News & Current Affairs

October 3, 2008

House set for fresh bail-out vote

House set for fresh bail-out vote

Pedestrians outside the New York Stock Exchange on Wall St (02/10/2008)

President Bush has said the bill is the best chance of rescuing the economy

The US House of Representatives is preparing to vote on a $700bn (£380bn) plan to rescue the US financial sector.

Party leaders are hoping the House, which stunned global markets by rejecting the initial plan, will follow the Senate and back a new version.

The House began debating the deal on Friday morning and is expected to vote later in the day.

The Senate bill added about $100bn in new tax breaks in the hope of gaining more support from House Republicans.

The New York stock exchange opened shortly after the debate began and the Dow Jones Industrial Average jumped more than 100 points in early trading.

But earlier in Japan, shares fell to a three-year low. The Nikkei index closed down more than 1.9%, its lowest level since May 2005.

In Europe, shares were relatively flat. In early afternoon trading the UK’s FTSE 100 was down just 18 points, France’s Cac 40 was down nine and Germany’s Dax up seven.

The financial volatility continued on Friday as US bank Wells Fargo announced it would buy troubled rival Wachovia in a $15.1bn (£8.5bn) deal.

The US also reported its biggest monthly job loss in more than five years.

Bush plea

In Washington, House Speaker Nancy Pelosi, a Democrat, has said no vote will be scheduled until the party feels it will pass.

NEW MEASURES IN BAIL-OUT BILL
Increased protection for saving deposits
Increased child tax credits
More aid for hurricane victims
Tax breaks for renewable energy
Higher starting limits to alternative minimum tax

“We’re not going to take a bill to the floor that doesn’t have the votes. I’m optimistic that we will take a bill to the floor,” she said.

When the House first rejected the plan on Monday – by 228 votes to 205 – legislators had concerns about both the content of the plan and the speed with which they were being asked to pass it.

President George W Bush has since urged the House to back his revised bill.

The package is aimed at buying up the bad debts of failing institutions on Wall Street.

Both the Democratic and Republican parties are pressing their members in the House to swing behind the revised bill and party leaders expect it to pass.

This thing, this issue, has gone way beyond New York and Wall Street
President George W Bush

Some members have called for more amendments, which opens up the prospect of further horse-trading up to the point at which votes are cast.

Pressure will particularly be applied to the 133 House Republicans who went against party affiliation to reject President Bush’s bill, correspondents say.

Tennessee Republican Zach Wamp, one of those who voted against the bill on Monday, said he would now vote in favor of the measure despite ordinary Americans remaining “as mad as heck” at the situation on Wall Street.

“You have got to do what you think is right. I thought the right thing Monday was to vote no. And I think the right thing to do tomorrow is to vote yes.”

The bill successfully passed through the Senate on Wednesday after it was amended to raise the government’s guarantee on savings from $100,000 to $250,000.

It also now includes tax breaks to help small businesses, expand the child tax credit and extend help to victims of recent hurricanes.

Most importantly, it extends the tax break aimed at boosting the provision of alternative energy such as wind farms.

It also includes a number of so-called “pork-barrel” measures including tax cuts for rum manufacturers in Puerto Rico and the owners of racetracks.

The additional cost of these unrelated tax breaks – which could add $100bn to the bill – have worried some fiscally conservative Democrats in the House of Representatives.

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October 2, 2008

US markets wary over rescue deal

US markets wary over rescue deal

Wall Street trader

The markets remain nervous

US shares have fallen sharply with investors cautious over whether the House of Representatives will back the revised bank rescue plan.

The House is due to discuss the scheme later, with a vote expected on Friday. The bill successfully passed through the US Senate on Wednesday.

On Wall Street, the Dow Jones index was down 263 points or 2.4% at 10,571, a slide dragging European shares lower.

The falls came as France said it would host a summit on the financial crisis.

The UK’s FTSE 100 closed was down 1.8% to 4,870.3 points while Germany’s Dax index shed 2.5% and France’s Cac 40 lost 2.3%.

Sentiment was further hit by glum economic data – showing that the number of people filing for new unemployment benefit claims rose to a seven-year high, while factory orders had seen a steeper-than-expected drop in August.

European talks

The office of French President Nicolas Sarkozy said the special meeting on Saturday would discuss a co-ordinated response to the financial turmoil amongst European members of the G8 ahead of a meeting of world finance leaders in Washington next week.

UK Prime Minister Gordon Brown is due to attend, together with German Chancellor Angela Merkel, Italian Prime Minister Silvio Berlusconi and European Central Bank President Jean-Claude Trichet.

Investors are still concerned about the efficiency of this rescue plan and how it can help the global economy
Aric Au, Phillip Securities

But with just two days to go before the talks start, EU members are deeply divided, correspondent said.

France and Holland favor a European response to help banks hit by the credit crisis while Germany and Luxembourg believe a joint rescue plan is not necessary.

European leaders have denied speculation that they wanted to establish a unified 300bn euro ($418.4bn; £236bn) banking rescue deal along the same lines as the US plan.

The rescue idea was said to be being proposed by France, but Mr Sarkozy insisted that there were no such plans.

“I deny both the amount and the principle [of such a plan],” he said.

‘Essential’

In the US, a number of changes had to be made to the $700bn (£380bn) bail-out plan in order to help win approval in the Senate.

These include raising the government’s guarantee on savings from $100,000 to $250,000, tax breaks to help small businesses, expansion of child tax credit, and help for victims of recent hurricanes.

President George W Bush said that the package was “essential to the financial security of every American”.

However, economists said doubts remained about how effective the package would be.

“Investors are still concerned about the efficiency of this rescue plan and how it can help the global economy,” said Aric Au of Phillip Securities in Hong Kong.

McCain and Obama

US presidential hopefuls John McCain and Barack Obama, who both returned from the campaign trail for last night’s Senate debate, voted in favor of the rescue plan.

Senate majority leader Harry Reid, a Democrat, said he was happy with the result and praised both presidential candidates for voting.

“I think it shows that when we work together we can accomplish good things,” he said.

Mitch McConnell, leader of Republican senators, was also in jubilant mood.

“This was a measure that was much needed, to unfreeze the credit markets and get America’s economy working again,” he said.

October 1, 2008

Senate urged to back crisis bill

Senate urged to back crisis bill

Wall Street, file pic

Shares remain volatile ahead of Wednesday’s key vote

Democratic and Republican Senate leaders have appealed for a new version of a $700bn (£380bn) Wall Street bail-out to be approved in a key vote.

Republican Mitch McConnell said it would shield Americans from “shockwaves of a problem they didn’t create”.

The plan needs support in the Senate and House of Representatives, which rejected a similar bill on Monday.

Senate Democrat Harry Reid said he hoped a strong show of bipartisanship would “spark the House to do the same”.

President George W Bush has been speaking to senators ahead of the vote. The White House said it hoped to see “strong support for the bill”.

“It’s critically important that we approve legislation this week and limit further damage to our economy,” said spokesman Tony Fratto.

US presidential hopefuls John McCain and Barack Obama are returning from the campaign trail for the vote, which is due to begin late on Wednesday.

Revised proposal

Global shares were mixed in Wednesday trading ahead of the vote.

By early afternoon on Wall Street the Dow Jones was down 0.2% or 30 points.

CHANGES TO BILL
Raises government’s guarantee on savings from $100,000 to $250,000
Tax breaks to help small businesses and promote renewable energy
Expansion of child tax credit and help for victims of recent hurricanes

But hopes that enough changes had been made to get the bill through saw shares close up strongly in Asia on Wednesday.

In Europe, the UK’s FTSE 100 finished 1.1% higher at 4,959.6 points, France’s key index added 0.6% while German shares fell.

Changes to the rescue plan involve lifting the US government’s guarantee on savings from $100,000 to $250,000 and a package of targeted tax breaks.

They are designed to answer critics who felt the original plan was weighted too much in favour of Wall Street while not enough was being done to help struggling American families.

To get through the Senate, the bill will require backing by 60 of the 100 senators. It would then return to the House of Representatives for a vote on Thursday or Friday.

Some members of Congress continue to press for more fundamental changes to the bill.

President Bush has warned of “painful and lasting” consequences for the US should Congress fail to agree a rescue plan.

The House’s rejection of the earlier version of the plan on Monday led to sharp falls on world stock markets.

In other developments:

  • The European Union outlines its own proposals for reforming banking regulation which, if approved, could see dramatic changes to the way in which banks operate
  • Russian Prime Minister Vladimir Putin says the “irresponsibility” of the US financial system is to blame for the crisis
  • Ireland’s government discusses a move to guarantee all bank deposits with the EU Competition Commissioner

‘Painful recession’

In election campaigning on the eve of the vote, Mr McCain and Mr Obama urged politicians of both parties to work together to pass the emergency legislation.

Speaking in Reno, Nevada, Mr Obama warned that without action by Congress “millions of jobs could be lost, a long and painful recession could follow”.

John McCain campaigns in Iowa, 30 Sept

John McCain said inaction by Congress was putting the US at risk

He added: “There will be a time to punish those who set this fire, but now is the moment for us to come together and put the fire out.”

Mr McCain, who campaigned in Des Moines, Iowa, said inaction by Congress had “put every American and the entire economy at the gravest risk” and that Washington urgently needed to show leadership.

“I am disappointed at the lack of resolve and bipartisan goodwill among members of both parties to fix this problem,” he said.

The vote comes a day before a TV debate between vice-presidential candidates Joe Biden and Sarah Palin.

Mr Biden, Mr Obama’s running mate, is also expected to take part in the Senate vote.

Meanwhile, ex-President Bill Clinton is to hold his first rally for Mr Obama.

Mr Clinton, whose wife Hillary lost to Mr Obama in a fierce primary contest for the Democratic nomination, is due to appear in Florida, where he will encourage people to register as voters before a deadline on Monday.

September 26, 2008

Bush scrambles to save $700B bailout plan

Bush scrambles to save $700B bailout plan

President George W Bush has said that legislators will “rise to the occasion” and pass the Wall Street rescue plan.

In a statement he said that are still disagreements because, “the proposal is big and the reason it’s big is because it’s a big problem”.

President Bush is expected to resume talks with Congressional leaders later on Friday to try to reach an agreement.

He wants to pass a $700bn (£380bn)rescue package to buy mortgage-backed assets from US banks.

‘Shouting match’

He added that, “there is no disagreement that something substantial must be done”.

Talks to agree the huge bail-out of the financial industry ended in a “shouting match” on Thursday.

After several hours of discussions with President Bush, a group of Republican members of Congress blocked the government plan.

The proposal would have seen the government buy bad debts from US banks to prevent more of them collapsing.

The leader of the Democrats in the House of Representatives, Nancy Pelosi, told ABC News that she “hoped” a bailout plan could be agreed within 24 hours, because “it has to happen”.

Financial markets are gummed up because banks do not know exactly how much bad debt they hold and are therefore reluctant to lend to businesses, consumers and each other.

The fall-out of this credit crunch continues to have a huge impact:
The United States suffered its largest bank failure yet, when regulators moved in to close down Washington Mutual and then sold it to US rival JP Morgan Chase for $1.9bn
In a co-ordinated move the European Central Bank, the US Federal Reserve, the Bank of England, Bank of Japan and the Swiss National Bank announced new short-term loans to the banking sector worth tens of billions of dollars
Banks continued to cut costs, with UK banking giant HSBC saying it would axe 1,100 jobs
Shares in UK bank Bradford & Bingley fell another 20% to 17 pence before recovering slightly.

‘Full throated discussion’

On Thursday, Democrat and Republican legislators appeared to have struck a deal.

A group of Democrats and Republicans even made a public statement, with Senator Christopher Dodd, chairman of the Senate Banking Committee, announcing that they had reached “fundamental agreement” on the principles of a bail-out plan.

But after the White House meeting, the top Republican on the committee, Richard Shelby, told reporters: “I don’t believe we have an agreement.”

The intense discussions reportedly saw US Treasury Secretary Henry Paulson literally down on one knee, begging Ms Pelosi to help push through the bail-out package.

September 19, 2008

Shares surge on US bail-out plan

Shares surge on US bail-out plan

Wall Street shares have rebounded sharply after a proposed US government plan to buy billions of dollars of US banks’ bad mortgage-related loans.

The Dow Jones index jumped 3.8% in early trading, while London’s FTSE 100 index was up 8.6%. In Paris, the Cac 40 was 7.6% higher.

US Treasury Secretary Henry Paulson said the bad debts were “clogging up” the financial system.

He said more details of the rescue package would be announced next week.

“To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem,” Mr Paulson said.

Financial stocks have gained the most from the rise in confidence on the markets. In London, the Royal Bank of Scotland and HBOS rose as much as 50%.

Moves to restrict short-selling in the US and UK also helped to boost financial shares.

Short-selling occurs when a trader borrows shares from another to sell them with the hope of buying them back at a lower price, thereby profiting from the difference. It has been blamed for the recent sharp falls in some banking shares.

Crisis of confidence

The proposed US government rescue plan comes at the end of a week of almost unprecedented turmoil on world financial markets:

  • Central banks around the world have pumped billions of dollars of extra funding into money markets on Thursday and Friday to ease the liquidity crisis
  • The US Treasury also said it would guarantee US money market funds – mutual funds that typically invest in low-risk credit such as government bonds and are often used by pension funds – up to a value $50bn to further restore confidence
  • Stock markets in Russia have been suspended for the second time on Friday at the end of a week of wild swings and stop-go trading
  • The US financial regulator the Securities and Exchange Commission banned short-selling in the stock of 799 financial companies until 2 October
  • The move followed similar moves by the UK’s City watchdog on Thursday
  • Nervous traders turned on the last independent US Wall Street giants Morgan Stanley and Goldman Sachs on Thursday sending their shares lower
  • There are rumours that Morgan Stanley is looking for a partner. Reports have cited talks with US bank Wachovia and the possibility that China Investment Corp – China’s sovereign wealth fund – could buy a major stake

Dramatic measures

News of a US bail-out emerged after a meeting with Congress members late on Thursday, when Mr Paulson announced plans to introduce new laws to buy hundreds of billions of dollars of bad debt from banks.

There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
Robert Peston,
BBC Business Editor

This, he said, was at the heart of the almost unprecedented malfunction of the banking system, which has caused havoc in world stock markets this week.

“We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions’ balance sheets,” he said.

Mr Paulson and Federal Reserve Chairman Ben Bernanke are expected to thrash out the details of the plan over the weekend.

It is thought options under consideration include establishing a government agency that would buy bad loans to allow troubled Wall Street banks to clear their balance sheets.

Reports said Mr Paulson was looking into setting up something akin to the Resolution Trust Corp (RTC), which was formed after savings and loans banks collapsed in the 1980s.

The RTC took over most of the smaller banks in the US at a cost of $400bn – about $1 trillion (£550bn) in today’s money – and then tried to sell off their assets.

The cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.

Some analysts welcomed the news.

“It’s a relief, it allows for an orderly workout for the impaired assets and it will help the banking sector get back to business,” said Hans Kunnen of Colonial First State Fund Managers in Australia.

Howard Wheeldon, senior strategist at London-based BGC Partners, also welcomed the market rally after a “torrid week”.

But he added: “We still face many problems not least the threat of recession because of the fallout of the banking crisis.

And he cautioned against central banks flooding the financial system with too much liquidity.

“In a way we are now paying the price for the liquidity-boosting measures taken after the September 11 atrocities. We can’t afford to have a short-term fix and then in three or four years have an even bigger bubble explode,” he warned.

BBC Business Editor Robert Peston said that the taxpayer funded bail-out “represents a massive humiliation for Wall Street” and will severely dent the ability of the US to export its way of doing business to the rest of the world.

But an even bigger risk could be a loss of confidence in the American government’s balance sheet, he said.

“This could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities,” our correspondent explained.

Market moves

The UK’s FTSE 100 index of largest shares added 8.6% with banking stocks among the biggest gainers.

Halifax owner HBOS, which was forced into the arms of rival Lloyds TSB after its shares slumped this week, traded up 30.5%.

France’s Cac 40 and Germany’s Dax indexes joined in the rally, up 7.5% and 5.1% in afternoon trade.

Earlier, Japan’s Nikkei jumped 3.8%, while the Shanghai Composite recovered from 22-month lows to close up 9.5% and Hong Kong’s Hang Seng soared almost 10%.

Graph of FTSE 100 this week

September 18, 2008

September 10, 2008

Lehman reports third quarter loss

Lehman reports third quarter loss

Lehman Brothers office

Lehman has suffered heavy losses from the credit crunch

Troubled US bank Lehman Brothers has reported a third quarter net loss of $3.9bn as it unveils radical restructuring plans.

The losses were at the top end of analysts’ expectations.

The bank’s shares on Tuesday plunged 45% on fears about the state of its financial health.

Korea Development Bank (KDB) has said talks with Lehman Brothers have ended for now with regard to possible investment in the US bank.

KDB said in a statement: “We are announcing that we ended talks at this point in time because of a disagreement over conditions of a transaction and considering domestic and foreign financial market conditions.”

State-run KDB said the decision came because of disagreement over terms and current financial market conditions.

Lehman, the fourth-largest US investment bank, had hoped to secure a deal with the Korean fund before announcing its third-quarter earnings.

A Wall Street Journal report said Lehman might be considering selling UK property assets to BlackRock.

September 9, 2008

Economic battle is joined in US race

Economic battle is joined in US race

Jobseekers at a jobs fair in California. File photo

Unemployment is rising in the US as the credit crunch hits home

With just two months to go before the US presidential election, the state of the economy is far and away the biggest concern for most US voters.

The credit crunch has inflicted severe damage on Wall Street, left millions at risk of losing their homes, and millions more in negative equity.

Unemployment has risen above 6% while high petrol prices and rising inflation have squeezed household budgets to the limit.

Things are unlikely to get any better soon. Most economic forecasts suggest that the economy will slow sharply in the rest of 2008. The first official figures will be published in late October – on the very eve of the election.

TOP ISSUES
Economy: 39%
Iraq: 14%
Gas prices: 4%
Source: Washington Post/ABC News telephone poll, 19-22 August 2008, sample size 1108, margin of error +/- 3%

This is the background for a battle over economic policy that has so far been dominated by two issues – energy prices and taxes.Senator McCain made headlines by calling for a temporary suspension of federal gasoline taxes over the summer. He favors a major expansion of nuclear power and further drilling for oil on the US continental shelf. His running mate Sarah Palin, meanwhile, is a strong advocate of further development of Alaskan oil and gas reserves.

Mr Obama has called Mr McCain’s proposals “the same old gimmicks” though he has recently softened his outright opposition to drilling.

His energy plan calls for a big effort to shift the US towards cleaner energy, a windfall tax on oil companies, and a $50bn government investment plan to promote “energy independence”.

Tax cuts

To boost the economy, Senator Obama and many Democrats in Congress would like another stimulus package, worth around $50bn – following on from the $168bn package already put into effect – and more aid to help people at risk of foreclosure to stay in their homes.

But the growing size of the government’s budget deficit, which is expected to more than double to $400bn next year, limits the scope for further action of this kind.

It’s the size of that deficit that has put taxes at the heart of the economic debate between the two candidates.

Mr Obama wants to repeal the “tax cuts for the rich” of the Bush administration, and use the money to give further tax breaks to the “middle class” (all taxpayers earning less than $250,000), including special tax relief for college education.

He also has ambitious plans to use the tax system to boost jobs, provide subsidies for healthcare, and help redistribute income to the working poor.

PORK- BARREL POLITICS
Commerce: $9bn
Defence: $9bn
Military construction: $6.6bn
Energy: $4.6bn
Transportation: $3.2bn
Foreign aid and exports: $14bn
Congressional earmarks in FY 2005. Source: Congressional Research Service

Senator McCain, however, reversing his earlier position, wants to keep the Bush tax cuts, which he argues will help small businessmen and lead to more job creation, while balancing the federal budget by eliminating wasteful spending.He has attacked “earmarks”, the system of “pork-barrel” politics where individual Congressmen and Senators get extra spending projects for their districts by attaching riders to important bills.

The most infamous of these pork-barrel projects was the $400m “bridge to nowhere” – which would have linked the 7,000 people in Ketchikan , Alaska, with their airport on Gravina island, replacing a three-minute ferry ride – promoted by the now-disgraced Alaska Republican Senator Ted Stevens.

It was Sarah Palin’s role as governor of Alaska in ultimately blocking this project which first brought her to the attention of Senator McCain.

But earmarks make up only $50bn of the $2,000bn Federal budget, according to the Congressional Research Service, and two-thirds of them relate to military spending or foreign aid, which Mr McCain has pledged to preserve.

Balancing acts

The ability of both candidates to project bold economic policy initiatives has been limited by disagreement within their own camps.

Manhattan street scene - file image

Wall Street wants a fiscal conservative – but small businessmen want tax cuts

Mr Obama’s economic instincts appear to lie with the moderate wing of the Democratic party, to judge from his appointment of Jason Furman, a close associate of former US Treasury Secretary Robert Rubin as his economic advisor.These “Rubin” Democrats persuaded the last Democratic president, Bill Clinton, that balancing the budget was more important for long-term economic growth than new spending programs.

Senator Obama has emphasized “nudge” economics, where the government tries to encourage individuals to take out private pensions and healthcare, rather than big new government programs.

But he faces pressure from the Democratic base, which is expecting him to tackle the lack of healthcare coverage for one in six Americans, and from the unions, which want him to do more to protect American jobs from “unfair” foreign competition.

Expanding health coverage to all children, as he has proposed, could cost at least $100bn a year.

And his support for renegotiating trade talks to include clauses recognising workers’ rights has worried businessmen.

Senator McCain, meanwhile, also has to appease two conflicting constituencies.

Many traditional Republicans share Mr McCain’s original beliefs in small government, low taxes and a balanced budget – as, mostly, does Wall Street, the US financial centre.

However, the Republican Party in power increased spending, especially on defence, while cutting taxes, leading to growing deficits.

Mr McCain backs higher defense spending, and in recent months he has increasingly leaned to the “supply-siders”, Republicans who believe that tax cuts are more important than balancing budgets – a view many small businessmen on Main Street, struggling in the economic downturn, would endorse.

Empathy

Both parties are also divided on how far the government should go in bailing out homeowners and banks who are the victims of the credit crunch.

Many Main Street Republicans are outraged by the idea that people who undertook irresponsible home loans, when they knew they could not afford them, should be bailed out – a view Mr McCain sometimes reflects.

And many left-leaning Democrats believe that the big banks and their shareholders who irresponsibly promoted sub-prime lending should be allowed to fail, rather than being bailed out by the US Treasury – as happened with Wall Street investment bank Bear Stearns and now the government-sponsored giant mortgage lenders Fannie Mae and Freddie Mac.

The policy solutions so far put forward to ease the credit crunch have been agreed on a bipartisan basis between Congress and the Bush administration.

WHO DO YOU TRUST MORE TO HANDLE THE ECONOMY?
Barack Obama: 50%
John McCain: 39%
Neither/None: 9%
Source: Washington Post/ABC News telephone poll, 19-22 August 2008, sample size 1108, margin of error +/- 3%

But voters have consistently expressed more confidence in the Democrats’ ability to handle the economy than the Republicans’ – so it’s a puzzle why this has not translated into a decisive poll lead for Senator Obama.

This may be because the battle is really over perception – which candidate has more empathy for the economic plight of ordinary Americans.

The choice of Sarah Palin as Mr McCain’s vice-presidential candidate was partly an attempt to put an “ordinary hockey mom” at the heart of his campaign.

Senator Obama, for his part, devoted much of his speech at the Democratic convention to the difficulties faced by hard-working Americans – perhaps hoping to banish the memory of his comments in March about “bitter” small-townspeople.

“It’s not because John McCain doesn’t care – it’s because John McCain doesn’t get it,” he said.

If Americans are persuaded that one candidate both understands their problems and can fix them, that could be the key to an election victory.

So far there is still everything to play for.

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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