TAG | Federal Reserve System
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President-elect Barack Obama on Monday called the financial crisis one of “historic proportions” and said that he and the Bush administration are “united” in their efforts to get the economy back on track.
As Obama unveiled his economic team, he said there isn’t “a minute to waste” when it comes to rebuilding the economy.
“My commitment is to do what is required. President Bush has indicated that he has the same approach, the same attitude,” Obama said at a news conference in Chicago, Illinois.
Obama’s remarks came just hours after the federal government announced a massive rescue package for Citigroup — which President Bush said he’d spoken about with Obama before it was announced.
Obama said Monday that he has asked his newly formed economic team to develop recommendations for his economic plan, which he outlined Saturday, and to consult with Congress, the current administration and the Federal Reserve on immediate economic developments over the next two months.
In selecting his economic team, Obama said he sought leaders who share his fundamental belief that “we cannot have a thriving Wall Street without a thriving Main Street.”
Watch Obama call the economic crisis one of ‘historic proportions »
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NEW YORK (CNNMoney.com) — The Federal Reserve announced a new program to help the battered market for short-term business loans - taking its closest step yet to lending directly to businesses.
The program addresses commercial paper, a form of short-term funding that is crucial to many businesses operations.
Commercial paper is sold by major corporations and most of the nation’s leading financial institutions. They use the proceeds to fund day-to-day business operations. It is bought primarily by money market fund managers and other institutional investors.
Before the current credit crisis, there was nearly $2 trillion of commercial paper outstanding and was mostly issued for short terms - never more than nine months - and thus had to be renewed frequently.
For investors, it was considered a very safe investment to purchase and one that could be easily resold to other investors.
In the past month, the amount of money outstanding in commercial paper loans has fallen 11% to a seasonally adjusted $1.6 trillion on Oct. 1 from $1.82 trillion on Sept. 10.
The decline in available funding indicates only part of the market’s problems, however. Investors have also become unwilling to buy longer-term paper - beyond a week or two - from even companies and financial institutions with top-flight credit ratings.
Federal Reserve officials speaking on background to reporters said that the overwhelming majority of the paper outstanding is coming up for renewal in the next several days and companies needing to use the money could face trouble when they try to renew it.
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Image via Wikipedia The Federal Reserve Board late Tuesday confirmed it would authorize the Federal Reserve Bank of New York to lend as much as $85 billion to American International Group Inc., which has unraveled in the face of mounting losses related to insurance on complex financial instruments and credit downgrades that forced the company to raise billions in capital. The New York insurance company is the largest in the world.
Bailing out a private company not under its direct purview is an extraordinary and historic move for the Federal Reserve, whose primary roles include setting United States monetary policy and banking supervision and regulation.
The Fed took the action under Section 13(3) of the Federal Reserve Act, which lays out the powers of Federal Reserve Banks. Section 13(3) states that in unusual and exigent situations, the Board of Governors of the Federal Reserve may “discount” financial instruments for any individual, partnership of corporation when such instruments are secured to the satisfaction of the Fed and when the institution is unable to secure adequate credit accommodations from other banking institutions.
In a statement, the Fed said, “The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.”
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Sept. 17 (Bloomberg) — American International Group Inc. averted the worst financial collapse in history by accepting an $85 billion federal loan and giving the government a majority stake.
The U.S. reversed its opposition to a bailout of AIG, the nation’s biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that “a disorderly failure of AIG could add to already significant levels of financial market fragility,” according to a Fed statement late yesterday.
“It’s an enormous relief,” said David Havens, credit analyst for UBS AG in Stamford, Connecticut. “Nobody really knows what it would have meant if they would have been allowed to fail, but there was an enormous amount of systemic risk. The problem was, nobody really knew how bad it could have been.”
AIG gives up a 79.9 percent stake to the government and senior managers including Chief Executive Officer Robert Willumstad, 63, will give up their jobs. Retired Allstate Corp. CEO Edward Liddy, 62, will be AIG’s new leader, according to a person familiar with the plans, who declined to be identified because the change hadn’t been formally announced. Allstate is the biggest publicly traded home and auto insurer in the U.S.
The two-year revolving loan gives AIG time to sell assets “on an orderly basis,” the New York-based insurer said late yesterday in a statement. The U.S. has the right to discontinue payment of dividends to AIG’s common and preferred stockholders, who are already reeling from a 94 percent drop in common shares this year.
Global Disruptions
The agreement, supported by the Treasury Department, may avoid wider chaos in world markets that threatened to engulf more financial companies. Industry losses could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets.
“This should help to calm the markets in the short-term and hopefully provides AIG some time to get their house in order,” said Michael Cuggino, president and CEO of San Francisco-based Pacific Heights Asset Management LLC, which manages about $3.8 billion.
AIG posted three quarterly losses totaling $18.5 billion. The insurer was pushed to the brink of failure because of a business that sold credit-default swaps, the protection for debt investors that plunged in value as the securities they guaranteed declined. The company covered $441 billion of fixed- income investments for banks and other parties, including $57.8 billion in securities tied to subprime mortgages.
The insurer’s survival became uncertain after credit-rating downgrades on Sept. 15 threatened to force AIG to post more than $13 billion in collateral when the company was already short on cash. AIG couldn’t raise money by selling shares after the stock plunged to less than $4 a share, compared with $70.11 in October, 2007.
Loan Terms
The Fed’s loan doesn’t require asset sales or the company’s liquidation, though these are the most likely ways AIG will repay the Fed, central bank staff officials told reporters on condition of anonymity. Interest will accrue at the three-month London interbank offered rate plus 8.5 percentage points.
The Fed doesn’t have an expectation of whether AIG will be smaller, nonexistent or similar to its current form at the end of the loan’s term, the staffers said.
The Fed or Treasury will end up actually holding the AIG stake, the staffers said. The Fed bailed out AIG while refusing aid to Lehman Brothers Holdings Inc., which collapsed earlier this week, because financial markets were more prepared for a Lehman failure, a Fed staff official said.
“It’s extraordinary, I am floored,” said former Treasury counsel Peter Wallison in an interview. “No one could have possibly imagined this a few months ago. I can’t imagine why the Fed would do this unless they were sure AIG’s failure posed systemic risk. It does speak to the fears in the market.”
From: AIG Gets $85 Billion Fed Loan, Cedes Control to Avoid Collapse
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Image via Wikipedia I doubt it, as the apparent action NOT to bailout Lehman’s is actually a panic move, under normal circumstances the US Treasury and Fed WOULD bailout Lehman’s but the in the current climate of the likelihood that the US government will have to start bailing out other distressed industries in some shape or form such as airlines, insurers and auto manufacturers, though probably not going so far as to nationalize them but rather to make huge loans available to corporations much as the Japanese government did during the early 1990’s which resulted in Japans Great Depression.
Already it is being reported that Bank of America is eagerly sniffing around Merrill Lynch as a better candidate to takeover following Lehman’s bankruptcy, will they get a sweetener form the US Fed?, despite announcements of no tax payers money, they probably will.
Whilst the focus is on the US, the bailouts and unprecedented loans being made available to financial intuitions is not just limited to the US Fed, Central banks right across the globe will be flooding the markets Monday in an attempt to prevent a cascade of failures amongst banks that have already lost their capital bases over the last 12 months and therefore are teetering over the edge.
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Wreckage from a massive crisis on Wall Street could prompt the Federal Reserve to do an about face and once again cut a key interest rate this week or possibly later this year, economists said Monday.
Just a few days ago, a rate cut appeared largely off the table. Now it has emerged as a possibility as the Fed prepares to meet Tuesday against a backdrop of historic upheaval in the U.S. financial system.
Lehman Brothers Holdings Inc., the country’s fourth-largest investment firm, filed for bankruptcy protection on Monday. And, Bank of America is buying Merrill Lynch in a $50 billion deal.
“It puts a Fed rate cut back on the table,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
Seeking to calm frazzled markets, President Bush assured the country his administration is “working to reduce disruptions and minimize the impact of these developments on the broader economy.”
More at MSN
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Image via Wikipedia The fate of the world financial system hangs from a thread today after the New York office of the Federal Reserve stood up to the big Wall Street financial houses on Sunday and essentially told them, “thanks but no thanks” on their request for a bridge loan to nowhere.
It’s about time. For years, the country’s major broker-dealers and banks have competed with each other to become the No. 1 underwriter of loans, bonds, mergers, mortgages, swaps and equities. The industry’s compensation system is focused on rewarding managers who took big risks, and could bring home top rankings in dealmaker lists.
All the while, banks figured that if they really got into trouble, the federal government would back them up with taxpayer funds. And the government reluctantly complied twice this year, backing up the reckless behavior of high-flying bankers at Bear Stearns in March, and Fannie Mae and Freddie Mac last week with loan guarantees costing untold billions.
But when Lehman Brothers chief Richard Fuld came to the Fed with his hand out on Friday, the central bankers had finally had enough – and told the banking industry that it needed to come up with its own solution to its problems. In meetings over the weekend in New York that must have frozen the veins of bankers used to bullying the government into doing their bidding, the government left Lehman Brothers and all its creditors out to dry, figuring it was better to let the financial system burn to the ground than to risk any more of the Federal Reserve’s withering balance sheet.
More at MSN
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