After two weeks of contentious and often emotional debate, the federal government’s far-reaching and historic plan to bail out the nation’s financial system was signed into law by President Bush on Friday afternoon.
"By coming together on this legislation, we have acted boldly to prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said less than an hour after the House voted 263 to 171 to pass the bill.
The House vote followed a strong lobbying push by the White House and other supporters of the bill. The House rejected a similar measure on Monday - a defeat that shocked the markets and congressional leaders on both sides of the aisle.
The law, which allows the Treasury Secretary to purchase as much as $700 billion in troubled assets in a bid to kick-start lending, ushers in one of the most far-reaching interventions in the economy since the Great Depression.
Federal Reserve Chairman Ben Bernanke said he welcomed the news. "The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses," he said.
Treasury Secretary Henry Paulson said he would act swiftly but "methodically" to carry out the plan.
"The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets," Paulson said.
Republicans picked up 26 votes in favor of the bill among caucus members who’d originally voted against it on Monday, while Democrats picked up an additional 32 votes.
According to voting results, 172 Democrats voted in favor of the bill while 62 opposed it; and 91 Republicans voted for it and 108 voted against it.
"We did today what we had to do because past mistakes made it necessary," said Rep. Barney Frank, D-Mass., one of the lead negotiators on the bill.
Republicans who switched their votes from "no" to "yes" included Rep. Howard Coble, R-N.C., and Rep. Sue Myrick, R-N.C. In a statement before the vote, Myrick said, "We’re on the cusp of a complete catastrophic credit meltdown. There is no liquidity in the market. We are out of time. Either you believe that fact, or you don’t. I do."
Democrats who switched to "yes" votes include Rep. John Lewis, D-Ga., Rep. Elijah Cummings, D-Md., and Rep. Donna Edwards, D-Md.
Cummings noted before the vote that this was the most difficult vote for him in his 12 years in Congress. "But today we must step up and lead," he said.
Earlier this week, Cummings and Edwards were part of a group that had been working on an alternate proposal. The lawmakers had lobbied strongly but unsuccessfully to include, among other things, a change to the bankruptcy law that would let judges modify mortgages on primary residences, a move the lending industry has strongly opposed.
Cummings and Edwards said they had received calls from Democratic presidential nominee Barack Obama, encouraging them to change their minds. They said they received assurances that he was committed to the bankruptcy provision.
House Minority Whip Roy Blunt, R-Mo., told reporters before the vote on Friday morning that three things have happened to change some Republican members’ opposition to the bill since the House defeated the measure on Monday: more calls to their district offices in support of the bill; a clarification of SEC accounting rules; and the Senate additions, passed on Wednesday, including a number of tax break extenders and an increase in FDIC deposit insurance coverage. (What’s in the law.)
The House debate began on the heels of two market-moving events early Friday morning: a worse-than-expected monthly jobs number; and a surprise merger announcement between Wachovia and Wells Fargo (500 fast cash).
For the past two weeks, lending between banks and between banks and businesses has gotten considerably more expensive. Small businesses are having trouble getting loans. As of midday Friday, one key measure showed that banks were hoarding cash rather than loaning it. Meanwhile, a risk indicator showing banks’ willingness to lend to each other was at an all-time high.
Advocates say the plan is crucial to government efforts to attack a credit crisis that threatens the economy and would free up banks to lend more. Opponents say it rewards bad decisions by Wall Street, puts taxpayers at risk and fails to address the real economic problems facing Americans.
Lawmakers who voted against the bill warned that "being stampeded" into voting the bill through would be a serious mistake.
"Wall Street is so hungry for the $700 billion they can taste it. To get it they need to … create panic, block alternatives and herd the cattle. We ask Congress not to rush. Defeating this bill today isn’t the last step. It’s the first step in passing a good bill," said Rep. Brad Sherman, D-Calif., before the vote.
Rep. Marcy Kaptur, D-Ohio, who has called for the FDIC and SEC to use their powers to ease the credit crisis, said, "Pray for our Republic. She’s being placed in … very greedy hands."
Lawmakers who stood in support of the plan noted that it will help Main Street, not Wall Street. "We [would] rescue the jobs, the savings and the ability to get a loan for each hard-working American," said Rep. Louise Slaughter, D-N.Y.
Rep. Maxine Waters, D-Calif., noted in the floor debate that the plan as amended by lawmakers also supports homeowners at risk of foreclosure by giving the government more say in how loans for troubled borrowers are modified so people can stay in their homes.
"When we buy up this toxic paper, we’re in charge. We can do the kind of loan modifications we’ve been urging [the industry coalition] Hope Now to get done. … We’ll be able to set some standards," Waters said during the floor debate. "For anybody who says there’s nothing in this bill for homeowners, they’re incorrect."
Even though the financial rescue plan has been signed into law, there are still a lot of unanswered questions regarding how some key provisions will work.
For instance, just how will Treasury structure the pricing and purchase of the troubled assets, which are troubled precisely because they’re difficult-to-value? For one thing, Treasury will be buying a variety of asset types backed by mortgages and loans of hard-to-verify credit quality. And financial institutions are not all in the same pickle - they each have their own combination of problems.
"The challenges our institutions face are just as varied - from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence," Paulson said after the House vote.
How much will the investment managers that Paulson will hire to run the asset purchase program be paid? What will the hiring guidelines be to prevent conflicts of interest?
One thing seems certain: Treasury staff are likely to be working more nights and weekends in the next month trying to figure it all out.
CNN congressional producers Deirdre Walsh and Lesa Jansen contributed to this report.
NEW YORK — Investors who are getting beaten up in the stock market often look to bonds as a safe place to stash their money. But they need to make their moves deliberately, not out of panic, or they can end up losing money rather than stabilizing a portfolio.
Common mistakes investors are likely to make in the current climate include moving too quickly and not paying enough attention to the kinds of bonds they’re buying.
The idea of moving toward safety is more complex these days because some of the chaos in the financial markets stems from bonds — including those tied to risky mortgages that since have gone into default. The multiplication in recent years of the types of fixed-income investments means that not all bonds are the same; while the government provides safe investments, there also are bonds that bring in higher returns but take more chances to do so.
Rich Berg, chief executive and co-founder of Performance Trust Capital Partners, said investors need to know what they’re getting into. If they’re lured by exotic names like collateralized debt obligations or collateralized loan obligations, they need to understand that the more complex the investment, the more likely it is to spell trouble.
"These aren’t mom and dad’s bonds," he said. "When people think they’re going into bonds for safety they might actually be exacerbating their risk."
He said investors also need to consider how much they’re willing to sacrifice in investment returns in order to safeguard their money by putting it into bonds. That’s important these days because interest rates are low, limiting what many bonds pay.
"Right now, if people are OK with a long-term return of between 3 and 4 percent, go put your money in government bonds. But don’t expect 6 to 8. It can’t happen," he said.
They might want to consider that professional investors have been stashing cash into 3-month Treasury bills, sometimes earning almost nothing, but secure knowing that their principal will remain intact.
The average investor doesn’t need to look for such short-term investments, but that kind of safety is what makes government debt of all maturities so attractive.
Stuart Ritter, an assistant vice president and certified financial planner at T (instant payday loans). Rowe Price Associates Inc., said investors who want to make money shouldn’t simply scout around for the highest returns because market forces can shift what is in favor — and those returns could then head south.
"If you start making investment decisions based on what happened in the recent past and try to forecast the near future, you’re no longer investing, you’re fortune telling," he said.
And he warned that investors who move too much money into bonds might risk earning so little they can’t keep pace with inflation.
"As people go to something that is ’safe’ from short-term volatility, by definition they are in something that gives them much higher exposure to the risks of inflation," he said.
Consider an example of how two investors with $1 million portfolios at the start of 2001 would have fared by taking two different paths, according to T. Rowe Price research.
The first investor who panicked and shifted from stocks to cash during the downturn after the tech-stock boom and the Sept. 11, 2001 terror attacks would have ended up five years later with about $700,000, while the investor who stayed in stocks and rode the ups and downs would have come out with about $1.25 million.
"You didn’t see the decline coming, you’re not likely to see any recovery that’s to come. The only way to participate in the recovery is to stay in," Ritter said.
But before putting money into bonds or bond funds, investors should remember, again, that those paying higher yields likely are taking on more risk. And a conservative approach can be in order for investors who soon will need the money.
Michael Cuggino, president and portfolio manager at Pacific Heights Asset Management, said the company’s bond funds didn’t extract the returns that some other funds did in recent years because they didn’t wade into more exotic investments that now have run into trouble.
"We’ve never pretended that we should chase every last basis point of yield and take on unnecessary risk to do so," he said.
The government kicked off a program Wednesday that aims to prevent foreclosures by letting an estimated 400,000 troubled homeowners swap their mortgages for more affordable loans.
Lenders, rather than borrowers, will decide whether to participate in the program, which requires them to take a loss on the initial loan. The $300 billion, three-year program is designed to help borrowers who owe more on their loans than their homes are worth.
To qualify, borrowers must be spending more than 31% of their income on mortgage payments. Loans made this year are excluded, except for those completed on Jan 1. Borrowers must have made six months of payments on their loans.
"For homeowners in trouble, this may be the help that they need," Housing and Urban Development Secretary Steve Preston said Wednesday. Officials did not have an updated estimate of how many homeowners were likely to qualify, beyond the Congressional Budget Office’s projection from earlier this year that 400,000 borrowers would participate.
The program, dubbed ‘Hope for Homeowners,’ was passed by Congress this summer as part of a massive housing bill. It is one of several government efforts to stem the mortgage crisis.
Critics, however, call the government’s actions sluggish and inadequate. Earlier action to modify loans, they say, might have prevented a $700 billion financial industry bailout now being debated in Washington.
Executives from Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500) told lawmakers last month they have been hiring additional workers to put the new program in place (no fax payday loans).
Still, it is unclear whether the industry will embrace the plan fully check cash advance. One concern is that investors in mortgage securities must take an immediate loss and can’t recoup their lost money if home prices turn upward again.
Investors would rather modify loans in ways that maintain the ability to "share in future appreciation," JPMorgan Chase executive Marguerite Sheehan said in written testimony submitted to House lawmakers last month.
On Monday, a group of state banking and law enforcement officials released a report that said nearly 80% of borrowers with subprime loans were not on track for assistance to avoid foreclosure as of May.
The report by the State Foreclosure Prevention Working Group criticized the lending industry for making only small changes to loan terms and noted that about one in five loans that were modified over the past year became delinquent again.
"While banks and Wall Street firms continue to report record write-downs of mortgage loan portfolios and securities, the losses do not appear to be flowing down to homeowners in the form of sustainable loan modifications," Iowa Attorney General Tom Miller, a founder of the state effort, said in a statement.
Michael Sroka dreamed up a day-trading website for sports fans while still in high school, and the concept will finally come to fruition with the launch of OneSeason.com.
The website, scheduled to debut on Wednesday, offers U.S. fans the chance to buy shares in such athletes as basketball star LeBron James and golfer Tiger Woods. The aim is to make a profit from trades, much like investors do when betting on the stocks of General Electric Co or Cisco Systems Inc.
At OneSeason, users can trade real money based on the performance of athletes, teams, leagues and other sports personalities. The idea came to Sroka, 27, at his Winnetka, Illinois, high school.
“Daydreaming in my economics classroom, I mashed together my two favorite things, which were sports and trading,” he told Reuters in a telephone interview.
Designed to appeal to sports fans, investors and gamblers, OneSeason allows users to build a portfolio — the company prefers “sportfolio” — of shares in athletes.
The shares, called “synthetic ownership interests,” are delineated with ticker symbols, just like real stocks cash advance loans. So Los Angeles Lakers all-star guard Kobe Bryant will have shares with the ticker “KOBE” when issued.
The value of those shares is determined by market demand influenced by onfield play, off-field behavior, fan opinion and future prospects, Sroka said. While OneSeason represents a first, it comes as Internet users grow comfortable with dealing in intangible assets.
“People have become much more comfortable with virtual goods and digital assets,” Sroka added. “In the past five years, people have also become much more comfortable with financial transactions online.”
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