from nytimes.com
September 23, 2008
Stopping a Financial Crisis, the Swedish Way
By CARTER DOUGHERTY
A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?
It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.
But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.
Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.
That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.
“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”
Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.
But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.
The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.
A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.
The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.
Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.
The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.
Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.
Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.
After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.
Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.
Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.
Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.
The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.
“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”
By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.
More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.
The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.
Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.
“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”
Thursday, September 25, 2008
How the rich keep their money FDIC insured
Exploiting FDIC Loopholes Enriches Former U.S. Bank Regulators
By David Evans
Sept. 25 (Bloomberg) -- As chief of staff of the Federal Deposit Insurance Corp. from 1999 to 2002, Mark Jacobsen was responsible for a safety net that protects U.S. savers. He now runs a company that critics say is designed to stretch that net to its breaking point.
Jacobsen, 42, is president and co-founder of Arlington, Virginia-based Promontory Interfinancial Network, a company that makes it easy for a wealthy depositor to keep FDIC-insured cash in separate accounts at multiple banks. It offers customers up to $50 million of FDIC insurance, 500 times the single-account limit approved by Congress.
``When I first saw Promontory, I was amazed that the regulators would let it fly,'' says Sherrill Shaffer, a former chief economist at the New York Federal Reserve Bank. ``It undermines a lot of the safeguards around the FDIC deposit fund. I'm astounded that the FDIC has not picked up on that and tried to shut down that loophole.''
The loophole Promontory exploits is the FDIC rule that allows an individual to open up federally insured accounts of up to $100,000 at an unlimited number of banks.
Promontory has contracts with 2,350 banks. It advertises to wealthy investors who want to insure more than $100,000 in certificates of deposit. Customers tap into Promontory's network through their home banks.
Promontory arranges for the customer's money to be divided among banks, with each receiving less than $100,000 so all of the cash is FDIC insured. The receiving banks pay Promontory a fee, and in return, Promontory directs deposits to them.
Working the System
Promontory is peopled by former federal banking officials. Jacobsen started the company with Alan Blinder, who was vice chairman of the Federal Reserve from 1994 to 1996, and Eugene Ludwig, who was Comptroller of the Currency from 1993 to 1998.
William Seidman, the FDIC's chairman from 1985 to 1991, is a board member. William Isaac, who chaired the FDIC from 1981 to 1985, is chairman of the company's bank advisory board.
``These guys know how to work the system,'' says Shaffer, who's now a professor of banking at the University of Wyoming in Laramie. ``They saw a good buck in it for themselves.''
Seidman says he knows Promontory has critics. ``The question can be raised, `Is this what the government wanted when they put in deposit insurance?''' he says. ``One man's loophole is another man's God-given right.''
Does the Legwork
Jacobsen says the company provides a service for investors and does nothing improper. Individuals could open accounts on their own or through brokers at hundreds of banks. Promontory does the legwork at no cost to depositors and helps community banks compete for deposits with large money-center banks, he says.
The firm calls its system CDARS, an acronym for certificate of deposit account registry service.
``What we're doing is no different from what others have been doing for many decades,'' Jacobsen says. ``We just make it a little bit easier. Instead of having to knock on the doors of 20 banks to deposit $2 million, or going to a broker to do the same on your behalf and collect a big fee, we allow banks to offer the service directly.''
Isaac says he's not sure what role he plays at the company. ``I think I'm some kind of an adviser or director,'' he says. ``I'm not really involved. The board of advisers has never met. I allowed them to make me the chairman of a bank advisory board that has no members.''
`Significant Amounts'
Blinder, Promontory's vice chairman, says the company has eliminated any need to increase the $100,000-per-account ceiling on what the FDIC covers.
``It's not so important anymore, because any depositor who's worried about that can, through CDARS, get very significant amounts of deposit insurance,'' he says.
Edward Kane, senior fellow of the FDIC's Center for Financial Research, says CDARS intercepts FDIC premiums.
``It's portrayed as a public-spirited way to help customers as opposed to a way to game the system,'' he says. ``They've decided there's a loophole that they're in charge of.''
More than 50 banks joined Promontory after IndyMac Bancorp Inc. collapsed in July.
Promontory placed more than $10 billion in August. That's up from $1 billion a week in January, says spokesman Phil Battey, who worked in public relations for the FDIC from 1994 to 2003.
Promontory charges banks more in fees, about $12.50 per a $10,000 one-year CD to get access to federally insured funds, than the FDIC itself charges in insurance premiums, typically $5-$7 per $10,000 deposited.
`Tiniest Nibble'
``We take the tiniest nibble,'' says Ludwig, now Promontory's chief executive officer.
FDIC Chairman Sheila Bair says she's surprised that Promontory gets a higher fee than her agency. ``That's an interesting question,'' she says. ``I'll have to look into that.''
To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net Last Updated: September 25, 2008 00:42 EDT
By David Evans
Sept. 25 (Bloomberg) -- As chief of staff of the Federal Deposit Insurance Corp. from 1999 to 2002, Mark Jacobsen was responsible for a safety net that protects U.S. savers. He now runs a company that critics say is designed to stretch that net to its breaking point.
Jacobsen, 42, is president and co-founder of Arlington, Virginia-based Promontory Interfinancial Network, a company that makes it easy for a wealthy depositor to keep FDIC-insured cash in separate accounts at multiple banks. It offers customers up to $50 million of FDIC insurance, 500 times the single-account limit approved by Congress.
``When I first saw Promontory, I was amazed that the regulators would let it fly,'' says Sherrill Shaffer, a former chief economist at the New York Federal Reserve Bank. ``It undermines a lot of the safeguards around the FDIC deposit fund. I'm astounded that the FDIC has not picked up on that and tried to shut down that loophole.''
The loophole Promontory exploits is the FDIC rule that allows an individual to open up federally insured accounts of up to $100,000 at an unlimited number of banks.
Promontory has contracts with 2,350 banks. It advertises to wealthy investors who want to insure more than $100,000 in certificates of deposit. Customers tap into Promontory's network through their home banks.
Promontory arranges for the customer's money to be divided among banks, with each receiving less than $100,000 so all of the cash is FDIC insured. The receiving banks pay Promontory a fee, and in return, Promontory directs deposits to them.
Working the System
Promontory is peopled by former federal banking officials. Jacobsen started the company with Alan Blinder, who was vice chairman of the Federal Reserve from 1994 to 1996, and Eugene Ludwig, who was Comptroller of the Currency from 1993 to 1998.
William Seidman, the FDIC's chairman from 1985 to 1991, is a board member. William Isaac, who chaired the FDIC from 1981 to 1985, is chairman of the company's bank advisory board.
``These guys know how to work the system,'' says Shaffer, who's now a professor of banking at the University of Wyoming in Laramie. ``They saw a good buck in it for themselves.''
Seidman says he knows Promontory has critics. ``The question can be raised, `Is this what the government wanted when they put in deposit insurance?''' he says. ``One man's loophole is another man's God-given right.''
Does the Legwork
Jacobsen says the company provides a service for investors and does nothing improper. Individuals could open accounts on their own or through brokers at hundreds of banks. Promontory does the legwork at no cost to depositors and helps community banks compete for deposits with large money-center banks, he says.
The firm calls its system CDARS, an acronym for certificate of deposit account registry service.
``What we're doing is no different from what others have been doing for many decades,'' Jacobsen says. ``We just make it a little bit easier. Instead of having to knock on the doors of 20 banks to deposit $2 million, or going to a broker to do the same on your behalf and collect a big fee, we allow banks to offer the service directly.''
Isaac says he's not sure what role he plays at the company. ``I think I'm some kind of an adviser or director,'' he says. ``I'm not really involved. The board of advisers has never met. I allowed them to make me the chairman of a bank advisory board that has no members.''
`Significant Amounts'
Blinder, Promontory's vice chairman, says the company has eliminated any need to increase the $100,000-per-account ceiling on what the FDIC covers.
``It's not so important anymore, because any depositor who's worried about that can, through CDARS, get very significant amounts of deposit insurance,'' he says.
Edward Kane, senior fellow of the FDIC's Center for Financial Research, says CDARS intercepts FDIC premiums.
``It's portrayed as a public-spirited way to help customers as opposed to a way to game the system,'' he says. ``They've decided there's a loophole that they're in charge of.''
More than 50 banks joined Promontory after IndyMac Bancorp Inc. collapsed in July.
Promontory placed more than $10 billion in August. That's up from $1 billion a week in January, says spokesman Phil Battey, who worked in public relations for the FDIC from 1994 to 2003.
Promontory charges banks more in fees, about $12.50 per a $10,000 one-year CD to get access to federally insured funds, than the FDIC itself charges in insurance premiums, typically $5-$7 per $10,000 deposited.
`Tiniest Nibble'
``We take the tiniest nibble,'' says Ludwig, now Promontory's chief executive officer.
FDIC Chairman Sheila Bair says she's surprised that Promontory gets a higher fee than her agency. ``That's an interesting question,'' she says. ``I'll have to look into that.''
To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net Last Updated: September 25, 2008 00:42 EDT
September 25, 2008
Plan’s Mystery: What’s All This Stuff Worth?
By VIKAS BAJAJ
What would you pay, sight unseen, for a house that nobody wants, on a hard-luck street where no houses are selling?
That question is easy compared to the one confronting the Treasury Department as Washington works toward a vast bailout of financial institutions. Treasury Secretary Henry M. Paulson Jr. is proposing to spend up to $700 billion to buy troubled investments that even Wall Street is struggling to put a price on.
A big concern in Washington — and among many ordinary Americans — is that the difficulty in valuing these assets could result in the government’s buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers’ expense.
Anyone who has tried to buy or sell a house when the market is falling, as it is now, knows how difficult it can be to agree on a price. But valuing the securities that the Treasury aims to buy will be far more difficult. Each one of these investments is tied to thousands of individual mortgages, and many of those loans are going bad as the housing market worsens.
“The reality is that we are not going to know what the right price is for years,” said Andrew Feltus, a bond portfolio manager at Pioneer Investments, a mutual fund firm based in Boston.
“It might be 20 cents on the dollar or 60 cents on the dollar, but we won’t know for years.”
While prices of most stocks are no mystery — they flicker across PCs and televisions all day — the troubled investments are not traded on any exchange. The market for them is opaque: traders do business over the telephone, and days can go by without a single trade.
Not only that, many of these instruments are extremely complex. Consider the Bear Stearns Alt-A Trust 2006-7, a $1.3 billion drop in the sea of risky loans. Here’s how it worked:
As the credit bubble grew in 2006, Bear Stearns, then one of the leading mortgage traders on Wall Street, bought 2,871 mortgages from lenders like the Countrywide Financial Corporation.
The mortgages, with an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers’ incomes or savings. Nearly 60 percent of the loans were made in California, Florida and Arizona, where home prices rose — and subsequently fell — faster than almost anywhere else in the country.
Bear Stearns bundled the loans into 37 different kinds of bonds, ranked by varying levels of risk, for sale to investment banks, hedge funds and insurance companies.
If any of the mortgages went bad — and, it turned out, many did — the bonds at the bottom of the pecking order would suffer losses first, followed by the next lowest, and so on up the chain.
By one measure, the Bear Stearns Alt-A Trust 2006-7 has performed well: It has suffered losses of about 1.6 percent. Of those loans, 778 have been paid off or moved through the foreclosure process.
But by many other measures, it’s a toxic portfolio. Of the 2,093 loans that remain, 23 percent are delinquent or in foreclosure, according to Bloomberg News data. Initially rated triple-A, the most senior of the securities were downgraded to near junk bond status last week. Valuing mortgage bonds, even the safest variety, requires guesstimates: How many homeowners will fall behind on their mortgages? If the bank forecloses, what will the homes sell for? Investments like the Bear Stearns securities are almost certain to lose value as long as home prices keep falling.
“Under the current circumstances it’s likely that you are going to take a loss on these loans,” said Chandrajit Bhattacharya, a mortgage strategist at Credit Suisse, the investment bank.
The Bear Stearns bonds are just one example of the kind of assets the government could buy, and they are by no means the most complicated of the lot. Wall Street took bonds like those of Bear Stearns and bundled and rebundled them into even trickier investments known as collateralized debt obligations, or C.D.O.’s
“No two pieces of paper are the same,” said Mr. Feltus of Pioneer Investments.
On Wall Street, many of these C.D.O.’s have been selling for pennies on the dollar, if they are selling at all. In July, Merrill Lynch, struggling to bolster its finances, sold $31 billion of tricky mortgage-linked investments for 22 cents on the dollar. Last November, Citadel, a large hedge fund in Chicago, bought $3 billion of mortgage securities and other investments for 27 cents on the dollar.
But Citigroup, the financial giant, values similar investments on its books at 61 cents on the dollar. Citigroup says its C.D.O.’s are relatively high quality because they were created before lending standards weakened in 2006.
A big challenge for Treasury officials will be deciding whether to buy the troubled investments near the values at which the banks hold them on their books. That would help minimize losses for financial institutions. Driving a hard bargain, however, would protect taxpayers.
“Many are tempted by a strategy of trying to do both things at once,” said Lawrence H. Summers, a former Treasury secretary in the Clinton administration. As a hypothetical example, Mr. Summers suggested that an institution could have securities on its books at $60, but the current market price might only be $30. In that case, the government might be tempted to come in at about $55.
Many financial institutions are so weak that they must sell their troubled assets at prices near the value on their books, Carlos Mendez, a senior managing director at ICP Capital, an investment firm that specializes in credit markets. Anything less would eat into their capital.
“Depending on your perspective on the economy, foreclosure rates and home prices, the market may eventually reflect that price. But most buyers are not willing to make that bet right now,” he said. “And that’s why we have these low prices.”
Ben S. Bernanke, the chairman of the Federal Reserve, told Congress on Tuesday that the government should avoid paying a fire-sale price, and pay what he called the “hold-to-maturity price,” or the price that investors would bid if they expected to keep the bond till it was paid off.
The government would buy the troubled investments with the intention of eventually selling them back to the market when prices recover.
The Treasury has suggested it might conduct reverse auctions to determine the price for securities that are not trading in the market.
Unlike in a traditional auction in which would-be buyers submit bids to the seller, in a reverse auction the buyer solicits bids from would-be sellers. Often, the buyer agrees to pay the second-highest bid submitted to encourage sellers to compete by lowering their bids for all the assets submitted. The buyer often also sets a reserve price and refuses to pay any more than that price.
But Mr. Paulson told Congress on Tuesday that the government would use many other means in addition to auctions, suggesting that it would exercise wide discretion over the final prices to be paid.
Financial institutions will have an incentive to sell their worst assets to the government, a risk that the Treasury will have to guard against, said Robert G. Hansen, senior associate dean at the Tuck School of Business at Dartmouth College.
“I am worried that the people who are going to offer the securities to the government will be the ones that have the absolute worst toxic waste,” Professor Hansen said. Even so, he added, the government could actually make a profit on its purchases — provided the Treasury buys at the right prices. Richard C. Breeden, a former chairman of the Securities and Exchange Commission, said the auctions could thaw parts of the markets that have been frozen since late last year.
“One of the problems that many institutions are having is finding any bid for some of these assets, even though they are not without value,” said Mr. Breeden, who is chairman and chief executive of Breeden Capital Management, an investment firm in Greenwich, Conn.
“What are these assets worth?” asked Mr. Breeden. “Sometimes, because of fear or extreme uncertainty in the markets, you get in a situation in which there are no bids at all, or at least no realistic bids.”
Edmund L. Andrews contributed reporting.
Plan’s Mystery: What’s All This Stuff Worth?
By VIKAS BAJAJ
What would you pay, sight unseen, for a house that nobody wants, on a hard-luck street where no houses are selling?
That question is easy compared to the one confronting the Treasury Department as Washington works toward a vast bailout of financial institutions. Treasury Secretary Henry M. Paulson Jr. is proposing to spend up to $700 billion to buy troubled investments that even Wall Street is struggling to put a price on.
A big concern in Washington — and among many ordinary Americans — is that the difficulty in valuing these assets could result in the government’s buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers’ expense.
Anyone who has tried to buy or sell a house when the market is falling, as it is now, knows how difficult it can be to agree on a price. But valuing the securities that the Treasury aims to buy will be far more difficult. Each one of these investments is tied to thousands of individual mortgages, and many of those loans are going bad as the housing market worsens.
“The reality is that we are not going to know what the right price is for years,” said Andrew Feltus, a bond portfolio manager at Pioneer Investments, a mutual fund firm based in Boston.
“It might be 20 cents on the dollar or 60 cents on the dollar, but we won’t know for years.”
While prices of most stocks are no mystery — they flicker across PCs and televisions all day — the troubled investments are not traded on any exchange. The market for them is opaque: traders do business over the telephone, and days can go by without a single trade.
Not only that, many of these instruments are extremely complex. Consider the Bear Stearns Alt-A Trust 2006-7, a $1.3 billion drop in the sea of risky loans. Here’s how it worked:
As the credit bubble grew in 2006, Bear Stearns, then one of the leading mortgage traders on Wall Street, bought 2,871 mortgages from lenders like the Countrywide Financial Corporation.
The mortgages, with an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers’ incomes or savings. Nearly 60 percent of the loans were made in California, Florida and Arizona, where home prices rose — and subsequently fell — faster than almost anywhere else in the country.
Bear Stearns bundled the loans into 37 different kinds of bonds, ranked by varying levels of risk, for sale to investment banks, hedge funds and insurance companies.
If any of the mortgages went bad — and, it turned out, many did — the bonds at the bottom of the pecking order would suffer losses first, followed by the next lowest, and so on up the chain.
By one measure, the Bear Stearns Alt-A Trust 2006-7 has performed well: It has suffered losses of about 1.6 percent. Of those loans, 778 have been paid off or moved through the foreclosure process.
But by many other measures, it’s a toxic portfolio. Of the 2,093 loans that remain, 23 percent are delinquent or in foreclosure, according to Bloomberg News data. Initially rated triple-A, the most senior of the securities were downgraded to near junk bond status last week. Valuing mortgage bonds, even the safest variety, requires guesstimates: How many homeowners will fall behind on their mortgages? If the bank forecloses, what will the homes sell for? Investments like the Bear Stearns securities are almost certain to lose value as long as home prices keep falling.
“Under the current circumstances it’s likely that you are going to take a loss on these loans,” said Chandrajit Bhattacharya, a mortgage strategist at Credit Suisse, the investment bank.
The Bear Stearns bonds are just one example of the kind of assets the government could buy, and they are by no means the most complicated of the lot. Wall Street took bonds like those of Bear Stearns and bundled and rebundled them into even trickier investments known as collateralized debt obligations, or C.D.O.’s
“No two pieces of paper are the same,” said Mr. Feltus of Pioneer Investments.
On Wall Street, many of these C.D.O.’s have been selling for pennies on the dollar, if they are selling at all. In July, Merrill Lynch, struggling to bolster its finances, sold $31 billion of tricky mortgage-linked investments for 22 cents on the dollar. Last November, Citadel, a large hedge fund in Chicago, bought $3 billion of mortgage securities and other investments for 27 cents on the dollar.
But Citigroup, the financial giant, values similar investments on its books at 61 cents on the dollar. Citigroup says its C.D.O.’s are relatively high quality because they were created before lending standards weakened in 2006.
A big challenge for Treasury officials will be deciding whether to buy the troubled investments near the values at which the banks hold them on their books. That would help minimize losses for financial institutions. Driving a hard bargain, however, would protect taxpayers.
“Many are tempted by a strategy of trying to do both things at once,” said Lawrence H. Summers, a former Treasury secretary in the Clinton administration. As a hypothetical example, Mr. Summers suggested that an institution could have securities on its books at $60, but the current market price might only be $30. In that case, the government might be tempted to come in at about $55.
Many financial institutions are so weak that they must sell their troubled assets at prices near the value on their books, Carlos Mendez, a senior managing director at ICP Capital, an investment firm that specializes in credit markets. Anything less would eat into their capital.
“Depending on your perspective on the economy, foreclosure rates and home prices, the market may eventually reflect that price. But most buyers are not willing to make that bet right now,” he said. “And that’s why we have these low prices.”
Ben S. Bernanke, the chairman of the Federal Reserve, told Congress on Tuesday that the government should avoid paying a fire-sale price, and pay what he called the “hold-to-maturity price,” or the price that investors would bid if they expected to keep the bond till it was paid off.
The government would buy the troubled investments with the intention of eventually selling them back to the market when prices recover.
The Treasury has suggested it might conduct reverse auctions to determine the price for securities that are not trading in the market.
Unlike in a traditional auction in which would-be buyers submit bids to the seller, in a reverse auction the buyer solicits bids from would-be sellers. Often, the buyer agrees to pay the second-highest bid submitted to encourage sellers to compete by lowering their bids for all the assets submitted. The buyer often also sets a reserve price and refuses to pay any more than that price.
But Mr. Paulson told Congress on Tuesday that the government would use many other means in addition to auctions, suggesting that it would exercise wide discretion over the final prices to be paid.
Financial institutions will have an incentive to sell their worst assets to the government, a risk that the Treasury will have to guard against, said Robert G. Hansen, senior associate dean at the Tuck School of Business at Dartmouth College.
“I am worried that the people who are going to offer the securities to the government will be the ones that have the absolute worst toxic waste,” Professor Hansen said. Even so, he added, the government could actually make a profit on its purchases — provided the Treasury buys at the right prices. Richard C. Breeden, a former chairman of the Securities and Exchange Commission, said the auctions could thaw parts of the markets that have been frozen since late last year.
“One of the problems that many institutions are having is finding any bid for some of these assets, even though they are not without value,” said Mr. Breeden, who is chairman and chief executive of Breeden Capital Management, an investment firm in Greenwich, Conn.
“What are these assets worth?” asked Mr. Breeden. “Sometimes, because of fear or extreme uncertainty in the markets, you get in a situation in which there are no bids at all, or at least no realistic bids.”
Edmund L. Andrews contributed reporting.
Bush: BOO! Entire economy is in Danger!
from nytimes.com
September 25, 2008
Bush and Candidates to Meet on Bailout
By SHERYL GAY STOLBERG and DAVID M. HERSZENHORN
WASHINGTON — President Bush appealed to the nation Wednesday night to support a $700 billion plan to avert a widespread financial meltdown, and signaled that he is willing to accept tougher controls over how the money is spent.
As Democrats and the administration negotiated details of the package late into the night, the presidential candidates of both major parties planned to meet Mr. Bush at the White House on Thursday, along with leaders of Congress. The president said he hoped the session would “speed our discussions toward a bipartisan bill.”
Mr. Bush used a prime-time address to warn Americans that “a long and painful recession” could occur if Congress does not act quickly.
“Our entire economy is in danger,” he said.
On Capitol Hill, Democrats said that progress toward a deal had come after the White House had offered two major concessions: a plan to limit pay of executives whose firms seek government assistance, and a provision that would give taxpayers an equity stake in some of the firms so that the government can profit if the companies prosper in the future. Details of those provisions, and many others, were still under discussion.
Mr. Bush’s televised address, and his extraordinary offer to bring together Senator Barack Obama, the Democratic presidential nominee, and Senator John McCain, the Republican, just weeks before the election underscored a growing sense of urgency on the part of the administration that Congress must act to avert an economic collapse.
It was the first time in Mr. Bush’s presidency that he delivered a prime-time speech devoted exclusively to the economy. It came at a time when deep public unease about shaky financial markets and the demise of Wall Street icons such as Lehman Brothers has been coupled with skepticism and anger directed at a government bailout that could become the most expensive in American history.
The administration’s plan seeks to restore liquidity to the market and restore the economy by buying up distressed securities, many of them tied to mortgages, from struggling financial firms.
The address capped a fast-moving and chaotic day, in Washington, on the presidential campaign trail and on Wall Street.
On Capitol Hill, delicate negotiations between Treasury Secretary Henry M. Paulson Jr. and Congressional leaders were complicated by resistance from rank-and-file lawmakers, who were fielding torrents of complaints from constituents furious that their tax money was going to be spent to clean up a mess created by high-paid financial executives.
On Wall Street, financial markets continued to struggle. The cost of borrowing for banks, businesses and consumers shot up and investors rushed to safe havens like Treasury bills — a reminder that credit markets, which had recovered somewhat after Mr. Paulson announced the broad outlines of the bailout plan last week, remain under severe stress, with many investors still skittish.
Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said a deal could come together as early as Thursday. “Working in a bipartisan manner, we have made progress,” the House speaker, Nancy Pelosi, and Representative John A. Boehner, the Republican leader, said in a joint statement.
“We agree that key changes should be made to the administration’s proposal. It must include basic good-government principles, including rigorous and independent oversight, strong executive compensation standards and protections for taxpayers.”
Mr. Bush used his speech to signal that he was willing to address lawmakers’ concerns, including fears that tax dollars will be used to pay Wall Street executives and that the plan would put too much authority in the hands of the Treasury secretary without sufficient oversight.
“Any rescue plan should also be designed to ensure that taxpayers are protected,” Mr. Bush said. “It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan’s implementation. And it should be enacted as soon as possible.”
The speech came after the White House, under pressure from Republican lawmakers, opened an aggressive effort to portray the financial rescue package as crucial not just to stabilize Wall Street but to protect the livelihoods of all Americans.
But the White House gave careful thought to the timing; aides to Mr. Bush said they did not want to appear to have the president forcing a solution on Congress.
On Capitol Hill, Mr. Paulson, facing a second day of questioning by lawmakers, this time before the House Financial Services Committee, tried to focus as much on Main Street as Wall Street.
“This entire proposal is about benefiting the American people because today’s fragile financial system puts their economic well being at risk,” Mr. Paulson said. Without action, he added: “Americans’ personal savings and the ability of consumers and business to finance spending, investment and job creation are threatened.”
But it was the comments of Mr. Paulson, a former chief of Goldman Sachs, about limiting the pay of executives that signaled the biggest shift in the White House position and the urgency that the administration has placed in winning Congressional approval as quickly as possible.
“The American people are angry about executive compensation, and rightly so,” he said. “No one understands pay for failure.”
Officials said the legislation would almost certainly include a ban on so-called golden parachutes, the generous severance packages that many executives receive on their way out the door, for firms that seek government help. The measure also is likely to include a mechanism for firms to recover any bonus or incentive pay based on corporate earnings or other results that later turn out to have been overstated.
Democrats were also working to include tax provisions that would cap the amount of an executive’s salary that a company could deduct to $400,000 — the amount earned by the president.
At the same time, Congressional Democrats said they were prepared to drop one of their most contentious demands: new authority for bankruptcy judges to modify the terms of first mortgages. That provision was heavily opposed by Senate Republicans.
In addition, Democrats also are leaning toward authorizing the entire $700 billion that Mr. Paulson is seeking but disbursing a smaller amount, perhaps only $150 billion, to start the program, with future funds dependent on how well it is working.
Representative Barney Frank of Massachusetts, the lead negotiator for Congressional Democrats, said they also planned to insert a tax break to aid community banks that have suffered steep losses on preferred stock that they own in the mortgage finance giants Fannie Mae and Freddie Mac.
That change is in addition to others that already have been accepted by Mr. Paulson that would create an independent oversight board and require the government to do more to prevent foreclosures.
Mark Landler and Carl Hulse contributed reporting.
September 25, 2008
Bush and Candidates to Meet on Bailout
By SHERYL GAY STOLBERG and DAVID M. HERSZENHORN
WASHINGTON — President Bush appealed to the nation Wednesday night to support a $700 billion plan to avert a widespread financial meltdown, and signaled that he is willing to accept tougher controls over how the money is spent.
As Democrats and the administration negotiated details of the package late into the night, the presidential candidates of both major parties planned to meet Mr. Bush at the White House on Thursday, along with leaders of Congress. The president said he hoped the session would “speed our discussions toward a bipartisan bill.”
Mr. Bush used a prime-time address to warn Americans that “a long and painful recession” could occur if Congress does not act quickly.
“Our entire economy is in danger,” he said.
On Capitol Hill, Democrats said that progress toward a deal had come after the White House had offered two major concessions: a plan to limit pay of executives whose firms seek government assistance, and a provision that would give taxpayers an equity stake in some of the firms so that the government can profit if the companies prosper in the future. Details of those provisions, and many others, were still under discussion.
Mr. Bush’s televised address, and his extraordinary offer to bring together Senator Barack Obama, the Democratic presidential nominee, and Senator John McCain, the Republican, just weeks before the election underscored a growing sense of urgency on the part of the administration that Congress must act to avert an economic collapse.
It was the first time in Mr. Bush’s presidency that he delivered a prime-time speech devoted exclusively to the economy. It came at a time when deep public unease about shaky financial markets and the demise of Wall Street icons such as Lehman Brothers has been coupled with skepticism and anger directed at a government bailout that could become the most expensive in American history.
The administration’s plan seeks to restore liquidity to the market and restore the economy by buying up distressed securities, many of them tied to mortgages, from struggling financial firms.
The address capped a fast-moving and chaotic day, in Washington, on the presidential campaign trail and on Wall Street.
On Capitol Hill, delicate negotiations between Treasury Secretary Henry M. Paulson Jr. and Congressional leaders were complicated by resistance from rank-and-file lawmakers, who were fielding torrents of complaints from constituents furious that their tax money was going to be spent to clean up a mess created by high-paid financial executives.
On Wall Street, financial markets continued to struggle. The cost of borrowing for banks, businesses and consumers shot up and investors rushed to safe havens like Treasury bills — a reminder that credit markets, which had recovered somewhat after Mr. Paulson announced the broad outlines of the bailout plan last week, remain under severe stress, with many investors still skittish.
Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said a deal could come together as early as Thursday. “Working in a bipartisan manner, we have made progress,” the House speaker, Nancy Pelosi, and Representative John A. Boehner, the Republican leader, said in a joint statement.
“We agree that key changes should be made to the administration’s proposal. It must include basic good-government principles, including rigorous and independent oversight, strong executive compensation standards and protections for taxpayers.”
Mr. Bush used his speech to signal that he was willing to address lawmakers’ concerns, including fears that tax dollars will be used to pay Wall Street executives and that the plan would put too much authority in the hands of the Treasury secretary without sufficient oversight.
“Any rescue plan should also be designed to ensure that taxpayers are protected,” Mr. Bush said. “It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan’s implementation. And it should be enacted as soon as possible.”
The speech came after the White House, under pressure from Republican lawmakers, opened an aggressive effort to portray the financial rescue package as crucial not just to stabilize Wall Street but to protect the livelihoods of all Americans.
But the White House gave careful thought to the timing; aides to Mr. Bush said they did not want to appear to have the president forcing a solution on Congress.
On Capitol Hill, Mr. Paulson, facing a second day of questioning by lawmakers, this time before the House Financial Services Committee, tried to focus as much on Main Street as Wall Street.
“This entire proposal is about benefiting the American people because today’s fragile financial system puts their economic well being at risk,” Mr. Paulson said. Without action, he added: “Americans’ personal savings and the ability of consumers and business to finance spending, investment and job creation are threatened.”
But it was the comments of Mr. Paulson, a former chief of Goldman Sachs, about limiting the pay of executives that signaled the biggest shift in the White House position and the urgency that the administration has placed in winning Congressional approval as quickly as possible.
“The American people are angry about executive compensation, and rightly so,” he said. “No one understands pay for failure.”
Officials said the legislation would almost certainly include a ban on so-called golden parachutes, the generous severance packages that many executives receive on their way out the door, for firms that seek government help. The measure also is likely to include a mechanism for firms to recover any bonus or incentive pay based on corporate earnings or other results that later turn out to have been overstated.
Democrats were also working to include tax provisions that would cap the amount of an executive’s salary that a company could deduct to $400,000 — the amount earned by the president.
At the same time, Congressional Democrats said they were prepared to drop one of their most contentious demands: new authority for bankruptcy judges to modify the terms of first mortgages. That provision was heavily opposed by Senate Republicans.
In addition, Democrats also are leaning toward authorizing the entire $700 billion that Mr. Paulson is seeking but disbursing a smaller amount, perhaps only $150 billion, to start the program, with future funds dependent on how well it is working.
Representative Barney Frank of Massachusetts, the lead negotiator for Congressional Democrats, said they also planned to insert a tax break to aid community banks that have suffered steep losses on preferred stock that they own in the mortgage finance giants Fannie Mae and Freddie Mac.
That change is in addition to others that already have been accepted by Mr. Paulson that would create an independent oversight board and require the government to do more to prevent foreclosures.
Mark Landler and Carl Hulse contributed reporting.
China Banks say NO! to US Banks
China banks told to halt lending to US banks-SCMP
Wed Sep 24, 2008 9:52pm EDT
BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.
The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.
"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.
A spokesman for the CBRC had no immediate comment. (Reporting by Alan Wheatley and Langi Chiang; editing by Ken Wills)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.
Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
Wed Sep 24, 2008 9:52pm EDT
BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.
The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.
"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.
A spokesman for the CBRC had no immediate comment. (Reporting by Alan Wheatley and Langi Chiang; editing by Ken Wills)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.
Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
Subscribe to:
Posts (Atom)