TARP Up-dates

Last week Ben Bernanke stated that the United States of America is just starting to come out of recession.

In the week, The IMF announced that Japan, France and Germany had officially come out of recession.

It has been a horrible week on the share market. In fact it's worse than just a bad week: a fundamental change has occurred in the nature of this crisis.
This week's central drama was the collapse of Citigroup's share price, formerly world's largest bank. The stock has fallen 60 per cent in a week. It's now worth less than Australia's Commonwealth Bank and there's talk that the US government will have to step in.

Why did this happen? Because US Treasury Secretary, Hank Paulson, announced on November the 12th that he would no longer spend the $700 billion given to him by Congress under the Temporary Asset Relief Programme, or TARP, on buying mortgage securities.

He's been sitting on the money. On Wednesday this week Paulson was hauled before Congress and asked to explain himself - after all, the TARP money was specifically meant to buy mortgage securities.

He couldn't and didn't explain it. It was a pathetic performance, and it capped the most egregious mistake imaginable by a government official. As the implications of that decision sank in, the market prices of mortgage securities in the United States crashed.

US bank stocks have fallen with them. It's not just Citigroup, although that's been the worst. Bank of American and JP Morgan Chase shares have fallen by half, and other global banks like UBS, Barclays and BNP Paribas have fallen almost as much.

$US250 billion has been wiped off the value of US banks stocks since Hank Paulson made his announcement on the TARP 7 trading days ago. As a direct result of that, the global financial crisis has entered a new and catastrophic phase, including in Australia. The All Ordinaries index has fallen 13 per cent since the 12th of November.

We can only hope that George Bush and his mob don't break something else on their way out of the White House.

Reporter: Alan Kohler

Good news!

The US Government has said that it will now take steps to re-captitalise the US banks, in line with the 5-point plan put forward by Prime Minister Gordon Brown of the UK.

Re-capitalisation of the banks is the next necessary step in getting the banks and money markets working again, particularly achieving lending between banks. This action will instill confidence, which has been a missing factor over the last 6 months' or so.

Also, countries all over Europe are today pledging large sums of money to bail out their banks, which shows a more co-ordinated approach is necessary in such a large globalised challenge.

We are indeed in interesting and historical times!

Treasury Secretary Henry Paulson at a meeting last month, had shocked congressional leaders into action by warning of pending economic collapse without immediate federal intervention. After the climatic House vote on Friday, he said aides already were working out details and lining up advisers from outside the government so the money could start flowing. The goal is to unfreeze credit markets.

The immediate response to the 263-171 vote was not promising. Wall Street, which plunged a record 778 points after the House initially rejected the bill last Monday, fell 157 points. More economic bad news _ a jump in job losses _ outweighed the good news from Capitol Hill.

"Congress took a big step in the direction of at least giving us the tools necessary to bring some stability into the marketplace," Bush said Saturday while visiting Midland, Texas, his boyhood hometown.

Earlier, in his weekly radio address, Bush spoke cautiously about the economy's future. "My administration will move as quickly as possible, but the benefits of this package will not all be felt immediately. The federal government will undertake this rescue plan at a careful and deliberate pace to ensure that your tax dollars are spent wisely," he said.

Bush acknowledged that people are worried about their personal finances. "I'm confident by getting our markets moving, we will help unleash the key to our continued economic success: the entrepreneurial spirit of the American people," he said.

House Republican leader John Boehner of Ohio said lawmakers knew that if they failed to act, the crisis probably would worsen and "put us in a slump the likes of which most of us have never seen." The bailout, said House Speaker Nancy Pelosi, D-Calif., is intended to help address "the real pain felt by Mr. and Mrs. Jones on Main Street."

The Bush administration gained broad authority to buy up toxic mortgage-related investments and other distressed assets from shaky financial institutions. The hope is it will restore confidence in markets and thaw a near-freeze in credit availability that has begun to affect the ability of banks to lend, businesses to obtain money for payrolls and investments, and individuals to gain credit to buy a home or a car.

In an attempt to aid smaller banks with serious liquidity problems, the measure raises the ceiling on federally insured deposits from $100,000 to $250,000. It increases federal oversight over Wall Street transactions and assures that chief executives whose companies benefit from the bailout do not leave with huge golden parachute payoffs.

Last Monday, despite pleas from Bush and his financial advisers and the support of congressional leaders, the House voted 228-205 to reject the rescue plan. Stock markets around the world plunged, then recovered somewhat as economists warned that the U.S. was facing its gravest economic threat since the Great Depression.

But the 95 Democrats and 133 Republicans who voted against the bill were responding to a deluge of calls and messages from constituents demanding defeat of the plan. Many saw it as a $700 billion giveaway to Wall Street when average people were getting no help.

Shortly before recessing for the election, senators stepped in and approved legislation Wednesday that linked the rescue to the extension of popular tax breaks for research and development, renewable energy and victims of natural disasters. The $110 billion in additions included benefits parity for people with mental health problems. The Senate also added the boost in the ceiling for bank deposits.

Those extras were enough to sway some House members who voted "no" the first time around. Others were swamped by calls from business and political leaders warning of the possible consequences of inaction.

California Gov. Arnold Schwarzenegger sent out a letter that said without a clear resolution to the crisis, his state and others "may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal Treasury for short-term financing."

Democrat presidential nominee Barack Obama spoke to many in the Congressional Black Caucus and helped persuade 13 to switch their votes. Nine freshmen Democrats also switched to "yes" votes after a conference call with Obama in which he promised an economic stimulus bill would be a top priority if he is elected.

Republican John McCain also lobbied for the measure, according to aides who declined to release a list of lawmakers he called.

In the end, 33 Democrats and 25 Republicans switched from opposition to support. In all, 91 Republicans joined 172 Democrats to support the measure while 108 Republicans and 63 Democrats voted 'no."

Originally published October 5, 2008
JIM ABRAMS ASSOCIATED PRESS

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