TimesPeople
September 29, 2008
Party Leaders Back Revised Plan for Bailout
By DAVID M. HERSZENHORN and CARL HULSE
WASHINGTON — Congress braced for a difficult vote on a $700 billion rescue of the financial markets after a weekend of tense negotiations produced a plan that Congressional leaders began selling to lawmakers on Sunday as significantly strengthened by new taxpayer safeguards.
The 106-page bill, intended to ease a growing credit crisis, came after a frenzied week of political twists and turns and still faced some resistance from lawmakers on both the left and right who portrayed it as a dangerous rush to economic judgment.
But leaders of both parties in the House and Senate were moving to back the legislation, which they said had been significantly improved from the Bush administration’s initial proposal by limiting gold-plated farewells for executives of some participating companies and a deal-clinching plan to eventually recoup any losses from the financial community.
That provision, pushed by House Democrats, was one of the last to be agreed to in a high-level series of talks that had top lawmakers and administration economic chiefs huddled in offices just off the Capitol Rotunda after midnight Saturday as they raced to strike an agreement before Asian markets open Sunday night.
Under the provision, if the Treasury Department program to purchase and later sell mortgage-backed securities records losses after five years, Congress is directed to develop a program to recover the losses from the participating financial communities.
Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee and the lead Senate negotiator, said the economy faced an unthinkable catastrophe without the aid and he called on his colleagues to act positively and with alacrity.
“If we don’t pass it, we shouldn’t be a Congress,” Mr. Gregg said Sunday afternoon.
The two presidential candidates, who dipped into the negotiations at a contentious White House meeting Thursday, both gave guarded endorsements of the bailout plan Sunday.
Republicans won inclusion of some of their ideas, though a call to have the plan work more like an insurance program was not fully adopted. Republicans were also able to force from the bill provisions they described as favoring labor and liberal housing groups. And Democrats abandoned a proposal to have bankruptcy judges adjust mortgages for strapped homeowners.
House Republicans remained a potential stumbling block to the plan and the leadership was to hold a closed-door session Sunday evening to review the plan internally. But the party leadership was circulating information aimed at refuting some of the main criticisms of the plan, indicating they were poised to support it.
Members of the conservative rank-and-file remained unconvinced.
Congressional leaders and Treasury Secretary Henry M. Paulson Jr. had emerged from behind closed doors to announce the tentative agreement at 12:30 a.m. Sunday, after two days of marathon meetings.
“We have made great progress toward a deal, which will work and be effective in the marketplace,” Mr. Paulson said at a news conference in Statuary Hall in the Capitol.
In the final hours of negotiations on Saturday night, Democratic lawmakers, including Representative Rahm Emanuel of Illinois and Senator Kent Conrad of North Dakota, carried pages of the bill by hand, back and forth, from Speaker Nancy Pelosi’s office, where the Democrats were encamped, to the Treasury Secretary Henry M. Paulson and other Republicans in the offices of Representative John A. Boehner of Ohio, the House minority leader.
At the same time, a series of phone calls was taking place, including conversations between Ms. Pelosi and President Bush; between Mr. Paulson and the two presidential candidates, Senator John McCain and Senator Barack Obama; and between the candidates and top lawmakers.
“All of this was done in a way to insulate Main Street and everyday Americans from the crisis on Wall Street,” Ms. Pelosi said at the news conference. “We have to commit it to paper so we can formally agree, but I want to congratulate all of the negotiators for the great work they have done.”
In a statement, Tony Fratto, the deputy White House press secretary, said: “We’re pleased with the progress tonight and appreciate the bipartisan effort to stabilize our financial markets and protect our economy.”
Mr. Obama and Mr. McCain both expressed support for the rescue package early on Sunday, while adding that it was hardly a moment for taxpayers to cheer.
“This is something that all of us will swallow hard and go forward with,” Mr. McCain said in an interview on ABC’s “This Week.” “The option of doing nothing is simply not an option.”
Mr. Obama, in a statement, said: “When taxpayers are asked to take such an extraordinary step because of the irresponsibility of a relative few, it is not a cause for celebration. But this step is necessary.”
The backing of the presidential candidates will be crucial to Congressional leaders seeking to generate votes for the bailout plan among lawmakers, especially those up for re-election in November. The general public has bristled at the notion of risking $700 billion in taxpayer funds to address mistakes on Wall Street, and many constituents have urged their elected officials to vote against the plan.
Among the last sticking points was an unexpected and bitter fight over how to pay for any losses that taxpayers may experience after distressed debt has been purchased and resold.
Democrats had pushed for a fee on securities transactions, essentially a tax on financial firms, saying it was fitting that they contribute to the cost.
In the end, lawmakers and the administration opted to leave the decision to the next president, who must present a proposal to Congress to pay for any losses.
Saturday’s intense negotiating effort followed a tumultuous week, including a contentious meeting at the White House with President Bush and the two presidential candidates.
That meeting had moments of drama, including a blunt warning by President Bush. “If money isn’t loosened up, this sucker could go down,” he said. It ended with angry recriminations after House Republicans scotched a near-agreement from earlier in the day.
Mr. Paulson scrambled to revive the talks, and they resumed almost immediately. Congressional and Treasury staff then worked all of Friday and through the night, ending in the predawn.
Mr. Paulson and Congressional leaders stepped in at 3 p.m. Saturday and were in direct negotiations for most of the rest of the night. And immediately after the news conference, staff members began efforts to finalize the language.
Even then, their work is hardly over.
Congressional leaders who want the bailout to pass with solid bipartisan support had already begun to anxiously court votes, mindful of the difficulty they could face in a high-stakes election year.
Public opinion polls show the bailout plan to be deeply unpopular. Conservative Republicans have denounced the plan as an affront to free market capitalism, while some liberal Democrats criticize it as a giveaway to Wall Street.
Representative Roy Blunt of Missouri, the chief negotiator for House Republicans, who have been among the most reluctant to support the plan, expressed some satisfaction but did not commit his members’ support.
“We need to look and see where we are on paper tomorrow,” Mr. Blunt said. “We have been talking about how we can make these things work in a way that our conference can come together.”
Representative Barney Frank of Massachusetts, the lead negotiator for the House Democrats, said that there was no expectation of making anyone smile.
“This was never going to be a bill that was going to make people happy,” he said. “No solution to a problem can be more elegant than the problem itself. We are dealing with a very difficult problem.”
“Given the dimensions of the problem, I believe we have done a good job,” he added. “It includes genuine compromises.”
Aides described a tense meeting on Saturday afternoon that included Senator Max Baucus, Democrat of Montana, shouting at Mr. Paulson about executive pay caps.
Outside, stunned tourists visiting the Capitol watched as camera operators shoved one another to get footage of lawmakers talking outside of the meeting room.
At one point, when too much information was leaking out, staff members’ BlackBerrys were confiscated and collected in a trash bin.
While Congressional Republicans sent only their chief negotiators, Mr. Blunt and Senator Judd Gregg of New Hampshire, at least nine Democrats with competing priorities piled into the meeting, surprising the Republicans but apparently not unsettling them.
The centerpiece of the rescue effort remains the plan for the government to buy up to $700 billion in troubled assets from financial firms as a way to free their balance sheets of bad debts and to help restore a healthy flow of credit through the economy.
The money will disbursed in parts, with an initial $250 billion to get the rescue effort under way, followed by another $100 billion upon a report by Mr. Bush to Congress.
The president could then request the balance of $350 billion at any time. If Congress disapproved, it would have to act within 15 days to deny the Treasury the money.
Early in the day, the two presidential nominees were active from the sidelines. Mr. McCain telephoned Congressional Republicans to sound them out, and Mr. Obama got regular updates by phone from Mr. Paulson and top lawmakers.
Some lawmakers have made clear that they will not vote for the bailout plan under virtually any terms. “I didn’t want to be in the negotiations because I object to the basic principles of this,” said Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, who would normally be his party’s point man.
Pressed about his role, Mr. Shelby replied, “My position is ‘No.’ “
Officials, including Mr. Bush, stepped up efforts to sell the plan to the American public, which, according to opinion polls, is deeply skeptical.
“The rescue effort we’re negotiating is not aimed at Wall Street; it is aimed at your street,” Mr. Bush said in his weekly radio address. “There is now widespread agreement on the major principles. We must free up the flow of credit to consumers and businesses by reducing the risk posed by troubled assets.”
In a brief speech on the Senate floor, Senator Kent Conrad, Democrat of North Dakota, said: “It’s not just going to be Wall Street. The chairman of the Federal Reserve has told us if the credit lockup continues, three million to four million Americans will lose their jobs in the next six months.”
The ultimate cost of the rescue plan to taxpayers is virtually impossible to know. Because the government would be buying assets of value — potentially worth much more than the government will pay for them — there is even a chance the rescue effort would eventually return a profit.
Some Democrats had sought to direct 20 percent of any such profits to help create affordable housing, but Republicans opposed that and demanded that all profits be returned to the Treasury.
Jeff Zeleny and Robert Pear contributed reporting.
Showing posts with label wall street. Show all posts
Showing posts with label wall street. Show all posts
9/21/2008
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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.
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
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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