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.

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."

DON'T FORGET TO CLICK ON RELATED STORES (SEE TOP OF PAGE, TO CLICK ON ITEMS) THIS IS A HISTORY MAKING EVENT... AND WE HOPE IT WORKS. Gloria

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







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