ToneHall

Bloomberg: Paulson to Push Debt Ceiling to $11.3 Trillion

Debt levels close to post-WWII?  An additional bump in the national debt to $11.3T?  A budget gap exceeding $1T?  All this in the United States?

Yes....read the excerpt from Bloomberg...the tone is incredulous..

Sept. 23 (Bloomberg) -- Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.

``This is sobering, absolutely sobering, even to someone who doesn't drink,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.

At risk for the world's largest economy: a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan, and a diminished desire among international investors to add to their holdings. The dollar yesterday slid the most against the euro since the European currency's 1999 introduction.

Paulson may be questioned on the borrowing impact of his plan at a hearing at the Senate Banking Committee today that begins at 9:30 a.m. He's asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion from the current $10.6 trillion.

Treasuries fell in the past two trading days after Paulson signaled Sept. 18 a sweeping rescue was needed, with the 10-year note yield rising 29 basis points to 3.84 percent. The two-year note climbed 47 basis points on Sept. 19, the most in 23 years. A basis point is 0.01 percentage point.

$700B Plan Creeping Forward

Congress pushed back against a Treasury plan with no oversight - and the cost of the huge plan may be increased by a plan to assist taxpayers.

The Bush administration backed down and allowed two key Democratic priorities - help for homeowners and Congressional oversight.  The government may take equity sakes in certain companies involved in the rescue.

It remains to be seen what agreements will be reached on limiting executive compensation for firms that get bailed out, and it's uncertain what changes will be made to bankruptch law to allow judges adjust mortgage terms.

This story will continue on Tuesday.  Paulson has been clear about what will happen if Congress fails to act.  Stay tuned...

Goldman Sachs and Morgan Stanley: Will the Regulatory Handcuffs Hurt?

Graduation day for Goldman Sachs and Morgan Stanley.  The party's over with regard to high stakes gambles and tons of borrowed money to take advantage of market opportunities.

They're watched over by the Fed now, and with that comes a host of regulations that the former investment banks aren't used to.  Get ready for the pressure other financials have had for decades with regard to earnings.  It will be interesting to see if they're able to come anywhere near their former profit levels.

The WSJ reported today that "Dozens of federal banking regulators will be permanently stationed at the firms to monitor their risk-taking..." Yikes - that tone of pain indicates quite a sea change.  Leverage ratios may drop by half.

Fasten Your Seatbelts, It's Going to be a Bumpy Night!

It seems this is the way weekends go now - notification in the early evening on Sunday of the latest edition of the financial crisis or the latest reaction to the financial crisis.

Today, the last standing independent investment banks, Morgan Stanley and Goldman Sachs were 'flown up' to full-fledged bank status and given the ability to tap a Fed credit line - after a 5-day waiting period.  It might as well be 5 seconds.

Meanwhile, they can get loans from the Fed - which they'll probably need, as the new 'banks' will almost surely be under-capitalized - and they'll be regulated.

This closes the last chapter of the Glass-Steagall act, a regulation formulated during the depression that separated investment banking from retail banking.  Many believe that the elimination of the wall will increase the potential for cascading negative reactions.

The quote?  Stated by Bette Davis as Margo Channing in All About Eve. Yes, the tone is sarcastic and wry.

William Shakespeare: On Evil

"But then I sigh, and with a piece of scripture,
Tell them that God bids us do good for evil.
And thus I clothe my naked villainy
With odd old ends stolen forth of holy writ,
And seem I a saint, when most I play the Devil."

                -- William Shakespeare, Richard the III

Lin Yutang on the Ephemeral Country

"How many of us are able to distinguish between the odors of noon and midnight, or of winter and summer, or of a windy spell and a still one?  If man is so generally less happy in the cities than in the country, it is because all these variations and nuances of smell and sound are les clearly marked and lost in the general monotony of gray walls and cement pavements."
                            -- Lin Yutang

BBC: Top Republican Says Palin Not Ready

Well, if Hagel says she's not ready, I guess he'd know.  I can't think of another campaign - ever - in which a Senator from a candidate's party said the candidate wasn't ready.  Frankly, I'm shocked.

Here's the BBC excerpt:

Senior Republican Senator Chuck Hagel has voiced doubts about Sarah Palin's qualifications for the vice-presidency.

John McCain's running mate "doesn't have any foreign policy credentials", Mr Hagel told the Omaha World-Herald.

Mr Hagel was a prominent supporter of Mr McCain during his 2000 bid for the US presidency, but has declined to endorse either candidate this year.

He was opposed to the Iraq War, and recently joined Mr McCain's rival Barack Obama on a Middle East trip.

'Stop the nonsense'

"I think it's a stretch to, in any way, to say that she's got the experience to be president of the United States," Mr Hagel told the Omaha World-Herald newspaper.

And he was dismissive of the fact that Mrs Palin, the governor of Alaska, has made few trips abroad.

"You get a passport for the first time in your life last year? I mean, I don't know what you can say. You can't say anything."

This kind of thing will have an effect on independents BBC North America editor Justin Webb

Mr Hagel also criticised the McCain campaign for its suggestion that the proximity of Alaska to Russia gave Mrs Palin foreign policy experience.

"I think they ought to be just honest about it and stop the nonsense about, 'I look out my window and I see Russia and so therefore I know something about Russia'," he said.

"That kind of thing is insulting to the American people."

Bloomberg: Paulson and Bernanke to get Congress to Legislate Corporate Absolution

I'd say only in America, but more likely this is a scenario that would take place in any country with the kind of financial problems we've been experiencing.

It appears that the crisis is so pervasive that the toxic mortgage problem can only be solved by taking the assets off the books.

With Paulson running things, and Bernanke backing him, I'm betting on quick passage of the legislation.

Critical in the excerpt below is Marilyn Cohen's quote, "Hopefully, this will give the trading desks the confidence to start making markets again."  Confidence is just as important as funding.  The one-off solutions just don't meet the need - it's time for some stronger medicine.

This will also encourage companies to clean it all out - there will be no better opportunity than this to get rid of the financial toxins that have been polluting the balance sheets. 

It's the best bet they're going to get - I hope the CFOs are sharpening their pencils and getting prepared to slice off the non-performing junk that's been making their lives miserable.

Here's the excerpt from Bloomeberg:

Sept. 19 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution.

Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative, which may also insure money-market funds, is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.

The effort is a recognition that Paulson's and Bernanke's steps have so far failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.

``They were just worn out and weary from the one-off situations they had to deal with, and finally came to the realization that it's a much more pervasive problem,'' said Marilyn Cohen, who manages $185 million in bonds as president and chief executive of Envision Capital Management in Los Angeles. ``Hopefully, this will give the trading desks the confidence to start making markets again.''

Securities and Exchange Commission Chairman Christopher Cox, who attended the gathering with lawmakers, said the SEC planned to consider more rules to guarantee market liquidity. The commission is weighing a ban on short-sales of the shares of Wall Street brokerages after Morgan Stanley fell 39 percent this week, said a person familiar with the matter.

Stocks Rally

U.S. stock index futures gained more than 1.6 percent, the dollar rose versus the yen and Japan's Nikkei 225 Stock Average climbed 3.1 percent on optimism that Congress and policy makers will enact a comprehensive plan for the crisis.

Options under consideration include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff who spoke on condition of anonymity because the plans may change.

Another possibility is using Fannie and Freddie, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said.

Thoreau on Simplicity

"Our life is frittered away by detail: Simplify, simplify, simplify!  I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumbnail."
                            -- Henry David Thoreau

Financials in Free Fall

WSJ sums it up - we're in a very serious crisis and even the so-called 'experts' don't know where it's headed.  They do know it's bad.

Here's an excerpt from WSJ:

The financial crisis that began 13 months ago has entered a new, far more serious phase.

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners.

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The consequences for companies and chief executives who tarry -- hoping for better times in which to raise capital, sell assets or acknowledge losses -- are now clear and brutal, as falling share prices and fearful lenders send troubled companies into ever-deeper holes. This weekend, such a realization led John Thain to sell the century-old Merrill Lynch & Co. to Bank of America Corp. Each episode seems to bring government intervention that is more extensive and expensive than the previous one, and carries greater risk of unintended consequences.

Expectations for a quick end to the crisis are fading fast. "I think it's going to last a lot longer than perhaps we would have anticipated," Anne Mulcahy, chief executive of Xerox Corp., said Wednesday.

"This has been the worst financial crisis since the Great Depression. There is no question about it," said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy. "But at the same time we have the policy mechanisms in place fighting it, which is something we didn't have during the Great Depression."