/ 23 September 2008

Paulson, Bernanke push bailout; Lehman deal looms

The architects of a $700-billion bailout for the United States financial system urged lawmakers on Tuesday to move quickly, and the sale of Lehman Brothers’ European arm loomed as the next step in the industry’s dramatic transformation.

Federal Reserve chairperson Ben Bernanke and Treasury Secretary Henry Paulson called for immediate action on a plan for the government to buy up hundreds of billions of dollars of tainted mortgage-related securities, but world markets remained on tenterhooks.

US stock index futures fell in early New York trading, with the S&P 500 futures down 2,20 points, shadowing losses in European and Asian markets on uncertainty over what price the government will pay for the securities, when it would start buying them, and how confidence can be restored.

”Action by Congress is urgently required to stabilise the situation and avert what could otherwise be very serious consequences for our financial markets and our economy,” Bernanke said in remarks prepared for delivery later on Tuesday to the Senate Banking Committee.

He said global financial markets ”remain under extraordinary stress”.

Paulson said market turmoil was already spilling into the broader US economy. ”We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil,” he said.

Democrats are pushing back. Senate banking committee chairperson Christopher Dodd said lawmakers must limit executive pay for companies participating in the bailout or risk the wrath of voters.

”Taxpayers deserve to be first in line in all of this,” Dodd told CNN.

US lawmakers and the Bush administration are trying to resolve differences so that legislation authorising the proposed bailout can begin to move through Congress.

”I just don’t think the American public is sold,” said David Dietze, chief investment officer of Point View Financial Services in New Jersey. ”I think they are skeptical of the need and they are fearful of the cost.”

Japanese rush on US assets
Japanese firms are leading the rush to acquire US investment banking assets. Japan’s top bank, Mitsubishi UFJ Financial Group, said on Monday it would buy up to 20% of Morgan Stanley for as much as $8,5-billion, and Nomura Holdings bought Lehman’s franchise in Japan and Australia, with about 3 000 employees.

Speculation is growing that Goldman Sachs, which like Morgan Stanley is transforming itself into a commercial bank, might turn to Sumitomo Mitsui Financial Group (SMFG), Japan’s number three bank, with which it has a long relationship.

”SMFG has always had very close ties with Goldman Sachs, so you can’t rule out some sort of a more comprehensive tie-up there,” said Jason Rogers, credit analyst at Barclays Capital.

Lehman’s European investment banking operations, which employ about 6 000 people, are next on the block. Sources familiar with the situation said Nomura is in talks to buy them, with a deal seen coming as early as Tuesday.

Insurance giant American International Group should have a list of assets it wants to sell by next week, new chief executive Edward Liddy said. Canada’s Toronto-Dominion Bank was among those weighing a bid for Washington Mutual, a source familiar with the situation said.

Singapore sovereign fund GIC said it still has plenty of cash after investing nearly $18-billion in UBS and Citigroup and would consider opportunities to invest in US distressed assets.

Bailout jitters
Some analysts and investors harbor deepening doubts over whether Paulson and Bernanke can steer the world’s largest economy out of its worst crisis of confidence since the Great Depression.

”You two gentlemen have been wrong about the housing crisis, missed the leverage problem, and understated the derivative issue,” said Barry Ritholtz, director of research at Fusion IQ, an investment firm in New York. ”Indeed, you two have been wrong about nearly everything since this crisis began years ago. Why should we trust your judgement on the largest bailout in American history?”

Banks remained wary of lending to each other, as seen in overnight dollar borrowing rates that remained almost one percentage point above the Federal Reserve’s 2% target.

Britain’s biggest home lender, HBOS, which sealed a takeover by UK bank Lloyds TSB last week, was down more than 10% after weak housing data sparked worries that its woes could linger despite the takeover.

”The risk has been transferred, it hasn’t gone away,” said Mike Trippitt, analyst at Oriel Securities. – Reuters