Libor Rises a Fourth Day as Banks Hoard Cash After Bill Passed
By Gavin Finch and Lukanyo Mnyanda
Oct. 2 (Bloomberg) -- The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a $700 billion plan to rescue beleaguered financial institutions.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.
``We still see upward pressure on maturities from one week,'' said Patrick Jacq, a fixed-income strategist in Paris at BNP Paribas SA, France's biggest bank. ``The situation is still blocked and we're unlikely to see spreads decline before confidence has been restored.''
Credit markets have frozen as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Libor, set by 16 banks in a daily survey by the British Bankers' Association, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.
The U.S. Senate passed the Bush administration's bank- rescue package yesterday with inducements for the House of Representatives to approve the measure after an earlier version was rejected. The legislation, approved on a 74-25 vote, authorizes the government to buy troubled assets from banks rocked by record home foreclosures.
Bank Rescues
Interbank rates have soared as governments in Europe and the U.S. rescued six financial institutions in the past week. The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, widened to a record 260 basis points today. It was at 197 basis points a week ago and 79 basis points a month ago.
Lenders are balking at offering cash for longer than a day even as central banks pump an unprecedented amount of cash into the banking system. The European Central Bank today offered $50 billion of overnight cash at a marginal rate of 2.75 percent. The Swiss National Bank awarded $9 billion. The Bank of England sold $8.9 billion.
The Libor for overnight dollars fell 111 basis points to 2.68 percent, the BBA said.
Rates in Asia rose earlier. The cost of borrowing in dollars in Singapore for three months surged to 4.16 percent today, the highest since Jan. 11. The rate in Hong Kong, known as Hibor, climbed 13 basis points to 3.79 percent.
Markets `Frozen'
``There are a lot of bids but no offers,'' said Pang Meng Yam, a money-market dealer at KBC Bank NV in Singapore. ``There's no lending, most money markets are frozen and the discrepancy between the benchmark rates and the actual trading rates are getting wider.''
Financial institutions worldwide posted $588 billion of writedowns and losses tied to U.S. subprime mortgages since the start of last year, according to data compiled by Bloomberg.
The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 360 basis points today. The spread was 110 basis points a month ago.
To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
Last Updated: October 2, 2008 10:17 EDTI think it is odd that this bill originates in the Senate. Isn't it the House of Representatives that, constitutionally (Article 1, Sections 7 and 8), is responsible for originating any budget legislation? Are we laying the ground for some real judicial problems?--java
Paulson Bank Rescue Proposal Is `Crazy,' O'Neill Says (Update1)
By Brendan Murray
Oct. 1 (Bloomberg) -- Former U.S. Treasury Secretary Paul O'Neill said the $700 billion bank-rescue proposal under negotiation in Washington is ``crazy,'' with potentially ``awful'' consequences for the world's largest economy.
``Doesn't this seem like lunacy to you?'' said O'Neill, who was President George W. Bush's first Treasury chief, from 2001 to 2002, in a telephone interview today. ``The consequences of it are unbelievably bad in terms of public intrusion into the private sector.''
O'Neill's objections mirror those of Republicans in the House of Representatives who rejected the plan in a Sept. 29 vote. The former Treasury chief said he's lobbying for an alternative solution that would offer guarantees for troubled assets, stopping short of purchasing the debt.
``Is anybody thinking there?'' asked O'Neill, who also served as deputy budget director in the Ford administration. ``It's too late, it's not going to make any difference and it's aggravating as hell when there's a better idea and you can't even get it in play,'' he said, recognizing little success so far in pitching his own proposal.
O'Neill, 72, was fired after an almost two-year tenure marked by strains with White House officials and comments that roiled markets.
`Just Like Cash'
His plan to deal with the crisis would start with a ``discounted cash-flow analysis'' of distressed instruments that are clogging the financial system. The government would guarantee the assets, paring back the support as principal and interest payments were made, he said.
``That should take care of the liquidity problem because if they have a government guarantee at a specified level they should trade just like cash,'' O'Neill said.
He likened his solution to the Treasury's decision Sept. 19 to guarantee domestic money-market funds for a year to try to stop a run on what traditionally have been among the safest of investments.
To replenish capital in banks, the government should make 20-year loans to institutions and charge 2 percentage points above the government's borrowing rate, he said. Regulators could count the loans as part of the banks' capital base, he added. Paying the premium would give banks an incentive to retire the government loans faster, he said.
O'Neill said he has tried to shop his ideas to congressional leaders including Joint Economic Committee Chairman Charles Schumer; Senate Banking Committee Chairman Christopher Dodd; and Senator Richard Shelby, the ranking Republican on the Banking Committee.
Senate Vote
``None of them are returning phone calls,'' O'Neill said. ``I honestly don't think they really understand it and they're so much in a bubble that it's impossible to penetrate it.''
Meanwhile, the Senate is set to vote tonight on a modified version of the $700 billion rescue plan the House rejected two days ago. The House may vote again Oct. 3.
``If they pass this thing, it's awful what the consequences are going to be in terms of an ongoing federal relationship that doesn't need to exist with the institutions,'' O'Neill said. ``Are we going to insist on having a federal representative on boards of directors to protect our investment?''
The main component of the legislation now under consideration is giving the Treasury secretary authority to purchase distressed mortgage-related assets with an amount of money equivalent to about half of Canada's annual gross domestic product.
``We have no capacity in the federal government and it's not possible to create a capacity to manage a $700 billion property portfolio,'' said O'Neill, who was chairman of Alcoa Inc., the largest U.S. aluminum producer, from 1987 to 2000. ``It's crazy. It's like we've lost our moorings.''
To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.net
Senate Approves Bailout
House to Take Up Bill With Added Tax Breaks, Higher FDIC Limits
By Lori Montgomery and Shailagh Murray
Washington Post Staff Writers
Thursday, October 2, 2008; A01
The Senate last night easily approved a massive plan to shore up the U.S. financial system, but the measure faces a tougher test tomorrow in the House, where leaders will try to reverse the stunning defeat the legislation suffered earlier this week.
As the Bush administration issued fresh warnings that Congress's failure to act would have dire consequences for the economy, the Senate revived the package the House defeated Monday and voted to approve it, 74 to 25.
The proposal -- which calls for spending up to $700 billion to buy bad assets from faltering financial institutions -- was heavily revised to attract wider support. The bill passed last night would extend an array of tax breaks worth $108 billion to businesses and families next year. It would also temporarily increase the limit on federal insurance for bank deposits to $250,000 from $100,000.
Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, acknowledged last night that it was tempting to oppose a bailout and "stick a finger in the eye of the bankers and the tycoons whose greed brought us to this crisis."
"But after the rush of righteousness fades, what then?" said Dodd, an architect of the package. "We can take a cut at Wall Street, but Wall Street won't feel the brunt of the pain."
Nine Democrats, 15 Republicans, and one independent opposed the plan. Sen. Edward M. Kennedy (D-Mass.), who is ailing, was not present for the vote.
The provisions added to the original bill infuriated fiscally conservative Democrats in the House, who have argued for months that the tax breaks should not be extended at the expense of increasing the federal deficit. Yet some congressmen who opposed the bailout Monday were newly interested in it yesterday.
Rep. John Shadegg (R-Ariz.), an influential conservative, said the new bill was "materially better" than the one that failed in the House, sending the Dow Jones industrial average plummeting a record 778 points.
"Much as I would like to see much more dramatic changes, there comes a point in time where we've got to send the signal to the U.S. markets, U.S. consumers and world markets that we're dealing with this," Shadegg said. "I'm inclined to hold my nose and vote yes."
House Republicans said the new package could attract as many as 100 GOP votes -- enough to put it over the top if Democrats can garner as many votes as they did on Monday. House Majority Leader Steny H. Hoyer (D-Md.) said he and other fiscal conservatives are "angry" about the addition of the tax provisions but unlikely to abandon the package.
"Frankly, we really don't have much flexibility, and this is important to do," Hoyer said.
Across Washington yesterday, politicians and interest groups worked frantically to build support for the bailout, which seeks to prop up U.S. financial institutions and calm investors.
Treasury Secretary Henry M. Paulson Jr. also worked the phones, participating in conference calls with banking groups and business associations. Other organizations joined the campaign, including the AARP, whose members have inundated lawmakers with more than 110,000 e-mails in recent days.
"People's nest eggs are disappearing," AARP chief executive Bill Novelli said. "It's no secret that people are angry about bailing out Wall Street. But Wall Street is us. These are our stocks, our retirement funds and our futures."
House leaders, meanwhile, leaned on rank-and-file members to fall in line behind the new plan, plucking out provisions to sell to specific constituencies. Party leaders hoped to lure African American lawmakers, who voted "no" on Monday in surprisingly large numbers, with a new property tax deduction of up to $1,000 for homeowners who do not currently itemize deductions on their federal income taxes. Advocates say 30 million people would be eligible for the benefit.
The homeowners' deduction is part of a massive tax package that has been batted back and forth between the House and Senate for months and was tacked onto the bailout legislation. That package includes new tax breaks for renewable energy and a much longer list of expired tax cuts that would be extended for two years. The largest, which would be extended for one year, would restrain the growth of the alternative minimum tax, a parallel tax structure that would add thousands of dollars to the tax bills of more than 20 million families next year without congressional action.
The tax package also would extend federal deductions for sales taxes in states that do not levy an income tax, as well as for tuition and for teachers who spend their own money on classroom supplies. There are also tax breaks worth nearly $40 billion for businesses over the next 10 years, including incentives for conducting research and development domestically, for opening new restaurants and for doing business in the District.
The measure also would require insurance companies to provide the same level of coverage for mental illnesses as for other heath problems, a long-sought priority for Democrats.
The cost of the package would be offset somewhat by new taxes on hedge-fund managers who avoid taxes by transferring income offshore, as well as by a new reporting requirement for stock brokers that would make it easier to tax capital gains on stock sales. Still, those provisions would come nowhere near covering the cost of the package, which the Joint Committee on Taxation yesterday estimated at $110 billion over the next decade.
The new bill was assembled behind closed doors on Tuesday. In an unusual bipartisan power play, Senate Majority Leader Harry M. Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) collaborated to produce a package that could easily pass the Senate and build momentum in the more reluctant House.
They also saw an opportunity to force through the Senate-drafted tax package, even though House leaders earlier had insisted it be accompanied by other tax increases to avoid adding to the deficit. Reid's main priority was securing the renewable energy tax credits, which would benefit his home state. The provisions reward investments in wind and solar energy and the purchase of plug-in electric cars.
Senior Democratic aides who were involved in the negotiations said Reid kept Hoyer informed but did not engage him because Hoyer led the House opposition to the Senate tax package. But Reid spoke with House Speaker Nancy Pelosi (D-Calif.) at least three times Tuesday, aides said.
Negotiators said Sen. Barack Obama (D-Ill.) played a minor but important role in courting Democratic holdouts, contacting individual lawmakers from the campaign trail. He also announced his support for an increase in the FDIC insurance limit; his opponent in the presidential race, Sen. John McCain (R-Ariz.) did so as well.
During Senate debate yesterday, Obama echoed President Franklin D. Roosevelt's first fireside chat to the nation during the Great Depression, calling on the American people to have "confidence and courage" through what is likely to be an extended period of economic turmoil.
"This is not just a Wall Street crisis. It's an American crisis," Obama said. "Passing this bill can't be the end of our efforts to support the economy; it must be the beginning."
McCain was elsewhere in the Capitol and did not speak during the debate. He later supported the measure.
Minutes before the vote started, senior aides predicted the "yeas" could be as few as 60, the minimum needed to pass. But when the moment arrived, senators sat at their desks, appearing grave and intent, and the "no" votes were surprisingly few. Only three senators who face tough re-election battles -- GOP Sens. Elizabeth Dole (N.C.) and Roger Wicker (Miss.), and Democratic Sen. Mary Landrieu (La.) -- were opposed.
Bush issued a statement last night applauding the Senate for passing the bill. The White House said the president planned to remain in Washington until after the House vote on Friday, then depart for a previously scheduled trip for the weekend.
Despite some grumbling, Democratic proponents of the bailout package said they did not expect many lawmakers who supported the bailout plan Monday to switch their votes tomorrow. "How do you say, if you voted yes already, now that it has tax cuts and FDIC insurance, that you're going to vote against it? That just doesn't make sense," noted one senior Democratic lawmaker, speaking on condition of anonymity so he could speak candidly.
Conservative Republicans remained among the most fervent opponents. But Rep. Jeb Hensarling (R-Tex.), chairman of the conservative Republican Study Committee, sent a letter alerting members that the new measure "contains far more tax relief than tax increases" and is not considered "a taxpayer pledge violation" by the anti-tax group Americans for Tax Reform.
Meanwhile, a handful of more moderate House Republicans yesterday signaled that they were at least studying the changes in the bill. Reps. Charles Boustany Jr. (R-La.), Pat Tiberi (R-Ohio) and Marsha Blackburn (R-Tenn.) all voted against the measure Monday, but their aides said yesterday that they were undecided on the latest version.
House lawmakers said that calls and letters to their offices yesterday remained overwhelmingly against the bailout but that there had been a shift since Monday's gut-wrenching drop in the stock market. Rep. Michele Bachmann (R-Minn.), who cheered on the House floor as the bill went down, said her office was hearing from slightly more people who support it.
"There's been more media attention," she said. "People are talking. People are getting more educated."
Staff writers Jonathan Weisman and Dan Eggen contributed to this report.
Show Us the Hope
Falling house prices are driving the collapse of the financial system. But the bailout bill, even the “sweetened” version that was approved by the Senate Wednesday night, does little to avert the defaults and foreclosures that are pushing house values ever downward.
At last count, six million people were expected to default on their mortgages this year and next, putting them at risk of losing their homes unless they can catch up in their payments or catch a break on their loan terms. And they’re not the only ones at risk. As prices drop, millions of people who have never missed a mortgage payment stand to lose their home equity.
Leaving these Americans out of the bailout bill is unwise and unfair, but neither Congress nor the Bush administration has ever shown anywhere near the sense of urgency to rescue homeowners at the bottom of the collapse as they have for the financiers at the top of it.
Take, for example, a new government program that took effect on Wednesday with the aim of helping as many as 400,000 struggling homeowners keep their homes. Even before it got started, the program — called Hope for Homeowners — was looking like a lead balloon.
Under the program, the government will insure up to $300 billion in new, more affordable loans for troubled borrowers. For the insurance to kick in, however, lenders must first voluntarily refinance the delinquent mortgages by reducing the loan balances to 90 percent of the home’s current market value.
In exchange, lenders would avoid the expense of foreclosure and uncertainty about being repaid. The government would stem the social and economic damage of more foreclosures, at presumably little risk to taxpayers.
There’s just one problem. At a Congressional hearing in September, lenders were lukewarm about participating in the new program — reluctant, it seems, to take the loss that comes with reducing loan balances.
The lenders, including JPMorgan Chase, Bank of America, Wells Fargo and CitiMortgage, a unit of Citigroup, all said they were taking other steps to help troubled borrowers, like reducing a loan’s interest rate or extending its term. That’s helpful, but the industry’s efforts don’t go far enough: defaults and foreclosures continue to outstrip efforts to rework bad loans.
As home prices fall, the most effective modification is to reduce the loan balance; otherwise, borrowers are in the position of repaying a loan higher than the value of the property. That burden can become unbearable when combined with unemployment or reduced work hours or unexpected expenses like medical bills.
There are two sides to the mortgage mess. The mortgage industry, in pursuit of upfront fees, deliberately made loans to people who could not afford the payments over time. They justified their actions on the self-serving and unsound basis that rising home values would forever postpone a day of reckoning.
Many borrowers — naïvely, foolishly or selfishly — took on those loans. Yet well over a year into the housing bust, the mortgage industry still calls the shots, as if it is a victim of the borrowers.
Congress could change that dynamic, by amending the bankruptcy code to allow the court to modify troubled mortgages. But lawmakers still are afraid to hold the industry accountable. Instead, they are offering Hope for Homeowners that looks to be anything but.
US economic dominance over - Russia
From correspondents in St Petersburg | October 02, 2008THE era of US global economic dominance is over and the world now needs a new and "more just" financial system, Russian President Dmitry Medvedev said today.
"The time of domination by one economy and one currency has been consigned to the past once and for all," Mr Medvedev said in an address to a Russian-German development forum, with German Chancellor Angela Merkel at his side."We must work together towards building a new and more just financial-economic system in the world based on the principles of multipolarity, supremacy of the law and taking account of mutual interests."
The current crisis proved that even with its vast economic resources the United States was not in a position to play the role of "mega-regulator" and that a new system based on collective management was needed, he said.
"We simply need new mechanisms of collective decision-making and collective responsibility," Mr Medvedev said.
His comments came a day after Russia's powerful Prime Minister Vladimir Putin lashed out at US economic "irresponsibility" for the global financial crisis.
"Everything happening now in the economic and financial sphere began in the United States," Mr Putin told a televised government meeting.
"This is not the irresponsibility of specific individuals but the irresponsibility of the system which claims leadership," he said.
Mr Putin's remarks, made hours before the US Senate approved a $US700 billion ($A888 billion) Government bailout plan for the country's financial sector, were rebuffed by the White House, which called them "unfair" finger-pointing.
Russia's young stock markets, rarely predictable in normal times, have swung wildly in recent weeks as the scope of the US-rooted crisis has become clear, with regulators repeatedly suspending trading after sharp drops.
Although Russia's Central Bank still holds massive US dollar reserves, the Kremlin has in the past two years sought to diversify the country's holdings, notably by boosting holdings in euros.
New housing and automobile purchases in Russia, two closely watched indicators of Russia's economic health, are heavily dependent on bank financing and the crisis has reportedly taken a toll in those two sectors.
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