NEW YORK - Last week legendary investor Warren Buffet warned that we were on a financial precipice and that if Congress didn't act we were facing a financial crisis that would make crises of the past pale in comparison.
Monday we got a peek over that precipice. After the House of Representatives voted down the stabilization bill, U.S. stocks tanked. The Dow suffered its biggest point drop on record, surpassing even the dark days following September 11. On a percentage basis, it was not among the top 10, but if you look at the broader measure, the S&P 500, it suffered its worst percent drop since the market crash of 1987. U.S. stocks lost an incredible $1.2 TRILLION of market value.
As I write this Monday evening there is no panic on Wall Street, just a grim acceptance that there is going to have to be much pain inflicted before lawmakers put their difference aside and act.
The wave of selling that swept through Wall Street is expected to circle the globe. More banks failures are predicted. What we don't know yet are how many businesses will have to shut their doors because they do not have access to credit.
Don't get me wrong, most this plan is no magic wand. Years of work will be needed to clean up banks, fix the regulatory system and restore confidence. But there is a sense that government intervention now can help lessen the severity of the downturn that now threatens the global economy.
During the debate on the floor of the House of Representatives Monday, the republican from Alabama, Spencer Bachus compared this vote to a game of Russian roulette saying: "I am not willing to put that bullet in the revolver and spin it. I am not willing to take that gamble ... because I am not willing to subject the American people to the worst case scenario."
The stock sell-off we saw was painful, but it was just a warning shot. Despite the stunning failure of leadership we saw from Congress, most traders and investors are still holding out hope that elected officials will get their act together and get something passed this week. If there are any signs that is not the case, the market fallout will get much worse.
Do you think "free markets" can still work out the problems themselves? Do you worry the global contagion will adversely affect your financial well-being?
LONDON, England - They don't make Mondays like they used to. In the good old days, Mondays were about cranking one's mind back into working mode after a weekend of relaxation, occasional excess and not much else. The return to weekday routine involved a certain amount of pain, but no more than a mild sense of shock.
Over the past few weeks, things have changed. The collapse of Lehman Brothers a fortnight ago is only the most dramatic of the huge shockwaves that have pounded through the financial world, and a startling number of them have been unleashed on a Monday, following a weekend of frenzied negotiation and agonised decision-making by bankers, officials and government ministers.
This Monday is yet another monster day in the markets. The US bailout plan (apparently I should be calling it TARP, but I'm somehow wary of doing so) is due to be voted on in the House of Representatives; Wachovia's banking operations are being bought by Citigroup; the governments of the Netherlands, Belgium and Luxembourg are bailing out Fortis to the tune of $16bn; the UK government, still reeling from the failure of Northern Rock, has now been forced to nationalise Bradford & Bingley, taking on its $80bn mortgage book; the German federal government is leading a consortium of commercial banks providing a $51bn line of credit to keep Hypo Real Estate afloat; and there are bank rescues under way in Iceland, Russia and Denmark.
Quite a list. But can you spot the odd one out? It's actually obvious: the US bailout plan is the only one that is open-ended, does not apply to a particular bank, has not been substantially worked out behind closed doors and - crucially - the only one so far subjected to any degree of scrutiny by legislators. Under the US system of government, Congress holds the purse-strings, and though the President holds awesome powers, when he starts to think in terms of serious money, he has to seek Congressional approval.
It is actually remarkable how much firefighting the US federal authorities have done in this crisis without having to bow the knee on Capitol Hill (as US Treasury Secretary Henry Paulson rather chivalrously did before House Speaker Nancy Pelosi last week). The underpinning of the insurer AIG was an $85bn operation undertaken by administrative fiat.
But European governments and their funds are controlled by whoever has the majority in parliament, so once in office they can rely on their majority, act first and then worry about consulting other legislators afterwards - this is often not the case in the US. It does not mean that European legislators and the media will not give them a hard time. Look at the criticism the UK Chancellor of the Exchequer Alistair Darling has been subjected to after nationalising Northern Rock.
The separation of powers is one of the key features of the US Constitution, the work of people in whose ear the anti-British cry "No Taxation without Representation!" still resounded. The Founding Fathers created a President who would undoubtedly sit at the top of the tree of government and who would wield huge power in the fields of national defence and foreign policy, but who would always have to bow to the wisdom of other representatives of the people when it came to money.
On paper, then, a European head of government has a more comprehensive range of levers to pull, once she or he has gone to the trouble of being put in place by directly elected parliaments. Many on this side of the Atlantic will have watched the last 10 days of politicking in Washington with a mixture of bemusement and awe.
And John McCain and Barack Obama will also have drawn some important lessons from the contortions in which President Bush and his administration have had to indulge to hammer through their rescue plan. Sitting in the Oval Office is probably the greatest job in the world, but the US constitution sees to it that whoever moves in there on January 20, 2009 must remember who is picking up the check: the taxpayer - as represented by the Congress of the day.
John and Barack, it's not too late. If humility is not your thing, now's the time to drop out of the race.
NEW YORK - Many of you have written in expressing outrage over this plan to "bailout Wall Street."I can understand the anger. The problem is that Wall Street and Main Street, as we refer to the general public, are not separate entities.
As I write this blog, Washington Mutual has collapsed, making it the largest bank failure in U.S. history. Lending has come to a stand still. The problems in the financial sector are already rippling out through the economy.
Small businesses are going under because they no longer have access to funding. People with good credit are getting turned down for mortgages. This is just a taste of what is to come.
The government isn't bailing out Wall Street. They are trying to save Main Street from a banking system that is on the verge of collapse and an economy that faces a severe recession.
If U.S. Treasury Secretary Henry Paulson wanted to bail out Wall Street he would have saved Lehman Brothers. He would have prevented Merrill Lynch from being forced into a hasty merger and the list goes on. Paulson and Bernanke's plan may be flawed, but they are right to argue the government must step in.
Is it fair that taxpayers get stuck bearing the risk and burden of fixing this mess? No way.
But let's stop using the broad term "Wall Street" and zero in on the real source of outrage - overpaid executives who took excessive risk in order to achieve short-term profit so they could boost their fat stock options. Executives who signed contracts that entitled them to millions of dollars in compensation, no matter how poorly their company performed. I just read the CEO of Washington Mutual could walk away with $18 million dollars after just three weeks on the job!!
Will he have the indecency to take it? I doubt it. But it is those kinds of headlines that have taxpayers screaming down the lines at their Congressmen.
I read that according the Economic Policy Institute, in 2007 total compensation for CEO's for large U.S. corporations was 275 times that of the average workers. In the 1970's it was 35 times the average worker. That has to change. Lawmakers should insist it is part of the rescue package.
But they should not reject a bailout altogether. That would only cost average people jobs. It will do nothing to reign in the "super rich greedy swindlers," as one of our viewers called them.
What do you think? Should executive pay be reformed? What is the best way to do that?
I doubt that even Hollywood could have come up a story line with as many nail biting, stomach churning twists and turns as we've seen in real life these past two weeks.
Could you see Bruce Willis playing Wall Street enforcer Hank Paulson?
I won't list every plot development in the financial thriller of the decade. If your nerves are anything like as jangled as mine you could probably do without yet another blow by blow account of all the highs and lows.
As I write cnn.com is reporting that negotiations over the proposed $700 billion bail out of the nation's financial system are on a knife edge. And so it goes on.
I don't know about you, but I could do with a little light relief.
So how about this? When Hollywood makes the inevitable blockbuster version of the events of September 2008, when superhero Hank saved the world from financial Armageddon, which of the world's celebrities would you like to see cast as the major players?
We had some fun with this in the office today. Let us know what you think and we'll read the best suggested cast lists out on air in a future edition of World Business Today.
Have a great, ‘restful' weekend!
It has a kind of inevitability to it. No sooner had U.S. congressional leaders proclaimed that they were on the brink of a deal than it all fell apart: House Republicans have declared that they reject a measure they see as unnecessary and reminiscent of socialism, and financial markets have reacted predictably to the latest dollop of uncertainty to land on their groaning plates.
You can read full details elsewhere on CNN.com, but it is worth noting that we are in effect looking at a split within the Republican Party, with the Bush administration unable to convince its allies in the House of Representatives (which as an institution is crucially important in matters of the federal budget) that this dramatic measure is necessary. Congressional Democrats, by contrast, appear to be on board.
It may be no bad thing that the discussions are continuing. The sum involved is colossal, as are the power handed to the Treasury Secretary and the ideological about-face involved for almost all the United States' political leaders. Wise heads are pleading for more thinking to be devoted to proper guarantees for the taxpayer, including provision for the federal government to take an equity stake in the banks its assists, as it did with the failing insurer AIG and as happened when Sweden successfully rescued its banks from a similar pickle in the early 1990s.
That, though, would stick in the craw of many Republicans; they'd see such state ownership as "socialistic and unamerican." But it is interesting that one of the many voices calling for equity stakes is that of the billionaire investor and philanthropist George Soros, hardly someone bent on destroying the capitalist system which has made him so wealthy.
Hold on a minute, though - where is the Republican presidential nominee John McCain in all of this? He broke away from the presidential campaign a couple of days ago to return to Washington and help work on the crisis, and President Bush invited him along to Thursday's key meeting at the White House, along with the biggest names from Conress and Treasury Secretary Henry Paulson.
All the same, McCain is reported to have said little. His Democratic rival, Barack Obama, by contrast, did not allow himself to be wrong-footed for long: he is reported by the New York Times to have "peppered Mr Paulson with questions".
That silence seems to have stung the House Republicans: one reason for their anger is their perception that the bailout plan is being rushed through before their man has a chance to put his mark on it and reap due political gains.
But while this may be an awkward time in U.S. politics, it's an ugly one in U.S. finance: after the White House talks broke up, Washington Mutual went down in the biggest-ever failure by a US bank. As the talks restart on Friday, that should concentrate a few minds.
It is a rule of thumb in big negotiations like this one that there are false dawns and false sunsets. Brinkmanship is a skill much practised in Washington DC.But here is an awesome chance for the two presidential candidates: which of them has the statesmanship to heal the rift between Republicans and Democrats and lead the country - and the global financial system - to a fair and effective solution to the crisis?
"Bank robbers and asset strippers." That's what the Archbishop of York John Sentamu called short sellers (those who profit from falling share prices) during a speech in London's financial district Wednesday night.
Churches and financial institutions rub shoulders in the City of London.
Some might argue the financial markets have been to hell and back and that many who worship money are paying the price ... certainly the Church of England's top two leaders are questioning the morality of those behind it all.
Sentamu's boss, the Archbishop of Canterbury Rowan Williams wrote banks now need to pay the piper with stronger regulation. He even said Karl Marx was correct about a few things when it comes to "unbridled capitalism."
Why are Britain's clergy sticking their noses into the markets? They feel a $700 billion bailout of the U.S. financial sector is in the works, but only a fraction of that is needed to fight child poverty, and it is not forthcoming.
The Church of England often likes to play the role of the nation's conscience. Though few people here actually step into a church or any other house of worship, the church does take vocal stands on things like the Iraq War, the growing gap between rich and poor and the problem of household debt.
By attacking short sellers and those who created this mess, church leaders say they want it known that the financial crisis has now unleashed a "risk to social stability."
Of course this is the same Church of England which lost millions of dollars in the property market during the house price crash of the late 1980's. It invested in property and got it wrong. Will be interesting to see how its portfolio is doing this time around.
LONDON, England - It's not that far from the U.S. Treasury, next door to the White House, to the great white dome of the U.S. Capitol. But as Treasury Secretary Henry Paulson shuttles daily along Pennsylvania Avenue to plead with America's legislators and secure their swift approval for his plans to bail out struggling U.S. banks, it must feel as if he's crossing a huge cultural divide.
Paulson must use all his skills in dealing with politicians.
Let me explain. Paulson is from Wall Street, where he used to run Goldman Sachs, and in financial markets, there's a particular discipline to describing problems and suggesting solutions. There's no room for distortion, exaggeration, sentimentality or wishful thinking; you have to call things the way you see them. If what you see happens not to fit in with your ideological viewpoint, tough.
The political world is different. I'm not calling politicians liars here, but what I think they would acknowledge is that, in politics, to call things exactly the way you see them can be painfully naïve and damaging. Call it restraint, call it spin, call it smoke and mirrors; if you're in politics you need to look principled and you have to toe the line. That's why you were elected, and if you really have to abandon your principles, make sure you're as graceful and as persuasive as you possibly can be.
There's no grace to the jagged shape of the ideological U-turn Henry Paulson has described in embracing the $700 billion bailout plan he and the Fed Chairman Ben Bernanke are touting to Congress. Not only have recent events forced him to set aside his own personal beliefs in free markets and minimal regulation, but he has had to drag the rest of the Bush administration with him, including a president steeped in the idea that business must be free and taxes must be low.
It speaks volumes for Paulson's advocacy that he has succeeded here. Now he has to do the same on Capitol Hill, and I suspect that his appearances there will have been among the most stressful moments of his life. He has not minced words when describing what he sees as the consequences of failure to rescue the banks and the financial system, and whether or not you think he is doing the right thing, he is clearly totally convinced in his own mind that this bumpy road is the only way forward, and he has no qualms about letting his conviction shine through - even if he surely thought something quite different a couple of weeks ago.
Equally striking, though, is the way that Paulson's elected questioners seem publicly to be going through the motions of hostility and resistance to the bailout plan, even as we learn that behind the scenes there is strong bipartisan support for it. The betting is that the legislation will pass in some shape or form, yet there's an unwritten understanding that as part of the price of approving it, Paulson, Bernanke and administration officials have to be given a ritual hard time.
The politicians know that the fallen titans of Wall Street are an easy target, and by saying that the bailout plan gets them off the hook, they will score points among the voters. I won't call it bad faith, just part of an essential political process in a mature democracy. Perhaps, though, this feeling explains why I prefer to cover business rather than politics.
Henry Paulson also used to be an American Football star. It's a game in which sheer weight counts - look at the size of the players - but skill trumps weight. He knows it's not enough for the Treasury Secretary, the Fed Chairman and other financial luminaries to demand something. They also have to deploy their utmost skills - and, crucially, be seen by the voters to do so - if they are to win this game against opponents who love to play to the grandstand.
When my crew and I arrived on the scene at the Singapore office of AIG, we were not only struck by the number of people lining up to cancel their policies and withdraw their money but also by the remarks of the cab driver who pulled us up to the side of the building.
"Haven't you heard?" he asked us incredulously when we tried to confirm exactly what the people were waiting for. "AIG is going bankrupt!"
Now, that might not sound surprising to someone living in the United States. But we were thousands of miles away from the home turf of the American insurance giant. Granted Singaporeans have a strong interest in the financial world, but the driver got me wondering ...
How many Asian financial institutions can you name?
In the past few days, Japanese companies such as Mitsubishi UFJ and Nomura have been throwing their money into Wall Street firms - either to buy a strategic stake (Mitsubishi UFJ into Morgan Stanley) or to pick up assets (Nomura into Lehman). The belief here is that these Japanese players are building their brands and positioning themselves for greater influence in the global financial markets.
And the Japanese aren't the only ones.
Before Lehman went bust, shares of the investment bank were supported by news Korea Development Bank was gearing up to buy a massive chunk of the venerable U.S. firm.
Cash-rich governments are getting in on the action, too.
State investment arms, known as sovereign wealth funds, are buying up shares of Wall Street titans such as Merrill. Many of the governments out here have coffers filled with cash from goods sold to American consumers.
So are Asian financial firms poised to become household names?
NEW YORK - What will happen if U.S. lawmakers do not pass the $700 billion dollar rescue proposal they are now debating? What is the worst case scenario? It is the question everyone has been asking.
Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke have predicted a "significant deterioration of economic activity." Financial markets that don't work. Job losses. More foreclosures.
Bernanke went a bit further Wednesday, saying it would result in the most significant financial crisis in the post-war period and it would be global in reach.
What are noteworthy in these answers are the words they are NOT using. Depression. Market crash. Bank runs. Lawmakers are looking for such language because they need to justify this plan to their constituents, the taxpayers who are going to shoulder the burden.
During Wednesday's hearings on Capitol Hill, Bernanke was asked directly whether there was a risk of another Great Depression. He refused to go there, saying he was "reluctant to make that comparison."
That is not to say he doesn't fear it, but as a student of the Great Depression, Bernanke knows how much confidence in government and in the system matter. If the Fed chairman warns the U.S. is on the verge of a depression, it could have terrible consequences.
And he is not the only one choosing his words carefully. Early Wednesday, famed investor Warren Buffett warned that we were on the "precipice" and that we came "very very close to something that would make the financial crises of the past pale in comparison."
"Precipice." "Looking into the abyss." It is not hard to read between the lines. Without saying the D-word, officials and some of the most respected names in finance are trying to tell us what they think will happen if governments around the world don't act.
When stunned U.S. lawmakers first learned the Treasury was asking them for a $700 billion rescue plan, they asked Paulson what would happen if they said no. His reported response, "God help us all."
How worried are you? Do you think officials are adequately explaining the risks? Do you think your personal financial situation will be impacted by what happens here in the U.S.?
NEW YORK - It is rare moment when you hear frank honest talk coming from politicians, but in Tuesday's congressional testimony on the rescue package, U.S. Senator Robert Menendez from New Jersey provided just that.
Menendez said, "I get the sense we are flying by the seat of our pants. These assets are so complex no one seems to know how to value these things."
It is true!! I listened to more than four hours of testimony, heard a lot of questions and little in the way of concrete answers from U.S. Treasury Secretary Henry Paulson or Fed chairman Ben Bernanke. So I called one of the few people I know that does understand these things. Josh Rosner of Graham Fisher, a research firm for institutional investors. I asked him if the market couldn't figure out a way to value these things, how can the government?
They can't. I am going to paraphrase his explanation. It is a bit daunting, but stay with me, it is important to understand this.
In order to determine a value on these mortgage-related assets you need to know where mortgage default levels will peak. You can't know that ... until you know where housing prices will bottom and how consumer's behave. Do people remain committed to paying their mortgages or do they give up and walk away from their homes?
There is also a problem trying to distinguish the intrinsic value of these assets. Unlike a piece of real estate, which is a tangible structure, or a company, which is a dynamic entity that can cut spending, manage assets and grow a business, these pools of mortgages are static finite instruments. They are just pieces of paper. If the mortgage they are based on become worthless the paper becomes worthless. There is no recourse. No building to sell (as in the case of the savings and loan bailout in the 1980s). No company to restructure (as in the Chrysler bailout).
That is not to say ALL these securities are worthless. The majority of people in the U.S. are paying their mortgages and if housing recovers SOME of these mortgage-backed securities may rebound. But there may be entire groups of these things which will never recover. And that is why the market has been assigning fire sale prices to them.
How can we separate those securities which have a chance to recover from those which are worthless? Experts say the government needs to step in and be a market maker. During Tuesday's testimony Fed chairman Ben Bernanke used the analogy of a Sotheby's auction. The value of the painting – mortgage debt in this case – will be determined by what the people in the "room" are willing to pay. Sounds good, except that isn't exactly what they are proposing. They want to do a reverse auction, which means that the owner of the paintings, or assets in this case, gets to dictate the minimum bid they are willing to entertain.
They are doing that because the banks cannot afford to take too low a price. Their balance sheets would blow up. But helping banks comes at the expense of the taxpayer investment. The government is hoping that once the market starts moving again private money will come in and taxpayers will make money, but that is a huge gamble.
I asked Josh if he felt the government's plan, as it now stands, will work. He said he is 100 percent confident it will work to help banks. But he estimates chances for success at 50-50 that it will work to restore market function and stability. And he is 100 percent confident that it will not work for the taxpayers.
I am no fan of anyone currently in Congress, but lawmakers are right to demand answers before they sign away $700 billion. Very few people, including global bankers who bought these things, seem to understand the risk these assets carried and how they will trade in the future. It is important we all try to get our heads around it if we are going to have educated opinions about how to get out of this mess.
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