Law of Unintended Results: Outrageous - Bailout $$ Being Misused

CARELESSNESS, ERROR, OR BOUGHT OUT?

Below is an article I find astounding...not only is the bailout money being spent in ways that were not intended, but Congress itself, after all the talk, vows, promises - NEVER put a restriction in the Bailout Bill to forbid the use of the money for executive salaries and BONUSES! (My reaction..."Are you serious").

This was a major issue that Congress said they were against, but then quietly left out any salary or bonus restrictions. Again, it isn't what you say, but what you do. Think about this when you vote this year. Were they careless, duplicitous, or just bought off by the banking lobbyists. This is an outrage. Are you getting a bonus? Are you getting relief with your mortgage?

Do you think Congress just over looked it; or again trusted people who have beenshown to be heartless and greedy. Or were the lobbyists just too effective?

A lot of thinking to do before election day.

Gloria


Bailout off track
Money being spent in unintended ways

Remember the original bailout bill, sold by the Bush administration to Congress as a way the government could soak up the toxic mortgage debt crippling banks, thus unclogging the credit market and rescuing the economy?

That notion looks downright quaint now.

Only $100 billion out of that $700 billion bailout measure has been set aside for that purpose this year. So where’s the rest going?

The government just decided to pump $250 billion into buying equity stakes in banks, again with the idea that our money would flow into loans to boost business and the economy.

Somehow, this veered off track — with bankers reportedly looking at the prospect of purchasing other banks, paying dividends and even doling out salary increases and executive bonuses.

Citizen outrage over eye-popping Wall Street bonuses when the financial meltdown began surely will bubble back to the surface.

Whatever happened to the alleged safeguards enacted in the final bailout bill?

Now comes word that Congress did not write anything in that law to prevent banks from spending taxpayer money in this manner.

Appalling. Congress failed us again.

Upon hearing about federal money going into bank acquisitions, Sen. Christopher Dodd, chairman of the Senate banking committee, uttered this response: “beyond troubling.”

Well, yes, and look who we have to blame — Congress and the Bush administration playing fast and loose with our money.

Bankers didn’t sit on their newfound riches long, either.

PNC Financial Services Group Inc. pocketed $7.7 billion in rescue money in return for company stock, then turned right around and announced a $5.58 billion purchase of National City Corp. We can only hope that all our taxpayer stock gets a good return.

But remember AIG, the country’s largest insurance company facing massive losses to pay off mortgages and other assets it guaranteed?

American International Group, bailed out by the government to the tune of $123 billion, earned our scorn for shelling out $440,000 for a spa outing mere days after securing that rescue package.

Now the company is paying lobbyists millions to stifle pending regulations of the mortgage industry. Our money is being spent to fight off rules that would protect us? Executive greed and arrogance knows no bounds.

And that, too, is “beyond troubling.”

AIG now claims that $123 billion is not enough.

Can we trust a company with such a dubious track record? Every executive should be replaced and every financial record examined.

Other insurers are rushing up to the government trough, with the Hartford, Prudential and MetLife leading the way.

Automakers got in line for $25 billion, with $5 billion of that possibly heading to seal the deal on a merger of General Motors and Chrysler.

How much of the hundreds of billions of dollars in taxpayer money will trickle down to the average citizen? Those of us who lost our jobs, our savings, our homes?

The numbers are telling.

So far this year, the nation’s economy has lost 760,000 jobs.

More than 2,700 Americans lost their homes to foreclosure every single day from July through September.

With stock markets around the world on a roller-coaster ride for the ages and the Dow Jones sinking to its lowest close Monday since this financial crisis began, we’ve lost hundreds of billions in our savings and retirement accounts.

We cannot claim to be wizards on the economy, but something’s out of whack here.
The government should prop up failing industries else they collapse and put even more employees out of work.

But where’s the bailout for the average American?

Last month Senate Republicans shot down a $56 billion stimulus package for infrastructure projects.

That money would have led to tens of thousands of jobs for a construction industry already battered by the loss of some 35,000 jobs across the nation.

The loss of that stiumulus is also troubling. Congress should reverse course.
If we can allocate hundreds of billions to Wall Street, surely we can put a fraction of that into Main Street.

"SUPERPOWER AMERICA" AT WORLD'S MERCY FOR MONEY

China state paper lashes US monetary policy

8 Oct, 2008, 0637 hrs IST, REUTERS

BEIJING: The "tsunami" in the US financial system was touched off by short-sighted monetary policy and lax regulation, a leading Chinese state newsp aper said on Wednesday.

The front-page commentary in the overseas edition of the People's Daily is the latest in a stream of critical articles that have lashed US policy even as the Chinese central bank has said it endorses a Washington bailout plan.

"Throughout the sub-prime crisis, each step appears to have been reasonable and proper, but in fact each one was expanding and accumulating risks," said the commentary by Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a leading government think-tank.

The People's Daily is the ruling Communist Party's official paper, and the overseas edition is a small offshoot of the main domestic edition. Its commentaries do not necessarily directly reflect leadership positions. But this commentary and previous ones have reflected dismay with US economic policy and debate over how China should respond to Washington's financial straits.

"Due to the government's short-sightedness or short-term behaviour, there was no formulation of monetary policy from a long-term strategic perspective," Yi wrote. "At the same time, government departments were seriously remiss in oversight and management of financial innovations."

The commentary offered no prescriptions for how Beijing should respond to the global crisis. But it stressed the dangers of venturing into derivatives and other complex financial products that many have blamed for the turmoil.

In another official newspaper, however, Yao Zhizhong, an economist at the Chinese Academy of Social Sciences, said Beijing should put some of his financial muscle behind the US bailout. If China and others with big foreign exchange reserves do not help, Washington may resort to dangerously inflationary monetary policy, Yao told the Chinese-language International Finance News, which is also run by the People's Daily.

"China will certainly sustain losses from this financial crisis, and now we have to think up ways of lowering those losses," he said.

China might not necessarily support the bailout using its foreign exchange reserves to buy US bonds, he said. China could "along with other countries, provide various kinds of cooperation for US financial interventions", he added.

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A futile bailout as darkness falls on America

By Paul Craig Roberts

America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because they no longer have a free and responsible press.

The 20th century proves that the market is likely to know better than a central planning bureau. It was Soviet Communism that collapsed, not American capitalism. However, the market has to be protected from greed. It was greed, not the market that was unleashed by deregulation during the Clinton and George W Bush

The Paulson (the former CEO of Goldman Sachs) bailout transfers the troubled financial instruments that the financial sector created from the books of the financial sector to the books of the taxpayers at the US Treasury.

This is all the bailout does. It rescues the guilty. The Paulson bailout does not address the problem, which is the defaulting home mortgages.

The defaults will continue, because the economy is sinking into recession. Homeowners are losing their jobs, and homeowners are being hit with rising mortgage payments resulting from adjustable rate mortgages and escalator interest rate clauses in their mortgages that make homeowners unable to service their debt.

Shifting the troubled assets from the financial sectors' books to the taxpayers' books absolves the people who caused the problem from responsibility. As the economy declines and mortgage default rates rise, the US Treasury and the American taxpayers could end up with a $700 billion loss

Since Paulson's bailout of his firm and his financial friends does nothing to lessen the default rate on mortgages, how will the bailout play out?

If the $700 billion bailout is based on an estimate of the current amount of bad mortgages, as the recession deepens and Americans lose their jobs, the default rate will rise. The $700 billion might not suffice. The Treasury will have to go hat in hand to its foreign creditors for more loans. ( Like China, Japan and Europe and Russia)

As the US Treasury has not got $7, much less $700 billion, it must borrow the bailout money from foreign creditors, already overloaded with US paper.

At what point do America's foreign bankers decide that the additions to US debt exceed what can be repaid? This question was ignored by the bailout. There were no hearings. No one consulted China, America's principal banker, or the Japanese, or the OPEC sovereign wealth funds, or Europe. Does the world have a blank check for America's mistakes?

This is the same world that is faced with American demands that countries support with money and lives America's quest for world hegemony.

Europeans are dying in Afghanistan for American hegemony. Do Europeans want their banks, which hold US dollars as their reserves, to fail so that Paulson can bail out his company and his friends?

The US dollar is the world's reserve currency. It comprises the reserves of foreign central banks. Bush's wars and economic policies are destroying the basis of the US dollar as reserve currency. The day the dollar loses its reserve currency role, the US government cannot pay its bills in its own currency. The result will be a dramatic reduction in US living standards.

Currently Treasuries are boosted by the habitual "flight to quality," but as Treasury debt deepens, will investors still see quality? At what point do America's foreign creditors cease to lend? That is the point at which American power ends. It might be close at hand.

The Paulson bailout is predicated on cleaning up financial institutions' balance sheets and restoring the flow of credit. The assumption is that once lending resumes, the economy will pick up. This assumption is problematic.

The expansion of consumer debt, which kept the economy going in the 21st century, has reached its limit. There are no more credit cards to max out, and no more home equity to refinance and spend. The Paulson bailout might restore trust among financial institutions and enable them to lend to one another, but it doesn't provide a jolt to consumer demand.

Moreover, there may be more shoes to drop. Credit card debt could be the next to threaten balance sheets of financial institutions. Apparently, credit card debt has been securitized and sold as well, and not all of the debt is good.

In addition, the leasing programs of the car manufacturers have turned sour. As a result of high gasoline prices and absence of growth in take-home pay, the residual values of big trucks and SUVs are less than the leasing programs estimated them to be, thus creating more financial problems.

Car manufacturers are canceling their leasing programs, and this will further cut into sales.

According to statistician John Williams, who measures inflation, unemployment, and GDP according to the methodology used prior to the Clinton regime's corruption of these measures, the US unemployment rate is currently at 14.7% and the inflation rate is 13.2 percent. (I'm not sure I agree with this...but there are others who know more about this methodology than I, gg)

Consequently, real US GDP growth in the 21st century has been negative. This is not a picture of an economy that a bailout of financial institution balance sheets will revive. As the Paulson bailout does not address the mortgage problem per se, defaults and foreclosures are likely to rise, thus undermining the Treasury's estimate that 90 percent of the mortgages backing the troubled instruments are good.

Moreover, one consequence of the ongoing financial crisis is financial concentration. It is not inconceivable that the US will end up with four giant banks: J.P. Morgan Chase, Citicorp, Bank of America, and Wachovia Wells Fargo. If defaulting credit card debt then assaults these banks' balance sheets, who is there to take them over?

Would the Treasury be able to borrow the money for another Paulson bailout? An alternative to refinancing troubled mortgages would be to attempt to separate the bad mortgages from the good ones and revalue the mortgage-backed securities accordingly.

If there are no further defaults, this approach would not require massive write-offs that threaten the solvency of financial institutions. However, if defaults continue, write-downs would be an ongoing enterprise.

Clearly, all Secretary Paulson thought about was getting troubled assets off the books of financial institutions. The same reckless leadership that gave us expensive wars based on false premises has now concocted an expensive bailout that does not address the problem, which will fester and become worse.

Paul Craig Roberts is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com

AHA! A MUST READ ON BAILOUT; ALSO HECM LIMIT TO STAY AT $417,000; MAKE SURE YOUR LENDER IF FHA APPROVED!

NEW FHA/HECM REVERSE MORTGAGE LIMIT.

Through a source that was helping negotiate the changes in the recent FHA Modernization Bill I have learned that there will NOT be any change from the newly established $417,000 nationwide lending cap on the Reverse Mortgage.

Some people had hopes that by the first of the year, the committee would have worked out a formula for loans up to $625,500 in high-cost area. THIS IS DEAD AT THIS POINT. IF THERE IS A CHANGE I'LL POST IT. But for now, we should be thankful for the increase to $417,000 which will allow thousand and thousands of people getting Reverse Mortgages to have enough to retire currently obtained, high interest rate/payment loans.

FHA and committee are still working on the Reverse Mortgage Purchase program.

Gloria



THE BAILOUT NOTES:

Notes: Although the House was the one that voted down the bailout Bill, perhaps they just wanted to let the Senate be the House that would add the "Pork". (There is a adage I learned in graduate school that the "House gives, and the Senate takes away", but it seems opposite this time.) And, brother, did the Senate add Pork --enough to satisfy them and House Representatives. Can you read anything below that has to do with the Wall Street Bailout?

This isn't a political site...and yet....I'm changing more than I thought; but I can't see myself voting for any incumbents in the upcoming elections. Not-a-one, at any level. I think we need a real House Cleaning!

Gloria


What started as a three-page “blank check” request for $700 billion to buy “toxic” assets on Wall Street, has now passed the Senate as a 451-page pork-laden piece of detritus.

by: Ian Mathias. 5 Minute Forecast, of Agora Financial, 10-2-2008

Ian sifted through the table of contents for tax exemptions and picked out a few of his favorites:

Sec. 101: Extension of alternative minimum tax relief for nonrefundable personal credits.
Sec. 102: Extension of increased alternative minimum tax exemption amount.
Sec. 201: Deduction for state and local sales taxes.
Sec. 202: Deduction of qualified tuition and related expenses.
Sec. 203: Deduction for certain expenses of elementary and secondary school teachers.
Sec. 204: Additional standard deduction for real property taxes for nonitemizers.
Sec. 205: Tax-free distributions from individual retirement plans for charitable purposes.
Sec. 304: Extension of look-thru rule for related controlled foreign corporations.
Sec. 305: Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space.
Sec. 307: Basis adjustment to stock of S corporations making charitable contributions of property.
Sec. 308: Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands.
Sec. 309: Extension of economic development credit for American Samoa.Sec. 310: Extension of mine rescue team training credit.
Sec. 311: Extension of election to expense advanced mine safety equipment.
Sec. 312: Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
Sec. 314: Indian employment credit.
Sec. 315: Accelerated depreciation for business property on Indian reservations.
Sec. 316: Railroad track maintenance.
Sec. 317: Seven-year cost recovery period for motorsports racing track facility.Sec. 318: Expensing of environmental remediation costs.
Sec. 319: Extension of work opportunity tax credit for Hurricane Katrina employees.
Sec. 320: Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone.
Sec. 321: Enhanced deduction for qualified computer contributions.
Sec. 322: Tax incentives for investment in the District of Columbia.
Sec. 323: Enhanced charitable deductions for contributions of food inventory.
Sec. 324: Extension of enhanced charitable deduction for contributions of book inventory.
Sec. 325: Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec. 401: Permanent authority for undercover operations [as related to tax provisions].
Sec. 402: Permanent authority for disclosure of information relating to terrorist activities [as related to tax provisions].
Sec. 501: $8,500 income threshold used to calculate refundable portion of child tax credit.Sec. 502: Provisions related to film and television productions.
Sec. 503: Exemption from excise tax for certain wooden arrows designed for use by children.
Sec. 504: Income averaging for amounts received in connection with the Exxon Valdez litigation.
Sec. 505: Certain farming business machinery and equipment treated as five-year property.
Sec. 506: Modification of penalty on understatement of taxpayer’s liability by tax return preparer.
Sec. 601: Secure rural schools and community self-determination program.
Sec. 602: Transfer to abandoned mine reclamation fund.
Sec. 702: Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados and flooding.
Sec. 704: Temporary tax-exempt bond financing and low-income housing tax relief for areas.
Sec. 709: Waiver of certain mortgage revenue bond requirements following federally declared disasters.
Sec. 710: Special depreciation allowance for qualified disaster property.
Sec. 711: Increased expensing for qualified disaster assistance property.

Seriously, did they think no one was going to read this thing?

“Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands”?

“Seven-year cost recovery period for motorsports racing track facility”? “Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds”?

It’s one thing to drown a piece of legislation with pork.

But the urgency laid on thick by the administration and Sen. Gregg over the last two days all but guaranteed even armchair economists like yours truly would be reading this thing line by line.

C’mon, fellas.
Couldn’t you be a little more discreet? Guess you just couldn’t help yourselves.

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MAKE SURE YOUR REVERSE MORTGAGE LENDER IS A DIRECT FHA APPROVED LENDER.


It’s OK to interview your mortgage company and make sure they are properly licensed an approved to originate FHA loans.


PLEASE READ THIS IMPORTANT WARNING:

As FHA becomes a bigger and bigger player in the finance market, mortgage brokers who are not approved start getting creative at how they can close FHA loans even though they are not approved. BE SURE that whoever is doing the mortgage REALLY IS FHA approved! Here’s 2 reasons why this is important:

1. Some brokers will have their “spouse” be an “employee” of an FHA approved lender so they can put the loan through them. I recently worked as a buyers agent on one of these and our closing was delayed by about 2 weeks because nobody knew what was going on and the processor was out of another state and it was a REAL mess, AND, the buyer got a really high interest rate because so many people had their fingers in the pie.

2. There are some companies now that have found a loophole in the FHA rules and they CAN help a client get an FHA loan and get paid for it, but they cannot get paid to originate the loan, they can only get paid as a “consultant” AND they can only get paid out of the borrowers own funds, up to 2%, so this means there will be an EXTRA 2% FEE that your buyer will have to pay, above and beyond the normal fees and closing costs.

3. You CANNOT originate FHA loans if you are a Realtor, insurance agent, or title agent. If your company is letting you do both, be careful!

From: Andy Tolbert: Invest In Yourself. 10-3-2008

BAILOUT AND BANKING: The Accounting Rule You Should Care About

SHRINKING ASSETS





The battle over how banks and Wall Street value their assets is at the center of credit crisis and the debate over the $700 billion bailout plan. and

(Excellent Related Article: The Roots of the Crisis: How did Wall Street get into this mess? )





NEW YORK (CNNMoney.com) -- It's easy to understand why the proposal to spend $700 billion in taxpayer money to rescue banks would inspire impassioned debate in Washington.


But in a sign of just how complex and controversial the current credit crisis has become, a move to potentially change accounting rules on how banks and Wall Street firms value the securities they own is almost as heated.



Some argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector.



Roots of the problem



First a bit of background. The one fact everyone agrees on is that the current financial crisis centers on trillions of dollars worth of mortgage loans that were packaged together into financial instruments known as mortgage-backed-securities (MBS's). It's easy to understand why the proposal to spend $700 billion in taxpayer money to rescue banks would inspire impassioned e-backed securities, or MBS holders to agree. Those securities were purchased by banks and Wall Street firms.



But as home prices started to fall and foreclosures rose, the value of these securities plunged. Today, there is almost no market for the securities.





This is why Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed that the government buy the securities. The hope is that doing so could restart the MBS market at something well above the current fire sale valuations and that the government could hold the securities until the market improves.





Some advocates of the plan argue that taxpayers will be able to eventually make money if the government sells the securities at a higher price down the road. But the more immediate hope is that banks and Wall Street firms, freed from the toxic loans on their balance sheet, will start lending again.



What is fair value






Still, others contend that it was not real financial losses from these securities that led to the credit crunch as much as it was an arcane accounting rule known as "mark-to-market."


Mark-to-market means that companies have to report what the fair value of their investments were if they sold them at the current time.

In recent years, firms were required by the Securities and Exchange Commission and the Federal Accounting Standards Board to use mark-to-market valuations for all the MBS on their books.

As more subprime borrowers started to default on their loans, that quickly eroded the value of many MBS pools. Major banks and financial firms around the globe have taken writedowns topping $500 billion in the last year, as a result.

For this reason, some have argued that fixing the rule would solve the credit crisis.

"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC.


"And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity," he added.


Isaac believes that since the overwhelming majority of loans packaged together in even the weakest MBS pools are not in foreclosure, it is proper to value these securities based on the flow of cash from all the loans instead of a non-existent market value.



A change of course


Tuesday afternoon, the SEC and FASB seemed to change course on the rule, as they published new guidance to firms. The two organizations said when the market for a security disappears, it is now allowable to arrive at a value using "estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."


In plain English, banks may not be forced to take huge writedowns on investments that lost all their value. But the guidance is just that: guidance. The SEC and FASB suggested that more concrete rule changes could come later.


While the possible end of mark-to-market might please critics of the rule, it doesn't satisfy everybody.


Some financial experts argue that even though banks and Wall Street firms may be able to make their balance sheets look better if the rule changes, these companies will be less attractive to investors because there isn't as much information about their true financial condition.


"The garbage is on the books and no one wants to admit the original error of purchasing this class of assets," said Barry Ritholtz, CEO of Fusion IQ, a research firm.



Ritholtz said mark-to-market accounting forces banks to honestly disclose what they own and how much those investments are worth. Changing the rule would make it tougher to come up with a bank's real value.


"I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately is no longer an investment. It is pure speculation, with more in common to spinning a roulette wheel," he said.



Too little, too late

Accounting experts also think that determining the value of pools of loans based on expected payments isn't any easier than figuring out their market value after demand has dried up. Rising default and foreclosure rates makes estimates about future value very suspect


"People talk about 'hold to maturity', 'economic value.' I'm in the business and I don't know what that means," said David Larsen, managing director at investment advisor Duff & Phelps.


Larsen said that even with the new guidance from the SEC and FASB, it's not clear if accountants and chief financial officers are going to be able to ignore the sharp drop in market value for MBS pools in the current environment.


"To try to put a genie back in the bottle and go backwards from a transparency point of view makes little sense," said Larsen.


Others argue that the potential benefit to banks and Wall Street firms from a rule change is much less than is widely assumed since much of the writedowns have already occurred.


And it's too late to save the large financial institutions that have collapsed because of exposure to soured mortgages.


"I think mark to market is seen as a panacea, but I don't think it's that simple," said Brian Gardner, the Washington analyst for KBW, an investment firm that focuses on the financial services industry. "I don't think it's as big a deal for a lot of the banks."

First Published: October 1, 2008: 4:03 PM ET

BAILOUT SUFFERS DEFEAT AT REPUBLICANS (Tho It Was Their Bill)

Fear and caution rule in Congress' bailout vote

Constituents vent fury at House members jittery about losing their jobs. Even supporters of the rescue package are tepid
.
By Doyle McManus, Los Angeles Times Staff Writer September 30, 2008

WASHINGTON -- President Bush lobbied. Treasury Secretary Henry M. Paulson pleaded. Vice President Dick Cheney worked on conservative Republicans; House Speaker Nancy Pelosi coaxed liberal Democrats. Barack Obama lobbied gently. John McCain worked the phones and boasted about how effective he was.

But all that leadership failed to command much loyalty in either party Monday. When the financial rescue plan came to a vote, two-thirds of the House's Republicans and two-fifths of its Democrats ignored their leaders' pleas and voted no.

The surprise defeat of the Bush administration's financial rescue plan was a product of the waning influence of a lame-duck president and the nervousness of members of Congress, whose institution is even less popular and who faced a flood of angry messages from constituents. McCain and Obama are more popular, but neither candidate embraced the bailout measure enthusiastically before the vote.

Their cautiousness, combined with the unpopularity of other senior political leaders, left rank-and-file members of Congress free to draw their own conclusions about how to react to public skepticism of the bailout, coming only five weeks before election day."We're all worried about losing our jobs," Rep. Paul D. Ryan (R-Wis.), who voted in favor of the plan, said in a speech in the House. "Most of us say, 'I want this thing to pass but I want you to vote for it, not me.' "

The rescue plan, which would have allowed the Treasury to spend as much as $700 billion to buy distressed investments from troubled financial institutions, was always going to be a hard sell.

No grass-roots constituency supported the idea.

Instead, conservative Republicans protested the bill as a huge federal intrusion into private enterprise, and liberal Democrats complained that it rescued wealthy investors but didn't give homeowners a refuge in bankruptcy to avoid foreclosure.

Members of Congress were flooded with messages from voters urging them to vote no. In the final hours before the vote, AFL-CIO President John Sweeney, who is bankrolling campaigns to aid Democratic candidates, condemned the plan. Influential conservative groups such as the Club for Growth and FreedomWorks called for its defeat.In the face of that storm, members of Congress in tight races walked away.

All seats in the House are up for grabs this year. But many members who voted no are in safe districts -- where voters are overwhelmingly conservative or liberal. That's partly because, over years of redistricting, many districts have become politically polarized, and members from those districts have less incentive to compromise with the other party."They don't face any backlash to this vote," said congressional scholar Norman J. Ornstein. "Their constituents will say, 'Right on.'

"Since at least 1990, when then-Rep. Newt Gingrich (R-Ga.) led a conservative revolt against a budget plan sponsored by fellow Republicans and then-President George H.W. Bush, bipartisan compromise has been rare in the House.

Instead, Republicans and Democrats have focused on sharpening their conflicts, each hoping to push the other out of power."When you're counting on the minority party [to help pass a bill], that's difficult," said John Feehery, a former top Republican aide. "The minority doesn't trust the majority. They don't want to help them out.

"Pleas from a president may not work either -- especially if the president's public standing has fallen to record lows. White House spokesmen said Bush called dozens of GOP members of Congress. His efforts appeared to bear little fruit. Rep. Joe L. Barton (R-Texas) said the president called him, but the lawmaker explained that he preferred to listen to his constituents.

In such a situation, even a powerful vice president such as Cheney can no longer command votes from members of the House. "Cheney lived up to his reputation as Darth Vader . . . talking about all the terrible things that were going to happen," said Rep. Christopher Shays (R-Conn.). "People weren't afraid of Darth Vader.

"Nor did Republican members appear to pay much heed to their presidential nominee.

Over the weekend, aides said, McCain spoke to at least 11 House members to try and round up votes. On Monday morning, he told a rally in Ohio that his intervention had helped aid the expected deal.

Of the 11 lawmakers that the McCain campaign said the nominee talked to Saturday, seven voted for the measure, although five of those were members of the House GOP leadership. Four, including two from Arizona, did not.The voices of angry constituents seemed to count most.

"When Congress' approval rating is so low, when the president is such a lame duck, and when your constituents are calling . . . you run," Feehery said."You've got constituents out there that are angry about this deal on both sides," he added. "They don't believe anybody -- the leadership, the president, the secretary of the Treasury. They go on the Internet and find economists saying the situation isn't really a crisis, it's no big deal. That complicates it even further.

"Strangely, perhaps, some House members on both sides said the pressure from their leaders for a yes vote was milder than they had expected.There was "no whipping on my side of the floor," said Shays, who voted for the plan."Leadership did not go around and jam people," agreed Rep. Vernon J. Ehlers (R-Mich.), another yes vote.

Democrats said that as the number of "yes" votes faltered, Pelosi and other Democratic leaders began trying to rustle up more support. Rep. Bennie Thompson (D-Miss.) said Pelosi approached him to ask if he would reverse his vote."There wasn't any arm-twisting or anything like that," Thompson said. Pelosi could be tough, he said, but in this case "she wasn't. "doyle.mcmanus@latimes.com

Times staff writers Janet Hook and Peter Wallsten contributed to this report

RETIREES IN PERIL: HOW THEY HOPE TO COPE

Notes:

From Atlanta, GA. to Las Vegas, NV and back east to Florida, retirees, and the almost-retired across the country are taking the current financial mess on the chin.

With their bank savings dwindling and CD rates declining, to fixed-income pensions with less and less buying power, and 401K's and IRA's in stocks that race up and down, day to day, sometime hour to hour, in this volatile market, the retirees, the elderly parents, the grandparents are getting hit the worse.

And, it's the worse, not just because of the losses and effect on the quality of life they worked so hard to have...but because they don't have time to recover the lost money. Nor can many find jobs; and some are unable to work.

Costs for goods and services they need more than the general population, such as for medicine and medical care, assisted living, in-home help, senior living establishments, Medicare Insurance and supplemental insurance rise faster than the rest of goods and services and the general public need.

Increasingly, if they have homes they will turn to reverse mortgages, or if not, then to their families, and for those that are able, to the workplace for help with the so-called "golden years" they have been robbed of. Not for fun, but perhaps in many cases, just for survival.

Here are some of their stories...the kind that really do give you worry wrinkles and grey hair.

Gloria


Retirees ‘going through hell’ with
declining markets, housing crisis
As asset values continue to fall, those 60 or older need bailout plan to work, analysts say

By BOB DART
The Atlanta Journal-Constitution
Thursday, September 25, 2008

WASHINGTON — At the end of working lives where deprivation rarely dwelled, older Americans now worry that they’re teetering at the edge of their own Great Depression.
“Right now, older Americans — those retired or about to retire — are going through hell,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “They’re seeing the value of their 401(k) assets decline and facing risks that assets will go down even more in the future.”

OLDER HOUSEHOLDS TAKE BIG HIT

Equities held by households with members 60 or older

• Value at peak of market, Oct. 9, 2007: $5.12 trillion
• Value on Sept. 23, 2008: $3.94 trillion
• Loss in value: $1.18trillion
• Percentage change: 23 percent
Source: Center for Retirement Research

RELATED:
• No demographic group faces greater financial danger as Congress debates President Bush’s proposed $700 billion bailout of the financial services industry.

People over 60 own nearly half of all equities, and have seen this wealth — and their sense of security — plummet in recent months. Likewise, after paying mortgages for decades and counting on rising home values to help fund their retirements, they’ve been blind-sided by the fall in real-estate prices. And those with fixed incomes from pensions see inflation returning to gobble up their nest eggs.

This age group has matured mostly amid prosperity and knows of the historic hardships of the 1930s only from their parents’ stories. Now, ready to enjoy retirement, they may be asked to help pay higher taxes because of the blunders of financiers.

The fear and resentment of older Americans is evident on the Web site of AARP, the nation’s largest organization for those over 50.

“I’m tired of being treated like sheeple. I don’t trust anybody in authority any more,” complained one writer. “People who were careful, didn’t go into debt, saved and scrimped, are going to be the ones who have to pay for this bailout. They will see the value of their dollars go down and their taxes go up to pay for the recklessness of those we trusted to keep our country strong.”

“I feel AARP needs to urgently address the issue of the proposed bailout!” wrote another. “I feel it will result in massive inflation, and an erosion of all retirees’ standard of living.”

But some economists say older Americans especially need the bailout to succeed — and succeed quickly.

“They need stability in the market,” Munnell explained. “For most, it doesn’t make sense to sell now. The $700 billion so-called bailout seems like the best chance for them to enjoy some security. It certainly seems better than not doing anything.”

Massive wealth held by those over 60

At the end of the third quarter of 2007, U.S. households and nonprofit organizations had almost $10.5 trillion in equities, the Center for Retirement Research calculated from federal data. It estimated that almost half of this was held by people over the age of 60.

Since the broad stock market has fallen by 23 percent since its peak in October 2007, the Center said, Americans over the age of 60 have seen their equity wealth fall by nearly a fourth.

“The bailout could help retirees if it boosts the stock market,” acknowledged Richard Johnson, a principal research associate at the Urban Institute in Washington. “But there are potential down sides. What is unknown is how we’re going to pay for the bailout. Big tax increases in the future would hurt retirees. Paying for the bailout could siphon money from Social Security and Medicare.”

If the massive infusion of federal money sparks more inflation, the rising prices would also land hard on retirees, Johnson said. “There are cost-of-living adjustments for Social Security, but savings are not protected and traditional defined pensions usually don’t have inflation escalators built in.”

In addition to their savings and financial investments, the economic crisis has hit older Americans where they felt most secure — in their home equity .

“It’s one thing for people to be watching on the Internet on an hour-by-hour basis and see equity prices decline. At least they can quantify how much was lost,” said Jack VanDerhei, research director for the Employee Benefit Research Institute.

"It’s quite another thing to hear that the house you thought you were going to sell for half a million dollars to help pay for your retirement is now worth much less — but you don’t know how much less.”

Many people planned on using the appreciation in their paid-for houses to provide up to 50 percent of their retirement funds, he said.

And, especially in an era where many took equity out of their homes to pay children’s college costs and other expenses of middle age, older Americans are not immune to other aspects of the housing crisis.

Many in foreclosure or behind on mortgage payments

The AARP’s Public Policy Institute reported last week that 684,000 Americans older than 50 were either in foreclosure or delinquent in mortgage payments.

“The public perception is that older Americans are financially secure in their homes,” said Susan Reinhard, the institute’s director. “But the reality is that … hundreds of thousands of others are not and face unsettling uncertainty over their futures as homeowners.

“Older Americans depend on their homes both for shelter and as a retirement asset,” she pointed out. “Losing a home jeopardizes long-term financial security. For older Americans it also leaves them with limited time to recover.”

This particular crisis has another insidious aspect — older workers losing their jobs and retirement investments in one swoop, said John Laitner, an economics professor at the University of Michigan and director of the Michigan Retirement Research Center.

Despite warnings to diversity their 401(k) investments, many workers — especially at financial firms — put too much of their money into their own companies, he said.

“If something goes wrong with the company, you can lose your shirt. You can lose the value of your retirement account at the same moment you lose your job. It can really leave those people high and dry,” he said.

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Retirees, and those who’d like to be, worry about investments, expenses
By Amanda Finnegan, Joe Schoenmann, Las Vegas Sun, 9-26-2008

Some of those to be hardest hit by the flood of bad economic news cascading down from Wall Street are retired Las Vegas Valley residents who, even a month ago, might have believed their days of work were behind them.

Now many of them are sitting, waiting and watching as reports of bailouts, buyouts and failings threaten their life savings.

And their plans? They are as varied as the people of the Las Vegas area.

Some are going back to work.
Everyone’s watching his spending.
And some aren’t doing much worrying at all.

“Sure, I’m scared for my investments,” says Don Shreffner, 67, a retired truck driver visiting the Henderson Senior Center on Wednesday afternoon. “All of us have pulled out of the market. We’re all watching it and wondering what’s happened.”

Fixed pensions used to be the gold standard for company retirees, but many employers have switched to 401(k) accounts, whose payments vary with investment results, in recent decades.

That shift has left people such as Larry Dostal, 70, and his wife, Sharon, 63, guessing how Wall Street’s tumult will affect their nearly $300,000 in retirement investments. Some of that money is in a 401(k), but most is invested with American International Group, (AIG) the insurer that became the beneficiary of an $85 billion government bailout.

Right now, as a whole, it’s still OK, but I’m sure we will feel it later,” says Dostal, a retired financial manager who worked 35 years for the same company. He now works about 12 hours a week at Henderson’s Multigenerational Center. His wife, a nurse, had planned on retiring in a few years.

“But now we’re not so sure she’ll be able to,” Dostal says.

Perhaps with good reason. People who were counting on their investments to see them through retirement are in trouble.

“And it is likely that older Americans are among the most at risk, especially those who got aggressive with their investment portfolios,” Jeremy Aguero, principal analyst with Applied Analysis, a finance and economics consulting company, says.

The risk is exacerbated because people are living longer — and are counting on the fruits of their investments to sustain them longer than earlier generations.

This is the first generation that truly faces a crisis, versus those in the past who didn’t live long beyond their retirements,” says Hugh Anderson, vice president of ABD&F Group at Merrill Lynch and Las Vegas Chamber of Commerce government affairs chairman.

“The reality is that individuals, especially those who are already retired, recognize that there’s no additional income streams coming in while the purchasing ability of their dollar seems to shrink,” Anderson says. Anderson generally recommends that those with investment plans reexamine them, and those without plans “develop one to best minimize volatility.”

The key, he adds, “is to avoid getting caught up in the daily noise and recognize that the world is not going to come to an end. “I remind myself, and my clients, that I look out my window and cars are driving by and local businesses have cars in their lots. Things are muted, but they are not zero.”

That’s about how Gary Herndon, 58, who retired from the life insurance business three years ago, sees it. “If you look back over the last 70 years, you see these things happen and it takes the stock market about three to five years to recover,” he says, adding that he “doesn’t even look” at his 401(k) because he’s confident of the eventual turnaround.

Still, he and his wife are finding it difficult to make ends meet.They still go out for dinner, “but we don’t go here anymore, we go here,” Herndon says, shifting his hands from one side to the other.

Even so, after they pay the $1,100 a month mortgage, other expenses are forcing them to dip into their savings.

So he’s developing a marketing strategy for a business he wants to launch — he won’t elaborate except to say it could benefit from the problems people face in a tight economy.“We need the extra money,” he says.

Richard Carlson is rocking back and forth on his heels in a shopping mall on Green Valley Parkway, thinking about simpler times, when people “didn’t kick you when you were down.”

The lifelong Las Vegas area resident wonders how his $3,500 monthly Teamsters pension — earned over 30 years working as a bellhop, doorman and gardener — Social Security benefits and tiny Naval Reserve pension are going to hold out.

His monthly payments include $1,200 on a mortgage, $400 on a truck, and a big chunk of money to help his 94-year-old mother, whose own savings are being drained by the assisted-living home she lives in.

“I’ll tell you, I won’t be buying another new truck again; I’ll run this one into the ground,” he says. “I’m not traveling like I would. At the end of the month, I pretty much have nothing left.”

His question is whether a Great Depression, if that’s what all this turns into, will hurt or possibly help the country.

"I’ve cut way back, but that’s not so bad,” he says. “I just wonder if maybe what happens will wake us up.”

Robert Southerland, 73, says he’s known for years where the nation’s economy was headed. That’s why he doesn’t use retirement fund managers to handle his money. He does it all himself. “I invest in commodities, things that are real,” says Southerland, a part-time actor whose day job is selling for a window manufacturer.

His investment philosophy, he says, has saved him from some of the worry weighing on other retirees. “I’m not sitting pretty,” he adds. “But I saw this coming ... And you can’t take it too seriously. Stuff cycles back and forth. The price is always right, the only thing we don’t know is, when that price is coming around.”

Alex Richards contributed to this story.

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Retirees' Nest Eggs Take a Hit: South Florida Retirees Who Rely Heavily on Investment Income Are on the Front Lines of the Wall Street Debacle.

IStock Analyst, Thursday, September 25, 2008 6:00 AM
(Source: The Miami Herald)By Martha Brannigan, Monica Hatcher and Amy Sherman, The Miami Herald )

Like many American retirees, Gerry Lackey is fretting over how the turmoil in the financial markets will crimp his plans.

The retired lawyer, who counts on savings and investments for about half his income, has watched in dismay as major stock markets plummeted about 19 percent this year. "I don't know if I have enough years to allow the market to come back."

Retirees like Lackey, 69, who depend on investment income to help buy groceries and pay the bills, are among the most vulnerable groups scrambling for cover in the current market upheaval. South Florida, with its wealth of retirees, may suffer disproportionately because of its large number of older souls whose financial well being is closely tied to Wall Street.

"This whole debacle is so much harder on older people -- approaching retirement and those in retirement," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "They're jammed: They don't have the time and space to bounce back like someone in their 30s or 40s."

South Florida financial advisors and estate and trust attorneys say they are fielding numerous inquiries from nervous seniors. "There is a high degree of concern," said Michael A. Dribin, head of the estate planning and trusts practice group at law firm Broad and Cassel in Miami. "They may not be working anymore, and so are not in a position to put new funds into their savings."

TOUGH POSITION

Experts say many older folks were already poorly positioned for their golden years, as 401(k)s and IRAs, or Individual Retirement Accounts, have replaced traditional fixed retirement plans that dole out monthly checks.

According to AARP, only 20 percent of U.S. workers are covered by old-style defined-benefit retirement plans. That means most people are left to fend for themselves: They have to look to 401(k)s and IRAs for their nest egg.

The rub is many people haven't made adequate contributions to the voluntary plans. On top of that, a lot of people have tapped their IRAs and 401(k)s indiscriminately to pay for everyday expenses, luxury purchases or vacations.

"The balances were already modest," Munnell said. "Now, to have them hit by this storm is just a death blow."

Even before the current crisis, a key problem was people thought they could retire sooner than was realistic, experts say. "Too many people retire too early. They thought the market was going to generate 10 percent to 15 percent a year," said Margaret Starner, senior vice president and financial planner with Raymond James in Coral Gables.

The Outrage Was Palpable: Congress vs Bush

My Notes:

This last minute power play (before the elections eject the President, Paulson and other political appointees from their jobs) is highly offensive to me.

Yes, some major overhaul needs to take place to unclog the lending pipelines at banking and lending institutions. But, not this proposal.

What would it do?

It would give the Secretary of the Treasury, an appointed, not elected official, absolute control of the program and the money, with no questions asked. The wording is "...would make the Treasury secretary's decisions "non-reviewable" — including by "any court of law or any administrative agency." That is, if not unconstitutional (and that's definitely up for debate) absolutely outrageous.

The free capitalist market is based on risk and reward. If you invest in a venture, you reap rewards if it works, and pay the price if it doesn't. That's why there are business schools and advanced degrees given out to people who study business and risk and reward. It takes a lot of knowledge, experience and nerve...and should take ethics and fudiciary responsibility seriously to invest or run a business.

Little people, like me, trust in these people who run banks, investment funds, mutual funds and lend money, to use that knowledge and experience to run safe and profitable entities. But, I, like many of you have to sit here and watch my IRA's and 401K's melt away because of their actions and misdeeds.

As noted in the article below there are other ways to unclog the lending institutions' pipelines so money may flow freely; but if what Paulson and Berneke are proposing is the best way, then why does it start with $700 Billion? (It will turn out to be much more, I believe). What's wrong with starting with $50 or $100 Billion, with establishing the proper and correct procedures, establish meaningful oversight and reporting procedures and audits?

The Secretary of the Treasury can't possibly spend all that money before the elections; they don't know how many institutions would participate, how quickly it would work, or if the plan would work as envisioned.

There's already one holdover issue of the greed and bad judgment that started all this - executive pay. But, Paulson (former executive at Goldman-Sachs) resists this.

He thinks cutting executive pay would discourage companies from participating, and, oh, it would take time to review executive compensation packages. I wonder, just how fast does he think he can give away the money from Congress (read taxpayers)? And why do executives that have failed, failed like no executives before them, deserve huge salaries that range into millions of dollars a year, and golden parachutes?

"Paulson and Bernanke have warned lawmakers about the dire consequences of not acting — but these economic Doomsday scenarios have not been spelled out to the public." And, to me, the fearmongering, the bums rush remind me too much of how the Iraq War got funded

I do understand their argument about the falling dollar, and how it must be stablized. For instance, right now all oil is traded in US dollars. If we don't stablize the dollar, if we don't stop it's fall, there will be worldwide calls to trade/buy oil in Euros. That would be a calamity for the United States, with far reaching changes in our way of life.

And we must stop the volitility of the market; we must pay off our debts; we have been a superpower because we have always been a save haven for investors, and we have an outstandingly stable government. But now our national debt exceeds anything we ever dreamed of, and over $500 Billion in Treasury Bonds are owned by China and Japan, and over $60 Billion by Russia. We certainly don't need them selling off these huge investments or having this kind of economic power over us.

So, yes, we must do something quickly about the banks and mortgages, but to me this is not the answer - to consolidate all this power and money into the hands of an appointed Secretary of the Treasury, who wants no controls, whatsoever, from Congressional oversight to the Courts, yet still wants to protect the executives who blatently disregarded the basics of lending --security, assets, credit, and some of the borrower's money in the game.

Have a great day! Friday will soon be here.

Gloria


Why Congress Objects To The Bailout Plan
by Maria Godoy NPR, September 23, 2008 ·

The outrage was palpable Tuesday as the Senate Banking Committee grilled Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on the details of their $700 billion plan to bail out Wall Street with taxpayer funds. But lawmakers are hardly the only ones questioning whether the plan will work. Here's a look at some of the objections being raised on and off Capitol Hill.

It's A Huge Amount Of Power To Invest In The Treasury:

The Bush administration's plan would grant the Treasury secretary nearly absolute control of the $700 billion authorized by the bailout measure. The language in the measure sent to Congress would make the Treasury secretary's decisions "non-reviewable" — including by "any court of law or any administrative agency." That would give the Treasury secretary powers that are not only extraordinary but, some would say, also unconstitutional because of the lack of accountability.

Jon Macey, a professor and deputy dean of Yale Law School, says the bill contains the largest transfer of power from Congress to the administration that he has ever seen. Macey says Congress is handing over more power than it did in granting the executive branch leeway in the Patriot Act, and more powers than when authorizing combat through the war powers clause. He says the move amounts to a sidelining of Congress.

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, on Tuesday called the language in the plan "so troubling" and said it "cannot last" as part of the legislation.

It Represents A Fundamental Shift In The Way The U.S. Economy Works:

The Bush administration's plan to bail out the nation's financial institutions represents an unprecedented intervention in free markets. If the Wall Street bailout is adopted, Republican Sen. Jim Bunning of Kentucky said last week, "the free market for all intents and purposes is dead in America."

A fundamental principle of free-market capitalism is that investors take on big risks to reap big rewards — but they also assume any losses that occur. The government's plan would radically alter that model, leaving profits private while making losses public.

It's Not The Only Viable Option For Fixing This Mess:

In a nutshell, the Bush administration's plan would authorize up to $700 billion to let Treasury buy up bad mortgages from financial institutions. With these toxic assets off the books for firms, lenders would once again be willing to lend and the money would start flowing freely through the markets, the theory goes. Objections to the plan have come from both sides of the aisle — and from academics and economists who say it amounts to a huge handout to Wall Street without necessarily fixing the problem.

Many economists have proposed alternatives and alterations to the administration's proposal, some of which have been taken up by lawmakers. Details of the plan are still being negotiated, but here are some of the key points of contention:

Equity stakes: Rather than simply buying up bad loans and letting taxpayers assume all the risk, why not take shares in the financial firms in exchange, so that taxpayers could also participate in any potential profits? Banking Committee Chairman Dodd has proposed "contingency shares" that would only be issued if losses are realized on the assets bought up from a firm. In Tuesday's hearing, Paulson rejected the idea of equity shares, saying it would make the bailout program "ineffective" — though he didn't offer details on why that would be the case.

Valuing assets: There are already buyers for these toxic assets out there — they just aren't willing to buy them at prices that financial institutions find palatable. (In some cases, selling at those prices would make firms insolvent.) Many critics argue that the fundamental problem is that the financial markets lack capital, so the only way the government's plan will work is if the Treasury overpays for the assets; otherwise, why not just let investors buy them up?

So, how to price these assets? Technically, assets are only worth what a buyer is willing to pay for them. If no one wants to buy mortgage-backed securities, then right now they are worthless — but that doesn't mean they will always be worthless. Paulson has suggested that one way to set prices would be through what's known as a reverse auction, the goal of which is to drive prices down, rather than up.

But some economists note that reverse auctions work best when the assets being auctioned off are essentially identical. That's not the case with mortgage-backed securities: Some of them may have plenty of healthy, payment-producing mortgages in them, while others may be full of defaulted loans. If the government simply buys the securities with the lowest price, it may end up with $700 billion worth of the worst loans, critics say.

Executive-pay limits: Some lawmakers want any company that participates in the bailout to agree to slash the pay of its executives. After all, they say, those who created the mortgage mess shouldn't be allowed to profit from the bailout.

But Paulson has resisted this idea. He argues that pay cuts would discourage firms from using the program and would force thousands of firms to review their executive compensation before participating, a time-consuming process.

Lawmakers Are Being Urged To Act While Staring At The Barrel Of A Gun:

Congress is being asked to enact a fundamental restructuring of the U.S. economy — in one week. That's not a lot of time for lawmakers to weigh their options and the repercussions of their actions. In private meetings on the Hill, Paulson and Bernanke have warned lawmakers about the dire consequences of not acting — but these economic Doomsday scenarios have not been spelled out to the public.

Democratic Sen. Jon Tester of Montana told Paulson as much on Tuesday: "I fully feel the urgency … But the truth is that we have to be given the time to do this right, or it's not going to work and we'll be back here next year or in two years asking for another $700 billion or more."

With additional reporting by Laura Conaway and Adam Davidson.

Related Story: Bernanke, Paulson Face Skeptics On the Hill Despite Dire Warnings

Don't forget to check out the other new stories, listed at the top of the page under New Postings. Just scroll up and click.

$700 Billion: Treasury Relents on Key Points

Tuesday, September 23, 2008

Plan Now Envisions Oversight of Cleanup, New Homeowner Aid

By GREG HITT, DEBORAH SOLOMON and MICHAEL M. PHILLIPS

WASHINGTON -- The Bush administration and the Democratic Congress inched closer to agreement on a $700 billion plan to rescue troubled financial firms, with the Treasury making most of the concessions amid an increasing backlash from a range of economists and lawmakers.
The administration agreed to allow tougher oversight over the cleanup and provide fresh assistance to homeowners facing foreclosure, two Democratic priorities. In addition, negotiators neared agreement on allowing the government to take equity stakes in certain companies that participate in the rescue.

Congress may raise the cost of a $700 billion market-rescue deal by adding a new economic stimulus plan to benefit taxpayers, according to Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

But differences remain on two big items: possible limits on executive compensation at firms taking advantage of the bailout; and changes to bankruptcy law that would let judges adjust the terms of mortgages. And late Monday, negotiations were slowed -- but not derailed -- as Treasury was hit with congressional Republican concerns about the direction of talks, and as Democratic leaders heard a range of concerns from rank-and-file members of their party.

For both sides, the stakes are high. Treasury Secretary Henry Paulson has given Congress dire warnings of the consequences of inaction, and has no other plan that the Treasury thinks can address the magnitude of the problems. Congress, for its part, wants to reassert control over an increasingly expensive financial-system bailout in which, until now, it has played little part.
Investors, spooked by the lack of detail in the plan and the wrangling in Congress, sent the Dow Jones Industrial Average down 3.27%, or 372.75 points, erasing half the stock gains of late last week as the proposal was emerging.

The plan's reception -- from academics, politicians and commentators of varied stripes -- has been largely hostile, weakening the administration's negotiating position on the remaining issues. On executive pay, Republican presidential candidate Sen. John McCain has called for limits.
Sen. Richard C. Shelby, an Alabama Republican and the ranking Republican on the Senate Banking Committee, reiterated his distaste for the plan, calling it "neither workable nor comprehensive, despite its enormous price tag." Sen. Shelby, whose influential position makes his opposition a potential stumbling block, called for Congress to look for alternative solutions.
(Associated Press)

Even some business groups concede pay curbs might be unavoidable. "If we're talking huge infusions of your money and my money, there's going to be some limitations" on compensation, said Bruce Josten, executive vice president of government affairs at the U.S. Chamber of Commerce.

Mr. Paulson has argued that pay limits shouldn't be part of this plan because they could discourage firms from participating. Treasury is also arguing that it isn't feasible to expect thousands of companies to change their executive compensation structure just to participate in the program and says such a move would discourage small banks and credit unions from participating.

Some lawmakers are looking to call Mr. Paulson's bluff, thinking that many institutions would find the choice between limits on executive pay and bankruptcy an easy one. But Treasury is insisting that is a false choice and that the program isn't aimed at preventing firms from filing for bankruptcy but is instead supposed to help relieve pressure on firms that are being weighed down by a glut of assets they can't sell.

The Treasury is looking for a compromise, a structure that satisfies Congress yet doesn't punish firms that want to participate, said people familiar with the matter. One potential option is for executive compensation curbs to apply in cases where Treasury structures a deal where it injects a significant amount of capital into a firm.

Under the plan, details of which are still being worked out, the Treasury would buy from financial firms as much as $700 billion of the souring mortgages and mortgage securities that lie at the heart of the financial crisis.

House Financial Services Chairman Barney Frank (D., Mass.), who is leading negotiations in Congress, said Democratic leaders don't intend to stand in the way of the package. "We do agree you should move quickly," he said. "We understand that bad market choices have put us in a situation where something has to happen." Democratic leaders are aiming for votes in the House and Senate late this week.

Economists and commentators from both ends of the political spectrum, including former House Speaker Newt Gingrich, have heaped criticism on the plan. "Is there anyone who isn't a backlasher?" asked Jared Bernstein, senior economist at the Economic Policy Institute, a left-of-center think tank. "I haven't seen people saying, 'Good plan -- like it.'"

Mr. Bernstein noted that the government is in a bind: Paying rock-bottom prices for shaky mortgage-backed securities might hurt the firms that the bailout is supposed to rescue, but if the government pays a higher price, taxpayers might end up with securities it can't resell except at a big loss.

"I think it's awful," said Allen Meltzer, a former Reagan economic adviser now teaching at Carnegie Mellon University. "It puts private interests ahead of the public interest." Mr. Meltzer pointed to past occasions when, he said, doomsayers warned of financial panic, the government resisted the urge to bail out the markets, and nothing terrible ensued. Among those he cited was President Richard Nixon's decision not to rescue the commercial-paper market in the aftermath
of the collapse of the Penn Central railroad.

Former St. Louis Federal Reserve Bank President William Poole, a senior fellow at the free-market Cato Institute, said, "The Treasury will be stuck with the least-attractive paper, and that means taxpayer losses will be large."

C. Fred Bergsten, director of the Peterson Institute for International Economics, called the package essential, given the unusual circumstances. He predicted taxpayers would ultimately be on the hook for about $100 billion, once the government resells the securities it plans to take off financial firms' hands.

Discontinued to simmer among rank-and-file Republicans and Democrats. In Republican ranks, especially among conservatives, there are concerns over the cost and over the scope of powers that would be concentrated with Secretary Paulson.
"Congress needs to slow down, take a breath," said Rep. Mike Pence, an Indiana Republican. He acknowledges the country faces a crisis but still intends to vote against the Treasury plan. House Minority Leader John Boehner, while he has pushed for some action, is not yet committed to voting for the legislation.

In some ways, Mr. Paulson isn't the ideal pitchman. A Wall Street titan, he spent 32 years at Goldman Sachs Group Inc. and has a personal fortune estimated at $500 million. A former deal maker, he is comfortable in the language of Wall Street, talking with ease about commercial paper, debt spreads and Treasury yields.

But Congress wants the plan to benefit Main Street, not Wall Street, and Mr. Paulson has tried to shift his language to emphasize how the plan will help ordinary citizens. At a news conference to announce the plan, he talked at length about the threats to the financial markets, ending with a passage about how it would affect ordinary Americans. U.S. purchases of distressed assets would help people, Mr. Paulson says, by enabling lenders to resume making loans for homes, cars and small businesses, and by keeping the economy from sliding into a deep decline that would cost jobs.

Mr. Paulson is scheduled to testify Tuesday and Wednesday before House and Senate committees, giving him a chance to speak to lawmakers' concerns. (Associated Press)

One broad area of agreement involves congressional oversight. Rep. Frank said the Treasury agreed to an independent board to monitor the bailout and report on its progress to Congress and the public. The board wouldn't have authority to veto Treasury investment decisions, and the bailout's launch wouldn't be delayed while a board was being put in place.

While details are still being worked out, both sides have also agreed to a measure that would allow -- but not require -- the Treasury to take an equity stake in a financial institution that sells assets to the government. Whether it did so might be dependent on the size of the capital injection the government makes when it buys the assets, according to a person familiar with the matter.

There are precedents for the government taking stakes in private companies, dating back to the bailout of Chrysler Corp. in 1979, when the government got warrants to buy Chrysler shares.

Most recently, the Federal Reserve took warrants in American International Group Inc., representing a majority equity interest in the big insurer.

There has also been discussion among some Democratic leaders of breaking apart the package, with swift initial action on about a third of the borrowing authority, a senior congressional official said. Approval of the balance of the funding would come later this year or early next year, giving lawmakers a chance to assess the success of the bailout and consider additional long-term overhauls.

The plan would include help for distressed homeowners. Officials at the Federal Deposit Insurance Corp., the Federal Housing Administration and Fannie Mae and Freddie Mac would all be deployed to help adjust the loans of borrowers who were behind on payments but deemed creditworthy. The bill also includes tenant protections, to ensure that renters in homes headed for foreclosure aren't evicted.


Write to Greg Hitt at greg.hitt@wsj.com, Deborah Solomon at deborah.solomon@wsj.com and Michael M. Phillips at michael.phillips@wsj.com

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BAILOUT: Costs Higher Than You Think

Intervention buoys the financial sector at a time when consolidation is what the economy needs.
Colin Barr, senior writer
Last Updated: September 19, 2008: 5:32 PM EDT

FORTUNE (New York) -- Henry Paulson and Ben Bernanke have saved us, for now, from a market meltdown - but at the cost of allowing the folks who caused the current crisis to keep ducking reality.

In the long run, guess who gets to bear that cost?

The Treasury secretary and Federal Reserve chairman have spent September dashing off blank check after blank check in a bid to quell turbulent markets. Since Sept. 5, the feds have pledged $200 billion to shore up mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), $85 billion to prop up insurer AIG (AIG, Fortune 500), and $50 billion to guarantee money-market funds.

Then there are the untold sums the U.S. might spend under the plan Paulson unveiled Friday to set up a bad bank to relieve institutions of their troubled mortgage assets. And let's not forget the hundreds of billions the Fed has poured into the markets in the name of maintaining liquidity.

Even in a U.S. economy that produces $14 trillion worth of goods and services a year, that's a lot of cash.

Spending all that money, sooner or later, will intensify long-standing questions about the nation's fiscal health, possibly at the expense of another drop in the value of the dollar.

"We're going to be sorting this out for years," says Howard Simons, a strategist at Bianco Research in Chicago who questions the blitz of taxpayer spending on programs that haven't even been debated in Congress.

Ultimately, what could prove to be the most expensive aspect of the bailout spree is the message the government is sending to firms in which the market has lost confidence. Prudent management, it seems, will be punished, while the status quo - however unhealthy - must be maintained at all costs.

The strong stock-market rally of the past two days aside, intervention that fails to foster a shakeout of weaker firms will only delay the reckoning that must occur before a sustainable economic recovery can take shape.

"We continue to believe that the financial sector is in need of massive consolidation because the sector simply has too much lending capacity left over from the credit bubble," Merrill Lynch investment strategist Rich Bernstein writes Friday. "History shows well that consolidation is the primary driver of post-bubble economies."

The upside to down

Though the free fall in financial shares over recent weeks wasn't pretty to watch, it had the sanguine effect of forcing businesses with questionable fundamentals to confront an uncertain future. Take the case of Merrill Lynch (MER, Fortune 500) chief John Thain.

Thain took over at the struggling broker last November, promising to "continue to grow Merrill's global business and add value to our customers and our shareholders." He then spent 10 months recognizing more than $50 billion in losses, mostly on risky mortgage-related debt gone bad, and raising almost $30 billion in new capital, in a furious fight to keep the 94-year-old firm independent.

But in the meantime, the market was concluding that Merrill and its rivals at Lehman Brothers, Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) were pursuing a business model - the standalone trading firm that borrows heavily in the short-term debt markets - that makes no sense in an era of risk aversion and rising funding costs.

Thain, after a game fight, conceded to the market's view Monday, when Merrill - facing the prospect of a run on its shares after Lehman imploded - agreed to sell itself to Bank of America (BAC, Fortune 500) for $44 billion in stock.

Thain, of course, had seen his peer Dick Fuld run Lehman Brothers into the ground by refusing to accept the low-ball offers of potential partners, a stand that ended up putting thousands of Lehman workers out of work. Thain chose instead to take a deal that likely saved most of

Merrill's 60,000-plus workers.

And yet now - with the feds organizing a bailout and banning short-selling, the practice of betting against a company in the stock market - Thain's decisiveness seems misplaced. Rather than acknowledging economic reality and selling his firm, he could have waited for a handout and Merrill could have lived to see another day, it now appears.

Dodging the tough calls

Thain's rivals seem to be reaping the rewards of expanded federal largesse. Morgan Stanley, after plunging as low as $16 a share in panicked trading Wednesday afternoon, has recovered to the low $30s, possibly forestalling the need for the firm to find a merger partner such as Wachovia (WB, Fortune 500).

CEO John Mack, who responded to his firm's plunge with a memo to employees blaming short-sellers, surely likes the way this week has turned out.

But for the rest of us, the feds' rush to defend teetering financial firms only defers the tough decisions that will need to be made before this crisis subsides - at the expense, perhaps, of repeating Japan's so-called lost decade of economic stagnance after its property bubble collapsed around 1990.

History shows that setting up bad banks without forcing financial firms' managers to confront their problems won't solve anything.

"This seems to us," Bernstein writes, "to be a very Japanese approach to solving a credit crisis."

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