White House, lawmakers plan new bailout deal

AP
White House, lawmakers plan new bailout deal
Tuesday September 30, 5:24 am ET 
By Jim Kuhnhenn, Associated Press Writer

White House and congressional officials scramble to structure new financial bailout plan

WASHINGTON (AP) -- Top congressional and White House officials, stunned when the House rejected a massive rescue plan for the nation's economy, scrambled to structure a new bailout proposal that would attract reluctant lawmakers and still soothe the unnerved financial markets.

"Doing nothing is not an option," House Majority Leader Steny Hoyer, D-Md., said after seeing the $700 billion emergency package for the nation's financial systems fail 228-205 on Monday.

With the House not scheduled to meet again until Thursday, congressional leaders and Bush administration officials promptly sought to assess what types of changes could win over enough votes to guarantee success. President Bush planned to make a statement on the rescue plan at 8:45 a.m. EDT Tuesday.

The outcome of Monday's vote fed a huge sell-off in the stock market, sending the Dow Jones Industrial Average into its biggest single-day plunge, 777 points. The House vote and the market's terrified reaction shook Washington and New York centers of power -- even overseas markets -- but no immediate solution seemed at hand.

The bill's failure came despite furious personal lobbying by Bush and support from House leaders of both parties. But the legislation was highly unpopular with the public, ideological groups on the left and the right organized against it, and Bush no longer wielded the influence to leverage tough votes. Even pressure in favor of the bill from some of the biggest special interests in Washington, including the U.S. Chamber of Commerce and the National Association of Realtors, could not sway enough votes.

The legislation the administration promoted would have allowed the government to buy bad mortgages and other deficient assets held by troubled financial institutions. If successful, advocates of the plan believed it would help lift a major weight off the already sputtering national economy.

Treasury Secretary Henry Paulson emerged after the vote and warned of a credit crunch that would affect American businesses and said families would find it harder to get student loans and car loans.

"We need to work as quickly as possible," he said gravely. "We need to get something done."

The sense of urgency was not universal. Many opponents of the bill argued that the package amounted to a too-costly commitment of taxpayer money to bail out financial institutions for their own mistakes.

Rep. Dean Heller, R-Nev., offered a typical sentiment. "I cannot with good conscience put Nevada's taxpayers on the hook for the foolish excesses of Wall Street," he said. "Congress should pass legislation that protects the taxpayer, assists with bad assets and allows the market to correct itself."

Immediately following the vote, Republican leaders blamed their failure to secure more votes on the partisan tone of Speaker Nancy Pelosi's pre-vote speech on the House floor. "There were a dozen members who we thought ... we had a really good chances of getting on the floor," said Minority Leader John Boehner of Ohio. "And all that evaporated with that speech."

Rep. Barney Frank, D-Mass., the gruff but quick-witted chairman of the House banking committee, countered, "Give me the names of those 12 people and I'll go talk uncharacteristically nice to them."

Behind the bluster, lawmakers pledged to work again. Hoyer met with House Republican Whip Roy Blunt of Missouri, one of the lead GOP negotiators from the House.

Blunt, noting that the House would break for the Jewish holidays until Thursday, said, "We are going to have a couple days to see how the marketplace reacts to all this, and maybe that's a good thing."

House members weren't going home to campaign for re-election "until this is addressed," Hoyer vowed.

Both Blunt and Hoyer suggested that the Senate could vote first on a bill then send it to the House, but Senate leaders showed no inclination to take up a bill without being certain of its fate in the House.

"What would be wrong, I think, would be to act without some kind of clear indication from the House about how they're going to proceed," said Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee. "We don't need to start all over."

The two men campaigning to replace Bush watched the situation closely -- from afar -- and demanded action.

In Iowa, Republican John McCain said his rival Barack Obama and congressional Democrats "infused unnecessary partisanship into the process. Now is not the time to fix the blame; it's time to fix the problem."

Obama said, "Democrats, Republicans, step up to the plate, get it done."

The burden for votes fell more strongly on Republican leaders. About three out of five House Democrats voted for the legislation; only a third of Republicans backed it.

Republicans, already seeking possible votes, floated several ideas. One would double the $100,000 ceiling on federal deposit insurance. Another would end rules that require companies to devalue assets on their books to reflect the price they could get in the market.

Associated Press writers Andrew Taylor and Julie Hirschfeld Davis contributed to this report.

For Stocks, Worst Single-Day Drop in Two Decades

By VIKAS BAJAJ and MICHAEL M. GRYNBAUM

Published: September 29, 2008

Even before the opening bell, Monday looked ugly.

But by the time that bell sounded again on the New York Stock Exchange, seven and a half frantic hours later, $1.2 trillion had vanished from the United States stock market.

What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street’s blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor’s 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average fell nearly 778 points, or 6.98 percent, to 10,365.45.

Across Wall Street, no one could quite believe what was happening on the floor — the floor of the House of Representatives, not the New York Exchange.

As lawmakers began to vote on a $700 billion rescue for financial institutions, the Voyageur Asset Management trading desk in Chicago went silent. Money managers gaped at a television screen carrying news that seemed unthinkable: the bill was not going to pass. Shortly after 1:30 p.m., the rescue was rejected.

“You just felt like the world was unraveling,” Ryan Larson, the firm’s senior equity trader, said. “People started to sell and they sold hard. It didn’t matter what you had — you sold.”

Frustration, and then panic, coursed through the markets. Investors feared the decision in Washington would imperil the financial industry, as well as the broader economy.

At the Federal Reserve and other central banks, policy makers were also anxious. Even before the vote on Capitol Hill, central bankers tried to jump-start the credit markets. They offered hundreds of billions of dollars in loans to banks around the world because banks and investors were unwilling to lend to each other. But neither the stock market nor the credit markets appeared to respond.

Just 24 hours earlier, few imagined Monday would play out this way. Treasury Secretary Henry M. Paulson Jr. and the House speaker, Nancy Pelosi, announced Sunday afternoon they had agreed on terms of a bailout.

But while Congressional aides and lawmakers worked on the details, the credit crisis that began more than a year ago in the American mortgage market was setting off new alarms in Europe.

Shortly before 6 p.m. New York time on Sunday, Belgium, the Netherlands and Luxembourg agreed to invest $16.2 billion to rescue a big bank, Fortis. A few hours later, the German government and a group of banks pledged $43 billion to save Hypo Real Estate, a commercial property lender. At 2:50 a.m., news came that the British Treasury had seized the lender Bradford & Bingley and sold the bulk of it to Banco Santander of Spain.

“We will continue to do what is necessary,” a somber Gordon Brown, the British prime minister, told reporters at 10 Downing Street in London.

In Tokyo, where stocks had opened higher in early trading on Monday, worries quickly set in. Traders returned from lunch to reports suggesting the financial crisis was taking a toll on the global economy. Markets across Asia began to sell off.

In Tokyo, the Nikkei 225 sank 1.5 percent. In India, stocks fell nearly 4 percent. In Hong Kong, where a big bank, HSBC, raised key lending rates because of the credit market turmoil, the Hang Seng tumbled nearly 4.3 percent.

As events unfolded in Asia, a major American bank was in trouble. Regulators in Washington were rushing to broker the sale of the Wachovia Corporation to Citigroup or Wells Fargo.

At about 4 a.m., Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, called Citigroup executives to say Wachovia’s banking business was theirs.

On Monday morning, before financial markets in the United States had opened, Federal Reserve officials were alarmed that credit markets in Europe and Asia had spiraled even deeper into crisis on Monday.

Fed officials could see that money markets were freezing up in every part of the world, even though the Fed and other central banks had expanded their emergency lending programs last Thursday. This time, Fed officials felt compelled to provide a true show of force by expanding their existing loan arrangements by an unprecedented $330 billion.

As investors in New York were getting up, the credit markets were again flashing red as banks reported higher borrowing costs. Investors continued to seek safety in Treasuries. The yield on one-year Treasury bills, for instance, fell to almost zero, meaning investors were willing to accept no return just for the assurance that they would get their money back.

When trading opened on the New York Exchange at 9:30 a.m., stocks immediately fell 1 percent.

Worried officials at the Fed announced at 10 a.m. that the central bank would increase to $620 billion its program to lend money through foreign central banks, up from $290 billion, to keep credit flowing. The central bank also said it would double the money it lends out domestically through an auction program to $300 billion.

Many eyes on Wall Street turned to National City, the Cleveland-based bank, which has a $20 billion portfolio of troubled loans it is trying to sell. National City’s shares plummeted 50 percent to $1.50 in early trading, prompting Peter E. Raskind, the bank’s chief executive, to assert that the bank was sound.

“It’s not overly dramatic to say that investors are panicking. You can see it in the market and we can feel it,” Mr. Raskind said in an interview.

In New York, 10 executives at an investment firm, Bessemer Trust, huddled to discuss the markets. A question arose: What would it take to restore confidence to the credit markets? There were few upbeat answers, though one said Citigroup’s takeover of Wachovia could pave the way for more consolidation in banking. “It is the type of solution that makes good sense in these challenging times,” Marc D. Stern, Bessemer Trust ’s chief investment officer, said as he recounted the meeting.

But Mr. Stern and his group would soon be dismayed by what was happening in Washington.

At 1:30 p.m. the House began to vote on the rescue package that Mr. Paulson and Congressional leaders negotiated over the weekend. About 10 minutes later, when it became clear that the legislation was in trouble, the stock market went into a free fall, with the Dow plunging about 400 points in five minutes.

At his home office in Great Neck, N.Y., Edward Yardeni, the investment strategist, received terse e-mail messages from clients and friends. “Is this the end of the world?” one asked. Another sent a simple plea: “Stop the world, I want to get off.”

Mr. Yardeni and other analysts said the action in Washington left many investors discouraged and feeling powerless. “You can come into the office and spend a lot of time researching companies, trying to understand them. You’ve got a portfolio that you think should do well,” he said. “And none of that matters.”

Marc Groz, chief executive of Topos Partners, a hedge fund in Stamford, Conn., put it this way: “It’s frustrating for someone like me because I don’t have a pipeline to what is happening in Washington, D.C.”

The stock market briefly rallied, then slowly lost ground in the afternoon. A flurry of sales minutes before the close sent the Dow down another 200 points, to its lowest level for the day.

Shortly after the closing bell rang on the floor of the Big Board, Mr. Paulson, looking exhausted, spoke to reporters at the White House. He lamented the vote, but vowed to keep pressing Congress for a broad rescue plan to help ease stress in the credit markets.

Paulson vows continued efforts on rescue plan

Monday September 29, 6:06 pm ET 
By Martin Crutsinger, AP Economics Writer

Paulson says administration will continue to work to get rescue package approved by Congress

WASHINGTON (AP) -- Treasury Secretary Henry Paulson said his agency would use "all the tools available to protect our financial system and the economy" in response to Monday's stunning defeat of the government's proposed $700 billion bailout.

Paulson, speaking with reporters after meeting with President Bush at the White House, said, "our toolkit is substantial but insufficient" without a bailout, and that the Bush administration will continue to seek congressional approval for a rescue package.

He warned that the same stresses overwhelming the banking industry, including last week's collapse of Washington Mutual Inc. -- the biggest bank failure in history -- and the purchase of troubled Wachovia Corp.'s banking operations by Citigroup on Monday, were also being felt by ordinary families.

"Families, too, feel the credit crunch as it becomes more difficult to get car loans or a student loan," Paulson said.

The Treasury secretary spoke after the House had rejected the $700 billion bailout plan on a 228-205 vote and after the Dow Jones industrial average had plunged by 777 points, the largest point-decline on record.

"We need to put something back together that works," Paulson said, facing reporters on the White House driveway. He said the administration still believed that its plan could work.

Treasury spokeswoman Michele Davis said Paulson would be consulting with President Bush, Federal Reserve Chairman Ben Bernanke and congressional leaders on what next steps to take.

Davis did not specify what the administration will do next to stabilize the economy.

Treasury was expected to continue working with other government agencies including the Federal Reserve and the Federal Deposit Insurance Corp. to deal with problems facing the financial system on a case-by-case basis.

At the White House, deputy press secretary Tony Fratto said the administration will talk with congressional leaders before deciding what to do.

Paulson had spent the day before the House vote on the telephone speaking to lawmakers, seeking their support.

Now What?

Joshua Zumbrun and Brian Wingfield 09.29.08, 2:45 PM ET

WASHINGTON, D.C. -

In a suspenseful vote of 205-228, the House of Representatives squashed a bill granting the Treasury $700 billion to shore up the U.S. financial system. Clearing the House was seen as the bill's biggest hurdle, and now the proposed bailout is thrown into disarray.

The bill had majority support from House Democrats, at around 140-95. It was killed by staunch opposition from House Republicans, 65-133. The voting was left open for several minutes, while congressional leaders tried to get members to change nay votes, and the tallies shifted slightly but not enough to pass.

On Wall Street, market response was swift and terrible. The Dow Jones Industrial Average, which had been trending down throughout the morning, plunged almost 7% in minutes before recovering somewhat. Prices for Treasury bonds soared into the stratosphere, pushing the yields down. The three-month Treasury yield sank to 0.68%, while the London interbank offer rate rose to 3.88%.

The Dow ended the day down 777.68 points, or 6.98%. The S&P 500 and Nasdaq plunged 106.59 points, or 8.79%, and 199.61, or 9.14%, respectively.

"This is bad," said Aaron Smith, senior economist at Moody's Investors Service's economy.com. "This starts messing with their credibility."

Though support for the bill was strong at the start of voting, it tapered off at the end, and the nays carried the day. A motion was made to reconsider the bill at an unspecified later time. 

"The legislation has failed, the crisis has not gone away," said House Speaker Nancy Pelosi, who added that legislators would go back to negotiations. "We must work in a bipartisan way to have another bite at the apple," she said. A new vote today or tomorrow, however, is unlikely as many Jewish members of the House will be away tomorrow to observe Rosh Hashanah.

"I don't know that we know the path forward at this point," said House Minority Leader John Boehner, R-Ohio, "We need everyone to calm down and relax and get back to work."

Rep. Roy Blunt, R-Mo., said "we did think we had a dozen more votes going to the floor than we had." Blunt and Rep. Eric Cantor, R-Va., blamed the collapse of support on a speech given by House Speaker Nancy Pelosi, D-Calif., shortly before voting, which they said stirred partisan tensions.

There was already a sense that the plan would not be enough to break the log jam in the credit markets, where banks are even refusing to lend to each other. Earlier Monday the Federal Reserve raised the amount of swap lines it has with foreign central banks to $650 billion from $290 billion. It also announced bigger and longer-term auctions totalling more than $400 billion, but the credit markets remained stuck.

Fixed-income strategists noted with alarm the string of bank failures and near-failures in the last three weeks, includingWachovia's (nyse: WB - news - people ) regulator-assisted takeover by Citigroup (nyse: C - news - people ) on Monday. Previous credit crises would be punctuated by one or two failures, tops; now, "it's one a day--it's shocking," said William O'Donnell, the head of U.S. interest-rate strategy at UBS(nyse: UBS - news - people ). "Armaggeddon it is."

Expectations are now for the Fed to cut interest rates by as much as 50 points before the next meeting at the end of October.

The vote came after more than three hours of floor debate and 10 days of intense negotiation since Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke warned that the economy was in crisis and urgent action was needed.

The House Republicans were the last block of Congress with reservations about the deal. And although on Sunday evening, the House Republican leadership threw their support behind a compromise draft of the bailout proposal, the support was not enough. "The risk in not acting is much greater than the risk in acting," said House Minority Leader John Boehner, R-Ohio, in a passionate plea on the House floor before the vote. "These are the votes that separate the men from the boys and the girls from the women," Boehner said.

Thinking they had enough support from both Democrats and Republicans in the House of Representatives, House leaders brought the bill to a vote.

In an address Monday morning, President George W. Bush acknowledged how tenuous the situation was. "Now I fully understand that this will be a difficult vote," Bush said before markets opened in the U.S. But he tried to sound reassuring. "With the improvements made in this bill I'm confident that members of both parties will support it," he said.

They were not enough.

The legislation was voted unchanged from the draft released on Sunday. But the modifications made to the bill since it was first proposed by Paulson were not great enough to overcome the reservations of House members.

Now it is back to the drawing board for the bailout, as congressional leaders must scramble to salvage the failed piece of legislation hammered out after 10 days of drama in the halls of Congress, including two lengthy congressional hearings on the matter, three nationally televised pitches by Bush in favor of the plan, a volatile and controversial meeting at the White House that included both presidential candidates, a full-fledged defection by a core block of Congress, and days of "deal or no deal?" The result: no deal.

Worst case scenario: dow under 8400

Jim Cramer detailed last week what he thought the impact on the Dow Jones Industrial Average would be if the bailout plan failed in Congress. We are rerunning that column today.

---

Without the Paulson plan, or if the plan is so watered down and delayed, I have been saying all bets are off and we could be in for a huge swoon. How huge?

I like to sit down and noodle on the actual components of the Dow Jones Industrial Average to give you a real sense of what can go wrong. And there is so much going wrong. The credit markets are vanishing, the earnings are vanishing and the only hope is a plan that ignites credit markets, forces money off the sidelines and gets this economy and the worldwide economy moving again.

Not long ago, I postulated that this market is literally repealing all of the moves since the Brazil-Russia-India-China emergence that gave us better markets to sell into than just the U.S. With the collapse of Chinese growth -- they have simply ceased to be importers since the summer -- the inflation in India, the war in Russia and a U.S.-led slowdown in Brazil (although that remains a robust market) BRIC is more like having a brick around your neck than a wind at your back.

Meanwhile, the peak in energy and the collapse of the financial system have left both of those groups in disarray with valuations simply too difficult to pin down, so you retreat to worst-case scenarios where you can at least find some terra firma -- mainly where stocks were last time things were this bad.

Given that most of these companies bought back stock at high prices and issued stock to executives, the actual value of the buybacks seems almost nonexistent, so the value that was created since those hard times is hard to see.

Finally, in a recession like we are having, one can only guess how badly the consumer will be scalded. This list of prices is about a scalded consumer.

I don't want to bury the punchline, but when you add these worst-case prices together you get Dow Jones 8378, which, reluctantly, I admit is where we are going if everything fails with the plan and the economies here and worldwide are left to their own devices.

Let's run through the Dow 30.

1. Caterpillar(CAT Quote - Cramer on CAT - Stock Picks) can retreat back to $43 where it started both before the housing boom and before the energy boom and before BRIC became a dominant force. All of its markets will be challenged with housing downturns worldwide and energy prices retreating from highs, something that I think will happen as economies slow.

2. Citigroup(C Quote - Cramer on C - Stock Picks) -- $14. This is where it traded before the short-selling rules were created on July 15, and this is where it is going without a financing and a big investment. It might not stop there if there is no relief at all. I am really bearish on this stock without a plan.

3. Du Pont(DD Quote - Cramer on DD - Stock Picks)has a lot of businesses that are less cyclical than people think and a safe dividend. I would be surprised if it went much below $40, where I would like to buy it.

4. American Express(AXP Quote - Cramer on AXP -Stock Picks) has turned into a terrible lender with a product that is viewed as something that is no longer indispensable, courtesy great marketing byMastercard(MA Quote - Cramer on MA - Stock Picks)and Visa(V Quote - Cramer on V - Stock Picks). This stock's headed to $31, maybe lower, as it is really a weak sister in the Dow now.

5. Disney(DIS Quote - Cramer on DIS - Stock Picks)traded at $25 when people thought there was nothing to it other than a declining advertising business and an expensive group of theme parks. This is a company I will buy for Action Alerts PLUS if it hits that downside target.

6. United Technologies(UTX Quote - Cramer on UTX -Stock Picks) is a BRIC derivative for certain with too much aerospace and a defense business that could be hurt by an Obama election. Knock it back to $51, which would be a repeal of the whole BRIC move.

7. Coca-Cola (KO Quote - Cramer on KO - Stock Picks)talked recently about how it is not immune from a retail sales slowdown; when it did, the stock retreated to about $48, where it would surely be headed again.

8. 3M(MMM Quote - Cramer on MMM - Stock Picks) is a play on worldwide growth in a number of industrial areas, and worldwide growth is on the decline beyond what this fine firm is ready for. It could have a huge decline in earnings, and I am putting it at $50.

9. General Motors(GM Quote - Cramer on GM - Stock Picks), without a plan and without a handle on Delphi and on the right kind of cars, will burn through the bailout money quickly and disappears. Yes, it goes bankrupt. Stocks don't get down to where they are like this one if something hasn't become out of control. This one's out of control.

10. General Electric(GE Quote - Cramer on GE - Stock Picks) -- I think it could trade down to $20. The decision to end the buyback, which was just wasting a gigantic amount of money, is now behind them, so all it would have to contend with is lower earnings and a less turbo-charged report.

11. McDonald's(MCD Quote - Cramer on MCD - Stock Picks): This one's going to suffer for pennies by a stronger dollar, but not much more, and it just boosted the dividend. I think it would be a gift below $57.

12. Home Depot (HD Quote - Cramer on HD - Stock Picks) retreats to where it was on that July 15 low, $21, where it finds buyers for that dividend.

13. Bank of America(BAC Quote - Cramer on BAC -Stock Picks): With the plan, this is the biggest winner in the Dow. Without the plan? Sorry, it revisits the low of July 15 as it has to get rid of these bad mortgages it is stocked with. Target is $18.

14. Chevron(CVX Quote - Cramer on CVX - Stock Picks): This is a slow-growth company with decent oil assets that would quickly go down to where its dividend made it compelling. Call it $54 as in a falling-oil environment -- perhaps down to $70. You will see price/earnings shrinkage continuing.

15. Hewlett-Packard (HPQ Quote - Cramer on HPQ -Stock Picks): This company's acquisition of EDS is going to work and help numbers for years, but the stock will still have to revisit at least its recent lows on fears of a worldwide tech slowdown; call it $41.

16. JPMorgan (JPM Quote - Cramer on JPM - Stock Picks): This company keeps doing everything right, but the plan would make this the best bank on earth other than Bank of America. Without the plan, it goes to its July 15 low of $31.

17. Pfizer (PFE Quote - Cramer on PFE - Stock Picks): Here's a company that can only make more money by firing people, which is a good strategy until you run out of people. Still, the dividend is safe for at least another two years, so I think the stock stays at $18.

18. Kraft (KFT Quote - Cramer on KFT - Stock Picks): A food company that is getting better run is nothing to rave about, but this new addition to the Dow sure beats the disastrous run AIG (AIG Quote - Cramer on AIG - Stock Picks) has had. I think it can drop a couple to $30 but not go much below that because it is so defensive.

19. Alcoa (AA Quote - Cramer on AA - Stock Picks) is a great mystery. During the great 21st-century commodity boom that say Phelps Dodge and Alcan disappear, this homely little aluminum company has done nothing! Now it is free to go to $19, as the boom is totally over.

20. Johnson & Johnson (JNJ Quote - Cramer on JNJ -Stock Picks) is a super stock. Well managed, great earnings, good pipeline, I think it goes up a couple from here.

21. Boeing (BA Quote - Cramer on BA - Stock Picks): Here's one that could get cut in half if the strike doesn't settle and the airlines around the world contract. It could go as low as $24. It's one of the most vulnerable stocks in the Dow because of its clients' stress and voracious need for hard-to-get capital.

22. Intel (INTC Quote - Cramer on INTC - Stock Picks)retreats back to where it was during the last tech recession -- $13. Think of it this way: It bought back a lot of stock. That money was wasted.

23. AT&T (T Quote - Cramer on T - Stock Picks) faces landline challenges and corporate weakness. In a disaster scenario, it could lose a third of its value. Call it $21. I only say that because look at what the competition, outfits likeQwest (Q Quote - Cramer on Q - Stock Picks) andWinstar are selling for with slackened to no growth. Bad geographies. At the bottom, there will be a lot of fretting about the dividend.

24. Verizon (VZ Quote - Cramer on VZ - Stock Picks)needs more phone lines, more frivolous texters and photo-senders and a heck of a lot of clients for FiOS. None is likely to happen in this environment. I could see the stock retreat back to $26. It didn't help that they bought Alltel ... for now. Same dividend worries as above.

25. Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) is like Intel. Bought back a lot of stock. Nothing to show for it, and it now goes to $21.

26. Wal-Mart (WMT Quote - Cramer on WMT - Stock Picks) either stays the same or goes up, because that's where everyone will shop -- they'll all be trading down in retail.

27. Merck (MRK Quote - Cramer on MRK - Stock Picks)is pretty much where it is going to go. It's a challenged company with safe yield. $31.

28. IBM (IBM Quote - Cramer on IBM - Stock Picks)could be facing a huge headwind of global recession, and I think that its business is far more economically sensitive than people realize. It could lose as much as 50 points -- it used to be that low for a long time -- sending it to $60. This and Boeing are probably the two most severe cuts, and the ones I am most likely going to be too pessimistic about if things get a little better.

29. Procter (PG Quote - Cramer on PG - Stock Picks)stays at $68 or goes a little lower, not much. The company is set up to win in this environment.

30. Exxon (XOM Quote - Cramer on XOM - Stock Picks): If you repeal the whole oil boom, which is what will happen in a worldwide recession or worse, Exxon's failed buyback strategy will be revealed for what it was: a giant money pit. The stock could retreat to $57, as it has minimal dividend support.

At the time of publication, Cramer was long GE, Wal-Mart, Procter & Gamble, JPMorgan and Hewlett-Packard.

European banks bailed out as crisis spreads

Monday September 29, 3:44 pm ET 
By Jane Wardell, AP Business Writer

Banks bailed out across Europe as contagion from US credit crisis spreads further

LONDON (AP) -- European governments announced a flurry of bank bailouts from Germany to Iceland on Monday, but the rescue deals only heightened fears that the contagion from the U.S. credit crisis has much further to spread before the financial system recovers.

European shares fell heavily and money markets remained frozen with banks refusing to lend to each other for all but the shortest periods amid concern that a planned U.S. government $700 billion bailout package would not be enough to stem the crisis. A few hours later, the U.S. House defeated the rescue package by a vote of 228-205.

"In the near term, it will be the weak ones that will be picked off," Global Insight chief European economist Howard Archer said before the congressional vote of the expectation that more banks would collapse or need rescue.

"But, obviously, the more the turmoil and dislocation continues, the further this could spread," he added. "We live in vicious times."

The governments of Belgium, the Netherlands and Luxembourg took partial control late Sunday of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley early Monday.

Germany organized a credit lifeline for blue-chip commercial real estate lender Hypo Real Estate Holding AG, while Iceland's government took over Glitnir bank, the country's third largest.

Additionally, the European Central Bank joined with the U.S. Federal Reserve in doubling the credit swap line that makes dollars made available to cash-hungry banks from $120 million to $240 million. The Bank of England doubled dollar availability to $80 billion, while other central banks offered smaller amounts.

Renate Brand, a banking analyst at SNS Securities, said that "it's getting difficult for a lot of banks at once now, because mistrust is so great and so widespread."

Ton Gietman from Petercam Securities said that markets had become so jittery that rumor and fact were being treated about the same.

"Take a company like Fortis, whose management swears high and low that they don't have any solvency problem -- and it's still an open question whether they did or not -- this market doesn't care," he said. "If you can't stop your share price from falling with anything you say, you have to take some action to reassure investors and depositors."

Analysts are closely watching Dexia, a French-Belgian specialist in lending to local governments that ran up huge losses in its U.S. operations. The bank had no comment on a report it was planning a rapid capital increase but said the board would meet Monday night to assess the situation.

Belgian Prime Minister Yves Leterme was quick to assure savers -- and the stock market -- that the government was ready to stand behind the bank if needed.

"We will take the necessary measures to guarantee the interests of all the savers, all the customers," he told reporters, describing the bank as very important to the Belgian economy.

He called a cabinet meeting Monday to discuss Dexia and told VRT news earlier in the day that the government had been talking to Dexia management for several days and its problems were "fundamentally different" from Fortis.

Notably, the Fortis bailout took place across national lines. For months, European officials have been concerned whether governments would work together in a crisis. In this case they did, with European Central Bank president Jean-Claude Trichet attending the negotiations in Brussels on the euro11.2 billion euro ($16.4 billion) bailout package.

The three governments took a 49 percent stake in exchange and demanded Fortis sell the stake it had bought in ABN Amro a year ago for euro24 billion euros -- a move that many analysts believe started its troubles. However, , said some positive news was provided by the joint action taken by Belgium, the Netherlands and Luxembourg in agreeing

"The ability of the euro area fiscal authorities to co-ordinate on a bailout for a bank with not-only strong cross-boundary operations, but indeed with a strong multinational (almost supranational) identity was untested until today," Willem Buiter, a professor at the London School of Economics and a former Bank of England policymaker, said in his blog on http://www.ft.com.

"They passed the test."

The government took over Bradford & Bingley's 50 billion pound ($91 billion) mortgage and loan books and paid out 18 billion pounds (US$33 billion) to facilitate the sale of its savings business, including its entire retail branch network, to Spain's Banco Santander.

Britain earlier this year nationalized Northern Rock, but not until after the mortgage lender suffered a damaging run on its deposits by spooked customers. The government's desire to move quickly to avert any repeat was underscored by its swift action on Bradford & Bingley -- a systematically unimportant buy-to-let lender that is around half the size of Northern Rock at its peak.

In Iceland, the government took control of Glitnir bank, the country's third largest, buying a 75 percent stake for 600 million euros ($878 million) in a move it said was to ensure broader market stability. Central Bank of Iceland chairman David Oddsson said that Glitnir, which has operations in 10 countries, would have collapsed if the authorities had not intervened.

In Germany, Hypo Real Estate Holding AG, the country's No. 2 commercial property lender, became the first German blue chip company to seek a bailout in the global financial crisis, securing a line of credit of up to 35 billion euros ($51.2 billion).

Despite the concerted attempt by European authorities to shore up confidence, stock markets tumbled in response to the series of measures -- the London Stock Exchange FTSE 100 dropped 4.7 percent, Germany's DAX fell 3.7 percent and France's CAC 40 shed 4.6 percent.

"All banks are having difficulty with long term loans and short term financing. It's difficult to say which could be affected," said UniCredit economist Alexander Koch in Munich. "I see the problem flowing until late next year."

The biggest U.S. bailout in history, which goes to the House for a vote Monday and to the Senate later in the week, would give the administration broad power to use taxpayers' money to purchase billions of home mortgage-related assets held by cash-starved financial firms. Analysts said a decision to break up the total amount into smaller stages may have limited its effectiveness in reassuring markets.

AP Business Writers George Frey in Frankfurt, Emily Flynn Vencat in London, Toby Sterling in Amsterdam and Matt Moore in Berlin contributed to this report.

House Rejects Bailout Package, 228-205; Stocks Plunge

By CARL HULSE and DAVID M. HERSZENHORN

Published: September 29, 2008

WASHINGTON — In a moment of historic import in the Capitol and on Wall Street, the House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry. The vote came in stunning defiance of President Bush and Congressional leaders of both parties, who said thebailout was needed to prevent a widespread financial collapse.

The vote against the measure was 228 to 205, with 133 Republicans joining 95 Democrats in opposition. The bill was backed by 140 Democrats and 65 Republicans.

Supporters vowed to try to bring the rescue package up for consideration again as soon as possible, perhaps late Wednesday or Thursday, but there were no definite plans to do so.

Stock markets plunged as it appeared that the measure would go down to defeat, and kept slumping into the afternoon when that appearance became a reality. By late afternoon the Dow industrials had fallen more than 5 percent, and other indexes even more sharply. Oil prices fell steeply on fears of a global recession; investors bid up prices of Treasury securities and gold in a flight to safety. House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail.

The vote was a catastrophic political defeat for President Bush, who was described as “very disappointed” by a spokesman, Tony Fratto. Mr. Bush had put the full weight of the White House behind the measure and had lobbied wavering Republicans in intensely personal telephone calls on Monday morning before the vote. Both presidential candidates also supported the plan.

Supporters of the bill had argued that it was necessary to avoid a collapse of the economic system, a calamity that would drag down not just Wall Street investment houses but possibly the savings and portfolios of millions of Americans. Moreover, supporters argued, a lingering crisis in America could choke off business and consumer loans to a degree that could prompt bank failures in Europe and slow down the global economy.

Opponents said the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.

Immediately after the vote, many House members appeared stunned. Some Republicans blamed Speaker Nancy Pelosi, Democrat of California, for a speech before the vote that disdained President Bush’s economic policies, and did so, in the opinion of the speaker’s critics, in too partisan a way.

“Clearly, there was something lacking in the leadership here,” said Representative Eric Cantor, Republican of Virginia.

Democrats, meanwhile, blamed the Republicans for not coming up with enough support for the measure on their side of the aisle.

Members of both parties, doing a quick political post-mortem, said those who voted no had encountered too much hostility for the bill among their constituents, and were worried that a vote in favor would be political suicide.

The Senate had been expected to vote later in the week if the bill had cleared the House on Monday. Senate vote-counters had predicted that there was enough support in the chamber for the measure to pass. But the stunning vote in the House, coupled with the Jewish holidays, made it difficult to predict when other votes might be held. Many House members who voted for the bill held their noses, figuratively speaking, as they did so.

Representative John A. Boehner of Ohio, the Republican minority leader, called the measure “a mud sandwich” at one point, but he said that there was too much at stake not to support it. He urged members to reflect on the damage that a defeat of the measure could mean “to your friends, your neighbors, your constituents” as they might watch their retirement savings “shrivel up to zero.”

And Representative Steny Hoyer of Maryland, who as Democratic majority leader often clashes with Mr. Boehner, said that on this “day of consequence for America” he and Mr. Boehner “speak with one voice” in pleading for passage.

When it comes to America’s economy, Mr. Hoyer said, “none of us is an island.”

The House debate was heated and, occasionally, emotional up to the last minute, as illustrated by the remarks of two California lawmakers.

Representative Darrell Issa, a Republican, said he was “resolute” in his opposition to the measure because it would betray party principles and amount to “a coffin on top of Ronald Reagan’s coffin.”

But Representative Maxine Waters, a Democrat, said the measure was vital to help financial institutions survive and keep people in their homes. “There’s plenty of blame to go around,” she said, and attaching blame should come later.

The House vote came after a weekend of tense negotiations produced a rescue plan that Congressional leaders said was greatly strengthened by new taxpayer safeguards. “If we defeat this bill today, it will be a very bad day for the financial sector of the economy,” said Representative Barney Frank, Democrat of Massachusetts and the chairman of the Financial Services Committee. Earlier Monday, President Bush urged Congress to act quickly. Calling the rescue bill “bold,” Mr. Bush praised lawmakers “from both sides of the aisle” for reaching agreement, and said it would “help keep the crisis in our financial system from spreading throughout our economy.”

After long favoring a hands-off approach and deregulation of the financial industry, the Bush administration has found itself in recent weeks interceding repeatedly in the private market to try to avert one calamity after another.

Even before the House vote, European and Asian stock markets declined sharply on Monday, especially in countries where major banks have had significant problems with mortgage investments, like Britain and Ireland. In the credit markets, investors once again bid up prices of Treasury securities and shunned more risky debt.

Early in the House debate, Jeb Hensarling, Republican of Texas, said he intended to vote against the package, which he said would put the nation on “the slippery slope to socialism.” He said that he was afraid that it ultimately would not work, leaving the taxpayers responsible for “the mother of all debt.”

Another Texas Republican, John Culberson, spoke scathingly about the unbridled power he said the bill would hand over to the Treasury secretary, Henry M. Paulson Jr., whom he called “King Henry.”

A third Texan, Lloyd Doggett, a Democrat, said the negotiators had “never seriously considered any alternative” to the administration’s plan, and had only barely modified what they were given. He criticized the plan for handing over sweeping new powers to an administration that he said was to blame for allowing the crisis to develop in the first place.

The administration accepted limits on executive pay and tougher oversight; Democrats sacrificed a push to allow bankruptcy judges to rewrite mortgages. But Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry.

Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department. But by mid-afternoon on Monday, no one could safely predict whether the provisions in the 110-page bill were strictly academic.

“The legislation has failed,” Speaker Pelosi said at a news conference after the vote. “The crisis has not gone away. We must continue to work in a bipartisan manner.”

Dear Hank: Here’s How to End the Credit Crisis at No Cost to Taxpayers

Thursday, September 25th, 2008

Dear Hank: Here’s How to End the Credit Crisis at No Cost to Taxpayers
By Shah Gilani
Contributing Editor

While it’s clear from the current credit crisis that our financial system is at a critical juncture, it’s just as clear that there’s no agreement over how we should fix the problems we face. The reality is that neither the plan put forth by U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. - nor any of the addendums offered up by Congress or the lobbyists - will resolve this crisis.

The key culprits are the structured financial products that reside on the balance sheets of banks, dead investment banks, insurance companies, hedge funds and all manner of other duped and unsuspecting investor entities worldwide, as well as the proliferation of the unregulated $62 trillion credit default swaps (CDS) market.

Because all these securities, and in the case of credit default swaps, bilateral contracts, are impossible to value and impossible to guarantee, no one trusts them. As a result, everyone is afraid of these securities and contracts.

Banks are currently not lending to one another because they are afraid that the next round of write-downs and losses may imperil some of their trading partner banks to which they formerly lent billions and billions of dollars to every night. If the answer were really as simple as adding liquidity, the Federal Reserve would have lowered the Fed Funds target. But that won’t work. It’s a vicious cycle that’s eroding banks’ faith in one another, and worse, our faith in our banks.

Unfortunately, I don’t see the Treasury Department’s much-needed rescue plan being effective without actually addressing the pricing of - indeed, the very existence of - credit default swaps and collateralized debt obligations. As well intentioned as it is, the Treasury plan will create more problems than it solves and will eventually saddle taxpayers with so much debt that it will tank the dollar. It could even put the U.S. government’s AAA investment rating at risk. That would be calamitous.

I have a modest proposal that I’m calling the Money Morning Plan, because it potentially heralds a new dawn in the credit crisis, addressing the problems from the bottom up, and not from the top down. The bottom line is that my plan will end the credit crisis quickly with potentially little or no cost to taxpayers. And those are the two most important benefits of all. I present my plan as an open letter for public debate.

An open letter to U.S. Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, Distinguished Members of Congress, and the American Taxpayers:

Dear Ladies and Gentlemen,

How we respond to the upheavals in our financial markets will define the American character at home and in the eyes of the world. With our cherished history of free markets and entrepreneurial spirit, we should guide ourselves as we always have, trusting our collective financial interests to our Constitution, which created a government by the people, for the people. Trying times are not a mandate to foreswear our personal, financial nor collective economic interests to any lobby or government other than one that protects all our rights, especially the right to not be taxed unfairly or unjustly.

The proposed Treasury Department rescue plan before Congress has not been presented without due consideration. There are, however, other proposals that merit our collective contemplation. As a taxpayer and investor, I am proposing an alternative plan for open discussion. We need to act quickly, but we need to act responsibly.

Respectfully;

Shah Gilani
Contributing Editor
Money Morning
www.moneymorning.com

The Money Morning Plan



Establish an empowered, not overpowering, regulatory apparatus to rein-in structured products and establish protocols for the creation and tradability of financial products based on real-world economics and hedging considerations. Products must be transparent, easily valued and rated on a universal ratings model.
Establish regulated standards to support the universal ratings model and allow free-market competition for providing rating services based on a "pooled-income revenue model," whereby all issuers that either want to be rated, or that are required to be rated, pool funds on a per-volume, pro-rata basis and ratings providers are paid blindly for rating services.
Immediately stop the issuance of credit default swaps without mandatory reserve requirements and safeguards typical of what insurance regulations already require of legitimate insurers. Net out all existing credit default swaps to tighten counterparty risk and unwind positions that cannot be secured by issuers meeting adequate reserve requirements. Eliminate virtual insurers.
Only allow issuance of credit default swaps up to the actual outstanding dollar value of corporate debts and loans outstanding. This will ensure legitimate hedging and eliminate undue pressure on outstanding debt issuers.
Create a class of "eligible (mortgage-related only) securities" that constitutes problem securities. Leave all eligible securities on the books of existing holders.
Have eligible security holders identify to the U.S. Federal Reserve every eligible security by CUSIP and face amount. Only the Fed will have knowledge of institutional and investor positions. This will allow the Fed to correctly assess the risks at hedge funds and others with "significant operations" without exposing their positions to competitors.
Create a new accounting domain in-between "held-to-maturity" and "available-to-trade" where only eligible securities, as of a predetermined valuation date, can be accounted for at their value on the predetermined valuation date and not further subject to fair-value (marked-to-market) accounting, while held.
Mandate all holders of eligible securities mark-to-market inventories on a predetermined valuation date, preferably as soon as the Fed expects all eligible securities to be registered with it. Those who have recently marked their securities have already taken their write-downs; those who haven’t will have to. If the totality of the resolution represents a bona-fide solution, investors and speculators will bid up eligible securities to own them before the predetermined valuation date, because of newly ascribed accounting advantages of holding eligible securities.
Reduce the haircut on the reserve requirements for all eligible securities covered by this plan. Since valuations have already fallen precipitously, reducing reserve requirements on eligible securities would additionally enhance their value as balance-sheet assets with upside potential.
Have both the Fed and Treasury determine a liquidation or receivership outcome for holders suffering from insolvency as a result of accurately marking-to-market their holdings on the predetermined valuation date in the event bankruptcy would result in further systemic problems. This scenario would be cheaper and quicker to manage than what’s in store for us under the present Treasury draft, and it allows the two to assess the potential fallout of insolvent entities prior to their exposing the financial system to resulting disruptions. Hedge funds would not be saved.
The Fed must establish and manage a conservative, transparent pricing model for eligible securities based on actual underlying cash-flow measures, projections and model specific criteria. Absolutely no trading would be allowed over-the-counter or otherwise on any of the eligible-securities specific pricing models or indexes.
The Fed, with a firm handle on all eligible securities and a transparent-pricing methodology, would have to take in any and all eligible securities as collateral against Fed borrowings from the discount window or through its dealer facility.
"Servicers" managing underlying mortgages on behalf of trust entities, under which securitized pools are created, must be empowered to alter and modify terms and conditions of underlying mortgages in conjunction with originating banks or lending institutions.
To incentivize banks and lending institutions to modify existing mortgages and to incentivize homeowners to stay in homes with upside-down mortgage-to-appraised values, eliminate all capital gains on appreciation of newly appraised homes when they are sold by either homeowners, banks or lending institutions.
Create tax-advantaged scenarios for banks and homeowners partnering in the reduction of delinquent obligations whenever loans can be brought to a performing status.

paulson retreats on pay

Paulson is working to salvage a deal in the face of opposition from lawmakers of both parties. House Republicans today warned him that the plan wouldn't pass and asked for time to consider alternatives. Paulson and Federal Reserve Chairman Ben S. Bernanke stressed the importance of easing the credit crunch soon, while acknowledging the need for taxpayer protections.

``The American people are angry about executive compensation and rightfully so,'' Paulson, a former chief executive officer of Goldman Sachs Group Inc., told the House panel today, departing from his prepared remarks. ``We must find a way to address this in the legislation, but without undermining the effectiveness of this program.''

The remarks were a shift from yesterday, when the Treasury chief said introducing limits on pay would impede getting the fund started. Both Democratic and Republican legislators have insisted on some restrictions on compensation for companies that would sell devalued assets to the government.

Talks `Ongoing'

``Nothing is final and discussions are ongoing,'' said Treasury spokeswoman Jennifer Zuccarelli in response to a question about Paulson's position on the equity provision.

Frank is consulting Paulson as he leads negotiations in the House on crafting a joint Senate-House measure that Congress will vote on as early as this week. The legislation doesn't need approval from the Treasury to be considered by Congress.

A joint House-Senate bill may be ready as soon as tomorrow, Frank said.