Markets Await Final Word on Financial Rescue Plan
President Bush Urges Quick Passage, but Democrats Want to Restrict Executive Compensation
By Renae Merle and Lori Montgomery
Washington Post Staff Writer
Monday, September 22, 2008; 3:31 PM
President Bush this morning warned lawmakers against trying to make too many changes to the proposed financial bailout legislation, but Senate Democrats announced that they would add provisions to the plan that could spur opposition from the administration or congressional Republicans and bog down the measure.
The continued uncertainty about the final version of the plan, which is expected to cost $700 billion, appears to have investors nervous, sending U.S. stocks down and oil prices skyward. After rising $6 a barrel Friday, oil prices were up more than $25 a barrel today before moderating to settle up $18.05, at $122.60.
"This is more of a concept than a plan. The skepticism in the market is beginning to build," said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments.
Administration officials worked with members of Congress over the weekend on the proposed legislation in the hopes of quick passage.
Senate Democrats, like their counterparts in the House, are calling for restrictions to the executive compensation of the firms that receive help and for more government oversight. They would also require the Treasury Department to help distressed homeowners as part of the package, including rewriting bad mortgages.
President Bush said the plan needs to be passed quickly and relatively intact to stem damage to global financial markets. "Obviously, there will be differences over some details, and we will have to work through them," Bush said, but "the whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector, and retirement accounts."
The Dow Jones industrial average fell 202 points, or nearly 2 percent, at 2:40 p.m. The technology-heavy Nasdaq was down 2.4 percent and Standard and Poor's 500-stock index was down about 2 percent.
"They realize that even if the bill is successful there are a lot of hurdles to come," said Doug Roberts, chief investment strategist for New Jersey-based Channel Capital Research. "People are coming to realize this might be a stopgap measure. There is a long way to go."
The bailout could have an inflationary effect on the economy and add to the trade deficit, said Phil Flynn, oil analyst at Alaron Trading in Chicago. "A bigger trade deficit may mean a weaker dollar. The weaker the dollar gets, the more expensive oil gets," he said.
The Senate Democrats' plan calls for the creation of an emergency oversight board made up of the Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission, plus two outside experts appointed by Congress. It also calls for the secretary of the Treasury to make monthly reports to Congress.
The Senate proposal mimics the House version in restricting executive compensation of firms that receive help. Unlike the House proposal, the Senate plan would completely rewrite the Treasury's bailout language, placing new conditions on the types of assets Treasury may purchase and new requirements on what it must receive in return. For example, the Senate plan would require any firm taking advantage of the bailout to give the Treasury "contingent shares" equal in value to the price Treasury pays for their assets.
The provision is intended to help ensure that taxpayers will recover their money.
The Senate proposal also contains many details likely to anger Republican lawmakers, which could slow the process. For example, although some Republicans have asked that any profits from the sale of the assets be dedicated to deficit reduction, the Senate proposal would set aside 20 percent of any profits on each sale for Democratic priorities, such as an affordable housing fund.
But as investors await Congress's next step, some analysts note that it will not address some of the economy's fundamental weakness, including weak housing prices and growing unemployment figures. "With talk of the government buying assets at 'steep discounts' and of an emphasis on taxpayer protection, the benefits to bank and thrift capital levels may be less than the market anticipates," Paul J. Miller Jr., an analyst with FBR, said in a research note today. "At this point, we just do not know. While the plan will most likely help, banks and thrifts still need to raise capital."
It is also unclear, for example, whether the $700 billion that the Treasury Department has said the plan would cost will be enough, said Brusuelas. Will banks be forced to open their books to their public and how will their bad debt be evaluated?
"It's not clear who is going to be allowed to participate. How much will each individual bank be allowed to dump on the public?" Brusuelas said.
The government's plan comes as Wall Street's landscape continues to shift. Last week included the disappearance of two investment banks, Lehman Brothers and Merrill Lynch. Now Morgan Stanley and Goldman Sachs, the two remaining investment banks, have gained approval to convert into bank holding companies. In exchange for more government regulation, the firms will be able to take deposits like traditional banks.
Mitsubishi, Japan's largest bank, also said today that it would buy 10 to 20 percent of Morgan Stanley's shares. The capital infusion, up to $8.4 billion, could help Morgan stall pressure it has been facing to merge with another firm.
Morgan extended last week's rebound, with shares rising 3 percent. Goldman stocks, however, were down 4 percent in the early afternoon.
But concerns about some banks remain. Washington Mutual, which has been in talks to be acquired, continued to struggle in trading today. It was down 23 percent in early afternoon trading to $3.29.
In other news, Microsoft, Hewlett-Packard and Nike announced multibillion-dollar plans to buy back shares today. Microsoft, which said it would buy back up to $40 billion in stock by 2013 and raise its dividend, rose 4 percent in mid-morning trading. By the afternoon, it was up nearly 3 percent. Nike and Hewlett-Packard announced $5 billion and $8 billion programs, respectively, and their shares remained flat.