bank run blog

With Congressional leaders and senior administration officials working to craft a palatable sequel to the emergency economic rescue package defeated in the House on Monday, it was clear that Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke had encountered their first significant setback since they embarked last year on a series of increasingly aggressive market interventions in an attempt to sustain the failing US banking and financial system. At the same time, the protracted two-week “crisis”, a flurry of meetings, press conferences, market updates, and cable news chatter, has inadvertently revealed the enormous power of these two unelected stewards of the nation’s economy, as President Bush and his would- be successors loiter on the periphery of federal efforts to bail out what’s left of the sector.

It has been reported that one provision of the original draft of Paulson’s plan asserted that, under the authority of the Act, Treasury’s actions “are non-reviewable” and “may not be reviewed by any court of law or any administrative agency.” The extraordinary claim of broad powers reminded many in Washington of Bush administration concepts about the “unitary” executive. But even under the revised terms agreed with Congressional leaders, Paulson and Bernanke will assume unprecedented authority and discretion.

Paulson, a lifelong member of the Wall Street investment banking demimonde, has ironically been called upon to oversee the receivership of the entire collapsed sector, including once-revered Goldman Sachs, where he was CEO. Bernanke, an academic who in recent Congressional testimony stressed his lack of ties to Wall Street, seems determined to deny the deflationary fundamentals of the current “disorderly unwinding.” Their actions, taken coincidentally during the election campaign, will delineate many aspects of the next presidential administration.

cross posted at

redstateupdate.net

The value of single-family homes across the US continues to plummet. The Associated Press reports;

“The Standard & Poor’s/Case-Shiller 20-city housing index released Tuesday fell a record 16.3 percent in July from the year-ago period, the largest drop since its inception in 2000. The 10-city index plunged 17.5 percent, its biggest decline in its 21-year history.”

The Los Angeles Times reports that in California, the value of single-family homes declined significantly more than the national average. The Times writes;

“Los Angeles and Orange County home prices fell 26.2% in July compared to July 2007.”

see articles-
Associated Press : S&P: Home prices post 16 pct. annual drop in July
Los Angeles Times : Home prices fall at record pace in July

The failure of the Paulson bailout plan to pass in the House of Representatives sent the market tumbling in an unprecedented sell-off. The Associated Press is reporting :

“The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic selloff — including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.

The Dow Jones industrial average lost 777 points Monday, its biggest single-day fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks.

As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.”

The markets are pressing for quick reconsideration of the plan, and there will continue to be tantrums like this until they get it. From Bloomberg :

“‘Fear is permeating all markets and everyone is pretty much running for the hills,’ said Jack Ablin, who helps manage about $55 billion as chief investment officer of Harris Private Bank in Chicago. ‘We’re watching this thing crumble.’

The S&P 500 retreated 106.62 points to 1,106.39, as only one company gained, Campbell Soup Co. The benchmark index for American equities slipped to a four-year low. The Dow Jones Industrial Average decreased 777.68 to 10,365.45 for its steepest point drop ever. The MSCI World Index lost 86.84 to 1,163.53. Europe’s Dow Jones Stoxx 600 Index sank 5.5 percent to 251.43, the lowest since January 2005.”

Associated Press : Dow plummets record 777 as financial rescue fails

Bloomberg : Stocks, Oil Plunge After Congress Rejects Bailout

A wave of regional and local bank failures in the United States is at this point inevitable, despite the efforts of the Treasury, the Fed and Congress to fashion a palatable “bailout” package. These banks are heavily exposed to commercial loans, an already-collapsing market that has received very little media attention. Reuters is reporting this morning that a Crisis of confidence hits regional bank shares :

“Shares of regional banks sank on Monday, with National City Corp down 45 percent, as the sector suffered what analysts called a deepening crisis of confidence.

Investors wondered which banks might need a merger partner in order to survive amid the upheaval in the U.S. financial system.

Sovereign Bancorp fell 32 percent, Fifth Third Bancorp dropped 25 percent, FirstFed Financial Corp gave up 20 percent, and KeyCorp slumped 10 percent. The closely watched S&P Financial index fell 4.4 percent.”

Meanwhile, the Wall Street Journal reports that more and more analysts are recognizing the global nature of the crisis, and its historic proportions :

“U.S. stocks slid Monday, with the Dow Jones Industrial Average down nearly 300 points as the proposed $700 billion bailout package and the rescue of Wachovia by Citigroup failed to break the credit-market paralysis.

Reminiscent of the epidemic bank failures of the 1930s and prior panics, financial giants Lehman Brothers and American International Group, thrift Washington Mutual, British savings bank Bradford & Bingley, Belgian lender Fortis and now Wachovia have either been taken over, acquired or filed for bankruptcy protection in the space of two weeks. Meanwhile, spreads on the credit market suggest banks are still wary of lending out money, and that’s already taking a toll on industrial activity.

‘The major concern is the bailout plan isn’t enough to avert a recession in the U.S.,’ said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, in an email. ‘Then throw in the fact that today financial institutions across Europe are announcing more bad news (and) the reality is the crisis continues to be a worldwide issue with no end in sight.’”

Reuters : Crisis of confidence hits regional bank shares

Wall Street Journal :U.S. Stocks Skid Despite Bailout Plan

Wachovia, the nation’s fourth largest bank, has been wrapped up and folded into Citigroup, according to an official statement from The FDIC. The announcement had been expected since last Thursday’s failure and federally arranged sale of Washington Mutual.

Wachovia shares lost over 35 percent of their remaining value in trading on Friday, and the bank had little realistic prospect of making it through the weekend. The Associated Press reports :

“In the latest byproduct of the widening global financial crisis, Citigroup Inc. will acquire the banking operations of Wachovia Corp. in a deal facilitated by the Federal Deposit Insurance Corp.

Citigroup will absorb up to $42 billion of losses in the deal, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will grant the FDIC $12 billion in preferred stock and warrants.

The deal greatly expands Citigroup’s retail outlets and leaves it among the U.S. banking industry’s Big Three along with Bank of America Corp. and J.P. Morgan Chase & Co.

The deal comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia, which was suffering from mounting mortgage losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.

The FDIC asserted that Wachovia didn’t fail, and that all depositors are protected and there will be no cost to the Deposit Insurance Fund.”

The FDIC insists that the collapse of Wachovia isn’t a “failure”, but according to this article from the Washington Post, the Charlotte-based bank was “pushed” by federal regulators to finalize a deal before the markets opened Monday morning :

“Federal officials pushed Wachovia to agree to a sale during a long weekend of talks with Citigroup and other bidders. The Charlotte company has been crushed by losses on mortgage loans, and regulators were increasingly concerned that it might collapse, forcing taxpayers to cover the losses of its depositors.

‘On the whole, the commercial banking system in the United States remains well capitalized. This morning’s decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury,’ Bair said in a statement.”

Associated Press : Citigroup to buy Wachovia banking operations

Washington Post : FDIC Announces Citigroup to Buy Wachovia