News & Current Affairs

November 25, 2008

US Fed unveils new $800bn rescue

US Fed unveils new $800bn rescue

A US home that has been repossessed

The Fed’s aim is to prevent a deep economic slump

The Federal Reserve is to pump $800bn (£526.8bn) into the markets in another bid to deal with the financial crisis.

The US central bank said it would use $600bn to buy-up mortgage-backed securities to help encourage lending.

Separately the Fed also unveiled a $200bn plan to help unfreeze the consumer credit market.

As the credit crisis has deepened, banks and other financial institutions have been reluctant to lend, deepening the economic slowdown.

Under this new rescue plan – which is in addition to the already-announced $700bn bank bail-out – the Fed is to buy up to $100bn in debt from the troubled mortgage giants Fannie Mae and Freddie Mac.

The central bank said it would also buy another $500bn in mortgage-backed securities – pools of mortgages that are bundled together and sold to investors.

New bail-out

The $600bn effort on mortgages came as the Fed also unveiled a separate program to help unfreeze the consumer debt market.

The central bank said it would lend up to $200bn to the holders of securities backed by various types of consumer loans, such as credit cards and student loans.

The Fed said that the $600 billion effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability.

It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months.

The severe financial crisis that is rocking global markets at the moment began more than a year ago with rising defaults on subprime mortgages, loans provided to borrowers with weak credit histories.

‘Unblocking credit’

Recently, Treasury secretary Henry Paulson had indicated that the government was working on this new program, which will be supported by $20bn of credit protection provided by the existing $700bn bank bail-out fund.

The news of this latest massive financial rescue plan was generally welcomed.

“They are getting to the heart of the problem, it’s clean, it’s quick, it’s direct. It’s a good way to bring down mortgage rates, because at the end of the day they have to stabilise the housing market,” said Todd Abraham of Federated Investors, Pittsburgh.

Robert Macintosh, chief economist with Eaton Vance, Boston, said: “If they can pull it off it’ll make some people happy, but I don’t know how effective it’ll actually be.”

Scott Brown, chief economist at Raymond James Associates, Florida, said: “Here is the Fed taking a bunch of debt out of the market, which doesn’t hurt. I think it should it should help unblock the credit markets.”

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October 3, 2008

Biden and Palin debate

Biden and Palin debate

The two US vice-presidential candidates have traded blows on the financial crisis, climate change and foreign policy in their only TV debate.

Democrat Joe Biden sought to link Republican presidential candidate John McCain to the policies of President Bush, saying he was “no maverick”.

Republican Sarah Palin defended herself against claims of inexperience and said the McCain ticket would bring change.

Voter polls suggested Mr Biden had won but Mrs Palin did better than expected.

The debate at Washington University in St Louis, Missouri, was seen as particularly crucial for Mrs Palin, whose poll ratings have fallen.

Mrs Palin played to her strengths and her image as a mother in touch with ordinary Americans.

For the most part she spoke fluently but simply about the economy, climate change and the war in Iraq, our correspondent says, and there were few of the stumbling gaffes that have become the staple of late-night comedy shows.

Two polls conducted after the debate, by US networks CNN and CBS News, judged Mr Biden the winner. However, the CNN poll found a large majority thought Mrs Palin had done better than expected.

‘Hockey moms’

Asked by moderator Gwen Ifill who was at fault for the current problems with the US banking system, Mrs Palin blamed predatory lenders and “greed and corruption” on Wall Street.

It would be a travesty if we were to quit now in Iraq
Sarah Palin
Republican VP nominee

Senator McCain would “put partisanship aside” to help resolve the crisis, she said, and had raised the alarm over mortgage giants Fannie Mae and Freddie Mac long ago.

She said “Joe six-packs and hockey moms across the country” – referring to middle-class voters – needed to say “never again” to Wall Street chiefs.

Mrs Palin also accused Democratic presidential candidate Barack Obama of seeking to raise taxes but Mr Biden rejected that claim.

He said the economic crisis was evidence that the policies of the past eight years had been “the worst we’ve ever had” and accused Mr McCain of being “out of touch” on the economy.

Senator Obama’s plan to raise taxes on households earning over $250,000 was “fairness”, Mr Biden said, unlike Mr McCain’s proposals for more tax breaks for big companies.

‘Dead wrong’

On foreign policy, Mrs Palin accused Mr Obama of refusing to acknowledge that the “surge” strategy of extra troops in Iraq had worked.

He’s not been a maverick on virtually anything that people talk about around the kitchen table
Joe Biden
Democratic VP nominee

“It would be a travesty if we were to quit now in Iraq,” she said, describing Mr Obama’s plan to withdraw combat troops a “white flag of surrender”.

Mr Biden countered by saying Mr McCain had been “dead wrong” on Iraq and had yet to present a plan to end the conflict.

He said the US was wasting $10bn a month in Iraq while ignoring the real front line in the fight against terrorism, Afghanistan.

In turn, Mrs Palin said Mr Obama was naive for saying he was willing to talk directly to the leaders of Iran, North Korea and Cuba. “That is beyond bad judgment. That is dangerous,” she said.

The pair also sparred on the issue of climate change.

Mrs Palin, governor of energy-rich Alaska, said human activities were a factor in climate change but that climatic cycles were also an element. She urged US energy independence as part of the answer.

Key words used most frequently by Joe Biden in the debate

Mr Biden pointed to climate change as one of the major points on which the two campaigns differed, saying: “If you don’t understand what the cause is, it’s virtually impossible to come up with a solution.”

He said he and Mr Obama backed “clean-coal” technology and accused Mr McCain of having voted against funding for alternative energy projects and seeing only one solution: “Drill, drill, drill.”

While Mrs Palin described her party’s candidate as “the consummate maverick”, her rival argued that Mr McCain had followed the Bush administration’s policies on important issues such as Iraq.

“He’s not been a maverick on virtually anything that people talk about around the kitchen table,” Mr Biden said.

Overall, commentators highlighted Mrs Palin’s frequent use of a “folksy” style, for example using expressions like “doggone it” and telling her opponent: “Aw, say it ain’t so, Joe.”

They also noted how Mr Biden appeared emotional as he talked about raising his two young sons alone after a car crash killed his first wife.

Poll shift

According to a Pew Research Center poll, two-thirds of voters planned to follow the debate, far more than in 2004.

McCain and running mate Sarah Palin at Republican convention in St Paul on 4 September 2008

Sarah Palin was a huge hit at the Republican convention last month

A new poll by the Washington Post suggests that 60% of voters now see Mrs Palin as lacking the experience to be an effective president.

One-third say they are less likely to vote for Senator McCain, as a result.

Independent voters, who are not affiliated to either political party, have the most sceptical views of the 44-year-old Alaska governor.

Another poll, for CBS News, gives Senator Barack Obama 49% to 40% for Mr McCain.

It is the latest in a series of opinion polls that have shown a significant shift in the direction of Mr Obama since the economic crisis began.

Mrs Palin, whose fiery speech at last month’s Republican convention inspired Christian conservatives, produces unusually strong feelings – both positive and negative – among voters.

Key words used most frequently by Sarah Palin in the debate

Although Mrs Palin has succeeded in mobilising conservative Republicans, her key challenge is to appeal to the swing voters who could determine who will win the battleground states, analysts say.

In particular, she needs to win over the “Wal-Mart moms” – white, working-class married women.

A recent poll of customers of discount giant Wal-Mart suggested that Mr McCain was slightly ahead with this group in Ohio and Florida, while Mr Obama was leading in Virginia and Colorado.

Meanwhile, the McCain campaign is scaling back its operations in another swing state, Michigan, effectively conceding the advantage to Mr Obama there.

September 7, 2008

US lenders ‘face state takeover’

US lenders ‘face state takeover’

Home repossessed in US

US mortgage giants Freddie Mac and Fannie Mae are set to be put under government control in an attempt to rescue the firms, media reports say.

Treasury Secretary Henry Paulson will outline government plans at a news conference at 1100 (1600 BST).

The move to shore up the shareholder-owned firms, which hold or guarantee half the US mortgage debt, would be the US’s largest ever financial bail-out.

In July, Congress approved a plan aimed

at offering them more liquidity.

This followed huge losses by the two firms as result of a big increase in defaults and repossessions in the US housing market.

‘Management told’

On Saturday, a senior politician, Barney Frank, chairman of the House Financial Services Committee, said US Treasury Secretary Henry Paulson had told him the government would use its powers to ensure the continued and stable functioning of the companies.

The Washington Post, quoting senior administration sources, said the firms would be put under a legal status known as “conservatorship” which would greatly reduce the value of the two companies’ common stock.

BBC Business Editor Robert Peston
This is an event of profound significance for the global economy
BBC Business Editor Robert Peston

Other securities – including company debt and preferred shares – would be guaranteed by the government, the paper added.

The New York Times reported that senior executives at Freddie Mac and Fannie Mae were informed about the plan on Friday.

The Wall Street Journal said it would include changes in the top management.

There would also be quarterly infusions of cash to keep both firms afloat, the papers say. The total cost to taxpayers is not known but could amount to billions of dollars, they add.

The government was being forced to step in because it was dangerous for the US economy for doubts to persist about the two firms’ viability.

Struggling homeowners

HAVE YOUR SAY

Government control over larger portions of the economy can only end badly

TB, US

The two contenders for the US presidency, Barack Obama and John McCain, have been briefed on the takeover by Mr Paulson.

“We’ve got to keep people in their homes,” said the Republican candidate, John McCain.

“There’s got to be restructuring, there’s got to be reorganisation, and there’s got to be some confidence that we’ve stopped this downward spiral,” he added, saying that the takeover of Fannie Mae and Freddie Mac must not benefit executives at the two companies.

The Democratic Party candidate, Barack Obama, said any action should be focused “on whether it will strengthen our economy and help struggling homeowners”.

“We must not allow government intervention to protect investors and speculators who relied on the government to reap massive profits,” he said, adding “we must protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac”.

Fragile

On Friday, America’s Mortgage Bankers Association reported that at the end of June, about four million homeowners with a mortgage – representing a record 9% – either were behind in their payments or faced repossession.

In the past year, the financial crisis has taken a heavy toll on both Fannie Mae and Freddie Mac.

The country’s two largest buyers and backers of mortgages lost a combined $3.1bn between April and June.

Both companies say they have the resources to weather the losses, but their shares have fallen sharply on fears that they could go bankrupt as borrowers default.

The rescue plan passed by Congress in July gave the US government the authority to buy shares and offer liquidity to companies to keep them afloat.

Many analysts believe their collapse would be a major shock to the already fragile global financial system.

Together, the two firms own or guarantee about $5.3 trillion worth of home loans – about half the outstanding mortgages in the US.

That is about 25 times as big as the obligations of Northern Rock – which was nationalised by the UK government earlier this year, and twice the size of the UK economy.

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