Bernanke demands bail-out action
 Mr Bernanke has urged the bail-out to go through |
The chairman of the US Federal Reserve has urged politicians to "act quickly" to support the proposed $700bn (£378bn) bail-out of the financial markets.
The US economy risked "very serious consequences" if measures were not taken, Ben Bernanke added.
Mr Bernanke said Congress must "address the grave threats to financial stability" which were being faced.
On Tuesday politicians expressed strong scepticism about the bail-out following a five-hour Senate hearing on the plan.
'Work together'
 |  Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy  Ben Bernanke Chairman, Federal Reserve  |
Treasury Secretary Henry Paulson had told already the banking panel that delaying the bail-out would put the entire US economy at risk.
The White House has called on Republicans and Democrats to work together to approve the plan, under which a federal fund could buy bad debt from financial institutions with "significant operations in the US".
The fund would aim to sell off these mortgage-related debts in the future when, the Treasury says, their value might have risen.
But congressmen from both sides said they wanted assurances that the plan would benefit ordinary American home-owners as well as Wall Street.
Some have gone further, calling the plan a potential waste of public money.
'Stresses intensified'
For the economy to pick up required a "return to more normal functioning" of the financial system - allowing credit to flow and giving a boost to the housing sector, Mr Bernanke said.
"Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress.
"Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."
He added that the US economy continued to face substantial challenges, including a weakening labour market and elevated inflation.
"Notably, stresses in financial markets have been high and have recently intensified significantly," he said.
"If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse."
Commentary by Amity Shlaes
Sept. 24 (Bloomberg) -- When Hank Paulson powers over like a battleship to Capitol Hill from the Treasury, the eyes of the entire world are on him. That's too bad because there is a real battleship that also requires monitoring as it powers toward the Atlantic. It is Russia's Peter the Great cruiser, which just departed Severomorsk with three other craft to join the navy of Venezuela's Hugo Chavez in maneuvers.
The U.S. always turns inward at times of economic crisis. There's a sense of apocalyptic self-importance -- ``We are the (economic) world'' -- that goes beyond the numerical value of globalization. Most of the energy goes toward blame -- go after the Lehman Brothers Holdings Inc. bosses, unseat the chairman of the Securities and Exchange Commission, halt the Sith Lord short sellers.
Turning inward, the U.S. forgets that its domestic negatives represent opportunity to foreign challengers, and that we ignore those challengers at our peril. Hard as it is to conceive on the Hill, Vladimir Putin represents a greater threat to global stability than either Dick Fuld or Chris Cox.
Consider another moment of economic crisis -- the Great Depression. In 1930, President Herbert Hoover signed the Smoot- Hawley Tariff Act, which raised taxes on imports to historically high levels, even though he knew better because macaroni makers and hemp-cord manufacturers were important constituents in the Republican Party.
The severe unemployment -- two or even three in 10 -- provided the second argument for the tariff. The Hoover administration wasn't wildly protectionist. It was just so preoccupied with domestic troubles that it didn't have time to think past these obstacles.
America First
President Franklin D. Roosevelt also put America first in 1933. London was hosting a monetary conference in the hope that the U.S. would join Europe in writing an international arrangement that might help the world out of the Depression. Bank of England Governor Montagu Norman, especially, was counting on U.S. Secretary of State Cordell Hull and U.S. Treasury Secretary William Woodin to write a sterling-dollar agreement.
But FDR had other concerns. Commodity prices at home were in the toilet. Mobs of farmers dangled lynching ropes before the noses of Midwestern judges who dared to permit foreclosures. It was time for ``individual countries to restore their economic strength,'' FDR said in a statement transmitted to the surprised Europeans. He was going to inflate at home regardless of what Europe said.
`On Your Own'
Other measures Roosevelt would take were recognizing the young Soviet Union and appeasing domestic silver miners by driving up prices for the metal with the Silver Purchase Act. This regardless of what happened to China's fragile silver-based economy.
Taken together, these moves told the rest of the world: ``You're on your own.''
The consequences of these steps we now know. At home, they may have calmed public rage, but they didn't bring recovery. Abroad, they were disastrous. The internationalists in Germany were humiliated; the head of Hitler's Reichsbank, Hjalmar Schacht, told foreign correspondents that ``the depreciation of foreign currencies has further strangled exports'' and Germany would therefore take its future in its own hands.
With U.S. recognition in his back pocket, Josef Stalin began to prosecute his Great Terror. As China scholar Lyric Hughes Hale has pointed out, the rise in silver prices caused by the U.S. punished Chinese borrowers and strengthened the followers of Mao Zedong at a moment when they looked irreversibly weak. Today we are again jerking China around by permitting movements in the dollar for domestic political purposes.
Off the Hook
Historians highlight other points. Harold James of Princeton University sees the decision of the U.S. Congress not to ratify the League of Nations treaty as the signal event.
James also points to the unique damage that can happen during financial turmoil in Washington and on Wall Street: ``There is a sense that this is a crisis that weakens, and so other nations can take advantage.''
This time, of course, the political story isn't about losing Europe. It is about losing Latin America -- to Moscow-backed Chavez, the host of the naval exercise. With Russia behind him, Chavez is likely to fill the vacuum left when Fidel Castro passes.
Cheap Insurance
One of the more compelling figures at the United Nations General Assembly this week is President Alvaro Uribe of Colombia. To sign off on a free-trade agreement with Bogota is one of the cheapest forms of insurance against Chavez the U.S. could take. Yet due to other preoccupations -- this week, bringing Sith Lords to their knees -- U.S. House Speaker Nancy Pelosi won't do it.
At issue is a difference between politics and economics. Politics are binary -- you do either foreign or domestic, but not both at once. In reality, the two are linked. To talk about foreign issues at times like this is sometimes deemed elitist and distant. A multisyllabic-trade agreement makes for much less interesting television spots than, say, a tirade about the gas price at the pump.
But many of the same farmers who hungered because of grain prices in the 1930s found themselves battling in Europe or on the Pacific Islands in the 1940s. In the long run, foreign issues have a way of becoming immediate as well.
Give Paulson a Clean Bill
By Lawrence KudlowHonestly. A clean bill as requested by Treasury man Henry Paulson, along with John McCain's oversight board, can help fix the credit-crunch problem. It needn't be this hard.
According to the Paulson plan, distressed assets will be sold by banks through a reverse auction (the low bid wins) to various investment funds, hedgies, private-equity boys, and other banks. And taxpayers will have a strong ownership position in these asset sales. When the assets are worked out over time -- as they will be once housing and the economy recover -- taxpayers will actually make money on the deal.
This is similar to the RTC story twenty years ago, when Bill Seidman presided over similar asset sales from bankrupt S&Ls and wound up making money for Uncle Sam and his taxpayers. A long prosperity wave followed.
In fact, industry insiders tell me the Federal Reserve and the SEC may be moving toward a five-to-seven year amortization plan for the scoring of bank losses from the sale of this distressed paper. This is very constructive. Fed head Ben Bernanke also is talking about getting rid of mark-to-market accounting and moving towards "hold to maturity." This is good.
But the credit arteries are now clogged with a terrible virus that can be removed by the Paulson rescue plan. And as the problem is solved, credit and loans will be made more available to Main Street homeowners, small businesses, and consumers of every type. Credit markets will gradually unfreeze. It can be done. A deep recession can be avoided.
And maybe along the way we can get a strong King Dollar to fight inflation and attract international investment. And perhaps, just perhaps, we can get more drilling to reduce gas prices at the pump -- a big recovery tonic. And, dare I hope, maybe we even can get corporate tax reform with lower tax rates, which along with energy deregulation will spur jobs and wage growth.
But after Tuesday's Senate hearing I'm very concerned. The bells and whistles that would be attached to Paulson's plan by our Democratic friends are anti-capitalist and anti-opportunity.
Capping compensation for both the selling and purchasing institutions? What? Salaries and bonuses are no business of the government. People go to work for profits. For opportunities. It's at the heart of our free-market capitalist system.
Now, I can understand companies like AIG, Fannie, and Freddie, which effectively have been nationalized. That's different. I don't care if they all make $75,000 a year, just like the regulators. But to stretch this to the banks that are selling or buying the assets goes beyond the pale. It's France. But it's France heading toward the old Soviet Union, or at least Tsar Putin's Russia.
And then there's the ownership question. Some Democrats want Uncle Sam to take an ownership position in all the selling and purchasing banks. This is nuts. In America, this is nothing but property confiscation. It also will sharply curb buyers of the distressed assets.
You think Henry Kravis or Steve Schwarzman are gonna take a salary cap and lose an ownership share of the private-equity funds they themselves created and built? They shouldn't and they won't. And these funds are crucial to the new process. The only banks that will sell in this over-regulatory environment are the absolute, near-bankruptcy turkeys.
Meanwhile, Sen. McCain apparently has proposed that the buying and selling banks have comp-levels no higher than the top paycheck in the U.S. government, which I guess is the president's at around $400,000 a year. Hey, I've got an idea. Let's raise the chief executive's pay to $50 million. He probably earns it anyway.
It's these congressional bells and whistles that really trouble me. And they also trouble the stock market. Stocks absolutely roared last Thursday and Friday when they got wind of Paulson's program. But Monday and Tuesday, as the new details leaked out and various Democratic senators put their ideas on the table, shares plunged big time. What does that tell you?
I can understand legitimate concerns about a big-government intervention and a giant $700 billion number. There's a shock effect here. But once in a while the financial center of capitalism goes into panic mode and something has to be done.
Actually, it's a marvel that we permit government to infrequently come to the rescue of our credit system. It doesn't happen everyday. But it has been necessary going all the way back to Alexander Hamilton's original rescue of our failing debt system in the 1790s.
Understanding this history, conservatives should not panic or walk away from the Paulson assistance plan. It would be great to avoid either a deep credit-driven recession or a global banking meltdown -- or both. Paulson has always viewed his rescue plan as an economic-growth tool. I think he's right.
The United States of Mind
Researchers Identify Regional Personality Traits Across America
STEPHANIE SIMON
Certain regional stereotypes have long since become cliches: The stressed-out New Yorker. The laid-back Californian.
But the conscientious Floridian? The neurotic Kentuckian?
You bet -- at least, according to new research on the geography of personality. Based on more than 600,000 questionnaires and published in the journal Perspectives on Psychological Science, the study maps regional clusters of personality traits, then overlays state-by-state data on crime, health and economic development in search of correlations.
The Geography of Personality
View an interactive map of states' personality profiles, with details on each state's rankings in all five categories.
Even after controlling for variables such as race, income and education levels, a state's dominant personality turns out to be strongly linked to certain outcomes. Amiable states, like Minnesota, tend to be lower in crime. Dutiful states -- an eclectic bunch that includes New Mexico, North Carolina and Utah -- produce a disproportionate share of mathematicians. States that rank high in openness to new ideas are quite creative, as measured by per-capita patent production. But they're also high-crime and a bit aloof. Apparently, Californians don't much like socializing, the research suggests.
As for high-anxiety states, that group includes not just Type A New York and New Jersey, but also states stressed by poverty, such as West Virginia and Mississippi. As a group, these neurotic states tend to have higher rates of heart disease and lower life expectancy.
Lead researcher Peter Jason Rentfrow, lecturer at the University of Cambridge in England, said he was startled to find such correlations. "That just blew me away," he said.
Psychologists unaffiliated with the study say it's intriguing but limited. There's no way to unravel the chicken-and-egg question: Do states tend to nurture specific personalities because of their histories, cultures, even climates? Or do Americans, seeking kindred spirits, migrate to the states where they feel at home? Maybe both forces are at work -- but in what balance?
Another issue: The personality maps may reinforce stereotypes and tempt us to draw overly simplistic conclusions, said Toni Schmader, a psychologist at the University of Arizona. Knowing Arizona ranks low in neuroticism, Ms. Schmader said, she might conclude that sunny weather makes for sunny dispositions. But if the data had turned out the other way, the sun could just as easily be blamed for high neuroticism -- for driving Arizonans stir crazy by keeping them cooped up in air conditioning.
"We tend to reject information that doesn't agree with our stereotypes," Ms. Schmader said.
Cross-cultural psychology was all the rage in the 1930s and 1940s, driven by a craze among anthropologists for comparing child-rearing practices in modern and pre-industrial societies. But the discipline fell out of favor, partly because of concerns that the comparisons were driven more by value judgments than standardized assessments.
In the past decade, the field has been reinvigorated by the development of a 44-question personality test that evaluates five traits: extraversion, agreeableness, conscientiousness, neuroticism and openness. Some psychologists disagree with this matrix; others would add traits such as honesty. But the assessment, called the Big Five Inventory, has been widely used in scientific research.
Mr. Rentfrow came to the field full of questions gleaned from a life spent hop-scotching across America. Why were his neighbors in Texas so relaxed, so courteous, so obsessed with sports? Why did New Yorkers seem so tense and inward-focused, often brusque to the point of rudeness?
Eager to dig deeper, Mr. Rentfrow turned to a huge collection of psychological tests administered online from 1999 to 2005.
The assessments were linked to each respondent's current residence, so there was no way to tell if a New Yorker was a New Yorker born and bred, or had just moved from Kansas. But that suited Mr. Rentfrow's purposes. He wasn't trying to gauge how life in New York had shaped any one individual. His goal was a psychological snapshot of the state, and for that he needed to include even recent migrants -- who may, after all, have been drawn to New York because the big-city bustle suited their personality.
Mr. Rentfrow said his sample was proportionate to the U.S. population by state and race. Though it underrepresented the extremes of poor and rich, that shouldn't skew the results, he said.
While the findings broadly uphold regional stereotypes, there are more than a few surprises. The flinty pragmatists of New England? They're not as dutiful as they may seem, ranking at the bottom of the "conscientious" scale. High scores for openness to new ideas strongly correlates to liberal social values and Democratic voting habits. But three of the top ten "open" states -- Nevada, Colorado and Virginia -- traditionally vote Republican in presidential politics. (All three are prime battlegrounds this election.)
And what of the unexpected finding that North Dakota is the most outgoing state in the union? Yes, North Dakota, the same state memorialized years ago in the movie "Fargo" as a frozen wasteland of taciturn souls. Turns out you can be a laconic extrovert, at least in the world of psychology. The trait is defined in part by strong social networks and tight community bonds, which are characteristic of small towns across the Great Plains. (Though not, apparently, small towns in New England, which ranks quite low on the extraversion scale.)
The findings pleased Nebraska Gov. Dave Heineman, who said it was nice to have scientific proof that his state is super-friendly. "That's the Nebraska I know," he said.
But Las Vegas Mayor Oscar B. Goodman can't understand how Nevada got ranked so low in agreeableness. "We're probably the most agreeable folks in the world, because we have to treat visitors with a great deal of kindness ... to get a big tip," he said.
In Florida, meanwhile, tourism official Dia Kuykendall groped to explain her state's high "conscientious" ranking. She was having trouble reconciling that with, say, the party scene on Miami Beach. "Conscientious of how they look?" she wondered.
The research did give Ms. Kuykendall an idea for a new Florida tourism pitch: "Come visit us, we're not neurotic!"
Social scientists suggest other applications for the research as well. In the Northeast "stress belt," health officials might consider programs to help folks relax. In the Midwest, a dutiful state like Kansas might look to woo more innovative personalities, perhaps by nurturing an artists' enclave or encouraging young chefs to start restaurants, said Richard Florida, an economic development analyst who has written extensively on geography and psychology.
"Most cities are still trapped in the idea that they can recruit a call center or build a big stadium" to spur revitalization, Mr. Florida said. "This is a big wake-up call for policy makers."
It's also a wake-up call for proud residents of the great state of wherever -- some of whom aren't fond of the findings. Mr. Rentfrow said he's had to help some of them feel better. Yes, North Dakota and Wyoming rank quite low in openness to new ideas. But why label them narrow-minded and insular? Say, instead, he suggests, that they value tradition. New York may be neurotic, but he offers another way to put it: "It's a state in touch with its feelings."
Or take a cue from Ted Ownby, who studies Southern culture at the University of Mississippi. His state came up highly neurotic -- and he suspects his neighbors would be proud.
"Here in the home of William Faulkner," Mr. Ownby said, "we take intense, almost perverse neuroticism as a sign of emotional depth."
Our Generals Almost Cost Us Iraq
MACKUBIN THOMAS OWENS
The dominant media storyline about the Iraq war holds that the decisions about how to conduct it pitted ignorant civilians -- especially the president and secretary of defense -- against the uniformed military, whose wise and sober advice was cavalierly ignored. The Bush administration's cardinal sin was interference in predominantly military affairs, starting with overruling the military on the size of the force that invaded Iraq in March 2003.
But it's not just the media that peddles this story. As Bob Woodward illustrates in his new book, "The War Within: A Secret White House History 2006-2008," it also resonates among many senior uniformed military officers.
The plausibility of the narrative rests on two questionable principles. The first is that soldiers have the right to a voice in making policy regarding the use of the military instrument -- that indeed they have the right to insist that their views be adopted. The second is that the judgment of soldiers is inherently superior to that of civilians when it comes to military affairs. Both of these principles are at odds with the American practice of civil-military relations, and with the historical record.
In our republic the uniformed military advises the civilian authorities, but has no right to insist that its views be adopted. Of course, uniformed officers have an obligation to stand up to civilian leaders if they think a policy is flawed. They must convey their concerns to civilian policy-makers forcefully and truthfully. But once a policy decision is made, soldiers are obligated to carry it out to the best of their ability, whether their advice is heeded or not.
Moreover, even when it comes to strictly military affairs, soldiers are not necessarily more prescient than civilian policy makers. This is confirmed by the historical record.
Historians have long recognized that Abraham Lincoln's judgment concerning the conduct of the Civil War was vastly superior to that of Gen. George McClellan. They have recognized that Gen. George C. Marshall, the greatest soldier-statesman since George Washington, was wrong to oppose arms shipments to Great Britain in 1940, and wrong to argue for a cross-channel invasion during the early years of World War II, before the U.S. was ready.
Historians have pointed out that the U.S. operational approach that contributed to our defeat in Vietnam was the creature of the uniformed military. And they have observed that the original -- unimaginative -- military plan for Operation Desert Storm in the Gulf War was rejected by the civilian leadership, which ordered a return to the drawing board. The revised plan was far more imaginative, and effective.
So it was with Iraq. The fact is that the approach favored by the uniformed leadership was failing. As the insurgency metastasized in 2005, the military had three viable alternatives: continue offensive operations along the lines of those in Anbar province after Fallujah; adopt a counterinsurgency approach; or emphasize the training of Iraqi troops in order to transition to Iraqi control of military operations. Gen. John Abizaid, commander of the U.S. Central Command, and Gen. George W. Casey, commander of the Multi-National Force in Iraq -- supported by Secretary of Defense Donald Rumsfeld and Joint Chiefs Chairman Gen. Richard Myers -- chose the third option.
Transitioning to Iraqi control was a logical option for the long run. But it did little to solve the problem of the insurgency, which was generating sectarian violence. Based on the belief by many senior commanders, especially Gen. Abizaid, that U.S. troops were an "antibody" to Iraqi culture, the Americans consolidated their forces on large "forward operating bases," maintaining a presence only by means of motorized patrols that were particularly vulnerable to attacks by improvised explosive devices. They also conceded large swaths of territory and population alike to the insurgents. Violence spiked.
In late 2006, President Bush, like President Lincoln in 1862, adopted a new approach to the war. He replaced the uniformed and civilian leaders who were adherents of the failed operational approach with others who shared his commitment to victory rather than "playing for a tie." In Gen. David Petraeus, Mr. Bush found his Ulysses Grant, to execute an operational approach based on sound counterinsurgency doctrine. This new approach has brought the U.S. to the brink of victory.
Although the conventional narrative about the Iraq war is wrong, its persistence has contributed to the most serious crisis in civil-military relations since the Civil War. According to Mr. Woodward's account, the uniformed military not only opposed the surge, insisting that their advice be followed; it then subsequently worked to undermine the president once he decided on another strategy.
In one respect, the actions taken by military opponents of the surge, e.g. "foot-dragging," "slow-rolling" and selective leaking are, unfortunately, all-too-characteristic of U.S. civil-military relations during the last decade and a half. But the picture Mr. Woodward draws is far more troubling. Even after the policy had been laid down, the bulk of the senior U.S. military leadership -- the chairman of the Joint Chiefs of Staff, Adm. Mike Mullen, the rest of the Joint Chiefs, and Gen. Abizaid's successor, Adm. William Fallon, actively worked against the implementation of the president's policy.
If Mr. Woodward's account is true, it means that not since Gen. McClellan attempted to sabotage Lincoln's war policy in 1862 has the leadership of the U.S. military so blatantly attempted to undermine a president in the pursuit of his constitutional authority. It should be obvious that such active opposition to a president's policy poses a threat to the health of the civil-military balance in a republic.
Mr. Owens is a professor at the Naval War College and editor of Orbis, the journal of the Foreign Policy Research Institute.
Bankruptcy Ploy
Apparently Democrats in Congress aren't satisfied with the billions of dollars that will be required to clean up their Fannie and Freddie mess. As the price for passing Treasury Secretary Hank Paulson's asset-purchase plan, Democrats are pushing a plan to make it easier for borrowers to renege on their mortgage payments yet still keep their home.
As Senator Chris Dodd's Banking Committee Web site explains it, "The only way to really help homeowners keep their homes is to allow borrowers to get the mortgages on their first homes reduced to the market value of those homes through bankruptcy." This may sound like a great idea to troubled borrowers, but since taxpayers are increasingly now the lenders in these transactions, it will simply increase the cost of Mr. Paulson's plan.
The pain may be even more acute for those hoping to buy a home, if markets logically respond by setting mortgage interest rates closer to those on, for example, auto loans or credit cards. A bankruptcy judge is now free to reduce amounts owed on many types of consumer debt. For mortgages, the iron-clad requirement to pay off the loan or lose the house is precisely to encourage lower rates on a less risky investment.
Justice John Paul Stevens described the importance of this principle in 1993 in Nobelman v. American Savings Bank: "At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual's interest in retaining possession of his or her home than of other assets. The anomaly is, however, explained by the legislative history indicating that favorable treatment of residential mortgages was intended to encourage the flow of capital into the home lending market."
That's why a group of moderate Democrats put up roadblocks in the House when Judiciary Chairman John Conyers wanted to move a broad "cramdown" bill last year. After much delay, his scaled-down version passed his committee but went no further. Even a financial crisis is no reason to enact a measure sure to increase costs for both taxpayers and borrowers.
Mobile phones
Here we go again
Google’s mobile phone launches a familiar-looking race
NOT since the launch of Apple’s iPhone last year has the unveiling of a handset caused such a stir. On Tuesday September 23rd T-Mobile, a mobile operator owned by Germany’s Deutsche Telekom, presented its new phone, the G1, which is made by HTC, a Taiwanese manufacturer. The reason for the buzz is that the device is the first to be based on software called Android, made by Google, the largest internet company.
The phone naturally invites comparisons to the iPhone, still the most elegant “smartphone” on the market. But these focus on the wrong thing. It is not the features or design that matter, since the two phones aim at different users. Rather, it is what each phone is likely to do for the industry as a whole. The iPhone, for its part, has already demonstrated that consumers do and will use mobile phones to search, browse and otherwise use the internet. Vendors of other smartphones, such as RIM, the maker of the famous BlackBerry, are now racing to match the iPhone in usability. As they do so, mobile-internet usage has begun to rise steeply.
But fancy smartphones account for less than 15% of the mobile-phone market, according to Kevin Burden at ABI Research, a consultancy. Most consumers, using simpler phones that the industry confusingly calls “feature phones”, are not going online while on the move. These are the people that Google and its partners are targeting.
For one thing, Android-based phones will be cheaper than smartphones. But the more fundamental difference harkens back to the mid-1980s, when the PC era was dawning and two rival operating systems—one from Apple, the other from Microsoft—were competing to become the dominant platform for which software companies would develop useful programs. Something similar is now happening with phones, all of which will become “smart”.
Most mobile operators and handset-makers are searching for a platform for their mass-market phones of the future. Many have of late warmed to Linux, a free, open-source operating system which can be customised. Some are tweaking Linux to make their own flavours. Others, such as those in the LiMo (Linux Mobile) Consortium, are working on a standard version. None, however, has the clout of Google. Its operating system, Android, is also a variant of Linux, and will be open-source once the phones are in the market.
Google hopes that other carriers and handset-makers—South Korea’s Samsung and LG appear to be next—will adopt Android to save themselves the expense of developing their own software. It also hopes that developers will start improving Android and writing fun applications for it, making it as ubiquitous as Microsoft Windows became in the PC era (but has failed to become on phones). In PCs, Apple ended up with a premium-priced, high-end niche, while Microsoft dominated the market with a product that is inferior in many respects but good enough for most people. Might something similar be about to happen with phones, but with Google as the new Microsoft?
Sept. 24 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's bailout plan hinges on answering the question that has vexed global markets for more than a year and sunk two securities firms: What's a bad mortgage worth?
Pay too much for hard-to-value mortgage debt held by banks and recouping taxpayers' $700 billion investment becomes less likely, Merrill Lynch & Co. analysts led by Akiva Dickstein wrote in a Sept. 22 report. Pay too little and the banks may either refuse to sell or be forced to hoard cash to make up for losses, the analysts said.
``This pricing thing is the 800-pound gorilla, the absolute core of the whole plan,'' said Bert Ely, a banking industry consultant in Alexandria, Virginia. ``If the government takes an aggressive posture, it benefits taxpayers but it means some of the banks will have serious capital problems. This has the potential of politically being very troubling.''
Paulson said an economic recovery in the U.S. depends on stabilizing home prices, which were down 18.8 percent in June from their peak two years ago, according to the S&P/Case-Shiller Home Price Index. That rebound is impossible without mortgage financing, and it's unclear how the government bailout will make credit more available, said New York-based UBS AG analyst David Goldberg.
Helps Balance Sheets
``This plan clearly helps bank balance sheets, but to what end?'' Goldberg said in an interview. ``Why do we make the assumption that it will lead to looser lending standards? It's conceivable it might be exactly the opposite. So I'm not sure this helps that much.''
To ensure bank solvency, regulators require institutions to keep a minimum amount of cash on hand based on the loans they've made, said Gary Gordon, an analyst at Portales Partners LLC in New York.
Some banks have set aside money to cover losses on mortgage assets and some haven't, Gordon said. Those that haven't will lend less because they have to keep their cash to meet loss reserves, he said.
``If banks don't have loss provisions, they'll need to shore up their capital and that might cause a contraction of credit,'' Nouriel Roubini, chairman of Roubini Global Economics and professor of economics at New York University's Stern School of Business, said in an interview. ``We're still in the process of a severe housing recession, with or without this plan.''
Proposed Bailout
The proposed bailout, being debated in Congress, comes in the wake of the Sept. 15 bankruptcy filing of New York-based Lehman Brothers Holdings Inc., the biggest U.S. underwriter of mortgage- backed securities, and the Sept. 7 nationalization of the two biggest U.S. mortgage finance companies, Washington-based Fannie Mae and Freddie Mac, based in McLean, Virginia.
Credit markets froze in August 2007 after two hedge funds run by New York-based Bear Stearns Cos., the fifth-largest U.S. securities firm, collapsed due to the deteriorating value of its mortgage-related holdings. An inability to set a price on such securities has frozen the market, said Joshua Rosner, managing director at Graham Fisher & Co. in New York.
``It's not a liquidity problem, it's a valuation problem,'' Rosner said.
After its value fell 93 percent in a week, Bear Stearns was bought by New York-based JPMorgan Chase & Co., the third-largest U.S. bank by assets, in a bailout orchestrated in March by the Federal Reserve.
The Paulson plan would focus on $6 trillion of residential mortgages not currently owned or guaranteed by Fannie Mae or Freddie Mac, and $3.4 trillion in commercial and multifamily loans and mortgage-backed securities, according to the analysts at New York-based Merrill Lynch.
The government would hold a reverse auction, Paulson said, meaning that firms holding the distressed assets would submit bids on the prices at which they were willing to sell. The Treasury might then buy the assets that are offered at the lowest prices.
Fewer Mortgages
In testimony yesterday to the Senate Banking Committee, Paulson called his troubled-asset relief program the ``single most effective thing we can do to help homeowners'' and the overall economy.
In a Sept. 11 report, the Washington-based Mortgage Bankers Association estimated that 20 percent fewer residential mortgage loans would be made this year than in 2007. Home-loan borrowing was at a 26-year low in the second quarter, according to the Federal Reserve's Sept. 18 Flow of Funds report.
The number of available mortgages will fall even further, said William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985.
``I doubt the banks that got burned in subprime mortgages will start lending anytime soon,'' Isaac said. ``I wouldn't expect a rapid comeback of the mortgage market anytime soon, especially the lower end.''
Price Comfort
In a survey of real estate executives released this month by the Chicago-based law firm DLA Piper LLP, 46 percent said they didn't expect securitized commercial property lending to return to its previous market levels until at least 2011. Sixteen percent reported that securitized lending will never again reach those levels.
``The banks haven't been able to make loans because they can't get comfortable on the price of the assets,'' said Jay Epstien, a Washington-based partner in the law firm and chairman of its U.S. real estate practice group. ``The price is the key variable. How do you pin that down? I'm sure Congress will agree that the devil is in the details in implementing this plan.''
Accounting rules require holders of mortgage debt to establish its value on an ongoing basis and post losses when it declines.
22 Cents
Merrill said in July it sold $30.6 billion of collateralized debt obligations, which included mortgages, to an affiliate of the Dallas-based investment firm Lone Star Funds for $6.7 billion, resulting in a pretax writedown of $4.4 billion. The sale valued the CDOs at about 22 cents on the dollar.
``I think the key to the Paulson program is the belief in the decoupling of the intrinsic value of the securities from market valuations,'' said Jay Brinkmann, chief economist for the Mortgage Bankers Association. ``Treasury can bid somewhere between full value and market value and the lenders would not take a big hit on the sale.''
The Treasury Department should buy the distressed mortgage- related assets at ``hold-to-maturity'' value, which assumes that the debt will be paid in full over time, rather than at discounted prices, Federal Reserve Chairman Ben S. Bernanke said at yesterday's congressional hearing.
In a conference call with analysts yesterday, Stuart Miller, chief executive officer of Miami-based Lennar Corp., the second- biggest U.S. homebuilder by revenue, said Paulson's plan wouldn't stop home-price declines.
``The current stop-gap measures to aid hard-hit financial companies will be repeatedly frustrated by falling home prices and the securities that back them,'' Miller said.
Ten percent, or $1.1 trillion, of the $11.25 trillion of U.S. mortgages are delinquent or in foreclosure, according to Guy Cecala of Bethesda, Maryland, trade newsletter Inside Mortgage Finance.
``The $700 billion theoretically would be enough to completely pay off about two-thirds of all troubled mortgages in the country,'' Cecala said.
Sept. 24 (Bloomberg) -- Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won't happen quickly enough to ease short-term funding constraints.
The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. The corresponding rate in euros rose 7 basis points to 4.91 percent and the pound rate also advanced 7 basis points, to 5.91 percent.
``There's no real term funding markets except for central banks,'' said Meyrick Chapman, a fixed-income strategist in London at UBS AG. ``The Libor is meaningless. It's for unsecured lending and there is no unsecured lending as far as I can see.''
Money markets have frozen since the collapse of the U.S. housing market more than a year ago. Efforts by the Federal Reserve, along with central banks worldwide, to revive lending through emergency cash auctions have failed as banks hoard cash and balk at lending to each other on concern more institutions will go bankrupt.
The collapse of Lehman Brothers Holdings Inc. and the U.S. government's takeover of insurer American International Group Inc. last week sent the overnight rate for dollars to 6.44 percent on Sept. 16, double the rate of the previous day.
The Treasury and Fed last week unveiled a $700 billion plan to move troubled assets from the balance sheets of U.S. financial companies and put them in a new institution.
Record Cash Demand
Demand for euros at today's European Central Bank auction of three-month loans was the strongest on record, while banks paid a record premium for dollar loans at yesterday's Fed sale.
The ECB allotted 50 billion euros ($73.3 billion) at a marginal rate of 4.98 percent. That's the highest since 2000. Banks bid for 155 billion euros. Banks paid 3.75 percent at yesterday's 28-day Fed term auction facility, or TAF. That's 57 basis points more than yesterday's one-month rate, the widest spread since the TAF program began in December.
Libor loans aren't secured and typically command rates above those of secured loans of similar maturities.
``We've seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday's one-month Libor will no doubt add to that,'' said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country's second-biggest bank.
Libor-OIS Widens
The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 30 basis points to 165 basis points today, the highest level since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
To help ease the gridlock in dollar funding, the Fed arranged $30 billion in swap lines today with central banks in Norway, Sweden, Denmark and Australia.
The Fed, the ECB and the Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada last week to pump hundreds of billions of dollars into the financial system.
The world's biggest financial companies posted $522 billion in subprime-related losses and writedowns since the start of last year. That's more than last year's gross domestic product of Ireland and Finland combined, according to data compiled by Bloomberg.
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