SEC bans short-selling

[Sie]

SEC bans short-selling

I am just curious to see how much impact this will have...

Source: http://news.yahoo.com/s/ap/20080919/ap_on_go_ot/sec_short_selling

The Securities and Exchange Commission took the dramatic step early Friday of temporarily banning the routine practice of betting against company stocks.

The move, announced on the agency's Web site, may well be unprecedented and a reflection of regulators' concern about the widening scope of the financial crisis as entreaties come from all quarters to stem a swarm of short-selling.

In the announcement, the commission said it was acting in concert with the U.K. Financial Services Authority in taking emergency action to "prohibit short selling in financial companies" to protect the integrity of the securities market and boost investor confidence.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC chairman Christopher Cox said in a statement. "The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets."

The move, he said, would not be necessary in a well-functioning market and is only a temporary step that is part of the actions being taken by the Federal Reserve, the Treasury and Congress.

A recent wave of the market maneuvers — where traders seek to profit by selling unowned shares of companies in the anticipation their prices will drop — has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big companies.

Cox, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting Thursday night with members of Congress.

The SEC said its action calls a time-out to aggressive short-selling in financial stocks and said it would consider measures to address short-selling in other publicly traded companies.

Short-selling, in a normal market, contributes to efficiency while adding liquidity to the markets. But now, the SEC said, it appears that "unbridled" short-selling was contributing to the sudden price declines in the securities of financial institutions.

On Wednesday, New York Sens. Charles Schumer and Hillary Clinton, both Democrats, appealed to the SEC for such a temporary ban, saying the watchdog agency "has the power to take a temporary but important step to help restore a measure of stability to our financial markets."

The California Public Employees' Retirement System, the nation's largest pension fund, said that starting Thursday it is no longer lending out shares of Goldman Sachs Group Inc. and Morgan Stanley, joining a growing number of public pension funds that are attempting to curb short-selling of two investment banks' stocks.

[Mariam]

What do you think about this financial crisis? Could it have been prevented? I am just appaled by all that transpires in the USA and globaly. The ban on short-selling + the rescue plan seem to have an immediate effect on the market, not sure how long it will last, please see the article below:

Wall Street surges on gov't rescue, short-selling ban

Stocks soar as investors look to gov't rescue plan

By TIM PARADIS, AP Business Writer
7 minutes ago

NEW YORK - 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.

The plan to rescue banks from billions of dollars in bad debt has relieved investors who worried that bad bets on mortgages would hobble more financial companies and cause even more damage to the banking system and the overall economy.

The Dow Jones industrials are up about 370 points at the 11,389 level, giving the blue chips a two-day gain of about 780. Yet the Dow is ending a volatile week largely unchanged follow massive losses earlier Monday and Wednesday. Those losses came in response to the failure of Lehman Brothers Holdings Inc. and the government bailout of American International Group Inc.

 

_________________
Goals: The World has a habit of making room for those who are trying.
Excellence: The secret of fulfillment is excellence. To do something well is to enjoy it.

[Mariam]

Friday, September 19, 2008
Uptick
Dow Soars 370 to Cap Historic Week
Matt Egan - FOXBusiness

http://www.foxbusiness.com/furl/story/markets/rescue-plans-ignite--point-surge/

The markets put the finishing touches on one of the most unforgettable weeks in Wall Street history with a wave of buying on Friday after the government came to the financial system's aid with a massive rescue effort.

Today's Market

According to preliminary calculations, the Dow Jones Industrial Average jumped 367.21 points, or 3.33% to 11387.39, the Standard & Poor’s 500 added 45.87 points, or 3.80%, to 1252.38 and the Nasdaq Composite picked up 74.80 points, or 3.40%, to 2273.90. The FOX 50 rose 27.11 points, or 3.10%, to 900.52.

“I don’t think we’ve ever seen anything like this. This week is one for the history books,” said Ryan Detrick, equities analyst at Schaeffer’s Investment Research.

Friday's staggering move to the upside came after the federal government unveiled a three-pronged attack aimed at bringing the current financial crisis to an endgame. At the forefront of this rescue is a planned entity that will hold the toxic assets that banks can't rid from their balance sheets -- one that some say could cost $1 trillion.

“I’ve never seen anything like this. The moves are absolutely staggering,” said Anthony Conroy, head trader at BNY ConvergEx. “I think the Fed is doing everything it possibly can to keep the financial system sound. It’s a world-wide effort to keep stocks afloat.”

Incredibly, Friday’s colossal rally nearly brought the markets to a break-even point for the week, erasing most of a pair of massive sell offs sparked by credit and bankruptcy fears. The Dow saw an incredibly wide trading range this week of more than 1,000 points -- a range that isn't usually eclipsed during an entire month of trading.

It's no wonder the markets swung so wildly this week given the dramatically reshaped financial landscape that has emerged now that the dust has settled: Storied investment bank Lehman Brothers (LEH: 0.13, -0.17, -56.66%) filed for bankruptcy, insurer American International Group (AIG: 3.85, +1.16, +43.12%) needed an unprecedented $85 billion loan to avoid disaster, banking behemoth Merrill Lynch (MER: 29.50, +7.44, +33.72%) sold itself to Bank of America (BAC: 37.48, +6.90, +22.56%) and the credit markets froze to a near halt.

Banks and other financial companies stand the most to gain from the government rescue, thus their stocks saw enormous gains on Friday. Wachovia (WB: 18.75, +4.25, +29.31%) and Washington Mutual (WM: 4.25, +1.26, +42.14%) surged about 25% each, erasing some of their massive losses from earlier this week. Investment banking giants Goldman Sachs (GS: 129.80, +21.80, +20.18%) and Morgan Stanley (MS: 27.21, +4.66, +20.66%) also enjoyed huge gains.

Not surprisingly, the largest percentage gainers on the Dow were financial giants AIG, Citigroup (C: 20.65, +4.00, +24.02%) and Bank of America. A handful of blue-chip stocks failed to join in the rally, including defensive plays like Coca-Cola (KO: 52.72, -0.67, -1.25%) and consumer products maker Proctor & Gamble (PG: 70.36, -0.95, -1.33%).

“It’s a sigh of relief. They handed a life preserver out to the market and it’s holding on,” said Frank Davis, director of sales and trading at Lek Securities. “There is no reason for any of these stocks to rebound as much as they are. I still think the smart money is sitting on the sidelines for a good amount” of time.

Banks: Rescue Me!

Details of the rescue plans have emerged over the past day, sending the blue chips up by as much as 850 points since the close of trading on Wednesday. In fact, Thursday's rally on the Dow was the largest one-day percentage gain in nearly six years. The government's latest efforts consist of a broad-based approach to solving the ongoing credit freeze that has slammed Wall Street and the nation's economy.

The headline component of the plan comes from the Treasury Department, which is spearheading a push to create an entity that will take toxic mortgage-backed assets off banks' balance sheets, allowing them to begin lending again. A Treasury plan of this magnitude will likely cost hundreds of billions of dollars and would be subject to approval from Congress.

Treasury Secretary Henry Paulson described a "troubled asset relief program" during a press conference Friday morning, calling the efforts "bold" and aimed at restoring confidence in the financial system. No price tag has been cited for the bailout as of yet and a source told FOX Business reporter Rich Edson that Federal Reserve Chairman Ben Bernanke has asked Congress for a bill without a cap.

Further details of what such an entity will look like have not yet been hammered out but The Wall Street Journal reported it may resemble the Reconstruction Finance Corporation, which was created in 1932 to inject liquidity by giving loans to banks and other businesses. Others believe the body could emulate the Residential Trust Corporation that was used to help banks emerge from the savings and loan crisis in the late 1980s and early 1990s.

Get Shorty!

Financial stocks were also given a huge boost on Friday when the Securities and Exchange Commission released a ban on short selling on 799 financial stocks. Shorting a stock, or betting that its price will go down, has been blamed as a main culprit in the plummeting shares of financial stocks this year, especially in the demise of Bear Stearns and Lehman.

The SEC confirmed to FOXBusiness.com that the SEC is considering adding to the list, giving hope to financial names like CIT Group (CIT: 11.16, +0.46, +4.29%) and General Electric (GE: 26.62, +1.83, +7.38%).

While short selling is considered to be a way of getting pricing accuracy in the market, concerns have risen from both government regulators and Wall Street executives that too much short selling is happening -- causing company’s stock to plummet in value too quickly. The ban on short selling will be in effect until Oct 2, the SEC said.

(Click here to read "What the SEC's Ban on Shorting Really Means" http://emac.blogs.foxbusiness.com/2008/09/19/177/ )


Soothing the Money Markets

Additionally, the government released plans to ease fears about money-market funds just days after Reserve Primary Fund, a $62 billion money-market mutual fund, became just the second fund ever to "break the buck," or expose investors to losses. Money-markets funds are a vital source of short-term liquidity to the markets.

The Treasury said it is instituting a temporary guarantee program to ensure there isn’t a repeat of the Reserve Primary Fund. And the Federal Reserve started $50 billion measures aimed at ensuring money-market funds can meet redemption demands.

That news gave a big lift to financial names like Federated Investors (FII: 31.50, +4.40, +16.23%) and Bank of New York Mellon (BK: 35.70, +4.13, +13.08%).

Other Market-Moving Headlines

Building on Thursday's record volume, the New York Stock Exchange set a record with 1.2 billion shares changing hands in the first hour of trading on Friday alone. By the time the day ended, nearly 2.5 billion shares moved, compared to a typical day's volume of about 1.3 billion.

The markets weren't even slowed by a $6 jump in crude oil futures, which settled above $100 a barrel for the first time in a week.. Crude closed at $104.55 a barrel, up $6.67 on the day. Energy analysts attributed the jump to relief in the financial market rescue plan.

Gold futures, which had shot up this week amid market fears, fell $32.20 to end at $861.00 an ounce.

The day’s trading was also subject to quadruple witching, a market phenomenon that sounds more mysterious than it really is. Quadruple witching, which occurs just four times a year and can add volatility to the markets, occurs when options, index options and stock futures options expire all at once.

Corporate Movers

Morgan Stanley (MS: 27.21, +4.66, +20.66%), the investment bank reported to be in merger talks with Wachovia (WB: 18.75, +4.25, +29.31%), is considering all options, including remaining independent, a source tells FOX Business. Pressure to do a deal quickly has eased given the government's bailout plans, The Wall Street Journal reported. However, a Merrill Lynch analyst said the odds have increased for a deal between Wachovia and Morgan, which has also reportedly held talks to sell up to a 49% stake to China Investment Corp., a state investment fund.

AIG (AIG: 3.85, +1.16, +43.12%) shareholders are attempting to pay off the Fed's $85 billion loan before Washington takes an 80% stake in the insurance giant, the Journal reported. However, there remains significant hurdles before this can happen as huge sums of cash would have to be raised to ensure the government gets paid back quickly, the newspaper reported. Earlier this week the Fed agreed to give AIG an emergency loan at a very high interest rate to avoid the insurer filing for a potentially disastrous bankruptcy.

Oracle (ORCL: 20.07, +1.32, +7.04%) posted a better-than-expected quarterly profit late Thursday, sending the software giant’s shares soaring by double-digit percentages. Oracle’s adjusted-profit of 29 cents per share topped analyst estimates by two cents and its adjusted operating margin rose 3.5 percentage points. Oracle sees earnings for the current quarter in-line with analyst estimates.

Palm (PALM: 7.93, -0.56, -6.59%) failed to join in the tech rally as shareholders dumped stocks after the phone maker warned its earnings for the current quarter will decline. Palm, which reported results after Thursday’s closing bell, posted a net loss of 39 cents per share, compared to forecasts for a loss of 23 cents. The company gave no specifics for its forecast for the current quarter.

Global Markets

Major foreign indexes posted epic gains on the rescue plans.

The FTSE 100, London’s benchmark index, soared by 431.30 points, or 8.84%, to 5311.30. The gains were the largest in the FTSE 100’s history, according to Bloomberg.

The Dow Jones Euro Stoxx 50, which tracks the 50 largest companies in Europe, jumped 252.69 points, or 8.42%, to 3253.52.

Russian stock exchanges bounced back from a two-day closure with such enormous gains that the indexes were halted twice during the day. The RTS and MICEX were up 20% and 26.3% respectively.

Hong Kong’s Hang Seng Index surged by 1695.27 points, or 9.61%, to close at a reading of 19,327.73.

 

_________________
Goals: The World has a habit of making room for those who are trying.
Excellence: The secret of fulfillment is excellence. To do something well is to enjoy it.

[Sie]

I think it could have been prevented or at least minimized... But I guess they did "do something about it"... the people who are in the most important positions to make decisions right now about what to do are supposed to be experts in this kind of economic environment so they'll know what to do... and because they came in before it happened they must have been prepared...

[Jonny]

I don't think short selling was the problem. They are simply doing things to try and influence that market that all is good so that the capital markets don't melt away but in reality short selling was not the problem.
When it comes to short selling, the real problem was "naked" short selling which is actually prohibited but for whatever reason the authorities were not willing to enforce the laws against it. I wonder why?

The stimulus package earlier this year evidently didn't work. i remember i criticized it before and almost got my head chopped off. Well, look where we are today.

The same result is going to come about this new $700+ billion stimulus package. Its too expensive even for the US. It might work initially but unless the fundamentals of the US economy are fixed this train is still on the wrong track. The dollar is still weak and now you add another trillion dollars to its load that will make it weaker. Gas prices are still relatively high and heating oil is about to go up as it usually does towards winter and your are still fighting a war that cost $10 billion per month.
Lets not forget the trade deficit with China which have now even bigger than ever. Oh, lets not forget that US owes China over a trillion dollars and counting! Where are they getting this $700 billion by the way?

This $700 billion bailout is going to buy mostly bad assets that are killing the corporations. Does that sound like good business sense to you?
If you were going to take over a company would you want to buy the bad assets or the good assets? They say they will sell off these bad assets in time to return that money? If its bad now, what will make better in the future? Yes, some of the assets will increase in value over time but most will not especially if deregulation is reversed.
This money is being donated to these corporations in the name if financial crisis, nothing less!

I have a question, how is money created?
If we understand this then i think we will understand this financial situation better.

Now since I have criticized that current solution offered by the US gov i guess its only fair to offer an alternative.....well we all know one of the big issues is that millions are foreclosing and therefore can't afford their current mortgages. Instead of giving $700 billion to the cooperation why doesn't the government simply cut the mortgage interest rates for individuals so that they can pay the mortgages, the cooperation get money over time and instantly millions of bad assets will not be written off . People stay in their homes, spend money and the economy train is back on track.
Yes the coperations would loose money ( which they should ) but they would still be in business since the "projected" losses will be manageable but "real" lives will not be destroyed. The government could also allow some of of the company losses due to the cutting of interest rates be written off their cooperate taxes if need be.
This is what I call a real stimulus package!

There is a summary of my solution, what say you?
-------------------------

 

_________________
Opportunities are never lost, someone will take the ones you miss.

[Sie]

I agree with Jonny that there are just too many areas that need rescuing in this economy and the impact that the 700b is going to have might be too little and too late.
Today the topic of discussion is what happens if the bail out doesn't work? Well, it doesn't look like will... and since it doesn't look like there is any other option, they only way to go is down, sadly. Sorry I am not trying to be pessimistic...

I am not sure if Jonny's question "how is money created" was supposed to be literally speaking or? Did you mean how is money is printed or what constitutes money (as in economics M0 through M3)?

I also think the main problem is that "confidence in the economy" has decreased. If they can fix that then we will be one step ahead but even I doubt it. Once fear sets in it is hard to stimulate the economy no matter how much money the government prints or gives out.

I like the stimulus plan suggested by Jonny but I don't know how much lowering mortgage rates for those who are foreclosing will help the economy. Rates are already low, how much lower should they get? And is interest really the problem or is it the whole mortage to start with??

Economic theories are calling for a low in this economy (I will avoid mentioning the dreaded word) and it's going to happen, sorry to say that

[Jonny]

Yes interest rates were cut but first it took them too long to do it and they did it 0.5-1 a point at a time, how is that suppose to help people.

To expand a bit more on my plan lowering rates will not just be lowered arbitrarily, it would be applied to those who need it based on a set criteria.
For example, if you are servicing a troubled mortgage then you would be looked at to see if you quality based on certain criteria. Such as; your income, number of dependents, health needs....etc and if you qualify then based on your income the interest rate is reduced accordingly say from 8% to 4% so if you were paying say 3000/ month it's now $1500/ per month.

The banks will of course complain that their income has been slashed. Well the gov then examines the mortgages and if its determined that the bank issued it in good standing then they can write off the reduced $1500 from their taxes but if otherwise then the banks will have to be responsible and take the loss. In a rough way this is the plan. The objective is to approach this crisis from the bottom-up and not top-bottom, because we all know by the time to top is done the bottom will only get crumbs.

In addition this will encourage banks and financial institutions to be more responsible next time and not just expect to be bailed out. I think most people would be happy with such a plan because the government will be putting people first and not just giving $1 trillion dollars to coperations.
Families would stay in their homes instead of foreclosing and neighborhoods would not loss value due to foreclosed properties and the real estate market would also be helped by this approach.


Regarding my question about how money is created, first we need to understand what money is. Traditionally money is defined and understood based on its physical nature ( paper, metal, gold...etc).
When you define and understand money in this narrow way as most of us do, then the logical conclusion is that money is created when its printed. This however is not true! When you print paper money you are simply printing monetary receipts that represent the monetary value at that particular moment in time.
Money = value and not paper or coins. The physical aspect of money is merely a receipt that represents the value (the real money) you have at the time. If you have that same paper 5 years later, will it have the same value?
When you begin to understand money in non physical terms such as value and time then you begin to truly understand what money is.

So again how is money is created?
--------------------------

 

_________________
Opportunities are never lost, someone will take the ones you miss.

[Sie]

Jonny you know they cannot decrease interest rate with such a huge margin! However I agree it may work in the very long run if it were to be allowed to happen.
I think houses will continue to decrease in value since they had been overpriced by all what had been happening in the housing market.
So even if "qualified" homeowners were to be given a lower rate now, if the price of the house is way below its true value why would one want to keep it if they are facing forecloser? Especially if the homeowner is just paying interest only (even if monthly mortgage payments dropped from 3K to 1.5K)... considering that equity is shrinking...

How do we deal with this issue where the value of the home has gone down while the loan amount (principal) is still the same? Will lowering interest rate change that fact?

Remember, I am agreeing with you on starting from the bottom-up and not the other way around BUT I am trying to put these other factors into the equation to see how this will really change things...

Others will probably beg to differ and say that we should start from the top-bottom because these are the people/companies who can make a difference in the economy through re-investment.

M0 which I mentioned earlier is the printed type (coins and paper money)
However there is M1, M2 and M3. M3 encompasses all types including credit/lending. Money supply can be influenced through printing (which usually doesn't do much in way of strengthening the economy I would say) but it can also be influenced through the Multiplier effect.

This is the same as saying how much money (monetary activity) would be created by the 700B if you gave it to the big corporations as against giving it to distressed mortgage owners.
I think this is why economic decision makers want to start from the top-bottom, it will presumably "multiply faster"

Below are some articles related to the current situation:

Housing grim as financial rescue debate rages
NEW YORK (Reuters) - Prices of U.S. existing homes suffered a record drop in August and the rate of sales tumbled, offering little sign of improvement in the source of the financial crisis in the United States.
To read more here is the link: http://news.yahoo.com/s/nm/20080924/bs_nm/us_usa_economy_housingbiz

I had some hope with the announcement from Buffett yesterday thinking it would help soothe some fears, but today it seems attention is still on the bailout...

Stocks fluctuate after Buffett-Goldman deal
NEW YORK - Financial markets were tense Wednesday, with stocks fluctuating following investor Warren Buffett's decision to invest $5 billion in Goldman Sachs Group Inc. The credit markets showed added strain as investors await news about the government's plan to rescue banks from crippling debt.
To read more here is the link:
http://news.yahoo.com/s/ap/20080924/ap_on_bi_st_ma_re/wall_street

[Sie]

Economy's spring rebound was bit less energetic

By JEANNINE AVERSA, AP Economics Writer

Source: http://news.yahoo.com/s/ap/20080926/ap_on_bi_go_ec_fi/economy


The economy's spring rebound turned out to be slightly less energetic than the government previously thought. And, the road ahead is likely to be rocky as the country gets pounded by the worst financial crisis in decades.

The Commerce Department reported Friday that gross domestic product, or GDP, increased at a 2.8 percent annual rate in the April-June period. That wasn't as strong as the 3.3 percent growth estimate made a month ago.

But it did mark a pick up after two terrible quarters. The economy barely grew in the first quarter — advancing at a feeble 0.9 percent pace. And, in the final quarter of last year, the economy actually shrank.

Nonetheless, the lower reading for second-quarter GDP surprised economists; they were expecting the government would stick with the 3.3 percent growth estimate.

The main reasons behind the downgrade: consumer spending and U.S. exports didn't grow as much during the spring as previously thought. Yet export growth was still very brisk, a key factor keeping the economy afloat. And, consumers were helped out by the government's tax rebates.

GDP measures the value of all goods and services produced within the U.S. and is the best barometer of the country's economic health.

Since the spring, the economy has lost traction.

In the past week alone, the clogging of the nation's credit arteries had become so bad that the Bush administration proposed a $700 billion financial bailout to Congress in a desperate bid to stem the fallout.

Despite marathon negotiations between congressional leaders and the administration to hash out a deal, the package is in limbo. Angry Republicans are balking even in the face of a prime-time plea by President Bush to move swiftly.

GOP presidential nominee Sen. John McCain and his Democratic rival, Sen. Barack Obama, were summoned to the White House and have scrambled to assure the public they are on top of the nation's economic and financial problems.

Federal Reserve Chairman Ben Bernanke earlier this week told Congress that failing to enact the bailout could drive unemployment and foreclosures even higher and push the economy into a recession.

The economy already is faltering. It will lose momentum during the second half of this year, Bernanke told lawmakers. Consumers have clamped down and slowdowns overseas are sapping demand for U.S. exports, he said.

Businesses in turn are hunkering down and cutting back on hiring. The nation's unemployment rate jumped to 6.1 percent in August, a five-year high. So far this year, a staggering 605,000 jobs have vanished. The economy needs to generate more than 100,000 new jobs a month for employment to remain stable.

A growing number of analysts predict the economy will shrink in the final quarter of this year and in the first quarter of 2009 as the mounting damage of the housing, credit and financial debacles take their toll on the country.

In the spring, consumers — armed with tax rebates — boosted their spending at a 1.2 percent pace. That was down from the 1.7 percent growth rate previously reported for the second quarter, but was an improvement from the 0.9 percent growth rate in the first three months of the year.

Exports grew at a 12.3 percent pace in the spring. That was down from a previous estimate of a 13.2 percent growth rate, but marked a big pickup from the first quarter's 5.1 percent pace.

One of the country's biggest problems — the housing collapse — was evident in the GDP report.

Builders cut back at an annual rate of 13.3 percent in the second quarter. Still, that was a better showing than early this year and late last year.

An inflation gauge tied to the GDP report showed prices — excluding food and energy — rose at a 2.2 percent pace in the second quarter.

Although that was down from a 2.3 percent growth rate in the first quarter, it still remained outside the Federal Reserve's comfort zone.

The Fed in June halted its most aggressive rate-cutting campaign in decades to shore up the economy out of concern that additional rate reductions would worsen already-high inflation. The Fed last week agreed to again hold its key rate steady at 2 percent, despite all the turmoil in financial markets and the broader economy. Some analysts believe the problems may force the Fed to do an about face later this year and cut rates again.

[Sie]

Obama Proposes Increasing Federal Deposit Insurance to $250,000
Nadine Elsibai

Now this might help reduce fear and uncertainty, keep money in the banks (not mattresses ) and raise some level of confidence in the financial services industry... could be a good idea...

Sept. 30 (Bloomberg) -- Barack Obama, the Democratic presidential nominee, today proposed increasing the Federal Deposit Insurance Corp. limit to $250,000 from the current level of $100,000.

This is ``a step that would boost small businesses, make our banking system more secure and help restore public confidence in our financial system,'' Obama, an Illinois senator, said in an e- mailed statement.

Obama said he would propose the idea to leaders of Congress today ``and urge them to act without delay to pass a rescue plan.''

The U.S. Senate is expected to try to salvage a $700 billion financial-rescue package after the measure was defeated in the House of Representatives yesterday.

Keeping the FDIC's fund healthy has been a priority for U.S. regulators because its $100,000 insurance on deposits keeps depositors from panicking when a bank's health is questioned.

In proposing an increase, Obama noted that the current $100,000 limit was set 28 years ago and hasn't been adjusted for inflation.

The Dow Jones Industrial Average dropped 778 points yesterday after the House failed to pass the rescue measure, the biggest point drop ever that erased more than $1 trillion in market value.

To contact the reporter on this story: Nadine Elsibai in Washington at nelsibai@bloomberg.net .

[Mariam]

McCain plan would buy bad homeowner mortgages
http://news.yahoo.com/s/ap/20081008/ap_on_el_pr/mccain_mortgages

By JIM KUHNHENN, Associated Press Writer
1 hour, 22 minutes ago

John McCain's proposal to buy up bad home mortgages would use nearly half the $700 billion from the recent Wall Street bailout package to assist Americans directly, instead of indirectly by rescuing the nation's financial markets.

The Republican presidential candidate announced during Tuesday's debate that he would order the federal government to spend $300 billion in federal funds to buy the mortgages and allow financially troubled homeowners to keep their houses.

Democratic nominee Barack Obama last month sounded a similar theme, proposing that the government consider taking such a step.

But McCain's approach was far more categorical.

"I would order the secretary of the Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes — at the diminished values of those homes — and let people be able to make those payments and stay in their homes," he said.

The proposal, which he called the American Homeownership Resurgence Plan, is as much a policy plan for the future as it is a political tactic for the present.

The economy has been a key factor in helping Obama pull ahead of McCain nationally and in key battleground states. What's more, Americans reacted with helpless outrage at the need for a $700 billion rescue for the country's financial institutions.

Many Republicans voted against the package, objecting to its size and to government intervention in the free market economy. McCain's step would represent an even greater role for government and potentially an even greater financial loss.

McCain made clear he would use the plan to distinguish himself not only from his rival but also from President Bush, an increasingly unpopular figure as the economy sinks.

"It's my proposal," McCain said. "It's not Sen. Obama's proposal. It's not President Bush's proposal."

As conceived by Treasury Secretary Henry Paulson and as passed by Congress, the rescue package would be used primarily to purchase mortgage-backed securities. It would allow, but not require direct purchase of mortgages. Under McCain's plan, the Treasury would be required to rework mortgages directly with homeowners whose houses were losing value.

McCain economic adviser Douglas Holtz-Eakin said the plan envisions mortgages in "the low 5 percent" that would help halt the plunge in housing values. Thirty-year mortgage rates are now hovering between 5.8 and 6 percent.

It was unclear — either from McCain's remarks or from the backup materials provided by the campaign — how such a massive plan would be administered. Though McCain, a budget hawk and critic of rising federal spending, did concede one point. "Is it expensive? Yes," he said.

Under the plan, the government would buy failing mortgages from homeowners and provide new fixed-rate mortgages. As a policy matter, the plan would likely have greater support among Democrats than Republicans. Economists with the liberal Center for American Progress have been pushing a similar idea for some time.

Holtz-Eakin said the plan would help stabilize the plunging values of mortgage-backed securities that have been at the heart of the crisis in the financial markets.

"Sen. McCain believes this is exactly the right kind of policy." Holtz-Eakin said. "Provide direct help to homeowners; at the same time, support the financial markets and keep them from further damaging the availability of credit to Main Street America, one of the — the real threats to the economy at this point in time.

The Treasury's current plans for the money, however, could be well under way by the time a new administration is sworn in next year, leaving fewer options for a new administration.

The bailout package gives the secretary of the Treasury great latitude to deal with financial markets and address the current credit crunch. Ostensibly, the department would have the authority to intervene directly and help homeowners.

In fact, at a news conference on Sept. 24, Obama said, "we should consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities."

Days later, in a news release, he said he would "encourage Treasury to study the option of buying individual mortgages like we did successfully in the 1930s."

"Senator Obama has been consistently calling for policies that would buy up mortgages and restructure them so that families can stay in their houses," Obama economic adviser Jason Furman said. "He continues to support that and believes Treasury should use its authority in whatever way it can to bring about that goal, including buying mortgages directly."

 

_________________
Goals: The World has a habit of making room for those who are trying.
Excellence: The secret of fulfillment is excellence. To do something well is to enjoy it.

[Mariam]

The two articles I have posted have something to do with what Sie and Johnny have been discussing.
We are in a deep hole ...also, do you guys know "stimulus package" is an expense?

Fed, central banks cut rates to aid world economy
By JEANNINE AVERSA, Associated Press Economic Writer
http://news.yahoo.com/s/ap/20081008/ap_on_bi_ge/financial_meltdown

In a rare coordinated move, the Federal Reserve and other major central banks from around the world slashed interest rates Wednesday to prevent a mushrooming financial crisis from becoming a global economic meltdown.

Overseas markets tumbled on worries that the move wouldn't immediately help ease the pain from the financial crisis. U.S. share prices seesawed, with some investors buying a few beaten down shares, but most still gloomy about the economy's prospects.

The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank sliced its rate by half a point to 3.75 percent.

The central banks of China, Canada, Sweden, and Switzerland also cut rates. The Bank of Japan said it strongly supported the actions.

"The recent intensification of the financial crisis has augmented the downside risks to growth," the Fed said in explaining the coordinated action, the latest in a series of bold moves meant to pry open tight lending and revive the global economy.

The Dow Jones industrials, already down 875 points this week, rose 13 points in afternoon trading.

The Fed's action will reduce borrowing costs almost immediately for U.S. bank customers whose home equity and other floating-rate loans are tied to the prime interest rate. Bank of America, Wells Fargo and other banks cut their prime rate by half a point to 4.5 percent after the Fed announcement.

White House spokesman Tony Fratto welcomed the cooperation among the Fed and other countries' central banks to battle the crisis. "It's important and helpful that central banks are working in a coordinated way to deal with stress in the financial system," Fratto said.

The country's presidential contenders also embraced the action. "This is a global crisis that requires a global solution," said Democrat Barack Obama. Republican rival John McCain hoped it would contain the "financial crisis spreading across the globe."

Some analysts were skeptical that the coordinated rate reductions would do much to turn things around.

"At first blush, while this is a big step, it is unlikely to prove sufficient to stem the rot. Additional rate cuts are likely and further measures to inject liquidity and re-capitalize banks are needed," said Marc Chandler, global head of currency strategy at the investment firm Brown Brothers Harriman.

The rate cuts came against a backdrop of increasing anxiety in global financial markets. Investors have been fleeing shares on worries that neither the Fed, nor other central banks, could move fast enough to stop the rising turmoil.

European indexes fell. In Britain, the FTSE-100 fell 5.2 percent, Germany's DAX dropped 5.9 percent, and France's CAC-40 dropped 6.3 percent.

In Asia, Japan's Nikkei 225 closed 9.38 percent lower and Hong Kong's Hang Seng tumbled 8.17 percent hours before the rate cuts were announced; their declines showed the extent of the worldwide gloom.

The worldwide gloom follows a sell-off in U.S. markets late Tuesday, where major stock indexes slid 5 percent. The rout brought the Dow Jones industrials' losses to more than 875 points in two days, and its close was the lowest close in five years. The blue chip index is now around 33 percent below its record close of 14,164.53 a year ago.

The Fed's action Wednesday was the latest in a long series of moves over the last several weeks that the central bank has taken in coordination with other federal agencies, Congress and the White House to shore up a financial industry stung by bad loans, mounting losses and — in many cases — collapse. President Bush signed a $700 billion financial bailout bill into law on Friday.

The Fed's action reversed its current policy on interest rates, which had been to hold them steady out of concern that more cuts would fuel inflation. Since Fed Chairman Ben Bernanke and his colleagues put a stop to interest-rate cuts in June, economic and financial conditions have deteriorated significantly.

"The pace of economic activity has slowed markedly in recent months," the Fed said. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

Although inflation has been high, the Fed believes the recent drop in energy prices and the weaker prospects for economic activity have reduced this threat to the economy.

The orchestrated rate reductions had a mixed impact on stressed credit markets. Rates dipped on some commercial paper, a crucial short-term financing mechanism that many businesses rely on to bankroll day-to-day operations. The important "Libor" rate, which affects a vast array of loans, remained high, however.

The Fed also reduced its emergency lending rate to banks by half a percentage point to 1.75 percent. Given the intense credit crisis, banks have been ramping up their borrowing from the Fed's emergency "discount" window.

The fact that the Fed felt it couldn't wait until its regularly scheduled meeting on Oct. 28-29, underscored the urgency of the situation.

One of the goals of the coordinated rate cuts is to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the United States is on the brink of, or already in, its first recession since 2001, one that could quickly spread to other countries around the globe.

It can take months before rate cuts work their way through the financial system, however, and the economy has pressing problems now. Major U.S. retailers turned in dismal reports of third quarter sales, a dire omen for the all-important holiday shopping season. Consumer spending accounts for more than two-thirds of the nation's economic activity.

The Fed's last rate cut was in late April, capping one of the most aggressive rate-cutting campaigns in decades as it scrambled to shore up the faltering economy. After that, the Fed moved to the sidelines, holding rates steady as zooming food and energy prices during that period threatened to ignite inflation. In the past few months, energy prices have retreated from record highs reached in mid-July, giving the Fed more leeway to drop rates again.

At its last meeting in September, the Fed struck a more dire tone about the economy, hinting that a rate reduction once again could be in the offing.

Even with the unprecedented $700 billion financial bailout plan, the failing economy and the jobs market probably will get worse. Many believe the economy will jolt into reverse later this year — if it hasn't already_ and will stay sickly well into next year.

One of the most crucial pillars of the economy — the jobs market — has cracked, and wage growth is slowing. This means that consumers will be even more hard-pressed to spend in the fashion that helps grow the economy.

Increasingly skittish employers slashed payrolls by 159,000 in September, the most in more than five years. A staggering 760,000 jobs have disappeared so far this year. The unemployment rate is 6.1 percent, up sharply from 4.7 percent a year ago.

The U.S. unemployment rate could hit 7 or 7.5 percent by late 2009. If that happens, it would mark the highest rate of joblessness since the months immediately following the 1990-91 recession. Some economists say the jobless rate could rise even more before the situation starts to get better.

Mounting job losses, shrinking paychecks, shriveling nest eggs and rising foreclosures all have weighed heavily on American voters, who will be electing a new president in about four weeks. The economy is their No. 1 concern, polls have shown.

__

Associated Press writers Joe Bel Bruno, Anne D'Innocenzio and Madlen Read in New York and Pan Pylas in London contributed to this report.

 

_________________
Goals: The World has a habit of making room for those who are trying.
Excellence: The secret of fulfillment is excellence. To do something well is to enjoy it.

[Mariam]

Ooops! I guess Nancy Pelosi didn't get my memo! Another expense . I feel these politicians are manipulating people not instilling confidence, they are the ones creating fear throughout...What did the other stimulus package do anyways? Some people didn't even get the money and those who got the money didn't spend the way law makers and the president expected - to stimulate the economy!...They are making the bad situation worse...what do you think guys?

Pelosi says $150B economic stimulus plan needed
By COLLEEN SLEVIN, Associated Press Writer
18 minutes ago
http://news.yahoo.com/s/ap/20081008/ap_on_go_co/meltdown_pelosi

House Speaker Nancy Pelosi said Wednesday that a $150 billion economic stimulus plan is needed now because of the faltering economy and she may call the House into session after the election to pass it.

Pelosi told reporters that the stock market meltdown, which has caused an estimated $2 trillion loss from pension funds, was a factor in her recommendation for a second stimulus bill. The first relief plan sent out $600-$1,200 tax rebate checks to most individuals and couples this year.

The House did pass a $61 billion economic aid proposal last month before lawmakers left Capitol Hill ahead of the Nov. 4 election. But a similar plan failed to pass the Senate. President Bush had promised a veto anyway.

If Democratic nominee Barack Obama wins the White House and if Capitol Hill Democrats make gains in the elections as well, it might be easier to pass a stimulus measure over dispirited Republicans, especially if the economy remains in big trouble.

The Senate is expected to be back at work after Election Day to complete a public lands bill and perhaps deal with other matters, such as a measure to extend unemployment benefits. The House also could return to consider a stimulus plan and additional issues in a lame-duck session before the newly elected Congress takes over in January.

"We may have to go back into session before the next Congress," Pelosi said.

Pelosi said a stimulus package would create jobs by investing in public works, increasing food stamps benefits and extending unemployment insurance for the long-term jobless. She said lawmakers need to "hunker down" and look closely at the federal budget for possible savings, and reconsider whether the U.S. can afford to fight "a war without end" in Iraq.

"We have some very harsh decisions to make and some of them can't wait until January," said Pelosi, D-Calif.

"What we can't wait for is a stimulus package," Pelosi added. "We may have to go back into session before the next Congress."

 

_________________
Goals: The World has a habit of making room for those who are trying.
Excellence: The secret of fulfillment is excellence. To do something well is to enjoy it.

[Sie]

I think it's true that they are making it worse but I also think it is very real that the situation is not at all good.

Below is another article and I agree with Schlesinger (all the way at the end of the article) that maybe only time can make things right again by letting the markets regulate themselves then maybe everything will back to it's true value... these are just the laws of economics... of course I agree that doing something about it (the right thing, that is...) will help lessen the severe effects of a global recession.

Will Fed's Moves Work? If Not, What Can It Do Next?
by Chris Isidore

Source: http://finance.yahoo.com/banking-budgeting/article/105939/Will-Fed's-Moves-Work?-If-Not,-What-Can-It-Do-Next?

Friday, October 10, 2008 provided by

Efforts by governments worldwide to stop a slide in financial markets haven't worked yet and the Federal Reserve and the U.S. Treasury may have to consider more dramatic measures.
This week the Fed has moved to pump potentially trillions of additional dollars into the nation's banks and leading corporations. And it led the way on emergency interest rate cuts by central banks around the globe Wednesday morning.

As the global selloff continues, the U.S. government is now said to be considering steps that include taking direct investments in banks, as well as guaranteeing their debt and insuring all deposits.
But experts say the Fed's actions may not be enough to stop the global economy from plunging into the worst downturn seen in at least 25 years, if not since the Great Depression.
Even those praising the Fed say it's not clear what it would take to calm markets.
"I think they've been pretty inventive and pretty unrestrained," said Tom Schlesinger, executive director of the Financial Markets Center, a think tank that follows the Fed. "But I'm not sure what it would take to stem the fear in the markets. It's such a contagious and irrational phenomenon, and feeding on itself and compounding itself day by day."

What the Fed Has Already Done....
On Tuesday, the Fed unveiled a plan to lend directly to the nation's major companies by buying up an unlimited amount of the $1.3 trillion in commercial paper, short-term loans that businesses use to operate day-to-day, on the market.
The Fed also announced it was doubling the size of its term auction facility, a program the Fed created last year to lend banks money for up to 85 days at a time, to $300 billion. The Fed added it was prepared to boost the term auction facility to $900 billion by year's end.
Despite this, banks still appear to be reluctant to lend money and stock markets around the globe have continued to fall. On Thursday, the Dow industrials plunged nearly 700 points to a five-year low and markets worldwide plunged.
Experts say there are worries that the global economy is now sliding towards recession and that there is relatively little that the Fed or other central banks can do to stop that. The International Monetary Fund warned Wednesday that the world's economy will slow sharply this year and next.
"They're looking a bit more impotent with each action," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute, about the Fed.
Achuthan said that since major banks around the world are cutting back on their lending, that dwarfs the economic muscle of the world's central banks and governments.
But in a speech Tuesday, Federal Reserve chairman Ben Bernanke vowed that the Fed would do whatever it takes to try to fix the credit crunch.
"To support growth and reduce the downside risks, continued efforts to stabilize the financial markets are essential," he said. "The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity."
Experts say they don't think Wednesday's global rate cuts are the last steps the Fed plans to take. And many have suggestions as to what the Fed might do to get banks in the business of lending again.

More Cuts On the Way?
The first step is probably the most traditional one - further rate cuts.
According to closely watched interest rate futures, investors are pricing in an 84% chance of another quarter point cut at the Fed's next meeting, a two day session that concludes on Oct. 29. That would leave the central bank's key fed funds rate at 1.25%.
Many experts believe the Fed would not want to take rates below 1% - which is where they were for 12 months in 2003 and 2004. Some have blamed those low rates for helping to create an environment of easy lending that contributed to the housing bubble.
Yet, the Bank of Japan's key interest rate is already at 0.5%. And some argue that it would be justified for the Fed to lower rates to that level, or even to 0%, because of current conditions.
"Why not? If you're facing a situation where you need to lower the rates all the way to zero to keep the economy from going over the precipice, why wouldn't you do that," said Lyle Gramley, a former Fed governor now working as an economist for the Stanford Group.
Regardless of how far the Fed is willing to cut, more cuts are expected by other central banks, most notably the European Central Bank. That's because the ECB had not been cutting rates during the past year and have more room to lower rates.

Other Options for the Fed
Bill Gross, the chief investment officer at giant bond manager Pimco, wrote this week that another step the Fed could take is to become a clearing house for trades of a variety of exotic and arcane financial instruments such as collateralized debt obligations or credit default swaps. These have traditionally been traded directly between two firms rather than in an open market.
"We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear," Gross wrote in his most recent commentary.
Schlesinger agreed, saying that while the Fed would normally never think to take such an active role in markets, these are far from normal times.
Gramley said he also believes that the Fed may supplement its efforts to help larger firms by starting to lend money to small and medium sized businesses as well.
The Fed could agree to buy small business loans from banks that are backed by collateral, such as inventories or equipment. Gramley said the loans could be purchased on a non-recourse basis, meaning the Fed, and not the bank, assumes the risk if the loan goes bad.
That would free the banks from the need to raise more capital if the loans sour and could make them more willing to make such loans once again.
"The Fed can work aggressively enough to break the logjam," Gramley said.

Can Anything Work but Time?
Still, Schlesinger is worried that there is little that the Fed or other government entities can do to fix the current crisis of confidence gripping financial markets.
A painful recession may be the only way for the markets to work the problems out of the system - with further declines in housing prices and deeper job losses likely a result.
"I wish I had a silver bullet. But the fear is disconnected from underlying fundamentals at this point," said Schlesinger. "What will thaw it out is a sense among lenders that a modicum of trust has been restored in these complicated, opaque markets."
But Gramley said that even if recent or future actions by the Fed aren't enough to stop the economy from slowing further, they can still have a positive effect.
"Even if it's not going to prevent the recession from deepening, what it can prevent is a huge meltdown," said Gramley.

Copyrighted, CNNMoney. All Rights Reserved.

[Mariam]

Do you think this is the good time to invest? (When there is a fall in the market). I would think so for those with money and long term investment goals, but those with short term goals will not be a good idea because this crisis looks like it will stretch longer than anyone may anticipate.

I too agree with you and Schlesinger; I think the market should be allowed to self-correct, even if it means some banks should be allowed to fail, which will only allow the emergence of new ones, new regulations, etc. It looks like a cookie jar is opened and all those with tongue for sweets jump to dip their hands in before all cookies are gone. This increases fear in the market. It didn't seem at all the money injected into the system had any effect last week, untill today, I see some good numbers, not sure how long today's bounce will last...
Here is UK also feeding its banks:

British banks to get cash infusion from government

http://news.yahoo.com/s/ap/20081013/ap_on_bi_ge/eu_britain_bank_bailout

By JANE WARDELL, AP Business Writer

The British government injected an unprecedented 37 billion pounds ($63 billion) into the country's leading banks Monday to avoid a full-scale collapse of the sector.

In return for the rescue, the Royal Bank of Scotland Group PLC, Lloyds TSB Group PLC and HBOS PLC will cede majority control to the government and halt cash bonuses for bank board members this year. The banks will also be required to lend more money to small- and medium-sized businesses and homeowners in a bid to rescue the country's housing market.

"The action we are taking today is unprecedented but essential to all of us," said British Prime Minister Gordon Brown. "We must in an uncertain and unstable world be the rock of stability upon which people can depend."

The humiliation of holding out the beggar bowl to the government prompted the resignation of a handful of senior executives at the banks, where the government will now have the right to appoint board members and fix dividends.

The deal will leave taxpayers owning as much as 60 percent of RBS and 43.5 percent of the merged Lloyds HBOS bank — the two are in the process of combining.

The government said its position as majority shareholder in each of the banks is strictly temporary, but the subsequent transformation of the sector is on the massive scale of the postwar bank nationalizations in the 1940s and the privatization of the industry in 1980s.

"The hope is that today will mark a watershed, with vast measures of government reassurance finally rekindling some confidence in the shattered banking sector," said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.

The government said that it will buy 5 billion pounds ($8.6 billion) of preference shares directly and underwrite 15 billion pounds ($25.7 billion) of ordinary shares in RBS. The preference shares carry a fixed interest payment of 12 percent.

If no other investor comes forward to buy those shares, as many analysts anticipate, the government will invest the full 20 billion pounds ($34.5 billion) itself.

It is investing a further 17 billion pounds ($29.2 billion) in LLoyds TSB and HBOS.

The country's two other major banks, Barclays PLC and HSBC PLC are not receiving a government handout.

Barclays said it will try to raise more than 6.5 billion pounds ($11.3 billion) without the government's help, while HSBC, Britain's other major banking group, has already announced separate capital raising measures to bolster its balance sheet without government assistance.

The takeovers of the three banks mark the implementation of a 50 billion pound ($86.8 billion) rescue package announced by Brown last week to shore up British banks, which have been buffeted by the global credit squeeze.

Brown was quick to reassure taxpayers that they would get a fair deal from their new ownership of the banks, saying there would be "no rewards for failure."

No dividends will be paid until the government's preference shares have been fully redeemed and future executive salary will be based on performance "and long-term value creation," Brown said.

"This crisis has proved beyond doubt the virtures of the sound business practice of rewarding responsible risk-taking and not irresponsibility," he added.

Among the high level casualties resulting from the announcements are RBS chief executive Steve Goodwin, who will be replaced by Stephen Hester, currently chief executive of British Land. The bank said that Goodwin will not be receiving any severance payment.

Chairman Tom McKillop will be retiring at the group's annual meeting in April. Johnny Cameron, RBS's chairman of global markets, is leaving the board immediately.

HBOS chief executive Andy Hornby and chairman Dennis Stevenson will leave their posts when the merger with Lloyds is completed.

Brown stressed that Monday's action needed to be accompanied by reforms to the international banking system.

"We must now put in place new structures and new rules for the future," he said. "This cannot simply be a short term rescue to paper over the cracks. Only a surgical approach that gets to the root of the problem will now work to ensure the problems do not return."

Along with the bailout, Lloyds and HBOS said Monday that the terms of their merger would be altered so that Lloyds would be paying less than previously agreed for HBOS.

Lloyds had previously agreed to give HBOS shareholders 0.83 shares in Lloyds for every HBOS share held. It will now give just 0.605 shares for each HBOS share.

 

_________________
Goals: The World has a habit of making room for those who are trying.
Excellence: The secret of fulfillment is excellence. To do something well is to enjoy it.