Barack Obama's world tour
Roll up for the tour
Barack Obama visits Iraq, as it gets a little harder to distinguish his foreign-policy views from his rivals'
SO FAR, so presidential. The spin doctors who organised Barack Obama’s world tour must be content with the public-relations success achieved by their man to date. The Democratic candidate visited Afghanistan over the weekend. Then, on Monday July 21st, he appeared in Iraq. He has enjoyed the sort of high-level reception generally reserved for heads of state; the accompanying press coverage will have his PR advisers salivating. Later this week he will visit Germany’s capital, Berlin, where he may draw the size of crowd usually reserved for rock stars. The Democratic campaign must be delighted, not least by the neglect of his Republican rival, John McCain.
Yet, beyond public relations and an effort to make Mr Obama look more convincing as a potential commander-in-chief, the more substantial foreign policy news seems to be coming, if rather quietly, from Mr Obama’s rivals. Over Iran’s efforts to develop a nuclear programme, for example, George Bush had suggested that talking to America’s enemies would be tantamount to appeasement. In contrast Mr Obama has long espoused direct talks with Iran. Although he has waffled a bit, saying that he would make appropriate “preparations”, his point has been that Iran should not be required to suspend its efforts to enrich uranium as a condition for holding talks.Then came the news, this weekend, that William Burns, a high-ranking diplomat, sat down with Iranian envoys in Geneva to discuss Iran’s nuclear programme. The meeting on Saturday did not produce spectacular results. Iran rejected Western demands that it stop enriching uranium, although it was given two more weeks to deliver a formal answer. But the meeting itself was news: it was the highest-level American contact with Iran during the Bush administration and it happened while Iran’s centrifuges were spinning along, undermining the suggestion that holding talks with opponents in such circumstances is irresponsible. Mr McCain, however, continues to stress the need for a coercive approach to Iran with stringent preconditions necessary for any talks.
On Iraq, arguably, a shift has also taken place in the White House. Late last week news broke that Mr Bush and Iraq’s prime minister, Nuri al-Maliki, had agreed to a “time horizon” for American troop withdrawals from the country. Precisely what this will mean is not yet clear. Mr Bush’s officials were quick to talk about “aspirational goals” and to stress that any talk of withdrawal would continue to depend on a range of conditions: the facts on the ground would still determine any outcome, says the White House. Mr McCain, too, remains committed to leaving Iraq based on conditions, not calendars.
But Mr Maliki last week suggested in an interview with a German magazine that a timetable for American withdrawal would be welcome, even praising Mr Obama’s timeframe of a phased exit over 16 months (without offering an endorsement of the candidate). He was quoted as saying “[He] Who wants to exit in a quicker way has a better assessment of the situation in Iraq.” His statement was later revised, perhaps under pressure from America, but it allowed Mr Obama’s campaign to claim that his talk of timetables is justified. In contrast Mr McCain suggests that the Maliki-Bush agreement on “time horizons” was only possible because of the success of the surge of troops, begun in 2007, which he strongly advocated even when many others (including Mr Obama) thought it would be hopeless. Mr Obama has now removed his harshest criticism of the surge strategy from his campaign website.
Finally, on Afghanistan, although Mr McCain and Mr Bush admit no change of course, it has become clear that, along with Mr Obama, there is now general agreement on the need to renew the military effort with the provision of extra troops. Mr Obama is hoping to frame discussion of Afghanistan in his terms, and thereby to persuade voters that he is offering leadership on this particular issue: it helps that the Democrat can make the more plausible claim to beefing up in Afghanistan, if one assumes that he would be able redeploy troops from Iraq.
Commentary by John M. Berry
July 22 (Bloomberg) -- Sure, the U.S. economy has lots of problems, including falling payroll employment, the highest inflation in 17 years, declining home prices and a shaky financial industry.
Consumer confidence has dropped into the basement, partly because of the cost of gasoline, which has gotten so high it's killing sport-utility-vehicle sales. Maybe without the tax-rebate checks, consumers wouldn't have been spending on other stuff. Nevertheless they have.
The dollar is in the tank, too, adding to inflation, even for goods coming from China.
And for all that, the U.S. economy expanded in the second quarter, and not at too shabby a rate considering the many drags on growth.
Even with all the things going wrong -- including the official bear market on Wall Street -- growth probably checked in at about a 2.5 percent annual rate in the second quarter. That's about as fast as many economists think it could grow on a sustained basis without generating more inflation.
Some of the gain can be traced to exports, which are soaring at the same time that imports are slowing. That makes a big difference in U.S. economic growth.
``The second quarter appears to be actually better than expected,'' Federal Reserve Chairman Ben S. Bernanke said at a congressional hearing on July 15. ``We're looking at the remainder of the year as being probably positive growth but certainly not robust growth.''
No Recession
In spite of the hand-wringers, the U.S. economy isn't mired in a recession -- and that's not just a technical matter of definitions. It's a matter of how many jobs are likely to be lost as the country works its way out of the mess created by the bursting of the housing bubble, the resulting financial-market turmoil and soaring energy prices.
At a July 16 hearing, Massachusetts Democratic Representative Barney Frank, chairman of the House Financial Services Committee, said ``if the numbers on employment in the second half are no better than those for the first half, we are on track to lose nearly 1 million jobs this year.''
That's true, though with about 138 million payroll jobs, that would be a loss of three-quarters of 1 percent. Losses in recessions normally are much higher than that. Early in 2002, after the last recession had ended, the 12-month job loss was more than 2 million, according to the Bureau of Labor Statistics.
The unemployment rate, which was 5.5 percent in both May and June, is about a percentage point higher than it was in the first half of 2007, and it is likely to increase unless economic growth becomes stronger than now expected.
Productivity Gains
Falling payrolls are usually a symptom of slowing economic growth. Hefty productivity gains are making a difference this time, a contrast with past slowdowns in which productivity normally fell.
When the financial-market turmoil intensified last August and housing turned down with a vengeance, growth seemed to hit a wall. Gross domestic product, which had increased at a 4.9 percent rate in the third quarter, all but came to a standstill in the fourth, registering a 0.6 percent gain. The first quarter was a bit better at 1 percent.
As demand slowed, businesses quickly cut the number of hours their employees worked. That kept inventories from building and helped maintain profits. The payroll reductions were possible only because workers still on the job produced more.
In the fourth quarter, non-farm business increased its output at a 0.2 percent rate while the number of hours their employees worked fell at a 1.6 percent rate. The bottom line: Productivity increased at a 1.8 percent pace.
Increased Production
The first-quarter numbers were even better -- output was up 0.7 percent, hours down 1.8 percent and productivity increased 2.6 percent.
Productivity gains in manufacturing, and the drop in hours worked, were much stronger than in other industries, as Bernanke noted in one of the hearings.
Even when factory output is increasing -- over the past 12 months manufacturing production fell 0.6 percent -- there has been a loss of jobs, Bernanke said, ``because the U.S. manufacturing sector is enormously productive and its productivity has been growing more quickly that the rest of the economy.''
In the 2001 recession, which was caused by a large retrenchment in business investment, there were several months in which factory output fell 0.6 percent or more.
Sometimes it seems we have lost our sense of perspective about the state of the economy. Growth certainly isn't good and there's no guarantee it won't get worse. Families losing their homes to a foreclosure are undoubtedly feeling intense pain.
As I said in a recent column, the bulk of the cutback that had to occur in housing construction is behind us. And some analysts have begun to suggest that the worst for the large financial institutions, such as Citigroup Inc. and Bank of America Corp., may be over as well.
Let's take a deep breath and give thanks for the incredible resilience of the U.S. economy.
July 22 (Bloomberg) -- Federal Reserve Bank of Philadelphia Charles Plosser said the central bank should raise interest rates ``sooner rather than later'' to lower inflation and prevent price expectations from getting out of control.
``We will need to reverse course -- the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later,'' Plosser, who argued against cutting interest rates in two Fed decisions this year, said in a speech today in King of Prussia, Pennsylvania. ``It will likely need to begin before either the labor market or the financial markets have completely turned around.''
Plosser joins Minneapolis Fed President Gary Stern, who also votes on rate decisions this year, in making the case for raising borrowing costs, a move Fed Chairman Ben S. Bernanke avoided discussing in congressional testimony last week. Record oil prices and rising food costs this year have increased investor expectations for the Fed to raise the benchmark interest rate.
``Monetary policy cannot control changes in the relative price of a key commodity, like oil or food,'' Plosser said at a breakfast hosted by the Philadelphia Business Journal. ``But it can help ensure that a relative price increase doesn't turn into a rise in overall inflation.''
Stern, the longest-serving Fed policy maker, said in a July 18 interview that ``we can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course.''
The Nov. 4 presidential election won't influence the Fed's decision incoming meetings, Plosser told reporters after the speech.
Market Expectations
Investors expect the Fed to raise the benchmark U.S. interest rate at least a quarter-point by year-end, based on futures prices. The Federal Open Market Committee next meets Aug. 5 in Washington.
Plosser dissented from the Federal Open Market Committee's March 18 decision to lower the main interest rate by 0.75 percentage point. He voted against the April 30 move to cut the rate by a quarter-point to 2 percent. At the last meeting, June 24-25, he supported the decision to leave the rate at 2 percent, a pause after seven straight reductions.
Plosser, 59, a former professor and business-school dean at the University of Rochester in New York, has taken one of the toughest anti-inflation stances on the Fed since joining the central bank in 2006.
`Laying the Ground'
His position today is ``not necessarily reflective'' of the broader group of Fed policy makers, said Richard DeKaser, chief economist at National City Corp. in Cleveland, in an interview with Bloomberg Television. At the same time, ``inflationary risks have risen,'' and ``they want to start laying the ground for eventual rate hikes to come,'' he said.
Plosser said recent turmoil at Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies, has ``shaken confidence in our financial institutions and markets,'' which has increased the ``uncertainty surrounding forecasts for the economy, including my own.''
The Fed announced on July 13 that it would lend to the government-chartered companies if necessary. The central bank is ``just kind of a bystander here,'' Plosser told reporters.
Washington-based Fannie Mae has fallen about 65 percent this year in New York trading, while McLean, Virginia-based Freddie Mac has tumbled about 74 percent amid concerns the companies lack enough capital to weather the worst housing slump since the Great Depression.
Inflation Accelerates
U.S. consumer prices surged 5 percent last month from a year earlier, the biggest increase since 1991, a government report showed last week. Such figures are fueling speculation the Fed will raise rates even as a yearlong credit contraction threatens to constrain economic growth.
Bernanke, in congressional testimony last week, said there are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified.''
American households foresee average annual inflation of 3.4 percent over the next five years, the highest expectation since 1995, according to the Reuters/University of Michigan survey.
``If we remain overly accommodative in the face of these large relative price shocks to energy and other commodities, we will ensure that they will translate into more broad-based inflation that -- once ingrained in expectations -- will be very difficult to undo,'' Plosser said today. ``I believe we must and will take the appropriate steps to ensure that does not happen.''
Bernanke said last week that markets and institutions ``remain under considerable stress.'' The benchmark Standard & Poor's 500 Index has dropped almost 20 percent from its record high in October. The subset of financial stocks has tumbled about 45 percent from May 2007.
`Sluggish' Growth
While the outlook for economic growth this year is ``somewhat better'' than a few months ago, Plosser said he expects ``sluggish'' growth in the second half and a rising unemployment rate. So far, economic conditions aren't ``nearly as dire as some people predicted,'' he said afterward.
At the same time, Plosser said he's ``generally more optimistic about 2009,'' projecting that growth in gross domestic product will rise to about 2.75 percent, with the jobless rate declining to 5.25 percent by the end of next year.
Inflation, both including and excluding food and energy costs, will drop to a range of 2 percent to 2.25 percent by the end of 2009, ``provided we set monetary policy appropriately to restrain inflation and keep inflation expectations well- anchored,'' he said.
July 22 (Bloomberg) -- Fannie Mae and Freddie Mac may need to record more writedowns after they expanded their purchases of non-guaranteed subprime and Alt-A mortgage securities just as other investors fled to safer investments, their regulator said.
The value of $217 billion of the so-called non-agency securities is falling as other financial firms write down their holdings, the Office of Federal Housing Enterprise Oversight said in its annual mortgage market report. Privately issued securities backed by subprime mortgages made up 9.2 percent of the companies' combined portfolio, while Alt-A represented about 5.8 percent, Ofheo said.
By investing ``heavily'' in private-label securities in 2004 and 2005, the companies ``significantly increased their exposure to fair value losses from changes in market prices,'' Ofheo said. Structured investment vehicles and securities firms, battered by $452 billion in asset writedowns and credit losses, were invested in similar securities and have contributed to the price swings that may lead to more losses at Fannie Mae and Freddie Mac under generally accepted accounting principles.
``To the extent that those institutions recognize fair value losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well,'' the Washington-based regulator wrote in the report.
Shares Fall
Fannie Mae declined $1.02, or 7 percent, to $13.11 at 10:36 a.m. in New York Stock Exchange composite trading, after earlier slipping as much as 18 percent. Freddie Mac fell 27 cents, or 3 percent, to $8.48, after earlier declining by 20 percent. Fannie Mae had doubled in the past four trading days on optimism that the government won't let the companies fail. Freddie Mac had been up 66 percent in the past four days.
Fannie Mae is down about 67 percent this year, and Freddie Mac about 75 percent, drops that began amid speculation the companies don't have the capital to survive the biggest housing slump since the Great Depression. Both traded at almost $70 a share last year.
Treasury Secretary Henry Paulson said today his rescue plan for Fannie and Freddie will help stabilize financial markets, and that he doesn't anticipate using taxpayer funds.
Housing, Capital Markets
``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television in New York. ``This goes well beyond the two institutions, Fannie and Freddie; it has to do with investors in the United States and investors all over the world.''
Paulson's package will probably cost $25 billion, the Congressional Budget Office said today. The non-partisan agency was assessing the companies' capital needs as Congress weighs Paulson's request for unlimited power to fund Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding.
Paulson on July 13 asked lawmakers for the authority to extend credit and buy equity stakes in Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac if needed amid speculation that the government-sponsored enterprises don't have the capital to survive the biggest housing slump since the Great Depression.
Freddie Mac Losses
Freddie Mac has as much as $24 billion of potential losses related to privately issued subprime and Alt-A mortgage securities that it now calls ``temporary'' as the company is assuming it can recover its investment when the debt matures, Credit Suisse analyst Moshe Orenbuch wrote in a July 16 research note.
Non-agency, or private-label, mortgage securities, once the most profitable home-loan debt for Wall Street, lack guarantees from Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae.
``The exposure at Freddie Mac is about twice that at Fannie Mae,'' Orenbuch said in an interview. He said market conditions have deteriorated since Freddie Mac reported $18 billion in ``temporary'' losses from private label subprime- and Alt-A- mortgage securities.
Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote homeownership. The shareholder-owned companies, the largest U.S. mortgage-finance providers, profit by holding mortgage assets as investments and on guarantees of mortgage- backed securities they create out of loans bought from lenders.
Subprime mortgages are primarily made to borrowers with poor credit, while Alt-A loans are often chosen by borrowers who want atypical loan terms such as proof-of-income waivers or delayed principal repayment without offering compensating attributes.
Subprime Bonds
Subprime and Alt-A mortgage bonds, already trading at or near record lows, may continue their declines as banks limit purchases of some securities and are forced to sell off what they hold, JPMorgan Chase & Co. analysts said in a report last month.
Paulson has been lobbying on Capitol Hill after lawmakers balked at a July 15 hearing at his request, which the Treasury said it anticipated would be enacted this week. Paulson is trying to provide a backstop after Fannie Mae and Freddie Mac shares fell to the lowest level in more than 17 years, threatening to limit their ability to alleviate the mortgage-market collapse.
Freddie Mac registered last week with the U.S. Securities and Exchange Commission, removing the biggest obstacle to selling common stock and increasing its mortgage holdings. The company intends to proceed with a $5.5 billion capital-raising plan it announced in May that ``will include both common and preferred securities,'' according to a statement.
The registration fulfills an agreement made six years ago with lawmakers before the government-chartered company's plans stalled after revealing $5 billion of accounting errors.
July 22 (Bloomberg) -- Treasury Secretary Henry Paulson, trying to persuade Congress to approve his rescue plan for Fannie Mae and Freddie Mac, said U.S. financial market stability is at stake and international investors are awaiting the outcome.
``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television today. ``This goes well beyond the two institutions -- Fannie and Freddie -- it has to do with investors in the United States and investors all over the world.''
The Treasury chief said his plan is about restoring confidence in the two companies, which account for almost half the $12 trillion U.S. mortgage market, and he doesn't expect to have to use taxpayer funds. Paulson predicted that lawmakers will back his proposals, which would give him the right to buy equity in and lend funds to Fannie Mae and Freddie Mac.
``I am confident they recognize the demands of the current situation, and will act to complete work on this legislation this week,'' Paulson said in a speech at the New York Public Library earlier today. ``We must, in the short term, take steps to boost confidence'' in the firms, he said.
Paulson plans to talk with lawmakers when he returns to Washington later today, spokeswoman Michele Davis said. He made two trips to Capitol Hill last week to lobby for his plan after legislators criticized the proposals in a Senate Banking Committee hearing he attended. They expressed concern that the authority could expose taxpayers to unlimited liability.
Taxpayer Funds
``We have no plans right now to put capital in,'' he said in the interview. ``It's very important that the markets know that we're there with capital if necessary,'' Paulson said.
Paulson's outlook is ``far from the only possible result,'' the Congressional Budget Office said today, estimating the cost of his plan at $25 billion. ``Many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected'' on the two companies' balance sheets.
``Such continuing problems would increase the probability that this new authority would have to be used,'' said the CBO, a nonpartisan agency that provides economic and budget analysis for lawmakers.
Fannie Mae fell 95 cents, or 6.7 percent, to $13.18 at 11:27 a.m. in New York Stock Exchange composite trading. Freddie Mac dropped 41 cents, or 4.7 percent, to $8.34. Fannie has dropped about 42 percent in the past month, and Freddie is down about 58 percent, on concern the companies have insufficient capital to cover writedowns and losses amid the mortgage-market collapse.
`Divisive' Measures
Paulson urged Congress not to include ``extraneous'' or ``divisive'' measures in the housing bill, which the House expects to pass tomorrow. The legislation originally was designed to set up a stronger regulator for Fannie Mae and Freddie Mac, and provide for mortgage guarantees to help stem foreclosures.
The Treasury chief asked in an emergency statement on Sunday, July 13, that the bill include the right for the Treasury to buy equity in Fannie Mae and Freddie Mac, and expand their lines of credit. He also urged a role for the Federal Reserve in overseeing the companies' capital.
Democratic lawmakers in the House want to add $4 billion to the bill to provide funds for authorities to buy foreclosed properties, and ease the damage to communities. President George W. Bush's administration has repeatedly threatened to veto the housing bill if it includes the measure.
Wasting Time
``We shouldn't be spending time debating extraneous provisions which I think are counterproductive,'' Paulson said on Bloomberg Television. The GSE-related items in the bill are ``orders of magnitude'' more important than any other items, he said.
``Both sides'' will work to avoid a veto of the bill, he said later on Fox Business Network.
The Treasury chief said that he's worked since 2006 to get Congress to set up a stronger regulator for the two government- sponsored enterprises, recognizing the risks they posed to markets because of their size.
``I would rather not be in the position of asking for extraordinary authorities to support the GSEs'' now, Paulson said. ``But I am playing the hand that I have been dealt.''
Answering questions after his speech, he said that any aid to Fannie Mae and Freddie Mac would be ``collateralized,'' helping provide protection for taxpayers.
Assessing Finances
Paulson also said the Fed and Office of the Comptroller of the Currency are helping assess Fannie Mae and Freddie Mac finances. There is a discrepancy between the judgments of investors and the firms' current regulator, the Office of Federal Housing Enterprise Oversight, he said in an interview with the New York Times yesterday, the paper reported.
The Treasury chief today said he has ``confidence'' in Ofheo, which has said Fannie Mae and Freddie Mac are adequately capitalized.
``The Federal Reserve is working with Ofheo to get a better understanding of the issues facing the GSEs,'' Fed spokesman David Skidmore said today. He said the Fed doesn't have examiners on site at the companies.
Financial market turmoil will take ``additional time'' to be resolved, and progress ``won't come in a straight line,'' Paulson reiterated in his speech. ``Until the housing market stabilizes further, we should expect some continued stresses.''
July 22 (Bloomberg) -- Crude oil fell more than $5 a barrel, dropping to a six week low, on forecasts a tropical storm in the Gulf of Mexico will miss oil fields and refineries, easing concern that supplies will be disrupted.
Oil fell below $126 a barrel, down more than $21 from a record $147.27 reached on July 11, as forecasts showed Tropical Storm Dolly moving toward the Texas border with Mexico. The drop in prices accelerated after futures fell below $129 a barrel, triggering orders to sell.
``It looks like Dolly will be a big rainmaker and nothing else,'' said Kyle Cooper, an analyst at IAF Advisors in Houston.
Crude oil for August delivery fell $5.05, or 3.9 percent, to $125.99 a barrel at 11:33 a.m. on the New York Mercantile Exchange. The contract touched $125.63, the lowest since June 5. Futures are up 66 percent from a year ago. The August contract expires today. The more-active September contract declined $5.22, or 4 percent, to $126.60 a barrel.
Gasoline for August delivery fell 11.58 cents, or 3.6 percent, to $3.1013 a gallon in New York. Futures reached a record $3.631 a gallon on July 11.
Pump prices are following changes in futures. Regular gasoline, averaged nationwide, fell 1.4 cents to $4.055 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.114 a gallon on July 17.
Dolly strengthened over the Gulf of Mexico, and may become a hurricane before making landfall, the U.S. National Hurricane Center said today. Offshore fields in the Gulf are responsible for about 25 percent of U.S. oil production.
The storm's maximum sustained winds strengthened to almost 70 miles (110 kilometers) per hour, the agency said in an advisory on its Web site at 10 a.m. central time. Dolly was 230 miles southeast of Brownsville, Texas, and moving west at 12 mph, with a turn toward the west-northwest forecast.
Production Platforms
Petroleos Mexicanos, Mexico's state oil company, produces about 1.07 million barrels of oil a day in the Bay of Campeche, which is south of the storm's track. Dolly isn't expected to reach company platforms after it enters the Gulf, Petroleos Mexicanos spokesman Javier Delgado Pena said yesterday.
U.S. crude oil and fuel production plunged and prices rose to records when hurricanes Katrina and Rita shut refineries and platforms as they struck the Gulf of Mexico coast in August and September 2005. Katrina shut 95 percent of offshore output in the region. Almost 19 percent of U.S. refining capacity was idled because of damage and blackouts caused by the hurricanes.
Brent crude oil for September settlement dropped $4.54, or 3.4 percent, to $128.07 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $147.50 on July 11.
Strengthening Dollar
Oil futures also declined as the dollar strengthened against the euro, reducing the appeal of commodities as a hedge against the U.S. currency's drop.
``There are dual causes to today's move lower,'' said Brad Samples, commodity analyst for Summit Energy Inc. in Louisville, Kentucky. ``There's a strong move by the dollar, which always puts pressure on energy prices. We aren't worried about Dolly anymore, also putting pressure on prices.''
The U.S. currency rose as Treasury Secretary Henry Paulson predicted lawmakers will pass a bill this week to shore up confidence in Fannie Mae and Freddie Mac. Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed should raise interest rates ``sooner rather than later'' to lower inflation.
The dollar increased 0.8 percent to $1.5798 per euro at 11:22 a.m. in New York, from $1.5922 yesterday. It fell to $1.6038 on July 15, the weakest since the European currency's 1999 debut.
U.S. Senate Democrats expect Wall Street lobbyists to try to defeat a bill aimed at curbing excess speculation and manipulation in oil markets. Senate Majority Leader Harry Reid of Nevada introduced the measure, which may be brought up for debate today, as part of an effort to reduce record prices.
July 22 (Bloomberg) -- Treasury Secretary Henry Paulson's rescue package for Fannie Mae and Freddie Mac would probably cost taxpayers $25 billion, the Congressional Budget Office said.
``There is a significant chance -- probably better than 50 percent -- that the proposed new Treasury authority would not be used before it expired at the end of December 2009,'' the nonpartisan agency, which provides economic and budget analysis for lawmakers, said in a report today.
Democratic lawmakers were seeking to determine the cost of Paulson's plan to offer emergency funding to Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding. Paulson today said Congress understands ``the demands'' of the housing downturn and will likely approve this week his request to help the government- sponsored enterprises.
``We need to act in the short-term because the GSEs are vital institutions in our capital markets today and are vital to emerging from the housing correction,'' Paulson, 62, said in a speech in New York. Fannie Mae and Freddie Mac are among the ``most interconnected of all global financial institutions,'' he said.
Fannie Mae fell $1.61, or 11 percent, to $12.52 at 9:35 a.m. in New York Stock Exchange composite trading. Freddie Mac dropped $1.25, or 14 percent, to $7.50.
Paulson on July 13 asked Congress to grant the Treasury the power for 18 months to buy equity in Fannie Mae and Freddie Mac and expand their credit lines with the government after concern that the companies don't have enough capital sent the shares to the lowest in more than 17 years. Paulson also requested expanded powers for the Federal Reserve to oversee capital requirements.
Political Pressure
The cost of the plan will depend upon terms of the credit, whether the companies have to put up collateral, pay fees or commit a portion of profit to the Treasury, said Marvin Phaup, a CBO economist for almost 20 years who retired in 2007 and is now a research scholar at George Washington University in Washington.
``This is a very very difficult thing to do and of course the political pressure will be great to make the cost estimate zero,'' Phaup said in a telephone interview last week. ``You can make a reasoned argument that it will be zero with some probability, but of course, it's also with some probability it could be very costly to taxpayers.''
Neither the Treasury nor the White House budget office has estimated publicly the cost of the bailout. Paulson has said the plan would restore investor confidence in the companies and thereby pose little cost to taxpayers.
Lawmakers have negotiated with Paulson over the details, with the goal of putting the package to a vote in the House of Representatives tomorrow. The Senate would also need to vote.
The Federal Reserve is talking with the Office of Federal Housing Enterprise Oversight, the regulator for Fannie Mae and Freddie Mac, to determine whether the companies have enough capital to offset credit losses.
More Market Stress
``The Federal Reserve is working with Ofheo to get a better understanding of the issues facing the GSEs,'' Fed spokesman David Skidmore said. The New York Times earlier reported that the Fed and the Comptroller of the Currency are examining the books of Fannie Mae and Freddie Mac to evaluate their health, citing an interview with Paulson.
Paulson said the Treasury has no plans to execute the financial backstop plan, and added that before doing so he would consult with the Congress and the companies. Paulson said financial market turmoil will take ``additional time'' to be resolved and that progress ``won't come in a straight line.''
``Until the housing market stabilizes further, we should expect some continued stresses in our financial markets,'' he said.
Savior No More
The Bush administration is depending on Fannie Mae and Freddie Mac to help pull the U.S. out of the worst housing slump since the Great Depression. The companies, which buy mortgages from banks, face mounting credit losses stemming from the collapse of the subprime-mortgage market.
Freddie Mac may cut purchases of home loans from banks and bonds backed by housing debt to shore up its capital amid record delinquencies.
Freddie Mac, which last week registered with the U.S. Securities and Exchange Commission for the first time, is also considering selling securities and reducing its dividend while it prepares to issue $5.5 billion of stock. JPMorgan Chase & Co. analyst Matthew Jozoff said last week that growth in the mortgage holdings of Freddie Mac and Fannie Mae will be ``weak.''
``This just means much less credit availability for mortgage borrowers,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. ``They were teed up to be saviors of the mortgage crisis, but now they've got their own capital issues.''
Mortgage Losses
Combined losses at the companies will probably total $48 billion through 2009, Jozoff said in a July 18 report.
``Mortgage losses are significant, and will probably foster capital conservation from the agencies rather than portfolio growth,'' he said.
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has said he agrees with Paulson that the cost of a rescue would be insignificant.
Lawmakers will probably cap federal aid by counting any liabilities against the government's debt limit, Frank said. Such a safeguard may reassure lawmakers concerned about taxpayers' exposure to losses, he said.
Minimum Capital
Fannie Mae, created in Franklin Delano Roosevelt's New Deal plan, and Freddie Mac, started in 1970, have the implicit backing of the U.S. government and get access to funds at lower rates than banks, became more indispensable this year after private providers of mortgages collapsed or were acquired.
At the end of March Freddie Mac had $6 billion more than the minimum capital required by its regulator, and Fannie Mae had surplus capital of $5.1 billion. The companies already raised $20 billion in the past year to cover losses and meet Ofheo rules.
Freddie Mac will probably report a surplus exceeding the minimum 20 percent required for the second quarter, according to a company filing with the SEC last week. The SEC registration and equity raising will allow the company to reduce its capital surplus level to 10 percent.
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