Detroit demonstration in the financial district on Sept. 25, 2008. The march opposed the trillion dollar bailout of Wall Street. (Photo: Alan Pollock).
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New Bank Bailout Could Cost $2 Trillion
By DEBORAH SOLOMON, DAVID ENRICH and JON HILSENRATH
Wall Street Journal
WASHINGTON -- Government officials seeking to revamp the U.S. financial bailout have discussed spending another $1 trillion to $2 trillion to help restore banks to health, according to people familiar with the matter.
President Barack Obama's new administration is wrestling with how to stem the continuing loss of confidence in the financial system, as it divides up the remaining $350 billion from the $700 billion Troubled Asset Relief Program launched last fall. The potential size of rescue efforts being discussed suggests the administration may need to ask Congress for more funds. Some of the remaining $350 billion of TARP funds has already been earmarked for other efforts, including aid to auto makers and to homeowners facing foreclosure.
The administration, which could announce its plans within days, hasn't yet made a determination on the final shape of its new proposal, and the exact details could change. Among the issues officials are wrestling with: How to fix damaged financial institutions without ending up owning them.
The aim is to encourage banks to begin lending again and investors to put private capital back into financial institutions. The administration is expected to take a series of steps, including relieving banks of bad loans and distressed securities. The so-called "bad bank" that would buy these assets could be seeded with $100 billion to $200 billion from the TARP funds, with the rest of the money -- as much as $1 trillion to $2 trillion -- raised by selling government-backed debt or borrowing from the Federal Reserve.
The administration is also seeking more effective ways to pump money into banks, and is considering buying common shares in the banks. Government purchases so far have been of preferred shares, in an effort to both protect taxpayers and avoid diluting existing shareholders' stakes.
A Treasury spokeswoman said that "while lots of options are on the table, there are no final decisions" on what she described as a "comprehensive plan." She added: "The president has made it clear that he'll do whatever it takes to stabilize our financial system so that we can get credit flowing again to families and businesses."
Treasury Secretary Timothy Geithner said Wednesday that he wants to avoid nationalizing banks if possible. "We'd like to do our best to preserve that system," Mr. Geithner said. But given the weakened state of the banking industry, with bank share prices low and their capital needs high, economists say the government probably can't avoid owning at least some banks for a temporary period.
Stock-market investors have grown confident that the bailout plan will help the banks without wiping out their investments. Just over a week ago, investors dumped bank stocks, sending shares of some of the most vulnerable down to their lowest levels of the financial crisis. But as fears faded that the banks would be nationalized, financial stocks have rallied, and soared nearly 13% on Wednesday.
In one of the steps under discussion, the government may shift how it injects money into banks, choosing to buy common shares. Bolstering banks' common equity is important because when a bank takes a loss, it has to subtract that amount from the value of its common equity. As losses mount, investors increasingly believe banks need to find ways to bolster this first line of defense on their balance sheets.
But buying common shares raises the likelihood that weaker banks will become largely government-owned. Bank share prices are so low that any sizable government investment in a bank would give the U.S. effective control of it.
The best approach is to have banks "under pretty heavy government control as briefly as possible -- basically long enough to take off the bad assets and recapitalize -- and sell the back to full private control as quickly as possible," said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington.
Another way being considered for the government to inject money into banks is the purchase of convertible bonds -- in which the government would be paid interest now but have the option to get common equity later. That would give banks a chance to pay back the bonds as they recover, and avoid government control. Some critics of this approach say it would do little to solve the banks' current shortage of common equity.
The government is also likely to create a "bad bank" that would buy distressed assets from firms, helping them to avoid more damaging write-offs. The tricky question is figuring out how much the government should pay for these assets. That issue helped scuttle the Bush administration's plan to buy distressed assets. If the U.S. pays too high a price for the assets, it would essentially be shortchanging taxpayers. But if it pays too little, banks would have to take further losses.
Another option under discussion is insuring some of the assets against further losses. That is the route the U.S. has taken in its rescues of Citigroup Inc. and Bank of America Corp. Insuring the assets would limit the amount the banks could lose but wouldn't remove the securities and loans from their books. The government would cover any losses in the assets' value beyond agreed-upon levels.
Charles Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia University, said that approach is preferable since it leaves the assets in private hands while giving investors confidence to put money into the institution.
"You have to eliminate prospective stockholders' concern that there's a bottomless hole at the banks," Mr. Calomiris said. "Getting them off the books solves that problem, but insuring against the downside would have a huge positive effect and might end up costing nothing."
Write to Deborah Solomon at deborah.solomon@wsj.com, David Enrich at david.enrich@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com
New bank bailout could cost up to $2 trillion: report
(Reuters) – Government officials seeking to revamp the financial bailout have discussed spending another $1 trillion to $2 trillion to help restore banks to health, the Wall Street Journal said, citing people familiar with the matter.
The paper said the Barack Obama administration could announce its plans within days but has not yet determined the final shape of its new proposal, and the exact details could change.
The administration is also seeking more effective ways to pump money into banks, and is considering buying common shares in the banks, according to the paper.
A Treasury spokeswoman told the paper that "while lots of options are on the table, there are no final decisions" on what she described as a "comprehensive plan."
"The president has made it clear that he'll do whatever it takes to stabilize our financial system so that we can get credit flowing again to families and businesses," she told the paper.
The U.S. Treasury has already disbursed nearly $294 billion from the government $700 billion Troubled Asset Relief Program, or TARP to shore up the banking system and faltering U.S. automakers. Billions more have been pledged for particular uses.
A Treasury spokeswoman did not immediately respond to a Reuters email seeking comment that was sent after normal business hours.
The WSJ said another way being considered for the government to inject money into banks is the purchase of convertible bonds, in which the government would be paid interest now but have the option to get common equity later.
(Reporting by Ajay Kamalakaran in Bangalore; Editing by Anshuman Daga)
Wall St mood turns on glum economic data
By Alistair Gray in New York
January 29 2009 14:12
A glut of economic data that was even worse than expected was set to conspire with a fresh batch of downbeat earnings and help snap Wall Street stocks’ four-session winning streak.
Market futures extended their losses on Thursday morning after US Labor Department figures showed continuing claims for unemployment benefit rose to 4.78m in the week ended January 17 – the highest since records began in 1967.
Initial jobless claims last week also rose more than forecast, to 589,000.
Meanwhile, a Commerce Department reading of durable goods orders showed a wider-than-expected drop of 2.6 per cent last month. That followed a downwardly revised fall of 3.7 per cent in the prior month.
Less than an hour before the opening bell, S&P 500 futures were down 9.7 points at 861.80, Nasdaq 100 futures were down 8 points at 1,223.2, while futures for the Dow Jones Industrial Average were down 77 points at 8,245.
The futures were also lower on a fair-value basis, which takes into account interest rates, dividends and time to expiration on the contract. Futures markets do not necessarily indicate accurately the market’s direction after the opening bell.
Investors were set to take profits following the longest run of gains for the S&P since the government rescued Citigroup last November.
In the previous session, US banking stocks enjoyed a spectacular rally on hopes that Washington could set up a so-called bad bank to take on the toxic assets that lie at the heart of the financial crisis.
However, investors had lingering concerns that the proposed $825bn economic stimulus may face political wrangling that would hamper speedy implementation.
“Certainly no one will be under the illusion that this is the turning point for the economy,” said Ian Griffiths, dealer at CMC Markets. “The bad bank bounce from yesterday looks set to be partly eroded.”
The energy sector could come under pressure on Thursday as oil prices were lower early in New York. US crude prices were down $1.04 at $41.12 a barrel.
Among oil stocks, Exxon Mobil lost 1.8 per cent to $77.85 in pre-market trade after Goldman Sachs removed the company from its Americas ‘buy’ list.
Meanwhile, Ford edged 1 per cent higher to $2.05 ahead of the bell in spite of disclosing a worse-than-expected fourth quarter loss. The group nevertheless said it would not need a bridge loan to fund its restructuring.
In the consumer discretionary sector, Starbucks fell 4.2 per cent to $9.25 after the coffee chain’s profit fell more than expected. The group plans to close 300 cafes and cut 6,700 jobs.
3M, the diversified manufacturer that makes Scotch tape, could be a bright spot. The shares were broadly flat ahead of the bell after unveiling a fall in profit that was not as much as expected, along with plans for a 30 per cent cut in capital expenditure.
European stocks were lower ahead of the open on Wall Street. The FTSE Eurofirst 300 index fell 1.3 per cent to 800.44. Asian equity markets closed mainly higher, while Hong Kong shares gained nearly five per cent.
Bond yields were higher. The yields on the two-year and 10-year Treasury notes were 1 basis points higher at 0.834 per cent and 2.677 per cent, respectively.
The dollar rose 0.2 per cent to $1.4206 against the pound, rose 0.8 per cent to $1.3055 against the euro and climbed 0.3 per cent to SFr1.1547 against the Swiss franc. However, the greenback was lower against the Yen.
Gold was trading $10.70 lower at $879.30 per troy ounce.
Copyright The Financial Times Limited 2009
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