If the $700 billion financial rescue plan is meant to restore investor confidence, so far it isn't working. The Dow Jones industrial average at one point fell as much as 800 points on Monday before paring those losses by the end of the day.
The Dow ended down 369.88 points to 9,955.50 — the first time it has closed below the 10,000 mark in four years. Stocks in the U.S. have been down in the past four trading sessions.
Turmoil In Europe
Wall Street's dark Monday followed a weekend of activity among financial officials in Europe. Germany ended up issuing a blanket guarantee of all its consumer bank deposits on Sunday — along with the surprise announcement that it had arranged a bailout for Hypo Real Estate Holding AG, a huge property lender.
Hypo came perilously close to collapse after private investors pulled out of a $48 billion rescue plan last week. Belgium and Luxembourg also found themselves in the bailout business over the weekend, swooping in to take over — with French lender BNP Paribas — the Belgian and Luxembourg operations of Fortis NV. They got Fortis for roughly 15 billion euros in cash and stock.
If anyone doubted the financial crisis had gone global, this weekend confirmed it.
Ex-Goldman Sachs Exec To Head Bailout
Here at home, Treasury Secretary Henry Paulson met with Federal Reserve Chairman Ben Bernanke on Monday to work on setting up a team to administer the bailout program. The Treasury named Neel Kashkari, a 35-year-old assistant secretary and former Goldman Sachs executive, as the interim head of the Treasury program.
The idea is to have the government buy illiquid assets such as home loans and mortgage-backed securities so that banks and other financial institutions can clear them off their books. Doing that will allow them to start offering more loans and, it is hoped, will once again free up the credit markets.
The Treasury isn't expected to start buying assets for six weeks — which means the first purchase won't take place until after the presidential elections.
Tapping Contractors To Administer Program
The Treasury is expected to hire a skeleton crew of about two dozen asset managers and will most likely farm out the bulk of the program to a half-dozen to a dozen asset management companies. Those firms haven't been formally chosen yet, although the Treasury announced on Monday that firms that were interested needed to bid on the program by Oct. 8. The winners will be announced on Oct. 11, the Treasury said.
As the Treasury envisions it, those asset management companies will get some portion of the first $250 million of the $700 billion program. In return for managing the program, the companies will get some percentage, though it's not yet clear how much.
Paulson has been saying that the most likely mechanism for buying the assets will be reverse auctions. Those work like regular auctions, but in reverse. Instead of bidding a price up, bidders would be driving the prices down.
The problem is, if the government purchases toxic assets for the lowest possible price, it would defeat the purpose of the bailout, because banks would not get the funds they need to stop the hemorrhaging and would be forced to book huge losses. If the government buys the assets at what the banks think they are worth, they could be overpaying.
Also unclear is how the Treasury will deal with conflicts of interest. If fund managers are working for both their own clients and taxpayers, how will they be able to balance those priorities? Paulson has said he is aware of the problem and will find a fix for it.
Executives In The Hot Seat
Meanwhile, on Capitol Hill, the House convened its first hearing into what caused the financial crisis. The House Government Oversight and Reform Committee had the CEO of Lehman Brothers, Richard Fuld, in the cross hairs.
Lehman was the first investment bank to collapse in the crisis, and Fuld appeared contrite. "I feel horrible about what has happened to the company and its effects on so many," he told the committee. "None of us ever gets the opportunity to turn back the clock, but with the benefit of hindsight, would I have done things differently? Yes, I would have."
Lehman's demise was key to the financial crisis because it transformed an already bad situation in the credit markets into a full-scale global crisis. Fuld says it was a confluence of events — widening borrowing costs, accounting rules that forced the bank to write down its assets, and rating-agency downgrades — that all conspired to hobble Lehman.
Fuld said that in the past year, Lehman had recognized that it was overleveraged. It had been trying to bring down the amount of debt it had on its books — shedding, among other things, bad mortgages and other loans. He said that when Lehman finally declared bankruptcy in September, it had one of the best leverage ratios on Wall Street. But it wasn't enough.
"I, like a number of people, thought that the mortgage crisis was contained to the residential mortgages, and there were a number of other people who thought that. ... And I was wrong."
The committee made much of the fact that days before declaring bankruptcy, Lehman steered millions of dollars to departing executives. Chairman Henry Waxman asked Fuld about his reported $480 million in compensation.
"A lot of people ask, 'Is that fair for a CEO of a company that is now bankrupt to have made that much money?' It is so unimaginable to so many people," Waxman said.
Fuld took off his glasses and shifted uncomfortably. He said a compensation committee took care of those sorts of issues. He added that rumors about what he and other executives made were wildly off the mark. Fuld said he took home a little less than $250 million in the past eight years; about $60 million of it was in cash.