President Bush and Congressional leaders tried to assure Americans on Friday morning that lawmakers and the administration would be able to come together and reach an agreement on a proposal to rescue the country’s financial system.

“We are going to get a package passed,” Mr. Bush said, a day after an earlier agreement dissolved amid a flurry of political rancor. “We will rise to the occasion. Republicans and Democrats will come together and pass a substantial rescue plan.”

A short time later, the Senate majority leader, Harry Reid of Nevada, made similar assurances. “We’re going to get this done and stay in session as long as it takes to get it done,” Mr. Reid said.

Read it all.

As congressional leaders struggled to craft a bailout plan for the nation’s troubled financial system Thursday, angry protesters mobbed Wall Street, telephones rang off the hook in House and Senate offices and a group of prominent economists sent off e-mail blasts critiquing the proposal.

Numerous opinion polls taken this week came to wildly varying conclusions about the level of support among Americans for the Bush administration’s $700-billion plan. But the increasingly loud roar coming from all corners of the nation shows that the idea of a bailout has touched a particularly sensitive nerve among the public.

A spokesman for Sen. Dianne Feinstein (D-Calif.) said her five offices had doubled staffing to deal with the constantly ringing phones. Through late Thursday, Feinstein’s offices had received a total of 39,180 e-mails, calls and letters on the bailout, with the overwhelming majority of constituents against it. The spokesman said the volume was as great as during the immigration debate and at key points during the war in Iraq.

Read it all.

I am worried for our country — not so much because of the tumult in the financial markets but because of the federal government’s response and its implications.

It seems that each new crisis is met with a new answer from the government. After Hurricane Katrina, the federal government assumed roles traditionally handled by state and local governments. After the Sept. 11, 2001, attacks, the government federalized 25,000 workers through the Transportation Security Administration. The example of security-focused countries such as Israel, which elects to have that function handled by the private sector, did not matter. Now, our federal government is likely to commit three-quarters of a trillion dollars — more than last year’s Pentagon budget — to a bailout based on what happened in the credit markets last week.

An ever-expanding scope of federal commitment and power is not what made this country great. Expanded power in one place comes at a cost in other places. American cornerstones such as individual initiative and an entrepreneurial spirit — born in free and open societies with private property rights and the rule of law — have never fit particularly well within the context of an ever-growing federal government.

Read it all.

Congressman Paul Kanjorski was on CNBC earlier and said that his mail and calls on the Paulson plan are running 50-50: 50% no and 50% hell no.

“I’m a dirt farmer,” said Senator Jon Tester, the Montana Democrat who still lives on his family homestead. “Why do we have one week to determine that $700 billion has to be appropriated or this country’s financial system goes down the pipes?”

—From Tim Egan in the NY Times

There are good reasons for Congress to feel unease about the administration plan, beginning with its $700 billion cost and the free hand sought by the Treasury Department. But there is no time for a normal legislative process. Congress, faced with a take it or leave it situation, should have the courage to act decisively now in a way that will sustain the economy.

The issue facing the Congress isn’t a political one. It is a technical financial question: what will it take to keep the American economy afloat in the immediate future, and at the least long-term cost?

Quibbling about the details at this time is like telling the surgeon in a life-or-death emergency situation that you’d like him to form a medical task force for your operation before going under the knife.

Read it all.

A high-profile White House meeting on Treasury’s $700 billion Wall Street rescue plan ended on a sour, contentious note Thursday after animated exchanges among lawmakers laced with presidential politics just weeks before the November elections.

Treasury Secretary Henry Paulson came up to the Capitol hours later to revive talks, but House Republicans did not participate, and Democrats warned that the whole process could collapse unless President Bush gets them to come to the table.

“Unless this fourth leg shows up at some point, this could fall off very quickly,” said Senate Banking Committee Chairman Christopher Dodd (D-Conn.).

Read it all.

The meeting revealed that President Bush’s $700 billion bid to combat the worst financial crisis in decades had been suddenly sidetracked by fellow Republicans in the House, who refused to embrace a plan that appeared close to acceptance by the Senate and most House Democrats.

Treasury Secretary Henry Paulson begged Democratic participants not to disclose how badly the meeting had gone, dropping to one knee in a teasing way to make his point according to witnesses.

And when Paulson hastily tried to revive talks in a nighttime meeting near the Senate chamber, the House’s top Republican refused to send a negotiator.

“This is the president’s own party,” said Rep. Barney Frank, a top Democratic negotiator who attended both meetings. “I don’t think a president has been repudiated so strongly by the congressional wing of his own party in a long time.”

Read it all.

So, let’s use the next few years to plan, mapping out a program of energy conservation, reconstruction and renewable power. Let’s get the public sector and the universities working on it. And let’s prepare the private sector so that when the credit crunch finally ends, we’ll have the firms, the labs, the standards and the talent in place, ready to go.

Some will ask if we can afford it. To see the answer, don’t look at budget projections. Just look at interest rates. Last week, in the panic, the federal government could fund itself, short term, for free. It could have raised money for 30 years and paid less than 4 percent. That’s far less than it cost back in 2000.

No country in this situation is broke, or insolvent, or even in much trouble. For once, Wall Street’s own markets speak the truth. The financially challenged customer isn’t Uncle Sam. He’s up on Wall Street, where deregulation, greed and fraud ran wild.

Read it all.

Talks over a massive bailout for the U.S. financial system stumbled as they entered their most critical hours, with some Republicans working yesterday to undermine a deal between key congressional leaders and reinvent the plan put forward by the Bush administration one week ago.

Early yesterday, Democratic and Republican leaders said they had reached agreement on the “fundamentals” of a deal. But at a meeting later at the White House that included President Bush, top lawmakers and both presidential candidates, House Minority Leader John A. Boehner (R-Ohio) mentioned a new plan for addressing the crisis that has hobbled global markets.

Under the plan, the government would set up an expanded insurance system, financed by the banks, that would rescue individual home mortgages. The government would not have to buy up the toxic mortgage-backed assets that are weighing down financial institutions.

The proposal angered Democrats, who accused Boehner of acting on behalf of GOP presidential candidate John McCain (R-Ariz.) in trying to disrupt a developing consensus. It also displeased White House officials, including Treasury Secretary Henry M. Paulson Jr., who — half-jokingly — dropped to one knee and pleaded with the lawmakers not to “blow up” the deal, according to two people present at the meeting.

Read it all.

A democrat was quoted as saying the deal has “cratered.”

This is like living through a national soap opera–KSH

JOE [KERNEN]: But when the more dire it looked, in terms of communicating, with some of these Senators, the three-month or one-month bill, again, started acting similar to what was happening on Thursday[of last week]. Now we averted that disaster on Thursday, but it’s already been three or four days. It’s almost as if these guys already forgot about the position that we were in. Do you think that accounted — we’re still susceptible to that happening again if it looked like they’re not going to go through with this?

[WARREN] BUFFETT: No, it would get worse. Last week will look like Nirvana (laughs) if they don’t do something. I think they will. I understand where they’re very mad about what’s happened in the past, but this isn’t the time to vent your spleen about that. This is the time to do something that gets this country back on the right track. What you have, Joe, you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they’re trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that’s willing to leverage up. And there’s no one that can leverage up except the United States government. And what they’re talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that’s going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won’t do it perfectly right, I think they’ll make a lot of money. Because if they don’t — they shouldn’t buy these debt instruments at what the institutions paid. They shouldn’t buy them at what they’re carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

—From a CNBC interview yesterday (all three parts of which are worth the time)

[In Allentown, Pennsylvania] the latest details of the government’s proposed $700 billion rescue plan was not the main story in the local paper, The Morning Call, on Sept. 23 (an article about the end of a teachers’ strike was). But it is on people’s minds. For many of Allentown’s residents, the rescue is an occasion for anger, even if that feeling is at times blunted by fatigue and resignation. They dislike what goes on in Washington, but those ill feelings are nothing compared with their view of Wall Street. “People see that the chief executives of these finance companies are making millions on the backs of taxpayers,” says Ed Pawlowski, the Democratic Mayor of Allentown. They are worried about how the next generation will fare in an America that many feel has mixed up its priorities.

At Wal-Mart (WMT) SuperCenter Store #2641, Brett Slack, one of the owners of Lehigh Valley Paintball, was picking up groceries with his two-year-old daughter while his wife was at her part-time job as a cashier at Giant Food. He, like most others here, believes that the government has no choice but to intervene, since the consequences of inaction appear to be far worse. So fine: He can live with his tax money helping to prop up America’s financial system. But he wants the chief executives of those companies (unnamed by anyone in Allentown) to pay, too. “The government should go after the CEOs,” he said. “I own a business, and if I went under, the bank would come after me. They made bad decisions and figured the government would bail them out. If the CEOs end up sleeping in cardboard boxes, that would be O.K. with me. They don’t deserve to be multimillionaires.”

Slack, who is 32, has had to lay off 20 of his 35 employees in the past year as rising gas prices slowed business. He and his two partners took pay cuts, too. “That’s what CEOs and owners should do,” he says. He put all his savings into the company when he started it four years ago. “If I have money to invest one day, I’ll just start another business. I won’t invest in the stock market,” he says.

Read it all.

What would you pay, sight unseen, for a house that nobody wants, on a hard-luck street where no houses are selling?

That question is easy compared to the one confronting the Treasury Department as Washington works toward a vast bailout of financial institutions. Treasury Secretary Henry M. Paulson Jr. is proposing to spend up to $700 billion to buy troubled investments that even Wall Street is struggling to put a price on.

A big concern in Washington ”” and among many ordinary Americans ”” is that the difficulty in valuing these assets could result in the government’s buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers’ expense.

Anyone who has tried to buy or sell a house when the market is falling, as it is now, knows how difficult it can be to agree on a price. But valuing the securities that the Treasury aims to buy will be far more difficult. Each one of these investments is tied to thousands of individual mortgages, and many of those loans are going bad as the housing market worsens.

Read it all.

The debate in Washington over the $700 billion bail-out plan for the US financial system is starting to resemble a plot from the television show 24.

—Gerard Baker in the (London) Times

Congress looked close to reaching a deal to approve a $700 billion plan to bail out the U.S. financial system and President George W. Bush called an emergency meeting for Thursday to hammer out details.

The move toward a deal will likely calm U.S. markets, which remained on tenterhooks on Wednesday as negotiations dragged on. Investors sought cash and safe-haven assets, briefly sending short-term interest rates below zero. Experts said banks were hoarding cash, fearful that if they loaned money to other banks they might not get repaid.

Most Asian stock markets were weaker and the U.S. dollar dipped against major currencies on Thursday on lingering worries about the timing and scale of rescue plan and fears of the financial contagion deepening.

On Wednesday, Senate Banking Committee Chairman Christopher Dodd expressed optimism a deal was nearing.

Read it all.

President Bush appealed to the nation Wednesday night to support a $700 billion plan to avert a financial meltdown on Wall Street, and he invited both major presidential candidates to join him and Congressional leaders at the White House on Thursday to forge a bipartisan compromise.

Warning that “a long and painful recession” could occur if Congress does not act quickly, Mr. Bush said the consequences could play out in “a distressing scenario,” including potential bank failures, job losses and inability for ordinary Americans to borrow money to buy cars or send their children to college.

“Fellow citizens, we must not let this happen,” he said.

The address, and the extraordinary offer to bring together Senator Barack Obama, the Democratic presidential nominee, and Senator John McCain, the Republican, just weeks before the election underscored a growing sense of urgency on the part of the administration that Congress must act to avert a far-reaching economic collapse.

It was the first time in Mr. Bush’s presidency that he delivered a prime-time address devoted exclusively to the economy, and it came at a time when deep public unease about shaky financial markets has been coupled with skepticism and anger directed at a government bailout that would be the most expensive in American history.

Read it all.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit — combined with the faulty assumption that home values would continue to rise — led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected — along with mortgage payments they could not afford. As a result, many mortgage holders began to default.

These widespread defaults had effects far beyond the housing market. See, in today’s mortgage industry, home loans are often packaged together, and converted into financial products called “mortgage-backed securities.” These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all.

Read it all.

Mr Paulson’s proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?

Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for the homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers’ money. These are the right principles. They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.

The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.

Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay.

Read it all.

I will take comments on this submitted by email only to at KSHarmon[at]mindspring[dot]com.

President Bush readied a prime time speech to the nation and Treasury Secretary Henry Paulson accepted a major change in legislation for a $700 billion bailout of the financial industry on Wednesday as the administration scrambled to prevent further deterioration in the economy.

Republican officials said that Paulson had bowed to demands from critics in both parties to limit the pay packages of executives whose companies benefit from the proposed bailout. They spoke on condition of anonymity because Paulson’s decision had not been formally announced.

White House officials said Bush’s speech would dwell on the financial crisis.

Press secretary Dana Perino said the president wants to tell the American people how the crisis affects them and help them understand the depth of the problem.

Read it all.

The biggest problem Paulson faces, though, is that the American people don’t seem to have understood that the crisis on Wall Street could spread to Main Street with very painful consequences. “We just haven’t communicated as well as we need to,” Paulson acknowelged this morning. “The average American looks at this as being about Wall Street, and they’re angry, and I’m angry too. There have been huge excesses and flaws in the system, but the average American doesn’t understand the implications this has for them: money needs to flow through the system so that every American business virtually every day can operate the way it needs to.”

Paulson faces other problems on Capitol Hill too. Both parties in Congress are by now deeply skeptical of any new Administration demands for increased executive authority and are vehemently pushing for more oversight of how Treasury will manage the bailout. The Paulson plan is bigger in that regard than just about anything Bush asked for in the war on terror. Section eight of the proposal he sent to Congress says, for example, “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Senators and Representatives feel most keenly uncomfortable about the nasty politics of the deal. In an election year dominated by a bad economy, it’s not good to throw huge money at a bunch of Wall Street firms, especially when each party is worried the other is going to bluff and ultimately try to use the deal as a populist rallying cry. This is compounded by the fact that Paulson just happened to lead one of the biggest market players, Goldman Sachs, before coming to Treasury. In that role, he acknowledges, he placed a lot of the bad debt that the now defunct Fannie Mae and Freddie Mac were peddling. “Yeah, I and everyone else placed Fannie and Freddie debt,” he says, but “We didn’t create this system and this was a mess that had to be cleaned up.” He also acknowledges that he put the former Fannie Mae head, Jim Johnson, on the board of Goldman, and that Johnson chaired Paulson’s compensation committee.

All of this, however, will not be enough to blow out the deal, because the consequences of a collapse in the so-called shadow banking system would be much worse.

Read it all.

And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from “troubled financial institutions” to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.

In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a “best efforts” future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below “par” or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction — financial derivatives — that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.

Read it all.

Very soon thereafter, CNBC said it was not true.

Journalists like simple stories with clear-cut villains who are easy for readers (and journalists themselves) to recognize. And so, as the financial crisis has brought Wall Street to its knees in recent weeks, it’s become so much easier for journalists to cope. Time Magazine, for instance, tells us in its current issue that Wall Street “sold out” America, while the New York Times decries “Wall Street’s ”¦.real estate bender.” John McCain has helped out the scribes by attributing the problems we now face to greed on Wall Street.

Listening to this sort of chatter, it’s easy to forget that this mess began with a heap of bad mortgages made by American consumers who never came within a hundred miles of the card sharps on Wall Street. The inability (and in a good deal of cases, the unwillingness) of these same ordinary Americans to pay back these loans, many of which are sitting in mortgage backed-securities held by institutions around the world, helped tilt us toward this systemic threat to our financial system. And even as we focus on bad bets and lousy leverage ratios on Wall Street, these toxic mortgages continue to unwind, and as they do, we are getting a better look at how they were made””and it’s not pretty. If it wasn’t clear before, it should be now, that speculation and fraud””much of it on the part of borrowers””were rampant.

As I have observed before, mortgage fraud soared in the run-up to this mess, and believe it or not, it’s continuing to rise. The FBI says that reports of suspicious mortgage activity increased by 10-fold from 2001 through 2007, and rose another 42 percent in the first quarter of 2008.

As I continue to insist, this is only part of the story that has four parts, but it is a part which cannot be ignored. I am afraid in many more instances than people want to admit, the lender was so incentivized to make the mortgage that he or she did not present it to the would be borrower realistically and truthfully. Read it all–KSH

As Setser and Duy pointed out, we got a subsidy of $1000 a person from our friendly foreign funding sources. The bailout bill $700 billion figure (which could be larger, since that is the maximum outstanding at any one time; the real limit is the increase in the debt ceiling) amounts to $2000 a person. Will our creditors play ball and lend us the money? It isn’t at all clear that they will, at least at current interest rates. They have become decidedly cool on buying agency paper. The man on the street in Asia and Europe is taken aback by the events of the last two weeks. Funding the US has become controversial in China, and may be in other major lenders. And a rise in interest rates would considerably undermine the supposed benefits of the program.

The sorry fact is the US has consumed at an unsustainable level. We need to reduce consumption and increase savings (and reducing debt is a form of savings).

Read it all and especially take the time to look at the main useful charts.

The most obvious solution is to pay more than 25 cents on the dollar and then demand something in return for the premium ”” namely, a stake in any firm that participates in the bailout. Congressional Democrats have been pushing for such a provision this week, and it’s one of the most important things they have done.

The government would then be accomplishing three things at once. First, it would take possession of the bad assets now causing a panic on Wall Street. Second, it would inject cash into the financial system and help shore up firms’ balance sheets (which some economists think is actually a bigger problem than the bad assets). And, third, it would go a long way toward minimizing the ultimate cost to taxpayers.

Why? The more that the government overpays for the assets, the larger the subsidy it’s providing to Wall Street ”” and the more it is pushing up the share prices of Wall Street firms. As Senator Jack Reed, Democrat of Rhode Island, notes, the equity stakes allow the government to recapture some of the subsidy down the road. It’s a self-correcting mechanism.

Some details of a bailout will have to remain vague, in part so that Treasury officials have the flexibility to respond to an obviously fluid situation. But Congress can still do a lot this week to make sure the final cost is a lot closer to, say, $100 billion than $700 billion.

Read it all.

Whether or not tomorrow’s accounts of today’s turmoil prove David Owen of Dresdner Kleinwort right; whether or not this is the beginning of the end of the dollar’s pre-eminence in the world’s central banks and foreign exchanges, the economic landscape has undoubtedly changed forever.

The US taxpayer bail-out of America’s banking sector is an event whose significance will reverberate for many years. What it means for free markets, for the way Western economies are run, for the prosperity of the world economy, must remain to be seen.

But as investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable ”“ the US dollar will have to take another major fall.

Read it all.

With financial markets in flux and a massive government rescue package in the works, financial reporter and New York Times columnist Gretchen Morgenson looks into what’s involved in the nearly $700 billion deal.

One central concern: The way troubled banks’ assets get valued when the federal government buys them. “Depending on how [the bailout program] is operated, and how the assets are valued before taxpayers are forced to buy them, it could bloat our final bill for this mess while benefiting the very institutions that got us into it,” Morgenson wrote in a recent column.

Morgenson talks to Terry Gross about strategies the government might employ to value the assets taxpayers are buying from endangered institutions ”” and how regulators might earn back some of the trust they’ve lost in recent weeks.

Listen to it all from NPR.

1. You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Recall the overuse of the word “Contained.” Indeed, you two have been wrong about nearly everything financially related since this crisis began years ago.

Question: Why should we trust your judgment on the largest bailout in American history?

2. How are you pricing the purchase of these damaged assets? Is the taxpayer paying 22 cents on the dollar? 5.5 cents? If there is no market price for this junk paper, how are you going to determine a purchase price?

Read it carefully and read it all.