History > 2008 > USA > Economy (IXb)

John Darkow

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The Columbia Daily Tribune        Missouri

Cagle

18.9.2008

R: U.S. President George W. Bush

Reaching for the Right Levers

in an Anxious Situation

September 30, 2008
The New York Times
By EDMUND L. ANDREWS
and MARK LANDLER

WASHINGTON — For the Federal Reserve and the Treasury Department, the crisis continues.

Without the broad bailout plan they invented and lobbied hard for, the two agencies are once again forced to careen from one desperate path to another, and to dig deep into their toolkits to rescue the global financial system. Even before the House stunned the world on Monday by rejecting the Bush administration’s bailout bill, the Fed was already resorting to the oldest action in its book: printing money.

With money markets around the world seizing in fear, the Fed on Monday announced that it would provide an extra $150 billion through an emergency lending program for banks, and an additional $330 billion through so-called swap lines with foreign central banks to help money markets from Europe to Asia.

It was an extraordinary display of financial power, and it reflected acute new anxiety at the Fed and central banks around the world that the crisis of confidence in American financial markets had metastasized to money markets everywhere.

That was on top of the $230 billion the Fed borrowed last week so it could finance its previous efforts to prop up the American International Group and other institutions. But these are only the latest in a long series of jaw-dropping departures from normal policy that the Fed has undertaken this year as it seeks to inject vast amounts of capital into the financial system. And they are unlikely to be the last.

Even if Congress refuses to pass the bailout measure, there is more money where that came from. The Treasury Department has already created a series of “supplemental” Treasury securities to finance the Fed’s activities, and there is no limit to how many more it can issue and sell.

Treasury and Fed officials made it clear after the House vote on Monday that they still had a wide range of tools at their disposal. But most of the remaining options are ad hoc, rather than systemwide. The Fed, for example, can lend money to any company it deems too dangerous to fail by invoking the same Depression-era law it has already used to deal with failing firms like Bear Stearns and A.I.G.

The Treasury Department, meanwhile, has already vowed to buy up billions of dollars in mortgage-backed securities under the authority it received in the housing bill that Congress passed in the summer.

The bad news is that those attempts have done little or nothing to bolster confidence in the financial markets. Yields on three-month Treasury bills shrank to just 0.29 percent on Monday, a sign that investors were fleeing from any kind of risk, even if it meant earning a return far lower than the inflation rate.

Interbank lending rates climbed to new highs on Monday, as banks became even more fearful about lending to one another than they were last week.

“The liquidity measures are a stopgap,” said Laurence H. Meyer, vice chairman of Macroeconomic Advisers, a forecasting firm. “You’re funding the banks’ balance sheets, but nobody wants to lend money to them because they’re all afraid of insolvency.”

Administration officials were shocked at the House’s refusal to approve their bailout plan but are still hoping to rescue the plan later this week, by offering some modifications that will win over rebellious House Republicans without losing crucial Democratic votes.

“We need to put something back together that works,” said Treasury Secretary Henry M. Paulson Jr. Though he promised to “use all the tools available to protect our financial system,” he warned that “our toolkit is substantial but insufficient.”

In the absence of broader authority, Treasury officials are reviewing the options for creatively using the same kinds of case-by-case actions they have taken over the last six months — taking over Fannie Mae and Freddie Mac, bailing out A.I.G., and arranging shotgun marriages between failing institutions and healthy ones.

Robert A. Dye, chief economist at PNC Financial in Pittsburgh, said those efforts amounted to patchwork solutions and had thus far failed to bolster confidence in credit markets.

“The problem is that these are just a series of ad hoc solutions on a business-by-business basis, and they aren’t addressing the systemic problems in any basic way,” Mr. Dye said.

But other analysts said that credit markets around the world were almost entirely dysfunctional on Monday morning, when political leaders and investors alike assumed that Congress had reached a firm deal and would easily approve the bailout.

“It’s our view that this package, in a fundamental sense, will not solve the problem,” said Simon Johnson, a former chief economist at the International Monetary Fund. Mr. Johnson said that he had been hoping that the bailout plan would simply stabilize the markets through the presidential elections in November, but that he was now pessimistic about even that.

Michael Darda, chief economist at MKM Partners, an investment firm in Greenwich, Conn., said the Treasury’s bailout plan might have even unnerved many investors.

“I don’t see how it can help banks unless it’s clear that the government is going to buy these assets for substantially more than they are worth right now,” Mr. Darda said. “It’s such a big step in terms of government influencing the private sector, and it’s hard for investors to take a leap like that overnight, especially when they don’t know what’s going on.”

The Federal Reserve has stretched its resources to the limit. Before the crisis began in August 2007, the Fed had about $800 billion in reserve, nearly all in Treasury securities.

But because of all the new lending programs for banks and Wall Street firms, analysts estimate that the Fed’s balance sheet now has less than $300 billion in unfettered reserves.

The central bank can expand its reserves at will, because it controls the money supply and can create more to buy things like Treasury securities and mortgage-backed securities.

“We have a lot of money to play with,” said Kenneth Rogoff, an international economist at Harvard. “As long as foreigners have a lot of confidence in our ability to solve our problems, we can borrow the $1 trillion to $2 trillion we need to solve it.”

But Mr. Rogoff cautioned that the real limitation for American policy makers is whether they can maintain the government’s long-term credibility. “The real constraint is not a bookkeeping one,” he said. “It is a sense of faith on the part of foreigners that the U.S. government will repay its debt. Our most precious asset is that credibility.”

    Reaching for the Right Levers in an Anxious Situation, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30plan.html

Trying to Avoid Economic Calamity,

Lawmakers Grope for Resolution

September 30, 2008
The New York Times
By CARL HULSE and DAVID M. HERSZENHORN

WASHINGTON — Defying President Bush and the leaders of both parties, rank-and-file lawmakers in the House on Monday rejected a $700 billion economic rescue plan in a revolt that rocked the Capitol, sent markets plunging and left top lawmakers groping for a resolution.

The stunning defeat of the proposal on a 228-205 vote after marathon talks by senior Congressional and Bush administration officials lowered a fog of uncertainty over economies around the globe. Its authors had described the measure as essential to preventing widespread economic calamity.

The markets began to plummet even before the 15-minute voting period expired on the House floor. For 25 more minutes, uncertainty gripped the nation as television showed party leaders trying, and failing, to muster more support. Finally, Representative Ellen Tauscher, Democrat of California, pounded the gavel and it was done.

In the end, only 65 Republicans — just one-third of those voting — backed the plan despite personal pleas from President Bush and encouragement from their presidential nominee, Senator John McCain. By contrast, 140 Democrats, or 60 percent, voted in favor, many after voicing grave misgivings. Their nominee, Senator Barack Obama, also backed the bill.

By the end of day, the Dow had fallen almost 778 points, or nearly 7 percent, to 10,365. Credit markets also remained distressed, with bank lending rates rising and investors fleeing to the safety of Treasury bills.

Among opponents of the rescue plan, some Republicans cited ideological objections to government intervention, and liberal Democrats said they were of no mind to race to aid Wall Street tycoons. Other critics complained about haste and secrecy in assembling the plan.

But lawmakers on both sides pointed to an outpouring of opposition from deeply hostile constituents just five weeks before every seat in the House was up for election as a fundamental reason that the measure was defeated. House members in potentially tough races and those seeking Senate seats fled from the plan in droves.

“People’s re-elections played into this to a much greater degree than I would have imagined,” said Representative Deborah Pryce of Ohio, a former member of the Republican leadership who is retiring this year and voted for the plan. Congressional leaders in both parties said they did not know how they would proceed but were examining options, including having the Senate, where there was more support for the bailout, advance a bill after the Jewish New Year on Tuesday. Congressional leaders said any doubt about the need for action should have been removed by the market fall.

“We’re not leaving town till we get it fixed,” said Senator Mitch McConnell of Kentucky, the Republican leader.

At the White House, Mr. Bush met with his economic advisers as well as the Federal Reserve chairman, Ben S. Bernanke, to discuss next steps. “I was disappointed in the vote,” Mr. Bush said, appearing in the Oval Office with President Viktor A. Yushchenko of Ukraine. “Our strategy is to continue to address this economic situation head on.”

The Treasury secretary, Henry M. Paulson Jr., who was the main architect of the financial rescue plan, said he would continue to work with Congressional leaders “to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people.” He added, “This is much too important to simply let fail.”

Mr. McCain and Mr. Obama renewed their calls for swift action, though each campaign sought to partly blame the other for the defeat.

At the Capitol, Democrats accused Republicans of failing to deliver enough number of votes. “Sixty-seven percent of the Republican Conference decided to put political ideology ahead of the best interest of our great nation,” the Democratic whip, Representative James E. Clyburn of South Carolina, said after the vote.

Representative Roy Blunt of Missouri, the Republican whip, said that before the vote he had tallied 75 votes in his conference in favor of the plan. By the time the votes were cast, the Republicans could deliver only 65 of them.

Other top Republicans pointed at what they saw as a partisan speech by Speaker Nancy Pelosi in advance of the vote as a factor — a charge Democrats derided.

Republicans said they had alerted Democrats they might not have the numbers required. But they never recommended the legislation be put off and in the end they were unable to win any last-second converts to change the votes that would have been necessary to turn defeat into victory.

Representative John A. Boehner of Ohio, the House Republican leader, said he tried repeatedly and unsuccessfully to sway a handful of holdouts, but eventually gave up.

“You can’t break their arms, you can’t put your whole relationship on the line with them and ask them to do something they do not want to do and have that member regret that vote for the rest of their life,” said Mr. Boehner, who said he could not remember a time when the muscle of both parties and the White House failed to produce a victory.

The outcome after a slightly more than 40-minute vote on the House floor left lawmakers almost speechless. Even the strongest opponents of the measure did not expect to prevail, and the leadership of both parties, while increasingly nervous, figured they would squeak out a victory despite a parade of Republicans and Democrats to microphones to assail the measure. At the White House, the deputy press secretary, Tony Fratto, said just before the vote: “We’re confident that it will pass.”

Under the proposal, the Treasury Department could tap up to $700 billion in taxpayer money in installments to buy troubled debt from financial firms, in the hopes of freeing up credit to fuel normal economic activity.

In the final stages of negotiations, new provisions intended to recoup taxpayer losses were added. They helped the measure win support from Mr. Boehner and some other House Republican leaders, who had strongly opposed an earlier version of the bill. But they did not put the package over the top.

In impassioned speeches on the House floor, Democrats and Republicans alike vented their frustration over the nation’s perilous economic condition and the uncomfortable position they were in, facing pressure to approve an unpopular bailout package during an election year, with no guarantee that it would work.

“This is a huge cow patty with a piece of marshmallow stuck in the middle of it and I am not going to eat that cow patty,” said Representative Paul Broun, Republican of Georgia.

“Nobody wants to do this,” said Representative Edward J. Markey, Democrat of Massachusetts, who nonetheless voted for it. “Nobody wants to clean up the mess created by Wall Street recklessness.”

In the speech that Republicans said infuriated them, Ms. Pelosi accused Mr. Bush of squandering the budget surpluses of the Clinton years. “They claim to be free-market advocates, when it’s really an anything-goes mentality,” she said. “No supervision. No discipline. And if you fail, you will have a golden parachute and the taxpayer will bail you out.”

Democrats later said that if her speech truly cost votes, then Republicans, in the words of Representative Barney Frank, Democrat of Massachusetts, were guilty of punishing the country because Ms. Pelosi had hurt their feelings.

As the voting time expired on the floor, party leaders realized they were coming up far short. At 1:49 p.m., it was 205 for and 228 against. At 1:54 p.m., they inched closer: 207 to 226, as some representatives changed their votes. What followed was a remarkable stalemate on the House floor, with top lieutenants in both parties clutching lists of votes, as they clustered in the well and made unusual forays into what is normally enemy territory across the aisle.

“I was asking where the hell their votes were,” said Representative Rahm Emanuel of Illinois, the No. 4 Democrat.

Mr. Blunt said he told Democrats he thought he could flip five votes, if Democrats could do the same. Democrats had warned that the Republicans that they would need to produce 80 to 100 votes to adopt an unpopular plan championed by the Republican White House. Ultimately, the Democrats decided the votes were not there and they allowed the gavel to come down. Opponents of the measure said they expected the administration and Congressional leaders to try again on a rescue proposal and were not worried about being held responsible for the stock decline or other economic uncertainty.

“I think we will be back in a couple of days with a proposal more palatable to more members,” said Representative John Yarmuth, a Kentucky Democrat who voted against the plan. “You don’t make the biggest financial decision in the history of this country in a few days’ time without hearings.”

But Representative Tom Davis, a Virginia Republican who is retiring from Congress and who backed the proposal, said those who opposed to the measure might be hearing a different message from their voters if economic conditions worsen. “The members who voted no will have some culpability,” he said.

The House leadership said Monday night that the House would reconvene at noon Thursday, though it was not known if another economic plan would be on the table.

“Stay tuned,” said Ms. Pelosi, who seemed physically drained. But she added: “What happened today cannot stand. We must move forward, and I hope that the markets will take that message.”

Representative Greg Walden, an Oregon Republican who supported the bailout, said lawmakers may quickly discover “whether this is as dire a situation as we were told.”

“This is playing with fire,” Mr. Walden said. “It’s very, very dangerous.”
 

Robert Pear, Steven Lee Myers and Sheryl Gay Stolberg contributed reporting.

    Trying to Avoid Economic Calamity, Lawmakers Grope for Resolution, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30cong.html?hp

Transcript of Speaker Pelosi’s Speech

September 30, 2008
The New York Times

Text of a speech given by Speaker Nancy Pelosi before the House vote on the bailout plan on Monday.

Madam speaker, when was the last time anyone ever asked you for $700 billion? It’s a staggering figure. And many questions have arisen from that request. And we have been hearing, I think, a very informed debate on all sides — of — of this issue here today. I’m proud of the debate.

$700 billion. A staggering number. But only a part of the cost of the failed Bush economic policies to our country. Policies that were built on budget recklessness. When President Bush took office, he inherited President Clinton’s surpluses — four years in a row, budget surpluses, on a trajectory of $5.6 trillion in surplus. And with his reckless economic policies, within two years, he had turned that around.

And now eight years later, the foundation of that fiscal irresponsibility, combined with an anything goes economic policy, has taken us to where we are today. They claim to be free market advocates, when it’s really an anything goes mentality. No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute, and the taxpayer will bail you out.

Those days are over. The party is over in that respect. Democrats believe in a free market. We know that it can create jobs, it can create wealth, it can create many good things in our economy. But in this case, in its unbridled form, as encouraged, supported, by the Republicans — some in the Republican Party, not all — it has created not jobs, not capital, it has created chaos.

And it is that chaos that the secretary of the Treasury and the chairman of the Fed came to see us just about a week and a half ago — seems like an eternity, doesn’t it, so much has happened, the news was so bad. They described a very, very dismal situation. A dismal situation describing the state of our economy, the fragility of our financial institutions and the instability of our markets, our equity markets, our credit markets, our bond market.

And here we were listening to people who knew of what they spoke. Secretary of the Treasury brings long credentials and knowledge of the markets. More fearful, though, to me, more scary, was the statement — were the statements of Chairman Bernanke [Ben S. Bernanke, chairman of the Federal Reserve], because Chairman Bernanke is probably one of the foremost authorities in America on the subject of the Great Depression. I don’t know what was so great about the Depression, but that’s the name they give it. And we heard the secretary and the chairman tell us that this was a once in a hundred year phenomenon, this fiscal crisis was so drastic. Certainly once in 50 years, probably once in a hundred years.

And how did it sneak up on us? So silently, almost on little cat feet. That they would come in on that day — and they didn’t actually ask for the money, that much money that night. It took two days until we saw the legislation that they were proposing to help calm the markets. And it was on that day that we learned of a $700 billion request.

But it wasn’t just the money that was alarming. It was the nature of the legislation. It gave the secretary of the Treasury czar-like powers, unlimited powers, latitude to do all kinds of things and specifically prohibited judicial review or review of any other federal administrative agency to review their actions.

Another aspect of it that was alarming is it gave the secretary the power to use any money that came back from these infusions of cash to be used at the discretion of the secretary. Not to reduce the deficit, not to go into the general funds so that we could afford other priorities. To be used at the discretion of the secretary. It was shocking. Working together in a bipartisan way, we were able to make major improvements on that proposal, even though its fundamental basis was almost arrogant and insulting.

The American people responded almost immediately. Overwhelmingly, they said they know that something needs to be done. Say 78 percent of the American people said Congress must act. Fifty-eight-some percent said, but not to accept the Bush proposal. And so here we are today, a week later and a couple of days later, coming to the floor with a product — not a bill that I would have written, one that has major disappointments with me, beginning with the fact that it does not have bankruptcy in this bill — and we will continue to persist and work to achieve that.

It’s interesting, though, to me that when they describe this, the magnitude of the challenge and the precipice that we were on and how we had to act quickly and we had to act boldly and we had to act now, that it never occurred to them that the consequences of this market were being felt well in advance by the American people. And unemployment is up, and therefore we need unemployment insurance. That jobs are lacking, and therefore we need a stimulus package. So how can on the one hand could this be so urgent at the moment, and yet so unnecessary for us to address the effects of this poor economy in the households of America across our country?

We’ll come back to that in a moment. Working together, we put together some standards — and I am really proud of what Barney Frank did in this regard. The first night, that night, that Thursday night, when we got the very, very dismal news, he immediately said, if we’re going to do this — and Spencer Bachus was a part of this as well — in terms of if we’re going to do this, we must have equity for the American people. We’re putting up $700 billion, we want the American people to get some of the upside. So equity, fairness for the American people.

Secondly, if they were describing the root of the problem as the mortgage-backed securities, Barney insisted that we would have forbearance on foreclosure. If we’re now going to own that paper, that we would then have forbearance to help responsible homeowners stay in their home.

In addition to that, we have to have strong, strong oversight. We didn’t even have to see the $700 billion or the full extent of their bill to know that we needed equity and upside for the taxpayer, forbearance for the homeowner, oversight of the government on what they were doing, and something that the American people understand full well, an end to the golden parachutes and the — a — review and reform of the compensation for C.E.O.’s.

Let’s get this straight. We have a situation where on Wall Street people are flying high, they are making unconscionable amounts of money. They make a lot of money, they privatize the gain, the minute things go tough, they nationalize the risk. They get a golden parachute as they drive their firm into the ground, and the American people have to pick up the tab. Something is very, very wrong with this picture.

So just on first blush, that Thursday night, we made it clear, meeting much resistance on the part of the administration, that those four things, equity, forbearance, oversight, and reform of compensation. Overriding all of this is a protection of the taxpayer. We need to stabilize the markets. In doing so, we need to protect the taxpayers.

And that’s why I’m so glad that this bill contains a suggestion made by Mr. Tanner [Representative John Tanner, Democrat of Tennessee] that if at the end of the day, say in five years, when we can take a review of the success or whatever of this initiative, that if there is a shortfall and we don’t get our whole $700 billion back that we have invested, that there will be an initiative to have the financial institutions that benefited from this program to make up that shortfall.

But not one penny of this should be carried by the American people. People asked, and Mr. Spratt [Representative John M. Spratt Jr., Democrat of South Carolina] spoke with great knowledge and eloquence on the budget and aspects of the budget. $700 billion, what is the impact, what is the opportunity cost for our country of the investments that we would want to make?

O.K., now we have it in place where the taxpayer is going to be made whole and that was very important for us. But why on the drop of a hat can they ask us for $700 billion, and we couldn’t get any support from the administration on a stimulus package that would also help grow the economy?

People tell me all over the world that the biggest emerging market, economic market in the world, is rebuilding the infrastructure of America. Roads, bridges, waterways, water systems in addition to waterways. The grid, broadband, schools, housing, certain schools. We are trillions of dollars in deficit there.

We know what we need to do to do it in a fiscally sound way, in a fiscally sound way that creates good-paying jobs in America immediately. Brings money into the treasury by doing so, and again does all of this in an all-American way. Good-paying jobs here in America.

We can’t get the time of day for 25, $35 billion for that, which we know guarantees jobs, et cetera, but $700 billion. So make no mistake, when this Congress adjourns today to observe Rosh Hashanah and have members go home for a bit, we are doing so at the call of the chair. Because this subject is not over, this discussion about how we save our economy.

And we must insulate Main Street from Wall Street. And as Congresswoman Waters [Representative Maxine Waters, Democrat of California] said, Martin Luther King Drive, in my district Martin Luther King Drive, and Cedar Chavez Road and all of the manifestations of community and small businesses in our community. We must insulate them from that. And so we have difficult choices, and so many of the things that were said on both sides of this issue in terms of its criticisms of the bill we have and the bill that we had at first, and the very size of this, I share. You want to go home, so I’m not going to list all of my concerns that I have with it.

But it just comes down to one simple thing. They have described a precipice. We are on the brink of doing something that might pull us back from that precipice. I think we have a responsibility. We have worked in a bipartisan way. I want to acknowledge Mr. Blunt and Mr. Boehner, the work that we have done together, trying to find as much common ground as possible on this.

But we insisted the taxpayer be covered. We all insisted that we have a party-is-over message to Wall Street. And we insisted that, that taxpayers at risk must recover — that any risk must be recovered. I told you that already. So, my colleagues, let’s recognize that this Congressional — this legislation is not the end of the line.

Mr. Waxman [Representative Henry A. Waxman, Democrat of California] will be having vigorous oversight this week, hearings this week on regulatory reform and other aspects of it. I hope you will pursue fraud and mismanagement and the rest. Mr. Frank and his committee will continue to pursue other avenues that we can stabilize the markets and protect the taxpayer. For too long, this government, in eight years, has followed a right-wing ideology of anything goes, no supervision, no discipline, no regulation.

Again, all of us are believers in free markets, but we have to do it right. Now, let me again acknowledge the extraordinary leadership of Mr. Frank. He has been an exceptional leader in the Congress, but never has his knowledge and his experience and his judgment been more needed than now. And I thank you, Mr. Frank, for your exceptional leadership, Mr. Chairman.

I also — so many people worked on this, but I also want to acknowledge the distinguished chair of our caucus, Mr. Emanuel. His knowledge of the markets, the respect he commands on those subjects, and his boundless energy on the subjects served us well in these negotiations. But this, this is a bipartisan initiative that we are bringing to the floor. We have to have a bipartisan vote on this. That is the only message that will send a message of confidence to the markets.

So I hope that — I know that we will be able to live up to our side of the bargain. I hope the Republicans will, too.

But my colleagues, as you go home and see your families and observe the holiday and the rest, don’t get settled in too far, because as long as the American — this challenge is there for the American people, the threat of losing their jobs, the credit, their credit, their jobs, their savings, their retirement, the opportunity for them to send their children to college.

As long as in the households of America, this crisis is being felt very immediately and being addressed at a different level, we must come back, and we will come back as soon and as often as it is necessary to make the change that is necessary. And before long we will have a new Congress, a new president of the United States, and we will be able to take our country in a new direction.

    Transcript of Speaker Pelosi’s Speech, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/washington/30pelositranscript.html

Your Money

‘Is My Money Safe?’ and Other Questions to Ask

September 30, 2008
The New York Times
By RON LIEBER

For all of you on Main Street who have been watching the turmoil on Wall Street for the last few weeks, Monday’s shockwaves rattled even the most steadfast.

The day began with the announcement that another big bank — Wachovia — had been taken over, just days after Washington Mutual collapsed and was sold. In early afternoon, the House rejected the bailout package for the financial industry. Stocks plunged, with the Dow ending the day down nearly 778 points in the worst single-day drop in two decades.

What is a regular investor to make of it all? What about people who have money in bank accounts? Below are some answers to questions that are probably on your mind.

Q. Why did the stock market fall so far so fast on Monday?

A. The element of surprise surely didn’t help, since everyone was expecting the bailout bill to pass. There may have been a bit of investor disgust thrown in, too, a sense that our representatives in Washington just don’t get it.

Fear may be the biggest driver, however — the worry that it may be weeks or longer before companies can get the affordable, short-term loans they need to finance their operations. Without easy access to that money, it’s hard to run a profit-making operation on a day-to-day basis, let alone grow over the long haul. The professional investors who often drive big market moves don’t want to hold onto stocks to see if things will really get that bad.

Q. What’s likely to happen in the markets over the next few days?

A. It’s possible that Monday’s market moves will spook members of the House of Representatives enough that they will be willing to change their votes with only a modest amount of compromise. Or, there may be hasty efforts to write a new bill from scratch. This will take days, however, not hours, since Tuesday is the Jewish holiday of Rosh Hashana. Stocks may rebound, at least somewhat, if another similar bill emerges. But much will depend on the revisions.

Q. Is any investment truly safe right now?

A. As long as you trust the United States government, sure. Plenty of banks, like HSBC Direct and Capital One are offering online savings accounts paying more than 3 percent. These accounts have all the normal Federal Deposit Insurance Corporation protections of at least $100,000. Also, the Treasury Department is currently insuring investors who had holdings in money market mutual funds as of Sept. 19, as long as the fund company pays to participate.

Q. What about Treasury bills?

A. Treasuries are issued and backed by the United States government. But since throngs of investors have rushed into these investments, it has pushed their yields down. Way down. Some Treasuries, with maturities in the one-week to three-month range, are yielding less than 1 percent, anywhere from 0.10 percent to 0.50 percent. Clearly, many investors are willing to accept paltry yields as long as they know their money is secure.

Another government offering is Treasury Inflation-Protected Securities, or TIPS, which protect investors against rising inflation. That may be one result of any big government bailout.

Q. My retirement portfolio has been wrecked by this. How should I respond?

A. Continue to save. Big losses mean you’ll need that much more time, or good news, to bring your balances back to where they need to be for you to retire comfortably. If your employer matches your contributions, this is a great time to take advantage of the largess.

As for whether you should pile into beaten down stocks, no one knows how much further the markets will fall or how long they’ll take to bounce back. But people who move their savings to ultrasafe investments and then leave them there usually miss out on the gains when the markets come back. If you need to do that to sleep at night or avoid stomach ulcers, then do what you have to do. But it may cost you in quality of life come retirement time.

Q. But what if I am about to retire? Then what?

A. Leaving the work force at a time like this creates big problems. Not only is your portfolio down, but you need to start withdrawing from it. So you are essentially locking in your losses.

If your portfolio has taken a big hit, it may be time to seriously consider delaying retirement. Working just a few years more can make a big difference. Or, a part-time job may keep you from having to dip into your portfolio before it recovers. To get a better idea of how much you can afford to withdraw, you can test different amounts with a retirement income calculator on the Web, like T. Rowe Price’s.

Q. With things looking increasingly gloomy, though, why not allocate extra cash to other types of savings or paying down debt?

A. If you’re saving for a downpayment, you could put enough money in your retirement account to match any employer contribution. Then, use whatever money you have left for the downpayment fund, which should be in an ultrasafe account. The same logic goes for a teenager’s college fund, which ought to be mostly in steady investments by now. There are nice tax breaks on 529 college savings accounts, too.

Yes, paying down debt, especially high-interest credit card debt, is always a good idea, though it’s probably best to take advantage of employer matches on retirement savings first.

Q. Is it time to buy stocks?

A. Like gambling? This is a great time to make bets on the wide price swings that we’re seeing in some stocks and entire sectors of the market. Just be prepared to lose big, as plenty of professionals have done of late.

Q. I’m worried sick about my parents, who rely on stock dividends for their income. What will happen to them?

A. It’s not a great time to be relying on dividends. We’ve seen plenty of companies cut them. (Citibank did so on Monday as part of its acquisition of Wachovia’s banking operations.) Still, if your parents were planning all along to keep their shares until they die and live only off the dividends and Social Security, perhaps now is the time to encourage them to be selfish. They could sell some shares and live well now, even if it means you’ll get less later when they pass on.

Q. I’m a long-term investor and prefer not to see my retirement balances as real numbers for now. So the crisis doesn’t feel like it has hit me financially yet. Should I be doing anything defensively?

A. It’s not yet clear how much more the crisis will affect employment levels. Still, this seems like the best moment in years to have a few months of cash set aside in one of those online savings accounts just in case you lose your job or face some large expense that you haven’t predicted.

Q. What’s the next shoe to drop?

A. It seems certain that it will be harder for consumers to borrow money in the next year or two than it was earlier this decade. How much harder isn’t clear yet. It will be more difficult for people who need jumbo mortgages than for those whose lenders can simply sell off their loans to Fannie Mae or Freddie Mac. Home-equity lenders are already cutting plenty of people off, while credit card companies are lowering credit limits on others.

Q. What about more bank failures?

A. They will happen. In recent days, we’ve seen the F.D.I.C. getting out in front of troubles at big banks like Wachovia and Washington Mutual, by arranging for other banks to take over their consumer accounts. What’s less clear, however, is how many healthy institutions are left to take in other big banks that may run into trouble.

As always, stay within F.D.I.C. deposit limits. Then, the worst-case scenario is that it will take a couple of days to extract your funds from a failed bank.

    ‘Is My Money Safe?’ and Other Questions to Ask, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/yourmoney/30money.html

For Stocks,

Worst Single-Day Drop in Two Decades

September 30, 2008
The New York Times
By VIKAS BAJAJ and MICHAEL M. GRYNBAUM

Even before the opening bell, Monday looked ugly.

But by the time that bell sounded again on the New York Stock Exchange, seven and a half frantic hours later, $1.2 trillion had vanished from the United States stock market.

What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street’s blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor’s 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average fell nearly 778 points, or 6.98 percent, to 10,365.45.

Across Wall Street, no one could quite believe what was happening on the floor — the floor of the House of Representatives, not the New York Exchange.

As lawmakers began to vote on a $700 billion rescue for financial institutions, the Voyageur Asset Management trading desk in Chicago went silent. Money managers gaped at a television screen carrying news that seemed unthinkable: the bill was not going to pass. Shortly after 1:30 p.m., the rescue was rejected.

“You just felt like the world was unraveling,” Ryan Larson, the firm’s senior equity trader, said. “People started to sell and they sold hard. It didn’t matter what you had — you sold.”

Frustration, and then panic, coursed through the markets. Investors feared the decision in Washington would imperil the financial industry, as well as the broader economy.

At the Federal Reserve and other central banks, policy makers were also anxious. Even before the vote on Capitol Hill, central bankers tried to jump-start the credit markets. They offered hundreds of billions of dollars in loans to banks around the world because banks and investors were unwilling to lend to each other. But neither the stock market nor the credit markets appeared to respond.

Just 24 hours earlier, few imagined Monday would play out this way. Treasury Secretary Henry M. Paulson Jr. and the House speaker, Nancy Pelosi, announced Sunday afternoon they had agreed on terms of a bailout.

But while Congressional aides and lawmakers worked on the details, the credit crisis that began more than a year ago in the American mortgage market was setting off new alarms in Europe.

Shortly before 6 p.m. New York time on Sunday, Belgium, the Netherlands and Luxembourg agreed to invest $16.2 billion to rescue a big bank, Fortis. A few hours later, the German government and a group of banks pledged $43 billion to save Hypo Real Estate, a commercial property lender. At 2:50 a.m., news came that the British Treasury had seized the lender Bradford & Bingley and sold the bulk of it to Banco Santander of Spain.

“We will continue to do what is necessary,” a somber Gordon Brown, the British prime minister, told reporters at 10 Downing Street in London.

In Tokyo, where stocks had opened higher in early trading on Monday, worries quickly set in. Traders returned from lunch to reports suggesting the financial crisis was taking a toll on the global economy. Markets across Asia began to sell off.

In Tokyo, the Nikkei 225 sank 1.5 percent. In India, stocks fell nearly 4 percent. In Hong Kong, where a big bank, HSBC, raised key lending rates because of the credit market turmoil, the Hang Seng tumbled nearly 4.3 percent.

As events unfolded in Asia, a major American bank was in trouble. Regulators in Washington were rushing to broker the sale of the Wachovia Corporation to Citigroup or Wells Fargo.

At about 4 a.m., Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, called Citigroup executives to say Wachovia’s banking business was theirs.

On Monday morning, before financial markets in the United States had opened, Federal Reserve officials were alarmed that credit markets in Europe and Asia had spiraled even deeper into crisis on Monday.

Fed officials could see that money markets were freezing up in every part of the world, even though the Fed and other central banks had expanded their emergency lending programs last Thursday. This time, Fed officials felt compelled to provide a true show of force by expanding their existing loan arrangements by an unprecedented $330 billion.

As investors in New York were getting up, the credit markets were again flashing red as banks reported higher borrowing costs. Investors continued to seek safety in Treasuries. The yield on one-year Treasury bills, for instance, fell to almost zero, meaning investors were willing to accept no return just for the assurance that they would get their money back.

When trading opened on the New York Exchange at 9:30 a.m., stocks immediately fell 1 percent.

Worried officials at the Fed announced at 10 a.m. that the central bank would increase to $620 billion its program to lend money through foreign central banks, up from $290 billion, to keep credit flowing. The central bank also said it would double the money it lends out domestically through an auction program to $300 billion.

Many eyes on Wall Street turned to National City, the Cleveland-based bank, which has a $20 billion portfolio of troubled loans it is trying to sell. National City’s shares plummeted 50 percent to $1.50 in early trading, prompting Peter E. Raskind, the bank’s chief executive, to assert that the bank was sound.

“It’s not overly dramatic to say that investors are panicking. You can see it in the market and we can feel it,” Mr. Raskind said in an interview.

In New York, 10 executives at an investment firm, Bessemer Trust, huddled to discuss the markets. A question arose: What would it take to restore confidence to the credit markets? There were few upbeat answers, though one said Citigroup’s takeover of Wachovia could pave the way for more consolidation in banking. “It is the type of solution that makes good sense in these challenging times,” Marc D. Stern, Bessemer Trust ’s chief investment officer, said as he recounted the meeting.

But Mr. Stern and his group would soon be dismayed by what was happening in Washington.

At 1:30 p.m. the House began to vote on the rescue package that Mr. Paulson and Congressional leaders negotiated over the weekend. About 10 minutes later, when it became clear that the legislation was in trouble, the stock market went into a free fall, with the Dow plunging about 400 points in five minutes.

At his home office in Great Neck, N.Y., Edward Yardeni, the investment strategist, received terse e-mail messages from clients and friends. “Is this the end of the world?” one asked. Another sent a simple plea: “Stop the world, I want to get off.”

Mr. Yardeni and other analysts said the action in Washington left many investors discouraged and feeling powerless. “You can come into the office and spend a lot of time researching companies, trying to understand them. You’ve got a portfolio that you think should do well,” he said. “And none of that matters.”

Marc Groz, chief executive of Topos Partners, a hedge fund in Stamford, Conn., put it this way: “It’s frustrating for someone like me because I don’t have a pipeline to what is happening in Washington, D.C.”

The stock market briefly rallied, then slowly lost ground in the afternoon. A flurry of sales minutes before the close sent the Dow down another 200 points, to its lowest level for the day.

Shortly after the closing bell rang on the floor of the Big Board, Mr. Paulson, looking exhausted, spoke to reporters at the White House. He lamented the vote, but vowed to keep pressing Congress for a broad rescue plan to help ease stress in the credit markets.

Following are the results of Monday’s auction of three- and six-month Treasury bills.
 

Eric Dash and Ben White contributed reporting.

For Stocks, Worst Single-Day Drop in Two Decades, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30markets.html



 

Fear swept the financial markets

after the vote and resulted

in the worst single-day drop in two decades,
nearly nine percent.

The Standard & Poor's 500-stock index fell 8.77 percent,

its biggest drop since October 1987.

A trader, left, looked at the numbers on a board

at the New York Stock Exchange.

Photo: Timothy A. Clary/Agence France-Presse -- Getty Image

http://www.nytimes.com/slideshow/2008/09/30/business/0930-MARKETS_2.html

Trying to Avoid Economic Calamity, Lawmakers Grope for Resolution

NYT

30.9.2008

http://www.nytimes.com/2008/09/30/business/30cong.html

Dow Falls Nearly 700 Points

September 30, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Stocks took a dramatic plunge on Monday afternoon after the government’s bailout plan — touted by its supporters as a balm for the current market stress — failed to pass the House of Representatives, setting off a fresh wave of anxious selling.

In yet another day that has shaken the embattled canyons of Wall Street, the Dow Jones industrials fell to a nearly 700-point deficit in the moments after it became clear that the legislation could not muster the support it needed to pass the House. After recovering slightly, the Dow was again down by 700 points shortly before 3:30 p.m.

A more holistic measure of the American stock market, the Standard & Poor’s 500-stock index, was down by 8 percent, after the House defeated the bill by a vote of 228-205.

The fear was most pronounced in the world’s credit markets, considered gauges of anxiety among investors. Yields on Treasuries plummeted after the House rejected the plan, with the one-month Treasury note yielding virtually zero.

Banks are charging enormous premiums for short-term financing; the difference between the cost of a three-month loan from a bank, and a three-month loan from the government, rose to the widest point since at least 1984. Other lending rates stayed high.

On Wall Street, the drops were sharp and swift, catching many investors and stock strategists on Wall Street by surprise. Many had expected the measure to be passed in the House, and lawmakers in Congress had suggested as much in comments earlier on Monday.

Instead, traders around the world turned to their television screens to see the votes opposed to the bill adding up, and eventually surpassing those in favor. The banal image broadcast on several television networks — a no-frills table of ‘yay’ and ‘nay’ votes — contrasted with the expressions of increasing concern on the faces of workers on the floor of the New York Stock Exchange.

“The bottom line is that everybody seems confused,” Ryan Detrick, a strategist at Schaeffer’s Investment Research, said just moments after the initial plunge. “When that happens, you get selling, you get panicky, you get selling.”

The sell-off reinforced the fear coursing through Wall Street as investors wondered, first, whether the bailout plan would pass Congress, and second, what would happen if it did not.

Earlier on Monday, in response to the strain, the Federal Reserve moved to increase the amount of liquidity it makes available to major players in the world financial system. The Fed will triple the size of its regular auctions for banks and work with nine other central banks to increase the flow of credit.

The Fed is hoping to combat a hoarding mentality that has arisen among banks, whose reluctance to lend — even to healthy institutions — has jammed up critical financial arteries that many small businesses depend on.

Shares had fallen earlier in the day after Citigroup snatched up the core business of Wachovia, the ailing banking giant, which had been in danger of collapse.

The Wachovia move, which was spearheaded by federal regulators, could have been taken as a sign that the government was eager to restore stability to the financial system. But the near-collapse of Wachovia, which was the nation’s fourth-largest bank, seemed to only underscore the troubling sense among investors that any bank is vulnerable in the current crisis.

Shares of Wachovia lost 90 percent of their value in electronic overnight, but the stock never opened on Monday morning as officials halted trading before the opening bell.

Citigroup shares fell, and shares of financial stocks traded lower. Morgan Stanley fell 16 percent and Goldman Sachs was off 13 percent.

European stocks closed before the bailout bill was rejected in the House. But they had already fallen sharply: stocks in London and Paris were down more than 5 percent, and Frankfurt was down about 4 percent. In Asia, the benchmark Hong Kong index plummeted 4.3 percent overnight; Tokyo’s Nikkei 225 lost 1.2 percent.

President Bush appeared outside the White House at 7:30 a.m. on Monday, before the markets opened, to endorse the bailout legislation that was agreed upon over the weekend.

“A vote for this bill is a vote to prevent economic damage to you and your community,” the president said in a brief statement. “The impact of the credit crisis and housing correction will continue to affect our financial system and growth of our economy over time. But I am confident that in the long run, America will overcome these challenges.”

The problems in Europe came after government bailouts of several banks, including the British lender Bradford & Bingley and the Belgian-Dutch financial group, Fortis.

If anything, the moves created uncertainty about which institution would be next, said Jean Bruneau, a trader at Société Générale in Paris.
 

Vikas Bajaj, Keith Bradsher and Matthew Saltmarsh contributed reporting.

    Dow Falls Nearly 700 Points, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30markets.html?hp

Dow Falls More Than 500 Points

September 30, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The stunning rejection of the administration's $700 billion financial bailout plan sent stocks plunging on Monday even before the House of Representatives finished voting.

The Dow, which had been trading down about 300 points for most of the afternoon, fell to a 600-point deficit before recovering slightly. The index was down more than 550 points as lawmakers scrambled, but failed, to round up votes to pass the package.

The House on Monday defeated the bill by a vote of 228-205.

At 3 p.m., less than an hour after the voting ended, the Dow was at 10,609.09, down 534.04, or 4.8 percent. But the broader market was down even more sharply. The Standard & Poor’s 500-stock index was down 6.3 percent after dropping as far as 7 percent.

The drop reinforced the fear coursing through Wall Street as investors wondered whether the bailout plan would eventually pass Congress. Before the vote, supporters of the bill said they thought the legislation would squeak through with a slim majority. But as the initial period of voting ended, the bill appeared to be in danger of not passing the House.

Shares had fallen earlier in the day despite what lawmakers had described as an agreement on the bailout plan. Citigroup also snatched up the core business of Wachovia, the ailing banking giant, which had been in danger of collapse.

The Wachovia move, which was spearheaded by federal regulators, could have been taken as a sign that the government was eager to restore stability to the financial system. But the near-collapse of Wachovia, which was the nation’s fourth-largest bank, may have underscored the troubling sense among investors that any bank is vulnerable in the current crisis.

The world’s credit markets also remained under pressure. Yields on Treasuries dropped and lending rates stayed high, signs that investors remained deeply ill at ease about the health of the financial system.

Responding to the strain, the Federal Reserve moved to vastly increase the amount of liquidity it makes available to major players in the world financial system. The Fed will triple the size of its regular auctions for banks and work with nine other central banks to increase the flow of credit.

The Fed is hoping to combat a hoarding mentality that has arisen among banks, whose reluctance to lend — even to healthy institutions — has jammed up critical financial arteries that many small businesses depend on.

On Monday, the cost of borrowing euros for a three-month period rose to the highest price on record. Banks are charging enormous premiums for short-term financing. And money continued to flow into the safe space of Treasury bills and traditional hedges like gold, the price of which rose 2.2 percent.

Shares of Wachovia lost 90 percent of their value in electronic overnight, but the stock never opened on Monday morning as officials halted trading before the opening bell.

Citigroup shares fell, and shares of financial stocks traded lower. Morgan Stanley fell 11 percent and Goldman Sachs was off 8 percent.

European stocks, already sharply down at the New York open, fell further after the declines on Wall Street. Stocks in London and Paris were down more than 5 percent, and Frankfurt was down about 4 percent. In Asia, the benchmark Hong Kong index plummeted 4.3 percent overnight; Tokyo’s Nikkei 225 lost 1.2 percent.

President Bush appeared outside the White House at 7:30 a.m. on Monday, before the markets opened, to endorse the bailout legislation that was agreed upon over the weekend.

“A vote for this bill is a vote to prevent economic damage to you and your community,” the president said in a brief statement. “The impact of the credit crisis and housing correction will continue to affect our financial system and growth of our economy over time. But I am confident that in the long run, America will overcome these challenges.”

The problems in Europe came after government bailouts of several banks, including the British lender Bradford & Bingley and the Belgian-Dutch financial group, Fortis.

If anything, the moves created uncertainty about which institution would be next, said Jean Bruneau, a trader at Société Générale in Paris.

Shares of the Brussels-based lender Dexia fell 22.7 percent as investors worried that it might be the next bank to need government help. The company may soon announce a plan to raise capital, the French newspaper Le Figaro said, without citing a source.

The agreement on Capitol Hill on the terms of the bailout package failed to lift the mood in Europe.

“The U.S. bailout doesn’t change some negative short-term factors — that the economic outlook is weak and that the earnings outlook is weak,” said Tammo Greetfeld, a strategist at UniCredit Markets & Investment Banking in Munich. “The key question is can the bailout create enough optimism among investors that they focus on the medium-term improvement and ignore short-term weakness. We’re not there yet, the benefits look to be too far down the road.”

The dollar gained against the euro and the pound, and was stable against the yen.

Stock markets in Asia fell on renewed fears of a global credit crunch, erasing earlier gains that came after the weekend agreement on Capitol Hill.

The Standard and Poor’s/Australian Stock Exchange 200 Index fell 2 percent after rising slightly on Monday morning. The Kospi Index was down 1.3 percent after an early 1.2 percent surge in Seoul.

Bradford & Bingley, the British lender, was seized by the government after the credit crisis shut off financing and competitors refused to buy mortgage loans that customers were struggling to repay.

Banco Santander, the Spanish lender, will pay $1.1 billion to buy Bradford & Bingley branches and deposits, the Treasury said. Santander shares declined 2.8 percent, to 10.61 euros. Shares in UBS, the Swiss bank, fell 7.7 percent.

The stock market in Taiwan was closed on Monday as Typhoon Jangmi passed directly over Taipei. Mainland China’s stock markets in Shanghai and Shenzhen are closed this week as part of a national holiday marking the establishment of China as a Communist country in 1949.
 

Vikas Bajaj, Keith Bradsher and Matthew Saltmarsh contributed reporting.

    Dow Falls More Than 500 Points, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30markets.html?hp

Dow Falls More Than 400 Points

September 30, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The Dow Jones industrials dropped suddenly on Monday afternoon after the bailout plan being voted on by the House of Representatives failed to pass.

The Dow, which had been trading down about 300 points for most of the afternoon, fell to a 600-point deficit before recovering slightly. The index was down more than 550 points as lawmakers scrambled, but failed, to round up votes to pass the package.

The House on Monday defeated the bill by a vote of 228-205.

The Standard & Poor’s 500-stock index was down 6.5 percent after dropping as far as 7 percent.

The drop reinforced the fear coursing through Wall Street as investors wondered whether the bailout plan would eventually pass Congress. Before the vote, supporters of the bill said they thought the legislation would squeak through with a slim majority. But as the initial period of voting ended, the bill appeared to be in danger of not passing the House.

Shares had fallen earlier in the day despite what lawmakers had described as an agreement on the bailout plan. Citigroup also snatched up the core business of Wachovia, the ailing banking giant, which had been in danger of collapse.

The Wachovia move, which was spearheaded by federal regulators, could have been taken as a sign that the government was eager to restore stability to the financial system. But the near-collapse of Wachovia, which was the nation’s fourth-largest bank, may have underscored the troubling sense among investors that any bank is vulnerable in the current crisis.

The world’s credit markets also remained under pressure. Yields on Treasuries dropped and lending rates stayed high, signs that investors remained deeply ill at ease about the health of the financial system.

Responding to the strain, the Federal Reserve moved to vastly increase the amount of liquidity it makes available to major players in the world financial system. The Fed will triple the size of its regular auctions for banks and work with nine other central banks to increase the flow of credit.

The Fed is hoping to combat a hoarding mentality that has arisen among banks, whose reluctance to lend — even to healthy institutions — has jammed up critical financial arteries that many small businesses depend on.

On Monday, the cost of borrowing euros for a three-month period rose to the highest price on record. Banks are charging enormous premiums for short-term financing. And money continued to flow into the safe space of Treasury bills and traditional hedges like gold, the price of which rose 2.2 percent.

Shares of Wachovia lost 90 percent of their value in electronic overnight, but the stock never opened on Monday morning as officials halted trading before the opening bell.

Citigroup shares fell, and shares of financial stocks traded lower. Morgan Stanley fell 11 percent and Goldman Sachs was off 8 percent.

European stocks, already sharply down at the New York open, fell further after the declines on Wall Street. Stocks in London and Paris were down more than 5 percent, and Frankfurt was down about 4 percent. In Asia, the benchmark Hong Kong index plummeted 4.3 percent overnight; Tokyo’s Nikkei 225 lost 1.2 percent.

President Bush appeared outside the White House at 7:30 a.m. on Monday, before the markets opened, to endorse the bailout legislation that was agreed upon over the weekend.

“A vote for this bill is a vote to prevent economic damage to you and your community,” the president said in a brief statement. “The impact of the credit crisis and housing correction will continue to affect our financial system and growth of our economy over time. But I am confident that in the long run, America will overcome these challenges.”

The problems in Europe came after government bailouts of several banks, including the British lender Bradford & Bingley and the Belgian-Dutch financial group, Fortis.

If anything, the moves created uncertainty about which institution would be next, said Jean Bruneau, a trader at Société Générale in Paris.

Shares of the Brussels-based lender Dexia fell 22.7 percent as investors worried that it might be the next bank to need government help. The company may soon announce a plan to raise capital, the French newspaper Le Figaro said, without citing a source.

The agreement on Capitol Hill on the terms of the bailout package failed to lift the mood in Europe.

“The U.S. bailout doesn’t change some negative short-term factors — that the economic outlook is weak and that the earnings outlook is weak,” said Tammo Greetfeld, a strategist at UniCredit Markets & Investment Banking in Munich. “The key question is can the bailout create enough optimism among investors that they focus on the medium-term improvement and ignore short-term weakness. We’re not there yet, the benefits look to be too far down the road.”

The dollar gained against the euro and the pound, and was stable against the yen.

Stock markets in Asia fell on renewed fears of a global credit crunch, erasing earlier gains that came after the weekend agreement on Capitol Hill.

The Standard and Poor’s/Australian Stock Exchange 200 Index fell 2 percent after rising slightly on Monday morning. The Kospi Index was down 1.3 percent after an early 1.2 percent surge in Seoul.

Bradford & Bingley, the British lender, was seized by the government after the credit crisis shut off financing and competitors refused to buy mortgage loans that customers were struggling to repay.

Banco Santander, the Spanish lender, will pay $1.1 billion to buy Bradford & Bingley branches and deposits, the Treasury said. Santander shares declined 2.8 percent, to 10.61 euros. Shares in UBS, the Swiss bank, fell 7.7 percent.

The stock market in Taiwan was closed on Monday as Typhoon Jangmi passed directly over Taipei. Mainland China’s stock markets in Shanghai and Shenzhen are closed this week as part of a national holiday marking the establishment of China as a Communist country in 1949.

Vikas Bajaj, Keith Bradsher and Matthew Saltmarsh contributed reporting.

    Dow Falls More Than 400 Points, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30markets.html?hp

House Rejects Bailout Package, 228-205,

But New Vote Is Planned; Stocks Plunge

September 30, 2008
The New York Times
By CARL HULSE and DAVID M. HERSZENHORN

WASHINGTON — In a moment of historic drama in the Capitol and on Wall Street, the House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry.

The vote against the measure was 228 to 205. Supporters vowed to try to bring the rescue package up for consideration against as soon as possible.

Stock markets plunged sharply at midday as it appeared that the measure was go down.

House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail.

Supporters of the bill had argued that it was necessary to avoid a collapse of the economic system, a calamity that would drag down not just Wall Street investment houses but possibly the savings and portfolios of millions of Americans. Opponents said the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.

Should the measure somehow clear the House on a second try, the Senate is expected to vote later in the week. The Jewish holidays and potential procedural obstacles made a vote before Wednesday virtually impossible, but Senate vote-counters predicted that there was enough support in the chamber for the measure to pass. President Bush has urged passage and spent much of the morning telephoning wavering Republicans to plead for their support.

Many House members who voted for the bill held their noses, figuratively speaking, as they did so. Representative John A. Boehner of Ohio, the Republican minority leader, said there was too much at stake not to support it. He urged members to reflect on the damage that a defeat of the measure could mean “to your friends, your neighbors, your constituents” as they might watch their retirement savings “shrivel up to zero.”

And Representative Steny Hoyer of Maryland, who as Democratic majority leader often clashes with Mr. Boehner, said that on this “day of consequence for America” he and Mr. Boehner “speak with one voice” in pleading for passage.

When it comes to America’s economy, Mr. Hoyer said, “none of us is an island.”

The House debate was heated and, occasionally, emotional up to the last minute, as illustrated by the remarks of two California lawmakers.

Representative Darrell Issa, a Republican, said he was “resolute” in his opposition to the measure because it would betray party principles and amount to “a coffin on top of Ronald Reagan’s coffin.”

But Representative Maxine Waters, a Democrat, said the measure was vital to help financial institutions survive and keep people in their homes. “There’s plenty of blame to go around,” she said, and attaching blame should come later.

The House vote came after a weekend of tense negotiations produced a rescue plan that Congressional leaders said was greatly strengthened by new taxpayer safeguards. “If we defeat this bill today, it will be a very bad day for the financial sector of the economy,” Representative Barney Frank, Democrat of Massachusetts and the chairman of the Financial Services Committee, said as the debate began and the stock market opened sharply lower. The Standard & Poor’s 500 index was down almost 3.4 percent at midmorning.

Earlier Monday, President Bush urged Congress to act quickly. Calling the rescue bill “bold,” Mr. Bush praised lawmakers “from both sides of the aisle” for reaching agreement, and said it would “help keep the crisis in our financial system from spreading throughout our economy.”

He said the vote would be difficult, but he urged lawmakers to pass the bill promptly. “A vote for this bill is a vote to prevent economic damage to you and your community,” he said.

“We will make clear that the United States is serious about restoring stability and confidence in our system,” he said, speaking at a lectern set up on a path on the White House grounds.

He addressed concerns about the high cost of the legislation to taxpayers, but he said he expected that “much if not all of the tax dollars will be paid back.”

Despite Mr. Bush’s urgings, investors around the world continued to demonstrate doubts that the bill would fully address the financial crisis. European and Asian stock markets declined sharply on Monday, especially in countries where major banks have had significant problems with mortgage investments, like Britain and Ireland. In the credit markets, investors once again bid up prices of Treasury securities and shunned more risky debt.

The 110-page rescue bill, intended to ease a growing credit crisis, was shaped by a frenzied week of political twists and turns that culminated in an agreement between the Bush administration and Congressional leaders early Sunday morning.

The measure faced stiff resistance from Republican and Democratic lawmakers who portrayed it as a rush to economic judgment and an undeserved aid package for high-flying financiers who chased big profits through reckless investments.

Early in the House debate, Jeb Hensarling, Republican of Texas, said he intended to vote against the package, which he said would put the nation on “the slippery slope to socialism.” He said that he was afraid that it ultimately would not work, leaving the taxpayers responsible for “the mother of all debt.”

Another Texas Republican, John Culberson, spoke scathingly about the unbridled power he said the bill would hand over to the Treasury secretary, Henry M. Paulson Jr., whom he called “King Henry.”

A third Texan, Lloyd Doggett, a Democrat, said the negotiators had “never seriously considered any alternative” to the administration’s plan, and had only barely modified what they were given. He criticized the plan for handing over sweeping new powers to an administration that he said was to blame for allowing the crisis to develop in the first place.

With the financial package looming as a final piece of business before lawmakers leave to campaign for the November elections, leaders of both parties in the House and Senate intensified their efforts to sell reluctant members of Congress on the legislation.

All sides had to surrender something. The administration had to accept limits on executive pay and tougher oversight; Democrats had to sacrifice a push to allow bankruptcy judges to rewrite mortgages; and Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

Even so, lawmakers on all sides said the bill had been significantly improved from the Bush administration’s original proposal.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

“This is a major, major change,” Speaker Nancy Pelosi said on Sunday evening as she declared that negotiations were over and that a House vote was planned for Monday, with Senate action to follow.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department.

House Republicans had threatened to scuttle the deal, and proposed a vastly different approach that would have focused on insuring troubled debt rather than buying it. In the end, the insurance proposal was included on top of the purchasing power, but there is no requirement that the Treasury secretary use it, leaving them short of that goal.

It is virtually impossible to know the ultimate cost of the rescue plan to taxpayers, but Congressional leaders stressed that it would likely be far less than $700 billion. Because the Treasury will buy assets with the potential to resell them at a higher price, the government might even turn a profit.

That provision, pushed by House Democrats, was the last to be agreed to in a high-level series of talks that had top lawmakers and White House economic advisers hustling between offices just off the Capitol Rotunda until midnight on Saturday, scrambling to strike an agreement before Asian markets opened Sunday night.

The bill calls for disbursing the money in parts, starting with $250 billion followed by $100 billion at the discretion of the president. The Treasury can request the remaining $350 billion at any time, and Congress must act to deny it if it disapproves.

Ms. Pelosi, Mr. Paulson and others taking part in the talks announced that they had clinched a tentative deal at 12:30 a.m. Sunday, exhausted and a little giddy after more than seven hours of sparring. There were several tense moments, none more so than when Mr. Paulson, a critical player, suddenly seemed short of breath and possibly ill. He was tired, but fine.

Trying to bring around colleagues who remained uncertain of the plan, its architects sounded the alarm about the potential consequences of doing nothing. Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee and the lead Senate negotiator, raised the prospect of an economic catastrophe.

“If we don’t pass it, we shouldn’t be a Congress,” Mr. Gregg said.

Both major presidential candidates, Senator John McCain of Arizona, the Republican nominee, and Senator Barack Obama of Illinois, the Democratic candidate, gave guarded endorsements of the bailout plan. Both Mr. McCain and Mr. Obama had dipped into the negotiations during a contentious White House meeting on Thursday.

On Sunday evening, both parties convened closed-door sessions in the House to review the plan, and conservative House Republicans remained a potential impediment.

But the party leadership was circulating information aimed at refuting some of the main criticisms of the bailout, indicating they were poised to support it. “I am encouraging every member of our conference whose conscience will allow them to support this bill,” said Representative John A. Boehner of Ohio, the Republican leader.

A series of business-oriented trade associations with influence with Republicans also began weighing in on behalf of the plan.

The United States Chamber of Commerce issued a statement on Sunday night that said it “believes the legislation contains the necessary elements to successfully remove the uncertainty and stem the turmoil that has plagued financial markets in recent weeks.”

Members of the conservative rank and file remained unconvinced.

“While it creates a gimmicky $700 billion installment plan, attempts to improve transparency, and has new provisions cloaked as taxpayer protections, its net effect is still a huge bailout of the financial sector that will snuff out the free market system,” said Representative Connie Mack, Republican of Florida.

Some Democrats bristled that they were now being called on to do the financial bidding of an administration they had viewed as previously uncooperative in dealing with executives who had performed irresponsibly or worse.

“Financial crimes have been committed,” said Representative Marcy Kaptur, Democrat of Ohio. “Now Congress is being asked to bail out the culprits.”

Throughout Sunday, small groups of lawmakers could be found around the Capitol exchanging their views on the plan. Some said they were willing to take a political risk and back it.

One, Representative Jim Marshall, a Georgia Democrat facing a re-election contest, told colleagues in a private meeting that he would vote for the measure to bolster the economy. “I am willing to give up my seat over this,” Mr. Marshall said, according to another person who was there.

The architects of the plan said they realized they were calling on Congress to cast a tough vote since lawmakers might not get credit for averting a financial crisis since some constituents will not believe one was looming.

“Avoiding a catastrophe won’t be recognized,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee. “This economy is not going to have a blossoming on Wednesday.”

But he and others said the support from the two presidential contenders should provide some comfort to nervous lawmakers.

One of the more contentious issues was how to limit the pay of executives whose firms seek government aid, a top priority for Democrats and even some Republican lawmakers. But it was a concern for Mr. Paulson, who worried about discouraging firms from participating in the rescue plan, which seeks to convince companies to sell potentially valuable assets to the government at relatively bargain prices.

In the end, they settled on different rules for different companies depending on how they participate in the bailout. Firms that sell distressed debt directly to the government will be subject to tougher pay limits, including a mechanism to recover any bonuses or other pay based on corporate earnings that turn out to be inaccurate or fraudulent, and a ban on so-called “golden parachute” severance packages as long as the government has a stake in the firm.

Companies that participate in auctions, or other market-making mechanisms, and sell more than $300 million in troubled financial instruments to the government, will be barred from making any new employment contract with a senior executive that provides a golden parachute in the event of “involuntary termination, bankruptcy filing, insolvency or receivership.”

While some critics said the limits did not go far enough, lawmakers described the provision as a historic first step by Congress to limit exorbitant pay of corporate titans. “I think we wrote it as tight as we can get it in here,” Mr. Dodd said.

Reporting was contributed by Keith Bradsher from Hong Kong, Robert Pear from Washington and Graham Bowley from New York.

    House Rejects Bailout Package, 228-205, But New Vote Is Planned; Stocks Plunge, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30bailout.html?hp

Bailout Plan Rejected, Markets Plunge,
Forcing New Scramble to Solve Crisis

SEPTEMBER 30, 2008
The Wall Street Journal
By SARAH LUECK, DAMIAN PALETTA and GREG HITT

WASHINGTON -- The House of Representatives defeated the White House's historic $700 billion financial-rescue package -- a stunning turn of events that sent the stock market into a tailspin and added to concerns that the U.S. faces a prolonged recession if the legislation isn't revived.

The Dow Jones Industrial Average sustained its biggest point drop in history and its biggest closing decline since the day the markets re-opened after the Sept. 11, 2001, terrorist attacks. The Dow, which had opened sharply lower on fears of more possible bank failures, finished the day down 7%, with a 777.68 point drop to 10365.45. Losses to shares on the broader Dow Jones Wilshire 5000 index amounted, on paper, to $1.2 trillion -- eclipsing the size of the proposed bailout package. The Nasdaq Stock Market finished down 9.1%.

The widely watched VIX index, a measure of market volatility often called "the fear index," closed at its highest levels in its 28-year history. In early trading in Asia Tuesday, Japan's Nikkei was off 4.5%, and other markets also were down.

The 228-205 vote, which defied a full-court press from the president and the Treasury secretary, marked a dark moment in a month that has shaken the financial system to its core and forced the government to take a host of ad hoc measures to shore up confidence. Earlier Monday, U.S. authorities helped arrange the sale of Wachovia Corp. to Citigroup Inc., while the Federal Reserve joined other central banks in injecting more funds into credit markets.

The bailout was designed in part to get financial institutions lending again by ridding the market of the toxic mortgage-backed securities and other holdings that lenders fear could cause borrowers to default. If credit markets continue to seize, the impact on businesses and consumers could be widespread. Access to loans would be reduced, crimping spending and investment. Economists said the credit crunch could lead to increased layoffs in the U.S. and prompt a hefty rate cut from the Federal Reserve.

"The legislation may have failed," said House Speaker Nancy Pelosi, a California Democrat. "The crisis is still with us."

The bill's failure puts the Treasury Department in a bind. Officials there considered the rescue plan as a last-ditch effort to come up with a systemic approach to tackling the financial crisis. The Treasury can take some incremental steps, such as expanding a program to buy mortgage-backed securities issued by mortgage giants Fannie Mae and Freddie Mac, or using other administrative tools. But none of these measures would be as comprehensive in tackling the problems at the heart of the financial system.

In lieu of legislation, Treasury is likely to revert to addressing problems institution by institution, according to a person familiar with the matter, while waiting to see whether Congress will revisit Monday's vote. The government is likely to continue trying to extinguish fires by lending money to troubled institutions, aiming to prevent failures that could ripple through the financial sector. That could result in the government taking on the same toxic assets, but by a different route. The Federal Insurance Deposit Corp., which resolves failed banks, could also play a greater role.

"Our tool kit is substantial but insufficient," Treasury Secretary Henry Paulson said after the bill's failure.

Ever since Mr. Paulson unveiled the proposal two weekends ago, the rescue package had helped buoy financial markets. But it also sparked deep unease among lawmakers over what would be an unprecedented government intervention in the private sector.

The bill's failure marks a stinging defeat for the nation's political leadership. Both Republican and Democratic leaders in Congress and the White House had crafted an agreement over the weekend that was supposed to appease these simmering tensions.

But Monday's vote split both parties, whose members had been barraged all week with angry messages from constituents who opposed the bill. Among Democrats, 140 supported the bill and 95 voted against. Support among Republicans, who had revolted against an earlier iteration of the bill last week, was at the low end of what was expected by the House Republican leadership, with 65 in favor and 133 against. One Republican, retiring Rep. Jerry Weller of Illinois, did not vote.

In voting against the bill, conservatives who opposed government intervention were joined by many Democrats facing tight races in November. Other no votes were cast by House members from poorer districts, including members of the Congressional Black and Hispanic caucuses.

Of the 18 Democratic and Republican incumbents in close races -- classified "tossup" contests by the Cook Political Report -- just three voted for the bill. All six freshmen Democrats in tossup races voted against the bill.

Congressional leaders said they intended to go back to work on the bill, with a new vote possibly late in the week after the Jewish holiday of Rosh Hashanah, which began at sundown Monday and runs through Wednesday night.

'Calm Down and Relax'

But complex election-year politics make the outcome hard to predict. "We are going to continue to work," said Rep. Steny Hoyer, House majority leader. John Boehner, his Republican counterpart, suggested there would be further efforts to change the bill. "We need everybody to calm down and relax and get back to work," he said.

Democrats face a choice whether to continue work on a bipartisan bill or try to pass the bill with a majority of their party alone. That would likely mean reviving points that Republicans oppose, including an economic-stimulus package and a controversial provision that would allow bankruptcy-court judges to alter the terms of mortgages. For now, House Speaker Pelosi is committed to a "bipartisan bill," a Democratic leadership aide said.

Following the bill's failure, both parties embarked on a round of bitter finger-pointing. Congressional Republicans cited a speech by Ms. Pelosi on the House floor that blamed the economic crisis on years of Republican economic policies, including deregulation. "For too long this government, eight years, has followed a right-wing ideology of anything goes, no supervision, no discipline, no regulation," Rep. Pelosi said. "It has created not jobs, not capital; it has created chaos."

Rep. Eric Cantor of Virginia held up a copy of the remarks at a press conference held by Republican leaders and said Rep. Pelosi's "failure to listen and failure to lead" was to blame for some Republican defections.

Rep. Roy Blunt, the minority whip, said that "a couple" of Republicans said they were offended by the speaker and changed their minds. But he said those lawmakers were already wavering.

Rep. David Obey, a Wisconsin Democrat who stood watching the Republicans criticize Rep. Pelosi, called their remarks "ridiculous." He said the Republicans were jockeying for position before upcoming leadership elections. "The President wouldn't have gotten to first base without the cooperation of the Democratic leadership," Rep. Obey said. "Evidently some of these guys would rather lose the economy than lose the election."

The measure would have given Treasury a $700 billion line of credit and wide authority to buy the mortgages, securities and financial assets that are undermining market confidence.

The Bush administration had hoped the plan would stabilize financial markets as bad assets are pulled under the government's wing. Under the legislation, troubled banks and investment firms would qualify for government assistance, as would pension plans, local governments and small banks.

In many ways, the plan was star-crossed from the beginning. Treasury's initial two-and-a-half page proposal was ridiculed by lawmakers for granting the administration virtually unfettered power to spend the money as it saw fit. During a week of negotiations, the bill swelled with extra conditions and protections for taxpayers.

On Thursday, President George W. Bush convened a White House summit in a bid to unite leaders of both parties, as well as presidential candidates Sens. Barack Obama and John McCain, behind the proposal. But conservative House Republicans, encouraged by the return to Washington of Sen. McCain, demanded additions to make the bill more "free market." The dissention derailed an already contentious summit.

The administration, meanwhile, failed to get a handle on the politics of the package. It was quickly dubbed a "Wall Street bailout." Although President Bush talked repeatedly about the impact of restricted lending on small businesses, jobs and savings, a populist uproar continued to tag the bill as a rescue plan for the financial whizzes who caused the financial mess. In addition, lawmakers were frustrated with the terse answers from Treasury about how exactly the money would be spent.

"I guess [Democrats] saw the same problems we did and they didn't want to go home and explain this thing," said Rep. Scott Garrett, a Republican from New Jersey who voted against the bill.

When the deal was brokered, Democrats said they planned to come up with 120 votes. Party leaders drew votes from the New York delegation, which tends to be sensitive to stock-market concerns, and gained support from moderate Democrats.

    Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis, WSJ, 30.9.2008, http://online.wsj.com/article/SB122270285663785991.html

Freddie Mac and Fannie Mae

Receive Subpoenas

September 30, 2008
By REUTERS
The New York Times

Fannie Mae and Freddie Mac, the mortgage finance giants that were taken over by the government this month, said Monday that they were subpoenaed for documents as part of a federal grand jury investigations into their accounting.

The United States attorney’s office for the Southern District of New York subpoenaed the two on Friday for documents related to accounting, disclosure and corporate governance dating from Jan. 1, 2007, to the present.

The Securities and Exchange Commission is also investigating these matters and directing the companies to preserve the documents, Fannie Mae and Freddie Mac said.

Both companies said they would cooperate.

The Federal Bureau of Investigation said last week that it was expanding its inquiry of possible corporate fraud related to the mortgage market collapse to include Fannie Mae, Freddie Mac, Lehman Brothers and the giant insurer American International Group.

The allegations would deal with misstatements of assets, the F.B.I. director, Robert Mueller, told Congress earlier this month.

Financial upheaval tied to the mortgage market meltdown has propelled the government toward a $700 billion financial rescue package.

With the broader stock markets down more than 3 percent, shares of Fannie Mae were up more than 6 percent at $2.11 and Freddie Mac’s shares were little changed at around $1.85.

    Freddie Mac and Fannie Mae Receive Subpoenas, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30subpoena.html

Oil Falls Sharply on Renewed Economic Fears

September 30, 2008
The New York Times
By JAD MOUAWAD

Crude oil prices dropped sharply on Monday because of concerns that a $700 billion American bailout plan for the financial markets may fail to revive the economy, depressing demand for petroleum products.

Crude oil futures fell as much as 7 percent to $99.80 a barrel on the New York Mercantile Exchange. They have lost more than $20 since last Monday.

In the last two weeks, commodity markets have been shaken by the turmoil on Wall Street while still recovering from the impact of two powerful hurricanes in the Gulf of Mexico. After reaching $145.29 a barrel in July, prices had slumped to nearly $90 a barrel earlier this month as the nation’s economic prospects dimmed. But in a wild market, they spiked back up last week on the back of tremendous uncertainty in the financial markets.

Anxiety has gripped investors once again on Monday even after Congressional leaders said they had reached an agreement about the financial bailout plan, the largest in history. The plan would allow the Treasury Department to buy back troubled assets held by banks and other financial institutions.

But the news was overshadowed by fresh concerns that the financial crisis was far from over, helping push down equity as well as commodity markets.

In the latest episode of the unfolding meltdown, Citigroup will buy the banking operations of the Wachovia Corporation, the government said Monday. Meanwhile, the Belgian, Dutch and Luxembourg governments partially nationalized the European financial conglomerate Fortis, another sign that the crisis that began because of sour home mortgages in the United States could be spreading.

Analysts at Barclays Capital said the frantic weekend negotiations that led to the bailout agreement “appear to have failed to revive market sentiment.” As the economic situation deteriorates, the demand for commodities, including oil, is expected to slow.

“The outlook for global equity, interest rate and exchange rate markets has become increasingly uncertain,” analysts at Deutsche Bank wrote in a note to investors. “We believe commodities will be unable to escape the contagion. From a commodity perspective our most pressing concern is to what extent the U.S. virus spreads globally and specifically to China.”

The bank’s analysts pared their expectations for next year as oil consumption drops because of slowing economic growth, reducing their oil and gas price forecasts by about 20 percent for 2009.

Concerns that the crisis might be spreading to Europe helped push down the value of the European common currency. The euro dropped against the dollar to $1.43 on Monday from $1.46 on Friday.

The weaker economic outlook could further push down oil prices in the coming months if demand for oil in developed countries keeps falling, according to Ben Dell, an analyst at Bernstein Research. He expects oil consumption could fall by 1.3 million barrels a day, or 2.6 percent, in the fourth quarter this year. That is much more than the 470,000 barrels a day drop forecast from the International Energy Agency.

“This dynamic is similar to that of the 1980s and suggests that investors should be increasingly concerned with the slowdown in Europe, Japan and the U.S.,” he wrote in a note to clients.

    Oil Falls Sharply on Renewed Economic Fears, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30oil.html?ref=business

Dow Down 300 in Early Trading

September 30, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The financial system remained on edge as another week dawned on the embattled canyons of Wall Street.

Stocks opened sharply lower on Monday, with the Dow Jones industrials down more than 300 points in the first half-hour of trading, even as federal lawmakers hammered out an agreement on the government bailout plan and Citigroup snatched up the core business of Wachovia, the ailing banking giant.

The latter move, which was spearheaded by federal regulators, could have been taken as a sign that the government was eager to restore stability to the financial system. But the near-collapse of Wachovia, which was the nation’s fourth-largest bank, may have underscored the troubling sense among investors that any bank is vulnerable in the current crisis.

And with the bailout plan still pending Congressional approval __ — and the Senate vote not scheduled until Wednesday — there were no guarantees that even a $700 billion bailout package would solve the ongoing problems.

As pressure continued on the world’s credit markets, the Federal Reserve announced a coordinated move with nine other central banks to vastly increase the amount of liquidity in the world financial system.

Money continued to flow into the safe space of Treasury bills and lending rates stayed high, signs that investors remained deeply ill at ease about the health of the financial system.

The Standard & Poor’s 500-stock index was down more than 3.6 percent shortly before 10 a.m. Shares of Wachovia lost 90 percent of their value overnight. Citigroup shares fell, and shares of Morgan Stanley and Goldman Sachs also traded lower.

The declines in New York came sharp drops in stocks across the world. The benchmark Hong Kong index plummeted 4.3 percent overnight; Tokyo’s Nikkei 225 lost 1.2 percent.

In Europe, stocks in London, Paris and Frankfurt were down around 3 percent in mid-afternoon trading.

President Bush appeared outside the White House at 7:30 a.m., before the markets opened, to endorse the bailout legislation that was agreed upon over the weekend.

“A vote for this bill is a vote to prevent economic damage to you and your community,” the president said in a brief statement. “The impact of the credit crisis and housing correction will continue to affect our financial system and growth of our economy over time. But I am confident that in the long run, America will overcome these challenges.”

The problems in Europe came after government bailouts of several banks, including the British lender Bradford & Bingley and the Belgian-Dutch financial group Fortis.

If anything, the moves created uncertainty about which institution would be next, said Jean Bruneau, a trader at Société Générale in Paris.

Shares of the Brussels-based lender Dexia fell 22.7 percent as investors worried that it might be the next bank to need government help. The company may soon announce a plan to raise capital, the French newspaper Le Figaro said, without citing a source.

The agreement on Capitol Hill on the terms of the bailout package failed to lift the mood in Europe.

“The U.S. bailout doesn’t change some negative short-term factors — that the economic outlook is weak and that the earnings outlook is weak,” said Tammo Greetfeld, a strategist at UniCredit Markets & Investment Banking in Munich. “The key question is can the bailout create enough optimism among investors that they focus on the medium-term improvement and ignore short-term weakness. We’re not there yet, the benefits look to be too far down the road.”

The dollar gained against the euro and the pound, and was stable against the yen.

Stock markets in Asia fell on renewed fears of a global credit crunch, erasing earlier gains that came after the weekend agreement on Capitol Hill.

The Standard and Poor’s/Australian Stock Exchange 200 Index fell 2 percent after rising slightly on Monday morning. The Kospi Index was down 1.3 percent after an early 1.2 percent surge in Seoul.

Bradford & Bingley, the British lender, was seized by the government after the credit crisis shut off funding and competitors refused to buy mortgage loans that customers are struggling to repay.

Banco Santander, the Spanish lender, will pay $1.1 billion to buy Bradford & Bingley branches and deposits, the Treasury said. Santander shares declined 2.8 percent to 10.61 euros. Shares in UBS, the Swiss bank, fell 7.7 percent.

The stock market in Taiwan was closed on Monday as Typhoon Jangmi passed directly over Taipei. Mainland China’s stock markets in Shanghai and Shenzhen are closed this week as part of a national holiday marking the establishment of China as a Communist country in 1949.

Keith Bradsher and Matthew Saltmarsh contributed reporting.

    Dow Down 300 in Early Trading, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30markets.html?hp

Citigroup Buys Banking Operations of Wachovia

September 30, 2008
The New York Times
By ERIC DASH and ANDREW ROSS SORKIN

Citigroup will acquire the banking operations of the Wachovia Corporation, the Federal Deposit Insurance Corporation said Monday morning, the latest bank to fall victim to the mortgage market.

The F.D.I.C. said that the agency would absorb losses from Wachovia above $42 billion and that it would receive $12 billion in preferred stock and warrants from Citigroup.

“Wachovia did not fail,” the F.D.I.C. said, “rather it is to be acquired by Citigroup Inc on an open bank basis with assistance from the F.D.I.C.”

Under the deal, Citigroup will acquire most of Wachovia’s assets and liabilities, including five depository institutions and will assume senior and subordinated debt of Wachovia, the F.D.I.C. said. Wachovia Corporation will continue to own the AG Edwards and Evergreen..

“There will be no interruption in services and bank customers should expect business as usual,” the F.D.I.C. chairman, Sheila C. Bair, said.

The move was necessary, the F.D.I.C. said, to avoid serious adverse effects on economic conditions and financial stability.

“This morning’s decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury,” Ms. Bair said. “This action was necessary to maintain confidence in the banking industry given current financial market conditions.”


The sale would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup.

Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.

The talks with Wachovia intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry. Only days earlier, federal regulators seized and sold the nation’s largest savings and loan, Washington Mutual, in one of a series of important deals that have reshaped the financial landscape.

As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.

The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks may be unable to compete with these behemoths.

In the last two weeks, Wachovia had entered into discussions with several possible suitors. After the collapse of Lehman Brothers, Wachovia held talks with Goldman Sachs and Morgan Stanley and put out inquiries to other banks, according to people close to the situation.

Last week, it held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interested cooled.

As lawmakers worked in Washington on the financial bailout this weekend, Wachovia executives huddled in the Seagram Building offices of Sullivan & Cromwell on Park Avenue.

Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department, who took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker. At 8:15 am. on Saturday, Citigroup and Wells took their first peek at Wachovia’s books.

Regulators pressed the parties to move quickly. Senior officials at the Federal Reserve in Washington, and its branches in New York, Richmond and San Francisco held weekend discussions with all the banks involved. Top officials at the Federal Deposit Insurance Corporation and the Treasury were also in the loop.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York, personally reached out to executives involved in the process to assess the situation and spur it along. Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial guarantee, as regulators did with JP Morgan’s acquisition of Bear Stearns, according to people briefed on and involved with the process.

Both Citigroup and Wells Fargo are deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people said. Bankers had little time to assess the risk.

Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday, according to people briefed on the talks. For Wells Fargo, a deal would extend its branch banking network across the Mississippi River, creating a nationwide franchise that would compete with Bank of America and JPMorgan Chase.

Citigroup executives consider Wachovia a make-or-break deal for their consumer banking ambitions. If Citigroup were to buy Wachovia, it would gain one of the preeminent retail bank operations after struggling to build one for years. It would also give Citigroup access to more stable customer deposits, allowing it to rely less heavily on outside investors for funds. If Citigroup fails to clinch a deal, its domestic retail operations would be far behind Bank of America and JPMorgan Chase. Vikram S. Pandit, Citigroup’s chief executive, was personally overseeing the talks.

With a big presence in California, where home prices have fallen particularly sharply, Wells Fargo has suffered big losses on mortgages and credit card loans. But Wells, unlike many banks, maintained relatively high lending standards, so it has not been crippled by the bust like many of its big competitors.

Wachovia, by contrast, has been ravaged. Its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages, has proved disastrous. The bank also faces mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.

    Citigroup Buys Banking Operations of Wachovia, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30bank.html?hp

Bailout Plan in Hand, House Braces for Tough Vote

September 30, 2008
The New York Times
By CARL HULSE and DAVID M. HERSZENHORN

WASHINGTON — President Bush made a televised statement at the White House early on Monday urging Congress to act quickly, as the House of Representatives braced for a difficult vote on a $700 billion rescue of the financial industry.

The vote, expected later on Monday, comes after a weekend of tense negotiations produced a rescue plan that Congressional leaders said was greatly strengthened by new taxpayer safeguards.

Calling it a “bold” bill, Mr. Bush praised lawmakers “from both sides of the aisle” for reaching agreement, and said it would “help keep the crisis in our financial system from spreading throughout our economy.”

He said the vote would be difficult, but he urged lawmakers to pass the bill promptly. “A vote for this bill is a vote to prevent economic damage to you and your community,” he said.

“We will make clear that the United States is serious about restoring stability and confidence in our system,” he said, speaking at a lectern set up on a path on the White House grounds.

He addressed concerns about the high cost of the legislation to taxpayers, but he said he expected that “much if not all of the tax dollars will be paid back.”

Despite Mr. Bush’s urgings, investors around the world continued to demonstrate doubts that the bill would pass, or if it does, whether it would fully address the financial crisis. European and Asian stock markets declined on Monday, and there were early signs that American markets would trade lower as well.

The 110-page rescue bill, intended to ease a growing credit crisis, was shaped by a frenzied week of political twists and turns that culminated in an agreement between the Bush administration and Congressional leaders early Sunday morning.

The measure still faced stiff resistance from Republican and Democratic lawmakers who portrayed it as a rush to economic judgment and an undeserved aid package for high-flying financiers who chased big profits through reckless investments.

With the financial package looming as a final piece of business before lawmakers leave to campaign for the November elections, leaders of both parties in the House and Senate intensified their efforts to sell reluctant members of Congress on the legislation.

All sides had to surrender something. The administration had to accept limits on executive pay and tougher oversight; Democrats had to sacrifice a push to allow bankruptcy judges to rewrite mortgages; and Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

Even so, lawmakers on all sides said the bill had been significantly improved from the Bush administration’s original proposal.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

“This is a major, major change,” Speaker Nancy Pelosi said on Sunday evening as she declared that negotiations were over and that a House vote was planned for Monday, with Senate action to follow.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department.

On Sunday, President Bush called the measure “a very good bill” and praised Congressional leaders. “This plan sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system,” he said in a statement, a sentiment he echoed on Monday. “Without this rescue plan, the costs to the American economy could be disastrous.”

House Republicans had threatened to scuttle the deal, and proposed a vastly different approach that would have focused on insuring troubled debt rather than buying it. In the end, the insurance proposal was included on top of the purchasing power, but there is no requirement that the Treasury secretary use it, leaving them short of that goal.

It is virtually impossible to know the ultimate cost of the rescue plan to taxpayers, but Congressional leaders stressed that it would likely be far less than $700 billion. Because the Treasury will buy assets with the potential to resell them at a higher price, the government might even turn a profit.

That provision, pushed by House Democrats, was the last to be agreed to in a high-level series of talks that had top lawmakers and White House economic advisers hustling between offices just off the Capitol Rotunda until midnight on Saturday, scrambling to strike an agreement before Asian markets opened Sunday night.

The bill calls for disbursing the money in parts, starting with $250 billion followed by $100 billion at the discretion of the president. The Treasury can request the remaining $350 billion at any time, and Congress must act to deny it if it disapproves.

The agreement on a bailout plan was greeted with subdued optimism in early Asian trading on Monday. But shares sank by late Monday morning on renewed worries about the credit crisis, with a decision by HSBC to raise lending rates by 0.5 percent in Hong Kong triggering a drop of 2 percent in the Hang Seng Index in Hong Kong and 0.9 percent in the Kospi Index in Seoul.

The stock market in Taiwan is closed on Monday as Typhoon Jangmi passes over Taipei.

The dollar also strengthened in Asia and was worth 106.485 yen by midmorning on Monday after trading at 106.01 late Friday in New York. The euro weakened to $1.4506 on Monday from $1.4614 in late New York trading on Friday.

Ms. Pelosi, Treasury Secretary Henry M. Paulson Jr. and others taking part in the talks announced that they had clinched a tentative deal at 12:30 a.m. Sunday, exhausted and a little giddy after more than seven hours of sparring. There were several tense moments, none more so than when Mr. Paulson, a critical player, suddenly seemed short of breath and possibly ill. He was tired, but fine.

Trying to bring around colleagues who remained uncertain of the plan, its architects sounded the alarm about the potential consequences of doing nothing. Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee and the lead Senate negotiator, raised the prospect of an economic catastrophe.

“If we don’t pass it, we shouldn’t be a Congress,” Mr. Gregg said.

Both major presidential candidates, Senator John McCain of Arizona, the Republican nominee, and Senator Barack Obama, the Democratic candidate, gave guarded endorsements of the bailout plan. Both Mr. McCain and Mr. Obama had dipped into the negotiations during a contentious White House meeting on Thursday.

On Sunday evening, both parties convened closed-door sessions in the House to review the plan, and conservative House Republicans remained a potential impediment.

But the party leadership was circulating information aimed at refuting some of the main criticisms of the bailout, indicating they were poised to support it. “I am encouraging every member of our conference whose conscience will allow them to support this bill,” said Representative John A. Boehner of Ohio, the Republican leader.

A series of business-oriented trade associations with influence with Republicans also began weighing in on behalf of the plan.

The United States Chamber of Commerce issued a statement on Sunday night that said it “believes the legislation contains the necessary elements to successfully remove the uncertainty and stem the turmoil that has plagued financial markets in recent weeks.”

Members of the conservative rank and file remained unconvinced.

“While it creates a gimmicky $700 billion installment plan, attempts to improve transparency, and has new provisions cloaked as taxpayer protections, its net effect is still a huge bailout of the financial sector that will snuff out the free market system,” said Representative Connie Mack, Republican of Florida.

Some Democrats bristled that they were now being called on to do the financial bidding of an administration they had viewed as previously uncooperative in dealing with executives who had performed irresponsibly or worse.

“Financial crimes have been committed,” said Representative Marcy Kaptur, Democrat of Ohio. “Now Congress is being asked to bail out the culprits.”

Throughout Sunday, small groups of lawmakers could be found around the Capitol exchanging their views on the plan. Some said they were willing to take a political risk and back it.

One, Representative Jim Marshall, a Georgia Democrat facing a re-election contest, told colleagues in a private meeting that he would vote for the measure to bolster the economy. “I am willing to give up my seat over this,” Mr. Marshall said, according to another person who was there.

The architects of the plan said they realized they were calling on Congress to cast a tough vote since lawmakers might not get credit for averting a financial crisis since some constituents will not believe one was looming.

“Avoiding a catastrophe won’t be recognized,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee. “This economy is not going to have a blossoming on Wednesday.”

But he and others said the support from the two presidential contenders, Senators McCain and Obama, should provide some comfort to nervous lawmakers.

While the House was planning to act Monday, the Senate schedule was uncertain. A vote might not occur until Wednesday or later because of the Jewish holidays and possible procedural obstacles. But Senate vote-counters were confident they could get the needed support.

One of the more contentious issues was how to limit the pay of executives whose firms seek government aid, a top priority for Democrats and even some Republican lawmakers. But it was a concern for Mr. Paulson, who worried about discouraging firms from participating in the rescue plan, which seeks to convince companies to sell potentially valuable assets to the government at relatively bargain prices.

In the end, they settled on different rules for different companies depending on how they participate in the bailout. Firms that sell distressed debt directly to the government will be subject to tougher pay limits, including a mechanism to recover any bonuses or other pay based on corporate earnings that turn out to be inaccurate or fraudulent, and a ban on so-called “golden parachute” severance packages as long as the government has a stake in the firm.

Companies that participate in auctions, or other market-making mechanisms, and sell more than $300 million in troubled financial instruments to the government, will be barred from making any new employment contract with a senior executive that provides a golden parachute in the event of “involuntary termination, bankruptcy filing, insolvency or receivership.”

While some critics said the limits did not go far enough, lawmakers described the provision as a historic first step by Congress to limit exorbitant pay of corporate titans. “I think we wrote it as tight as we can get it in here,” Mr. Dodd said.

Congressional staff from both parties and Treasury worked through Friday night and into the predawn, before heading home for some sleep. They resumed work late Saturday morning, and Mr. Paulson arrived at the Capitol to join top lawmakers in Ms. Pelosi’s suite for a meeting at 3 p.m. At least a dozen major differences remained.

The meeting was initially described as a gathering of the five chief negotiators, Mr. Paulson, and a Democrat and Republican each from the House and Senate. But additional Democrats piled into the talks, angering Republicans who accused Democrats of packing the sessions.

For a brief, nerve-fraying moment at the outset, one administration participant said, Mr. Paulson surveyed the circus-like scene and wondered if everyone was committed to reaching a deal. It was quickly clear that they were — but not before so much information starting leaking out that the BlackBerrys of staff members were confiscated and collected in a trash bin.

At one point, Senator Charles E. Schumer, Democrat of New York, was thumping the table, demanding to release the $700 billion in installments. At another point, Senator Max Baucus, Democrat of Montana, was shouting at Mr. Paulson, accusing him of trying to undermine the limits on pay for executives.

Reporting was contributed by Keith Bradsher from Hong Kong, Robert Pear from Washington and Graham Bowley from New York.

    Bailout Plan in Hand, House Braces for Tough Vote, NYT, 30.9.2008, http://www.nytimes.com/2008/09/30/business/30bailout.html?hp

    Related > http://graphics8.nytimes.com/packages/pdf/business/20080928bailout_text.pdf

FACTBOX:

Key elements of Congress' bailout plan

Mon Sep 29, 2008
4:51am EDT
Reuters

(Reuters) - Leaders in the Congress have agreed to the underpinnings of a deal that will allow the Treasury Department to buy up to $700 billion in troubled securities to soothe global credit markets.

Congressional negotiators amended the Treasury Department's original proposal to add new oversight powers and conditions that would protect taxpayers.

The full House of Representatives and Senate must both approve the legislation, with a vote expected in the House on Monday. Key elements of the plan follow:

- The $700 billion in buying power would be doled out by Congress in stages. After the first $250 billion is authorized, the President could request another $100 billion. The final $350 billion could be cleared by a further act of Congress.

- Eligible assets include residential or commercial mortgages and related instruments which were originated or issued on or before March 14, 2008. Other financial instruments can be included in consultation with the Federal Reserve if Congress is notified.

- Treasury secretary given broad discretion to determine the methods for buying assets.

- Foreign central banks, or institutions owned by a foreign government, cannot take part.

- The government will take a stake in companies that tap federal aid so that taxpayers can share in the profits if those companies get back on their feet. An exception applies to financial firms that offload less than $100 million of soured investments.

- If a company receives aid but fails, the government will be one of the last investors to see a loss.

- A new congressional panel would have oversight power and the Treasury secretary would report regularly to lawmakers in two elements of a multi-level oversight apparatus.

- If the Treasury takes a stake in a company, the top five executives would be subject to limits on their compensation.

- Executives hired after a financial company offloads more than $300 million in assets via auction to the government will not be eligible for "golden parachutes."

- Would permit the Federal Reserve to begin paying interest on bank reserves from October 1, giving it another tool for easing credit strains.

- Mandates a study on the impact of mark-to-market accounting standards, that critics blame for a downward spiral in the valuation of assets on corporate balance sheets.

- The federal government may stall foreclosure proceedings on home loans purchased under the plan.

- Alongside the plan to buy securities outright, the Treasury Department will conceive an alternative insurance program that would underwrite troubled loans and would be paid for by participating companies.

- If the government has taken losses five years into the program, the Treasury Department will draft a plan to tax the companies that took part to recoup taxpayer losses.

(Reporting by Patrick Rucker; Editing by Tim Dobbyn)

    FACTBOX: Key elements of Congress' bailout plan, R, 29.9.2008, http://www.reuters.com/article/idINTRE48S01420080929?virtualBrandChannel=10112

Bailout snag seen extending Wall Street's pain

Mon Sep 29, 2008
6:50pm EDT
By Ellis Mnyandu
Reuters

NEW YORK (Reuters) - There could be more pain ahead for Wall Street on Tuesday as the odds of quick passage of the $700 billion bill to bail out the financial sector looked slim after lawmakers rejected the first version on Monday.

With Asian stocks set to follow Wall Street's biggest slide since the 1987 crash, investors' fear threatened to grip markets further after U.S. lawmakers rejected the proposed $700 billion plan to stabilize the U.S. financial sector and contain the credit crisis.

"Short term, the market is getting crushed. But more importantly, we are telling clients we could be at the beginning of a whole new down phase," said Bill Strazzullo, partner and chief market strategist at Bell Curve Trading in Boston.

He said the benchmark S&P 500 .SPX falling to the 1,000 level was not out of the question.

The U.S. House of Representatives voted 228 to 205 against a compromise bailout plan that would have let the Treasury Department buy toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the November 4 U.S. elections.

On Monday the Dow Jones industrial average .DJI sank 777.68 points, or 6.98 percent, to 10,365.45. The Standard & Poor's 500 Index .SPX dropped 106.59 points, or 8.79 percent, to 1,106.39. The Nasdaq Composite Index .IXIC lost 199.61 points, or 9.14 percent, to 1,983.73.

UNCHARTED WATERS

"We have to see what happens here," Strazzullo said. "It is totally uncharted. I think it is very difficult to gauge. It's not trying to predict an economic event. It's a political event and you never know what is going on behind the scenes."

Analysts said the freezing of credit markets and signs that more and more banks are now succumbing to the strains stemming from the U.S. housing slump probably will fuel more volatility.

S&P 500 futures dropped 3.50 points late on Monday, while Dow Jones industrial average futures declined 40 points and Nasdaq 100 fell 3 points.

On the Asian front, Nikkei futures traded in Chicago were down 905 points, or 7.5 percent.

"Everyone is talking about when are they going to have another vote. The big thing this market wants is some type of a resolution on whatever bailout plan we get," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.

"Fear seems to be really ramping up. Tomorrow's open is going to be the most anticipated opening since the reopening of the market on September 17, 2001."

That day, which was a Monday, marked the first day of trading after the September 11 attacks on the United States in 2001.

The failure of the bailout bill -- after more than a week of intensive closed-door negotiations intended to hammer out a compromise plan -- brought new uncertainty about the response of the U.S. government to the worst financial crisis since the Great Depression.

U.S. President George W. Bush was set to huddle with economic advisers to consider the administration's next move.

Any action, however, might be complicated by the observation of Rosh Hashanah, the Jewish New Year holiday, from sunset on Monday, September 29, until sunset on Wednesday, October 1.

"The world is obviously looking for some type of leadership from the United States, but the crisis is bigger than just the U.S. obviously," said Detrick.
 

(Additional reporting by Kristina Cooke)

(Reporting by Ellis Mnyandu; Editing by Jan Paschal)

    Bailout snag seen extending Wall Street's pain, R, 29.9.2008, http://www.reuters.com/article/ousiv/idUSTRE48S8X920080929

How J.P. Morgan Raised $11.5 Billion in 24 Hours

September 29, 2008
9:03 am
The Wall Street Journal
Posted by Heidi N. Moore

The fall of Washington Mutual wasn’t a surprise to the government. Nor was it a surprise to J.P. Morgan.

Three weeks before J.P. Morgan bought WaMu’s deposits for $1.9 billion, officials at the Federal Deposit Insurance Corporation had called J.P. Morgan to say that the FDIC was carefully monitoring WaMu and that a seizure of its assets was likely. The FDIC said it would want to immediately auction off WaMu’s assets if a seizure was necessary, people familiar with the situation told Deal Journal.

J.P. Morgan was well-prepared, then, when the FDIC asked for bids on Tuesday, Sept. 23. On Wednesday night, the regulators told J.P. Morgan that the bank had won the bidding, one person close to the situation said. The Wall Street Journal reported the sale at around 7 p.m. on Thursday, and J.P. Morgan hurriedly called a conference call in two hours to discuss the sale.

But that was just the first step. J.P. Morgan had known for three weeks that if WaMu was seized, and J.P. Morgan won the assets, the big bank would want to raise enough capital to keep its Tier 1 capital at at least 8%. Tier 1 capital is the gauge of a bank’s health watched by regulators, and it measures whether a bank has sufficient capital to cushion future losses. The federal government requires a minimum Tier 1 ratio of 4%, and 8% is typically thought to be robust. J.P. Morgan’s plan was to gather $8 billion in one big capital-raising, which would put its Tier 1 ratio between 8% and 8.5%

It is not, however, easy to raise $8 billion of capital without revealing why. J.P. Morgan could not risk revealing anything about WaMu’s potential seizure, or face the FDIC’s wrath and a major market disruption. So the bank chose a strategy that has become increasingly popular in these times of crisis: “wall-crossing.”

Here’s how it worked. J.P. Morgan picked 10 major financial firms that could help the bank raise money. None were sovereign wealth funds or private equity firms, according to people familiar with the situation; all 10 were U.S. asset managers, and several were already among the list of the biggest J.P. Morgan shareholders. Some of the firms — who remain unnamed — also helped Goldman Sachs raise billions of dollars last week.

J.P. Morgan’s bankers called the 10 chosen firms and posed a question: the bankers were advising a U.S. bank that was contemplating a strategic acquisition of a retail bank, and a capital-raising could be connected. The bankers could not reveal their client until the bidding was done. Did the investors want to hear more? If they said yes, they would get details; if they said no, they would be left out in the cold on a deal that could potentially move the markets.

Nine of the 10 investors that J.P. Morgan invited said they were interested in hearing more. As soon as they agreed, they were asked to sign confidentiality agreements that would make them official J.P. Morgan insiders, which would mean that they could not trade in the bank’s stock. J.P. Morgan’s CEO, Jamie Dimon, along with CFO Mike Cavanagh and retail chief Charlie Scharf triple-teamed to speak with the investors in half-hour conference calls that extended throughout the day on Thursday. The investors were told that the U.S. bank in question was J.P. Morgan itself. Some of the investors independently guessed that the takeover candidate was WaMu, but none knew that a potential seizure of WaMu’s assets was in the works, nor did J.P. Morgan tell them.

By the end of the day, J.P. Morgan had raised $7 billion from the nine investors. By 9:15 p.m., when J.P. Morgan held its public conference call to announce the deal, all seven investors were taken off the “insiders” list and no longer had any access to material non-public information about the bank. J.P. Morgan also planned to raise another $1 billion in the capital markets on Friday by opening the offering to anyone who wanted to participate. Meanwhile, Dimon repeatedly touted the effort as an “offensive” one, painting the capital-raising as an effort to get ahead while other banks, he indicated, were just trying to keep up.

Between 7 a.m. and 9:30 a.m. on Friday, before the markets opened, J.P. Morgan pitched the offering to new investors, who clamored for enough shares to double the amount J.P. Morgan had expected to raise in the open market to $2 billion. A “greenshoe,” or overallotment, added another $1.5 billion. The bank had gathered $11.5 billion, enough to take its regulatory capital ratio very close to 9%, a full 100 basis points above what it had expected just a day before.

J.P. Morgan had sold its open-market shares at their Wednesday closing price of $40.50, a 6.8% discount to the Thursday close of $43.46. Investors expected a thick discount because the offering itself was so large. In addition, nvestors wanted the benefit of a lower price where they would not be paying for Thursday’s one-day rally in a volatile market.

In an internal memo, J.P. Morgan executives Steve Black and Bill Winters warned employees, “the dislocation and volatility in the markets are far from over.” Many investors, including J. Christopher Flowers and his old shop Goldman Sachs, are gearing up to bid for the masses of distressed bank assets that are expected to flood the markets in coming months.

Will J.P. Morgan be a buyer again?

    How J.P. Morgan Raised $11.5 Billion in 24 Hours, WSJ, 29.9.2008, http://blogs.wsj.com/deals/2008/09/29/how-jp-morgan-raised-115-billion-in-24-hours/

Fearful consumers stop spending in August

Mon Sep 29, 2008
12:08pm EDT
Reuters
By Glenn Somerville

WASHINGTON (Reuters) - Consumers facing rising unemployment kept their spending unchanged in August even though incomes rose, according to a government report Monday that showed optimism about the economy's direction was fading.

The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise.

Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July's revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain.

Incomes were boosted early this year by payments made under an economic stimulus program but that has largely worn off.

"Consumers seem to have hit the foxholes," said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, adding that he hoped a proposed $700-billion bailout package that Congress is voting on for U.S. financial firms may relieve some uncertainty about the future.

Consumer spending on goods and services fuels about two-thirds of U.S. economic activity so the economy is widely predicted to slow in coming quarters. In the second-quarter report on gross domestic product issued last Friday, consumer spending already was revised down to a 1.2 percent annual rate from 1.7 percent and is likely to keep losing momentum.

"It looks like we are poised to see a real-term decline in personal consumption and that will likely result in a negative GDP number in the third quarter," cautioned James O'Sullivan, economist at UBS Securities in Stamford, Connecticut.

Separately, the Dallas Federal Reserve Bank said its index of manufacturing activity weakened sharply in September, falling to -39.6 from -18.8 in August though some of the drop likely stemmed from Hurricane Ike causing temporary factory closings.

The income and spending data had no impact on financial markets, which still were grappling with news of another U.S. bank merger and with details of the huge taxpayer-financed bailout program for U.S. financial firms. The Dow Jones Industrial Average and the Nasdaq composite index both were sharply lower at midday.

Despite higher August incomes, consumers facing higher prices for gasoline and other items were unable to save more. The personal savings rate dropped to 1 percent from 1.9 percent in July.

Meanwhile, the report pointed to persistent inflation pressures. The personal consumption expenditures index on a year-over-year basis rose 4.5 percent in August, only barely below the 4.6 percent rise posted in July. Core prices that exclude food and energy were up 2.6 percent -- the highest rate since the beginning of 1995.

Core PCE was up 0.2 percent from July, in line with expectations.
 

(Additional reporting by Richard Leong in New York, Editing by Andrea Ricci)

    Fearful consumers stop spending in August, R, 29.9.2008, http://www.reuters.com/article/topNews/idUSTRE48S3CB20080929

Hedge Funds Are Bracing for Investors to Cash Out

September 29, 2008
The New York Times
By LOUISE STORY

First, the money rushed into hedge funds. Now, some fear, it could rush out.

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

“Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

What happens at hedge funds, those loosely regulated private investment vehicles, matters to just about every investor in America. Hedge funds are not just for the rich anymore. Since 2002, the industry has roughly tripled in size, as pension funds, endowments and foundations piled in, hoping for market-beating returns.

Now, the heady returns of the industry’s glory days are over, at least for now. This is shaping up to be the industry’s worst year on record, with the average fund down nearly 10 percent so far, according to Hedge Fund Research. Famous traders like Steven A. Cohen, who runs SAC Capital Advisors, are losing money, and even Kenneth C. Griffin, the head of Citadel Investment Group, is down in one of his funds.

And they are the lucky ones. A growing number of hedge funds are closing down. About 350 were liquidated in the first half of the year. While hedge funds come and go all the time, if the trend continues, the number of closures would be up 24 percent this year from 2007.

Many funds are bracing for trouble. The industry has set aside $600 billion in cash, according to Citigroup analysts, partly because of the uncertainty hanging over the markets but also because of possible redemptions. If redemptions do pour in, hedge funds can freeze the process by not paying investors for a certain period of time, slowing the pace of withdrawals.

One little-known hedge fund barometer is pointing to trouble, however. The alphabet soup of complex investments that Wall Street created in recent years — R.M.B.S.’s, C.D.O.’s and the like — includes C.F.O.’s, short for collateralized fund obligations. Virtually unknown outside the industry, these investments are the hedge fund equivalent of mortgage-backed securities: securities backed by hedge funds.

But last week, credit ratings agencies warned that they might lower the ratings of several C.F.O.’s, in part because of the concern that investors would withdraw money from the funds backing the investments. Standard & Poor’s downgraded parts of nine C.F.O. deals, Fitch placed five on a negative rating watch, and Moody’s put one on a downgrade review.

“The concern is over the redemptions that are happening,” said Jenny Story, an analyst with Fitch Ratings. “The gates are being closed.”

While few in number, C.F.O.’s represent a broad swath of the industry. The vehicles were created by funds of funds, which invest in hedge funds. Each C.F.O. includes stakes in dozens and sometimes hundreds of hedge funds with a variety of investment strategies.

Coast Asset Management, a $5.6 billion fund of funds in Santa Monica, Calif., created three C.F.O.’s in the last few years. The three vehicles raised a total of $1.85 billion, according to Dealogic, and they have a seven-year lock-up on the money. It was that lock-up that appealed to David E. Smith, the firm’s chief executive, who ran into trouble borrowing in 1998, after the collapse of the giant hedge fund Long Term Capital Management.

Coast executives said they were not particularly concerned about the C.F.O.’s, because they had not seen many hedge funds putting limits on redemptions, or “closing the gates,” as the industry calls it.

“It’s clearly been a very tough year for investors in general,” Mr. Smith said. “But I think hedge funds have done a good job of navigating very tough markets and don’t get the type of recognition that they should.”

Two of the C.F.O.’s put on watch or downgraded by the ratings agencies are run by two units of the British hedge fund Man Group. One is run by Glenwood Capital in Chicago, which saw its multi-strategy fund lose more than 4 percent through July, according to an investor. A spokesman for the funds declined to comment.

Returns are not in yet for September, but hedge fund managers say this month is even worse than the summer. Some funds were hurt by new rules from the Securities and Exchange Commission on short-selling, a tactic for betting against stock prices. The commission made it more difficult to short all stocks and temporarily banned the strategy in more than 800 financial stocks. In particular, this hurt convertible-bond managers, who often buy bonds that can be converted into shares and short the underlying stocks.

The short-selling ban lasts until Thursday evening, but it is widely expected to be extended.

John P. Rigas, the chief executive of Sciens Capital Management, knows firsthand how difficult it can be to get money out of troubled hedge funds. He spotted problems at Amaranth Advisors a year before that fund collapsed because of wrong-way bets in the energy markets, but it took him eight months to retrieve all of his fund of funds’ investment. Mr. Rigas’ firm runs a C.F.O. that is invested in 41 hedge funds, but he said he had put more than 25 percent of his funds’ capital into cash to weather the storm.

He predicts further liquidations in the industry.

“How can I say that the environment is not bad?” Mr. Rigas said. “It’s difficult with hedge funds because they are very fragile. By their nature they’re fragile instruments because investors can ask for their money.”

    Hedge Funds Are Bracing for Investors to Cash Out, NYT, 29.9.2008, http://www.nytimes.com/2008/09/29/business/29hedge.html?hp

Treasury Would Emerge With Vast New Power

September 29, 2008
The New York Times
By FLOYD NORRIS

During its weeklong deliberations, Congress made many changes to the Bush administration’s original proposal to bail out the financial industry, but one overarching aspect of the initial plan that remains is the vast discretion it gives to the Treasury secretary.

The draft legislation, which will be put to a House vote on Monday, gives Treasury Secretary Henry M. Paulson Jr. and his successor extraordinary power to decide how the $700 billion bailout fund is spent. For example, if he thinks it wise, he may buy not only mortgages and mortgage-backed securities, but any other financial instrument.

To be sure, the Treasury secretary’s powers have been tempered since the original Bush administration proposal, which would have given Mr. Paulson nearly unfettered control over the program. There are now two separate oversight panels involved, one composed of legislators and the other including regulatory and administration officials.

Still, Mr. Paulson can choose to buy from any financial institution that does business in the United States, or from pension funds, with wide discretion over what he will buy and how much he will pay. Under most circumstances, banks owned by foreign governments are not eligible for the money, but under some conditions, the secretary can choose to bail out foreign central banks.

Under the bill, the Treasury is to buy the securities at prices he deems appropriate. Mr. Paulson may set prices through auctions but is not required to do so.

Rarely if ever has one man had such broad authority to spend government money as he sees fit, with no rules requiring him to seek out the lowest possible price for assets being purchased.

The secretary is supposed to do what he can to maximize the profit or minimize the eventual loss to the federal government as a result of its purchase of mortgages and other financial instruments. But in the case of mortgages controlled by the government, he is required to approve “reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write-downs” and other possible changes. Such requests could help homeowners at the expense of the government.

Congress forced the Bush administration to agree to a provision requiring financial institutions that sell securities to the program to give an equity or debt stake to the government. But Mr. Paulson will have wide latitude in deciding how large a stake is needed. His discretion in setting those limits could have a major impact on how many institutions choose to participate.

The limits on executive pay in the bill, also added in response to pressure from legislators, appear unlikely to be used very often. The secretary could take such steps if he bought substantial assets “from an individual financial institution where no bidding process or market prices are available.”

Presumably, if there is some kind of bidding process, those limitations, over which the secretary also has considerable discretion, will not apply. However, institutions that receive $300 million or more from the program would face limitations on executive pay.

One of the most important decisions the secretary will make is the price the government pays for securities. Here again, there is wide discretion. He is directed to “make such purchases at the lowest price” that is “consistent with the purposes of this act.”

Those purposes, however, are expansive and leave him room to pay well over the lowest price available if he wishes to do so. The act is designed to “restore liquidity and stability to the financial system of the United States” and protect homeownership, home values and economic growth. If he concludes that a higher price is needed to provide stability in the financial markets, that is evidently acceptable.

When the Bush administration submitted its original proposal, there was an uproar over the lack of oversight of the secretary’s actions. This bill requires frequent reports to Congressional committees, including a Congressional oversight panel; audits by the comptroller general; and appointment of an inspector general for the program.

The bill also sets up an oversight board, which is directed to “ensure that the policies implemented” by Mr. Paulson are proper. Mr. Paulson is to be one of the five members of the board watching over his actions, joined by the chairman of the Federal Reserve, the chairman of the Securities and Exchange Commission, the Housing Secretary and the director of the Federal Home Finance Agency.

If Mr. Paulson wishes to use his authority to buy financial assets not linked to mortgages, he can do so after consulting the Fed chairman. But he does not need the approval of the Fed chairman or the oversight board.

The bill does allow legal challenges, but attempts to assure they are quickly handled and that the most important decisions can be challenged only on constitutional grounds, not on the ground that they conflict with some other law.

While the bill does not drop the accounting rule that requires banks to report on the market value of their assets — a rule that some banks believe has forced them to report excessive losses — it gives the S.E.C. permission to suspend the rule for any individual company if it thinks that is in the public’s interest. That is likely to lead to intensive lobbying of the commission.

    Treasury Would Emerge With Vast New Power, NYT, 29.9.2008, http://www.nytimes.com/2008/09/29/business/29bill.html?hp

News Analysis

Bailout Plan Is Only One Step on a Long Road

September 29, 2008
The New York Times
By STEVE LOHR

The government’s planned financial bailout is a significant if costly step intended to avert economic calamity, but it may not be the last one, according to economists and finance experts.

The rescue plan would use taxpayer money — $350 billion initially, and up to $700 billion with Congressional approval — to buy mostly soured mortgage-backed securities from Wall Street firms and banks.

These arcane investment instruments, linked to home mortgages, have combined with falling housing prices to ignite the credit crisis, which in turn has dire potential for an economic contagion that threatens even sound businesses and secure jobs in industry after industry.

By taking these securities off the banks’ hands, the bailout plan seeks to restore confidence in the financial system and ensure that banks can still carry on their fundamental role of handling payments and offering credit to the masses.

“Maybe they can restore confidence with the program,” said Simon Johnson, an economist at the Sloan School of Management at the Massachusetts Institute of Technology.

“It may work, and it could get us through the election in November,” he said.

But Mr. Johnson, a former senior researcher at the International Monetary Fund, said further steps might well be needed, with much work remaining for the next administration.

The list, he said, includes overseeing the workings of the rescue plan, helping to guide the contraction and recapitalization of the banking industry, assisting homeowners who face mortgage defaults, and in general shaping policy for a nation that will be less accustomed to easy credit and overspending.

“Managing this issue is going to dominate the agenda of the next president for two years,” Mr. Johnson said.

Besides buying troubled mortgage securities, the main features of the bailout package include restraints on executive pay for companies that sell off weak assets; a shareholder stake for the government in firms that sell large amounts of distressed securities to the government; and a requirement that the government take more aggressive steps to prevent home foreclosures.

The eventual price tag for the bailout is uncertain. It all depends on the price that the government pays for the troubled securities it buys from banks, and the price the government receives when it eventually sells them, years later.

To many, the weekend agreement on a plan is cause for a qualified sense of relief, even for many conservative policy makers and economists, despite qualms that it may be too generous to Wall Street bankers, too weak for struggling homeowners and too costly for taxpayers.

“By far, the most important way to help homeowners and taxpayers is avoid a serious economic recession,” said Robert E. Hall, an economist and senior fellow at the Hoover Institution, a conservative research group at Stanford.

An abrupt downturn, Mr. Hall estimated, would reduce economic activity and opportunity in the United States by 5 percent to 10 percent in terms of production of goods and services, job creation and personal income. That total cost, he noted, would certainly exceed $1 trillion.

“A recession costs way more than $700 billion,” Mr. Hall said.

There was no assurance that the bailout plan would work as intended to ease financial turmoil and economic uncertainty.

Indeed, the reckoning in the finance industry has a long way to go, said Nouriel Roubini, an economist at the Stern School of Business at New York University.

The $350 billion to $400 billion in bad credit reported by the banks so far could eventually exceed $1.5 trillion, he estimated, as banks are forced to write off more bad loans, not only on more housing-related debt, but also for corporate lending, consumer loans, credit cards and student loans.

The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government’s role to move it along instead of coddling the banks if the financial system is going to return to health.

Japan’s experience in the 1990s is a cautionary example of the peril of propping up banks after a real estate boom ends. The Japanese government helped keep many troubled banks afloat, hoping to avoid the pain of bank failures, only to extend the economic downturn as consumer spending and job growth fell.

The Japanese slump continued for many years, ending only a few years ago, a stretch of economic stagnation known as Japan’s lost decade.

“The lesson from Japan is that tough love for the banks is what’s needed,” said Kenneth Rogoff, an economist at Harvard. “In the current crisis, you do want to get rid of the bad assets from the banks, to get markets working again. But the key is going to be in the details of how the bailout works. You don’t want it to be a subsidy in disguise that keeps insolvent banks alive. That would just prolong the economic pain.”

History’s most sobering example, though, is the Great Depression. In that case, the government waited too long to do anything to aid the battered banks, and the economy cracked.

The Federal Reserve chairman, Ben S. Bernanke, a former professor at Princeton, has studied Japan’s policy missteps and is also an expert on the Depression. “The lesson of the Depression, failing to act soon enough, very much underlies the urgency behind the government’s proposal,” Mr. Rogoff said.

Sweden in the early 1990s took a middle path, swiftly taking over many of its troubled banks. The American bailout plan, economists say, takes a page from the Swedish example by making the government a shareholder in banks participating in the program. But, they add, the American banking system is so much larger and diverse than Sweden’s that the parallels are limited.

The curbs on executive pay were an essential ingredient to gain political support for the United States rescue plan, blunting the criticism that a bailout would protect the suspect gains of wealthy Wall Street executives. For companies making substantial use of the program, the government would limit the tax deductibility of executive pay to $500,000, prohibit “golden parachute” payments to departing executives, and allow the recovery by the financial institution of bonuses from gains that later prove to have been based on false or inaccurate information.

Earlier legislative efforts to curb executive pay have had little lasting effect, corporate governance experts say. In the early 1990s, curbs on the tax deductibility of executive salaries, they say, were sidestepped and even contributed to the generous grants of stock options, which helped drive executive pay to new heights.

The provision to recover hefty bonus payments is problematic, the experts say. To make a recovery, they say, the government would have to show an executive had engaged in misconduct, not just poor judgment.

Yet by taking such action, combined with the provision to become a big shareholder in companies that take part in the bailout, the government moves could well have an impact on executive pay.

“Even if these steps prove to be largely symbolic, it will influence practices,” said Charles Elson, a corporate governance expert at the University of Delaware. “The government has made a clear statement, and the boards of these financial companies will be under pressure to rein in compensation.”

The bailout effort, economists say, underlines the pivotal role of the financial industry in the economy and the need for proportionate regulation.

When the Internet dot-com bubble burst at the start of the decade, investors suffered, employment dropped, companies went out of business and America slipped into a brief recession. But there were no calls, or need, for government rescue plans for the technology industry.

“Finance is so central and peculiar, so essential, and yet it carries a death threat for the economy,” said Jagdish Bhagwati, a professor of economics at Columbia. “What we’ve seen, once again, is that finance is a very powerful instrument, but one that needs to be intensively watched.”

    Bailout Plan Is Only One Step on a Long Road, NYT, 29.9.2008, http://www.nytimes.com/2008/09/29/business/29econ.html?hp

Breakthrough Reached in Negotiations on Bailout

September 28, 2008
The New York Times
By DAVID M. HERSZENHORN and CARL HULSE

WASHINGTON — Congressional leaders and the Bush administration reached a tentative agreement early Sunday on what may become the largest financial bailout in American history, authorizing the Treasury to purchase $700 billion in troubled debt from ailing firms in an extraordinary intervention to prevent widespread economic collapse.

Officials said that Congressional staff members would work through the night to finalize the language of the agreement and draft a bill, and that the bill probably would be brought to the House floor on Monday.

The bill includes pay limits for some executives whose firms seek help, aides said. And it requires the government to use its new role as owner of distressed mortgage-backed securities to make more aggressive efforts to prevent home foreclosures. In some cases, the government would receive an equity stake in companies that seek aid, allowing taxpayers to profit should the rescue plan work and the private firms flourish in the months and years ahead.

The White House also agreed to strict oversight of the program by a Congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program. As they approached a final deal, both sides appeared to have given up a number of contentious proposals, including a change in the bankruptcy laws sought by some Democrats to give judges the authority to modify the terms of first mortgages.

Congressional leaders and Treasury Secretary Henry M. Paulson Jr. emerged from behind closed doors at 12:30 a.m. Sunday after two days of marathon meetings.

“We have made great progress toward a deal, which will work and be effective in the marketplace,” Mr. Paulson said at a news conference in Statuary Hall in the Capitol.

A senior administration official who participated in the talks said the deal was effectively done. “I know of no unresolved open issues for principals,” the official said.

In the final hours of negotiations, Democratic lawmakers were carrying pages of the bill by hand, back and forth from Speaker Nancy Pelosi’s office, where the Democrats were encamped, to Mr. Paulson and other Republicans in the offices of Representative John A. Boehner of Ohio, the House minority leader.

At the same time, a series of phone calls was taking place, including conversations between Ms. Pelosi and President Bush; between Mr. Paulson and the two presidential candidates, Senator John McCain and Senator Barack Obama; and between the candidates and top lawmakers.

In announcing a tentative agreement, lawmakers and the administration achieved their goal of sending a reassuring message ahead of Monday’s opening of the Asian financial markets. Lawmakers were also eager to adjourn and return home for the fall campaign season.

Officials said they had agreed to include a proposal by House Republicans for an alternative that gives the Treasury authority to issue government insurance for troubled financial instruments as a way of reducing the amount of taxpayer money spent up front on the rescue effort. Mr. Paulson had expressed little interest in that plan, but final details were not immediately available.

The day’s intense effort followed a tumultuous week, including a contentious meeting at the White House with President Bush and the two presidential candidates.

But their work is hardly over. Even before finalizing the accord with the White House, Congressional leaders who want the bailout to pass with solid bipartisan support had begun to anxiously court votes, mindful of the difficulty they could face in a high-stakes election year. Public opinion polls show the bailout plan to be deeply unpopular. Conservative Republicans have denounced the plan as an affront to free market capitalism, while some liberal Democrats criticize it as a giveaway to Wall Street.

Aides described a tense meeting on Saturday that included Senator Max Baucus, Democrat of Montana, shouting at Mr. Paulson about executive pay caps. Outside, stunned tourists visiting the Capitol watched as camera operators shoved one another to get footage of lawmakers talking outside of the meeting room. At one point, when too much information was leaking out, staff members’ BlackBerrys were confiscated and collected in a trash bin.

While Congressional Republicans sent only their chief negotiators, Representative Roy Blunt of Missouri and Senator Judd Gregg of New Hampshire, at least nine Democrats with competing priorities piled into the meeting, surprising the Republicans but apparently not unsettling them.

The centerpiece of the rescue effort is a plan for the government to buy up to $700 billion in troubled assets from financial firms as a way to free their balance sheets of bad debts and to help restore a healthy flow of credit through the economy. It could become the largest government bailout in the nation’s history.

The two presidential nominees were active from the sidelines. Senator John McCain of Arizona, the Republican nominee, telephoned Congressional Republicans to sound them out on the bailout, and Senator Barack Obama of Illinois, the Democratic nominee, was getting regular updates by phone from Mr. Paulson and top lawmakers.

But with conservative Republicans denouncing the plan as an affront to free market capitalism and some liberal Democrats criticizing it as a giveaway to Wall Street, both parties were anxiously starting to court votes, particularly in the House, where angry Republicans nearly scotched a deal that had been in the works for days.

Republicans, under pressure from Democrats to deliver 70 to 100 votes from their side, were scouring the ranks and focusing on the two dozen Republicans who were retiring this year.

“It is a good number,” said Representative Ray LaHood of Illinois, one of the Republicans leaving Congress this year.

Mr. LaHood said he had suggested to the leadership that they convene the departing members to get them to make the case to wavering Republicans.

Both parties were also scouring the political map to identify lawmakers who face little or no opposition for re-election in November, knowing they would be more willing to vote yes.

Democratic officials said that despite controlling both chambers in Congress, they were far from having a majority sufficient to pass the measure just from their ranks. And they also warned that Democrats in potentially tough races could not be counted on to provide the votes to put the package over the top when, and if, it reaches the floor.

Republicans countered that if Democrats were truly in need of generating more support, they would have to jettison some provisions in the bill that were most objectionable to their members, particularly a provision that would direct 20 percent of any profits from the rescue plan to help create affordable housing. The Republicans want all profits returned to the Treasury.

Some lawmakers have made clear that they will not vote for the bailout plan under virtually any terms. “I didn’t want to be in the negotiations because I object to the basic principles of this,” said Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, who would normally be his party’s point man.

Pressed about his role, Mr. Shelby replied, “My position is ‘No.’ ”

Officials, including Mr. Bush, stepped up efforts to sell the plan to the American public, which, according to opinion polls, is deeply skeptical.

“The rescue effort we’re negotiating is not aimed at Wall Street; it is aimed at your street,” Mr. Bush said in his weekly radio address. “There is now widespread agreement on the major principles. We must free up the flow of credit to consumers and businesses by reducing the risk posed by troubled assets.”

In a brief speech on the Senate floor, Senator Kent Conrad, Democrat of North Dakota, said: “It’s not just going to be Wall Street. The chairman of the Federal Reserve has told us if the credit lockup continues, three million to four million Americans will lose their jobs in the next six months.”

The ultimate cost of the rescue plan to taxpayers is virtually impossible to know. Because the government would be buying assets of value — potentially worth much more than the government will pay for them — there is even a chance the rescue effort would eventually return a profit.

Congressional aides said that initial cost projections for the House Republicans’ proposal to insure troubled mortgage-backed assets came with a price tag for insurance premiums to be paid by the private firms at $1 trillion or more — a potentially staggering expense for financial institutions, many of which are already in a weakened state.

The administration had initially requested nearly unfettered authority to run the rescue program. But in negotiations over the last week, the White House agreed to accept strict oversight of the program by an independent board, as well as a requirement that the government increase its efforts to prevent home foreclosures.

Mr. Paulson, in Congressional testimony last week, had also expressed support for provisions to limit the pay of executives whose firms seek assistance, including a ban on so-called golden parachute retirement plans.

Democrats said Saturday that Republicans wanted to restrict that to firms that sell at least 20 percent of their total assets to the government, or to firms that sell troubled assets directly to the Treasury rather than participating in an auction or some other market-making procedure. The Democrats said few firms would qualify.

Some Republicans said Democratic negotiators were continuing to push for a change in the bankruptcy laws to give judges the authority to modify the terms of first mortgages, even though some Democrats, including Mr. Obama, had said that proposal should not be added to the bailout.

Supporters say such a provision would encourage banks and other lenders to avoid foreclosures and negotiate to modify loans for troubled borrowers. Opponents of the bankruptcy change, including many Senate Republicans, say it would raise interest rates on mortgages for everyone as lenders braced for a steep rise in litigation costs.

Robert Pear contributed reporting.

    Breakthrough Reached in Negotiations on Bailout, NYT, 28.9.2008, http://www.nytimes.com/2008/09/28/business/28bailout.html?hp

Behind Insurer’s Crisis, a Blind Eye to a Web of Risk

September 28, 2008
The New York Times
By GRETCHEN MORGENSON

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

— Joseph J. Cassano, a former A.I.G. executive, August 2007


Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

The London Office

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

A onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges — Mr. Cassano helped start the London unit in 1987.

The unit became profitable enough that analysts considered Mr. Cassano a dark horse candidate to succeed Maurice R. Greenberg, the longtime chief executive who shaped A.I.G. in his own image until he was ousted amid an accounting scandal three years ago.

But last February, Mr. Cassano resigned after the London unit began bleeding money and auditors raised questions about how the unit valued its holdings. By Sept. 15, the unit’s troubles forced a major downgrade in A.I.G.’s debt rating, requiring the company to post roughly $15 billion in additional collateral — which then prompted the federal rescue.

Mr. Cassano, 53, lives in a handsome, three-story town house in the Knightsbridge neighborhood of London, just around the corner from Harrods department store on a quiet square with a private garden.

He did not respond to interview requests left at his home and with his lawyer. An A.I.G. spokesman also declined to comment.

At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had a long and storied history of deftly juggling risks. It insured people and properties against natural disasters and death, offered sophisticated asset management services and did so reliably and with bravado on many continents. Even now, its insurance subsidiaries are financially strong.

When Mr. Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.

Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid A.I.G. to insure bonds that they held in their portfolios.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Since A.I.G. itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable.

These insurance products were known as “credit default swaps,” or C.D.S.’s in Wall Street argot, and the London unit used them to turn itself into a cash register.

The unit’s revenue rose to $3.26 billion in 2005 from $737 million in 1999. Operating income at the unit also grew, rising to 17.5 percent of A.I.G.’s overall operating income in 2005, compared with 4.2 percent in 1999.

Profit margins on the business were enormous. In 2002, operating income was 44 percent of revenue; in 2005, it reached 83 percent.

Mr. Cassano and his colleagues minted tidy fortunes during these high-cotton years. Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings. That meant that on average each person in the unit made more than $1 million a year.

In fact, compensation expenses took a large percentage of the unit’s revenue. In lean years it was 33 percent; in fatter ones 46 percent. Over all, A.I.G. Financial Products paid its employees $3.56 billion during the last seven years.

The London unit’s reach was also vast. While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.

At the 2007 conference he noted that his company worked with a “global swath” of top-notch entities that included “banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals.”

Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of a black box.

Goldman Sachs was a member of A.I.G.’s derivatives club, according to people familiar with the operation. It was a customer of A.I.G.’s credit insurance and also acted as an intermediary for trades between A.I.G. and its other clients.

Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

Later that same day, the government announced its two-year, $85 billion loan to A.I.G., offering it a chance to sell its assets in an orderly fashion and theoretically repay taxpayers for their trouble. The plan saved the insurer’s trading partners but decimated its shareholders.

Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of risk tied to A.I.G., saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

Regarding Mr. Blankfein’s presence at the Fed during talks about an A.I.G. bailout, he said: “I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.”

Mr. van Praag declined to comment on what communications, if any, took place between Mr. Blankfein and the Treasury secretary, Mr. Paulson, during the bailout discussions.

A Treasury spokeswoman declined to comment about the A.I.G. rescue and Goldman’s role. The government recently allowed Goldman to change its regulatory status to help bolster its finances amid the market turmoil.

An Executive’s Optimism

Regardless of Goldman’s exposure, by last year, A.I.G. Financial Products’ portfolio of credit default swaps stood at roughly $500 billion. It was generating as much as $250 million a year in income on insurance premiums, Mr. Cassano told investors.

Because it was not an insurance company, A.I.G. Financial Products did not have to report to state insurance regulators. But for the last four years, the London-based unit’s operations, whose trades were routed through Banque A.I.G., a French institution, were reviewed routinely by an American regulator, the Office of Thrift Supervision.

A handful of the agency’s officials were always on the scene at an A.I.G. Financial Products branch office in Connecticut, but it is unclear whether they raised any red flags. Their reports are not made public and a spokeswoman would not provide details.

For his part, Mr. Cassano apparently was not worried that his unit had taken on more than it could handle. In an August 2007 conference call with analysts, he described the credit default swaps as almost a sure thing.

“It is hard to get this message across, but these are very much handpicked,” he assured those on the phone.

Just a few months later, however, the credit crisis deepened. A.I.G. Financial Products began to choke on losses — though they were only on paper.

In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap portfolio.

Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.

So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.

Mortgage foreclosures set off questions about the quality of debts across the entire credit spectrum. When the value of other debts sagged, calls for collateral on the securities issued by the credit default swaps sideswiped A.I.G. Financial Products and its legendary, sprawling parent.

Yet throughout much of 2007, the unit maintained that its risk assessments were reliable and its portfolios conservative. Last fall, however, the methods that A.I.G. used to value its derivatives portfolio began to come under fire from trading partners.

In February, A.I.G.’s auditors identified problems in the firm’s swaps accounting. Then, three months ago, regulators and federal prosecutors said they were investigating the insurer’s accounting.

This was not the first time A.I.G. Financial Products had run afoul of authorities. In 2004, without admitting or denying accusations that it helped clients improperly burnish their financial statements, A.I.G. paid $126 million and entered into a deferred prosecution agreement to settle federal civil and criminal investigations.

The settlement was a black mark on A.I.G.’s reputation and, according to analysts, distressed Mr. Greenberg, who still ran the company at the time. Still, as Mr. Cassano later told investors, the case caused A.I.G. to improve its risk management and establish a committee to maintain quality control.

“That’s a committee that I sit on, along with many of the senior managers at A.I.G., and we look at a whole variety of transactions that come in to make sure that they are maintaining the quality that we need to,” Mr. Cassano told them. “And so I think the things that have been put in at our level and the things that have been put in at the parent level will ensure that there won’t be any of those kinds of mistakes again.”

At the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion.

As those losses mounted, and A.I.G.’s once formidable stock price plunged, it became harder for the insurer to survive — imperiling other companies that did business with it and leading it to stun the Federal Reserve gathering two weeks ago with a plea for help.

Mr. Greenberg, who has seen the value of his personal A.I.G. holdings decline by more than $5 billion this year, dumped five million shares late last week. A lawyer for Mr. Greenberg did not return a phone call seeking comment.

For his part, Mr. Cassano has departed from a company that is a far cry from what it was a year ago when he spoke confidently at the analyst conference.

“We’re sitting on a great balance sheet, a strong investment portfolio and a global trading platform where we can take advantage of the market in any variety of places,” he said then. “The question for us is, where in the capital markets can we gain the best opportunity, the best execution for the business acumen that sits in our shop?”

    Behind Insurer’s Crisis, a Blind Eye to a Web of Risk, NYT, 28.9.2008, http://www.nytimes.com/2008/09/28/business/28melt.html?hp

McCain and Team Have Many Ties to Gambling Industry

September 28, 2008
The New York Times
By JO BECKER and DON VAN NATTA Jr.

Senator John McCain was on a roll. In a room reserved for high-stakes gamblers at the Foxwoods Resort Casino in Connecticut, he tossed $100 chips around a hot craps table. When the marathon session ended around 2:30 a.m., the Arizona senator and his entourage emerged with thousands of dollars in winnings.

A lifelong gambler, Mr. McCain takes risks, both on and off the craps table. He was throwing dice that night not long after his failed 2000 presidential bid, in which he was skewered by the Republican Party’s evangelical base, opponents of gambling. Mr. McCain was betting at a casino he oversaw as a member of the Senate Indian Affairs Committee, and he was doing so with the lobbyist who represents that casino, according to three associates of Mr. McCain.

The visit had been arranged by the lobbyist, Scott Reed, who works for the Mashantucket Pequot, a tribe that has contributed heavily to Mr. McCain’s campaigns and built Foxwoods into the world’s second-largest casino. Joining them was Rick Davis, Mr. McCain’s current campaign manager. Their night of good fortune epitomized not just Mr. McCain’s affection for gambling, but also the close relationship he has built with the gambling industry and its lobbyists during his 25-year career in Congress.

As a two-time chairman of the Indian Affairs Committee, Mr. McCain has done more than any other member of Congress to shape the laws governing America’s casinos, helping to transform the once-sleepy Indian gambling business into a $26-billion-a-year behemoth with 423 casinos across the country. He has won praise as a champion of economic development and self-governance on reservations.

“One of the founding fathers of Indian gaming” is what Steven Light, a University of North Dakota professor and a leading Indian gambling expert, called Mr. McCain.

As factions of the ferociously competitive gambling industry have vied for an edge, they have found it advantageous to cultivate a relationship with Mr. McCain or hire someone who has one, according to an examination based on more than 70 interviews and thousands of pages of documents.

Mr. McCain portrays himself as a Washington maverick unswayed by special interests, referring recently to lobbyists as “birds of prey.” Yet in his current campaign, more than 40 fund-raisers and top advisers have lobbied or worked for an array of gambling interests — including tribal and Las Vegas casinos, lottery companies and online poker purveyors.

When rules being considered by Congress threatened a California tribe’s planned casino in 2005, Mr. McCain helped spare the tribe. Its lobbyist, who had no prior experience in the gambling industry, had a nearly 20-year friendship with Mr. McCain.

In Connecticut that year, when a tribe was looking to open the state’s third casino, staff members on the Indian Affairs Committee provided guidance to lobbyists representing those fighting the casino, e-mail messages and interviews show. The proposed casino, which would have cut into the Pequots’ market share, was opposed by Mr. McCain’s colleagues in Connecticut.

Mr. McCain declined to be interviewed. In written answers to questions, his campaign staff said he was “justifiably proud” of his record on regulating Indian gambling. “Senator McCain has taken positions on policy issues because he believed they are in the public interest,” the campaign said.

Mr. McCain’s spokesman, Tucker Bounds, would not discuss the senator’s night of gambling at Foxwoods, saying: “Your paper has repeatedly attempted to insinuate impropriety on the part of Senator McCain where none exists — and it reveals that your publication is desperately willing to gamble away what little credibility it still has.”

Over his career, Mr. McCain has taken on special interests, like big tobacco, and angered the capital’s powerbrokers by promoting campaign finance reform and pushing to limit gifts that lobbyists can shower on lawmakers. On occasion, he has crossed the gambling industry on issues like regulating slot machines.

Perhaps no episode burnished Mr. McCain’s image as a reformer more than his stewardship three years ago of the Congressional investigation into Jack Abramoff, the disgraced Republican Indian gambling lobbyist who became a national symbol of the pay-to-play culture in Washington. The senator’s leadership during the scandal set the stage for the most sweeping overhaul of lobbying laws since Watergate.

“I’ve fought lobbyists who stole from Indian tribes,” the senator said in his speech accepting the Republican presidential nomination this month.

But interviews and records show that lobbyists and political operatives in Mr. McCain’s inner circle played a behind-the-scenes role in bringing Mr. Abramoff’s misdeeds to Mr. McCain’s attention — and then cashed in on the resulting investigation. The senator’s longtime chief political strategist, for example, was paid $100,000 over four months as a consultant to one tribe caught up in the inquiry, records show.

Mr. McCain’s campaign said the senator acted solely to protect American Indians, even though the inquiry posed “grave risk to his political interests.”

As public opposition to tribal casinos has grown in recent years, Mr. McCain has distanced himself from Indian gambling, Congressional and American Indian officials said.

But he has rarely wavered in his loyalty to Las Vegas, where he counts casino executives among his close friends and most prolific fund-raisers. “Beyond just his support for gaming, Nevada supports John McCain because he’s one of us, a Westerner at heart,” said Sig Rogich, a Nevada Republican kingmaker who raised nearly $2 million for Mr. McCain at an event at his home in June.

Only six members of Congress have received more money from the gambling industry than Mr. McCain, and five hail from the casino hubs of Nevada and New Jersey, according to data from the Center for Responsive Politics dating back to 1989. In the presidential race, Senator Barack Obama has also received money from the industry; Mr. McCain has raised almost twice as much.

In May 2007, as Mr. McCain’s presidential bid was floundering, he spent a weekend at the MGM Grand on the Las Vegas strip. A fund-raiser hosted by J. Terrence Lanni, the casino’s top executive and a longtime friend of the senator, raised $400,000 for his campaign. Afterward, Mr. McCain attended a boxing match and hit the craps tables.

For much of his adult life, Mr. McCain has gambled as often as once a month, friends and associates said, traveling to Las Vegas for weekend betting marathons. Former senior campaign officials said they worried about Mr. McCain’s patronage of casinos, given the power he wields over the industry. The officials, like others interviewed for this article, spoke on condition of anonymity.

“We were always concerned about appearances,” one former official said. “If you go around saying that appearances matter, then they matter.”

The former official said he would tell Mr. McCain: “Do we really have to go to a casino? I don’t think it’s a good idea. The base doesn’t like it. It doesn’t look good. And good things don’t happen in casinos at midnight.”

“You worry too much,” Mr. McCain would respond, the official said.

A Record of Support

In one of their last conversations, Representative Morris K. Udall, Arizona’s powerful Democrat, whose devotion to American Indian causes was legendary, implored his friend Mr. McCain to carry on his legacy.

“Don’t forget the Indians,” Mr. Udall, who died in 1998, told Mr. McCain in a directive that the senator has recounted to others.

More than a decade earlier, Mr. Udall had persuaded Mr. McCain to join the Senate Indian Affairs Committee. Mr. McCain, whose home state has the third-highest Indian population, eloquently decried the “grinding poverty” that gripped many reservations.

The two men helped write the Indian Gaming Regulatory Act of 1988 after the Supreme Court found that states had virtually no right to control wagering on reservations. The legislation provided a framework for the oversight and growth of Indian casinos: In 1988, Indian gambling represented less than 1 percent of the nation’s gambling revenues; today it captures more than one third.

On the Senate floor after the bill’s passage, Mr. McCain said he personally opposed Indian gambling, but when impoverished communities “are faced with only one option for economic development, and that is to set up gambling on their reservations, then I cannot disapprove.”

In 1994, Mr. McCain pushed an amendment that enabled dozens of additional tribes to win federal recognition and open casinos. And in 1998, Mr. McCain fought a Senate effort to rein in the boom.

He also voted twice in the last decade to give casinos tax breaks estimated to cost the government more than $326 million over a dozen years.

The first tax break benefited the industry in Las Vegas, one of a number of ways Mr. McCain has helped nontribal casinos. Mr. Lanni, the MGM Mirage chief executive, said that an unsuccessful bid by the senator to ban wagering on college sports in Nevada was the only time he could recall Mr. McCain opposing Las Vegas. “I can’t think of any other issue,” Mr. Lanni said.

The second tax break helped tribal casinos like Foxwoods and was pushed by Scott Reed, the Pequots’ lobbyist.

Mr. McCain had gotten to know Mr. Reed during Senator Bob Dole’s 1996 presidential campaign, which Mr. Reed managed. Four years later, when Mr. McCain ran for president, Mr. Reed recommended he hire his close friend and protégé, Rick Davis, to manage that campaign.

During his 2000 primary race against George W. Bush, Mr. McCain promoted his record of helping Indian Country, telling reporters on a campaign swing that he had provided critical support to “the Pequot, now the proud owners of the largest casino in the world.”

But Mr. McCain’s record on Indian gambling was fast becoming a difficult issue for him in the primary. Bush supporters like Gov. John Engler of Michigan lambasted Mr. McCain for his “close ties to Indian gambling.”

A decade after Mr. McCain co-authored the Indian gambling act, the political tides had turned. Tribal casinos, which were growing at a blazing pace, had become increasingly unpopular around the country for reasons as varied as morality and traffic.

Then came the biggest lobbying scandal to shake Washington.

Behind an Inquiry

At a September 2004 hearing of the Indian Affairs Committee, Mr. McCain described Jack Abramoff as one of the most brazen in a long line of crooks to cheat American Indians. “It began with the sale of Manhattan, and has continued ever since,” he said. “What sets this tale apart, what makes it truly extraordinary, is the extent and degree of the apparent exploitation and deceit.”

Over the next two years, Mr. McCain helped uncover a breathtaking lobbying scandal — Mr. Abramoff and a partner bilked six tribes of $66 million — that showcased the senator’s willingness to risk the wrath of his own party to expose wrongdoing. But interviews and documents show that Mr. McCain and a circle of allies — lobbyists, lawyers and senior strategists — also seized on the case for its opportunities.

For McCain-connected lobbyists who were rivals of Mr. Abramoff, the scandal presented a chance to crush a competitor. For senior McCain advisers, the inquiry allowed them to collect fees from the very Indians that Mr. Abramoff had ripped off. And the investigation enabled Mr. McCain to confront political enemies who helped defeat him in his 2000 presidential run while polishing his maverick image.

The Abramoff saga started in early 2003 when members of two tribes began questioning Mr. Abramoff’s astronomical fees. Over the next year, they leaked information to local newspapers, but it took the hiring of lobbyists who were competitors of Mr. Abramoff to get the attention of Mr. McCain’s committee.

Bernie Sprague, who led the effort by one of the tribes, the Saginaw Chippewas in Michigan, hired a Democratic lobbyist who recommended that the tribe retain Scott Reed, the Republican lobbyist, to push for an investigation.

Mr. Reed had boasted to other lobbyists of his access to Mr. McCain, three close associates said. Mr. Reed “pretty much had open access to John from 2000 to at least the end of 2006,” one aide said.

Lobbyist disclosure forms show that Mr. Reed went to work for the Saginaw Chippewa on Feb. 15, 2004, charging the tribe $56,000 over a year. Mr. Abramoff had tried to steal the Pequots and another tribal client from Mr. Reed, and taking down Mr. Abramoff would eliminate a competitor.

Mr. Reed became the chief conduit to Mr. McCain’s committee for billing documents and other information Mr. Sprague was digging up on Mr. Abramoff, Mr. Sprague said, who said Mr. Reed “did a great to service to me.”

“He had contacts I did not,” Mr. Sprague said. “Initially, I think that the senator’s office was doing Reed a favor by listening to me.”

A few weeks after hiring Mr. Reed, Mr. Sprague received a letter from the senator. “We have met with Scott Reed, who was very helpful on the issue,” Mr. McCain wrote.

Information about Mr. Abramoff was also flowing to Mr. McCain’s committee from another tribe, the Coushatta of Louisiana. The source was a consultant named Roy Fletcher, who had been Mr. McCain’s deputy campaign manager in 2000, running his war room in South Carolina.

It was in that primary race that two of Mr. Abramoff’s closest associates, Grover Norquist, who runs the nonprofit Americans for Tax Reform, and Ralph Reed, the former director of the Christian Coalition, ran a blistering campaign questioning Mr. McCain’s conservative credentials. The senator and his advisers blamed that attack for Mr. McCain’s loss to Mr. Bush in South Carolina, creating tensions that would resurface in the Abramoff matter.

“I was interested in busting” Mr. Abramoff, said Mr. Fletcher, who was eventually hired to represent the tribe. “That was my job. But I was also filled with righteous indignation, I got to tell you.”

Mr. Fletcher said he began passing information to John Weaver, Mr. McCain’s chief political strategist, and other staff members in late 2003 or January 2004. Mr. Weaver confirmed the timing.

Mr. McCain announced his investigation on Feb. 26, 2004, citing an article on Mr. Abramoff in The Washington Post. He did not mention the action by lobbyists and tribes in the preceding weeks. His campaign said no one in his “innermost circle” brought information to Mr. McCain that prompted the investigation.

The senator declared he would not investigate members of Congress, whom Mr. Abramoff had lavished with tribal donations and golf outings to Scotland. But in the course of the investigation, the committee exposed Mr. Abramoff’s dealings with the two men who had helped defeat Mr. McCain in the 2000 primary.

The investigation showed that Mr. Norquist’s foundation was used by Mr. Abramoff to launder lobbying fees from tribes. Ralph Reed was found to have accepted $4 million to run bogus antigambling campaigns. And the investigation also highlighted Mr. Abramoff’s efforts to curry favor with the House majority leader at the time, Tom DeLay, Republican of Texas, a longtime political foe who had opposed many of Mr. McCain’s legislative priorities.

Mr. McCain’s campaign said the senator did not “single out” Ralph Reed or Mr. Norquist, neither of whom were ever charged, and that both men fell within the “scope of the investigation.” The inquiry, which led to guilty pleas by over a dozen individuals, was motivated by a desire to help aggrieved tribes, the campaign said.

Inside the investigation, the sense of schadenfreude was palpable, according to several people close to the senator. “It was like hitting pay dirt,” said one associate of Mr. McCain’s who had consulted with the senator’s office on the investigation. “And face it — McCain and Weaver were maniacal about Ralph Reed and Norquist. They were sticking little pins in dolls because those guys had cost him South Carolina.”

Down on the Coushattas reservation, bills related to the investigation kept coming. After firing Mr. Abramoff, the tribe hired Kent Hance, a lawyer and former Texas congressman who said he had been friends with Mr. McCain since the 1980s.

David Sickey, the tribe’s vice chairman, said he was “dumbfounded” over the bills submitted by Mr. Hance’s firm, Hance Scarborough, which had been hired by Mr. Sickey’s predecessors.

“The very thing we were fighting seemed to be happening all over again — these absurd amounts of money being paid,” Mr. Sickey said.

Mr. Hance’s firm billed the tribe nearly $1.3 million over 11 months in legal and political consulting fees, records show. But Mr. Sickey said that the billing statements offered only vague explanations for services and that he could not point to any tangible results. Two consultants, for instance, were paid to fight the expansion of gambling in Texas — even though it was unlikely given that the governor there opposed any such prospect, Mr. Sickey said.

Mr. Hance and Jay B. Stewart, the firm’s managing partner, defended their team’s work, saying they successfully steered the tribe through a difficult period. “We did an outstanding job for them,” Mr. Hance said. “When we told them our bill was going to be $100,000 a month, they thought we were cheap. Mr. Abramoff had charged them $1 million a month.”

The firm’s fees covered the services of Mr. Fletcher, who served as the tribe’s spokesman. Records also show that Mr. Hance had Mr. Weaver — who was serving as Mr. McCain’s chief strategist — put on the tribe’s payroll from February to May 2005.

It is not precisely clear what role Mr. Weaver played for his $100,000 fee.

Mr. Stewart said Mr. Weaver was hired because “he had a lot of experience with the Senate, especially the new chairman, John McCain.” The Hance firm told the tribe in a letter that Mr. Weaver was hired to provide “representation for the tribe before the U.S. Senate.”

But Mr. Weaver never registered to lobby on the issue, and he has another explanation for his work.

“The Hance law firm retained me to assist them and their client in developing an aggressive crisis management and communications strategy,” Mr. Weaver said. “At no point was I asked by Kent Hance or anyone associated with him to set up meetings with anyone in or outside of government to discuss this, and if asked I would have summarily declined to do so.”

In June 2005, the tribe informed Mr. Hance that his services were no longer needed.
 

Change in Tone

After the Abramoff scandal, Mr. McCain stopped taking campaign donations from tribes. Some American Indians were offended, especially since Mr. McCain continued to accept money from the tribes’ lobbyists.

Resentment in Indian Country mounted as Mr. McCain, who was preparing for another White House run, singled out the growth in tribal gambling as one of three national issues that were “out of control.” (The others were federal spending and illegal immigration.)

Franklin Ducheneaux, an aide to Morris Udall who helped draft the 1988 Indian gambling law, said that position ran contrary to Mr. McCain’s record. “What did he think? That Congress intended for the tribes to be only somewhat successful?” Mr. Ducheneaux said.

Mr. McCain began taking a broad look at whether the laws were sufficient to oversee the growing industry. His campaign said that the growth had put “considerable stress” on regulators and Mr. McCain held hearings on whether the federal government needed more oversight power.

An opportunity to restrain the industry came in the spring of 2005, when a small tribe in Connecticut set off a political battle. The group, the Schaghticoke Tribal Nation, had won federal recognition in 2004 after producing voluminous documentation tracing its roots.

The tribe wanted to build Connecticut’s third casino, which would compete with Foxwoods and another, the Mohegan Sun. Facing public opposition on the proposed casino, members of the Connecticut political establishment — many of whom had received large Pequot and Mohegan campaign donations — swung into action.

Connecticut officials claimed that a genealogical review by the Bureau of Indian Affairs was flawed, and that the Schaghticoke was not a tribe.

The tribe’s opponents, led by the Washington lobbying firm Barbour Griffith & Rogers, turned to Mr. McCain’s committee. It was a full-circle moment for the senator, who had helped the Pequots gain tribal recognition in the 1980s despite concerns about their legitimacy.

Now, Mr. McCain was doing a favor for allies in the Connecticut delegation, including Senator Joseph I. Lieberman, a close friend, according to two former Congressional aides. “It was one of those collegial deals,” said one of the aides, who worked for Mr. McCain.

Barbour Griffith & Rogers wanted Mr. McCain to hold a hearing that would show that the Bureau of Indian Affairs was “broken,” said Bradley A. Blakeman, who was a lobbyist for the firm at the time.

“It was our hope that the hearing would shed light on the fact that the bureau had not followed their rules and had improperly granted recognition to the Schaghticoke,” Mr. Blakeman said. “And that the bureau would revisit the issue and follow their rules.”

Mr. McCain’s staff helped that effort by offering strategic advice.

His staff told a lobbyist for the firm that the Indian Affairs Committee “would love to receive a letter” from the Connecticut governor requesting a hearing, according to an e-mail exchange, and offered “guidance on what the most effective tone and approach” would be in the letter.

On May 11, 2005, Mr. McCain held a hearing billed as a general “oversight hearing on federal recognition of Indian tribes.” But nearly all the witnesses were Schaghticoke opponents who portrayed the tribe as imposters.

Mr. McCain set the tone: “The role that gaming and its nontribal backers have played in the recognition process has increased perceptions that it is unfair, if not corrupt.”

Chief Richard F. Velky of the Schaghticokes found himself facing off against the governor and most of the state’s congressional delegation. “The deck was stacked against us,” Mr. Velky said. “They were given lots of time. I was given five minutes.”

He had always believed Mr. McCain “to be an honest and fair man,” Mr. Velky said, “but this didn’t make me feel that good.”

Mr. Velky said he felt worse when the e-mail messages between the tribe’s opponents and Mr. McCain’s staff surfaced in a federal lawsuit. “Is there a letter telling me how to address the senator to give me the best shot?” Mr. Velky asked. “No, there is not.”

After the hearing, Pablo E. Carrillo, who was Mr. McCain’s chief Abramoff investigator at the time, wrote to a Barbour Griffith & Rogers lobbyist, Brant Imperatore. “Your client’s side definitely got a good hearing record,” Mr. Carillo wrote, adding “you probably have a good sense” on where Mr. McCain “is headed on this.”

“Well done!” he added.

Cynthia Shaw, a Republican counsel to the committee from 2005 to 2007, said Mr. McCain made decisions based on merit, not special interests. “Everybody got a meeting who asked for one,” Ms. Shaw said, “whether you were represented by counsel or by a lobbyist — or regardless of which lobbyist.”

Mr. McCain’s campaign defended the senator’s handling of the Schaghticoke case, saying no staff member acted improperly. The campaign said the session was part of normal committee business and the notion that Mr. McCain was intending to help Congressional colleagues defeat the tribe was “absolutely false.”

It added that the senator’s commitment to Indian sovereignty “remains as strong as ever.”

Within months of the May 2005 hearing, the Bureau of Indian Affairs took the rare step of rescinding the Schaghticokes’ recognition. A federal court recently rejected the tribe’s claim that the reversal was politically motivated.
 

Making an Exception

That spring of 2005, as the Schaghticokes went down to defeat in the East, another tribe in the West squared off against Mr. McCain with its bid to construct a gambling emporium in California. The stakes were similar, but the outcome would be far different.

The tribe’s plan to build a casino on a former Navy base just outside San Francisco represented a trend rippling across the country: American Indians seeking to build casinos near population centers, far from their reservations.

The practice, known as “off-reservation shopping,” stemmed from the 1988 Indian gambling law, which included exceptions allowing some casinos to be built outside tribal lands. When Mr. McCain began his second stint as chairman of the Indian Affairs Committee three years ago, Las Vegas pressed him to revisit the exceptions he had helped create, according to Sig Rogich, the Republican fund-raiser from Nevada.

“We told him this off-reservation shopping had to stop,” Mr. Rogich said. “It was no secret that the gaming industry, as well as many potentially affected communities in other states, voiced opposition to the practice.”

In the spring of 2005, Mr. McCain announced he was planning a sweeping overhaul of Indian gambling laws, including limiting off-reservation casinos. His campaign said Las Vegas had nothing to do with it. In a 2005 interview with The Oregonian, Mr. McCain said that if Congress did not act, “soon every Indian tribe is going to have a casino in downtown, metropolitan areas.”

Prospects for the proposed California project did not look promising. Then the tribe, the Guidiville Band of Pomo Indians, hired a lobbyist based in Phoenix named Wes Gullett.

Mr. Gullett, who had never represented tribes before Congress, had known Mr. McCain since the early 1980s. Mr. Gullett met his wife while they were working in Mr. McCain’s Washington office. He subsequently managed Mr. McCain’s 1992 Senate campaign and served as a top aide to his 2000 presidential campaign. Their friendship went beyond politics. When Mr. McCain’s wife, Cindy, brought two infants in need of medical treatment back to Arizona from Bangladesh, the Gulletts adopted one baby and the McCains the other. The two men also liked to take weekend trips to Las Vegas.

Another of Mr. McCain’s close friends, former Defense Secretary William S. Cohen, was a major investor in the Guidivilles’ proposed casino. Mr. Cohen, who did not return calls, was best man at Mr. McCain’s 1980 wedding.

Scott Crowell, lawyer for the Guidivilles, said Mr. Gullett was hired to ensure that Mr. McCain’s overhaul of the Indian gambling laws did not harm the tribe.

Mr. Gullett said he never talked to Mr. McCain about the legislation. “If you are hired directly to lobby John McCain, you are not going to be effective,” he said. Mr. Gullett said he only helped prepare the testimony of the tribe’s administrator, Walter Gray, who was invited to plead his case before Mr. McCain’s committee in July 2005. Mr. Gullett said he advised Mr. Gray in a series of conference calls.

On disclosure forms filed with the Senate, however, Mr. Gullett stated that he was not hired until November, long after Mr. Gray’s testimony. Mr. Gullett said the late filing might have been “a mistake, but it was inadvertent.” Steve Hart, a former lawyer for the Guidivilles, backed up Mr. Gullett’s contention that he had guided Mr. Gray on his July testimony.

When asked whether Mr. Gullett had helped him, Mr. Gray responded, “I’ve never met the man and couldn’t tell you anything about him.”

On Nov. 18, 2005, when Mr. McCain introduced his promised legislation overhauling the Indian gambling law, he left largely intact a provision that the Guidivilles needed for their casino. Mr. McCain’s campaign declined to answer whether the senator spoke with Mr. Gullett or Mr. Cohen about the project. In the end, Mr. McCain’s bill died, largely because Indian gambling interests fought back. But the Department of Interior picked up where Mr. McCain left off, effectively doing through regulations what he had hoped to accomplish legislatively. Carl Artman, who served as the Interior Department’s assistant secretary of Indian Affairs until May, said Mr. McCain pushed him to rewrite the off-reservation rules. “It became one of my top priorities because Senator McCain made it clear it was one of his top priorities,” he said.

The new guidelines were issued on Jan. 4. As a result, the casino applications of 11 tribes were rejected. The Guidivilles were not among them.
 

Kitty Bennett and Griff Palmer contributed to reporting.

    McCain and Team Have Many Ties to Gambling Industry, NYT, 28.9.2008, http://www.nytimes.com/2008/09/28/us/politics/28gambling-web.html?hp

Editorial

Don’t Blame the New Deal

September 28, 2008
The New York Times

This year’s serial bailouts are proof of a colossal regulatory failure. But it is not “the system” that failed, as President Bush, Treasury Secretary Henry Paulson and others who are complicit in the calamity would like Americans to believe. People failed.

For decades now, antiregulation disciples of the Reagan Revolution have eliminated vital laws, blocked the enactment of much-needed new regulations, or simply refused to exercise their legal authority.

The regulatory system for banks, securities, commodities and insurance is unwieldy and in need of modernization. The system has gaps, like the absence of regulation for “innovations” such as credit default swaps, the insurance-like contracts now valued at $62 trillion whose destructive potential prompted the bailouts of Bear Stearns and the American International Group.

But the failures that have landed us in the mess we are in today are not mainly structural. To assert that they are masks deeper failings and sets false terms for the upcoming debate on regulatory reform.

Under a law passed in 1994, for example, the Federal Reserve was obligated to regulate banks and nonbank lenders to curb unfair, deceptive and predatory lending. Alan Greenspan, the former Federal Reserve chairman, ignored his responsibility, even as junk mortgage lending proliferated in plain sight.

Mr. Greenspan later said the law defined “unfair” and “deceptive” too vaguely. If so, he should have asked Congress for clarification. Instead, he did nothing — and the Republican-led Congress did not question him. When Ben Bernanke took over as Fed chairman in early 2006, the negligence continued. It was not until mid-2007, after the housing bubble had begun to burst, that federal regulators offered guidelines for subprime lending.

The systematic dismantling of laws that called for regulation also contributed to the current crisis.

In 1995, Congress passed a law that restricted the ability of investors to sue companies, securities firms and accounting firms for misstatements and pie-in-the-sky projections. That helped inflate the dot-com bubble and contributed to the Enron debacle. It also engendered a sense of impunity that helped to foster the excessive risk-taking so prevalent in the mortgage mess.

Then, in 1999, Congress dismantled the Glass- Steagall Act, a pillar of the New Deal, which separated commercial and investment banking. That enormous change was undertaken with no thought or effort — or desire — to regulate the world that it would help to create. Now we know that an entire “shadow banking system” has grown up, without rules or transparency, but with the ability to topple the financial system itself.

But perhaps no deregulatory effort had more catastrophic effect than the 2000 law that explicitly excluded derivatives, including those credit default swaps, from regulation under the Commodity Exchange Act of 1936.

And there is probably no greater missed opportunity than the reform of Fannie Mae and Freddie Mac passed by the House in 2005. If the law had been enacted, the takeover of those companies may have been avoided. It failed in large part because President Bush wanted to fully privatize them and feared that if they were adequately reformed, privatization would lose steam.

Indeed, it was in the Bush years that antiregulation and deregulation found full expression, fueled by an ideology that markets know best, government hampers markets, and problems will magically fix themselves.

The nation is now painfully relearning that the opposite is true. Christopher Cox, chairman of the Securities and Exchange Commission, admitted on Friday that his agency’s “voluntary regulation” of investment banks was a failure that contributed to the current crisis.

That is a good starting point for a debate about how to get back on the road to sensible, responsible government regulation.

    Don’t Blame the New Deal, NYT, 28.9.2008, http://www.nytimes.com/2008/09/28/opinion/28sun1.html

Wall Street, R.I.P.: The End of an Era, Even at Goldman

September 28, 2008
The New York Times
By JULIE CRESWELL and BEN WHITE

WALL STREET. Two simple words that — like Hollywood and Washington — conjure a world.

A world of big egos. A world where people love to roll the dice with borrowed money. A world of tightwire trading, propelled by computers.

In search of ever-higher returns — and larger yachts, faster cars and pricier art collections for their top executives — Wall Street firms bulked up their trading desks and hired pointy-headed quantum physicists to develop foolproof programs.

Hedge funds placed markers on red (the Danish krone goes up) or black (the G.D.P. of Thailand falls). And private equity firms amassed giant funds and went on a shopping spree, snapping up companies as if they were second wives buying Jimmy Choo shoes on sale.

That world is largely coming to an end.

The huge bailout package being debated in Congress may succeed in stabilizing the financial markets. But it is too late to help firms like Bear Stearns and Lehman Brothers, which have already disappeared. Merrill Lynch, whose trademark bull symbolized Wall Street to many Americans, is being folded into Bank of America, located hundreds of miles from New York, in Charlotte, N.C.

For most of the financiers who remain, with the exception of a few superstars, the days of easy money and supersized bonuses are behind them. The credit boom that drove Wall Street’s explosive growth has dried up. Regulators who sat on the sidelines for too long are now eager to rein in Wall Street’s bad boys and the practices that proliferated in recent years.

“The swashbuckling days of Wall Street firms’ trading, essentially turning themselves into giant hedge funds, are over. Turns out they weren’t that good,” said Andrew Kessler, a former hedge fund manager. “You’re no longer going to see middle-level folks pulling in seven- and multiple-seven-dollar figures that no one can figure out exactly what they did for that.”

The beginning of the end is felt even in the halls of the white-shoe firm Goldman Sachs, which, among its Wall Street peers, epitomized and defined a high-risk, high-return culture.

Goldman is the firm that other Wall Street firms love to hate. It houses some of the world’s biggest private equity and hedge funds. Its investment bankers are the smartest. Its traders, the best. They make the most money on Wall Street, earning the firm the nickname Goldmine Sachs. (Its 30,522 employees earned an average of $600,000 last year — an average that considers secretaries as well as traders.)

Although executives at other firms secretly hoped that Goldman would once — just once — make a big mistake, at the same time, they tried their darnedest to emulate it.

While Goldman remains top-notch in providing merger advice and underwriting public offerings, what it does better than any other firm on Wall Street is proprietary trading. That involves using its own funds, as well as a heap of borrowed money, to make big, smart global bets.

Other firms tried to follow its lead, heaping risk on top of risk, all trying to capture just a touch of Goldman’s magic dust and its stellar quarter-after-quarter returns.

Not one ever came close.

While the credit crisis swamped Wall Street over the last year, causing Merrill, Citigroup and Lehman Brothers to sustain heavy losses on big bets in mortgage-related securities, Goldman sailed through with relatively minor bumps.

In 2007, the same year that Citigroup and Merrill cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd C. Blankfein, $68.7 million — the most ever for a Wall Street C.E.O.

Even Wall Street’s golden child, Goldman, however, could not withstand the turmoil that rocked the financial system in recent weeks. After Lehman and the American International Group were upended, and Merrill jumped into its hastily arranged engagement with Bank of America two weeks ago, Goldman’s stock hit a wall.

The A.I.G. debacle was particularly troubling. Goldman was A.I.G.’s largest trading partner, according to several people close to A.I.G. who requested anonymity because of confidentiality agreements. Goldman assured investors that its exposure to A.I.G. was immaterial, but jittery investors and clients pulled out of the firm, nervous that stand-alone investment banks — even one as esteemed as Goldman — might not survive.

“What happened confirmed my feeling that Goldman Sachs, no matter how good it was, was not impervious to the fortunes of fate,” said John H. Gutfreund, the former chief executive of Salomon Brothers.

So, last weekend, with few choices left, Goldman Sachs swallowed a bitter pill and turned itself into, of all things, something rather plain and pedestrian: a deposit-taking bank.

The move doesn’t mean that Goldman is going to give away free toasters for opening a checking account at a branch in Wichita anytime soon. But the shift is an assault on Goldman’s culture and the core of its astounding returns of recent years.

Not everyone thinks that the Goldman money machine is going to be entirely constrained. Last week, the Oracle of Omaha, Warren E. Buffett, made a $5 billion investment in the firm, and Goldman raised another $5 billion in a separate stock offering.

Still, many people say, with such sweeping changes before it, Goldman Sachs could well be losing what made it so special. But, then again, few things on Wall Street will be the same.

GOLDMAN’S latest golden era can be traced to the rise of Mr. Blankfein, the Brooklyn-born trading genius who took the helm in June 2006, when Henry M. Paulson Jr., a veteran investment banker and adviser to many of the world’s biggest companies, left the bank to become the nation’s Treasury secretary.

Mr. Blankfein’s ascent was a significant changing of the guard at Goldman, with the vaunted investment banking division giving way to traders who had become increasingly responsible for driving a run of eye-popping profits.

Before taking over as chief executive, Mr. Blankfein led Goldman’s securities division, pushing a strategy that increasingly put the bank’s own capital on the line to make big trading bets and investments in businesses as varied as power plants and Japanese banks.

The shift in Goldman’s revenue shows the transformation of the bank.

From 1996 to 1998, investment banking generated up to 40 percent of the money Goldman brought in the door. In 2007, Goldman’s best year, that figure was less than 16 percent, while revenue from trading and principal investing was 68 percent.

Goldman’s ability to sidestep the worst of the credit crisis came mainly because of its roots as a private partnership in which senior executives stood to lose their shirts if the bank faltered. Founded in 1869, Goldman officially went public in 1999 but never lost the flat structure that kept lines of communication open among different divisions.

In late 2006, when losses began showing in one of Goldman’s mortgage trading accounts, the bank held a top-level meeting where executives including David Viniar, the chief financial officer, concluded that the housing market was headed for a significant downturn.

Hedging strategies were put in place that essentially amounted to a bet that housing prices would fall. When they did, Goldman limited its losses while rivals posted ever-bigger write-downs on mortgages and complex securities tied to them.

In 2007, Goldman generated $11.6 billion in profit, the most money an investment bank has ever made in a year, and avoided most of the big mortgage-related losses that began slamming other banks late in that year. Goldman’s share price soared to a record of $247.92 on Oct. 31.

Goldman continued to outpace its rivals into this year, though profits declined significantly as the credit crisis worsened and trading conditions became treacherous. Still, even as Bear Stearns collapsed in March over bad mortgage bets and Lehman was battered, few thought that the untouchable Goldman could ever falter.

Mr. Blankfein, an inveterate worrier, beefed up his books in part by stashing more than $100 billion in cash and short-term, highly liquid securities in an account at the Bank of New York. The Bony Box, as Mr. Blankfein calls it, was created to make sure that Goldman could keep doing business even in the face of market eruptions.

That strong balance sheet, and Goldman’s ability to avoid losses during the crisis, appeared to leave the bank in a strong position to move through the industry upheaval with its trading-heavy business model intact, if temporarily dormant.

Even as some analysts suggested that Goldman should consider buying a commercial bank to diversify, executives including Mr. Blankfein remained cool to the notion. Becoming a deposit-taking bank would just invite more regulation and lessen its ability to shift capital quickly in volatile markets, the thinking went.

All of that changed two weeks ago when shares of Goldman and its chief rival, Morgan Stanley, went into free fall. A national panic over the mortgage crisis deepened and investors became increasingly convinced that no stand-alone investment bank would survive, even with the government’s plan to buy up toxic assets.

Nervous hedge funds, some burned by losing big money when Lehman went bust, began moving some of their balances away from Goldman to bigger banks, like JPMorgan Chase and Deutsche Bank.

By the weekend, it was clear that Goldman’s options were to either merge with another company or transform itself into a deposit-taking bank holding company. So Goldman did what it has always done in the face of rapidly changing events: it turned on a dime.

“They change to fit their environment. When it was good to go public, they went public,” said Michael Mayo, banking analyst at Deutsche Bank. “When it was good to get big in fixed income, they got big in fixed income. When it was good to get into emerging markets, they got into emerging markets. Now that it’s good to be a bank, they became a bank.”

The moment it changed its status, Goldman became the fourth-largest bank holding company in the United States, with $20 billion in customer deposits spread between a bank subsidiary it already owned in Utah and its European bank. Goldman said it would quickly move more assets, including its existing loan business, to give the bank $150 billion in deposits.

Even as Goldman was preparing to radically alter its structure, it was also negotiating with Mr. Buffett, a longtime client, on the terms of his $5 billion cash infusion.

Mr. Buffett, as he always does, drove a relentless bargain, securing a guaranteed annual dividend of $500 million and the right to buy $5 billion more in Goldman shares at a below-market price.

While the price tag for his blessing was steep, the impact was priceless.

“Buffett got a very good deal, which means the guy on the other side did not get as good a deal,” said Jonathan Vyorst, a portfolio manager at the Paradigm Value Fund. “But from Goldman’s perspective, it is reputational capital that is unparalleled.”

EVEN if the bailout stabilizes the markets, Wall Street won’t go back to its freewheeling, profit-spinning ways of old. After years of lax regulation, Wall Street firms will face much stronger oversight by regulators who are looking to tighten the reins on many practices that allowed the Street to flourish.

For Goldman and Morgan Stanley, which are converting themselves into bank holding companies, that means their primary regulators become the Federal Reserve and the Office of the Comptroller of the Currency, which oversee banking institutions.

Rather than periodic audits by the Securities and Exchange Commission, Goldman will have regulators on site and looking over their shoulders all the time.

The banking giant JPMorgan Chase, for instance, has 70 regulators from the Federal Reserve and the comptroller’s agency in its offices every day. Those regulators have open access to its books, trading floors and back-office operations. (That’s not to say stronger regulators would prevent losses. Citigroup, which on paper is highly regulated, suffered huge write-downs on risky mortgage securities bets.)

As a bank, Goldman will also face tougher requirements about the size of the financial cushion it maintains. While Goldman and Morgan Stanley both meet current guidelines, many analysts argue that regulators, as part of the fallout from the credit crisis, may increase the amount of capital banks must have on hand.

More important, a stiffer regulatory regime across Wall Street is likely to reduce the use and abuse of its favorite addictive drug: leverage.

The low-interest-rate environment of the last decade offered buckets of cheap credit. Just as consumers maxed out their credit cards to live beyond their means, Wall Street firms bolstered their returns by pumping that cheap credit into their own trading operations and lending money to hedge funds and private equity firms so they could do the same.

By using leverage, or borrowed funds, firms like Goldman Sachs easily increased the size of the bets they were making in their own trading portfolios. If they were right — and Goldman typically was — the returns were huge.

When things went wrong, however, all of that debt turned into a nightmare. When Bear Stearns was on the verge of collapse, it had borrowed $33 for every $1 of equity it held. When trading partners that had lent Bear the money began demanding it back, the firm’s coffers ran dangerously low.

Earlier this year, Goldman had borrowed about $28 for every $1 in equity. In the ensuing credit crisis, Wall Street firms have reined in their borrowing significantly and have lent less money to hedge funds and private equity firms.

Today, Goldman’s borrowings stand at about $20 to $1, but even that is likely to come down. Banks like JPMorgan and Citigroup typically borrow about $10 to $1, analysts say.

As leverage dries up across Wall Street, so will the outsize returns at many private equity firms and hedge funds.

Returns at many hedge funds are expected to be awful this year because of a combination of bad bets and an inability to borrow. One result could be a landslide of hedge funds’ closing shop.

At Goldman, the reduced use of borrowed money for its own trading operations means that its earnings will also decrease, analysts warn.

Brad Hintz, an analyst at Sanford C. Bernstein & Company, predicts that Goldman’s return on equity, a common measure of how efficiently capital is invested, will fall to 13 percent this year, from 33 percent in 2007, and hover around 14 percent or 15 percent for the next few years.

Goldman says its returns are primarily driven by economic growth, its market share and pricing power, not by leverage. It adds that it does not expect changes in its business strategies and expects a 20 percent return on equity in the future.

IF Mr. Hintz is right, and Goldman’s legendary returns decline, so will its paychecks. Without those multimillion-dollar paydays, those top-notch investment bankers, elite traders and private-equity superstars may well stroll out the door and try their luck at starting small, boutique investment-banking firms or hedge funds — if they can.

“Over time, the smart people will migrate out of the firm because commercial banks don’t pay out 50 percent of their revenues as compensation,” said Christopher Whalen, a managing partner at Institutional Risk Analytics. “Banks simply aren’t that profitable.”

As the game of musical chairs continues on Wall Street, with banks like JPMorgan scooping up troubled competitors like Washington Mutual, some analysts are wondering what Goldman’s next move will be.

Goldman is unlikely to join with a commercial bank with a broad retail network, because a plain-vanilla consumer business is costly to operate and is the polar opposite of Goldman’s rarefied culture.

“If they go too far afield or get too large in terms of personnel, then they become Citigroup, with the corporate bureaucracy and slowness and the inability to make consensus-type decisions that come with that,” Mr. Hintz said.

A better fit for Goldman would be a bank that caters to corporations and other institutions, like Northern Trust or State Street Bank, he said.

“I don’t think they’re going to move too fast, no matter what the environment on Wall Street is,” Mr. Hintz said. “They’re going to take some time and consider what exactly the new Goldman Sachs is going to be.”

    Wall Street, R.I.P.: The End of an Era, Even at Goldman, NYT, 28.9.2008, http://www.nytimes.com/2008/09/28/business/28lloyd.html
 

New Yorkers Reflect in a Time of Less

September 28, 2008
The New York Times
By CARA BUCKLEY and ERIC KONIGSBERG

A small-business owner in Brooklyn worries about making the payroll. A homeowner in Queens faces foreclosure. A suburban stay-at-home mother cuts back on luxuries. A retiree watches rent, food and cable bills rise while her income stays flat. An aspiring musician chooses between recording fees and a trip to see his family at Christmas. A head of a nonprofit group sees grants disappear.

Six New Yorkers anxiously watch the Wall Street roller coaster and wonder how it will affect them.

Making Drinks and Song, But Not Enough of Either

Rescalla Cury, 22, an aspiring musician, lives in Williamsburg, Brooklyn, and tends bar at a restaurant in Chelsea:

I came to study music. I am taking private lessons, which made things a little bit harder. I also wanted to take a sound engineering course, but since I’m a foreigner, I would have had to pay the whole course up front, like $15,000. I play solo. I sing and play the guitar. My music is like Brazilian jazz with rock and blues. Hopefully I’m not going to be a bartender for the rest of my life.

What I can see from last year to this year is that the season is definitely slower. I’m making less money because less people are going out. And when they go out, they spend less than what they used to. I’ve been doing the same, I’ve been having friends together in my house, to drink bottles of wine, instead of going out to bars. It’s kind of like a chain. I make less money, and I stop going out too.

The rent is so absurd, and everything is so expensive. How can people afford $2,200 for an apartment? I want to stay in the apartment I’m in; hopefully my building won’t get sold.

I was planning to start recording a track by the end of the year, but I don’t know if it’s going to happen or not. Because I may have to choose between recording a track and going home for Christmas with my family.

Income Is Unchanged, Costs and Worries Rise

Betty Jones, 79, a retired social work administrator, lives in Stuyvesant Town, in Manhattan:

I live on a fixed income to the extent that I get Social Security and then I get a small federal pension from my husband, who died in 1999. Then I get a monthly check from my retirement plan.

Those three checks add up to about $5,000 a month — about $2,000 a month short for covering my expenses. My basic yearly expenses are $60,000 to $65,000 but other things come up. I fortunately have some other savings my husband and I put aside, and that’s how I make up the difference.

Rent has gone up. The cost of food is up. I have RCN for cable and phone and that’s gone up. So I really have to budget more carefully now.

I just came back from Rwanda. It cost about $5,000, for 10 days. I went with People to People, to volunteer in orphanages and vocational training programs for young people. I came back wondering what’s happening to my money. It was right in the middle of the week when the market crisis was happening. I was worrying, “What about my money-market at Citibank?” I get my statements and I’m getting poorer and poorer. I’ve lost about $40,000 or $50,000 in the past few months.

The money has to last a long time. I expect to keep ticking.

I’m not nearly as frightened as some of my friends. But I won’t spend $5,000 for another trip right away. Having been a part of the Depression as a child, I worry about what happens on Wall Street. I wonder, “My God, are we going to live through that again? Is everything going to collapse around me?”

I haven’t taken any of my money out of the market yet. Where do I put it, under the mattress?

An American Dream Slowly Evaporates

Rico Lumaban, 49, immigrated from the Philippines in 1982 and lives with his wife, a nurse, and three children, ages 21, 19 and 13, in Bellerose, Queens:

We bought our house in 1989. I had a 30-year fixed mortgage. But in the year 2001, I had difficulties. I bought the right to run a gas station in Astoria, Queens. They had all these accounts with people who work at the embassies. It was supposed to change everything. But the guy I bought it from built another shop and took all the customers with him. I lost close to $200,000; it was all my savings.

In 2006, I had the house refinanced, and I got into a very bad subprime loan. I needed to pay some debts. My son was starting college. I had used all his college savings; that was a very sad thing for him.

I got two kinds of loans, an adjustable-rate mortgage over three years and a home-equity loan. After three years, the mortgage will go to $4,000 a month. I didn’t know that the mortgage payments would also increase every six months.

I was relying on the representative that was helping me to help me do the right thing. Sometimes you trust people. The worst thing was, after it’s all said and done, I never heard anything from the representative. It’s like they got away.

I’m trying to get a permanent job. I just do, like, moonlighting as a handyman and mechanic but it doesn’t pay.

We are in the foreclosure process. I got the court summons and I answered it last week. I haven’t been paying for the last five months, because I can’t.

I don’t want to think about it, with my three kids. I’m so stressed out thinking about where we’re going to be next year. I’m just closing my eyes, and seeing if things change. It’s really scary; it’s hard to sleep.

Stay-at-Home Mother Ponders a Paycheck

Jennifer Manthei, 40, worked in museums but now stays at home in Pelham, N.Y., with her two sons, ages 4 and 1 ½:

I don’t know anybody who’s had to go back to work out of necessity yet, but in our community of stay-at-home moms, it’s certainly something we talk about.

I’m an art historian, so my earning potential in the field is low even in a good market. I used to work at the Met. Curatorial jobs without a master’s degree — well, it was 10 years ago, but I made not even $30,000 a year. At the Museum of Natural History, where I worked after that, I was making more, but I was in an administrative job. But in a bad market, jobs in the arts are probably the first to get cut.

So I would end up doing something like secretarial work, something just for the money, something that is not as fulfilling. I imagine if I were working I could make around $50,000 now, and I imagine a great percentage of that would go toward providing the basic care for my children — a baby sitter and day care, plus nursery school for our oldest. So it would be a lose-lose situation, basically.

My husband co-owns a small recruiting boutique and he specializes in information-technology placement. Because he places people for both temporary and permanent jobs, his business can weather some of the employment ups and downs, but I think he’s felt the change in the economy in his business. And he anticipates he might feel it more.

Our family’s economic certainty is something we’ve been talking about more than in the past. We’re already cutting back on things that I consider luxuries. I’d sound silly if I considered this a real sacrifice, but we’re not redoing all of the first floor like we’d wanted to, just some rooms. We wonder about how much money we’ll be able to set aside for our children’s college fund this year.

Restoring Hot Lunches, At the Expense of Jobs

Stanley Richards, 47, is chief operating officer of the Fortune Society, a nonprofit organization in Long Island City, Queens, which helps former convicts find jobs and housing:

Our budget is about $14 million. Ninety percent of our contributions come from government funding and the rest is mostly foundations. We’re already feeling the pinch. We’ve talked about the worst-case scenario and what programs we absolutely can’t cut. The cuts will come down on the drug treatment side, on the housing side, for the next few years.

This year for the first time, the city gave us a 50 percent cut in a contract that had started in January. It was already August — the year was more than half over — so we had to end the program immediately and go through a series of steps to recoup the money we’d already spent past July 1.

Also, we had a discharge-planning program — for prisoners who are going to be released soon. The Department of Corrections stopped funding it, so we’ve canceled that.

We’re looking at a minimum of a 5 percent cut from the city. State contracts will be cut worse. We expect notification any day now. A funder at the city Department of Health and Mental Hygiene told us to be prepared for our AIDS housing funding to be cut by two-thirds, from about $1.6 million a year to $600,000.

Two foundations have told us that their portfolio is in trouble. One is cutting back their contribution this year and the other told us to reapply and ask for less.

We wiped out our hot lunches earlier this year, but we’ve decided that has to stay, and so we’re going to bring it back and have layoffs. The food program, for some of these people who come in — some of them have kids — it’s the only meal of the day. Right now we’re serving peanut butter and jelly and what they call “jail soup,” which is dry packets.

Earlier this year, we laid off 21 people — about 10 percent of our staff. It’s very personal for me. A lot of people who work here are former inmates. This is the first place they come when no one else wants to hire them. I started here in 1991 as a counselor. Prior to that, I’d been in prison several times, for robbery the last time, a four-and-a-half year term.
 

Success Breeds Growth And an Element of Caution

Tricialee Riley, 34, owns the Polish Bar of Brooklyn, a nail and beauty salon on Myrtle Avenue in Clinton Hill, and she just signed a lease to open a second location in neighboring Prospect Heights:

I’ve been in the beauty business since college, since I was 19, and I’ve been in New York for 10 years. For seven years, I was working and earning and saving. There was never a day without me planning my small business. I always saved, and knew it was going to happen. And I opened in July 2006.

It’s a small business, but I had a very big opening, and business has been tremendous. So much so that we’re expanding and opening a much larger space. I just signed my lease 15 minutes ago. We’ll be opening in December 2008.

Securing a loan for the second business was a lot more challenging that I anticipated. We had been successful. I have a good credit score. All my i’s are dotted and my t’s are crossed. I literally have in the savings almost the equivalent of what I needed to secure the second store. But my own personal bank denied me the loan, so I went to a microlender to do the financing. That was shocking.

All my profits are in savings, liquid cash. Because that might have to be the payroll for a while. We anticipated on hiring 14 people for the second store, but will probably hire 8 and take on people as needed.

We’re in the middle of something that’s so extremely exciting for us, but worried about how the economy will affect us. Everybody’s being suggested to watch their money and cut their spending and we’re at the top of the list of what to cut.

I think there may be a drastic change in the habits and behaviors of women over the next season. I am fearful of the change, I am. But I can’t work off of fear.

There is a doubt that creeps in now that I really haven’t had to deal with a lot. On Saturday (Sept. 20) in particular. I came into work, early in the morning. And I said ‘God, if I’m doing too much too soon, I can wait a year and a half.’ I’d rather wait a year and a half and give up a wonderful location than to fail. I had so much doubt. And he sent me a sign. I opened the store and we had our second largest day ever, after a week when Myrtle Avenue looked like a ghost town.

Interviews were conducted by Cara Buckley and Eric Konigsberg and then condensed.

    New Yorkers Reflect in a Time of Less, NYT, 28.9.2008, http://www.nytimes.com/2008/09/28/nyregion/28faces.html

Op-Ed Contributor

Help Housing

September 27, 2008
The New York Times
By CHRIS MAYER

AT the heart of the financial crisis is an unprecedented decline in house prices. Yet the government response so far has been to try to prop up insolvent financial institutions while doing nothing about the underlying housing problem. The proposed Wall Street bailout would not stop the next wave of defaults, which are coming from the rapidly rising delinquencies in near-prime mortgages.

The government needs to directly stabilize the housing market. This is equivalent to treating the infection with antibiotics, instead of applying a cold compress for the fever. Both the fever and the infection need treating.

The first step should be to reduce mortgage interest rates. In a normal mortgage market, rates are about 1.6 percentage points above the interest rate for 10-year Treasury notes. Recently, the difference has been closer to 2.5 percentage points.

The government is in a great position to cut rates by about a point: Through Fannie Mae, Freddie Mac and the Federal Housing Administration, it now controls nearly 90 percent of all mortgage originations. These lower rates would apply to most home buyers who take out a loan under $729,750 for a house that they will live in.

Along with lower rates, the government should provide temporary down-payment assistance for buyers. The government could, for example, match the amount of money that buyers use for a down payment, up to $15,000. Because the government now controls the bulk of all mortgage financing, this money could be provided directly at closing. Homeowners who refinance their current mortgages could also receive assistance, allowing them to avoid foreclosure.

Programs like these would draw buyers into the housing market and reduce the backlog of unsold and vacant homes. Investors and speculators would be ineligible and would face the full cost of their mistakes.

By stabilizing house prices, these programs would benefit the bulk of Americans, who own a home but did not get involved in the subprime mortgage market. Price stability would more directly achieve the goals of the Wall Street bailout: increase the value of mortgage-backed securities (by increasing the value of the underlying houses) while injecting government capital into the financial system.

Some in Congress have suggested allowing homeowners to go to bankruptcy court to lower their mortgage payments. But this would only make credit more expensive by reducing the willingness of companies to lend money. It would also worsen the current problems by letting bankruptcy judges reduce mortgage balances — imposing even greater losses on the owners of the mortgages, whose problems are at the heart of the financial crisis. Such a program would also be limited to only the most indebted and, in some cases, financially irresponsible homeowners.

Some might argue that propping up house prices is what got us into this mess. But with the recent decline in house prices, my calculations suggest that the cost of owning a home today, relative to renting, is about 10 percent lower than its average over the past 20 years.

The credit crisis will not be over until house prices stop falling. Direct assistance for home buyers and homeowners is the best, and the fairest, way to make that happen.
 

Chris Mayer is a professor of real estate and the senior vice dean of Columbia Business School.

    Help Housing, NYT, 27.9.2008, http://www.nytimes.com/2008/09/27/opinion/27mayer.html

How to Spend That $700 Billion

Paulson and Bernanke Would Do Better to Put Capital Directly Into the Banks

Friday, September 26, 2008
A23
The Washington Post
By Sebastian Mallaby

Even if congressional leaders can close a deal on the bank rescue, the real debate is just beginning. The key questions about the plan are not the ones that Congress debated: how much it would cost and whether it would impose symbolic pay caps for bosses whose wealth has already been hammered. Rather, the key question lies in the execution of the bailout.

Start with the sobering fact that even a $700 billion rescue fund would be small relative to financial markets. Private lenders (not counting Fannie Mae and Freddie Mac) own $6.5 trillion of mortgage-related loans plus $2.5 trillion in consumer loans and yet more trillions in corporate loans. By themselves, federally insured deposit-taking banks hold loans totaling $14 trillion.

Given these astronomical numbers, the government's plan will fare best if markets respond favorably to it. The bailout is often seen as a commando operation, in which you take out the bad-loan enemy and imprison him in a government vault. But it is also a hearts-and-minds operation, in which you persuade wary financiers whose territory you have invaded to trust you and work with you.

The key question is whether Treasury purchases of bad loans will encourage hedge funds and other investors to dive in themselves. If the government starts a buying trend, its plan will work brilliantly. If it triggers a selling reaction, those trillions of dollars in private hands could swamp its efforts.

How can the Treasury encourage private players to back up its purchases? The short answer is: Buy cheaply. If the government pays, say, 30 percent of what the loans were originally worth, any hedge fund that thinks they are really worth 40 percent will dive into the market. If the government pays 50 percent of what the loans were originally worth, that same hedge fund will stay on the sidelines -- or may even figure out a way of betting against the government.

In their congressional testimony this week, Hank Paulson and Ben Bernanke have sent mixed signals on this crucial issue. They say they want to create a liquid market for bad loans -- which means they want to encourage private buying. Yet they also say they don't want banks to have to unload assets at "fire-sale" prices, which suggests they may want to pay some higher price -- which would discourage private buying.

Some Wall Streeters believe that Paulson and Bernanke can have it both ways. If the government buys large quantities of debt at 50 cents on the dollar, the turnover in that debt could make it more attractive to buyers: Investors like to own stuff that's actively traded and can be unloaded. So perhaps the government could pay 50 cents on the dollar and still persuade the hedge funds to pile in. What was worth 40 cents before the rescue operation could soon be worth 50 cents-plus because it is being traded.

Unfortunately, this is probably too optimistic. If the government buys a mountain of loans and then goes home, it will not have created the ongoing turnover that investors find attractive. If it buys loans in monthly installments, it will create some continuing action, but the purchases may be too small to persuade hedge funds that they can unload their paper if they need to. Besides, the hedge funds would have to believe that next month's government purchases would be targeted at the particular type of loans they own. Faced with these uncertainties, the funds would probably hold back unless the loans are a real bargain.

Paulson and Bernanke constitute a dream team -- a top market practitioner and a top economist. But they shrink from buying loans cheaply because doing so would force banks that currently value loans at high prices to recognize big losses, leaving them with too little capital. Buying loans cheaply would solve the liquidity problem in the loan market, but it would also reveal banks' capital shortage.

In the face of this dilemma, the dream team's instinct seems to be to split the difference -- pick a price that's low but not too low, so that you get some liquidity without vaporizing bank capital. But there is a better way: Tackle the capital shortage directly. Paulson has already urged banks to cut their dividends in order to preserve capital. When his key lieutenant, Robert Steel, left Treasury to run a troubled bank, its dividend was cut immediately. Now, Paulson needs to move more forcefully. He should use every power to block dividend payments, and he should overcome his squeamishness about using part of the bailout fund to bolster banks' capital.

Paulson may not like the idea of the government owning chunks of the financial system. But after the nationalization of Fannie, Freddie and AIG, it's too late to worry about that. Besides, if the U.S. government refuses to recapitalize the banking system, foreign governments may eventually do so. Sovereign wealth funds have already bought $35 billion worth of stakes in U.S. financial institutions.

    How to Spend That $700 Billion, WP, 26.9.2008, http://www.washingtonpost.com/wp-dyn/content/article/2008/09/25/AR2008092503070.html

Bailout in chaos, government seizes WaMu

Fri Sep 26, 2008
12:24am EDT
Reuters
By Tom Ferraro and Richard Cowan

WASHINGTON (Reuters) - Talks on a $700 billion rescue for the U.S. financial system fell into chaos on Thursday amid accusations Republican presidential candidate John McCain scuppered the deal, and U.S. authorities closed Washington Mutual and sold its assets in America's biggest ever bank failure.

As negotiations over an unprecedented bailout plan to restore credit markets degenerated into chaos, the largest U.S. savings and loan bank was taken over by authorities and its deposits auctioned off. U.S. stock futures fell by more than 1 percent, the dollar weakened and share markets in Asia fell.

The third-largest U.S. bank JPMorgan Chase & Co said it bought the deposits of Washington Mutual Inc, which has seen its stock price virtually wiped out because of massive amounts of bad mortgages. The government said there would be no impact on WaMu's depositors and customers. JPMorgan said it would be business as usual on Friday morning.

Had a bailout deal been reached in Congress, it may have helped the savings and loan, founded in Seattle in 1889. Efforts to find a suitor to buy WaMu faltered in recent days over concerns about whether the government would reach a deal to buy its toxic mortgages.

Earlier on Thursday, U.S. lawmakers had appeared close to a final agreement on the bailout, lifting world stock markets and sending the dollar higher. But an emergency White House meeting between Congressional leaders with U.S. President George W. Bush "devolved into a contentious shouting match," according to a statement from the McCain campaign.

In advance of that meeting, which included the two men battling to succeed him, Democrat Barack Obama and McCain, a compromise bipartisan deal seemed imminent.

After the session, Congressional leaders said an agreement could take until the weekend or longer.

Democratic Rep. Barney Frank, who has played a key role in talks over the Bush administration proposal, said negotiations would continue on Friday, but with no sign that House Republicans would take part.

Republican U.S. Sen. Richard Shelby bluntly told reporters, "I don't believe we have an agreement." He later said the deal was in "limbo."

A group of conservative Republican lawmakers proposed an alternative mortgage insurance plan, eschewing the Bush administration's Wall Street bailout just weeks before the November 4 election as many lawmakers try to hold on to their seats.

Democrats said McCain had scuppered the anticipated agreement by throwing his support behind that scheme.

"Sen. McCain has sided with the House Republicans who want to start with a completely different approach and reject what President Bush put forward," said Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform.

"It's hard to imagine where we go from here," he said.

However, a statement issued by the McCain campaign said:

"At today's cabinet meeting, John McCain did not attack any proposal or endorse any plan."

The conservative group's plan calls for the U.S. government to offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure.

The architects of the original plan, U.S. Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben Bernanke, rushed to Capitol Hill for late night meetings to urge House Republicans to get back on track.

"It is critical that this legislation get done quickly," White House spokesman Tony Fratto said. "We have serious concerns about the state of our credit markets."

U.S. Senate Banking Committee Chairman Christopher Dodd said a deal could take beyond Friday to reach and took a swipe at McCain, who returned from his presidential campaign to try to broker a deal.

"What this looked like to me was a rescue plan for John McCain for two hours," Dodd told CNN. "To be distracted for two to three hours for political theater doesn't help."

INJECTION OF POLITICS

Also speaking to CNN, Obama said of McCain's involvement, "The concern that I have ... is that when you start injecting presidential politics into delicate negotiations then you can actually create more problems rather than less."

Earlier, news that a deal was near stabilized beleaguered money markets, frozen by a reluctance by banks to lend. The rate on one-month U.S. Treasury bills shot higher as traders unwound safe-haven trades.

Still, officials from France to China voiced alarm.

"A crisis of confidence without precedent is shaking the global economy," French President Nicolas Sarkozy said in a speech in Toulon, France.

As Thursday's meeting began, Bush warned, "We're in a serious economic crisis in the country if we don't pass a piece of legislation."

Frank, the powerful Democratic chairman of the House Financial Services Committee, said before the Bush meeting that the deal would give the money to the U.S. Treasury in installments rather than a $700 billion lump sum the Bush administration wanted.

The enormity of the deal, which would cost every man, woman and child in the United States about $2,300, led many lawmakers to ask Paulson during two days of rancorous hearings this week to take the cash in installments.

The bailout exceeds total lending by the International Monetary Fund since its inception after World War II. The IMF has loaned $506.7 billion since 1947 to countries in crisis as far flung as Argentina, Britain, Turkey and South Korea.

Frank also said the deal would allow the government to take part-ownership of banks and ban companies that sell toxic assets to the government from paying massive "golden parachutes" to executives being fired.

Reflecting that the current crisis appears to be the most serious since the Great Depression of the 1930s, fresh Federal Reserve data showed U.S. banks and money managers have borrowed a record $188 billion daily in recent days from the Fed -- a daily amount roughly equal to Argentina's annual economic output.

"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.

The swirl of political theater and meetings in Washington followed fresh turbulence in the world economy.

Orders for costly U.S. manufactured goods plunged in August, new-home sales hit a 17-year low, while new claims for jobless benefits shot up last week.

Top U.S. industrial conglomerate General Electric Co, widely seen as a bellwether of the U.S. economy, issued a profit warning, citing "unprecedented weakness and volatility" in the financial services market.

The crisis reverberated in Amsterdam and Brussels, where Fortis NV, the Belgian-Dutch financial services group, denied a rumor the Dutch central bank had asked a Fortis rival to support the company's liquidity position. Fortis shares sank as much as 21 percent to 14-year lows.

In Asia, hundreds of people lined up outside the Hong Kong branches of the Bank of East Asia Ltd, some sleeping there overnight, to withdraw their savings.

China's banking regulator sought to reassure jittery financial markets, denying a report that it had told local banks to stop lending to U.S. banks.

INTENSE BAILOUT TALKS

The crisis comes after a month of turbulence marked by the government's takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc, and the bankruptcy filing of investment bank Lehman Brothers Holdings Inc.

Concern lingered that even with a bailout, the United States may stumble, prompting a global slowdown.

German Finance Minister Peer Steinbrueck said one outcome of the crisis would be a less dominant role for the United States in the global financial system.

"The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar.
 

(Writing by Mark Egan; Reporting by Richard Cowan, Alister Bull, David Lawder, Kevin Drawbaugh, Glenn Somerville, Noah Barkin, Richard Leong, Megan Davies, John Parry, Jessica Hall and Ellis Mnyandu; editing by Jeffrey Benkoe, Toni Reinhold and Tomasz Janowski)

    Bailout in chaos, government seizes WaMu, NYT, 26.9.2008, http://www.reuters.com/article/topNews/idUSTRE48O7RX20080926

Talks Implode During Day of Chaos; Fate of Bailout Plan Remains Unresolved

September 26, 2008
The New York Times
By DAVID M. HERSZENHORN, CARL HULSE and SHERYL GAY STOLBERG

This article was reported by David M. Herszenhorn, Carl Hulse and Sheryl Gay Stolberg and written by Ms. Stolberg.

WASHINGTON — The day began with an agreement that Washington hoped would end the financial crisis that has gripped the nation. It dissolved into a verbal brawl in the Cabinet Room of the White House, urgent warnings from the president and pleas from a Treasury secretary who knelt before the House speaker and appealed for her support.

“If money isn’t loosened up, this sucker could go down,” President Bush declared Thursday as he watched the $700 billion bailout package fall apart before his eyes, according to one person in the room.

It was an implosion that spilled out from behind closed doors into public view in a way rarely seen in Washington.

By 10:30 p.m., after another round of talks, Congressional negotiators gave up for the night and said they would try again on Friday. Left uncertain was the fate of the bailout, which the White House says is urgently needed to fix broken financial and credit markets, as well as whether the first presidential debate would go forward as planned Friday night in Mississippi.

When Congressional leaders and Senators John McCain and Barack Obama, the two major party presidential candidates, trooped to the White House on Thursday afternoon, most signs pointed toward a bipartisan agreement on a grand compromise that could be accepted by all sides and signed into law by the weekend. It was intended to pump billions of dollars into the financial system, restoring liquidity and keeping credit flowing to businesses and consumers.

“We’re in a serious economic crisis,” Mr. Bush told reporters as the meeting began shortly before 4 p.m. in the Cabinet Room, adding, “My hope is we can reach an agreement very shortly.”

But once the doors closed, the smooth-talking House Republican leader, John A. Boehner of Ohio, surprised many in the room by declaring that his caucus could not support the plan to allow the government to buy distressed mortgage assets from ailing financial companies.

Mr. Boehner pressed an alternative that involved a smaller role for the government, and Mr. McCain, whose support of the deal is critical if fellow Republicans are to sign on, declined to take a stand.

The talks broke up in angry recriminations, according to accounts provided by a participant and others who were briefed on the session, and were followed by dueling news conferences and interviews rife with partisan finger-pointing.

In the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr., literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to “blow it up” by withdrawing her party’s support for the package over what Ms. Pelosi derided as a Republican betrayal.

“I didn’t know you were Catholic,” Ms. Pelosi said, a wry reference to Mr. Paulson’s kneeling, according to someone who observed the exchange. She went on: “It’s not me blowing this up, it’s the Republicans.”

Mr. Paulson sighed. “I know. I know.”

It was the very outcome the White House had said it intended to avoid, with partisan presidential politics appearing to trample what had been exceedingly delicate Congressional negotiations.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee, denounced the session as “a rescue plan for John McCain,” and proclaimed it a waste of precious hours that could have been spent negotiating.

But a top aide to Mr. Boehner said it was Democrats who had done the political posturing. The aide, Kevin Smith, said Republicans revolted, in part, because they were chafing at what they saw as an attempt by Democrats to jam through an agreement on the bailout early Thursday and deny Mr. McCain an opportunity to participate in the agreement.

The day seemed to hold promise as it began. On Wednesday night, Mr. Bush had delivered a prime-time televised address to the nation, warning that “our country could experience a long and painful recession” if lawmakers did not act quickly to pass a huge Wall Street bailout plan.

After spending Thursday morning behind closed doors, senior lawmakers from both parties emerged shortly before 1 p.m. in the ornate painted corridors on the first floor of the Capitol to herald their agreement on the broad outlines of a deal.

They said the legislation, which would authorize unprecedented government intervention to buy distressed debt from private firms, would include limits on pay packages for executives of some firms that seek assistance and a mechanism for the government to take an equity stake in some of the firms, so taxpayers have a chance to profit if the bailout plan works.

“I now expect we will indeed have a plan that can pass the House, pass the Senate, be signed by the president, and bring a sense of certainty to this crisis that is still roiling in the markets,” said Robert F. Bennett, Republican of Utah, a member of the banking committee.

He made a point of describing that meeting as free of political maneuvering. “It was one of the most productive sessions in that regard that I have participated in since I have been in the Senate,” Mr. Bennett said.

But a few blocks away, a senior House Republican lawmaker was at a luncheon with reporters, saying his caucus would never go along with the deal. This Republican said Representative Eric Cantor of Virginia, the chief deputy whip, was circulating an alternative course that would rely on government-backed insurance, not taxpayer-financed purchase of mortgage assets.

He said the recalcitrant Republicans were calculating that Ms. Pelosi, Democrat of California, would not want to leave her caucus politically exposed in an election season by passing a bailout bill without rank-and-file Republican support.

“You can have all the meetings you want,” this Republican said, referring to the White House session with Mr. Bush, the presidential candidates and Congressional leaders, still hours away. “It comes to the floor and the votes aren’t there. It won’t pass.”

House Republicans have spent days expressing their unease about a huge government intervention, which they regard as a step down the path to socialism.

Mr. Smith, the aide to Mr. Boehner, said the leader had directed a group of Republicans a few days ago to see whether they could come up with alternatives that relied less on tax funds in providing the rescue package; that led to Mr. Cantor’s mortgage-insurance approach. He said Mr. Boehner thought Mr. Cantor’s idea should be taken into consideration in the talks.

At 4 p.m., Mr. Bush convened his meeting at the White House; Mr. McCain had already met with House Republicans to hear their concerns. He later said on ABC that he had known going into the White House that “there never was a deal,” but he kept that sentiment to himself.

The meeting opened with Mr. Paulson, the chief architect of the bailout plan, “giving a status report on the condition of the market,” Tony Fratto, Mr. Bush’s deputy press secretary, said. Mr. Fratto said Mr. Paulson warned in particular of the tightening of credit markets overnight, adding, “that is something very much on his mind.”

Mr. McCain was at one end of the long conference table, Mr. Obama at the other, with the president and senior Congressional leaders between them. Participants said Mr. Obama peppered Mr. Paulson with questions, while Mr. McCain said little. Outside the West Wing, a huge crowd of reporters gathered in the driveway, anxiously awaiting an appearance by either presidential candidate, with expectations running high.

Instead, the first politician to emerge was Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, waving a sheet of paper that he said detailed his own concerns. “The agreement,” Mr. Shelby declared, “is obviously no agreement.”

The House Republicans’ revolt shocked Democrats; the Senate majority leader, Harry Reid of Nevada, said later that he was under the impression that Mr. Boehner had been a strong advocate for moving forward with the Paulson plan.

Representative Barney Frank, the Massachusetts Democrat, who attended the White House meeting, was shocked as well. “We were ready to make a deal,” Mr. Frank said later.

At 8 p.m., an exasperated Mr. Frank, the lead Democratic negotiator, walked back to the Rules Committee room on the second floor of the Senate side of the Capitol, with a pack of reporters on his heels. He was headed for another late-night meeting with Mr. Paulson and many other lawmakers to see whether they could restart the negotiations — and ward off a Friday morning bloodbath in the markets.

Ms. Pelosi told reporters that she was open to considering ideas proposed by the House Republicans. And Mr. McCain and Mr. Obama both said they held out hope that a deal could be reached soon.

At the White House, Mr. Bush was holding fast to the approach that Mr. Paulson has championed.

“In case there’s any confusion,” Mr. Fratto, the deputy press secretary, wrote in an e-mail message. “The president supports the core of Secretary Paulson’s plan.”

Elisabeth Bumiller contributed reporting.

    Talks Implode During Day of Chaos; Fate of Bailout Plan Remains Unresolved, NYT, 26.9.2008, http://www.nytimes.com/2008/09/26/business/26bailout.html?hp

WaMu is largest U.S. bank failure

Thu Sep 25, 2008
11:24pm EDT
Reuters
By Elinor Comlay and Jonathan Stempel

NEW YORK/WASHINGTON (Reuters) - Washington Mutual Inc was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co for $1.9 billion.

Thursday's seizure and sale is the latest historic step in U.S. government attempts to clean up a banking industry littered with toxic mortgage debt. Negotiations over a $700 billion bailout of the entire financial system stalled in Washington on Thursday.

Washington Mutual, the largest U.S. savings and loan, has been one of the lenders hardest hit by the nation's housing bust and credit crisis, and had already suffered from soaring mortgage losses.

Washington Mutual was shut by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. This followed $16.7 billion of deposit outflows at the Seattle-based thrift since Sept 15, the OTS said.

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the OTS said.

Customers should expect business as usual on Friday, and all depositors are fully protected, the FDIC said.

FDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.

Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.

JPMorgan said the transaction means it will now have 5,410 branches in 23 U.S. states from coast to coast, as well as the largest U.S. credit card business.

It vaults JPMorgan past Bank of America Corp to become the nation's second-largest bank, with $2.04 trillion of assets, just behind Citigroup Inc. Bank of America will go to No. 1 once it completes its planned purchase of Merrill Lynch & Co.

The bailout also fulfills JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States. It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price through a government-financed transaction.

On a conference call, Dimon said the "risk here obviously is the asset values."

He added: "That's what created this opportunity."

JPMorgan expects to incur $1.5 billion of pre-tax costs, but realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011.

It also plans to sell $8 billion of stock, and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.

The FDIC said the acquisition does not cover claims of Washington Mutual equity, senior debt and subordinated debt holders. It also said the transaction will not affect its roughly $45.2 billion deposit insurance fund.

"Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. "He's becoming an acquisition machine."

BAILOUT UNCERTAINTY

The transaction came as Washington wrangles over the fate of a $700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.

"It removes an uncertainty from the market," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are."

Washington Mutual's collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae and Freddie Mac and the insurer American International Group Inc, the bankruptcy of Lehman Brothers Holdings Inc, and Bank of America's purchase of Merrill.

JPMorgan, based in New York, ended June with $1.78 trillion of assets, $722.9 billion of deposits and 3,157 branches. Washington Mutual then had 2,239 branches and 43,198 employees. It is unclear how many people will lose their jobs.

Shares of Washington Mutual plunged $1.24 to 45 cents in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose $1.04 to $44.50 after hours, but before the stock offering was announced.

119-YEAR HISTORY

The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, "to offer its stockholders a safe and profitable vehicle for investing and lending," according to the thrift's website. This helped Seattle residents rebuild after a fire torched the city's downtown.

It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.

These included Banco Santander SA, Citigroup Inc, HSBC Holdings Plc, Toronto-Dominion Bank and Wells Fargo & Co, as well as private equity firms Blackstone Group LP and Carlyle Group, people familiar with the situation said.

Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift's growth as well as its expansion in subprime and other risky mortgages. It replaced him with Alan Fishman, the former chief executive of Brooklyn, New York's Independence Community Bank Corp.

WaMu's board was surprised at the seizure, and had been working on alternatives, people familiar with the matter said.

More than half of Washington Mutual's roughly $227 billion book of real estate loans was in home equity loans, and in adjustable-rate mortgages and subprime mortgages that are now considered risky.

The transaction wipes out a $1.35 billion investment by David Bonderman's private equity firm TPG Inc, the lead investor in a $7 billion capital raising by the thrift in April.

A TPG spokesman said the firm is "dissatisfied with the loss," but that the investment "represented a very small portion of our assets."

DIMON POUNCES

The deal is the latest ambitious move by Dimon.

Once a golden child at Citigroup before his mentor Sanford "Sandy" Weill engineered his ouster in 1998, Dimon has carved for himself something of a role as a Wall Street savior.

Dimon joined JPMorgan in 2004 after selling his Bank One Corp to the bank for $56.9 billion, and became chief executive at the end of 2005.

Some historians see parallels between him and the legendary financier John Pierpont Morgan, who ran J.P. Morgan & Co and was credited with intervening to end a banking panic in 1907.

JPMorgan has suffered less than many rivals from the credit crisis, but has been hurt. It said on Thursday it has already taken $3 billion to $3.5 billion of write-downs this quarter on mortgages and leveraged loans.

Washington Mutual has a major presence in California and Florida, two of the states hardest hit by the housing crisis. It also has a big presence in the New York City area. The thrift lost $6.3 billion in the nine months ended June 30.

"It is surprising that it has hung on for as long as it has," said Nancy Bush, an analyst at NAB Research LLC.

(Additional reporting by Paritosh Bansal, Christian Plumb and Dan Wilchins; Jessica Hall in Philadelphia; John Poirier in Washington, D.C. and Kevin Lim in Singapore; Editing by Gary Hill and Carol Bishopric)

    WaMu is largest U.S. bank failure, R, 25.9.2008, http://www.reuters.com/article/newsOne/idUSTRE48P05I20080926

Economic Memo

Credit Enters a Lockdown

September 25, 2008
The New York Times
By PETER S. GOODMAN

The words coming out of Washington this week about the American financial system have been frightening. But many have raised the possibility that the Bush administration is fear-mongering to gin up support for its $700 billion bailout proposal.

In many corporate offices, in company cafeterias and around dining room tables, however, the reality of tight credit already is limiting daily economic activity.

“Loans are basically frozen due to the credit crisis,” said Vicki Sanger, who is now leaning on personal credit cards bearing double-digit interest rates to finance the building of roads and sidewalks for her residential real estate development in Fruita, Colo. “The banks just are not lending.”

With the economy already suffering the strains of plunging housing prices, growing joblessness and the new-found austerity of debt-saturated consumers, many experts fear the fraying of the financial system could pin the nation in distress for years.

Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.

Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.

“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” said Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management. “It would be disastrous to have no plan.”

The Bush administration has hit this message relentlessly. On Capitol Hill, Treasury Secretary Henry M. Paulson Jr. warned of a potential financial seizure without a swift bailout. Federal Reserve Chairman Ben S. Bernanke — an academic authority on the Great Depression — used words generally eschewed by people whose utterances move markets, speaking of a “grave threat.”

In a prime-time television address Wednesday night, President Bush, who has described the strains on the economy as “adjustments,” put it this way: “Our entire economy is in danger.”

The considerable pushback to the bailout reflects discomfort with the people sounding the alarm. Mr. Paulson, a creature of Wall Street, asked Congress for extraordinary powers to take bad loans off the hands of major financial institutions with a proposal that ran all of three pages. Subprime mortgages have been issued with more paperwork than Mr. Paulson filled out in asking for $700 billion.

“The situation is like that movie trailer where a guy with a deep, scary voice says, ‘In a world where credit markets are frozen, where banks refuse to lend to each other at any price, only one man, with one plan can save us,’ “ said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington.

And yet, the more he looked at the data, the more Mr. Bernstein became convinced the financial system really does require some sort of bailout. “Things are scary,” he said.

For nonfinancial firms during the first three months of the year, the outstanding balance of so-called commercial paper — short-term IOUs that businesses rely upon to finance their daily operations — was growing by more than 10 percent from a year earlier, according to an analysis of Federal Reserve data by Moody’s Economy.com. From April to June, the balance plunged by more than 9 percent compared with the previous year.

This week, the rate charged by banks for short-term loans to other banks swelled to three percentage points above the most conservative of investments, Treasury bills, with the gap nearly tripling since the beginning of this month. In other words, banks are charging more for even minimal risk, making credit tight.

Suddenly, people who have spent their careers arguing that government is in the way of progress — that its role must be pared to allow market forces to flourish — are calling for the biggest government bailout in American history.

“We are in a very serious place,” said William W. Beach, an economist at the conservative Heritage Foundation in Washington. “There is risk of contagion to the entire economy.”

Even before the stunning events of recent weeks — as the government took over the mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers disintegrated into bankruptcy, and American International Group was saved by an $85 billion government bailout — credit was tight, sowing fears that the economy would suffer.

The demise of those prominent institutions and anxiety over what could happen next has amplified worries considerably.

“The problem is so big that if somebody doesn’t step in, it will cause a panic,” said Michael Moebs, an economist and chief executive of Moebs Services, an independent research company in Lake Bluff, Ill. “Things could worsen to the point that we could see double-digit unemployment.”

This week, Mr. Moebs said he heard from two clients, one a bank and the other a credit union in a small city in the Midwest, now in serious trouble: Both are heavily invested in Lehman, Fannie Mae and Freddie Mac.

“One is going to lose about 80 percent of their capital if they can’t cash those in, and the other is going to lose about half,” Mr. Moebs said.

The credit union is located in a city in which the auto industry is a major employer — an industry now laying off workers. Yet as people try to refinance mortgages to hang on to homes and extend credit cards to pay for gas for their job searches, the local credit union is saying no.

“They have become very restrictive on who they are lending to,” Mr. Moebs said. “They can’t afford a loss. Their risk quotient is next to zero. You have a financial institution that really can’t help out the local people who are having financial difficulties.”

Along the Gulf of Mexico, in Cape Coral, Fla., Michael Pfaff, a mortgage broker, has become accustomed to constant telephone calls from local real estate agents begging for help to save deals in danger of collapsing for lack of finance.

“The underwriters are terrified and they’re dragging their feet, and making more excuses not to close loans,” Mr. Pfaff said. “Basically, they just don’t want the deals.”

Three years ago, when Cape Coral was among the fastest-appreciating real estate markets in the nation, Mr. Pfaff specialized in financing luxury homes with seven-figure price tags. “Now I’m doing a $32,000 loan on a mobile home,” he said.

Finance is still there for people with unblemished credit, he said. Mr. Pfaff recently closed a deal for a couple in Indiana that bought a second house in Cape Coral, a waterfront duplex for $300,000. Their credit score was nearly impeccable, and they had a 20 percent down payment, plus income of nearly $8,000 a month.

For people like that, conditions have actually improved since the government took over the mortgage giants. A month ago, Mr. Pfaff could secure 30-year fixed rate mortgages for about 7 percent. On Thursday, he was quoting 6 percent.

But those with less-than-ideal credit are increasingly shut out of the market, Mr. Pfaff said, and there are an awful lot of those people. So-called hard money loans, for those with problematic credit but large down payments, were easy to arrange as recently as last month.

“That money has just dried up,” Mr. Pfaff said. “I’m afraid. I’m 54 years old, and I’ve seen a lot of hyperventilating in my life, but I absolutely believe that this is a very serious issue.”

    Credit Enters a Lockdown, NYT, 25.9.2008, http://www.nytimes.com/2008/09/26/business/26assess.html

As Homes Are Lost, Fears That Votes Will Be, Too

September 25, 2008
The New York Times
By IAN URBINA

More than a million people have lost their homes through foreclosure in the last two years, and many of them are still registered to vote at the address of the home they lost. Now election officials and voting rights groups are struggling to prevent thousands of them from losing their vote when they go to the polls in November.

Many of these voters will be disqualified at the polls because, in the tumult of their foreclosure, they neglected to tell their election board of their new address. Some could be forced to vote with a provisional ballot or challenged by partisan poll watchers, a particular concern among Democrats who fear that poor voters will be singled out. That could add confusion and stretch out lines that are already expected to be long because of unprecedented turnout.

Federal election officials say they are concerned that voters are not being properly informed of how to update their addresses.

“Our biggest concern is that many of these voters will stay home or that poll workers will give misinformation,” said Rosemary E. Rodriguez, the chairwoman of the federal Election Assistance Commission, which oversees voting.

Todd Haupt, a home builder, lost his home in Josephville, Mo., to foreclosure last year, and said he had since become much more interested in politics. But asked whether he had remembered to update his voter registration information when he moved into his parents’ home in St. Charles, Mo., Mr. Haupt, 33, paused silently. “Is that required?” he said. “I had no idea.”

“I’ve moved three times in the past two years,” he added. “Keeping my voter registration information was not top on my mind because I figured it was all set already.”

Ms. Rodriguez said the commission issued a notice this month encouraging voters to update their registration information before the Oct. 6 cutoff date imposed by many states for new voter registrations. She added that the commission considered issuing a notice this month informing local officials how to handle these voters, but in the end decided not to give poll chal-lengers any ideas on new tactics for singling out voters.

Many of the nation’s highest foreclosure rates are also in crucial swing states like Colorado, Florida, Michigan and Ohio. Because many homeowners in foreclosure are black or poor, and are considered probable Democratic voters in many areas, the issue has begun to have political ramifications. Political parties have long challenged voters with expired registrations, but the possible use of foreclosure lists to remove people from the rolls — though entirely legal — has become a new partisan flashpoint.

Last week, Senator Barack Obama’s campaign filed a lawsuit in federal court, seeking to prohibit the Michigan Republican Party from using foreclosure lists to single out and challenge voters. The state Republican Party has denied having any such plans.

Senator Joseph R. Biden Jr., the Democratic vice-presidential candidate, sent a letter last week along with a dozen other Democratic senators to Attorney General Michael B. Mukasey asking him to ensure that voters facing foreclosure are not harassed or intimidated at polling places.

In Ohio, liberal-leaning groups are planning to help people in foreclosure and families who are homeless to vote by using a five- to seven-day window starting Sept. 30 when state residents are permitted to register and cast an early ballot simultaneously. The Republican Party has filed a lawsuit in state court to block registering and voting on the same day, arguing that state law forbids it.

Asked whether his party planned to use foreclosure information to compile challenge lists, Robert Bennett, a spokesman for the Ohio Republican Party, said the party did not discuss its election strategies in public.

[After this article was published, Mr. Bennett sent an e-mail message adding that the Ohio Republican Party condemns "any effort to challenge the eligibility of voters based on home foreclosures."]

Similar questions were raised two years ago over how to deal with more than a million people who were displaced by Hurricane Katrina. Some of these voters were never found, while others were able to vote with absentee ballots or at satellite locations outside New Orleans.

“Foreclosure victims are distinctly vulnerable because they are not officially recognized as a group needing voting help,” said Robert M. Brandon, president of the Fair Elections Legal Network, a liberal-leaning voting rights group.

Last month, his organization sent letters to the secretaries of state in Arizona, Florida, Missouri and Ohio, asking them to better educate foreclosure victims on their rights. The letters argued that the laws in these states do not bar such voters from voting in their former jurisdictions if their intent is to move back as soon as circumstances allow.

On Wednesday, Jennifer L. Brunner, the Ohio secretary of state who is a Democrat, sent out an advisory to all local officials instructing them what to do if anyone who has lost a home to foreclosure shows up at the polls. If the address listed for such voters is no longer valid, and they moved outside the precinct, Ms. Brunner said, poll workers are instructed to send the voter to the polling place that corresponds to the voter’s new address. The voter will then be given a provisional ballot — special ballots that can be counted only after the voter’s eligibility is verified — at the proper polling place, the directive said.

The state requires that election officials send a notice to all registered voters verifying their address 60 days before an election to check the accuracy of the voter rolls. This month, Ms. Brunner ruled that an undeliverable notice will not be grounds enough on its own for a voter to be removed from the registration lists.

So far, election officials in Indiana, Kentucky, Missouri and Ohio have sent out notices to residents in select counties who have filed for a change of address but who have not updated their voter registration.

But the number of people who have moved, through foreclosure or for any other reason, far exceeds the number of people who have notified their election boards. In Ohio, 375,000 people filed change-of-address forms with the Postal Service, but when state officials sent them cards asking for updated registration information, only 24,000 responded. In Missouri, where 250,000 people notified the Postal Service of their move, only 22,000 told the election board.

Robin Carnahan, the Missouri secretary of state, and a Democrat, said that she is trying to get local election officials to increase the number of poll workers to deal with any confusion or challenges of voters.

In 2004, a Republican Party official challenged a large number of voters at a largely black precinct in Boone County, Mo., causing a backup. Such challenges can cause long lines at polling places if there are not enough poll workers to pull challenged voters out of line, or if the workers have to consult with higher-level election officials for each challenge.

State political parties have traditionally used the mail to determine which voters to challenge. By sending out mailings to voters likely to be of the opposite party, and then seeing which mailings are returned as undeliverable, they know whom to challenge at the polls for not living at their registered address. Using public lists of foreclosed homes, however, can save money by allowing a party to avoid sending out mailings.

William Nowling, a spokesman for the Michigan Republican Party, said that Democratic complaints about foreclosure victims being singled out were baseless.

“We are not using foreclosure lists in any way,” Mr. Nowling said, accusing Democratic groups of engaging in fear-mongering by spreading rumors of such plans. “Our voter integrity efforts are solely designed to fight voter fraud perpetrated by the Democrats, of which there is ample proof and examples, including previous elections where the F.B.I. had to seize and secure ballots in Detroit because ballot boxes were being stuffed.”

    As Homes Are Lost, Fears That Votes Will Be, Too, NYT, 25.9.2008, http://www.nytimes.com/2008/09/25/us/politics/25voting.html

President Issues Warning to Americans

September 25, 2008
The New York Times
By SHERYL GAY STOLBERG and DAVID M. HERSZENHORN

WASHINGTON — President Bush appealed to the nation Wednesday night to support a $700 billion plan to avert a widespread financial meltdown, and signaled that he is willing to accept tougher controls over how the money is spent.

As Democrats and the administration negotiated details of the package late into the night, the presidential candidates of both major parties planned to meet Mr. Bush at the White House on Thursday, along with leaders of Congress. The president said he hoped the session would “speed our discussions toward a bipartisan bill.”

Mr. Bush used a prime-time address to warn Americans that “a long and painful recession” could occur if Congress does not act quickly.

“Our entire economy is in danger,” he said.

On Capitol Hill, Democrats said that progress toward a deal had come after the White House had offered two major concessions: a plan to limit pay of executives whose firms seek government assistance, and a provision that would give taxpayers an equity stake in some of the firms so that the government can profit if the companies prosper in the future. Details of those provisions, and many others, were still under discussion.

Mr. Bush’s televised address, and his extraordinary offer to bring together Senator Barack Obama, the Democratic presidential nominee, and Senator John McCain, the Republican, just weeks before the election underscored a growing sense of urgency on the part of the administration that Congress must act to avert an economic collapse.

It was the first time in Mr. Bush’s presidency that he delivered a prime-time speech devoted exclusively to the economy. It came at a time when deep public unease about shaky financial markets and the demise of Wall Street icons such as Lehman Brothers has been coupled with skepticism and anger directed at a government bailout that could become the most expensive in American history.

The administration’s plan seeks to restore liquidity to the market and restore the economy by buying up distressed securities, many of them tied to mortgages, from struggling financial firms.

The address capped a fast-moving and chaotic day, in Washington, on the presidential campaign trail and on Wall Street.

On Capitol Hill, delicate negotiations between Treasury Secretary Henry M. Paulson Jr. and Congressional leaders were complicated by resistance from rank-and-file lawmakers, who were fielding torrents of complaints from constituents furious that their tax money was going to be spent to clean up a mess created by high-paid financial executives.

On Wall Street, financial markets continued to struggle. The cost of borrowing for banks, businesses and consumers shot up and investors rushed to safe havens like Treasury bills — a reminder that credit markets, which had recovered somewhat after Mr. Paulson announced the broad outlines of the bailout plan last week, remain under severe stress, with many investors still skittish.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said a deal could come together as early as Thursday. “Working in a bipartisan manner, we have made progress,” the House speaker, Nancy Pelosi, and Representative John A. Boehner, the Republican leader, said in a joint statement.

“We agree that key changes should be made to the administration’s proposal. It must include basic good-government principles, including rigorous and independent oversight, strong executive compensation standards and protections for taxpayers.”

Mr. Bush used his speech to signal that he was willing to address lawmakers’ concerns, including fears that tax dollars will be used to pay Wall Street executives and that the plan would put too much authority in the hands of the Treasury secretary without sufficient oversight.

“Any rescue plan should also be designed to ensure that taxpayers are protected,” Mr. Bush said. “It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan’s implementation. And it should be enacted as soon as possible.”

The speech came after the White House, under pressure from Republican lawmakers, opened an aggressive effort to portray the financial rescue package as crucial not just to stabilize Wall Street but to protect the livelihoods of all Americans.

But the White House gave careful thought to the timing; aides to Mr. Bush said they did not want to appear to have the president forcing a solution on Congress.

On Capitol Hill, Mr. Paulson, facing a second day of questioning by lawmakers, this time before the House Financial Services Committee, tried to focus as much on Main Street as Wall Street.

“This entire proposal is about benefiting the American people because today’s fragile financial system puts their economic well being at risk,” Mr. Paulson said. Without action, he added: “Americans’ personal savings and the ability of consumers and business to finance spending, investment and job creation are threatened.”

But it was the comments of Mr. Paulson, a former chief of Goldman Sachs, about limiting the pay of executives that signaled the biggest shift in the White House position and the urgency that the administration has placed in winning Congressional approval as quickly as possible.

“The American people are angry about executive compensation, and rightly so,” he said. “No one understands pay for failure.”

Officials said the legislation would almost certainly include a ban on so-called golden parachutes, the generous severance packages that many executives receive on their way out the door, for firms that seek government help. The measure also is likely to include a mechanism for firms to recover any bonus or incentive pay based on corporate earnings or other results that later turn out to have been overstated.

Democrats were also working to include tax provisions that would cap the amount of an executive’s salary that a company could deduct to $400,000 — the amount earned by the president.

At the same time, Congressional Democrats said they were prepared to drop one of their most contentious demands: new authority for bankruptcy judges to modify the terms of first mortgages. That provision was heavily opposed by Senate Republicans.

In addition, Democrats also are leaning toward authorizing the entire $700 billion that Mr. Paulson is seeking but disbursing a smaller amount, perhaps only $150 billion, to start the program, with future funds dependent on how well it is working.

Representative Barney Frank of Massachusetts, the lead negotiator for Congressional Democrats, said they also planned to insert a tax break to aid community banks that have suffered steep losses on preferred stock that they own in the mortgage finance giants Fannie Mae and Freddie Mac.

That change is in addition to others that already have been accepted by Mr. Paulson that would create an independent oversight board and require the government to do more to prevent foreclosures.
 

Mark Landler and Carl Hulse contributed reporting.

    President Issues Warning to Americans, NYT, 25.9.2008, http://www.nytimes.com/2008/09/25/business/economy/25bush.html?hp

Transcript

President Bush’s Speech to the Nation on the Economic Crisis

September 24, 2008
The New York Times

Following is a transcript of President Bush's address to the nation Wednesday evening, as recorded by by CQ Transcriptions:

Good evening. This is an extraordinary period for America's economy.

Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration.

We've seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending, credit markets have frozen, and families and businesses have found it harder to borrow money.

We're in the midst of a serious financial crisis, and the federal government is responding with decisive action.

We boosted confidence in money market mutual funds and acted to prevent major investors from intentionally driving down stocks for their own personal gain.

Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets.

Financial assets related to home mortgages have lost value during the house decline, and the banks holding these assets have restricted credit. As a result, our entire economy is in danger.

So I propose that the federal government reduce the risk posed by these troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending.

This rescue effort is not aimed at preserving any individual company or industry. It is aimed at preserving America's overall economy.

It will help American consumers and businesses get credit to meet their daily needs and create jobs. And it will help send a signal to markets around the world that America's financial system is back on track.

I know many Americans have questions tonight: How did we reach this point in our economy? How will the solution I propose work? And what does this mean for your financial future?

These are good questions, and they deserve clear answers.

First, how did our economy reach this point? Well, most economists agree that the problems we're witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business.

This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.

Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.

BUSH: Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.

As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.

See, in today's mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.

Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.

Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.

Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

With the situation becoming more precarious by the day, I faced a choice, to step in with dramatic government action or to stand back and allow the irresponsible actions of some to undermine the financial security of all.

I'm a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America's financial system are at risk of shutting down.

The government's top economic experts warn that, without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold.

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically.

And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs.

Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession.

Fellow citizens, we must not let this happen. I appreciate the work of leaders from both parties in both houses of Congress to address this problem and to make improvements to the proposal my administration sent to them.

There is a spirit of cooperation between Democrats and Republicans and between Congress and this administration. In that spirit, I've invited Senators McCain and Obama to join congressional leaders of both parties at the White House tomorrow to help speed our discussions toward a bipartisan bill.

I know that an economic rescue package will present a tough vote for many members of Congress. It is difficult to pass a bill that commits so much of the taxpayers' hard-earned money.

I also understand the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15th, and are reluctant to pay the cost of excesses on Wall Street.

But given the situation we are facing, not passing a bill now would cost these Americans much more later.

Many Americans are asking, how would a rescue plan work? After much discussion, there's now widespread agreement on the principles such a plan would include.

It would remove the risk posed by the troubled assets, including mortgage-backed securities, now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses.

Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars.

BUSH: It should establish a bipartisan board to oversee the plan's implementation, and it should be enacted as soon as possible.

In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday.

First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.

In the short term, this will free up banks to resume the flow of credit to American families and businesses, and this will help our economy grow.

Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply, yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages.

The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal.

And when that happens, money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back.

The final question is, what does this mean for your economic future? Well, the primary steps -- purpose of the steps I've outlined tonight is to safeguard the financial security of American workers, and families, and small businesses. The federal government also continues to enforce laws and regulations protecting your money.

The Treasury Department recently offered government insurance for money market mutual funds. And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000.

The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit, and this will not change.

Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st-century global economy remains regulated largely by outdated 20th-century laws.

Recently, we've seen how one company can grow so large that its failure jeopardizes the entire financial system.

Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability.

There are other good ideas, and members of Congress should consider them. As they do, they must ensure that efforts to regulate Wall Street do not end up hampering our economy's ability to grow.

In the long run, Americans have good reason to be confident in our economic strength. Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised.

It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back.

Our economy is facing a moment of great challenge, but we've overcome tough challenges before, and we will overcome this one.

I know that Americans sometimes get discouraged by the tone in Washington and the seemingly endless partisan struggles, yet history has shown that, in times of real trial, elected officials rise to the occasion.

And together we will show the world once again what kind of country America is: a nation that tackles problems head on, where leaders come together to meet great tests, and where people of every background can work hard, develop their talents, and realize their dreams.

Thank you for listening. May God bless you.

    President Bush’s Speech to the Nation on the Economic Crisis, NYT, 24.9.2008, http://www.nytimes.com/2008/09/24/business/economy/24text-bush.html

Crash

September 24, 2008
9:30 pm
The New York Times > Opinion > Outposts
Timothy Egan

The big guy with the crew cut and a hand that lost three fingers to a meat grinder looked out at the most powerful men in global capitalism Tuesday, and asked a pointed question:

“I’m a dirt farmer,” said Senator Jon Tester, the Montana Democrat who still lives on his family homestead. “Why do we have one week to determine that $700 billion has to be appropriated or this country’s financial system goes down the pipes?”

Good question, one that Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben Bernanke have yet to adequately answer. If they seemed flummoxed, perhaps it’s because they still can’t explain what will be accomplished by nearly nationalizing the banking system and giving the treasury secretary more power than a king.

Another question — since we now own a big part of the world’s largest insurance company, A.I.G., does that mean I can save a load of money on my car insurance? — might be easier to answer.

This bailout, in present form, is toast. Now, with John McCain offering to suspend his campaign and delay Friday’s debate, it looks like the drainage of years past is pulling him down. He wants to back out of facing Barack Obama at the height of the campaign. Why not change the topic, from foreign affairs to the economy?

Some have already tried to protect the true villains of the crash of 2008. Witness Neil Cavuto of Fox News, he of the sycophantic questions to Enron executives and other thieves just before they were exposed, blaming the mortgage crisis on banks lending to “minorities and risky folks,” as he said last week.

There is certainly a food chain of greed, from the lowliest house-flipper in the Southern California exurbs to the Hamptons hedge fund manager. We all put reason in a box and buried it for a time. But before $700 billion is committed to a secretary whose decisions “may not be reviewed by any court of law or any administrative agency,” as the original draft of the bailout states, it’s worth remembering where the biggest heist took place, and how Wall Street dragged down the rest of the country once before. You could hear the echoes of history in Tester’s question, riding the fierce urgency of now at a time when the Great Depression and all its gloomy atmospherics are in the air again.

When the stock market crashed in 1929, losing 40 percent of its value over a brutal autumn, barely 2 percent of Americans owned stocks. People asked, sensibly: how could this affect me? Who cared about those swells on Wall Street when cars were rolling off factory lines and the big open expanse of middle America was flush with wheat and corn?

Today, with more than 90 percent of all homeowners paying their mortgages on time and on budget, the parallel question arises: how could this minority of bad loans drag down Western capitalism? It may be news to Joe Biden — with three gaffes this week, he’s approaching a record, even for him – but Franklin Roosevelt was not yet president during the crash. Herbert Hoover was, and there we have the reason why so many people cringed when John McCain said last week that the fundamentals of the economy were sound.

In his first days in office, Hoover said, “Americans are nearer to the final triumph over poverty than ever before in the history of the land.” Oops. And just before he was swept to the dunce corner of history, Hoover said, “No one has yet starved.” At the time, people in rural America were eating brined tumbleweed and road-kill rabbits; the unemployment rate was 25 percent.

But the larger lesson is how Wall Street brought down Main Street. Banks were largely unregulated then, free to gamble people’s savings on stock market long-shots. When the market collapsed, the uninsured deposits went with it. By the end of 1932, one fourth of all banks were shuttered, and 9 million people lost their savings.

In this century, thanks to the deregulatory demons released by former McCain adviser Phil Gramm and embraced by just enough lobbyist-greased Democrats, Wall Street was greenlighted again to act like a casino. Banks in the heartland passed on their mortgages to Wall Street, where they were sliced and diced in hundreds of largely incomprehensible ways. And while few people understand how those investment giants made money, this much is clear: it was a killing. In 2006 alone, Wall Street firms paid out $62 billion in bonuses.

With all the urgency of that famous National Lampoon magazine cover that showed a cute pooch with a gun to its head, and the line “If You Don’t Buy This Magazine, We’ll Kill This Dog,” President Bush says the biggest bailout in American history must be passed now or the world will crumble. He said a similar thing in the run-up to war.

Just once, it might be worthwhile to listen to a dirt farmer like Jon Tester, who wonders why the same breathless attention is not given to the concerns of average Americans. Ah, but he’s only been in the Senate two years. Give him another term and he may start quoting Phil Gramm with approval.

    Crash, NYT, 24.9.2008, http://egan.blogs.nytimes.com/2008/09/24/crash/




 

Ben S. Bernanke,

the Federal Reserve chairman,

testifying in on Capitol Hill on Wednesday.

Brendan Smialowski for The New York Times        September 24, 2008

Bernanke Warns of Threat to Economy        NYT        25.9.2008

http://www.nytimes.com/2008/09/25/business/economy/25cong.html

 

Bernanke Warns of Threat to Economy

September 25, 2008
The New York Times
By DAVID STOUT

WASHINGTON — The Federal Reserve chairman Ben S. Bernanke urged Congress on Wednesday to take quick action on a proposed $700 billion economic-recovery plan, and warned that delays threaten not only financial stability in the United States but, by implication at least, prosperity overseas.

“Despite the efforts of the Federal Reserve, the Treasury and other agencies, global financial markets remain under extraordinary stress,” Mr. Bernanke told the Joint Economic Committee. “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 our economy.”

The chairman of the committee, Senator Charles E. Schumer, said that all but “a few outliers” among lawmakers agreed that some version of the plan to rescue the American financial system must be approved, and soon. But he said it would not be passed without adequate safeguards.

“We will not be dilatory, we will not add extra amendments, we will not Christmas-tree this bill,” Mr. Schumer, Democrat of New York, said using slang for the lawmakers’ occasional propensity to tack special-interest items onto legislation.

Mr. Bernanke said that international trade “provided considerable support for the U.S. economy over the first half of the year,” but that this stimulus could not be counted on in the long run.

“Economic activity has been buoyed by strong foreign demand for a wide range of United States exports, including agricultural products, capital goods and industrial supplies, even as imports declined,” Mr. Bernanke said.

“However,” he went on, “in recent months, the outlook for foreign economic activity has deteriorated amid unsettled conditions in financial markets, troubling housing sectors and softening sentiment. As a consequence, in coming quarters, the contribution of net exports to United States production is not likely to be as sizable as it was in the first half of the year.”

Mr. Bernanke’s remarks added to the continuing sense of urgency, as he alluded to extraordinarily high levels of uncertainty and risk, well beyond the sagging housing market whose troubles lie at the core of the problems.

“Given the extraordinary circumstances, greater-than-normal uncertainty surrounds any forecast of the pace of activity,” Mr. Bernanke said. Overall growth is likely to continue “below its potential rate,” he said, and “the inflation outlook remains highly uncertain.”

The session offered a blend of concerns over financial markets, both on Wall Street and abroad, and intensely political worries for the lawmakers as Election Day draws near.

Mr. Schumer said he and other lawmakers were listening to their constituents, who were reacting with “amazement, astonishment and intense anger” to the original outlines of the $700 billion plan, as laid out by the Bush administration, and to the high-risk behavior that spawned the crisis.

“We were told that markets knew best, and that we were entering a new world of global growth and prosperity,” Mr. Schumer said as the committee greeted Mr. Bernanke, who is testifying on Capitol Hill for a second consecutive day. “We now have to pay for the greed and recklessness of those who should have known better.”

It is time, Mr. Schumer said, for the American economy to be revived as the “engine of prosperity,” rather than as a “casino” for high-rollers in the realm of finance.

“With the exception of a few outliers on either side, there is clear recognition among members of both parties that we must act and act soon,” Mr. Schumer said. But without adequate safeguards, he said, “then we risk the plan failing.”

The White House said President Bush may make a prime-time television appearance to bolster support for the program, whose basic premise calls for the Treasury Department to oversee the purchase of distressed mortgage-backed securities, and hopefully resell them to recoup at least some of the taxpayers’ money used to buy them.

Mr. Bush’s chief spokeswoman, Dana Perino, said on Wednesday that the country could face “a financial calamity” if Congress does not act soon.

Mr. Bernanke, who reminded lawmakers on Tuesday that his background is in academe, not Wall Street, told Mr. Schumer’s panel that the Federal Reserve believes in general that “private-sector arrangements” are best in straightening out problems in the financial markets.

“Government assistance should be given with the greatest of reluctance and only when the stability of the financial system and, consequently, the health of the broader economy is at risk,” Mr. Bernanke said. And now is such a time, he said.

Meanwhile, doubts were raised about the ultimate cost of the bailout, assuming it is approved in some form. Until more details emerge about what the government will buy, and how, the director of the Congressional Budget Office said it “cannot provide a meaningful estimate of the ultimate cost” to taxpayers.

Over time, Peter R. Orszag of the nonpartisan budget office told the House Budget Committee, the cost could actually be less than the $700 billion “sticker price.”

The challenge, he said, is for the Treasury to avoid taking the riskiest assets off Wall Street’s hands unless it can get them at fire-sale prices.

    Bernanke Warns of Threat to Economy, NYT, 25.9.2008, http://www.nytimes.com/2008/09/25/business/economy/25cong.html?hp

Pickens Funds Down About $1 Billion

SEPTEMBER 24, 2008
The Wall Street Journal
By GREGORY ZUCKERMAN

Lately, T. Boone Pickens would get better marks as a policy advocate and author than an energy investor.

The 80-year-old Texas oil magnate has bankrolled a massive public campaign for improved U.S. energy independence, and his new book, "The First Billion is the Hardest," is a best seller. But the downturn in energy has blindsided the industry veteran, leaving one of his hedge funds that focuses on energy stocks down almost 30% through August. A smaller commodity-focused fund is down 84%.

Pickens on Funding Swift Boat AdsPickens on PhilanthropyPickens Outlines Plan for Windmill FarmPickens Shares His View on Global WarmingPickens on the 2008 Presidential RaceAll in, the funds have lost around $1 billion this year, a figure that includes $270 million of personal losses. "It's my toughest run in 10 years," said Mr. Pickens, a former geologist who earned billions by building an oil company and investing in energy. "We missed the turn in the market, there's nothing fun about it."

Until lately, money had gushed from Mr. Pickens's trading desk as energy prices climbed. His energy-stock fund, which started the year at $2 billion, has returned a compounded annual return of 37% over seven years, according to an investor. The commodity fund, which started the year at about $600 million, has had similar strong performance. That fund relies heavily on borrowed money, resulting in the deeper losses.

Mr. Pickens argues that the recent falloff in energy prices in large part is due to dislocations in financial markets, which forced a range of investors to sell holdings to raise cash. "I'm not willing to accept that [the downturn] was due to a global slowdown" reducing energy demand, he says. "When there's deleveraging in markets it will affect everything."

Unless there's a deep, global economic downturn, he says, oil prices will head higher because oil demand will outpace supply by at least two million barrels over the next year. "Oil likely will finish the year around $120 or $125 a barrel." Still, Mr. Pickens says he's shifted his funds' portfolios to a more neutral stance, to keep his losses in check. That means he hasn't fully benefited as oil prices jumped in the past few days to $106.61 a barrel from about $90.

Despite crisscrossing the country to discuss his energy plan, Mr. Pickens says he remains focused on his investment firm, BP Capital LLC. When he's in Dallas, where he lives, Mr. Pickens starts the day with a workout, and then meets his 10-person investment team for breakfast. He leaves the office around 6:30 p.m.

He's been getting calls from concerned investors, but many are longtime friends. It also helps that he's made them a fortune over the years. "He made his [bullish] views well known and we expected volatility," says John Trammell, president of Cadogan Management LLC, a $7.5 billion firm that invests in hedge funds. "They're not as exposed to the downward movement in oil as they were" a few months ago.

Mr. Pickens is upbeat about the prospects of the firm. But he acknowledges that the recent losses have an impact. "It's like mashing all your fingers in the door... This has been a pretty bad period for us," he says.

    Pickens Funds Down About $1 Billion, WSJ, 24.9.2008, http://online.wsj.com/article/SB122221505732769415.html

Op-Ed Contributor

The Buck Stopped Then

September 24, 2008
The New York Times
By JAMES GRANT

CRITICS of the administration’s Wall Street bailout condemn the waste of taxpayer dollars. But the taxpayers aren’t the weightiest American financial constituency, even in this election year. The dollar is the world’s currency. And it is on the world’s opinion of the dollar that the Treasury’s plan ultimately hangs.

It hangs by a thread, if Monday’s steep drop of the greenback against the euro is any indication. We Americans, constitutionally inattentive to developments in the foreign exchange markets, should be grateful for what we have. That a piece of paper of no intrinsic value should pass for good money the world over is nothing less than a secular miracle. We pay our bills with it. And our creditors not only accept it, they also obligingly invest it in American securities, including our slightly shop-soiled mortgage-backed securities. Every year but one since 1982, this country has consumed much more than it has produced, and it has managed to discharge its debts with the money that it alone can lawfully print.

No other nation ever had it quite so good. Before the dollar, the pound sterling was the pre-eminent monetary brand. But when Britannia ruled the waves, the pound was backed by gold. You could exchange pound notes for gold coin, and vice versa, at the fixed statutory rate.

Today’s dollar, in contrast, is faith-based. Since 1971, nothing has stood behind it except the world’s good opinion of the United States. And now, watching the largest American financial institutions quake, and the administration fly from one emergency stopgap to the next, the world is changing its mind.

“Not since the Great Depression,” news reports keep repeating, has America’s banking machinery been quite so jammed up. The comparison is hardly flattering to this generation of financiers. From 1929 to 1933, the American economy shrank by 46 percent. The wonder is that any bank, any corporate borrower, any mortgagor could have remained solvent, not that so many defaulted. There is not the faintest shadow of that kind of hardship today. Even on the question of whether the nation has entered a recession, the cyclical jury is still out. Yet Wall Street shudders.

The remote cause of its troubles is the paper dollar itself — the dollar and the growth in the immense piles of debt it has facilitated. The age of paper money brought with it an increasingly uninhibited style of doing business.

The dollar emerged at the center of the monetary system that took its name from the 1944 convention in Bretton Woods, N.H. The American currency alone was made exchangeable into gold. The other currencies, when they got their peacetime legs back under them, were made exchangeable into the dollar.

All was well for a time — indeed, for one of the most prosperous times in modern history. Under the system of fixed exchange rates and a gold-anchored dollar, world trade boomed (albeit from a low, war-ravaged base). Employment was strong and inflation dormant. The early 1960s were a kind of macroeconomic heaven on earth.

However, by the middle of that decade it had come to the attention of America’s creditors that this country, fighting the war in Vietnam, was emitting a worryingly high volume of dollars into the world’s payment channels. Foreign central banks, nervously eyeing the ratio of dollars outstanding to gold in the Treasury’s vaults, began prudently exchanging greenbacks for bullion at the posted rate of $35 per ounce. In 1965, William McChesney Martin, chairman of the Federal Reserve, sought to reassure the quavering dollar holders. He lectured the House Banking Committee on the importance of maintaining the dollar’s credibility “down to the last bar of gold, if that be necessary.”

Necessary, it might have been, but expedient, it was not, and the Nixon administration, on Aug. 15, 1971, decreed that the dollar would henceforth be convertible into nothing except small change. The age of the pure paper dollar was fairly launched.

In the absence of a golden anchor, the United States produced as many dollars as the world cared to absorb. And the world’s appetite was prodigious. “Balance of payments” crises were now, for this country, things of the past. “Liquidity,” that bubbly speculative elixir, gurgled from the founts of the world’s central banks.

It was the very lack of gold-standard inhibition that permitted the buildup of titanic dollar balances overseas. At the end of 2007, no less than $9.4 trillion in dollar-denominated securities were sitting in the vaults of foreign investors. Not a few of these trillions were the property of Asian central banks. So, although the United States has run heavy and persistent current account deficits — $6.7 trillion in total since 1982 — they have been “deficits without tears,” to quote the French economist Jacques Rueff. The dollars American debtors sent abroad America’s creditors sent right back in the shape of investments in American stocks, bonds and factories.

Under the Bretton Woods system, worried foreign creditors would long ago have cleaned out Fort Knox. But, conveniently, the dollar is uncollateralized and unconvertible. America’s overseas creditors hold it for many reasons. Some — notably Asian central banks — acquire dollars simply to help make their exports grow. But even the governments that scoop up dollars for no better reason than to manipulate their own currency’s value presumably put some store in the integrity of American finance.

As never before, that trust is being put to the test. In the best of times, the Treasury and the Federal Reserve pretended as if the dollar were America’s currency alone. Now, in some of the worst of times, Washington is treating its vital overseas dollar constituency as if it weren’t even there.

Which failing financial institution will the administration pluck from the flames of crisis? Which will it let roast? Which market, or investment technique, will the regulators bless? Which — in a capricious change of the rules — will it condemn or outlaw? Just how shall the Treasury secretary spend the $700 billion he’s begging for? Viewed from Wall Street, the administration’s recent actions appear erratic enough. Seen from the perch of a foreign investor, they must look very much like “political risk,” a phrase we Americans usually associate with so-called emerging markets, not with our own very developed one.

Where all this might end, nobody can say. But it is unlikely that either the dollar, or the post-Bretton Woods system of which it is the beating heart, will emerge whole. It behooves Barack Obama and John McCain to do a little monetary planning. In the absence of faith, what stands behind a faith-based currency?

James Grant, the editor of Grant’s Interest Rate Observer, is the author of the forthcoming “Mr. Market Miscalculates: The Bubble Years and Beyond.”

    The Buck Stopped Then, NYT, 24.9.2008, http://www.nytimes.com/2008/09/24/opinion/24grant.html

Jimmy Carter says bailout plan is 'extremely faulty'

24 September 2008
USA Today

ATLANTA (AP) — The Bush administration's $700 billion plan to bail out the financial industry is "extremely faulty," Former President Jimmy Carter said at a Tuesday night town hall-style meeting.

Carter said he believes action is necessary but is skeptical of Treasury Secretary Henry Paulson's current plan.

"It's only three pages of outline. It gives him dictatorial power with no supervision," Carter said.

Carter told the audience the $700 billion bailout figure amounts to "$10,000 for every family in America."

"I believe that the proposal put forth by Mr. Paulson is extremely faulty," Carter said.

Before a sold-out crowd of enthusiastic supporters and guests, Carter and wife Rosalynn Carter outlined Carter Center initiatives and answered questions at their annual town hall meeting.

Kicking off their "Conversations at The Carter Center" program series, the Carters also talked about the presidential campaign and problems associated with emerging democracies.

So far this year, a dozen federally insured banks and thrifts have failed, compared with three last year. The country's largest thrift, Washington Mutual Inc., is faltering.

The U.S. has taken extraordinary measures in recent weeks to prevent a financial calamity, which would have devastating implications for the broader economy. It has, among other things, taken control of mortgage giants Fannie Mae and Freddie Mac, provided an $85 billion emergency loan to insurance colossus American International Group Inc. and temporarily banned short selling of hundreds of financial stocks.

    Jimmy Carter says bailout plan is 'extremely faulty', UT, 24.9.2008, http://www.usatoday.com/money/economy/2008-09-24-jimmycarter-bailout_N.htm

F.B.I. Looks Into 4 Firms at Center of the Economic Turmoil

September 24, 2008
The New York Times
By ERIC LICHTBLAU

WASHINGTON — The Federal Bureau of Investigation, under pressure to look at possible criminal activity in the financial markets, is expanding its corporate fraud inquiries in the wake of the tumult in the last 10 days, officials said Tuesday.

The F.B.I. has now opened preliminary investigations into possible fraud involving the four giant corporations at the center of the recent turmoil — Fannie Mae and Freddie Mac, Lehman Brothers and the American International Group, The Associated Press reported.

A government official, speaking on condition of anonymity because he was not authorized to discuss the issue publicly, said it was “logical to assume” that those four companies would come under investigation because of the many questions surrounding their recent collapse.

F.B.I. officials said Tuesday that the total number of corporate fraud investigations at the bureau was 26, an increase from the 24 open cases cited just a week ago by Robert S. Mueller III, director of the F.B.I. That number stood at 21 as recently as July, but the bureau has not named most of the targets.

Mr. Mueller told members of the Senate Judiciary Committee that the major corporate investigations are aimed at companies that “may have engaged in misstatements in the course of what transpired during this financial crisis.”

He added that “the F.B.I. will pursue these cases as far up the corporate chain as is necessary to ensure that those responsible receive the justice they deserve.”

In addition to the major corporate cases, the bureau said it had about 1,400 open investigations into smaller companies and individuals suspected of mortgage fraud.

Nonetheless, the bureau and the Justice Department have come under pressure from some critics who assert that investigators need to take a broader and more comprehensive approach to the financial inquiries. But Attorney General Michael B. Mukasey has rejected calls for the Justice Department to create the type of national task force that it did in 2002 to respond to the collapse of Enron.

Mr. Mukasey said in June that the mortgage crisis was a different “type of phenomena” that was a more localized problem akin to “white-collar street crime.”

Officials at the Justice Department declined to comment on Tuesday on which companies were under investigation by the bureau. “As part of our investigative responsibility, the F.B.I. conducts corporate fraud investigations,” Brian J. Roehrkasse, spokesman for the department, said in a statement. “The number of cases fluctuates over time. However, we do not discuss which companies may or may not be the subject of an investigation.”

In a major case in June, federal prosecutors in Brooklyn brought conspiracy and securities fraud charges against two portfolio managers at Bear Stearns, which nearly collapsed in June before it was bought for a fire-sale price.

When that prosecution was announced, Deputy Attorney General Mark R. Filip acknowledged that the mortgage crisis “includes a wide variety of criminal acts that have proved devastating to American families.”

Still, several senators at last week’s hearing by the judiciary committee made it clear that they wanted to see the F.B.I. take aggressive steps to investigate possible criminal wrongdoing in connection with the crisis.

Senator Patrick J. Leahy, the Vermont Democrat who leads the committee, told Mr. Mueller that “obviously everybody’s concerned where the U.S. government’s on the hook” for up to $1 trillion in bailout costs.

“And if people were cooking the books, manipulating, doing things they were not supposed to do, then I want people held responsible. And I suspect every American taxpayer — I don’t care what their political background is — would like them held responsible,” he said.

    F.B.I. Looks Into 4 Firms at Center of the Economic Turmoil, NYT, 24.9.2008, http://www.nytimes.com/2008/09/24/business/24inquiry.html

In Bailout Furor, Wall Street Pay Becomes a Target

September 24, 2008
The New York Times
By STEVE LOHR

Congress wants Wall Street to feel it where it hurts: the wallet.

The stratospheric pay packages of Wall Street executives have become a lightning rod issue as Congress shapes a $700 billion bailout for financial firms. Proposals circulating on Capitol Hill vary, but they all would impose some limits or approval authority on salaries of executives whose firms seek help.

The moves in Washington mirror the popular outcry — in constituent e-mail messages and postings in the blogosphere — over the prospect of Wall Street’s tarnished titans walking away with tens of millions of dollars a year while taxpayers pick up the bill.

But Wall Street, its lobbyists and trade groups are waging a feverish lobbying campaign to try to fight compensation curbs. Pay restrictions, they say, would sap incentives to hard work and innovation, and hurt the financial sector and the American economy.

“We support the bill, but we are opposed to provisions on executive pay,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a trade group. “It is not appropriate for government to be setting the salaries of executives.”

Yet some formal restraint on executive pay seems unavoidable, even sensible, some finance experts and economists said.

Arthur Levitt Jr., a former Wall Street executive as well as a former chairman of the Securities and Exchange Commission, said pay curbs on executives whose firms take part in the bailout were essential for Congressional approval and were reasonable.

The finance industry, Mr. Levitt added, will continue to offer handsome salaries for the successful, though not as high as in the boom years. “The golden egg has disappeared,” he said.

Scott A. Shay, chairman of Signature Bank, which holds no high-risk securities, called a limit on executive pay for firms participating in the bailout only fair.

“If that doesn’t happen, you are effectively advantaging the institutions that made those risky bets at taxpayers’ cost,” Mr. Shay said. “What sense does that make?”

Across the Atlantic, there is also an appetite for stepping into pay practices in the finance industry. This week, Prime Minister Gordon Brown of Britain called “unacceptable” the practice of linking bonus payments to high-risk investments that delivered hefty profits in the short term.

His Treasury minister, Alistair Darling, echoed that view by saying that Britain’s main regulator, the Financial Service Authority, should take a hard look at regulating pay.

Angry sentiments on the issue in Congress were palpable on Tuesday, when Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the Federal Reserve chairman, testified before the Senate banking committee.

Senator Christopher J. Dodd, chairman of the committee, said the “authors of this calamity” should not walk away enriched.

The presidential candidates, Senators Barack Obama and John McCain, have also called for pay limits.

The proposals in Washington are still tentative, and often vague. A Senate draft document calls for a ban on incentive payments that the Treasury deems “inappropriate or excessive” and a “claw-back” provision, requiring executives to give up pay or severance benefits if the firm’s financial results are later shown to be overstated.

Other proposals call for a ban on severance payments and allowing large shareholders, with a stake of 3 percent or more, to propose alternative slates of directors. This would be an effort to tackle excessive pay practices by opening up and strengthening corporate governance.

Some corporate governance experts say hastily devised compensation curbs in the bailout package would be a mistake and perhaps open the door to unintended consequences.

“Clearly, the level of pay at some of the Wall Street firms was appalling, given the performance,” said Charles M. Elson, a corporate governance expert at the University of Delaware. “But the bailout is about saving the economy, while executive pay is a separate, and complex, issue.”

In 1993, Mr. Elson noted, Congress limited the tax deductibility of executive salaries to $1 million, unless it could be demonstrated that the extra pay was linked to performance incentives. That move, he said, contributed to the practice in later years of very generous grants of stock options, which helped drive executive pay to new heights.

In 2007, the total compensation of chief executives in large American corporations was 275 times that of the salary of the average worker, the Economic Policy Institute, a liberal research organization, estimates. In the late 1970s, chief executive pay was 35 times that of the average American worker.

Wall Street has been the top tier of the corporate pay range, with executives earning eight-figure salaries. Its bonus system, which rewards short-term trading profits, has been singled out as an incentive for Wall Street executives to expand their highly profitable business in exotic securities and ignore the risks.

“This financial crisis is a direct result of the compensation practices at these Wall Street firms,” said Paul Hodgson, a senior analyst at the Corporate Library, a governance research group.

One possible answer, compensation analysts and economists say, would be to stretch out payments for several years, encouraging executives to pursue the long-term health and stability of the firms they head.

“I’m of a free-market, conservative bent, but I am sympathetic to some reshaping of executive pay on Wall Street,” said Kenneth S. Rogoff, a professor of economics at Harvard. “For sure, I would consider very long-term payouts, up to 10 years out.”

Whether Congress acts on executive pay or not, Wall Street pay levels are destined to come under pressure, said Michael Karp, chief executive of the Options Group, an executive search firm. The fallout from the financial crisis and the consolidation in the industry, he said, inevitably mean that more people will be competing for fewer jobs, dragging down salaries.

“Of course, superstars will always get paid,” Mr. Karp said. “But they won’t be the way they used to be.”

Eric Dash, Landon Thomas Jr., Leslie Wayne and Ben White contributed reporting.

    In Bailout Furor, Wall Street Pay Becomes a Target, NYT, 24.9.2008, http://www.nytimes.com/2008/09/24/business/24pay.html?hp

Congress Urged to Act Soon on Bailout

September 24, 2008
The New York Times
By MARK LANDLER and STEVEN LEE MYERS

WASHINGTON — Treasury Secretary Henry M. Paulson Jr. received an angry and skeptical reception on Tuesday when he appeared before the Senate Banking Committee as he called on Congress to act promptly to give him wide authority to rescue the nation’s financial system.

Mr. Paulson urged the lawmakers “to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don’t have broad support.” But one after another, senators from both parties said that, while they were prepared to move fast, they are far from ready to give the administration everything it wants in its proposed $700 billion rescue plan.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the panel, called the Treasury proposal “stunning and unprecedented in its scope and lack of detail.”

Asserting that the plan would allow Mr. Paulson to act with “absolute impunity,” Senator Dodd said, “After reading this proposal, I can only conclude that it is not only our economy that is at risk, Mr. Secretary, but our Constitution, as well.”

Another expression of disgust came from Senator Jim Bunning, Republican of Kentucky, who said the plan would “take Wall Street’s pain and spread it to the taxpayers.”

“It’s financial socialism, and it’s un-American,” Mr. Bunning said.

Senator Dodd called the crisis “entirely foreseeable and preventable, not an act of God,” and said it angered him to think about “the authors of this calamity” walking away with the proverbial golden parachutes while taxpayers pick up the tab.

“There is no second act on this,” Mr. Dodd said, acknowledging that speed was important. But it is more important, he said, “to get it right.”

In remarks prepared for testimony before the Senate Banking Committee, Mr. Paulson said that “this troubled asset purchase program is the single most effective thing we can do to help homeowners, the American people, and stimulate our economy.”

He noted that Congress had moved quickly earlier this year to pass an economic stimulus program. The challenge this time, he said, was greater and demanded “bipartisan discipline and urgency.”

With global financial stresses and uncertainties continuing to play out, the chairman of the Federal Reserve, Ben S. Bernanke, warned in his testimony that “if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.”

Senator Charles E. Schumer, Democrat of New York, recalled Mr. Bernanke telling him in a recent meeting that the growing freeze in the credit markets, spawned by troubles with shaky mortgages, meant that “the arteries are clogged,” and that without action “the patient will surely suffer a heart attack.”

So Congress will act quickly, Mr. Schumer said, but not without strict scrutiny. “Even on Wall Street, $700 billion is a lot of money,” he said.

None of the senators disputed the grim possibilities if Congress should do nothing, but it was clear that they are hearing from their angry constituents. Senator Elizabeth Dole of North Carolina, for instance, said people in her state have been complaining about “costly and reckless” behavior on Wall Street, and the potential cost to people who are anything but wealthy. (Senator Dole is running for re-election.)

President Bush, speaking in New York before the markets opened, expressed confidence that Congress would agree on a financial bailout plan and left open the possibility of accepting amendments being proposed by Democrats.

“Now there’s a natural give and take when it comes to the legislative process,” Mr. Bush said in brief remarks with the president of Pakistan, Asif Ali Zardari. “There are good ideas that need to be listened to in order to get a good bill that will address the situation.”

In a statement released earlier in the day, Mr. Bush said he had reassured worried world leaders that the United States had the “right plan” to deal with the crisis.

Vice President Cheney was on Capitol Hill Tuesday morning, trying to round up support for the administration’s package. But the senators on the banking panel were unanimous in calling for ways to protect taxpayers’ investments — which at $700 billion would amount to $2,300 for every American citizen, Senator Mike Enzi, Republican of Wyoming, noted.

Mr. Paulson had been expected to encounter sharp questioning from lawmakers about the scope of the program, although several members of the banking committee applauded the credentials of Mr. Paulson and Mr. Bernanke.

Democrats and Republicans are eager to include legislation that would protect mortgage holders, cut the salaries of executives at Wall Street firms and prevent a breakdown of the financial system.

Senator Richard C. Shelby of Alabama, the ranking Republican on the panel, expressed disdain for regulars “who sat on the sidelines” as the crisis was building. He recalled, too, that Alan Greenspan, the former Federal Reserve chairman, once told him that the rate of borrowing in the American economy and the high percentage of their incomes that many people were spending on their homes posed “a rather small risk to the mortgage market.”

Mr. Shelby complained that the emerging program seemed to be “a series of ad hoc measures,” rather than the kind of comprehensive approach that is needed.

The back-and-forth came as the Bush administration and Congressional leaders moved closer to some kind of agreement on an historic $700 billion bailout, including tight oversight of the program and new efforts to help homeowners at risk of foreclosure.

But Congress and the administration remained at odds over the demands of some lawmakers, including limits on the pay of top executives, and new authority to allow bankruptcy judges to reduce mortgage payments for borrowers facing foreclosure.

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.

In his prepared remarks, Mr. Bernanke said the Fed was reluctant to intervene in the market, saying it should be done “only when the stability of the financial system and, consequently, the health of the broader economy is at risk.”

Such conditions applied in the deteriorating financial situation at the mortgage finance giants, Fannie Mae and Freddie Mac, Mr. Bernanke said. He also said that the government tried to let market forces handle the problems at the investment bank Lehman Brothers and the insurance giant American International Group, but the rapid sequences of events caused “extraordinarily turbulent conditions in global financial markets.”

Even after the actions of the Fed and the Treasury, Mr. Bernanke said, “global financial markets remain under extraordinary stress. Action by the Congress is required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and our economy.”

Mr. Bernanke’s testimony was exceptionally brief, considering the enormous stakes involved, a mere nine paragraphs, much of it devoted to a recapitulation of the growing crisis and how it took shape.

It seemed to reflect the way Mr. Paulson and the administration have presented the bailout legislation, in bare-bones fashion, but with a clear tone of urgency.

The White House has begun intensive lobbying to persuade nervous lawmakers to support the plan. Joshua B. Bolten, the White House chief of staff, and Keith Hennessy, the chairman of Mr. Bush’s National Economics Council, were also headed to Capitol Hill on Tuesday.

Tony Fratto, Mr. Bush’s deputy secretary, told reporters there is a “great sense of urgency” to get the legislation passed this week.
 

Mark Landler reported from Washington; Steven Lee Myers from New York. Brian Knowlton and Sheryl Gay Stolberg contributed reporting from Washington.

    Congress Urged to Act Soon on Bailout, NYT, 24.9.2008, http://www.nytimes.com/2008/09/24/business/economy/24fannie.html?hp

Op-Ed Contributor

The Power of Negative Thinking

September 24, 2008
The New York Times
By BARBARA EHRENREICH

GREED — and its crafty sibling, speculation — are the designated culprits for the financial crisis. But another, much admired, habit of mind should get its share of the blame: the delusional optimism of mainstream, all-American, positive thinking.

As promoted by Oprah Winfrey, scores of megachurch pastors and an endless flow of self-help best sellers, the idea is to firmly believe that you will get what you want, not only because it will make you feel better to do so, but because “visualizing” something — ardently and with concentration — actually makes it happen. You will be able to pay that adjustable-rate mortgage or, at the other end of the transaction, turn thousands of bad mortgages into giga-profits if only you believe that you can.

Positive thinking is endemic to American culture — from weight loss programs to cancer support groups — and in the last two decades it has put down deep roots in the corporate world as well. Everyone knows that you won’t get a job paying more than $15 an hour unless you’re a “positive person,” and no one becomes a chief executive by issuing warnings of possible disaster.

The tomes in airport bookstores’ business sections warn against “negativity” and advise the reader to be at all times upbeat, optimistic, brimming with confidence. It’s a message companies relentlessly reinforced — treating their white-collar employees to manic motivational speakers and revival-like motivational events, while sending the top guys off to exotic locales to get pumped by the likes of Tony Robbins and other success gurus. Those who failed to get with the program would be subjected to personal “coaching” or shown the door.

The once-sober finance industry was not immune. On their Web sites, motivational speakers proudly list companies like Lehman Brothers and Merrill Lynch among their clients. What’s more, for those at the very top of the corporate hierarchy, all this positive thinking must not have seemed delusional at all. With the rise in executive compensation, bosses could have almost anything they wanted, just by expressing the desire. No one was psychologically prepared for hard times when they hit, because, according to the tenets of positive thinking, even to think of trouble is to bring it on.

Americans did not start out as deluded optimists. The original ethos, at least of white Protestant settlers and their descendants, was a grim Calvinism that offered wealth only through hard work and savings, and even then made no promises at all. You might work hard and still fail; you certainly wouldn’t get anywhere by adjusting your attitude or dreamily “visualizing” success.

Calvinists thought “negatively,” as we would say today, carrying a weight of guilt and foreboding that sometimes broke their spirits. It was in response to this harsh attitude that positive thinking arose — among mystics, lay healers and transcendentalists — in the 19th century, with its crowd-pleasing message that God, or the universe, is really on your side, that you can actually have whatever you want, if the wanting is focused enough.

When it comes to how we think, “negative” is not the only alternative to “positive.” As the case histories of depressives show, consistent pessimism can be just as baseless and deluded as its opposite. The alternative to both is realism — seeing the risks, having the courage to bear bad news and being prepared for famine as well as plenty. We ought to give it a try.

Barbara Ehrenreich is the author, most recently, of “This Land Is Their Land: Reports From a Divided Nation.”

    The Power of Negative Thinking, NYT, 24.9.2008, http://www.nytimes.com/2008/09/24/opinion/24ehrenreich.html?ref=opinion

Editorial

Trust Me

September 23, 2008
The New York Times

The nation’s financial mess was caused to a great degree by a culture of lax regulation and even less oversight, in which ordinary Americans were told to trust the government and Wall Street to do the right thing.

President Bush’s proposed solution, which he wants Congress to authorize immediately, tells taxpayers to write a check for $700 billion and trust the government and Wall Street to do the right thing — with inadequate regulation and virtually no oversight.

We agree with Senator Barack Obama that the administration’s plan lacks regulatory muscle, and we agree with Senator John McCain when he said: “When we’re talking about a trillion dollars of taxpayer money, ‘trust me’ just isn’t good enough.”

Nearly everyone agrees that the there will have to be another very big bailout. The financial system, gorged on its own excesses, cannot stabilize without intervention. The $700 billion would be used to buy up the bad assets that are presumably clogging the system.

To protect the American taxpayer, Congress must ensure that the bailout comes with clear ground rules and vigilant oversight. In an appalling, though familiar fashion, the ground rules proposed by the Bush administration are wholly unacceptable — as are its tactics.

At 1 o’clock in the morning on Saturday, the Treasury Department released its “Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets.” The witching hour timing seemed designed to underscore the urgency of the effort.

The proposal, which is now being negotiated with Congressional leaders, would give the Treasury secretary the authority to buy any assets from any financial institution at any price that he deemed necessary to provide stability to the financial markets. And it asserts that neither the courts nor any administrative agency would be allowed to question or review those decisions.

We’ve seen this kind of over-reaching from the Bush administration before. It has usurped far too many powers under a banner of urgency — think wiretapping — and abused those powers. Now, Congress and the American people are being told that unless they quickly approve sweeping executive powers for the bailout, capitalism may collapse. Even if this administration weren’t so untrustworthy, rushing ahead would be a bad idea.

No one is saying the financial crisis is not serious and urgent. We know that it will be hard for lawmakers to resist White House pressure — especially if the Dow continues to drop. But it is essential that Congress takes the time to get the bailout right, even if it cuts into lawmakers’ campaigning.

Treasury Secretary Henry Paulson must craft and execute the bailout in a way that persuades Wall Street and the global financial system that they will be saved while protecting the American taxpayers’ $700 billion investment. Balancing those complex mandates is made more difficult by the fact that Mr. Paulson hails from Wall Street and could, if he wanted to, return to Wall Street.

The only way to avoid the appearance of a conflict of interest is for Mr. Paulson to welcome full and transparent legislative and judicial review.

A counterproposal now being developed by the Democrats would require firms that sell their troubled assets to the Treasury to give the government stock — an idea that has populist appeal but also needs to be vetted carefully. It also would try to help homeowners, who are left out of the administration’s plan entirely, allowing them to have their mortgages modified under bankruptcy court protection. That step that should have been taken long ago to avert the foreclosures and house price declines that are at the root of the crisis.

Senator Christopher Dodd, chairman of the Senate Banking Committee, is also calling for an oversight board of federal officials and other experts. We believe that is still not enough. But all of the competing proposals provide interesting starts for a serious debate.

There is time to have it.

    Trust Me, NYT, 23.9.2008, http://www.nytimes.com/2008/09/23/opinion/23tue1.html

Bernanke: Recession certain in absence of bailout

September 23, 2008
Filed at 11:48 a.m. ET
By THE ASSOCIATED PRESS
The New York Times
 

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke bluntly warned Congress on Tuesday it risks a recession, with higher unemployment and increased home foreclosures, if it fails to act on the Bush administration's plan to bail out the financial industry.

Bernanke told the Senate Banking Committee that failure to act could leave ordinary businesses unable to borrow the money they need to expand and hire additional employees, while consumers could find themselves unable to finance big-ticket purchases such as cars and homes.

The Senate Banking Committee listened in silence as the nation's central banker sketched his scenario.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) -- The Bush administration urgently pressed Congress in public and private Tuesday for quick passage of a $700 billion bailout of the financial industry as Democratic and Republican lawmakers vented their anger over a crisis that slid the nation's economy toward the brink.

Stocks held steady in pre-noon trading on Wall Street as Treasury Secretary Henry Paulson told the Senate Banking Committee that quick passage of the administration's plan is ''the single most effective thing we can do to help homeowners, the American people and stimulate our economy.''

But even before Paulson could speak, lawmakers expressed unhappiness, criticism of the plan and -- in the case of some conservative Republicans -- outright opposition.

''I understand speed is important, but I'm far more interested in whether or not we get this right,'' said Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee. ''There is no second act to this. There is no alternative idea out there with resources available if this does not work,'' he added.

Sen. Richard C. Shelby of Alabama, the panel's senior Republican, was even more blunt. ''I have long opposed government bailouts for individuals and corporate America alike,'' he said. Seated a few feet away from Paulson and Ben Bernanke, the chairman of the Federal reserve, he added, ''We have been given no credible assurances that this plan will work. We could very well send $700 billion, or a trillion, and not resolve the crisis.''

Dodd and other key Democrats have been in private negotiations with the administration since the weekend on legislation designed to allow the government to buy bad debts held by banks and other financial institutions.

Key details remain unresolved, although President Bush predicted the Democratic-controlled Congress would soon pass a ''a robust plan to deal with serious problems.'' He was speaking to the United Nations General assembly.

The Senate hearing unfolded as Vice President Dick Cheney and Jim Nussle, the Bush administration's budget director, met privately with restive House Republicans. Some members of the GOP rank and file have expressed concerns about the bailout proposal, either because they view it as an unwarranted government intrusion into the financial markets, or because the $700 billion price tag gives them pause.

''Just because God created the world in seven days doesn't mean we have to pass this bill in seven days,'' said Rep. Joe Barton, R-Texas.

Added Rep. Darrell Issa, R-Calif., ''I am emphatically against it.''

A third witness, Securities and Exchange Commission Chairman Christopher Cox, urged Congress to regulate a type of corporate debt insurance that figured prominently in the country's financial crisis.

''I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets,'' he said. The debt insurance is known as credit default swaps.

Despite the bipartisan unhappiness, the prospects for legislation seemed strong, with lawmakers eager to adjourn this week or next for the elections.

Differences remained, though, including a demand from many Democrats and some Republicans to strip executives at failing financial firms of lucrative ''golden parachutes'' on their way out the door.

The administration is balking at another key Democratic demand: allowing judges to rewrite bankrupt homeowners' mortgages so they could avoid foreclosure.

The legislation that the administration is promoting would allow the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions. Getting those debts off their books should bolster their balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it should help lift a major weight off the sputtering economy.

Buttressing Paulson's comments, Bernanke said action by lawmakers ''is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.''

So far this year, a dozen federally insured banks and thrifts have failed, compared with three last year. The country's largest thrift, Washington Mutual Inc., is faltering.

Republicans said the sheer size of the bailout would cost each man, woman and child in the United States $2,300.

If approved and implemented, that could push the government's budget deficit next year into the $1 trillion range -- far and away a record.

Sen. Barack Obama, the Democratic presidential candidate, pointed to other potential consequences, as well. In an interview with NBC, he said that if he wins the White House, he would likely have to phase in the proposals he has outlined for new federal spending. He did not elaborate.

Congressional Republicans, in particular, piled on the criticism of the administration's suggested solution to the crisis.

''This massive bailout is not a solution, It is financial socialism and it's un-American,'' said Sen. Jim Bunning, R-Ky.

Dodd and others indicated that the stakes are too high for Congress not to act, but they made clear they would insist on changes in the administration's weekend changes.

Dodd said the administration's initial proposal would have allowed the Treasury secretary to ''act with utter and absolute impunity -- without review by any agency or court of law'' in deciding how to administer the envisioned bailout program.

''After reading this proposal, I can only conclude that it is not just our economy that is at risk, Mr. Secretary, but our Constitution, as well,'' Dodd said.

The U.S. has taken extraordinary measures in recent weeks to prevent a financial calamity, which would have devastating implications for the broader economy. It has, among other things, taken control of mortgage giants Fannie Mae and Freddie Mac, provided an $85 billion emergency loan to insurance colossus American International Group Inc. and temporarily banned short selling of hundreds of financial stocks.

    Bernanke: Recession certain in absence of bailout, NYT, 23.9.2008, http://www.nytimes.com/aponline/washington/AP-Financial-Meltdown.html

Bailout Talks Advance, but Doubts Voiced in Congress

September 23, 2008
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — The Bush administration and Congressional leaders moved closer to agreement on a historic $700 billion bailout for financial firms on Monday, including tight oversight of the program and new efforts to help homeowners at risk of foreclosure.

But lawmakers in both parties voiced anger over the steep cost and even skepticism about the plan’s chances of success.

As heated debate began on Capitol Hill, Congress and the administration remained at odds over the demands of some lawmakers, including limits on the pay of top executives whose firms seek help, and new authority to allow bankruptcy judges to reduce mortgage payments for borrowers facing foreclosure.

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.

Despite the progress, the rancor in Congress ratcheted up the pressure on Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke, the architects of the proposal to let financial institutions, including some foreign firms, pass their most distressed assets to the United States Treasury.

Both are scheduled to testify before the Senate banking committee on Tuesday morning, where they must now sell the bailout plan to dubious lawmakers and to an increasingly angry public. They will also appear before the House Financial Services committee on Wednesday afternoon.

“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.

Some conservative Republicans also expressed outrage, echoing scornful comments by Newt Gingrich, the former House speaker, and Lou Dobbs, the CNN anchor, among other right-leaning critics.

Treasury officials brushed off the protests from influential Republicans like Mr. Shelby and said they were confident that Republican leaders could bring their members along. “We are making progress and have confidence that a plan will pass by the end of this week,” said Michele Davis, a spokeswoman for Mr. Paulson.

The financial markets, however, reacted badly to the wrangling in Washington, with the Dow Jones industrial average tumbling 372 points.

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.”

House Speaker Nancy Pelosi, after a meeting with party leaders on Monday evening, said she, too, remained committed to getting a bill to the president as quickly as possible.

But powerful lawmakers in both parties said they would not be rushed into granting Mr. Bush’s request.

“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.”

Mr. Gingrich, the former House speaker, said he expected Republican lawmakers to oppose the plan in increasing numbers. “I think this is going to be a much bigger fight than he expected,” Mr. Gingrich said, referring to President Bush.

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.”

Early on Monday, Senator Christopher J. Dodd, Democrat of Connecticut, and chairman of the banking committee, introduced a 44-page draft bill that his staff pulled together on Sunday incorporating many priorities of Senate Democrats — a hefty counterproposal to the administration’s initial three page proposal.

Representative Barney Frank, Democrat of Massachusetts, and chairman of the Financial Services Committee, who had already submitted a series of demands to the Treasury, worked Monday to revise his version of the legislation to reflect various agreements with the administration on oversight and other issues.

Officials said that the administration was also prepared to adopt conflict-of-interest rules for any private firms that are hired to help the Treasury manage the bailout program. Some lawmakers were worried that such firms might also own assets that could grow in value depending on how the rescue plan was run.

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.”

Carl Hulse, Sheryl Gay Stolberg, Jackie Calmes and Edmund L. Andrews contributed reporting.

    Bailout Talks Advance, but Doubts Voiced in Congress, NYT, 23.9.2008, http://www.nytimes.com/2008/09/23/business/23cong.html


 

Reuters        23.9.2008

http://static.reuters.com/resources/media/editorial/20080923/executivepaycopy.gif

Op-Ed Columnist

The Establishment Lives!

September 23, 2008
The New York Times
By DAVID BROOKS

Once, there was a financial elite in this country. During the first two-thirds of the 20th century, middle-aged men with names like Mellon and McCloy led Wall Street firms, corporate boards and white-shoe law firms and occasionally emerged to serve in government.

Starting in the 1960s, that cohesive elite began to fall apart. Liberal interest groups took control of Democratic economic policy. Supply-side think tankers and Southern conservatives dominated the GOP.

In the 1980s, the old power structures frayed, even on Wall Street. Corporate raiders took on the old business elite. Math geeks created complicated financial instruments that the top executives couldn’t control or understand. (The market for credit-default swaps alone has exploded to $45.5 trillion, up from $900 billion in 2001.)

Year followed year, and the idea of a cohesive financial establishment seemed increasingly like a thing of the past.

No more. Over the past week, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and Tim Geithner of the New York Fed have nearly revived it. At its base, the turmoil wracking the world financial markets is a crisis of confidence. What Paulson, et al. have tried to do is reassert authority — the sort that used to be wielded by the Mellons and Rockefellers and other rich men in private clubs.

Inspired in part by Paul Volcker, Nicholas Brady and Eugene Ludwig, and announced last week, the Paulson plan is a pure establishment play. It would assign nearly unlimited authority to a small coterie of policy makers. It does not rely on any system of checks and balances, but on the wisdom and public spiritedness of those in charge. It offers succor to the investment banks that contributed to this mess and will burn through large piles of taxpayer money. But in exchange, it promises to restore confidence. Somebody, amid all the turmoil, will occupy the commanding heights. Somebody will have the power to absorb debt and establish stability.

Liberals and conservatives generally dislike the plan. William Greider of The Nation writes: “If Wall Street gets away with this, it will represent an historic swindle of the American public — all sugar for the villains, lasting pain and damage for the victims.”

He approvingly quotes the conservative economist Christopher Whalen of Institutional Risk Analytics: “The joyous reception from Congressional Democrats to Paulson’s latest massive bailout proposal smells an awful lot like yet another corporatist love fest between Washington’s one-party government and the Sell Side investment banks.”

Thanks to their criticism, the plan will be pinned back. Oversight will be put in place. But the plan will probably not be stopped. The markets would tank. There is a hunger for stability, which only the Treasury and the Fed can provide.

So we have arrived at one of those moments. The global financial turmoil has pulled nearly everybody out of their normal ideological categories. The pressure of reality has compelled new thinking about the relationship between government and the economy. And lo and behold, a new center and a new establishment is emerging.

The Paulson rescue plan is one chapter. But there will be others. Over the next few years, the U.S. will have to climb out from under mountainous piles of debt. Many predict a long, gray recession. The country will not turn to free-market supply-siders. Nor will it turn to left-wing populists. It will turn to the safe heads from the investment banks. For Republicans, people like Paulson. For Democrats, the guiding lights will be those establishment figures who advised Barack Obama last week — including Volcker, Robert Rubin and Warren Buffett.

These time-tested advisers, or more precisely, their acolytes, are going to make the health and survival of the financial markets their first order of business, because without that stability, the entire economy will be in danger. Beyond that, they will embrace a certain sort of governing approach.

The government will be much more active in economic management (pleasing a certain sort of establishment Democrat). Government activism will provide support to corporations, banks and business and will be used to shore up the stable conditions they need to thrive (pleasing a certain sort of establishment Republican). Tax revenues from business activities will pay for progressive but business-friendly causes — investments in green technology, health care reform, infrastructure spending, education reform and scientific research.

If you wanted to devise a name for this approach, you might pick the phrase economist Arnold Kling has used: Progressive Corporatism. We’re not entering a phase in which government stands back and lets the chips fall. We’re not entering an era when the government pounds the powerful on behalf of the people. We’re entering an era of the educated establishment, in which government acts to create a stable — and often oligarchic — framework for capitalist endeavor.

After a liberal era and then a conservative era, we’re getting a glimpse of what comes next.

    The Establishment Lives!, NYT, 23.9.2008, http://www.nytimes.com/2008/09/23/opinion/23brooks.html


 

Michael Sloan

A Huge Plan to Rescue Wall Street        NYT        23.9.2008

http://www.nytimes.com/2008/09/23/opinion/l23econ.html

Letters

A Huge Plan to Rescue Wall Street

September 23, 2008
The New York Times

To the Editor:

Re “Administration Is Seeking $700 Billion for Wall St.; Bailout Could Set Record” (front page, Sept. 21):

The bailout plan for American financial institutions appears to put most or all of the risk on taxpayers and minimal risk on the institutions that made incredibly large numbers of incredibly poor financial decisions. If this plan is put into effect, we will witness the final and most devastating act of the largest transfer of wealth from the middle class to the truly rich in this nation’s history.

I miss the good old days when hard work was rewarded and incompetence was punished. These days, we have it backward.

Mitchell Turker
Portland, Ore., Sept. 21, 2008

•

To the Editor:

So an administration that is unsuccessful at war, disaster relief and so on now wants to be given a free hand in spending $700 billion on assets for which there is no agreed value or way to value.

To get this, it uses its favorite weapon, scaring people about what would happen if its plan is not followed.

I cannot help but think that this is more a bailout for its friends in the financial industry than something needed to help ordinary Americans.

I would feel more comfortable that this was not some gift to financial institutions if those institutions that took part in the bailout had to revoke top management’s stock incentives given during the last five years, were forbidden to award such incentives over the next five years, had to cap salaries at $250,000 and had to pay into a fund that would help repay at least a portion of these costs.

Otherwise, I can see the day when these firms again operate based on greed and their managers profit while taxpayers foot the bill for their ineptitude.

Roy Weber
Ridgewood, N.J., Sept. 21, 2008

•

To the Editor:

In “Democrats Set Conditions on Bailout as 2 Firms End Investment Banking Era” (front page, Sept. 22), this sentence appears: “The Bush administration proposal ... calls for nearly unfettered powers to the Treasury secretary.”

We must demand to know whom John McCain and Barack Obama would appoint to this position. Not vague generalities about experience, character and so on, but specific names. And we need to know now, before the election.

Susan Black
San Francisco, Sept. 22, 2008

•

To the Editor:

Once again, Democrats are falling into the trap of allowing the Bush administration to frame the response to a crisis. Just as in 9/11, Democrats will allow President Bush and his supporters to frame the qualifications and responses of “patriotic” legislators.

The present crisis did not happen overnight, and no one should expect Congress to enact anything close to resembling a comprehensive and effective response in a matter of a few days.

Douglas Salerno
Traverse City, Mich., Sept. 22, 2008

•

To the Editor:

American families are hurting in many ways these days. The mortgage crisis threatens tens of thousands of families with the loss of their homes. The Wall Street meltdown undoubtedly means layoffs and bare pantries for many more families. The gas crisis already has some parents facing painful choices about whether to heat their homes this winter or feed their children.

And let us not forget that hundreds of thousands of families in Texas and Louisiana are already without power, or have actually lost their homes. With schools serving 300,000 children closed because of Hurricane Ike, parents in these devastated areas have no way to care for their children except to miss work — if indeed they still have jobs to go to.

American politicians need to stop focusing so much on the needs of investors and the “gotcha” politics of the campaign and tell us what they will do to help America’s families cope with the disasters — natural and otherwise — that face so many Americans today.

Steven Mintz
New York, Sept. 20, 2008

The writer is the national co-chairman of the Council on Contemporary Families and a historian at Columbia University.

•

To the Editor:

In “Cash for Trash” (column, Sept. 22), Paul Krugman wrote about the current economic bailout before Congress: “Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.”

I am already sorry. On Sunday, I read the business section of The Times and was appalled by the chief executives’ salaries at our financial institutions, even when they were cut in half. Those C.E.O.’s of failed institutions should consider returning those millions to shareholders, employees and taxpayers.

In all other segments of our democratic and capitalistic society, employees are rewarded with higher salaries for work well done. But in the business world, success or failure, the C.E.O.’s walk away with obscene payments, and now we are to bail them out!

Middle-class citizens like me did not benefit from the bubble years, and I don’t see why we must pay back that debt incurred by recklessness and greed. But something must be done and done quickly by Congress.

I agree with Mr. Krugman that some regulations should be tied to this bailout and that Henry M. Paulson Jr., the Treasury secretary, should not be given “dictatorial authority, plus immunity from reviews.”

Mary Leonard
Kingston, N.Y., Sept. 22, 2008

•

To the Editor:

Re “Hard Truths About the Bailout” (editorial, Sept. 20):

While no thoughtful person questions the need for government intervention in this most troubling financial collapse, it is well past time to face other hard truths. The same high fliers who support the use of taxpayer money to buy troubled loans and other mortgage-related securities from banks and Wall Street firms have been the first to cry “foul” when average citizens suggest that tax revenues should pay for health care, education and infrastructure repair.

Socialism for wealthy gamblers is deemed acceptable; social programs that benefit average citizens somehow are suspect, even subversive.

It’s time to put the Orwellian use of language to bed and to create a level playing field in which the same rules apply in protecting the interests of the public at large as now are being advocated to advance the interests of Wall Street. Socialism by any other name ...

Ann Galloway
Stamford, Conn., Sept. 20, 2008

•

To the Editor:

Ron Lieber (Your Money column, Sept. 20) presents a sound discussion on preserving adequate retirement funds. Yet the one secure source of retirement income is Social Security.

With most pension funds and 401(k)s invested primarily in the stock market, if the administration had succeeded in its desire to privatize Social Security, it would have created a huge hole in what still remains a major safety net.

Nathan T. Melamed
Pittsburgh, Sept. 20, 2008

•

To the Editor:

The investment banking community must have thousands of bright young minds like Sam G. Baris (“Present at the Crash,” Op-Ed, Sept. 19). Having chosen a profession faced with a major crisis and an uncertain future, they are anxious and having second thoughts about their career path.

When the smoke clears in a few months, the profession will almost certainly be very different than it is now. Certainly, the opportunities will be fewer, and the promise of large financial reward less assured.

Let me suggest that analysts and investment bankers confronting such thoughts recognize both their youth and their intelligence. The analytical skills that they possess are valued in other professions. As a 20- or 30-something, there’s plenty of life left to apply those skills elsewhere: consider the life sciences, medicine, teaching, journalism.

The current financial crisis affects us all. But for those who are on the front lines, it may seem as if choices are few. In fact, for many, this crisis may be an opportunity in disguise.

Mark E. Horowitz
New York, Sept. 19, 2008


The writer is a family physician practicing in the financial district.

    A Huge Plan to Rescue Wall Street, NYT, 23.9.2008, http://www.nytimes.com/2008/09/23/opinion/l23econ.html

Retirees Filling the Front Line in Market Fears

September 23, 2008
The New York Times
By JOHN LELAND and LOUIS UCHITELLE

Older Americans with investments are among the hardest hit by the turmoil in the financial markets and have the least opportunity to recover.

As companies have switched from fixed pensions to 401(k) accounts, retirees risk losing big chunks of their wealth and income in a single day’s trading, as many have in the last month.

“There’s a terrified older population out there,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “If you’re 45 and the market goes down, it bothers you, but it comes back. But if you’re retired or about to retire, you might have to sell your assets before they have a chance to recover. And people don’t have the luxury of being in bonds because they don’t yield enough for how long we live.”

Today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the last week of turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute, an industry-sponsored group in Washington.

“This really highlights the new world of retirement,” said Richard Johnson, a principal research associate at the Urban Institute in Washington. “It’s a much riskier world for retirees, because people don’t have defined-benefit plans. They have pots of money and they have to worry about making it last.”

Carol J. Emerson, 65, sees herself as particularly vulnerable. Her annual income of $50,000 comes almost entirely from dividends, and she says she is worried that as her stocks decline, some of those dividends will fall, too.

“If I were guaranteed that the dividend would remain unchanged, I could ignore that the underlying value of my stocks has eroded,” she said. “But that is not the way it works. If the value of the stocks doesn’t go up again, there are not a lot of companies that can keep on paying a 16 percent dividend.”

Nevertheless, Ms. Emerson decided to push ahead last week with the rebuilding of her sun porch in Ventura, Calif., not wanting to endure any longer the discomfort of life in a mobile home with a leaky and rusting porch.

“I don’t obsess about what is happening, but it is always in the back of my mind,” Ms. Emerson said, adding that she would cancel the $30,000 project if she lost faith that stocks would rebound in her lifetime.

“I can sustain the ups and downs, as long as the downs are followed by ups,” Ms. Emerson said, “but I cannot sustain a constant slow erosion. I am assuming, despite all the terrible news, that somehow things will get better.”

Older people with few assets, including the one-third of retirees who rely on Social Security for 90 percent or more of their income, may not suffer directly from the decline in the stock market, but they feel the pain of higher gas and food prices and reductions in volunteer services like Meals on Wheels, which have been curtailed because of fuel costs.

The collapse of the housing market has hit older homeowners. According to the Center for Retirement Research, Americans over age 63 pulled $300 billion out of their home equity through refinancing from 2001 to 2006, lowering their net worth.

Surveys by AARP, the Transamerica Center for Retirement Studies and the Employee Benefit Research Institute have found that more workers nearing retirement age are putting off their plans to retire, curtailing contributions to their 401(k) accounts and borrowing from the accounts to pay for living expenses, including credit card and mortgage debt.

After three decades of decline, a higher percentage of Americans older than 55 are now working than at any time since 1970, the Bureau of Labor Statistics reports. Some are working because they want to, but many because they need to.

The McKinsey Global Institute reported in June that the typical worker would have to work to age 70 to maintain his or her standard of living in retirement.

Mary O’Connell, 76, and her husband, S. F., 78, of St. Peters, Mo., retired without pensions and with meager benefits from Social Security, counting on income from four stocks. But the bulk of the stock was in Bank of America, whose stock has dropped by nearly a third since the start of the year, including 10 percent last week. “It’s been horrible,” Ms. O’Connell said.

“I can’t cash anything because the value has deteriorated so much that I would lose money. And even if I did I’d face capital gains tax that would wipe out what little bit I’d get.”

At the same time, she said, her “safe” investments — her certificates of deposit — have rolled over to lower interest rates, reducing a reliable stream of income.

Ms. O’Connell said she did not follow her stocks too closely because it would only make her depressed. “We figure we worked all our lives,” she said. “This is something we wanted to enjoy. Now that’s taken away from us.”

For many older people, last week’s turmoil on Wall Street was just the latest in a series of shocks that have eroded their stability.

When Robert Waskover, 79, was asked how the economy was affecting him, the first thing he mentioned was gas prices.

Mr. Waskover, who sells insurance part time in Palm Beach Gardens, Fla., said he and his wife, Barbara, 75, were being squeezed from all sides: rising expenses for gas, food and health care; lower income from his business; and the collapse in value of their home and stock portfolio.

Mr. Waskover described a one-two punch from the economy. First, his expenses started to exceed his income, so he began occasionally selling some of his stock. Then the stock prices fell, so any sale meant taking a loss. “Now I’m looking to see if I can take a bridge loan on the house so I can draw on that,” he said. “We’ve been watching every penny. And everything keeps going up and up.”

Corlette McShea, 61, of Libertyville, Ill., is one of those worried about how she will live in retirement. Ms. McShea, who works nearly full time for a market research company, has scrimped to build a nest egg — buying her house for cash after a divorce settlement, building a 401(k) account and buying a seven-year, $30,000 annuity from the American International Group.

Then she discovered the annuity was not protected by the Federal Deposit Insurance Corporation. As A.I.G. teetered this month, Ms. McShea tried to call the number given to her for A.I.G. “Their office is in Texas, so after the hurricane, the office is not even open so I couldn’t talk to anybody,” she said. She was willing to pay a penalty for early withdrawal, she said, but at 61, “how do you recoup any of this?”

At the same time, other parts of the economy are closing in around her. Though her home is paid off, her property taxes have risen to nearly $14,000 a year, up from $5,000 when she bought the house 10 years ago. She was counting on the annuity to pay the taxes.

“What a terrible situation that you have a house that is paid for and you can’t even afford to stay in it because the real estate taxes keep going up,” she said. “In my neighborhood, there’s houses up and down the street that are for sale and not even an offer. I’m stuck. I’m stuck with the house; I don’t know what my investments are doing; and here’s this annuity with A.I.G. that is in jeopardy. Every way I look, I’m feeling kind of scared and panicked.”

Younger people, of course, have been feeling the market’s pain as well. But for some — including those who have felt priced out of the housing market — the dips mean a chance to get in. For older people, there is no upside to the distress. “They’ve got to adjust their expectations of retirement,” said Martin Baily, a senior fellow at the Brookings Institution. “The market will recover, but you won’t.”
 

Malcolm Gay and Ana Facio Contreras contributed reporting.

    Retirees Filling the Front Line in Market Fears, NYT, 23.9.2008, http://www.nytimes.com/2008/09/23/business/23retirees.html?hp

Op-Ed Columnist

Cash for Trash

September 22, 2008
The New York Times
By PAUL KRUGMAN

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

    Cash for Trash, NYT, 22.9.2008, http://www.nytimes.com/2008/09/22/opinion/22krugman.html?ref=opinion

Op-Ed Columnist

A Fine Mess

September 22, 2008
The New York Times
By WILLIAM KRISTOL

A friend serving in the Bush administration called Sunday to try to talk me out of my doubts about the $700 billion financial bailout the administration was asking Congress to approve. I picked up the phone, and made the mistake of good-naturedly remarking, in my best imitation of Oliver Hardy, “Well, this is a fine mess you’ve gotten us into.”

People who’ve been working 18-hour days trying to avert a meltdown are entitled to bristle at jocular comments from those of us not in public office. So he bristled. He then tried to persuade me that the only responsible course of action was to support the administration’s request.

I’m not convinced.

It’s not that I don’t believe the situation is dire. It’s not that I want to insist on some sort of ideological purity or free-market fastidiousness. I will stipulate that this is an emergency, and is a time for pragmatic problem-solving, perhaps even for violating some cherished economic or political principles. (What are cherished principles for but to be violated in emergencies?)

And I acknowledge that there are serious people who think the situation too urgent and the day too late to allow for a real public and Congressional debate on what should be done. But — based on conversations with economists, Wall Street types, businessmen and public officials — I’m doubtful that the only thing standing between us and a financial panic is for Congress to sign this week, on behalf of the American taxpayer, a $700 billion check over to the Treasury.

A huge speculative housing bubble has collapsed. We’re going to have a recession. Unemployment will go up. Credit is going to be tighter. The challenge is to contain the damage to a “normal” recession — and to prevent a devastating series of bank runs, a collapse of the credit markets and a full-bore depression.

Everyone seems to agree on the need for a big and comprehensive plan, and that the markets have to have some confidence that help is on the way. Funds need to be supplied, trading markets need to be stabilized, solvent institutions needs to be protected, and insolvent institutions need to be put on the path to a deliberate liquidation or reorganization.

But is the administration’s proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for — or even promises of — disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.

And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right — or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.

But will political leaders dare oppose it? Barack Obama called Sunday for more accountability, and I imagine he’ll support the efforts of the Democratic Congressional leadership to try to add to the legislation a host of liberal spending provisions. He probably won’t want to run the risk of actually opposing it, or even of raising big questions and causing significant delay — lest he be attacked for risking the possible meltdown of the global financial system.

What about John McCain? He could play it safe, going along with whatever the Bush administration and the Congress are able to negotiate.

If he wants to be critical, but concludes that Congress has to pass something quickly lest the markets fall apart again, and that he can’t reasonably insist that Congress come up with something fundamentally better, he could propose various amendments insisting on much more accountability and transparency in how Treasury handles this amazing grant of power.

Comments by McCain on Sunday suggest he might propose an amendment along the lines of one I received in an e-mail message from a fellow semi-populist conservative: “Any institution selling securities under this legislation to the Treasury Department shall not be allowed to compensate any officer or employee with a higher salary next year than that paid the president of the United States.” This would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble.

Or McCain — more of a gambler than Obama — could take a big risk. While assuring the public and the financial markets that his administration will act forcefully and swiftly to deal with the crisis, he could decide that he must oppose the bailout as the panicked product of a discredited administration, an irresponsible Congress, and a feckless financial establishment, all of which got us into this fine mess.

Critics would charge that in opposing the bailout, in standing against an apparent bipartisan consensus, McCain was being irresponsible.

Or would this be an act of responsibility and courage?

    A Fine Mess, NYT, 22.9.2008, http://www.nytimes.com/2008/09/22/opinion/22kristol.html?ref=opinion

Death and Near-Death Experiences on Wall St.

September 21, 2008
The New York Times
By JENNY ANDERSON and CHARLES DUHIGG

EARLY last Monday morning, Richard S. Fuld Jr., the longtime chief executive of Lehman Brothers, put his 158-year-old firm into bankruptcy, burying a company where he had spent his entire career.

Several hours later, John A. Thain, the chief executive of Merrill Lynch, climbed a stage in Manhattan and told his employees, most of whom he had barely gotten to know during his brief tenure, that he was selling the troubled firm to the Bank of America Corporation.

Although both men played starring roles in a cataclysm that has threatened to break the economic backbone of the United States and has rearranged the financial landscape, their firms are hardly the only ones wounded in the crisis. And what began with falling house prices has escalated into staggering bank and stock-market losses, unleashing deep-rooted uncertainty about the resilience of the economy.

Over the last six months alone, the federal government has ponied up hundreds of billions in taxpayer funds to try to blunt the impact of outsize financial blunders on Wall Street and at Fannie Mae, Freddie Mac and the American International Group. On Friday, the government took extraordinary and historic steps to save some firms and restore investor confidence by proposing to buy hundreds of billions of dollars in distressed assets.

Lehman had pleaded with regulators for months to use similar tactics to rescue it, but to no avail. Merrill, on the other hand, was able to stay in the game just long enough to find a suitor and benefit from the federal bailout announced on Friday.

Mr. Thain and Mr. Fuld made different strategic decisions over the last year that shaped radically diverse outcomes for their employees and shareholders. But the chaotic backdrop also spelled death for some companies and unlikely survival for others. Indeed, had last week’s government bailout arrived sooner, Lehman, like Merrill, might still exist.

A reserved and almost robotic executive, Mr. Thain approached Merrill’s fate like a technocrat, coolly assessing his options and selling the company before the pain got worse. Mr. Fuld, a passionate, dedicated and combative leader, kept struggling to survive until his firm finally ran into the ground.

“We are all prisoners of where we have been. The longer you are attached to a place, the harder it is to see it without rose-colored glasses,” says James D. Cox, a professor at the Duke University School of Law. “When Mr. Thain got to Merrill, he started moving quickly to put the problems behind him.”

“But Mr. Fuld helped build Lehman,” he adds. “He had spent his entire career there and helped build some of the assets that ended up causing so many problems. It’s almost impossible to force yourself to completely reconceptualize your career and your life, and undo the company you built.”

Other than being in the same business, Mr. Thain, 53, and Mr. Fuld, 62, appear to have little in common. Mr. Fuld is a classic Wall Street trader — taking big risks, reaping huge rewards, exuding intensity and demanding loyalty. A University of Colorado graduate, he stumbled into the industry and through sheer determination rose from a trading floor to the highest ranks of his profession.

Mr. Thain, a dead ringer for Clark Kent, is cautiously amiable and seemed to act out, rather than inhabit, the role of C.E.O. A graduate of the Massachusetts Institute of Technology, he spent his career at Goldman Sachs and the New York Stock Exchange before Merrill’s board asked him to calm a firm rife with palace politics and glaringly lax risk management.

In the end, the technocrat brought Merrill a measure of safety, though only by the narrowest of margins.

And the defiance and independence that marked Mr. Fuld’s tenure and made him one of Wall Street’s most admired chief executives served him poorly when — like many — he misjudged the severity of the financial upheaval.

“Everyone on Wall Street is navigating uncharted waters right now,” said Jeffrey A. Sonnenfeld, a professor at the Yale School of Management. “No one could have dreamed it would have gotten this bad, and now that it is, no one is completely certain which choices were right and which were wrong.”

LAST October, E. Stanley O’Neal, Merrill’s ambitious chief executive, was forced to resign after reporting a $2.3 billion loss and making a desperate and unapproved attempt to find a merger partner. About two weeks later, the board announced that it had hired Mr. Thain.

At the time, Mr. Thain said he took the job because Merrill had the best wealth management business in the world and a premier investment banking franchise. Privately, he told friends that he wanted to resurrect the “MGM” days when Merrill, Goldman Sachs and Morgan Stanley dominated investment banking.

But his immediate needs were more prosaic: raising money to fill the firm’s dwindling coffers. Even before Mr. Thain arrived, Merrill executives concluded that they needed to raise money in order to survive.

Mr. Thain argued to investors that he hadn’t created the debacle enveloping Merrill and that he came to the firm to fix its problems. On Christmas Eve, he announced that he had raised $6.2 billion; a few weeks later, he announced an additional $6.6 billion.

Just as important, he began an internal charm offensive. In January, a day before Merrill announced its annual earnings, Mr. Thain traveled to Arizona to meet with 800 of the firm’s wealth managers. He warned them that the firm’s results would be bad. But he promised that the company was on the right track. As he exited the stage, he was followed by Money, a live bull who was a flesh-and-blood embodiment of Merrill’s ubiquitous corporate logo.

The next day Merrill announced a huge hit: $9.8 billion in losses and $16.7 billion in write-downs. Speaking to investors, Mr. Thain said he was “confident that we have the capital base we need to go forward with 2008.” A few weeks later in a private meeting with a group of investors at the company’s headquarters in New York, Mr. Thain reassured them that he would take a tough-love approach.

“We’ve got fresh eyes on these problems, and we’re not wedded to believing this company has done everything right for years,” he said, according to two participants in that meeting, who requested anonymity because the talks were confidential.

“Look at Citi,” he said, referring to Citigroup, the banking giant. “If the 800-pound gorilla has to raise money, then everyone should be asking if it isn’t time to do the same.”

As Merrill wrestled with its financial demons, Lehman seemed in better shape.

Earlier this year, Mr. Fuld, who started as a Lehman intern 42 years ago and had run the firm since 1994, was basking in two quarters of surprisingly good results. Investors were hammering his stock, but he saw those downturns as opportunities to dole out more shares to employees he believed would benefit when the storm passed.

After all, he was fond of noting, life on Wall Street was war.

“Every day is a grind, every day we’re in it, really trying to trudge through the stuff, and don’t think this is a walk through the park,” he said in an interview last fall. “Every day is a battle: think about the firm, do the right thing, protect your client, protect the firm, be in it, be a good team member.”

Lehman executives took comfort in the fact that their balance sheet was heavily weighted with commercial real estate — which they felt was immune to the mess in residential housing. Moreover, Lehman didn’t hold the same type of bundled mortgages, known as collateralized debt obligations, that had hamstrung Merrill.

Earlier this year, when Lehman’s chief financial officer, Erin Callan, met with some investors at the company’s headquarters in Midtown Manhattan, she exuded confidence.

During the meeting an investor challenged Ms. Callan, according to two participants who requested anonymity because they did not want to jeopardize their relationships with senior executives. With firms like Citigroup and Merrill raising capital, the investor asked, why wasn’t Lehman following suit?

Ms. Callan was brusque, the two participants recalled. Glaring at her questioner, she said that Lehman didn’t need more money at the time — after all, it had yet to post a loss during the credit crisis. The company had industry veterans in the executive suite who had perfected the science of risk management, she said.

According to both investors, she said Lehman’s real estate investments were top-notch. “This company’s leadership has been here so long that they know the strengths and weaknesses,” participants recalled her saying. “We know when we need to be worried, and when we don’t.”

In an interview, Ms. Callan challenged that version of events and said that she was never defensive with investors. While conceding that she may have said those things, she thinks that investors who met with her took her comments out of context.

Lehman had been searching for a strategic partner for almost two years to buy a 10 percent or 15 percent stake in it — a move that would have made its stock less volatile and expand its business — according to people briefed on the discussions.

In 2006, it had unsuccessfully tried to team up with American International Group, the insurance behemoth. A year later it considered links with state investment agencies in Kuwait and China. Mr. Fuld and other Lehman executives also held discussions with Mizuho Corporate Bank of Japan, these people said.

But those deals hadn’t panned out. And as the credit crisis grew, investors were increasingly wary of the firm.

After federal regulators intervened to stop a collapse of Bear Stearns in March, Lehman’s stock fell 45 percent in two days. Shortly after, it reported meager profits of $489 million and write-downs of $1.8 billion — and soon after, it raised $4 billion in new capital.

With Bear gone, Lehman became the smallest investment bank on Wall Street. A chorus of whispers began: Lehman is next. Critics began opining that a world of woe lurked on its balance sheet. In May, David Einhorn, a well-regarded hedge fund manager, began publicly questioning the company’s accounting and mocking Ms. Callan’s self-assurance.

As the stock declined, Mr. Fuld authorized his executives to seek a minority investment from a deep-pocketed investor, which would give the market confidence, according to people briefed on the discussions. Potential investors were said to include General Electric, HSBC and Barclays.

Top executives still believed Lehman could remain independent. The market, however, disagreed.

As Lehman tried to make a case with the media and regulators that investors betting against its stock were unfairly going after the firm, top executives increasingly realized that their strategy was failing and assets were withering.

In June, Lehman was forced to unveil its second-quarter earnings early — an unexpected loss of $2.8 billion. Mr. Fuld replaced the president, Joseph Gregory, his closest friend at the company, and demoted Ms. Callan, who later left.

Lehman raised $6 billion more in capital and explored selling parts of its business. But neither management shake-ups nor promises that a dramatic turnaround was forthcoming stopped the stock from dropping.

AS Lehman publicly struggled, Merrill was quietly trying to right its ship.

In spite of Mr. Thain’s assurances in January that Merrill wouldn’t need new capital, the plummeting value of its mortgage securities soon made it apparent to its executives that they needed more funds.

Inside Merrill, Mr. Thain had drawn criticism for being aloof and for surrounding himself with a small cadre of colleagues from his previous jobs.

By July, when the stocks of mortgage giants Fannie Mae and Freddie Mac began spiraling downward, it was clear to investors everywhere that problems within the housing market were getting out of control.

Most consumers could see the reality of collapsing home prices for themselves. Within banks like Merrill, other hidden dangers existed: a dizzying array of complex products, known as derivatives, that tied mortgage-related securities, other assets and debts to companies here and overseas — a daisy chain that amplified the downturn.

Knowing he was caught in this web, Mr. Thain announced in July that he would sell some assets, including the firm’s stake in Bloomberg, the financial data and media company, for $4.4 billion. Merrill also raised $8.5 billion in a deal that severely diluted Merrill’s shareholders. It reported a second-quarter loss of $4.6 billion and $9.7 billion in write-downs.

A few weeks later, Mr. Thain announced a deal that stunned the markets: he offloaded $31 billion of toxic mortgage assets to Lone Star, a small investment company, for 22 cents on the dollar. Merrill had to finance 75 percent of the sale. Analysts uniformly agreed that Lone Star got a sweet deal.

“We have over 60,000 people working every day,” Mr. Thain said in an interview at the time, responding to criticism that he had sold the assets for a song. “All the efforts of these people were overwhelmed by the write-downs in the mortgage-related assets.”

Within months it would become clear that the Lone Star deal had, in fact, helped give Merrill extra time by untethering it from a block of ugly assets that might have stood in the way of a merger.

As the crisis escalated in July and August, Lehman was also racing to shore up its weaknesses. But investors had been burned by earlier investments in struggling financial service companies and were tapped out.

Still, Lehman executives held out hope that they would be able to save themselves by selling a stake to the Korea Development Bank, a state bank. But when Mr. Fuld, ever the tough negotiator, pushed the bank to take over some underperforming loans, the Koreans balked.

By Labor Day, a tidal wave was crashing down on the entire economy and Fannie Mae and Freddie Mac had become the centers of concern. Hoping to prevent companies of all sizes from toppling into one another like dominos, the government bailed out the two mortgage giants for about $200 billion.

While most banks and brokerage stocks soared on the news, including Merrill’s, Lehman’s stock dropped more than 50 percent in the two days following the bailout.

As government officials quietly said they were done rescuing financial firms, Lehman scrambled to find a solution. It was waiting for bids on its investment management division, a deal it hoped might secure $5 billion to $6 billion. It also floated the idea of splitting itself in two to create a separate company to house its troubled assets.

Then, just over a week ago, Lehman announced a $4 billion loss and a $5.6 billion write-down. It also said it would spin out $30 billion of troubled assets into a separate company.

“We’ve been through adversity before, and we always come out a lot stronger,” Mr. Fuld said in a conference call on Sept. 10, sounding unusually resigned and utterly exhausted.

The markets didn’t buy it. Clients pulled money from Lehman, other firms wanted trading guarantees and Lehman finally ran out of cash. After surviving more than a century, Lehman would be dead within days unless someone stepped in.

ON a rainy afternoon nine days ago, with just an hour’s notice, Timothy F. Geithner, president of the Federal Reserve Bank of New York, summoned Wall Street’s leading chief executives to a meeting at the Fed’s cavernous downtown offices. Many were getting ready to leave for the weekend, and all of them were worn out after a treacherous week.

Notably absent from the meeting was Mr. Fuld, who was scrambling to strike a deal with Bank of America, said people briefed on the negotiations. Mr. Geithner, who declined interview requests, told the gathering the government wouldn’t rescue Lehman, according to various participants. It was up to the industry to find a solution, he said.

Although Lehman’s woes were in the headlines, some participants wondered if they shouldn’t be talking about other troubled firms as well. Weren’t A.I.G.’s problems just as big, if not bigger? James Dimon, JPMorgan’s chief executive, said A.I.G. had hired his bank, which was trying to find a solution.

Others in the room focused on Merrill’s sagging stock and huge debt burden. If Lehman collapsed, participants wondered to themselves, was Merrill next? Some banks were so concerned that they considered stopping trading with Merrill if Lehman went under.

When the meeting broke up at 8:30 p.m., Mr. Geithner asked the executives to return at 9 the next morning and to count on spending most of the weekend trying to build a bulwark against the biggest economic firestorm since the Great Depression.

On Saturday morning, when Mr. Thain arrived at the Fed, Lehman had returned to the center of discussion. Various scenarios, including the impact of a Lehman bankruptcy, were considered; everyone knew that Bank of America and Barclays were considering buying Lehman but had wanted government backing. Regulators made it clear that that wasn’t going to happen.

During the morning session, Mr. Thain sat across the table from Herbert H. McDade III, Lehman’s president. “I don’t want to be in his seat,” Mr. Thain thought to himself, according to a person familiar with his thinking.

And to make sure he didn’t wind up in that seat within days, Mr. Thain decided Merrill had to do something bold by Monday. His hope was to sell about a 10 percent stake to a cash-rich partner.

His first call was to Kenneth D. Lewis, Bank of America’s chief executive, who had long coveted Merrill. Mr. Thain got Mr. Lewis’s phone number from Gregory J. Fleming, Merrill’s president, who wanted a tie-up between the two. Mr. Fleming was worried that if Bank of America purchased Lehman first, the bank wouldn’t cut a deal with Merrill.

Mr. Lewis raised the ante: he said he wasn’t interested in buying just a stake in Merrill. He wanted the whole company. Mr. Lewis flew to New York from the bank’s headquarters in Charlotte, N.C., to meet with Mr. Thain on Saturday afternoon in a corporate apartment.

Those conversations went well. But then Mr. Thain trekked back to the Fed, where another surprise awaited. Peter Kraus, his head of strategy, told him that Goldman Sachs was interested in buying a 9.9 percent stake and extending a $10 billion credit line, according to people briefed on the discussions.

And Goldman wasn’t the only other interested suitor. John J. Mack, chief executive of Morgan Stanley, told Mr. Thain that “we should talk,” according to people familiar with the discussions. A two-hour meeting was held that afternoon on the Upper East Side with the C.E.O.’s and their advisers.

But by Saturday afternoon, Mr. Fleming was already leading Merrill’s bankers and lawyers through a quick scouring of Bank of America and its proposal, giving the North Carolina bank a leg up.

Around 9 on Sunday morning, Henry M. Paulson Jr., the Treasury secretary, told the Fed group that Lehman hadn’t found a buyer and that they should brace for its bankruptcy.

ATTENTION immediately shifted to Merrill Lynch, which many were certain would be the next to topple. Bankers started discussing the possibility of creating a vast liquidity pool that the next troubled institution could tap into.

Meanwhile, Mr. Thain set a noon conference call with his board. He said he expected a bid from Bank of America and had held discussions with Goldman Sachs and Morgan Stanley, according to people briefed on the discussions. He concluded that Mr. Lewis’s bid — a takeover of the entire company at a premium price — was the best offer.

At a 6 p.m. meeting with his board at the St. Regis hotel, Mr. Thain recommended to his board that it accept. The deal was unanimously approved.

For Lehman, the weekend shaped up very differently.

On Friday night, Lehman executives believed a deal with Bank of America was possible, according to people briefed on the negotiations. But by Saturday, they couldn’t get Bank of America to return their calls.

Mr. Fuld stayed in his office from 7 a.m. until after midnight on Saturday and on Sunday, calling regulators, potential buyers and his own team. But his options were fading. Even promising talks with Barclays, a British bank, were running aground.

Late in the day on Sunday, Mr. Fuld learned that the Fed would expand its lending by allowing banks to post a wider variety of collateral, and that the banking industry had cobbled together a $70 billion lending pool.

According to people briefed on the conversations, Mr. Fuld implored the regulators to let Lehman have access to those new funds — a move that he believed would have saved the firm. No, he was told: these measures are to stabilize the market in the aftermath of a Lehman liquidation, not to prevent it.

In fact, the pool was intended to help Merrill, industry participants said. Ironically, though, Merrill wouldn’t need that capital because it was completing its deal with Bank of America.

Regulators and bankers tried to wait for Lehman’s bankruptcy filing before announcing the two new lending options. But by 10 Sunday night, Lehman still hadn’t filed, because Mr. Fuld was still trying to do a deal with Barclays.

After Barclays fell through, Mr. Fuld directed his lawyers at 12:30 a.m. Monday to file for bankruptcy. Within hours, Mr. Thain announced his deal.

On Wednesday, Barclays offered the bankruptcy court $1.75 billion — far less than Lehman wanted for that firm’s core capital markets and investment banking business, its headquarters and two data centers.

And with each day the drama continues. On Friday, the rumor mill was speculating that a huge market rebound sparked by the federal bailout of Wall Street might mean that Merrill wouldn’t need to sell itself to Bank of America.

Both companies insist the deal is still on.

Landon Thomas Jr. contributed reporting.

    Death and Near-Death Experiences on Wall St., NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/business/21exec.html

News Analysis

But Will It Work?

September 21, 2008
The New York Times
By PETER S. GOODMAN

As the federal government steps to the center of the financial crisis, devising plans to take ownership of hundreds of billions of dollars’ worth of bad mortgages, a pair of simple questions rise to the fore: Will this intervention finally be enough to restore order? And what will this grand rescue cost taxpayers?

The Treasury Department, as overseer of the financial system, has in recent weeks unleashed a vast array of initiatives in a bid to stave off catastrophe. It took over the country’s largest mortgage finance companies and put untold billions of taxpayer dollars on the line to prop up other lenders.

Now, although the details are still being worked out, the government is dispensing with rescuing one company at a time, and instead is taking on a vast pile of bad debt in one gulp.

If it all comes to pass — if Uncle Sam becomes the repository for the radioactive leftovers of bad real estate bets — will the crisis lift? Will the fear that has kept banks clinging to their dollars, starving the economy of capital, give way to free-flowing credit?

Most broadly, what are the long-term costs of the government’s stepping in to restore order after so many wealthy financiers became so much wealthier through what now seem like reckless bets on housing — bets now covered with public dollars?

Some question the prudence of adding to the nation’s overall debt at a time when the Treasury relies on the largess of foreigners to cover the bills. Even so, there is wide agreement that a broad intervention like the one Treasury is proposing is necessary.

“It goes a long way; it ameliorates it very substantially,” said Alan S. Blinder, an economist at Princeton and a former vice chairman of the board of governors at the Federal Reserve, who has said for months that the government must step in forcefully to buy mortgage-linked investments.

“We’re deep into Alice in Wonderland’s rabbit hole,” Mr. Blinder said.

But significant skepticism confronts the plan. Under a proposal circulating Saturday, the Treasury could spend as much as $700 billion to buy mortgage-linked investments, then sell what it can as it works out the messy details of the loans. But no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday.

Also, what message does that send to the next investment bank caught up in the next speculative bubble and contemplating the risks of jumping in while wondering who is ultimately on the hook if things go awry?

Many economists say such questions are beside the point. The nation is gripped by the worst financial crisis since the Great Depression. Before Thursday night, when the Treasury secretary, the Federal Reserve chairman and leaders on Capitol Hill proclaimed their intentions to take over bad debts, the prognosis for the American financial system was sliding from grim toward potentially apocalyptic.

“It looked like we might be falling into the abyss,” Mr. Blinder said.

As the details of the government’s plans are hashed out, no hallelujah chorus is wafting across Washington, down Wall Street or through the glistening condominiums of the nation. Too many households are having trouble paying their mortgages. Too many people are out of work. Too many banks are bloodied.

Still, the 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.”

For many Americans, the events that have transfixed and horrified Wall Street in recent days — the disintegration of supposedly impregnable institutions, government bailouts with 11-figure price tags — have been less stunning than inscrutable. The headlines proclaim that the taxpayer now owns the mortgage finance giants Fannie Mae and Freddie Mac, along with the liabilities of a mysterious colossus called the American Insurance Group, which, as it happens, insures against corporate defaults. Much like the human appendix, these were organs whose existence was only dimly evident to many until the pain began.

Yet these institutions are deeply intertwined with the American economy. When the financial system is in danger, it stops investing and lending, depriving people of financing for homes, cars and education. Businesses cannot borrow to start up and expand.

“Wall Street isn’t this island to itself,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute. “Even people with good credit histories are having a very hard time getting loans at terms that make sense. If that gets worse, we’re going to be stuck in the doldrums for a very long time, because that directly blocks healthy economic activity.”

The financial crisis gripping the United States is the direct outgrowth of the speculative orgy in real estate that began early this decade. Once home values began falling two years ago, the financial institutions that had poured capital into real estate confronted a very big problem.

Over the last year, one financial giant after another has written off billions of dollars worth of mortgage-linked investments. Some have succumbed to the storm. In March, the investment bank Bear Stearns nearly collapsed before JPMorgan Chase bought it at a fire-sale price. This month, the government effectively nationalized Fannie Mae and Freddie Mac — government-backed mortgage companies that together guarantee $5 trillion in American mortgages.

Last week, Merrill Lynch — a name synonymous with Wall Street — found itself forced to pawn itself off to Bank of America. Lehman Brothers, an investment banking giant, collapsed into bankruptcy. Worries now hover over other banks.

“It may not be over,” said Mr. Blinder, the former Fed vice chairman.

Some say the tightening of credit is an unavoidable corrective. For a quarter-century, the American economy has gorged itself on borrowed money, from the speculative investments that created the dot-com boom to the exuberant borrowing that made houses in Las Vegas trade like technology stocks.

“Credit was too easy for too long, and now it’s a little tighter,” said Mark Vitner, a senior economist at Wachovia in Charlotte, N.C. “It’s a necessary though painful correction.”

Others say that in the last few weeks, the profligate era of easy money had swung to the opposite extreme: a widespread reluctance to lend.

“The danger is swinging from far too risk-friendly to far too risk-averse,” Mr. Bernstein said.

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.

“It’s not enough,” Mr. Roubini said. “But it’s the first time they have done something that makes a difference.”

    But Will It Work?, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/business/21econ.html?hp

Administration Is Seeking $700 Billion

for Wall Street

September 21, 2008
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — The Bush administration on Saturday formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from the private firms.

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.

“This is a big package, because it was a big problem,” President Bush said Saturday at a White House news conference, after meeting with President Álvaro Uribe of Colombia. “I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.”

After a week of stomach-flipping turmoil in the financial system, and with officials still on edge about how global markets will respond, the delivery of the administration’s plan set the stage for a four-day brawl in Congress. Democratic leaders have pledged to approve a bill but say it must also include tangible help for ordinary Americans in the form of an economic stimulus package.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill and were expected to work through the weekend. Congressional leaders are hoping to recess at the end of the week for the fall elections, after approving the bailout and a budget measure to keep the government running.

With Congressional Republicans warning that the bailout could be slowed by efforts to tack on additional provisions, Democratic leaders said they would insist on a requirement that the administration use its new role, as the owner of large amounts of mortgage debt, to help hundreds of thousands of troubled borrowers at risk of losing their homes to foreclosure.

“It’s clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary,” the House speaker, Nancy Pelosi of California, said in a statement. “Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes.”

Ms. Pelosi said Democrats would also insist on “enacting an economic recovery package that creates jobs and returns growth to our economy.”

Even as talks got under way, there were signs of how very much in flux the plan remained. The administration suggested that it might adjust its proposal, initially restricted to purchasing assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.

The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers was first put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant American International Group and a plan to spend up to $200 billion to shore up the mortgage finance giants Fannie Mae and Freddie Mac.

At his news conference, Mr. Bush also sought to portray the plan as helping every American. “The government,” he said, “needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren’t going to let that happen.”

A program to help troubled borrowers refinance mortgages — along with an $800 billion increase in the national debt limit — was approved in July. But financing for it depended largely on fees paid by Fannie Mae and Freddie Mac, which have been placed into a government conservatorship.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said in an interview that his staff had already begun working with the Senate banking committee to draft additions to the administration’s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan, raising the prospect of a contentious battle with the White House.

“There are going to be federal tax dollars buying up some of the bad paper,” Mr. Frank said. “They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it’s ‘heads I win, tails I break even.’ ”

Mr. Frank said Democrats were also thinking about tightening the language on the debt limit to make clear that the additional borrowing authority could be used only for the bailout plan. And he said they might seek to revive a proposal that would give bankruptcy judges the authority to modify the terms of primary mortgages, a proposal strongly opposed by the financial industry.

Senator Charles E. Schumer, Democrat of New York, who attended emergency meetings with the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, on Capitol Hill last week, described the proposal as a good start but said it did little for regular Americans.

“This is a good foundation of a plan that can stabilize markets quickly,” Mr. Schumer said in a statement. “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.”

Ms. Pelosi’s statement made clear that she would push for an economic stimulus initiative either as part of the bailout legislation or, more likely, as part of the budget resolution Congress must adopt before adjourning for the fall elections. Such a plan could include an increase in unemployment benefits and spending on infrastructure projects to help create jobs.

Some Congressional Republicans warned Democrats not to overreach.

“The administration has put forward a plan to help the American people, and it is now incumbent on Congress to work together to solve this crisis,” said Representative John A. Boehner of Ohio, the Republican leader.

Mr. Boehner added, “Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors and small businesses deserve.”

Aides to Senator Barack Obama of Illinois, the Democratic presidential nominee, said he was reviewing the proposal. In Florida, Mr. Obama told voters he would press for a broader economic stimulus.

“We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street,” Mr. Obama said. “We have to make sure it helps folks cope with rising prices, and sparks job creation, and helps homeowners stay in their homes.”

Senator John McCain of Arizona, the Republican nominee, issued a statement saying he, too, was reviewing the plan.

“This financial crisis,” Mr. McCain said, “requires leadership and action in order to restore a sound foundation to financial markets, get our economy on its feet, and eliminate this burden on hardworking middle-class Americans.”

If adopted, the bailout plan would sharply raise the stakes for the new administration on the appointment of a new Treasury secretary.

The administration’s plan would allow the Treasury to hire staff members and engage outside firms to help manage its purchases. And officials said that the administration envisioned enlisting several outside firms to help run the effort to buy up mortgage-related assets.

Officials said that details were still being worked out but that one idea was for the Treasury to hold reverse auctions, in which the government would offer to buy certain classes of distressed assets at a particular price and firms would then decide if they were willing to sell at that price, or could bid the price lower.

Mindful of a potential political fight, Mr. Paulson and Mr. Bernanke held a series of conference calls with members of Congress on Friday to begin convincing them that action was needed not just to help Wall Street but everyday Americans as well.

Republicans typically supportive of the administration said they were in favor of approving the plan as swiftly as possible.

Senator Mitch McConnell of Kentucky, the Republican leader, said in a statement, “This proposal is, and should be kept, simple and clear.” The majority leader, Senator Harry Reid, Democrat of Nevada, said that the bailout was needed but that Mr. Bush owed the public a fuller explanation.

Some lawmakers were more critical or even adamantly opposed to the plan. “The free market for all intents and purposes is dead in America,” Senator Jim Bunning, Republican of Kentucky, declared on Friday.

It is far from clear how much distressed debt the government will end up purchasing, though it seemed likely that the $700 billion figure was large enough to send a reassuring message to the jittery markets. There are estimates that firms are carrying $1 trillion or more in bad mortgage-related assets.

The ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise.

Lehman Can Sell to Barclays

A federal bankruptcy judge decided early Saturday that Lehman Brothers could sell its investment banking and trading businesses to Barclays, the big British bank, the first major step to wind down the nation’s fourth-largest investment bank.

The judge, James Peck, gave his decision at the end of an eight-hour hearing, which capped a week of financial turmoil.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s office tower in Midtown Manhattan.

Lehman Brothers Holdings Inc. on Monday filed the biggest bankruptcy in United States history, after Barclays PLC declined to buy the investment bank in its entirety.

Reporting was contributed by Jeff Zeleny from Daytona Beach, Fla., and Michael Cooper, Carl Hulse, Stephen Labaton and David Stout from Washington.

    Administration Is Seeking $700 Billion for Wall Street, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/business/21cong.html

President Bush discussed the government’s financial bailout proposal

during a news conference at the White House on Saturday.

Saul Loeb/Agence France-Presse — Getty Images        September 20, 2008

$700 Billion Is Sought for Wall Street in Vast Bailout        NYT        21.9.2008

http://www.nytimes.com/2008/09/21/business/21cong.html

$700 Billion Is Sought

for Wall Street in Vast Bailout

September 21, 2008
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — The Bush administration on Saturday formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from the private firms.

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.

“This is a big package, because it was a big problem,” President Bush said Saturday at a White House news conference, after meeting with President Álvaro Uribe of Colombia. “I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.”

After a week of stomach-flipping turmoil in the financial system, and with officials still on edge about how global markets will respond, the delivery of the administration’s plan set the stage for a four-day brawl in Congress. Democratic leaders have pledged to approve a bill but say it must also include tangible help for ordinary Americans in the form of an economic stimulus package.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill and were expected to work through the weekend. Congressional leaders are hoping to recess at the end of the week for the fall elections, after approving the bailout and a budget measure to keep the government running.

With Congressional Republicans warning that the bailout could be slowed by efforts to tack on additional provisions, Democratic leaders said they would insist on a requirement that the administration use its new role, as the owner of large amounts of mortgage debt, to help hundreds of thousands of troubled borrowers at risk of losing their homes to foreclosure.

“It’s clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary,” the House speaker, Nancy Pelosi of California, said in a statement. “Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes.”

Ms. Pelosi said Democrats would also insist on “enacting an economic recovery package that creates jobs and returns growth to our economy.”

Even as talks got under way, there were signs of how very much in flux the plan remained. The administration suggested that it might adjust its proposal, initially restricted to purchasing assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.

The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers was first put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant American International Group and a plan to spend up to $200 billion to shore up the mortgage finance giants Fannie Mae and Freddie Mac.

At his news conference, Mr. Bush also sought to portray the plan as helping every American. “The government,” he said, “needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren’t going to let that happen.”

A program to help troubled borrowers refinance mortgages — along with an $800 billion increase in the national debt limit — was approved in July. But financing for it depended largely on fees paid by Fannie Mae and Freddie Mac, which have been placed into a government conservatorship.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said in an interview that his staff had already begun working with the Senate banking committee to draft additions to the administration’s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan, raising the prospect of a contentious battle with the White House.

“There are going to be federal tax dollars buying up some of the bad paper,” Mr. Frank said. “They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it’s ‘heads I win, tails I break even.’ ”

Mr. Frank said Democrats were also thinking about tightening the language on the debt limit to make clear that the additional borrowing authority could be used only for the bailout plan. And he said they might seek to revive a proposal that would give bankruptcy judges the authority to modify the terms of primary mortgages, a proposal strongly opposed by the financial industry.

Senator Charles E. Schumer, Democrat of New York, who attended emergency meetings with the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, on Capitol Hill last week, described the proposal as a good start but said it did little for regular Americans.

“This is a good foundation of a plan that can stabilize markets quickly,” Mr. Schumer said in a statement. “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.”

Ms. Pelosi’s statement made clear that she would push for an economic stimulus initiative either as part of the bailout legislation or, more likely, as part of the budget resolution Congress must adopt before adjourning for the fall elections. Such a plan could include an increase in unemployment benefits and spending on infrastructure projects to help create jobs.

Some Congressional Republicans warned Democrats not to overreach.

“The administration has put forward a plan to help the American people, and it is now incumbent on Congress to work together to solve this crisis,” said Representative John A. Boehner of Ohio, the Republican leader.

Mr. Boehner added, “Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors and small businesses deserve.”

Aides to Senator Barack Obama of Illinois, the Democratic presidential nominee, said he was reviewing the proposal. In Florida, Mr. Obama told voters he would press for a broader economic stimulus.

“We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street,” Mr. Obama said. “We have to make sure it helps folks cope with rising prices, and sparks job creation, and helps homeowners stay in their homes.”

Senator John McCain of Arizona, the Republican nominee, issued a statement saying he, too, was reviewing the plan.

“This financial crisis,” Mr. McCain said, “requires leadership and action in order to restore a sound foundation to financial markets, get our economy on its feet, and eliminate this burden on hardworking middle-class Americans.”

If adopted, the bailout plan would sharply raise the stakes for the new administration on the appointment of a new Treasury secretary.

The administration’s plan would allow the Treasury to hire staff members and engage outside firms to help manage its purchases. And officials said that the administration envisioned enlisting several outside firms to help run the effort to buy up mortgage-related assets.

Officials said that details were still being worked out but that one idea was for the Treasury to hold reverse auctions, in which the government would offer to buy certain classes of distressed assets at a particular price and firms would then decide if they were willing to sell at that price, or could bid the price lower.

Mindful of a potential political fight, Mr. Paulson and Mr. Bernanke held a series of conference calls with members of Congress on Friday to begin convincing them that action was needed not just to help Wall Street but everyday Americans as well.

Republicans typically supportive of the administration said they were in favor of approving the plan as swiftly as possible.

Senator Mitch McConnell of Kentucky, the Republican leader, said in a statement, “This proposal is, and should be kept, simple and clear.” The majority leader, Senator Harry Reid, Democrat of Nevada, said that the bailout was needed but that Mr. Bush owed the public a fuller explanation.

Some lawmakers were more critical or even adamantly opposed to the plan. “The free market for all intents and purposes is dead in America,” Senator Jim Bunning, Republican of Kentucky, declared on Friday.

It is far from clear how much distressed debt the government will end up purchasing, though it seemed likely that the $700 billion figure was large enough to send a reassuring message to the jittery markets. There are estimates that firms are carrying $1 trillion or more in bad mortgage-related assets.

The ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise.

Lehman Can Sell to Barclays

A federal bankruptcy judge decided early Saturday that Lehman Brothers could sell its investment banking and trading businesses to Barclays, the big British bank, the first major step to wind down the nation’s fourth-largest investment bank.

The judge, James Peck, gave his decision at the end of an eight-hour hearing, which capped a week of financial turmoil.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s office tower in Midtown Manhattan.

Lehman Brothers Holdings Inc. on Monday filed the biggest bankruptcy in United States history, after Barclays PLC declined to buy the investment bank in its entirety.

Reporting was contributed by Jeff Zeleny from Daytona Beach, Fla., and Michael Cooper, Carl Hulse, Stephen Labaton and David Stout from Washington.

    $700 Billion Is Sought for Wall Street in Vast Bailout, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/business/21cong.html

$700 Billion Is Sought for Wall Street in Vast Bailout        NYT        21.9.2008

http://www.nytimes.com/2008/09/21/business/21cong.html

Text of Draft Proposal for Bailout Plan

September 21, 2008
The New York Times

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.

    Text of Draft Proposal for Bailout Plan, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/business/21draftcnd.html

A Professor and a Banker Bury Old Dogma on Markets

September 21, 2008
The New York Times
By PETER BAKER

This article was reported by Peter Baker, Stephen Labaton and Eric Lipton and written by Mr. Baker.

WASHINGTON — For the last year, as the nation’s economy lurched from crisis to crisis, the chairman of the Federal Reserve, Ben S. Bernanke, had been warning Henry M. Paulson Jr., the Treasury secretary, that the worsening situation might ultimately force a sweeping federal intervention.

A longtime student of the Great Depression, Mr. Bernanke was acutely aware of what could happen without a decisive move. Finally, the moment that called for action arrived late Wednesday. Less than 24 hours after the Fed bailed out American International Group, the giant insurer, it was clear the turmoil gripping Wall Street was only growing worse and that ad hoc solutions were not working.

Talking into a speaker phone from his ornate office, Mr. Bernanke told Mr. Paulson that it was time to adopt a comprehensive strategy that Congress would have to approve. Mr. Paulson understood. Reluctant in recent days to send Congress a plan that lawmakers had warned had little chance of quick passage, he had worried that a rejection would only further shock the markets. But during two conference calls Wednesday night and Thursday morning, he agreed that they had no choice.

“It just happened dramatically,” Mr. Paulson said in an interview on Friday. “There was only one way that we could reassure the markets and deal with a very significant and broad-based freezing of the credit market. There was no political calculus. It was overwhelmingly obvious.”

Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat.

Befitting their roles and personalities, Mr. Paulson has become the public face of their team — he plans to appear on four Sunday talk shows — while the less visible Mr. Bernanke provides the historical underpinnings for their strategy.

Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

“There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

The improvisational nature of their effort has turned President Bush and Congressional Democrats into virtual bystanders, sometimes uncertain about what comes next and left to wonder about the new power dynamics in the capital. Seemingly every time lawmakers tried to get a handle on what was happening and what role they might play with elections around the corner, Mr. Paulson and Mr. Bernanke would show up again on Capitol Hill for another evening meeting with another surprise development.

The two men have been working early and working late, tracking Asian markets and fielding calls from their European counterparts, then reconnecting with each other by phone eight or nine times a day, talking so often that they speak in shorthand. Mr. Paulson has powered through the long days with a steady infusion of Diet Coke. Asked twice to testify by the Senate last week, he begged off.

“He told me he had like four hours of sleep,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking Committee. But there were limits to Mr. Dodd’s sympathy. “The public wants to know what’s going on,” he said he replied.

Mr. Bernanke (his drink: Diet Dr Pepper) has made a point of leaving the office by midnight to get at least some rest, but friends say the toll on him is clear as well. Alan S. Blinder, a longtime friend and former vice chairman of the Federal Reserve, recalled seeing Mr. Bernanke at a conference last month in Jackson Hole, Wyo. “He looked like he had the weight of the world on his shoulders,” Mr. Blinder said.

And that was before last week.

Mr. Bernanke took office in February 2006 and Mr. Paulson five months later, both Republicans and Bush appointees, yet arriving from starkly different places. Mr. Bernanke, 54, had managed the academic politics of the Princeton economics department, where he served as chairman, by developing a conciliator’s style. Mr. Paulson, 62, rose to the top of Goldman Sachs by pounding the phones, and the occasional table.

“Hank is just the most hyperactive, get-it-done kind of guy who’s always trying to get the problem solved and move on. He’s impatient to fix things,” said Allan B. Hubbard, a former national economic adviser to Mr. Bush. “Ben is much more low-key. He’s very thoughtful. He’s an incredible thinker, listens well, analyzes well and is not intimidated by anyone. It’s probably a great pair.”

While Mr. Bernanke talks in lofty terms and Mr. Paulson speaks in great bursts of Wall Street jock language, the new Washington odd couple bonded in part over baseball. The Treasury secretary is a Chicago Cubs fan and the Fed chairman is a Boston Red Sox fan who has adopted the Washington Nationals and shares season tickets with the White House chief of staff, Joshua B. Bolten.

But neither Mr. Paulson nor Mr. Bernanke has been deeply involved in the political process before. As they try to navigate Washington together, they have surrounded themselves respectively with advisers drawn from Goldman and career professionals at the Fed.

Mr. Paulson initially declined to join the cabinet. He changed his mind only after extensive lobbying by Mr. Bolten, a former Goldman executive, and commitments by Mr. Bush to let him truly run economic policy, unlike his predecessors. The Hammer, as Mr. Paulson has been called since his days on the Dartmouth football squad, brought to Washington his characteristic intensity.

“He is a hurricane. He is used to living in a turbulent world,” said John H. Bryan Jr., a close friend and former chief executive of the Sara Lee Corporation. “He has lived in a world of deadlines, decisions and pressure-packed things.”

Mr. Paulson, a Christian Scientist, does not drink or smoke. Once, at a cocktail party where he was giving a speech, recalled Andrew M. Alper, a former Goldman colleague, Mr. Paulson accidentally took a gulp from a glass of vodka, thinking it was water. His face turned bright red and his eyes were watering for an hour. “He just kept going,” Mr. Alper said. “It did not slow him down.”

Mr. Bernanke has a more obscure nickname, Helicopter Ben, after a speech he gave in 2002 in which he talked about the Fed’s “helicopter drops” of emergency money to keep the system liquid. For Mr. Bernanke, the current crisis is the culmination of a lifetime of figuring how the system works from a theoretical viewpoint.

Mr. Bernanke made clear long ago that he realized he might someday be called on to act on his studies. Vincent R. Reinhart, a former Fed official, said Mr. Bernanke’s research into Japan’s financial crisis in the 1990s reinforced his view that the government had to be aggressive in intervening during market crises.

And at a party he had in 2002 to honor the 90th birthday of Milton Friedman, the famed economist, Mr. Bernanke, then a governor of the Federal Reserve, brought up the mistakes the nation made in the face of the Depression and promised not to repeat them. “We did it,” he said then. “We won’t do it again.”

Mr. Paulson, in the interview Friday, said that Mr. Bernanke had long warned that a moment might come like the one they saw last week.

“Going back a long time, maybe a year ago, Ben, as a world-class economist, said to me, ‘When you look at the housing bubble and the correction, if the price decline was significant enough,’ ” the only solution might be a large-scale government intervention, Mr. Paulson said. “He talked about what had happened when there had been other situations historically.”

Mr. Paulson said he agreed but hoped it would not come to that. “I knew he was right theoretically,” he said. “But I also had, and we both did, some hope that, with all the liquidity out there from investors, that after a certain decline that we would reach a bottom.”

He was also hearing as late as last Monday from senior Democratic and Republican lawmakers, including Steny H. Hoyer, the House majority leader, and Representative John A. Boehner of Ohio, the House Republican leader, that there was no chance Congress would adopt any legislation before it planned to leave town in September. Even Representative Barney Frank, a proponent of a greater role for the government in the market, said on Monday that the issue would have to be resolved by the next president and the new Congress next year.

By Tuesday, however, the troubles were only deepening. Lehman Brothers had declared bankruptcy, Merrill Lynch had agreed to be bought by Bank of America and A.I.G. was on the verge of collapse. Mr. Paulson and Mr. Bernanke put together an $85 billion bailout of A.I.G. and presented it to Mr. Bush.

But the two warned the president that it might not be enough to stabilize the broader crisis. A senior administration official, who spoke on condition of anonymity to discuss internal deliberations, paraphrased their message to Mr. Bush this way: “There may still be problems after this, and if there are, we’ll come back to you.”

They did, two days later, after plunging stock prices and frozen credit markets made clear the case-by-case strategy was not working. Mr. Paulson had been talking with Mr. Bush by telephone throughout Wednesday and early Thursday. The decision to finally take a radical, systemwide step came after an endless stream of conference calls involving Fed, Treasury and Securities and Exchange Commission officials, one participant recalled, when Mr. Bernanke said: “We have got to go to Congress.” Mr. Paulson concurred.

On Thursday afternoon, the two men, along with Christopher Cox, the S.E.C. chairman, went to the White House to explain their plan. “The president said, ‘Let’s do it,’ ” an official said. “There was no hesitation.”

Within hours, Mr. Paulson and Mr. Bernanke were in the office of House Speaker Nancy Pelosi, briefing Congressional leaders on how bleak the situation was. Lawmakers were shaken but offered tentative support. Torn by conflicting imperatives to take action and to go home to campaign, they 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.

Mr. Paulson and Mr. Bernanke came under fire for being too aggressive and for not being aggressive enough. Senator Jim Bunning, Republican of Kentucky, said they were killing the free market. R. Glenn Hubbard, former chairman of Mr. Bush’s Council of Economic Advisers, said they should have acted sooner.

“The opportunity to have taken bold action would obviously have been better had they done it months ago,” he said. “But better late than never.”

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.

David M. Herszenhorn contributed reporting from Washington, and Michael Barbaro and Eric Dash from New York.

    A Professor and a Banker Bury Old Dogma on Markets, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/business/21paulson.html

Gary Taxali

 Bubblenomics        NYT        21.9.2008

http://www.nytimes.com/2008/09/21/weekinreview/21leonhardt.html

 Bubblenomics        NYT        21.9.2008

http://www.nytimes.com/2008/09/21/weekinreview/21leonhardt.html

 Bubblenomics        NYT        21.9.2008

http://www.nytimes.com/2008/09/21/weekinreview/21leonhardt.html

Punctured

Bubblenomics

September 21, 2008
The New York Times
By DAVID LEONHARDT

The past week, by any standard, has been an extraordinary one for America’s economy and its financial system. Merrill Lynch, which was founded during Woodrow Wilson’s administration, agreed to be bought for a bargain-basement price, while Lehman Brothers, which dates back to John Tyler’s presidency, simply collapsed.

By the end of the week, the federal government was preparing to buy hundreds of billions of dollars in securities that no bank wanted. It appears to be the government’s biggest fiscal intervention since the Great Depression, designed to get the financial markets working again and keep a credit freeze from sending the economy into a deep recession.

The announcement of the plan changed the mood on Wall Street and sent stocks soaring at the end of the week. But even if the economy avoids a tailspin, the next couple of years aren’t likely to feel especially good. It’s been a long period of excess, and the hangover could be long, as well. For the near future, the most likely outcome remains slow economic growth, scant income gains for most workers and, for investors, disappointing returns from stocks and real estate. If consumers begin to cut back on their debt-fueled spending things could get worse.

On Friday morning, the economists at Lehman Brothers sent out their usual weekly roundup of the news, but it came this time with a short, italicized note, explaining that the report would be the final one to appear under the Lehman banner. That bit of understatement preceded some more: “This episode of financial crisis,” Lehman’s economists explained, “appears to be much deeper and more serious than we and most observers thought it likely to be. And it is by no means clear that it is over.”

Yet, historic though this week has been, there is something familiar about what is happening. Once again, we are seeing the puncturing of a speculative bubble that was the result of asset prices soaring high above the underlying value of the assets. For as long as markets have existed, bubbles have formed. And whenever one of those bubbles begins to leak, it typically needs years to deflate, causing enormous economic damage as it does.

Only now, for instance, are the bubbles of the past decade and a half, first in the stock market and then in real estate, starting to go away. It’s easy to think of the turmoil of the past 13 months as being unconnected to the stock bubble of the 1990s, which appeared to end with the dot-com crash of 2000 and 2001. That crash brought down the overall stock market by more than a third, its worst drop since the 1970s oil crisis. Corporate spending on new equipment then plunged and employment fell for three straight years.

But dramatic though it was, the dot-com crash did not actually come close to erasing the excesses of the 1990s. Indeed, by some of the most meaningful measures, Wall Street after the crash looked a lot more like it was in a bubble than a bust.

As late as 2004, financial services firms earned 28.3 percent of corporate America’s total profits, according to Moody’s Economy.com. That was somewhat lower than it had been over the previous few years, but still almost double the financial sector’s average share of profits throughout the 1970s and ’80s. By 2007, the share had fallen only marginally, to 27.4 percent.

Meanwhile, the share of wages and salaries earned by employees of financial services firms continued to climb and reached a peak last year. Of every dollar paid to the American work force in 2008, almost 10 cents went to people working at investment banks and other finance companies, up from about 6 cents or 7 cents throughout the 1970s and ’80s.

How did this happen? For one thing, the population of the United States (and most of the industrialized world) was aging and had built up savings. This created greater need for financial services. In addition, the economic rise of Asia — and, in recent years, the increase in oil prices — gave overseas governments more money to invest. Many turned to Wall Street.

Nonetheless, a significant portion of the finance boom also seems to have been unrelated to economic performance and thus unsustainable. Benjamin M. Friedman, author of “The Moral Consequences of Economic Growth,” recalled that when he worked at Morgan Stanley in the early 1970s, the firm’s annual reports were filled with photographs of factories and other tangible businesses. More recently, Wall Street’s annual reports tend to highlight not the businesses that firms were advising so much as finance for the sake of finance, showing upward-sloping graphs and photographs of traders.

“I have the sense that in many of these firms,” Mr. Friedman said, “the activity has become further and further divorced from actual economic activity.”

Which might serve as a summary of how the current crisis came to pass. Wall Street traders began to believe that the values they had assigned to all sorts of assets were rational because, well, they had assigned them.

Traders sliced mortgages into so many little pieces that they forgot what they were really trading: contracts based on increasingly shaky loans. As the crisis has spread, other loans have started going bad as well. Hyun Song Shin, an economist at Princeton, estimates that banks have thus far absorbed only about one-third to one-half of the losses they will eventually be forced to take.

One of the few pieces of good news is that Wall Street finally seems to be coming to grips with the depth of its problems. You can see that most clearly, perhaps, in stock prices, which have at long last fallen from the stratospheric levels of the past decade.

The classic measure of whether the stock market is overvalued is the price-earnings ratio, which divides stock prices by annual corporate earnings. At the height of the bubble, in 2000, companies in the Standard & Poor’s 500 Index were trading at 36 times their average earnings over the previous five years. It was the highest valuation since at least the 1880s, according to the economist Robert Shiller.

By 2004, surprisingly enough, the ratio had dropped only to about 26, still higher than at any point since the 1930s. At the start of last year, it was still 26.

But after the market closed on Friday, the ratio was down to roughly 17, which happens to be about its post-World War II average. At least by this one measure, stocks are no longer blatantly overvalued.

This doesn’t necessarily mean they are done falling. For one thing, corporate profits could decline, particularly if households begin pulling back on spending. The unusually rapid rise of consumer spending over the past two decades is arguably the third bubble confronting the economy. It has happened thanks in part to a huge increase in debt, which may now be coming to an end, just as Wall Street’s love affair with debt appears to be ending as well.

And even if the economy does better than expected, investors may still turn pessimistic. “We tend to go through pendulum swings,” said Joel Seligman, the president of the University of Rochester, a longtime Wall Street observer. There are long periods of overexuberance, in which investors worry that they are missing the next great thing, followed by crises that make those same investors fear that the world as they know it is coming to an end.

That seemed to be the case last Wednesday, when share prices of Goldman Sachs and Morgan Stanley plunged even though the firms were still making money. Glenn Schorr, a UBS analyst, wrote an e-mail message to clients saying, “Stop the Insanity.”

But bubbles inevitably produce insanity, both on the way up and the way down. On Friday, the formerly laissez-faire Bush administration, along with the Federal Reserve, announced that the only way to restore sanity to the markets was for the government to buy an enormous pile of mortgage-related securities. Theoretically, the government could turn a profit on the securities if they can be sold for higher prices when normal conditions return.

But few expect that outcome. Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, estimated that the ultimate cost to taxpayers could be in the range of $1 trillion, or about two-and-a-half times as large as this year’s federal budget deficit.

A guiding principle of economic policy in recent years has been that nobody is smart enough to diagnose a bubble until it has already deflated. This was one of Alan Greenspan’s mantras during his tenure as the chairman of the Fed. His successor, Ben Bernanke, said much the same thing when he took office in 2006. As they saw it, no matter how high stock prices rose relative to profits, or no matter how high house prices rose relative to rents, regulators deferred to the collective wisdom of the market.

The market is usually right, after all. Even when it isn’t, Mr. Greenspan maintained, pricking a bubble before it grew too large could stifle innovation and hurt other parts of the economy. Cleaning up the aftermath of a bubble is easier and less expensive, he argued. We’re living through that cleanup now.

    Bubblenomics, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/weekinreview/21leonhardt.html
 

Political Memo

Capital Feels Its Way

on Huge Rescue Plan,

Eyes on Nov. 4

September 20, 2008
The New York Times
By JACKIE CALMES

WASHINGTON — The huge bailout of the financial system that the Bush administration and Congress are rushing to draft will leave taxpayers with at least part of the bill at a time when high gasoline prices, job losses and stagnant incomes have already helped produce an overwhelming sense that the nation is on the wrong track.

Policy makers cannot say where it all ends. News reports are unrelentingly talking of “crisis.” After decades of deregulation and free-market fealty, antiregulation, small-government Republicans are putting the government in control of a big chunk of the financial sector.

All of which has left Washington in the midst of a political convulsion that both parties are struggling to understand and turn to their advantage — or at least keep from turning against them.

The capital almost had the feel of wartime. President Bush appeared in the Rose Garden and gravely appealed for bipartisanship. Democrats, starting with their presidential nominee, Senator Barack Obama, responded in kind. Congressional assistants spent their days glued to cable television, while across the city, people who a few days ago had few contacts with Wall Street outside of their 401(k) statements were speaking knowingly about credit-default swaps and debating the latest moves by Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the chairman of the Federal Reserve.

But even as the realization settled in that American capitalism was going through something historic — and not in a good way — Washington could not escape the reality that another kind of judgment day was coming and that policy and political choices the two parties make now could weigh heavily on voters when they go to the polls in little more than six weeks.

And voters might well wonder why perhaps a half-trillion dollars — about the same amount spent so far in Iraq — is suddenly available to help Wall Street when promises to address issues like health care insurance have gone largely unkept for years.

On the presidential campaign trail, Mr. Obama and Senator John McCain are now hurtling toward Election Day making up new strategies and policies on the run. On Friday, their divergent approaches were in sharp relief. Mr. McCain, the Republican nominee, ratcheted up his populist tone further and pushed ahead with his own plan to create a government trust to relieve ailing financial firms of bad mortgages. He clearly hoped to look like a leader and steal the mantle of change claimed by Mr. Obama.

Mr. Obama struck a more cautious and bipartisan chord. Mr. Obama delayed release of his own plan’s details until the Treasury Department and Federal Reserve release their blueprint.

“I’m much less interested — at this point — in scoring political points than I am in making sure that we have a structure in place that is sound and actually going to work,” he said at a campaign stop in Miami.

After the cascade of financial failures and rescues in the last two weeks, what is easy to forget is how just recently the presidential election seemed to be turning on Mr. McCain’s choice of Gov. Sarah Palin of Alaska as his vice presidential running mate, shaking up the election dynamic to elevate cultural issues and personalities alongside the economy as the focal points for the campaign. Mr. McCain’s campaign manager had even said that “this election is not about issues” and that voters’ views about the candidates would be crucial to the outcome.

But with Mr. McCain aggressively competing as an agent of change, he remains in a dead heat with Mr. Obama in what should be a Democratic year, given Mr. Bush’s unpopularity. Ms. Palin’s popularity in some Western and Southern states has lifted Congressional Republicans’ hopes in some competitive but socially conservative districts and states.

And now, with the promised bipartisanship between the administration and the Democratic-controlled Congress to negotiate the emergency legislation to help financial institutions and many homeowners, both parties are invested in the outcome of their talks over coming weeks — for better or worse.

The necessity of averting a further breakdown in the markets has forced Mr. Bush to put aside ideological principles in the last few weeks, and with just four months to go until he leaves office, he has his legacy to think about. Just as in the September of his first year in office, Mr. Bush made a televised statement from the White House on Friday calling the financial crisis one of those moments “that requires us to come together across party lines to address major challenges.”

But there was no presidential election around the corner in 2001. And now, many in the United States may well be less willing to pull together if they believe Wall Street is being bailed out while average Americans are losing homes and piling up debt.

And Democrats in Congress may also be less willing to do so. Congressional leaders have served notice that any compromise must include not only help for corporate America, but also billions of dollars more to help homeowners facing foreclosures, victims of Hurricane Ike, flooded farmers and struggling automakers and to provide states and cities with job-creating money for building roads and public works.

Along with Mr. Obama, House Speaker Nancy Pelosi, a Democrat from California, and Harry Reid, a Democrat from Nevada and the Senate majority leader, will push such demands on behalf of their voters. Then Mr. McCain will have to decide whether to stand in the way of any plan that includes the “pork” he boasts of stopping. But the risk for all sides is to be seen as obstructing needed legislation at a time of national emergency.

Mr. McCain on Friday was claiming to have middle-class interests at heart more than Mr. Obama. He stepped up criticism of Mr. Obama for the Democrats’ ties to the former chief executives at the mortgage finance giants Fannie Mae and Freddie Mac, which the government seized last week.

Alleging fraud and corruption at Fannie under James Johnson and Franklin Raines, both Obama supporters, Mr. McCain said, “Senator Obama did nothing and actually profited from this system of abuse and scandal” by accepting contributions from company employees.

Mr. McCain even seemed to poke at Mr. Obama’s image as aloof and intellectual — like the college lecturer Mr. Obama used to be — at a time when the Democrat is trying to connect with working-class voters. “Maybe, just this once, he could spare us the lectures and admit to his own poor judgment in contributing to these problems,” Mr. McCain said.

But Democrats and the media were quick to cite Mr. McCain’s own numerous ties to former lobbyists, executives and board members of Fannie Mae and Freddie Mac. In crisis, Mr. Obama seems to have found the more passionate voice that Democrats nervous about his working-class appeal have listened for. His challenge is to balance the need to be seen as representing average taxpayers’ interests, and at the same time to rebut Mr. McCain’s frequent charge that Mr. Obama has no record of working effectively across party lines. That, too, holds risks of devaluing his pledge for change.

In Miami, Mr. Obama pledged bipartisan cooperation with a Republican administration that he and other Democrats have blamed for the mess, standing at a lectern with the campaign sign “Change We Need.” He was flanked by his economic advisers — veterans of President Bill Clinton’s administration, including the former Treasury secretaries Robert E. Rubin and Lawrence H. Summers.
 

Michael Cooper contributed reporting from Green Bay, Wis., and Blaine, Minn., and Jeff Zeleny from Coral Gables, Fla.

    Capital Feels Its Way on Huge Rescue Plan, Eyes on Nov. 4, NYT, 20.9.2008, http://www.nytimes.com/2008/09/20/business/20politics.html

McCain says Fed should stop government bailouts

September 20, 2008
Filed at 2:32 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

GREEN BAY, Wis. (AP) -- Republican John McCain said Friday the Federal Reserve needs to stop bailing out failed financial institutions. The Republican presidential hopeful said the Fed should get back to ''its core business of responsibly managing our money supply and inflation'' and he laid out several recommendations for stabilizing markets in the financial crisis that has rocked Wall Street and commanded the dialogue in the presidential campaign.

McCain made little mention of the massive proposal being crafted by Treasury Secretary Henry Paulson that could amount to a $1 trillion taxpayer bailout of the mortgage industry. McCain said simply that leaders should put aside partisan differences and ''any action should be designed to keep people in their homes and safeguard the life savings of all Americans.''

The Fed engineered an $85 billion takeover of insurance giant AIG this week after seizing control of housing giants Freddie Mac and Fannie Mae. McCain said that to help return the U.S. to fiscal solvency, the powerful central bank should instead focus on shoring up the dollar and keeping inflation low.

''A strong dollar will reduce energy and food prices,'' McCain said to applause from the Green Bay Chamber of Commerce. ''It will stimulate sustainable economic growth and get this economy moving again.''

In the speech and later at a boisterous rally in Minnesota, McCain sharply criticized Democratic rival Barack Obama for ties to Freddie Mac and Fannie Mae and for advocating tax increases McCain said would ''turn a recession into a depression.''

Obama has said he would raise taxes on people making over $250,000 a year and would cut taxes on the middle class. McCain restated his claim that Obama had voted to raise taxes on people who make just $42,000 a year -- a claim that has been widely debunked by nonpartisan fact check organizations.

McCain noted the Illinois senator had taken large campaign contributions from both Fannie Mae and Freddie Mac and that the one-time head of Obama's vice presidential search team, Jim Johnson, had received a $21 million severance deal after stepping down as Fannie Mae CEO. McCain's campaign released a new television ad Friday hitting Obama for his connection to Johnson.

The Arizona senator neglected to say that some of his closest advisers had ties to or lobbied for the home loan giants.

McCain is correct when he says Obama is the No. 2 recipient of campaign money from employees of Fannie Mae and Freddie Mac. Obama has collected $126,349 from those sources, according to a compilation by the Center for Responsive Politics, second only to Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., who has received $165,400. The ranking covers the period since 1989.

In Minnesota, the mention of Johnson's severance deal brought loud chants from thousands of McCain supporters who filled an airport hangar. ''Give it back! Give it back!'' they shouted.

McCain renewed his call for tighter regulation of financial markets, even though he has generally championed deregulation throughout his career in the Senate and as chairman of the influential Commerce Committee.

He called Securities and Exchange Commission Chris Cox a ''good man'' but reiterated his view that Cox should step down or be fired, saying there needed to be greater accountability in Washington.

McCain said as president he would create a Mortgage and Financial Institutions Trust to help homeowners avoid foreclosure. He said he would propose and sign into law changes to prevent financial firms from concealing ''bad practices.''

Throughout the week, McCain and Obama have tangled over which candidate is better to steer the U.S. out of its financial crisis. One investment giant, Lehman Brothers, collapsed this week and another, Merrill Lynch, was purchased by rival Bank of America for less than half its value.

McCain spokesman Matt McDonald said the campaign was reviewing the Paulson plan and McCain had not yet taken a position on it. ''He's supportive that there are steps being taken,'' he said.

    McCain says Fed should stop government bailouts, NYT, 20.9.2008, http://www.nytimes.com/aponline/washington/AP-McCain-Financial-Crisis.html

Radical bailout plan has a jawdropping price tag

September 20, 2008
Filed at 2:30 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Struggling to stave off financial catastrophe, the Bush administration on Friday laid out a radical bailout plan with a jawdropping price tag -- a takeover of a half-trillion dollars or more in worthless mortgages and other bad debt held by tottering institutions.

Relieved investors sent stocks soaring on Wall Street and around the globe. The Dow-Jones industrials average rose 368 points after surging 410 points the day before on rumors the federal action was afoot.

A grim-faced President Bush acknowledged risks to taxpayers in what would be the most sweeping government intervention to rescue failing financial institutions since the Great Depression. But he declared, ''The risk of not acting would be far higher.''

The administration is asking Congress for far-reaching new powers to take over troubled mortgages from banks and other companies, including purchasing sour mortgage-backed securities. Administration officials and congressional leaders are to work out details over the weekend.

Congressional officials said they expected a request for legal authority to buy up the bad loans, at a cost in excess of $500 billion to the government. Democrats were discussing whether to try to attach middle class assistance to the legislation, despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.

In other major steps, the Treasury Department and Federal Reserve moved to give money-market mutual funds the same kind of federal protection, at least temporarily, that now applies to savings and checking accounts and certificates of deposit at banks. Money-market accounts sold through retail banks are already FDIC insured.

The spreading global selling panic had started to threaten some money-market funds, usually thought of as rock-solid investments. Administration officials feared a run on these funds, held by millions of Americans.

''Every American should know that the federal government continues to enforce laws and regulations protecting your money,'' Bush said at the White House. The 75-year-old Federal Deposit Insurance Corporation now insures savings and checking accounts and certificates of deposit up to $100,000.

Separately, the Securities and Exchange Commission acted to block short-selling in financial securities. That is a trading method that bets the value of stocks will go down. It has been blamed for accelerating the plunge in stock prices of banks and other financial institutions.

''This is a pivotal moment for America's economy,'' Bush said. ''In our nation's history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment.''

Congressional leaders of both parties welcomed the administration's bold moves, after a series of ad hoc rescues.

The talk on the presidential campaign trail, barely six weeks before the election, was of bipartisanship, too.

Democrat Barack Obama said it was critical that leaders in both parties work in concert. ''Truly, we are all in this together,'' he said.

GOP presidential nominee John McCain said leaders should put aside partisan differences and ''any action should be designed to keep people in their homes and safeguard the life savings of all Americans.''

The federal government already has pledged more than $600 billion in the past year to bail out, or help bail out, some of the biggest names in American finance. That includes the rescue of investment bank Bear Stearns in March, the takeover of mortgage giants Fannie Mae and Freddie Mac earlier this month and the takeover of the world's largest insurance company, American International Group, just this week.

But the contagion continued to spread, bringing political consensus that drastic and comprehensive federal action was needed.

There are precedents for such a federal takeover.

In the late 1980s, the government created the Resolution Trust Corporation to tackle the savings and loan crisis. It acquired the defaulted mortgages, foreclosed real estate and other assets of nearly a thousand failed S&Ls, restoring order and stability to the system. Resolving that crisis took six years and $125 billion in taxpayer money -- roughly equal to $200 billion in today's dollars.

And there was the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to revive the market by giving loans to banks and other businesses.

On Friday, Treasury Secretary Henry Paulson gave few details about the structure of the new program. Asked about an overall price tag, he said, ''hundreds of billions'' of dollars.

Congressional leaders said they were ready to move quickly but still needed details of the administration plan. For instance, there was no indication of what the government would get in return from financial companies for the federal assistance.

Paulson and Federal Reserve Chairman Ben Bernanke briefed lawmakers in both parties on the idea by conference call Friday.

In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets -- such as loans that are delinquent but not in default -- and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the call.

''You give them good cash; they give you the worst of the worst,'' Sherman said of the plan, which he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping.

Paulson rejected Democrats' calls to include tighter regulations, corporate reforms or limits on executive compensation as part of the measure, Sherman said. ''He's doing his best to paint a picture of the sky falling, and then he says, because the sky's falling, you have to do it my way.''

Paulson said the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary impact while protecting taxpayers as much as possible.

''I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,'' Paulson. ''The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing.''

Bush said simply, ''We must act now.''

''America's economy is facing unprecedented challenges. We're responding with unprecedented measures,'' Bush declared, standing in the White House Rose Garden with Paulson, Bernanke and Christopher Cox, chairman of the Securities and Exchange Commission.

Shortly after his remarks, Bush called congressional leaders with whom the administration will be working on the final plan. He spoke to Senate Majority Leader Harry Reid, D-Nev., House Speaker Nancy Pelosi, D-Calif., Senate Republican leader Mitch McConnell of Kentucky and House GOP leader John Boehner of Ohio.

The administration wants to see a package emerge from the weekend, to lend calm to Monday morning's market openings, said Keith Hennessey, the director of the president's economic council. The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.

Paulson said Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market. He also said the Treasury Department will expand a program, announced earlier this month, to buy mortgage-backed securities, which have been badly hurt by the housing and credit crises.

''As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford,'' Paulson said.

Bush authorized Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money-market mutual funds. And the Federal Reserve announced it would expand its emergency lending program to help support the $3.4 trillion in total assets of the funds.

On Wednesday alone, investors had pulled more than $89 billion from money-market funds, according to iMoneyNet, publisher of the newsletter Money Fund Report.

The government's actions could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has come to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings Inc.

European Central Bank, Swiss National Bank and Bank of England also offered up more cash Friday. The three banks put a combined $90 billion into money markets.

------

Associated Press writers Julie Hirschfeld Davis, Martin Crutsinger, Andrew Taylor, Marcy Gordon, David Espo and Jim Abrams in Washington and Joe Bel Bruno in New York contributed to this report.

    Radical bailout plan has a jawdropping price tag, NYT, 20.9.2008, http://www.nytimes.com/aponline/business/AP-Financial-Meltdown.html

Paulson Explains Need for Plan to Buy Mortgages

September 20, 2008
The New York Times
By DAVID STOUT

WASHINGTON — An enormous, taxpayer-financed program to buy up bad mortgages and other distressed debt is necessary to protect the savings and aspirations of millions of Americans, Treasury Secretary Henry M. Paulson Jr. said on Friday.

“We’re talking hundreds of billions” of dollars, Mr. Paulson said at a briefing in which he underscored the depth of the problem, pledged to work with Congress to address it quickly and voiced optimism that, in the end, the country would emerge from the financial chaos.

Seeking to dispel any impression that the bailout would amount to a rescue of greedy Wall Street executives by Main Street Americans, Mr. Paulson said the program “will cost Americans far less than the alternative.”

Resolving the financial problems is of paramount importance, not just for major corporations and investment banks but for people who have never set foot in the corridors of corporate and political power, Mr. Paulson said. “Their retirement savings, their home values, their ability to borrow for college” and their chance to find and keep good jobs depend on it, he said.

Mr. Paulson said Fannie Mae and Freddie Mac, which were recently taken under the federal government’s wing, would expand their purchases of mortgage-backed securities to help ease the problems.

He declined to lay out specifics of the unfolding recovery program, which he said he would work on through the weekend with lawmakers so that it can be acted upon next week. But he said that the program must be well-designed and “sufficiently large” to protect taxpayers “to the maximum extent possible.”

Mr. Paulson did not specify what he told Congressional leaders on Thursday evening, when they met in what he called a “lengthy and productive working session” on how to deal with the crisis. He said the problems were spawned by shaky and sometimes opaque real estate investments, and now streams of credit have been clogged, not just for big investors but for families wanting to buy houses and cars and pay for tuition.

But if what Mr. Paulson told the lawmakers was similar to what he told the American public on Friday, he surely conveyed to them a sense of urgency, telling the legislators that the situation is too important for them to adjourn and go home to campaign, which many of them hoped to be doing by now.

House Speaker Nancy Pelosi, Democrat of California, pledged Thursday night to keep Congress in session beyond its scheduled adjournment next Friday, if necessary, “to consider legislative proposals and conduct necessary investigations” linked to the crisis.

On Friday, what Mr. Paulson called the “tactical steps” taken by the government caused the markets to shoot up on Friday morning. But deeper, long-range moves are necessary to address the causes of the crisis, the secretary said.

Mr. Paulson said that when the country has put the crisis behind it — “which we will” — there must be a comprehensive drive to shore up a federal regulatory structure that he called “sub-optimal, duplicative and outdated.”

“This is a critical debate for another day,” Mr. Paulson said.

    Paulson Explains Need for Plan to Buy Mortgages, NYT, 20.9.2008, http://www.nytimes.com/2008/09/20/business/economy/20paulson.html


 

President Bush with the Federal Reserve chairman, Ben S. Bernanke, left,

and Treasury Secretary Henry M. Paulson Jr., right, at the White House on Friday,

where he delivered remarks on the economy.

Pablo Martinez Monsivais/Associated Press        September 19, 2008

Stocks Surge as U.S. Acts to Shore Up Money Funds and Limits Short Selling

NYT

20.9.2008

http://www.nytimes.com/2008/09/20/business/economy/20cndleadall.html
 

Stocks Surge

as U.S. Acts to Shore Up Money Funds

and Limits Short Selling

September 20, 2008
The New York Times
By GRAHAM BOWLEY

Realizing that its case-by-case approach was not sufficient, the federal government has started to put in place a sweeping plan to restore confidence in the financial markets.

And markets around the world have reacted by shooting up, with the Dow Jones industrial average up more than 390 points.

The actions began to unfold Thursday with discussions between the Treasury, Federal Reserve and Congressional leaders on what could become the biggest bailout in United States history, a plan likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions.

“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” Henry M. Paulson Jr., the Treasury secretary, said Friday. “This troubled asset relief program must be properly designed and sufficiently large to have maximum impact.”

In a move against traders who have sought to profit from the financial crisis by betting against bank shares, the Securities and Exchange Commission issued a temporary ban on short sales of 799 financial stocks, following similar action in Britain on Thursday.

And the Treasury, moving to restore confidence in another financial bedrock, said that it would guarantee, at least temporarily, money market funds up to an amount of $50 billion in order to ensure their solvency, a startling intervention into an area that had been considered among the safest investments.

“We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to A.I.G. so it can sell some of its assets in an orderly manner,” Mr. Paulson said.

“Despite these steps, more is needed,” he said. “We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system’s stresses.”

The mortgage crisis has already forced the Treasury and the Fed to bail out four of the country’s most prominent financial institutions — Bear Stearns in March; Fannie Mae and Freddie Mac earlier this month; and American International Group, the insurance conglomerate, just this week.

Later, in a separate statement from the White House, President Bush echoed Mr. Paulson, saying that the intervention to calm the “precarious state of today’s financial markets” was “not only warranted but also essential.”

“In our nation’s history there have been moments that require us to come together across party lines to address major challenges,” he said, standing beside Mr. Paulson, Federal Reserve chairman, Ben S. Bernanke, and Christopher Cox, chairman of the Securities and Exchange Commission. “This is such a moment,” Mr. Bush said.

Stock markets across the globe from Sydney to London soared in response to the plans Friday.

“Nobody knows how sustainable this is, but the immediate reaction just to the rumors about the steps yesterday showed that this has the potential of being the beginning of the end,” Michael Holland, chairman of Holland & Company, said of the market rally.

“The problem has been negative psychology and the lack of liquidity,” Mr. Holland said, “and this move by the Fed and the Treasury may just be part of a solution to that. It’s been a crazy couple of days. In my entire career I haven’t seen anything as crazy as this.”

The bailout proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.

Senior aides and lawmakers said the goal was to complete the legislation by the end of next week, when Congress is scheduled to adjourn. The legislation would grant new authority to the administration and require what several officials said would be a substantial appropriation of federal dollars, though no figures were disclosed in the meeting.

Democrats, having their own desire for a second round of economic aid for struggling Americans, see the administration’s request as a way to win White House approval of new spending to help stimulate the economy in exchange for support for the Treasury request. Democrats also say they will push for relief for homeowners faced with foreclosure in return for supporting any broad bailout of struggling financial institutions.

“What we are working on now is an approach to deal with systemic risks and stresses in our capital markets,” Mr. Paulson said Thursday night. “And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions’ balance sheets,” he added.

One model for the proposal could be the Resolution Trust Corporation, which bought up and eventually sold hundreds of billions of dollars’ worth of real estate in the 1990s from failed savings-and-loan companies. In this case, however, the government is expected to take over only distressed assets, not entire institutions. And it is not clear that a new agency would be created to manage and dispose of the assets, or whether the Federal Reserve or Treasury Department would do so.

The bailout discussions came on a day when the Federal Reserve poured almost $300 billion into global credit markets and barely put a dent in the level of alarm.

Hoping to shore up confidence with a show of financial shock and awe, the Federal Reserve stunned investors before dawn on Thursday by announcing a plan to provide $180 billion to financial markets through lending programs operated by the European Central Bank and the central banks of Canada, Japan, Britain and Switzerland.

But after an initial sense of relief swept markets in Asia and Europe, the fear quickly returned. Tensions remained so high that the Federal Reserve had to inject an extra $100 billion, in two waves of $50 billion each, just to keep the benchmark federal funds rate at the Fed’s target of 2 percent.

None of those actions, however, brought much catharsis or relief, with banks around the world remaining too frightened to lend to each other, much less to their customers. This forced Mr. Paulson and Mr. Bernanke to think the unthinkable: committing taxpayer money to buy hundreds of billions of dollars in distressed assets from struggling institutions.

The scale and complexity of the project are almost certain to create huge philosophical differences among the parties, which could make negotiations difficult to say the least. Still, lawmakers said the goal was to work through the coming weekend and to have both the House and Senate vote on a measure by the end of next week.

As they exited the Thursday night session, grim-faced lawmakers said they would await proposals from the Treasury Department. The Senate majority leader, Harry Reid, said he expected to see a proposal within hours, not days.

Created in 1989, the Resolution Trust Corporation disposed of bad assets held by hundreds of crippled savings institutions. The agency closed or reorganized 747 institutions holding assets of nearly $400 billion. It did so by seizing the assets of troubled savings and loans, then reselling them to bargain-seeking investors.

By 1995, the S.& L. crisis had abated and the agency was folded into the Federal Deposit Insurance Corporation, which Congress created during the Great Depression to regulate banks and protect the accounts of customers when they fail.

The meeting in the Capitol came after Congressional leaders had initially appeared unclear about what role they would play in the rapid-fire decisions being made. Leaders of both parties had complained about a lack of hard information flowing from the administration. House Republicans even canceled a closed-door party session Thursday morning after the administration refused to provide an official to brief them on the administration’s emerging policies.

But as Thursday progressed, Congressional leaders sought to reassert themselves on the crisis, scheduling oversight hearings, calling for a legislative response to the market turmoil and offering to put off an adjournment scheduled to start at the end of next week if the administration and Congress could find common ground on a solution.

Nancy Pelosi, the House speaker, in a letter sent Thursday evening to President Bush, reiterated that view. “We stand ready beyond the targeted adjournment date of September 26 to permit Congress to consider legislative proposals and conduct necessary investigations,” Ms. Pelosi said in the letter, which said “the worsening crisis in our financial markets demands strong solutions and decisive leadership.”

But whether a legislative consensus could be found remained an open question, and members of Mr. Bush’s own party were among those who were most critical of the increasing federal intervention in private markets.

At the meeting Thursday night, where officials said the atmosphere was tense, Senator Richard Shelby of Alabama, the senior Republican on the banking committee, was notably skeptical.

A spokesman for the senator, Jonathan Graffeo, said later: “Senator Shelby believes it’s his responsibility to be skeptical on behalf of taxpayers. He believes our goal must be to minimize taxpayer exposure while maximizing the benefit to the economy. ”

Earlier in the day, Representative John A. Boehner of Ohio, the House Republican leader, had expressed similar wariness about the risk to taxpayers’ funds. And Representative Jeb Hensarling, a Texas Republican who heads a coalition of House conservatives, was circulating a letter to the administration demanding that it not engage in any further bailouts.

Even before the Thursday night session with Mr. Paulson — the second for top Congressional leaders this week — the House had scheduled new oversight hearings. The Financial Services Committee set a session for next week, with Mr. Paulson and Mr. Bernanke as witnesses. The Oversight and Government Reform Committee set hearings for early October to examine developments that led to the collapse of Lehman Brothers and the bailout of A.I.G., even though Congress is to be in recess.

Ms. Pelosi, suggesting the public was probably not of a mind to wait until 2009 for a Congressional fix, said lawmakers first had to explore the causes of the problems and potential solutions in hearings.

Stocks Surge as U.S. Acts to Shore Up Money Funds and Limits Short Selling,
NYT, 20.9.2008,
http://www.nytimes.com/2008/09/20/business/economy/20cndleadall.html