Congress tried late last week to stall the financial crisis by pledging to spend $700 billion on devalued securities held by financial institutions, and by Monday morning, it was clear that the pledge wasn’t enough to reassure investors or restart lending.
Instead, a classic panic has set in here and around much of the world as public confidence in banks, other financial institutions and the markets themselves has nosedived; at the same time, banks and other financial institutions are wary of loaning money to potential borrowers. This panicked mindset threatens the economy more today than the continuing turmoil in the housing and financial markets.
We must now recreate baseline confidence before we can repair the continuing damage to our financial and housing markets.
Financial and broader economic panics thrive on a combination of huge and unexpected setbacks and a serious absence of information. They unfold when people face enormous uncertainty about matters vital to them, such as the value and security of their homes, retirement accounts and college savings. Panics thrive when people see everyone else, including those with the power and position to manage such weighty matters, struggling with the same uncertainty.
People feel threatened and powerless to do anything, not because they have no options, but because they have to evaluate or choose among those options, and they worry that more unexpected calamities could overtake whatever course they decide upon. That’s where tens of millions of Americans – and Europeans and Asians as well – have found themselves this week. They don’t understand why the value of their homes and investments has plummeted so suddenly, and they see that those ostensibly in charge of the economy in Washington and on Wall Street have little grip on this as well. The result is that spending and investment are shutting down, dragging the entire economy into what seems very likely to be the worst downturn since the 1930s.
The remedy to this panic is information, which only the nation’s leaders can generate and demonstrate they understand. For example, the Federal Reserve and the FDIC should have legions of examiners working around the clock to re-audit the conditions of all major financial institutions, starting with commercial banks. The Treasury and Fed could then report to the public on each institution’s financial health and their confidence in its continuing financial health. The largest group would still be judged healthy; another group could be designated as worth watching, with measures to help it move to the first group; those in trouble would be identified with a plan of action to help them recover, if possible. Without this information, most people have been panicking that almost every institution and every investment might well be in serious trouble.
This program won’t solve the capitalization crisis across financial institutions, much less the crisis gripping housing markets, which itself has driven so much of the current upheaval. But it would staunch the panic as investors, business owners and families come to feel that they finally know where the problems lie and what the government and nation’s business leaders will do to address them.
At the same time, our leaders can finally begin to address seriously the housing and capitalization crises in an economic environment in which businesses and people will be able respond reasonably and predictably.
Update, Tuesday, 4:34 p.m.: Looks like Newt is always going to stir up trouble, whether he's in Congress or not. According to this breaking news report from ABC News:
Gingrich Denies Whipping Against Bailout
September 30, 2008 4:00 PM
ABC News' Teddy Davis, Arnab Datta, and Rigel Anderson Report: Former House Speaker Newt Gingrich said Tuesday that he did not personally urge members of Congress to vote against Monday's failed Wall Street bailout bill, disputing a report made earlier in the day on MSNBC by correspondent Andrea Mitchell.
"MSNBC is just wrong," said Gingrich. "And it is probably wrong deliberately. It is a stunningly dishonest network."
It's been a hard two weeks for Treasury Secretary Henry Paulson. And now, an attack from Newt?
No, its not Macbeth, it's ABC's "This Week with George Stephanopoulos."
ABC News' Tahman Bradley and Arnab Datta Report: Former House Speaker Newt Gingrich, R-Ga., on Sunday described Treasury Secretary Henry Paulson's request for billions of dollars to buy debt from struggling Wall Street financial firms as "un-American" and said the secretary should have stepped down.
Gingrich even expressed concern with Paulson's connections to Wall Street. The treasury secretary served as the chairman of a major global investment banking and securities firm before joining the Bush administration.
"You have the former Chairman of Goldman Sachs asking for 700 billion dollars, and in his initial request, asking for it in such an un-American way that I think he should have resigned," said Gingrich. "I think Paulson has terminally misunderstood the nature of the American system. Not just no review, no judicial review, no congressional accountability. Give me 700 billion dollars, 700 BILLION dollars! 'I'll be glad to spend it for you.' That's a centralization of power that is totally un-American."
Were defiant House Republicans channeling former U.S House of Representatives Speaker Newt Gingrich when many of them voted against the Bush bailout legislation today, a move that sent the Dow plunging and the Bush Administration scrambling?
Apparently not. Gingrich admits that while he didn't like the Bush bailout, if he were still in Congress, he probably would have voted for it because of a lack of alternatives.
You never know where Newt will pop up next. For now, watch him here:
Just now, in some serious high-drama action usually reserved for reality TV, the U.S. House of Representatives just rejected (OK, Simon, you called it) the proposed $700 billion proposal to bail out the nation's financial markets.
And more bad financial news keeps rolling in: the New York Times reported earlier today that, "Citigroup has reached an agreement early today to acquire the banking operations of the Wachovia Corporation after making a daring bid that pulled the deeply troubled company from the brink of collapse."
Whether Congress ultimately passes the bailout or not, NDN strongly believes that Congress' work has just begun.
Nearly two weeks ago, NDN launched an effort to ensure that the actual cause -- the massive destabilization of the U.S. housing market -- was addressed. Michael, Rob, Simon and Jake have said it much more eloquently, but the bottom line is that faulty financial products were at the bottom of the financial cave-in. An excellent article in yesterday's Washington Post explains why you and I now own millions of properties across America.
For that reason, and because lawmakers should make every effort to help homeowners as much as they are helping Wall Street, Simon, Rob and Michael today issued the following statement:
While we applaud the bipartisan effort by Congress and the White House to craft a response to the turmoil in the American financial markets, we are concerned that this package does not address critical issues causing the current problems and will not be effective unless additional steps are taken.
First, Congress and the President must do much more to stabilize the housing market by helping people keep their homes. This crisis began when the home mortgages that had been securitized with massive leverage began a precipitous decline. As housing prices fell and more mortgages defaulted, the decline in the value of the only real assets in this financial house of cards began to pull down the highly leveraged securities and their derivatives. The financial crisis will continue so long as the housing market declines.
A real solution to this crisis, therefore, must include far-reaching measures to break this vicious cycle and end waves of foreclosures. Last week Senator Obama, Senator Clinton, NDN and others argued that an effective response to the financial crisis must include a mechanism for rapidly renegotiating the mortgages of Americans facing imminent foreclosure, or a direct federal loan facility to help those Americans stay in their homes.
After Congress finishes with this bill, it should turn immediately to legislation designed to keep people in their homes. Further, if the new legislation fails to restore confidence in financial institutions, as we believe may well be the case, Congress and the Administration should also come together to consider approaches other than a massive bailout to provide stability to the financial sector.
Nine days ago, Dr. Rob Shapiro, Chair of NDN's Globalization Initiative, and NDN President Simon Rosenberg launched a "Keep People in Their Homes" effort to ensure that any proposal to put our financial markets and economy back on track include provisions to do just that.
This strategy is now one of the core points of the Obama plan. Yesterday, Senator Hillary Clinton embraced the idea in a powerful op-ed, "Let's Keep People in Their Homes," in the Wall Street Journal. Today, the New York Times embraced it in its lead editorial, "What About the Rest of Us?"
On Tuesday of this week, Rob and Simon released a more detailed essay, entitled, "Keep People in Their Homes." On Wednesday, Rob wrote an important piece, "Back to the Basics: The Treasury Plan Won't Work." Rob's arguments from that essay received excellent coverage today in an insightful Wall Street Journalarticle, "Bailout Proposal Gets Hung Up Over Central Issue: Will It Work?" by Deborah Solomon and colleagues. Also today, NDN Fellow and Green Project Director Michael Moynihan argued in his essay, "Notes on the Financial Crisis," that the Administration needs to stop using panic as a negotiating tactic in an effort to reach an agreement.
I encourage you to read the Obama statement, Senator Clinton's op-ed and the New York Times editorial above.
NDN's argument is simple: among all the things the government can do to address the financial crisis, there is at least one thing it must do -- keep people in their homes. Keeping people in their homes will help stabilize the declining assets that are causing the current financial market collapse. We must drastically reduce the foreclosures that have destablized the housing market underneath all the leveraged debt that is weakening our financial markets. Unless we do so, those markets will continue to weaken, even with a $700 billion bailout. And homeowners will continue to lose their homes.
Passing an economic rescue plan that does not directly address declining home prices by helping people keep their homes is a risk too great for the American people to take.
That's why we are asking today for you to do more than just read our e-mails. We are asking you to take action. We are asking you to call or e-mail your Senators and House Members, regardless of party, and insist that this provision be in any final economic plan. If you know Members of Congress outside of your state, call or e-mail them as well.
While it is critical for Washington to act this week, it is more important that we do the right thing rather than the expedient thing. We cannot accept any deal that doesn't address the struggles of everyday people, particularly a deal crafted by an Administration that has gotten so little right these last 7 1/2 years. Please join us and make sure our elected officials do what they need to do in these next few days. The stakes are too great for us to get this one wrong.
In an op-ed published in today's Wall Street Journal, U.S. Sen. Hillary Clinton (D-NY) makes a forceful and compelling argument that any proposal to bail out Wall Street financial institutions must include provisions to help the millions of Americans who have lost or in are danger of losing their homes as a result of mortgage defaults and foreclosures.
Senator Clinton writes:
There is a broad consensus that Congress must act to stave off deeper turmoil on Wall Street. Irrespective of the final agreement yet to be reached, there are several principles that must be part of a broader reform effort that begins this week and continues in the coming months.
This is not just a financial crisis; it's an economic crisis. Therefore, the solutions we pursue cannot simply stabilize the markets. We must also deal with the interconnected economic challenges that set the stage for this crisis -- and reverse the failed policies that allowed a potential crisis to become a real one.
First, we must address the skyrocketing rates of mortgage defaults and foreclosures that have buffeted the economy and ignited the credit crisis. Two million homeowners carry mortgages worth more than their homes. They hold $3 trillion in mortgage debt. Nearly three million adjustable-rate mortgages are scheduled for a rate increase in the next two years. Another wave of foreclosures looms.
I've proposed a new Home Owners' Loan Corporation (HOLC), to launch a national effort to help homeowners refinance their mortgages. The original HOLC, launched in 1933, bought mortgages from failed banks and modified the terms so families could make affordable payments while keeping their homes. The original HOLC returned a profit to the Treasury and saved one million homes. We can save roughly three times that many today. We should also put in place a temporary moratorium on foreclosures and freeze rate hikes in adjustable-rate mortgages. We've got to stem the tide of failing mortgages and give the markets time to recover.
The time for ideological, partisan arguments against these actions is over. For years, the calls to provide borrowers an affordable opportunity to avoid foreclosure as a means of preventing wider turmoil were dismissed as government intrusion into the private marketplace. My proposals over the past two years were derided as too much, too soon. Now we are forced to reckon with too little, too late.
As a result, the home-mortgage crisis slowly erode d the value of debt instruments upon which Wall Street firms were depending. That is how this house of borrowed cards began to fall. If we do not take action to address the crisis facing borrowers, we'll never solve the crisis facing lenders. These problems go hand in hand. And if we are going to take on the mortgage debt of storied Wall Street giants, we ought to extend the same help to struggling, middle-class families.
Senator Clinton's op-ed, entitled, "Let's Keep People In Their Homes," echoes NDN's statements of last week and this week. On Tuesday of this week, NDN Globalization Initiative Chairman Dr. Robert Shapiro and NDN President Simon Rosenberg released an op-ed, "Keep People in Their Homes," which can be read here.
NDN applauds Senator Clinton's leadership on this critical issue.
For well over a week, NDN has been offering its thoughts on the causes, effects, and proposals in the financial meltdown. Yesterday, Simon Rosenberg and Dr. Robert Shapiro released an essay encouraging the federal government to keep people in their homes and stabilize the housing sector. U.S. Sen. Barack Obama has been doing the same, meeting with top economists, outlining his principles, and working to ensure that this financial bailout actually helps everyday Americans.
Meanwhile, U.S. Sen. John McCain, has, in the words of George Will, "substituted vehemence for coherence," for the last week, calling for the head of SEC Chairman Chris Cox, demanding regulation he used to crusade against, and otherwise misunderstanding the complex levers that drive America’s financial sector.
Today, following an 8:30 am call from Obama and some very, very bad public polling, McCain snapped, and decided that the financial crisis was in fact worthy of a significant reaction. McCain’s chosen reaction, leaving the campaign trail to return to the scene of the deregulation and try his hand at crafting legislation that accomplishes the opposite of what he has stood for his entire political career, is the easy way out. It is designed to do one thing: place Obama in an awkward position. One must not confuse this – campaign tactics – for what McCain wants people to think it is – leadership.
So, instead of campaign trail theatrics and huff-and-puff returns to Washington, let’s have a debate on Friday. But, instead of talking about foreign policy, let’s talk about the financial meltdown and the future of the American economy. An unprecedented number of Americans think the country is headed in the wrong direction, and they are looking for those who would lead to demonstrate that they have a plan to put the nation back on track. These two Senators are running for President amidst the greatest economic turmoil in a very long time. The American people deserve a debate.
UPDATE: From Obama, courtesy of Politico.com's Ben Smith:
It’s my belief that this is exactly the time the American people need to hear from the person who in approximately 40 days will be responsible with dealing with this mess.
...
Presidents are going to have to deal with more than one thing at a time. It's not necessary for us to think that we can do only one thing, and suspend everything else.
Last Wednesday, Rob and Simon staked out early and important ground, making a forceful argument that of the many steps the government needs to take to address the worsening financial crisis, one of its top priorities must be to keep people in their homes.
We at NDN are pleased to see how central this argument has become in the important debate taking place now in Washington and across the country. Building on this initial statement, Rob and Simon offer this new essay, which offers further analysis and additional recommendations:
Keep People in Their Homes
by Rob Shapiro and Simon Rosenberg
A decade of reckless deregulation, mismanaged regulation and equally reckless private mismanagement has now brought the American and global economies to a crisis point. Investment banks, hedge funds and other financial institutions have borrowed hundreds of billions of dollars to sink into securities widely recognized to entail extraordinary risk, passing that risk along to millions of Americans whose retirement plans, pension funds and money market accounts found their way into funds set up by such mismanaged financial titans as Lehman Brothers, Bear Stearns, Merrill Lynch and AIG.
Through it all, the White House, Treasury and Federal Reserve have practiced their own reckless regulatory mismanagement, allowing the gradual accretion of the biggest financial house of cards in history. Now it has caught up with them and the rest of us, and those who let it happen are asking taxpayers to spend hundreds of billions of dollars to clean up this mess.
This crisis is far from over, and its effects are still spreading. We need a broad plan that will actually work to restore financial and economic stability. But those who have had little or no hand in it - America's taxpayers and most Members of Congress - should not be steamrolled into giving a blank check to those in the Administration who failed to head off this crisis. There are three primary reasons this plan is the wrong solution to the problem.
First, the check they want us to write is unlike any ever written before during financial crises. When Washington last took over the failing assets of private institutions, during the savings and loan bailout, taxpayers first took over the institutions themselves and then sold the assets, while the regulation of the remaining S&Ls was tightened and reformed to preclude another round of the same problems down the road. This time, Congress is being told that it must use taxpayers' money to buy up the degraded assets of hundreds of financial institutions while they continue operating as private entities and without any guarantee of regulatory changes that will prevent it from happening the next time. That's a bad bargain and terrible policy.
Second, it's doubtful that the plan will even work in its own terms. If the Paulson Treasury plans to buy the deteriorating securities at their current, low market values, it may help the institutions holding them to avoid further deterioration, but it won't reduce the losses they've already taken. Consequently, this bailout cannot actually lead us out of the crisis - unless the Treasury plans to pay these institutions above-market prices for the tanking securities they now hold, which would produce the largest direct transfer of money from taxpayers to shareholders and executives ever seen.
Third, the plan does not address the forces which continue to drive this crisis. At the base of the pyramid scheme that has infected our financial markets - underneath the credit default swaps and collateralized debt obligations created with borrowed money to "guarantee" mortgage-backed securities created with more borrowed money, in a housing market swollen by a historic bubble - lies the only real assets in the picture, the mortgaged homes of tens of millions of Americans. On that critical score, the Administration plan offers nothing
The only way to stop the cascading financial crisis consuming not only investment banks, investment funds, mortgage lenders and insurance companies, but also pieces of most Americans' retirement security, is to stabilize the housing market from which all of the rest arises. The Treasury and the Administration propose to use taxpayers to bail out the institutions which speculated in the securities based on that market. Given the system's current precarious position, a bail out of some kind cannot be avoided. But our government owes at least as much attention to homeowners facing foreclosure. If the Treasury and Fed had been willing to spend $85 billion on loans to strapped homeowners, as they did to AIG last week, the crisis might never have crested into the conditions that now require a system-wide bailout.
These mortgages are at the root of the crisis. It's their mounting defaults driving down the overall housing market which has brought venerable banks like Lehman Brothers and Bear Stearns. Before Congress leaves this week or next, it should enact legislation that either provides a mechanism for direct loans to people to avoid foreclosure or allows them to renegotiate their mortgages. This single step will keep untold numbers of people in their homes, help stabilize the housing market, help contain the crisis at one of its critical origins, and thereby help shore up the financial system. Paired with a program to provide more liquidity to financial institutions and an orderly way to write down their failing holdings, this step could finally take us past this crisis.
Even so, only a small share of the costs of this historic mismanagement are apparent today. This financial shock, on top of the housing and energy shocks that preceded it, have almost certainly pushed our economy into recession. That will further reduce the value of the assets held by tens of millions of American through their pension funds, retirement accounts, money market and mutual fund investments. The squeeze will be hardest on the rising numbers of Americans who will also lose their jobs. The need to help these people and millions of others keep their homes is urgent, then, for a host of economic and social reasons.
When Congress returns in December or next year, it will find itself with far fewer resources to finance badly-needed new initiatives in health care, climate change and tax policy. One urgent order of business, however, will be entirely within its capacity: adopt and apply strict and appropriate transparency, capital and other regulatory standards to all financial institutions. And the politicians who hailed the hands-off attitude that enabled this crisis to fester and break out, and who now blame greed instead of their own negligence, must be held accountable.
What a difference a few billion-dollar federal government bailouts can make.
U.S. Sen. John McCain is up with a new commercial in which he sounds like Wall Street's answer to Robin Hood.
Is this the same McCain that has spent the last quarter century in Washington deregulating the banking and insurance industries and decrying "government interference?"
Is this the same McCain that was instrumental in passage of the Gramm-Leach-Bliley Act designed to make the nation's financial institutions more competitive by tearing down firewalls built between banking, insurance and investment companies (firewalls designed to prevent exactly what's happening right now?)
An interesting note: Bill author U.S. Rep. Jim Leach, a Republican who is now retired, supports Obama. Another bill author, former U.S. Sen. Phil Gramm, is one of McCain's top economic advisers.
A report in today's Washington Post by Michael Shear takes a look at McCain's conversion to economic populist. According to the article:
"I'm always for less regulation," he told the Wall Street Journal in March. He added: "I'd like to see a lot of the unnecessary government regulations eliminated."
Watch the new McCain ad below and see the difference for yourself:
Ooops. Looks like U.S. Sen. John McCain's economic campaign surrogate Carly Fiorina didn't get this morning's talking points.
As you may recall, Fiorina used to head up Hewlett Packard. According to a report by Huffington Post's Sam Stein,Fiorina, appearing on a local St. Louis radio talk show, was asked if Alaska Gov. Sarah Palin had the experience to run a company such as Hewlett Packard.
"Do you think [Sarah Palin] has the experience to run a major company, like Hewlett Packard?" asked the host.
"No, I don't," responded Fiorina. "But you know what? That's not what she's running for."
Fiorina tried quickly to recover, but with Wall Street in shambles and the economy the central focus of the presidential campaign, for one of McCain's highest-profile economic surrogates to say that Palin -- who would be just one basis point away from the presidency -- couldn't run a major company, much less oversee the U.S. economy, could be a serious problem (kind of like when another McCain economic adviser, Phil Gramm, said America was a nation of "whiners.")
Two former managers of hedge funds at Bear Stearns were arrested and charged with securities fraud on Thursday, a year after the collapse of the funds signaled the onset of a credit crunch that shows little sign of abating.
The indictments, which were detailed this afternoon by federal prosecutors in Brooklyn, are the first to be brought against senior Wall Street executives linked to a tight credit market that has rattled global markets, led to more than $350 billion in write-offs, cost numerous executives their jobs and culminated in the demise of Bear Stearns.
The two funds had names as abstruse as the complex subprime securities in their portfolios - High Grade Structured Credit Strategies Fund, and its riskier sister offering, the High Grade Structured Credit Strategies Enhanced Leverage Fund.
And on Thursday, the two fund managers, Ralph R. Cioffi, 52, and Matthew Tannin, 46, who just 18 months ago reveled in their status as top hedge managers in a firm at the vanguard of the mortgage boom, surrendered to federal agents.
Like Enron several years ago and the insider trading scandals two decades earlier, the prosecution of the Bear Stearns executives is expected to become a test of the government's ability to make successful prosecutions of highly complex financial transactions.
Somehow this feels like the beginning of something rather than its end.
Thurs 430 Update - Apparently there is more, much much more, to come.
