Financial bailout bill: Still a blank check?
By Peter Grier | 10.02.08
Washington – Wow. Calling him “King Henry” may be a little much, but Treasury Secretary Henry Paulson would still gain unprecedented powers under the financial rescue legislation the Senate passed Oct. 1.
This bill is different from the one rejected by the House on Sept. 29. Congressional leaders have added tax breaks and an increase in deposit insurance in an effort to make it more palatable to nervous lawmakers.
But at heart the authority it would invest in the Treasury chief is little changed.
“He’s still getting a blank check,” said Thomas Mann, Brookings Institution senior fellow in governance studies, at an Oct. 1 seminar. “Just with some whistles and bells on it.”
To see what this means, look at the language in the bill. It’s apparent from the start. Here’s a good excerpt from page 6:
“The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘TARP’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.”
So … in other words, Mr. Paulson (and his successor) gets to buy stuff pretty much any way he wants. Reverse auction, forward auction, Statue-of-Liberty auction, church raffle – Lehman Brothers, come on down!
But it has got to be from financial institutions, right? There’s that restriction.
Except, here’s the definition of “financial institution.” It’s on page 4.
“The term ‘financial institution’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States….”
See? That one can sneak by you. The important part is “any institution, including, but not limited to.” So, the Treasury secretary can buy troubled assets from anything! True, the end of that sentence, which is very long, excludes things owned by foreign governments, or their central banks. And the institution in question has to at least have operations in the US.
But if Taco Bell has any bad assets it wants to unload, it looks to me as if it qualifies.
The bill goes on to say that the Treasury secretary has to make purchases at the “lowest price that the Secretary determines to be consistent with the purposes of this Act….” He or she is also supposed to “maximize the efficiency of the use of taxpayer resources by using market mechanisms … where appropriate.”
Again, who is making the decisions there? You guessed it. That’s not what you’d call binding legislative language.
At least we all know what the the Treasury will be buying. It will be those much-discussed toxic assets – mortgage-based securities that have gone bad because real estate prices have fallen.
Except when they aren’t. Here’s the bill’s secondary definition of troubled assets: “Any other financial instrument that the Secretary … determines the purchase of which is necessary to promote financial market stability.”
To be fair, the depth of the credit crisis and the need for quick action may call for a rescue program that allows its overseer maximum flexibility. And the Senate-passed bill keeps tighter control over the nation’s purse strings. It only allots the Treasury a first tranche of $250 billion for the program, toward a cap of $700 billion.
And there will be a number of oversight boards to check Treasury’s actions, including a congressional panel of five lawmakers.
Still, to call the whole thing a “plan” is something of a misnomer, according to the panel at Brookings’ Oct. 1 event.
“It’s important to understand there’s no plan. What the legislation would do, would say to Paulson, you deal with this, we don’t know how you’re going to do it, but we’re giving you some money to deal with it,” said William Gale, Brookings director of economic studies.
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Why Asia isn’t buying the Senate bailout
By Simon Montlake | 10.02.08
Bangkok
Another day, another rout in Asian stock markets.
Investors didn’t find much to cheer in Wednesday’s Senate approval of the revised bailout plan, reasoning that the House vote later in the week is the bigger hurdle to climb. An index of Asian equity markets hit a three-year low and is so far down around 32 percent this year. Stocks initially rose Thursday on talk of the US bailout package, but the euphoria soon died.
Japan set the bearish mood, as manufacturers like Toyota turned pessimistic over their earnings at home and abroad. Many consumers are also more hesitant to spend, stoking fears of lower growth, according to a Japanese government survey.
The doom and gloom might seem overdone, as Asia isn’t holding much of the toxic securities that have felled once mighty US and European financial houses. Sure, there was panic in Hong Kong last week over one bank seen as unstable. But that run was quickly averted when a local billionaire bought into the bank.
Credit markets in Asia have seized up, prompting central banks in Japan, China, Australia, and elsewhere to pump in money to keep them going. But there isn’t yet the same panic that has afflicted the US and Europe.
What does worry investors is that spendthrift Americans are about to become more frugal, by necessity rather than choice. That’s bad news for producers in Asia who rely on external demand.
A decade ago, it was East Asia that suffered a financial meltdown.
Linda Lim, a Singaporean who is a professor of strategy at the University of Michigan’s Ross School of Business, recalls that Asian governments were scolded then for their lax regulations of financial markets. In the aftermath of the 1997 crisis, Western investors snapped up assets at fire-sale prices.
Now the shoe is on the other foot. Will Asians return the favor by plowing their surplus capital into US assets, thus keeping Wall Street – and by extension Main Street – afloat? A Japanese bank has already bought a chunk of Morgan Stanley.
Don’t bet on it, write Ms. Lim. Sovereign wealth funds are worried that US politicians may block takeovers. Lehman went bankrupt last month after trying and failing to sell a stake to a state-owned South Korean bank. China is still wondering if it got burned by buying a piece of Blackstone.
Nor will Asian consumers pick up the global slack if Americans start spending less. Yes, US exports have risen on the back of a weak dollar, but Asia isn’t about to go on a made-in-America buying spree. Consumers and governments prefer to save for a rainy day, it seems.
“So salvation for the West’s economic downturn won’t come from Asian capital or consumption,” warns Lim.
This isn’t to say that Asia doesn’t have a major stake in how Washington handles the credit crunch. It does, and policymakers are watching closely to see what happens to the financial sector and, crucially, to the dollar.
That’s because Asia has stashed its savings in US government debt, helping America to keep interest rates low and spend more freely. It was a back-scratching formula that allowed countries like China to keep their currency cheap and keep exporting to indebted Americans.
Former Treasury Secretary Larry Summers called this arrangement a “balance of financial terror,” as it locks in creditors like China and Japan into the dollar, the world’s reserve currency. Plenty of other economists took note of the imbalance, too, and its political implications.
Writing earlier this year in The Atlantic, James Fallows calls it the $1.4 trillion question. What happens if China wants its foreign reserves back? Or will it keep indefinitely propping up American consumption as long as it sustains China’s own export-led growth?
That question seems ever more pertinent as economists fret over the risk of a prolonged US downturn, one that would be felt acutely in Asia.
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House braces for second try at financial bailout plan
By Gail Russell Chaddock | 10.02.08
Washington – After gliding to victory in the Senate late Wednesday, the Bush administration’s proposed $700 billion financial rescue plan heads back to the House, where its prospects remain uncertain despite the inclusion of tax breaks and consumer perks designed to win over enough votes to push it through.
It was an anguished vote for senators. Many expressed misgivings about the bill even as they voted for it. But it is likely to be an even tougher vote for House lawmakers, each of whom is already on record as being for or against the plan - and most of whom are up for reelection in 33 days.
The House of Representatives just three days ago rejected an earlier version of the bill, stunning party leaders and driving down stock values worldwide on the day. The Senate version of the rescue legislation – which has been widely derided as a bailout of high-flying Wall Street CEOs – contains the same basic provisions as the defeated House bill, plus some tax-break extensions and extra guarantees for depositors.
Even so, this time the political forces appear to be aligning more favorably for the bill – and the world, along with Main Street USA, is watching.
As the Senate took up the issue Wednesday night, news crews spilled out into the corridors and the public jammed available galleries. The final vote was 74 to 25 in favor. Presidential hopefuls John McCain and Barack Obama both voted for the measure, as did Democratic vice-presidential candidate Joseph Biden.
“We’ve sent a clear message to all America that we will not let this economy fail,” said Senate majority leader Harry Reid, after the vote.
The changes in the Senate version of the bill came down to two points aimed less at the Senate, where passage of the plan had been expected, than at the House.
One provision in the revised Senate plan would raise the Federal Deposit Insurance Corp.’s (FDIC) limit for insuring individual bank accounts from $100,000 to $250,000. The move aims to boost confidence in financial markets and enjoys broad bipartisan support in both chambers.
But the second major revision, a $110 billion package of tax extensions, is one of the most bitterly divisive issues in the 110th Congress. Backers of the rescue plan say it’s this very divisiveness, ironically, that could change the calculus of votes in the House and secure victory in a vote expected by Friday.
“We’re optimistic. And I think a good vote coming out of the Senate will certainly be helpful over in the House side,” said Republican Senate leader Mitch McConnell on Wednesday.
After the Senate vote, House speaker Nancy Pelosi released a statement, pledging that “the House will act in a bipartisan way to restore market confidence as well as Main Street’s confidence in our economic future.”
The proposed rescue plan provides as much as $700 billion for the Treasury secretary to buy “troubled assets” from financial institutions, including foreign banks doing business in the United States. Congressional negotiators added other features: oversight, curbs for excessive executive compensation, and an option – urged by House Republicans – for the Treasury secretary to solve the problem through insurance and loans, rather than purchase of assets.
After the bill failed in the House, Senate negotiators began working on add-ons that could win over enough support in the House to pass on a second vote.
“The FDIC was talked about immediately after the House vote failed,” said Sen. Pete Domenici (R) of New Mexico.
But the key new element is the tax package, viewed by both sides of the aisle as must-pass legislation but stymied by disagreements between the House and Senate over how to pay for it.
The package includes repeal for a year of the Alternative Minimum Tax (first drafted to make sure that the superrich pay some income taxes, but now set to hit more than 22 million additional Americans if Congress does not act); disaster relief; a clean-energy tax package; and tax-break extensions, such as the popular research-and-development tax credit, deductions for tuition and education expenses, and deductions for sales tax in states that do not have an income tax.
The glitch is financing. The House has always insisted that the plan be paid for mainly with budgetary offsets – a signature demand of the Blue Dog caucus, a group of fiscally conservative Democrats. The Senate insists that offsets are not necessary for extending expiring tax cuts.
The tax package had passed the Senate by a vote of 93 to 2 on Sept. 23, but House Democratic leaders refused to take it up because it did not offset all new spending and tax cuts. By attaching the package to a rescue plan seen as vital to the health of America’s economy, the Senate is trying to force the House to pass both.
Here’s how: If some House Republicans who opposed the rescue plan on Monday (133 of 198 voted no) are attracted enough by the tax package, they’ll flip their votes. Some Blue Dog Democrats, angered that they now have to swallow new spending that’s not paid for, may drop their support of the bill, but perhaps not by enough numbers to sink it.
Many senators on Wednesday described the vote on a rescue plan for financial markets as the toughest of their career. They, too, are angry at Wall Street for the misdeeds that led to a financial crisis, they said.
“This isn’t a matter of helping Wall Street,” said Sen. Carl Levin (D) of Michigan, after Wednesday’s vote. “It’s a matter of trying to the best of our ability to protect people’s pensions and savings, home values and jobs and businesses. That’s what’s at stake here.”
“Don’t expect any ribbons for this one…. If it works, the cataclysmic event won’t happen and you’ll never be given any credit for avoiding a problem,” Sen. Christopher Dodd (D) of Connecticut, who chairs the Senate Banking Committee, told his Democratic colleagues at lunch on Wednesday.
Opponents of the bill said they, too, were torn.
“It was a tough vote for me, but they stacked in so much spending there that pretty soon the concern for increasing the debt limit and the expenses was a problem. I’ve always been known as a fiscal conservative,” said Wayne Allard (R) of Colorado, one of seven Republican senators who opposed the bill and also face a reelection race in November.
“We are on uncharted water here,” said Sen. Kent Conrad (D) of North Dakota, who chairs the Senate Budget Committee. “We’ve got the chairman of the Federal Reserve telling us that if we don’t do this, 4 million Americans will lose their jobs in the next six months,” he added. “We have got to move forward.”
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A depression: Could a third of Americans be right?
By Mark Trumbull | 10.01.08
The ongoing credit crisis raised fresh worries about an old problem – a 1930s kind of problem.
Yes, the D-word.
Most forecasters say an economic depression remains a highly unlikely scenario.
But many also say that the risk is real – because of the possible collapse of credit markets.
At the very least, it seems as if fear and the search for historical reference points are causing a refresher course in lessons from nearly 80 years ago.
Consider this: The words “depression” and “economy” coincided in 1,235 articles in major US newspapers last month, according to the Nexis database service. That compares with 228 times in September 2007. In a new USA Today/Gallup poll, one-third of Americans defined the current state of the economy as a depression, not a recession.
The economic news certainly isn’t buoying anyone’s spirits. Major automakers reported Wednesday double-digit declines in car sales for last month. The same day, the Institute for Supply Management reported a large drop in new orders for September, suggesting a continuing slowdown in manufacturing.
Still, concern about the direst outcomes is still hypothetical, not reality. On Friday, the Labor Department will release unemployment figures that are expected to show the continued erosion of jobs. But at 6 percent, unemployment is far below the devastating 25 percent rate seen in the Great Depression’s low point.
On its website, the National Bureau of Economic Research refers to depression as “a recession that is major in both scale and duration.” So what’s a recession? “A period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.”
The big risk right now, economists say, is that a credit crunch causes major shifts in behavior – where employers can’t get loans needed to create new jobs, consumers can’t get loans for major purchases, and soon lots of people are losing jobs as everyone hunkers down. Asset prices for things like homes could keep falling, if few are able or willing to be buyers.
That risk is offset by a reason for optimism: Nobody wants to repeat the 1930s, and policymakers have learned some lessons from that era.
In his life before becoming Federal Reserve chairman, Ben Bernanke’s academic research focused heavily on the Great Depression. In one important paper, he argued that a breakdown in the credit system “helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression.”
To the degree that that risk is present today, the process of purging bad debts and reviving channels of credit is vital to the economy. That’s why there’s all the talk about a rescue package in Washington – not for bankers personally but for the system.
Another lesson of the Depression is this: Policymakers responding to a crisis can sometimes create new problems if they send mixed signals – engendering confusion or hesitation among the marketplace participants on whom the economy ultimately depends.
These are just a couple of lessons from the past – ones worth remembering in the heat of fast-paced current news.
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While Congress debates, FDIC steps to fore of credit crisis
By Mark Trumbull | 10.01.08
Even as proposals for a financial bailout dominate the news, an existing federal agency – the FDIC – has stepped into a prominent role as crisis manager of last resort for faltering banks.
In the past week, the Federal Deposit Insurance Corp. has become a major deal broker in a manner that would normally make its actions a lead-the-news story. With two of America’s 10 largest deposit-taking institutions looking like dominoes that could fall, the FDIC made a quick call: Wachovia and Washington Mutual would be sold now rather than potentially cost the government later.
The actions are not without controversy. Shareholders were all but wiped out and now two other giant banks have become larger still – Citigroup by buying Wachovia, and JPMorgan Chase by buying WaMu.
But to many experts in bank regulation, the moves are a reassuring sign that the nation’s defender of depositors is on the case. They say the FDIC will continue to play a big role, even if Congress approves other rescue efforts.
“The FDIC has been very efficient at closing banks quickly, so that it hasn’t had to put much money in” to save depositors, says Peter Morici, an economist at the University of Maryland. “It is good if it remains proactive.”
Congress is weighing other measures to revive the financial system, such as by allowing the Treasury to buy distressed bank debts that have caused investor confidence to fray. If such measures go forward, banks will still fail, Mr. Morici says. When the FDIC steps in promptly, he says “it mitigates the losses” that bank failures create for taxpayers and the economy.
In both the WaMu and Wachovia cases, the FDIC was able to resolve problems without tapping its Deposit Insurance Fund, which banks pay into to insure depositors. That was achieved by acting early, so that the banks were in shape for quick resale.
The moves have thrust FDIC chairman Sheila Bair into the limelight, and not only for her influence when banks falter. She’s also busy trying to bolster the confidence of depositors even as she prods banks to dig out of trouble.
“You simply must accept that the credit downturn is far from over,” she told the Florida Bankers Association last month. “It’s a tough slog, but there’s no easy way out.”
The agency regulates US banks, alongside the Federal Reserve and the Treasury’s Office of the Comptroller of the Currency.
It expects to handle more bank failures in months to come.
“There’s going to be more work to be done,” says Brian Bethune, an economist at Global Insight, a forecasting firm in Lexington, Mass.
But despite a mood of near panic in credit markets in recent weeks, most banks remain safely managed and diversified in their operations, and not overly exposed to risky mortgage loans, he says.
The banks in deep trouble tend to be those most exposed to real estate busts (such as Florida’s or California’s) or an otherwise sagging economy (such as Ohio’s). Even then, bank failures tend to involve poor risk-management, not just being in the wrong location.
In her Florida speech, Bair said that 98 percent of banks are well-capitalized, accounting for 99 percent of total bank assets.
Still the combination of investor uncertainty and a weakening economy have in recent weeks created a kind of run-on-the-bank mentality that poses its own risk to the financial system.
“Now we’re definitely into contagion, and that’s problematic,” Mr. Bethune says. “The media is contributing to this by putting certain [bank] names out there…. That’s led to a lot of withdrawal of deposits, even though the deposits are insured. It’s obviously very dangerous.”
A new Gallup survey of affluent Americans finds that only 21 percent have a “great deal” or “quite a lot” of faith in banks and other financial firms, down from 40 percent at the end of August.
Many people are dividing their money among several institutions, Morici says.
Several moves are under way to try to restore calm. The FDIC may get authorization to insure accounts of up to $250,000, versus the limit of $100,000 now in place (with a $250,000 current limit for retirement accounts).
The FDIC also launched an ad campaign Wednesday to expand awareness of deposit insurance. To quell waves of concern beyond regulated banks, the Treasury recently announced a plan to insure money market mutual funds.
