Post by psychecc on Oct 10, 2008 15:00:22 GMT -6
Link to full article follows.
Radical Measures May Be In The Wings
Posted By: Albert Bozzo | Senior Features Editor
CNBC.com | 10 Oct 2008 | 12:33 PM ET
As the financial crisis threatens to spiral out of control, Treasury Secretary Henry Paulson is prepared to take extraordinary steps through the extensive authority granted to him under emergency rescue legislation.
With the legislation’s main mechanism—an auction system to purchase bad mortgage-based securities—still weeks away from implementation, Paulson is now expediting plans to inject capital into banks, CNBC has learned.
According to senior government officials, the plan is to offer a term sheet, offering capital injections to all banks. An announcement won't happen for several days.
....
“I don't wish to spread alarm on the line people but the big issue confronting the market is I'm afraid the health and sustainability of Morgan Stanley and Goldman Sachs ," Hugh Hendry, Partner and CIO at Eclectica, told CNBC early Friday. "It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend," he add.
The Emergency Economic Stabilization Act of 2008’s vague language gives Paulson almost unlimited power to intervene and leaves much up to interpretation.
In that context, some say cash injections could apply to non-depository institutuons like investment banks, insurers and hedge funds.
“He’s free to just strike deals, to do special deals,” says Lawrence White, a former White House economist and savings and loan regulator, who adds Congress was aware of the powers being given to Paulson and thus pressed hard for an oversight board.
Like the auction process, however, that board has yet to be set up, and with developments in the financial markets moving much faster than the Washington bureaucracy it might not be long before Paulson takes action.
Indeed, on Thursday Treasury indicated it would take action by the end of the month. In a brief speech on Friday, President Bush mentioned the cash injections and promised the department would move quickly.
Independent bank analyst Bert Ely, who says he’s read the new law closely, sees no such specific authority for the Treasury in the EEA. "Presumably they have the authority some place—in this legislation or otherwise," he adds.
A staffer in the House Financial Services Committee says Congress was aware that the EEA would authorize the Treasury Secretary to make cash injections separate to the auction process.
....
(Calls Thursday to the office of Sen. Christopher Dodd, who chairs the Senate Finance Committee, and that of Sen. Charles Schumer, a vocal member of the panel, were either not answered or failed to yield comment. Sen. Richard Shelby, the Ranking Republican on the committee, who opposed the bill, had no comment.)
“I've got to think they have that figured out, to interpret the legislation broadly enough that they can do it," says Ely.
A government move to prop up an investment bank-turned bank-holding company, such as Morgan or Goldman is all the more likely given the growing consensus that says Paulson and Federal Reserve Chairman Ben Bernanke erred in not rescuing Lehman Brothers three weeks ago, a date which happens to coincide with the beginning of the market’s deep descent. psychecc: [They're kidding, right?]
Pressure has been mounting on Morgan Stanley for days now, amid growing speculation Japan's Mitsubishi UFJ will not proceed with plans to purchase a major stake. Goldman shares, in contrast, have held up relatively well compared to the broader market.
In publicly acknowledging that it is "seriously considering" capital injections Thursday, the Treasury is recognizing it “might have to do something different,” says Dean Baker, co-director of the Center for Economic And Policy Research.
“In a sense, they are also following the markets,” adds Baker. “There was no burst of relief last week when the bill was passed. People were not impressed. He's [Paulson] got to take that seriously.” psychecc:
In his news conference Wednesday, Paulson said the “primary motivation” of the government’s efforts was to lead to the “recapitalization” of the financial services industry, but he avoided outlining what circumstances would determine whether institutions would be allowed to fail or the government would step in to save them. He also declined to comment on whether he would consider a bank nationalization plan, such as the $77-billion one announced by the UK.
Bank nationalization would be a more extraordinary move for the US, but in a recent interview former FDIC Chairman William Isaac provided some rare insight into the matter. He said that during the Latin American debt crisis of the 1980s when major money center banks were facing possible loan payment defaults by sovereign governments, the US “had a contingency plan in place to nationalize [the banks].”
“That's always going to be the answer," Isaac explained.
Though deatils of the Treasury's term-sheet plan are just beginning to emerge, it is by no means a simple undertaking. There are some 8,400 banks and savings and loans in the country with government-insured deposits.
There’s also a sense that the concept of moral hazard may have become something of a luxury item in the current meltdown. psychecc: [And that guarantees a repeat of the same bad behavior.]
....
www.cnbc.com/id/27114651/
Radical Measures May Be In The Wings
Posted By: Albert Bozzo | Senior Features Editor
CNBC.com | 10 Oct 2008 | 12:33 PM ET
As the financial crisis threatens to spiral out of control, Treasury Secretary Henry Paulson is prepared to take extraordinary steps through the extensive authority granted to him under emergency rescue legislation.
With the legislation’s main mechanism—an auction system to purchase bad mortgage-based securities—still weeks away from implementation, Paulson is now expediting plans to inject capital into banks, CNBC has learned.
According to senior government officials, the plan is to offer a term sheet, offering capital injections to all banks. An announcement won't happen for several days.
....
“I don't wish to spread alarm on the line people but the big issue confronting the market is I'm afraid the health and sustainability of Morgan Stanley and Goldman Sachs ," Hugh Hendry, Partner and CIO at Eclectica, told CNBC early Friday. "It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend," he add.
The Emergency Economic Stabilization Act of 2008’s vague language gives Paulson almost unlimited power to intervene and leaves much up to interpretation.
In that context, some say cash injections could apply to non-depository institutuons like investment banks, insurers and hedge funds.
“He’s free to just strike deals, to do special deals,” says Lawrence White, a former White House economist and savings and loan regulator, who adds Congress was aware of the powers being given to Paulson and thus pressed hard for an oversight board.
Like the auction process, however, that board has yet to be set up, and with developments in the financial markets moving much faster than the Washington bureaucracy it might not be long before Paulson takes action.
Indeed, on Thursday Treasury indicated it would take action by the end of the month. In a brief speech on Friday, President Bush mentioned the cash injections and promised the department would move quickly.
Independent bank analyst Bert Ely, who says he’s read the new law closely, sees no such specific authority for the Treasury in the EEA. "Presumably they have the authority some place—in this legislation or otherwise," he adds.
A staffer in the House Financial Services Committee says Congress was aware that the EEA would authorize the Treasury Secretary to make cash injections separate to the auction process.
....
(Calls Thursday to the office of Sen. Christopher Dodd, who chairs the Senate Finance Committee, and that of Sen. Charles Schumer, a vocal member of the panel, were either not answered or failed to yield comment. Sen. Richard Shelby, the Ranking Republican on the committee, who opposed the bill, had no comment.)
“I've got to think they have that figured out, to interpret the legislation broadly enough that they can do it," says Ely.
A government move to prop up an investment bank-turned bank-holding company, such as Morgan or Goldman is all the more likely given the growing consensus that says Paulson and Federal Reserve Chairman Ben Bernanke erred in not rescuing Lehman Brothers three weeks ago, a date which happens to coincide with the beginning of the market’s deep descent. psychecc: [They're kidding, right?]
Pressure has been mounting on Morgan Stanley for days now, amid growing speculation Japan's Mitsubishi UFJ will not proceed with plans to purchase a major stake. Goldman shares, in contrast, have held up relatively well compared to the broader market.
In publicly acknowledging that it is "seriously considering" capital injections Thursday, the Treasury is recognizing it “might have to do something different,” says Dean Baker, co-director of the Center for Economic And Policy Research.
“In a sense, they are also following the markets,” adds Baker. “There was no burst of relief last week when the bill was passed. People were not impressed. He's [Paulson] got to take that seriously.” psychecc:
In his news conference Wednesday, Paulson said the “primary motivation” of the government’s efforts was to lead to the “recapitalization” of the financial services industry, but he avoided outlining what circumstances would determine whether institutions would be allowed to fail or the government would step in to save them. He also declined to comment on whether he would consider a bank nationalization plan, such as the $77-billion one announced by the UK.
Bank nationalization would be a more extraordinary move for the US, but in a recent interview former FDIC Chairman William Isaac provided some rare insight into the matter. He said that during the Latin American debt crisis of the 1980s when major money center banks were facing possible loan payment defaults by sovereign governments, the US “had a contingency plan in place to nationalize [the banks].”
“That's always going to be the answer," Isaac explained.
Though deatils of the Treasury's term-sheet plan are just beginning to emerge, it is by no means a simple undertaking. There are some 8,400 banks and savings and loans in the country with government-insured deposits.
There’s also a sense that the concept of moral hazard may have become something of a luxury item in the current meltdown. psychecc: [And that guarantees a repeat of the same bad behavior.]
....
www.cnbc.com/id/27114651/