U.S. Lawmakers Seek Details; Oil, Metals Fall

123jump.com Staff
23 Sep, 2008
New York City

U.S. stocks accelerate their losses as lawmakers debate the details and size of the bailout plan. Executive compensation, the nature of auctions and regulatory oversights are some of the key concerns of the senators of both parties. Crude oil and metals prices fell on global worries.

[R]4:45PM New York – U.S. stocks accelerate their slide as investors learn more of details of Treasury and Fed supported bailout plan.[/R]

U.S. market averages accelerated their declines as lawmakers navigate to hear more details of the bailout plan proposed by the U.S. administration. In the question and answer session with the Senate Banking Committee, Paulson and Bernanke remarks showed a lack of details planning and sever underestimation of the ongoing financial crisis.

The Treasure Secretary Paulson made it clear more than once that the “taxpayer is already on the hook” and urged the committee members several times to act quickly. Senators are frustrated with the Fed and Treasury approach of informing lawmakers after the event.

Secretary Paulson had to backtrack several times after several senators called his bluff on executive compensation. Paulson urged the Senate Banking Committee that it will be difficult for thousands of banks to change their compensation plan to access the funds in the bailout plan. Lawmakers pointed out if the choice is between going bankrupt and changing executive compensations, most banks will make right choice.

The secretary Paulson comments clearly showed frustration with questions from the lawmakers and he tried several times to tell the committee members that laws enacted by the Congress are “outdated” and are from “different era.” He did not cite a single instance when Senator Bunnnig grilled him that he did not complain of these laws when he was chief executive of Goldman Sachs between 1999 and 2006.

While the Treasury secretary hopes that the $700 billion plan will create a market in illiquid securities and start a price discovery process through auction and various other mechanisms, it is not clear how the prices will be determined. There is a fear that banks will use this plan to dump the worst securities at inflated prices to the government and taxpayers will be left with losses.

Paulson blamed regulatory regime on the current crisis and on lapses from the mortgage loans issuing banks. There appears to be no plan how the U.S. taxpayer will benefit from this action, even though Bernanke and Paulson said several times that the “alternatives are worse.” Paulson also said that there is “Plenty of blame to go around” but now is not the time to debate this.

Lawmakers are worried that if the U.S. government pays too much for illiquid or potentially worthless loans then taxpayers will be on the hook and if it pays too little than the banks will fail. And the plan without appropriate safeguards may encourage banks to dump bad loans at high prices to the government and keep the good debt on the balance sheet.

Senator Richard Shelby of Alabama suggested that the current bailout plan will not reach the homeowners that are in default or likely to suffer from the housing market decline and will only benefit the rich bankers on the Wall Street. Not a single dollar of the plan will prevent existing foreclosure but may prevent spreading of the current crisis to a wider economy. He went on to say the despite its huge price tag it is “neither workable nor comprehensive.”

Senator Chuck Schumer of New York said that if the Fed plans to spend $50 billion a month than why is the proposed plan wants $700 billion limit. He will prefer to approve $150 billion for three months and then reconvene in few months to judge the effectiveness of the plan.

Senator Jim Bunning of Kentucky said that the objective is to deal with the home market crisis than why is the plan proposed by the Treasury includes student loans and credit card loans. He also said that most senators will have to deal with consequences of the Treasury plan, long after the secretary Paulson will leave in three months.

Senator Elizabeth Dole of North Carolina said that the credit derivates for default swaps market has jumped from $140 billion in 2006 to $67 trillion in 2008 and during the rescue of Bear Stearns and in prior hearings to the Senate committee the Fed Chairman and Treasury secretary had stressed that these derivatives are insignificant and they are not the reason for the current financial crisis. The Fed loaned $85 billion to AIG after the insurance company was on the verge of default of the credit default swaps contracts.

Several lawmakers pointed out that Bush administration had asked for a swift approval during the Iraq war and the administration is using the same pressure tactics to ask for the record bailout plan without enough debate in both chambers of the Congress.

Fed Chairman Bernanke and Treasury Secretary Paulson in prepared remarks for the Senate Banking Committee exhorted Congress for quick action. However, lawmakers are increasingly questioning the effectiveness of the plan and size of the debt that the U.S. government will be saddled with. SEC Chairman Cox and FHFA director James Lockhart are also appearing before the committee.

Commodities Edge Lower

Crude oil futures declined 3.8% or $4.23 to $105.14 as investors worried that global economic slowdown will lower the demand. Copper declined 3.3% or 11 cents to 314.45, gold dropped $16.40 to $892.60 and silver declined 2.3% or 31 cents to $13.14.

Stock Movers

Mining companies stocks fell sharply as fearful investors sell stocks of miners and energy companies. BHP Billiton ((BHP)) fell $3.87 to $61.31, Rio Tinto ((RTP)) declined $45.71 to $286.29 and Brazil based iron ore miner, Vale ((RIO)) dropped $2.34 to $21.22. Freeport McMoran ((FCX)) declined $1.92 to $70.36 and Lihir Gold ((LIHR)) dropped 45 cents to $24.45.

Nucor Corporation dropped $1.45 to $45.76, ArcelorMittal ((MT)) declined $2.89 to $59.77 and U.S. Steel ((X)) fell $3.56 to $95.65.