Sept. 22 (Bloomberg) -- Democrats are questioning the legality of an important provision in the Bush administration's financial rescue plan: a proposal to bar judicial scrutiny of the U.S. Treasury Department's acquisition of up to $700 billion in troubled assets.
``I think that may be illegal, not to be able to challenge things,'' Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters. ``I'm not sure that would hold up anyway.''
Judicial bypass provisions are common in statutes and in some cases have been upheld by the U.S. Supreme Court. Congress, nonetheless, may choose to revise the administration plan to permit some independent review. So far, the issue has been overshadowed by Democratic demands to broaden the rescue plan to include a stimulus package for the economy and help for homeowners having difficulty paying their mortgages.
The proposed rescue echoes some of the most momentous presidential actions in U.S. history, including President Franklin Roosevelt's New Deal and President Harry S Truman's seizure of the nation's steel mills.
The Bush plan bars review by administrative agencies, as well as the judiciary, giving the Treasury secretary the final word on transactions.
Democratic Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, would change that provision by giving oversight authority to the U.S. Comptroller General and the Government Accountability Office, Congress's financial watchdog.
Delegation of Power
Frank's proposal would address concerns that the Bush plan would be an unconstitutional delegation of congressional spending power, said Walker Todd, a former Cleveland Federal Reserve attorney who is now a research fellow at the American Institute for Economic Research in Great Barrington, Massachusetts.
``The number one thing in play here is the constitutional principle that no money shall be withdrawn from the Treasury except pursuant to appropriations by law,'' Todd said.
Still, Todd said that the Supreme Court has been reluctant to overturn laws on those grounds in recent decades. The last time the court declared a law to be an unconstitutional delegation of legislative power was in 1935, when a majority voided parts of Roosevelt's National Industrial Recovery Act.
More recently, the court has given Congress broad authority to hand off its responsibilities, requiring only that Congress provide an ``intelligible principle'' for administrators to follow.
Complex Society
``In our increasingly complex society, replete with ever- changing and more technical problems, Congress simply cannot do its job absent an ability to delegate power under broad general directives,'' the high court ruled 8-1 in a 1989 case that upheld federal criminal sentencing guidelines.
The Supreme Court has likewise proven reluctant to strike down measures based on the unavailability of judicial review. University of Michigan securities law Professor Adam Pritchard pointed to a unanimous 1994 Supreme Court decision upholding a ban on judicial review of decisions by the president to close military bases.
``Lots of statutes have those provisions,'' said Gilbert Schwartz, formerly the associate general counsel of the Federal Reserve Board.
In 1952 the Supreme Court said Truman exceeded his authority by seizing the nation's steel mills to head off a strike. The parallels with that case are limited because it involved a unilateral presidential action, rather than one done with congressional authorization.
Government Seizure
In addition, the steel case centered on a government seizure -- not the consensual purchases envisioned under the Bush administration rescue plan.
Should it survive, the judicial-bypass provision likely would prevent a recurrence of the lawsuit flurry that followed the government's 1989 bailout of the troubled savings and loan industry. Investors and thrifts filed more than 120 suits, claiming regulators broke promises of special regulatory treatment.
``One of the reasons they want the nonreviewability provision is they got bogged down in lawsuits for a decade or more after they stepped in to take over the savings and loans that were insolvent,'' Pritchard said.
The suits collectively sought tens of billions of dollars in damages from the government.
Ultimately, the biggest obstacle facing the judicial-bypass provision may be the skepticism it is sparking on Capitol Hill rather than any courtroom problems. Dodd said other lawmakers share his concerns about the legality of the review provision.
``You can't give all this power to any one person, particularly a non-elected person, as much as we respect the secretary, without making sure that conflicts of interest are dealt with, that people are treated fairly,'' Democratic Senator Charles Schumer of New York told reporters.
Sept. 22 (Bloomberg) -- Freddie Mac Chief Executive Officer Richard Syron stood before investors at New York's Palace Hotel in May last year lauding his company's ``cautious'' avoidance of the subprime-mortgage crisis.
What Syron, who was ousted last week, didn't say was that Freddie Mac had been gorging on subprime and Alt-A debt. While it and the larger Fannie Mae bought the safest classes of the mortgage-loan pools, Freddie's purchases totaled $158 billion, or 13 percent, of all the securities created in 2006 and 2007, according to data from its regulator and Inside MBS & ABS, a Bethesda, Maryland-based newsletter used by Federal Reserve researchers. Fannie, which was also seized by the U.S. on Sept. 7, bought an additional 5 percent.
The purchases by Freddie and Fannie helped fuel the boom in lending that led to frozen credit markets, more than $514 billion in bank losses and the collapse of two of the country's biggest securities firms. The subprime overhang may determine whether the $200 billion U.S. Treasury Secretary Henry Paulson earmarked for the companies will all be used to rev up mortgage lending. He may have to spend about $300 billion, William Poole, the former Federal Reserve Bank of St. Louis president, said in a Bloomberg Television interview this month.
The final sum ``is going to depend on how fast these losses accumulate,'' said Poole, 71. The deficit may grow quickly because the companies may be ``carrying some of these assets at prices above where they should be.''
Treasury spokeswoman Jennifer Zuccarelli declined to comment. The department's capital injections will keep the companies from defaulting on their almost $6 trillion of debt and mortgage-backed securities.
`Big Players'
Fannie Mae of Washington and McLean, Virginia-based Freddie Mac held $114 billion of subprime and $71 billion in Alt-A securities as of June 30, according to the companies. Subprime mortgages were given to people with poor credit scores. Alt-A loans, which rank between subprime and prime, were made to borrowers with better credit who provided no proof of income, bought property for investment or took out so-called option adjustable-rate mortgages.
``We've heard a lot of people stand up and say, `Fannie and Freddie really did not promulgate the problems; they weren't big players,''' said Joshua Rosner, an analyst with Graham Fisher & Co., an independent research firm in New York. ``Actually, they were.''
The biggest suppliers of the securities to Fannie and Freddie included Countrywide Financial Corp. of Calabasas, California, as well as Irvine-California-based New Century Financial Corp. and Ameriquest Mortgage Co., lenders that either went bankrupt or were forced to sell themselves. Fannie and Freddie were the biggest buyers of loans from Countrywide, according to the company.
$5 Billion Fall
Fannie and Freddie, which were taken over by the Treasury and the Federal Housing Finance Agency, the new regulator created for the companies last month, reported writedowns of less than $2.9 billion on those securities. Their actual value had declined by $40 billion more as of June 30, though the losses were deemed temporary, according to the companies. They've probably dropped at least an additional $5 billion in value since, according to Moshe Orenbuch, an analyst at Credit Suisse in New York.
``I'm sure there will be some sizable losses,'' Orenbuch said.
The companies said actual losses on the securities aren't likely to be that large.
Freddie won't lose anything on about 95 percent of its uninsured subprime bonds unless more than 90 percent of borrowers already two months late are foreclosed upon and more than half of the rest default, according to slides from a company presentation in August.
Guarantee Losses
Fannie and Freddie also guaranteed from $470 billion to $873 billion of debt backed by borrowers with credit scores below 700 out of a possible 850, less than 20 percent of the starting equity in their homes, or both, according to calculations by FTN Financial based on public disclosures about their mortgage securities.
The companies face losses on those and other guarantees, Rosner said. FTN, the securities arm of First Horizon National Corp. in Memphis, Tennessee, has underwritten Fannie and Freddie debt sales.
The two companies, created to increase home ownership and provide market stability in times of turmoil, own or guarantee more than 40 percent of U.S. residential mortgages.
They make money by buying both home-loans and mortgage- backed securities, funding their purchases with low-cost debt. They also guarantee home-loan securities, putting their AAA rating behind the debt to attract investors. The firms mainly buy debt guaranteed by each other and U.S. agency Ginnie Mae, known as agency mortgage securities.
Urged to Buy
The companies said they were urged to increase purchases of subprime debt by the Bush administration. The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37 percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year.
The updated goals ``were significant enough to force them to go down the credit curve to meet them, which meant participating in some way or form in the higher-risk areas of the mortgage market,'' said David Stevens, a former head of Freddie's single- family mortgage business who now runs lenders affiliated with Long & Foster Real Estate Inc. in Fairfax, Virginia. That included ``the subprime business.''
At the same time, Fannie and Freddie were under pressure from shareholders to generate profits to bolster their stock price. Fannie dropped 17 percent from 2004 through 2006 and Freddie declined 7.9 percent. The Standard & Poor's 500 Index, by contrast, gained 7.4 percent.
Attractive Yields
Fannie and Freddie gravitated to the securities as yields on agency mortgage bonds often fell below the cost of selling their debt. In 2006, AAA rated securities backed by subprime or second mortgages averaged 0.57 percentage points more than U.S. Treasuries, according to Lehman Brothers Holdings Inc. index data. That compares with 0.48 percentage points for fixed-rate agency mortgage securities.
The public and private demands on Fannie and Freddie led to their demise, Paulson said on Sept. 7, when he announced the government was assuming control after their shares plunged more than 90 percent. HUD said the companies shouldn't blame policy makers for driving up subprime holdings. The companies weren't required to keep the debt on their books as part of their home- financing goals.
``If Freddie Mac and Fannie Mae are holding securities backed by these loans, it is because they were attracted to their yields and not because of a public policy designed to promote affordable homeownership,'' HUD said in a statement on its Web site. Spokesman Brian Sullivan declined to elaborate.
Securities, Not Loans
As they acquired subprime debt, Fannie and Freddie fed on mortgage-backed securities, rather than buying or guaranteeing individual loans, according to Judy Kennedy, chief executive officer of the National Association of Affordable Housing Lenders in Washington.
The companies could have bought ``hundreds of billions of dollars'' of loans made to low-income people by banks, some of which were granted with terms that were equal to prime, said Kennedy, whose organization represents financial companies including JPMorgan Chase & Co. of New York, Charlotte, North Carolina-based Bank of America Corp. and pension funds. Fannie and Freddie failed to buy $50 billion to $90 billion of apartment-building loans that would also have qualified, she said.
Plan `Boomeranged'
The bonds Fannie and Freddie bought comprised thousands of loans to borrowers with poor credit. The securities are split into pieces with varying risk and returns. Fannie and Freddie bought the safest of the top-rated pieces of the securities. Their yields of about 0.1 percentage points above the London interbank offered rate made the debt less appealing to other investors, such as hedge funds or collateralized debt obligations, whose safest pieces were bought by banks. The lowest investment-grade classes offered yields of about 1.95 percent points over Libor.
The companies' willingness to buy the low-yielding pieces provided demand that fueled subprime lending, Kennedy said.
``Their throwing of money at subprime has boomeranged,'' Kennedy said.
The companies can't be blamed for fueling the crisis, said Thomas Lawler, a former senior vice president for risk policy at Fannie who left in January 2006 after 22 years. Other investors would have bought the same securities and demanded a yield increase of less than 0.1 percentage points, said Lawler, an economist in Vienna, Virginia.
Expansion Plans
``People say, `You may not have been keeping it alive, but you should have been doing everything you can to kill it, and you certainly weren't doing that. If anything, you probably helped it along a little bit,''' Lawler said. ``I do think there is validity to that.''
Former Fannie Mae CEO Dan Mudd, 50, said in a 2006 interview that he planned to expand the companies' holdings to include more higher-risk loans. Anything else would be ``counterproductive,'' he told investors in March of that year. Brian Faith, a spokesman for Fannie, declined to comment.
Syron, 64, said at the investor conference in May 2007 that the subprime collapse let Fannie and Freddie prove their worth by offering refinancing options to some borrowers whose rates were set to rise and remaining active in the mortgage market as others fled.
``In the current period, I have to say I am sort of grateful that we have been cautious for a variety of reasons,'' Syron said. Sharon McHale, a spokeswoman for Freddie, declined to comment, as did Stefanie Mullin, a spokeswoman for the companies' regulator.
Meeting Requirements
Demand from Fannie and Freddie was large enough that the nation's biggest issuers created securities tailored to meet the mortgage giants' needs, according to prospectuses for the bonds.
New Century, which collapsed into bankruptcy after being overwhelmed by customer defaults and an accounting fraud, and Ameriquest, once the biggest home-loan provider to consumers with poor credit, produced securities backed by loans small enough for Fannie and Freddie to buy. Fannie and Freddie's government charter restricted them from buying loans of more than $417,500.
The bonds also met other criteria demanded by Fannie and Freddie. They included limiting penalties to homeowners who pay off early and banning contracts that force borrower complaints into arbitration instead of courts.
Ameriquest paid $295 million to consumers in 2006 to settle charges by states of predatory lending.
The company, which sold part of itself to Citigroup Inc., created 52 percent of its securities for Fannie and Freddie in 2006, according to newsletter Inside B&C Lending.
20 Percent
New Century, now the biggest subprime lender in bankruptcy, produced 24 percent. It created a security for Fannie and Freddie in August 2006. About 75 percent of the loans had interest rates set to adjust to as high as 20 percent, mostly after two years, from an average of 8.3 percent.
Countrywide, which faces investigations for fraudulent lending practices, supplied about 23 percent of Fannie's and Freddie's total loan volume in 2007, according to Credit Suisse.
Terry Francisco, a spokesman for Bank of America Corp., which bought Countrywide for $2.5 billion in stock in July, declined to comment.
`Affordability Programs'
The lender's chief risk officer, John McMurray, told analysts in a conference call in July last year that Fannie would buy loans to borrowers with credit scores from Minneapolis-based Fair Isaac Co., known as FICOs, that would typically be considered subprime. Fannie used those loans to meet its affordable-housing goals, McMurray said.
``There is a belief by many that prime FICOs stop at 620,'' McMurray said. ``That's not the case. There are affordability programs and Fannie Mae expanded approval, as an example, that go far below 620, yet those are still considered prime.''
Borrowers were at least 60 days late on about 31 percent of the loans underlying Freddie's $81.6 billion of uninsured subprime securities, including almost 37 percent of the ones underlying the company's $33.1 billion of remaining 2006 securities, according to an earnings presentation in August.
Sept. 22 (Bloomberg) -- On Aug. 19, U.S. Securities and Exchange Commission Chairman Christopher Cox summoned the press to a conference room at the SEC's Washington headquarters for an important announcement. The agency's new computer technology to make corporate filings more useful to investors was almost ready, and Cox wanted to give reporters a preview.
In a flourish uncharacteristic of the normally buttoned- down ex-congressman, Cox, 55, strutted across the stage, took off his suit jacket and sat down at a computer to demonstrate the new Extensible Business Reporting Language, or XBRL. Investors were given a chance to ask questions about the technology online as an aide wrote a live blog.
When it came time for reporters to pose questions, however, it didn't take long for the queries to turn to the news of the day: the roiling controversy over the sale of billions of dollars of so-called auction-rate securities to investors who found they couldn't get their money back. Cox urged reporters to stick to the topic of technology and then gave a brief answer.
``Nobody is getting a pass,'' he said of the banks and brokers being probed for misleading buyers of the auction-rate bonds. The SEC, he added, had more than a dozen investigations under way.
U.S. financial markets had been swooning for a year as Cox gave his computer lesson. Commercial and investment banks had suffered more than $500 billion in losses and writedowns related to the sale of mortgage-backed securities. Financial stocks were reeling, with Lehman Brothers Holdings Inc. at risk of following Bear Stearns Cos. into extinction.
Missing in Action
Yet former SEC officials and members of Congress say throughout the tumult in the banks and markets, Cox, a Harvard University-trained lawyer, has often been missing in action.
``Cox just hasn't done anything except for XBRL,'' says Peter Wallison, who supervised the SEC chairman when he worked in the White House counsel's office under President Ronald Reagan. ``It perfectly encapsulates what Chris Cox's chairmanship has been: exceedingly cautious, a chairmanship which seemed to take as many steps as possible to avoid controversy that would result in pushback by anyone.''
Wallison is now a fellow at the American Enterprise Institute in Washington, which advocates for limited regulation of financial markets.
Cox was hardly part of the conversation when Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson stepped in last March and arranged for JPMorgan Chase & Co. to rescue Bear Stearns from collapse, according to people familiar with the matter at the Treasury, Fed and SEC.
The Birthday Party
On the night of March 15, when Fed and Treasury officials were hammering out the terms of JPMorgan's takeover of Bear Stearns, an SEC official looking for Cox found him at a birthday party for Mark Olson, head of the Public Company Accounting Oversight Board.
When Paulson, two weeks after the Bear Stearns crisis, proposed a reorganization of Washington regulators that would abolish the SEC, Cox didn't strongly defend his agency. He now says that was because he didn't think Congress would take such a proposal seriously.
Some of Cox's own enforcement attorneys say the chairman has undermined them by delaying votes on settlements they've reached with accused corporate miscreants and by publicly rebuking them in a case where they subpoenaed journalists.
``A lot of investors are looking at the SEC and saying, 'Where were you with respect to auction-rate securities? And where were you with the securitization process of home mortgages?''' says Senator Jack Reed, Democrat of Rhode Island and a member of the Senate Banking Committee.
GAO Probe
Committee Chairman Christopher Dodd, a Connecticut Democrat, and Reed ordered a probe by the Government Accountability Office this year after the SEC disclosed that sanctions against companies and individuals accused of violating its rules fell 51 percent, to $1.6 billion, for the fiscal year ended in September 2007.
It's not just Democrats who are dismayed at Cox's approach. On Sept. 18, Republican presidential candidate John McCain called for Cox's resignation. ``The chairman of the SEC serves at the appointment of the president and, in my view, has betrayed the public's trust,'' McCain said at an Iowa campaign rally. ``If I were president today, I would fire him.''
On Sept. 15 Carly Fiorina, former CEO of Hewlett Packard and a McCain economic adviser, said, "We have had a regulator in the SEC that in many ways has been asleep at the switch." Dana Perino, President George W. Bush's spokeswoman, said Cox has Bush's confidence.
Obama Statement
Democratic candidate Barack Obama, campaigning in New Mexico, responded to McCain's statement by saying, ``Don't get rid of one guy. Get rid of this administration.''
Ralph Ferrara, a Republican and former SEC general counsel, says Cox has been too nonchalant. ``Paulson and Bernanke have stepped up to the plate and taken the lead in responding to the current economic crisis,'' he says. ``There is a risk that the SEC will be marginalized unless the chairman insists on a seat at the table.''
As the financial crisis escalated in mid-September, Cox made sure he had a seat. He was there for the marathon weekend talks in New York that ended with the bankruptcy of Lehman Brothers and an agreement for Bank of America Corp. to take over Merrill Lynch & Co. Cox took a private jet to New York with Paulson and stayed through the weekend, announcing his participation with a press release. When the talks failed to save Lehman, the SEC issued a statement saying it would enforce SEC rules that protect Lehman brokerage accounts.
Cox's Response
Cox declined to be interviewed for this story. On the day McCain called for his ouster, he issued a written response to McCain's broadside and another to a series of questions posed to him by Bloomberg News.
He writes that he has been tough on enforcement and more independent than his predecessors. ``Because regulators so often come straight out of the industries they regulate, it's often hard to find both knowledge of finance and markets and independence in the same person,'' Cox writes.
The chairman takes issue with critics who say he played little role in attempting to rescue Bear Stearns. Cox says he worked over 100 hours during the week beginning on March 10 and, in one instance, was in the office for a 7 a.m. call with Paulson. The Treasury secretary told him he was still in his pajamas, Cox says. The SEC chose not to be a main participant in the talks, Cox says, because it had responsibility for policing the transaction in case of fraud and for acting as an arm's- length regulator.
Rumors, Rumors
Cox wrote in his answer to McCain that he had launched investigations of the trading practices of hedge funds and probed unsubstantiated rumors about the health of investment banks. He wrote that the agency had stiffened rules governing rating companies, which regulators blame for giving high ratings to subprime-tainted mortgage securities that didn't deserve them.
Cox says he will leave office at the end of the Bush administration. His term officially ends in June 2009.
In other forums, Cox has pointed to the SEC's crackdown on stock option abuses and abusive short selling. In Cox's three years in office, the SEC has filed cases against 23 companies or their executives for improperly backdating stock options -- by changing the date of issuance to a day when a company's shares had hit a low. The total the SEC has collected from companies and individuals since Cox took office is almost $100 million.
Short Sales Banned
As world stock markets unraveled from Sept. 15 to 17, Cox led what ended up being a two-continent assault on the short selling of financial shares. On Sept. 19, the SEC banned short selling of U.S. banks, insurance companies and securities firms through Oct. 2, while the Financial Services Authority in the U.K. banned short sales of financial shares for the rest of the year.
The SEC action affected 799 financial and insurance companies. In an earlier action, the SEC took action against ``naked'' short selling of Fannie Mae, Freddie Mac and 17 other financial stocks in an order that extended from July 21 to Aug. 12.
A short sale takes place when an investor borrows stock and sells it, hoping to replace it later with new shares at a lower price. Naked short selling, which can violate SEC rules, happens when the investor fails to borrow the shares before selling them. A flood of sell orders by naked short sellers can artificially drive down a stock's price.
On Sept. 17, as shares of investment bank Morgan Stanley tumbled more than 40 percent and those of Goldman Sachs Group Inc. fell more than 20 percent, Morgan Stanley CEO John Mack declared, ``Short sellers are driving our stock down.''
Fraud
On that same day, the SEC passed new rules declaring it a fraud if investors deceive their brokers about their intention to deliver borrowed shares.
The broader ban on short selling came after senators Hillary Clinton and Charles Schumer of New York pressured the SEC to impose a moratorium on short selling of bank stocks to restore stability. James Angel, a finance professor at Georgetown University in Washington, doubts that the SEC move will have much impact.
``Cox is trying to show that he's doing something about the situation, but he is fundamentally a politician and not a market guy,'' Angel says. ``If he understood how the market worked, the SEC wouldn't be pushing proposals like this.''
Cox's original short-selling order raised a storm of opposition in the hedge fund community. The Managed Funds Association, the top U.S. hedge fund group, said in a letter to the SEC that there was no reason to believe in a ``mysterious conspiracy'' to artificially drive down stock prices.
`Too Little, Too Late'
Harvey Goldschmid, a Democratic SEC commissioner from 2002 to '05, says Cox's sudden burst of activity in defense of the financial system is too little, too late.``I have respect for Chris Cox, but the SEC has been too passive in a period where rigor and leadership were essential,'' he says.
Lynn Turner, who was the SEC's chief accountant from 1998 to 2001, says he's not surprised at Cox's diminished role in ad- dressing the country's financial crisis. ``When you do nothing, you make yourself no longer relevant,'' he says. ``When things do blow up, people don't look to you.''
Cox has his champions. ``In my view, Chairman Cox has done a very effective job,'' says Harvey Pitt, a Republican who was SEC chairman from 2001 to '03. ``He's looked at a number of issues and modernized the agency's approach to disclosure and the use of technology.''
Pitt, Ruder Defense
Both Pitt, 63, and David Ruder, a Republican SEC chairman under Ronald Reagan, defend Cox's role in the takeover of Bear Stearns. Ruder says the chairman was available to the extent that Fed and Treasury officials needed him. ``Cox and his staff followed developments very closely, but they believed -- and I think correctly -- that it was the Fed that should be the leader,'' Ruder, 79, says.
Yet the Bear takeover and its aftermath have resulted in a profound change in the SEC's role, with Cox ceding power to the Federal Reserve. In March, the Fed began extending credit to nonbank securities firms for the first time since the 1930s.
The Fed also put its own examiners inside Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley -- institutions supervised by the SEC. Cox and Bernanke signed an agreement on July 7 that will give the central bank a permanent role in determining how much capital and liquid assets securities firms must hold to stave off financial trouble.
Paulson, Deregulator
As for Paulson, he took office determined to relieve the financial services industry of some of the burden of the new regulations imposed by Cox's predecessors, as he made clear in his first speech as Treasury secretary in August 2006.
The next month, he issued a statement backing the Committee on Capital Markets Regulation, a group that sought to amend the 2002 Sarbanes-Oxley Act, which imposed new strictures on corporate boards and managers.
In 2007, Paulson set up a panel to examine the pressures on the auditing industry, another area under the SEC's jurisdiction. The group is co-chaired by ex-SEC Chairman Arthur Levitt and Donald Nicolaisen, who headed the agency's accounting office from 2003 to '05. ``It seems clear the Treasury Department is intruding,'' says former SEC chief accountant Turner.
Levitt sits on the board of Bloomberg Inc., the general partner of Bloomberg LP, parent of Bloomberg News.
Abolishing the SEC
Then, in March of this year, came the Treasury Department's ``blueprint'' for restructuring federal regulation of the financial industry, which called for the merger of the SEC with the Commodity Futures Trading Commission.
Since then, Paulson the deregulator has evolved into Paulson the interventionist, with his shepherding of the Bear Stearns takeover by JPMorgan and the government's appropriation of American International Group Inc. and federally backed mortgage packagers Fannie Mae and Freddie Mac.
Cox says he wasn't consulted about Treasury's plan for merging the SEC with the CFTC and doesn't think Congress will enact it. ``As I told Congress earlier this year and have stated publicly at every opportunity, if this agency chartered to protect investors, maintain orderly markets and facilitate capital formation did not exist, we would have to invent it,'' Cox writes.
State officials have also stepped on the SEC's toes in their rush to respond to the brouhaha over the $330 billion auction-rate-securities market. Massachusetts Secretary of State William Galvin says the SEC has been playing catch-up with state enforcement officials like himself and New York Attorney General Andrew Cuomo.
Auction Rate Debate
Auction-rate securities are long-term bonds whose interest rates were reset weekly or monthly at auctions sponsored by the investment banks.
The market for the bonds froze in February when banks were no longer willing to bid on the securities themselves to make sure the auctions didn't fail. On June 26, Galvin sued Zurich- based UBS AG, charging the bank had defrauded the charities, individuals and small investors to which it sold the securities by touting them as safe and liquid when they knew that wasn't the case. On July 31, Galvin sued Merrill Lynch on the same basis.
Galvin chides the SEC for not doing enough to protect investors. ``Once again, the states are leading the way,'' Galvin says in an interview. ``It argues strongly for a much more aggressive regulatory effort at the national level. You need the national regulator to be fully engaged.''
Helping the States
In the auction-rate cases, Cox declines to specifically address Galvin's comments, though he says the agency's settlements will be among the largest in its history.
``The SEC investigated these abuses and took these actions in record time,'' Cox says. ``The SEC helped the states to structure their own settlements with the firms.''
On Aug. 7, Cuomo held a press conference to announce that Citigroup Inc. would buy back $7.5 billion in auction-rate securities as part of a settlement that included the SEC and other states. Cuomo thanked Cox for being ``very helpful in resolving the matter.''
As of mid-September, 15 banks and brokerages, including Merrill and UBS, had agreed with the states and the SEC to buy back $50 billion of auction-rate bonds.
Meanwhile, the states also jumped on the anti-short-selling bandwagon. Cuomo started an investigation into whether investors illegally drove down stock prices of financial firms. And the California Public Employees' Retirement System, the California State Teachers' Retirement System and the New York State Common Retirement Fund decided to stop lending shares for short sales.
SEC Is Born
Congress created the SEC in 1934 to stem abuses by Wall Street, including rampant insider trading, in a time of even greater financial upheaval, the Great Depression. ``Unscrupulous money managers stand indicted in the court of public opinion,'' President Franklin D. Roosevelt declared in his 1933 inaugural address.
The SEC's job is to regulate stock markets, police securities sales and make sure public companies of all kinds make adequate disclosures to investors. The commission has five members appointed to five-year terms, with the chairman and two commissioners typically from the president's political party and the other two from the party not in the White House.
The SEC employs about 3,400 full-time staff, including 1,000 in the enforcement division, who investigate alleged corporate malfeasance and refer cases to the Justice Department for criminal prosecution. The SEC commissioners vote on whether to impose civil sanctions on companies and individuals accused of violating securities laws.
Third Bush Appointee
Cox is the third SEC chief appointed by Bush. Unlike his two predecessors -- Pitt, a prominent securities lawyer, and William Donaldson, former CEO of the New York Stock Exchange -- Cox had little background in the securities industry when he took office in August 2005.
Born in St. Paul, Minnesota, Cox graduated from the University of Southern California and then simultaneously earned a law degree and a Master of Business Administration at Harvard. After working in the White House counsel's office under Reagan, Cox served 17 years as a Republican member of the House of Representatives from Orange County, California, home to Disneyland and the John Wayne International Airport.
He sat on the House panel overseeing the banking industry and sponsored legislation designed to curtail class-action lawsuits against companies by raising the bar for what plaintiffs have to show for such suits to proceed. The measure passed in 1995 over then President Bill Clinton's veto.
Cheney's Invitation
Cox was named head of the SEC -- Vice President Dick Cheney offered him the job -- in the wake of years of scandal that led to the Sarbanes-Oxley law and a raft of new regulations.
In 2001, Enron Corp., a company with close ties to the Bush administration that reported $111 billion in 2000 revenues, collapsed because it had masked declining earnings through manipulation of a group of special-purpose entities it controlled.
Enron's accounting firm, Arthur Andersen LLP, fell apart in 2002 after it was found guilty of obstruction of justice for destroying Enron-related records. (The conviction was later overturned.) Arthur Andersen was also the auditor for WorldCom Inc., the giant telecommunications firm run by Bernard Ebbers that declared bankruptcy in 2002 after it too was found to have manipulated its books to conceal declining earnings.
Skilling, Ebbers Jailed
Ebbers and Enron executives Kenneth Lay and Jeffrey Skilling were all convicted of fraud. Ebbers and Skilling are in prison; Lay died shortly after his conviction.
In light of these events, Cox's nomination to head the SEC drew widespread opposition from investor groups that asserted he would roll back rule changes instituted under Pitt and Donaldson.
``We were extremely concerned,'' says Damon Silvers, associate general counsel at the AFL-CIO labor federation. ``He had every indication of being a deregulator, someone who would bring us back to the set of problems that brought us Enron.''
To Silvers's relief, one of Cox's first declarations after his confirmation was that he would make no effort to overturn the initiatives adopted during the tenures of Pitt and Donaldson.
Donaldson, a Republican who co-founded brokerage Donaldson, Lufkin & Jenrette Inc., spearheaded rules overhauling securities trading, revising mutual fund governance and creating new controls on hedge funds. Donaldson, now 77, then voted with the two SEC Democrats, Goldschmid, 68, and Roel Campos, 59, to get them passed -- much to the consternation of Republicans in Congress and the White House.
Donaldson Battles
Donaldson, who served from 2003 to '05, also battled with Republican commissioners Paul Atkins and Cynthia Glassman over their opposition to imposing multimillion-dollar fines on public companies for fraud, misrepresentation and accounting violations.
Under Donaldson, total penalties increased 10-fold to $3.1 billion in fiscal 2005 from two years earlier. Atkins and Glassman publicly complained that the fines against companies were ultimately paid by shareholders who already may have been victimized by dishonest management.
According to a person who worked with him, Donaldson was pressured by aides to Cheney to jettison a proposal to make it easier for shareholders to pick corporate board members.
The message, one former top Donaldson staff member says, was that this was not the policy of the Republican Party.
Nonpartisan
The admonition still rankles the ex-chairman, who thought his handling of the wave of corporate misbehavior took the issue off the table for the 2004 presidential election, the former aide says.
Donaldson says he saw the job of SEC chairman as nonpartisan.
``I did what I did without concern for the politics of it, and I think that is the role of an independent agency,'' he says. ``It should not be tainted by politics.''
Donaldson, who declined to comment about Cheney's complaints or Cox's tenure, also downplays the significance of his battles with other commissioners.
``If there is a disagreement one way or the other, that is not bad,'' he says. ``People say that if the SEC doesn't act with unanimity that it somehow undercuts the message the agency is sending. I don't think that is true.''
No More Fighting
The public fights among Democratic and Republican commissioners stopped after Cox took office. ``It's pretty evident that Chris Cox had, as one of his high priorities, finding a way to stop public disagreements among the commissioners,'' says Campos, an SEC commissioner from 2002 to '07 who now practices law at Cooley Godward Kronish LLP in Washington.
During Cox's first 22 months on the job, the SEC commissioners approved every new rule that came before them unanimously. Cox supporters say the strategy was necessary--that it was important to make peace after the quarrelsome Donaldson administration.
``He took on non-controversial things, things everybody could agree on,'' says Stanley Sporkin, SEC enforcement director from 1974 to '81, who later became a federal judge. ``He built a consensus. And now he's able to take on the controversial stuff.''
Defining Leadership
Former SEC general counsel Ferrara disagrees. ``The most important character trait of a great SEC chairman is the ability to lead,'' he says. ``Sometimes leadership means reaching consensus. More frequently, it means driving to a result without it.''
Under Cox, most issues that triggered disagreement have either been delayed or shelved. When two controversial Donaldson-era rules on hedge and mutual funds were overturned by the federal appellate court in Washington, Cox declined to appeal to the Supreme Court.
The first court ruling, in April 2006, held that the SEC didn't follow proper procedures when it tried to force mutual funds to appoint independent chairmen. Two months later, the court struck down a rule that boosted SEC oversight of hedge funds, saying that the SEC acted outside the law when it required the private investment pools to register with the agency and submit to routine inspections of their books.
Proxy Fight
One charged issue that followed Cox into office was Donaldson's 2003 initiative to make it easier for shareholders to get their candidates elected to corporate boards. Donaldson's plan died in the face of opposition from business groups and the White House.
In September 2006, the U.S. Court of Appeals in New York forced Cox to revisit the issue by striking down a long-standing SEC staff ruling that let companies keep the names of shareholder director nominees off company proxy statements. The court decision pushed the full SEC commission to establish a formal rule on the question.
As Cox prepared to present the issue to the commissioners, he was inundated with pleas from business executives to leave their prerogatives intact and from investors who, up until that time, had been allowed to nominate directors only by offering a separate proxy and sending the ballots out at their own expense.
Cox responded in July 2007 by putting two conflicting solutions up for a preliminary vote -- and then voting for both of them. One, favored by the agency's Democratic commissioners, allowed shareholders to change a company's bylaws, potentially giving them the right to nominate directors on proxy statements. The other, backed by Cox's Republican colleagues, made it a formal rule that companies could keep shareholder nominees off their proxies.
Head Scratching
``Chris used a strategy that is common in Congress -- putting out two completely different proposals to receive feedback,'' Campos says. ``This approach was unfamiliar to many of the SEC's constituents and left them scratching their heads.''
SEC rule making is a two-step process. The agency's staff proposes a new regulation, and commissioners vote to solicit public feedback for either 30, 60 or 90 days. Once the comment period ends, commissioners then decide whether to hold a second vote to make the rule binding.
In the proxy debate, Cox never held a second vote on the rule change supported by Democrats. Two months after Campos left the agency in September 2007, the commissioners approved the measure backed by Republicans in a 3-1 vote.
Reaction was heated. ``It will be viewed as an anti- investor action and a commission that has failed investors,'' former SEC Chairman Levitt said in a Bloomberg Radio interview on Nov. 28.
Cox, Levitt Exchange
Cox took Levitt to task later that same day in a private e- mail exchange obtained by Bloomberg News. He complained, ``You're the only former chairman whose criticisms are made publicly.'' He also remarked that several people had warned him, ``Arthur Levitt is not your friend.''
Cox added that in the weeks leading up to the SEC vote, he had been ``threatened with ample bluster'' by lobbyists. ``One meeting was devoted to explaining how the attendees would work to destroy my reputation so that I would never work again,'' Cox wrote.
``It all comes with the territory, and truly it's not as if proxy access is the Gulf War or the nation's tax system or nuclear disarmament or any of the other far more weighty issues that I dealt with for two decades in Congress and the White House.''
No Friendship Involved
Levitt responded that he felt so strongly that shareholders should have the right to nominate corporate directors that he was compelled to speak out. ``This is not a matter of friendship,'' Levitt wrote.
Levitt declined to comment on the e-mails.
Though Cox says his most important tasks are rooting out corporate fraud and protecting investors, behind-the-scenes his relations with his own enforcement division have been strained, according to interviews with more than a dozen current and former SEC staffers.
The lawyers say that Cox has slowed cases and instituted policies that take decision-making away from line-level attorneys.
Cox angered some rank-and-file enforcement attorneys when, in February 2006, he publicly rebuked the division for issuing subpoenas to several journalists. The SEC had requested e-mails and other correspondence as part of an investigation into whether Gradient Analytics Inc., a stock research firm, had colluded with short sellers to spread misinformation about public companies.
Cox Not Consulted
Cox issued a public statement saying that he hadn't been consulted before the subpoenas were issued. ``Issuing subpoenas to journalists can pose a genuine risk of chilling the kind of reporting that investors depend upon,'' Cox writes. The SEC withdrew them.
``To have the chairman publicly slap us in the face for doing our jobs -- that really crushed the spirit of a lot of people for a long time,'' says Kathleen Bisaccia, the SEC attorney who supervised the investigation. Bisaccia quit the SEC in April 2006 after 17 years and is now a managing director at FTI Consulting Inc. in San Francisco.
In February 2007, the SEC dropped its probe of Scottsdale, Arizona-based Gradient.
Alienating Staff
Cox has also alienated staff in his effort to resolve the continuing struggle over how and when to fine companies. In January 2006, Cox issued internal guidelines saying the decision to impose a financial penalty would be based on whether a corporation benefited from the alleged infraction and the degree to which a fine would harm shareholders already victimized by dishonest management.
Cox went further in a 2007 edict, leaked to the press by enforcement staff, declaring that the division's lawyers must seek approval from the commissioners before negotiating agreements on corporate fines with investigation targets.
The changes have caused long delays in bringing cases and stalled the agency's crackdown on stock option backdating and other corporate fraud cases, current and former SEC attorneys say.
A $7 million options-backdating settlement with Brocade Communications Systems Inc. was delayed for almost a year as Cox held off putting the case up for a vote. The company said in July 2006 it had reached a preliminary agreement with the agency; the final settlement was announced on May 31, 2007. A $75 million agreement with bond insurer MBIA Inc. and a $30 million accord with Symantec Corp.'s Veritas Software unit also languished for more than a year.
Promoting XBRL
If Cox's SEC has been slow to reach settlements with the targets of its investigations, it's been quick to advertise its new XBRL technology. During Cox's time in office, the SEC has issued more than 20 press releases about the XBRL software program and held at least four ``roundtables'' to discuss it. When, three months after he took office, Cox made a speech at the annual Securities Industry and Financial Markets Association conference, XBRL was the only new policy initiative he brought up.
Meanwhile, Henry Paulson is moving ahead with his plan for a regulatory overhaul that would abolish the SEC. Though Cox has assured his staff that the agency will not be reorganized out of existence, current and former SEC employees are not reassured, a dozen of them said in interviews.
``Pulling the plug on the SEC would be a monumental thing,'' says Stephen Crimmins, a former trial lawyer at the commission who's now a partner at law firm Mayer Brown LLP in Washington. ``It would send a tradition of effective financial regulation down the chute.''
The SEC will celebrate its 75th anniversary in 2009. Cox, notwithstanding the Paulson proposal, has assured his 3,400 employees that it won't be its last.
Sept. 22 (Bloomberg) -- The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.
The U.S. Treasury submitted revised guidance to Congress on its plan late yesterday as lawmakers and lobbyists push their own agendas. The department also adjusted its plan to insure money-market funds to limit protection to balances as of Sept. 19, after complaints from bank lobbyists.
Officials made the changes two days after unveiling plans for an unprecedented intervention in financial markets. The change to potentially allow purchases of instruments such as car loans, credit-card debt and other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress.
``The Treasury's thinking is to make it as big and wide as possible so they have the flexibility to act if need be,'' said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. ``There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.''
Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
`Significantly Higher'
``The costs of the bailout will be significantly higher than originally considered or acknowledged,'' said Josh Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. ``How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?''
Treasuries rose on speculation the Fed will cut interest rates to support the rescue plan. Two-year note yields declined 8 basis points to 2.11 percent as of 3:20 p.m. in Tokyo.
Separately, the Treasury said in a statement late yesterday it would limit its $50 billion plan for insuring money-market funds to those held by investors as of Sept. 19, excluding any subsequent contributions.
The American Bankers' Association, which had expressed concern about the plan last week, praised the move, saying it would eliminate an incentive for savers to shift out of bank accounts into money-market funds. The Treasury put no limit on the money-market fund insurance, while the Federal Deposit Insurance Corp. protects bank deposits up to $100,000.
Money Market Funds
``If all money market mutual funds had been included with the government guarantee moving forward, this proposal would have threatened to take money out of local FDIC-insured banks,'' Edward Yingling, president of the ABA in Washington, said in a statement.
In its latest guidance on the bad-debt fund, the Treasury said firms that are headquartered outside the U.S. will now be eligible for assistance.
The changes come after two days of weekend talks between administration officials and congressional staff in Washington. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke told lawmakers Sept. 18 that a comprehensive attack on the worst financial crisis since the Great Depression was critical after a series of government interventions failed to normalize markets.
Rapid Passage
Paulson announced his intention to seek legislation from Congress on Sept. 19. Appearing on television talk shows yesterday he called for rapid passage of a bill. Congressional panels have scheduled two hearings this week on the crisis; Bernanke appears at a third hearing on the economic outlook.
Lawmakers are also seeking changes to Paulson's plan.
Democrats are pressing for oversight through the Government Accountability Office, and for the inclusion of efforts to refinance mortgages for struggling homeowners. House Financial Services Committee Chairman Barney Frank wants limits on compensation of corporate executives who benefit from the program.
Republicans are urging limits on how any profits from the program could be spent.
`Needs to Be Simple'
``Just about everyone in the markets agrees the Paulson plan needs to be simple -- unencumbered by complications and penalties,'' Christopher Low, chief economist at FTN Financial in New York, wrote in a note to clients. ``Of course, Washington doesn't know how to do that.''
It was the third straight weekend of crisis work for Paulson and his Treasury colleagues. The previous week, he and New York Fed President Timothy Geithner led talks with banks in an unsuccessful effort to avert the bankruptcy of Lehman Brothers Holdings Inc.
On Sept. 7, Paulson seized Fannie Mae and Freddie Mac, the largest sources of U.S. mortgage financing, after the government-chartered, shareholder-owned companies failed to raise sufficient capital from private sources to satisfy regulators.
Late yesterday, the Fed approved requests from Goldman Sachs Group Inc. and Morgan Stanley, Wall Street's last two independent investment banks, to become bank holding companies.
``It's hard to say there are any illusions left'' about the seriousness of the financial crisis, said Jason Trennert, chief investment strategist at Strategas Research Partners in New York.
Sept. 22 (Bloomberg) -- The worst may be over for commodities after the steepest rout since at least 1956 drove out speculators and the U.S. government unveiled a plan to end the worst credit-market seizure since the Great Depression.
The Standard & Poor's GSCI Index of commodities had the biggest three-day gain in 18 years, surging 8.4 percent through Sept. 19, the day U.S. Treasury Secretary Henry Paulson said the government will spend ``hundreds of billions'' to cleanse banks of mortgage-related assets. Crude oil rose 6.8 percent that day, while wheat and copper gained 3.6 percent.
``What the government just did is the end game, and it's going to mean a good rally for commodities,'' said Michael Pento, a senior market strategist who helps oversee $1.5 billion at Delta Global Advisors in Holmdel, New Jersey. ``Six weeks ago, I thought it was prudent to exit most commodities. Now you want to own these things. I'm jumping in twice with both feet.''
Commodities, which had the best first half in 35 years, tumbled so far this quarter as the combination of slowing economic growth and the strengthening U.S. dollar popped the speculative bubble that drove prices to record highs. The Reuters/Jefferies CRB Index of 19 raw materials is down 22 percent since June 30, heading for the biggest quarterly loss since at least 1956, data compiled by Bloomberg show.
Speculators Sell
Hedge funds and other large speculators sold U.S. commodity futures tracked by the CRB. Excluding nickel and aluminum traded in London, so-called net-long positions, or bets prices will rise, dropped 72 percent since July 1 to 241,370 contracts on Sept. 16, data from the Commodity Futures Trading Commission in Washington show.
Investors pulled a net $3.9 billion from commodity and energy funds since mid-July, money-flow tracker EPFR Global, based in Cambridge, Massachusetts, said in a statement Sept. 19.
The CRB rose 2.4 percent the day of Paulson's announcement and the MSCI World Index of stocks rose 5.7 percent, the biggest gain in almost 21 years. The index increased 0.8 percent today.
The plan by Paulson and Federal Reserve Chairman Ben S. Bernanke would purge banks of devalued mortgage-linked assets, after earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past two weeks, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans withdrew a record $89.2 billion from money-market funds.
More to Come
``We're probably going to see a really prompt recovery of the U.S. economy in the fourth quarter or early 2009,'' said Michael Aronstein, president of New York-based Marketfield Asset Management, who correctly predicted in June that commodities would fall. ``I've been bearish on commodities since the second quarter, but we could certainly get a rally for a few months for many of these markets.''
The U.S. rescue plan ``won't be the end'' of the crisis, Aronstein said. ``You'll still see tighter liquidity conditions, and in the developing markets there are still structural problems. Commodities will probably bounce for two to three months, but you're not going to see them at record highs.''
Not everyone expects commodities to rally, because economic growth remains sluggish. The U.S. economy will grow 1.5 percent next year, down from 1.7 percent this year, according to a survey of economists by Bloomberg.
``It seems pretty clear we are in a recession or heading there, and ultimately that spells soft demand and lower prices,'' said Tom Knight, a trading director at Truman Arnold Cos., an independent fuel wholesaler in Texarkana, Texas.
Price Increases
Commodities may rise anyway because Paulson's plan will pump more cash into the economy, increasing the chance of accelerating inflation, said William Fordham, president of C&S Grain Market Consulting in Ohio, Illinois.
Consumer prices will likely accelerate 4.5 percent this year, according to a Bloomberg survey of analysts. The U.S. may have to borrow an extra $700 billion to $1 trillion to fund the rescue, according to Michael Pond, an interest-rate strategist at Barclays Capital Inc. in London.
``Everything that has happened this week is inflationary in the long run,'' Fordham said in a Sept. 19 e-mail. Government efforts to ``support Wall Street'' and keep stocks from falling are ``long-term bearish for the U.S. dollar and extremely inflationary for commodities.''
The CRB posted its best first half since 1973 as the dollar sank toward a record low against the euro, and the index reached a record on July 3. The U.S. currency rebounded 11 percent against the euro since touching the low on July 15, prompting investors to unload commodities.
`Crazy Money'
Commodity markets are ``oversold,'' and the ``bull cycle'' for energy and raw-materials producers ``is far from over as severe supply constraints that have led to high and rising prices in recent years remain intact,'' strategists at Goldman Sachs Group Inc., the largest of the remaining independent U.S. securities firms, said in a report last week.
The GSCI Index of 24 commodities should return 17 percent in the next 12 months, Goldman strategists led by Allison Nathan said. The index is down 26 percent since the end of June.
The decline was ``all about this crazy money flow that gripped all the financial markets,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``We could start to see a shift in the flow.''
Open Interest Falls
As of Sept. 17, open interest in commodity futures tracked by the CRB, excluding aluminum and nickel, was down 12 percent this quarter, data compiled by Bloomberg show. Open interest, the total number of contracts yet to be closed, liquidated or delivered, is a measure of what direction money is flowing in commodity markets, O'Neill said.
Inflation prospects make commodities more appealing than equities, said Christoph Eibl, who helps manage more than $1 billion of commodities at Tiberius Asset Management AG in Zug, Switzerland.
``It's not time to panic'' in commodities, Eibl said. ``There are a lot more problems in the banking sector, in the real economy. Commodities have already taken a serious hit. There are other assets in the portfolio you have to worry about.''
Sept. 22 (Bloomberg) -- U.S. stock-index futures and European shares dropped as the biggest gain in oil since 2000 offset benefits of the U.S. government's $700 billion plan to bail out the nation's banks. The MSCI Asia Pacific Index rose.
General Motors Corp. fell 2.3 percent in Germany as crude posted the steepest four-day advance in eight years and the automaker said it will tap the remaining $3.5 billion of a revolving credit line. Ambac Financial Group Inc. declined 10 percent as the company said it may delay the start of a new municipal bond insurer. Mitsubishi UFJ Financial Group Inc. added more than 4 percent in Tokyo after U.S. Treasury Secretary Henry Paulson announced plans to buy soured mortgage securities and provide $400 billion to guarantee money-market mutual funds.
Futures indicated the Standard & Poor's 500 Index may slip after the government's plan to purge banks of toxic assets and crack down on speculators who bet against shares of financial companies sent the benchmark for American equities to its biggest two-day gain since the aftermath of the 1987 crash.
``We may see a bit of unraveling of those gains,'' said Nick Skiming, who helps oversee about $2 billion at Asburton Ltd. in Jersey, Channel Islands. ``There are still fears about what's going to happen to the overall U.S. economy, but there is also concern about dollar weakness which is already feeding through to higher commodity prices including oil.''
S&P 500 futures expiring in December dropped 8.7, or 0.7 percent, to 1,237.4 as of 10:54 a.m. in London. Dow Jones Industrial Average futures fell 67 to 11,288, and Nasdaq-100 Index futures decreased 7.5 to 1,732.
Europe's Dow Jones Stoxx 600 Index lost 0.3 percent, following its steepest advance on record Sept. 19. The MSCI Asia Pacific Index added 2.6 percent, brining its two-day rally to 8.3 percent.
Lehman, Merrill, AIG
The S&P 500 climbed 8.5 percent in the last two days of trading last week after a rout that began when Lehman Brothers Holdings Inc. filed for bankruptcy, Merrill Lynch & Co. was sold to Bank of America Corp. and the U.S. took control of American International Group Inc.
The Federal Reserve yesterday approved bids by Goldman Sachs Group Inc. and Morgan Stanley to become banks, ending the ascendancy of the securities firms 75 years after Congress separated them from deposit-taking lenders.
More than $500 billion in losses at banks stemming from the first nationwide drop in home prices since the 1930s has pushed the S&P 500 15 percent lower in 2008. U.S. economic growth may slip to 1.7 percent this year and 1.5 percent in 2009, the slowest since the last recession in 2001 and its aftermath in 2002, according to the median forecast of 80 economists compiled by Bloomberg.
Bank Bailout
The Bush administration widened the scope of its plan to including assets other than mortgage-related securities. The change to potentially allow purchases of instruments such as car loans, credit-card debt may force an increase in the size of the package as the legislation proceeds through Congress.
Speculation that the plan will help shore up demand helped push oil up as much as 1.8 percent to $106.41 in New York.
GM fell 2.3 percent to $12.78 in Germany after the company said it will draw on the remaining credit line as the crisis on Wall Street threatens to crimp the carmaker's ability to borrow. The balance of the $4.5 billion line will go to help cover restructuring costs, GM said in a statement on Sept. 19.
Ambac
Ambac lost 10 percent to $3.48 after the company said its contribution of $850 million of capital to Connie Mae is being postponed because it may need the cash to terminate or post collateral for its guaranteed investment contracts.
A downgrade and terminations of some GICs as a result of Lehman's bankruptcy may force Ambac to come up with as much as $2.1 billion of cash and new collateral.
Moody's last week said it was considering cutting Ambac's financial-strength rating by several grades.
Mitsubishi UFJ, Japan's biggest bank, advanced 4.2 percent to 898 yen, the highest since Aug. 6. Sumitomo Mitsui Financial Group Inc., Japan's second-largest by market value, added 2.6 percent to 676,000 yen.
Goldman lost 3.1 percent to $125.75 in Germany and Morgan Stanley rose 1.1 percent to $27.53. The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money -- the leverage that led to the undoing of Bear Stearns Cos. and Lehman.
Sunday, September 21, 2008
Sept. 22 (Bloomberg) -- Treasury Secretary Henry Paulson's plan to end the rout in U.S. financial markets may derail the dollar's three-month rally as investors weigh the costs of the rescue.
The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.
``As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.
The dollar fell against 14 of the world's most-traded currencies on Sept. 19, including the euro, as Paulson unveiled the plan, while the Standard & Poor's 500 Index rose 4 percent. The plan may end the rally that began in June and drove the U.S. currency up 10 percent versus the euro, 2 percent against the yen and almost 13 percent compared with Brazil's real, strategists said.
Paulson's plan, sent to Congress Sept. 20, would mark an unprecedented government intrusion into markets and increase the nation's debt ceiling by 6.6 percent to $11.315 trillion. Officials may also start a $400 billion Federal Deposit Insurance Corp. pool to insure investors in money-market funds.
Dollar `Downdraft'
``The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,'' said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc.
Paulson and Federal Reserve Chairman Ben S. Bernanke began plotting the rescue last week after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy, the government seized control of American International Group Inc. and Merrill Lynch & Co. was forced into the arms of Charlotte, North Carolina-based Bank of America Corp.
Morgan Stanley dropped as much as 44 percent Sept. 17, the biggest one-day decline in its history, and Goldman Sachs Group Inc., where Paulson was chief executive officer from 1998 to 2006, lost 26 percent. Both are based in New York.
The dollar fell 0.2 percent to $1.4498 per euro as of 8:25 a.m. in Tokyo, after dropping 1.7 percent in the week to Sept. 19. It slid 0.8 percent to 106.61 yen, extending last week's 0.5 percent decline.
Dollar Hegemony
In the four days following Lehman's bankruptcy, the ICE future exchange's Dollar Index, which measures the currency's performance against the U.S.'s six biggest trading partners, dropped 1.2 percent. It fell 0.2 percent today, leaving it 1.1 percent higher this year.
``After years of doubting the hegemonic status of the dollar, this proves it's still there,'' said Stephen Jen, London-based head of research at Morgan Stanley. ``But of course this situation is definitely not stable. The capital leaving the emerging markets is only going into the dollar and that's a powerful force. It's a very uncomfortable balance.''
By the end of the year, the euro will weaken to $1.43 and the yen will trade at 108 to the dollar, according to analyst surveys by Bloomberg. The dollar will depreciate to 1.65 against the real, compared with 1.83 on Sept. 19.
Growth, Deficits
Although the dollar may suffer short-term, at least one analyst says the U.S. government's planned rescue will strengthen the currency before long. Paulson's proposals will return foreign-exchange markets to the trend of the past months, according to Adam Boyton, senior currency strategist at Frankfurt-based Deutsche Bank AG, the world's biggest currency- trading bank. Since the end of June, the Dollar Index has gained 7.2 percent.
``It's a positive plan that's ultimately good for the dollar,'' said New York-based Boyton. ``It reduces risk and volatility and gets the focus back on macroeconomic fundamentals, which suggest weakness throughout the rest of the globe next year, with returning strength in the U.S.''
The U.S. economy may expand 1.5 percent next year, according to the median estimate of 80 analysts surveyed by Bloomberg. That compares with 1.1 percent for the euro-region and 1.15 percent for Japan, the world's second-largest economy.
`Huge New Supply'
The rescue comes as the U.S. budget deficit and the current-account balance, the broadest measure of trade, grow. The Congressional Budget Office projects the spending shortfall will increase to $438 billion next year from $407 billion. The current account deficit is up from $167.24 billion in December.
``Investors may start to worry about the amount of debt the U.S. is taking on and its impact on the dollar,'' said Geoffrey Yu, a currency strategist in London at UBS AG, the second- largest foreign-exchange trader. ``The fact that they mentioned taxpayer money implies that they're going to issue debt. If there's going to be a huge new supply of Treasuries, this will be dollar negative. It's too much for the dollar to take.''
Traders are also concerned the bank bailout will spread to other U.S. industries suffering from the credit crunch that's holding back an economy growing at its slowest pace since 2001. Detroit-based General Motors Corp., the world's biggest automaker, said last week it will tap the remaining $3.5 billion of a $4.5 billion credit line to pay for restructuring costs.
`Damaged' Currencies
Lower interest rates may also weigh on the dollar. Futures on the Chicago Board of Trade show there's a 38 percent chance policy makers will lower their target rate for overnight lending between banks to at least 1.75 percent by January from 2 percent currently. A month ago, they showed a 46 percent chance of an increase to 2.25 percent.
Rates in the U.S. are already the lowest of any the Group of 10 industrialized nations except Japan, where they are 0.5 percent. The European Central Bank's benchmark is 4.25 percent.
Another drawback for the dollar is that the Fed's key rate is 3.4 percentage points less than the rate of inflation, the most since 1980, so investors lose money by investing in short- term U.S. fixed-income assets.
``People thought that the Fed was done cutting,'' said Andrew Balls, an executive vice president and member of the investment committee of Newport, California-based Pacific Investment Management Co., which oversees almost $830 billion. ``In the longer term the diversification away from the dollar will remain intact. The U.S. hasn't done itself any favors in making its assets attractive to foreign investors.''
Brazil, Australia
The biggest beneficiaries may be Brazil's real and Australia's dollar, as demand for higher-yielding assets rebounds, according to Goldman Sachs. The two currencies, the biggest losers versus the dollar since July, may rebound 7.7 percent and 4.6 percent, respectively, the next two weeks, Goldman Sachs forecasts.
``The currencies that have been damaged the most have the best growth,'' said Jens Nordvig, a strategist with Goldman Sachs in New York. ``You're going to see a lot of flows back into these currencies now.''
Sept. 22 (Bloomberg) -- Asian stocks surged, led by financial and commodity companies, after the U.S. government proposed buying $700 billion of bank assets and Australia and Taiwan restricted the short sale of equities.
Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, rose 4.2 percent after the U.S. Treasury asked Congress to clear plans to clean up bank balance sheets. Macquarie Group Ltd. jumped 5.5 percent after Australia's regulator banned speculators from borrowing stocks and selling them in the hope of driving down the price. Bank of China Ltd. led gains in Chinese shares after the nation's top securities regulator made it easier for companies to buy back stock.
``I think the exodus from Asia, at least from our part of the world, is probably just about over,'' said Don Gimbel, who oversees $2 billion as senior managing director at Carret & Co. in the U.S., in an interview with Bloomberg Television. The U.S. rescue plan is ``a step in the right direction,'' he said.
The MSCI Asia Pacific Index added 2.4 percent to 116.89 as of 12:33 p.m. in Tokyo, extending Sept. 19's 5.5 percent jump. The measure's gauge of financial stocks, which ended last week at the lowest price-earnings ratio this decade, was the biggest contributor to today's gains.
The regional measure tumbled to the lowest in three years last week after Lehman Brothers Holdings Inc. filed for bankruptcy, the U.S. government seized control of American International Group Inc. and Merrill Lynch & Co. was forced to sell itself to Bank of America Corp.
Japan's Nikkei 225 Stock Average rose 2 percent to 12,156.90. NGK Insulators Ltd. soared after lifting its profit forecast. Benchmarks advanced in all markets open for trading, except in Hong Kong and Singapore.
Fast Passage
Standard & Poor's 500 Index futures fell 0.9 percent in after-hours trading. U.S. stocks advanced on Sept. 19, with the S&P 500 jumping 4 percent. Treasuries rose on speculation the Federal Reserve will cut interest rates to support the U.S. rescue plan. The dollar dropped against the yen on concern the plan will widen the U.S. budget deficit.
Mitsubishi UFJ, Japan's biggest bank, rose 4.2 percent to 898 yen, the highest since Aug. 6. Sumitomo Mitsui Financial Group Inc., Japan's second-largest by market value, advanced 3.5 percent to 682,000 yen. Kookmin Bank, South Korea's largest, added 3.6 percent to 57,900 won.
U.S. Treasury Secretary Henry Paulson's rescue plan would allow the government to buy a variety of mortgage-related securities to relieve a freeze in credit markets. Democrats, who control both houses of the U.S. Congress, pledged not to slow down its passage or tie it to an economic stimulus plan.
``The speed and degree to which the U.S. government has intervened with this buying of nonperforming assets is positive for the market,'' Tomochika Kitaoka, a Tokyo-based strategist at Mizuho Securities Co., said in an interview with Bloomberg Television.
Babcock Soars
Since the start of 2007, global financial companies have reported more than $510 billion in credit losses and writedowns linked to the slump in the U.S. housing market and slowing economic growth.
Macquarie, Australia's largest securities firm, added 5.5 percent to A$37.88. Babcock & Brown Co., which had lost 97 percent this year until Sept. 19, surged 70 percent to A$1.35. Cathay Financial Holding Co., Taiwan's largest financial- services company, rose 3.2 percent to NT$50.30.
Australian regulators said on Sept. 19 it will abolish so- called ``naked'' short selling of shares from today, and extended its ban yesterday to ``covered'' transactions. In covered short selling, stock is borrowed for the purposes of betting on share price declines, while shares are never borrowed in naked sales.
Share Buybacks
Taiwan's Financial Supervisory Commission said yesterday it will ban the short-selling of 150 stocks when the shares trade below the previous session's close.
The U.S. Securities and Exchange Commission said on Sept. 19 it temporarily banned short-selling in shares of financial companies to curtail the market rout.
Bank of China, the nation's third-largest lender, rose by the daily 10 percent limit to 3.70 yuan. Industrial & Commercial Bank of China Ltd., the nation's largest bank, gained 10 percent to 4.16 yuan.
Chinese companies can start the share buyback process after two-thirds of shareholders approve it, and disclose details the next working day without seeking approval from the China Securities Regulatory Commission, the regulator said yesterday. Last week, China scrapped the tax on stock purchases and said it will buy shares in three of the largest state-owned banks to shore up investor confidence.
Oil, Metals Advance
BHP Billiton Ltd., the world's biggest mining company, added 8.9 percent to A$38.55 in Sydney. Mitsubishi Corp., Japan's largest trading company which generates more than half of its profit from commodities dealing, soared 8.1 percent to 2,880 yen.
Crude oil surged 6.8 percent on Sept. 19 to $104.55 a barrel in New York, capping a three-day, 15 percent rally. The contract recently rose further to $104.80 in after-hours trading. A measure of six metals that trade on the London Metal Exchange advanced 3.4 percent on Sept. 19, breaking a four-day slide.
NGK, which makes filters for diesel engines, soared 11 percent to 1,302 yen, the most since July 30 2007, after lifting its estimate for earnings.
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