Citing Grave Financial Threats, Officials Ready Massive Rescue
Lawmakers Work With Fed, Treasury To Try to Restore The Flow of Money
The Bush administration is urgently preparing a massive intervention to revive the U.S. financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.
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House Republicans Criticize U.S. Action on Crisis (Update3)
By Brian Faler
Sept. 18 (Bloomberg) -- The Bush administration's response to the turmoil in financial markets has turned into ``bailout mania'' and should be curtailed, a group of House Republicans said today.
``Enough is enough,'' said Representative Jeb Hensarling of Texas. ``It's time to bail out the American taxpayers from bailout mania.''
The Republican Study Committee, a group of more than 100 self-described conservative lawmakers, released a letter today asking Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to ``refrain from conducting any additional government-financed bailouts for large financial firms.''
``These massive federal bailouts have exposed taxpayers to literally tens of billions of dollars of new risk,'' and created a ``moral hazard where companies are absolved, not punished, for excessive risk taking,'' the letter said.
The criticism of President George W. Bush by fellow Republicans suggests a growing backlash in Congress to the recent government interventions, and highlights the president's increasing isolation as his term draws to a close.
Bush, in comments today at the White House, said the administration will continue in its current course.
Stabilizing Markets
``The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence,'' Bush said.
The furor over bailouts was triggered by a series of recent actions. The Federal Reserve Board, with support of the U.S. Treasury, invoked emergency powers to lend as much as $85 billion to American International Group Inc. to save the insurance giant from collapse. At the start of the week, Lehman Brothers Holdings Inc. filed for bankruptcy after the government declined to save the company. That followed the bailout of Bear Stearns Cos. in March, and the takeover of Fannie Mae and Freddie Mac earlier this month.
House Minority Leader John Boehner, an Ohio Republican, declined today to ``second-guess'' the policy makers' decision to take over AIG, saying ``history will show'' whether they made the right call. Boehner said he and other lawmakers are frustrated though that they haven't received more consultation on the decisions from the administration.
`Lack of Information
``I am and all my colleagues here on the Hill are concerned about the lack of information, the lack of consultation that has occurred,'' he told reporters today. ``We are a separate branch of our government. Members are entitled to information.''
He said the administration ``refused'' to send someone to Capitol Hill today to meet with Hensarling's group. Asked whether Bernanke is going too far in using public money to shore up private companies, Boehner said: ``I have concerns as do all of my colleagues.''
Lawmakers will ``have to go back home and explain'' to constituents ``why we gave $80 billion to an insurance company, which is unprecedented,'' said Republican Representative Ray LaHood of Illinois. ``What do we say to them? Nobody asked us.''
New Jersey Representative Scott Garrett, also a Republican, said Paulson and Bernanke may be exaggerating the severity of the threat.
``It's very easy for them to stand up here and say, `Well but for us taking this action, calamity would have occurred in the world' because you have no evidence to say otherwise,'' he said. ``Only historians, I guess, in the future will be able to go back and analyze that.''
Budget Panel
Representative Paul Ryan of Wisconsin, the top Republican on the House Budget Committee, said lawmakers ought to consider rewriting the Federal Reserve's charter to curtail its ability to prop up private companies.
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said he disagreed, though he said Bernanke has too much power to decide how to spend public dollars.
``I think Chairman Bernanke is a responsible and thoughtful person,'' said Frank. ``But no one in a democracy, unelected, should have $800 billion to dispense as he sees fit,'' he said. ``He can make any loan he wants under any terms to any entity or individual in America.''
To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net.
Last Updated: September 18, 2008 16:51 EDT
Central Banks Offer Extra Funds to Calm Money Markets (Update7)
By John Fraher and Simon Kennedy
Enlarge Image/Details
Sept. 18 (Bloomberg) -- The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the aftermath of the 1929 Wall Street crash.
The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated. Several of them lent funds in their own currencies as well with the Fed adding a record $105 billion in temporary reserves.
Policy makers have struggled to revive confidence in markets this week as investors stockpiled money on concern more financial institutions would fail after the bankruptcy of Lehman Brothers Holdings Inc. and the U.S. government bailout of American International Group Inc. The cost to hedge against losses on U.S. government debt climbed to a record yesterday.
``There's a complete lack of faith in the markets,'' said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. ``There's a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.''
Cheaper Borrowing
Markets welcomed the announcement, which was made in statements from each central bank at 9 a.m. Frankfurt time at the start of European trading. The cost of borrowing dollars overnight slid to 3.84 percent from 5.03 percent yesterday. It was 2.15 percent last week and reached the highest since 2001 on Sept. 15.
The Fed will spray dollars around the world via swap lines with other central banks. They can then auction them in their own markets.
The ECB, Bank of England and SNB allotted a total of $64 billion for one day today. With both the ECB and Bank of England offering $40 billion, U.K. banks bid for just $14 billion, while those in the 15-nation euro area sought almost $102 billion.
``The timing, so early in the trading day, shows both the severity of the strains in the interbank market and as well the authorities' determination to resuscitate orderly functioning of the money markets,'' said Julian Callow, head of European economics at Barclays Capital in London.
$110 Billion for ECB
Under the new arrangements, the ECB doubled the limit of dollars it can get from the Fed to $110 billion and Switzerland's central bank can offer $27 billion, an extra $15 billion. Today marked the first time the two had auctioned dollars overnight since swap lines were opened with the Fed last December.
New swap facilities with the Bank of Japan, the Bank of England and the Bank of Canada amount to $60 billion, $40 billion and $10 billion, respectively. The arrangements are authorized until Jan. 30.
The ECB said it would offer $40 billion ``for as long as needed'' in overnight funds to the region's banks. It will also increase by $5 billion the amount it lends for 28 days and 84 days to $25 billion and $15 billion. The Swiss National Bank will boost its 28-day auctions to $8 billion and the 84-day offering to $9 billion. Both were previously $6 billion.
The Bank of Canada said it has decided not to draw on its $10 billion swap facility at this time. The Bank of Japan, whose policy board held an emergency meeting today, said it will use its $60 billion as required by market conditions.
Adding Euros, Pounds
In auctions of their own currencies, the ECB today lent 25 billion euros in one-day money and the Bank of England 66.2 billion pounds in one-week loans.
The joint action is the latest attempt by central bankers to fight the financial crisis which deepened this week after Lehman and AIG tumbled and Merrill Lynch & Co. was sold. The crisis began over a year ago after the U.S. housing market imploded and has pushed the world economy to the brink of recession.
As markets seized up this week, central bankers pushed more than $200 billion into markets with those in Japan, Hong Kong, South Korea and Australia doing so again today. The U.S. Treasury today announced plans to sell an additional $100 billion in short- term debt to aid the Fed's balance sheet as it extends credit to financial companies.
Wall Street's woes have gone global, forcing the U.K. government to sponsor a rescue of mortgage lender HBOS Plc and Russia to pour money into its banks. Russia's government said today it would invest in the country's stock market when it reopens tomorrow. The official Xinhua News Agency said China will buy equity stakes in state-owned banks to stabilize its market.
Swap Lines
Swap lines were first established in December when officials joined forces to boost dollar liquidity around the world after interest-rate reductions in the U.S., the U.K. and Canada failed to ease concerns about bank lending. The Fed increased its link with the ECB in July.
The announcement today boosted U.S. shares, which have been pummeled this week as contagion spread through financial markets. The Standard & Poor's 500 Index jumped 9.47, or 0.8 percent, to 1,165.86 at 11:05 a.m. in New York, recovering about one-fifth of its loss from yesterday. More than $19 trillion has been wiped off the value of global stock markets since Oct. 31.
Failure to calm markets will see central banks inject even more cash, said Robert Barrie, an economist at Credit Suisse Group in London. Other options central banks could take include accepting greater collateral denominated in foreign currencies, increasing lending to banks abroad and eventually even buying assets directly.
``The lack of dollars has been making the financial crisis worse around the world, which is why we now have this coordinated response,'' Barrie said. The rate of borrowing in dollars for three months rose to the highest since January, indicating bankers are still wary.
Unaddressed Problem
Laurence Mutkin, head of European fixed income strategy at Morgan Stanley, said that while the central banks had prevented money markets from failing, their intervention didn't ``address the key problem'' of banks sitting on cash and refusing to lend.
Since the credit squeeze began in August 2007, central banks have sought to keep apart the need to soothe markets and to combat inflation. They argue that interest rates are a blunt tool for helping markets and that price pressures prevent them from cutting rates.
While the Fed slashed its key lending rate to 2 percent, the central bank has left it there since April. The Bank of Japan kept its key rate at 0.5 percent this week and the European Central Bank increased its benchmark to a seven-year high in July. The Swiss National Bank kept its key rate on hold today.
If the spasms in the markets continue and threaten to derail growth central bankers may shift, although for now they will want to wait, said Kevin Gaynor, head of economics at Royal Bank of Scotland Group Plc in London.
``Partly this is to keep powder dry and partly because cutting interest rates won't make much difference,'' he said.
To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Simon Kennedy in Paris at Skennedy4@bloomberg.net
Resurrect the Resolution Trust Corp.
By NICHOLAS F. BRADY, EUGENE A. LUDWIG and PAUL A. VOLCKER
We are in the midst of the worst financial turmoil since the Great Depression. Absent bold action, matters could well get worse.
Neither the markets nor the ordinary diet of regulatory orders, bank examinations, rating downgrades and investigations can do the job. Extraordinary emergency actions by the Federal Reserve and the Treasury to date, while necessary, are also insufficient to resolve the crisis.
Fannie Mae and Freddie Mac, the giants in the mortgage market, are overextended and now under new government protection. They are not in sufficiently robust shape to meet all the market's needs.
The fact is that the financial system needs basic, long-term reform, but right now the system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times.
Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions. This contraction will undercut the financial system, and with it, the broader economy that so far has held up reasonably well.
There is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.
Such a stabilizing mechanism would accomplish four much-needed tasks:
- First, by buying paper that otherwise is effectively not trading, it would help restore liquidity to the marketplace and help markets to function more fluidly again.
- Second, by warehousing the troubled paper for a longer period than, for instance, the Fed's discount window typically should or could, it would allow for a more orderly liquidation of this paper, and the chance for much of it to recover a portion of its value.
- Third, by giving the agency the ability to manage mortgages with flexibility to keep people in their homes and businesses running, it should lessen the number of foreclosures. This, in turn, would help moderate the decline in real estate values and the deterioration of neighborhoods, thus supporting house prices that in fact lie at the heart of the crisis.
- Fourth, where necessary, like the RTC of the 1980s, this new mechanism can assist the Federal Deposit Insurance Corporation in resolving sick institutions that are so clogged with the troubled paper they cannot continue as independent entities. However, we would hope that purchasing the mortgage-related paper will minimize the need to provide emergency, short-term assistance to solvent banking institutions.
It is certainly the case that the new institution we are proposing will in the short run require serious money. That will involve a risk to the taxpayer; but the institution, administered by professionals, means that ultimate gains to the taxpayer are also possible.
Moreover, a failure to act boldly in the fashion we are suggesting would cost the taxpayer and the country far more. The pathology of this crisis is that unless you get ahead of it and deal with it from strength, it devours the weakest link in the chain and then moves on to devour the next weakest link. A deteriorating financial system, diminished economic activity, loss of jobs and loss of revenues to the government is enormously costly. And the cost to our citizens' well-being is incalculable.
Crisis times require stern measures. America has done well in the past to face up to economic turmoil, take strong measures, and put our problems behind us. RTC-like mechanisms have worked well in past crises. Now is the time to take a similarly forceful step.
The American economy still has enormous underlying strengths. What we need, and in part are proposing, is a road map to financial stability.
Mr. Brady was U.S. Treasury secretary from 1988-1993. Mr. Ludwig was U.S. comptroller of the currency from 1993 to 1998. Mr. Volcker was chairman of the Federal Reserve from 1979-1987.
Five banks exploring WaMu records
By Saskia Scholtes in New York
Published: September 18 2008 20:19 | Last updated: September 18 2008 23:53
Five banks have come forward to evaluate Washington Mutual’s financial records as part of an auction process run by WaMu’s adviser, people familiar with the matter said on Thursday.
WaMu shares rose 14 per cent on Thursday after news it had put itself up for sale. The five banks that have looked through the WaMu materials include JPMorgan Chase, Wells Fargo, Citigroup, HSBC and Banco Santander, the people familiar said. It was unclear whether any of them intended to make an offer for WaMu.
EDITOR’S CHOICE
Full coverage: Global financial crisis - Sep-16
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TPG clears way for WaMu sale - Sep-17
Lex: WaMu’s downgrades - Sep-16
WaMu faces price to keep deposits - Sep-16
Battered WaMu tries to calm jitters - Sep-12
Goldman Sachs is conducting the auction for Seattle-based WaMu, which is the sixth largest US bank, with $310bn in assets.
JPMorgan and Wells Fargo both declined to comment. Citi, HSBC and Santander were not available for comment.
JPMorgan made an offer for WaMu this spring but was rebuffed. JPMorgan may be waiting to see whether the auction heats up before determining whether to bid for WaMu’s assets now or try to buy pieces of the bank more cheaply later, sources close to the matter said.
Fred Cannon, analyst at Keefe, Bruyette & Woods, said WaMu’s franchise and retail branch network on the west coast of the US made it an attractive prospect for banks such as JPMorgan, but added that a buyer would have to take up to a $37bn accounting hit from the deteriorating mortgage portfolio.
TPG, the private equity firm that led an investor group that put $7bn into WaMU in April, on Wednesday tried to facilitate a sale of the ailing bank, waiving its right to be compensated for dilution from any future capital-raising.
In its memo to its investors back in April, TPG estimated that cumulative losses from the residential mortgages at WaMU would likely be in the ”mid $20 billions” but other firms looking at WaMu at the time thought losses could be far higher.
WaMu’s troubles have accelerated over the past week after downgrades to junk status from Standard & Poor’s and Moody’s rocked investor confidence.
If the auction does not draw interest, Goldman may have to evaluate other options for the bank. These could include raising capital by selling off the attractive assets, which would still leave WaMu holding the mortgage portfolio, or raising fresh capital to allow the bank to stand alone – a challenge in the current climate.
TPG litself put $2bn into WaMu. Since then, TPG has sold down its exposure and now has about $1.3bn spread across three of its funds.
TPG’s right to a so-called “reset” – originally meant to safeguard the value of its minority investment in WaMu – made it difficult to attract new capital and effectively functioned as a poison pill.
Copyright The Financial Times Limited 2008
Freddie Mac says Lehman owed it over $1.2 billion
YORK (Reuters) - Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) said on Thursday it has yet to receive payments of more than $1.2 billion due from Lehman Brothers Holdings LEHM.PQ, which went bankrupt after the U.S. government refused to bail out the investment bank. Mortgage giant Freddie Mac, which was taken over by the government about two weeks ago, said Lehman was due to make principal payments of $1.2 billion plus accrued interest under unsecured lending transactions due to mature Sept 15, the day Lehman filed for bankruptcy protection.
In a document filed with the Securities and Exchange Commission, it said Lehman also services single-family loans for Freddie Mac and estimated its potential exposure to Lehman for servicing-related obligations, including repurchase obligations, was about $400 million.
But the mortgage company said it did not know whether or to what extent it will take a loss related to the transactions and noted that actual losses could be materially greater than its estimates.
Freddie Mac said it is in the process of evaluating its exposures to Lehman and its affiliates arising under other business relationships and that until this is complete it could not provide assurances as to the amount of its exposure.
(Reporting by Sinead Carew; Editing by Anshuman Daga)
State Street, Federated Fall After Money-Fund Loss (Update2)
By Matthew Keenan and Christopher Condon
Sept. 18 (Bloomberg) -- State Street Corp. fell 8.9 percent and Federated Investors Inc. and Bank of New York Mellon Corp. declined in New York trading on concerns that money-market funds will be hit by a wave of losses.
At one point, Boston-based State Street plunged as much as 55 percent. The stocks dropped after BNY Mellon said a $22 billion institutional fund suffered losses on debt issued by bankrupt Lehman Brothers Holdings Inc. While not a money-market fund, BNY Mellon's $22 billion Institutional Cash Reserves was designed to work like one.
Money-market funds, considered the safest investments after bank deposits and Treasury debt, were swept into turmoil after the Reserve Primary Fund said Sept. 16 that losses on Lehman debt forced its net asset value below the $1-a-share price paid by investors. The oldest U.S. money fund, which managed $62.6 billion before investors yanked 60 percent of their cash earlier in the week, was the first money-market fund in 14 years to break the buck, as falling under $1 is known.
``Money-market funds are viewed by most as very safe investments where you put in a dollar and get out a dollar,'' said E. William Stone, who oversees $66 billion as chief investment strategist at PNC Wealth Management in Philadelphia. ``If you had one that went below a dollar, people would view that poorly. That's the concern swirling around.''
Lehman, AIG
Investors have been scouring money-fund financial reports for holdings of Lehman, whose debt was written down as worthless by Reserve Primary. They are also concerned that the funds will suffer losses on American International Group Inc., which was taken over earlier this week by the U.S. government, and Washington Mutual Inc., whose shares have plunged 83 percent this year.
State Street fell $5.75 to $59 at 4:15 p.m. in New York Stock Exchange composite trading. It fell as low as $29.09 earlier in the day.
Federated Investors, the fourth-largest money-fund manager, lost $3.41, or 11 percent, to $27.10 after being down as much as 44 percent. BNY Mellon declined $1.53, or 4.6 percent, to $31.57 after dropping as much as 36 percent.
State Street and Federated issued statements saying that none of their money-market funds had broken the buck. Companies including Wachovia Corp. have pledged to support their money- market funds in case of investment losses.
BNY Mellon Institutional Cash Reserves fell to $0.991 a share on Sept. 16. The New York-based company has ``isolated the Lehman assets in the fund into a separate structure,'' Ivan Royle, a spokesman for the New York-based company, said today.
The fund invests cash deposited as collateral by clients who borrow securities from BNY Mellon, the world's largest custody bank. Lehman debt represented 1.13 percent of the fund's holdings.
Putnam Closes Fund
Putnam Investments LLC in Boston said today that it closed the $12.3 billion institutional Putnam Prime Money Market Fund yesterday after receiving a surge of investor redemptions. It plans to return all cash to investors.
State Street investors may be worried that earnings would be hurt if institutional investors curtail securities lending, said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia.
The California Public Retirement System, the largest U.S. pension; California State Teachers' Retirement System; and New York State Common fund have decided to stop lending shares of Morgan Stanley and Goldman Sachs Group Inc. to short sellers after the companies fell because of the credit crisis.
Credit Risks
Also weighing on State Street was a Merrill Lynch & Co. report that said the credit crisis may force the company to raise additional capital.
Merrill analyst Brian Bedell wrote in a report yesterday that State Street investors ``may remain concerned about credit risks'' in State Street's investment holdings and in commercial paper programs called conduits. The Boston-based company, which sold stock in June, may be required to raise new capital if markets deteriorate, he said.
``The question that has the market nervous in this setting is whether the capital raise was sufficient, assuming they have to bring this off-balance-sheet item back on,'' said Gayle, who helps oversee $70 billion, including State Street shares.
State Street said in a statement that it doesn't ``believe that consolidation of its conduits is required.''
``State Street confirms that even if it had to consolidate its conduits, it would remain well capitalized with ample sources of liquidity,'' according to the statement
The company doesn't ``currently have any plans to raise additional equity,'' the statement said.
State Street Global Advisors managed about $43.6 billion in money-market funds as of Aug. 31, according to in Crane Data LLC in Westborough, Massachusetts. The company said its money-market funds have never declined below $1 a share. That includes a fund used in connection with collateral management for State Street securities-lending program, the statement said.
To contact the reporters on this story: Matthew Keenan in Boston at mkeenan6@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net.
Putnam Closes Money-Market Fund After Withdrawals (Update2)
By Christopher Condon
Sept. 18 (Bloomberg) -- Putnam Investments LLC closed its $12.3 billion institutional Putnam Prime Money Market Fund yesterday and plans to return all cash to investors.
The fund, which was valued yesterday at $1 a share, experienced ``significant redemption pressure,'' the Boston- based company said in a statement. A drop below $1 a share, known as breaking the buck, would have exposed investors to losses.
The fund had no current exposure to securities issued by Lehman Brothers Holdings Inc., Washington Mutual Inc. or American International Group Inc., the company said.
Reserve Primary Fund, the oldest U.S. money-market fund, on Sept. 16 became the first in 14 years to break the buck. Investors pulled 60 percent of their money from the $62.6 billion fund on Sept. 15 and 16 before withdrawals were delayed.
Putnam, a unit of Canadian insurer Great-West Lifeco Inc., said in a shareholder report for the period ended March 31 that the Putnam Prime Money Market was continuing to invest in short- term debt issued by ``large global banks.'' The fund looks for banks with sizable franchises and diverse revenue sources that can help them weather economic slowdowns, according to the report, which cited Citigroup Inc. and Bank of America Corp. as examples of companies that fit these criteria.
As of June 30, Putnam Prime Money Market held $27 million of Lehman debt that matured on Aug. 27, along with $98.5 million of senior secured notes issued by Merrill Lynch & Co. that also came due last month, according to an Aug. 28 filing with the U.S. Securities and Exchange Commission. The fund also held about $109 million of notes issued by Wachovia Corp. that mature next year in February and August.
`Cautionary Stance'
In its March report, Putnam Prime said its ``cautionary stance'' toward mortgage and credit markets helped the fund avoid securities ``that proved the most disappointing'' in terms of falling values earlier this year and in 2007. ``The fund not only lacked direct exposure to the subprime mortgage market,'' the report said, but also avoided investments in structured investment vehicles that came under scrutiny when financial markets ``experienced credit and liquidity problems.''
Other Putnam funds hold shares in the Prime money-market fund, according to SEC filings. The fund was managed by Joanne Driscoll, 38, who, prior to joining Putnam in 1995, worked as a graduate teaching assistant in the finance department of Northeastern University in Boston and as a financial associate at Bank of Boston.
To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net
Modern history’s greatest regulatory failure
By Roger Altman
Published: September 17 2008 18:52 | Last updated: September 17 2008 18:52
Financial market conditions have now descended to the lowest point since the banking shutdown of 1932. In one 96-hour period, we saw three nearly unimaginable events. Lehman Brothers, America’s fourth-largest securities firm, filed for bankruptcy. Merrill Lynch, the best-known firm, was forced overnight to sell itself to Bank of America. And market pressures forced the Federal Reserve into a huge $85bn takeover of AIG, our largest insurer, to avert its bankruptcy.
All of this occurred only two weeks after the massive federal rescue of Fannie Mae and Freddie Mac and three months after the collapse of Bear Stearns. Market participants around the world have been shocked senseless by these serial failures. Their confidence has evaporated, replaced by an unprecedented level of fear. That is why lending is frozen and worldwide markets are plunging.
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Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers
'They constructed a mechanism that simply didn't work'
By JULIE SATOW, Staff Reporter of the Sun | September 18, 2008
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/
U.S. Meltdown Reflects Regulators' Failures, Wu Says (Update1)
Sept. 18 (Bloomberg) -- U.S. regulators failed to manage the risks of new financial products and China needs to learn the lessons to avoid its own meltdown, former central bank deputy governor Wu Xiaoling said.
``The U.S. crisis reflects regulatory problems in the U.S. and innovative financial products that ignored basic economic rules,'' Wu told a financial conference in Beijing today. ``The U.S. crisis today would be China's tomorrow if financial products such as securitization are introduced without proper risk-control measures.''
China has resisted years of pressure from U.S. Treasury Secretary Henry Paulson to open its financial system more quickly and add new products. Those barriers helped the nation limit its losses and writedowns from the credit-market crisis to less than 1 percent of the $516 billion global total.
``Now is the time for the Chinese to say that `you didn't do it quite right either,''' said David Cohen, an economist at Action Economics in Singapore. ``The world is very dependent on China to help cushion the downturn.''
This week, the crisis drove Lehman Brothers Holdings Inc. into bankruptcy and forced American International Group Inc. into the hands of the U.S. government. Merrill Lynch & Co. sold itself to Bank of America Corp. Morgan Stanley is weighing a merger with Wachovia Corp. and other banks, people familiar with the matter said.
Asian Stocks Tumble
Asian stocks tumbled to the lowest in three years today while gold and U.S. Treasuries surged as concerns mounted that more financial firms will collapse. China's benchmark CSI 300 Index fell 5.1 percent as of 1:27 p.m. in Shanghai.
Paulson said last year that China risked wasting trillions of dollars in resources and lost economic potential unless it rapidly opened its capital markets.
``An open, competitive and liberalized financial market can effectively allocate scarcer resources in a manner that promotes stability and prosperity far better than government intervention,'' Paulson said in Shanghai in March last year. ``Time is of the essence.''
China's government may thwart new financial products including derivatives and enhance risk-management practices to avoid a U.S.-style crisis, the bank regulator's deputy research chief, Fan Wenzhong, said today at the Beijing conference. He's also a former Lehman economist.
Stability `Not Speed'
The aim of China's financial reforms is ``not speed, it's about stability,'' he said.
In the past three years, China dropped a decade-old currency peg to the U.S. dollar, introduced foreign-exchange swaps and forwards and expanded the bond market as the government moves to a more market-driven financial system.
It's yet to allow margin trading -- where investors borrow money to buy shares -- or futures contracts based on equity indexes. The central bank said last year that it was tightening disclosure rules on sales of asset-backed bonds.
U.S. banks ``dared'' to lend to riskier borrowers in the hope that a housing boom would continue and interest rates would stay low, Wu said. Sellers of financial derivatives ``abandoned the principle of letting clients fully understand their risks,'' she said.
Crisis `Far From Over'
Wu, the deputy director of the Financial and Economic Affairs Committee of the National People's Congress, which is China's legislature, wouldn't say when the crisis may end.
``No one really knows how many times these subprime derivatives were repackaged and how many times the risks were amplified, so the crisis is far from over.''
China's losses and writedowns are $4.3 billion, according to Bloomberg data.
The nation's stocks fell today as international credit markets seized up, stoking concern that more financial companies will collapse. Industrial & Commercial Bank of China Ltd., which has $151.8 million at risk because of the Lehman collapse, dropped 4.7 percent.
To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net
'The World As We Know It Is Going Down'
By Marc Pitzke in New York
Panic is the word of the hour on Wall Street. Now even Morgan Stanley is fighting for survival. The commercial bank Wachovia and China's Bank Citic are being discussed as possible rescuers. The crisis has led President Bush to cancel a trip.
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