Now, public is spurring Congress to act
By Gail Russell Chaddock | 10.01.08
Washington – The tide is shifting over prospects in Congress for an epic $700 billion financial rescue package.
The reason: Voter anger over a “bailout” for Wall Street, which nearly shut down switchboards on Capitol Hill last week, is being eclipsed by new evidence that the credit crisis is hitting Main Street – and is on track to get worse.
“I got a call yesterday from a car dealer in Las Vegas saying, ‘I can’t buy any more cars.’… If somebody buys a car, most of them can’t get a loan,” said Senate majority leader Harry Reid on Wednesday.
The stunning defeat of the financial rescue plan in the House on Monday sent the stock market plunging and prompted renewed efforts on both sides of the aisle to find a compromise. At the same time, business groups stepped up an all-out offensive to muscle a bill across the line this week.
“The pain on Main Street is real. It’s being felt,” says Bruce Josten, chief lobbyist for the US Chamber of Commerce, which has been mobilizing local chambers across the country to weigh in on this vote.
“It’s been a 24/7 exercise in improvisation. There’s no playbook for a crisis like this,” he adds. “Members are beginning to realize that, despite ideological reactions, they’d better do something.”
In a bid to move a bill to President Bush’s desk by end of week, the Senate opted to vote on a compromise bill Wednesday evening. The new deal adds a package of tax breaks for business, as well as an increase in the government’s $100,000 cap on insuring bank deposits.
“We will have demonstrated to the American people that we could deal with the crisis in the most difficult of times, right before an election, when the tendency to be the most partisan is the greatest,” said Senate Republican leader Mitch McConnell, who predicted that the revised plan would pass.
Meanwhile, House members across the political spectrum have been scrambling to add their own elements to a plan that many see as one that must pass this week.
It’s creating some odd ideological matchups. House progressives, on the left of the Democratic Party, announced on Tuesday that they are working with conservative Republicans on low-cost or no-cost alternatives to relieve credit markets. Such alternatives would have less risk to taxpayers than the $700 billion “bailout.”
“That’s a common theme among members both who voted for the bill and who voted against the bill: Don’t put the taxpayers at risk,” said Rep. Peter DeFazio (D) of Oregon, a member of the Congressional Progressive Caucus, at a briefing Tuesday.
The progressive caucus proposal includes rule changes in the Securities and Exchange Commission aimed at increasing liquidity, such as requiring the SEC to suspend fair-value accounting standards. (This so-called mark-to-market rule forces financial institutions to mark assets to the market value, even if that means dropping still-performing assets, such as some mortgage-backed securities, to zero.)
It’s a policy change also endorsed by many House Republicans. And in an independent move, the SEC on Tuesday posted clarifications that ease that rule.
GOP presidential nominee John McCain and Democratic nominee Barack Obama, who both spoke with Mr. Bush on Tuesday, urged Congress to add a provision increasing insurance coverage from the Federal Deposit Insurance Corp. (FDIC).
With two-thirds of the House Republican caucus on record opposing the Bush administration’s plan, the focus is on Senator McCain to help flip enough GOP votes in the House to pass a bill this week. “It took Congress awhile, and there were costs to these delays. But they have awakened to the danger. And today, with the unity that this crisis demands, Congress will once again work to restore confidence and stability to the American economy,” McCain said in a speech on the economy in Independence, Mo., on Wednesday morning.
Meanwhile, regulatory agencies such as the SEC and FDIC are giving a nod to reform proposals on Capitol Hill. This week, FDIC Chairman Sheila Bair said she would seek a temporary increase in the deposit insurance limit.
“The SEC came out [Tuesday] with a clarification on fair-value accounting that would focus on the economic value of the assets. It looks like the SEC is finally moving on this,” says Melissa Netram, director of regulatory affairs at the Financial Services Roundtable, an industry-sponsored consortium in Washington.
“But since Congress didn’t pass the [rescue] legislation on Monday, the credit markets, not just the stock markets, suffered. This hasn’t been clear to the American public,” she adds. “The plan isn’t just for Wall Street, but also for Main Street.”
But lawmakers say the message from business groups suffering from a credit freeze is being heard, along with voters still angry over what they see as an undeserved, taxpayer bailout of Wall Street.
“At the grass-roots level, people are still largely opposed to this, but I talked to CEOs of healthcare organizations, business leaders, auto dealers, all of whom say that this credit crisis is real,” says Sen. John Thune (R) of South Dakota. “They believe that steps need to be taken to ensure that we don’t have a crisis that limits credit to those businesses that operate on credit.”
“This is going to happen,” says lobbyist Josten. “The last House vote was a ‘conscience vote’ that wasn’t whipped on either side. But the credit crisis is now so great that some local businesses aren’t making payrolls. Congress can’t afford not to act.”
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Ireland’s bailout proposal boosts confidence
By Michael Seaver | 10.01.08
Dublin, Ireland – In response to money markets freezing due to the global banking crisis, the Irish government has drafted emergency legislation to help Irish banks access funds on the international markets.
After a turbulent day of trading on Monday, when shares in Irish banks suffered their sharpest fall in more than 25 years, Finance Minister Brian Lenihan pledged to fully guarantee deposits, bonds, and debt against Irish banks up to an amount of €400 billion ($563 billion).
“Coming into work on Tuesday we were expecting the worst,” says Ciaran Callaghan, an equity analyst at NCB Stockbrokers. “If there was no government announcement … then there was a threat that some Irish banks could go under because they weren’t able to fund themselves.”
Although the legislation is still making its way through the Irish parliament, the announcement increased confidence in the Irish financial markets. On Tuesday the Iseq index of Irish financial shares increased 28 percent, its biggest gain in 15 years.
“It’s all about confidence,” Mr. Callaghan says. “Now the cost of interbank lending and wholesale funding will be lower for Irish banks.”
Although not unprecedented, the move is unusual.
“Nobody uses it as a first option, and the textbooks say that you should avoid it if at all possible,” says Patrick Honohan of Trinity College’s School of Economics in Dublin. “There is clear evidence that crises that involve deposit guarantee end up more costly to the government in the end, probably because it reduces the market discipline pressure. It makes bankers who have a tendency to take risks to take even more risks,” he says.
Some opposition politicians have also expressed misgivings about the amount of risk, which is twice the country’s gross national product.
“We’re effectively being asked to put up the deeds of the country by [being] guarantors,” said Eamon Gilmore, leader of the Labour Party, during the government’s debate.
If, as expected, the legislation is approved, it could give Irish banks an unfair advantage over their European counterparts. But Irish Prime Minister Brian Cowen maintains that there is a full understanding of the Irish government’s position. Speaking at a news conference after a meeting with his French counterpart and current European Union president Nicolas Sarkozy in Paris, he said: “I think the [European Union] understands precisely why the Irish government had to act, and the circumstances in which we found ourselves.”
Nevertheless the European Commission will monitor the legislation with attention to any potential breach of competition law, although the commission is expected to support national initiatives. In a statement, Neelie Kroes, competition commissioner, stated that the commission would look at any state aid involved as a matter of urgency.
International banks with Irish branches are also at a disadvantage as they are not included in the legislation. “It is important that there continues to be a level playing field so that customers enjoy equal choice from all Irish licensed banks,” says Mark Duffy of the Bank of Scotland (located in Ireland), which has asked to be included in the plan.
The guarantee will last until September 2010 and will be monitored by Mr. Lenihan’s office.
“The bill will give significant power to the minister, including the option to force mergers or takeovers,” says Mr. Callaghan. It could also force a rights issue if a bank was severely undercapitalized.
Like other governments’ bailouts, the Irish plan’s success will depend on effective regulation.
“Regulators all around the world have got a fright because of this crisis and their models have been seen to be unreliable,” says Professor Honohan. “Their mechanical approaches to rating agencies to assess risks is not up to the complexities of the modern world. They need to have a more holistic approach to risk management. You are dealing with people – decisionmakers – not just mathematical models of risk.”
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Europe eager for Senate bailout vote
By Mark Rice-Oxley | 10.01.08
London
Right then, the Senate. Will they or won’t they?
Europe reckons “yes” as everyone seems to be betting that the US political elite cannot make the same mistake twice. To lose one vote, to paraphrase Oscar Wilde, might be considered unfortunate, but to lose two would be downright careless.
For many British commentators, however, the damage has been done - to the US political as well as financial class.
Willem Buiter, a former member of England’s central bank who yesterday revealed that he was keeping his financial wealth in an “a (small) old sock,” said he was relieved that the US bailout plan is still alive. But he thinks the Senate plan to raise the bank deposit insurance from $100,000 to $250,000 per account is “a bad idea.” And he chastised the US presidential candidates for a failure to lead in a time of crisis.
“The unwillingness/inability of the next president of the USA to display judgment, leadership and courage … is likely to do more to undermine the international prestige (and credit rating!) of the US than any increase in the public debt to GDP ratio associated with the plan,” he opined.
Simon Tisdall, the Guardian’s foreign columnist, was even more scathing.
“Eminent reputations lie in ruins; the august institutions of Congress, the Treasury, the Federal Reserve tremble; the presidency itself is shaken. In America’s year of living dangerously, few will emerge unscathed. The consensus view, if there is one in so divided a nation, is that the US has suffered a calamitous, across-the-board failure of leadership. The bankruptcy is political as well as economic.”
Signs are multiplying here of the financial squeeze starting to grip the real economy. British manufacturing is shrinking at the fastest rate since records began.
Hardy Amies, the fashion house that dressed Queen Elizabeth for 30 years, is on the verge of insolvency. Foreclosures were up 17 percent in the second quarter. Everyone seems to be scrambling to make sure what cash they have is safe.
The British government looks like it will increase its guarantee on ordinary bank deposits from £35,000 ($62,000) to £50,000 ($89,000). The Irish have given blanket guarantees on covering deposits at its six financial institutions for two years, upsetting some in Europe who think it will give Irish banks a competitive advantage.
But how many banks will be left once the brutal Cull of 2008 is over?
One of Britain’s veteran bankers hazarded a guess on BBC radio Wednesday morning. Sir Brian Pitman, who spent almost 50 years at Lloyds TSB, said banks had expanded too quickly and now we are witnessing “a process of clearing out the stables.”
Sir Brian predicted that ultimately we’ll see “six banks slugging it out” in Britain, though it remains to be seen how many of these will be British. One of the big winners of the credit crisis in Europe is the Spanish bank Santander, which is gobbling up High Street names as if Credit Crunch was a new form of breakfast cereal.
One of those left will be the behemoth created by the Lloyds TSB-HBOS merger – though doubts have multiplied in the last 24 hours about the deal, brokered by Prime Minister Gordon Brown to prevent HBOS going HBUST.
During the recent market rout, share prices of both institutions were pummeled so badly that skeptics began to wonder: Would Lloyds go through with the deal? Would it try to knock down the offer price, given that HBOS value was evaporating?
Today, it appears, that deal is still firmly in place. No. 10 Downing Street, we are reassured, is “in touch” with the players.
I presume that means that our prime minister is on the phone making sure that the (political) capital he has vested in the deal will not go down the tube.
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Congressional leaders pledge to try again on ‘bailout’
By Gail Russell Chaddock | 09.30.08
It’s not over.
That’s the message lawmakers are sending to Wall Street and Main Street after the stunning defeat of a $700 billion financial rescue plan this week.
But to get there, they’ll need a plan that both meets the need on Wall Street and can also win a majority of House members, who face voters in little more than a month from now.
Leaders in Congress on both sides of the aisle say this can be done.
For Democrats, it will take tweaks to the core plan that address more of the needs on Main Street, including more stimulus for the economy. For Republicans, it will take more protection for taxpayers and, if possible, more free-market elements in the plan.
“That’s not just Wall Street. It’s the pensions of people who are retired and worked for city and county government,” said Senate majority leader Harry Reid, as he opened the Senate on Tuesday. “We’re all committed to keep this rescue package moving forward.”
Meanwhile, outside finance experts are lining up to urge lawmakers to also revise the Wall Street face of the plan.
Rejecting appeals from their party leaders, 228 House members – 133 Republicans and 95 Democrats – voted to derail the plan, which failed by 12 votes, 204-228.
Republican leaders, who had predicted a tough vote, lost most conservatives, wary of a big-government takeover, along with many moderates facing close races in November.
On the eve of the vote, House Speaker Nancy Pelosi insisted that Republicans deliver a majority of their caucus, or 100 votes, to show the American people that the historic vote was bipartisan. In the end, they could produce only about a third of the caucus.
Democrats, who have produced lock-step majority votes on important issues for most of the 110th Congress, lost most of their black and Hispanic members, riled that the plan didn’t help enough homeowners facing foreclosure; and also lost many of the 29 votes in the Progressive Caucus and 22 in the fiscally conservative Blue Dog caucus.
News of the House vote sent stock values plunging some $1.3 trillion in paper value after the vote. The record 778 point drop of the Dow Jones industrial average got Congress’s attention. After the vote, negotiators on both sides of the aisle repeated the need to convince voters that the rescue plan isn’t just a “bailout” for Wall Street, but also essential for Main Street. But they add that it will take more than better public relations to move the bill to the Senate and the president’s desk.
Democrats say that the burden of finding those additional votes must fall on Republicans: It’s a Republican administration, more Republicans must back it. But leaders are also preparing language that will deliver more relief to homeowners. Many on the left wing of the party are mining outside experts for alternatives to the plan negotiated with Treasury Secretary Henry Paulson – and are urging party leaders to hold out for more.
“This Congress must step up to its constitutional responsibilities to craft that right deal, not an insider trade,” says Rep. Marcy Kaptur (D) of Ohio, who opposes $700 billion in government purchases of “troubled assets” on the books of US and foreign financial institutions.
The financial crisis in the 1980s was resolved “in a much more disciplined and rigorous way than taxpayers printing money for Wall Street,” she adds, referring to actions by the FDIC to resolve thousands of problem situations with no cash changing hands.
Meanwhile, Republicans face a tougher task of bringing on board conservatives convinced that the Paulson plan is a step toward socialism. “I’m resolute in my opposition,” said Rep. Darrell Issa (R) of California. “Today we are ending the Reagan era if we vote for this, and we can’t come back and fix it next year.”
“Unless the market drops substantially, the Republicans aren’t going to get scared enough to do the right thing. At this point, they’re listening to talk radio and not listening to the president,” said Rep. James Moran (D) of Virginia, after the vote.
He and other Democrats cite contacts with outside experts, such as financier George Soros, as advisers for the next steps forward. “I just talked to George Soros on the phone. He’s coming up with a bill,” Mr. Moran said.
A report released Monday by the nonpartisan Center for Responsive Politics signals another dimension to the calculus of support on a Wall Street rescue plan: Members who voted for the $700 billion plan received 51 percent more in campaign contributions from the finance, insurance and real estate sector over their congressional careers than those who opposed it.
Since 1989, the finance, insurance, and real estate sector has given more than $2 billion to federal candidates and parties, more than $68 million to House members in this campaign cycle.
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Impatient with U.S., Europe crafts own rescue plans
By Mark Rice-Oxley | 09.30.08
Europe was aghast – and impatient – at the US failure to approve a banking bailout plan, and credit remained tight. But reflecting the view that approval was inevitable, stock markets Tuesday didn’t follow Wall Street’s record plunge Monday.
Indeed, financial authorities in Europe are taking different measures than the US leadership to address the crisis, preferring to nationalize failing banks rather than sustain them with a plan to buy out their most toxic assets.
French, Belgian, and Luxembourg authorities rescued a second cross-border bank in two days, injecting $9 billion into Dexia. The bank is the world’s biggest lender to local governments. That lifeline came just a day after the part-nationalization of Fortis in the Benelux countries and Bradford and Bingley in Britain.
“The way we do things in Europe will be different than in the US – and that’s a good thing,” says Philippe Martin, an economics professor at the Sorbonne in Paris. “It’s moving towards the nationalization of banks, which is the right model.
“Some [European] banks will fail, but there won’t be a Paulson plan for Europe,” he adds. In the US, the taxpayer bears a significant portion of the risk. “Nationalization means we give you money, but we take the power. We fire the management, and when the situation gets better we sell the assets and the government makes a profit on some assets.”
Nonetheless, the financial community in Europe is eager for the US to resurrect the bailout plan. Economists and investors expressed their frustration Tuesday, while leaders and financial authorities in Paris, London, Rome, and other centers huddled to ensure that the US inaction would not upend their own financial systems.
“There is anger and frustration and a complete lack of understanding for self-indulgent politicians who clearly live on another planet,” says David Buik of Cantor Index, a commodities spread-betting firm in London. “We can’t believe this for a minute, we hope and think it’s just posturing. There has to be a deal after Jewish New Year.”
European and Asian markets see-sawed as traders tried to work out whether the US rejection was temporary or not. “There is still some hope across the market that this bailout plan in the US will eventually be passed,” says Keith Bowman, an analyst at Hargreaves Lansdown, a stock brokerage firm.
British Prime Minister Gordon Brown said the vote was “very disappointing” and said he’d told the White House as much, reminding the Bush administration “about the importance that we attach to taking decisive action in America.”
The European Union spokesman, Johannes Laitenberger, told journalists that Europe “expects that the decision will go through soon…. The turmoil that we are facing has originated in the US; it’s become a global problem. The US has a special responsibility in this situation.”
Mr. Brown and French President Nicolas Sarkozy each met with their financial lieutenants and bank chiefs, and then sought to calm investors. Brown reiterated several times in one interview that he was taking “decisive action” to shore up stability; French bank chiefs said their system was “solid,” despite alarms over Dexia. “We must stop collectively frightening ourselves,” said France’s central bank governor Christian Noyer.
But economists say that Europe is dependent on decisive US action. “It would be catastrophic if it [the US plan] is not resurrected,” says Anne Sibert, professor of economics at University of London’s Birkbeck College.
Willem Buiter, a former member of the Bank of England’s monetary policy committee, wrote that hope remained that the US House of Representatives “will be frightened by its own audacity and will reverse itself.”
If not, he said in a published commentary, bank lending would dry up, panic selling would ensue even of unblemished assets, household-name banks would collapse, and financial anarchy would ensue leading into “the Great Depression of the 2010s.”
“My remaining financial wealth is now kept in a [small] old sock in an undisclosed location,” he concluded.
Europeans are tentatively pushing for an international conference to address institutional reform and regulatory changes. Mr. Sarkozy has called for a summit to take place in November. Brown told the UN last week that there was a need for global oversight with “colleges” of regulators to keep tabs on the largest institutions.
Economists remain unsure that a multinational response can work, citing the US experience. “Any rescue plan is going to require sizable fiscal transfer and it’s hard enough to do that within a single country,” says Professor Sibert. “I can’t see an international effort being effective.”
“It’s very difficult to regulate financial institutions,” she adds. “One problem is that regulators aren’t paid enough and don’t have the incentives the employees of financial institutions do.”
Professor Martin says a conference would do little in the short term, but “in the longer term, to try and avert such crises again we will need some minimal regulation for financial markets and sovereign funds.”
Aside from rescuing banks, European monetary authorities have been pumping money into markets to help ease the liquidity crisis. They do this by lending money against collateral that can be in the form of questionable assets, freeing up the bank to swap bad debt for cold, hard cash.
Rym Ayadi, senior research fellow at the Centre for European Policy Studies in Brussels, says this is fine as far as it goes, but it’s a drop in the ocean of what the market needs, and hardly a long-term solution.
