Here is a screen grab that I got during my late lunch Pacific Time:
Now here are links and items from three articles which were not picked as the top news item of the moment during Day 15 following the Fannie and Freddie bailout:
Here is the second article to get snubbed for headline status:
Starting a New Era at Goldman and Morgan
The transformation of Wall Street picked up pace on Monday as Goldman Sachs and Morgan Stanley, the last big independent investment banks, moved to restructure into larger, less risk-taking organizations that will be subject to far greater regulation by the Federal Reserve.
Investment banking dies on Wall Street! How quickly it gets brushed aside by more important matters–like bailing out capitalism.
Now here is the third:
Crude Oil Prices Up More Than $16
By 11:00pm Pacific time the headline changed to this:
Oil price jumps $25 in a day
Crude oil prices jumped $25 a barrel on Monday – the largest one-day rise – as financial investors betting on falling oil prices were forced to cover their positions ahead of the expiry of the current benchmark futures contract.
The jump to an intraday high of $130 a barrel – a rise of about $40 a barrel from last week’s low – was exacerbated by a weakening US dollar and data showing weaker supplies from Mexico, Nigeria and Saudi Arabia in recent weeks and surging imports by China.
Here is fourth article that the New York Times was not covering at the time because there was a big fire in DC to put out and details of other business had been obscured:
Freddie and Fannie bank losses grow
US regulators have underestimated potential bank losses on preferred stock issued by Fannie Mae and Freddie Mac, the American Bankers Association said on Monday.
Nearly a third of US banks hold preferred stock issued by the two mortgage financiers that were taken into conservatorship this month, according to an industry survey conducted by the ABA. The average bank exposure to such securities relative to core equity capital was 11 per cent.
“The negative impact on banks – particularly Main Street community banks – is far greater than regulators first thought,” wrote Edward Yingling, chief executive of the ABA in a letter to the Treasury, the Federal Reserve and other banking regulators.
The government takeover of Fannie and Freddie all but wiped out the value of $36bn of their preferred shares. This would force exposed banks to take writedowns at the end of the third quarter that could impede future lending, the ABA warned.
“When the actions were contemplated to reduce dividends on Fannie Mae and Freddie Mac preferred stock, the bank regulators estimated that only a dozen banks would be affected by it,” Mr Yingling said.
Regulators said this month only a small handful of banks had “significant” holdings in Fannie Mae and Freddie Mac relative to their capital bases and that they would help develop plans to restore capital at these banks.
However, the ABA survey suggests the impact of writedowns could be more widespread and more severe than regulators initially indicated, particularly among small community banks that engage in lending for small and medium-sized local businesses.
The ABA’s letter called for regulators to reconsider the suspension of dividend payments on Fannie and Freddie preferred stock to alleviate the capital impact on banks and avoid a multi-billion dollar decline in lending.
The fact that none of these got top billing emphasizes the importance of the rest of this post. This previous article should be read by George W. Bush himself so that he cools his heels on pushing haste on the process of Congress to approve his legislation proposal-which he asked zero questions about when he approved the action on Thursday. Here is a graphic that appeared with the headline lunch time article as Congress negotiated amendments to the Executive branches 3 page bailout proposal:
Highlights from that afternoon article:
Stocks Fall as Rescue Plan Is Negotiated
New York Times
By DAVID M. HERSZENHORNThis article was reported by David M. Herszenhorn, Stephen Labaton and Mark Landler, and written by Mr. Herszenhorn.
…Democrats are bracing for a battle over efforts to limit the pay of executives whose firms seek help and over whether to grant bankruptcy judges authority to modify the mortgages of borrowers in danger of foreclosure…
…epresentative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said he had reached a general agreement with the Treasury Department over mortgage aid and Congressional oversight.
But Mr. Bush may find that members of his own party are among the holdouts…
…The Senate Democrats’ proposals includes two bold provisions. One would grant the Treasury “contingent shares” of stock in any financial institution that wants to sell bad debt to the government; the other would grant bankruptcy judges the authority to modify the terms of primary mortgages, a step aimed at helping homeowners at risk of foreclosure.
The bankruptcy provision is staunchly opposed by the banking, lending and securities industries and by many Republicans in Congress, but Democrats insist that it is one of the few mechanisms to provide direct assistance to homeowners caught in the foreclosure crisis.
The contingent shares would give taxpayers an equity stake in companies seeking help through the rescue program, potentially allowing the government not only to recoup however much of the $700 billion it spends on bad debt, but also to profit should the financial firms prosper in years ahead. The legislation would require the value of the contingent shares to equal the value of the assets purchased by the government.
The 44-page Senate proposal, pulled together by Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, would require the Treasury to run the rescue plan through a new “Office of Financial Stability” to be headed by an assistant treasury secretary. It would also establish an “Emergency Oversight Board” to monitor the bailout effort, made up of the Fed Chairman; the chairman of the Federal Deposit Insurance Corporation; the chairman of the Securities and Exchange Commission; and two non-government employees with “financial expertise” in the public and private sectors, one each appointed by the majority and minority leadership in Congress…
…In addition, the Senate proposal would require monthly reports to Congress, rather than the biannual reports that would be required under the Bush administration’s proposal…
The Bush administration’s proposal could prove to be the largest government bailout of private industry in the nation’s history. It calls for nearly unfettered powers for the Treasury secretary in managing the bailout.
Though the jittery state of the financial markets put pressure on officials and legislators to move quickly, some lawmakers said they did not want to be rushed into approving extraordinary new powers for the Treasury secretary and the government without full consideration of the consequences…
Financial companies were already lobbying to broaden the plan. And the Bush administration did indeed widen the scope by allowing the government to buy out assets other than mortgage-related securities as well as making foreign companies eligible for government assistance.
“We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome,” House Speaker Nancy Pelosi said.
Top administration officials and senior lawmakers said that the markets could be devastated if Congress and the administration failed to reach agreement on the plan.
Mr. Paulson said he hoped that the government would recoup much of the cost of buying distressed mortgage-related assets. But he did not rule out that the initial cost of the bailout could rise beyond $700 billion, the limit set in the terse proposal sent by the Treasury to Congress on Saturday.
“That doesn’t mean we’ll go all the way there, or it doesn’t mean it will stop there and we won’t ask for more,” Mr. Paulson said Sunday on the CBS program, “Face the Nation.” “What we need is something that is big enough to get the job done. We’ll ask for what we think is a right amount to give us plenty of flexibility.”
Now here are the highlights from the evening article which was written by the same author as the first article (good days work sir!):
Stocks Fall as Rescue Plan Is Negotiated
By DAVID M. HERSZENHORN
…lawmakers in both parties voiced anger over the steep cost and even skepticism about the plan’s chances of success…
Congressional leaders and Treasury officials also said they were close to an agreement over a proposal by some Democrats in which taxpayers could receive an ownership stake, in the form of warrants to buy stock, from firms seeking to sell distressed debt.
Lawmakers want to require an equity stake, while the administration wants flexibility on that matter, a Treasury official said…
“I am concerned that Treasury’s proposal is neither workable nor comprehensive despite its enormous price tag,” Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, said in a statement. “It would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted.”
While Congressional leaders in both chambers said they were confident that they could reach a quick deal, it was also clear that Mr. Paulson and Mr. Bernanke would face rough questioning and that initial support for the bailout had begun to fray. Some Democrats said they simply did not trust the president, and drew a parallel to Mr. Bush’s request for authority to wage war in Iraq.
President Bush urged Congress on Monday to act fast. “Americans are watching to see if Democrats and Republicans, the Congress and the White House, can come together to solve this problem with the urgency it warrants,” he said in a statement. “The whole world is watching to see if we can act quickly to shore up our markets.”
The majority leader, Senator Harry Reid of Nevada, said Democrats were prepared to do so. “Democrats in the Senate aren’t going to drag our feet,” he said in a speech on the Senate floor. “We’ll respond with the urgency of action that this situation demands, but after eight years of fiscal dereliction of duty, it’s time for accountability.”
“Should we resolve the issue in one day?” he asked. “I think not.”
Republican leaders who support the administration’s plan warned the Democrats on Monday to exercise restraint and not slow the bailout package, even as they prepared for an aggressive internal campaign to rally Republican support.
“When there’s a fire in your kitchen threatening to burn down your home, you don’t want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement,” Senator Mitch McConnell of Kentucky, the Republican leader, said in a speech on the Senate floor. “You want them to put out the fire before it burns down your home and everything you’ve saved for your whole life.”
Mr. McConnell added: “The same is true of our current economic situation. We know that there is a serious threat to our economy, and we know that we must take action to try and head off a serious blow to Main Street.”
“I walked down LaSalle Street on Friday, a great street in Chicago lined with banks and big office buildings,” said Senator Richard J. Durbin of Illinois, the No. 2 Democrat. “A lot of people came up and said ‘hi.’ But a lot of them came up and said: ‘Are you really going to do this? $700 billion bailing out the banks? And I said: ‘I don’t know. At the end of the day, I just don’t know.’ ”
Mr. Durbin, in a speech on the Senate floor, angrily recalled that the administration had similarly requested swift approval of its plan to attack Iraq. “Just as we should have asked more questions about weapons of mass destruction six years ago before we found ourselves in this war,” Mr. Durbin said, “we need to ask questions today about where this is leading.”
Representative Henry A. Waxman, Democrat of California who leads the Oversight and Government Reform Committee, said: “The taxpayer is being asked to risk billions to protect the bonuses of investment bankers.”
The skepticism was equally palpable at the other end of the ideological spectrum.
“This is going way too fast,” said Representative Mike Pence, Republican of Indiana and a conservative leader who said constituents he met this weekend were flabbergasted at the plan. “The American people don’t want Congress to make haste with the financial recovery legislation; they want us to make sense.”
And Mr. Shelby, of the banking committee, said: “Congress must immediately undertake a comprehensive, public examination of the problem and alternative solutions rather than swiftly pass the current plan with minimal changes or discussion. We owe the American taxpayer no less.”…
…In a sign of how complicated the negotiations over specific provisions of the bailout could become, Senator Mel Martinez, Republican of Florida, and a member of the banking committee, said that he would strongly support limiting the pay of executives whose firms seek government aid. But Mr. Martinez said he would oppose any effort to change the bankruptcy laws.
In his prepared testimony, Mr. Paulson sought to underscore the huge risks to everyday Americans. “The market turmoil we are experiencing today poses great risk to U.S. taxpayers,” Mr. Paulson plans to testify. “When the financial system doesn’t work as it should, Americans’ personal savings, and the ability of consumers and business to finance spending, investment and job creation are threatened.”
Mr. Bernanke, in his remarks, will implore the Congress to act. “Despite the efforts of the Federal Reserve, the Treasury and other agencies, global financial markets remain under extraordinary stress,” he says in his remarks. “Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”…
Officials said there was also a deal to mandate that the government develop a plan to prevent foreclosures by renegotiating any mortgages that it purchases.
Because the markets are eager for a final deal and because Congress is trying to adjourn for the fall elections, lawmakers are bypassing the normal committee process and working toward an agreement in hopes of votes in both chambers within days.
And some lawmakers said it could be done. “We are convinced that inaction could be a disaster,” said Senator Robert Bennett, Republican of Utah. “We don’t believe that inaction is an option, so therefore we are going to do whatever we can to make sure that the action that is taken is as responsible and well thought-out as possible.”
When I read, and especially when I hear Thomas L. Friedman, I associate him as either a Salesman or a Cheerleader of globalization thoughts. I quoted large swatches from his book “The Lexus and the Olive Tree” and “The World is Flat” when I began this blog over two years ago. Now he has a new book and I would like to direct you to this video from Charlie Rose where Thomas is absolutely trying to sell you on his ideas. In the end he has sold me to buy his new book “Hot, Flat, and Crowded: Why We Need a Green Revolution–and How It Can Renew America”. As for further content for this post lets take a look at his most recent op ed on the New York Times:
No Laughing Matter
September 21, 2008
OP-ED COLUMNIST
By THOMAS L. FRIEDMANOf all the points raised by different analysts about the economy last week, surely the best was Representative Barney Frank’s reminder on “Charlie Rose” that Ronald Reagan’s favorite laugh line was telling audiences that: “The nine most terrifying words in the English language are: ‘I’m from the government, and I’m here to help.’ ”
Hah, hah, hah.
Are you still laughing? If it weren’t for the government bailing out Fannie Mae, Freddie Mac and A.I.G., and rescuing people from Hurricane Ike and pumping tons of liquidity into the banking system, our economy would be a shambles. How would you like to hear the line today: “I’m from the government, and I can’t do a darn thing for you.”
In this age of globalization, government matters more than ever. Smart, fiscally strong governments are the ones best able to empower their people to compete and win. I was just in Michigan to give a talk on energy. I can’t tell you how many business cards I collected from innovators who had either started renewable-energy companies or were working for big firms, like the Dow Chemical Company, on clean energy solutions.
It just reminded me how much innovative prowess and entrepreneurial energy is exploding from below in this country. If it were channeled and enhanced by better leadership in Washington, no one could touch us.
If I were to draw a picture of America today, it would be of the space shuttle taking off. There is all this thrust coming from below. But the booster rocket — Washington — is cracked and leaking energy, and the pilots in the cockpit are fighting over the flight plan. So we can’t achieve escape velocity to enter the next orbit — the next great industrial revolution, which is going to be E.T., energy technology.
Read the rest of this entry » »
I do love my fill of this weekly conversation on the NewsHour. Video link:
Wall Street’s woes put the economy at the top of the campaign agendas of John McCain and Barack Obama this week as the two sought to shape their views on government regulation and other issues. Analysts Mark Shields and David Brooks examine reactions to the crisis.
JIM LEHRER: And that brings us to the analysis of Shields and Brooks, syndicated columnist Mark Shields, New York Times columnist David Brooks.
David, you wrote in your column today (full article below the break in this post) that the candidates’ reaction to the financial crisis has been, quote, “moronic,” end quote. Would you flesh that out a little bit?
DAVID BROOKS, Columnist, New York Times: Yes, I guess I’d amend it to say “nauseatingly stupid,” at least for the first four days. I think today was an improvement.
Listen, you’ve got this incredibly complicated situation. You have subprime mortgages. You’ve got these foreign investment flows. You’ve got accounting these mark-to-market standards. You’ve got a whole range of highly sophisticated derivatives that have all fed into this crisis, an incredibly complicated crisis.
So for the first four days, the two candidates essentially treat us as kindergarteners. Barack Obama doesn’t seem to know what’s causing the crisis, but he knows George Bush must be to blame.
John McCain gives no evidence of appreciating the complexity of the crisis, but he knows there are some really bad people on Wall Street who are selfish, and who must be punished, and, by the way, there’s this guy, Chris Cox, he’s bad, too.
So the descriptions of the crises were insultingly stupid and insultingly partisan. When you’ve got a situation like this, a week like this, when the whole world is tremendously nervous about where the whole economy is going, it seems to me it’s time to elevate the tone and get a little grown-up. And for the first four days, there was none of that.
Now, today, I think they did do that.
JIM LEHRER: Both of them?
Assessing the candidates’ reaction
DAVID BROOKS: I think both of them — Obama got there with Bob Rubin, and Laura Tyson, and Larry Summers, and Gene Sperling, serious people, and issued a statement which wasn’t daring by any means. [inaudible...] but it was sober and responsible. It was fine.
McCain gave the speech in South Bend, a pretty substantive speech about what he would do in the foreign — in the — to direct the crisis, not directly on this, but generally.
And so today they stepped it up a notch. And I think they achieved mediocrity for the whole week. But in the beginning, the partisan tone, the standard, you know, “lipstick on a pig” tone prevailed, and it was insane.
JIM LEHRER: Insane, moronic?
MARK SHIELDS, Syndicated Columnist: No, I don’t think so. I think David’s level of expectation, his own standards are quite high.
This was an unprecedented crisis. I think they were too partisan. I don’t think they were — I think it was revealing. A crisis reveals where people come from and how they think.
And in that sense, I think that we have no reason to expect that a policy answer of this complexity, of this cosmic reach is going to be developed by a campaign. Campaigns don’t do that.
JIM LEHRER: Why not?
MARK SHIELDS: Because it isn’t what campaigns do. Look what it took. It took the entire Treasury Department, the Federal Reserve Board, all of their experts, the Congress, the administration, and they had four bites at it and came up with this today.
So, I mean, the idea that on the run a political campaign that is out trying to win votes is going to compete with that in terms of depth and dimension, but, that aside, I think the important question really about this week is the reaction.
And, you know, Jeffrey Frankel of Harvard put it, I thought, perfectly well. He said, “Just as there are no foxholes — there are no atheists in a foxhole, there are no libertarians in a financial crisis.”
I mean, all of the good folks who’ve told us “hands off, laissez-faire, no government,” I don’t know where they are. They’ve suddenly become Marcel Marceau . They’ve gone mute on us. You know, everybody wants Sam in there, and you can feel the irresistible wave for regulation.
Read the rest of this entry » »
• “…(Congress) seemed alternately grateful and resentful of the new power couple in Washington. Some referred to “President Paulson” and others groused about an unelected central bank chairman doling out hundreds of billions of dollars…
In the end, what left so many lawmakers and economists frustrated was the sense that no one had a better idea. So they waited for Mr. Paulson and Mr. Bernanke to give them more details about what they wanted to do.” – from A Professor and a Banker Bury Old Dogma on Markets
• “(T)he prospect that the government is preparing to wade in deep — perhaps sparing families from foreclosure and banks from insolvency — has muted talk of the most dire possibilities: a severe shortage of credit that would crimp the availability of finance for many years, effectively halting economic growth.
“The risk of ending up like Japan, with 10 years of stagnation, is now much lessened,” said Nouriel Roubini, an economist at the Stern School of Business at New York University. “The recession train has left the station, but it’s going to be 18 months instead of five years.”
If the plan works, it will attack the central cause of American economic distress — the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.”…
…(Financial) institutions are deeply intertwined with the American economy. When the financial system is in danger, it stops investing and lending, depriving ordinary people of financing for homes, cars and education. Businesses cannot borrow to start up and expand…
…The economy has shed roughly 600,000 jobs since the beginning of the year. If healthy companies cannot get their hands on financing, they will not be able to expand and hire.
“What we’re looking at now is simply an amplified version of what we’ve been in since last August,” Mr. Bernstein added. “You’re witnessing a sudden death instead of a slow bleed.”
The impact of the pullback among banks was evident in the interest rates banks pay other banks to borrow money short-term. Traditionally, banks charge one another a little more than 0.2 percentage point over the rate on the safest investment, United States Treasury bills. But on Friday that spread was more than two percentage points, meaning a bank must pay an enormous premium to persuade another to part with its money.
And still no one knows the extent of the carnage. The financial system has acknowledged roughly $400 billion in losses so far, Mr. Roubini estimates, yet as much as another $1.1 trillion may be lying in wait.
As the government steps in to take over bad debts, it is aiming to clear away the detritus and lift the uncertainty, emboldening banks to lend anew.
Whether it will work in the long term is a question that awaits reaction from investors. But even the most skeptical economists say this is the path the government must take for confidence to crystallize that a genuine fix is under way…” – from But Will It Work?
$700 Billion Is Sought for Wall Street in Massive Bailout
New York Times
September 21, 2008 (found on the NYT.com web site one day before publishing)
By DAVID M. HERSZENHORNWASHINGTON — The Bush administration on Saturday formally proposed to Congress what could become the largest financial bailout in United States history, requesting unfettered authority for the Treasury Department to buy up to $700 billion in mortgage-related assets.
The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.
Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill, where negotiations were likely to be complicated but quick. Democratic Congressional leaders have pledged to approve legislation by the end of this week.
Read the rest of this entry » »
If laws are not strict enough, the credit bubble makes clear that markets cannot be trusted to regulate themselves.
Markets are a useful tool for society. But they are a function of the legal environment created for them, and they can act in ways that are detrimental to the public good…
…you do not need to be Descartes to doubt the planned US bail-out will be a success. Its total cost will be massive. It must be agreed by rival politicians who are not expert in finance, and who face re-election in weeks. And it must rescue fiendishly complicated instruments invented during a historically irresponsible lending binge. Its success is far from a certainty.
Three articles on the present, recent past, and future of Anglo/American Capitalism. These are still the same lessons we were learning this Spring after the Bear Stearns bailout, yet this past week drives the point home that markets must be regulated by the societies they function inside of. At the top, here is the Financial Times call on the plan being brought forward by the Bush Administration:
Proposed Wall St bailout to cost $700bn
Last updated: September 20 2008 17:49
The Bush administration sought congressional support Saturday for a $700bn bailout for US financial institutions to quell the turmoil in financial markets.
The plan would allow the government to buy the bad debt of any US institution for the next two years, raising the legal ceiling on the national debt from $10.6 trillion to $11.3 trillion.
President George W. Bush said: “We’re going to work with Congress to get a bill done quickly.” Treasury officials and members of Congress were meeting throughout the weekend to secure broad agreement on the package by the time world markets reopen on Monday. Legislation could pass early next week.
Saying the administration was faced with preventing the collapse of a financial “house of cards”, Mr Bush said: “People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system.” he said.
He said the risk of doing nothing far outweighed the risk of the package.
He assured taxpayers that over time they would get a lot of their money back…attention on the crisis has focused on demands that the rescue package should help not only Wall Street but also “Main Street” where ordinary Americans are already faced by foreclosures, job losses, and high food and energy prices.
Presidential candidates Barack Obama and John McCain are vying with each other to convince voters that their plans for the economy have the best chance of succeeding while protecting taxpayers. However, Nancy Pelosi, Democratic speaker of the House has assured the administration Mr Obama’s party is committed to “quick, bipartisan action”.
Charles Schumer, New York Democratic senator, said on Saturday: “This is a good foundation of a plan that can stabilise markets quickly. But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas.”
The plan is aimed at restoring confidence in the financial system by allowing US institutions to transfer their bad debt to the government.
The draft legislation would authorize the Treasury to: “purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.”
Henry Paulson, treasury secretary, who would be charged with executing the bailout plan, said: ”We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system’s stresses. The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy.”
The action came after stock markets around the world roared their approval on Friday to news of plans for significant government action.
Shanghai surged 9.5 per cent, in the biggest daily gain for seven years, to 2,075.091. Hong Kong ’s Hang Seng gained 9.6 per cent to 19,327.73, breaking a seven-day losing streak. In London the FTSE 100 had its biggest daily gain in its 24-year history, jumping 8.8 per cent, while in New York the S&P 500 closed up 4.0 per cent, having risen 4.3 per cent on Thursday. The rallies in London and the US were partially fuelled by bans on short-selling in financial stocks announced on Thursday night.
The political negotiations on the rescue plan, which followed a week of unprecedented stress in global financial markets, envisage the most extensive peacetime expansion of the role of government in the financial system since the Great Depression and appeared to many to mark the end of an era of Reaganite deregulation.
Hank Paulson, the US Treasury secretary, said the programme would initially cost “hundreds of billions of dollars.” But he added it was far cheaper than the alternative – “a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion”.
In addition, the Bush administration also announced a blanket guarantee on all money market mutual funds, in an effort to curtail a brewing crisis in the $3,500bn (€2,422bn) sector. The Federal Reserve announced new plans to support liquidity in the mutual fund sector.
Here is an excellent review covering what has transpired so rapidly over these historic days:
Capitalism in convulsion: Toxic assets head towards the public balance sheet
By John Plender
Published: September 19 2008 19:25 | Last updated: September 19 2008 19:25In the space of just two momentous weeks, the landscape of global finance has been dramatically transformed. President George W. Bush’s administration has mounted a multi-billion-dollar rescue of the financial system at the cost of inflicting severe damage on the US model of free-market capitalism.
Heavy costs will be inflicted on the American taxpayer, who is now subsidising Wall Street – and indeed financial institutions around the world – in a bail-out of unprecedented size.
The sequence of events that led to this extraordinary socialisation of finance began with the de facto nationalisation of Fannie Mae and Freddie Mac, the bankrupt government-sponsored mortgage lenders at the heart of the US housing finance system. There followed a rise in the cost of insuring against default in the world’s most powerful economy. On some independent estimates, the overall response to crisis could take the outstanding US public sector debt from readily manageable status to a level comparable with such fiscally stretched countries as Italy and Japan.
Concern about the creditworthiness of the US is nonsensical, according to Charles Goodhart of the London School of Economics. It has nonetheless surfaced, along with worried punditry about the dollar’s role as a reserve currency.
Then came the absorption of Merrill Lynch by Bank of America and a bold decision by Hank Paulson, US Treasury secretary, to allow Lehman Brothers, the fourth largest US investment bank, to go to the wall. This constrasted with the government orchestrated rescue of the smaller Bear Stearns by JPMorgan Chase earlier this year.
The disappearance of these two Wall Street securities giants raised questions about the durability of the independent model of investment banking. Shares in the two independent survivors, Morgan Stanley and Goldman Sachs, were quickly savaged by short-sellers. In the UK, such short-selling is alleged to have been what pushed HBOS, the country’s biggest mortgage lender, into its shotgun marriage with Lloyds TSB.
Still more startling was news that the Federal Reserve was advancing $85bn (€59bn, £47bn) of taxpayers’ money to AIG, the world’s biggest private insurer. Thanks to its role in the global market for credit insurance, AIG was so interconnected with other financial institutions that its bankruptcy would have been catastrophic for the whole system.
Yet despite the rescue, the festering lack of trust that has dogged the banking system since August last year worsened after this move. On Wednesday, the interest rate on one-month US Treasury bills turned negative, bearing the astonishing message that investors would rather lose money on government paper where repayment was certain than invest in money market funds. The climactic point had been reached where nobody trusted any credit other than the government’s.
In such circumstances, experience teaches that central banks have to lend freely. In the event, the Federal Reserve injected $180bn into the markets, while other leading central banks said they were taking co-ordinated measures to help short-term dollar markets.
To round off the week, Mr Paulson announced discussions with political leaders to create a government-sponsored vehicle to take on toxic assets created during the bubble, prompting a manic stock market bounce.
The paradox in this remarkable tale is that extreme illiquidity exists in a world awash with the excess savings of Asia and the petro-economies. Russia illustrates the point. Thanks to the oil windfall, it sports high economic growth, the third largest foreign exchange reserves in the world and low public sector debt. Yet Moscow stocks are collapsing and trust in the financial system has eroded to the point where overstretched Russian investment banks are starved of funds and threatened with bankruptcy.
This is what happens when an overleveraged global financial system unwinds. Borrowing is being forcibly reduced across the world after the greatest credit bubble in history. It amounts, says David Roche of Independent Strategy, a research boutique, to a “tectonic shift from leverage to thrift as the means of financing growth and the concomitant dramatic reduction in global imbalances such as the US current account deficit”.
The reality is that the financial system has been operating as if it were an off-balance-sheet vehicle of the government. Private-sector companies and individual bankers have been making huge profits in the bubble. Their risk appetite has been enhanced by previous bail-outs and, in the case of Fannie and Freddie, by the government’s implicit guarantee. Yet their market pricing does not reflect the potential cost to the system of their own collapse.
This inability to handle externalities has again been apparent in the markets over the past two weeks as speculators have engaged in short-selling strategies against AIG and the investment banks in the US and HBOS in the UK. This threatens the financial system because the rating agencies respond to the consequent falls in share prices by cutting credit ratings, so jeopardising the victims’ ability to fund the business.
Once again, property has been at the heart of a financial debacle, in spite of the assurances of central bankers that a nationwide fall in US house prices was an impossibility. Yet the peculiarity this time lies in property being wrapped in complex financial products that few could understand.
When investors go outside their areas of competence, trouble follows. Walter Bagehot, the 19th-century economist who defined the rules for central bank management of financial crises in his book Lombard Street, said: “Common sense teaches that booksellers should not speculate in hops, or bankers in turpentine; that railways should not be promoted by maiden ladies, or canals by beneficed clergymen … in the name of common sense, let there be common sense.”
The twist in the current decade is that even bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.
In this off-balance sheet Alice in Wonderland world, the most absurd feature has been a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products and does not permit much of the money to be clawed back now that the going is bad. Almost as absurd has been the degree of leverage racked up by investment banks.
As Michael Lewitt, the Florida-based money manager, puts it: “Allowing investment banks to be leveraged to the tune of 30 to 1 is the equivalent of playing Russian roulette with five of the six chambers of the gun loaded. If one adds the off-balance-sheet liabilities to this leverage, you might as well fill the sixth chamber with a bullet and pull the trigger.”
So what stage in the the crisis have we reached? Bagehot quoted the banker Lord Overstone’s description of the progress of an unstable cycle thus: “quiescence, improvement, confidence, prosperity, excitement, overtrading, CONVULSION [Bagehot’s capitals], pressure, stagnation, ending again in quiescence”.
Over the past two weeks we have experienced convulsion. Yet it ought to be possible to avoid stagnation, because the authorities are following the prescriptions of Hyman Minsky, the economist whose work Stabilizing An Unstable Economy best explains the dynamics of this crisis.
Minsky saw fiscal activism by big government, alongside last-resort lending by central banks, as the modern way of coping with financial distress. That is now taking place. In effect, the US government is replicating what happened in the private banking system earlier in the crisis, when institutions were obliged to take entities they had created, such as structured investment vehicles and conduits, back on to their balance sheets as funding dried up.
Having implicitly guaranteed Fannie and Freddie and underpinned the operations of irresponsible bankers at AIG and elsewhere, the US government is putting bankrupt institutions back on to the public sector balance sheet via nationalisation. Now, Mr Paulson’s proposal for the system’s toxic assets has the makings of a turning point.
What will the banking landscape look like after this saga? Much depends on the regulatory response. At the very least, tougher capital requirements will be imposed, which could mean the banking system reverts to a lower-risk, utility-like function. Yet one of the most important questions concerns the independence of central banks.
If central banks have to be recapitalised, as seems likely, politicians may want to extract a price that diminishes their operational independence. That could have damaging consequences. For a central point of Minsky’s thesis is that fiscal activism and last-resort lending set the stage for serious inflation.
That, together with an increased burden on future generations of taxpayers, could be the cost of the last two weeks’ frantic efforts to stave off deflation and keep some semblance of the Anglo-American model of capitalism afloat.
The writer is an FT columnist and chairman of Quintain
Now for a look into the crystal ball to see what the future might hold or, more appropriately, how these events will put limits on how future financial systems will be allowed to behave by the societies that they function inside of:
Long View: Increased regulation of financial markets
By John Authers, Investment Editor
Published: September 19 2008 21:41 | Last updated: September 19 2008 21:41“I think therefore I am.” That was the one certainty the philosopher Descartes could find after he set himself a discipline of radical doubt – trying to doubt everything, so that he would be left only with what was certain, starting with his own existence.
This exercise is useful after a week that changed the parameters of global capital markets, probably for generations. More news of huge import will come this weekend, as politicians in the US try to hammer out a rescue vehicle for the US mortgage market.
After this week, is there anything we cannot doubt?
First, the independent investment bank, as a business model, is over. Much more capital, of the kind boasted by big universal banks, is needed if you want to take the kind of risks the investment banks have been taking.
Second, the model that will emerge triumphant will look a lot like a traditional commercial bank, built around deposit-taking and strong balance sheets, with lending decisions taken by humans, not markets. Among the few winners from this crisis are Bank of America (which won Merrill Lynch), and Lloyds TSB, which gets HBOS for a knockdown price.
Third, the market for credit derivatives – swaps of debts between banks that created a myriad of financial relationships – is also dead in its current form. Any doubt about this was extinguished when the US swallowed hard and spent $85bn of US taxpayers’ money to rescue American International Group only two days after it had tried to draw a line in the sand by refusing to bail out Lehman.
Why? AIG was more central to the credit derivatives market. This proves beyond doubt that credit derivatives were too important to be left unregulated: if this market is to be reinvented, it will be based on some kind of exchange.
Fourth, the fate of New York as the unquestioned capital of global finance is sealed. And London’s pretensions to take over are dead. Not even two years ago, London was trumpeting the success of its “light-touch” financial regulation, and Wall Streeters complained of over-regulation. Such claims now seem both distasteful and foolish.
Finally, the regulation system that has overseen the globalisation of finance for the past decade has, beyond doubt, failed. It must be replaced, with something more intrusive. That means the profitability of the financial services industry, even if the US can bail out its worst excesses, will stay below the levels that it had been enjoying, probably for a generation. We now see, beyond doubt, that banks are a public utility and must be treated as such.
What can we doubt? We can doubt market timers, who say the bear market has hit bottom. They have points on their side. The panic in midweek was of historic proportions. The yield on three-month Treasury bills, the world’s safest investments, dropped to 0.02 per cent, its lowest since 1941, when the world was at war. That was plainly senseless. Extreme panics generally come before rallies, so a “bear market rally”, like others in the past two years, is likely.
But the extent of the problems for US banks, and the drag they could place on the economy, suggest that stocks could still go much lower than their low of this week in the long run. At its worst, the S&P was down only 26 per cent. If the market can really limit the damage to that, it will have escaped very lightly. A rally followed by new lows seems likely.
But it is possible to doubt these things. A balanced portfolio remains as advisable as ever.
More radically, we can doubt capitalism. The US government evidently does. Most of the time, markets are efficient instruments for raising and allocating capital. Hence democratic governments have an interest in letting them get on with the job.
But the past week rams home that market outcomes should not be endowed with any moral glow. Market participants are motivated by fear and greed. They will do what they can get away with, and laws are necessary to regulate them. If laws are not strict enough, the credit bubble makes clear that markets cannot be trusted to regulate themselves.
When governments intervene in markets, they can have perverse effects – as seen when the decision not to bail out shareholders in Lehman and AIG turned short-selling financial stocks into a one-way bet and forced a crude ban on short-sellers.
Markets are a useful tool for society. But they are a function of the legal environment created for them, and they can act in ways that are detrimental to the public good. It may be a generation before the free-marketeers’ contention that governments should never interfere in markets gets taken seriously again.
Finally, you do not need to be Descartes to doubt the planned US bail-out will be a success. Its total cost will be massive. It must be agreed by rival politicians who are not expert in finance, and who face re-election in weeks. And it must rescue fiendishly complicated instruments invented during a historically irresponsible lending binge. Its success is far from a certainty.
Flames poured from the Marriott Hotel in Islamabad on Saturday after a massive truck bombing.
New York Times
September 21, 2008
By CARLOTTA GALLISLAMABAD, Pakistan — A huge truck bomb exploded at the gateway of the five-star Marriott Hotel in Islamabad on Saturday evening, just a few hundred yards from the prime minister’s house, where all the leaders of government were dining after the president’s address to Parliament.
At least 40 people were killed and 100 were wounded, according to The Associated Press. The toll was expected to grow because of reports that many people were still trapped inside the six-story hotel, which was engulfed in flames.
A vast crater, some 40 feet wide and 5 feet deep, lay at the security barrier to the hotel. Witnesses said security guards and their gate posts were buried under a mound of rubble. A line of cars across the street from the hotel were mangled and trees on the street were charred. Windows in buildings hundreds of yards away were shattered.
Witnesses said they dragged out dozens of bodies from the lobby of the hotel and an adjacent parking lot, including those of a number of foreigners.
One wounded American who works at the embassy here in the capital said he had just opened his car door in the parking lot when the explosion erupted. The American, who gave only his first name, Chris, said he had received injuries to his face, neck and shoulder, and was holding a bloody T-shirt to his face.
He said American Embassy personnel were at the scene, trying to help American citizens they said were trapped in the hotel.
Amjad Ali Khan, a guard on duty at a side entrance to the hotel, said he saw four to five bodies in the hotel parking lot and that he helped carry out 40 bodies from inside the hotel. He said they were “in the lobby and in the restaurant and everywhere.”
“There were very few people injured,” he said. “They were all dead.” He said he saw three Western women who had died from head wounds.
“They are terrorists,” he said when asked who he thought was responsible for the blast. “They threatened a few days ago. We heard there were four to five suicide bombers on the loose.”
The Marriott, a favorite place for foreigners to stay and gather, has been attacked by militants at least twice in the past, including a suicide attack in January 2007 that killed a policeman.
There was no immediate claim of responsibility for the blast, and its exact cause was unclear.
But Pakistan, an ally of the United States in the fight against terrorism, has faced a wave of militant violence in recent weeks following army-led offensives against militants in its border regions, though the capital has avoided most of the bloodshed.
LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY
TO PURCHASE MORTGAGE-RELATED ASSETS
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.
Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.–The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.
(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.
Form the OPB NewsHour.
Here is a link to the video.
After a week on Wall Street that saw stalwart financial firms fall and unprecedented levels of government intervention, NewsHour economics correspondent Paul Solman and market historian Richard Sylla offer perspective on the events.
JIM LEHRER: Next, a bit of a history lesson about this unprecedented week on Wall Street and in Washington. Jeffrey Brown has that part of the story.
JEFFREY BROWN: The fall of storied Wall Street institutions, huge government interventions, and a sense of spreading global panic. It has been a history-making week and one that has evoked much comparison to past crises.
To look at that big picture, we’re joined by Richard Sylla, an economist and financial historian at New York University’s Stern School of Business. And with me here is our own economics correspondent, Paul Solman.
Well, Professor Sylla, the comparisons have been made to the biggest crises of the past, including the Great Depression. How do you see all this?
Read the rest of this entry » »
“We have got to deal with the foreclosure issue. You have got to stop that hemorrhaging..If you don’t, the problem doesn’t go away. Ben Bernanke has said it over and over again. Hank Paulson recognizes it. This problem began with bad lending practices. Those are his words, not mine…” – Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee
New York Times
By DAVID M. HERSZENHORN
WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.
“When you listened to him describe it you gulped,” said Senator Charles E. Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were
told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”
When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”
“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”
Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.
“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”
As he spoke, Mr. Schumer swooped his hand, to make the gesture of a plummeting bird. “You know we’d be lucky …” he said as his voice trailed off. “Well, I’ll leave it at that.”
Read the rest of this entry » »
• “The Bush administration’s great irony is that by abstaining from any kind of involvement in the market, they created a situation where they are more deeply engaged with the market, in a financial entanglement with the market, than the liberals ever wanted to be.” - Rep. Barney Frank
Charlie Rose interviews, even if you are not a big fan of the Charlie Rose style, tend to get into the kind of information exchange that you don’t see on Television programs driven by advertisements–no commercial interruptions and the final editor is the Charlie himself instead of a corporate chain of command. The Charlie Rose website states: “I believe that there is a place in the spectrum of television for really good conversation, if it is informed, spirited, soulful.” Here is a set of links to five interviews appearing over a span of two days with three people: a corporate executive, a politician, and a DC journalist.
Hank Greenberg : an American businessman and former chairman and CEO of American International Group (AIG), the world’s largest insurance and financial services corporation. In 1962, Greenberg was named by AIG’s founder.
Interview 1 on September 16th 2008
Interview 2 on September 17th 2008
Barney Frank : an American politician and a member of the United States House of Representatives. He is a Democrat and has represented Massachusetts’s 4th congressional district since 1981. Following the Democratic takeover of the House of Representatives in the 2006 midterm elections, Frank assumed the chairmanship of the House Financial Services Committee.
Interview on September 17th 2008
Barney Frank talks about how Monday of this week was the only day in which the Bush Administration stuck to its ‘Free Enterprise’ ideology. He talks about how we got into this problem: the lack of the appropriate regulation–a trend which began with Ronald Reagan who said “Government is not the answer to our problems, government is the problem.” This week the Bush Administration has ’sent’ the Fed Chief and the Treasury Secretary to Wall Street to say in effect: “we are from the Government and we are here to help you.”
If you don’t have appropriate regulation, if you don’t have a set of rules for financial activities to be conducted, you get the kind of problems that we have now. The Bush administration’s great irony is that by abstaining from any kind of involvement in the market, they created a situation where they are more deeply engaged with the market, in a financial entanglement with the market, than the liberals ever wanted to be.
Frank goes on to talk about appropriate regulation, particularly regulations that Alan Greenspan passed over and failed to act upon. In 1994, the Democratic congress passed legislation, the Homeowners Equity and Protection Act, which said to the Federal Reserve that their needed to be regulations for mortgages created by banks-which are regulated entities-which began to make loans then immediately sold the mortgages to brokers with unregulated pools of capital. The banks became less concerned if the mortgages would be able to be paid back since they were not going to hold the paper long term. Thus the banks became less concerned to who they were lending to, their underwriting criteria loosened, then the banks got involved with making the kind of loans that started the problems that we are facing now. Alan Greenspan famously responded that ‘he was not smart enough’ to make rules to regulate this because regulation ‘was up to the market.’ If Alan Greenspan would have used the authority given to him by congress to restrict sub-prime mortgages, we would not be in this crisis.
Investment houses need to be more tightly regulated, particularly by creating a criteria where they need to hold more capitalization so they can not leverage highly wound positions in the market.
Frank also notes that after 8 years of Reagan in the 80’s, Congress was controlled by the Republicans from 1995-2007 which is the span of time which the approach of laissez faire management of the market (deregulation) by the government was more deeply entrenched.
If we would have had regulation the crisis would not have happened: this is undisputable.
Bob Woodward : an assistant managing editor of The Washington Post, has written 12 best-selling non-fiction books and has twice contributed reporting to efforts that collectively earned the Post and its National Reporting staff a Pulitzer Prize.
Interview 1 on September 16th 2008
Interview 2 on September 17th 2008