Thursday, October 2, 2008

Oktoberfest!


The U.S. Senate passed a $700 billion financial-market rescue package loaded with inducements for the House of Representatives to approve the measure, following the House's rejection of an earlier version:

The legislation, approved last night on a 74-25 vote, authorizes the government to buy troubled assets from financial institutions rocked by record home foreclosures. It contains two provisions favored by House Republicans: One raises the limit on federal bank-deposit insurance; the other reiterates the authority of securities regulators to suspend asset-valuing rules that corporate executives blame for fueling the crisis.

The bill's proponents cited the record 778-point drop in the Dow Jones Industrial Average after the House's 228-205 defeat of the legislation Sept. 29 as evidence of the urgency to stabilize the banking system. They suggested that the market reaction may spur some House Republicans to change their minds when the bill comes to a vote, likely tomorrow afternoon.

``The big drop'' in the Dow Index ``really had a chilling effect on a lot of our members and a lot of their constituents,'' House Republican Leader John Boehner said on Fox News. With changes made by the Senate, the legislation ``has a much better chance'' of passage this time, he said.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said he hoped the vote ``will send a very strong signal even to the Asian markets and others.''

But wait, not everyone is happy with the "new improved" rescue package:

Still, House passage is far from certain.

House Majority Leader Steny Hoyer told MSNBC News yesterday that no Democrats who opposed the measure earlier this week have pledged to back it. ``We don't have any more Democrats at this hour,'' he said.

Some Republicans said they also weren't budging.

``The bill that they are going to send back is the same bill that I voted against two days ago,'' Representative Joe Barton of Texas told Bloomberg Television. ``Why would I turn around and vote for it tomorrow evening or Friday?''

President George W. Bush said in a written statement after the vote that ``the bill the Senate passed is essential to the financial security of every American.'' He said the House should follow suit in approving the proposal.

The bill was a bipartisan effort, with 40 Democrats, 33 Republicans and independent Joe Lieberman of Connecticut voting for it. The two presidential nominees, Democrat Barack Obama and Republican John McCain, returned from the campaign trail to vote for the plan.

The Senate also sweetened the measure for Republicans by authorizing the government's purchase of troubled assets with a $149 billion package of tax breaks. They would spare 24 million households from a $62 billion alternative minimum tax and extend $17 billion in benefits to companies that produce alternative energy.

Yet Hoyer warned there was a possibility that some additional Democrats may oppose the legislation because of the tax breaks, which aren't offset with spending cuts.

``There are people who are upset that we are making the deficit worse as we try to stabilize the economy,'' he told reporters. Hoyer said he was ``personally disappointed' by the Senate's decision to include the tax legislation in the package.

Deficits? If people lose their jobs as the credit markets seize, you will see government revenues drop fast and then watch the deficit soar.

I personally like the sweeteners in the new rescue package, including the tax incentives for alternative energy (solar, wind, etc.).

But even if the bill passes the House, don't expect a magical recovery. Credit markets remained choked late Wednesday, keeping key lending rates and demand for Treasurys high:

There was no discernible change in the markets after the Senate approved the plan Wednesday night and sent it on to the House, which defeated an earlier version of the propsal on Monday. President Bush and congressional leaders on Wednesday expressed optimism that the $700 billion bill to take risky mortgage-backed assets off banks' books would pass, after the addition of a provision that would boost insurance for people's deposits.

But investors were not expected to cheer even if the House does approve the plan — they are unsure how effective the plan will be.

"It can only be effective if it marshals private confidence," said Citigroup economist Steven Wieting. "Private credit markets, as of yesterday, in some ways have ceased to exist. ... This is a confidence crisis."

Investors, particularly money market mutual funds, have been rushing for the safety of Treasurys since the collapse of Lehman Brothers Holdings Inc. and the takeover of the world's largest insurer, American International Group Inc. in September. A money market fund called the Primary Reserve Fund "broke the buck" two weeks ago due to its exposure to Lehman; when a fund breaks the buck, it means it does not have enough assets to cover every dollar invested in it.

Because of the recent drought in credit market activity, more large companies have been having trouble getting loans at rates they can tolerate — and as a result, they're altering their business plans.

Anglo-Swiss mining giant Xstrata PLC dropped its $10 billion bid for British rival Lonmin PLC, the world's No. 3 platinum producer, pointing to uncertainty surrounding "the future availability of credit." And Actuant Corp., an industrial products maker, trimmed its fiscal 2009 sales outlook Wednesday, citing the "unsettled economic and credit environments and headwinds from the stronger U.S. dollar and higher borrowing costs."

To be sure, lending is not at a complete standstill. General Electric Co., which said last month it would scale back its commercial paper holdings, said it is not having problems selling commercial paper when it announced Wednesday that Warren Buffett's Berkshire Hathaway is buying $3 billion worth of GE preferred shares.

Southwest Airlines' chief financial officer said the company has few financing needs and limited immediate exposure to financial markets' troubles. Southwest — the only major U.S. airline to stay profitable this year thanks to its hedges against rising fuel prices — also said it has an unused $600 million line of credit.

But the longer the credit markets stay tight, the longer many companies will have to draw down their reserves and credit lines. Eventually, companies' inability to get credit could deliver a large blow to the already deteriorating economy. The CEO of consumer products maker Procter & Gamble Co. wrote in a newspaper guest column that its customers are feeling pinched, and that small- and mid-sized suppliers aren't finding enough money to run their businesses.

Late tonight (actually, very early Thursday morning), Asian stocks fell, led by automakers, after U.S. car sales plunged the most in 17 years and the Senate's approval of a $700 billion rescue package failed to ease concern the global slowdown will worsen.

The message is clear: we are not out of the woods yet. Keep an eye on credit markets. If they keep deteriorating, go enjoy a nice beer (or two, or three) with your buddies.

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