President Bush's $700B Prime Time Push
Wednesday, September 24, 2008SUSIE GHARIB: President Bush talks to the nation tonight. He will try to persuade the American public that the government's $700 billion financial rescue plan is the best way to resolve the credit crisis. Meanwhile, on Capitol Hill today, another day of intense debate on that bailout. Federal Reserve Chairman Ben Bernanke warned lawmakers the U.S. is facing "grave threats" to its financial stability and he urged swift passage of the plan. But many Democrats in Congress aren't convinced and want tough restrictions on it. We have two reports tonight looking at where the plan stands and what happens if Congress doesn't approve it. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Clearly unhappy at the huge mess they are being asked to clean up, members of Congress searched for alternatives. And on one alternative, Treasury Secretary Henry Paulson came Congress's way, agreeing to limit the pay of CEOs at companies that take taxpayer dollars.
HENRY PAULSON, TREASURY SECRETARY: The American people are angry about executive compensation and rightfully so. Many of you cite this as a serious problem and I agree. We must find a way to address this in the legislation, but without undermining the effectiveness of this program.
GERSH: But the concerns about the Paulson plan went deeper. Citing articles on the web like "Why Paulson Is Wrong," Ohio's Deborah Pryce wanted to know if there was a better way to use $700 billion in taxpayer money.
REP. DEBORAH PRYCE (R), OHIO: Instead of buying these toxic assets, the government should buy preferred stock in ailing banks, and that could raise matching private sector equity.
GERSH: Paulson argued no one would invest in a bank until they know what the bad mortgages on the books are really worth and the only way to price mortgage-related securities now is to hold a Treasury auction
PAULSON: That encourages private capital to follow and it makes it possible for the banks to recapitalize themselves because lenders right now are concerned about putting capital in, because they don't trust the balance sheets and they have concerns about what these assets are worth.
GERSH: Bernanke suggested the Treasury's asset purchase plan might do a little bit of both, buy up assets and inject cash directly into banks. But at a hearing earlier in the day, Bernanke said private investors would likely pull back needed funds if the government stepped in. After all, when the government took over Fannie Mae and Freddie Mac, private shareholders who had put in billions were effectively wiped out.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: If it were possible to convince the markets that in fact the government was going to act like Warren Buffet, and make investment banking deals based on, you know, negotiations and approval by the common shareholders and the board, et cetera, et cetera, I think that's something that's probably worth discussing with the White House, and see if they see any benefit in that.
GERSH: All the talk of high finance was lost on many members of Congress. What they really wanted to know is how this mess affects voters back home. Bernanke says unfortunately Wall Street has a lot to do with Main Street right now.
BERNANKE: It's really a question of saying, there's a hole in the boat, you did it, why should I help you? Well, there's a hole in our boat, we need to fix it and then we need to figure out how make sure it doesn't happen again.
GERSH: Democrats are considering another option to fix the boat, putting the Treasury on an installment plan, approving $150 billion now and offering more later if it's needed. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT NEW YORK BUREAU CHIEF: This is Scott Gurvey on Wall Street. What if nothing passes? Or if something passes, but it doesn't work? The specter raised is one of possible economic disaster, with a deep recession, a sharp drop in consumer sales and a big spike in unemployment. While Wall Street will take the biggest hit, Jerry Webman of Oppenheimer says Main Street will not escape.
JERRY WEBMAN, CHIEF ECONOMIST, OPPENHEIMER FUNDS: If nothing passes, it will be very dangerous for financial markets. That doesn't just mean people who own stocks right now, but it means the functioning of the whole system that makes loans for automobiles, for mortgages, for capital equipment, for countries, for cities to pave roads, for countries to borrow for national purposes. If nothing happens, that system locks up.
GURVEY: But that doesn't mean the system will come to a complete standstill. New York's 80-year old Sterling National Bank (STL) ran an ad in today's Wall Street Journal titled, "What Credit Crunch?" The ad says Sterling continues to provide financing for growing businesses. President John Millman says Sterling can still make loans because it avoided the traps others fell into.
JOHN MILLMAN, PRESIDENT, STERLING NATIONAL BANK: We do not do exotic things. We do not have involvement with subprime lending. We don't do home equity loans. We don't do auto leasing. We're not a retail bank. We're a business bank.
GURVEY: But unless lenders can get some of the bad loans off their books, William O'Donnell of UBS says only the best credit risks will have access to funds.
WILLIAM O'DONNELL, FIXED INCOME STRATEGIST, UBS: Lending standards have been tightened throughout this year in all loan categories. We see this in the senior loan officer survey and we expect to see it again in the quarterly survey from the Fed in October.
GURVEY: And then there is the question of price. Jerry Webman says unless the government plan succeeds. The cost of money will stifle growth.
WEBMAN: Anything that has a credit or liquidity aspect to it, whether it's corporates, mortgages, municipals which are unbelievably cheap relative to Treasuries right now, the market is just not receptive. So good quality issuers and borrowers will be able to get a mortgage, or sell a municipal bond, or raise corporate funds, but they're going to pay a premium to do it.
GURVEY: There was clear evidence of that today as industrial giant Caterpillar (CAT) announced a new bond issue at an interest rate roughly double what it would have had to offer just six weeks ago. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
