The maverick and the hockey mom
Republicans are more fired up than before, but less so than Democrats
BEFORE Barack Obama’s big open-air speech in Denver last week, some Christian conservatives prayed for rain. That was in poor taste. But this is a competitive election, and anything the right can do, the left can do better. When the news came that a hurricane might strike New Orleans during the Republican convention in St Paul, Minnesota this week, Michael Moore, a film-maker, said it was “proof that there is a God in heaven”. Another calamitous storm, you see, would remind people how ineptly George Bush dealt with Hurricane Katrina three years ago and spur them to vote Democratic.
The first day of the convention, September 1st, was all but cancelled—though, in the end, the hurricane was less destructive than had been feared (see article). That left three days for Republicans to achieve three goals. They needed to distance John McCain from Mr Bush, to introduce Sarah Palin (Mr McCain’s surprise vice-presidential pick) to voters and to denigrate Mr Obama. Strangely, Hurricane Gustav may have helped. The storm gave Mr Bush a good reason to stay away on the first day. During a brief video link-up, he generously stressed the times Mr McCain has disagreed with him.
To boost their nominee, Republicans played all the familiar tunes. Videos hinted at parallels with previous presidents: Teddy Roosevelt, the war hero, and Ronald Reagan, who faced down the Soviet Union. Fred Thompson, a gravel-voiced actor, former senator and unsuccessful presidential candidate, praised Mr McCain’s courage during two years of solitary confinement where the heat caused “boils the size of baseballs under his arms”. “It’s pretty clear,” said Mr Thompson, that “there are two questions we will never have to ask ourselves: ‘Who is this man?’ and ‘Can we trust this man with the presidency?’”
The highlight of the first full day was an independent Democrat who got the crowd cheering for Bill Clinton, of all people. Joe Lieberman, who was Al Gore’s running-mate in 2000, listed what happened when Mr Clinton stood up to his own party’s interest groups and worked with a Republican Congress: welfare reform, free-trade agreements and balanced budgets. Mr Obama, by contrast, “has not reached across party lines to get anything significant done”. John McCain had done it “over and over again”, said Mr Lieberman, citing his friend’s struggles with his own party over campaign-finance and immigration reform. This speech provoked howls of “traitor” from Democratic bloggers, but cheers from the floor.
The week’s biggest buzz surrounded Mr McCain’s little-known running-mate. Delegates waxed ecstatic about Mrs Palin, the governor of Alaska. Social conservatives, who have reservations about Mr McCain, immediately sensed that she is one of them. Christians applauded her piety, gun-lovers her love of guns and pro-lifers the Down’s syndrome baby she calls “perfect”. And nearly everyone warmed to her moose-skinning authenticity. “I give her extreme credit for being a mother of five and a governor. I’m a mother of five. And I can barely keep milk in the house,” said Kelley McDonald of New Jersey.
All week Democrats hammered Mrs Palin for her lack of experience of national or international politics. Republicans retorted that, as a governor and former mayor, she has more executive experience than Mr Obama and Joe Biden combined. Speaker after speaker contrasted Mr Obama’s record of rubbing along with machine politicians in Chicago with Mrs Palin’s record of confronting corruption within her own party. But everyone knew that picking her was a risk. “You’re not a [bomber] pilot if you don’t take risks,” said Mike Huebsch, the Republican speaker of the Wisconsin assembly.
On September 3rd the “hottest VP from the coolest state,” as the badges put it, took the stage. She seemed a trifle nervous and unsure of the teleprompter. But the audience loved her. She spoke of her union-member, snowmobile-champion husband and her five children, including one who is about to deploy to Iraq.
She accused Democrats of looking down on small-town mayors. “Let me explain to them what the job involves,” she said. “I guess a small-town mayor is sort of like a community organiser, except that you have actual responsibilities.” She boasted of vetoing half a billion dollars in wasteful spending as governor and selling the former governor’s jet on eBay. There was much to admire about Mr Obama, but she chided him for having written “two memoirs but not a single major law”.
Since voters say they care most about energy, and since she governs an oil state, she spoke about it at length. She scoffed at Democrats who oppose drilling for oil on the ground that it won’t solve all America’s energy problems—“as if we didn’t know that already”—and promised to promote nuclear, solar, wind, geothermal energy and clean coal, too. The crowd chanted “Drill, baby, drill!”
The Economist went to press before Mr McCain’s speech on September 4th. Both he and Mr Obama say they want to unite their country, but their two parties’ conventions showed a gaping cultural gulf. In Denver abortion-rights advocates handed out condoms with the logo “Protect yourself from John McCain”, while Obamaphiles wore badges that substituted “Obama” for “God” in the motto “In God We Trust”. Evangelicals in St Paul sighed that secular Democrats probably did not realise how offensive this was.
Outside the Republican convention, largely peaceful protests were marred by a few thugs who smashed windows. More violent disruptions were avoided, however, because police informants infiltrated a gang of anarchists who were allegedly planning them. Police seized weapons and buckets of urine, apparently intended for throwing at people. Lawyers for some of those arrested demanded the return of their possessions. “Who should we return the urine to?” asked the judge, according to the Star-Tribune, a local paper.
The coming days
The week ahead
Another attempt by Nicolas Sarkozy, the EU president, to resolve the stand-off with Russia
• THE French president, Nicolas Sarkozy, is scheduled to travel to Russia on Monday September 8th, in his latest attempt to push for a resolution to the stand-off in Georgia, where Russian forces remain. Mr Sarkozy, who holds the presidency of the European Union, is trying to get Russia to comply with a peace plan that he promoted in August. Russia's newly aggressive foreign policy is causing concern in Ukraine, too, where political infighting also threatens government instability. On Tuesday a summit between the EU and Ukraine is scheduled to take place.
For background, see article
• THE 13 members of OPEC, the oil-producers' cartel, gather on Tuesday September 9th to discuss whether to lower targets for their collective output. The price of a barrel of oil has slumped since a record of $147 in July and some analysts think that it could drop below $100 a barrel in the coming week, as demand slows in America and Europe and as Saudi Arabia pumps oil at a rate not seen since the early 1980s.
For background, see article
• WILL the world come to an end on Wednesday September 10th? On that day scientists working at the Large Hadron Collider at the European Organisation for Nuclear Research (CERN) are expected to begin an experiment to simulate conditions that were thought to exist moments after the “Big Bang”, which scientists believe created the universe 15 billion years ago. They will eventually send beams in different directions around a huge, circular, “collider” pipe. The collision may not happen until later this year.
For background, see article
• IF THE world still exists on Thursday September 11th, the two men vying to be the next president of America will speak at a summit in New York, marking the seventh anniversary of the al-Qaeda attacks on the city (and on Washington, DC). It is billed as a non-partisan event, but with a tight electoral race under way both Barack Obama and John McCain need to sound tough on the subject of how to tackle terrorism.
Sept. 7 (Bloomberg) -- The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.
``Our economy and our markets will not recover until the bulk of this housing correction is behind us,'' Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in Washington today. ``Fannie Mae and Freddie Mac are critical to turning the corner.''
The FHFA will take over Fannie and Freddie under a so- called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury can purchase up to $100 billion of a special class of stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.
The takeovers bring Fannie, formed after the Great Depression and spun off in 1968, and Freddie, created in 1970, back under the government's fold. It's the biggest step yet in officials' efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns.
Treasury Gets Stock
Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on its stake.
As a condition for the assistance, Fannie and Freddie eventually will have to reduce their holdings of mortgages and securities backed by home loans.
The portfolios ``shall not exceed $850 billion as of Dec. 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,'' the Treasury said. Fannie's portfolio was $758 billion at the end of July, and Freddie's was $798 billion.
Officials are aiming ``to prevent the mortgage market from falling apart,'' said former Federal Reserve Bank of St. Louis President William Poole. The Treasury's funds ``will be flowing in for quite a long time,'' Poole, a Bloomberg contributor, said on Bloomberg Radio.
Herbert Allison, 65, former chief executive officer of TIAA-Cref, will take over as Fannie's new CEO. David Moffett, 56, who was vice chairman of US Bancorp, will head Freddie, Lockhart said. They will work with existing management, he added.
Mudd, Syron Exit
Fannie CEO Daniel Mudd, 50, and Freddie CEO Richard Syron, 64, will serve in a transition period as consultants.
``Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth,'' President George W. Bush said today in a statement released by the White House.
``The actions taken today are temporary,'' Bush said. As the administration considers the companies' future role, ``it is critical that they not pose similar risks to our economy and to our financial system again.''
While common stockholders of Fannie and Freddie won't be eliminated under the conservatorships, they will be last in line for any claims, Paulson said. Preferred shareholders will be second in absorbing losses, he said.
`Restoration Plans'
Banks and insurance companies have typically purchased the two companies' preferred shares. The Federal Reserve and three other bank regulators said that they will work to ``develop capital restoration plans'' with the ``limited number'' of smaller institutions that hold Fannie and Freddie stock as a significant portion of their capital.
By ensuring that Fannie and Freddie maintain positive net worth, the Treasury will provide ``additional security'' to the owners of Fannie and Freddie bonds and ``additional confidence'' for the holders of their mortgage-backed securities, it said. The Treasury noted that Fannie and Freddie securities are held by central banks and ``investors around the world.''
Lockhart added that interest and principal payments will continue to be made on the companies' subordinated debt.
The government is taking an increasing role in financial markets, after the Fed six months ago provided $29 billion of financing to prevent Bear Stearns & Cos.'s collapse. Chairman Ben S. Bernanke praised today's action in a statement.
`Inherent Conflict'
The plan doesn't answer all of investors' questions about the companies' long-term prospects. It also doesn't address the question of whether the companies will be nationalized, privatized, or kept as government-sponsored enterprises that are shareholder owned. Paulson said that ``only Congress'' can tackle the ``inherent conflict'' of serving shareholders and a public mission.
``Keeping them alive is the wrong approach,'' said Peter Wallison, a fellow at the American Enterprise Institute in Washington and a former Treasury general counsel. ``They need to be sustained, they're essential to financing housing right now. But it doesn't mean that they have to be maintained as GSEs.''
Wallison added that if Fannie and Freddie return to profitability, ``then what the shareholders have is worth something.''
Lobbying Ban
Congress has long avoided making major changes to the two companies, which have had extensive lobbying operations. Lockhart said today that those operations will cease.
``All political activities -- including all lobbying -- will be halted immediately,'' Lockhart said. ``We will review the charitable activity.''
Democratic presidential nominee Barack Obama said today that ``some'' intervention was necessary to prevent a ``larger and deeper crisis,'' while adding that the ultimate resolution of the firms' status will need to be addressed.
Free-marked advocates such as former Fed Chairman Alan Greenspan and Richmond Fed President Jeffrey Lacker have called for the two companies to be split up and sold off.
``Debt holders still face uncertainty, especially regarding what happens in 2010 and what is the business plan going forward,'' said Eric Johnson, president of Carmel, Indiana-based 40/86 Advisors Inc., which manages $25 billion in fixed-income assets.
$5 Billion Purchase
Starting with a $5 billion purchase this month, the Treasury will buy new mortgage-backed securities from the two companies, in an effort ``to broaden access to mortgage funding for current and prospective homeowners,'' according to the Treasury.
The Treasury will hire independent asset managers to purchase and run the portfolio of mortgage-backed securities it will buy. ``There is no reason to expect taxpayer losses from this program, and it could produce gains,'' the department said.
For Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., today's announcement was good news.
``We own lots of mortgage-backed bonds, and I would expect on Monday and in the ensuing weeks for them to do very well,'' Gross said in a Bloomberg Radio interview. ``So yes, I'm smiling at the moment.''
Inflated Capital
Paulson's decision, taken after consulting with Bernanke, followed a review that found Washington-based Fannie and McLean, Virginia-based Freddie used accounting methods that inflated their capital, according to people with knowledge of the decision.
Paulson, 62, hired Morgan Stanley a month ago to probe the companies' finances. The investment bank concluded that the accounting, while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves, according to the people who declined to be identified because the findings were confidential.
Robert Scully, an adviser to Morgan Stanley CEO and Chairman John Mack, and Ruth Porat, head of global financial institutions, led a 39-person team at the investment bank that explored a range of alternatives for Fannie and Freddie.
Morgan Stanley, officials and regulators determined it was too risky for the companies to try to raise money themselves, because of the losses on many private capital injections in the past year, two people involved in the discussions said. They also deemed a Treasury capital infusion without a government takeover as too risky for taxpayers, the people said.
No End Date
The FHFA will aim to ``preserve and conserve'' the companies' assets and property and put them ``in a sound and solvent condition,'' according to a fact sheet distributed by the Treasury. There is ``no exact time frame'' for when the conservatorship will end, the statement said.
Fannie and Freddie own or guarantee almost half of the $12 trillion in U.S. home loans and the government had been leaning on the companies to help pull the economy out of the housing crisis.
Concern over the companies' capital pushed their borrowing costs to record levels over U.S. Treasuries, sent their common and preferred stocks tumbling and boosted mortgage rates. Fannie is down about 66 percent in New York Stock Exchange trading since the end of June. Freddie has fallen about 69 percent.
Paulson briefed Republican presidential candidate John McCain, Obama, and the Democratic and Republican leaders of the House and Senate. Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank and their Republican minority counterparts were also informed.
Congressional Reaction
``Paulson has threaded the needle just right by taking necessary action to stabilize U.S. financial markets while minimizing the liability for taxpayers,'' Democratic Senator Charles Schumer of New York, who heads the congressional Joint Economic Committee, said in a statement. ``This plan will be met with broad acceptance in Congress because it doesn't prejudge the ultimate fate of Fannie Mae and Freddie Mac.''
Other congressional statements indicated hearings are likely as soon as this week.
Fannie was created by the government in 1938 as part of President Franklin D. Roosevelt's New Deal. Freddie was chartered in 1970 to compete with Fannie.
As losses on the mortgages grew late last year, the companies recorded $14.9 billion in combined net losses, eating into their capital. Fannie raised $14.4 billion since November and Freddie sold $6 billion of preferred securities. Plans for a $5.5 billion sale were delayed as the company's fortunes sank.
Required By Regulator
Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie's capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show.
Fannie's market capitalization is now $7.6 billion, down from $38.9 billion at the end of last year. Freddie's has fallen to $3.3 billion, from $22 billion over the same period.
Bernanke participated in the meetings because the central bank was given a consultative role in overseeing Fannie's and Freddie's capital under legislation approved in July.
The FHFA was scheduled to release its assessment of the companies' capital levels as early as last week as part of a quarterly appraisal of their finances.
Sept. 8 (Bloomberg) -- The yen fell by the most in seven weeks against the euro and dropped versus the dollar on speculation the U.S. government's takeover of Fannie Mae and Freddie Mac prompted investors to buy higher-yielding assets.
The yen declined the most against the Australian and New Zealand dollars, two favorites of so-called carry trades, on speculation support for the two largest U.S. mortgage financiers will stem subprime losses. The dollar fell against the euro and British pound before reports this week on home and retail sales, which economists forecast will show declines.
``The yen is likely to weaken further,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``This is a big release of stress on the global financial system that will help improve risk appetite.''
The yen fell 1.4 percent to 155.78 per euro at 10:40 a.m. in Tokyo from 153.67 late in New York on Sept. 5. It declined to 108.32 versus the dollar from 107.73. The euro rose to $1.4389 from $1.4267. The pound advanced to $1.7887 from $1.7661. The yen may drop to 110 per dollar in the next two weeks, Fukaya forecast.
Against the Australian dollar, the yen fell 2.2 percent to 89.83 from 87.91 late in New York on Sept. 5. It declined 2.4 percent to 73.80 per New Zealand dollar from 72.04.
In carry trades investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 2 percent in the U.S., 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to carry trades is that currency moves erase profits.
Government Control
The U.S. government seized control of Fannie Mae and Freddie Mac yesterday after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.
The Treasury can buy as much as $100 billion of a special class of stock in each company as needed to maintain their positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.
Treasuries tumbled, causing the biggest increase in 10-year yields in almost two months. Japanese 10-year bond yields climbed toward a four-week high. Asian stocks rose from the lowest in two years and futures on the Standard & Poor's 500 Index jumped more than 2 percent.
Standard & Poor's said yesterday the rescue of Fannie and Freddie won't change its AAA rating for U.S. debt, its highest credit rating.
Risk Appetite
``The yen is likely to take a hit,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``A government bailout will certainly stabilize Freddie and Fannie and improve risk appetite for carry trades.''
The yen may decline to 109.20 versus the dollar today, he said.
Futures traders increased their bets that the euro will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 38,623 on Sept. 2, compared with net shorts of 33,778 a week earlier.
The dollar declined against the euro and the pound on speculation U.S. consumer spending will falter as the labor market weakens.
U.S. Economy
U.S. retail sales excluding cars and trucks dropped 0.2 percent in August, the first decline since February, according to the median projection in a Bloomberg News survey, after a 0.4 percent gain in July. The Commerce Department is scheduled to release the retail sales report on Sept. 12.
The U.S. lost more jobs than forecast in August and the unemployment rate climbed to a five-year high, data on Sept. 5 showed.
``The dollar still stands to weaken against major currencies,'' said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed bank. ``The U.S. economy is worsening. The Fed's benchmark rate is justified given the labor market outlook.''
The dollar may decline to $1.47 against the euro this month, he said.
Sept. 8 (Bloomberg) -- Asian stocks surged the most in eight months and U.S. futures jumped after the U.S. government seized control of Fannie Mae and Freddie Mac, shoring up global financial markets reeling from more than $500 billion in credit losses.
Mizuho Financial Group Inc. and Macquarie Group Ltd. rose more than 10 percent after the bailout of the two-biggest U.S. mortgage guarantors lowered credit risk. Toyota Motor Corp. led exporters higher with a 3.8 percent advance after the yen weakened as investors sought higher-yielding assets on speculation the move will help revive growth in the world's biggest economy.
``It draws a line under the recent problems,'' said Nader Naeimi, a Sydney-based senior investment strategist at AMP Capital Investors, which manages about $108 billion. ``It's very positive for the banking sector in particular, which has been beaten down quite badly.''
The MSCI Asia Pacific Index climbed 4.3 percent to 121.84 as of 10:55 a.m. in Tokyo, with financial companies accounting for almost half of that gain. The measure on Friday closed at its lowest level since June 13, 2006.
Japan's Nikkei 225 Stock Average rose 3.5 percent to 12,642.41 as Mizuho, the nation's second-largest listed bank, soared as much as 11 percent to 458,000 yen.
Taiwan's Taiex Index jumped 5.5 percent for the biggest gain in Asia on speculation the government may take action to boost stock prices and consumer spending. All Asian markets advanced.
More than $17 trillion in global equity value has been wiped out since October as the credit crisis and U.S. housing recession dragged economies worldwide. Investors had worried failures by Fannie and Freddie, which hold more than $1.5 trillion in assets and almost the same amount of debt, would spark further losses at financial institutions around the world.
Futures Jump
S&P 500 futures expiring in September climbed 2.6 percent to 1,273.80, the steepest advance since Aug. 5.
Macquarie, Australia's biggest investment bank which had lost 45 percent of its value this year to the end of last week, rose 8.9 percent to A$45.72. Woori Finance Holdings Co., which control's South Korea's second-largest bank, advanced 14 percent to 14,950 won, the steepest advance since July 21.
The cost to protect Asia-Pacific corporate bonds from default fell by the most in about five months, credit-default swaps show.
Nomura Holdings Inc., Japan's biggest investment bank, advanced 7.8 percent to 1,474 yen after the Yomiuri newspaper said on Sept. 6 the company may bid for a stake in Lehman Brothers Holdings Inc. Orix Corp., Japan's biggest leasing company, rallied 12 percent for the biggest gain in three years to 13,340, paring its loss for the year to 30 percent.
`Dogs' Rally
Fannie and Freddie, which make up almost half the U.S. home- loan market, were seized after the biggest surge in mortgage defaults in at least three decades, Treasury Secretary Henry Paulson said in Washington. Both fell more than 80 percent since the start of the year.
``If these issues are closer to being resolved, the dogs of the sector are likely to perform better in a recovery phase,'' said Don Williams, who manages $1.6 billion at Platypus Asset Management in Sydney.
Toyota climbed 3.8 percent to 4,930 yen. The world's No. 2 automaker also rose after the yen weakened against the dollar and euro. Samsung Electronics Co., the biggest computer-memory maker, added 2.7 percent to 534,000 won.
``The market likes less uncertainty and this takes care of that,'' said E. William Stone, who oversees $66 billion as chief investment strategist at PNC Wealth Management in Philadelphia. ``If this helps re-stabilize the housing situation it's got to be looked at as a positive.''
Origin Energy Ltd., Australia's biggest producer of gas from coal seams, gained 14 percent to A$17.80 after ConocoPhillips, the second-biggest U.S. oil refiner, agreed to pay as much as $8 billion to join a natural gas venture in Queensland.
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