Stocks soar as investors look to gov't rescue plan

NF Reporter · 09-19-2008, 04:20 PM

AP - Wall Street has just had another huge rally, with stocks soaring as investors stormed back into the market following a government plan to restore calm to the financial system.

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waltky · 09-19-2008, 06:07 PM

Granny says, "Cut to the chase - what's it gonna cost us?...

Bailout cost: higher than you think
September 19, 2008: Intervention buoys the financial sector at a time when consolidation is what the economy needs.

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Henry Paulson and Ben Bernanke have saved us, for now, from a market meltdown - but at the cost of allowing the folks who caused the current crisis to keep ducking reality. In the long run, guess who gets to bear that cost?

The Treasury secretary and Federal Reserve chairman have spent September dashing off blank check after blank check in a bid to quell turbulent markets. Since Sept. 5, the feds have pledged $200 billion to shore up mortgage giants Fannie Mae and Freddie Mac, $85 billion to prop up insurer AIG, and $50 billion to guarantee money-market funds.

Then there are the untold sums the U.S. might spend under the plan Paulson unveiled Friday to set up a bad bank to relieve institutions of their troubled mortgage assets. And let's not forget the hundreds of billions the Fed has poured into the markets in the name of maintaining liquidity. Even in a U.S. economy that produces $14 trillion worth of goods and services a year, that's a lot of cash. Spending all that money, sooner or later, will intensify long-standing questions about the nation's fiscal health, possibly at the expense of another drop in the value of the dollar.

"We're going to be sorting this out for years," says Howard Simons, a strategist at Bianco Research in Chicago who questions the blitz of taxpayer spending on programs that haven't even been debated in Congress. Ultimately, what could prove to be the most expensive aspect of the bailout spree is the message the government is sending to firms in which the market has lost confidence. Prudent management, it seems, will be punished, while the status quo - however unhealthy - must be maintained at all costs.

The strong stock-market rally of the past two days aside, intervention that fails to foster a shakeout of weaker firms will only delay the reckoning that must occur before a sustainable economic recovery can take shape. "We continue to believe that the financial sector is in need of massive consolidation because the sector simply has too much lending capacity left over from the credit bubble," Merrill Lynch investment strategist Rich Bernstein writes Friday. "History shows well that consolidation is the primary driver of post-bubble economies."

The upside to down

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Rescue cost: Hundreds of billions
September 19, 2008: Washington unveils sweeping efforts to save financial system. Bottom line will depend on what Uncle Sam pays for toxic assets.

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Treasury Secretary Henry Paulson on Friday didn't mince words when it came to the cost of his latest proposal to stem the credit crisis. "We're talking hundreds of billions of dollars - this needs to be big enough to make a real difference and get at the heart of the problem," he said. "This is the way we stabilize the system." Paulson, speaking at a brief press conference in Washington, offered few details on his plan to help banks offload their toxic mortgage assets. Treasury is drafting a legislative proposal for lawmakers to consider this weekend. The speculation is that the Treasury will help banks clear their balance sheets of illiquid mortgage assets by buying them at a discount.

One way the plan could work is for the Treasury to make the purchases through a bidding process. Companies that want to offload their hard-to-sell assets from their balance sheets would bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins. The government would then be able to sell the assets back into the market when it wanted. The idea is that the government would buy at below-market rates and sell for a gain when the housing market recovers.

"The government could make a profit, a substantial profit," said Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm. This optimistic scenario hinges not only on a housing recovery but on how big a discount the government gets when it buys banks' toxic mortgage assets to begin with. The problem is that the assets have proven extremely difficult to value as the demand for them has disappeared. "The pricing mechanism is going to be central," Seiberg said.

On Friday, Sen. Richard Shelby, R-Ala., the ranking member on the Senate Banking Committee, told CNNMoney.com that the latest plan from Treasury could cost up to $500 billion. Awaiting details on the plan from Treasury, Shelby said, "I think this is too big to just accept ... without understanding who pays." If he's right about the $500 billion, the headline figure on the government's attempts to stem the credit crisis hits $1.3 trillion. That includes all the loans, investments and new programs committed by the Federal Reserve and Treasury this year.

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waltky · 09-20-2008, 03:03 PM

This thing just keeps gettin' bigger...

Okay, that brings us up to $1.314 trillion. Next item?
September 20, 2008 - The Treasury Department has asked Congress for permission to spend $700 billion buying up unloved mortgage securities.

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Add that to $200 billion pledged to Fannie Mae and Freddie Mac, that $85 billion loan to AIG, and $29 billion in Bear Stearns junk still stuck on the Federal Reserve's books, and you get a price tag of $1.014 trillion. Throw in up to $300 million in mortgage guarantees contained in the housing bill passed over the summer, and you're up to $1.314 trillion.

It's a staggering number--almost half what the U.S. government spent in total last year. And it certainly makes all those who've been predicting a trillion-dollar bailout for a while, like Nouriel Roubini and Charles Morris, look pretty smart. (Somewhat alarmingly, Morris is planning to update the title of his book The Trillion Dollar Meltdown to The Two Trillion Dollar Meltdown for the paperback next year.)

But does it mean we taxpayers are really out $1.3 trillion? No. First of all, they're not necessarily going to spend all that money--the $300 trillion in mortgage guarantees in particular vastly exaggerates the likely outlay. And a lot of the money they spend will eventually be recouped--what they're buying has some value, after all. What this does mean is that taxpayers are taking on a huge amount of risk, mainly because nobody else is willing to take on any right now. What I still can't figure out is how Treasury hopes to structure the bailout so there's at least a chance of getting a fair return on that risk-taking.

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Forget Wall Street. What about the rest of us?
September 20, 2008 - Ethan Harris, the chief U.S. economist at bankrupt Lehman Brothers, says it's been "the most tumultuous two weeks of my personal and professional life."

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Even on Friday, with the tumult settled somewhat by Barclays' purchase of Lehman's core business and Hank Paulson's plans to purchase the American financial system, things were still kind of weird: A Japanese TV crew was filming Harris as we talked on the phone. And next week, as Barclays takes over at Lehman, he gets to find out--or at least start to find out--if he still has a job.

For Harris and everybody else on Wall Street, the gravity of this financial near-meltdown is pretty clear. It understandably all remains something of a puzzle to a lot of other people. The New York Times reported that members of Congress were stunned into silence by the dire picture painted by Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke of what would happen if they didn't create an agency to take bad debts off bank balance sheets. The picture? Financial breakdown, with banks ceasing to lend and the economy grinding to a halt.

That's clearly really bad. But what will the economy look like if Congress does approve a workable bailout plan, and the worst-case scenarios are averted? Well, probably still pretty bad. "By the time we’re done here this is going to be equivalent to the big recessions of the past," says Harris. "Similar to the recessions of 1974 and 1982." That's a lot better than a rerun of the Great Depression. But it still means big-time job losses, and lots of painful retrenchment for consumers and business.

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