Wall Street Isn't Buying The $700B Bailout Plan
Monday, September 22, 2008SUSIE GHARIB: A huge sell-off on Wall Street today on uncertainty about the long-term benefits of the government's $700 billion bailout of the financial sector. The Dow plummeted 372 points and the NASDAQ plunged almost 95. Financial stocks led the decline, including shares of Goldman Sachs (GS) and Morgan Stanley (MS). The two investment banks failed to boost investor confidence even after they announced plans to convert into traditional banks. We have two reports tonight, looking at the specifics of the government rescue plan and what Wall Street thinks about it. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the first day of trading in this new era on Wall Street, it's clear investors don't know what to think. On the one hand, the government's $700 billion bailout plan should help restore investor confidence and ultimately put a floor under stock prices. On the other hand, it saddles the government and taxpayers with an unprecedented amount of debt. Standard & Poor's equity strategist Alec Young says investors are fixated on the challenges that remain for U.S. economy.
ALEC YOUNG, EQUITY STRATEGIST, STANDARD & POOR'S: We think it helps sort of draw a line under the market and under financial stocks. It helps prevent the likelihood that our weak economy will get even weaker. It doesn't mean that we have got a strong economy. We still face headwinds, and I think that reality is coming home to investors today.
PRATT: Another reality hitting investors with a thud today was that the government's plan will inflate America's budget deficit by Olympic proportions. NNYU Professor Larry White also says Americans are beginning to understand that the bailout doesn't alleviate problems in the housing sector.
LAWRENCE WHITE, ECONOMICS PROFESSOR, NYU STERN SCHOOL OF BUSINESS: Prices simply got too high. They have to come down. Most of that pain is going to be experienced by households who will simply be less rich than they thought they were two years ago.
PRATT: Investors were also digesting the changing landscape for investment banks on Wall Street. Morgan Stanley and Goldman Sachs got permission yesterday to transform from investment banks to more scrutinized bank holding companies. Veteran financial analyst Robert Albertson called the move a hurry-up fix in a period of great uncertainty, and says it's potentially unhealthy.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: What we've done with Lehman (LEH), AIG (AIG), Merrill (MER), inhibits financial sector capacity, creativity, and economic growth in general. And I'm sure the two survivors -- the large survivors, probably will be curtailed as a result.
PRATT: Extreme caution is the overwhelming sentiment on Wall Street tonight. There are still too many unknowns for investors to place any big bets, and as one expert put it, "volatility is the only certainty." Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Dhue in Washington. Lawmakers put their imprint on the Treasury's plan today, adding several provisions to the $700 billion plan to purchase troubled assets from financial firms. They include: profit-sharing for taxpayers if the assets are sold at a profit; an oversight board that includes the Federal Reserve and the SEC; limits on executive pay for companies that sell assets into the fund; and increased foreclosure prevention plans. Banking Committee Chairman Chris Dodd says senators realize the urgency.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: We don't have a lot of time, we recognize that, we want to act. But we also want to act responsibly and carefully, to make sure we do this correctly.
DHUE: President Bush also warned against too many changes. That didn't stop the call for add-ons. Housing advocates, like John Taylor of the National Community Reinvestment Coalition, are pressing for people's homes to become a protected asset in bankruptcy.
JOHN TAYLOR, NATIONAL COMMUNITY REINVESTMENT COALITION: With the lender knowing that they could declare bankruptcy and protect their home, it's really going to force them to the table to reach some sort of reasonable agreement to refinance, restructure that loan.
DHUE: Financial firms say requiring changes to the bankruptcy law as part of the Treasury plan would increase the risk of mortgage lending and reduce the availability of credit. They are also against the pay provision. Steve Bartlett heads the Financial Services Roundtable, which is made up of the CEOs of banks, brokerages, and insurance companies. He says cutting CEO pay could keep financial firms from participating.
STEVE BARTLETT, PRES. & CEO, THE FINANCIAL SERVICES ROUNDTABLE: If you say to management of a company that if you won't -- that if sell assets into this distressed asset fund, then you lose your pay, well, then they would be inclined not to do it, one would presume, until they really have to. And if you wait until they really have to, then you -- then you pervert the system.
DHUE: Lawmakers hope to have a final bill by the end of the week. But with so many issues still up for debate, that timing could slip. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
