bizzXceleration: Performance, Value and Profit

Strategic Situation: King Henry, Big Ben and Ken the Jester

Ten Days Changed Wall Street as Bernanke Saw `Massive Failures'  Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke had been thwarted all week in their efforts to stabilize U.S. financial markets. Now, early in the evening of Sept. 18, they had a bigger fix in mind, and they went to sell it to Congress. They sat in House Speaker Nancy Pelosi's office, at a wooden conference table adorned with pink roses and white hydrangeas, surrounded by more than a dozen congressional leaders. In the previous four days, Lehman Brothers Holdings Inc. had gone bankrupt. Merrill Lynch & Co. and Bank of America Corp. had rushed into a shotgun wedding. The regulators had pumped $85 billion into American International Group Inc., nationalizing the world's biggest insurer, and were trying to thaw frozen credit markets and prevent economic catastrophe. Earlier that week, lawmakers of both parties had talked about waiting until after the November election to take legislative action. Bernanke, a scholar of the Great Depression, let them have it. ``The credit lines in the American financial system, the lifeblood of the economy, are completely frozen,'' he said, according to Senator Charles Schumer of New York, a Democrat who was in the meeting. Banks had stopped lending to each other overnight, Bernanke said. That threatened to halt all lending in the U.S., forcing businesses to close and idling workers, the Fed chief said. The Fed also was seeing money being moved out of the country. ``You could have massive failures within days,'' he told the group, and it would go beyond the banking system to ``large name- brand companies,'' according to a congressional staff member who attended the meeting and took notes. Politicians leaving the meeting said they were shocked at these portents of Armageddon from the usually understated Bernanke. They left the 90-minute meeting looking shaken, and resolved to act before the election. It was ``as sobering a meeting as any of us have ever attended in our careers here,'' said Christopher Dodd, a Connecticut Democrat and chairman of the Senate Banking Committee. Thus culminated 10 days that rattled markets worldwide and changed the structure of the U.S. financial system. Wall Street firms are shuttering or selling themselves to the most stable bidders. Regulators and lawmakers are moving toward a rescue that could cost more than $700 billion and permanently step up regulation. President George W. Bush said as much in public remarks Sept. 20. ``At first, I thought we could deal with the problem one issue at a time,'' Bush said. ``The house of cards was much bigger and started to stretch beyond Wall Street. When one card started to go, we worried about the whole deck going down.'' The meltdown reached banks on Tuesday, Sept. 16, when the London interbank overnight rate jumped 3.33 percentage points to 6.44 percent. This signaled that banks didn't trust each other enough to make 24-hour loans -- except at a premium -- and overnight more than doubled the cost of borrowing in dollars. The rate was the highest since 2001. The fear gripping the market gridlocked the financial system, including collateralized debt obligations. ``The recent intervention in the markets, nationalization of financial services companies and systemwide RTC-like bailout being crafted in Washington are disconcerting to say the least,'' said Christopher Low, chief economist at FTN Financial in New York. ``Unfortunately, there's not much choice.''

Restoring the Strength of Our Financial System - We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses. The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy. As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners. A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged. These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted. To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

Treasury Secretary Henry Paulson & N.Y.C. Mayor Michael Bloomberg

MAYOR BLOOMBERG:  Well, I think number one, Hank's the right guy for now.  He knows what goes on on Wall Street, he understands these complex financial instruments in a ways most people do not and most Treasury secretaries do not. So if I had to have one person at the helm today, I would pick Hank Paulson. But I think you got to step back and say what's the real problem here?  There are two crises.  One is the crisis in the financial market, a lack of confidence that almost closed down the financial system this past week and that Hank has to address.  And it's up to the Treasury with the acquiescence of Congress, but to do something quickly.  And nobody knows exactly what they should do, but anything is better than nothing.  You've got to restore the public's belief and the market's belief that we will go on.  And this is not just an American problem, it's financial markets around the world that are all interlinked and they're all collapsing.  The second problem, which is up to Congress, it's a much longer-term problem and may be the genesis of the problem that we have today in the financial markets, and that is that people are losing their homes, deserted homes are destroying neighborhoods, people are losing their jobs.  We have some industries that Congress tried to protect, and instead of protecting them they've caused them to not keep up in a competitive world with new products.  We have an education system that isn't preparing us for the future, and we have a retirement system that's just not going to be there when we need it.  So there's two things here:  One you got to do quickly; one you really need a lot more thought about and that Congress should spend that time debating.  But I don't know that there's time for a lot of the debate now. You can put some safeguards in, but you don't have time to build in the safeguards that you should have for long-term.  And we're paying the price for the last years where we all wanted something for nothing, where we took risks because we were convinced that we would never have to pay, somebody else would pay on the downside, but we'd keep the profit.  Congress has been unwilling to address the fundamentals of this country--an energy policy that makes sense, infrastructure, health care, all of these kinds of things.  So you want something that overnight we can do, what Hank Paulson's been arguing for a long time. Regulation's a good example.  Our regulation in this country is designed for the world of 50 years ago.  We have separate regulation for different industries, except today those industries all do the same thing.  Also, our regulation isn't consistent with regulation around the world.  And every company, every bank, your job, my job, all our jobs depend on commerce and what happens elsewheres in the world.  And we have to find a ways to, to pull together, in Congress not have all of the different oversight committees, in the executive branch not have all the different agencies, and not just think that we're the only ones that can do this, but pull it all together. Paulson's been talking about it for a long time.  But I think it, Tom, it comes out of this instant gratification.  We all were happy when the stock market was going up, we were all happy when there was all this money sloshing around in the economy, and everybody could get a loan whether they could pay it back or not.  When companies went out and bought other companies and people got great bonuses, it was great.  And nobody wanted to say, "Wait a second, this can't go on forever."

Netcast (Sun. meet the press netcast) 

Remarks to the National Black MBA Association Kenneth D. Lewis, Chairman and Chief Executive Officer, Bank of America. Our economy is suffering from several major shocks, and one major imbalance. The shocks include rising energy prices, which are contributing to inflation; and the crash in the housing market, which led to the credit crunch, our financial crisis and upward pressure on unemployment. The imbalance is the ratio of household debt…including mortgage debt… to savings. The crash in the housing market, in hindsight, was inevitable. There were a lot of factors that played a role… think of it as a “perfect financial storm.”  Today, the greatest source of imbalance is household finance. But in past crises, the source has been too much debt leverage in the commercial sector. Either way, as you can imagine, the problem of excessive debt poses a challenge to bankers, for whom interest income is an important source of profit. The banks best able to meet this challenge are those whose business models balance interest income with fee income from services… whose consumer offerings balance loans with investments…and whose wholesale business balances credit with other services like treasury management and investment banking. This week’s events have led some to wonder if we’re close to hitting the bottom of the market. I won’t make a prediction. I will say that the industry, homeowners and investors have been through a lot of pain… and it’s not over. There’s a lot of bad debt out there that still needs to get cleaned out of the system. But it will… and in the meantime… at the risk of sounding like a contrarian… I’d like to put this situation in perspective. There are some obvious lessons learned from this episode. No asset is immune to the bubble effect – even housing. Distribution of risk is not the same as elimination of risk. Maybe most important: There are limits to the positive effects of financial leverage. The ability to increase demand through rising financial leverage can stimulate the economy. But it cannot create unlimited wealth out of thin air. Eventually, economic fundamentals always come back to remind us what’s real and what’s not. To this point, in hindsight, I’d say that the decision to lift leverage limits on investment banks earlier in the decade was, at the least, a contributor to our current situation. We’ve also had some reminders about what’s important for survival. Capital strength and liquidity are important. Diversity of assets, revenues and geography are important. And, obviously, good judgment is critical. Everyone has been hurt by the housing crisis. But good judgment has, more often than not, meant the difference between those who will survive, and those who are already among the missing. What is changing – as I said earlier – is consolidation. The industry is getting smaller. And it should. Even as the number of banks in the country has fallen by half, the financial services industry for the past 20 years has been on a rapid growth spurt. Financial stocks’ share of the market value of the S&P 500 tripled over the past 17 years. And over the past century, financial workers’ share of U.S. income quadrupled. Now, I’m the first one to defend the value that my industry adds to the economy. And much of the industry’s growth comes from exporting financial services to other countries with less-well-developed financial sectors – which, obviously, should continue. But there are limits to how fast and how much the financial industry can grow without distorting market fundamentals. And I think it’s clear that we passed those limits some time ago. So those of us in the industry need to come to terms with a more rational view of the value we add to the economy… and more humility in understanding the limits of the magical powers of finance to create economic value. The result will be fewer overall institutions... but good growth opportunities for those with broad and deep capabilities.

Ken Lewis' Speech on the Future of the Finance Industry

Charting the Outlook

What Happened, What's Next Back from the brink. The U.S. financial system last week was rocked by the biggest crisis since the 1930s -- and the federal government responded with a multi-pronged intervention that is the most sweeping since the New Deal. Over the course of just three days, Americans were shaken to see venerable investment bank Lehman Brothers Holdings file for bankruptcy protection, Merrill Lynch abruptly sell itself to Bank of America and the U.S. hurriedly launch an $85 billion bailout of American International Group, one of the world's largest insurers. Just one week earlier, the government had bailed out mortgage giants Fannie Mae and Freddie Mac. The turmoil has people worrying about the safety of their brokerage accounts, their insurance policies and even their "safe" stashes of cash -- as the problems at Lehman produced losses for investors in at least one money-market mutual fund. In the midst of the financial-industry carnage, the Dow Jones Industrial Average was down more than 8% for the week at one point midweek. But stocks soared Thursday and Friday as the government announced a massive effort to try to keep the financial system from unraveling. Key components: a plan to help financial institutions unload toxic mortgage assets and new federal insurance for money funds. How did all this happen and where do we go from here? We tackle those questions and others below: Q: Will that intervention turn things around?A: The hope is that it will prevent the crisis from spinning out of control and will thus buoy the economy. A revival of the credit markets and a bottoming of the housing market are keys to a revival. The government's debt plan may reduce the level of fear in the market, enabling the credit markets to operate properly. But such a plan wouldn't do anything about the excess supply of homes and the large number of mortgage borrowers in dire straits. Q: So what's the outlook for the economy and the stock market over the next few months?A: Housing could take many months to bottom, and then rebound, analysts say. Meanwhile, economies around the globe could weaken dramatically, something many investors aren't counting on. Still, investors shouldn't get too gloomy. The stock market's decline of about 20% from last fall's peak is close to the average fall for the market in periods of recession, notes Citigroup strategist Tobias Levkovich. "One can suggest that a bottom is near," he says. Adds Peter Brodie, director of investments at a unit of Bryn Mawr Trust: "History has shown that it is crises such as these that create the extreme pessimism required to set the stage for meaningful market recoveries -- and we feel that the resiliency of our economy will again be exhibited as we enter '09." SEC's Cox `Asleep at the Switch' as Paulson, Bernanke Encroach on His Turf

Brave new world for financial markets Before it gets a chance to embrace another round of irrational exuberance, the U.S. financial system will undergo a complete makeover. Besides the cost to U.S. taxpayers, banks will find that the cost of the moral hazard provided by the past week's massive government bailout will be more and tighter regulations. This will occur regardless of who is elected president or which party controls the Congress. Coming down the pike is nothing less than a modification of our capitalist system. You remember capitalism; it says that you are free to enter -- and free to exit -- any business you may want to. It also says that with reward comes risk. It will first be noticed on Wall Street. Now that the chasm between commercial and investment banking is all but closed, look for much more of the Street to be subject to tighter controls. Commercial banks have a conservative business model and are closely regulated, in order to safeguard people's deposits. Besides the existing regulations, look for a slew of new rules to hit the Street, starting with more transparent accounting. The regulators will want to see how much leverage these firms employ and their sources of funding, to name two items at the top of their list. Off-balance-sheet activities will come under the regulators' magnifying glasses as well. Bank regulators may also seek to limit the use of such exotic instruments as credit default swaps, collateralized debt obligations, structured investment vehicles, mortgage-backed securities and other products dreamed up by the Street's financial engineers. And speaking of mortgage-backed securities, don't be surprised if the government puts limits on how many mortgages a bank can sell. Forcing the banks to keep more of their mortgage loans on their books is a great way to ensure that they lend more carefully, going forward. Don't be surprised if investment banks return to being agents (executing trades), as opposed to owners. This, of course, will require less capital. Most commercial banks will have little trouble funding themselves. But the rewards will come down from the stratosphere.

First Wave Ripples

U.S. Stocks Slump on Speculation Financial Bailout Won't Prevent Recession U.S. stocks tumbled, led by banks, retailers and technology companies, as oil jumped 16 percent and investors speculated the Treasury's plan to buy toxic mortgage assets will fail to prevent a recession. The Standard & Poor's 500 Index lost 3.8 percent, erasing almost half of its rally over the previous two days. Sovereign Bancorp Inc., Marshall & Ilsley Corp. and Washington Mutual Inc. sank more than 21 percent, sending the S&P 500 Banks Index to a record plunge, on concern the government bailout will lower the value of mortgage loans they hold. Apple Inc. and Cisco Systems Inc. dragged down computer stocks on expectations slower growth will reduce sales. The S&P 500 retreated 47.99 points to 1,207.09. The Dow Jones Industrial Average slid 372.75, or 3.3 percent, to 11,015.69. The Nasdaq Composite Index decreased 94.92, or 4.2 percent, to 2,178.98. Six stocks retreated for each that rose on the New York Stock Exchange in floor volume of 1.3 billion shares, 45 percent below last week's average. ``They really haven't changed the economic fundamentals at all,'' said Jeffrey Coons, co-director of research at Manning & Napier Advisors Inc. in Fairport, New York, which manages $18 billion. ``We still have a debt-laden U.S. consumer facing falling employment.'' Treasury bonds and the dollar tumbled on speculation the U.S. government is spending too much to save banks after the collapse of Lehman Brothers Holdings Inc., Fannie Mae, Freddie Mac and American International Group. Heating oil, gold and copper climbed as the dollar's biggest-ever slide against the euro heightened the risk of inflation. All 10 industry groups in the S&P 500 lost at least 1 percent.

• Oil Declines as Dollar Rebounds, Paring Record Gain on End-Month Squeeze

New York Loses More Jobs, London Homes Drop as Finance Hubs Race to Bottom The London-New York tug-of-war for bragging rights as the world's preeminent financial center is now a race to the bottom. Six months after Bear Stearns Cos. was bailed out by JPMorgan Chase & Co. and a week after Lehman Brothers Holdings Inc. filed for bankruptcy, both cities are bleeding. While it will take months to determine which will be hardest hit, New York has so far lost more financial-services jobs and London's luxury housing market has taken the first hit. The market value of London's publicly traded financial firms has dropped by 99.4 billion pounds ($182.3 billion) in the past 12 months, cutting their worth by about 25 percent. Their counterparts in New York have lost $477 billion in market capitalization, or 37 percent. In New York, Vincent Alessi, general manager of Bobby Van's Steakhouse on Broad Street, says the same. ``It's tense,'' he says. ``But my bar business is doing great.''

Shaken Consumers, Wary Companies, Banks Stifle Growth, May Extend Slowdown The U.S. economy might be moving from the acute stage of the credit contagion to a chronic one. Even with hundreds of billions of dollars from Washington to keep them solvent, banks facing the prospect of more loan losses may still curb new lending. Debt-laden consumers look set to rein in spending further as job cuts take their toll. And profit-pinched companies are turning cautious on investing and hiring as the rest of the world slows. The plan the Bush administration and Congress are racing to enact is designed to alleviate the crisis in the markets rather than stimulate a sluggish economy. The credit squeeze is prompting some economists to lower their forecasts for the economy. Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, now expects the economy to contract next quarter and in the first quarter of 2009. That would be the first recession since 2001. The consensus forecast calls for growth of 0.7 percent in the fourth quarter and 1.1 percent in the first quarter, according to a Bloomberg News survey of economists completed Sept. 9. The economists saw a 51 percent chance of a recession in the next 12 months. For all of 2008, growth is forecast to be 1.8 percent, the slowest since 2002. Analysts at Merrill Lynch & Co. said Sept. 18 that U.S. retailers may suffer their slowest holiday sales since 1991 as households grappling with higher food and fuel costs cut back. ``Consumers are starting to get the idea that they've got to de-leverage,'' says David Wyss, chief economist at Standard & Poor's in New York. Companies may also be turning more cautious. Industrial production fell in August by the most in almost three years as slower consumer spending prompted automakers to cut back. Almost half of large companies across the globe have curbed technology spending for the next year, according to Cambridge, Massachusetts-based Forrester Research Inc. Firms are feeling the pinch as earnings slow along with the economy. Third-quarter profits of the Standard & Poor's 500 companies may sink the most in seven years, according to analyst estimates compiled by Bloomberg News. Foreign sales -- until now a major source of strength for U.S. companies -- are also hurt by the fallout from the credit crisis as the U.S. slowdown seeps abroad. Japan's government said last week that its economy, the world's second-largest, is weakening. Dell Inc., the world's second-biggest personal-computer maker, said Aug. 28 that ``continued conservatism'' from some U.S. customers was spreading to Western Europe and Asia. Companies are also getting hit by dearer credit. The average yield on the most actively traded investment-grade bonds fell Sept. 19 on Washington's moves to fight the crisis, yet still stood nearly 0.9 percentage point higher than a week earlier.

Commodities Bottom as Speculators Disappear, Paulson's Plan Spurs Demand The worst may be over for commodities after the steepest rout since at least 1956 drove out speculators and the U.S. government unveiled a plan to end the worst credit-market seizure since the Great Depression. The Standard & Poor's GSCI Index of commodities had the biggest three-day gain in 18 years, surging 8.4 percent through Sept. 19, the day U.S. Treasury Secretary Henry Paulson said the government will spend ``hundreds of billions'' to cleanse banks of mortgage-related assets. Crude oil rose 6.8 percent that day, while wheat and copper gained 3.6 percent. ``What the government just did is the end game, and it's going to mean a good rally for commodities,'' said Michael Pento, a senior market strategist who helps oversee $1.5 billion at Delta Global Advisors in Holmdel, New Jersey. ``Six weeks ago, I thought it was prudent to exit most commodities. Now you want to own these things. I'm jumping in twice with both feet.'' Commodities, which had the best first half in 35 years, tumbled so far this quarter as the combination of slowing economic growth and the strengthening U.S. dollar popped the speculative bubble that drove prices to record highs. The Reuters/Jefferies CRB Index of 19 raw materials is down 22 percent since June 30, heading for the biggest quarterly loss since at least 1956, data compiled by Bloomberg show.

Wall Street’s woes are hurting emerging markets  SO MUCH for decoupling. In the wake of Lehman Brothers’ failure, emerging markets have suffered one of their biggest sell-offs in years. On September 18th Russia’s main bourses suspended trading in shares and bonds for a third day in a row after the largest one-day stockmarket fall for a decade; the central bank poured billions into big banks and the money market in a forlorn bid to calm fears. JPMorgan’s emerging-markets bond index fell by more than 5% in the week to September 16th, giving up in a few days all the gains it had made this year. Prices of Argentina’s credit-default swaps, a gauge of credit risk, rose to their highest-ever level. Unexpectedly, the People’s Bank of China cut its benchmark lending rate by 27 basis points on September 15th, to 7.2%, the first cut for six years. These actions reflected a variety of concerns, such as a darkening economic mood in China and political worries in Russia. But they all have something in common: investors may be changing their minds about emerging markets. For the past few years, China, Brazil and others, with their high growth rates and large current-account surpluses, began to seem like desirable alternatives to developed markets. For part of last year, the MSCI emerging-markets index was even trading at a higher multiple of earnings than the index of rich-world shares. That is changing as investors lose their appetite for risk. Merrill Lynch’s most recent survey of fund managers found that they are now holding more bonds than normal for the first time in a decade (indicating a flight to safety). They also have smaller positions in emerging-market equities than at any time since 2001. In the past three months, says Michael Hartnett of Merrill Lynch, emerging-market funds have seen an outflow of $26 billion, compared with an inflow of $100 billion in the previous five years. Falling oil and commodity prices are partly to blame. When these were rising, money poured into Brazil and Russia, which became targets of the “carry trade” (investors borrow in low-yielding currencies and buy high-yielding ones). Now oil prices are falling (dipping almost to $90 a barrel this week), they are undermining the carry trade and forcing Russia to prop up the rouble. Indebted investors are also being forced by their banks to sell as falling prices reduce the value of their collateral.

Fannie, Freddie Subprime Buying Spree May Add $100 Billion to Bailout Tab Freddie Mac Chief Executive Officer Richard Syron stood before investors at New York's Palace Hotel in May last year lauding his company's ``cautious'' avoidance of the subprime-mortgage crisis. What Syron, who was ousted last week, didn't say was that Freddie Mac had been gorging on subprime and Alt-A debt. While it and the larger Fannie Mae bought the safest classes of the mortgage-loan pools, Freddie's purchases totaled $158 billion, or 13 percent, of all the securities created in 2006 and 2007, according to data from its regulator and Inside MBS & ABS, a Bethesda, Maryland-based newsletter used by Federal Reserve researchers. Fannie, which was also seized by the U.S. on Sept. 7, bought an additional 5 percent. The purchases by Freddie and Fannie helped fuel the boom in lending that led to frozen credit markets, more than $514 billion in bank losses and the collapse of two of the country's biggest securities firms. The subprime overhang may determine whether the $200 billion U.S. Treasury Secretary Henry Paulson earmarked for the companies will all be used to rev up mortgage lending. He may have to spend about $300 billion…

AIG Holders Plan Meeting to Trump U.S. Rescue; Willumstad Spurns Severance American International Group Inc. shareholders, opposed to an $85 billion Federal Reserve takeover that dilutes their stakes, plan to meet today in New York City to discuss alternatives. Maurice ``Hank'' Greenberg, the former chief executive officer of the New York-based insurer and one of the biggest stakeholders, will probably be represented at the afternoon meeting, said his lawyer, David Boies, in an interview late yesterday. Attorneys for other investors contacted Boies in the past week about the gathering, he said, without naming them or saying how many will attend. Greenberg, who saw the value of the AIG stake he controls plunge by more than $5 billion this month, has said the takeover might have been avoided if AIG got a bridge loan, tapped private investors and sold assets. Greenberg sent a letter to Willumstad before the latter resigned offering to help and complaining that his earlier offers had been rebuffed.

Goldman Sachs, Morgan Stanley Become Banks, Ending an Era for Wall Street The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken. The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp. Goldman, whose alumni include Henry Paulson, the Treasury Secretary presiding over a $700 billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week. By then, it was too late. As financial markets gyrated --the Dow Jones Industrial Average whipsawed 1,000 points in the week's last two days -- and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said. The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money -- the leverage that led to the undoing of Bear Stearns and Lehman.

Ford, Dow execs to announce national summit in '09 Amid the turmoil on Wall Street, leaders from two global companies hard hit by economic and industrial upheavals are expected to unveil plans Monday for a national convention being held next year to discuss the future of manufacturing, technology, energy and the environment. Ford Motor Co. Executive Chairman Bill Ford and Dow Chemical Co. Chairman and Chief Executive Andrew Liveris were scheduled to announce The National Summit after the Detroit Economic Club meeting Monday. The nonpartisan, nonprofit group is convening the summit, which is set for June 15-17 at Ford Field, the home of the Detroit Lions.Beth Chappell, the economic club's CEO, said the idea grew out of listening to leaders who have addressed the venerable speakers' forum during the past couple years. "So many speakers from the platform have this call to action ... and the themes -- technology, energy, environment and manufacturing -- kept coming up over and over again," she said. "This is not about Detroit, this is not about Michigan and this is not about automotive. It's cross-country and cross-industry." Ford and Liveris will serve as the summit's co-chairmen. Ford is the economic club's outgoing chairman, and General Motors Corp. Chairman and CEO Rick Wagoner succeeds him on Monday. Organizers hope the first-of-its kind U.S. gathering, which they say has received sponsorship pledges of more than $2 million from more than 50 organizations, will draw as many as 5,000 leaders and others from business, government and academia. The speaker lineup hasn't been announced, but companies planning to take part include GM, Chrysler LLC, IBM Corp., AT&T, Motorola Inc., Deloitte LLP and Masco Corp. Liveris, who is scheduled to give Monday's keynote address to the economic club about the need for a national, comprehensive industrial policy, has been vocal about industry troubles and the effect on the Midland-based company he leads. Dow this year has announced two sets of wide-ranging price increases in an attempt to offset record costs for energy and raw materials.

Responses, Reactions, Realities ?

Mad as hell - taxpayers lash out "NO NO NO. Not just no, but HELL NO," writes Richard, a reader from Anchorage, Alaska."This is robbery pure and simple," Anna from Denver posted on CNNMoney.com's TalkBack blog this weekend. "It's our money! Let these companies die," added Claudio from Plainville, Conn. After President Bush petitioned Congress Saturday for the authority to spend up to $700 billion to to bail out a financial industry on the verge of collapse, he said the high price tag was not only justified, but essential. But when asked what they thought of the government's proposal, most readers gave an overwhelming thumbs down. "I'm tired of rewarding institutions and people for the bad decisions they have made," said Dean from Madison, Wis. "Sure, it will hurt tax payers if/when some of these institutions fail, but perhaps we need to let that happen. We do not need more big government involved in our lives. Enough is enough." Readers focused most of their indignation on having to foot the bill for irresponsible lenders and borrowers. "Companies, like individuals, should be held responsible for their decisions," wrote Jorge from El Paso, Texas. "This buyout does not address the other problems in the pipeline such as personal credit default and market slowdowns in most industries. No new jobs will be created." Some readers said it was time for the politicians who support the bailout to get the heave-ho come November.

"I will be watching to see which of our representatives vote for this bailout," said R. Kidd in Troy, N.C. "Let the American people see how many we can fire come election time." And many readers, including Danny from Texas said we should stop typing and start dialing the lawmakers who are prepared to give the OK to the bailout. "Call your Congressman. Stop blogging, posting comments, and call your congressman. This is the patriotic thing to do. Let them hear your opinion, show them this is still America and that you will not stand for this!!" But not all readers agreed. Some thought the bailout was an unfortunate but necessary move to rescue our financial system from collapse. For instance, Bill from St. Louis said he changed his mind about the bailout when he realized the consequences of doing nothing. "I was opposed to the bailout at first, but realized that the scope of this thing is global and so massive that the entire global economy could collapse if nothing was done. ...The priority has to be resolving the present crisis of confidence in our economy. Remember, if Wall Street collapses, Main Street will go with it." Andy from Chicago said the cost to the taxpayer will not be what the headline number makes it seem. "This money is not a handout to companies. It's simply giving banks and mortgage companies loans, since the banking system itself is too unstable to raise this kind of capital. And no, the government cannot just use the $700 billion to pay back all the citizens that will be hurt by this. If the companies like AIG fail, the cost will be far far greater than $700 billion. Wake up!!"

Could your employer be the next Lehman? Here's what to do As the Lehman saga reminds us, it doesn't take much bad news these days to sack your employer. When you pick up bad signals on your antennae, be prepared. Don't put your head in the sand. Especially in bad times, when people sense trouble, there's a tendency to look the other way or trust the first thing they hear if it's what they want to hear. Laura asked her manager about the lawsuit, heard a reassuring answer, and didn't look further. Better to ask more questions, do independent research, and monitor industry news and sources. You still may not find out much, but it starts the rest of the preparing process. "Don't be afraid -- take charge, starting now," she said. Realize those closest may not be in the know. If Laura made a mistake, it was in trusting her first-line management. In hindsight, she said, she feels they weren't being dishonest but instead were probably not aware themselves. It's tricky. You don't want to be a nuisance or bypass channels too much. But still, make a few phone calls, keep an ear to the grapevine. It's your career. You have a right. Try to line up another job. Just in case, and it never hurts. Like buying that generator before the hurricane, it'll be easier if you've made your contacts before the job denouement. And you just may find something better. If you get reprimanded for doing this you might not be working in the right place anyway. Take care of your customers. Again, cold turkey, no pay? Laura could have simply walked away. But she spent two unpaid weeks finishing delicate escrow transactions that would be tied up for weeks otherwise. The goodwill helped her bring regular realtor clients along to the next job. When you're facing your own turmoil, this one's easy to forget, but important.

Dodd: Congress must be careful with financial mess Leading congressional Democrats called Monday for a cautious, deliberative approach to stabilizing troubled financial markets as lawmakers confronted this vexing issue with an election-year recess drawing near. Senate Banking Committee Chairman Christopher Dodd voiced confidence in Treasury Secretary Henry Paulson, saying that "we've got the right man" to deal with the problem that has roiled not only Wall Street but international markets as well. But his counterpart in the House, Rep. Barney Frank, accused Paulson of pushing Congress to move too hastily. Dodd, D-Conn., said Monday morning that there will be a division of thought in Congress about how best to proceed on a $700 billion bill the Bush administration is seeking from lawmakers to buy up bad mortgage loans that have been weighing down financial companies since they became engulfed in a severe credit crisis 14 months ago. Meanwhile, the Group of Seven, an organization of the world's leading economic powers, pledged Monday to do all it could to help ease the crisis. The group said in a conference call that it welcomed the extraordinary steps the United States has taken so far. Frank, chairman of the House Financial Services Committee, said that Paulson "is being entirely unreasonable" to expect that Congress will pass a bill right away without examining the proposal thoroughly and adding certain provisions the Democrats want, such as limiting pay for executives of the troubled companies in need of the bailout. "We want to limit those as a condition for giving them aid," Frank, D-Mass., told ABC's "Good Morning America." "If Secretary Paulson would agree to that, we could move quickly." Rep. Christopher Shays, R-Conn., who also serves on the panel, said members "need enough time to debate this" and echoed Frank's concerns about executive pay. "We don't have these great golden parachutes and so on. In the end we're doing it for the taxpayers." Frank said that lawmakers "are building strong oversight" into the measure, including establishing an oversight board that will report to Congress at least monthly. "The private sector got us into this mess," Frank said, "The government has to get us out of it. We do want to do it carefully."

McCain still seeking firm footing on crisis With just four days until the first presidential debate and just 42 days until the November 4 election, Senator John McCain is still feeling for his footing on the financial crisis that seems likely to consume the rest of the presidential campaign. A McCain aide told reporters last night that the Republican nominee would distance himself from Treasury Secretary Henry Paulson’s trillion-dollar bailout plan, saying it lacks “oversight.” And McCain in a “60 Minutes” interview Sunday Night floated the name of Andrew Cuomo, the confrontational Democratic New York attorney general, as the chairman of a tough new Securities and Exchange Commission. The Sunday night proposals were the latest in a series of attempts by McCain to draw a dramatic contrast between himself and President George W. Bush as the campaign appeared to shift decisively away from his chosen turf of culture wars and national security, and toward the economy. Obama, for his part, will have a final chance this week to duct tape McCain to the economic crisis and an unpopular president, and bury him in the flood of bad economic news. But as McCain tries to regain his grip on the campaign narrative, and Obama adopts a more reserved posture his campaign hopes appears “presidential,” both men are struggling with their sheer irrelevance to the fast-moving wrangle between the White House, Congress, and the turbulent stock markets. “The events are bigger than the candidates,” said Phil Singer, a former aide to Hillary Clinton.

• Obama calls financial bailout price tag "staggering"