October 6, 2008
HP-1177

Statement by the President’s Working Group on Financial Markets

Washington, DC– The President’s Working Group on Financial Markets issued the following statement today:

Conditions in U.S. and global financial markets remain extremely strained.  The President’s Working Group on Financial Markets (PWG) is working with market participants and regulators globally to address the current challenges and restore confidence and stability to financial markets around the world.

With the passage of the Emergency Economic Stabilization Act of 2008 (EESA), Congress has granted important new authorities to the Treasury, Federal Reserve, and the FDIC.  These new authorities will be employed in conjunction with existing authorities to restore market confidence by strengthening the balance sheets of financial intermediaries and improving overall market functioning.

The diversity of institutions and markets under stress, and the magnitude and complexity of the adjustment underway, requires that the tools available to policymakers, regulators and supervisors be used in forceful and coordinated ways across regulatory and supervisory agencies in the United States and throughout the world.  This will involve moving with substantial force on a number of fronts.  These broad initiatives are outlined below.

Strengthening Financial Institutions

The Treasury Department will move rapidly to implement the new authorities in EESA to help strengthen financial institutions that are struggling with troubled assets and/or need to raise capital. It will be done in a transparent and methodical fashion.  In the coming days, Treasury will work with the Federal Reserve and other financial regulators to develop strategies that deploy these tools to maximize their effectiveness in strengthening the financial system while protecting the taxpayers’ interests.

The new legislation adds broad, flexible authorities to allow Treasury to buy troubled assets and provide guarantees, and address capital raising.  The new legislation also enables Treasury to directly strengthen the balance sheet of individual institutions.  These authorities allow Treasury to act to remove some of the uncertainty regarding financial strength, and provide financial institutions with greater operating flexibility and enhance their ability to raise additional capital in the private marketplace.

FDIC Stand-alone Assistance

The FDIC has broad powers to protect depositors and mitigate instability in our banking system.  In addition to the coverage that it provides to insured deposits, the FDIC has the ability to use its insurance fund and its substantial lines of credit with the Treasury to address the risk to the financial system posed by the possible failure of a bank.

As the regulatory community confronted the risks posed by a potential failure of Wachovia Corporation, the Board of the FDIC, the Board of Governors of the Federal Reserve System, and the Secretary of the Treasury in consultation with the President determined that they should invoke the systemic risk exception to the traditional bank resolution process.

We will work together in the future where similar approaches are necessary for the stability of the financial system.

When systemic risk determinations are necessary and appropriate in the future, the FDIC will use its authority and its resources, on an open or closed-bank basis, to protect depositors, guarantee liabilities, facilitate orderly wind downs, mergers, or adopt other stabilizing measures.

Increasing Liquidity to Financial Markets

With regard to liquidity, the Federal Reserve has introduced a series of innovative facilities and policies to enhance liquidity in our markets.  These include the Term Auction Facility, Primary Dealer Credit Facility, Term Securities Lending Facility, and Currency swaps.

The Federal Reserve will continue to take a leadership role with respect to liquidity in our markets.  It is committed to using all of the tools at its disposal to provide the increased liquidity that is now required for the effective functioning of financial markets.  In this regard, the authority to pay interest on reserves that was provided by EESA is essential, because it allows the Federal Reserve to expand its balance sheet as necessary to support financial stability while conducting a monetary policy that promotes the Federal Reserve’s macroeconomic objectives of maximum employment and stable prices.

The Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets.

Cash / Money Markets

Bank deposits and money markets funds play an important role in the savings and investing of Americans.  These savings and investment vehicles are critical to investor confidence.  They also provide funds for financing activity that is so critically important to our credit markets.

Last month, the Treasury Department announced a temporary guarantee program for money market mutual funds.  That program began operations last Monday.  This action was complemented by the Federal Reserve providing additional liquidity to money market mutual funds with their Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) program, which has brought liquidity to the ABCP market.  Today, the Federal Reserve is taking additional actions to enhance the flexibility of bank holding companies to provide support to their bank sponsored funds.

In addition, the Securities and Exchange Commission and the FASB issued a clarification regarding the valuation of assets, including commercial paper, during such periods of market stress.

In addition, the recent legislation temporarily increases the amount that the FDIC insures in bank and thrift deposits from $100,000 to $250,000.  The legislation also increases the FDIC’s ability to borrow from the Treasury if needed.

Collectively these actions should enhance market stability and investor confidence in such funds

Mortgage Markets

We are committed to seeing the housing GSEs serve their public purpose of providing stability, liquidity, and affordability to the housing market.  The Federal Home Loan Bank System continues to be an important source of liquidity to the banking system in support of housing finance.  To provide critical additional funding to our mortgage markets, Fannie Mae and Freddie Mac are increasing their purchases of agency mortgage-backed securities (MBS).

FHFA has directed the two companies to implement such a purchase program immediately.  We also expect each company to continue to increase its direct support to the mortgage market through their ongoing securitization activities.

Treasury too has established a backstop secured credit facility for the housing GSEs.  In addition, to increase the availability of capital for new home loans, Treasury expanded the agency MBS purchase program we announced in September.  This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

Market Integrity

Confidence is also enhanced by vigorous law enforcement so that those who invest know there is someone who is looking out for them.  The SEC and Commodity Futures Trading Commission (CFTC) bring hundreds of cases every year directed at protecting investors.  This past fiscal year the SEC returned approximately $1 billion to injured investors just as it did the year before.  In the past few months, the SEC with others in law enforcement, have restored liquidity to Auction Rate Security investors in the largest securities buyback in the nation’s history with tens of billions of dollars of liquidity being restored to tens of thousands of investors.  The CFTC this year obtained more than $630 million in penalties against those attempting to manipulate the commodity markets and defraud customers as it continues to aggressively pursue its ongoing national crude oil investigation aimed at protecting the nation’s energy markets.  The SEC and CFTC have dozens of ongoing investigations related to the current market conditions and are using all of their tools to vigorously protect investors and maintain the integrity of our capital markets.

Clearing and Settlement Systems

Regulators are closely monitoring clearing and settlement systems to ensure their proper functioning as we encourage further centralized clearing for other financial instruments to bring enhanced transparency and counterparty risk management to those markets.

While addressing our challenges, we must also remind investors and lenders that we have a resilient and diverse economy and workforce.  We have faced economic and financial market challenges in the past.  Each time we have worked through them and emerged with stronger financial institutions and regulatory policies.  While it will take time and a lot of hard work, we are confident that this time will be no different.

Leadership has been shown with decisiveness and determination by the public sector. Together, we can greatly improve the functioning of markets and move forward to rebuilding our great capital markets.

Anyway, I am getting ready to go lay in my bed and toss and turn like it is Christmas eve and I was 5 except it is logical reasoning and logic games dancing through my head.

Also, in case you are wondering, don’t worry I am using a Ticonderoga #2 the Worlds Best Pencil. No worries.

They all voted no on the bailout. hmmmmmmmmm there is a lot of dems on that list. No Coburn. I am interested in looking into this further.

Anyways, this article made me smile. Here

Ha! At least that is a solution that doesn’t require money printing. (For the record-I don’t really support this solution, but it is smarter than what Sec. Paulson and the whole of Congress could come up with)

Wall Street Crash of 1929

On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system that normally gave investors the current prices of their shares. Telephone lines and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering.

Black Tuesday was a day of chaos. Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders. The glamour stocks of the age saw their values plummet. Across the two days, the Dow Jones Industrial Average fell 23%.

By the end of the week of November 11, the index stood at 228, a cumulative drop of 40 percent from the September high. The markets rallied in succeeding months but it would be a false recovery that led unsuspecting investors into the worst economic crisis of modern times.

The Crash of 1987

The mid-1980s were a time of strong economic optimism. From August 1982 to its peak in August 1987, the Dow Jones Industrial Average (DJIA) grew from 776 to 2722. The rise in market indices for the 19 largest markets in the world averaged 296 percent during this period. The average number of shares traded on the NYSE had risen from 65 million shares to 181 million shares.[1]

The crash on October 19, 1987, a date that is also known as Black Monday, was the climactic culmination of a market decline that had begun five days before on October 14th. The DJIA fell 3.81 percent on October 14, followed by another 4.60 percent drop on Friday October 16th. But this was nothing compared to what lay ahead when markets opened on the subsequent Monday. On Black Monday, the Dow Jones Industrials Average plummeted 508 points, losing 22.6% of its value in one day. The S&P 500 dropped 20.4%, falling from 282.7 to 225.06. The NASDAQ Composite lost only 11.3% not because of restraint on the part of sellers but because the NASDAQ market system failed.

And here is a link for a list of all the stock market crashes: List

I got this up as fast as I could, now maybe I can fill in a bit. The bailout is a bad idea. It causes the socialization of risk, which is a recipe for disaster in free, or freeish market society. The socialization of risk actually provides an incentive to businesses to increase the amount of risk that they take.

PROTECTING TAXPAYERS:

CHANGES AND ALTERNATIVES TO THE TREASURY BAILOUT

Secured Loans: The Treasury proposal essentially infuses capital onto the books of financial institutions. Instead of purchasing assets at inflated prices, a secured loan at a punitive interest rate would provide needed capital and give firms time to restructure, while still holding shareholders and debtholders accountable.

“Pay to Play”: Require Treasury to determine an up-front fee for firms to offload their assets, perhaps $0.10 (or more) for every $100 of the post-auction purchase price. The proposal would ensure that firms pay some portion of the financial exposure borne by taxpayers and provide a disincentive for firms that are more inconvenienced than jeopardized by their current portfolios.

Increased Transparency: Require participating firms to disclose to Treasury the value of their mortgage assets on their books and the value of any private bids within the last year for such assets. This information should be made publicly available, as well as the specific assets purchased, their purchase price, and the identity of the sellers.

Empower Private Investors I: Require that the auction process envisioned by Treasury include private investors. Some continue to overlook the willing buyers currently ready to purchase these mortgage-related assets. The problem is that the bailout firms are not willing to sell at such low prices, and taxpayers should not have to pay inflated prices as a result.

Empower Private Investors II: An alternative proposal would allow financial institutions (in 2008 or 2009) the option of a one-time, five-year carryback deduction on net operating losses. Firms could only take advantage of it by selling off undesired assets at the market rate. Such targeted tax relief for the financial services sector would provide an immediate infusion of liquidity and capital without handing a blank check to Treasury.

Limit Federal Backing for High Risk Loans: Mandate that the GSEs no longer securitize any unsound mortgage that is: (1) not fully documented to meet minimum requirements for work, assets, and income, (2) not backed by private mortgage insurance for no less than half the value of the loan, (3) written to comply with the Community Reinvestment Act and otherwise would violate a firm’s lending rules.

Corporate Accountability: Require that any firm selling its assets to Treasury replace its senior management immediately and freeze all executive bonuses and golden parachutes. In addition, all employees and board members of participating firms must forfeit their stock options before entering into negotiations or an auction with Treasury.

Limit Financial Firm Eligibility: Require the Treasury Department, in conjunction with the Federal Reserve, to publish a list of financial firms who pose a legitimate systemic risk to the entire economy, those truly “too big to fail,” and limit the purchasing program to those firms.

Independent Entity with an Independent Director: Set up an independent government-corporation to buy these assets, instead of Treasury, run by a Senate-confirmed administrator who can be held accountable by Congress. In addition, the administrator would have a fiduciary duty to minimize taxpayer exposure.

Criteria for Assets: Set some criteria for the quality and type of assets that are allowed to be purchased to guard against mission and asset creep.

Lower the Cap, Subject to Appropriations, and Offset: Lower the purchase authority to $350 billion in order to limit the amount of bad assets purchased or force the Secretary to return to Congress for additional authority. In addition, all funding needs to be subject to appropriations and offset, either through spending restraint or permanent authority to drill in the OCS and ANWR.

Ban Wall Street Cronyism: Mandate that no financial firm can both participate in the purchasing program and act as an agent of the government in order to limit potential conflicts of interests.

“Democratic vice presidential candidate Joe Biden said Thursday that paying more in taxes is the patriotic thing to do for wealthier Americans. The Republican campaign for president calls the tax increases their Democratic opponents propose “painful” instead of patriotic.”

Back at work:

Here is what they wrote about the speech in The Weekly Standard:

Thompson Speech Hits Media on Palin, Obama on Abortion

Fred Thompson will forcefully defend the selection of Sarah Palin tonight in a speech Republicans are characterizing as “red meat.” He will argue that the feeding frenzy over Palin’s is the result of “panic” from the Democrat-friendly mainstream media.

“What a breath of fresh air Governor Sarah Palin is. She is from a small town, with small town values, but that’s not good enough for those folks who are attacking her and her family. Let’s be clear, the selection of Governor Palin has the other side and their friends in the media in a state of panic. She is a courageous, successful, reformer, who is not afraid to take on the establishment.”

Thompson will also criticize Barack Obama’s answer on abortion from his recent appearance at Rick Warren’s Saddleback Church. Warren had asked: Now, let’s deal with abortion. 40 million abortions since Roe v. Wade. you know, as a pastor I have to deal with this all of the time. All of the pain and all of the conflicts. I know this is a very complex issue. 40 million abortions. At what point does a baby get human rights in your view?”

Obamas responded: “Well, I think that whether you are looking at it from a theological perspective or a scientific perspective, answering that question with specificity, you know, is above my pay grade.”

Thompson criticize Obama for dodging the issue: “We need a President, and Vice President, who will take the federal bureaucracy by the scruff of the neck and give it a good shaking. And we need a President who doesn’t think that the protection of the unborn or a newly born baby is above his pay grade.”

The bulk of Thompson’s speech will be a testimonial on behalf of John McCain, his character and his leadership. John McCain has “the kind of character that civilizations from the beginning of history have sought in their leaders.”