles the dollar rate every day from data submitted by 16 banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc. There are also rates for the euro, Japanese yen, British pound, Swiss franc, and Australian and Canadian dollars.
"I confess I've never heard banks charge interest to each other," said James Fouts, the mayor of Warren, Michigan, a Detroit suburb of 130,000 that is home to several General Motors Corp. and Chrysler LLC plants. "I'm frightened by the financial situation. Wall Street is exacerbating and accelerating a doomsday scenario." Corporate bank loans are often linked to three-month Libor rates. Libor also affects interest costs on credit cards, student loans and adjustable-rate mortgages. From 2004 to 2006, more than half of the U.S. subprime mortgages at the root of the financial crisis, or those issued to the least creditworthy borrowers, had adjustable rates linked to Libor, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland.
Americans' lack of financial sophistication is a cause, not just a symptom, of the credit crunch, said James Bowers, managing director of the Center for Economic and Entrepreneurial Literacy, a nonprofit group in Washington. It may be a reason people are willing to take out loans for homes they can't afford or add to credit card debt at adjustable rates. "When we go to a mechanic, we trust them to fix our problems," he said. "But right now, the mechanics on Wall Street can't get their own cars to start."
Fannie Mae forgives loan for 90-year old woman who shot herself
Addie Polk, 90, of Akron, Ohio, became a symbol of the nation's home mortgage crisis when she was hospitalized after shooting herself at least twice in the upper body Wednesday afternoon. On Friday, Fannie Mae spokesman Brian Faith said the mortgage association had decided to halt action against Polk and sign the property "outright" to her. "We're going to forgive whatever outstanding balance she had on the loan and give her the house," Faith said. "Given the circumstances, we think it's appropriate."
Residents of Akron have rallied behind Polk, who is being treated at Akron General Medical Center. She was listed in critical condition Friday afternoon, according to Akron City Council President Marco Sommerville. U.S. Rep. Dennis Kucinich, D-Ohio, mentioned Polk on the House floor Friday during debate over the latest economic rescue proposal.
"This bill does nothing for the Addie Polks of the world," Kucinich said after telling her story. "This bill fails to address the fact that millions of homeowners are facing foreclosure, are facing the loss of their home. This bill will take care of Wall Street, and the market may go up for a few days, but democracy is going downhill."
Neighbor Robert Dillon, 62, used a ladder to enter a second-story bathroom window of Polk's home after he and the deputies heard loud noises inside, Dillon said. "I was calling her name as I went in, and she wasn't responding," he said. He found her lying on a bed, and he could see she was breathing. He also noticed a long-barreled handgun on the bed, but thought she just had it there for protection. He touched her on the shoulder. "Then she kind of moved toward me a little and I saw that blood, and I said, 'Oh, no. Miss Polk musta done shot herself,' " Dillon said.
He hurried downstairs and let the deputies in. He said they told him they found Polk's car keys, pocketbook and life insurance policy laid out neatly where they could be found, suggesting that she intended to kill herself. "There's a lot of people like Miss Polk right now. That's the sad thing about it," said Sommerville, who had met Polk before and rushed to the scene when contacted by police. "They might not be as old as her, some could be as old as her. This is just a major problem."
In 2004, Polk took out a 30-year, 6.375 percent mortgage for $45,620 with a Countrywide Home Loan office in Cuyahoga Falls, Ohio. The same day, she also took out an $11,380 line of credit. Over the next couple of years, Polk missed payments on the 101-year-old home that she and her late husband purchased in 1970. In 2007, Fannie Mae assumed the mortgage and later filed for foreclosure. Deputies had tried to serve Polk's eviction notice more than 30 times before Wednesday's incident, Sommerville said. She never came to the door, but the notes the deputies left would always disappear, so they knew she was inside and ambulatory, he said.
The city is creating programs to help people keep their homes, Sommerville said. "But what do you do when there's just so many people out there and the economy is in the shape that it's in?" Many businesses and individuals have called since Wednesday offering to help Polk, Sommerville said. "We're going to do an evaluation to see what's best for her," he said. "If she's strong enough and can go home, I think we should work with her to where she goes back home. If not, we need to find another place for her to live where she won't have to worry about this ever again."
For his part, Dillon hopes his neighbor of 38 years can return to her home. "She loves that house," he said. "I hope they can get her back in. That would make me feel better because I don't know what they're going to put in there once she leaves." He said the neighborhood is declining because so many people have lost their homes. "There's a lot of vacant houses around here. ... Now I'm going to have a house on my left and a house on my right, vacant," he said. "That don't make me feel good, because we were good neighbors, we trusted each other, and we looked out for each other.
"This neighborhood is shot, to me, from what it used to be," he added. "When I moved here, if it were like it is now, I would have never moved here. But it was a nice neighborhood. ... "I'll just tough it out. I'm too old to start thinking about buying another house." Sommerville said that by the time people call for help with an impending foreclosure, it's usually too late. "I'm glad it's not too late for Miss Polk, because she could have taken her life," Sommerville said. "Miss Polk will probably end up on her feet. But I'm not sure if anybody else will."
Time to bet on an oil crunch
Back in May, when oil was at $129 per barrel and rising, billionaire investor Richard Rainwater did something as prescient as it was shocking: He sold off all the energy stocks he owned. Now he's making another bold move: He's betting on oil again.
A few weeks ago, when the price of oil tested a low near $90 per barrel for the first time in many months, Rainwater decided that he had found the right reentry point. "I reinvested back in the oil business, and it's worked out really well for me," he told me the other day. "I bought Exxon stock under $75. I bought ConocoPhillips under $68. I bought Pioneer Natural Resources under $50. I bought BP. I bought Statoil. I made a big bet on the sector. I bought a lot of stocks back." Considering Rainwater's incredible track record investing in the oil patch, that's big news.
Rainwater first made his reputation by greatly multiplying the Texas oil fortune of the Bass brothers of Fort Worth, with big bets on everything from the resurrection of Disney to the boom in cell phones. After going out on his own in 1986, he made bundles for himself in hospitals (by putting together HCA) and real estate (by forming Crescent Real Estate Equities). Then, in 1997, when crude was priced below $20 per barrel, he decided to make a huge bet on oil. He put $100 million into stocks and $200 million into oil futures. The wager netted him billions in profits.
As Time's Justin Fox reported in early June, Rainwater made the decision to close out his oil bet when the average price of gasoline passed $4 a gallon in the U.S. (and after he saw a reader poll on the Motley Fool Web site in which 77% of respondents said they were cutting down on gasoline consumption).
"I missed the very top by a lot," Rainwater told me. "That's okay. I'm always early. I sold after I got my first inclination that we had a problem with the demand side in America. I saw that we had a problem with the demand side and I sold out. But the stocks kept going up. And the price of oil kept going up. It went from $129 to $147 [on July 11]. But then it went from $147 back down to under $100, and that's when I bought back in."
Indeed, Rainwater is just as convinced as ever that oil prices are going higher in the long term. As he made clear in a Fortune story three years ago ("The Rainwater Prophecy") he believes that the world is facing a future shaped by scarce natural resources. His decision to sell out in May was based on a belief that oil prices had gone too far too fast, not that the bull market for oil - or for that matter, commodities of all kinds - has ended.
"I think we'll have a run on raw materials of all kinds because we've taught people all around the world how to play capitalism," he says, "and all those people want to live like Americans. But when you look at us being [4.5%] of the population and using 25% of the resource base, that can't go on. You can't extrapolate that out around the globe without there being price pressures on the upside. So there are price pressures in food. There are price pressures on raw materials of all kinds, including oil."
So with crude at around $100 and most of the stock market in chaos, he says oil companies look like a pretty good place for your money: "It's much more positive than the rest of the environment." Given the volatility of the market right now, though, Rainwater is monitoring his new stock holdings closely. "I've already sold some of them," he told me.
"Not all of them, but I sold some because they went way back up. I'm just playing cycles here, and the cycles are really powerful and fast moving. I bought ConocoPhillips for $68 and sold it two days later for $78. I don't think you can make that money in that short of a time unless you get lucky. And if I make that much money because I'm lucky, then I want out." Rainwater may be lucky. But when it comes to oil, his instincts are more than good.