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.
Thursday, September 25, 2008
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.
Wednesday, September 24, 2008
Failed Bank Specialist JC Flowers starts moving in
Flowers, LBO Investor, Approved to Buy Missouri Bank (Update1)
By Jonathan Keehner and Jason Kelly
Sept. 23 (Bloomberg) -- J. Christopher Flowers, founder of private-equity firm J.C. Flowers & Co., was approved by U.S. regulators to acquire the First National Bank of Cainesville in Missouri, a move that may allow him to buy other lenders.
The U.S. Office of the Comptroller of the Currency cleared the purchase by Flowers personally on Aug. 27, according to a public filing by the regulator. He may use the bank, which has assets of about $14 million, as a platform to buy failed institutions, according to a person close to Flowers, who asked not to be identified because the plans are private.
Flowers's deal comes as private-equity investors press the Federal Reserve to loosen regulations that limit their ability to invest in and influence management of banks. The Fed yesterday released revised guidelines for minority investments in banks, and New York-based J.C. Flowers & Co. is among the firms seeking controlling stakes to profit from the U.S. financial crisis.
``Their competitive advantage is to team up with experts in the industry and really make changes in the business,'' said Robert Kennedy, a partner with the law firm Jones Day in New York. ``That's the piece of financial-institution investing that's been unavailable.''
While buyout firms want the flexibility to buy controlling investments in banks, they are wary of becoming a bank holding company. That status would trigger restrictions on non-banking activities and the amount of debt they can take on. To avoid that classification, some individuals from private-equity firms have considered acquiring banks.
Small Bank
Such was the case with Flowers's Missouri deal, which may be a template for other transactions. First National Bank of Cainesville was the 17th smallest bank in Missouri, by deposits, of the 397 listed on the Web site of the Federal Deposit Insurance Corp. as of June 2007.
``An individual cannot be a bank holding company,'' said Mark Tenhundfeld, director of regulatory policy at the American Bankers Association, a Washington-based trade association, who was unaware of any other major private-equity firm head having bought a bank. ``If the OCC approves a change in bank control proposal by an individual, then that person may avoid bank holding-company regulations.''
An individual may also be able to co-invest with private- equity funds and still avoid bank holding-company classification if those funds take a noncontrolling stake in the bank, according to Tenhundfeld.
Model Deal
The revised Fed guidelines raised the threshold for such stakes to 33 percent from 25 percent.
Flowers, a former Goldman Sachs Group Inc. investment banker, may expand the First National Bank of Cainesville ``by means of internal growth or through the acquisition of troubled or failed depository institutions,'' according to the OCC's filing. Other businesses in Cainsville, a community of 400 in northern Missouri near the Iowa border, include A Thyme to Sow Herb Farm and the Wing Tip Hunting Preserve, according to the town's Web site.
``I don't see why this move by Flowers couldn't be repeated,'' said the ABA's Tenhundfeld. ``This could be a model for private-equity firms looking to acquire banks.''
J.C. Flowers & Co. spokesman Edward Grebow declined to comment. The private-equity firm has led minority investments in banks including buying a 23 percent stake in Japan's Shinsei Bank Ltd. and a 24 percent stake in Hypo Real Estate Holding AG, Germany's second-biggest commercial property lender.
Silo Approach
J.C. Flowers & Co. has also invested in non-banking companies, such as derivatives broker MF Global Ltd.
Making controlling investments plays more directly into private-equity firms' main business model -- using cash and borrowed money to buy troubled companies, fix them and sell them for a profit. Minority investments by buyout firms in Washington Mutual Inc. and National City Corp. have plummeted in value amid the ongoing U.S. financial crisis.
The Fed has explored ways for private-equity to take control of struggling U.S. banks, in addition to yesterday's guidance that loosens some restrictions on non-controlling stakes.
Such minority stakes don't ``allow them to do the things they like to do, which is to take over improve operations,'' said Jones Day's Kennedy. ``They're not typically passive investors.''
With the turbulent state of the banking industry, private- equity firms are more likely interested in controlling banks, such as through a ``silo'' structure that would be walled off from other investments in an attempt to keep Federal oversight of banking companies from their other holdings.
In the silo concept, a fund is specifically designated to own a bank and nothing else. That isolates the investment from other funds, and other companies, under the private-equity firm's control.
To contact the reporter on this story: Jonathan Keehner in New York jkeehner@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net. Last Updated: September 23, 2008 18:03 EDT
By Jonathan Keehner and Jason Kelly
Sept. 23 (Bloomberg) -- J. Christopher Flowers, founder of private-equity firm J.C. Flowers & Co., was approved by U.S. regulators to acquire the First National Bank of Cainesville in Missouri, a move that may allow him to buy other lenders.
The U.S. Office of the Comptroller of the Currency cleared the purchase by Flowers personally on Aug. 27, according to a public filing by the regulator. He may use the bank, which has assets of about $14 million, as a platform to buy failed institutions, according to a person close to Flowers, who asked not to be identified because the plans are private.
Flowers's deal comes as private-equity investors press the Federal Reserve to loosen regulations that limit their ability to invest in and influence management of banks. The Fed yesterday released revised guidelines for minority investments in banks, and New York-based J.C. Flowers & Co. is among the firms seeking controlling stakes to profit from the U.S. financial crisis.
``Their competitive advantage is to team up with experts in the industry and really make changes in the business,'' said Robert Kennedy, a partner with the law firm Jones Day in New York. ``That's the piece of financial-institution investing that's been unavailable.''
While buyout firms want the flexibility to buy controlling investments in banks, they are wary of becoming a bank holding company. That status would trigger restrictions on non-banking activities and the amount of debt they can take on. To avoid that classification, some individuals from private-equity firms have considered acquiring banks.
Small Bank
Such was the case with Flowers's Missouri deal, which may be a template for other transactions. First National Bank of Cainesville was the 17th smallest bank in Missouri, by deposits, of the 397 listed on the Web site of the Federal Deposit Insurance Corp. as of June 2007.
``An individual cannot be a bank holding company,'' said Mark Tenhundfeld, director of regulatory policy at the American Bankers Association, a Washington-based trade association, who was unaware of any other major private-equity firm head having bought a bank. ``If the OCC approves a change in bank control proposal by an individual, then that person may avoid bank holding-company regulations.''
An individual may also be able to co-invest with private- equity funds and still avoid bank holding-company classification if those funds take a noncontrolling stake in the bank, according to Tenhundfeld.
Model Deal
The revised Fed guidelines raised the threshold for such stakes to 33 percent from 25 percent.
Flowers, a former Goldman Sachs Group Inc. investment banker, may expand the First National Bank of Cainesville ``by means of internal growth or through the acquisition of troubled or failed depository institutions,'' according to the OCC's filing. Other businesses in Cainsville, a community of 400 in northern Missouri near the Iowa border, include A Thyme to Sow Herb Farm and the Wing Tip Hunting Preserve, according to the town's Web site.
``I don't see why this move by Flowers couldn't be repeated,'' said the ABA's Tenhundfeld. ``This could be a model for private-equity firms looking to acquire banks.''
J.C. Flowers & Co. spokesman Edward Grebow declined to comment. The private-equity firm has led minority investments in banks including buying a 23 percent stake in Japan's Shinsei Bank Ltd. and a 24 percent stake in Hypo Real Estate Holding AG, Germany's second-biggest commercial property lender.
Silo Approach
J.C. Flowers & Co. has also invested in non-banking companies, such as derivatives broker MF Global Ltd.
Making controlling investments plays more directly into private-equity firms' main business model -- using cash and borrowed money to buy troubled companies, fix them and sell them for a profit. Minority investments by buyout firms in Washington Mutual Inc. and National City Corp. have plummeted in value amid the ongoing U.S. financial crisis.
The Fed has explored ways for private-equity to take control of struggling U.S. banks, in addition to yesterday's guidance that loosens some restrictions on non-controlling stakes.
Such minority stakes don't ``allow them to do the things they like to do, which is to take over improve operations,'' said Jones Day's Kennedy. ``They're not typically passive investors.''
With the turbulent state of the banking industry, private- equity firms are more likely interested in controlling banks, such as through a ``silo'' structure that would be walled off from other investments in an attempt to keep Federal oversight of banking companies from their other holdings.
In the silo concept, a fund is specifically designated to own a bank and nothing else. That isolates the investment from other funds, and other companies, under the private-equity firm's control.
To contact the reporter on this story: Jonathan Keehner in New York jkeehner@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net. Last Updated: September 23, 2008 18:03 EDT
Monday, September 22, 2008
New era on Wall Street
from nytimes.com
September 23, 2008
Starting a New Era at Goldman and Morgan
By BEN WHITE
The transformation of Wall Street picked up pace on Monday as Goldman Sachs and Morgan Stanley, the last big independent investment banks, moved to restructure into larger, less risk-taking organizations that will be subject to far greater regulation by the Federal Reserve.
The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.
Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.
The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.
Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another flailing financial institution.
The changes, which came as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms, amount to a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives.
Commercial banks tend to produce both more modest profits and payouts to top executives.
“The kind of bonuses you saw on Wall Street over the last five years are not something you are likely to ever see again, not in our lifetime,” said Charles Geisst, a Wall Street historian and professor at Manhattan College.
By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.
They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments on mergers, stock offerings and restructurings.
But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.
Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.
In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities.
It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.
The decision by the banks to become a holding company also raises questions about whether the Federal Reserve will seek to regulate hedge funds, many of the largest of which closely resemble investment banks like Goldman.
Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.
As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.
That will make them more financially sound but will also significantly limit their profits. Today, both Goldman Sachs and Morgan Stanley have $1 of capital for every $22 of assets. By contrast, Bank of America’s has less than $11 for every $1 of capital.
JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.
As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.
It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. Both banks are likely to seek waivers from the Federal Reserve to give them time to comply with the capital requirements imposed on deposit-funded commercial banks.
The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.
Both banks already have limited retail deposit-taking businesses, which they plan to expand over time. Morgan Stanley had $36 billion in retail deposits as of Aug. 31 and Goldman Sachs had $20 billion in deposits.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C.Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.
John J. Mack, the chairman and chief executive of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”
In recent days, Morgan Stanley had sought other ways to bolster its capital and had been in advanced talks with China’s sovereign wealth fund and others about raising billions of dollars, people briefed on the matter said Sunday night. It had also been talking about a merger with Wachovia, a large commercial bank based in Charlotte, N.C.
With their transition to operating as bank holding companies, those talks are likely to take a different form, because now Morgan Stanley can buy a commercial bank.
How the mighty have fallen. This ends the era of Investment Banks and 30:1 leverage and brings us into a European model with a merging of deposit and investment banking where fractal banking ratios allow leverage of about 9:1. I still feel thats very high but its "manageable." About time.
September 23, 2008
Starting a New Era at Goldman and Morgan
By BEN WHITE
The transformation of Wall Street picked up pace on Monday as Goldman Sachs and Morgan Stanley, the last big independent investment banks, moved to restructure into larger, less risk-taking organizations that will be subject to far greater regulation by the Federal Reserve.
The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.
Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.
The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.
Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another flailing financial institution.
The changes, which came as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms, amount to a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives.
Commercial banks tend to produce both more modest profits and payouts to top executives.
“The kind of bonuses you saw on Wall Street over the last five years are not something you are likely to ever see again, not in our lifetime,” said Charles Geisst, a Wall Street historian and professor at Manhattan College.
By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.
They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments on mergers, stock offerings and restructurings.
But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.
Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.
In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities.
It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.
The decision by the banks to become a holding company also raises questions about whether the Federal Reserve will seek to regulate hedge funds, many of the largest of which closely resemble investment banks like Goldman.
Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.
As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.
That will make them more financially sound but will also significantly limit their profits. Today, both Goldman Sachs and Morgan Stanley have $1 of capital for every $22 of assets. By contrast, Bank of America’s has less than $11 for every $1 of capital.
JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.
As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.
It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. Both banks are likely to seek waivers from the Federal Reserve to give them time to comply with the capital requirements imposed on deposit-funded commercial banks.
The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.
Both banks already have limited retail deposit-taking businesses, which they plan to expand over time. Morgan Stanley had $36 billion in retail deposits as of Aug. 31 and Goldman Sachs had $20 billion in deposits.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C.Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.
John J. Mack, the chairman and chief executive of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”
In recent days, Morgan Stanley had sought other ways to bolster its capital and had been in advanced talks with China’s sovereign wealth fund and others about raising billions of dollars, people briefed on the matter said Sunday night. It had also been talking about a merger with Wachovia, a large commercial bank based in Charlotte, N.C.
With their transition to operating as bank holding companies, those talks are likely to take a different form, because now Morgan Stanley can buy a commercial bank.
How the mighty have fallen. This ends the era of Investment Banks and 30:1 leverage and brings us into a European model with a merging of deposit and investment banking where fractal banking ratios allow leverage of about 9:1. I still feel thats very high but its "manageable." About time.
Friday, September 19, 2008
Congress Stunned by Warnings
www.nytimes.com
September 20, 2008
Congressional Leaders Were Stunned by Warnings
By DAVID M. HERSZENHORN
WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.
“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”
When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”
“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”
Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.
“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”
As he spoke, Mr. Schumer swooped his hand, to make the gesture of a plummeting bird. “You know we’d be lucky ...” he said as his voice trailed off. “Well, I’ll leave it at that.”
As officials at the Treasury Department raced on Friday to draft legislative language for an ambitious plan for the government to buy billions of dollars of illiquid debt from ailing American financial institutions, legislators on Capitol Hill said they planned to work through the weekend reviewing the proposal and making efforts to bring a package of measures to the floor of the House and Senate by the end of next week.
Lawmakers in both parties described the meeting in Ms. Pelosi’s office on Thursday night with Mr. Paulson and Mr. Bernanke as collaborative, and that they were prepared to put politics aside to address the needs of the American people.
While Democrats initially said after the meeting that they planned to use the administration’s proposal of a huge rescue effort to win support for an economic stimulus package, they pulled back slightly on Friday morning, saying that their top priority was to help put together the bailout package and stabilize the economy.
But it was clear they continued to examine ways to make clear that the government was stepping up not just to help the major financial firms but also to protect the interests of American taxpayers and families by safeguarding their pensions and college savings, and by preventing any further drying up of consumer credit.
In addition to potential stimulus measures, which could include an extension of unemployment benefits and spending on public infrastructure projects, Democrats said they intended to consider measures to help stem home foreclosures and stabilize real estate values.
Among the potential steps Congress can take include approving legislation to allow bankruptcy judges to modify the terms of primary mortgages — authority that the bankruptcy laws do not currently allow and that the banking industry has strenuously opposed.
But the Democrats said it was too soon to discuss such details, and that they were awaiting a draft of the proposal from the Treasury Department.
“We have got to deal with the foreclosure issue,” Mr. Dodd said. “You have got to stop that hemorrhaging..If you don’t, the problem doesn’t go away. Ben Bernanke has said it over and over again. Hank Paulson recognizes it. This problem began with bad lending practices. Those are his words, not mine, and so this plan must address that or I’ll be back here in front of a bank of microphones at some point explaining the next failure.”
Even before the drafting of the plan was complete, the Bush administration and the Fed began efforts to sell the idea of a huge rescue to potentially skeptical rank-and-file members of Congress. Mr. Paulson and Mr. Bernanke held a conference call with House Republicans to explain their thinking.
Senator Richard C. Shelby of Alabama, the senior Republican on the Senate banking committee, said in a television interview that cost to the government of purchasing bad debt could run to $1 trillion — a potential warning sign since Mr. Shelby is a longtime skeptic of government intervention in the private market.
Until Mr. Shelby was interviewed on Friday morning, officials on Capitol Hill had been careful not to discuss specific figures, though the rescue envisioned by the Treasury Department clearly entails a government appropriation of hundreds of billions of dollars.
Holy cow!!!!
September 20, 2008
Congressional Leaders Were Stunned by Warnings
By DAVID M. HERSZENHORN
WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.
“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”
When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”
“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”
Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.
“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”
As he spoke, Mr. Schumer swooped his hand, to make the gesture of a plummeting bird. “You know we’d be lucky ...” he said as his voice trailed off. “Well, I’ll leave it at that.”
As officials at the Treasury Department raced on Friday to draft legislative language for an ambitious plan for the government to buy billions of dollars of illiquid debt from ailing American financial institutions, legislators on Capitol Hill said they planned to work through the weekend reviewing the proposal and making efforts to bring a package of measures to the floor of the House and Senate by the end of next week.
Lawmakers in both parties described the meeting in Ms. Pelosi’s office on Thursday night with Mr. Paulson and Mr. Bernanke as collaborative, and that they were prepared to put politics aside to address the needs of the American people.
While Democrats initially said after the meeting that they planned to use the administration’s proposal of a huge rescue effort to win support for an economic stimulus package, they pulled back slightly on Friday morning, saying that their top priority was to help put together the bailout package and stabilize the economy.
But it was clear they continued to examine ways to make clear that the government was stepping up not just to help the major financial firms but also to protect the interests of American taxpayers and families by safeguarding their pensions and college savings, and by preventing any further drying up of consumer credit.
In addition to potential stimulus measures, which could include an extension of unemployment benefits and spending on public infrastructure projects, Democrats said they intended to consider measures to help stem home foreclosures and stabilize real estate values.
Among the potential steps Congress can take include approving legislation to allow bankruptcy judges to modify the terms of primary mortgages — authority that the bankruptcy laws do not currently allow and that the banking industry has strenuously opposed.
But the Democrats said it was too soon to discuss such details, and that they were awaiting a draft of the proposal from the Treasury Department.
“We have got to deal with the foreclosure issue,” Mr. Dodd said. “You have got to stop that hemorrhaging..If you don’t, the problem doesn’t go away. Ben Bernanke has said it over and over again. Hank Paulson recognizes it. This problem began with bad lending practices. Those are his words, not mine, and so this plan must address that or I’ll be back here in front of a bank of microphones at some point explaining the next failure.”
Even before the drafting of the plan was complete, the Bush administration and the Fed began efforts to sell the idea of a huge rescue to potentially skeptical rank-and-file members of Congress. Mr. Paulson and Mr. Bernanke held a conference call with House Republicans to explain their thinking.
Senator Richard C. Shelby of Alabama, the senior Republican on the Senate banking committee, said in a television interview that cost to the government of purchasing bad debt could run to $1 trillion — a potential warning sign since Mr. Shelby is a longtime skeptic of government intervention in the private market.
Until Mr. Shelby was interviewed on Friday morning, officials on Capitol Hill had been careful not to discuss specific figures, though the rescue envisioned by the Treasury Department clearly entails a government appropriation of hundreds of billions of dollars.
Holy cow!!!!
Calculated Risk on the Bailout
from calculatedrisk.blogspot.com
Friday, September 19, 2008
The Price of the Bailout
by CalculatedRisk
Secretary Paulson said: "We're talking hundreds of billions."The NY Times DealBook has other estimates: Putting a Price Tag on a Government Bailout
“It’s probably $500 [billion] to a trillion dollars, and that’s going to visit the taxpayers sooner or later,” [Sen. Richard Shelby] said. “It’s either going to be a debt charged to all of us or to all our children.”...Bloomberg News ... reported that the government is considering establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corporation to insure investors in money-market funds.
However buying the assets isn't enough. These asset sales will lead to substantial write-downs, and that will reduce the regulatory capital at the banks. So how do the banks recapitalize?The hope is that by making the assets transparent, and selling off the toxic waste, that will rebuild confidence with investors. Maybe.
But the U.S. Government might also have to help recapitalize the banks to keep them lending (like the Reconstruction Finance Corporation (RFC) did during the Depression). Either way, it appears the current shareholders face massive dilution.
Also - as an aside - when the banks make their assets transparent (should be a requirement for participation), we will discover if any executives misrepresented their assets and filed false reports with the SEC. That could be prosecuted under Sarbanes-Oxley, and perhaps a few executives spending time in jail might help with the moral hazard issues.
I am not sure I would want to be a long term shareholder of some Financial firms with large Tier 3 assets.
Friday, September 19, 2008
The Price of the Bailout
by CalculatedRisk
Secretary Paulson said: "We're talking hundreds of billions."The NY Times DealBook has other estimates: Putting a Price Tag on a Government Bailout
“It’s probably $500 [billion] to a trillion dollars, and that’s going to visit the taxpayers sooner or later,” [Sen. Richard Shelby] said. “It’s either going to be a debt charged to all of us or to all our children.”...Bloomberg News ... reported that the government is considering establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corporation to insure investors in money-market funds.
However buying the assets isn't enough. These asset sales will lead to substantial write-downs, and that will reduce the regulatory capital at the banks. So how do the banks recapitalize?The hope is that by making the assets transparent, and selling off the toxic waste, that will rebuild confidence with investors. Maybe.
But the U.S. Government might also have to help recapitalize the banks to keep them lending (like the Reconstruction Finance Corporation (RFC) did during the Depression). Either way, it appears the current shareholders face massive dilution.
Also - as an aside - when the banks make their assets transparent (should be a requirement for participation), we will discover if any executives misrepresented their assets and filed false reports with the SEC. That could be prosecuted under Sarbanes-Oxley, and perhaps a few executives spending time in jail might help with the moral hazard issues.
I am not sure I would want to be a long term shareholder of some Financial firms with large Tier 3 assets.
Ballpark: 1-2 Trillion and counting....
from ft.com (Financial Times)
America will need a $1,000bn bail-out
ByKenneth Rogoff
Published: September 17 2008 19:06 Last updated: September 17 2008 19:06
One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it.
But can this extraordinary vote of confidence in the dollar last? Perhaps, but as investors step back and look at the deep wounds of America’s flagship financial sector, the public and private sector’s massive borrowing needs, and the looming uncertainty of the November presidential elections, it is hard to believe that the dollar will continue to stand its ground as the crisis continues to deepen and unfold.
It is true that the US government has very deep pockets. Privately held US government debt was under $4,400bn at the end of 2007, representing less than 32 per cent of gross domestic product. This is roughly half the debt burden carried by most European countries, and an even smaller fraction of Japan’s debt levels. It is also true that despite the increasingly tough stance of US regulators, the financial crisis has probably already added at most $200bn-$300bn to net debt, taking into account the likely losses on nationalising the mortgage giants Freddie Mac and Fannie Mae, the costs of the $29bn March bail-out of investment bank Bear Stearns, the potential fallout from the various junk collateral the Federal Reserve has taken on to its balance sheet in the last few months, and finally, Wednesday’s $85bn bail-out of the insurance giant AIG.
Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.
True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible.
It is hard to predict exactly how and when the mega-bail-out will evolve. At some point, we are likely to see a broadening and deepening of deposit insurance, much as the UK did in the case of Northern Rock. Probably, at some point, the government will aim to have a better established algorithm for making bridge loans and for triggering the effective liquidation of troubled firms and assets, although the task is far more difficult than was the case in the 1980s, when the Resolution Trust Corporation was formed to help clean up the saving and loan mess.
Of course, there also needs to be better regulation. It is incredible that the transparency-challenged credit default swap market was allowed to swell to a notional value of $6,200bn during 2008 even as it became obvious that any collapse of this market could lead to an even bigger mess than the fallout from subprime mortgage debt.
It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.
Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.
A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.
The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.
It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.
Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.
The writer is professor of economics at Harvard University and former chief economist of the International Monetary Fund
Several important points are raised. First - we are going to reflate (read inflate) - read the Fed statement from a couple of days ago again. They're concerned (wink, wink) about inflation. What they're actually saying is: we'll do anything to avoid zero bound on interest rates. Anything to avoid Japan 2.0 and deflation. Second - the cost is 1 - 2 Trillion dollars. I think 1 Trillion is the LOWER bound. The ultimate costs of Nationalization, Backstopping, creating a TARP / Bad Bank whatever you call this will include costs of: Fannie and Freddie, Nationalization Insolvent Banks, AIG and the cost of TARP that Hank Paulson discussed today. It means that inflation is certain as money (debt) is created. Dollar will likely fall and Gold and Commodities will rise. Again.
America will need a $1,000bn bail-out
ByKenneth Rogoff
Published: September 17 2008 19:06 Last updated: September 17 2008 19:06
One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it.
But can this extraordinary vote of confidence in the dollar last? Perhaps, but as investors step back and look at the deep wounds of America’s flagship financial sector, the public and private sector’s massive borrowing needs, and the looming uncertainty of the November presidential elections, it is hard to believe that the dollar will continue to stand its ground as the crisis continues to deepen and unfold.
It is true that the US government has very deep pockets. Privately held US government debt was under $4,400bn at the end of 2007, representing less than 32 per cent of gross domestic product. This is roughly half the debt burden carried by most European countries, and an even smaller fraction of Japan’s debt levels. It is also true that despite the increasingly tough stance of US regulators, the financial crisis has probably already added at most $200bn-$300bn to net debt, taking into account the likely losses on nationalising the mortgage giants Freddie Mac and Fannie Mae, the costs of the $29bn March bail-out of investment bank Bear Stearns, the potential fallout from the various junk collateral the Federal Reserve has taken on to its balance sheet in the last few months, and finally, Wednesday’s $85bn bail-out of the insurance giant AIG.
Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.
True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible.
It is hard to predict exactly how and when the mega-bail-out will evolve. At some point, we are likely to see a broadening and deepening of deposit insurance, much as the UK did in the case of Northern Rock. Probably, at some point, the government will aim to have a better established algorithm for making bridge loans and for triggering the effective liquidation of troubled firms and assets, although the task is far more difficult than was the case in the 1980s, when the Resolution Trust Corporation was formed to help clean up the saving and loan mess.
Of course, there also needs to be better regulation. It is incredible that the transparency-challenged credit default swap market was allowed to swell to a notional value of $6,200bn during 2008 even as it became obvious that any collapse of this market could lead to an even bigger mess than the fallout from subprime mortgage debt.
It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.
Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.
A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.
The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.
It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.
Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.
The writer is professor of economics at Harvard University and former chief economist of the International Monetary Fund
Several important points are raised. First - we are going to reflate (read inflate) - read the Fed statement from a couple of days ago again. They're concerned (wink, wink) about inflation. What they're actually saying is: we'll do anything to avoid zero bound on interest rates. Anything to avoid Japan 2.0 and deflation. Second - the cost is 1 - 2 Trillion dollars. I think 1 Trillion is the LOWER bound. The ultimate costs of Nationalization, Backstopping, creating a TARP / Bad Bank whatever you call this will include costs of: Fannie and Freddie, Nationalization Insolvent Banks, AIG and the cost of TARP that Hank Paulson discussed today. It means that inflation is certain as money (debt) is created. Dollar will likely fall and Gold and Commodities will rise. Again.
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