We are seeing governments and central banks around the world ‘injecting’ capital into the financial system. You’ll notice that when a government and/or central bank ‘injects’ money (also referred to as a ‘bailout’) into a private corporation (Example: AIG) or bank, often the government and/or central bank receives equity in that corporation or bank in return (article below). As an example, the Federal Reserve received an 80% equity stake in AIG when it provided $85 billion in funding. Where did they get this $85 billion? It was created out of thin air and $85 billion was added to the debt of the United States government. Nice arrangement if you can get it. It also appears that $85 billion wasn’t enough – yesterday AIG needed an additional $37 billion from the Fed. Things are beginning to get really ugly.
If we, once again, strip away the rhetoric – what is really happening? Governments (United States included) and central banks (around the world) are buying majority stakes in corporations and banks. It is being done under the guise of shoring up the financial system – deceptive, but effective. While the people of the world think that governments and central banks are doing whatever they can to alleviate the financial ‘crisis’ – there is actually a long term plan at work here. Control of the financial/banking system is being consolidated rapidly under the central banking system (now including investment banks). We even see the Federal Reserve considering loaning money directly to corporations (articles began appearing yesterday) – bypassing the crippled banking system. When was the last time they did this? The Great Depression.
This is not an ‘inevitable’ result of the current crisis. If we stop listening to the lies – we begin to see what is really happening – financial control of the world continues to be consolidated into the hands of a very few, powerful people.
Yesterday, central banks around the world lowered short-term interest rates by 50 basis points. Is the current financial crisis a result of the ‘cost’ of money or is this a ‘liquidity’ problem? It’s a liquidity problem – banks aren’t lending and credit markets are frozen. Does it matter that it costs you less to borrow money if you can’t borrow money? No, it doesn’t. So, why would all of these central banks lower interest rates in this environment? I believe it’s all about appearances. By doing this, they ‘appear’ to be doing something that will positively impact stock markets. The reality is that this does nothing to help or solve the problem. The charade continues.
As I’ve said before – the underlying problem isn’t the credit markets or the banks or any of the hundreds of reasons we hear about on the news everyday. The problem is our monetary system that requires exponential growth. This will not correct itself until the monetary system changes. Where does all of this lead? Can governments bailout financial/banking firms forever? Of course not. This financial ‘crisis’ will eventually spread to governments the world over. Governments receive revenue from this ‘system’ and are already saddled with massive debt. It won’t be long before we start hearing that the entire system needs to change. How will it change? We’ll be told that we need a ‘coordinated’ financial system without national boundaries – without national currencies – eventually leading to world government controlling a coordinated world financial system.
Of course the Bible tells us all of this. We’re simply living during times when we can watch all of the details play out.
jg – October 9, 2008
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U.S. Treasury Considers Buying Stakes in Banks
New Tack Comes Amid World-Wide Emergency Rate Cuts
By DEBORAH SOLOMON
Wall St. Journal
October 9, 2008
WASHINGTON—The Treasury Department is considering ways to inject capital directly into banks, possibly by taking equity stakes, as the financial crisis continues to worsen.
Treasury Secretary Henry Paulson, in a marked shift in rhetoric, played up Treasury's newfound authority to "to inject capital into financial institutions" in remarks Wednesday. Mr. Paulson, who won approval from Congress to buy $700 billion worth of distressed assets, had previously focused on Treasury's plan to buy mortgage-related securities from financial institutions that are having trouble getting the assets off their books.
As the financial crisis continues to escalate, Treasury has begun fleshing out ways to use its authority to make direct injections into financial institutions, according to a person familiar with the matter. Treasury is figuring out how to structure such infusions so that banks can recapitalize and begin lending.
No such moves are imminent, but the fact that the department is engaging in such discussions is an indication of how the crisis is constantly morphing. Such a move was not under consideration just a few days ago but has become more of a possibility in recent days as the stock market has plunged and the credit crunch shows no signs of easing.
Treasury wants to design something voluntary that encourages healthy institutions to participate. Treasury is discussing whether to buy preferred stock or find some other way to inject capital into the firms.
In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."
The U.K. government this week announced a plan to take stakes in a range of domestic banks.
Coordinated Rate Cuts
On Wednesday morning, the world's central banks launched a large coordinated attack against the widening global financial crisis, lowering short-term interest rates in unison.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke testify before the House Financial Services Committee on Sept. 24.
The emergency interest-rate action, which involved the Fed, the European Central Bank, the Bank of England and others, is a sign that fears that the financial crisis could cripple the global economy are spreading rapidly.
But the rate move failed to soothe jittery investors. The Dow Jones Industrial Average closed Wednesday at 9258.10, down 189 points, or 2%. The index has fallen 14.6% so far this month. Oil fell $1.11 to $88.95 a barrel, on signs of weakening global demand. Investors continued to flock to safe-haven U.S. Treasury bills, and away from riskier debt such as junk bonds.
One of the chief threats to the global economy is that banks and other financial institutions are hoarding cash, which makes it harder for businesses and households to finance their day-to-day affairs. Lower interest rates reduce the cost of borrowing for banks, businesses and households, and potentially boost confidence. But it's far from clear whether the lower rates will make banks and other lenders, which are gripped by fears of defaults by borrowers, any more willing to lend.
The U.K. government this week announced a plan to take stakes in a range of domestic banks. As recently as a few days ago, the U.S. Treasury was not considering any capital injections. But it has become more of a possibility as the stock market has plunged and the credit crunch shows no signs of easing.
Treasury wants to design something voluntary that encourages healthy institutions to participate. It is discussing whether to buy preferred stock or find some other way to inject capital into the firms.
In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."
On Wednesday, central banks in the U.S., the euro zone, the U.K., Canada, Sweden and Switzerland each cut short-term interest rates by a half percentage point, noting that "the recent intensification of the financial crisis has augmented the downside risks to growth." Acting on its own, the People's Bank of China also cut rates, as did Australia's central bank, a day earlier. Later, central banks in South Korean and Taiwan cut interest rates, too, and Brazil's central bank cut reserve requirements on cash and term deposits.
______________________________
Central Banks in Global Show of Force
Central banks around the world acted in concert Monday, hoping a half-percentage-point rate cut would restore confidence to battered markets, WSJ's David Wessel reports. (Oct. 8)
The global scope of the move was unprecedented, and the cuts marked the first time central banks across the Atlantic have moved in tandem on interest-rate policy since just after the Sept. 11, 2001, terrorist attacks in the U.S. The Fed has not moved rates since April, when it lowered them to 2%.
The moves likely mark just the beginning of broadened government efforts to keep the world-wide credit freeze from strangling the global economy. "For all central banks, this is not the end of the story," says Laurence Meyer, vice chairman of Macroeconomic Advisers, a forecasting firm, and a former Federal Reserve governor. "We're facing a potentially severe recession."
—Jon Hilsenrath, Joellen Perry and Sudeep Reddy contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com
Showing posts with label Credit Crisis. Show all posts
Showing posts with label Credit Crisis. Show all posts
Saturday, September 16, 2006
Leaders May Close World's Markets
I mentioned yesterday that we would begin seeing comments relating to how this financial crisis would need to be solved 'globally'. It's already starting. This is an article by Chris Martenson posted this morning.
John - Oct 10, 2008
Berlusconi Says Leaders May Close World's Markets
Friday, October 10, 2008, 12:15 pm, by cmartenson
An interesting bit of news:
Quote:
Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''
``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''
The really interesting part is here where he hints that a second aim is to revisit the Bretton Woods agreement.
Translation: The US dollar's role as the world's reserve currency is up for debate.
Quote:
Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.''
The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II in a hotel in Bretton Woods, New Hampshire. The aim of the agreements was to establish a monetary management system, initially by pegging currencies to gold. The IMF was set up later to help manage the international financial system.
John - Oct 10, 2008
Berlusconi Says Leaders May Close World's Markets
Friday, October 10, 2008, 12:15 pm, by cmartenson
An interesting bit of news:
Quote:
Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''
``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''
The really interesting part is here where he hints that a second aim is to revisit the Bretton Woods agreement.
Translation: The US dollar's role as the world's reserve currency is up for debate.
Quote:
Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.''
The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II in a hotel in Bretton Woods, New Hampshire. The aim of the agreements was to establish a monetary management system, initially by pegging currencies to gold. The IMF was set up later to help manage the international financial system.
Handouts to Wall Street Announced
Handouts to Wall Street Announced
By: Dr. Chris Martenson
Dr. Martenson adds some additional comments on the recent developments concerning the government’s investment in our banks.
Handouts to Wall Street Announced
By: Dr. Chris Martenson
Monday, October 13, 2008, 9:00 pm, by cmartenson
Once again, the "will of the people" was overridden by Congress in their haste to respond to an "emergency," and, once again, it turns out the people's instincts were right.
Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?
Turns out we don't need to buy any of those assets right away after all.
Who knew?
Quote:
WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.
Instead, the money will be used to buy bank stock, which is a great deal if you are a bank, because you get cash equity and probably a nice boost to your stock price (I am cynically assuming that the government is not going to get the best price here....). And these purchases will be non-dilutive to existing shareholders. I was okay with the notion of capital infusions, but I am astounded to hear that they will be done in this manner to save existing shareholders.
Even more startling to me is that, instead of slapping the banks firmly on the wrist for being reckless, the government is also "expected to guarantee new debt issued by banks for a period of three years." To put it bluntly, that is just not the way to combat the moral hazard that is clearly endemic to our current banking system. I think the banks should be kept fully on the hook for any loans they make from here on out....mess up again, and your institution goes under.
Next, if you read the list of handouts below, things get even more troublesome (if your measure is "enormous rewards for Wall Street for misbehaving bother me").
Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.
A few of those companies are not even in trouble, at all, and yet they are about to receive billions and billions of dollars. Apparently there is a $5 billion reward for acquiring a competitor....I wonder how many knew about that when they were at the bargaining table? I would bet quite a few of them.
Wait, it get's better:
The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.
First, this is NOT a liquidity injection, this is a capital injection, and there's a big difference. Second, this deal could not possibly be any sweeter for any of the bankers or their shareholders. It amounts to a gigantic reward for playing risky and getting caught. Executive positions and shareholders are to be spared.
I am now squinting anew at the market sell-off last week, because it served to inject a lot of fear into the government and G7 negotiations at a critical moment that paved the way for the largest and most massive bailout ever in history. Strangely good timing, for the banks.
I called this a looting operation at the outset, and my suspicions are now largely confirmed.
After these trillions of dollars have been spent and distributed to the least worthy institutions on the planet, you will discover a few oddities along the way:
• Government debts will balloon enormously.
• No new jobs will be created.
• House prices will continue to fall and foreclosures will continue to mount.
• The real economy will have received practically zero benefit.
• Bridges, roads, and schools will still be in poor repair.
• States will still be hurting for revenues.
• We will still have no national energy plan.
In short, none of this money is directed at the real economy. All of it is directed at the institutions that created this mess in the first place, and which, honestly, feast on the productive economy.
This was, quite simply, the largest-ever transfer of public monies to private parties with the least amount of public gain.
We're going to be paying for this for a long, long time.
Oh, well, I suppose it is all history now. Time to sit back and see how the bond markets respond to all this new borrowing.
By: Dr. Chris Martenson
Dr. Martenson adds some additional comments on the recent developments concerning the government’s investment in our banks.
Handouts to Wall Street Announced
By: Dr. Chris Martenson
Monday, October 13, 2008, 9:00 pm, by cmartenson
Once again, the "will of the people" was overridden by Congress in their haste to respond to an "emergency," and, once again, it turns out the people's instincts were right.
Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?
Turns out we don't need to buy any of those assets right away after all.
Who knew?
Quote:
WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.
Instead, the money will be used to buy bank stock, which is a great deal if you are a bank, because you get cash equity and probably a nice boost to your stock price (I am cynically assuming that the government is not going to get the best price here....). And these purchases will be non-dilutive to existing shareholders. I was okay with the notion of capital infusions, but I am astounded to hear that they will be done in this manner to save existing shareholders.
Even more startling to me is that, instead of slapping the banks firmly on the wrist for being reckless, the government is also "expected to guarantee new debt issued by banks for a period of three years." To put it bluntly, that is just not the way to combat the moral hazard that is clearly endemic to our current banking system. I think the banks should be kept fully on the hook for any loans they make from here on out....mess up again, and your institution goes under.
Next, if you read the list of handouts below, things get even more troublesome (if your measure is "enormous rewards for Wall Street for misbehaving bother me").
Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.
A few of those companies are not even in trouble, at all, and yet they are about to receive billions and billions of dollars. Apparently there is a $5 billion reward for acquiring a competitor....I wonder how many knew about that when they were at the bargaining table? I would bet quite a few of them.
Wait, it get's better:
The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.
First, this is NOT a liquidity injection, this is a capital injection, and there's a big difference. Second, this deal could not possibly be any sweeter for any of the bankers or their shareholders. It amounts to a gigantic reward for playing risky and getting caught. Executive positions and shareholders are to be spared.
I am now squinting anew at the market sell-off last week, because it served to inject a lot of fear into the government and G7 negotiations at a critical moment that paved the way for the largest and most massive bailout ever in history. Strangely good timing, for the banks.
I called this a looting operation at the outset, and my suspicions are now largely confirmed.
After these trillions of dollars have been spent and distributed to the least worthy institutions on the planet, you will discover a few oddities along the way:
• Government debts will balloon enormously.
• No new jobs will be created.
• House prices will continue to fall and foreclosures will continue to mount.
• The real economy will have received practically zero benefit.
• Bridges, roads, and schools will still be in poor repair.
• States will still be hurting for revenues.
• We will still have no national energy plan.
In short, none of this money is directed at the real economy. All of it is directed at the institutions that created this mess in the first place, and which, honestly, feast on the productive economy.
This was, quite simply, the largest-ever transfer of public monies to private parties with the least amount of public gain.
We're going to be paying for this for a long, long time.
Oh, well, I suppose it is all history now. Time to sit back and see how the bond markets respond to all this new borrowing.
U.S. Announces Plan to Buy Stakes in Largest Banks
How was the recent $700 billion bailout sold to the American people? It’s only been about a week – have we all forgotten this? If you will remember, this bailout was sold to us as the only way for the financial system to recover. What was causing all of the problems? Toxic securities (CDO’s, etc.). Our government was going to buy these securities and take them off the books of banks/financial institutions. So, what has the Treasury done with the first blank check? They have purchased equity stakes in our largest banks – moving towards nationalizing our banking system. I find this very interesting. What does it tell us? It tells us that our leaders have lied to us so that they could get what amounts to endless funding for nationalizing our banking system – plain and simple. We see the same game plan being played out the world over. Iceland has nationalized their banking system. The U.K. has nationalized their largest banks. Europe is moving in the same direction.
I’m sure that our government will purchase toxic securities at some point. Think about what’s going to happen to our government when the economy doesn’t recover and it has all of this additional toxic debt on its balance sheet. We’re already insolvent – this isn’t going to help anything – except accelerate our government’s decline.
jg – Oct 14, 2008
____________
OCTOBER 14, 2008, 10:31 A.M. ET
U.S. Announces Plan to Buy Stakes in Largest Banks
Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort
By DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI
WASHINGTON -- President George W. Bush announced Tuesday morning that the U.S. government is taking stakes in the nation's top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government's guarantee behind the basic plumbing of financial markets.
FDIC Chairperson Sheila Bair speaks at a news conference as U.S. Treasury Secretary Henry Paulson (center) and Federal Reserve Chairman Ben Bernanke (right) look on.
"The efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,'' President Bush said.
Mr. Bush said the government will purchase equity shares in banks to help institutions unfreeze lending and spur economic growth. Funds for the purchases, which may amount to $250 billion, will come from the recently passed $700 billion bank rescue bill.
"This is an essential short-term measure to ensure the viability of America's banking system," Bush said. "And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors."
Mr. Bush also said the Federal Deposit Insurance Corp. will temporarily guarantee most new debt issued by insured banks. He said that will make it easier for banks to borrow money, which can then be lent to consumers. The FDIC also will "immediately and temporarily" expand its insurance to cover every dollar in all noninterest-bearing transaction accounts, which are widely used by small businesses to cover day-to-day operations.
Under the last step announced by Mr. Bush, the Federal Reserve will finalize a program to serve as a buyer of last resort for commercial paper, an important source of short-term financing for businesses banks.
Mr. Bernanke said the U.S. will not "stand down" until financial system and prosperity restored. Mr. Paulson, in his own remarks, said financial institutions in the new program will limit executive compensation. He said that "government owning a stake in any private U.S. company is objectionable to most Americans," but said the alternative "of leaving businesses and consumers without access to financing is totally unacceptable."
The government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.
Getting a Grip on the Financial Crisis
• Real Time Economics: The Evolution of Henry Paulson
• Economists React: A Thumbs Up From Ivory Tower
• Treasury's stock-purchase plan
• FDIC's liquidity plan
• Paulson, Bernanke, Bair joint and individual remarks
• Bush remarks Tuesday morning
• Detail of commercial paper facility
• Commercial paper FAQs
• Treasury's Executive Compensation Rules
Related Articles
• Wash Wire: Bush Embraces Multilateral Intervention
• Real Time Econ: The Evolution of Henry Paulson
• Europe's Rescue Carries Huge Price Tag
• How the U.K. Rescue Plan Became a Banking Model
• Sumner Redstone Squeezed by Loan and Stock Price
Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.
Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.
Along with the government's involvement come certain restrictions, such as caps on executive pay. For example, firms can't write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.
Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.
A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, using funds approved by Congress through the recently approved $700 billion bailout plan.
Treasury will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.
The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don't come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.
The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government's stake, a person familiar with the discussions said.
Among the other key components of the plan is the FDIC temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.
The FDIC is also temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.
The FDIC's central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency's power.
The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.
“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.” President Bush in a joint statement with Prime Minister Berlusconi of Italy.
The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury's main goal is to attract private capital. To make sure private investors aren't scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.
The government's new focus is raising questions about why it didn't adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.
Senior executives and advisers to some of the nation's leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.
House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury's decision to inject capital into the banking system.
"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Jared Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"
Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn't have the authority to make such a comprehensive move until Congress passed the bailout bill. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.
The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won't come at their expense.
For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.
The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again. The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through instruments called commercial paper will start in about two weeks.
William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury's initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.
But Treasury's new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.
"Investors need to be confident that the banks they're dealing with are unquestionably solvent, and it's in the interest of banks to assure investors that that's the case," he said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."
Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, argues the country may have turned a corner on the financial panic -- the fear that has kept banks and investors from making even the most prudent loans. "I think we're through the worst on that," he said. "Maybe I'll be proven wrong, but it really was at an extreme last week."
Blanket guarantees, however, might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don't want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.
One sticking point could come from Congress, which wrote into the original bailout bill requirements that Treasury tamp down executive pay. Rep. Frank said Monday he wants the government to set tough conditions for any company that receives a capital injection. If Mr. Paulson didn't enforce such rules, Mr. Frank said the Treasury secretary could be "making a big mistake."
—Michael M. Phillips, David Enrich, Daniel Fitzpatrick, Susanne Craig and Robin Sidel contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Damian Paletta at damian.paletta@wsj.com, Jon Hilsenrath at jon.hilsenrath@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com
I’m sure that our government will purchase toxic securities at some point. Think about what’s going to happen to our government when the economy doesn’t recover and it has all of this additional toxic debt on its balance sheet. We’re already insolvent – this isn’t going to help anything – except accelerate our government’s decline.
jg – Oct 14, 2008
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OCTOBER 14, 2008, 10:31 A.M. ET
U.S. Announces Plan to Buy Stakes in Largest Banks
Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort
By DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI
WASHINGTON -- President George W. Bush announced Tuesday morning that the U.S. government is taking stakes in the nation's top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government's guarantee behind the basic plumbing of financial markets.
FDIC Chairperson Sheila Bair speaks at a news conference as U.S. Treasury Secretary Henry Paulson (center) and Federal Reserve Chairman Ben Bernanke (right) look on.
"The efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,'' President Bush said.
Mr. Bush said the government will purchase equity shares in banks to help institutions unfreeze lending and spur economic growth. Funds for the purchases, which may amount to $250 billion, will come from the recently passed $700 billion bank rescue bill.
"This is an essential short-term measure to ensure the viability of America's banking system," Bush said. "And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors."
Mr. Bush also said the Federal Deposit Insurance Corp. will temporarily guarantee most new debt issued by insured banks. He said that will make it easier for banks to borrow money, which can then be lent to consumers. The FDIC also will "immediately and temporarily" expand its insurance to cover every dollar in all noninterest-bearing transaction accounts, which are widely used by small businesses to cover day-to-day operations.
Under the last step announced by Mr. Bush, the Federal Reserve will finalize a program to serve as a buyer of last resort for commercial paper, an important source of short-term financing for businesses banks.
Mr. Bernanke said the U.S. will not "stand down" until financial system and prosperity restored. Mr. Paulson, in his own remarks, said financial institutions in the new program will limit executive compensation. He said that "government owning a stake in any private U.S. company is objectionable to most Americans," but said the alternative "of leaving businesses and consumers without access to financing is totally unacceptable."
The government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.
Getting a Grip on the Financial Crisis
• Real Time Economics: The Evolution of Henry Paulson
• Economists React: A Thumbs Up From Ivory Tower
• Treasury's stock-purchase plan
• FDIC's liquidity plan
• Paulson, Bernanke, Bair joint and individual remarks
• Bush remarks Tuesday morning
• Detail of commercial paper facility
• Commercial paper FAQs
• Treasury's Executive Compensation Rules
Related Articles
• Wash Wire: Bush Embraces Multilateral Intervention
• Real Time Econ: The Evolution of Henry Paulson
• Europe's Rescue Carries Huge Price Tag
• How the U.K. Rescue Plan Became a Banking Model
• Sumner Redstone Squeezed by Loan and Stock Price
Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.
Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.
Along with the government's involvement come certain restrictions, such as caps on executive pay. For example, firms can't write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.
Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.
A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, using funds approved by Congress through the recently approved $700 billion bailout plan.
Treasury will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.
The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don't come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.
The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government's stake, a person familiar with the discussions said.
Among the other key components of the plan is the FDIC temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.
The FDIC is also temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.
The FDIC's central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency's power.
The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.
“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.” President Bush in a joint statement with Prime Minister Berlusconi of Italy.
The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury's main goal is to attract private capital. To make sure private investors aren't scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.
The government's new focus is raising questions about why it didn't adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.
Senior executives and advisers to some of the nation's leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.
House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury's decision to inject capital into the banking system.
"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Jared Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"
Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn't have the authority to make such a comprehensive move until Congress passed the bailout bill. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.
The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won't come at their expense.
For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.
The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again. The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through instruments called commercial paper will start in about two weeks.
William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury's initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.
But Treasury's new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.
"Investors need to be confident that the banks they're dealing with are unquestionably solvent, and it's in the interest of banks to assure investors that that's the case," he said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."
Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, argues the country may have turned a corner on the financial panic -- the fear that has kept banks and investors from making even the most prudent loans. "I think we're through the worst on that," he said. "Maybe I'll be proven wrong, but it really was at an extreme last week."
Blanket guarantees, however, might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don't want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.
One sticking point could come from Congress, which wrote into the original bailout bill requirements that Treasury tamp down executive pay. Rep. Frank said Monday he wants the government to set tough conditions for any company that receives a capital injection. If Mr. Paulson didn't enforce such rules, Mr. Frank said the Treasury secretary could be "making a big mistake."
—Michael M. Phillips, David Enrich, Daniel Fitzpatrick, Susanne Craig and Robin Sidel contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Damian Paletta at damian.paletta@wsj.com, Jon Hilsenrath at jon.hilsenrath@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com
Next Move in European Bailouts: Paying for Them
Here we go. It appears that the public is now being made aware of the ‘potential’ risk to government finances involved with these worldwide bank bailouts. This is like watching a slow-motion train wreck. With the world’s economy destined to collapse – you are watching some highly intelligent people setting up the world’s governments to collapse as well. This is not going to be pleasant.
Watching all of this develop is like standing on a beach watching a 1,000 ft tidal wave approaching. You yell for everyone to get off the beach and prepare for the inevitable – but few are listening.
jg – Oct 14, 2008
______________________________
OCTOBER 14, 2008
Next Move in European Bailouts: Paying for Them
Governments' Bets on Banking Systems Begin to Lift Markets and Ease Lending, but Expose State Finances to Risk
Wall St. Journal
By MARCUS WALKER in Berlin, SARA SCHAEFER MUÑOZ in London and DAVID GAUTHIER-VILLARS in Paris
Now that governments across Europe have stepped in with bold plans to bail out their banking systems, they are facing a new challenge: How to pay for it all.
The U.K., Germany, France, Spain and Italy on Monday provided further details of measures that will see their governments spend tens of billions of pounds and euros on stakes in struggling banks and offer hundreds of billions more in guarantees aimed at helping banks borrow the money they need to do business. The U.S. followed suit late Monday, telling the nation's top financial institutions in a meeting in Washington that it would buy preferred equity stakes in those banks, and lift the insurance limits for non-interest bearing bank deposit accounts, among other measures.
But even as markets rose sharply on news of the concerted efforts, economists were fretting about the potential effect on taxpayers and government finances.
In essence, governments are making massive bets on the futures of their banking systems. If the plans work and banks do well, taxpayers could profit as the value of the government stakes rises. But if banks suffer further losses, governments could see their national debts grow and credit ratings fall as they are forced to pay up on guarantees. That, in turn, could boost governments' cost of borrowing, discourage private investment and put the brakes on economic growth.
"It's incredibly risky," said Simon Johnson, a professor at MIT and former chief economist of the International Monetary Fund. "You don't really know the losses that these [banks] are going to have."
Tom Bemis, a London-based MarketWatch editor, discusses the wave of capital injections that European governments are providing banks. Stocks are rebounding on the news, but it remains to be seen whether the action will unlock frozen credit markets.
So far, the U.K. and Germany have put forth the most ambitious bailout plans. The U.K. is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three banks: Royal Bank of Scotland Group PLC and the soon-to-be-merged Lloyds TSB Group and HBOS PLC.
If private investors don't take part in the banks' share issues, the government will likely end up with a 60% stake in RBS for £20 billion and a 40% stake in the combined Lloyds-HBOS for £17 billion. The U.K. will also guarantee some £250 billion in bank debts with maturities of up to three years. The guarantees extend to the vast and frozen market for interbank lending, or short-term loans among banks, a Treasury spokeswoman said.
Germany plans to borrow as much as €80 billion ($107.3 billion) to buy stakes in banks and provide an additional €400 billion in debt guarantees. The government didn't identify any targets for capital injections, but people familiar with the matter said officials have concerns about several of the country's state-sector Landesbanken, or regional lenders. Several of these, such as Westdeutsche Landesbank and Bayerische Landesbank, have suffered heavy writedowns on U.S. subprime-related securities since mid-2007. A spokeswoman for BayernLB said the bank needs capital but would have to study the details of Germany's plan. A spokesman for WestLB declined to comment.
The French government said it would inject as much as €40 billion into its banks and guarantee a total of €320 billion in bank debt. The government's first move will be to inject €1 billion into Dexia SA, the municipal lender that the French and Belgian governments have agreed to bail out.
Meanwhile, the Spanish government approved plans to guarantee as much as €100 billion in bank debt in 2008 and set up a mechanism to inject fresh capital into Spanish banks, though it said none needed the facility at present. Italy also announced an unlimited plan to guarantee bank debt, but a finance ministry spokeswoman said the government doesn't expect any banks to tap it in the near future.
Global investors issued a vote of confidence in the plans Monday, pushing European stocks sharply upward. The Dow Jones Stoxx 600 index, which tracks European shares, closed up 9.9%, before the U.S. Dow Jones Industrial Average closed up by more than 10%.
In one early sign that the measures might be working, short-term interest rates fell slightly as banks became a bit more comfortable about lending to one another. The three-month dollar London interbank offered rate, a benchmark that is meant to reflect banks' borrowing costs, fell to 4.7525% Monday from 4.81875% Friday. The three-month Sterling rate fell to 5.60% from 5.8125% Friday.
But the cost of insuring against debt defaults rose for a number of European countries, reflecting rising concerns about how the plans will affect governments' finances. The cost of insuring against a default on £10 million in U.K. government debt for five years, for example, rose Monday to £47,000 annually, from £41,000 Friday. The cost of five-year default insurance on €10 million in German debt jumped to €27,000 Monday from €23,000 Friday. A higher cost of default insurance translates into higher borrowing costs for governments, and more budget money spent on paying interest.
"You cannot issue this amount of debt in a short amount of time without having to" pay more for it, said Stuart Thomson, a fixed-income-fund manager and economist at Resolution Asset Management in Glasgow.
For the most part, Europe's larger governments are in a position to absorb even extreme bank losses. In Germany, a theoretical loss of all of the €480 billion in capital injections and guarantees would raise the country's net national debt to around 75% of gross domestic product, from around 56% now.
• Gulf Countries Set Measures to Back Banks
• Bush, Berlusconi Pledge Financial Action
• Hester Set to Guide RBS After Deal
• Key Central Banks to Boost Liquidity Statement
• Europe Backpedals on Climate Caps
Countries whose public debts already exceed 100% of GDP, such as Italy, might have bigger problems coping with such losses, Mr. Gros said. Smaller countries that are home to large banks could also face difficulties. Switzerland, for example, is home to one of Europe's largest banks, UBS AG, which has already suffered some $42 billion in write-downs on bad investments.
Banks that participate in the plans won't get a free ride. Governments intend to charge participating banks for the guarantees, and will also have a say in dividend policies and executive pay. Germany, for example, will charge a fee of at least 2% annually of the amount guaranteed. The U.K. will charge 0.50% plus the cost of default insurance on a bank's debt.
Executive heads are also likely to roll. On Monday, RBS confirmed that Fred Goodwin, the bank's chief executive for the past eight years, would be succeeded by Stephen Hester, most recently chief executive of real-estate trust British Land Company PLC. (See related article.)
—Neil Shah, Alistair MacDonald, Davide Berretta, Stacy Meichtry and Thomas Catan contributed to this article.
Watching all of this develop is like standing on a beach watching a 1,000 ft tidal wave approaching. You yell for everyone to get off the beach and prepare for the inevitable – but few are listening.
jg – Oct 14, 2008
______________________________
OCTOBER 14, 2008
Next Move in European Bailouts: Paying for Them
Governments' Bets on Banking Systems Begin to Lift Markets and Ease Lending, but Expose State Finances to Risk
Wall St. Journal
By MARCUS WALKER in Berlin, SARA SCHAEFER MUÑOZ in London and DAVID GAUTHIER-VILLARS in Paris
Now that governments across Europe have stepped in with bold plans to bail out their banking systems, they are facing a new challenge: How to pay for it all.
The U.K., Germany, France, Spain and Italy on Monday provided further details of measures that will see their governments spend tens of billions of pounds and euros on stakes in struggling banks and offer hundreds of billions more in guarantees aimed at helping banks borrow the money they need to do business. The U.S. followed suit late Monday, telling the nation's top financial institutions in a meeting in Washington that it would buy preferred equity stakes in those banks, and lift the insurance limits for non-interest bearing bank deposit accounts, among other measures.
But even as markets rose sharply on news of the concerted efforts, economists were fretting about the potential effect on taxpayers and government finances.
In essence, governments are making massive bets on the futures of their banking systems. If the plans work and banks do well, taxpayers could profit as the value of the government stakes rises. But if banks suffer further losses, governments could see their national debts grow and credit ratings fall as they are forced to pay up on guarantees. That, in turn, could boost governments' cost of borrowing, discourage private investment and put the brakes on economic growth.
"It's incredibly risky," said Simon Johnson, a professor at MIT and former chief economist of the International Monetary Fund. "You don't really know the losses that these [banks] are going to have."
Tom Bemis, a London-based MarketWatch editor, discusses the wave of capital injections that European governments are providing banks. Stocks are rebounding on the news, but it remains to be seen whether the action will unlock frozen credit markets.
So far, the U.K. and Germany have put forth the most ambitious bailout plans. The U.K. is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three banks: Royal Bank of Scotland Group PLC and the soon-to-be-merged Lloyds TSB Group and HBOS PLC.
If private investors don't take part in the banks' share issues, the government will likely end up with a 60% stake in RBS for £20 billion and a 40% stake in the combined Lloyds-HBOS for £17 billion. The U.K. will also guarantee some £250 billion in bank debts with maturities of up to three years. The guarantees extend to the vast and frozen market for interbank lending, or short-term loans among banks, a Treasury spokeswoman said.
Germany plans to borrow as much as €80 billion ($107.3 billion) to buy stakes in banks and provide an additional €400 billion in debt guarantees. The government didn't identify any targets for capital injections, but people familiar with the matter said officials have concerns about several of the country's state-sector Landesbanken, or regional lenders. Several of these, such as Westdeutsche Landesbank and Bayerische Landesbank, have suffered heavy writedowns on U.S. subprime-related securities since mid-2007. A spokeswoman for BayernLB said the bank needs capital but would have to study the details of Germany's plan. A spokesman for WestLB declined to comment.
The French government said it would inject as much as €40 billion into its banks and guarantee a total of €320 billion in bank debt. The government's first move will be to inject €1 billion into Dexia SA, the municipal lender that the French and Belgian governments have agreed to bail out.
Meanwhile, the Spanish government approved plans to guarantee as much as €100 billion in bank debt in 2008 and set up a mechanism to inject fresh capital into Spanish banks, though it said none needed the facility at present. Italy also announced an unlimited plan to guarantee bank debt, but a finance ministry spokeswoman said the government doesn't expect any banks to tap it in the near future.
Global investors issued a vote of confidence in the plans Monday, pushing European stocks sharply upward. The Dow Jones Stoxx 600 index, which tracks European shares, closed up 9.9%, before the U.S. Dow Jones Industrial Average closed up by more than 10%.
In one early sign that the measures might be working, short-term interest rates fell slightly as banks became a bit more comfortable about lending to one another. The three-month dollar London interbank offered rate, a benchmark that is meant to reflect banks' borrowing costs, fell to 4.7525% Monday from 4.81875% Friday. The three-month Sterling rate fell to 5.60% from 5.8125% Friday.
But the cost of insuring against debt defaults rose for a number of European countries, reflecting rising concerns about how the plans will affect governments' finances. The cost of insuring against a default on £10 million in U.K. government debt for five years, for example, rose Monday to £47,000 annually, from £41,000 Friday. The cost of five-year default insurance on €10 million in German debt jumped to €27,000 Monday from €23,000 Friday. A higher cost of default insurance translates into higher borrowing costs for governments, and more budget money spent on paying interest.
"You cannot issue this amount of debt in a short amount of time without having to" pay more for it, said Stuart Thomson, a fixed-income-fund manager and economist at Resolution Asset Management in Glasgow.
For the most part, Europe's larger governments are in a position to absorb even extreme bank losses. In Germany, a theoretical loss of all of the €480 billion in capital injections and guarantees would raise the country's net national debt to around 75% of gross domestic product, from around 56% now.
• Gulf Countries Set Measures to Back Banks
• Bush, Berlusconi Pledge Financial Action
• Hester Set to Guide RBS After Deal
• Key Central Banks to Boost Liquidity Statement
• Europe Backpedals on Climate Caps
Countries whose public debts already exceed 100% of GDP, such as Italy, might have bigger problems coping with such losses, Mr. Gros said. Smaller countries that are home to large banks could also face difficulties. Switzerland, for example, is home to one of Europe's largest banks, UBS AG, which has already suffered some $42 billion in write-downs on bad investments.
Banks that participate in the plans won't get a free ride. Governments intend to charge participating banks for the guarantees, and will also have a say in dividend policies and executive pay. Germany, for example, will charge a fee of at least 2% annually of the amount guaranteed. The U.K. will charge 0.50% plus the cost of default insurance on a bank's debt.
Executive heads are also likely to roll. On Monday, RBS confirmed that Fred Goodwin, the bank's chief executive for the past eight years, would be succeeded by Stephen Hester, most recently chief executive of real-estate trust British Land Company PLC. (See related article.)
—Neil Shah, Alistair MacDonald, Davide Berretta, Stacy Meichtry and Thomas Catan contributed to this article.
While the World Is Listening, Brown Touts Global Oversight
As the financial crisis continues to get worse – we are going to see more and more world leaders telling us that the world’s financial system needs a ‘global’ solution. Last week we heard the Prime Minister of Italy mention a ‘global’ solution – this week it’s the Prime Minister of England. Very soon – everyone will be singing the same song.
jg – Oct 15, 2008
__________________________
OCTOBER 15, 2008
While the World Is Listening, Brown Touts Global Oversight
By ALISTAIR MACDONALD
Wall St. Journal
LONDON -- As the British bank-bailout plan becomes a model for Europe and the U.S., U.K. Prime Minister Gordon Brown is using his new platform as financial statesman to push what he sees as the next step: a global system of financial supervision.
Risk from financial markets has become global but the way to supervise financial institutions and their products hasn't, and needs to be, Mr. Brown says. "You can't deal with the problems of global financial markets within national systems of regulation," he said at a news briefing.
Among other measures, Mr. Brown wants to empower international bodies including the International Monetary Fund to monitor global markets and act as early-warning systems.
Mr. Brown first proposed the idea after the Asian financial crisis in 1998, when he was Treasury chief under Prime Minister Tony Blair, and returned to it after the start of the credit crisis last year.
Mr. Brown said Tuesday that progress has been slow.
Though he may now have the attention of other leaders, getting them to act is more difficult. Moreover, warnings from central banks ahead of the credit crunch that there was too much leverage in the system were ignored. And the IMF's current global financial stability reports get little traction.
But in the U.K., Mr. Brown's handling of the credit crisis is lifting his popularity from its historic lows. He has a lot of ground to cover: his Labour Party trailed the rival Conservative Party by a wide margin in opinion polls before this week.
The U.K. leader's bailout approach -- injecting capital to bolster bank balance sheets as well as guaranteeing loans to unfreeze lending markets -- got its strongest endorsement Tuesday when the U.S. took similar steps.
Mr. Brown and his team looked for other options to help the country's banks after concluding that the massive amounts of liquidity that central banks had been pumping into the system weren't addressing the central problem that banks didn't trust each other so they weren't lending, Mr. Brown said.
"We defined the problem as the strengthening of our banks with more capital so they could deal with any bad assets," coupled with a need to guarantee some of their lending, he said. Taking stakes in banks also meant the government could dictate tough terms because taxpayers are footing the bill, he has said.
"I am very pleased that a large number of countries across the world, from Australia and New Zealand, to Sweden, to the euro area have moved towards the proposals that seem to me to be now the common ground for the way forward," he said.
While Mr. Brown calls for greater global supervision, the U.K.'s markets regulator, the Financial Services Authority, was criticized for failing to spot and react to the risks associated with some of the country's banks. Now, Mr. Brown's increased credibility and the fresh urgency of the global crisis may move it along.
"We need an effective global early-warning system for the world economy to alert us to the risks ahead. We need globally accepted and supervised standards of regulation applied equally in all countries. We need stronger arrangements for cross-border supervision of global firms," Mr. Brown said.
He talked with President George W. Bush on Tuesday about the crisis. Mr. Brown said he will push global regulation at the European Council meeting Wednesday, and he said he has talked to Chinese, Australian and other leaders this week about the idea.
An IMF spokesman didn't return calls seeking comment.
Write to Alistair MacDonald at alistair.macdonald@wsj.com
jg – Oct 15, 2008
__________________________
OCTOBER 15, 2008
While the World Is Listening, Brown Touts Global Oversight
By ALISTAIR MACDONALD
Wall St. Journal
LONDON -- As the British bank-bailout plan becomes a model for Europe and the U.S., U.K. Prime Minister Gordon Brown is using his new platform as financial statesman to push what he sees as the next step: a global system of financial supervision.
Risk from financial markets has become global but the way to supervise financial institutions and their products hasn't, and needs to be, Mr. Brown says. "You can't deal with the problems of global financial markets within national systems of regulation," he said at a news briefing.
Among other measures, Mr. Brown wants to empower international bodies including the International Monetary Fund to monitor global markets and act as early-warning systems.
Mr. Brown first proposed the idea after the Asian financial crisis in 1998, when he was Treasury chief under Prime Minister Tony Blair, and returned to it after the start of the credit crisis last year.
Mr. Brown said Tuesday that progress has been slow.
Though he may now have the attention of other leaders, getting them to act is more difficult. Moreover, warnings from central banks ahead of the credit crunch that there was too much leverage in the system were ignored. And the IMF's current global financial stability reports get little traction.
But in the U.K., Mr. Brown's handling of the credit crisis is lifting his popularity from its historic lows. He has a lot of ground to cover: his Labour Party trailed the rival Conservative Party by a wide margin in opinion polls before this week.
The U.K. leader's bailout approach -- injecting capital to bolster bank balance sheets as well as guaranteeing loans to unfreeze lending markets -- got its strongest endorsement Tuesday when the U.S. took similar steps.
Mr. Brown and his team looked for other options to help the country's banks after concluding that the massive amounts of liquidity that central banks had been pumping into the system weren't addressing the central problem that banks didn't trust each other so they weren't lending, Mr. Brown said.
"We defined the problem as the strengthening of our banks with more capital so they could deal with any bad assets," coupled with a need to guarantee some of their lending, he said. Taking stakes in banks also meant the government could dictate tough terms because taxpayers are footing the bill, he has said.
"I am very pleased that a large number of countries across the world, from Australia and New Zealand, to Sweden, to the euro area have moved towards the proposals that seem to me to be now the common ground for the way forward," he said.
While Mr. Brown calls for greater global supervision, the U.K.'s markets regulator, the Financial Services Authority, was criticized for failing to spot and react to the risks associated with some of the country's banks. Now, Mr. Brown's increased credibility and the fresh urgency of the global crisis may move it along.
"We need an effective global early-warning system for the world economy to alert us to the risks ahead. We need globally accepted and supervised standards of regulation applied equally in all countries. We need stronger arrangements for cross-border supervision of global firms," Mr. Brown said.
He talked with President George W. Bush on Tuesday about the crisis. Mr. Brown said he will push global regulation at the European Council meeting Wednesday, and he said he has talked to Chinese, Australian and other leaders this week about the idea.
An IMF spokesman didn't return calls seeking comment.
Write to Alistair MacDonald at alistair.macdonald@wsj.com
Crisis Reverberates in Credit & Stock Markets
We’re now beginning to see all of these ‘unintended’ consequences of the recent bailouts. Here’s a question you should be asking yourself – what if they’re not ‘unintended’? What if the ‘problems’ (mentioned in the article below) developing daily are part of a plan? Let’s summarize some of these unintended consequences.
1. Investors are selling Fannie and Freddie bonds and buying bonds issued by large U.S. banks since the banks are now backed by the U.S. government. No one should be surprised that investors would take higher yields with implied government guarantees in this chaotic environment. So – we see investors flocking to big bank bonds and out of the bonds that are not backed by the government. No Surprise. What long term effects will this have on Fannie and Freddie? Will the government continue to back them and how will they back them? What happens to the housing market if it doesn’t?
2. The U.S. government will be forced to issue new debt (Treasuries) to pay for these bailouts. This will drive up interest rates – including mortgages. What will happen to the crippled housing market when you throw in much higher interest rates? Nothing good. As the article below mentions – we’re already starting to see this. Last week the 30 yr mortgage rate increased to 6.75% from 6.05%.
3. Last month the Federal Reserve moved to support short-term commercial paper since this market was frozen. What happened? Investors are not dumb. Not surprisingly, they invested in the commercial paper backed by the Fed and pulled away from short-term debt not backed by the Fed. Who is getting hurt by this? Corporations and European Banks.
4. The Fed’s efforts to unfreeze the short-term debt markets coupled with the FDIC’s efforts to stop bank withdrawals (increased insured amount to $250K from $100K) has led many money market fund managers to stay out of the short term debt markets – especially commercial paper. They are worried that Americans and corporations will favor simple bank accounts over their funds. Money market funds have historically contributed vast amounts of money to the commercial paper market – without them, the commercial paper market will remain largely frozen – where many companies and banks finance short-term obligations. Soon after these efforts, you’ll notice the Fed began offering money directly to corporations (they have not done this since the Great Depression).
So, if we again strip away all of the government/Federal Reserve rhetoric we see what is really happening. On the surface, it appears that our leaders are doing whatever they can to help the situation. If we take a close look at what is really happening, we see something else. We see these ‘bailouts’ increasing the U.S. debt by enormous amounts, we see interest rates rising significantly and we see normal short-term funding drying up. Do these efforts actually help or hurt the housing market? Higher interest rates will certainly hurt the housing market. Can the U.S. support trillions more debt? As you’ve seen me explain before – the answer is no. Sooner or later this is going to get very, very bad. Is it good for corporations and banks to borrow directly from the Fed? They are providing ‘solutions’ that are causing our government, corporations and banks to borrow even more from them. Do we really need to be even more indebted to a cartel of international bankers? As I’ve said before, we will not be able to get out of their grip until our monetary system changes.
The truth is that central banks the world over are negatively impacting the world’s economy. Their ‘solutions’ are simply accelerating the problems. As I’ve said before, I believe that a plan is at work here – and it certainly doesn’t benefit us.
jg – October 16, 2008
___________________________
October 16, 2008
Crisis Reverberates in Credit, Stock Markets
U.S. Efforts to Aid Debt Arena Cause Unintended Upshots
By LIZ RAPPAPORT and SERENA NG
Wall St. Journal
Government efforts to heal the credit markets are having unintended consequences that are roiling different sectors of the market and adding to anxiety among investors, who already are worried about the impact of a possible recession on U.S. companies.
Barely two days after the Treasury announced plans to buy stakes in U.S. banks and the Federal Deposit Insurance Corp. said it would provide guarantees on bank debt for three years, investors are making unexpected shifts.
Wednesday, bonds issued by mortgage providers Fannie Mae and Freddie Mac sold off sharply, even though these companies have government backing behind their debt. Traders said hedge funds were forced to sell as they deleverage, and investors were selling some Fannie and Freddie bonds -- known as agency debt -- and shifting money into bonds issued by large U.S. banks. These bank bonds boast higher yields and also would benefit from implied government guarantees, making them appear relatively safe in the eyes of risk-averse investors, for now.
The difference between yields on two-year Fannie Mae bonds and Treasury notes rose 0.25 percentage point Wednesday to 1.5 percentage points. That gap was less than a single percentage point when the government said in early September that it would place Fannie and Freddie under conservatorship.
The bonds issued by Citigroup Inc., Goldman Sachs Group Inc. and Bank of America Corp. gained over the last two days.
Investors have begun "to realize how potent the new FDIC-backed bank paper could be," said Jim Vogel, an analyst at FTN Financial, who recently noted that there is some debate over how explicit the government's guarantee of Fannie Mae- and Freddie Mac-backed debt is.
The agency debt's selloff is the latest unexpected market response to Federal Reserve and Treasury attempts over the past few weeks to plug the financial system's holes. The bailout plans may force the U.S. to issue new government debt that could drive up interest rates on mortgages, undermining efforts to rescue the housing market, the very problem that started it all.
Also, last month, the Fed moved to backstop short-term debt called asset-backed commercial paper, which led investors to pull away from the other half of the short-term debt market because it had no government guarantee. This debt was issued largely by corporations and European banks.
Not long after, the government's move to provide more insurance for bank deposits caused some money managers to change the way they allocate their funds.
"Things are moving so fast, it's hard for anyone to know what is going on," said Jim Goulding, manager at Chicago trading firm GH Traders LLC.
While Treasurys remain popular now, because of a flight-to-quality trend that feeds off their safety, another unintended impact may be in the wings. The bailout plans will result in massive new issuance of U.S. Treasurys, sold to pay for it all. This likely would dilute the Treasury bond market, drive down prices, push up yields and cause mortgage rates to rise.
A miniature version of this happened this week. The average 30-year mortgage rate, which is based off of the 10-year Treasury rate, rose to 6.75% Wednesday from 6.05% Oct. 6, as the 10-year Treasury yield rose, according to HSH Associates.
"You have unintended consequences that spark government actions, that create other unintended consequences," said David Kotok, chairman at money managers Cumberland Advisors.
The Fed's efforts to unlock the short-term markets also have had meddlesome effects. The FDIC may have stopped the flood of withdrawals from banks when it agreed to insure deposits in accounts up to $250,000, up from $100,000, but this has led many money-market fund managers to stay out of the short-term debt markets, particularly for commercial paper. They worry that cash-strapped Americans and corporate treasurers will favor simple bank accounts over their funds even though they pay slightly higher returns.
Money-market fund managers are traditionally large participants in the commercial-paper market, where companies and banks finance near-term obligations.
The managers remain uncomfortable investing in debt that matures in more than a day. They still are holding on to large cash positions in case they are hit with redemption requests from investors.
The government's plan isn't a "panacea for money markets," said Alex Roever, fixed-income strategist at J.P. Morgan Chase & Co.
In mid-September, when the Fed agreed to lend to U.S. banks with asset-backed commercial paper as collateral, the move was intended to unlock the market and help mutual funds sell the debt to banks in order to meet investor redemptions.
In the weeks following the Fed move, some commercial-paper brokers lamented that the Fed's implied backstop for the asset-backed commercial-paper market caused investors to favor the higher yielding asset-backed debt over unsecured commercial paper issued by many corporations and European banks.
The imbalance squeezed European banks already having trouble funding themselves, and the Fed ultimately had to step in again to offer short-term loans directly to companies and banks.
Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com
1. Investors are selling Fannie and Freddie bonds and buying bonds issued by large U.S. banks since the banks are now backed by the U.S. government. No one should be surprised that investors would take higher yields with implied government guarantees in this chaotic environment. So – we see investors flocking to big bank bonds and out of the bonds that are not backed by the government. No Surprise. What long term effects will this have on Fannie and Freddie? Will the government continue to back them and how will they back them? What happens to the housing market if it doesn’t?
2. The U.S. government will be forced to issue new debt (Treasuries) to pay for these bailouts. This will drive up interest rates – including mortgages. What will happen to the crippled housing market when you throw in much higher interest rates? Nothing good. As the article below mentions – we’re already starting to see this. Last week the 30 yr mortgage rate increased to 6.75% from 6.05%.
3. Last month the Federal Reserve moved to support short-term commercial paper since this market was frozen. What happened? Investors are not dumb. Not surprisingly, they invested in the commercial paper backed by the Fed and pulled away from short-term debt not backed by the Fed. Who is getting hurt by this? Corporations and European Banks.
4. The Fed’s efforts to unfreeze the short-term debt markets coupled with the FDIC’s efforts to stop bank withdrawals (increased insured amount to $250K from $100K) has led many money market fund managers to stay out of the short term debt markets – especially commercial paper. They are worried that Americans and corporations will favor simple bank accounts over their funds. Money market funds have historically contributed vast amounts of money to the commercial paper market – without them, the commercial paper market will remain largely frozen – where many companies and banks finance short-term obligations. Soon after these efforts, you’ll notice the Fed began offering money directly to corporations (they have not done this since the Great Depression).
So, if we again strip away all of the government/Federal Reserve rhetoric we see what is really happening. On the surface, it appears that our leaders are doing whatever they can to help the situation. If we take a close look at what is really happening, we see something else. We see these ‘bailouts’ increasing the U.S. debt by enormous amounts, we see interest rates rising significantly and we see normal short-term funding drying up. Do these efforts actually help or hurt the housing market? Higher interest rates will certainly hurt the housing market. Can the U.S. support trillions more debt? As you’ve seen me explain before – the answer is no. Sooner or later this is going to get very, very bad. Is it good for corporations and banks to borrow directly from the Fed? They are providing ‘solutions’ that are causing our government, corporations and banks to borrow even more from them. Do we really need to be even more indebted to a cartel of international bankers? As I’ve said before, we will not be able to get out of their grip until our monetary system changes.
The truth is that central banks the world over are negatively impacting the world’s economy. Their ‘solutions’ are simply accelerating the problems. As I’ve said before, I believe that a plan is at work here – and it certainly doesn’t benefit us.
jg – October 16, 2008
___________________________
October 16, 2008
Crisis Reverberates in Credit, Stock Markets
U.S. Efforts to Aid Debt Arena Cause Unintended Upshots
By LIZ RAPPAPORT and SERENA NG
Wall St. Journal
Government efforts to heal the credit markets are having unintended consequences that are roiling different sectors of the market and adding to anxiety among investors, who already are worried about the impact of a possible recession on U.S. companies.
Barely two days after the Treasury announced plans to buy stakes in U.S. banks and the Federal Deposit Insurance Corp. said it would provide guarantees on bank debt for three years, investors are making unexpected shifts.
Wednesday, bonds issued by mortgage providers Fannie Mae and Freddie Mac sold off sharply, even though these companies have government backing behind their debt. Traders said hedge funds were forced to sell as they deleverage, and investors were selling some Fannie and Freddie bonds -- known as agency debt -- and shifting money into bonds issued by large U.S. banks. These bank bonds boast higher yields and also would benefit from implied government guarantees, making them appear relatively safe in the eyes of risk-averse investors, for now.
The difference between yields on two-year Fannie Mae bonds and Treasury notes rose 0.25 percentage point Wednesday to 1.5 percentage points. That gap was less than a single percentage point when the government said in early September that it would place Fannie and Freddie under conservatorship.
The bonds issued by Citigroup Inc., Goldman Sachs Group Inc. and Bank of America Corp. gained over the last two days.
Investors have begun "to realize how potent the new FDIC-backed bank paper could be," said Jim Vogel, an analyst at FTN Financial, who recently noted that there is some debate over how explicit the government's guarantee of Fannie Mae- and Freddie Mac-backed debt is.
The agency debt's selloff is the latest unexpected market response to Federal Reserve and Treasury attempts over the past few weeks to plug the financial system's holes. The bailout plans may force the U.S. to issue new government debt that could drive up interest rates on mortgages, undermining efforts to rescue the housing market, the very problem that started it all.
Also, last month, the Fed moved to backstop short-term debt called asset-backed commercial paper, which led investors to pull away from the other half of the short-term debt market because it had no government guarantee. This debt was issued largely by corporations and European banks.
Not long after, the government's move to provide more insurance for bank deposits caused some money managers to change the way they allocate their funds.
"Things are moving so fast, it's hard for anyone to know what is going on," said Jim Goulding, manager at Chicago trading firm GH Traders LLC.
While Treasurys remain popular now, because of a flight-to-quality trend that feeds off their safety, another unintended impact may be in the wings. The bailout plans will result in massive new issuance of U.S. Treasurys, sold to pay for it all. This likely would dilute the Treasury bond market, drive down prices, push up yields and cause mortgage rates to rise.
A miniature version of this happened this week. The average 30-year mortgage rate, which is based off of the 10-year Treasury rate, rose to 6.75% Wednesday from 6.05% Oct. 6, as the 10-year Treasury yield rose, according to HSH Associates.
"You have unintended consequences that spark government actions, that create other unintended consequences," said David Kotok, chairman at money managers Cumberland Advisors.
The Fed's efforts to unlock the short-term markets also have had meddlesome effects. The FDIC may have stopped the flood of withdrawals from banks when it agreed to insure deposits in accounts up to $250,000, up from $100,000, but this has led many money-market fund managers to stay out of the short-term debt markets, particularly for commercial paper. They worry that cash-strapped Americans and corporate treasurers will favor simple bank accounts over their funds even though they pay slightly higher returns.
Money-market fund managers are traditionally large participants in the commercial-paper market, where companies and banks finance near-term obligations.
The managers remain uncomfortable investing in debt that matures in more than a day. They still are holding on to large cash positions in case they are hit with redemption requests from investors.
The government's plan isn't a "panacea for money markets," said Alex Roever, fixed-income strategist at J.P. Morgan Chase & Co.
In mid-September, when the Fed agreed to lend to U.S. banks with asset-backed commercial paper as collateral, the move was intended to unlock the market and help mutual funds sell the debt to banks in order to meet investor redemptions.
In the weeks following the Fed move, some commercial-paper brokers lamented that the Fed's implied backstop for the asset-backed commercial-paper market caused investors to favor the higher yielding asset-backed debt over unsecured commercial paper issued by many corporations and European banks.
The imbalance squeezed European banks already having trouble funding themselves, and the Fed ultimately had to step in again to offer short-term loans directly to companies and banks.
Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com
Greenspan Admits Errors to Hostile House Panel
I am amazed at how easily our leaders lie to cover up what is happening to our economy. It is ridiculous for Alan Greenspan to say he is ‘shocked’ by the current credit/financial crisis. There is absolutely no doubt that the Federal Reserve setup the world system for a final, systemic failure during Greenspan’s watch. Let’s take a look at a couple of his comments and compare them to reality.
“no one could have predicted the collapse of the housing boom and the financial disaster that followed” – Alan Greenspan
Really? Let’s take a look at housing data and U.S. income from the 1970’s until now.
We can see that housing prices began to diverge from income in the mid-1990’s. By the year 2000, it was clear to anyone paying attention that a housing bubble was forming – housing prices cannot outpace income forever – people must be able to pay their mortgages. This was certainly known by the Federal Reserve – it’s easy to see there was a problem. Again, it’s doesn’t take a legion of Economists to understand this. So, you can see that it’s ridiculous for Greenspan to say that no one could have predicted the housing market collapse. There’s only one explanation for his comments – he’s lying. Not only did the Federal Reserve know about this housing bubble – they contributed to the magnitude of the bubble!
In order to sustain this bubble for a longer period than the previous two recent housing bubbles (late 70’s and mid 80’s), something different had to happen. What happened? If you remember, we began to see a massive amount of liquidity flowing throughout the world. Where did this liquidity come from? Central Banks throughout the world were creating massive amounts of money through our monetary system (once again – exponential money growth) and reducing interest rates to almost nothing. As a result, there was massive amounts of capital available for banks to lend – at low interest rates. This fueled all types of ‘exotic’ mortgages – subprime, interest only, no down payments, option-ARMs, etc. Banks had money to lend and created all kinds of ways to make loans. Wall Street began providing massive amounts of funding – contributing to the problem. Greenspan even told us that ARMs and variable interest rate loans were good options for mortgages. This environment allowed the housing market to continue on its unsustainable ride – a ride that would end with a massive collapse. This was not a surprise to Greenspan, Bernanke, Paulson, Bush or anyone else at the top echelons of power in our country. If only Hollywood had actors as good as our leaders. This would be entertaining if it was a fictional movie and they weren’t destroying the financial stability of our nation.
Let’s continue with a few more comments by Greenspan.
"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."
“Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century.”
Is this a once in a century crisis? Currencies, commodities, stocks and banks the world over are collapsing. I don’t think the world has seen what we’re experiencing.
Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."
More lies. As we’ve seen – it was obvious that housing prices would collapse. He knew very well that the worst was not over.
“Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.”
I can only imagine what it must be like to continue lying in this environment. This is a grand show – and everyone’s watching.
“Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure.”
I know that millions of people expected to be able to refinance before interest rates increased or balloon payments came due. Guess who slammed the door shut before people could escape from this nightmare? I’ve said it before - we are dealing with some very evil people here.
“In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.”
We never had a massive decline in housing prices because we’ve never experienced a housing bubble as large as this one. Factor in the effects of our monetary system (massive debt growing exponentially) and you’ve got a perfect financial storm. It’s hard to even listen to the lies anymore. Will anyone ever tell us the truth?
I’m going to stop here – you get the point. Think about where this is leading – bank failures, market crashes, currency crashes, government debt exploding, more regulation, governments taking control of private institutions – all planned by the global elite so they can implement a global ‘solution’. Lies upon lies – deception rules the day. Our enemy is making a final push to gain control of the world.
We’re watching it happen.
___________________________________________
OCTOBER 24, 2008
Greenspan Admits Errors to Hostile House Panel
By KARA SCANNELL and SUDEEP REDDY
Alan Greenspan, lauded in Congress while the economy boomed, conceded under harsh questioning from lawmakers that he had made mistakes during his long tenure as Federal Reserve chairman that may have worsened the current slump.
In a four-hour appearance before the House Oversight Committee Thursday, Mr. Greenspan encountered legislators who interrupted his answers, caustically read back his own words from years ago, and forced him to admit that, at least in some ways, his predictions and policies had been wrong.
Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century. Video courtesy of Reuters. (Oct. 23)
Former Federal Reserve Chairman Alan Greenspan testifies during a House Oversight and Government Reform Committee hearing on Capitol Hill Thursday.
Returning to Capitol Hill amid a financial crisis rooted in mortgage lending, Mr. Greenspan said he had been wrong to think banks' ability to assess risk and their self-interest would protect them from excesses. But the former Fed chairman, who kept short-term interest rates at 1% for a year earlier this decade, said no one could have predicted the collapse of the housing boom and the financial disaster that followed.
Lawmakers weren't buying his explanations. "You had the authority to prevent irresponsible lending practices that led to the subprime-mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price," said Rep. Henry Waxman (D., Calif.), chairman of the House committee.
Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."
The 82-year-old Mr. Greenspan said he made "a mistake" in his hands-off regulatory philosophy, which many now blame in part for sparking the global economic troubles. He quoted something he had written in March: "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."
He conceded that he has "found a flaw" in his ideology and said he was "distressed by that." Yet Mr. Greenspan maintained that no regulator was smart enough to foresee the "once-in-a-century credit tsunami."
The hearing made clear how far the 18-year central banker's reputation had fallen from the days when he was hailed for his stewardship in keeping inflation low, holding growth up and helping pull the world through financial crises, including the Asian crisis and other turmoil a decade ago.
When Alan Greenspan retired in 2006 after 18½ years as chairman of the Federal Reserve, his economic legacy seemed secure: Inflation and unemployment were lower than when he took office, and during his tenure, the U.S. experienced just two mild recessions and its longest expansion on record. But today, that legacy is under fire amid the housing slump and financial crisis. Here is a look back at Greenspan as covered in the Journal:
Two and a half years after Mr. Greenspan left office, Congress is drawing plans to remake global financial regulation with the kind of tight government hand that he long opposed. At the same House hearing, Securities and Exchange Commission Chairman Christopher Cox, himself a longtime free-market Republican, said he supported merging his agency with the Commodity Futures Trading Commission, creating a beefed-up supercop to police certain previously unregulated financial products.
Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.
In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.
Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure. Prices nationwide have fallen nearly 20% since their 2006 peak, and many economists foresee a further decline of 10% or more in the next year.
The difficulties of forecasting served as a key defense for Mr. Greenspan. The Federal Reserve, with its legions of Ph.D. economists, has a better forecasting record than the private sector, he said, but that's still not enough to prevent every problem. "We were wrong quite a good deal of the time," he said.
Forecasting "never gets to the point where it's 100% accurate."
Subprime mortgages led to a global economic crisis in considerable part because of securitization, in which the home loans were sliced up, packaged into securities and sold off to investors all around the world. Anticipating such a crisis is "more than anybody is capable of judging," Mr. Greenspan said.
If the best experts were not able to foresee the development, "I think we have to ask ourselves, 'Why is that?'" Mr. Greenspan said. "And the answer is that we're not smart enough as people. We just cannot see events that far in advance."
He continued, "There are always a lot of people raising issues, and half the time they're wrong. The question is what do you do?"
Lawmakers, stung by having to put $700 billion of taxpayer money on the line to rescue the financial system, were unmoved throughout the hearing, and eager to make their own points about the situation.
Rep. John Yarmuth, Democrat of Kentucky, hit Greenspan close to home, calling the avid baseball fan one of "three Bill Buckners." That was a reference to the Boston Red Sox first baseman whose flubbed handling of a routine grounder cost his team the 1986 World Series. Former Treasury Secretary John Snow and Mr. Cox, who sat alongside Mr. Greenspan, also got tagged with that comparison.
Lawmakers homed in on a warning the late Fed governor Edward Gramlich gave Mr. Greenspan in 2000 about potential problems in lending practices. Mr. Greenspan said he agreed but added that if the matter was of such high concern, a Federal Reserve subcommittee would have presented it to the full board. He said that never occurred.
The former Fed chief also said he was often following the "will of Congress" during his long tenure and did "what I am supposed to do, not what I'd like to do."
Mr. Greenspan has spent much of this year defending his record at the Fed, trying to take apart arguments to show how his decisions were far less significant than outside forces in causing the crisis.
The central bank is blamed for too vigorously spurring home buying through its low short-term interest-rate targets, which were initially set to fight the economic slump after the dot-com bubble burst in 2000-01. Mr. Greenspan maintains that the development of China and other factors fostered low rates -- around the globe and not just in the U.S. -- contributing to a housing boom that was world-wide.
Lawmakers took Mr. Greenspan to task for his advocacy of credit-default swaps, an unregulated kind of insurance contract that can help investors protect themselves against another party's bankruptcy. Credit-default swaps were also used as a way of taking risks and are widely blamed for adding to financial-market instability. Rep. Waxman asked pointedly, "Were you wrong?"
Mr. Greenspan said, "Partially." While he cautioned the lawmakers against excessive regulation, he said credit-default swaps "have serious problems" and, after some pointed questions, agreed they should be subject to oversight.
The treatment was a striking contrast with one of Mr. Greenspan's last appearances before Congress as Fed chairman, on Nov. 3, 2005. "You have guided monetary policy through stock-market crashes, wars, terrorist attacks and natural disasters," Rep. Jim Saxton (R., N.J.) told him then. "You have made a great contribution to the prosperity of the U.S. and the nation is in your debt."
—Brian Blackstone contributed to this article.
Write to Kara Scannell at kara.scannell@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com
“no one could have predicted the collapse of the housing boom and the financial disaster that followed” – Alan Greenspan
Really? Let’s take a look at housing data and U.S. income from the 1970’s until now.
We can see that housing prices began to diverge from income in the mid-1990’s. By the year 2000, it was clear to anyone paying attention that a housing bubble was forming – housing prices cannot outpace income forever – people must be able to pay their mortgages. This was certainly known by the Federal Reserve – it’s easy to see there was a problem. Again, it’s doesn’t take a legion of Economists to understand this. So, you can see that it’s ridiculous for Greenspan to say that no one could have predicted the housing market collapse. There’s only one explanation for his comments – he’s lying. Not only did the Federal Reserve know about this housing bubble – they contributed to the magnitude of the bubble!
In order to sustain this bubble for a longer period than the previous two recent housing bubbles (late 70’s and mid 80’s), something different had to happen. What happened? If you remember, we began to see a massive amount of liquidity flowing throughout the world. Where did this liquidity come from? Central Banks throughout the world were creating massive amounts of money through our monetary system (once again – exponential money growth) and reducing interest rates to almost nothing. As a result, there was massive amounts of capital available for banks to lend – at low interest rates. This fueled all types of ‘exotic’ mortgages – subprime, interest only, no down payments, option-ARMs, etc. Banks had money to lend and created all kinds of ways to make loans. Wall Street began providing massive amounts of funding – contributing to the problem. Greenspan even told us that ARMs and variable interest rate loans were good options for mortgages. This environment allowed the housing market to continue on its unsustainable ride – a ride that would end with a massive collapse. This was not a surprise to Greenspan, Bernanke, Paulson, Bush or anyone else at the top echelons of power in our country. If only Hollywood had actors as good as our leaders. This would be entertaining if it was a fictional movie and they weren’t destroying the financial stability of our nation.
Let’s continue with a few more comments by Greenspan.
"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."
“Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century.”
Is this a once in a century crisis? Currencies, commodities, stocks and banks the world over are collapsing. I don’t think the world has seen what we’re experiencing.
Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."
More lies. As we’ve seen – it was obvious that housing prices would collapse. He knew very well that the worst was not over.
“Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.”
I can only imagine what it must be like to continue lying in this environment. This is a grand show – and everyone’s watching.
“Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure.”
I know that millions of people expected to be able to refinance before interest rates increased or balloon payments came due. Guess who slammed the door shut before people could escape from this nightmare? I’ve said it before - we are dealing with some very evil people here.
“In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.”
We never had a massive decline in housing prices because we’ve never experienced a housing bubble as large as this one. Factor in the effects of our monetary system (massive debt growing exponentially) and you’ve got a perfect financial storm. It’s hard to even listen to the lies anymore. Will anyone ever tell us the truth?
I’m going to stop here – you get the point. Think about where this is leading – bank failures, market crashes, currency crashes, government debt exploding, more regulation, governments taking control of private institutions – all planned by the global elite so they can implement a global ‘solution’. Lies upon lies – deception rules the day. Our enemy is making a final push to gain control of the world.
We’re watching it happen.
___________________________________________
OCTOBER 24, 2008
Greenspan Admits Errors to Hostile House Panel
By KARA SCANNELL and SUDEEP REDDY
Alan Greenspan, lauded in Congress while the economy boomed, conceded under harsh questioning from lawmakers that he had made mistakes during his long tenure as Federal Reserve chairman that may have worsened the current slump.
In a four-hour appearance before the House Oversight Committee Thursday, Mr. Greenspan encountered legislators who interrupted his answers, caustically read back his own words from years ago, and forced him to admit that, at least in some ways, his predictions and policies had been wrong.
Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century. Video courtesy of Reuters. (Oct. 23)
Former Federal Reserve Chairman Alan Greenspan testifies during a House Oversight and Government Reform Committee hearing on Capitol Hill Thursday.
Returning to Capitol Hill amid a financial crisis rooted in mortgage lending, Mr. Greenspan said he had been wrong to think banks' ability to assess risk and their self-interest would protect them from excesses. But the former Fed chairman, who kept short-term interest rates at 1% for a year earlier this decade, said no one could have predicted the collapse of the housing boom and the financial disaster that followed.
Lawmakers weren't buying his explanations. "You had the authority to prevent irresponsible lending practices that led to the subprime-mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price," said Rep. Henry Waxman (D., Calif.), chairman of the House committee.
Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."
The 82-year-old Mr. Greenspan said he made "a mistake" in his hands-off regulatory philosophy, which many now blame in part for sparking the global economic troubles. He quoted something he had written in March: "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."
He conceded that he has "found a flaw" in his ideology and said he was "distressed by that." Yet Mr. Greenspan maintained that no regulator was smart enough to foresee the "once-in-a-century credit tsunami."
The hearing made clear how far the 18-year central banker's reputation had fallen from the days when he was hailed for his stewardship in keeping inflation low, holding growth up and helping pull the world through financial crises, including the Asian crisis and other turmoil a decade ago.
When Alan Greenspan retired in 2006 after 18½ years as chairman of the Federal Reserve, his economic legacy seemed secure: Inflation and unemployment were lower than when he took office, and during his tenure, the U.S. experienced just two mild recessions and its longest expansion on record. But today, that legacy is under fire amid the housing slump and financial crisis. Here is a look back at Greenspan as covered in the Journal:
Two and a half years after Mr. Greenspan left office, Congress is drawing plans to remake global financial regulation with the kind of tight government hand that he long opposed. At the same House hearing, Securities and Exchange Commission Chairman Christopher Cox, himself a longtime free-market Republican, said he supported merging his agency with the Commodity Futures Trading Commission, creating a beefed-up supercop to police certain previously unregulated financial products.
Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.
In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.
Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure. Prices nationwide have fallen nearly 20% since their 2006 peak, and many economists foresee a further decline of 10% or more in the next year.
The difficulties of forecasting served as a key defense for Mr. Greenspan. The Federal Reserve, with its legions of Ph.D. economists, has a better forecasting record than the private sector, he said, but that's still not enough to prevent every problem. "We were wrong quite a good deal of the time," he said.
Forecasting "never gets to the point where it's 100% accurate."
Subprime mortgages led to a global economic crisis in considerable part because of securitization, in which the home loans were sliced up, packaged into securities and sold off to investors all around the world. Anticipating such a crisis is "more than anybody is capable of judging," Mr. Greenspan said.
If the best experts were not able to foresee the development, "I think we have to ask ourselves, 'Why is that?'" Mr. Greenspan said. "And the answer is that we're not smart enough as people. We just cannot see events that far in advance."
He continued, "There are always a lot of people raising issues, and half the time they're wrong. The question is what do you do?"
Lawmakers, stung by having to put $700 billion of taxpayer money on the line to rescue the financial system, were unmoved throughout the hearing, and eager to make their own points about the situation.
Rep. John Yarmuth, Democrat of Kentucky, hit Greenspan close to home, calling the avid baseball fan one of "three Bill Buckners." That was a reference to the Boston Red Sox first baseman whose flubbed handling of a routine grounder cost his team the 1986 World Series. Former Treasury Secretary John Snow and Mr. Cox, who sat alongside Mr. Greenspan, also got tagged with that comparison.
Lawmakers homed in on a warning the late Fed governor Edward Gramlich gave Mr. Greenspan in 2000 about potential problems in lending practices. Mr. Greenspan said he agreed but added that if the matter was of such high concern, a Federal Reserve subcommittee would have presented it to the full board. He said that never occurred.
The former Fed chief also said he was often following the "will of Congress" during his long tenure and did "what I am supposed to do, not what I'd like to do."
Mr. Greenspan has spent much of this year defending his record at the Fed, trying to take apart arguments to show how his decisions were far less significant than outside forces in causing the crisis.
The central bank is blamed for too vigorously spurring home buying through its low short-term interest-rate targets, which were initially set to fight the economic slump after the dot-com bubble burst in 2000-01. Mr. Greenspan maintains that the development of China and other factors fostered low rates -- around the globe and not just in the U.S. -- contributing to a housing boom that was world-wide.
Lawmakers took Mr. Greenspan to task for his advocacy of credit-default swaps, an unregulated kind of insurance contract that can help investors protect themselves against another party's bankruptcy. Credit-default swaps were also used as a way of taking risks and are widely blamed for adding to financial-market instability. Rep. Waxman asked pointedly, "Were you wrong?"
Mr. Greenspan said, "Partially." While he cautioned the lawmakers against excessive regulation, he said credit-default swaps "have serious problems" and, after some pointed questions, agreed they should be subject to oversight.
The treatment was a striking contrast with one of Mr. Greenspan's last appearances before Congress as Fed chairman, on Nov. 3, 2005. "You have guided monetary policy through stock-market crashes, wars, terrorist attacks and natural disasters," Rep. Jim Saxton (R., N.J.) told him then. "You have made a great contribution to the prosperity of the U.S. and the nation is in your debt."
—Brian Blackstone contributed to this article.
Write to Kara Scannell at kara.scannell@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com
A 21st Century Bretton Woods
As I mentioned in a post a few weeks ago – we are going to see more and more articles like this that tell us the world needs to make a global change to the current financial system – that is failing. I expect that out of these ‘summits’ – we’ll see suggestions for consolidating currencies, much more structured regulatory agencies and overall financial control consolidated into some type of world financial ‘authority’. We are watching the beginning of the end of free markets and free enterprise.
jg
OCTOBER 25, 2008
A 21st-Century Bretton Woods
Success at global finance summit hinges on China's willingness to play role once taken by U.S.
By SEBASTIAN MALLABY
Wall St. Journal
There wasn't much to see in Bretton Woods in July 1944, when delegates from 44 countries checked into the sprawling Mount Washington Hotel for the United Nations Monetary and Financial Conference. Almost a million acres of New Hampshire forest surrounded the site; there were free Coca-Cola dispensers, but few other distractions.
In this scene of rustic isolation, 168 statesmen (and one lone stateswoman, Mabel Newcomer of Vassar College) joined in history's most celebrated episode of economic statecraft, remaking the world's monetary order to fend off another Great Depression and creating an unprecedented multinational bank, to be focused on postwar reconstruction and development.
At the Final Plenary, a sea of black-tied delegates gave a standing ovation to British economist John Maynard Keynes, whose intellect had permeated the three weeks of talks. Lord Keynes paid tribute to his far-seeing colleagues, who had performed a task appropriate "to the prophet and to the soothsayer."
The Bretton Woods conference has acquired mythical status. To economic-history buffs, it's akin to the gathering of the founding fathers at the constitutional convention. To politicians anxious to make their marks upon the world, it's a moment to be richly envied. The recent calls from British Prime Minister Gordon Brown and French President Nicolas Sarkozy for a new Bretton Woods conference, to which the Bush administration has acceded, have caused TV crews to descend upon the old hotel, which has undergone a $50 million facelift. But Bretton Woods revivalism is nothing new. Indeed, it's a long tradition.
After the onset of the Latin debt crisis in 1982, U.S. Treasury Secretary Donald Regan floated the idea of a new Bretton Woods to steady the hemisphere's currencies. The following year, reeling from three devaluations of the franc, French President Francois Mitterrand declared, "The time has really come to think in terms of a new Bretton Woods. Outside this proposition, there will be no salvation." Mitterrand persisted in this grandiloquence over the next two years. He finally quieted down in 1985, when Margaret Thatcher dismissed his proposal as "generalized jabberwocky."
In the wake of the emerging-market crises of 1997-98, Bretton Woods nostalgia broke out again -- this time in post-Thatcher Britain. "We should not be afraid to think radically and fundamentally," Tony Blair opined. "We need to commit ourselves today to build a new Bretton Woods for the next millennium." The precise content of Mr. Blair's millennial ambition was, shall we say, vague. But no fellow leader was rude enough to say so.
Among acts of international economic statesmanship, perhaps only the Marshall Plan has been invoked more frequently. There have been calls for a Marshall Plan for postcommunist eastern Europe, a Marshall Plan for Africa, a Marshall Plan for the inner cities. Indeed, anybody wanting Washington to splurge finds Marshall exceedingly convenient.
But Bretton Woods has a richer and more rarefied cachet. It was about reordering the international system, not just mobilizing money for an enlightened cause. And whereas the Marshall Plan was an example of the unilateralism for which the U.S. is known, the Bretton Woods conference was a triumph of multilateral coordination. It featured countries as diverse as Honduras, Liberia and the Philippines (Keynes spoke disdainfully of a "most monstrous monkey-house"), though it did not include South Korea or Japan, important voices in today's economic summitry.
Both sides of the Bretton Woods achievement seem alluring today, yet both may be chimerical. The conference rebuilt the economic order by creating a system of fixed exchange rates. The aim was to prevent a return to the competitive devaluations best illustrated by the "butter wars." In 1930 New Zealand secured a cost advantage for its butter exports by devaluing its money; Denmark, its main butter rival, responded with its own devaluation in 1931; the two nations proceeded to chase each other down with progressively more drastic devaluations.
This beggar-thy-neighbor behavior added to the protectionism that brought the world to ruin, and the Bretton Woods answer was simple. In the postwar era, the dollar would be anchored to gold, and other currencies would be anchored to the dollar: No more fluctuating money, ergo no competitive devaluation. To undergird this system, the Bretton Woods architects created the International Monetary Fund, which was far more central to their ambitions than their other legacy, the World Bank. If a country's fixed exchange rate led it into a balance of payments crisis, the IMF would bail it out and so avert devaluation.
Today the idea of another monetary rebirth has much to recommend it. The credit bubble that has wreaked havoc on the world's financial markets has its origins in a two-headed monetary order: Some countries allow their currencies to float, while others peg loosely to the dollar. Over the past five years or so, this mixture created a variation on the 1930s: China, the largest dollar pegger, kept its currency cheap, driving rival exporters in Asia to hold their exchange rates down also. Thanks to this new version of competitive currency manipulation, the dollar-peggers racked up gargantuan trade surpluses. Their earnings were pumped back into the international financial system, inflating a credit bubble that now has popped disastrously.
Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a "G-20 meeting," ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation -- how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.
If the Europeans shrink from demanding that China cease pegging to the dollar, it's perhaps because they anticipate the concession that would be asked of them. China isn't going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system -- meaning a much bigger voice within the International Monetary Fund and a corresponding reduction in Europe's exaggerated influence. When you strip out the blather about bank transparency and such, this is the core bargain that needs to be struck. Naturally, the Europeans aren't proposing it.
It will be up to the two great powers -- the U.S. and China -- to fashion the deal that brings China into the heart of the multilateral system. Here, too, is an echo of the first Bretton Woods, for underneath the camouflage of a multilateral process there was a bargain between two nations. Britain, the proud but indebted imperial power, needed American savings to underpin monetary stability in the postwar era; the quid pro quo was that the U.S. had the final say on the IMF's design and structure. Today the U.S. must play Britain's role, and China must play the American one.
There's a final twist, however. In the 1940s the declining power practiced imperial trade preferences; the rising power championed an open world economy. When Franklin Roosevelt told Winston Churchill that free trade would be the price of postwar assistance, he was demanding an end to the colonial order and the creation of a level playing field for commerce. "Mr. President, I think you want to abolish the British empire," Churchill protested. "But in spite of that, we know you are our only hope."
Today it is the rising power that pursues mercantilist policies via its exchange rate. China's leadership, which sits atop an astonishing $2 trillion in foreign-currency savings, could trade a promise to help recapitalize Western finance for an expanded role within the IMF. But China may simply not be interested. The future of the global monetary system depends on whether China aspires to play the role of Roosevelt -- or whether it prefers to be a modern Churchill.
Sebastian Mallaby directs the Center for Geoeconomic Studies at the Council on Foreign Relations. He is writing a history of hedge funds.
jg
OCTOBER 25, 2008
A 21st-Century Bretton Woods
Success at global finance summit hinges on China's willingness to play role once taken by U.S.
By SEBASTIAN MALLABY
Wall St. Journal
There wasn't much to see in Bretton Woods in July 1944, when delegates from 44 countries checked into the sprawling Mount Washington Hotel for the United Nations Monetary and Financial Conference. Almost a million acres of New Hampshire forest surrounded the site; there were free Coca-Cola dispensers, but few other distractions.
In this scene of rustic isolation, 168 statesmen (and one lone stateswoman, Mabel Newcomer of Vassar College) joined in history's most celebrated episode of economic statecraft, remaking the world's monetary order to fend off another Great Depression and creating an unprecedented multinational bank, to be focused on postwar reconstruction and development.
At the Final Plenary, a sea of black-tied delegates gave a standing ovation to British economist John Maynard Keynes, whose intellect had permeated the three weeks of talks. Lord Keynes paid tribute to his far-seeing colleagues, who had performed a task appropriate "to the prophet and to the soothsayer."
The Bretton Woods conference has acquired mythical status. To economic-history buffs, it's akin to the gathering of the founding fathers at the constitutional convention. To politicians anxious to make their marks upon the world, it's a moment to be richly envied. The recent calls from British Prime Minister Gordon Brown and French President Nicolas Sarkozy for a new Bretton Woods conference, to which the Bush administration has acceded, have caused TV crews to descend upon the old hotel, which has undergone a $50 million facelift. But Bretton Woods revivalism is nothing new. Indeed, it's a long tradition.
After the onset of the Latin debt crisis in 1982, U.S. Treasury Secretary Donald Regan floated the idea of a new Bretton Woods to steady the hemisphere's currencies. The following year, reeling from three devaluations of the franc, French President Francois Mitterrand declared, "The time has really come to think in terms of a new Bretton Woods. Outside this proposition, there will be no salvation." Mitterrand persisted in this grandiloquence over the next two years. He finally quieted down in 1985, when Margaret Thatcher dismissed his proposal as "generalized jabberwocky."
In the wake of the emerging-market crises of 1997-98, Bretton Woods nostalgia broke out again -- this time in post-Thatcher Britain. "We should not be afraid to think radically and fundamentally," Tony Blair opined. "We need to commit ourselves today to build a new Bretton Woods for the next millennium." The precise content of Mr. Blair's millennial ambition was, shall we say, vague. But no fellow leader was rude enough to say so.
Among acts of international economic statesmanship, perhaps only the Marshall Plan has been invoked more frequently. There have been calls for a Marshall Plan for postcommunist eastern Europe, a Marshall Plan for Africa, a Marshall Plan for the inner cities. Indeed, anybody wanting Washington to splurge finds Marshall exceedingly convenient.
But Bretton Woods has a richer and more rarefied cachet. It was about reordering the international system, not just mobilizing money for an enlightened cause. And whereas the Marshall Plan was an example of the unilateralism for which the U.S. is known, the Bretton Woods conference was a triumph of multilateral coordination. It featured countries as diverse as Honduras, Liberia and the Philippines (Keynes spoke disdainfully of a "most monstrous monkey-house"), though it did not include South Korea or Japan, important voices in today's economic summitry.
Both sides of the Bretton Woods achievement seem alluring today, yet both may be chimerical. The conference rebuilt the economic order by creating a system of fixed exchange rates. The aim was to prevent a return to the competitive devaluations best illustrated by the "butter wars." In 1930 New Zealand secured a cost advantage for its butter exports by devaluing its money; Denmark, its main butter rival, responded with its own devaluation in 1931; the two nations proceeded to chase each other down with progressively more drastic devaluations.
This beggar-thy-neighbor behavior added to the protectionism that brought the world to ruin, and the Bretton Woods answer was simple. In the postwar era, the dollar would be anchored to gold, and other currencies would be anchored to the dollar: No more fluctuating money, ergo no competitive devaluation. To undergird this system, the Bretton Woods architects created the International Monetary Fund, which was far more central to their ambitions than their other legacy, the World Bank. If a country's fixed exchange rate led it into a balance of payments crisis, the IMF would bail it out and so avert devaluation.
Today the idea of another monetary rebirth has much to recommend it. The credit bubble that has wreaked havoc on the world's financial markets has its origins in a two-headed monetary order: Some countries allow their currencies to float, while others peg loosely to the dollar. Over the past five years or so, this mixture created a variation on the 1930s: China, the largest dollar pegger, kept its currency cheap, driving rival exporters in Asia to hold their exchange rates down also. Thanks to this new version of competitive currency manipulation, the dollar-peggers racked up gargantuan trade surpluses. Their earnings were pumped back into the international financial system, inflating a credit bubble that now has popped disastrously.
Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a "G-20 meeting," ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation -- how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.
If the Europeans shrink from demanding that China cease pegging to the dollar, it's perhaps because they anticipate the concession that would be asked of them. China isn't going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system -- meaning a much bigger voice within the International Monetary Fund and a corresponding reduction in Europe's exaggerated influence. When you strip out the blather about bank transparency and such, this is the core bargain that needs to be struck. Naturally, the Europeans aren't proposing it.
It will be up to the two great powers -- the U.S. and China -- to fashion the deal that brings China into the heart of the multilateral system. Here, too, is an echo of the first Bretton Woods, for underneath the camouflage of a multilateral process there was a bargain between two nations. Britain, the proud but indebted imperial power, needed American savings to underpin monetary stability in the postwar era; the quid pro quo was that the U.S. had the final say on the IMF's design and structure. Today the U.S. must play Britain's role, and China must play the American one.
There's a final twist, however. In the 1940s the declining power practiced imperial trade preferences; the rising power championed an open world economy. When Franklin Roosevelt told Winston Churchill that free trade would be the price of postwar assistance, he was demanding an end to the colonial order and the creation of a level playing field for commerce. "Mr. President, I think you want to abolish the British empire," Churchill protested. "But in spite of that, we know you are our only hope."
Today it is the rising power that pursues mercantilist policies via its exchange rate. China's leadership, which sits atop an astonishing $2 trillion in foreign-currency savings, could trade a promise to help recapitalize Western finance for an expanded role within the IMF. But China may simply not be interested. The future of the global monetary system depends on whether China aspires to play the role of Roosevelt -- or whether it prefers to be a modern Churchill.
Sebastian Mallaby directs the Center for Geoeconomic Studies at the Council on Foreign Relations. He is writing a history of hedge funds.
China Backs Europe's Push for Oversight
Another country lining up to support additional oversight of financial markets. We’ve seen the U.S., Latin America, Europe (Italy, Britain, France, Germany) and now China support a move for more regulation – all within the past 2 weeks. We’re going to see more and more articles like this in the coming months as the global elite continue to push their agenda forward.
jg
OCTOBER 27, 2008
China Backs Europe's Push for Oversight
By IAN JOHNSON
Wall St. Journal
BEIJING -- After several days of talks between European and Asian leaders, China apparently has allied itself with Europe in calling for a vigorous system of international regulation.
In closed-door talks with European leaders Friday and Saturday, senior Chinese officials said they would back Europe's effort to overhaul international regulatory systems, European diplomats present at the meetings said. China most strongly stated its position Friday in a talk between Chinese President Hu Jintao and José Manuel Barroso, president of the European Commission.
Mr. Hu, according to diplomats at the meeting, said China would "actively cooperate" with the EU, which has been pushing an ambitious new system of global oversight. Formal talks on the new overhauls would begin in mid-November in Washington.
"The Chinese said they'd back more vigorous reforms," a senior European diplomat said in an interview. "They rely on the global economy and are afraid it's become very unstable."
Chinese officials had no comment on the closed-door meeting. In public statements, Chinese leaders issued milder endorsements of reforms. At the close of the seventh Asia-Europe Meeting on Saturday, for example, Chinese leaders backed the 45 nations' statement, which expressed "the need to improve the supervision and regulation of all financial actors, particularly their accountability."
Foreign diplomats have been keen to see how China would come down on the issue of regulation. On one hand, China values stability and thus would seem naturally to support regulation. On the other, it likely doesn't want international institutions that curb its sovereignty or constrain its financial flows.
In Brussels, EU officials said they weren't surprised China agreed to side with the EU in pushing for new rules for financial markets. "They want a seat at the table in whatever is going to happen," said an EU official who attended an Oct. 15-16 summit that drafted the EU's plan.
U.S. officials said that the Beijing meetings underscore the importance of President Bush's global economic summit, scheduled for Nov. 15 in Washington after the presidential election. The White House hopes to use the summit to discuss the crisis's underlying causes, analyze responses and develop principles to reform the global financial architecture.
Bush administration officials acknowledged their concerns that some countries could seek to use the financial crisis to move against free trade and promote more centralized economic models. "Whatever else we do, the summit needs to enhance our commitment to free markets and free trade -- the fundamental policies that have increased standards of living," said a U.S. Treasury Department official.
—John W. Miller in Brussels and Jay Solomon in Washington contributed to this article.
Write to Ian Johnson at ian.johnson@wsj.com
jg
OCTOBER 27, 2008
China Backs Europe's Push for Oversight
By IAN JOHNSON
Wall St. Journal
BEIJING -- After several days of talks between European and Asian leaders, China apparently has allied itself with Europe in calling for a vigorous system of international regulation.
In closed-door talks with European leaders Friday and Saturday, senior Chinese officials said they would back Europe's effort to overhaul international regulatory systems, European diplomats present at the meetings said. China most strongly stated its position Friday in a talk between Chinese President Hu Jintao and José Manuel Barroso, president of the European Commission.
Mr. Hu, according to diplomats at the meeting, said China would "actively cooperate" with the EU, which has been pushing an ambitious new system of global oversight. Formal talks on the new overhauls would begin in mid-November in Washington.
"The Chinese said they'd back more vigorous reforms," a senior European diplomat said in an interview. "They rely on the global economy and are afraid it's become very unstable."
Chinese officials had no comment on the closed-door meeting. In public statements, Chinese leaders issued milder endorsements of reforms. At the close of the seventh Asia-Europe Meeting on Saturday, for example, Chinese leaders backed the 45 nations' statement, which expressed "the need to improve the supervision and regulation of all financial actors, particularly their accountability."
Foreign diplomats have been keen to see how China would come down on the issue of regulation. On one hand, China values stability and thus would seem naturally to support regulation. On the other, it likely doesn't want international institutions that curb its sovereignty or constrain its financial flows.
In Brussels, EU officials said they weren't surprised China agreed to side with the EU in pushing for new rules for financial markets. "They want a seat at the table in whatever is going to happen," said an EU official who attended an Oct. 15-16 summit that drafted the EU's plan.
U.S. officials said that the Beijing meetings underscore the importance of President Bush's global economic summit, scheduled for Nov. 15 in Washington after the presidential election. The White House hopes to use the summit to discuss the crisis's underlying causes, analyze responses and develop principles to reform the global financial architecture.
Bush administration officials acknowledged their concerns that some countries could seek to use the financial crisis to move against free trade and promote more centralized economic models. "Whatever else we do, the summit needs to enhance our commitment to free markets and free trade -- the fundamental policies that have increased standards of living," said a U.S. Treasury Department official.
—John W. Miller in Brussels and Jay Solomon in Washington contributed to this article.
Write to Ian Johnson at ian.johnson@wsj.com
Mergers, Acquisitions and the Bailout
As I’ve mentioned in previous posts, we haven’t seen any of the $700 billion bailout used to buy distressed securities. What we have seen is the U.S. Treasury buying equity stakes in banks and the possibility that this buyout will extend to insurance companies. As you will read in the articles below – one of the consequences of these actions is that banks are taking these funds and are planning to acquire other banks. It appears that the same scenario will play out with insurance companies. Those banks and insurance companies lucky enough to be ‘chosen’ will have a significant advantage over those without access to these funds. How would you like to be one of the banks/companies without government funding trying to fight off a takeover in this current business environment? If it doesn’t sound fair – that’s because it isn’t. Don’t think for a minute that this wasn’t planned. You are seeing a forced consolidation of banks and companies across the board.
In order to see what is really happening, you must look past all of the rhetoric. We were told that this bailout was absolutely necessary or we faced an economic meltdown. It was absolutely necessary to buy billions of dollars of ‘toxic’ securities or face the consequences. Well, no securities have been purchased and the economy hasn’t melted down yet. What has happened is that the Federal Reserve and the U.S. Treasury are gaining ever more control over our banks and corporations by buying equity in these companies. Today, the Federal Reserve began lending directly to corporations (see article below). So, what we actually see is our government and an international banking cartel gaining more control over us as industries are forced to consolidate and the government continues to buy equity stakes.
There are very few people that recognize that all of these problems (mortgage foreclosures, bankruptcies, reduced lending, stock market volatility, banking instability, etc.) are merely symptoms of the underlying disease – our monetary system. Central Banks and governments have the world focused on the symptoms – while the disease destroys the world’s economy. You can’t simply treat the symptoms and expect a cure. If you want to be cured – you must cure the disease. To truly get free of this mess – the Federal Reserve must be removed and the U.S. must begin to manage its own money supply.
Remember - based on what we’ve learned – our economy is destined to collapse. This is not a mystery to the leaders of the Fed and it’s not a mystery to the highest echelon of power within our government. So, when they tell us that we must submit to their demands to ‘save’ our economy, what is really happening? They are simply forcing us to go along with their plans – knowing that we are destined for collapse. They are now consolidating power (bank/corporation consolidation & government equity stakes) for the time when our economy does collapse. This will usher in a new round of regulation and control as we move closer to world government and a world financial system. As I’ve said many times before – very ingenious. Evil - but ingenious. This ‘beast’ continues to deceive the world – just as the Bible tells us it would do.
The last comment I’ll make in this post is this – do we really want our government managing banks and corporations? Think about this for a minute. This is the same group of people (the Federal Reserve, Congress, Senate, Presidential administrations, U.S. Treasury, etc) that have led our nation to the brink of economic ruin – which could eventually lead to the collapse of the United States. This is a group of people (the term ‘leaders’ definitely does not apply here – leaders are worthy of our respect) that is extremely corrupt and focused on worldly wealth and glory for themselves. Do we really want this same group of people to gain even more control over us? Would you really want George W. Bush, Nancy Pelosi, Barney Frank or Ben Bernanke running your company? The thought of this keeps me up at night.
I’m sure there will be much more to discuss in coming days. Things are moving so fast that it’s difficult to keep up with the changes.
jg – Oct 28, 2008
______________
October 28, 2008
Plan Could Push Insurers Into Mergers
More Corporate Lending Also Could Be Sparked Under the Government's Rescue Program
By LESLIE SCISM
If the Treasury Department's capital-infusion program for the banking sector expands to insurers, industry consolidation may follow.
Some of the life insurers whose names have emerged as supportive of a widening of the Treasury's $700 billion rescue program, the possibility of which emerged Friday, are considered by ratings firms to be financially healthy and capable of acquisitions. One is New York-based MetLife Inc. Industry analysts say it could be a contender to acquire at least some of the U.S. life-insurance operations of American International Group Inc.
The financial-services conglomerate has said it is trying to sell business units, including these and part of its foreign life-insurance operations, to pay back an $85 billion rescue loan it received last month from the federal government in exchange an 80% equity stake. That rescue, by the Federal Reserve, is separate from the $700 billion Treasury program.
Raising large sums of money for acquisitions is a tough challenge for any financial company right now, with credit markets still tight and stocks beaten down. Analysts say the infusion of low-cost government capital into a potential acquirer could prove crucial for AIG's efforts to strike deals in the months ahead.
A MetLife spokesman said the company wouldn't comment on any potential acquisition plans. An AIG spokesman said: "AIG is moving forward aggressively with its plan to permanently resolve its liquidity problems, sell a number of our world-class businesses and repay the Fed loan. We also continue to evaluate other possible options to restore AIG as a healthy competitor." He declined to elaborate.
Banking-industry analysts interpreted Friday's announcement that PNC Financial Services Group Inc. has agreed to acquire National City Corp. as an indication that the government is using the rescue plan as ammunition to push weak banks into the arms of strong ones. PNC will sell $7.7 billion of preferred shares and warrants to the Treasury Department to finance the stock-and-cash deal.
Colin Devine, a stock analyst at Citigroup Global Markets, said in a note to clients Monday that he anticipates "a wave of M&A activity" among life insurers, with Treasury infusions taking "the form of facilitated deal financing such as" PNC will receive. He rates MetLife a top pick, saying it has a strong capital position and is "uniquely situated" to acquire U.S. units from AIG. MetLife shares rose 3 cents, or 0.11%, to $26.21 Monday.
Meanwhile, Evan Greenberg, chairman of trade group American Insurance Association, said a substantial majority of AIA's members "do not support the inclusion of property-casualty insurers" in the Treasury program and wouldn't participate if it becomes available. Mr. Greenberg, chairman of ACE Group, said AIA members are "well-capitalized." Members include Chubb Corp., Travelers Cos. and W. R. Berkley Corp. Property-casualty carriers tend to have more-liquid investments than life insurers, and their core businesses aren't as volatile as the overall economy because cars, homes and businesses continue to be insured.
One goal of any potential expansion of the Treasury program appears to be trying to ramp up the insurance industry's role as a lender.
On Sunday, New York Life Insurance Co., one of the highest-rated insurers in the U.S., said that Treasury officials recently asked it and others in the life-insurance industry "for help in developing solutions for strengthening the financial system. We agreed to work with other industry leaders and Treasury so we could play a constructive role in helping shape this important discussion." The insurer, which is mutually owned, doesn't require additional capital and hasn't made any decision to accept capital, if offered, a spokesman said.
Write to Leslie Scism at leslie.scism@wsj.com
______________
OCTOBER 28, 2008
U.S. May Offer GM $5 Billion Loan
By DEBORAH SOLOMON and STEPHEN POWER
Wall St. Journal
The U.S. Department of Energy is working to release $5 billion in loans to General Motors Corp., according to a person familiar with the matter, a move that could help ease the way for the auto maker's discussed merger with Chrysler LLC.
GM and Chrysler's majority owner, Cerberus Capital Management LP, have been negotiating a complex deal in which GM would end up owning its smaller Detroit rival, but the parties have struggled to line up financing. The combined entity would need about $10 billion in new equity to cover the cost of laying off workers, closing plants and integrating the two companies, according to people involved in the talks.
The $5 billion would come from the pool of $25 billion in low-interest loans that was approved by Congress and is being administered by the Energy Department. The loans are aimed at helping Detroit retool plants to meet new fuel-efficiency standards. It isn't clear how quickly the money could be made available or whether it would come with strings attached.
Although the loans are supposed to speed the availability of fuel-saving technologies, the money could help steady GM's finances and make it easier for the struggling auto giant and Cerberus to persuade investors to back a deal. Any transaction would involve both Chrysler and GMAC LLC, which loans money for car purchases and other purposes. Cerberus owns 51% of GMAC and GM owns the rest.
Both GM and Chrysler are losing money. Analysts believe each company could start to run short of cash within 12 months.
The auto makers and Michigan's congressional delegation have proposed at least three plans in recent weeks to unlock federal money for a GM-Chrysler merger. One is to seek an equity investment from the government. Another would draw money for the auto makers from the $700 billion Troubled Asset Relief Program, or TARP, set up ostensibly to help financial firms. A third possibility is accelerating the $25 billion in loans that the Energy Department is managing.
On Monday, White House spokeswoman Dana Perino, speaking of GM, Chrysler and Ford Motor Co., said "it's a possibility that they could qualify" for Treasury funds under the $700 billion rescue fund, either through a direct investment or participation in the administration's asset-purchase plan.
Treasury officials, however, are for now playing down that possibility, noting that any immediate federal aid will likely come from the Energy Department.
An Energy Department spokeswoman said Monday the agency is "in the process of developing the rules for the loan program" and that it would be "premature" to set a timetable for when the funds will be available.
The agency has come under criticism from prominent Michigan lawmakers in both parties after initially saying in September it could take "at least six to 18 months or more" to disburse the loans.
—John D. Stoll and Jeffrey McCracken contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com and Stephen Power at stephen.power@wsj.com
______________
OCTOBER 28, 2008
Federal Reserve Starts Lending Plan
By ANUSHA SHRIVASTAVA
Wall St. Journal
The Federal Reserve has kicked off a much-awaited lending program aimed at jump-starting the $1.45 trillion commercial-paper market, but investors say it could take days or weeks before short-term financing for U.S. companies loosens up.
Under its new Commercial Paper Funding Facility, the Fed is offering to lend money to highly rated companies for as long as three months. The goals are to persuade investors to lend to top-tier companies and give borrowers a backstop if funds can't be obtained in the open market.
The program's impact was muted Monday. Fewer companies came to market looking for financing than last week, and most were limited to uncomfortably short overnight loans. Rates rose modestly for debt maturing in 30 days.
"It will be a few more days before we have a good idea on the impact," said Ira Jersey, interest-rate strategist at Credit Suisse.
The test will be whether rates established in the commercial-paper market are lower than the somewhat punitive rates on the Fed's loans, which are intended to be a source of financing in emergencies rather than the first stop for companies seeking funds.
A related indicator of success will be how little companies borrow from the Fed. Data on borrowings will be released Thursdays.
For Monday, the Fed set its rates on three-month commercial paper at 2.88%, including a surcharge. For asset-backed commercial paper, the rate was set at 3.88%. New rates will be set daily.
The few companies looking for three-month loans in the open market Monday -- including heavy issuers American Express Co. and General Electric Co. -- offered to pay rates similar to those set by the Fed, according to Kevin Giddis, head of fixed income at Morgan Keegan.
It isn't clear whether investors agreed to lend at those rates.
GE and American Express have registered for the new program, giving them the option of selling to the Fed. They didn't respond to calls about whether they plan to actually use it. The Fed has said several dozen companies have signed up for its commercial-paper program, but isn't naming them.
Market participants also are waiting for the start-up of another Fed program -- the Money Market Investment Funding Facility -- which is aimed at supporting money-market funds, the single largest group of investors in the commercial-paper market.
This facility will buy commercial paper and other short-term debt from money-market funds, in theory giving them confidence that they can get out of investments if they need to raise cash to cover redemption requests from their own investors.
Money-market funds have shied away from the commercial-paper market since Lehman Brothers collapsed in mid-September. Investors have been more reluctant to take on the new debt companies need to issue to fund basic operating needs such as rent and supplies.
—Kellie Geressy contributed to the report.
Write to Anusha Shrivastava at anusha.shrivastava@dowjones.com
In order to see what is really happening, you must look past all of the rhetoric. We were told that this bailout was absolutely necessary or we faced an economic meltdown. It was absolutely necessary to buy billions of dollars of ‘toxic’ securities or face the consequences. Well, no securities have been purchased and the economy hasn’t melted down yet. What has happened is that the Federal Reserve and the U.S. Treasury are gaining ever more control over our banks and corporations by buying equity in these companies. Today, the Federal Reserve began lending directly to corporations (see article below). So, what we actually see is our government and an international banking cartel gaining more control over us as industries are forced to consolidate and the government continues to buy equity stakes.
There are very few people that recognize that all of these problems (mortgage foreclosures, bankruptcies, reduced lending, stock market volatility, banking instability, etc.) are merely symptoms of the underlying disease – our monetary system. Central Banks and governments have the world focused on the symptoms – while the disease destroys the world’s economy. You can’t simply treat the symptoms and expect a cure. If you want to be cured – you must cure the disease. To truly get free of this mess – the Federal Reserve must be removed and the U.S. must begin to manage its own money supply.
Remember - based on what we’ve learned – our economy is destined to collapse. This is not a mystery to the leaders of the Fed and it’s not a mystery to the highest echelon of power within our government. So, when they tell us that we must submit to their demands to ‘save’ our economy, what is really happening? They are simply forcing us to go along with their plans – knowing that we are destined for collapse. They are now consolidating power (bank/corporation consolidation & government equity stakes) for the time when our economy does collapse. This will usher in a new round of regulation and control as we move closer to world government and a world financial system. As I’ve said many times before – very ingenious. Evil - but ingenious. This ‘beast’ continues to deceive the world – just as the Bible tells us it would do.
The last comment I’ll make in this post is this – do we really want our government managing banks and corporations? Think about this for a minute. This is the same group of people (the Federal Reserve, Congress, Senate, Presidential administrations, U.S. Treasury, etc) that have led our nation to the brink of economic ruin – which could eventually lead to the collapse of the United States. This is a group of people (the term ‘leaders’ definitely does not apply here – leaders are worthy of our respect) that is extremely corrupt and focused on worldly wealth and glory for themselves. Do we really want this same group of people to gain even more control over us? Would you really want George W. Bush, Nancy Pelosi, Barney Frank or Ben Bernanke running your company? The thought of this keeps me up at night.
I’m sure there will be much more to discuss in coming days. Things are moving so fast that it’s difficult to keep up with the changes.
jg – Oct 28, 2008
______________
October 28, 2008
Plan Could Push Insurers Into Mergers
More Corporate Lending Also Could Be Sparked Under the Government's Rescue Program
By LESLIE SCISM
If the Treasury Department's capital-infusion program for the banking sector expands to insurers, industry consolidation may follow.
Some of the life insurers whose names have emerged as supportive of a widening of the Treasury's $700 billion rescue program, the possibility of which emerged Friday, are considered by ratings firms to be financially healthy and capable of acquisitions. One is New York-based MetLife Inc. Industry analysts say it could be a contender to acquire at least some of the U.S. life-insurance operations of American International Group Inc.
The financial-services conglomerate has said it is trying to sell business units, including these and part of its foreign life-insurance operations, to pay back an $85 billion rescue loan it received last month from the federal government in exchange an 80% equity stake. That rescue, by the Federal Reserve, is separate from the $700 billion Treasury program.
Raising large sums of money for acquisitions is a tough challenge for any financial company right now, with credit markets still tight and stocks beaten down. Analysts say the infusion of low-cost government capital into a potential acquirer could prove crucial for AIG's efforts to strike deals in the months ahead.
A MetLife spokesman said the company wouldn't comment on any potential acquisition plans. An AIG spokesman said: "AIG is moving forward aggressively with its plan to permanently resolve its liquidity problems, sell a number of our world-class businesses and repay the Fed loan. We also continue to evaluate other possible options to restore AIG as a healthy competitor." He declined to elaborate.
Banking-industry analysts interpreted Friday's announcement that PNC Financial Services Group Inc. has agreed to acquire National City Corp. as an indication that the government is using the rescue plan as ammunition to push weak banks into the arms of strong ones. PNC will sell $7.7 billion of preferred shares and warrants to the Treasury Department to finance the stock-and-cash deal.
Colin Devine, a stock analyst at Citigroup Global Markets, said in a note to clients Monday that he anticipates "a wave of M&A activity" among life insurers, with Treasury infusions taking "the form of facilitated deal financing such as" PNC will receive. He rates MetLife a top pick, saying it has a strong capital position and is "uniquely situated" to acquire U.S. units from AIG. MetLife shares rose 3 cents, or 0.11%, to $26.21 Monday.
Meanwhile, Evan Greenberg, chairman of trade group American Insurance Association, said a substantial majority of AIA's members "do not support the inclusion of property-casualty insurers" in the Treasury program and wouldn't participate if it becomes available. Mr. Greenberg, chairman of ACE Group, said AIA members are "well-capitalized." Members include Chubb Corp., Travelers Cos. and W. R. Berkley Corp. Property-casualty carriers tend to have more-liquid investments than life insurers, and their core businesses aren't as volatile as the overall economy because cars, homes and businesses continue to be insured.
One goal of any potential expansion of the Treasury program appears to be trying to ramp up the insurance industry's role as a lender.
On Sunday, New York Life Insurance Co., one of the highest-rated insurers in the U.S., said that Treasury officials recently asked it and others in the life-insurance industry "for help in developing solutions for strengthening the financial system. We agreed to work with other industry leaders and Treasury so we could play a constructive role in helping shape this important discussion." The insurer, which is mutually owned, doesn't require additional capital and hasn't made any decision to accept capital, if offered, a spokesman said.
Write to Leslie Scism at leslie.scism@wsj.com
______________
OCTOBER 28, 2008
U.S. May Offer GM $5 Billion Loan
By DEBORAH SOLOMON and STEPHEN POWER
Wall St. Journal
The U.S. Department of Energy is working to release $5 billion in loans to General Motors Corp., according to a person familiar with the matter, a move that could help ease the way for the auto maker's discussed merger with Chrysler LLC.
GM and Chrysler's majority owner, Cerberus Capital Management LP, have been negotiating a complex deal in which GM would end up owning its smaller Detroit rival, but the parties have struggled to line up financing. The combined entity would need about $10 billion in new equity to cover the cost of laying off workers, closing plants and integrating the two companies, according to people involved in the talks.
The $5 billion would come from the pool of $25 billion in low-interest loans that was approved by Congress and is being administered by the Energy Department. The loans are aimed at helping Detroit retool plants to meet new fuel-efficiency standards. It isn't clear how quickly the money could be made available or whether it would come with strings attached.
Although the loans are supposed to speed the availability of fuel-saving technologies, the money could help steady GM's finances and make it easier for the struggling auto giant and Cerberus to persuade investors to back a deal. Any transaction would involve both Chrysler and GMAC LLC, which loans money for car purchases and other purposes. Cerberus owns 51% of GMAC and GM owns the rest.
Both GM and Chrysler are losing money. Analysts believe each company could start to run short of cash within 12 months.
The auto makers and Michigan's congressional delegation have proposed at least three plans in recent weeks to unlock federal money for a GM-Chrysler merger. One is to seek an equity investment from the government. Another would draw money for the auto makers from the $700 billion Troubled Asset Relief Program, or TARP, set up ostensibly to help financial firms. A third possibility is accelerating the $25 billion in loans that the Energy Department is managing.
On Monday, White House spokeswoman Dana Perino, speaking of GM, Chrysler and Ford Motor Co., said "it's a possibility that they could qualify" for Treasury funds under the $700 billion rescue fund, either through a direct investment or participation in the administration's asset-purchase plan.
Treasury officials, however, are for now playing down that possibility, noting that any immediate federal aid will likely come from the Energy Department.
An Energy Department spokeswoman said Monday the agency is "in the process of developing the rules for the loan program" and that it would be "premature" to set a timetable for when the funds will be available.
The agency has come under criticism from prominent Michigan lawmakers in both parties after initially saying in September it could take "at least six to 18 months or more" to disburse the loans.
—John D. Stoll and Jeffrey McCracken contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com and Stephen Power at stephen.power@wsj.com
______________
OCTOBER 28, 2008
Federal Reserve Starts Lending Plan
By ANUSHA SHRIVASTAVA
Wall St. Journal
The Federal Reserve has kicked off a much-awaited lending program aimed at jump-starting the $1.45 trillion commercial-paper market, but investors say it could take days or weeks before short-term financing for U.S. companies loosens up.
Under its new Commercial Paper Funding Facility, the Fed is offering to lend money to highly rated companies for as long as three months. The goals are to persuade investors to lend to top-tier companies and give borrowers a backstop if funds can't be obtained in the open market.
The program's impact was muted Monday. Fewer companies came to market looking for financing than last week, and most were limited to uncomfortably short overnight loans. Rates rose modestly for debt maturing in 30 days.
"It will be a few more days before we have a good idea on the impact," said Ira Jersey, interest-rate strategist at Credit Suisse.
The test will be whether rates established in the commercial-paper market are lower than the somewhat punitive rates on the Fed's loans, which are intended to be a source of financing in emergencies rather than the first stop for companies seeking funds.
A related indicator of success will be how little companies borrow from the Fed. Data on borrowings will be released Thursdays.
For Monday, the Fed set its rates on three-month commercial paper at 2.88%, including a surcharge. For asset-backed commercial paper, the rate was set at 3.88%. New rates will be set daily.
The few companies looking for three-month loans in the open market Monday -- including heavy issuers American Express Co. and General Electric Co. -- offered to pay rates similar to those set by the Fed, according to Kevin Giddis, head of fixed income at Morgan Keegan.
It isn't clear whether investors agreed to lend at those rates.
GE and American Express have registered for the new program, giving them the option of selling to the Fed. They didn't respond to calls about whether they plan to actually use it. The Fed has said several dozen companies have signed up for its commercial-paper program, but isn't naming them.
Market participants also are waiting for the start-up of another Fed program -- the Money Market Investment Funding Facility -- which is aimed at supporting money-market funds, the single largest group of investors in the commercial-paper market.
This facility will buy commercial paper and other short-term debt from money-market funds, in theory giving them confidence that they can get out of investments if they need to raise cash to cover redemption requests from their own investors.
Money-market funds have shied away from the commercial-paper market since Lehman Brothers collapsed in mid-September. Investors have been more reluctant to take on the new debt companies need to issue to fund basic operating needs such as rent and supplies.
—Kellie Geressy contributed to the report.
Write to Anusha Shrivastava at anusha.shrivastava@dowjones.com
International Instability
October 28, 2008
Chris sums up the current global crisis nicely in this post. Take a close look at what is happening to the world’s shipping business. I believe we’re going to see the same dramatic decline in our stock market in the very near future.
jg
International instability
Monday, October 27, 2008, 9:06 pm, by cmartenson
As bad as the US is, there are worse problems elsewhere. This is why I think this credit crisis will not play out like any previously and why I think there's a better than even chance of a systemic banking crisis.
In times past when a country experienced a bubble or a banking crisis there was always a country next door that hadn't where the savvy could hide out. Where does one hide out today?
Europe on the brink of currency crisis meltdown
The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.
Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.
Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.
Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
Those figures in the bottom two paragraphs are quite the eye-openers. Somehow Austria's bank system loaned out 85% of Austria's GDP to emerging markets that are even now resorting to emergency measures to stem the erosion of the their currencies against the dollar. The problem, apparently, is that these countries were loaned vast amounts of money denominated in dollars.
The faster their currencies fall the more it costs them to pay back their loans. Some of these currencies have fallen by 40% in a matter of weeks.
So we're going to have to watch this very carefully. The reason this could lead to a systemic banking crisis is that some countries are going to have to resort to currency controls and outright defaults. Not just one at a time, like the Russian and Argentinian defaults of 1998 and 2001, respectively, but potentially a dozen or more. But the world's banks are all now interlinked to a degree that prevents walling off a country from being easily done. Hence, the chance of a systemic breakdown increases.
And if you wanted to find a more severe crash in any market in the world it would be hard to beat what's happened to the rates for global shipping. The measure of global shipping rates is known as the "Baltic Dry Index", and it has collapsed in a most dramatic manner.
For companies that are in the business of shipping, this represents a 90% cut in their pay:
The biggest bubble of them all; globalization
Oct. 24 (Bloomberg) -- The 90 percent tumble in the global benchmark for commodity shipping costs since May exceeded the Dow Jones Industrial Average's plunge during the Great Depression, signaling globalization is ``the biggest bubble of them all,'' Bespoke Investment Group LLC said.
The Baltic Dry Index's drop from its peak just five months ago surpassed all of those, along with the Dow's 89 percent retreat from 1929 to 1932, according to Bespoke.
``The Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the `globalization' trade,'' Paul Hickey, co-founder of the Harrison, New York-based research and money management firm, wrote in a report yesterday. ``It now appears that like any `new thing,' the globalization trade went too far.''
The Baltic Dry Index fell yesterday for a 14th straight session as the freeze in money markets curbed traders' ability to buy cargo on credit.
This means that global trade is rapidly slowing to a crawl with unknown impacts. The rates are plummeting as fewer international loads are competed for by a vast fleet of cargo ships whose carrying costs demand that they be used.
Certainly for the nearly record number of cargo ships that are being constructed somebody is going to take a huge hit. Many will never be completed. Dockyards and shipping companies alike will go under.
Before too long we might expect shortages of some products to begin showing up here and there.
For those more visually oriented, here's the chart of the shipping rates. Ouch. Imagine trying to run a shipping business. How would you set a budget and plan for this? Clearly the monetary system is broken and dysfunctional. The sooner we can all admit that, the better.
Chris sums up the current global crisis nicely in this post. Take a close look at what is happening to the world’s shipping business. I believe we’re going to see the same dramatic decline in our stock market in the very near future.
jg
International instability
Monday, October 27, 2008, 9:06 pm, by cmartenson
As bad as the US is, there are worse problems elsewhere. This is why I think this credit crisis will not play out like any previously and why I think there's a better than even chance of a systemic banking crisis.
In times past when a country experienced a bubble or a banking crisis there was always a country next door that hadn't where the savvy could hide out. Where does one hide out today?
Europe on the brink of currency crisis meltdown
The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.
Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.
Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.
Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
Those figures in the bottom two paragraphs are quite the eye-openers. Somehow Austria's bank system loaned out 85% of Austria's GDP to emerging markets that are even now resorting to emergency measures to stem the erosion of the their currencies against the dollar. The problem, apparently, is that these countries were loaned vast amounts of money denominated in dollars.
The faster their currencies fall the more it costs them to pay back their loans. Some of these currencies have fallen by 40% in a matter of weeks.
So we're going to have to watch this very carefully. The reason this could lead to a systemic banking crisis is that some countries are going to have to resort to currency controls and outright defaults. Not just one at a time, like the Russian and Argentinian defaults of 1998 and 2001, respectively, but potentially a dozen or more. But the world's banks are all now interlinked to a degree that prevents walling off a country from being easily done. Hence, the chance of a systemic breakdown increases.
And if you wanted to find a more severe crash in any market in the world it would be hard to beat what's happened to the rates for global shipping. The measure of global shipping rates is known as the "Baltic Dry Index", and it has collapsed in a most dramatic manner.
For companies that are in the business of shipping, this represents a 90% cut in their pay:
The biggest bubble of them all; globalization
Oct. 24 (Bloomberg) -- The 90 percent tumble in the global benchmark for commodity shipping costs since May exceeded the Dow Jones Industrial Average's plunge during the Great Depression, signaling globalization is ``the biggest bubble of them all,'' Bespoke Investment Group LLC said.
The Baltic Dry Index's drop from its peak just five months ago surpassed all of those, along with the Dow's 89 percent retreat from 1929 to 1932, according to Bespoke.
``The Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the `globalization' trade,'' Paul Hickey, co-founder of the Harrison, New York-based research and money management firm, wrote in a report yesterday. ``It now appears that like any `new thing,' the globalization trade went too far.''
The Baltic Dry Index fell yesterday for a 14th straight session as the freeze in money markets curbed traders' ability to buy cargo on credit.
This means that global trade is rapidly slowing to a crawl with unknown impacts. The rates are plummeting as fewer international loads are competed for by a vast fleet of cargo ships whose carrying costs demand that they be used.
Certainly for the nearly record number of cargo ships that are being constructed somebody is going to take a huge hit. Many will never be completed. Dockyards and shipping companies alike will go under.
Before too long we might expect shortages of some products to begin showing up here and there.
For those more visually oriented, here's the chart of the shipping rates. Ouch. Imagine trying to run a shipping business. How would you set a budget and plan for this? Clearly the monetary system is broken and dysfunctional. The sooner we can all admit that, the better.
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