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Financial Crisis Hits Obama Presidency as Republicans Plan to Oppose $825 Billion Stimulus

Politics / Credit Crisis 2009 Jan 26, 2009 - 07:58 AM GMT

By: Money_Morning


William Patalon III writes: President Barack Obama's $825 billion stimulus plan heads to the floor of the House of Representatives this week, with House Minority Leader John A. Boehner, R-Ohio, saying many in his party will vote against the package unless significant changes are made.

“Right now, given the concerns that we have over the size of this package and all of the spending in this package, we don't think it's going to work,” Rep. Boehner said yesterday (Sunday) on NBC-TV 's “Meet the Press.” “And so if it's the plan that I see today, put me down in the ‘No' column.”

The plan – detailed in a Money Morning report last week – could potentially pass the Democrat-dominated House without Republican support, The New York Times reported. But the stimulus plan will face major opposition when it comes before the U.S. Senate, U.S. Sen. John McCain, R-Ariz., told “Fox News Sunday.”

If at least two Republicans don't approve the bill, the proposal won't be able to achieve the majority vote of 60 it needs to be filibuster-proof. McCain said he also plans to vote “No” unless the stimulus bill is changed.

“We need to make tax cuts permanent, and we need to make a commitment that there'll be no new taxes,” McCain said. “We need to cut payroll taxes. We need to cut business taxes.”

Added McCain: “We need to have a commitment that after a couple of quarters of [gross domestic product] growth that we will embark on a path to reduce spending to get our budget in balance.”

McCain lost the November presidential election to Obama.

That's not all that's taking place in what figures to be a busy stretch this week.

The economic calendar will heat up this week as economists get their initial look at U.S. gross domestic product (GDP) data for the 2008 fourth quarter. Needless to say, the results are not expected to be pretty, with analysts predicting a 5% contraction during that final three months of the year.

The report is due out Friday.

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported in early December. This downturn – and the bigger-than-usual job cuts that have resulted – could generate a much-bigger financial crisis “ aftershock ” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010, many economists fear.

The U.S. economy shrank 0.5% in the third quarter, marking the slowing pace since 2001 and continuing a still deepening recession that has wrung the markets since last year. GDP advanced 0.9% in the first quarter of last year and 2.8% in the second quarter , Bloomberg News reported.
Dana Saporta, an economist at Dresdner Kleinwort Ltd. in New York, told Bloomberg projects a 5.4% overall contraction in the fourth quarter. Analysts expect the malaise to carry over well into this year.

The stimulus packages – money spent by the newly departed Bush administration, as well as one planned by the newly installed President Barack Obama – will have a lot to say about how long the U.S. economy stays down. As the Republican opposition comments demonstrate, with Congress (the Democratic members, at least) promising a stimulus package by President's Day (February 16th), Obama will have his hands full initiating some “give and take” from the dissenters of the current plan.

On Wednesday, U.S. Federal Reserve Chairman Ben S. Bernanke also leads the first Fed policy meeting of the Obama administration though he and his policymaking cohorts have no more wiggle room when it comes to cuts in the benchmark Federal Fed rate.

But the Fed statement should provide insight into the additional measures the central bank has in its arsenal to help jumpstart the economy.

Earnings season also moves forward with energy companies prepared to show the ill-effects of the drop in oil prices.  Exxon-Mobil Corp. ( XOM ) and Chevron Corp. ( CVX ) announce late in the week, as does consumer products giant Procter & Gamble Co. ( PG ) . Inc. ( AMZN ) also reports quarterly earnings during the week and analysts are speculating whether investors will cheer its results a la Google Inc. ( GOOG ) or frown along the lines of eBay Inc. ( EBAY ) .

Market Matters

Last Tuesday, Barack Obama took the oath of office (for the first time) and became the 44th president of the United States.  In his inaugural address, President Obama called for “action, bold and swift - not only to create new jobs, but to lay a new foundation for growth.” He then acted “boldly and swiftly” by freezing the pay of high-ranking members of his administration.  One of those potential members, U.S. Treasury Secretary-nominee Tim Geithner, faced the wrath of Congress for his role in the mis-handling of the banking bailout plan and for his failure to pay a mere $34,000 in taxes.  Since the treasury secretary oversees the Internal Revenue Service, certain “rule sticklers” in Congress frowned upon his “careless mistakes.”  Still, he was approved by the Senate Finance Committee and is expected to be confirmed – just in time to oversee the distribution of that next round of Troubled Assets Relief Program (TARP) money. 

While Obama begins a new job and tries to “faithfully execute the office” (rather “execute the office faithfully”), a few financial execs are headed for the unemployment line.  John Thain, formerly of Merrill Lynch & Co. Inc . fame/infamy, stepped down or was forced out from his role at Bank of America Corp. ( BAC ) after failing to disclose dramatic losses prior to the shareholder approved acquisition.

In an effort to stop the negativity – and no doubt to try and protect his own job – BofA Chief Executive Officer Kenneth D. Lewis and several cronies bought more than 500,000 company shares, a move that earned a collective yawn from investors.

Citigroup Inc. ( C ) will be replacing Chairman Win Bischoff with ex- Time Warner Inc . ( TWX ) CEO Richard Parsons, and also announced its intent to sell Japan's Nikko Cordial Securities , a move that confirms that brokerage will no longer be considered a core business.  In other financial news, State Street Corp. ( STT ) reported a far-worse-than-expected quarter from its asset management business; U.S. Bancorp ( USB ) announced that profits fell to the lowest level since 2001; Capital One Financial Corp. ( COF ) posted a huge loss in the quarter and predicted that credit card defaults will only grow in 2009.

Across the pond, Royal Bank of Scotland Group PLC (ADR: RBS ) forecast an annual loss above $40 billion which would be the largest ever reported in the United Kingdom.  On the heels of that news, the British government introduced new measures to its bailout plan, including a form of insurance to limit future loan losses.  Investors were hoping that earnings from non-financials would fare better, but Microsoft Corp. ( MSFT ) , eBay , General Electric Co. ( G E), Advanced Micro Devices Inc. ( AMD ) and Xerox Corp. ( XRX ), among others, disappointed with weak results as well (though Google and Apple offered some bright spots).  Time Warner , Intel Corp. ( INTC ) , and Clear Channel (among others) announced layoffs, proving that most sectors of the economy are hurting.  Non-government arranged deals still exist as Pfizer Inc. ( PFE ) attempts to acquire pharmaceutical rival Wyeth ( WYE ) and Mexican billionaire Carlos Slim. Carlos Slim plans to invest $250 million into The New York Times Co. ( NYT ) , The New York Times reported.

Market/ Index Year Close (2008) Qtr Close (12/31/08) Previous Week
Current Week
YTD Change
Dow Jones Industrial 8,776.39 8,776.39 8,281.22 8,077.56 -7.96%
NASDAQ 1,577.03 1,577.03 1,529.33 1,477.29 -6.32%
S&P 500 903.25 903.25 850.12 831.95 -7.89%
Russell 2000 499.45 499.45 466.45 444.36 -11.03%
Fed Funds 0.25% 0.25% 0.25% 0.25% 0 bps
10 yr Treasury (Yield) 2.24% 2.24% 2.30% 2.62% 38 bps

Economically Speaking

A rather slow week on the economic calendar last week allowed investors time to focus on the earnings data.  Housing starts fell for the sixth straight month and building permits, a predictor of future activity, dropped to the lowest level ever reported.

The never-ending layoff announcements continued to hinder the labor picture as jobless claims surged far more than expected.  In China, GDP rose by 6.8% in the fourth quarter, a number that would have prompted parades in this country. In China, however, those numbers confirm dramatic slowdowns in the world's third-largest economy.

The “weak” report means that growth for all of 2008 came in as 9%, the first year since 2002 that China's growth rate fell below double-digits.

Weekly Economic Calendar




January 19 Martin Luther King Day Markets Closed
January 20 Inauguration Day Worst inauguration day performance ever
January 22 Housing Starts (12/08) 6th consecutive monthly decline
Initial Jobless Claims (01/17/09) Last time claims were higher was 1982
The Week Ahead
January 26 Existing Homes Sales (12/08)
Leading Eco Indicators (12/08)
January 27 Consumer Confidence (01/09)
January 28 Fed Policy Meeting Statement
January 29 Initial Jobless Claims (01/24/09)
Durable Goods Orders (12/08)
New Home Sales (12/08)
January 30 GDP – 4th Quarter


William Patalon III
Executive Editor

Money Morning/The Money Map Report

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