Thursday, September 25, 2008

Deal close on $700 billion financial bailout plan


WASHINGTON (AP) - President Bush is bringing presidential candidates Barack Obama and John McCain into negotiations on a $700 billion rescue of Wall Street as Democrats and Republicans near agreement on a bailout plan with more protections for taxpayers and new help for distressed homeowners. Senior lawmakers and Bush administration officials have cleared away key obstacles to a deal on the unprecedented rescue, agreeing to include widely supported limits on pay packages for executives whose companies benefit. They're still wrangling over major elements, including how to phase in the eye-popping cost - a measure demanded by Democrats and some Republicans who want stronger congressional control over the bailout - without spooking markets. A plan to let the government take an ownership stake in troubled companies as part of the rescue, rather than just buying bad debt, also was under intense negotiation. A bipartisan meeting was set for Thursday to begin drafting a compromise, which top Democrats said they hoped could pass within days.

The core of the plan envisions the government buying up sour assets of shaky financial firms in a bid to keep them from going under and to stave off a potentially severe recession. Bush acknowledged in a prime-time television address Wednesday night that the bailout would be a "tough vote" for lawmakers. But he said failing to approve it would risk dire consequences for the economy and most Americans.

"Without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold," Bush said as he worked to resurrect the unpopular bailout package. "Our entire economy is in danger." Bush's warning came soon after he invited Obama and McCain, one of whom will inherit the economic mess in four months, as well as key congressional leaders to a White House meeting Thursday to work on a compromise. With the administration's original proposal considered dead in Congress, House leaders said they were making progress toward revised legislation that could be approved. Rep. Barney Frank, D-Mass., who has led negotiations with Treasury Secretary Henry Paulson on the package, said that given the progress of the talks, the White House meeting was a distraction.

"We're going to have to interrupt a negotiating session tomorrow between the Democrats and Republicans on a bill where I think we are getting pretty close, and troop down to the White House for their photo op," said Frank, the House Financial Services Committee chairman. "I wish they'd checked with us." Paulson and Federal Reserve Chairman Ben Bernanke have been crisscrossing Capitol Hill in recent days, shuttling between public hearings on the proposal and private meetings with lawmakers, to sell the proposal. Obama and McCain are calling for a bipartisan effort to deal with the crisis, little more than five weeks before national elections in which the economy has emerged as the dominant theme.

"The plan that has been submitted to Congress by the Bush administration is flawed, but the effort to protect the American economy must not fail," they said in a joint statement Wednesday night. "This is a time to rise above politics for the good of the country. We cannot risk an economic catastrophe." Presidential politics intruded, nonetheless, when McCain said earlier Wednesday he intended to return to Washington and was asking Obama to agree to delay their first debate, scheduled for Friday, to deal with the meltdown. Obama said the debate should go ahead. Lawmakers in both parties have objected strenuously to the rescue plan over the past two days, Republicans complaining about federal intervention in private business and Democrats pressing to tack on more conditions and help for beleaguered homeowners. But many in both parties said they were open to legislation, although on different terms than the White House has proposed. Some partisan sticking points remain. Democrats are pushing to allow bankruptcy judges to rewrite mortgages to ease the burden on consumers who are facing foreclosure - a nonstarter for Republicans.

Democrats acknowledge privately that the provision will almost certainly be dropped in the interest of a bipartisan deal. Obama told reporters it's "probably something that we shouldn't try to do in this piece of legislation." Democrats also want any potential proceeds the government reaps from the bailout to go to a fund designed to pay for housing for poor families. Many Republicans oppose the very existence of the fund, which they say is a backdoor means of funneling money to liberal political groups. Democratic demands that Congress be given greater authority over the bailout and that the government be required to help homeowners renegotiate their mortgages so they have lower monthly payments already have been accepted in principle. Under the bailout bill, which will let the government buy huge amounts of toxic mortgage-related assets, "we're now the biggest mortgage holder in town, and we can do serious foreclosure avoidance," Frank said.

Bush Warns "Entire Economy Is In Danger"

Media reports are casting President Bush's televised address last night as both a warning to the nation on the severity of the financial crisis and an attempt to push Congress into passing his proposed bailout. A number of the stories remark on Bush's stark warnings about the health of the economy. Roll Call, for example, says Bush "sketched a frightening view of the economic danger," and used "unusually blunt and even dramatic language." The New York Times reports Bush told the country that "'a long and painful recession' could occur if Congress does not act quickly." Like many other media outlets this morning, the Times quotes the President saying, "Our entire economy is in danger." Bush's speech highlighted "a growing sense of urgency on the part of the administration that Congress must act to avert a far-reaching economic collapse." USA Today notes the President also said, "Without immediate action by Congress, America could slip into a financial panic. ... More banks could fail, including some in your community." He also "warned that inaction could cause millions of layoffs, bank failures, business closures, lost retirement savings, more foreclosures, a further drying up of credit." McClatchy, Los Angeles Times and Washington Post run similar reports.

The speech is also seen as a response to critics who accused the President of not having played a lead role in the government's efforts to defuse the crisis. USA Today reports, for example, that Bush faced "criticism from some Democrats for being AWOL in the debate," and the Wall Street Journal says that "until now," the President had "relied largely on Treasury Secretary Henry Paulson -- a former Goldman Sachs CEO -- and Federal Reserve Chairman Ben Bernanke to make the case for the plan," but "Republican support has been so soft that Democrats worried they would have to take on most of the responsibility -- and political risk -- for passing the package." And "to spread that risk, Democrats on Tuesday called on Mr. Bush to address the nation."

The Politico describes Paulson as "the captain of a crowded lifeboat" who "struggled to stay afloat in Congress Wednesday, battling the waves crashing in on his Wall Street rescue plan." With his speech, Bush was "lending a hand" and taking "back the helm long enough Wednesday night to deliver a nationally televised address," but "to the surprise of some in his own administration, Bush spent precious political capital by using the speech to try to help McCain by bringing him into what have been delicate negotiations with Congress."

McCain, Obama To Attend White House Talks Today The AP notes Bush "spoke just after inviting Democrat Sen. Barack Obama and Republican Sen. John McCain, one of whom will inherit the mess in four months, and key congressional leaders to an extraordinary White House meeting Thursday to hammer out a compromise." In his speech, the President "explicitly endorsed several of the changes that have been demanded in recent days from the right and left. But he warned that he would draw the line at regulations he determined would hamper economic growth." Another AP story and a report in the Los Angeles Times, among other media stories, note both Obama and McCain have said they will attend the meeting.

Wednesday, September 10, 2008

Lehman: Too big to fail?

By Paul R. La Monica, editor

NEW YORK ( -- Lehman Brothers has finally announced a path to raising capital. But after Tuesday's 45% plunge in its stock price, it's unclear if Wall Street will let chief executive officer Richard Fuld carry out the plan. Lehman's (LEH, Fortune 500) stock was down about 2% late Wednesday morning after the company said it would slash its dividend, look for a buyer of the majority of its Neuberger Berman investment management unit and spin off part of its commercial real estate business. Shares are trading at their lowest point in 10 years, having plummeted nearly 90% so far this year. And by the way, the company lost $3.9 billion in the third quarter. So now, the natural question that needs to be asked is this: On the heels of the Treasury Department's takeover of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), does the government now have to step in and bailout Lehman as well. Unfortunately, it may have no choice.

Talkback: Do you think Lehman should be allowed to fail or does it need to be bailed out?

The Federal Reserve set a dangerous precedent in March when it helped engineer the takeover of Bear Stearns by JPMorgan Chase (JPM, Fortune 500) by agreeing to guarantee $29 billion in potential losses. Since then, several Fed members, most notably chief Ben Bernanke, have gone out of their way to defend the action, arguing that Bear Stearns simply was too big to fail. The repercussions of allowing Bear to collapse could have been catastrophic. So if Bear was determined to be too big to fail, isn't it likely the Fed would think Lehman is as well?

Probably. That's because Lehman, the fourth-largest investment bank, is bigger than Bear, which was the fifth-largest at the time it nearly imploded. What's more, Lehman, a bond-trading powerhouse, is even a bigger player in the mortgage-backed securities market than Bear was. So the Fed could easily argue that letting Lehman go under could create even more chaos in the already volatile credit markets. Yes, Fuld wants to keep the bank independent by taking a piecemeal approach to breaking up the company. But the market may not let him do so. And until Lehman actually announces that it has, in fact, raised a substantial amount of capital, it's likely that there will be continued pressure on the stock. If Lehman's stock falls further, it's reasonable to think that some financial institution would take a gamble on buying the company, especially if it could get Lehman through a "takeunder" just as JPMorgan did with Bear.

Some analysts have tossed out investment manager BlackRock (BLK, Fortune 500), British bank HSBC (HBC) and private equity firm Blackstone (BX) as potential bidders. But why would any of them agree to take on all the risk without some assurance from the Fed? After all, that's exactly what JPMorgan got in the Bear deal. Don't get me wrong. I don't like the notion of big Wall Street firms getting saved after making irresponsible, reckless decisions. In what's supposed to be a free market, companies should be allowed to fail. But the Fed has already opened Pandora's box. It's too late now to say that Lehman should be left to wither away to nothing while Bear was allowed to escape that fate. To be sure, if one of the three aforementioned firms were to try and buy Lehman and wanted the Fed's help, this would be more complicated than the JPMorgan takeover. BlackRock and Blackstone aren't banks. And HSBC is not a U.S.-headquartered institution.

Still, Bernanke and Fed vice chairman Tim Geithner have demonstrated a remarkable willingness to be flexible and creative in dealing with the credit crunch. So if they wanted to help someone buy Lehman, one would think they would find a way to get it done. Like it or not, the age of the bailout is in full swing. To top of page