The General Economy Sucks Thread

[alexamenos]

gee
zus

here's the text of the bailout plan --> text.

In summary it reads:

Here's $700 B Mr. Paulson. You've got two years to dole it out to your banking buddies as you see fit...and by the way all of the financial institutes in the US will answer to you. We promise not to interfere, just let us know if you need anything else.

It's no wonder why there's a mad push to get this thing signed ASAP...gotta get it signed before anyone has time to mount an opposition.
----------------------------------------------------

a couple of particulars:

Sec. 2. Purchases of Mortgage-Related Assets.
...
(b) Necessary Actions.—The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
...
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

hence, at the secretary's discretion, financial institutions are to be made "agents of the Government", and they'll do what the Government tells them to do. Is it an exaggeration to say that this act is a de facto Government takeover of financial institutions all over the Country?

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

The idea that this act has a $700B price tag is a clever canard -- it's not $700B, it's $700 B at any one time.

So, Commissar Paulson can purchase $700B of bad debt at 60 cents on the dollar, re-sell the debt at 10 cents on the dollar, and then start all over. This a royal posterior penetration.

[Mavdog]

first, that is a draft of the bill, and as we've seen the final version will be different.

for instance the definition of who is able to sell the mrtgages was "from any financial institution having its headquarters in the United States", and now is rumoured to be "from any financial institution having signifigant operations in the United States".

second, I believe that all national banks are already "financial agents of the Government" by way of their being national banks.

third, the amount is "up to $700 B", yet the authority is for a specified time period, which period was originally for 2 years bit is now rumoured to be until the end of 2009.

the idea behind the bailout is to create a vehicle to return liquidity to the market, the mortgages would be acquired in a "reverse auction" with sellers competing on the steepest discount for the money being offered. really very creative.

the concept is a good one, and we've been down this road before with success. as for getting it signed before opposition emerges, it needs to be approved before the politicians get crazy with their pet issues (like limiting exec compensation...).

[alexamenos]

Originally Posted by Mavdog

first, that is a draft of the bill, and as we've seen the final version will be different.

for instance the definition of who is able to sell the mrtgages was "from any financial institution having its headquarters in the United States", and now is rumoured to be "from any financial institution having signifigant operations in the United States".

that's hardly an improvement...

second, I believe that all national banks are already "financial agents of the Government" by way of their being national banks.

you make a fair point by noting that our banking system is already a Government sponsored cartel, but if the language of the act is not necessary to expand the government's power, I wonder why it is included in the text.

third, the amount is "up to $700 B", yet the authority is for a specified time period, which period was originally for 2 years bit is now rumoured to be until the end of 2009.

well...if we read the actual text, it says "$700B at any one time," and if the "any one time" does not modify the meaning of "limited to $700 B", then why is it included?

the idea behind the bailout

and the reality as may be enacted are two different things. I'm more concerned with the reality, and to date this is the only draft of the text that I've seen.

[Mavdog]

Originally Posted by alexamenos

that's hardly an improvement...

not sure if it's an improvement or not. as long as the mortgages are for domestic properties, it's not impotant in my book.

you make a fair point by noting that our banking system is already a Government sponsored cartel, but if the language of the act is not necessary to expand the government's power, I wonder why it is included in the text.

"cartel"? too funny.

seems that the language is merely sop.

well...if we read the actual text, it says "$700B at any one time," and if the "any one time" does not modify the meaning of "limited to $700 B", then why is it included?

it does allow for the use of that amount of money, and if the funds are returned why not use them again? why limit the program if the program is acheiving its original goal?

and the reality as may be enacted are two different things. I'm more concerned with the reality, and to date this is the only draft of the text that I've seen.

work in progress...

the item that seems to be most disconcerting is the stated immunity from review by the courts. while I understand the idea to not let the process get bogged down by frivalous use of lawsuits, stated lack of review is not how our current 3 legged system works.

[rabbitproof]

Ron Paul:
http://es.youtube.com/watch?v=3qLefrvxbq8

[rabbitproof]

Bush Backs Unlimited Compensation For Disgraced CEOs: Now Is Not The Time For ‘Punitive Measures

Today, the White House released a statement criticizing Congress’s potential plan to limit CEO compensation at the companies the federal government is bailing out, firmly standing against any “punitive measures”:

We certainly understand and are sympathetic to the sentiment regarding the pay of CEOs and senior management of these firms, but we have to focus on the problem, and the problem is that we need these firms to participate in the program and sell us this debt. Having punitive measures would provide a disincentive for firms to participate, and that would make the program much less likely to succeed.

CEO compensation and corporate governance in public companies are very important issues — especially when receiving taxpayer support — but we need to be focused on fixing this problem in our markets right now. We can and should return to those issues once we get this legislation passed.

President Bush also released another statement earlier today warning Congress against inserting any “unrelated provisions” — such as help for struggling homeowners — in the $700 billion Wall Street bailout.

The Bush administration’s position is unjustifiable. As ABC News reported:

In 2007, Wall Street’s five biggest firms — Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley — paid a record $39 billion in bonuses to themselves.

That’s $10 billion more than the $29 billion loan taxpayers are making to J.P. Morgan to save Bear Stearns.

Those 2007 bonuses were paid even though the shareholders in those firms last year collectively lost about $74 billion in stock declines — their worst year since 2002.

In short, the Bush administration wants zero punishment for these wreckless CEOs who lost shareholder money and are now costing each person in the United States $2,000. In return for $700 billion, the White House has yet to name any ways that it will hold these corporations accountable or institute safeguards to ensure that this irresponsible lending and borrowing won’t happen again.

Furthermore, the White House is demanding that Congress give up its oversight powers for this deal and “place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.”

http://thinkprogress.org/2008/09/22/...house-ceo-pay/

[aquaadverse]

Originally Posted by rabbitproof

Bush Backs Unlimited Compensation For Disgraced CEOs: Now Is Not The Time For ‘Punitive Measures

Today, the White House released a statement criticizing Congress’s potential plan to limit CEO compensation at the companies the federal government is bailing out, firmly standing against any “punitive measures”:

We certainly understand and are sympathetic to the sentiment regarding the pay of CEOs and senior management of these firms, but we have to focus on the problem, and the problem is that we need these firms to participate in the program and sell us this debt. Having punitive measures would provide a disincentive for firms to participate, and that would make the program much less likely to succeed.

CEO compensation and corporate governance in public companies are very important issues — especially when receiving taxpayer support — but we need to be focused on fixing this problem in our markets right now. We can and should return to those issues once we get this legislation passed.

President Bush also released another statement earlier today warning Congress against inserting any “unrelated provisions” — such as help for struggling homeowners — in the $700 billion Wall Street bailout.

The Bush administration’s position is unjustifiable. As ABC News reported:

In 2007, Wall Street’s five biggest firms — Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley — paid a record $39 billion in bonuses to themselves.

That’s $10 billion more than the $29 billion loan taxpayers are making to J.P. Morgan to save Bear Stearns.

Those 2007 bonuses were paid even though the shareholders in those firms last year collectively lost about $74 billion in stock declines — their worst year since 2002.

In short, the Bush administration wants zero punishment for these wreckless CEOs who lost shareholder money and are now costing each person in the United States $2,000. In return for $700 billion, the White House has yet to name any ways that it will hold these corporations accountable or institute safeguards to ensure that this irresponsible lending and borrowing won’t happen again.

Furthermore, the White House is demanding that Congress give up its oversight powers for this deal and “place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.”

http://thinkprogress.org/2008/09/22/...house-ceo-pay/

I agree with most of the sentiment. I've got some serious issues with speed of this blank check bailout. However, the longer it goes on the larger the hole. We seem to be spending much of time assigning blame. There is ample to go around no need to rush. We aren't going to run out. Each side of the aisle and the Executive branch are going to get their fill long before the keg is spitting air.

As others have pointed out, neither Party seems to be against a bailout. Or making any serious case that what we currently have isn't best described as under-sight. Having a majority in Congress for most of this decade is good enough to be correct in slapping Republicans around. Same with the Executive Branch.

But once you get to put your people in charge of the oversight committees, with Chairmanships doled out with the most important ones to long tenured members, your attempts to slip any responsibility by looking for the easy unelected with no real public forum and admittedly scummy and greedy CEOs is all well and good. If I was in a leadership position in this worthless Congress, I would be doing the same.

I'm not giving McCain a pass on this. either. I've been as pissed about this mess as anything in the 35 years I've been following politics. Much of the slime we are currently in can be blamed on a lack of proper consideration of the consequences of some of these "common sense" attempts to squash the ability of these new generation robber barons to loot companies with no regard to the consequences to the workers or stock holders.

Making a large share of compensation in stock options seemed like a good idea because it would make company performance the most important consideration to the CEO, unlike straight salary that is going to be there no matter what the stock does.

The short take is not necessarily that Bush is wanting these people to escape any punishment any more than my position that school is not the proper place to teach birth control means I'm against the use of it.

We aren't well served taking the extremely complex issue of regulating CEO compensation and treating it like some pork barrel slap on that uses the immediacy of need of other legislation to push it through. It's hard not get a whiff of the stench of political expediency on both sides.

I'm having trouble seeing this as a sudden concern for economic justice instead of a strategy to get as many of the peasants as possible to point the torches and pitch forks elsewhere. That's on both sides.

There is no argument here that we have something fundamentally broken in this whole oversight and regulation conga line. We need some drastic action. You may be absolutely correct and I'm not saying any of your points lack merit.

But the whole rush to politicize this issue by heaping as much blame on each other is very troubling because finding our way out of this dump should be the most important consideration here. I'm starting to feel the focus is shifting to arguing about the look of the drapes in the living room while the kitchen has a grease fire ready to gut the domicile.

[mary]

We certainly understand and are sympathetic to the sentiment regarding the pay of CEOs and senior management of these firms, but we have to focus on the problem, and the problem is that we need these firms to participate in the program and sell us this debt. Having punitive measures would provide a disincentive for firms to participate, and that would make the program much less likely to succeed.

If firms do back out because of salary provisions....do they really need bailing out in the first place?

Should the old saying "If you're hungry enough, you'll eat whatever I cook" apply here?

[aquaadverse]

Originally Posted by mary

If firms do back out because of salary provisions....do they really need bailing out in the first place?

Should the old saying "If you're hungry enough, you'll eat whatever I cook" apply here?

Or maybe "You get what you pay" for has a shot. One of the issues could be trying to sweeten a deal with lots downside. Short of making a federal entity of last resort to ensure higher risk loans are made, the best hope of spreading the risks is getting the biggest players who are least needy. How many Rent-A-Centers would there be if you locked the return down to say 6 points above prime? Doesn't mean the sky's the limit is any better.

You don't want to have the massive rape we've seen so far, but you don't want to end up with a mess where there are a bunch of Al Davises who could only get Kippens, or even worse whoever is going to be the next Raiders coach.

It's a real pisser of a problem and would seem to merit some cool study away from the current heat. I have no idea if that is possible under the current political realities.

A little more than a month before an even up election is going to bring out a tendency for both sides to attempting to land populist haymakers to sway the people who think the Presidency is just a form of American Idol with less convenient ways to vote.

There doesn't seem to be any problem with spouting whatever you need to promise to get elected and worry about delivering later. See Congress '06 Iraq.

[chumdawg]

Originally Posted by aquaadverse

You don't want to have the massive rape we've seen so far, but you don't want to end up with a mess where there are a bunch of Al Davises who could only get Kippens, or even worse whoever is going to be the next Raiders coach.

Kiffin, dude. Kiffin.

Besides, the argument is a nonstarter. Davis went way outside the loop, like McCain tapping Palin. There are plenty of coaches more qualified than Kiffin, just as there are plenty of politicians more qualified than Palin.

If anything, the lesson is that if you think you are smarter than everyone else who has a pulse, the chances are you aren't.

[aquaadverse]

Originally Posted by chumdawg

Kiffin, dude. Kiffin.

Besides, the argument is a nonstarter. Davis went way outside the loop, like McCain tapping Palin. There are plenty of coaches more qualified than Kiffin, just as there are plenty of politicians more qualified than Palin.

If anything, the lesson is that if you think you are smarter than everyone else who has a pulse, the chances are you aren't.

Thanks for pointing that out. Hopefully, that'll will keep me from making that particular mistake again. So many opportunities, so little time.

You'd have a point if this was the Palin thread.

But the discussion was if placing a limit on earnings was going to keep the companies who are better able to accept the risk of sub prime paper from stepping up to assume them, since they are the least likely to need them.

I think the comparison to is the Davis situation is very relevant. There might be a ton of more qualified coaches, but he has made the situation so unattractive because of white jump suited, Weekend at Bernie's perception of what he thinks is a good way to run his franchise. He's taken his storied team and made a position that many coaches have as a lifetime goal and made it so foul no one with the experience and knowledge to do it wants anything to do with it.

[alexamenos]

John Stewart continues to be the only decent reporter on TV....he's just played a clip of Paulson saying that everything is absolutely hunky-dory in the financial community...all is good, no problems, everything is cool and fine and fundamentally strong.

That was way back in March...

And this guy [Paulson, not Stewart], with this fabulous foresight, is the visionary who is guiding us through this mess.

[rabbitproof]

I'm beginning to think this bailout is a scare tactic, not unlike ones we've seen before related to terrorism and the other Hussein, that resulted in expanding executive branch powers, increased and unexpected burdens on taxpayers with no tangible expectations of these grand plans in sight.

I'm glad Congress is fighting back:
http://es.youtube.com/watch?v=J7ULDnJBA1w
http://es.youtube.com/watch?v=S27yitK32ds

[Arne]

http://www.thedailyshow.com/video/in...bt-to-America!

http://www.thedailyshow.com/video/in...cy&byDate=true

Jon Stewart...

[rabbitproof]

Thanks for posting. Those are hilarious. Political comedy is great because it cuts deeper than normal media is allowed to.

[alexamenos]

Originally Posted by rabbitproof

I'm beginning to think this bailout is a scare tactic, not unlike ones we've seen before related to terrorism and the other Hussein, that resulted in expanding executive branch powers, increased and unexpected burdens on taxpayers with no tangible expectations of these grand plans in sight.

This thought has crossed my mind as well, but I think it's more of a function of the hubris of power (absolute corruption) than a well thought out plan. The intra-party debate is certainly framed in very much the same way this time around as it was in the Hussein days, it's a question of:

The Worst Case Scenario if We (the Government) Don't Act v. The Best Case Scenario if We Do...

It's a silly way to frame a question, but it comes naturally to those who gain power by acting and lose it by not acting. Moral Hazards abound.

Rhylan made an interesting remark on Frannie and Freddie:

This strikes me as something that will wind up as the second sentence in a paragraph kicking off a chapter in a history textbook about a really shitty era of American economic history.

I think that sentence is going to read something like "the Government takeover of Franny Mae and Freddy Mac was a prelude to the catastrophic socialization of all aspects of the financial industry."

[Mavdog]

those who do not see the urgency of the situation fail to recognize the mistakes that preceeded the economic decline that we call "the great depression".

the credit markets are not functioning. if they continue to not function, activity will decrease, investment will decrease, and the engine sputters.

the throwing about of "government takeovers" and "socialism" are just hilarious. beside the fannie and freddie events (which were already quasi-government entities), just what has the government taken control of?

will this $700 B bill "take over" any business? any bank?

the answer is no.

[ty]

Arby's 5 for $6.95 sucks. Screw you economy!

[fluid.forty.one]

wamu collapsed

[fluid.forty.one]

WAMU has collapsed
NEW YORK/WASHINGTON (Reuters) - Washington Mutual Inc was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co for $1.9 billion.

The rescue marks a historic step to clean up a U.S. financial system littered with toxic mortgage debt.

Washington Mutual, the largest U.S. savings and loan, was closed by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. Customers should expect business as usual on Friday, the FDIC said.

The bailout came after the thrift suffered deposit outflows of $16.7 billion since September 15, the OTS said.

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the OTS said.

Seattle-based Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The nation's largest previous banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.

The transaction gives JPMorgan roughly 5,400 branches, and fulfills JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States.

It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price.

"Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. "He's becoming an acquisition machine."

On a conference call, JPMorgan said the transaction will add to earnings immediately, and result in $1.5 billion of annual cost savings, including from the closure of less than 10 percent of the combined company's branches. He also said JPMorgan plans to issue $8 billion of stock.

The acquisition does not cover Washington Mutual's equity, senior debt and subordinated debt holders, the FDIC. The FDIC said the transaction will not affect its roughly $45.2 billion deposit insurance fund.

The transaction also comes as Washington wrangles over the fate of a $700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.

"It removes an uncertainty from the market," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are."

Washington Mutual's collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae and Freddie Mac and the insurer American International Group Inc, the bankruptcy filing of Lehman Brothers Holdings Inc, and Bank of America Corp's planned purchase of Merrill Lynch & Co.

JPMorgan, based in New York, ended June with $1.78 trillion of assets, $722.9 billion of deposits and 3,157 branches. Washington Mutual had 2,239 branches and 43,198 employees.

Shares of Washington Mutual plunged $1.24 to 45 cents in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose $1.04 to $44.50 after hours.

119-YEAR HISTORY

The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, "to offer its stockholders a safe and profitable vehicle for investing and lending," according to the thrift's website. This helped Seattle residents rebuild after a fire torched the city's downtown.

It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.

These included Banco Santander SA, Citigroup Inc, HSBC Holdings Plc, Toronto-Dominion Bank and Wells Fargo & Co, as well as private equity firms Blackstone Group LP and Carlyle Group, people familiar with the situation said.

Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift's growth as well as its expansion in subprime and other risky mortgages, and replaced him with Alan Fishman, the former chief executive of Brooklyn, New York's Independence Community Bank Corp.

The transaction also appears to be a costly defeat for David Bonderman and his private equity firm TPG Inc, the lead investor in a $7 billion capital raise by the thrift in April. TPG was unavailable for comment.

Washington Mutual's roughly $227 billion book of real estate loans put the thrift at the top of the critical list of U.S. lenders, analysts said. More than half of this portfolio was in home equity loans and in adjustable-rate mortgages and subprime mortgages that are now considered risky.

Thursday's transaction makes JPMorgan close in size to Citigroup, now the largest U.S. bank by assets.

JPMorgan has surpassed Bank of America in size. That bank would become the largest U.S. bank once it completes its planned purchase of Merrill Lynch, expected in the first quarter of 2009.

DIMON POUNCES

The deal is the latest ambitious move by Dimon.

Once a golden child at Citigroup before his mentor Sanford "Sandy" Weill engineered his ouster in 1998, Dimon has carved for himself something of a role as a Wall Street savior.

Dimon joined JPMorgan in 2004 after selling his Bank One Corp to the bank for $56.9 billion, and became chief executive at the end of 2005. While results have been hurt by the credit crisis, JPMorgan has suffered less than many rivals.

Some historians see parallels between him and the legendary financier John Pierpont Morgan, who ran J.P. Morgan & Co and was credited with intervening to end a banking panic in 1907.

Bank of America Chief Executive Kenneth Lewis has also been credited with helping reduce damage on Wall Street with his acquisitions this year of Merrill Lynch and Countrywide Financial Corp, the nation's largest mortgage lender.

Washington Mutual has a major presence in California and Florida, two of the states hardest hit by the housing crisis. It also has a big presence in the New York City area.

The thrift amassed $6.3 billion of losses in the nine months ended June 30. It had also projected $19 billion of mortgage losses through 2011, but analysts said credit losses could reach as high as $30 billion.

"It is surprising that it has hung on for as long as it has," said Nancy Bush, an analyst at NAB Research LLC.

http://www.reuters.com/article/newsOne/i...26?sp=true

[Arne]

as for wamu, as long as the public doen't get hysterical everthing will work out. wamu has a sizeable capital base, they most likely will not fail in the near term.

Quote from this thread...

[Mavdog]

why did wamu collapse?

the run on deposits. the depositors became "hysterical". their deposits were not at risk.

wonder why they became irrational?

[92bDad]

Here's a link that does a better job of telling us about the economy than I can...and to think, this is not Partisn...simply a reality check:

http://www.daveramsey.com/etc/newsle...d=cnl0809_05#1

Don't panic, this isn't as bad as the media is making it out to be.

[Flacolaco]

I read something just now online that pointed out that the Democrats have enough votes to pass any legislation they want on the bailout....and Bush was on board with it....why are they not just passing what they wanted to pass? Why are they saying the house republicans are getting in their way?

[DirkFTW]

Originally Posted by Flacolaco

I read something just now online that pointed out that the Democrats have enough votes to pass any legislation they want on the bailout....and Bush was on board with it....why are they not just passing what they wanted to pass? Why are they saying the house republicans are getting in their way?

Political. Cover.

If the Democrats push a partisan package through and things somehow get worse, then they will get swept out of power so fast... especially if it's just Democrats and George Spawn-of-Satan Bush. They want Republicans and McCain tied to this anvil in case it goes over the edge.

[Mavdog]

rather than "political cover" I'd suggest "safety in numbers"....do you blame them for wanting everyone in the same boat?

[Flacolaco]

They never seemed to care before, is all I was observing.

[Mavdog]

thios one could be great in the end, or it could fail, blow up and leave a lot of crap on those that supported it.

[Arne]

Jon Stewart on Georgie Boy on the economy/Iraq:

http://www.thedailyshow.com/video/in...se&byDate=true

[Arne]

Wachovia Slumps After WaMu's Seizure, Impasse on Bank Bailout

By David Mildenberg and Linda Shen

Sept. 26 (Bloomberg) -- Wachovia Corp. slumped, leading other banks stocks lower, after negotiations on the government's financial bailout stalled and Washington Mutual Inc. was seized by regulators and sold to JPMorgan Chase & Co.

Wachovia, which the New York Times said today is in early merger talks with Citigroup Inc., dropped $3.70, or 27 percent, to $10 at 4 p.m. in New York Stock Exchange composite trading. Cleveland-based National City Corp. fell 27 percent and Downey Financial Corp. slipped 48 percent. All three lenders plunged more than 80 percent in the past 12 months.

``Washington Mutual showed that one of the big ones can go down, and if you are looking at who else in the top 10 is facing the most pressure, Wachovia is right there,'' said Stan Smith, a banking professor at the University of Central Florida in Orlando.

WaMu was taken over by regulators yesterday in the biggest U.S. bank failure after customers of the Seattle-based lender withdrew $16.7 billion from accounts since Sept. 16. The savings and loan was ``unsound,'' the Office of Thrift Supervision said. The collapse came as lawmakers planned to meet again after talks on Treasury Secretary Henry Paulson's bailout reached an impasse.

The Times said there's no guarantee the talks between Citigroup and Wachovia will result in a deal, citing people briefed on the matter. Citigroup spokeswoman Christina Pretto declined to comment on the Times report.

Steel's E-Mail

Fears of mounting losses on Wachovia's $122 billion in option adjustable-rate mortgages helped push the Charlotte, North Carolina-based company's shares down by 64 percent this year before today's trading. Chief Executive Officer Robert Steel is treating the loans as distressed debt and named a senior bank official, David Carroll, to lead an effort to minimize losses on option ARMs that the bank expects to total about $14 billion.

Steel sent an e-mail to employees today saying he's ``optimistic'' about the government rescue package.

``The Treasury plan under consideration by Congress and the fact that the WaMu situation was smoothly resolved for its customers are two constructive and important steps toward restoring confidence in the financial system,'' Steel wrote in the e-mail, which was confirmed by the bank. ``We are aggressively addressing our challenges and are working to strategically strengthen and manage capital and liquidity in this challenging environment.''

`Silent' Run

Still, customers may not be assuaged. Louise Pitt, a credit analyst at Goldman Sachs Group Inc., wrote in a report today that Wachovia may face the possibility of a ``silent'' run on desposits similar to that confronted by WaMu.

Outflows could come because of ``negative industry headlines and fear among retail customers,'' Pitt wrote in a report today. The bank has about $391 billion in core deposits out of a total of $436 billion, said Pitt, who cut her rating on Wachovia to ``trading sell'' from ``outperform.''

Christy Phillips-Brown, a spokeswoman for the bank, said the company doesn't comment on analyst reports. She noted that the bank has opened 745,000 retail deposit accounts since June, a 6 percent increase from the average daily sales rate in the first half of the year. Customers have also reinvested their certificates of deposits with Wachovia at a faster clip than during the first half of the year, she said.

CD Rates

The lender is paying among the highest CD rates among U.S. banks, which is typically seen as a signal that is struggling to win investor confidence, analyst Sean Ryan of Sterne Agee & Leach Inc. said today in an interview.

National City is well capitalized, has strong deposit inflows and has a fundamentally different business model than WaMu, said spokeswoman Kristen Baird Adams in an interview today.

``National City is a diversified commercial bank'' with no option ARMs, Adams said. ``WaMu was a thrift whose primary business was mortgage related.''

Wachovia had a total of $167 billion in mortgages as of June 30, ranking second among U.S. lenders behind Bank of America Corp.'s $239 billion, and followed by Citigroup Inc.'s $145 billion, according to an Oppenheimer & Co. report.

``All eyes are now on Wachovia,'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York.

Option-ARM Mortgages

Wachovia became the largest option-ARM seller through its $24 billion acquisition in 2006 of Golden West Financial Corp., the Oakland, California-based lender that popularized the product over the previous 30 years. Wachovia expects cumulative losses of about 11 percent to 12 percent on its option-ARM loans.

``We feel it is likely that Wachovia will need to issue equity to provide greater reassurance about its liquidity and solvency,'' Mike Mayo, an analyst at Deutsche Bank AG, wrote in a note today. He reduced his target price to $11 from $16 a share.

Mayo expects the firm will need an additional $11 billion in capital, assuming a 20 percent discount on its ARM portfolio, he wrote. If common shares were issued at yesterday's closing price, it would dilute current shareholders by about one third.

California Slump

Merrill Lynch & Co. analyst Edward Najarian expects the losses to be in the 15 percent to 17 percent range, according to a Sept. 9 report. Housing prices in California declined by a record 41 percent in August from a year earlier, the California Association of Realtors said yesterday. Almost half of Wachovia's option ARMs are in California.

Option ARMs allow borrowers to skip part of their payment and add that sum to their principal. Monthly costs eventually increase after introductory interest rates as low as 1 percent.

Because typical option ARM borrowers make less than the full payment each month, according to Fitch Ratings, they don't build equity in their homes. When house prices fall, borrowers often owe more than their homes are worth. That leaves lenders facing losses if the borrower defaults.

Downey, based in Newport Beach, California, ranked fourth among option ARM lenders behind Wachovia, WaMu and Bank of America's Countrywide Financial Corp. Downey said it held $6.9 billion in option ARMs at the end of the second quarter.

Downey Financial

Downey now has less than a month to submit a long-term business plan to its chief regulator, the Office of Thrift supervision. The agency ordered the bank on Sept. 5 to raise cash by the end of the year and halt dividend payments.

Downey spokeswoman Elizabeth Stover declined to comment.

``A bailout plan needs to be approved as credit markets have frozen, credit spreads have widened and it's getting more difficult for businesses and consumers to get access to credit,'' said BMO Capital Markets analyst Peter Winter in a note to investors today.

Wachovia's shares advanced last week on speculation it would be a beneficiary of the Treasury's rescue plan. The company's option ARMs may be simpler to sell to the government than securitized pools of loans, said Kevin Stein, associate director of the California Reinvestment Coalition, a San Francisco-based nonprofit.

Wachovia holds the loans on its balance sheet, while WaMu and other big option-ARM lenders pooled the loans into securities that were sold to investors, he said.

`A Major Hit'

``If Wachovia could unload a third or a half of its option-ARM portfolio without taking a major hit to earnings, that would be a very positive development,'' said Gerard Cassidy, an analyst at RBC Capital Management in Portland, Maine. ``Whole loans are a lot easier for the government to buy than CDOs or CDO squared,'' he said, referring to collateralized debt obligations.

At the time of its failure, WaMu had $28.4 billion in outstanding bonds, with Capital Research and Management the largest debt-holder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.

Wachovia, which has $125.9 billion of outstanding bonds, has investment-grade ratings from Moody's Investors Service, Standard & Poor's Corp. and Fitch. Moody's and Fitch have a negative outlook on the lender, indicating a possible downgrade.

The cost to protect against a default by Wachovia soared to distressed levels today. Credit-default swap sellers demanded 25 percentage points upfront and 5 percentage points a year to protect Wachovia bonds from default for five years, according to broker Phoenix Partners Group. That means it would cost $2.5 million initially and $500,000 a year to protect $10 million in Wachovia bonds, compared with $670,000 a year and no upfront payment yesterday.

During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

To contact the reporters on this story: Linda Shen in New York at lshen21@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net

http://www.bloomberg.com/apps/news?p...n.w&refer=home

[Arne]

Very interesting to see the pre-Clinton era CPI:

http://www.shadowstats.com/

[Arne]

Jim Rogers once again:

http://www.youtube.com/watch?v=O2mDJXBAN04

[Mavdog]

S.E.C. Concedes Oversight Flaws Fueled Collapse
By STEPHEN LABATON
WASHINGTON — The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.

But the retreat on investment bank supervision is a heavy blow to a once-proud agency whose influence over Wall Street has steadily eroded as the financial crisis has exploded over the last year.

Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.

The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.

The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.

Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities.

The commission will continue to be the primary regulator of the companies’ broker-dealer units, and it will work with the Fed to supervise holding companies even though the Fed is expected to take the lead role.

The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue.

The S.E.C. will still have primary responsibility for regulating securities brokers and dealers.

The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events.

Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape how the nation’s largest financial institutions are regulated. The report recommended, for instance, that the commission and the Fed consider tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices.

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

The S.E.C. approved the consolidated supervised entities program in 2004 after several important developments in Congress and in Europe.

In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.

In 2002, the European Union threatened to impose its own rules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks.

In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.

[Arne]

http://research.stlouisfed.org/publi...usfd/page3.pdf

[Arne]

More common sense on this stupid bailout:

http://blog.mises.org/archives/008629.asp

It's a great video!

[Arne]

Goldman, Merrill Collect Billions After Fed's AIG Bailout Loans
By Mark Pittman



Sept. 29 (Bloomberg) -- As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.

Without the government money, Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world's largest insurer, because of its billions in losses on subprime bonds and corporate debt.

``It was the biggest crisis ever -- if you're an investment bank,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York. ``We didn't just save AIG. We saved the counterparties, the banks. It's true that it would have been a disaster, but it would have been a disaster for them.''

The firms received cash as AIG borrowed from a Federal Reserve credit line endorsed by Paulson, Goldman's former chief executive. The insurer had borrowed $44.6 billion from the credit line as of Sept. 25, the Federal Reserve reported that day.

Paulson's successor at Goldman, Lloyd Blankfein, was the only chief executive at a meeting Sept. 15 at the New York Federal Reserve Bank at which the troubles at AIG were discussed, although representatives of other firms were present, a Fed spokesman said.

The same day, when its credit rating was downgraded, AIG needed as much as $37 billion to pay collateral calls from Wall Street firms and others because the value of its holdings had declined, Standard & Poor's said in a report that evening. ``Mark-to-market losses from mortgage-related investments and swap exposures have placed significant pressure on AIG's ability to access capital and liquidity,'' the report said.

Borrowing from Fed

The next day, AIG began borrowing money -- $14 billion -- from the Fed and continued borrowing for three more days, receiving loans totaling $37 billion, it disclosed in a financial filing on Sept. 26. AIG then met its collateral calls to its Wall Street trading partners, S&P analyst Rodney Clark said in an interview.

The payments show how bailouts engineered by Paulson and Federal Reserve Chairman Ben Bernanke are beginning to shift money to Wall Street firms involved in subprime mortgage trading. As Congress prepares to vote on a broader $700-billion bailout, the AIG credit line is one indication of how it might work.

The money is changing hands because AIG provided $441 billion in backing for Wall Street trades involving credit- default swaps, or transactions in which one party agrees to pay another to accept the risk of default. Those bets are packaged into larger securities called synthetic collateralized debt obligations. AIG's business was to insure the top-rated, safest part of those CDOs, also known as super-senior, from default.

Stand in Line

An AIG bankruptcy would have forced these counterparties to stand in line with other creditors and wait for perhaps years to be paid through the courts.

``There wasn't time to look real closely at what really happened at AIG,'' said Rep. Brad Miller, a North Carolina Democrat on the House Financial Services Committee that is holding hearings on the bailout plan. ``What created the problem is the unregulated exotic transaction, collateralized debt swaps. Almost certainly, there will be a forensic examination of what happened to AIG.''

$700-Billion Bailout

The Fed's loans to AIG were followed by Paulson's and Bernanke's proposal of a $700 billion package to buy mortgage assets that's now being debated by Miller and the rest of Congress. While Paulson originally demanded the authority to buy any asset without judicial or administrative oversight, Congress has pledged to rein in the Treasury secretary's power.

``What AIG did with its money, you should call AIG,'' said Fed spokesman Calvin Mitchell. ``I doubt that we will be talking about AIG's CDO portfolio.''

AIG spokesman Nicholas Ashooh said the company would not disclose its counterparties or the contents of the CDO portfolio. He declined further comment.

Paulson said Sept. 16 that he talked with lawmakers about AIG and on Sept. 17 endorsed the AIG financing package. The Fed appointed a member of Goldman's board, Edward Liddy, to run AIG, replacing Robert Willumstad. Liddy resigned Sept. 26 from Goldman's board.

Treasury spokeswoman Brookly McLaughlin said, ``The Fed had the lead on this one: It's their loan. I don't know how I could be more clear.''

Laying Off Risk

AIG has been helping firms lay off their financial risk for years by writing swap contracts, or transactions in which two parties enter into an agreement in which one agrees to assume the other's risk. Joseph Cassano, the former head of AIG's financial products unit, co-founded it in 1987 and turned it into a business providing financial guarantees on more than $500 billion of assets at year end, including $61.4 billion in securities tied to subprime mortgages.

AIG's need for immediate cash was triggered at 6:31 p.m. on Sept. 15, when Fitch Ratings dropped AIG's credit rating to A from AA-. Standard & Poor's and Moody's Investors Service followed within hours.

The reason: AIG had sold $441 billion in contracts protecting against default for securities originally rated AAA. The most troublesome were the $57.8 billion in multisector collateralized debt obligations that are structured debt securities backed by subprime loans. About 64 percent had since been downgraded and six were in default, the insurer said Aug. 9.

AIG didn't have the money and couldn't sell enough of its own securities in time to meet the terms of the contracts and its other obligations, so it would have had to declare bankruptcy, putting the banks in line with the rest of the creditors fighting it out in court.

Downgrade Report

S&P analysts led by Clark said in the firm's report on its three-level downgrade of AIG that credit default swaps on CDOs were causing most of the strain as well as holdings of residential mortgage-backed securities.

S&P estimated that AIG had market-value losses of more than $37 billion as of Sept. 15. While it is possible that those CDOs are undervalued, S&P said ``it is unlikely that any gains will be recorded before late 2009 or 2010.''

Estimated recoveries in liquidations of mortgage-tied CDOs average 8 percent for super-senior classes of those made up of low-rated bonds; 33 percent for CDOs of originally high-rated bonds; and 4 percent for CDOs of CDOs, according a report this month by New York-based JPMorgan Chase & Co.

``Overall, the most considerable level of exposure was held by the Wall Street banks,'' said S&P's Clark in an interview. ``However, it was very diversified and contained some European banks.''

$10 Billion

Last week, Goldman raised $10 billion in a stock offering, including an endorsement and a $5 billion cash infusion from billionaire investor Warren Buffett of Omaha, Nebraska.

Paulson last week hired former Goldman colleague Edward C. Forst to advise him on the government's $700 billion rescue plan. Forst left Goldman Sachs in June to become executive vice president at Harvard University.

``We have said many times on the record that our exposure to AIG was, and is, not material,'' said Lucas van Praag, a spokesman for New York-based Goldman. ``Our exposure to AIG is offset by collateral and hedges and is not material to Goldman Sachs in any way.''

Those hedges included derivative contracts that would pay Goldman if AIG defaulted, van Praag said.

Biggest Underwriters

Merrill was the biggest underwriter of CDOs in 2004 with $15.9 billion and the second-biggest underwriter in 2005 with $27 billion when AIG was the most active in writing credit default swaps, according to Asset-Backed Alert, a trade magazine.

Citigroup was the biggest underwriter of CDOs in 2005 with $27.1 billion, rising from $7.1 billion the year before. Goldman was fifth both years with $13.1 billion and $7.3 billion in 2004.

Merrill spokeswoman Jessica Oppenheim, Morgan Stanley spokesman Mark Lake and Deutsche Bank spokeswoman Michele Allison declined comment.

``There have been calls for a sweeping investigation of exactly what happened,'' said Congressman Miller. ``I'm not sure many people who are inside the policy loop on all this really knows what went wrong.''

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net.

http://www.bloomberg.com/apps/news?p...G8&refer=home#

[Flacolaco]

133 Republicans and 95 democrats vote against....

Interesting.

[DirkFTW]

Wait, so this thing just failed the House vote right?? Ugh.

You know, if we hadn't had that debate on Friday, I don't know what I would be doing right now. Those awesome words will carry me through the next two fiscal quarters at least!

[DirkFTW]

You won't believe where that $700-billion bailout figure came from
LA Times Blog post

...

You know where that very important $700-billion figure came from?

Here's a quote from that Forbes story:

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

They made it up to be sufficiently ginormous to frighten everyone into rapid action.

And it worked.

--Andrew Malcolm

http://latimesblogs.latimes.com/wash...lout-plan.html

WAT

WA-F'ing-T

[Flacolaco]

Is Pelosi seriously blaming the Republicans for this?

95 freaking democrats voted no. Sounds like her own little community is in need of some organizing. This should not be politicized...why can't they just work together? edit: And for the record, shame on the republicans as well for pointing fingers at Pelosi. This is stupid.

And as a completely unrelated aside... I am so sick of the phrase "working families." that she and Obama are always throwing around. We have to lower taxes for "working families." WTF does that mean? Every family is a "working family." Who doesn't work?