by Calculated Risk on 9/24/2008 09:32:00 PM

From the WSJ: Bush Addresses Bailout Plan

President George W. Bush on Wednesday warned Americans and legislators reluctant to pass a historic financial rescue plan that failing to act fast risks wiping out retirement savings, rising foreclosures, lost jobs, closed business and "a long and painful recession."

From the NY Times: President Issues Warning to Americans

From the WaPo: Bush: 'Our Entire Economy Is in Danger'

Bush painted a grim picture view of the future if Congress doesn't act, but he really didn't address how the plan would work. Bush did comment that the plan was to buy assets "at the current low price", seemingly contradicting the comments from Bernanke and Paulson earlier today that they would buy at above the current "fire sale" prices.

I'm not sure if this speech will motivate people to call their representatives, but it might motivate people that haven't been paying attention to say: "Wow, this is bad. Let's make sure our money is safe, and watch our expenditures." And that could lead to a deeper recession.

by Calculated Risk on 9/24/2008 08:36:00 PM

President Bush will speak on the financial crisis and Paulson bailout plan at 9 PM ET. The speech is expected to run 12 to 14 minutes according to the WSJ.

The speech will be on (C-SPAN2) for those that want to watch online. Here is the C-SPAN live video.

And on CNBC. Here is the live video from CNBC.

Discussion in the comments.

by Calculated Risk on 9/24/2008 07:01:00 PM

From MarketWatch: Fitch cuts WaMu long-term issuer default rating to junk

Is it Friday yet?

by Calculated Risk on 9/24/2008 05:27:00 PM

[I]sn’t it bizarre to have officials who miscalled so much ... confidently declaring that they know better than the market what a broad class of securities is worth?
Professor Krugman, Sept 24, 2008

Here are clips of Paulson, Bernanke, Bush and presidential economic advisor Edward Lazear from 2007:

by Calculated Risk on 9/24/2008 03:56:00 PM

From Professor Krugman: A $700 billion slap in the face

[L]et’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership.

That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.

But now Paulson and Bernanke are proposing, very nearly, to do the opposite: they want to buy bad paper from everyone, not just institutions in trouble, while taking no ownership. In fact, they’ve said that they don’t want equity warrants precisely because they would lead financial institutions that aren’t in trouble to stay away. So we’re talking about a bailout specifically designed to funnel money to those who don’t need it.

It took four days before P&B offered any explanation whatsoever of their logic. But as of now, it seems that the argument runs like this: mortgage-related assets are currently being sold at “fire-sale” prices, which don’t reflect their true, “hold to maturity” value; we’re going to pay true value — and that will make everyone’s balance sheet look better and restore confidence to the markets.

As I said, this is really a giant version of the slap-in-the-face theory: markets are getting hysterical, and the feds can calm them down by buying when everyone else is selling.

There is much more, but this point can't be emphasized enough:

And isn’t it bizarre to have officials who miscalled so much — “All the signs I look at,” declared Paulson in April 2007, show “the housing market is at or near a bottom” — confidently declaring that they know better than the market what a broad class of securities is worth?
emphasis added

If these are "fire sale" prices because of impending distress, then shouldn't the government be stepping in and taking temporary ownership? Or at the least a percentage of ownership while making an investment to increase capital, like with the Reconstruction Finance Corporation (RFC) during the Depression?

Note: the RFC is considered by most economists to have been very successful.

by Calculated Risk on 9/24/2008 02:24:00 PM

For those that want to watch online, here is the C-Span live video.

And here is a live video from CNBC.

Discussion in the comments.

by Calculated Risk on 9/24/2008 01:51:00 PM

From AP: Bush to address nation tonight on economy woes

But what about contingent shares, oversight, and transparency?

UPDATE: CNBC reports: Treasury Denies Report of Deal on Capping CEO Pay

by Calculated Risk on 9/24/2008 01:16:00 PM

From the NY Times: Anxious Depositors Withdraw Cash From Asian Bank (hat tip Dave B)

Throngs of depositors lined up outside the headquarters and branches of the Bank of East Asia here on Wednesday to withdraw their money, underlining widespread anxiety in Asia that Wall Street’s recent difficulties might spread across the Pacific.

Check out the photo. It looks like the earlier bank runs at Northern Rock and IndyMac.

by Calculated Risk on 9/24/2008 01:02:00 PM

I listened to Chairman Bernanke's testimony this morning. It is clear the goal is to recapitalize the banks, and Dr. Bernanke implied this would happen either by paying more than current book value (with the banks taking write-ups) or by building confidence in private investors after the toxic securities are bought by the taxpayers.

Bernanke went on to say that private investors might not be interested in investing if there were contingent shares outstanding - because they would be afraid of dilution.

From Bloomberg: Paulson, Bernanke Put Bank Aid Ahead of Best Deal

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke have signaled that their priority is shoring up the nation's banks even if it means they don't get taxpayers the cheapest prices for the devalued assets the government buys.

``I am not advocating that the government intentionally overpay,'' Bernanke told the Joint Economic Committee today, in response to a question from U.S. Rep. Jim Saxton, a New Jersey Republican.
...
Senate Banking Committee Chairman Christopher Dodd has proposed that the Treasury potentially receive equity stakes in some companies that sell assets to the government. The stakes would ``vest'' in an amount equal to the 125 percent of the dollar value of the loss realized by the Treasury on the sale of the assets.

That type of ``loss participation'' proposal would endanger companies' ability to raise private capital afterwards, Jeffrey Rosenberg, head of credit strategy research at Bank of America Corp. in New York, wrote in a report yesterday.

And if the program was changed to an RFC type recapitalization (as opposed to buying toxic assets), then most lenders wouldn't participate until they were at death's door.

What a mess.

And a final point, many people are saying the government can only lose a portion of the $700 billion because there will be offsetting assets. This is true in the Fannie and Freddie conservatorship (the mortgage assets mostly offset the debt of Fannie and Freddie), but it is not true here. Although Paulson and Bernanke are talking about hold-to-maturity prices, they are also talking about both buying and selling securities. A little math will show that if you take a loss (say 30%) on each transaction, it doesn't take many transaction to lose most of the entire $700 billion.

by Calculated Risk on 9/24/2008 11:51:00 AM

From MarketWatch:

[S&P] ... lowered Washington Mutual Inc.'s counterparty credit rating to "poor quality" of CCC/C from BB-/B. "The downgrade was due to the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors," said Victoria Wagner, an S&P credit analyst.
emphasis added

Is it Friday yet?