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Deal close on $700 billion financial bailout plan

By JULIE HIRSCHFELD DAVIS

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.

Lehman: Too big to fail?

By Paul R. La Monica, CNNMoney.com editor

NEW YORK (CNNMoney.com) -- 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

Fewer without health insurance, U.S. Census says

By Ruth Mantell

WASHINGTON (MarketWatch) -- Even as the number of Americans living in poverty rose last year, fewer Americans overall went without health insurance and there was an increase in the median household income adjusted for inflation, the Census Bureau reported Tuesday. The number of people without health-insurance coverage fell to 45.7 million in 2007 from 47 million in 2006, the government said in its annual snapshot. The number of uninsured children also declined, slipping to 8.1 million from 8.7 million. Median household income, adjusted for inflation, rose 1.3% to $50,233 -- the highest level since 2000. Income includes items such as earnings, interest, alimony and unemployment compensation. For households at the 20th percentile, income fell 1.5% to $20,291. For households at the 80th percentile, income rose less than a percentage point to $100,000.

Meanwhile, following three years of annual declines in real earnings, both men and women experienced gains in 2007. The real median earnings for men working full-time and on a year-round basis rose 3.8% to $45,113, with women's earnings growing by 5% to $35,102. The poverty rate hit 12.5% in 2007, compared with 12.3% in the prior year -- not statistically different, according to the Census Bureau. The poverty rate reached 11.7% in 2001, when the economy was in a recession. The number of Americans living under the poverty line reached 37.3 million, including 13.3 million children. In the prior year, there were 36.5 million under the poverty line, 12.8 million of whom were children.

Cause for concern

Despite some good news in the data, there is also cause for concern, according to the Center on Budget and Policy Priorities, a policy and research organization that specializes in programs that affect low- and moderate-income families and individuals. In particular, the rate of those without health insurance hit 15.3% in 2007, up from 14.1% in 2001. "The data for 2007 are of particular concern given that the economy is now in a slowdown, and poverty is almost certainly higher now -- and incomes lower -- than in 2007," said Robert Greenstein, CBPP's executive director.

"The 2007 levels -- already disappointing because they are worse than those for the 2001 recession -- are likely to constitute a high-water mark for the next few years. This suggests that significant pain may lie ahead for many Americans," he commented in a statement. Dr. Nancy Nielsen, president of the American Medical Association, said in a statement that many patients are priced out of coverage, and that covering all Americans would be a "good first step."

"We advocate for a shift in tax incentives for health insurance so lower-income Americans get money to purchase coverage," she added. "We also want insurance-market reforms to provide individuals more choices and ensure coverage for high-risk patients." CBPP estimates that the absolute number of Americans and the percentage of the overall population who are uninsured can be expected to increase both this year and next. "The numbers of uninsured parents and children are likely to grow as employers lay off more workers and states consider cuts in their Medicaid programs to help balance their budgets during the economic slowdown," Greenstein said.

U.S. Producer Prices Surge More Than Forecast in July

U.S. Producer Prices Surge More Than Forecast in July (Update2)

By Timothy R. Homan(Bloomberg) -- Prices paid to U.S. producers rose twice as much as economists had forecast in July, reflecting the jump in energy and commodity costs that has since started to wane. The 1.2 percent increase in the producer price index followed a 1.8 percent increase the prior month, the Labor Department said today in Washington. Costs were up the most in 27 years from a year before. So-called core prices that exclude fuel and food rose 0.7 percent after a 0.2 percent gain in June. Oil prices have dropped 21 percent since the start of last month, copper is down 15 percent and corn has dropped 14 percent, helping ease the cost pressures on companies. Federal Reserve officials anticipate the economic slowdown, along with a stabilization in commodity costs, will help contain inflation.

``It's not a pretty number,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. ``Today's PPI is a bit of an echo and maybe a little bit of a rude reminder of how much of a problem inflation was in July.'' Another government report showed builders in the U.S. broke ground in July on the fewest houses in 17 years, signaling the residential-construction slump will continue to hurt economic growth. Treasuries were little changed after the reports, with benchmark 10-year notes yielding 3.80 percent at 8:37 a.m. in New York, from 3.82 percent late yesterday. Futures contracts on the Standard & Poor's 500 Stock Index were down 0.9 percent at 1,270.20.

Housing Starts

The 11 percent decrease in housing starts to an annual rate of 965,000, the lowest since March 1991, followed a 1.084 million pace the prior month, the Commerce Department said today in Washington. Building permits, a sign of future construction, also fell. Prices paid to factories, farmers and other producers were forecast to rise 0.6 percent following a previously reported 1.8 percent increase the previous month, according to the median of 77 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 1.8 percent. Core prices were projected to rise 0.2 percent, according to the survey median. Producers paid 9.8 percent more for goods from July 2007, the biggest year-over-year gain since June 1981, compared with a 9.2 percent gain in the 12 months ended in June. Excluding food and energy, the increase was 3.5 percent from a year earlier, its biggest jump since 1991, compared with a 3 percent gain in the prior month.

Gasoline

Producers paid 0.2 percent less for gasoline, and diesel fuel gained 2.6 percent, the report showed. Natural gas costs were up 7.8 percent from the previous month. The wholesale-price report is based on figures for the Tuesday of the week that includes the 13th of the month. On that basis, a barrel of crude oil cost $138.74 on the New York Mercantile Exchange for July, up from $131.31 the previous month. August producer prices are likely to reflect this month's drop in the cost of oil, which traded at $112.11 a barrel earlier today. Oil futures prices reached a record $147.27 a barrel July 11. Food was 0.3 percent more costly, after a 1.5 percent increase the previous month, today's report showed. Prices for raw materials, or so-called crude goods, increased 4.2 percent, after a 3.7 percent rise the prior month.

Inflation Outlook

Fed policy makers in their statement on Aug. 5 indicated that they expect inflation will moderate in the second half of the year and into 2009. Still, the outlook for prices is ``highly uncertain,'' the central bank's Federal Open Market Committee said in a statement when it voted to keep its benchmark interest rate at 2 percent. Today's report showed passenger car prices gained 1.4 percent and light trucks increased 0.8 percent. The report also showed prices for capital equipment increased 0.8 percent. Consumer goods prices were up 1.2 percent. Producer prices are one of three monthly inflation gauges reported by the Labor Department. Import prices rose 1.7 percent in July and consumer prices increased 0.8 percent for the same period, the Labor Department said last week. Both figures were higher than estimated. Higher raw-material costs are outpacing price increases for some companies. Deere & Co., the world's largest maker of farm equipment, last week said higher prices for tractors and combines weren't enough to counter a $140 million increase in production costs for materials such as steel.

``Escalating raw-material costs are expected to have an impact on margins'' for the fourth quarter, the Moline, Illinois- based company said last week in a statement. Hershey Co., the largest U.S. chocolate maker, on Aug. 15 said it will raise prices to counter higher commodity costs. The changes will result in a roughly 10 percent increase across Hershey's entire U.S. product line, the company said in a statement.

Cablevision Systems mulls spin-off of units

By JEREMY HERRON

NEW YORK (AP) — Nine months after shareholders rejected the Dolan family's latest bid to take Cablevision Systems Corp. private, the cable operator said Tuesday it is considering options that could see it sell some of its diverse holdings. Chief Executive James Dolan, who has long criticized shareholders for undervaluing what is considered one of the strongest cable franchises in the country, said the Bethpage, N.Y., company may also buy back stock or pay a special dividend.

Dolan said Tuesday the company is "actively looking" at options to close the gap between operating performance and the market value of its shares. The company plans to hire investment banking firms. Its market capitalization stood at around $8.27 billion. The announcement comes a week after Dolan said investors are "significantly" undervaluing the company. The Dolan family controls Cablevision through a special class of shares and has tried to take the company private several times in the past few years. Its most recent attempt offered shareholders $36.26 per share, but that was rejected as too low in October 2007. Cablevision shares rose 7.5 percent to $27.82 in midday trading Tuesday.

Cablevision did not say which of its businesses it would consider selling. Analysts consider its cable franchise, which serves the affluent New York suburbs, one of the best in the business. The unit is the country's fifth-largest cable system and accounts for 75 percent of company revenue. It includes high-speed Internet and phone services that have helped beat back competition from phone companies and satellite TV operators. The company runs several cable television stations, including AMC, IFC and WE tv, as part of its Rainbow Media Holdings LLC unit. The market for popular cable networks has been hot in recent months, with General Electric's NBC Universal paying $3.5 billion for Weather Channel and $875 million for women's programming channel Oxygen. Cablevision paid about $500 million for independent film channel Sundance in June. The company also owns Madison Square Garden and the three sports teams that play there: basketball's New York Knicks and New York Liberty, and hockey's New York Rangers. But potential suitors may have trouble placing a value on the Knicks or Rangers because Cablevision has intertwined contracts among the teams, the arena and the regional sports network that airs their games.

"It will be next to impossible to assess the franchise values unless you know what the contracts are that they work under," said Andrew Zimbalist, a sports economist with Smith College.

Assuming the arena and cable contracts were broken, Zimbalist said the Knicks would be worth about $500 million and the Rangers about $300 million. He estimated average revenue for a National Basketball Association team is $150 million. Forbes magazine ranked the Knicks as the most valuable franchise in the NBA at $608 million in its 2007 rankings, which includes an estimate for the arena deal. Cablevision paid $300 million for the Knicks in 1997, the magazine said. Robert Johnson, the billionaire founder of Black Entertainment Television, paid $300 million for the expansion Charlotte Bobcats in 2003, one of the last NBA teams to be sold. Hockey's Edmonton Oilers, a storied franchise in a small media market, recently sold for about $200 million.

"There's a very special media market in New York for sports teams," Zimbalist said. "There is significant value over and above the average franchise because of the market."

Cablevision's other entertainment venues include Radio City Music Hall and the Beacon Theater, both in New York, and the Chicago Theater. Cablevision is unlikely to sell newspaper publisher Newsday Media Group, following its $650 million purchase of Newsday from Tribune Co. The acquisition closed in July. The company has paid a special dividend in past, returning $3 billion, or $10 per share, in cash to shareholders in 2006. The company took on debt to fund that dividend, which may not be an option now because of the credit crisis.

"We believe that Cablevision's options will be limited by the credit markets," said Goldman Sachs analyst Ingrid Chung in a note to clients.