Bailout bill passes Senate and Congress

Bailout bill passes

JULIE HIRSCHFELD DAVIS and DAVID ESPO
Friday, October 03, 2008

WASHINGTON — With the U.S. economy on the brink and elections looming, Congress approved an unprecedented $700-billion (U.S.) government bailout of the battered financial industry on Friday and sent it to President George W. Bush for his certain signature.

The final vote was 263-171 in the House of Representatives, a comfortable margin that was 58 more votes than the measure garnered in Monday's stunning defeat.

The vote capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act.

At the White House, Mr. Bush declared, “We have acted boldly to prevent the crisis on Wall Street from becoming a crisis in communities across our country.”

Treasury Secretary Henry Paulson pledged quick action to get the program up and operating.
“We all know that we are in the midst of a financial crisis,” House Republican Leader John Boehner of Ohio, said shortly before casting his vote for government intervention in private capital markets that was unthinkable only a month ago.

“And we know that if we do nothing, this crisis is likely to worsen and to put us into an economic slump like most of us have never seen.”

Speaker Nancy Pelosi, D-Calif., said the bill was needed to “Begin to shape the financial stability of our country and the economic security of our people.”

Stocks were up Friday on Wall Street, where there was a lot of anticipation of the vote but where investors also were buffeted by a bad report on the job market. The Labour Department said employers slashed 159,000 jobs in September, the largest cut in five years and further evidence of a sinking economy.

Federal Reserve Chairman Ben Bernanke, who had joined the administration in urging quick action, said, “The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses.” He said the Fed would work closely with the Treasury Department to put the bill's provisions into effect.
Even before the measure cleared Congress, the White House sought to dampen optimism of its immediate impact on the economy. “This legislation is to fix a problem in our financial markets,” said spokesman Tony Fratto. “It's not sold as giving a boost to the economy, but rather preventing a crisis in our economy... If it works as we hope it will, credit will be able to begin flowing again.”
The House vote marked a sharp change from Monday, when an earlier measure was sent down to defeat, largely at the hands of angry conservative Republicans.
Senate leaders quickly took custody of the measure, adding on $110-billion in tax and spending provisions designed to attract additional support, then grafting on legislation mandating broader mental health coverage in the insurance industry. The revised measure won Senate approval Wednesday night, 74-25, setting up a furious round of lobbying in the House as the administration, congressional leaders, the major party presidential candidates and outside groups joined forces behind the measure.
It worked — augmented by a sudden switch in public opinion that occurred after the U.S. stock market took its largest-ever one-day dive on Monday.
“No matter what we do or what we pass, there are still tough times out there. People are mad — I'm mad,” said Republican Rep. J. Gresham Barrett of South Carolina, who opposed the measure the first time it came to a vote. Now, he said, “We have to act. We have to act now.”
Rep. John Lewis, D-Ga., another convert, said, “I have decided that the cost of doing nothing is greater than the cost of doing something.”
Critics were unrelenting.
“How can we have capitalism on the way up and socialism on the way down,” said Rep. Jeb Hensarling of Texas, a leader among conservative Republicans who oppose the central thrust of the legislation — an unprecedented federal intervention into the private capital markets.
It was little more than two weeks ago that Mr. Paulson and Mr. Bernanke concluded that the economy was in such danger that a massive government intervention in the private markets was essential.
The core of the plan remains little changed from its inception — the Treasury Department would have $700-billion at its disposal to purchase bad mortgage-related securities that are weighing down the balance sheets of institutions that hold them. The flow of credit has slowed, in some cases drying up, threatening the ability of businesses to conduct routine operations or expand.
At the same time, lawmakers have dramatically changed the measure, insisting on greater congressional supervision over the money, taking measures to protect taxpayers, and insisting on steps to crack down on so-called golden parachutes that go to corporate executives whose companies fail.
Earlier in the week, the legislation was altered to expand the federal insurance program for individual bank deposits, and the Securities and Exchange Commission took steps to ease the impact of the questionable mortgage-backed securities on financial institutions.
In the moments before the vote, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, pledged “serious surgery” next year to address the underlying causes of the crisis.
If anything, the economic news added to the sense of urgency.
The Labour Department said initial claims for jobless benefits had increased last week to the highest level since the gloomy days after the 2001 terror attacks. The news of the payroll cuts came on top of Thursday's Commerce Department report that factory orders in August plunged by 4 per cent.
Typifying arguments the problem no longer is just a Wall Street issue but also one for Main Street, lawmakers from California and Florida said their state governments were beginning to experience trouble borrowing funds for their own operations.
Ms. Pelosi said, “We must win it for Mr. and Mrs. Jones on Main Street.”
One month before election day, the drama unfolded in an intensely political atmosphere.
Democratic presidential candidate Barack Obama, a supporter of the bill, made calls to members of the Congressional Black Caucus, who publicly credited him with changing their minds.
Rep. Elijah Cummings and Donna Edwards, both Maryland Democrats, were among them. They said Mr. Obama had pledged if he wins the White House that he would help homeowners facing foreclosure on their mortgages. He also pledged to support changes in the bankruptcy law to make it less burdensome on consumers.
“It's not too often you get the future president telling you that his priority matches your priority,” said Mr. Cummings.
Mr. Obama's rival, Sen. John McCain, who announced a brief suspension in his campaign more than a week ago to try and help solve the financial crisis, made calls to Republicans.
Republican Rep. Sue Myrick of North Carolina, who switched her vote to favour the measure, looked ahead to the election and said, “I may lose this race over this vote, but that's okay with me. This is the right vote for the country.”
The vote on Monday staggered the congressional leadership and contributed to the largest one-day stock market point drop in U.S. history, 778 points as measured by the Dow Jones industrial average.
Across the Capitol, Senate leaders reacted quickly, deciding to sweeten the bill with a series of popular tax breaks as well as spending on rural schools and disaster aid. They also grafted on a bill to expand mental health coverage under private insurance plans.
At the same time, the change in federal deposit insurance and the action by the SEC on an obscure accounting rule helped produce a steady trickle of converts.
© Copyright The Globe and Mail

Bank of Canada pumps billions into system

Bank of Canada pumps billions into system

HEATHER SCOFFIELD
Friday, October 03, 2008

OTTAWA — The Bank of Canada is substantially bulking up its liquidity injections, increasing their frequency and making it easier for financial institutions to partake - measures that aim to manage near-frozen conditions in money markets.

The central bank said it is increasing its plans to inject extra cash into term lending markets from $8-billion, announced recently, to $20-billion.
The extra securities will be made available more frequently, on a weekly basis, until at least the end of the year, the bank said in a statement on its website. Plus, the bank will announce well in advance the minimum amounts that will be made available.

“In light of persistent pressures in these markets, the Bank announces additional steps to provide term liquidity,” the bank explained.
The Bank of Canada also added an additional $830-million to the overnight money market Friday morning.

The central bank also said it is expanding its list of eligible collateral, again. “In recognition of market conditions,” it will now take bank-sponsored asset backed commercial paper, in addition to other securities recently added to its list of acceptable collateral, the bank said.
“The Bank will continue to provide term liquidity as long as conditions in financial markets warrant,” the statement concluded.

The announcement marked a dramatic escalation of the central bank's liquidity measures, with the Bank of Canada moving in tandem with central banks around the world to bolster money markets that have become paralyzed by fear.

The Canadian central bank has not been as active as others in the overnight money market, with intervention only needed sporadically -- albeit it intervened both Thursday with $610-million and Friday with $830-million so far.

But the “term” money market - involving one-month and three-month securities, among others - has required more and more support in Canada.

Already on Monday of this week, the central bank doubled its 28-day injection from $2-billion to $4-billion, pushing its total extraordinary measures to $10-billion from $8-billion.
Now, the bank's amounts have soared across the curve, in the hopes of bringing down spreads and diminishing risk aversion.

Money markets around the world were at a standstill on Friday, with banks refusing to lend to each other as they kept on an eye on the U.S. House of Representatives to see if it would pass the $700-billion (U.S.) bailout bill.

So-called “term” funding of one month and beyond remains mostly expensive and scarce because banks prefer to hoard cash to bolster battered balance sheets than lend to counterparties they fear may be in severe financial distress.

Canada has been no exception, with spreads rising substantially over the past few days, and signs that investors and financial institutions would prefer to hold government-backed treasuries over everything else. The spread between Canadian interbank lending rates and government-backed securities is now above 100 basis points, up from a normal range of 10.
Some analysts had hoped that money market spreads would relax somewhat after Sept. 30, since that's quarter end for many financial institutions and typically a time of high demand for short-term securities. But the end of the month has come and gone, and spreads are still breaking through record highs.

The passing of the U.S. financial rescue plan could come later on Friday and would help shore up confidence across financial markets. But many measures of deteriorating credit conditions, such as interbank premia over expected policy rates and swaps spreads, remained at extreme levels.
“Lower (interbank term) rates would be helpful overall for the economy, and it's disappointing that central banks can't engineer lower rates,” Ciaran O'Hagan, senior strategist at Societe Generale in Paris told Reuters.

“There's a big focus on spreads, but that's not as relevant for the economy as the level of rates. The more serious thing is the rationing of credit ... especially to the non-financial sector,” he said.
Massive central bank cash injections have helped keep trading going on an overnight basis since confidence collapsed with the demise of Lehman Brothers and subsequent rescue of several European banks.

The Bank of Japan injected $7.6 billion in an over-the-weekend operation on Friday to provide funds to foreign banks struggling to secure cash from Japanese lenders.
Australia's central bank added $1.2 billion in repurchase agreements, way above an estimated daily need of $1.195 billion.
The Bank of England auctioned $10-billion overnight money and $30-billion of one-week cash, while the European Central Bank auctioned $50-billion of three-day funds and threw open the doors for thousands of banks to access its so-called 'fine-tuning' operations for overnight auctions.
The ECB left its benchmark interest rate on hold at 4.25 per cent Thursday but highlighted the risk to the European economy from the credit crunch, suggesting the first euro zone rate cut in five years was on the cards.
Financial markets now expect a rate cut at the ECB's next meeting and a further two cuts to 3.50 per cent by February.
In the United States, there was no relief for the commercial paper market. Outstanding paper slumped by $94.9-billion to $1.607-trillion, Federal Reserve data showed, bringing the cumulative shrinkage to $208-billion in the past three weeks.
Fed data also showed banks borrowed a record $367.8-billion from the central bank in the latest week.
© Copyright The Globe and Mail