The financial crisis
What next?
Global finance is being torn apart; it can be put back together again
FINANCE houses set out to be monuments of stone and steel. In the widening gyre the greatest of them have splintered into matchwood. Ten short days saw the nationalisation, failure or rescue of what was once the world’s biggest insurer, with assets of $1 trillion, two of the world’s biggest investment banks, with combined assets of another $1.5 trillion, and two giants of America’s mortgage markets, with assets of $1.8 trillion. The government of the world’s leading capitalist nation has been sucked deep into the maelstrom of its most capitalist industry. And it looks overwhelmed.
The bankruptcy of Lehman Brothers and Merrill Lynch’s rapid sale to Bank of America were shocking enough. But the government rescue of American International Group (AIG), through an $85 billion loan at punitive interest rates thrown together on the evening of September 16th, marked a new low in an already catastrophic year. AIG is mostly a safe, well-run insurer. But its financial-products division, which accounted for just a fraction of its revenues, wrote enough derivatives contracts to destroy the firm and shake the world. It helps explain one of the mysteries of recent years: who was taking on the risk that banks and investors were shedding? Now we know.
Yet AIG’s rescue has done little to banish the naked fear that has the markets in its grip. Pick your measure—the interest rates banks charge to lend to each other, the extra costs of borrowing and of insuring corporate debt, the flight to safety in Treasury bonds, gold, financial stocks: all register contagion. On September 17th HBOS, Britain’s largest mortgage lender, fell into the arms of Lloyds TSB for a mere £12 billion ($22 billion), after its shares pitched into the abyss that had swallowed Lehman and AIG. Other banks, including Morgan Stanley and Washington Mutual, looked as if they would suffer the same fate. Russia said it would lend its three biggest banks 1.12 trillion roubles ($44 billion). An American money-market fund, supposedly the safest of safe investments, this week became the first since 1994 to report a loss. If investors flee the money markets for Treasuries, banks will lose funding and the contagion will suck in hedge funds and companies. A brave man would see catharsis in all this misery; a wise man would not be so hasty.
The blood-dimmed tide
Some will argue that the Federal Reserve and the Treasury, nationalising the economy faster than you can say Hugo Chávez, should have left AIG to oblivion. Amid this contagion that would have been reckless. Its contracts—almost $450 billion-worth in the credit-default swaps market alone—underpin the health of the world’s banks and investment funds. The collapse of its insurance arm would hit ordinary policyholders. At the weekend the Fed and the Treasury watched Lehman Brothers go bankrupt sooner than save it. In principle that was admirable—capitalism requires people to pay for their mistakes. But AIG was bigger and the bankruptcy of Lehman had set off vortices and currents that may have contributed to its downfall. With the markets reeling, pragmatism trumped principle. Even though it undermined their own authority, the Fed and the Treasury rightly felt they could not say no again.
What happens next depends on three questions. Why has the crisis lurched onto a new, destructive path? How vulnerable are the financial system and the economy? And what can be done to put finance right? It is no hyperbole to say that for an inkling of what is at stake, you have only to study the 1930s.
Shorn of all its complexity, the finance industry is caught between two brutally simple forces. It needs capital, because assets like houses and promises to pay debts are worth less than most people thought. Even if some gain from falling asset prices, lenders and insurers have to book losses, which leaves them needing money. Finance also needs to shrink. The credit boom not only inflated asset prices, it also inflated finance itself. The financial-services industry’s share of total American corporate profits rose from 10% in the early 1980s to 40% at its peak last year. By one calculation, profits in the past decade amounted to $1.2 trillion more than you would have expected.
This industry will not be able to make money after the boom unless it is far smaller—and it will be hard to make money while it shrinks. No wonder investors are scarce. The brave few, such as sovereign-wealth funds, who put money into weak banks have lost a lot. Better to pick over their carcasses than to take on their toxic assets—just as Britain’s Barclays walked away from Lehman as a going concern, only to swoop on its North American business after it failed.
The centre cannot hold
Governments will thus often be the only buyers around. If necessary, they may create a special fund to manage and wind down troubled assets. Yet do not underestimate the cost of rescues, even necessary ones. Nobody would buy Lehman unless the government offered them the sort of help it had provided JPMorgan Chase when it saved Bear Stearns. The nationalisation that, for good reason, wiped out Fannie’s and Freddie’s shareholders has made it riskier for others to put fresh equity into ailing banks. The only wise recapitalisation just now is an outright purchase, preferably by a retail bank backed by deposits insured by the government—as with Bank of America and Merrill Lynch, Lloyds and HBOS and, possibly, Wachovia with Morgan Stanley. The bigger the bank, the harder that is. Most of all, each rescue discourages investors from worrying about the creditworthiness of those they trade with—and thus encourages the next excess.
For all the costs of a rescue, the cost of failure to the economy would sometimes be higher. As finance shrinks, credit will be sucked out of the economy and without credit, people cannot buy houses, run businesses or as easily invest in the future. So far the American economy has held up. The hope is that the housing bust is nearing its bottom and that countries like China and India will continue to thrive. Recent falls in the price of oil and other commodities give central banks scope to cut interest rates—as China showed this week.
But there is a darker side, too. Unemployment in America rose to 6.1% in August and is likely to climb further. Industrial production fell by 1.1% last month; and the annual change in retail sales is at its weakest since the aftermath of the 2001 recession. Output is shrinking in Japan, Germany, Spain and Britain, and is barely positive in many other countries. On a quarterly basis, prices are falling in half of the 20 countries in The Economist’s house-price index. Emerging economies’ stocks, bonds and currencies have been battered as investors fret that they will no longer be “decoupled” from the rich countries.
Unless policymakers blunder unforgivably—by letting “systemic” institutions fail or by keeping monetary policy too tight—there is no need for today’s misery to turn into a new Depression. A longer-term worry is the inevitable urge to regulate modern finance into submission. Though understandable, that desire is wrong and dangerous—and the colossal success of commerce in the emerging world (see article) shows how much there is to lose. Finance is the brain of the economy. For all its excesses, it allocates resources to where they are productive better than any central planner ever could.
Regulation is necessary, and much must now be done to improve the laws of finance. But it must be the right regulation: an end to America’s fragmented system of oversight; more transparency; capital requirements that lean against booms and flex with busts; supervision of giants, like AIG, that are too big and too interconnected to fail; accounting that values risks better and that everyone accepts; clearing houses and exchanges to make derivatives safer and less opaque.
All that would count as progress. But naive faith in regulators’ powers creates ruinous false security. Financiers know more than regulators and their voices carry more weight in a boom. Banks can exploit the regulations’ inevitable blind spots: assets hidden off their balance sheets, or insurance (such as that provided by AIG) which enables them to profit by sliding out of the capital requirements the regulators set. It is no accident that both schemes were at the heart of the crisis.
This is a black week. Those of us who have supported financial capitalism are open to the charge that the system we championed has merely enabled a few spivs to get rich. But it helped produce healthy economic growth and low inflation for a generation. It would take a very big recession indeed to wipe out those gains. Do not forget that in the debate ahead.
Commentary by William Pesek
Sept. 19 (Bloomberg) -- Chalk it up to bad luck that so many Japanese bet big on Lehman Brothers Holdings Inc.
The list of out-of-luck Lehman creditors is a who's who of banks in the second-biggest economy. They hold 202.5 billion yen ($1.9 billion) of potential Lehman-related losses. And there's even an angle for the nation's fabled samurai.
The immediate focus is on Lehman's samurai bonds, yen- denominated notes sold in Japan by foreign borrowers. If Lehman reneges on its 195 billion yen of bonds, the shock could be as big as Argentina's default in 2001.
The focus is also on the self-described samurai who seems destined to become Japan's next prime minister next week: Taro Aso, whose Web site plays up his familial connections to the Satsuma samurai clan.
There's little excitement in this nation of 127 million over the prospect of a new leader. ``Another year, another PM,'' notes Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. All indications point to Aso, who turns 68 tomorrow, grabbing the helm at a time of global financial chaos and slowing Japanese growth.
Is Aso the best person for the job? It's highly debatable. There can be little doubt the gaffe-prone former foreign minister will make headlines around Asia.
Yet many in Tokyo say Japan desperately needs a strong, experienced and plain-talking leader -- even if economics isn't his thing. Nicholas Smith, director of equity sales at HSBC Holdings Plc, explained the dynamic as well as anyone in a recent report titled, colorfully, ``Who Is This Aso?''
U.S. Parallels
The parallels between Japan's leadership contest and one in the U.S. are striking. Voters could go with the fresh-faced Barack Obama, 47, or the been-around-forever John McCain, 72.
A straight-talker, McCain doesn't fit that description on the U.S. economy, which he calls fundamentally strong. Asians would disagree, never mind most Americans. Just ask the hundreds of Singaporean policy holders thronging a unit of American International Group Inc. the other day expecting its failure.
And yet, polls show McCain running neck-and-neck with Obama. It's not unlike Japan, where younger candidates with more interesting and nuanced ideas than older, entrenched politicians are virtually ignored. It's all about perceived experience.
Reagan Revolution
An equally important contrast is how the U.S. is becoming more Japanese than free-market enthusiasts want to admit. U.S. authorities are now in the banking and insurance businesses. What's next? Airlines? Carmakers?
The pro-market revolution championed by Ronald Reagan in the 1980s isn't looking so good. The Federal Reserve is becoming more and more Bank of Japan-like, slashing interest rates, providing untold amounts of liquidity and bailing out weak corporate links.
There are, of course, big differences between the U.S. and Japan. Whereas Japan's denial over the financial system lasted a decade, it has taken about one year for the U.S. to get truly serious. A move now seems afoot to create a Resolution Trust Corp.-like entity akin to the one used to dispose of bad debts of savings-and-loan associations in the 1980s and 1990s. It's recognition of how bad things are.
Yet Japan had a key advantage over the U.S.: its households were sitting on vast savings that cushioned consumers during the darkest days of deflation. Americans are shackled with debt and falling house prices, a serious weakness as the economy sits on the edge of recession.
Recession to Recession
Japan was able to muddle along for more than 10 years, recession to recession, because its financial system is as much about socialism as capitalism. Some critics say the U.S. is hurtling in a similar direction. Only time will tell.
U.S. officials must address the causes of the crisis. The problem isn't the availability of capital but a lack of trust. The faith that investors had in pieces of paper and financial contracts has been destroyed. Only regulatory changes of the kind the Bush administration abhors will restore credibility.
Japan's woes also are political. It seems Japan is incapable of functioning amid two-party rule. The ideas of the ruling Liberal Democratic Party and the opposition Democratic Party of Japan are as similar as they are vague. Both parties seem to exist only to score political points against the other.
Having been abandoned by two leaders in two years, many Japanese are losing faith in the LDP. It's hardly a promising environment even for the charismatic Aso. Turmoil in the global economy means Aso's priority will be to boost the LDP's popularity. While few doubt Aso's experience, it's likely to lead him to do more of the pork-barrel spending that left Japan with the world's largest public debt.
In less chaotic times, the LDP might take a chance with the younger Yuriko Koike or an experienced economist such as Kaoru Yosano. This is circle-the-wagons time, though, and an Aso victory is almost assured.
One reason Japanese banks bet on foreign names like Lehman has been their inability to get domestic consumers to borrow more. It's a key dynamic restraining growth. Fixing it will require hard work from all facets of Japanese society -- including samurai.
Commentary by Michael Lewis
Sept. 18 (Bloomberg) -- One of life's rules is that there's bad in good and good in bad. The total collapse of the U.S. financial system is no exception. Even in the midst of the current financial despair we can look around and identify many collateral benefits.
A lot of attractive office space seems to be opening up in midtown Manhattan, for instance, and the U.S. government is now getting paid to borrow money. (And with T-bills yielding 0 percent, they really ought to borrow a lot more of it, and quickly.)
And so as Morgan Stanley Chief Executive Officer John Mack blasts short sellers for his problems, and Goldman Sachs CEO Lloyd Blankfein swans around pretending to be above this little panic, we ought to step back and enjoy the positives.
To wit:
1) We finally get to see what's inside these big Wall Street firms.
We've just witnessed the largest bankruptcy in U.S. history and we know neither the inciting incident (though there is speculation that sovereign wealth funds decided to stop lending to Lehman Brothers Holdings Inc.), nor the deep cause. But there's now a pile of assets and liabilities smoldering in New York awaiting inspection.
The assets include subprime mortgage-backed bonds and no doubt many other things that aren't worth as much as Lehman hoped they might be worth. But it's the liabilities that are most intriguing, as they include more than $700 billion in notional derivatives contracts. Some of that is insurance sold by Lehman, against the risk of other companies defaulting.
Natural Question
The entire pile might be benign, but somehow I doubt it. We may well find out that Lehman Brothers, in liquidation, has a negative value of hundreds of billions of dollars. In that case the natural question will be: How much better could things be inside Morgan Stanley and Goldman Sachs, both of which were engaged in the same lines of business?
2) We are creating the financial leaders of tomorrow.
Remember when everyone believed in Alan Greenspan? When John McCain, running for president in 2000, said that if Greenspan died he'd have him stuffed and propped up against the wall at the Federal Reserve, where he'd remain chairman?
No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.
He's left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.
Nothing Like a Bailout
And there's nothing like a government bailout to create new public-sector heroes. Hank Paulson, 62, is probably too old; in any case, he's tarred by his association with both George Bush and Goldman Sachs. But 47-year-old Tim Geithner at the New York Fed is perfectly positioned to make Americans feel as if their financial system is in good hands for many years to come.
I have no real idea if Geithner knows what he's doing and he may not either. (``Bail out that one. No! Not that one -- the other one!'') It doesn't matter. He's in the middle of great events and should, by the end of them, know more about what happened than anyone.
Whatever happens to the U.S. financial system someone is bound to get the credit for something even worse not happening and, as no one really understands what Geithner does, he's the obvious choice.
3) Ordinary Americans get a lesson in low finance.
It's been expensive but, then, so is kindergarten.
Our willingness to believe that we can hire some expert to tell us how to outperform markets is a big problem, with big consequences. It underpins Wall Street's brokerage operations, for instance, and leads to a lot more people giving out financial advice than should be giving out financial advice.
Give Thanks
Thanks to the current panic many Americans have learned that the experts who advise them what to do with their savings are, at best, fools. Merrill Lynch & Co., Morgan Stanley, Citigroup Inc. and all the rest persuaded their most valuable customers to buy auction-rate bonds, telling them the securities were as good as cash.
Those customers will now think twice before they listen to their brokers ever again.
Many, I'm sure, are just waiting to get their money back from their brokers before they race for the exits and introduce themselves to Charles Schwab.
Bank of America Corp. will soon discover that the relationship between Merrill Lynch and its customers isn't what it used to be, but Bank of America's loss is America's gain.
So Many Houses
4) We have lots of new houses.
Not all of them have people in them, sadly, but that's a minor detail. Even better, no one has had to pay for them, and probably never will. I'm betting that the U.S. government will soon have no choice but to take the final step and guarantee every bad mortgage loan ever made by Wall Street.
I can hear you thinking: Doesn't that mean the taxpayer foots the bill? That's so negative! Sure, one day some taxpayer will foot the bill but if the government does what it does best, and continues to borrow huge sums from foreigners, it doesn't have to be you or me.
5) Huge numbers of Wall Street executives will have the time to raise their children.
For years now Wall Street has been far too lucrative for a certain kind of energetic and ambitious person to justify anything but the most perfunctory personal life. Now that the market for his services has collapsed, he has time to go home and figure out which of the children roaming around the mansion are actually his.
In time, he will learn to love them and they him, and they will gain the benefit of his wisdom and experience. Perhaps one day they will put it to use as traders and investment bankers, on the Wall Street of the future, where they will report to those exalted creatures of high finance: loan officers.
There, slowly, they can earn the money they will need to pay off the mortgages defaulted upon by their forebears.
Sept. 19 (Bloomberg) -- Treasury two-year notes headed for their biggest back-to-back decline since March as U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke sought legislation to stem a credit-market meltdown.
Government securities trimmed a weekly gain as the officials pledged to work through the weekend on a plan to remove illiquid mortgage-related assets from banks' balance sheets. House Speaker Nancy Pelosi said the initiatives will help resolve the U.S. financial crisis. Japanese bonds fell and the cost of protecting Australian corporate debt from default dropped. Asian stocks rose from a three-year low.
``Risk aversion is abating,'' curbing demand for Treasuries, said Edward Lee, a fixed-income strategist at Standard Chartered Bank in Singapore, part of the U.K. lender that specializes in emerging markets. ``This is a very volatile period.''
The yield on the two-year note rose 11 basis points, or 0.11 percentage point, to 1.84 percent at 10:50 a.m. in Tokyo, according to BGCantor Market Data. The price of the 2.375 percent security due in August 2010 slid 7/32, or $2.19 per $1,000 face amount, to 101.
Two-year rates have still declined 36 basis points this week, the most since February. The MSCI Asia Pacific Index of regional shares advanced 3.1 percent, the biggest gain in almost two weeks.
Treasuries began to slip yesterday after Senator Charles Schumer said Treasury and Fed officials are considering a ``permanent'' plan to address the turmoil in markets.
Default Swaps
Other legislators suggested plans that would resemble the Resolution Trust Corp., set up in 1989 to deal with the savings and loan crisis, and the Homeowner Loan Corp., which bought up mortgages and issued cheaper loans during the Depression.
``The flight to quality is somewhat over,'' said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. ``I was around for the original RTC. Once they got it going, it took a lot of assets off the books,'' Brenner said yesterday.
The yield on Japan's 1.1 percent note due in September 2013 increased 1 basis point to 1.135 percent, according to Japan Bond Trading Co., the nation's largest interdealer debt broker.
The Markit iTraxx Australia index of credit-default swaps declined 23 basis points to 1.75 percentage points, Credit Suisse Group prices show. The swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Sept. 19 (Bloomberg) -- The dollar rose the most in a month against the yen as central banks pumped cash into global credit markets and the U.S. government started work on a plan to prevent further finance industry collapses.
The currency gained for the first time in three days versus the euro as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke pledged a ``comprehensive approach'' to resuscitate the market for mortgage-related debt. The dollar pared its weekly loss against the yen as the yield gap between 10-year Treasuries and Japanese government bonds widened to 2.11 percentage points, the most in a week.
``This is providing some reassurance to the markets and improving trust,'' said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo and a former Bank of Japan official. ``It's a positive for the dollar.''
The dollar rose 1.4 percent, the largest gain since Aug. 22, to 106.88 yen at 12:40 p.m. in Tokyo, reducing this week's drop to 1 percent. The U.S. currency climbed 1 percent to $1.4200 per euro. It rose 0.8 percent to $1.8045 per British pound, the first gain in three days. The euro advanced to 151.77 yen from 151.28 yen, following a 0.9 percent gain yesterday.
The South Korean won rose 1.3 percent to 1,138.75 per dollar on optimism the global credit crunch will ease, boosting global demand for riskier assets including the nation's shares. The benchmark Kospi stock index jumped 4.6 percent and Japan's Nikkei 225 Stock Average surged 3.2 percent after the Standard & Poor's 500 Index rallied 4.3 percent yesterday.
U.S. regulators met with lawmakers late yesterday seeking support for a way to help banks remove illiquid mortgage-related assets from their balance sheets. Congressional leaders said they intend to pass legislation within days.
`Safeguard the U.S.'
``The plan is likely to be welcomed by the markets and will probably safeguard the U.S. financial system,'' said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's largest bank by market value.
Sen. Charles Schumer, a Democrat who chairs the congressional Joint Economic Committee, proposed an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages to make them more affordable. He spoke with reporters yesterday in Washington.
The dollar headed for a weekly loss versus the yen and the euro on speculation credit-market losses will deepen, adding to signs that the world's largest economy may slow further.
``I wouldn't have too much confidence in U.S. assets yet, because we don't know how the situation is going to play out,'' said Naomi Fink, a Tokyo-based strategist at Bank of Tokyo- Mitsubishi UFJ Ltd., in a Bloomberg television interview.
Carry Trade
Citigroup Inc., JPMorgan Chase Co., Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers Holdings Inc. alone had more than $500 billion as of June 30 of so-called Level 3 assets, or ones whose values they say can only be determined through internal models because of illiquid markets, according to data in a Sept. 15 report from New York-based bond research firm CreditSights Inc.
The U.S. financial crisis will continue for two years, said Eisuke Sakakibara, a former top currency-policy official in Japan, in a Bloomberg television interview.
There is ``no quick fix'' for the credit-market turmoil, he said, predicting that the yen may strengthen to 100 this year as traders cut holdings of higher-yielding overseas assets funded with Japan's currency.
Sakakibara, 67, currently a professor at Tokyo's Waseda University, was dubbed ``Mr. Yen'' because of his ability to influence the foreign-exchange market during his 1997-1999 tenure at the Finance Ministry.
The yen fell for a third day against the Australian and New Zealand dollars as investors returned to so-called carry trades, using yen financing to buy higher-yielding assets elsewhere.
`Unambiguous Good'
The yen dropped 2.3 percent to 86.41 versus Australia's dollar and 1.3 percent to 71.91 against New Zealand's dollar.
The benchmark interest rate is 0.5 percent in Japan, compared with 7 percent in Australia and 7.5 percent in New Zealand. The risk in carry trades is that currency market moves erase profits.
Japan's currency jumped 3 percent against the dollar on Sept. 15, the most in a decade, as Lehman filed for the biggest bankruptcy in history, sparking a global stock-market rout. The U.S. government's $85 billion rescue of American International Group Inc. failed to calm investors.
The Fed almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the aftermath of the 1929 Wall Street crash.
``The last 12 to 18 hours have been an unambiguous good for the financial world and the global economy,'' said Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``The first response is the yen isn't an attractive asset now.''
Sept. 19 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution.
Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative, which may also insure money-market funds, is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.
The effort is a recognition that Paulson's and Bernanke's steps have so far failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.
``They were just worn out and weary from the one-off situations they had to deal with, and finally came to the realization that it's a much more pervasive problem,'' said Marilyn Cohen, who manages $185 million in bonds as president and chief executive of Envision Capital Management in Los Angeles. ``Hopefully, this will give the trading desks the confidence to start making markets again.''
Securities and Exchange Commission Chairman Christopher Cox, who attended the gathering with lawmakers, said the SEC planned to consider more rules to guarantee market liquidity. The commission is weighing a ban on short-sales of the shares of Wall Street brokerages after Morgan Stanley fell 39 percent this week, said a person familiar with the matter.
Stocks Rally
U.S. stock index futures gained more than 1.6 percent, the dollar rose versus the yen and Japan's Nikkei 225 Stock Average climbed 3.1 percent on optimism that Congress and policy makers will enact a comprehensive plan for the crisis.
Options under consideration include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff who spoke on condition of anonymity because the plans may change.
Another possibility is using Fannie and Freddie, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said.
``We will try to put a bill together and do it fairly quickly,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said after the meeting. ``We are not in a position to give you any specifics right now'' on the proposals, he said when asked about the potential cost.
Debt Concern
The likelihood of the government taking on yet more devalued assets, after the seizures of Fannie, Freddie and AIG and the earlier assumption by the Fed of $29 billion of Bear Stearns Cos. investments, may spur concern about its own balance sheet.
The Treasury has pledged to buy up to $200 billion of Fannie and Freddie stock to keep them solvent, while the Fed agreed Sept. 16 to an $85 billion bridge loan to AIG. The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program.
``It sounds like there's going to be a giant dumpster for illiquid assets,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. ``It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative'' to the size of the American economy, he said.
Senator Richard Shelby of Alabama and some other Republicans have criticized the takeovers of AIG, Fannie and Freddie for imposing a potentially high cost on taxpayers.
Shelby Skeptical
``We cannot protect all risk in the market, and we shouldn't do it at the risk of the taxpayer,'' Shelby, the ranking Republican on the Senate Banking Committee, said in an interview with Bloomberg Television this week.
Still, Representative John Boehner, the head of the Republicans in the House, told reporters after the meeting with Paulson and Bernanke that he was ``hopeful that in the coming days we'll have a proposal that will pass this Congress.''
Senator Charles Schumer of New York, a Democrat who chairs the congressional Joint Economic Committee, warned yesterday against leaving the Fed with an expanding role for addressing the credit crisis.
``It's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' Schumer said yesterday in Washington.
Record Lending
The Treasury the past two days announced $200 billion in special bill sales to help the Fed expand its balance sheet. The U.S. central bank extended a record $59.8 billion in loans to investment banks and $33.4 billion to commercial banks as of Sept. 17. The Fed yesterday also joined its counterparts from around the world to pump $180 billion into global money markets.
An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults.
Schumer proposed an agency to inject capital into troubled financial companies in exchange for rewriting mortgages to make them more affordable. It would be modeled on the Great Depression-era Reconstruction Finance Corp., he said. Others have floated a type of Resolution Trust Corp., which was a 1990s fund to manage devalued assets from failed savings and loans.
Citigroup Inc., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers alone had more than $500 billion of so-called Level 3 assets as of June 30, according to data in a Sept. 15 report from New York-based bond research firm CreditSights Inc. The holders of these assets say their values can only be determined through internal models because of illiquid markets.
Senator Christopher Dodd, who chairs the Senate Banking Committee, said it was a ``sober'' gathering. The plan would likely come from the Treasury and Fed this weekend and ``nothing is more important than this,'' Dodd said.
Sept. 19 (Bloomberg) -- Asian stocks and U.S. futures surged as central banks pumped cash into money markets and the U.S. worked on plans to shore up banks and insurers.
Macquarie Group Ltd., Australia's largest investment bank, soared a record 38 percent. Citigroup Inc. jumped 19 percent in U.S. trading yesterday as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke pledged to work through the weekend on measures to ease the credit crisis. China's CSI 300 Index surged 9.3 percent, led by Bank of China Ltd., after the government scrapped a stock-trading tax and said it will buy more shares in three of the largest banks.
``The resolve to fundamentally solve the problem is intensifying, which suggests there's going to be a bit of a floor under share prices,'' said Shane Oliver, head of investment strategy at AMP Capital Investors, which manages $81 billion in Sydney. ``It's an environment where you'd be looking to buy into shares.''
The MSCI Asia Pacific Index added 3.9 percent to 112.38 as of 11:42 a.m. in Tokyo, with 71 of its 991 members climbing 10 percent or more. The measure rebounded from its lowest close in three years. A gauge of financial companies advanced 6.7 percent, the most among the gauge's 10 industry groups.
The benchmark index has lost 3.3 percent this week as bank lending seized up following Lehman Brothers Holdings Inc.'s bankruptcy filing and the U.S. government's takeover of American International Group Inc.
Japan's Nikkei 225 Stock Average added 3.3 percent to 11,868.20. All markets open for trading in the region advanced. South Korea halted program trading of stocks for the fourth time this year after futures jumped. The Kospi index rose 4.7 percent.
Easing The Squeeze
Standard & Poor's 500 Index futures gained 2.3 percent in after-hours trading. U.S. stocks rallied the most in six years yesterday, with the S&P 500 climbing 4.3 percent after Senator Charles Schumer proposed an agency to pump capital into financial companies.
Macquarie, whose shares have lost half their value this year, jumped a record 38 percent to A$36. Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank by market value, rose 11 percent to 644,000 yen. Kookmin Bank, South Korea's biggest, advanced 7.1 percent to 55,900 won.
The Bank of Japan yesterday agreed to offer up to $60 billion to local and overseas financial institutions to ease the credit squeeze. The U.S. Securities and Exchange Commission said it may require hedge funds to disclose short-sale positions, while the Financial Services Authority in the U.K. prohibited short selling financial shares for the rest of the year.
National Australia Bank, the nation's biggest by assets, gained 13 percent to A$22.19, the most since May 1988. Nomura Holdings Inc., Japan's largest brokerage, advanced 7.1 percent to 1,275 yen.
`Shot in the Arm'
Bank of China, the nation's second-biggest bank, jumped 10 percent to 3.36 yuan. Industrial & Commercial Bank of China Ltd., the country's largest, surged 9.9 percent to 3.78 yuan.
Their state-owned controlling shareholder will buy shares on the open market to shore up investor confidence, the official Xinhua News Agency reported.
``This is a shot in the arm to stem the hemorrhage and may lead to a 10 to 20 percent rebound of share prices,'' said David Liao, a Shanghai-based bank analyst at HSBC Jintrust Fund Management Co., which manages $975 million.
Shipping companies rose after cargo rates increased by the most in a month. Hanjin Shipping Co., South Korea's biggest, added 12 percent to 29,150 won. Kawasaki Kisen Kaisha Ltd., Japan's third-biggest, jumped 11 percent to 761 yen.
The Baltic Dry Index, a measure of commodity-shipping rates, gained 2.1 percent yesterday in London, the most since Aug. 14.
Korea Exchange Bank, controlled by U.S. buyout firm Lone Star Funds, fell 7.1 percent to 11,750 won, the biggest plunge since Dec. 27, 2006. HSBC Holdings Plc, Europe's largest bank, said it scrapped its planned $6 billion purchase of the Korean bank after the global credit crisis slashed asset values.
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