bizzXceleration: Performance, Value and Profit

Economic Consequences of the Bailout 

Bernanke Says Failure to Pass Bailout Threatens Financial Markets, Economy Federal Reserve Chairman Ben S. Bernanke warned lawmakers that failure to pass a rescue plan to take over troubled assets from financial firms would pose a threat to markets and the economy. ``Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy,'' Bernanke said in testimony prepared for delivery today to the Senate Banking Committee. ``Global financial markets remain under extraordinary stress.'' Bernanke and Treasury Secretary Henry Paulson are pushing Congress to quickly approve a $700 billion plan to remove illiquid assets from the banking system. Lawmakers have balked at rubber-stamping the proposal, with Democrats demanding it include support for homeowners and limits on executive pay, while some Republicans question the plan's reach and size. ``At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand,'' Bernanke said. Bernanke endorsed the biggest federal intrusion into markets since the Great Depression after failing to stem the credit crisis by cutting the benchmark interest rate at the most aggressive pace in two decades. He has also opened up lending to securities firms and expanded loans to commercial banks. Along with the government bailout, Bernanke supports a regulatory overhaul for a U.S. financial industry upended by $523 billion in losses from the collapse of mortgage credit.

Paulson, Bernanke May Find Painful Parallels in 1990s Nordic Bailout, Bust He says the effort by Finland, Sweden and Norway to save troubled banks in the early 1990s is the closest parallel to the market-rescue plan being engineered by the U.S. Treasury secretary and Federal Reserve chairman. The Nordic effort -- similar in speed and scope to what the U.S. is planning now, though smaller in size -- did manage to end the financial crisis. At the same time, it didn't prevent a deeper recession and surging unemployment in all three countries. ``In the long term, there were benefits, but it took half a decade before they began to show in the economy,'' said Esko Ollila, a member of the Bank of Finland board from 1983 to 2000.

Buffett Calls Credit Crisis an `Economic Pearl Harbor,' Backs Paulson Plan Billionaire investor Warren Buffett, calling the market turmoil ``an economic Pearl Harbor,'' said Treasury Secretary Henry Paulson's $700 billion proposal to prop up the U.S. financial system is ``absolutely necessary.'' ``The market could not have taken another week'' like last week, Buffett told CNBC today, a day after saying his Berkshire Hathaway Inc. will buy a $5 billion stake in Goldman Sachs Group Inc. ``I think it was the last thing Hank Paulson wanted to do, but there's no Plan B for this.'' ``I am betting on the Congress doing the right thing for the American public and passing this bill,'' Buffett said. The economy is ``everybody's problem,'' he said, likening it to ``a bathtub -- you can't have cold water in the front and hot water in the back.'' Berkshire is buying the stake in Goldman, Paulson's former firm, after three of the investment bank's biggest competitors went bankrupt or were forced into emergency sales. He has already agreed to spend at least $25 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire. ``I certainly have a vote of confidence in Goldman and vote of confidence in Congress,'' said Buffett, who is investing in the firm after it lost 40 percent of its market value in the past year.

Libor Rises as Funding Squeeze Worsens After Banks Pay Record Cash Premium Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won't happen quickly enough to ease short-term funding constraints. The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. The corresponding rate in euros rose 7 basis points to 4.91 percent and the pound rate also advanced 7 basis points, to 5.91 percent. ``There's no real term funding markets except for central banks,'' said Meyrick Chapman, a fixed-income strategist in London at UBS AG. ``The Libor is meaningless. It's for unsecured lending and there is no unsecured lending as far as I can see.'' Money markets have frozen since the collapse of the U.S. housing market more than a year ago. Efforts by the Federal Reserve, along with central banks worldwide, to revive lending through emergency cash auctions have failed as banks hoard cash and balk at lending to each other on concern more institutions will go bankrupt.

Treasuries Lose Allure for Axa, South Korea Pensions as Bailout Costs Soar Investors outside the U.S., who own more than half of all Treasuries outstanding, say the government's $700 billion plan to revive the banking system will diminish the appeal of the nation's bonds. Treasury Secretary Henry Paulson's proposal, which seeks funds to rescue banks by purchasing devalued securities, would drive the country's debt to more than 70 percent of gross domestic product. The last time taxpayers owed as much was in 1954, when the U.S. was paying down costs from World War II. ``The image of U.S. Treasuries as a safe haven has been tainted by the ongoing financial debacle,'' said Kwag Dae Hwan, head of global investment in Seoul with South Korea's $220 billion National Pension Fund, which holds about $14 billion of U.S. government debt. ``A big question mark hangs over whether the U.S. can deal with an unprecedented amount of debt. That is unnerving all the investors, including me.'' The government depends on foreign money to finance the budget deficit, which UBS AG estimates will increase to $1 trillion next year from $407 billion if the bailout is approved. Investors outside the U.S. own 56 percent of the $4.8 trillion in marketable Treasuries outstanding, up from 42 percent of the $3.4 trillion outstanding five years ago, according to data compiled by the government. U.S. long-term interest rates would be 1 percentage point higher without demand from foreign governments and central banks, according to Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville, who have done research for the Federal Reserve.

Bailout plan draws bipartisan anger in Congress The Bush administration urgently pressed Congress in public and private Tuesday for quick passage of a $700 billion bailout of the financial industry as Democratic and Republican lawmakers vented their anger over a crisis that slid the nation's economy toward the brink. But even before Paulson could speak, lawmakers expressed unhappiness, criticism of the plan and -- in the case of some conservative Republicans -- outright opposition. "I understand speed is important, but I'm far more interested in whether or not we get this right," said Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee. "There is no second act to this. There is no alternative idea out there with resources available if this does not work," he added.Sen. Richard C. Shelby of Alabama, the panel's senior Republican, was even more blunt. "I have long opposed government bailouts for individuals and corporate America alike," he said. Seated a few feet away from Paulson and Ben Bernanke, the chairman of the Federal reserve, he added, "We have been given no credible assurances that this plan will work. We could very well send $700 billion, or a trillion, and not resolve the crisis." Dodd and other key Democrats have been in private negotiations with the administration since the weekend on legislation designed to allow the government to buy bad debts held by banks and other financial institutions.

• U.S. Stocks Drop in Worst Two-Day Decline Since 2002 on Bailout Concerns
• Housing Prices Tumble 5.3% in U.S. as Home Loans Become Harder to Get
• Congressional Leaders Push for Changes to Bailout Plan as Opposition Grows

A Day in the Shooting Barrel 

Administration's rescue plan hits speed bump in Congress The biggest financial bailout in American history hit a speed bump Tuesday on Capitol Hill as members of the Senate began to balk at quick action to pass the measure, saying such a massive proposal requires more careful discussion and consideration. While there was no sense that the plan, authored by Treasury Secretary Henry Paulson, was yet in peril, senators suggested at a hearing with Paulson, Federal Reserve Chairman Ben Bernanke and other top regulatory officials that the measure would not be completed by the end of the week and needed extra provisions.Senate Banking Committee Chairman Christopher Dodd said that the plan "is not going to work" in its current form. Sen. Richard Shelby of Alabama, the panel's top Republican, said the plan "is not going to be just rubber-stamped." Lawmakers grilled the two financial chiefs about the huge package and pressed both of them to include other elements such as aid for homeowners and caps on executive pay. Notes of skepticism crept into the statements of congressional leaders. But many legislators were walking a tightrope -- complaining about the plan while promising to take action. Dodd said the Paulson proposal was "stunning" in its lack of detail. "It would do nothing in my view to let a single family save a home. It would do nothing to stop a CEO from dumping billion dollars of toxic assets on the back of American taxpayers," said Dodd. "It is not just our economy at risk but our Constitution as well," Dodd said, because it would allow Paulson to spend $700 billion "with impunity." Paulson’s Testimony on C-Span, Entire Hearing (opening statements are worth listening to; a masterpiece of political theatre, posturing and disingenuousness by one of the principal agents responsible)

• Paulson Says Crisis Spreading; Delay of $700 Billion Plan Would Be `Grave'

Bernanke rides to rescue of Paulson plan The quiet unassuming professor of economics appeared just in time at the crest of the hill and rode to the rescue of the savvy Wall Street tycoon who had his wagons circled in the valley below desperately trying to hold off the opposition. Such was the story line of the extraordinary Senate hearing Tuesday examining the historic $700 billion bailout of financial firms proposed by Treasury Secretary Henry Paulson. Many Congressional hearings are carefully scripted, with both sides prepared well in advance and with the conclusion never in doubt. But other hearings, like this one, contain real drama. The hearing began with Federal Reserve Chairman Ben Bernanke and Paulson forced to listen in stony silence for an hour of withering criticism of the proposal by members of both Republicans and Democrats on the Senate Banking panel. "I haven't had a single phone call in favor of this proposal," announced Sen. Sherrod Brown, Democrat of Ohio. When Sen. Mike Enzi, Republican of Wyoming, vowed that the Paulson proposal would not pass, applause broke out in the audience. Sen. Jim Bunning, Republican of Kentucky, followed up by calling the plan "un-American." When it was the turn for the government officials to speak, Paulson fought back with a tough, take-no-prisoner statement that brought to mind the "the Hammer' nickname that he was given by his colleagues at Goldman Sachs. It didn't play very well with the senators and clearly there was a sense in the room that the plan might be in deeper trouble than expected. But then, Bernanke took the microphone, set aside his prepare remarks, and calmly laid out the benefits of the Paulson proposal in such a way that took the starch out of the opposition. A key point of the critics was that under the plan Treasury must pay more than the market value for the mortgage assets. But Bernanke explained that the mortgage securities have two prices - a "fire-sale price" if the mortgage asset was sold quickly today and a "hold-to-maturity" price if the mortgages were held to maturity. Banks have been paralyzed by this fire-sale price because their precious capital would evaporate overnight. The key to the plan, Bernanke said, was that if Treasury was able to buy the mortgages, it will be able to hold them to maturity. As a result, the fire-sale price could be avoided. This would remove uncertainty, return liquidity, and credit markets should be able to unfreeze, Bernanke said. "This is not an expenditure of $700 billion. This is a purchase of assets. If auctions are done properly...the American taxpayer will get a good value for his or her money and as the economy recovers, most, all, or perhaps more than all, of the value will be recovered over time," Bernanke said. Bernanke warned that the plan was a "pre-condition" for an economic recovery. He said there would be a severe economic downturn with no action. "I believe that if the credit markets are not functioning that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, and the economy will not recover in a healthy way," he said. Bernanke’s Testimony on CSpan

• Bernanke Tells Congress U.S. Economy Will Shrink If Rescue Plan Not Passed

Americans Oppose Bailouts, Say Obama Would Best Handle Financial Emergency Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George W. Bush for the credit crisis. By a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll. Poll respondents say Democratic presidential nominee Barack Obama would do a better job handling the financial crisis than Republican John McCain, by a margin of 45 percent to 33 percent. Almost half of voters say the Democrat has better ideas to strengthen the economy than his Republican opponent. Six weeks before the presidential election, almost 80 percent of Americans say the U.S. is going in the wrong direction, the biggest percentage since the poll began asking that question in 1991. After market chaos this month drove Lehman Brothers Holdings Inc. into bankruptcy and prompted federal takeovers of American International Group Inc., Fannie Mae and Freddie Mac, most survey respondents said financial companies shouldn't expect taxpayers to rush to the rescue.

Bailout battle: Where things stand The battle over the proposed $700 billion bailout of the U.S. financial system continued on Tuesday. Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke defended the Bush administration's plan before the Senate Banking Committee, but new Democratic proposals have shifted the terms of the debate. Plus, some conservative Republicans have raised concern about the potential cost. The Bush administration's plan would allow the Treasury to buy up troubled assets from financial institutions. The aim is for the government to buy the assets at a discount, hold onto them and then sell them for a profit. The Democrats are considering several add-ons: They want the government to get an equity stake in the companies it helps; more assistance for those at risk of foreclosure; more oversight of the program; and curbs on compensation of executives of participating companies. Help for housing markets: Many experts are skeptical of the plan, especially in its indirect ability to help homeowners. Accordingly, the Senate Democrats' proposal would also require the government to include in the bailout proposal a separate systematic way to keep people in their homes. Democratic add-ons: Democrats have expressed concern about the lack of oversight in the Treasury's proposal. Both Sen. Dodd's and Rep. Frank's plans would create an oversight board for the Treasury program as well as regular updates on the plan's progress. Sen. Dodd would require the government to receive an ownership stake in the companies it helps. That idea would require companies who sell assets to the Treasury to give the government shares in the company.Curbs on executive pay were also proposed in the Dodd plan but not in the Frank plan. Dodd's proposal would set standards on compensation for big wigs from institutions that take advantage of the bailout, including limits on incentives and severance packages.

Non-intrusive Realities 

Cutting Back the Rescue's Price Tag In fact, there are a few reasons why the government's interventions probably won't be quite as expensive as people think. For starters, some experts say it's far from certain that the U.S. government will even need all the money it has budgeted. They say policy makers set their spending limits on the high side to make clear to investors that the government would do whatever it takes to make financial markets work again. And once the government's rescue program begins to establish prices for currently unmarketable securities, the hope is that the market will start functioning again before the U.S. actually has to buy $700 billion worth of them. Regardless of how much the government actually spends, the impact on the budget deficit will be further limited because budget rules allow the government to treat such debt as a "means of financing." Only the anticipated losses on the investments, plus interest costs, would show up as additions to the deficit. Ultimately, as Mr. Bernanke suggested, the government stands to get a lot of its money back on the securities it buys. It can sell them off or hold them as investments, depending on market conditions. Mark Zandi of Moody's Economy.com figures the government might pay out a total of $750 billion in all of its financial interventions -- about half the maximum $1.4 trillion total that has been allocated for the rescue package, the takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc. and the housing bill that Congress passed earlier this year -- and will be able to recover most of that. He estimates the total cost to taxpayers at no more than $250 billion, including the losses on the assets plus the interest on the government bonds that must be issued to finance the programs.