Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20
Does the Stock Market Really "See" the Future? - 12th Sept 20
Basel III and Gold, Silver and Platinum - 12th Sept 20
Tech Stocks FANG Index Nearing Critical Support – Could Breakout At Any Moment - 12th Sept 20
The Tech Stocks Quantum AI EXPLOSION is Coming! - 12th Sept 20
AMD Zen 3 Ryzen 4000 Questions Answered on Cores, Prices, Benchmarks and Threadripper Launch - 12th Sept 20
The Inflation Mega-trend is Going Hyper! - 11th Sep 20
Gold / Silver Ratio: Slowly I Toined… - 11th Sep 20
Stock Market Correction or Reversal? The Jury Isn't Out! - 11th Sep 20
Crude Oil – The Bearish Outlook Remains - 11th Sep 20
Crude Oil Breaks Lower – Sparking Fears Of Another Sub $30 Price Collapse - 11th Sep 20
Inflation by Fiat - 10th Sep 20
Unemployment Rate Drops. Will It Drag Gold Down? - 10th Sep 20
How Does The Global Economy Recover After This Global Pandemic? - 10th Sep 20
The Best Mobile Casino - 10th Sep 20
QE4EVER! - 9th Sep 20
AMD Ryzen Zen 3 4800x 10 Core 5ghz CPU, Cinebench Benchmark Scores (Est.) - 9th Sep 20
Stock Traders’ Dreams Come True – Big Technical Price Swings Pending on SP500 - 9th Sep 20
Should You Be Concerned About The Stock Market Big Downside Rotation? - 9th Sep 20
Options Traders Keep "Opting" for Even Higher Stock Market Prices - 8th Sep 20
Gold Stocks in Correction Mode - 8th Sep 20
The law of long-term time preference and Gold ownership - 8th Sep 20
Gold Bull Markets: History and Prospects Ahead - 8th Sep 20
Sheffield City Centre Coronavirus Shopping Opera Ahead of Second Covid-19 Peak - 8th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Washington Credit Crisis Bailout Plan Compromise Chaos

Politics / Credit Crisis Bailouts Sep 26, 2008 - 10:37 AM GMT

By: Money_Morning

Politics Best Financial Markets Analysis ArticleJason Simpkins, Jennifer Yousfi write: Congressional negotiators late yesterday (Thursday) reached a tentative agreement on a credit-crisis compromise that gives the Bush administration about a third of the $700 billion it has requested up front, but made sure half that outlay was subject to a congressional veto, published reports state.


Details remained sketchy late yesterday. However, this much is known. Under the plan – known as the “Troubled Assets Rescue Plan,” or TARP – U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. would get an immediate $250 billion to begin bailout operations, and could obtain an additional $100 billion if needed. The final installment of $350 billion could be blocked by a Congressional vote .

TARP is designed to give lawmakers a controlling stake in the unprecedented credit-crisis bailout plan, industry sources and The Associated Press both reported. Money Morning Contributing Editor R. Shah Gilani – a former hedge-fund manager and currency trader who this week proposed an alternate plan that wouldn't burden taxpayers with billions in federal debt – said it will be tough to evaluate TARP until all the details are known.

But he clearly didn't have strongly positive feelings about either Paulson's original plan or the revised TARP proposal put forth by congressional negotiators late yesterday.

“Commenting on what's under the TARP [proposal] is like asking if there's a Hell below us,” Gilani said in an interview late yesterday. “We won't know until we get there.”

Anatomy of a Deal

The tentative plan calls for the federal government to buy the “toxic,” mortgage-backed assets of failing – or failed – financial institutions in a bid to keep the U.S. financial system from melting down. A meltdown would be the penultimate event that would sap investor confidence, setting in motion a series of irreversible events that would wipe out savings, cause a big spike in home foreclosures, and ultimately, cause a major surge in unemployment after thousands of small businesses fail and major companies resort to widespread layoffs.

The Bush administration has made concessions almost daily to demands from both the political right and left from its original three-page proposal, including agreeing to limit pay for executives of bailed-out financial institutions.

Debate has been fierce on such questions as whether to phase in the cost and whether to give taxpayers an equity stake in rescued companies. House Financial Services Committee Chairman Barney Frank, D-Mass., told The Associated Press that both would be included in the legislation.

While details of the plan were not immediately provided, the compromise is said to include provisions to curb executive compensation for participating companies, provide more oversight of the Treasury's actions, and supply the government with stock warrants that let the government share in profits generated by participating Wall Street firms.

We came to some agreements on a lot of important issues ,” Frank told The Los Angeles Times . “We are on track to pass this.”

Investors Show Their Approval

U.S. stocks soared yesterday on news that Congress had reached an agreement.

After soaring as much as 300 points, the Dow Jones Industrial Average Index pared gains in late afternoon trading. But all three major U.S. indices still had solid jumps for the day, as optimism that Congress would soon pass the bailout legislation buoyed U.S. markets.

The blue-chip Dow gained 196.89 points (1.82%), to close at 11,022.06. The tech-laden Nasdaq Composite Index shot up 30.89 points (1.43%) for the day to 2,186.57. And the broader Standard & Poor's 500 Index rose 23.40 points (1.97%), to reach 1,209.27.

All sectors were up with the energy sector's 2.64% gain and the financial sector's 2.32% increase some of the highest.

Optimism lies in the hope that we're nearing the end of the credit crisis and that Paulson's plan will help settle things down and businesses can get back to functioning as normal,” James Gaul, a Boston-based money manager at Boston Advisors LLC, which oversees $1.8 billion, told Bloomberg News .

Financials such as JPMorgan Chase & Co. ( JPM ) and Bank of America Corp. ( BAC ) posted gains of 7% and 4%, respectively. Other stocks such as IBM Corp. ( IBM ), up 3% for the day, gained on hopes that the bailout plan would lead to economic recovery and reignite consumer demand. 

A Wait-And-See Saga For Commodities

Gold fell yesterday, as investors waited to see the full details of the amended bailout plan. Gold for December delivery fell $13, a decline of 1.5%, to end at $882 an ounce on the Comex division of the New York Mercantile Exchange, MarketWatch reported.

"Until the bailout proposal becomes law, investors will remain reluctant to take big positions in a number of commodity complexes," Edward Meir, a commodities analyst at futures brokerage MF Global Ltd. ( MF ), told MarketWatch .

But that position could quickly reverse once the proposed bailout becomes law – causing gold and other precious metals to soar in price.

The plan "will continue to undermine the value of the U.S. dollar and further support a flow of capital out of paper into hard assets, into gold and silver," said Peter Spina, president of Gold Seek LLC.

Oil got a boost on hopes that the bailout would jumpstart the U.S. economy and spur demand. Crude oil for November delivery rose $2.29, or 2.2%, to close at $108.02 a barrel on the New York Mercantile Exchange, according to MarketWatch data.

The bailout plan "is certainly driving the [oil] market higher" on hopes of a recovery in the U.S. economy, said Mark Waggoner, president of Excel Futures. “Once the initiative is passed, however, the market should revert lower to $98-$100 levels,” or even less.

Bush Backs Paulson's Plan

President Bush addressed the nation Wednesday night and tried to explain the crippling credit crisis, and why the costly bailout plan was needed, to the American public. 

" We're in the midst of a serious financial crisis ," Bush said in a nationally televised address, MarketWatch reported. "Our entire economy is in danger," as a result of the credit crunch, he said, and inaction on the plan could result in a "long and painful recession."

The high price tag for the $700 proposed bailout has triggered fear and disbelief with many voters. But Bush did his best to reassure the nation that taxpayer funds are in good hands at the Treasury Department.

"We expect that much, if not all, of the tax dollars we invest will be paid back," Bush said.

Bush explained that the U.S. government was the only entity with the patience to hold the troubled securities until the credit markets unfreeze and return to a more normal state of operation.

Gilani, the Money Morning editor, said he's stunned over how quickly this so-called agreement was reached.

“It's mind-boggling to me to even attempt a compromise in only a matter of days with regard to $700 billion, as if that's tip money,” he said. “There's something drafty in this whole process of hasty compromise and I'm afraid that it's going to turn into an ill wind and the worst kind of open partisan warfare after the fact.”

Rather than receiving the entire $700 billion in one lump sum, the Treasury Department will receive $250 billion immediately, with the remainder to be paid in installments. This is intended to provide more congressional oversight.

“The question is, first … do they actually need the whole $700 billion?” asked Sen. Charles Schumer, D-NY. “And, second, what kind of checkpoints are there along the road?”

A protracted dispersion of funds should give Congress opportunities to monitor the bailout's effectiveness over the next several months, proponents of the new TARP proposal said.

But Gilani sees this “bailout installment plan” as being problematic.

“Doling out capital in installments to satisfy the market's ravenous appetite for liquidity is like giving a starving person a nickel to buy a meal,” he said.

The new plan also includes caps on executive pay for company executives, which Paulson initially opposed. Rep. Frank on Sunday referred to lavish executive salaries and bonuses as a "perverse incentive" that encourages executives to take inappropriate or excessive risks in exchange for multi-million-dollar payouts, and therefore, part of the problem.

Paulson finally agreed yesterday, stating that “the American people are angry about executive compensation and rightfully so. We must find a way to address this in the legislation.”

The plan will likely include stock warrants that compensate the federal government, and perhaps the U.S. taxpayers, for their investment.

“Right now the price of admission [to the proposed Treasury program] is zero,” Sen. Jack Reed, D-RI, said Tuesday. “It's not inappropriate to demand that if they benefit from this transaction in the future … that they will share that benefit with the taxpayers who made the benefits possible."

Money Morning 's Gilani can't help but wonder if this isn't a case of too little, too late.
“Everyone knew since at least August 2007 that we were facing an increasingly dangerous credit crisis; that was the shot across our bow,” Gilani said. “When Bear Stearns failed in March that was a direct hit and we should have declared war. To now be trying to nuke the crisis with a $700 billion-bomb of legislation just makes me more afraid of the fall-out.”

Editor's Note : Contributing Editor R. Shah Gilani has toiled in the trading pits in Chicago, run trading desks in New York, operated as a broker/dealer and managed everything from hedge funds to currency accounts. In his just-completed three-part investigation of the U.S. credit crisis, Gilani was able to provide insider insights that no other financial writer or commentator could hope to match. He drew upon the experiences and network of contacts that he developed through the years to provide Money Morning readers with the "real story" of the credit crisis. It's a perspective on the near-financial meltdown that you'll find nowhere else. If you missed Gilani's investigative series, Part I appeared Friday , Part II ran Monday and Part III was published Wednesday . In his “Open Letter to U.S. Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, members of Congress and the governor of your state,” Gilani details a bailout proposal that he believes will fix the problem quickly and effectively – at little cost to taxpayers. If you like the plan, mail the plan to the leaders of Congress or to the governor of your state.]

News and Related Story Links :

By Jason Simpkins, Jennifer Yousfi
And William Patalon III

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules