tagged w/ Paulson Plan
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The J.E. Robert Cos. began in 1981 as a sleepy private real estate investment firm in Alexandria with a seemingly boring business aimed at helping federal agencies like the Federal Home Loan Bank sell off troubled real estate assets. Then the savings-and-loan crisis hit in the late-1980s. Plunging real estate values forced 747 savings institutions into insolvency. J.E. Robert moved quickly to capitalize on the meltdown, deploying a staff conversant in real estate and expert in the intricacies of unwinding troubled mortgage loans.
From 1991 through 1996, J.E. Robert and its partners acquired $10 billion in distressed real estate assets and mortgages from banks, insurance companies and the Resolution Trust Corp., which the U.S. government formed to help it liquidate the portfolios of failed savings-and-loan associations. The company earned billions for its founder, Joseph E. Robert Jr., and for its investors, be they wealthy individuals, endowments or foreign governments.
The J.E. Robert Cos. began in 1981 as a sleepy private real estate investment firm in... more
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Henry M. Paulson Jr. was in his corner office in the Treasury Department on Monday afternoon, too nervous to turn on his television, when his chief of staff poked his head into the Treasury secretary's office to tell him the stunning news playing out on Capitol Hill: The House had just defeated the Wall Street rescue plan that Paulson had helped craft.
Within minutes, Paulson was on his way across the street to the White House, his senior staff hustling to keep up, for a meeting in the Roosevelt Room with the administration's economic team. There was no time for pleasantries, and before everyone had taken their seats, the former Goldman Sachs chief began firing off options.
Should they push for an immediate vote in the Senate? Should the Democratic leaders be flashed a green light to put together a bill that they could pass on their own, without Republicans? Should they make small changes to win over the dozen or so votes they would need on a second try in the House?
Forty-five minutes into the meeting, they were joined by President Bush, who asked the one question no one had considered: If his plan is not working, what is Plan B?
Paulson looked at his boss, then delivered the answer he did not want to hear: There is no Plan B. The Treasury Department and the Federal Reserve had stretched their authorities to the limits, employing obscure powers never before used to keep their fingers in the dikes. The rescue package had to pass.
Yesterday, when the House reversed itself and approved the package by a 92-vote margin, there was little cause for celebration. Lawmakers had just taken one of the most painful and politically damaging votes of their lives. The stock market was sliding. Both presidential candidates had not only aligned themselves with an unpopular rescue plan and an unpopular president. They had actively worked for the bill's passage.
Many at Paulson's Treasury had already moved on to the next big news out of the financial markets: the sale of Wachovia Bank to Wells Fargo.
"There is no joy," said Rep. Sue Myrick (R-N.C.), a rock-ribbed conservative who switched her "no" vote to a "yes" yesterday, even though a Democratic surge in North Carolina is making her once-easy district look increasingly dicey. "I don't like the bill. I'm not going to defend the bill. . . . I had to do the right thing, even though, politically, it might kill me."
Henry M. Paulson Jr. was in his corner office in the Treasury Department on Monday... more
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With the political battle over the Bush administration's $700 billion financial rescue package at an end and the real work of rescuing the financial markets just beginning, all eyes are turning to Treasury Secretary Henry M. Paulson Jr.
The bill gave him unprecedented powers to shore up the ailing financial system. With few constraints, Paulson will make all the key decisions on who to hire, when to launch the program and perhaps most importantly how much the government will pay for troubled assets from ailing Wall Street firms. A misstep could mean hundreds of billions in losses for taxpayers or a cascade of failures for banks.
Speculation was rampant on Wall Street yesterday about who Treasury would hire to manage the assets that the government plans to buy. Industry sources say the department has asked leading Wall Street firms for feedback and that Legg Mason, Pimco, BlackRock and MKP Capital Management were recommended to Treasury.
These firms rose to the top of the list because of their expertise in mortgage-related assets. But hiring them as asset managers for the government would raise the potential for conflicts of interest, particularly because they would be managing the assets while also selling their own troubled securities to the government.
Treasury spokeswoman Michele Davis said the department plans to develop and publish guidance on "how to manage any conflicts." It is planning to put out a formal request for services Monday.
Besides hiring five to 10 asset managers, Paulson is seeking a top executive to oversee the program with the rank of assistant secretary of the Treasury as well as about two dozen bankers, lawyers and accountants.
Paulson urged Congress to pass the bailout plan quickly because credit markets were freezing up. Banks and investors were reluctant to make even overnight loans for fear that they would not get their money repaid. But the passage of the plan yesterday did not immediately ease the credit crunch.
Mohamed A. el-Erian, co-chief executive of the giant asset management firm Pimco, said that short-term credit trading for anyone other than the federal government remained at a "virtually nonexistent level."
"While constituting a necessary condition," he said, "the rescue package is not sufficient to radically counter the immediate disruptions."
Investors continued to pour money into Treasury bills, the banking equivalent closest to sticking money in a mattress, driving down the yield on short-term Treasuries to close to zero.
Paulson never claimed the bailout package would solve all of Wall Street's woes or prevent the economy from falling into a deep recession. Treasury officials even warned banking groups this week that firms may collapse before the program launches, which likely will take place in mid-November.
Well aware of the pressures on him, Paulson feels "the weight of the world on his shoulders," according to source close to him who talked to him recently and spoke on condition of anonymity because the conversation was private.
With the political battle over the Bush administration's $700 billion financial... more
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Sudeep Reddy writes an informative article for the Wall Street Journal discussing the $1 trillion cost of recent bailouts.
"That sum [$700 billion] amounts to about a quarter of the U.S. government's annual spending. It's more than the Pentagon's annual budget, more than the nation pays out each year in Social Security benefits and more than the federal government's cost for Medicare and Medicaid.
Members of Congress then asked the questions that continue to be on many Americans' minds:
* How will the U.S. pay for this program and the previously announced aid to Bear Stearns, Fannie Mae, Freddie Mac and American International Group?
(The Washington Mutual seizure doesn't add to the U.S. tab because the bulk of WaMu's operations are being taken over by J.P. Morgan Chase without cost to the Federal Deposit Insurance Corp.)
* And what will these efforts end up costing us all in taxes?
(Part of the answer is known today but other aspects -- including the ultimate tab for these rescue programs -- may not be clear for years or even decades.)
$1 Trillion Commitment
The total government commitment so far in its current and proposed bailouts: $1 trillion. But most of that money would give the government a claim on assets -- such as home mortgages and insurance operations -- that have actual value...
Biggest U.S. Bailout
In the rescue plan Congress was negotiating last week -- at $700 billion the biggest bailout in U.S. history -- a key goal is to remove much of those soured mortgage securities from banks' books, possibly through an auction system.
The government -- taxpayers, essentially -- would then hold those assets until they can be sold off in a more normal market once the economy and housing market recover.
A key point: The $700 billion would come from selling debt to the public, raising the total federal debt, which is approaching $10 trillion now.
But it's not direct government spending, which shows up as part of the U.S. budget. If the mortgage debt loses value over time, however, the U.S. would have to record those losses as spending. That could increase the budget deficit, which eventually must be offset by higher taxes or lower spending.
So taxpayers face the risk of losing some part of the $700 billion -- but could also turn a profit if the U.S. ends up selling those holdings for more than the purchase price...
With all these rescue efforts, even if the U.S. government profits after its expenses, there's still a broader unquantifiable cost: whether bailing out financial institutions and markets will create expectations for more taxpayer support down the road when Wall Street or big businesses get into trouble.
Government officials acknowledge that risk. But they say taxpayers are being helped in the long run because stronger financial markets will translate into more economic growth and higher tax revenue."
Full article at link...Sudeep Reddy writes an informative article for the Wall Street Journal discussing the... more
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"More than 150 U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing a $700 billion financial market rescue plan until it can be studied more closely.
In a Sept. 24 letter to congressional leaders, 166 academic economists said they oppose Treasury Secretary Henry Paulson's plan because it's a 'subsidy' for business, it's ambiguous and it may have adverse market consequences in the long term. They also expressed alarm at the haste of lawmakers and the Bush administration to pass legislation.
'It doesn't seem to me that a lot decisions that we're going to have to live with for a long time have to be made by Friday,' said Robert Lucas, a University of Chicago economist and 1995 Nobel Prize winner who signed the letter. 'The situation may get urgent, but it's not urgent right now. Right now it's a financial sector problem.'
The economists who signed the letter represent various disciplines, including macroeconomics, microeconomics, behavioral and information economics, and game theory. They also span the political spectrum, from liberal to conservative to libertarian.
Some lawmakers are already citing the letter as reason not to endorse Paulson's plan. Senator Richard Shelby, a Republican from Alabama, said yesterday he has 'five pages of the leading economists in America that wrote to me and the leadership saying the Paulson plan is a bad plan. It will not solve problems. It will create more problems.'
Negotiations over the plan stalled yesterday after Republicans in the U.S. House of Representatives undercut the Bush administration and left it to congressional leaders to hammer out a compromise.
'How Capitalism Works'
The letter, initially conceived by economists at the University of Chicago, was signed by professors from dozens of American universities and several outside the U.S.
David I. Levine, a professor of economics at University of California-Berkeley, says the current plan being discussed has the wrong structure.
'The structure is designed for the Treasury to be the first line of defense,' said Levine, who studies organizations and incentives. 'A whole lot of people made money supposedly by putting their capital at risk, and those are supposed to be the first line of defense, that's how capitalism works.'
Jeffrey Miron, a Harvard University professor and self- described libertarian, objects to what he says is 'a stunningly broad, aggressive government intervention without appropriate precedents.'
He advocates allowing the normal process of business failure and bankruptcy to run its course. 'It's just nothing like the calamity the administration is making it out to be,' he said.
Unprecedented Power
Erik Brynjolfsson, of the Massachusetts Institute of Technology's Sloan School, said his main objection 'is the breathtaking amount of unchecked discretion it gives to the Secretary of the Treasury. It is unprecedented in a modern democracy.'
Advocates for a rescue plan this week point to a seizing up of credit markets, reflected in elevated inter-bank lending rates, as reason for action. Some economists are unconvinced.
'I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,' said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory. ""More than 150 U.S. economists, including three Nobel Prize winners, urged... more
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