Along with Fed Chairman Ben Bernanke, U.S. Treasury Secretary Henry Paulson has quickly become a household name in recent days. As one of President Bush’s top economic advisers, Paulson has helped spearhead the movement to rescue Wall Street and the financial system on behalf of Main Street and the U.S. economy. His efforts to date have resulted in the $700 billion bailout legislation that was signed into law by President Bush over the weekend. The bailout authorizes the Treasury Department to buy bad mortgages and other troubled securities associated with them from banks and other financial institutions. It is hoped that these purchases will allow credit to flow more freely throughout the financial system.
Earlier today, Dean Baker, an economist and co-director of the Washington, D.C.- based Center for Economic and Policy Research, questioned whether or not Secretary Paulson presented all the available options to the White House. He wrote in the Huffington Post:
According to the Washington Post, after the initial defeat of the bailout package in the House last Monday, Treasury Secretary Henry Paulson went to see President Bush in the White House. The Post reports that President Bush asked Paulson about “Plan B.” According to the Washington Post, Paulson told Bush “there is no Plan B.”
Of course this was not true. Paulson could have easily designed a bailout plan that was centered on the direct infusion of capital in the banking system, as was suggested by George Soros in a Financial Time column later in the week. Virtually every economist who has written on the bailout argued that a direct infusion of capital is a far more effective approach to dealing with the financial crisis than the approach outlined by Paulson.
Clearly Paulson had not invested a great deal of time in crafting the initial proposal he submitted to Congress since it was just three pages and few of the details of the plan had yet been decided. This means that Paulson easily could have switched gears and developed a plan along the lines advocated by economists.
Baker, who has been warning of an economic crisis for years now, added:
If the Post accurately described the meeting between Paulson and Bush (there is no source given for this account), then Secretary Paulson badly misled President Bush on the most important economic decision of his presidency.
Do you think it’s possible Hank Paulson may have had an ulterior motive when he allegedly told President Bush there was no other option available?
“If there is anything that a public servant hates to do it’s something for the public”
Well, it’s official. The U.S. government bailout of Wall Street and the financial system is now law. From the Wall Street Journal’s Greg Hitt and Deborah Solomon today:
President George W. Bush signed into law an unprecedented $700 billion plan to rescue the U.S. financial system, one of the largest-ever government interventions in the nation’s economy — and almost certainly not the last.
The Treasury Department is expected to move quickly to start buying distressed assets from struggling financial institutions, although any impact might not be felt for some weeks. Many details — such as who will administer the program and how — are still to be worked out.
Even with the massive bailout, there is already talk of additional government intervention. Hitt and Solomon wrote:
It will likely be followed by other moves. The Federal Reserve could cut interest rates and take further steps to ensure there are enough funds coursing through the financial system. Congress has already beefed up jobless benefits and is expected next year to push for new stimulus efforts, such as spending on infrastructure.
Looking to next year, Democratic lawmakers are planning to revamp financial-system regulations, with hedge funds, private-equity funds and investment banks all likely to come in for tighter scrutiny. House Speaker Nancy Pelosi (D, Calif.) portrayed the legislation as “only the beginning” of the legislative response to the faltering economy…
“We will be back next year to do some serious surgery,” said House Financial Services Chairman Barney Frank (D., Mass.). Mr. Frank wants legislation to rewrite housing finance — including the roles of mortgage giants Fannie Mae and Freddie Mac – and overhaul regulation of financial services.
More intervention? Can’t wait…
Call me skeptical, but Congress has a habit of rendering things F.U.B.A.R. Speaker Pelosi may
want to pay heed to something one of her predecessors said many years ago:
One of the greatest delusions in the world is the hope that the evils in this world are to be cured by legislation.
-Thomas Reed, Speaker of the House of Representatives (1886)
Sources:
“Historic Bailout Passes As Economy Slips Further”
Greg Hitt, Deborah Solomon Wall Street Journal, October 3, 2008
Yep. You heard it right. The $700 billion price tag for the failed U.S. government bailout of Wall Street and the financial system was conjured up. Where’s the evidence? Forbes’ Brian Wingfield and Josh Zumbrun wrote on September 23:
In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.
“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”
And you wonder why Americans are suspicious of government…
Steve Miller Band, “Abracadabra” (1982)
YouTube Video Link
Source:
“Bad News For The Bailout”
Brian Wingfield, Josh Zumbrun Forbes, September 23, 2008
Obviously, there’s a lot of info on the proposed U.S. government bailout of the financial system circulating around cyberspace this Monday morning. Filtering out the noise, I tried to get at the nuts-and-bolts of what is being proposed in this post.
For those of you who prefer a short, multimedia-based breakdown of the bailout proposal, John Bussey of the Wall Street Journal talks about what’s at stake in a 3-minute MarketWatch video:
For an in-depth, print-based explanation of the $700 billion scheme, this morning the Journal’s Deborah Solomon picked apart the proposed legislation and talked about its components:
The Troubled Asset Relief Fund:
The bill authorizes $700 billion for the fund in installments. Treasury will first get $250 billion, with an additional $100 billion immediately accessible. Congress would have the option of blocking the final installment of $350 billion by issuing a joint resolution within 15 days of any requests.
How it works:
Treasury plans to hire asset managers to determine how to buy bad loans and other ailing assets from financial institutions. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. The legislation requires Treasury to set guidelines within 45 days for pricing methods and setting the value of troubled assets, as well as mechanisms for purchasing assets, procedures for selecting asset managers and criteria for identifying troubled assets to buy.
The legislation requires Treasury to purchase assets at the lowest price, and allows the government to buy through auction or direct from institutions.
Treasury expects to start buying the simplest assets first — mortgage-backed securities, for example — followed by more complex securities. Treasury likely will publish a list of the assets it is seeking to purchase. Banks and other institutions are expected to submit bids in a competition to sell bad loans and securities.
Executive compensation:
The legislation places restrictions on executive compensation for certain companies that sell assets to Treasury. If Treasury buys assets from a company directly — something it would do if a firm were failing — then no “golden parachute” exit payments could be made during the period when Treasury has an ownership stake in the firm. Companies that sell assets to Treasury through an auction process will be subject to some limits. Firms that sell more than $300 million of assets to Treasury won’t be allowed to make any new golden-parachute payments to top executives. A tax-deduction limit on compensation above $500,000 also will apply.
Equity stakes:
The legislation requires Treasury to receive warrants in companies that participate in the program. If a company sells its assets through an auction, Treasury will get a nominal amount of nonvoting warrants. If Treasury buys assets directly, it could get a majority equity stake.
Oversight:
The Troubled Asset Relief Fund will be overseen by a bipartisan congressional commission that will receive reports from Treasury every 30 days. The program will also be overseen by a board comprising the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission, the Housing and Urban Development Department and the Federal Housing Finance Agency.
The office of accountability will have an inspector-general office within Treasury.
Treasury will have to submit a written report to Congress no later than April 30 on the overall financial regulatory system and “its effectiveness at overseeing the participants in the financial markets, including the over-the-counter swaps market and government-sponsored enterprises” and recommend improvements.
Protecting taxpayers:
If after five years the government has a net loss, the president will be required to submit a legislative proposal to seek reimbursement from the financial institutions that participated.
Help for homeowners:
Treasury will buy mortgage-backed securities, mortgages and other assets secured by residential real estate. The legislation requires Treasury to use its position as the investor in those loans and securities to “encourage the servicers of the underlying mortgages” to help minimize foreclosures.
It also calls for Treasury to “identify opportunities” to acquire “classes of troubled assets” that will improve the ability of Treasury to help modify and restructure loans. The idea is that Treasury would be more patient with homeowners who have fallen behind on their payments than commercial lenders.
Insurance:
The bill would require Treasury to establish, alongside the asset-purchase plan, a program to insure mortgage-backed securities. Financial institutions that want to participate would essentially pay the government a fee and, in return, the government would insure their assets against any future losses.
Accounting:
The legislation would require the Securities and Exchange Commission to study so-called mark-to-market accounting standards, which require that firms reflect the market value of assets on their books. Such accounting has culminated in many financial institutions writing down big losses as the value of certain assets has fallen in price. The SEC would have to study the accounting rule’s effect on balance sheets and report to Congress within 90 days of its findings.
The bailout legislation (in .pdf format) can be accessed here.
This week, the QFTW (plural!) have to do with the looming government bailout of Wall Street and the financial system:
It’s astonishing, devastating, and very harmful for America and American citizens. It means we’re in for the worst recession since World War II, as well as higher long-term interest rates, higher inflation, higher taxes, a weaker dollar and substantially lower stock prices.
-Jim Rogers, legendary investor and CEO of Rogers Holdings, in the September 22, 2008, issue of the New York Sun
CBS News found 21 former staffers from the Senate Banking, Housing and Urban Affairs and House Financial Services Committees are now lobbyists for financial firms. Their job? To lobby those in Congress who will shape the financial bailout. The former staffers now represent hedge funds, private equity firms, investment banks and the failed mortgage giants Fannie Mae and Freddie Mac.
-CBS News, September 26 2008
The bottom line is the Democrats want to give this money to the banks because most of it’s going to go to the large New York city banks, and those folks are generous supporters of the National Democratic Party, senators and congressmen running for re-election, and Barack Obama.
-Peter Morici, University of Maryland business professor and multiple-time winner of MarketWatch’s “Forecaster of the Month” award, September 28, 2008
You have the former Chairman of Goldman Sachs asking for 700 billion dollars, and in his initial request, asking for it in such an un-American way that I think he should have resigned. I think Paulson has terminally misunderstood the nature of the American system. Not just no review, no judicial review, no congressional accountability. Give me 700 billion dollars, 700 BILLION dollars! I’ll be glad to spend it for you. That’s a centralization of power that is totally un-American.
-Newt Gingrich, former Speaker of the House on ABC’s “This Week with George Stephanopoulos” roundtable, September 28, 2008
This weekend, Michael Gray of the New York Post wrote:
The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.
According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.
The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.
The Fed’s dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.
Source:
“ALMOST ARMAGEDDON”
Michael Gray New York Post, September 21, 2008
From the office of U.S. Senator Jim Bunning (R-K.Y.) last week:
Bunning Declares The Free Market Dead
Washington, DC
Friday, September 19, 2008
U.S. Senator Jim Bunning today issued the following statement regarding the Treasury Department’s bailout of Wall Street.
“Instead of celebrating the Fourth of July next year Americans will be celebrating Bastille Day; the free market for all intents and purposes is dead in America,” said Bunning. “The action proposed today by the Treasury Department will take away the free market and institute socialism in America. The American taxpayer has been misled throughout this economic crisis. The government on all fronts has failed the American people miserably.
“My great grandchildren will be saddled with the estimated $1 trillion debt left in the wake of this proposal. We have gotten to this point because nobody has been minding the store. Both Secretary Paulson and Chairman Bernanke should be held accountable for their inaction – and now because of that inaction – the American taxpayer is left with bill.”
“We must take care of Main Street. Small businesses in Ashland, Bowling Green, and Paducah are hurting because of high taxes, and energy costs. Those small businesses are the economic engines that fuel our economy. I hope in the closing days of this Congress we can pass legislation to help those good people on Main Street rather than helping the power brokers on Wall Street.”
It’s not just Friday night. It’s an FDIC Friday Night— which means another U.S. bank closure. With more to come, according to the head of the Federal Deposit Insurance Corporation. MarketWatch reporter John Letzing wrote this evening:
A tumultuous week for financial markets was capped Friday with the closure of Northfork, W.Va.-based Ameribank Inc., the 12th U.S. bank closure so far this year.
The Federal Deposit Insurance Corporation said in a statement late in the day that deposits at Ameribank’s Ohio branches have been transferred to the Citizens Savings Bank, and Ameribank’s three Ohio branches will reopen Saturday as Citizens Savings Bank branches.
Ameribank’s West Virginia deposits have been transferred to Pioneer Community Bank, and Ameribank’s five West Virginia branches will reopen Monday as Pioneer branches, according to the FDIC.
As of June 30, Ameribank had $115 million in total assets and total deposits of $102 million, the regulator said.
Earlier today, FDIC Chairman Sheila Bair predicted there will be additional bank closures in the future. From the CNBC website:
There will be more U.S. bank failures as the global credit crisis continues, Federal Deposit Insurance Corp Chairman Sheila Bair said Friday.
“There’s going to be more, no doubt about it. We are in a challenging environment,” Bair said at a panel discussion at the New York Stock Exchange.
Banks have been struggling to survive amid a severe downturn in the housing market and tight lending conditions.
“We have industry reserves of $45 billion, but we also have longstanding lines of credit with the Treasury, so if need be, we have wide flexibility to borrow from the Treasury,” Bair reassured investors on CNBC.
“We’re explicitly backed by the full faith and credit of the United States government. People really don’t have anything to worry about,” she said.
And that’s when the red flag went up…
Note the fine print
Sources:
“Ameribank folds, 12th bank closure this year”
John Letzing MarketWatch, September 19, 2008
“More US Bank Failures Coming: FDIC’s Bair” CNBC, September 19, 2008
Marcy Gordon of the Associated Press reported yesterday that the insurance fund for protecting bank deposits has run into a bit of a problem. She wrote:
Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.
The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday…
Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators. Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC’s insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.
“We’ve got a … retail bank run forming in this country,” said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics…
Gordon noted the FDIC has turned to the Treasury Department before. She wrote:
If the FDIC doesn’t have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.
Source:
“Federal bank insurance fund dwindling”
Marcy Gordon Associated Press, September 16, 2008
American International Group Inc. avoided the worst financial collapse in history by accepting a rescue that provides an $85 billion loan from the federal government in return for a majority stake.
The U.S. reversed its opposition to a bailout of AIG, the nation’s biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that “a disorderly failure of AIG could add to already significant levels of financial market fragility,” according to a Fed statement today…
The agreement, supported by the Treasury Department, may avoid wider chaos in world markets that threatened to engulf more financial companies. Industry losses could have totaled $180 billion if AIG collapsed, according to RBC Capital.
And so, the “Day Of Reckoning” is postponed once again. I wonder though. Just how many bullets does the government and the Fed have left?
“Did he fire six shots or only five?”
Scene from “Dirty Harry” (1971)
Source:
“AIG Gets $85 Billion Fed Loan, Cedes Control to Avert Collapse”
Hugh Son, Craig Torres Bloomberg, September 16, 2008
Yes, you read correctly. There are two Quotes to start off the week. And, oh, what a week it’s been so far!
Quote #1: Jim Cramer
Back on August 4, I talked about CNBC television personality, former hedge fund manager, and best-selling author Jim Cramer, who declared the U.S. stock market bear was dead. Cramer said on July 15:
I am indeed sticking my neck out right here, right now… declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15, and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside…
My bottom call isn’t gutsy. I think it’s just a smart call that all the evidence points toward. Bye, bye bear market. Say hello to the bull and don’t let the door hit you on the way out.
On July 15, the Dow Jones Industrial Average stood at 10,962.54, and the S&P 500 at 1,214.91, at the close of trading.
Earlier today, the Dow finished at 10,917.51, while the S&P 500 fell to 1,192.70.
Boo-yah!
Quote #2: Hank Paulson
Earlier today, U.S. Treasury Secretary Henry Paulson told White House reporters that despite the financial chaos on Wall Street on Monday, Americans can remain confident in the “soundness and resilience in the American financial system.” The former head of investment bank Goldman Sachs talked a little about the U.S. housing market, and predicted housing would start to rebound soon. Paulson told reporters:
I’m not saying two or three months, but in months as opposed to… years.
Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.
“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.
Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:
Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.”
Kind of sucks being called to task for such “definitive” statements, huh?
Don’t know how I initially missed this one. MSNBC contributor Gina Pace wrote back on August 10:
Amid speculation that Treasury Secretary Henry Paulson would remain in his post to help the next president deal with the housing crisis, Paulson announced that he will not stay on during an interview on “Meet The Press” Sunday.
“I am very focused on getting everything done I can get done between now and January 19,” Paulson told moderator Tom Brokaw in Beijing. “I look forward to doing other things next year.”
Paulson told Brokaw that he thought it would take “well beyond” this year to work though the nation’s housing problems, and that they were at the heart of “our economic problems as a nation.”
Paulson, a former Chairman and Chief Executive Officer of Goldman Sachs, was sworn in as the 74th Secretary of the Treasury a little over two years ago on July 10, 2006.
Think Hank may be jumping ship because he has a pretty good idea of what’s in store for the economy down the line?
Financial analyst Eric King talked about gold and silver on the Financial Sense Newshour this weekend, and warned listeners:
But I want people to listen carefully to what I’m about to say to them. Do not listen to statements made from this government. Ignore them. Ignore statements made by Paulson, who is retiring in November right after the election. They have been consistently wrong in all of their statements. They have lost control of the system, in my opinion, and the system is breaking right now. The United States banking system is insolvent, and they are trying to keep this hidden from people and try to get more suckers to put more money into these banks, but the suckers are not lining up anymore. A big tax bill is going to be laid on the American public, and as Greenspan stated in Belgium, the Federal Reserve, and even the Treasury, stands ready to create money without limit. We are about to go into that phase now where we are going to have very serious money printing, and the Fed knows it, Paulson knows it, the Treasury and Bernanke know it, and because of that they had to crush these metals ahead of that…
