By Associated Press Saturday, September 20, 2008
WASHINGTON - The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained today by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
"We’re going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."
The White House and congressional leaders hoped the developing legislation could pass as early as next week.
Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their distressed mortgage-related assets on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.
Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we’re going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system."
"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn’t going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."
Sen. Chuck Schumer, D-N.Y., called the proposal "a good foundation," but raised concerns it "includes no visible protection for taxpayers or homeowners."
Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.
Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.
If passed by Congress, the plan would give the Treasury secretary broad power to buy and sell the mortgage-related investments without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government’s first use of the rescue power, and every six months after that.
While the proposal contains no requirement that the government receive anything from banks in return for unloading their bad assets, it would allow the Treasury Department to designate financial institutions as "agents of the government," and mandate that they perform any "reasonable duties" that might entail.
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets — such as loans that are delinquent but not in default — and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning’s market openings, said Keith Hennessey, the director of the president’s economic council.
The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.
Showing posts with label federal bailout. Show all posts
Showing posts with label federal bailout. Show all posts
9/21/2008
Congress Pledges Action
Rescue Talks Coming With White House as Differences Surface
By GREG HITT SEPTEMBER 20, 2008, Wall Street Journal
WASHINGTON -- Congressional leaders Friday vowed speedy action on a rescue plan for U.S. financial markets. But dangers lurked on Capitol Hill, as Democrats pushed for additional measures to aid the economy and conservative Republicans griped about the huge government bailout.
With a little more than 40 days to go before an election where control of both the White House and Congress are up for grabs, some lawmakers suggested the market-rescue package should offer fresh relief to troubled borrowers.
Doing so, however, could turn the bill into a "Christmas tree," by hanging unrelated measures on it and perhaps endanger its passage. Meanwhile, finance-industry lobbyists began fighting to block certain proposals, such as limits to executive pay.
Lawmakers from both parties and Bush administration officials plan negotiations over the weekend to pull together details of the program. A centerpiece of the proposal will be a new government authority empowered to buy hundreds of billions of dollars in bad securities and loans from troubled financial institutions.
The White House is urging Congress to act rapidly to calm turbulent markets. Democratic leaders said they hope to push the measure through the House and Senate by the end of next week.
House Speaker Nancy Pelosi said Democrats "are committed to quick, bipartisan action." A spokesman for Senate Majority Leader Harry Reid said the Nevada Democrat intends to "move heaven and earth" to get the bill done, though in a private meeting late Thursday night he was less sanguine, warning it can take a couple of days in the Senate "to pass a bill to flush the toilet," congressional officials said.
Just a few days ago, Mrs. Pelosi and Mr. Reid were saying they didn't expect major action on financial-markets issues before the current session ends. But that turned around overnight on Thursday after briefings from Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and others.
Senate Banking Committee Chairman Chris Dodd (D., Conn.) said the looming threats to the U.S. economy outlined by Mr. Paulson in a meeting with lawmakers late Thursday have galvanized lawmakers. "I've been here 28 years. I've never been in a more sobering moment," Mr. Dodd said Friday.
Until Friday, Capitol Hill was mired in partisan bickering over gas prices, an ethics inquiry into a top Democratic committee chairman and finger-pointing over the state of the teetering economy. But those issues have receded in the face of the crisis in the credit markets.
"Members of Congress need to set politics aside," said Missouri Rep. Roy Blunt, the House's second-ranking Republican, in comments echoed across Capitol Hill.
"We're all on the same page," said Sen. Jon Tester (D., Mont.), after emerging from a closed-door meeting of the Senate Banking Committee. "We understand this is bigger than anything we've faced in a long, long time."
New Hampshire Sen. Judd Gregg, the senior Republican on the Senate Budget Committee, pegged the cost of the bailout at "somewhere in the $500 billion range." Alabama's Richard Shelby, the senior Republican on the Senate Banking Committee, said the final figure could be closer to "a trillion dollars."
For Democrats, the unfolding crisis is forcing difficult choices about the party's priorities ahead of the election. Democratic leaders want the White House to support additional measures to stimulate the economy, such as expanded jobless benefits. Mrs. Pelosi pressed Mr. Paulson on that issue Friday.
At this point, the administration is deflecting the Democratic overtures. But the unfolding crisis could give Democrats new leverage to wring concessions from the White House: either in a must-pass budget bill later this month or the emerging financial-services bill.
Mr. Dodd said the financial-services bill shouldn't become a "Christmas tree" but should reflect Democratic priorities. One idea bandied about among Democrats would create a special funding mechanism that would help homeowners get out from underneath troubled mortgages.
Another proposal would give federal bankruptcy judges enhanced authority to adjust mortgages to prevent borrowers from tilting into foreclosure. Banking-industry lobbyists say they will fight proposals to amend mortgages in bankruptcy.
Mr. Tester said the goal is to make sure "we don't do something that makes Wall Street happy, but doesn't take care of Main Street."
House Republican Leader John Boehner (R., Ohio) urged Congress and the administration to keep the bill "as simple and straightforward as possible," warning any attempt to "score political points or fit a partisan agenda" into the measure will only delay action.
So far, no one on Capitol Hill was moving to openly oppose the administration plan. But in Republican ranks, conservatives were growing restless with the steady drumbeat of government intervention.
By GREG HITT SEPTEMBER 20, 2008, Wall Street Journal
WASHINGTON -- Congressional leaders Friday vowed speedy action on a rescue plan for U.S. financial markets. But dangers lurked on Capitol Hill, as Democrats pushed for additional measures to aid the economy and conservative Republicans griped about the huge government bailout.
With a little more than 40 days to go before an election where control of both the White House and Congress are up for grabs, some lawmakers suggested the market-rescue package should offer fresh relief to troubled borrowers.
Doing so, however, could turn the bill into a "Christmas tree," by hanging unrelated measures on it and perhaps endanger its passage. Meanwhile, finance-industry lobbyists began fighting to block certain proposals, such as limits to executive pay.
Lawmakers from both parties and Bush administration officials plan negotiations over the weekend to pull together details of the program. A centerpiece of the proposal will be a new government authority empowered to buy hundreds of billions of dollars in bad securities and loans from troubled financial institutions.
The White House is urging Congress to act rapidly to calm turbulent markets. Democratic leaders said they hope to push the measure through the House and Senate by the end of next week.
House Speaker Nancy Pelosi said Democrats "are committed to quick, bipartisan action." A spokesman for Senate Majority Leader Harry Reid said the Nevada Democrat intends to "move heaven and earth" to get the bill done, though in a private meeting late Thursday night he was less sanguine, warning it can take a couple of days in the Senate "to pass a bill to flush the toilet," congressional officials said.
Just a few days ago, Mrs. Pelosi and Mr. Reid were saying they didn't expect major action on financial-markets issues before the current session ends. But that turned around overnight on Thursday after briefings from Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and others.
Senate Banking Committee Chairman Chris Dodd (D., Conn.) said the looming threats to the U.S. economy outlined by Mr. Paulson in a meeting with lawmakers late Thursday have galvanized lawmakers. "I've been here 28 years. I've never been in a more sobering moment," Mr. Dodd said Friday.
Until Friday, Capitol Hill was mired in partisan bickering over gas prices, an ethics inquiry into a top Democratic committee chairman and finger-pointing over the state of the teetering economy. But those issues have receded in the face of the crisis in the credit markets.
"Members of Congress need to set politics aside," said Missouri Rep. Roy Blunt, the House's second-ranking Republican, in comments echoed across Capitol Hill.
"We're all on the same page," said Sen. Jon Tester (D., Mont.), after emerging from a closed-door meeting of the Senate Banking Committee. "We understand this is bigger than anything we've faced in a long, long time."
New Hampshire Sen. Judd Gregg, the senior Republican on the Senate Budget Committee, pegged the cost of the bailout at "somewhere in the $500 billion range." Alabama's Richard Shelby, the senior Republican on the Senate Banking Committee, said the final figure could be closer to "a trillion dollars."
For Democrats, the unfolding crisis is forcing difficult choices about the party's priorities ahead of the election. Democratic leaders want the White House to support additional measures to stimulate the economy, such as expanded jobless benefits. Mrs. Pelosi pressed Mr. Paulson on that issue Friday.
At this point, the administration is deflecting the Democratic overtures. But the unfolding crisis could give Democrats new leverage to wring concessions from the White House: either in a must-pass budget bill later this month or the emerging financial-services bill.
Mr. Dodd said the financial-services bill shouldn't become a "Christmas tree" but should reflect Democratic priorities. One idea bandied about among Democrats would create a special funding mechanism that would help homeowners get out from underneath troubled mortgages.
Another proposal would give federal bankruptcy judges enhanced authority to adjust mortgages to prevent borrowers from tilting into foreclosure. Banking-industry lobbyists say they will fight proposals to amend mortgages in bankruptcy.
Mr. Tester said the goal is to make sure "we don't do something that makes Wall Street happy, but doesn't take care of Main Street."
House Republican Leader John Boehner (R., Ohio) urged Congress and the administration to keep the bill "as simple and straightforward as possible," warning any attempt to "score political points or fit a partisan agenda" into the measure will only delay action.
So far, no one on Capitol Hill was moving to openly oppose the administration plan. But in Republican ranks, conservatives were growing restless with the steady drumbeat of government intervention.
What The Feds and Wall Street Are Proposing
The federal government is asking Congress for $700 billion to buy up distressed assets as part of its plan to help halt the worst financial crisis since the 1930s.
The Treasury Department sent Congress legislative language last night asking for broad authority to buy assets from U.S. financial institutions. The request is just two-and-a-half pages and contains a broad outline of how this new entity would function. The government wanted to keep the plan simple, in part because it wants the flexibility to adjust what its doing as market conditions change, a person familiar with the matter said. (Associated Press )
Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets. The bare-bones request may irk Congress, which is already expressing concerns about the plan. It could present an opportunity for Congress to stack the bill with other provisions, such as more housing relief.
The proposal would give the Treasury secretary significant leeway in buying, selling and holding residential or commercial mortgages, as well as "any securities, obligations or other instruments that are based on or related to such mortgages."
The only limitation would be that purchases couldn't exceed $700 billion outstanding at any one time. That figure compares with the $515 billion President George W. Bush included in his fiscal 2009 base budget request for the Department of Defense. The plan also calls for an increase in the public debt limit, boosting it to $11.3 trillion.
Congress already voted once this year to increase the debt limit, to $10.6 trillion as part of omnibus housing legislation that included broader federal authority over Fannie Mae and Freddie Mac. The two mortgage firms have since fallen under government control.
Democrats will work with the Bush administration on enacting legislation swiftly, but will insist on adding measures to protect taxpayers and tighten regulation of the industry, said House Speaker Nancy Pelosi (D., Calif.).
"We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform," she said.
Other leading congressional Democrats struck similar themes in statements issued Saturday. Senate Majority Leader Harry Reid (D., Nev.) struck a more critical tone, saying that "while the Bush proposal raises some serious issues, we need to resolve them quickly."
Sen. Charles Schumer (D., N.Y.) in a statement released by his office, offered a mixed reaction to the proposal. "This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Lawmakers have said they want to add additional provisions to the Treasury proposal, including more help for cash-strapped homeowners facing foreclosure. Financial Services Chairman Barney Frank (D., Mass.) has floated the idea of including limits on executive compensation for firms that take advantage of government aid.
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee met with Treasury staff at noon to discuss the proposal. No lawmakers attended the meeting.
Aides were "trying to understand this and get our hands around it" because "a lot of aspects of this are unprecedented," according to one senior Democratic aide who was present at the meeting.
Lawmakers want to make sure that taxpayers will be protected and that "we're not misfiring," the aide added.
Treasury 'Fact Sheet'
The Treasury Department on Saturday evening issued a "fact sheet" on the proposal, saying, "Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth."
Congressional Republicans have sent early signals that they oppose the addition of other measures to the Treasury proposal, such as an economic stimulus package pushed by Democrats. House Minority Leader John Boehner (R., Ohio) said in a statement that "efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve."
House and Senate lawmakers, working hand-in-hand with the Bush administration, are expected to work throughout the weekend on finalizing the details of the plan. Congressional leaders have targeted a vote on the comprehensive plan for the coming week, though that will depend on the ability of the White House and Congress to agree on a final product.
The proposal would expire after two years but would allow the government to hold the assets purchased from financial firms -- which must be headquartered in the U.S. -- for as long as is deemed necessary by the Treasury. Any assets purchased through the program would have to be tied to mortgages originated before Sept. 17 of this year.
The plan offered to Congress also gives the Treasury legal immunity from any lawsuits. "Decisions by the secretary pursuant to the authority are non-reviewable … and may not be reviewed by any court of law or any administrative agency," the proposal says.
The proposal doesn't detail how Treasury would manage the assets, but does give Paulson the authority to hire private financial institutions to conduct the program, as well as to create other entities to purchase mortgage assets and issue debt.
"Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets," the Treasury fact sheet said.
The Treasury "fact sheet" suggests very broad powers for the Treasury secretary under the proposal. The Treasury secretary "will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets," the fact sheet said.
"Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury's general fund for the benefit of American taxpayers," the fact sheet said.
Devil Is in the Details
The nation's top economic generals pressed Congress to move with extraordinary speed -- by next week -- to authorize a plan to bail out the U.S. financial system, but are still working to iron out enormously complicated details likely to generate controversy.
Markets soared Friday for a second straight day on news of the discussions. The Dow Jones Industrial Average rose 368.75, or 3.35%. Financial stocks led the rebound. Stock markets in Asia and Europe also rose sharply. The news also helped improve credit markets: Investors poured out of the ultra-safe Treasury bond market Friday, sending yields on the three-month T-bill up to 1% after briefly touching 0% on Wednesday.
Still, though members of Congress briefed on the idea generally voiced approval, lobbyists, policymakers and financial-services executives geared up for a fight over the details. (See related story.)
Among the measures announced Friday, the Treasury temporarily extended insurance, similar to that on bank deposits, to money-market mutual funds and the Federal Reserve said it would buy commercial paper from the funds. The Securities and Exchange Commission, meanwhile, banned short-selling of 799 financial stocks -- a financial bet that they will fall in price -- for at least 10 days. And the Treasury said it -- along with mortgage giants Fannie Mae and Freddie Mac, recently taken over by the government -- would step up their purchases of mortgage-backed securities to help keep the housing market afloat.
The most ambitious part of the government plan is to create a new entity to purchase impaired assets from financial firms. The process could work as a type of reverse auction, in which the government would buy from the institution that sells its assets for the lowest bid.
However, the government may find itself in a quandary: Does it pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar?
The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets. The Treasury department, which hasn't commented on specifics about the plan, is expected to propose issuing debt in $50 billion tranches to fund the purchases.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion," Mr. Paulson said at a morning press conference.
Others aren't sold. Douglas Elmendorf, a senior fellow at Brookings Institution and former Treasury official, said while inaction is a risk, the Treasury's plan could cost taxpayers a huge amount of money. "This approach saddles taxpayers with significant downside risk but limited potential upside gain," Mr. Elmendorf said.
Broad, Systematic Approach
The moves are an effort to take a broad, systematic approach to the financial crisis after a series of incremental moves failed to stem the turmoil. The crisis has worsened over the past two weeks as credit downgrades, bad investments and falling stock prices have felled financial institutions such as Lehman Brothers Holdings Inc. and American International Group Inc., a huge insurer.
While the Treasury department awaits approval from Congress it is also moving to start buying up mortgage-backed securities through existing mechanisms. The Federal Housing Finance Agency, a division of government that is effectively running both Fannie Mae and Freddie Mac, immediately directed both companies to purchase more mortgage-backed securities to help fund lending markets.
The Treasury department also plans to expand a program it implemented in the wake of its takeover of Fannie and Freddie to buy up to $10 billion in mortgage-backed securities debt issued by the companies in the open market. The Federal Reserve and the SEC also acted to stem the crisis.
The Fed acted before U.S. markets opened, effectively coming to the rescue of the money-market mutual-fund industry. Worried that money-market mutual funds weren't liquid enough to handle a wave of redemptions from nervous investors, the Fed said it would use its so-called discount window to lend up to $230 billion to the industry -- via commercial banks -- against illiquid asset-backed commercial paper which is widely held by money-market funds.
The asset-backed commercial paper market went through severe strain last year, because of holdings of troubled subprime mortgage debt instruments. Fed staff say that isn't a problem for the industry now, and that most of the assets backing the instruments it will lend against are auto loans and credit-card loans. The paper the Fed is financing is high-rated and Fed staff don't see it as a money-losing step.
The central bank is taking on a potentially big risk: If these assets fall in value or default, it may be on the hook, because the Fed cannot claim anything other than collateral as repayment. Officials say the assets are safe and the move is a temporary measure to provide liquidity to the market.
In another bid to provide liquidity, The Fed Friday, said it would buy short-term debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks through primary dealers. The Fed said it would buy up to $69 billion of these securities, called discount notes, to ease the crunch in the market.
The SEC ban on short selling of some financial stocks -- an attempt to stem some of the worst stock-market slides in years -- is effective immediately and will last 10 days, but could be extended for up to 30 days.
In short selling, traders borrow shares of stock and sell them, hoping the price of the shares declines and they can profit by buying them back at a lower price.
The SEC said it was acting in concert with the U.K.'s Financial Services Authority. The FSA said Thursday it would ban short selling in financial stocks until January, and would review the ban in 30 days.
Regulators in other countries quickly followed suit by tightening their own rules on short selling, including Ireland, Australia and France.
Bank of France governor Christian Noyer said Friday that the country's stock-market watchdog Autorité des Marchés Financiers would move to impose new restrictions on short-selling.
Commercial banks expressed skepticism about the Treasury department plan. They fear it may prompt investors to pull their money out of banks and place it in money-market mutual funds, which often have higher rates of return than commercial bank savings accounts.
The Independent Community Bankers of America in a statement said it was extremely concerned about the Treasury's announced mutual-fund guaranty program. "ICBA cautions
Treasury not to propose any solution to Wall Street's turmoil that will drain funding from community banks, constraining their ability to fund local economic activity and growth and serve local communities across the nation."
—Jon Hilsenrath, Kara Scannell, Peter McKay, Joellen Perry, Elizabeth Rappaport, James R. Hagerty, Corey Boles and Cassell Bryan-Low contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Michael R. Crittenden at michael.crittenden@dowjones.com and Damian Paletta at damian.paletta@wsj.com
.
.
The Treasury Department sent Congress legislative language last night asking for broad authority to buy assets from U.S. financial institutions. The request is just two-and-a-half pages and contains a broad outline of how this new entity would function. The government wanted to keep the plan simple, in part because it wants the flexibility to adjust what its doing as market conditions change, a person familiar with the matter said. (Associated Press )
Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets. The bare-bones request may irk Congress, which is already expressing concerns about the plan. It could present an opportunity for Congress to stack the bill with other provisions, such as more housing relief.
The proposal would give the Treasury secretary significant leeway in buying, selling and holding residential or commercial mortgages, as well as "any securities, obligations or other instruments that are based on or related to such mortgages."
The only limitation would be that purchases couldn't exceed $700 billion outstanding at any one time. That figure compares with the $515 billion President George W. Bush included in his fiscal 2009 base budget request for the Department of Defense. The plan also calls for an increase in the public debt limit, boosting it to $11.3 trillion.
Congress already voted once this year to increase the debt limit, to $10.6 trillion as part of omnibus housing legislation that included broader federal authority over Fannie Mae and Freddie Mac. The two mortgage firms have since fallen under government control.
Democrats will work with the Bush administration on enacting legislation swiftly, but will insist on adding measures to protect taxpayers and tighten regulation of the industry, said House Speaker Nancy Pelosi (D., Calif.).
"We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform," she said.
Other leading congressional Democrats struck similar themes in statements issued Saturday. Senate Majority Leader Harry Reid (D., Nev.) struck a more critical tone, saying that "while the Bush proposal raises some serious issues, we need to resolve them quickly."
Sen. Charles Schumer (D., N.Y.) in a statement released by his office, offered a mixed reaction to the proposal. "This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Lawmakers have said they want to add additional provisions to the Treasury proposal, including more help for cash-strapped homeowners facing foreclosure. Financial Services Chairman Barney Frank (D., Mass.) has floated the idea of including limits on executive compensation for firms that take advantage of government aid.
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee met with Treasury staff at noon to discuss the proposal. No lawmakers attended the meeting.
Aides were "trying to understand this and get our hands around it" because "a lot of aspects of this are unprecedented," according to one senior Democratic aide who was present at the meeting.
Lawmakers want to make sure that taxpayers will be protected and that "we're not misfiring," the aide added.
Treasury 'Fact Sheet'
The Treasury Department on Saturday evening issued a "fact sheet" on the proposal, saying, "Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth."
Congressional Republicans have sent early signals that they oppose the addition of other measures to the Treasury proposal, such as an economic stimulus package pushed by Democrats. House Minority Leader John Boehner (R., Ohio) said in a statement that "efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve."
House and Senate lawmakers, working hand-in-hand with the Bush administration, are expected to work throughout the weekend on finalizing the details of the plan. Congressional leaders have targeted a vote on the comprehensive plan for the coming week, though that will depend on the ability of the White House and Congress to agree on a final product.
The proposal would expire after two years but would allow the government to hold the assets purchased from financial firms -- which must be headquartered in the U.S. -- for as long as is deemed necessary by the Treasury. Any assets purchased through the program would have to be tied to mortgages originated before Sept. 17 of this year.
The plan offered to Congress also gives the Treasury legal immunity from any lawsuits. "Decisions by the secretary pursuant to the authority are non-reviewable … and may not be reviewed by any court of law or any administrative agency," the proposal says.
The proposal doesn't detail how Treasury would manage the assets, but does give Paulson the authority to hire private financial institutions to conduct the program, as well as to create other entities to purchase mortgage assets and issue debt.
"Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets," the Treasury fact sheet said.
The Treasury "fact sheet" suggests very broad powers for the Treasury secretary under the proposal. The Treasury secretary "will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets," the fact sheet said.
"Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury's general fund for the benefit of American taxpayers," the fact sheet said.
Devil Is in the Details
The nation's top economic generals pressed Congress to move with extraordinary speed -- by next week -- to authorize a plan to bail out the U.S. financial system, but are still working to iron out enormously complicated details likely to generate controversy.
Markets soared Friday for a second straight day on news of the discussions. The Dow Jones Industrial Average rose 368.75, or 3.35%. Financial stocks led the rebound. Stock markets in Asia and Europe also rose sharply. The news also helped improve credit markets: Investors poured out of the ultra-safe Treasury bond market Friday, sending yields on the three-month T-bill up to 1% after briefly touching 0% on Wednesday.
Still, though members of Congress briefed on the idea generally voiced approval, lobbyists, policymakers and financial-services executives geared up for a fight over the details. (See related story.)
Among the measures announced Friday, the Treasury temporarily extended insurance, similar to that on bank deposits, to money-market mutual funds and the Federal Reserve said it would buy commercial paper from the funds. The Securities and Exchange Commission, meanwhile, banned short-selling of 799 financial stocks -- a financial bet that they will fall in price -- for at least 10 days. And the Treasury said it -- along with mortgage giants Fannie Mae and Freddie Mac, recently taken over by the government -- would step up their purchases of mortgage-backed securities to help keep the housing market afloat.
The most ambitious part of the government plan is to create a new entity to purchase impaired assets from financial firms. The process could work as a type of reverse auction, in which the government would buy from the institution that sells its assets for the lowest bid.
However, the government may find itself in a quandary: Does it pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar?
The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets. The Treasury department, which hasn't commented on specifics about the plan, is expected to propose issuing debt in $50 billion tranches to fund the purchases.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion," Mr. Paulson said at a morning press conference.
Others aren't sold. Douglas Elmendorf, a senior fellow at Brookings Institution and former Treasury official, said while inaction is a risk, the Treasury's plan could cost taxpayers a huge amount of money. "This approach saddles taxpayers with significant downside risk but limited potential upside gain," Mr. Elmendorf said.
Broad, Systematic Approach
The moves are an effort to take a broad, systematic approach to the financial crisis after a series of incremental moves failed to stem the turmoil. The crisis has worsened over the past two weeks as credit downgrades, bad investments and falling stock prices have felled financial institutions such as Lehman Brothers Holdings Inc. and American International Group Inc., a huge insurer.
While the Treasury department awaits approval from Congress it is also moving to start buying up mortgage-backed securities through existing mechanisms. The Federal Housing Finance Agency, a division of government that is effectively running both Fannie Mae and Freddie Mac, immediately directed both companies to purchase more mortgage-backed securities to help fund lending markets.
The Treasury department also plans to expand a program it implemented in the wake of its takeover of Fannie and Freddie to buy up to $10 billion in mortgage-backed securities debt issued by the companies in the open market. The Federal Reserve and the SEC also acted to stem the crisis.
The Fed acted before U.S. markets opened, effectively coming to the rescue of the money-market mutual-fund industry. Worried that money-market mutual funds weren't liquid enough to handle a wave of redemptions from nervous investors, the Fed said it would use its so-called discount window to lend up to $230 billion to the industry -- via commercial banks -- against illiquid asset-backed commercial paper which is widely held by money-market funds.
The asset-backed commercial paper market went through severe strain last year, because of holdings of troubled subprime mortgage debt instruments. Fed staff say that isn't a problem for the industry now, and that most of the assets backing the instruments it will lend against are auto loans and credit-card loans. The paper the Fed is financing is high-rated and Fed staff don't see it as a money-losing step.
The central bank is taking on a potentially big risk: If these assets fall in value or default, it may be on the hook, because the Fed cannot claim anything other than collateral as repayment. Officials say the assets are safe and the move is a temporary measure to provide liquidity to the market.
In another bid to provide liquidity, The Fed Friday, said it would buy short-term debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks through primary dealers. The Fed said it would buy up to $69 billion of these securities, called discount notes, to ease the crunch in the market.
The SEC ban on short selling of some financial stocks -- an attempt to stem some of the worst stock-market slides in years -- is effective immediately and will last 10 days, but could be extended for up to 30 days.
In short selling, traders borrow shares of stock and sell them, hoping the price of the shares declines and they can profit by buying them back at a lower price.
The SEC said it was acting in concert with the U.K.'s Financial Services Authority. The FSA said Thursday it would ban short selling in financial stocks until January, and would review the ban in 30 days.
Regulators in other countries quickly followed suit by tightening their own rules on short selling, including Ireland, Australia and France.
Bank of France governor Christian Noyer said Friday that the country's stock-market watchdog Autorité des Marchés Financiers would move to impose new restrictions on short-selling.
Commercial banks expressed skepticism about the Treasury department plan. They fear it may prompt investors to pull their money out of banks and place it in money-market mutual funds, which often have higher rates of return than commercial bank savings accounts.
The Independent Community Bankers of America in a statement said it was extremely concerned about the Treasury's announced mutual-fund guaranty program. "ICBA cautions
Treasury not to propose any solution to Wall Street's turmoil that will drain funding from community banks, constraining their ability to fund local economic activity and growth and serve local communities across the nation."
—Jon Hilsenrath, Kara Scannell, Peter McKay, Joellen Perry, Elizabeth Rappaport, James R. Hagerty, Corey Boles and Cassell Bryan-Low contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Michael R. Crittenden at michael.crittenden@dowjones.com and Damian Paletta at damian.paletta@wsj.com
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9/20/2008
While the bailout is necessary, and what to do next
There is a fundamental problem with the whole "let Wall Street fail" meme. Here's why a bailout of some sort is unfortunately necessary - the fundamental issue is that it isn't Wall Street's money that's at risk; it's yours - and what should be done in the future.
The whole finance industry--from banks to hedge funds--is based on a simple principle: connecting folks with money to folks who need money, and taking a cut.
Banks permit individuals to open accounts, for the privilege of a little interest (and physical protection, more or less, of the assets--cash under the mattress is not safe, no matter what the outliers say). They turn around and lend that money to others--small businesses, homebuyers, auto buyers.
The bank, of course, takes a cut--the interest they charge borrowers is higher than the interest they pay depositors.
Likewise for investment banks. The investment banks issue bonds and other financial instruments which people (or other institutions--including other banks) buy, expecting a return.
The proceeds from this are then loaned out to finance all sorts of project (many of them, of course, have been prejudicial to US interests; such as construction of overseas factories).
Again, investment banks take a cut.
So what's the problem? The fundamental problem is that when financial institutions make bad loans--it's ultimately with your money.
In a normal economy, of course, it's with their money. The fact that a mortgagee defaults on his loan, or that a business goes bellyup, is normally the bank's problem--it doesn't excuse them from their obligations to their depositors or bondholders. In a normal economy, bad loans are eaten by the bank, and come out of the bank's profits.
But when a whole pile of bad debt piles up, then it's your money that is lost.
And unfortunately, the fact remains that banks make money by issuing loans. It's their primary source of revenue--giving someone money today in the hopes of getting more back tomorrow.
But when banks are publicly traded entities under market pressure to improve financial performance--what happens? They seek to increase revenue--by making more loans. What happens if there is a shortage of quality borrowers? They start making bad loans, and hoping they get paid back.
And in some cases, such as Charles Keating, it goes beyond unwise business decisions to outright fraud--loaning other people's money to croneys with little expection of being repaid.
The current mortgage crisis is, of course, excacerbated by the many interlinks between players, wherein the failure of one has a tremendous ripple effect. But the fundamental problem is that it's not Wall Street's money that's been lost; it's your money. (And China's money--it just isn't US investors and the public getting screwed here).
So a bailout does make sense--to prevent worse harm.
So--what to do? Obviously, re-regulation of the financial industry is important. Many specific proposals have been advanced. A couple of things I would like to see, both in the financial services market and in the broader stock market.
Restrictions on highly speculative investments. Tax the hell out of capital gains derived from short sales; and prohibit deductions of capital losses based on short positions.
Make it clear that corporate executives do not have a fiduciary duty to maintain stock price. Their duties to shareholders should be limited to maintaining the financial well-being of the company, and/or production of dividends.
A maximum wage, and limitations on severance packages. A big part of the problem is the immense amount of money diverted by executives--who have done little to earn it.
Restrictions on pooling of debt, coupled with tighter disclosure of exposure. One level of debt pooling (issuing bonds which aggregate a whole bunch of smaller loans) is a good risk management tool. But any more than that is unnecessary entanglement.
Capital requirements imposed on anybody who lends money that comes from someone else, whether a bank, a brokerage, or whatever else.
Increased personal liability for executives or officers who knowingly make bad loans. Sarbanes-Oxley made CEOs of corporations liable for financial chicanery affecting the stock market; likewise, there's a whole bunch of folks involved in the mortgage crisis that should be in jail--but won't be, because their avarice probably doesn't meet the threshold of "fraud".
* Disentangle the financial services market from the stock market. Prohibit financial service firms from taking both a debt and equity position in anything.
* Pay for regulation of the financial services industry by taxes/fees on that industry. Just like banks have to pay for FDIC insurance; require other financial services companies to pay for catastrophic failure insurance--both to repay the government for the current bailout, and to keep a rainy day fund around for future bailouts.
Other ideas?
Reported by Daily Kos.
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The whole finance industry--from banks to hedge funds--is based on a simple principle: connecting folks with money to folks who need money, and taking a cut.
Banks permit individuals to open accounts, for the privilege of a little interest (and physical protection, more or less, of the assets--cash under the mattress is not safe, no matter what the outliers say). They turn around and lend that money to others--small businesses, homebuyers, auto buyers.
The bank, of course, takes a cut--the interest they charge borrowers is higher than the interest they pay depositors.
Likewise for investment banks. The investment banks issue bonds and other financial instruments which people (or other institutions--including other banks) buy, expecting a return.
The proceeds from this are then loaned out to finance all sorts of project (many of them, of course, have been prejudicial to US interests; such as construction of overseas factories).
Again, investment banks take a cut.
So what's the problem? The fundamental problem is that when financial institutions make bad loans--it's ultimately with your money.
In a normal economy, of course, it's with their money. The fact that a mortgagee defaults on his loan, or that a business goes bellyup, is normally the bank's problem--it doesn't excuse them from their obligations to their depositors or bondholders. In a normal economy, bad loans are eaten by the bank, and come out of the bank's profits.
But when a whole pile of bad debt piles up, then it's your money that is lost.
And unfortunately, the fact remains that banks make money by issuing loans. It's their primary source of revenue--giving someone money today in the hopes of getting more back tomorrow.
But when banks are publicly traded entities under market pressure to improve financial performance--what happens? They seek to increase revenue--by making more loans. What happens if there is a shortage of quality borrowers? They start making bad loans, and hoping they get paid back.
And in some cases, such as Charles Keating, it goes beyond unwise business decisions to outright fraud--loaning other people's money to croneys with little expection of being repaid.
The current mortgage crisis is, of course, excacerbated by the many interlinks between players, wherein the failure of one has a tremendous ripple effect. But the fundamental problem is that it's not Wall Street's money that's been lost; it's your money. (And China's money--it just isn't US investors and the public getting screwed here).
So a bailout does make sense--to prevent worse harm.
So--what to do? Obviously, re-regulation of the financial industry is important. Many specific proposals have been advanced. A couple of things I would like to see, both in the financial services market and in the broader stock market.
Restrictions on highly speculative investments. Tax the hell out of capital gains derived from short sales; and prohibit deductions of capital losses based on short positions.
Make it clear that corporate executives do not have a fiduciary duty to maintain stock price. Their duties to shareholders should be limited to maintaining the financial well-being of the company, and/or production of dividends.
A maximum wage, and limitations on severance packages. A big part of the problem is the immense amount of money diverted by executives--who have done little to earn it.
Restrictions on pooling of debt, coupled with tighter disclosure of exposure. One level of debt pooling (issuing bonds which aggregate a whole bunch of smaller loans) is a good risk management tool. But any more than that is unnecessary entanglement.
Capital requirements imposed on anybody who lends money that comes from someone else, whether a bank, a brokerage, or whatever else.
Increased personal liability for executives or officers who knowingly make bad loans. Sarbanes-Oxley made CEOs of corporations liable for financial chicanery affecting the stock market; likewise, there's a whole bunch of folks involved in the mortgage crisis that should be in jail--but won't be, because their avarice probably doesn't meet the threshold of "fraud".
* Disentangle the financial services market from the stock market. Prohibit financial service firms from taking both a debt and equity position in anything.
* Pay for regulation of the financial services industry by taxes/fees on that industry. Just like banks have to pay for FDIC insurance; require other financial services companies to pay for catastrophic failure insurance--both to repay the government for the current bailout, and to keep a rainy day fund around for future bailouts.
Other ideas?
Reported by Daily Kos.
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ANOTHER GOVERNMENT RESCUE PLAN
Wall Street extended a huge rally Friday as investors returned to a buying mode with relief after the U.S. government announced plans to rescue mortgage banks from billions of dollars in bad home loan debt. The Dow Jones industrials rose nearly 360 points, giving them a massive gain of more than 770 points over two days, and Treasurys fell as money flowed into equities.
Treasury Secretary Henry Paulson, spoke about the home financing rescue plan said a bold approach is needed to remove troubled assets from the books of financial firms. He gave few details, but said he would work on it through the weekend with congressional leaders.
A plan to help the banking industry could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Mortgage lending has almost completely come to a stop in the wake of the bankruptcy of IndyMac and Lehman Brothers Holdings Inc. and the bailout of teetering insurer American International Group Inc.
The government took other steps Friday to restore stability to the financial system.
The Federal Reserve said it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed will also buy short-term debt obligations issued by Fannie Mae, Freddie Mac, FHA and the Federal Home Loan Bank.
The Treasury Department decided to use a Depression-era fund to provide guarantees for U.S. money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them due to worries about the funds’ exposure to the embattled financial industry.
On Thursday, the Federal Reserve and other major central banks around the world joined forces to inject as much as $180 billion into global money markets in an attempt to keep the mortgage loan and credit crisis from worsening.
But with worries swirling about the financial health of such major companies as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley, the cash infusion was not enough to alleviate the tension on Wall Street.
Mortgage refinance activity has continued to decline even though interest rates remain below 6% for FHA mortgage rates. The bottom line is that lending guideline are still too tight for equity levels that have evaporated with the housing market and foreclosure crisis.
From: From the Nationwide Mortgage Loan Blog 9/19/2008
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Treasury Secretary Henry Paulson, spoke about the home financing rescue plan said a bold approach is needed to remove troubled assets from the books of financial firms. He gave few details, but said he would work on it through the weekend with congressional leaders.
A plan to help the banking industry could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Mortgage lending has almost completely come to a stop in the wake of the bankruptcy of IndyMac and Lehman Brothers Holdings Inc. and the bailout of teetering insurer American International Group Inc.
The government took other steps Friday to restore stability to the financial system.
The Federal Reserve said it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed will also buy short-term debt obligations issued by Fannie Mae, Freddie Mac, FHA and the Federal Home Loan Bank.
The Treasury Department decided to use a Depression-era fund to provide guarantees for U.S. money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them due to worries about the funds’ exposure to the embattled financial industry.
On Thursday, the Federal Reserve and other major central banks around the world joined forces to inject as much as $180 billion into global money markets in an attempt to keep the mortgage loan and credit crisis from worsening.
But with worries swirling about the financial health of such major companies as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley, the cash infusion was not enough to alleviate the tension on Wall Street.
Mortgage refinance activity has continued to decline even though interest rates remain below 6% for FHA mortgage rates. The bottom line is that lending guideline are still too tight for equity levels that have evaporated with the housing market and foreclosure crisis.
From: From the Nationwide Mortgage Loan Blog 9/19/2008
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