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Emergency Economic Stabilization Act of 2008

From Wikipedia, the free encyclopedia

The Emergency Economic Stabilization Act of 2008 (Division A of Pub.L. 110–343, 122 Stat. 3765, enacted October 3, 2008), commonly referred to as a bailout of the U.S. financial system, is a law enacted subsequently to the subprime mortgage crisis authorizing the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, and supply cash directly to banks. The funds for purchase of distressed assets were mostly redirected to inject capital into banks and other financial institutions while the Treasury continued to examine the usefulness of targeted asset purchases.[1][2] Both foreign and domestic banks are included in the program. The Act was proposed by Treasury Secretary Henry Paulson during the global financial crisis of 2008 and signed into law by President George W. Bush on October 3, 2008.

YouTube Encyclopedic

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  • ✪ CSULB Economic Stabilization Act Panel Discussion
  • ✪ Bank Executives on the Use of Federal Funds by Financial Institutions Part 1 (2009)
  • ✪ The 2008 Financial Crisis: Crash Course Economics #12
  • ✪ Why Is the Debt So High? Bernie Sanders Explains Federal Spending (2011)
  • ✪ George Soros on Financial Markets, the Subprime Mortgage Crisis, and the Credit Crash (2008)

Transcription

[ BACKGROUND NOISE ] >> GOOD AFTERNOON. MY NAME IS DAVE DOWELL, I'M VICE-PROVOST HERE AT CSULB, AND I'LL BE MODERATING THE PANEL TODAY. BEFORE WE GET STARTED I WANT TO EXTEND SOME THANK YOUS, JEET JOSHEE AND HIS STAFF FROM UCES PLAYED A BIG ROLE IN ORGANIZING THIS AND DEANNA BENNET AND LINDA FONTES FROM THE PROVOST OFFICE -- [APPLAUSE] [INAUDIBLE] -- DEANNA AND LINDA, WHERE ARE THEY? ANYWAY THEY'RE, I GUESS, THEY'RE NOT IN THE ROOM BUT THEY PLAYED A BIG ROLE IN THIS AS WELL. I WANT TO LET YOU KNOW THAT THIS IS GOING TO BE BROADCAST ON CSULB CABLE, BEACH TV, CHANNEL 18 CHARTER, CHANNEL 28 IN SIGNAL HILL AND WHEN ARE THOSE BROADCASTS, DO YOU KNOW? >> I BELIEVE THEY SAID ON FRIDAY EVENING -- >> FRIDAY. >> -- RUNNING THROUGH THE WEEKEND, VARIOUS TIMES. >> OKAY. >> 6:10 P.M. >> AND ONE OTHER QUICK ANNOUNCEMENT FOR THOSE OF YOU WHO ARE TRULY ECONOMICS JUNKIES, THERE IS GOING TO BE ANOTHER FILM ON THE GLOBAL FINANCIAL CRISIS IN THE BEACH AUDITORIUM ON MONDAY OCTOBER 27TH, THIS IS A PROJECT OUT OF THE BUSINESS STUDENTS I UNDERSTAND. IT'S CALLED I.O.U U.S.A AND IT SHOULD BE -- [LAUGHTER] OKAY. I THINK WE'RE READY TO JUMP INTO OUR PANEL. THANK YOU ALL FOR BEING HERE WITH US. IN OCTOBER OF LAST YEAR THE EXECUTIVE VICE-PRESIDENT OF THE FEDERAL RESERVE BANK OF NEW YORK, WILLIAM DUDLEY, GAVE A SPEECH ENTITLED MAY YOU LIVE IN INTERESTING TIMES, BASED ON THE WELL-KNOWN CHINESE SAYING. IN THAT SPEECH HE PREDICTED MUCH OF WHAT WE HAVE SEEN COME TO PASS IN THE LAST FEW MONTHS AND WEEKS. ACCORDING TO WIKIPEDIA, THOUGH, THE PROPER TRANSLATION OF THIS CHINESE SAYING IS: IT IS BETTER TO BE A DOG IN A PEACEFUL TIME THAN TO BE A MAN IN A CHAOTIC PERIOD AND THAT TRANSLATION SEEMS TO SUIT OUR CURRENT ECONOMIC OUTLOOK PRETTY WELL. WE HAVE WITH US TODAY SOME VERY DISTINGUISHED PANELISTS WHO WILL HELP US UNDERSTAND THE CHAOTIC EVENTS ALL AROUND US. WE WERE TALKING BEFORE THE EVENT AND DECIDING THAT WE NEEDED TO CAUTION YOU THAT EVENTS ARE CHANGING SO RAPIDLY THOUGH THAT THE SHELF LIFE OF WHAT YOU'RE ABOUT TO HEAR COULD BE AS LITTLE AS THE HOUR AND A HALF OF THE -- [LAUGHTER] FIRST WANT TO INTRODUCE TO YOU MR. TIM ANDERSON, A PRINCIPAL OF HALBERT HARGROVE AND COMPANY A 1977 BUSINESS ADMINISTRATION GRADUATE OF PACIFIC LUTHERAN, A CPA PSF -- PFS AND HAS SERVED IN SEVERAL LEADERSHIP ROLES AT BOTH THE CHAPTER AND STATE LEVELS OF THE CALIFORNIA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS. PREVIOUSLY BASED IN LONDON, ENGLAND, MR. ANDERSON WAS FOUNDER, PRINCIPAL AND DIRECTOR OF FALCON REAL ESTATE INVESTMENT COMPANY LIMITED, SERVICING INSTITUTIONAL AND INDIVIDUAL PROPERTY INVESTORS IN EUROPE, THE MIDDLE EAST AND AFRICA. BETWEEN 1988 AND 1991 MR. ANDERSON WAS VICE-PRESIDENT OF CHASE MANHATTAN BANK -- PRIVATE BANKING, OVERSEEING PRIVATE, CLIENT INVESTMENT IN THE BANK'S EUROPE, MIDDLE EAST AND AFRICAN DIVISIONS. HE'S AN ACTIVE MEMBER OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS AND HAS EARNED AND MAINTAINED THE ACCREDITED INVESTMENT FIDUCIARY DESIGNATION FROM THE CENTER FOR FIDUCIARY STUDIES AT THE UNIVERSITY OF PITTSBURGH GRADUATE SCHOOL OF MANAGEMENT. PLEASE WELCOME MR. ANDERSON TO THE BEACH. [ APPLAUSE ] ROBERT SCHACK HAS BEEN IN THE BANKING BUSINESS FOR MORE THAN 40 YEARS, STARTING AS A SUMMER TRAINEE AT SECURITY PACIFIC BANK WHILE ATTENDING CALIFORNIA STATE UNIVERSITY LONG BEACH, GO BEACH. HE HAS BEEN SENIOR VICE-PRESIDENT AND DIVISION MANAGER IN SECURITY PACIFIC'S CALIFORNIA MIDDLE MARKET GROUP. IN 1992 HE JOINED FIRST BUSINESS BANK IN LOS ANGELES AS REGIONAL VICE-PRESENT. IN 1998 MR. SCHACK CO-FOUNDED AMERICAN BUSINESS BANK, A COMMERCIAL BANK SPECIALIZING IN SERVING MEDIUM SIZED COMPANIES IN SOUTHERN CALIFORNIA. MR. SCHACK SERVES ON NUMEROUS BOARDS THROUGHOUT THE COMMUNITY INCLUDING THE YMCA AND THE ORANGE COAST MEMORIAL MEDICAL CENTER. HE'S ON THE BOARD OF GOVERNORS AND WAS THE PAST CHAIRMAN OF THE CORPORATE SCHOLARS COUNCIL AT CALIFORNIA STATE UNIVERSITY LONG BEACH, AND HE IS AN AMBASSADOR FOR HIGHER EDUCATION FOR THE CALIFORNIA STATE UNIVERSITY SYSTEM, OBVIOUSLY DEDICATED TO EDUCATION, AND A MEMBER OF THE PEPPERDINE GRAZIADIO GRADUATE BUSINESS SCHOOL BOARD OF VISITORS. MR. SCHACK HOLDS BS AND MBA DEGREES FROM CALIFORNIA STATE UNIVERSITY LONG BEACH AND AN EXECUTIVE MBA FROM UCLA. [APPLAUSE] LISA GROBAR IS A PROFESSOR OF ECONOMICS AT CALIFORNIA STATE UNIVERSITY LONG BEACH AND SERVES AS DIRECTOR OF THE CSULB ECONOMIC FORECAST. SHE IS A REGIONAL ECONOMIST WITH A SPECIALIZATION IN THE CALIFORNIA ECONOMY. HER PROFESSIONAL WRITINGS HAVE APPEARED IN A WIDE VARIETY OF SCHOLARLY JOURNALS AS WELL AS NUMEROUS OTHER PUBLICATIONS. SHE IS RECOGNIZED AS AN EXPERT ON THE SOUTHERN CALIFORNIA ECONOMY AND IS FREQUENTLY QUOTED IN THE NATIONAL AND REGIONAL MEDIA CONCERNING REGIONAL ECONOMIC TRENDS. DR. GROBAR RECEIVED HER PHD FROM THE UNIVERSITY OF MICHIGAN. [APPLAUSE] MICHAEL SOLT IS DEAN OF THE COLLEGE OF BUSINESS ADMINISTRATION AT CAL STATE LONG BEACH. HE CAME TO CSULB LAST SPRING AFTER SERVING AS ASSOCIATE DEAN FOR THE LUCAS GRADUATE SCHOOL OF BUSINESS AND AS A PROFESSOR OF FINANCE AT SAN JOSE STATE UNIVERSITY WHERE HE TAUGHT NEW VENTURE AND INTERNATIONAL FINANCE. OVER HIS CAREER DR. SOLT HAS WON TEACHING AWARDS AT SAN JOSE STATE AND THE UNIVERSITY OF CINCINNATI AND HAS PUBLISHED PAPERS IN MANY RESPECTED ACADEMIC JOURNALS INCLUDING THE JOURNAL OF BUSINESS, FINANCIAL MANAGEMENT, THE JOURNEY OF PORTFOLIO MANAGEMENT, THE FINANCIAL ANALYST JOURNAL AND THE AMERICAN BUSINESS LAW JOURNAL. DR. SOLT HAS A BS DEGREE FROM OHIO STATE UNIVERSITY AND AN MBA AND A DOCTORATE OF BUSINESS ADMINISTRATION IN FINANCE FROM INDIANA UNIVERSITY. [APPLAUSE] AND LAST BUT CERTAINLY NOT LEAST, F. KING ALEXANDER WAS SELECTED AS THE SIXTH PRESIDENT OF CALIFORNIA STATE UNIVERSITY LONG BEACH IN NOVEMBER 2005. DR. ALEXANDER IS A WELL RESPECTED EXPERT IN HIGHER EDUCATION IN FINANCE AND PUBLIC POLICY. HIS WORK ON STATE AND NATIONAL HIGHER EDUCATION POLICY HAS BEEN FEATURED IN THE NEW YORK TIMES, THE CHRONICLE OF HIGHER EDUCATION, THE BOSTON GLOBE, THE AUSTRALIAN AND THE ECONOMIST. HE IS A FREQUENT CONTRIBUTOR TO MANY NATIONAL PUBLICATIONS AND HAS BEEN ASKED ON NUMEROUS OCCASIONS TO TESTILY BEFORE THE U.S. CONGRESS ABOUT TRENDS IN HIGHER EDUCATION AND FINANCE, AFFORDABILITY AND PUBLIC POLICY. THIS PAST YEAR DR. ALEXANDER PLAYED AN IMPORTANT LEADERSHIP ROLE IN REPRESENTING OVER 450 PUBLIC UNIVERSITIES IN ADVOCATING FOR THE ADOPTION OF A SERIES OF NEW FEDERAL AMENDMENTS TO THE HIGHER EDUCATION ACT INCLUDING A FIRST EVER MAINTENANCE OF EFFORT PROVISION YEAR ROUND PELL GRANTS AND ADDITIONAL FUNDING FOR HISPANIC SERVING INSTITUTIONS AND PUBLIC BLACK COLLEGES AND UNIVERSITIES. [APPLAUSE] SO, IT'S CLEAR THAT WE HAVE A VERY DISTINGUISHED PANEL OF EXPERTS WITH US AND LET'S DELVE INTO THE DEEP FINANCIAL WATERS BEGINNING WITH MR. ANDERSON. MR. ANDERSON WHAT IS THE SUBPRIME CRISIS AND HOW DID WE GET INTO THIS MESS? >> AND I'M SUPPOSED TO LEAVE TIME FOR EVERYONE ELSE TO TALK? [LAUGHTER] WHAT IS THE SUBPRIME CRISIS, FIRST OF ALL LET ME PREFACE MY REMARKS BY SAYING THAT MY PERSPECTIVE COMES THROUGH THE LENSES OF AN INVESTMENT MANAGER AND IN MY DEALINGS IN THE CAPITAL MARKETS, U.S. AND NON-U.S. [INAUDIBLE] FIXED INCOMES AND SECURITIES SO, THAT'S WHERE MY PERSPECTIVE COMES FROM, AND I THINK I'M GOING TO START ACTUALLY WITH A BRIEF EXPLANATION OF WHAT A SUBPRIME MORTGAGE IS AND IT'S A LITTLE MORE COMPLICATED THAN ANYTHING THAT'S NOT A SUBPRIME MORTGAGE. WHAT IT BASICALLY ENTAILS ARE REDUCED UNDERWRITING STANDARDS AND I KNOW MY COLLEAGUES IN THE BANKING INDUSTRY MIGHT CALL IT MORE THAN REDUCED BUT WHAT IT REALLY MEANS IS THERE ARE LESS REQUIREMENTS TO GET A MORTGAGE IN TERMS OF VERIFICATION OF INCOME, VERIFICATION OF JOB, VERIFICATION OF ASSETS THOSE KINDS OF THINGS WERE RELATIVELY ABSENT IN SOME OF THE UNDERWRITING OF THESE MORTGAGES. IF I CAN REMEMBER MY STATISTICS RIGHT, WE LOOKED INTO THIS ABOUT A YEAR AGO LAST AUGUST WHEN THIS STARTED TO UNRAVEL AND THE U.S. MORTGAGE MARKET -- AND ANYBODY WHO WANTS TO HELP ME ON THESE STATS IS WELCOME TO, THE U.S. MORTGAGE MARKET REPRESENTS ABOUT 18 PERCENT OF GDP AND THE SUBPRIME PIECE WAS ABOUT SIX PERCENT OF THAT SO, IN THE CONTEXT OF, QUOTE, THE "OVERALL MORTGAGE MARKET" MEANING MOST OF THE FOLKS OUT THERE ARE STILL PAYING ON THEIR MORTGAGES AND NOT LOSING THEIR HOMES SO IT'S A VERY SMALL PERCENTAGE. HOW DID WE GET HERE, I THINK WE HAVE TO GO BACK QUITE A WAYS, NEARLY TEN YEARS NOW. THERE WAS A PIECE OF LEGISLATION CALLED THE COMMUNITY REINVESTMENT ACT THAT BASICALLY MANDATED SOME LENDERS TO REDUCE THEIR UNDERWRITING STANDARDS ON SOME MORTGAGES AND LIKE ANY PIECE OF LEGISLATION IT NEEDS ALSO TO HAVE SOME OVERSIGHT AND SOME FOLLOW THROUGH AND SO, WHEN THE OPPORTUNITY WAS PRESENTED TO THE MARKETPLACE WITH THESE KINDS OF MORTGAGES BEING WRITTEN, WE BASICALLY PUT IT IN THE HANDS OF A LARGELY UNREGULATED BUSINESS, THE MORTGAGE LENDING BUSINESS AND THE MORTGAGE BROKERAGE BUSINESS, SO IMMEDIATELY THERE WERE OPPORTUNITIES FOR ABUSES AND, IT'S OUR OPINION AND OUR VIEW THAT WE GOT HERE BASICALLY BECAUSE OF WIDE-SCALE ABUSE IN THAT PARTICULAR AREA OF THE MORTGAGE SECTOR. SO, HAVING ESTABLISHED THAT AS OKAY THESE MORTGAGES ARE OUT HERE, WHAT HAPPENS TO THEM? THERE ARE PACKAGERS, COMPANIES ON WALL STREET THAT PUT THESE MORTGAGES TOGETHER ALONG WITH OTHER MORTGAGES, THEY MAKE DIFFERENT AND VARIOUS ASSUMPTIONS ABOUT DEFAULT RATES AND THEY BUILT THOSE ASSUMPTIONS INTO THE YIELDS THAT ARE ESTABLISHED ON THESE SECURITIES AND THEN THEY SELL THEM TO INVESTORS. AND SO, IF YOU HAVE A HOUSING MARKET -- AND I KNOW SOME OF THE FOLKS HERE ARE GOING TO TALK ECONOMICS WILL TALK A LITTLE BIT ABOUT THE HOUSING MARKET, BUT I'LL SAY THAT IT'S ARGUED THAT THE HOUSING MARKET DRIVES PRETTY MUCH EVERYTHING IN THE ECONOMY AND IT'S BECAUSE OF THE CONSUMER EN MASSE AND SO, IF THE HOUSING MARKET BEGINS TO COOL OFF IN OTHER WORDS THERE ARE NOT AS MANY MORTGAGES BEING WRITTEN NOT AS MANY HOUSES BEING PURCHASED A LOT OF HOUSES STILL BEING BUILT, IT CREATES AN OVERSUPPLY SITUATION IN GENERAL -- VERY, VERY GENERAL TERMS AND THIS OVERSUPPLY SITUATION THEN FORCES THE PRICES OF EXISTING HOMES TO GO DOWN AND SO, WHEN THAT BEGINS TO HAPPEN, THE NEXT STEP IS IT LEADS TO DEFAULTS AND THAT REALLY WAS THE TRIGGER HERE, AND LIKE ANY PERFECT STORM AND THIS CAN EASILY BE CONSIDERED SIMILAR TO A PERFECT STORM IT'S KIND OF A CONFLUENCE OF CIRCUMSTANCES AND EVENTS, MANY DIFFERENT CIRCUMSTANCES AND THERE'S BEEN A COUPLE OF DIFFERENT EVENTS THAT CAUSE THESE THINGS TO START TO UNRAVEL. SO THOSE SECURITIES BECAME AT RISK AND QUESTIONABLE AS TO WHAT THEIR REAL MARKET VALUE WAS AND, IF YOU'RE A LARGE COMPANY, A PUBLICALLY TRADED COMPANY LIKE FREDDIE MAC, FANNIE MAE, AIG, LEHMAN BROTHERS -- FREDDIE MAC, FANNIE, WASHINGTON MUTUAL BANK THERE ARE ACCOUNTING RULES CALLED THE MARK TO MARKET RULES, IN SIMPLE TERMS THAT REALLY MEANS, IF YOU DON'T KNOW WHAT YOUR SECURITY IS WORTH AND YOU DON'T HAVE ANYBODY WILLING TO PAY YOU A PRICE FOR IT, YOU HAVE TO WRITE IT DOWN AGAINST CURRENT EARNINGS, AND SO THEY WERE FOLLOWING THE ACCOUNTING RULES. IF YOU LOOK AT SOME OF THESE BIG CORPORATIONS THAT WE MENTIONED AND I AM OVERSIMPLIFYING HERE IN THE INTEREST OF TIME BUT, IF LOOK AT WHAT THESE COMPANIES WERE -- THERE WERE MULTIPLE GLOBAL COMPANIES, MULTI-NATIONAL COMPANIES IN A LOT OF CASES AND THEY HAD VERY PROFITABLE UNITS ELSEWHERE IN THE COMPANY, BUT THERE JUST WASN'T ENOUGH INCOME IN 2008 TO ABSORB THE MAGNITUDE OF WRITE-OFFS REQUIRED UNDER THE ACCOUNTING RULES, AND ONE OF THE THINGS THAT YOU WILL HEAR AS THIS BEGINS TO UNFOLD AND AS MORE DISCUSSION OF THIS SITUATION ENSUES IS THAT THERE IS DISCUSSION OF MAYBE RELAXING THOSE ACCOUNTING RULES OR ALTERING THEM IN SOME WAY SO THAT A LITTLE BIT MORE OF A REALISTIC ACCOUNTING WRITE DOWN FOR PURPOSES OF INSOLVENCY OF A COMPANY. THE THING THAT COMPLICATES THE ISSUE IS THE CERTIFICATES THAT THESE ENTITIES HOLD THAT THESE LARGE SCALE INVESTORS HOLD ARE LIQUID, THERE ARE SOME STATISTICS THAT WILL BE SHARED WITH YOU TODAY ABOUT WHAT PERCENTAGE OF THOSE ARE ACTUALLY BEING -- ACTUALLY BEING PAID ON. THEY STILL HOLD THESE SECURITIES, THEY'RE STILL COLLECTING THE PAST DUE PAYMENTS EVERY MONTH BUT THEY'RE INSOLVENT ON THEIR BALANCE SHEET AND THAT PREVENTS THEM FROM LENDING MONEY AND AT THE BASE OF ANY ECONOMIC ACTIVITY AND ANY KIND OF ECONOMIC GROWTH THERE NEEDS TO BE CREDIT AVAILABLE IN THE MARKETPLACE FOR BUSINESSES TO DO THE THINGS THAT THEY NEED TO DO, FOR PEOPLE TO PURCHASE HOMES OR CARS, WHATEVER ELSE THEY MIGHT BE DOING, FINANCING EDUCATION, CREDIT NEEDS TO BE AVAILABLE FOR THAT AND, IF BANKS ARE INSOLVENT, THEY CAN'T LEND AND SO WHERE WE ARE TODAY IS A WIDE-SCALE GLOBAL LOCKUP IN THE CREDIT MARKETS. IT'S A TERRIBLE OVERSIMPLIFICATION OF WHAT I THINK IS GOING ON OUT THERE AND, AGAIN, WE DON'T NECESSARILY THINK WE HAVE ALL THE ANSWERS BUT, YOU KNOW, BASICALLY TO SUMMARIZE: IT STARTED OUT WITH ENABLING LEGISLATION AND IT WAS FOLLOWED BY A LOT OF ABUSES AND THEN COUPLE THAT SEVERAL YEARS LATER WITH SOFTENING IN THE HOUSING MARKETS, NOT JUST LOCALIZED SOFTENING BUT FAIRLY WIDE SCALE SOFTENING IN THE HOUSING MARKETS, AND YOU PUT THE ACCOUNTING RULES ON TOP OF ALL OF THAT AND ALL OF A SUDDEN YOU HAVE A NEARLY INSTANT CREDIT FREEZE. >> THANK YOU, MR. ANDERSON. I WANT TO TURN NOW TO MR. SCHACK. MR. SCHACK, HOW DOES THE CREDIT CRISIS EFFECT LARGE AND SMALL BUSINESS AND DOES IT HELP OR HURT MAIN STREET? >> WELL, FIRST STOP FOR A MINUTE AND TAKE A MENTAL PICTURE OF WHAT'S GOING ON HERE IN THIS NEXT YEAR, THE PAST YEAR AND THIS YEAR GOING FORWARD, THESE ARE TRULY HISTORIC TIMES IN THE FINANCIAL MARKETS. THEY ARE FRIGHTENING TO A LOT OF PEOPLE, EVERYBODY, THERE IS SO MUCH UNCERTAINTY THAT WHAT'S HAPPENING IS THAT -- IS THAT EVERYBODY IS FREEZING UP. LET'S TALK ABOUT THE CREDIT MARKETS FOR A BIT, I'M -- I AM MAIN STREET, MY BANK IS A MAIN STREET BANK, WE BANK MAIN STREET COMPANIES AND SO -- AND I'M HAPPY TO SAY -- I'M KNOCKING ON WOOD, MY KNUCKLES ARE GETTING CALLOUSES BECAUSE I'M KNOCKING ON WOOD SO MUCH, WE DON'T HAVE ANY OF THESE PROBLEMS THAT ARE BEING EXPERIENCED BY SOME OF THE MAJOR BANKS AND BUT WHAT IS HAPPENING IS THAT -- LET'S JUST TALK ABOUT THE CREDIT MARKET FOR A MINUTE, WHAT IS THE CREDIT MARKET? FOR STARTERS, THE CREDIT MARKET IS AN ENORMOUS MARKET, IT DWARFS THE STOCK MARKET BY HUGE FACTORS AND IT ISN'T -- EVERYBODY THINKS INSTANTLY OF BANKS WHEN THEY THINK OF THE CREDIT MARKETS; THEY'RE GETTING ALL THE TRUST THESE DAYS. THE CREDIT MARKETS REALLY INCLUDE EVERYBODY FROM YOU AND ME, WHEN WE -- IF YOU HAVE A 401K OR YOUR PARENTS DO OR IF YOU HAVE A BOND OF ANY TYPE, YOU'RE A LENDER, YOU'RE LOANING MONEY TO SOMEBODY. IT JUST HAPPENS TO BE A PUBLICALLY TRADED DEBT BUT YOU'RE A LENDER, YOU'RE EXTENDING CREDIT. IT GOES SO FAR AS TO SAY THAT YOU -- WHEN YOU A OPEN A CD AT A BANK, YOU'RE LOANING THEM MONEY FOR A SPECIFIED PERIOD OF TIME AND FOR THAT YOU'RE GOING TO GET AN INTEREST RATE BACK FROM IT, SO YOU'RE A CREDITOR. THERE ARE ALL KINDS OF INTERMEDIARIES, COMPANIES THAT HAVE EXCESS CASH BERKSHIRE HATHAWAY WILL SEE THAT, YOU KNOW, FORD MOTOR CREDIT OR GE CAPITAL PROBABLY IS A BETTER EXAMPLE BUT BERKSHIRE HATHAWAY HAS EXCESS CASH, GE CAPITAL NEEDS SOME OVERNIGHT JUST TO MEET PAYROLL BECAUSE THEY HAVE A BIG RECEIVABLE COMING IN THE NEXT WEEK, THEY'LL LOAN THEM MONEY, THIS IS THE COMMERCIAL PAPER MARKET AND SO CORPORATIONS LOAN MONEY TO EACH OTHER. THERE ARE NONBANK LENDERS LIKE FORD MOTOR CREDIT, GE CAPITAL, GMAC, OTHERS THAT GO TO THE CAPITAL MARKETS TO RAISE CASH THAT THEY LOAN MONEY ON CARS, SOMETIMES HOMES, YOU KNOW, AIRPLANES, A VARIETY OF THINGS BUT THEY'RE NOT BANKS AND, OF COURSE, YOU HAVE THE BANKS. TOP TO BOTTOM WHAT WE'RE EXPERIENCING TODAY IS A PANIC, SO FOR STARTERS, RELAX. THIS -- WE'VE BEEN THROUGH THESE KINDS OF THINGS BEFORE, WE'RE GOING TO COME OUT OF THIS AGAIN JUST TRUST ME ON THIS. [LAUGHTER] I'M A BANKER! THE ISSUE HERE IS -- THE ISSUE HERE IS, WHEN FOLKS LIKE YOU AND I MAKE A [INAUDIBLE] START -- I'LL GIVE YOU A COUPLE OF EXAMPLES. I GOT A CALL FROM A PERSON WHO CARRIES A LOT OF MONEY AT THE BANK, LOT OF MONEY AND HE HAD A -- HE HAD A MILLION DOLLARS COMING IN BY WIRE, AND HE SAID I WANT YOU TO BUY ME SOME TREASURIES, JUST 30 DAYS, I'LL NEED IT AGAIN IN 30 DAYS. SO GO, BUY ME A TREASURY BILL AND JUST PAY ME WHAT IT IS. I SAID, HEY, LOOK. JUST PUT IT IN A 30-DAY CD, OUR BANK IS ROCK SOLID. IT'S PERFECTLY OKAY. AND HE SAID, YOU KNOW WHAT, I'VE GOT ENOUGH WITH YOU, I JUST WANT TO HEDGE MY BET A LITTLE BIT. SO I WENT OUT AND I BOUGHT HIM A TREASURY AND FOR $1.2 MILLION DOLLARS FOR 30 DAYS I'M GOING TO PAY HIM -- THE GOVERNMENT IS GOING TO PAY HIM $12 THAT'S LIKE GOING TO STARBUCKS A COUPLE TIMES FOR A MILLION BUCKS, I MEAN, SO THAT'S, YOU KNOW, I'LL EVEN GO ONE STEP FURTHER: ON A PER DAY BASIS TREASURIES WERE ACTUALLY PAYING NEGATIVE INTEREST RATES, YOU KNOW, IF YOU CAN VISUALIZE THIS. I'M GOING TO GIVE THE TREASURY A MILLION DOLLARS AND THEY'RE GOING TO PAY ME BACK -- I'VE GOT TO PAY THEM TWO BASIS POINTS TO HOLD MY MONEY FOR 30 DAYS THAT'S THE DEFINITION OF A PANIC. IT'S IRRATIONAL, IT'S THE OPPOSITE OF RATIONAL EXUBERANCE, AND IT'S GOING THE EXACTLY THE OPPOSITE WAY AND THIS IS JUST US DOING THIS, US IS THE CFOS OF THESE MAJOR CORPORATIONS THAT HAVE CASH AND ARE RELUCTANT TO LEND TO OTHER CFOS BECAUSE THEY WANT TO HOARD IT -- NOT HOARD, BUT THEY WANT TO MAKE SURE THEY RETAIN IT FOR THEMSELVES AND THEY'RE NOT SURE WHAT THEY HAVE ON THE OTHER SIDE. BANKS RECENTLY HAVE NOT WANTED TO LEND TO EACH OTHER. THEY KNOW WHAT KIND OF JUNK THEY HAVE ON THEIR OWN BALANCE SHEETS, SO THEY SAID, THEY KNOW WHAT THEY HAVE BUT THEY DON'T KNOW WHAT THE JUNK THE OTHER GUY HAS, SO BANKS WOULDN'T LEND TO EACH OTHER SO THIS IS -- EVERYBODY IN ALL LAYERS OF SOCIETY HAS JUST -- HAVE JUST TIGHTENED UP. SO WHAT HAPPENS TO BUSINESSES, I'LL GET TO THE ANSWER HERE. WHEN THIS SEIZES UP, IT -- IF YOU HAVE CASH AND YOU NEED TO EXPAND AND YOU CAN USE YOUR OWN CASH RIGHT NOW, YOU'RE FINE. IF YOU, LIKE MOST COMPANIES THAT ARE UNDERCAPITALIZED PARTICULARLY ON MAIN STREET, YOU NEED TO GO TO THE BANK FROM TIME TO TIME TO BORROW FOR EXPANSION AND, IF NOT THAT, THEN BORROW, YOU KNOW, FROM TIME TO TIME FOR WORKING CAPITAL. THE RECEIVABLE CHECK THAT YOU WERE EXPECTING IN THIS WEEK DIDN'T COME IN, I'VE GOT TO MEET A FRIDAY PAYROLL, LET ME BORROW IT FOR A COUPLE OF WEEKS AND, WHEN THE CHECK COMES IN, I'LL PAY THE BANK BACK THAT'S JUST KIND OF THE GREASE THAT MAKES THE ECONOMY GO. WHAT'S HAPPENING IS AND WILL HAPPEN IS THAT AS THESE WRITE DOWNS ARE TAKING PLACE, WITHIN THE BANKS, I'M JUST GOING TO ADDRESS THE BANKS NOW BECAUSE THEY'RE KIND OF EMBLEMATIC OF EVERYTHING ELSE, THE BANKS ARE FIGHTING TWO THINGS: FALLING ASSET VALUES THAT IS IN THE PAPER THEY HOLD, THE MORTGAGES THEY HOLD ARE STARTING TO DEFAULT A LITTLE BIT SO THAT MAKES THAT LOAN WORTH A LITTLE LESS AND THEN WHEN THEY'RE SEEING THE UNDERLYING VALUE OF THE COLLATERAL, MEANING THE SINGLE FAMILY HOMES DECREASING IN VALUE, NOW YOU AS A RATIONAL LENDER, YOU HAVE CASH, GOING TO MAKE A DEPOSIT IN A BANK, IF YOU SUSPECT THAT THE VALUE BEHIND THAT LOAN IS GOING TO BE DROPPING, WHAT'S YOUR RATIONAL DECISION? YOU'RE NOT GOING TO PUT IT IN THERE. YOU'RE NOT GOING TO MAKE THE LOAN. SO WHAT HAPPENS IS THAT THE BANKS ARE FIGHTING THIS FROM A FUNDAMENTAL STANDPOINT AND THEN THERE'S THIS ARTIFICIAL MARK TO MARKET NONSENSE. I'M JUST GOING -- I'M GOING TO RUN OVER BUT -- >> YOU ALREADY DID. >> -- I'VE GOT THE MIKE. JUST TO PUT THIS -- JUST TO PUT THIS WHOLE IDEA OF MORTGAGE BACKED SECURITY IN KIND OF REAL WORLD TERMS, IMAGINE THERE ARE A 1,000 BORROWERS OUT THERE AND ALL THESE LOANS ARE MADE, JUST REGULAR LOANS, AND SO WE HAVE 1,000 PEOPLE MAKING PAYMENTS EVERY MONTH, RIGHT NOW THE DELINQUENCY ON MORTGAGES IS RUNNING ABOUT FOUR PERCENT, DEFAULT RATE IS PROBABLY NINE PERCENT SO LET'S SAY THAT TEN PERCENT OF PEOPLE IN THIS MORTGAGE BACKED SECURITY AREN'T MAKING THEIR PAYMENTS, THAT'S 100 PEOPLE. 900 PEOPLE ARE STILL MAKING THEIR PAYMENTS. LET'S -- INSTEAD OF CALLING IT A SECURITY, LET'S CALL IT A 1,000 UNIT APARTMENT HOUSE WE CAN KIND OF RELATE TO THAT. SAY THANK YOU, WE HAVE 900 PEOPLE MAKING THEIR MONTHLY RENT PAYMENTS AND 100 ARE HAVING TROUBLE AND THEY'RE WORKING THROUGH THOSE. THE VALUE OF THAT APARTMENT HOUSE IS NOT ZERO BUT THAT'S THE BID, PER THE ACCOUNTING RULE I HAVE TO, YOU KNOW, I CAN'T SELL IT TO TIM. I HAVE NO BIDS FOR IT. I HAVE TO TAKE A SNAPSHOT OF MY -- OF MY BALANCE SHEET ON SEPTEMBER 30TH AND, IF I HAVE NO BUYERS FOR IT, I HAVE TO MARK THAT THING TO ZERO IN THE EXTREME CASE THAT APARTMENT HOUSE IS NOT WORTH ZERO SO -- BUT THAT'S WHAT THE ACCOUNTING RULES SAY I HAVE TO DO. SO, WHEN THAT HAPPENS, OKAY, SO I TAKE THIS MILLION DOLLAR APARTMENT HOUSE AND I HAVE A MILLION DOLLAR NET WORTH, I HAVE TO MARK IT TO ZERO, WHAT HAPPENS TO MY NET WORTH, GONE. SO I HAVE A PERFECTLY GOOD APARTMENT HOUSE, A PERFECTLY GOOD -- IT'S A FUNCTIONING, VIABLE BUSINESS AND MY NET WORTH IS WIPED OUT, WELL THAT'S INSOLVENCY AND THAT'S WHAT'S DRIVING SOME OF THESE BANKS UNDER. I THINK THAT'S WHAT HAPPENED TO LEHMAN. IT'S WHAT HAPPENED TO WAMU. IT'S WHAT HAPPENED TO ALL THESE BANKS. THIS IS AN ACCOUNTING RULE THAT HAS A CERTAIN RELEVANCE IN CERTAIN TIMES, IT HAS NO RELEVANCE TODAY. NOW, LET'S JUST TAKE THIS ONE STEP FURTHER FOR [INAUDIBLE] THE -- SO, LET'S SAY I HAVE ENOUGH CAPITAL TO WRITE THIS APARTMENT HOUSE DOWN TO ZERO AND I HAVE TWO MILLION DOLLARS IN NET WORTH. SO I HAVE A MILLION DOLLARS LEFT OVER AND I'VE GOT ENOUGH TO GET ME THROUGH -- THROUGH ALL OF THIS NONSENSE THAT WE'RE EXPERIENCING RIGHT NOW, THIS PANIC AND THEN SOMEBODY STEPS OUT OF THE BUSHES AND SAYS HEY, I'LL GIVE YOU, YOU KNOW, I'LL GIVE YOU $800,000 FOR IT. I THINK YOU'VE GOT A TEN PERCENT DEFAULT RATE. I'LL GIVE YOU 80 FOR IT AND I'LL MAKE TEN PERCENT ON IT PLUS THE, YOU KNOW, THE INTEREST ALONG THE WAY. AND I SELL IT TO HIM, I GET TO WRITE THAT ASSET FROM ZERO RIGHT ON BACK TO 800,000. SO WHAT'S MY NEXT P&L LOOK LIKE? I'M A GENIUS, I'VE MADE A FORTUNE. NEITHER OF THESE ACCOUNTING TREATMENTS IS TRANSPARENT IN ANY WAY. IT DOESN'T REFLECT WHAT'S GOING ON IN THE BUSINESS -- IN THIS BUSINESS MODEL, SO WE HAVE TO FIND ANOTHER WAY. [LAUGHTER] >> YOU'LL GET ANOTHER CHANCE. DR. GROBAR, AS WE ALL KNOW THE FEDERAL GOVERNMENT HAS DECIDED TO ENACT A $700 BILLION BAILOUT. IS THE BAILOUT A BETTER SOLUTION THAN LETTING THE MARKET FORCES WORK THIS OUT? >> WELL, THE CONCEPT OF LETTING MARKET FORCES WORK THINGS OUT WAS ACTUALLY VERY POPULAR IN 1929. THIS IS PRECISELY THE ADVICE THAT PRESIDENT HERBERT HOOVER GOT FROM HIS THEN TREASURY SECRETARY, ANDREW MELLON, WHO ADVISED HIM TO TAKE A HANDS OFF APPROACH TO THE ECONOMY AND TO, QUOTE/UNQUOTE, "ALLOW MARKET FORCES TO LIQUIDATE BAD BUSINESSES" AND IT WAS FELT AT THE TIME THAT TAKING THIS KIND OF PASSIVE APPROACH WOULD ENABLE THE ECONOMY TO SORT OF HEAL ITSELF IN A FAIRLY SHORT PERIOD OF TIME. AT THE SAME TIME THE LEADERS AT THE CENTRAL BANK, OUR NATION'S CENTRAL BANK, THE FEDERAL RESERVE, ENDED UP TAKING A SIMILARLY PASSIVE POLICY STANCE. THEY BASICALLY STOOD BY AND ALLOWED A SERIES OF BANK PANICS TO CAUSE TEN -- LITERALLY TENS OF THOUSANDS OF BANKS TO FAIL ACROSS THE UNITED STATES, SO WE ALL KNOW THE RESULT OF THESE PARTICULAR POLICY CHOICES IT WAS CALLED THE GREAT DEPRESSION. I THINK THAT WE'VE LEARNED SOME IMPORTANT LESSONS FROM THE EXPERIENCE OF THE DEPRESSION, ALTHOUGH, I THINK SOME OF THE LESSONS GOT A BIT DILUTED OVER TIME AND WE HAVE TO COME BACK TO THEM. FIRST AND FOREMOST THE IMPORTANCE OF THE COUNTRY'S FINANCIAL SYSTEM AND THE OVERALL HEALTH OF THE ECONOMY AND THE NECESSITY OF SAFEGUARDING THE HEALTH OF THE FINANCIAL AND BANKING SYSTEM THROUGH REGULATION AND OVERSIGHT. ONE OF THE WAYS THAT WE SORT OF LOST THAT LESSON WAS IN RECENT YEARS WHEN WE ALLOWED SO MUCH OF THIS MORTGAGE ORIGINATION ACTIVITY TO MOVE OUTSIDE OF THE BANKING SYSTEM WHICH MOVED IT OUTSIDE OF THE REGULATORY INFRASTRUCTURE, AND IT'S ESTIMATED THAT AS MANY AS 75 PERCENT OF THESE SUBPRIME LOANS WERE ACTUALLY ORIGINATED BY INDEPENDENT MORTGAGE COMPANIES, THESE ARE COMPANIES THAT ARE JUST SIMPLY -- THEY ONLY NEED TO GET A STATE CHARTER. THERE IS NO COMPREHENSIVE SYSTEM OF OVERSIGHT, SO I THINK THAT LESSON OF THE DEPRESSION HAS COME BACK TO US AGAIN AND THAT WAS A KEY MISTAKE. I THINK THE SECOND KEY LESSON FROM THE DEPRESSION IS THAT WE FOUND THAT MARKET FORCES, WHILE THEY DO WORK, MAY TAKE EXCEEDINGLY LONG TO RESOLVE AN ECONOMIC CRISIS AND IMPOSE AN EXCEEDINGLY HIGH COST ON THE ECONOMY AND THAT A BETTER OUTCOME CAN BE FOUND WITH GOVERNMENT INTERVENTION IN A CRISIS LIKE THIS. SO TO SUMMARIZE REALLY, MY ANSWER TO THE QUESTION IS IT BETTER -- IS THE BAILOUT BETTER OR LETTING MARKET FORCES WORK, CERTAINLY, MY ANSWER IS AN UNQUALIFIED YES BUT NOT JUST TO THE BAILOUT BECAUSE THE BAILOUT IS SORT OF THE PUBLIC RESPONSE THAT WE'VE ALL OBSERVED. THE BAILOUT REALLY INVOLVES WHAT WE CALL FISCAL POLICY THAT IS ACTIONS OF THE TREASURY AND ELECTED -- DECISIONS MADE BY THE ELECTED OFFICIALS, AND I THINK THE BAILOUT IS GOING TO BE AN ELEMENT OF POLICY THAT IS GOING TO HELP US BUT I THINK MUCH MORE IMPORTANT HAS BEEN THE WORK THAT IS BEING DONE BY THE FEDERAL RESERVE BANK ON THE SIDE OF MONETARY POLICY. NOW, THE FEDERAL RESERVE HAS BEEN OPERATING MUCH MORE, YOU KNOW, BEHIND THE SCENES. PEOPLE MAY NOT BE AWARE OF ALL THE THINGS THAT THEY'RE DOING BUT THE FED HAS BEEN, JUST TO ANNOUNCE A FEW OF THE THINGS THAT THEY'VE -- TALK ABOUT A FEW OF THE THINGS THAT THEY'VE ANNOUNCED RECENTLY, EVEN OVERNIGHT I WAS DRIVING INTO CAMPUS THIS MORNING, I HEARD THAT OVERNIGHT THEY CUT THE FED FUNDS RATES THAT'S GOING TO INCREASE LIQUIDITY TO THE BANKING SYSTEM, HELPING BANKS HAVE THE CASH TO LEND TO EACH OTHER AND TO BUSINESSES. ANOTHER THING THAT THE FED ANNOUNCED JUST THIS WEEK WAS THAT THEY ARE GOING TO ENTER THE COMMERCIAL PAPER MARKET. NOW I'VE NOT SEEN THE FED DO THIS BEFORE BUT IT IS AN EMERGENCY MEASURE AND I THINK IT IS APPROPRIATE TO GO IN AND PURCHASE UP COMMERCIAL PAPER, DIRECTLY IN SOME CASES, FROM ISSUERS TO TRY TO EASE UP CREDIT CONDITIONS THERE. I THINK THE WORK OF THE FED IS GOING TO BE VERY, VERY IMPORTANT IN GETTING US OUT OF THIS FINANCIAL CRISIS. YOU KNOW THESE FISCAL AND MONETARY POLICIES DO -- DO IMPOSE SOME COST ON TAXPAYERS BUT I THINK THAT ULTIMATELY THE ALTERNATIVE, THE ONLY ALTERNATIVE WE HAVE AT THIS POINT IS TO ALLOW MARKETS TO FUNCTION ON THEIR OWN. I'M PRETTY SURE A VERY SEVERE RECESSION OR EVEN DEPRESSION COULD RESULT WHICH WOULD BE MUCH MORE COSTLY TO THE AVERAGE AMERICAN. >> THANK YOU. DEAN SOLT, ON TUESDAY THE FEDERAL RESERVE ANNOUNCED IT WOULD BEGIN BUYING THE SHORT TERM DEBT THAT MANY COMPANIES USE TO FUND THEIR DAY-TO-DAY OPERATIONS, WHAT WILL BE THE IMPACT OF THIS MOVE? >> I THINK LISA STARTED ANSWERING THAT QUESTION A LITTLE BIT AND ALLOW ME TO ELABORATE AND MAYBE GIVE A BROADER ANSWER. BEFORE I DO THAT THOUGH LET ME JUST POINT OUT, WE'RE TALKING ABOUT SOME VERY COMPLICATED TOPICS, CONCEPTS AND SOMETIMES MAYBE USING JARGON THAT WE ALL FIND VERY UNDERSTANDABLE BUT, IF YOU MAYBE DON'T HAVE THAT LEVEL OF COMFORT WITH SOME OF THE TERMS, THE COLLEGE OF BUSINESS ADMINISTRATION HAS PREPARED A WEB PAGE WITH A LOT OF LINKS THAT MAY GIVE YOU SOME DEEPER UNDERSTANDING OF SOME OF THESE ISSUES, SO, IF WE MAKE YOU THINK OR MAKE YOU WONDER, THAT'S PROBABLY A GOOD THING BUT HOPEFULLY WE CAN ANSWER SOME OF THOSE BY YOU CAN EITHER GO TO THE MAIN PAGE OF THE UNIVERSITY, CLICK ON OUR LINK OR GO TO OUR COLLEGE OF BUSINESS ADMINISTRATION WEB PAGE AND GET SOME OF THESE ANSWERS. AND THE NOTION HERE ABOUT THIS QUESTION IS ABOUT THE FEDERAL RESERVE BOARD, WE'VE BEEN TALKING ABOUT COMMERCIAL BANKS AND BOB LENDS MONEY, HE BORROWS MONEY FROM DEPOSITORS, SO HE HAS A COMMERCIAL BANK. THE FED, AS WE CALL IT, IS NOT REALLY A COMMERCIAL BANK IT'S A FEDERAL RESERVE BOARD, THERE'S 12 BANKS IN THAT SYSTEM AND AS LISA POINTED OUT ONE OF THE THINGS IT DOES IS SORT OF COORDINATE AND RUN MONETARY POLICY, MONETARY, MONEY, OKAY, SUPPLY OF MONEY, GREATER GROWTH OF MONEY, MAYBE CREATING INFLATION FOR ALL OF US BUT, WHEN WE HAVE MONEY TO PAY BILLS OR TO BUY THINGS, WE SAY WE HAVE LIQUIDITY. SO THE PART OF THAT WE'RE -- I CAN FOCUS ON TODAY WILL BE THE LIQUIDITY. OTHER THINGS THAT THE FED DOES IS THEY SCRUTINIZE BANKS AND THEY -- I GUESS, THOSE ARE TWO OF THE MAIN -- THEY'RE ALSO LIKE A LENDER OF LAST RESORT SOMETIMES, OKAY. THEY'RE THE FEDERAL GOVERNMENT, OR PART OF THE FEDERAL -- THEY'RE NOT REALLY, THEY'RE INDEPENDENT OF THE FEDERAL GOVERNMENT BUT THEY ARE A LENDER OF LAST RESORT FOR OUR MONETARY SYSTEM, AND ANOTHER CONCEPT I MIGHT POINT OUT AND WE'LL GET TO THIS ANSWER IS THERE'S BEEN A FLIGHT TO SAFETY ALSO AND THAT USUALLY MEANS INVESTORS DON'T TRUST ASSETS IN THE PRIVATE SECTOR, THEY WANT TO HOLD U.S. GOVERNMENT SECURITIES WHICH ARE, IN THE SHORT-TERM, ARE TREASURY BILLS AND LONGER TERM ARE TREASURY BONDS. I'M LAYING OUT A LOT OF DIFFERENT IDEAS HERE IN THIS SORT OF ANSWER TO THIS, COUPLE OF OTHER CONCEPTS I'LL THROW OUT: FOR THOSE WHO ARE BUSINESS MAJORS YOU KNOW WHAT ASSETS AND LIABILITIES ARE AND THAT'S CALLED THE BALANCE SHEET OF THE FIRM, AND THE BALANCE SHEET EQUATION IS ASSETS MUST EQUAL LIABILITY PLUS EQUITY AND I THINK THIS IS WHERE BOB WAS TALKING ABOUT THE MARK TO MARKET RULES CAN MESS THAT UP SOMETIMES BUT ASSETS AND LIABILITIES ARE TWO IMPORTANT THINGS TO BUSINESSES. VALUE IS CREATED FROM ASSETS IN SORT OF THE REAL SECTOR, THE PRODUCTS THAT BUSINESSES MAKE, THE SERVICES THAT THEY OFFER THEY'RE SUPPORTED BY THE ASSETS OF THE FIRM THAT CREATES VALUE. BUT THE BALANCE SHEET EQUATION SAYS THEY HAVE TO BE FINANCED, SO YOU HAVE TO HAVE SOMEONE WILLING TO LEND YOU MONEY OR BUY YOUR STOCK SO THAT YOUR FINANCING EQUALS YOUR ASSETS. AND BOB TOUCHED ON THIS TOO, ANOTHER TWO WORDS I'LL THROW OUT ARE ILLIQUIDITY AND INSOLVENCY. BOB'S EXAMPLE OF INSOLVENCY WAS WHERE, YOU KNOW, YOUR ASSETS CANNOT SUPPORT YOUR LIABILITIES AT ALL; YOU'RE INSOLVENT, OKAY. BUT THIS QUESTION THAT DR. DOWELL ASKED ME WAS ABOUT THE FED BUYING UP SHORT-TERM DEBT OF COMPANIES THAT IS A LIQUIDITY PROBLEM. FIRMS ARE ILLIQUID RIGHT NOW BECAUSE THE BANKS WON'T LEND TO THEM OR MAYBE MONEY MARKET AND MUTUAL FUNDS WON'T LEND TO THEM BY BUYING THEIR COMMERCIAL PAPER, SO IT'S NOT INSOLVENCY FOR THESE SMALL BUSINESSES, IT'S ILLIQUIDITY. THEY JUST DON'T HAVE THE CASH RIGHT NOW TO PAY THEIR BILLS AS THEY COME DUE. TWO OTHER CONCEPTS I'LL THROW OUT THAT I THINK ARE OPERATING RIGHT NOW, GREED AND FEAR. OKAY. YOU KNOW, WALL STREET WAS, I GUESS YOU CAN SAY, PRETTY GREEDY DURING THIS PENDULUM SWINGING ONE WAY WHERE THEY COULDN'T CREATE ENOUGH OF THESE EXOTIC THINGS CALLED COLLATERALIZED DEBT OBLIGATIONS. CEOS, I GUESS THE CREDIT SQUABS, THE CREDIT DEFAULT SQUABS STARTING FROM HUNDREDS OF BILLIONS OF DOLLARS, SOME OF THESE FIRMS TURNED THEM INTO TRILLIONS AND TRILLIONS OF DOLLARS LIKE A HOUSE OF CARDS THOSE ARE WHAT ARE COLLAPSING AND, YOU KNOW, GREED IS ALL PART OF THAT. I INVEST TOO, I WANT MY ASSETS TO GROW IN THE LONG-TERM SO PERHAPS I'M A LITTLE BIT GREEDY ALSO. I THINK THE PENDULUM REALLY SWANG VERY FAR. WELL, WHEN THE PENDULUM STARTS TO SWINGING BACK THE OTHER WAY, WE WENT TOO FAR IN THE OTHER DIRECTION; COMPLETE FEAR, COMPLETE FEAR RIGHT NOW. IN BOB'S ANSWER HE HINTED AT THAT WHERE BANKS DIDN'T EVEN WANT TO LEND TO EACH OTHER, SO HERE WE HAVE THESE ASSETS AND LIABILITIES OF THESE FIRMS THAT ARE ILLIQUID. THEY NEED CASH TO PAY THEIR PAYROLLS, TO BUY RAW MATERIAL, TO PAY THEIR VENDORS, THEY'RE NOT INSOLVENT, THESE ARE GOOD BUSINESSES BUT THEY'RE ILLIQUID. SO WHAT HAPPENS, WE HAVE A LOT OF FEAR IN THE SYSTEM, WE TALKED ABOUT BEING FROZEN THE BANKING SYSTEM BEING FROZEN, NO CREDIT BEING AVAILABLE, SO WHERE ARE THEY GOING TO GO: THE LENDER OF LAST RESORT, OKAY. THE FED IS STEPPING IN TO BUY SOME OF THESE -- OR LEND MONEY TO THESE SHORT-TERM -- SHORT-TERM NEEDS OF BUSINESSES AND THAT'S PROBABLY A GOOD THING. IF YOU WANT TO SEE THIS, THE FEDERAL RESERVE WEB PAGE DESCRIBED IT, IT WAS A ONE-PAGE DOCUMENT, OKAY, IT'S YESTERDAY. THEY SAID, OKAY, WE WILL SPEND, I DON'T KNOW $160 BILLION OR WHATEVER THE NUMBER IS, WE WILL BUY ONLY QUALITY ASSETS, THEY HAVE TO BE RATED A1 OR BETTER, AND WE WILL BE SUPERVISING THESE ASSETS. WE WANT TO MAKE SURE THAT THERE'S ENOUGH COLLATERAL BEHIND THESE AND THIS WILL LAST FOR ONE YEAR. SO THE FED IS BEING VERY CLEAR ABOUT THIS PROGRAM TO INJECT LIQUIDITY INTO THESE BUSINESSES SO THEY CAN PAY YOUR PAY. THEY CAN SEND MONEY TO YOUR FIRM FOR THE RAW MATERIALS THEY BOUGHT FROM YOU, SO THAT WE CAN STAY -- OUR ECONOMY CAN KEEP GOING AND SO THAT THE 90 PERCENT OF THE LOANS THAT AREN'T DEFAULTING, PEOPLE CAN EARN THEIR INCOME TO PAY THESE AND THE LAST THING ABOUT THIS, THE FLIGHT TO SAFETY, I GUESS THAT'S WHY THE BANKS ARE LENDING TO EACH OTHER, THEY'RE BUYING TREASURY BILLS FROM THE FEDERAL GOVERNMENT. SO THE FED IS STEPPING IN TO PROVIDE LIQUIDITY TO THE FIRMS THAT NORMALLY WOULD COME FROM OTHER CHANNELS AND HOPEFULLY THAT WILL LEAD TO A SOFTER LANDING THAN OTHERWISE. >> THANK YOU. PRESIDENT ALEXANDER, HOW WILL THE CURRENT ECONOMIC SITUATION AFFECT THE PUBLIC SCHOOLS OF CALIFORNIA? >> MANY OF THE PANELISTS KNOW A LOT MORE ABOUT CAPITAL MARKETS THAN I BUT I'D LIKE TO REMIND EVERYBODY IN THE ROOM OF ANOTHER TYPE OF INVESTMENT: IT'S NOT PROPERTY, IT'S NOT STOCKS, BONDS BUT IT'S IN HUMAN CAPITAL AND THE GREAT ISSUE OF HUMAN CAPITAL IS THAT IT IS THE MOST STABLE INVESTMENT THAT WE'VE SEEN SINCE 1963 WHEN THEODORE SCHULTZ WON THE NOBEL PRIZE FOR HUMAN CAPITAL INVESTMENT THEORY AND IT DEMONSTRATED THAT FOR OUR STUDENTS, YOUR INVESTMENT ACTUALLY IS SECURED; YOUR INVESTMENT IN YOUR OWN EDUCATION. IN FACT, YOUR RETURN -- YOUR INDIVIDUAL RETURN RATE ON THE INVESTMENT THAT YOU'RE WORKING TO ATTAIN RIGHT NOW IS ROUGHLY BEEN ABOUT 12 TO 14 PERCENT FOR THE LAST 40 PLUS YEARS AND THAT IS UNCHANGED NOT JUST IN THE UNITED STATES BUT IT'S UNCHANGED THROUGHOUT THE OECD WORLD. THE SOCIAL INVESTMENT RATE OF INVESTING IN YOUR EDUCATION BY OTHERS HAS REMAINED UNCHANGED, BASICALLY, AN EIGHT TO TEN PERCENT RETURN RATE TO EVERYBODY ELSE IN SOCIETY TO MAKE SURE THAT YOU CAN HAVE EDUCATIONAL OPPORTUNITIES AND YOU PURSUE YOUR DEGREE AND YOU FINISH YOUR DEGREE AND YOU BECOME REVENUE PRODUCING CITIZENS OF THE STATE OF CALIFORNIA AND OTHER STATES. SO, WHEN WE TALK ABOUT INVESTMENTS, THE GREATEST INVESTMENT, MOST STABLE INVESTMENT THAT WE'VE SEEN FOR NEARLY 50 YEARS SINCE WE STARTED MEASURING EDUCATIONAL ECONOMICS IS ACTUALLY IN YOU. IT'S IN THE HUMAN CAPITAL OF THE NATION, IT'S IN THE HUMAN CAPITAL OF THE CHILDREN, IT'S IN THE HUMAN CAPITAL OF STUDENTS SO THAT'S GOOD NEWS. THE OTHER -- THERE'S, I THINK, EVEN BETTER NEWS TO SOME EXTENT, THIS IS THE FIRST TIME I'VE SEEN WHEN WE'VE HAD AN ECONOMIC DOWNTURN THAT WE DIDN'T SCAPEGOAT THE PUBLIC SCHOOLS AND BLAME THE PUBLIC SCHOOLS FOR ALL THE ECONOMIC PROBLEMS IN THE UNITED STATES BECAUSE IT'S INTERESTING BECAUSE, WHEN THE ECONOMY IS ROLLING WELL, NOBODY EVER CREDITS OUR PUBLIC SCHOOLS. NOBODY EVERY CREDITS THE PUBLIC SCHOOLS FOR DOING WELL AND PLAYING A ROLE IN EDUCATING PEOPLE TO BUILD THE ECONOMY. SO I FIND WITH GREAT INTEREST NOW THAT WE'VE IN MANY WAYS VILIFIED THOSE THAT HAVE DRIVEN THE ECONOMY INTO THE GROUND, NOW WE NEED TO WORK ON CONSTRUCTIVE SOLUTIONS TO DIG OUR WAY OUT. ON THE BAD SIDE OF THINGS, PUBLIC EDUCATION IS REVENUE RELIANT, TAX REVENUE RELIANT. THE LESS PEOPLE ARE SPENDING, THE MORE PEOPLE THAT ARE UNEMPLOYED, THE LESS PEOPLE ARE MAKING, THE LESS TAX REVENUES THAT WILL ACCRUE TO A STATE LIKE CALIFORNIA OR ANY STATE. SO, RIGHT NOW WE IN SORT A SORT OF IN A SWIRL OF TRYING TO FIGURE OUT WHERE OUR REVENUES ARE GOING TO BE. LAST YEAR IT CERTAINLY STARTED, THIS YEAR WE'RE SEEING REVENUES DECLINE, WHEN PEOPLE ARE IN TROUBLE WHEN PEOPLE ARE HURTING, REVENUES DECLINE TO THE STATE SO THERE'S A COMPOUNDING EFFECT. NOW, THAT HITS US THE HARDEST AS A UNIVERSITY BECAUSE WE'RE 40 PLUS PERCENT RELIANT ON THESE REVENUES THAT COME FROM THE CITIZENS OF CALIFORNIA. MY GREATER CONCERN IS FOR OUR SCHOOL -- OUR COLLEAGUES IN OUR PUBLIC SCHOOLS BECAUSE NOT ONLY ARE THEY RELIANT ON THESE REVENUES AND THESE STATE FUNDING ISSUES AND DECISIONS AND CUTS OR LACK OF ADDITIONAL FUNDING TO SUPPORT THE STUDENTS WHO NEED IT BUT THEY'RE VERY PROPERTY TAX RELIANT, AND WE'VE ALREADY SEEN STATES LIKE FLORIDA GOING THROUGH REASSESSMENTS OF PROPERTY VALUE. THEY'VE DROPPED 20 PERCENT ON THE HOMES IN FLORIDA WHICH MEANT THAT PROPERTY TAXES HAVE GONE DOWN 20 PERCENT FOR MANY PEOPLE WHICH ON THE SURFACE MAY SOUND VERY GOOD BUT IN ADDITION TO THAT THAT MEANS THE NET WORTH OF THE FAMILY OWNING THE HOME -- FOR MOST PEOPLE THE NET WORTH OF THEIR FAMILY, THE BULK OF THEIR NET WORTH IS VESTED IN THEIR HOMES, IS VESTED IN WHERE THEY LIVE AND IN ADDITION THE PUBLIC SCHOOLS HAVEN'T EVEN BEGUN TO FEEL THE RAMIFICATIONS OF REDUCING 20 PERCENT OF THEIR BASE THROUGH PROPERTY TAXES WHICH MAY NOT HIT THIS YEAR BUT WILL PROBABLY HIT NEXT YEAR OR THE YEAR BEYOND THAT THAT'S PARTICULARLY RELEVANT TO A STATE LIKE CALIFORNIA WHO HAS ALREADY SOME OF THE LARGEST STUDENT/TEACHER RATIOS IN OUR SCHOOLS, WHO HAS FALLEN TO 49TH IN TAX EFFORT AND SUPPORT OF ITS CHILDREN OF WHICH WE SPENT A LOT OF OUR TIME AS A UNIVERSITY HELPING OUR SCHOOLS OFFSET THESE FINANCIAL CHALLENGES THAT THEY FACE EVERYDAY. SO WITH REVENUES DECLINING, PEOPLE NOT SPENDING, I THINK YOU'RE CERTAINLY GOING TO SEE THESE REVENUES DECLINE. THE HOLIDAY EXPECTATIONS ARE GOING TO BE WAY BELOW WHAT WE'VE SEEN PROBABLY IN A DECADE OR BEYOND THAT THAT ALSO MEANS THAT THE RAMIFICATIONS WILL COME BACK TO HIGHER EDUCATION INSTITUTIONS. IT WILL ALSO IMPACT OUR SCHOOLS WHICH MEANS IT IMPACTS US FROM TOP TO BOTTOM AS INSTITUTIONS OF HIGHER EDUCATION THAT DOESN'T MEAN WE CANNOT AND WE DO NOT HAVE TO MAKE THE RIGHT INVESTMENT DECISIONS ON THE FUTURE. AND I WOULD JUST ENCOURAGE EVERYBODY TO PAY CLOSE ATTENTION TO THE TYPES OF INVESTMENTS THAT WE MAKE IN THE STATE OF CALIFORNIA AND OTHERS BECAUSE HUMAN CAPITAL, HUMAN CAPITAL, INVESTMENTS IN YOU AS STUDENTS, INVESTMENTS IN CHILDREN AND INVESTMENTS IN SO MANY OF US THAT HAVE GONE ON TO GET DEGREES HAVE ACTUALLY PROVEN TO BE THE MOST STABLE INVESTMENT THAT ANY STATE OR SOCIETY COULD MAKE. AND I'D LIKE US TO PAY A LITTLE MORE ATTENTION TO THE TYPE OF INVESTMENTS THAT BUILD ECONOMIES IN THE LONG-TERM INSTEAD OF THE TYPE OF ECONOMIC GAINS THAT PEOPLE LIKE TO ENJOY FOR A FEW YEARS HERE AND A FEW YEARS THERE. SO, WE'RE HERE IN A DIFFICULT SITUATION, REVENUES, PROPERTY TAX ISSUES FOR OUR SCHOOLS, WE NEED TO WORK TOGETHER BECAUSE THIS ISSUE ACTUALLY WILL IMPACT THE ENTIRE STATE OF CALIFORNIA AND OUR GRADUATES ARE GOING TO PULL US OUT OF THIS MESS OR WE'RE NOT GOING TO BE ABLE PULL OUT OF THIS MESS DOWN THE ROAD. THANK YOU, DAVE. >> THANK YOU. AND WE ARE RUNNING BEHIND SO I'D ASK THE PANELISTS TO TRY TO GIVE VERY CRISP ANSWERS TO OUR NEXT ROUND. BACK TO MR. ANDERSON, WHY HAVE THE MARKETS BEEN SO VOLATILE THIS SUMMER AND WHAT SHOULD THE INDIVIDUAL INVESTOR DO? >> WELL, IN A WORD PSYCHOLOGY. LET ME ELABORATE A LITTLE BIT MORE FIRST BY DEFINING VOLATILITY. AS AN INVESTMENT BANKER WE LOOK AT BOTH DOWNSIDE AND UPSIDE VOLATILITY AND BOTH PRESENT RISKS TO US IN TERMS OF ANY CLIENTS INVESTMENT PORTFOLIO. WHEN YOU LOOK AT WHAT THE VOLATILITY HAS BEEN TAKING PLACE NOT JUST THIS SUMMER IT'S BEEN KIND OF EXACERBATED THIS SUMMER BUT IT REALLY STARTED BACK IN SEPTEMBER AND OCTOBER OF 2007, SO IT BEGAN TO CREATE SOME UNCERTAINTY AND YOU HAVE TO -- THIS IS MY OPINION, YOU HAVE TO POINT A LITTLE BIT TO THE FINANCIAL PRESS AND THE OVERALL PRESS, THEY DON'T TELL YOU GOOD NEWS. THEY DON'T TELL YOU THAT ALL PLANES LANDED SAFELY AT LAX YESTERDAY. THEY TELL YOU, LOOK AT THIS, LOOK AT THIS POOR FAMILY IN KANSAS AND WHAT THIS WHOLE THING HAS DONE TO THEIR LIVES OR LOOK AT THIS SITUATION OVER HERE OR LOOK AT THIS BAD SITUATION OVER THERE, SO NATURALLY AS WE LOOK AT THE TELEVISION AND LISTEN TO IT DAY AFTER DAY IT BEGINS TO CREATE SOMEWHAT OF A SELF-FULFILLING PSYCHOLOGY, IF YOU WILL, AND PEOPLE BEGIN TO BELIEVE IT. AND I'M GOING TO VENTURE ON TO GIVING YOU GUYS A LITTLE HOPE HERE TODAY. BEEN DOING THIS FOR 30 YEARS, I ENTERED THE BUSINESS IN '74 OR '75 WHERE THE COVER OF BUSINESS WEEK MAGAZINE SAID STOCKS ARE DEAD. WELL, THAT WAS OVER 30 YEARS AGO AND I'M STILL HERE AND I'M STILL IN MY BUSINESS AND MY PARTNERS ARE STILL IN THEIR BUSINESS. I WAS AROUND IN OCTOBER 17TH, 1987, OCTOBER 19TH, 1987, WHEN THE DOW DROPPED 20 PERCENT IN A SINGLE DAY. WE WERE DEFINITELY OPENING THE SCOTCH THAT AFTERNOON, AND I WAS OLD ENOUGH TO DRINK IT AT THAT TIME. I ALSO WAS AROUND FOR THE RUSSIAN CURRENCY CRISIS, THE LONG-TERM FUNDING -- LONG-TERM CAPITAL MANAGEMENT SITUATION IN LATE '90'S. I WAS AROUND FOR THE TECH BUBBLE. I WAS AROUND FOR 9/11. I'M AROUND FOR THIS ONE, AND THEY ARE ALWAYS DIFFERENT CIRCUMSTANCES THAT CREATE THIS KIND OF PSYCHOLOGY IN THE MARKETPLACE BUT THEY ARE NEVER ANY DIFFERENT EFFECTS ON THE CAPITAL MARKETS AND THE PRICING OF SECURITIES THAT ARE HELD BY INVESTORS, SO THERE IS A HUGE DIFFERENCE. AND SO, WHEN WE COUNSEL CLIENTS -- AND WE HAVE BEEN DOING A LOT OF THAT LAST COUPLE OF WEEKS THEY HEAR THAT IT'S DIFFERENT THIS TIME, IT'S A GLOBAL DEPRESSION, YOU KNOW WE JUST KIND OF LAUGH. IT'S VERY HYSTERICAL AND VERY OVERBLOWN. YES, THESE ARE DIFFICULT PERIODS BUT, IF YOU LOOK HISTORICALLY AT THE CAPITAL MARKETS, ON AVERAGE ABOUT ONE IN FIVE YEARS ONE OF THESE KINDS OF THINGS COME ALONG AND SO WE TELL INVESTORS IN THE BEGINNING, LOOK THESE ARE SOME OF THE REALITIES OF THE MARKETPLACE. IF YOU CAN'T GET YOUR ARMS AROUND THE NOTION THAT YOUR INVESTMENTS ARE GOING TO LOSE MONEY ONE IN FIVE YEARS, YOU REALLY SHOULDN'T BE IN THE STOCK MARKET. OUR FAVORITE INDIVIDUAL CLIENTS ARE PHYSICIANS, YOU KNOW, YOU TELL THEM THEY'RE GOING TO LOSE ONE IN FIVE PATIENTS THEY LOOK AT YOU LIKE YOU'RE CRAZY, AND IT'S JUST NOT THE SAME KIND OF AN ENVIRONMENT; IN THE CAPITAL MARKETS THESE THINGS CAN HAPPEN. SO WHAT DO INDIVIDUAL INVESTORS DO, WHAT DO WE ADVISE OUR INDIVIDUAL INVESTORS TO DO? AND I'LL SEPARATE THEM FROM INSTITUTIONAL INVESTORS THEY HAVE DIFFERENT ISSUES TO DEAL WITH. THEY HAVE FIDUCIARY STANDARDS TO COMPLY WITH, IT'S A DIFFERENT SCENARIO. FOLKS LIKE YOU AND ME THAT HAVE THEIR MONEY IN THE MARKET OR ARE THE FOLKS THAT HAVE MONEY IN THE MARKET THE BEST THING TO DO IS BE BOLD. WE'RE -- A COUPLE OF CLIENTS HAVE BEEN VERY, VERY SURPRISED THE LAST COUPLE OF DAYS, WELL WHAT ARE YOU DOING? WELL, WE'RE REBALANCING IN THIS MARKET. WHAT REBALANCE MEANS IS, IF YOU HAVE A 50/50 EQUITY AND BOND PORTFOLIO AND YOUR EQUITY HAS DROPPED TO 40 PERCENT, WE GO BUY TEN PERCENT MORE TO BRING YOU BACK UP TO 50/50. SO IT'S KIND OF COUNTERINTUITIVE TO SAY YOU'RE BUYING INTO THIS MARKET, WELL THAT'S BECAUSE WE'VE BEEN THROUGH THEM BEFORE, WE KNOW MARKETS DO RECOVER. CAN'T TELL YOU HOW LONG THIS ONE IS GOING TO TAKE BUT I CAN TELL YOU THAT IT WILL RECOVER. MARKET DISLOCATIONS HAVE TAKEN PLACE LONG BEFORE I EVER GOT INTO THIS BUSINESS AND LONG BEFORE MY PREDECESSORS EVER GOT INTO THIS BUSINESS; IT'S A MATTER OF HISTORY. GETTING KIND OF PHILOSOPHICAL HERE BUT PEOPLE PICK THEMSELVES UP AND MOVE ON AND THEY ADJUST AND IN AMERICA, IN PARTICULAR, CAPITAL MARKETS ADJUST VERY QUICKLY. SO, DON'T LOSE HOPE AND THE FINAL THING I WOULD SAY, IF YOU'RE CONSIDERING BEING AN INVESTOR, GET INTO THE MARKET WITH A PLAN AND DON'T PUT A DOLLAR IN THE MARKET UNTIL YOU'VE ACTUALLY WRITTEN A PLAN. WE CALL THAT A WRITTEN INVESTMENT POLICY, IT'S KIND OF LIKE, IF YOU'RE GOING TO GO INTO A BUSINESS, WRITE A BUSINESS PLAN BEFORE YOU PUT ANY MONEY INTO YOUR BUSINESS SO YOU KNOW WHAT DECISIONS YOU NEED TO MAKE AND HOW TO MAKE THOSE DECISIONS WHEN YOU'RE CONFRONTED WITH THEM. SO THAT'S BEEN PART OF THE PROBLEM WE SEE IS THE PEOPLE THAT YOU SEE PANICKING AND THE FEAR YOU SEE IN THE MARKETPLACE ARE BASICALLY PEOPLE THAT DON'T KNOW WHAT THEY'RE DOING IN THERE. THEY DON'T HAVE A PLAN AND/OR THEY ARE SPECULATORS PLAYING MOMENTUM ONE WAY OR ANOTHER. SO, SORRY I WENT OVER TIME BUT I WANTED TO TELL EVERYBODY THIS IS NOT THE END OF THE WORLD. >> IF IT IS, ACTUALLY OUR MONEY IS THE LAST THING TO WORRY ABOUT. >> THANK YOU. MR. SCHACK, WOULD YOU HAVE HEARD A PLAN OTHER THAN SECRETARY PAULSON'S $700 BILLION BAILOUT? >> I WILL NOT -- I WILL NOT DO ANOTHER RANT. [LAUGHTER] HOWEVER, AS PHILOSOPHICALLY OPPOSED AS I AM TO GOVERNMENT INTERVENTION IN THE PRIVATE SECTOR TOTALLY, WE NEEDED TO DO SOMETHING TO STOP THE BLEEDING, THERE WAS TOO MUCH PANIC GOING ON. WE NEEDED TO CREATE SOME VENUE SO THAT FOLKS CAN RELAX AND JUST LET THE DUST SETTLE A LITTLE BIT AND THIS PLAN THAT THEY PUT FORWARD IS -- IS AS GOOD A PLAN AS ANY. FRANKLY NO ONE KNOWS HOW IT'S GOING TO TURN OUT. I DON'T THINK WE'RE GOING TO SPEND THE 700 BILLION FRANKLY. WHAT -- WHAT WE NEED TO DO THOUGH IS -- A LOT OF CHANGE IS OBVIOUSLY YOU KNOW ABOUT MY ATTITUDE ABOUT THE MARK TO MARKET LAW AND THE RULES, THEY HAVE -- ALONG WITH THIS PLAN, THEY HAVE THE POWER TO SUSPEND THE MARK TO MARKET RULES AND REPLACE IT WITH SOME KIND OF DISCOUNTED CASH FLOW VALUE, SOMETHING OF THAT SORT LIKE WE USED TO HAVE IN THE OLD DAYS WHEN I WAS IN YOUR SEAT. AND/OR IT'S A LITTLE RADICAL [INAUDIBLE] IF YOU WANT -- THE BANKS FAIL BECAUSE PEOPLE PULL THEIR MONEY OUT AND, YOU KNOW, THE INDYMAC WAS A RUN ON THE BANK. BASICALLY PEOPLE CAME OUT OF AND THERE'S A POLITICAL SIDE OF THIS BUT THERE WAS A CERTAIN SENATOR THAT WROTE A LETTER TO THE NEW YORK TIMES SAYING INDYMAC WAS GOING TO FAIL. WELL, WHAT WOULD YOU DO AS AN INVESTOR OR DEPOSITOR AT INDYMAC YOU GO UP IN THE MORNING AND YOU PULL YOUR MONEY OUT AND THAT'S EXACTLY WHAT HAPPENED. THE FED WAS ALREADY IN THERE GETTING READY TO MARRY INDYMAC OFF TO SOMEBODY ELSE AND THEY HAD TO SEIZE THE BANK THAT CAUSED LOSSES OF DEPOSITS AND STUFF. SO -- SO THAT'S WHAT CREATES BANK FAILURE, PEOPLE LOSE CONFIDENCE AND THEY HEAD FOR THE EXIT. THE ALTERNATIVE TO THE MARK TO MARKET THING IS KIND OF RADICAL IS TO JUST ENSURE ALL BANK DEPOSITS TOMORROW. YOU KNOW THEN EVERYONE WILL SAY WELL, YEAH BUT THAT'S GOING TO COST US, YOU KNOW, EVERYTHING WE EVER HAD. IT WON'T BECAUSE YOU'LL RELAX, I'LL RELAX AND THEN WE CAN WORK OUT ALL THE NONSENSE ON THE ASSET SIDE OF THE BALANCE SHEET WHETHER YOU USE MARK TO MARKET OR NOT. FRANKLY, IRELAND DID IT. I THINK THE EU IS CONSIDERING IT RIGHT NOW, SO THAT'S AN ALTERNATIVE TO THIS AND I THINK THEY'VE GOT THAT IN THEIR -- THAT ARROW IN THEIR QUIVER AS A POSSIBILITY AND SOME OTHER LITTLE THINGS TOO BUT THE ONE THING THAT LISA TOUCHED ON AND TIM DID, THEN I'LL STOP, IS THAT COMPARED TO 1929 WHEN THE FED STEPPED BACK, DIDN'T DO A THING, THE MONEY SUPPLY DECREASED BY 30 PERCENT IT'S LIKE, I MEAN, IT WAS EXACTLY THE OPPOSITE REACTION THAT SHOULD HAVE BEEN TAKEN. THEY RAISED TAXES AND DECREASED THE MONEY SUPPLY 30 PERCENT THAT IS NOT THIS -- THIS GROUP OF PEOPLE THAT IS IN -- THAT'S KIND OF RUNNING THIS BAILOUT NOW. IT'S EXACTLY THE OPPOSITE, THEY'RE MAKING SURE WE HAVE PLENTY OF LIQUIDITY, GOING TO TRY TO RIGHT SIZE THE MARKET, GET US CONFIDENT AGAIN SO WE ALL WILL START PUTTING MONEY BACK IN GRADUALLY AND DO THE SMART THINGS THE RIGHT WAY. SO I -- I -- I THINK IF YOU SORT OF STEP BACK FROM THE PRESS OF THIS RIGHT NOW AND -- AND -- AND JUST -- AND THEN ONE OTHER THING IS AS A STUDENT REALLY GET INTO THIS BECAUSE WHETHER YOU'RE A SERIOUS BUSINESS STUDENT OR NOT, THIS IS A HISTORIC DEAL. LISTEN TO BLOOMBERG, READ WALL STREET JOURNAL, READ THE ECONOMIST AND REALLY KIND OF TRY TO UNDERSTAND HOW IS IT WORKING BECAUSE IT WILL HELP PUT THINGS IN PERSPECTIVE FOR YOU AS YOU GET OLDER AND ALL OF A SUDDEN YOU FIND YOURSELF MY AGE AND JUST BEGINNING TO PUT THE PIECES TOGETHER, SO THAT'S ALL. >> VERY GOOD. DR. GROBAR, OUR WE IN OR HEADED FOR A RECESSION? WILL IT BE SHALLOW, DEEP, REGIONAL, NATIONAL, GLOBAL? AND WHAT IS THE ECONOMIC OUTLOOK FOR SOUTHERN CALIFORNIA FOR THE NEXT YEAR? >> OKAY. I THINK THE ANSWER TO THE FIRST QUESTION IS YES. I THINK WE ARE ACTUALLY IN A RECESSION RIGHT NOW. I THINK THAT RECESSION IS GOING TO LAST FOR THE NEXT SIX MONTHS BUT HAVING SAID THIS I SHOULD MENTION THAT THIS OPINION OF MINE IS REALLY A FORECAST AND THE REASON FOR THAT IS THAT AS ECONOMISTS WE GENERALLY ONLY KNOW THAT WE'VE BEEN IN A RECESSION AFTER THE FACT. SOME OF THE KEY ECONOMIC STATISTICS THAT WE USE TO GAUGE WHETHER THE ECONOMY IS IN RECESSION ARE ONLY RELEASED WITH A LAG. SO, WE DON'T KNOW FOR SURE BUT I CAN TELL YOU SOME OF THE INDICATORS THAT ECONOMISTS WILL LOOK AT TO TRY TO MAKE THIS ASSESSMENT, ONE OF THEM THE RAPID RUN UP OF THE UNEMPLOYMENT RATE TO 6.1 PERCENT, THE BIG DROP IN EMPLOYMENT PAYROLLS THAT OCCURRED IN THE MONTH OF SEPTEMBER, THE SEVERE SOFTENING IN CONSUMPTION SPENDING IN THE THIRD QUARTER, THE CONTINUED DETERIORATION OF THE HOUSING MARKET AND THEN FINALLY, YOU KNOW, THE ONE AREA THAT'S BEEN THE BRIGHT SPOT IN OUR ECONOMY HAS BEEN THE EXPORT SECTOR BECAUSE OF THE WEAK DOLLAR BUT WE'RE STARTING TO SEE OUR EXPORTS WEAKENING NOW TOO AND IT'S BECAUSE SO MANY OF OUR TRADING PARTNERS ARE STARTING TO HAVE BIG ECONOMIC PROBLEMS OF THEIR OWN. SO I THINK, MY VIEW IS THAT WE ARE IN A RECESSION. HOW DEEP OR SHALLOW WILL IT BE: IN MY VIEW I THINK THAT THE RECESSION IS GOING TO BE DEEPER THEN THE LAST TWO RECESSIONS SO THAT'S KIND OF BAD NEWS. THE RECESSION OF 2001 AND THE RECESSION BEGINNING 1990 WERE BOTH ACTUALLY VERY MILD RECESSIONS BY HISTORICAL STANDARDS. I THINK THIS TIME AROUND WE'RE LOOKING AT SOMETHING VERY SIMILAR TO THE SEVERITY OF THE '81, '82 RECESSION THAT WAS A RECESSION WHERE THE UNEMPLOYMENT RATE NATIONALLY REACHED ABOUT SEVEN AND A HALF PERCENT. TO PUT THAT IN PERSPECTIVE, THOUGH, DURING THE GREAT DEPRESSION UNEMPLOYMENT EXCEEDED 25 PERCENT, SO WE'RE TALKING ABOUT A RECESSION THAT IS DEFINITELY GOING TO BE SEVERE BY RECENT STANDARDS BUT BY HISTORICAL STANDARDS NOWHERE NEAR WHAT WE EXPERIENCED IN THE 1930'S. OKAY. WELL, WHAT ABOUT SOUTHERN CALIFORNIA: WE REALLY GENERALLY CAN NEVER AVOID THESE OVERALL MACROECONOMIC TRENDS SO GENERALLY, IF THE U.S. GOES INTO RECESSION, OUR ECONOMY HERE WILL GO INTO RECESSION TO SOME EXTENT, ALTHOUGH, THE RECESSION MAY BE MORE OR LESS SEVERE THEN THE NATIONAL ONE. YOU KNOW, IF YOU LOOK AT SOUTHERN CALIFORNIA RIGHT NOW, IT'S REALLY QUITE INTERESTING BECAUSE WE'RE SEEING SOME DIFFERENT ECONOMIC TRENDS GOING ON IN DIFFERENT PART OF THE REGION. BASICALLY WHAT WE'RE SEEING IS THAT THE COUNTIES THAT WERE REALLY BENEFITTED THE MOST FROM THE HOUSING BOOM ARE THE ONES THAT ARE CURRENTLY HARDEST HIT. SO IF YOU LOOK AT, FOR EXAMPLE, COUNTIES LIKE ORANGE COUNTY WHERE THERE HAVE BEEN TREMENDOUS LOSSES IN FINANCIAL EMPLOYMENT, RIVERSIDE, SAN BERNARDINO, WHERE THE CONSTRUCTION ACTIVITY OVER THE LAST TEN YEARS HAS BEEN SO HIGH AND NOW HAS DROPPED TO ZERO, THESE ARE THE COUNTIES REALLY BEING HURT IN THE CURRENT ECONOMIC CRISIS. INTERESTINGLY, LOS ANGELES COUNTY WHICH REALLY HAD DIFFICULTIES IN THE 1990 RECESSION AND IS BY FAR THE BIGGEST ECONOMY IN SOUTHERN CALIFORNIA WITH FOUR MILLION OUT OF THE REGION'S SEVEN MILLION JOBS LA COUNTY IS DOING PRETTY WELL, YOU KNOW. WE'RE SEEING SOME VERY MILD JOB LOSSES IN LOS ANGELES COUNTY. OVER THE LAST 12 MONTHS WE'VE LOST LESS THAN A HALF OF A PERCENTAGE POINT OF OUR EMPLOYMENT BASE. BY CONTRAST THE JOB LOSSES IN ORANGE COUNTY, RIVERSIDE, SAN BERNARDINO HAVE BEEN ABOUT TWO PERCENT OVER THE LAST YEAR, JOB LOSSES IN VENTURA COUNTY THREE PERCENT. SO, I THINK IT'S GOING TO BE A REGIONAL RECESSION THAT IS GOING TO BE GEOGRAPHICALLY UNEVEN WITH SOME AREAS DECLINING MORE THAN OTHERS BUT I THINK THE GENERAL TIMEFRAME OF THE RECESSION WILL BE VERY SIMILAR TO THE NATIONAL ONE. I THINK WE'RE GOING TO SEE THE LARGEST ACTUAL DECLINE IN THE ECONOMIC ACTIVITY OCCUR OVER THE NEXT THREE MONTHS WITH THE RECOVERY BEGINNING IN MID-2009. >> THANK YOU. DEAN SOLT'S NEXT QUESTION IS RATHER OF INTEREST TO PEOPLE WHO WORK HERE. ON TUESDAY CALIFORNIA'S SENATOR FLOREZ PROPOSED ASKING OUR PUBLIC RETIREMENT SYSTEMS, CALPERS AND CALSTRS TO PURCHASE THE STATE'S DEBT IN ORDER TO HELP SOLVE THE STATE'S LIQUIDITY PROBLEM INCLUDING PAYING STATE EMPLOYEE PAYROLL AND FUNDING SCHOOLS, WHAT WOULD BE THE IMPACT OF THIS PROPOSAL WERE IT IMPLEMENTED? >> WELL, FIRST OF ALL, I DON'T THINK I WOULD RECOMMEND THIS. I THINK [LAUGHTER] I HAVE REASONS THOUGH. IT'S MY MONEY [LAUGHTER]. I THINK IT'S A VERY WELL-INTENTIONED IDEA. CALIFORNIA IS IN A TOUGH SITUATION I'M NOT SURE WHETHER IT'S A LIQUIDITY CRISIS OR A SOLVENCY CRISIS. OKAY. BUT IN THE SHORT TERM, CALIFORNIA NEEDS SEVEN BILLION DOLLARS TO PAY ITS BILLS AND GOVERNOR SCHWARZENEGGER HAD ASKED THE TREASURY IF PERHAPS IT COULD GET A LOAN FROM THE U.S. TREASURY THAT MIGHT BE A BETTER PLACE, THE FEDERAL TREASURY, I MEAN THOSE ARE THE LENDERS OF LAST RESORT IF YOU WILL. MASSACHUSETTS HAD FLOATED THE SAME IDEA A WEEK OR SO AGO BUT TODAY'S HEADLINES SAYS MASSACHUSETTS WAS ABLE TO GO TO THE PRIVATE MARKET AND BORROW THE FUNDS IT NEEDS FROM NONGOVERNMENT SOURCES. NOW, GETTING BACK TO CALPERS AND CALSTRS THOSE ARE RETIREMENT SYSTEMS THAT MEANS THAT SOME OF MY SALARY EVERY MONTH IS DONATED TO CALPERS, PRESIDENT ALEXANDER, PROVOST GOULDEN ARE NICE ENOUGH TO PAY THE DOWER, OR NICE ENOUGH TO CONTRIBUTE SOME FROM THE UNIVERSITY BUT CALSTRS HAS A FIDUCIARY RESPONSIBILITY TO ME TO INVEST THOSE ASSETS FOR THE LONG-TERM SO THAT WHEN I RETIRE, I WILL BE ABLE TO HAVE A PENSION PLAN, I MEAN, THAT'S A PART OF THE BENEFIT. SO THE ASSETS ARE THE CONTRIBUTIONS THAT I'M MAKING AND THE UNIVERSITY IS MAKING BUT THE LIABILITIES ARE VERY, VERY LONG-TERM. I PLAN TO BE HERE FOR QUITE A WHILE YET AND THERE -- SOME OF THE PEOPLE THAT JOIN THIS WILL PROBABLY BE HERE 30 OR 40 YEARS, SOME OF MY COLLEAGUES HAVE BEEN 40 YEARS SO THESE ARE VERY LONG-TERM LIABILITIES THAT CALPERS HAS WITH THE UNIVERSITIES AND STRS HAS WITH OTHER PARTS OF OUR EDUCATIONAL SYSTEM, SO THE GOAL OF THE PLAN I WOULD SAY FOR CALPERS AND CALSTRS IS TO INVEST LONG-TERM TO MEET THEIR PENSION LIABILITY. CALSTRS SPOKESMAN SAID WELL, YOU KNOW, THAT'S AN INTERESTING PROPOSAL AND, IF THERE IS SOME ECONOMIC MERIT TO US THAT WE COULD ALLOCATE SOME OF OUR PORTFOLIO TO IT, MAYBE WE WOULD. WE WOULD NEED A PROPOSAL FROM THE STATE. I JUST DON'T THINK THIS ONE IS GOING TO FLY. >> THANK YOU. AND WE HAVE ONE MORE QUESTION AND THEN WE WILL OPEN IT UP TO QUESTIONS FROM THE AUDIENCE, SO BE THINKING ABOUT WHAT YOU WOULD LIKE TO ASK. AND THIS LAST QUESTION IS OF GREAT INTEREST. PRESIDENT ALEXANDER, HOW WILL THE CURRENT ECONOMIC SITUATION AFFECT THE CSU NEXT YEAR AND INTO THE FUTURE? >> WELL, A NUMBER OF WAYS AND WE'VE BEEN GOING THROUGH THIS FOR QUITE SOME TIME. I MENTIONED REVENUES THAT BEING PROBABLY THE MOST IMPORTANT ISSUE THAT WE'RE DEALING WITH. THE GOOD NEWS IS THAT OUR ENDOWMENT LOST A LOT LESS MONEY THAN STAMFORD'S ENDOWMENT THIS YEAR. [LAUGHTER] THERE ARE ADVANTAGES TO HAVING A MUCH LOWER ENDOWMENT ACTUALLY. OTHER THINGS THAT I THINK HAVE PARTICULARLY RELEVANT -- PARTICULAR RELEVANCE TO OUR STUDENTS I THINK NATIONWIDE YOU'RE GOING TO SEE A CONTINUED PRESSURE ON FEES AND TUITION AND AS STATES DO NOT FUND WIDER ACCESS BUT WANT WIDER ACCESS FOR THE ECONOMIC REASONS OF HIGHER LEVELS OF HUMAN CAPITAL ATTAIN -- EDUCATIONAL ATTAINMENT THE BURDEN HAS CERTAINLY SHIFT -- THE BURDEN OF TAXATION HAS SHIFTED AND IT'S SHIFTING ON THE BACKS OF STUDENTS. THE FORTUNATE NATURE OF CALIFORNIA IS WE'RE STILL FIGHTING THE GOOD FIGHT IN TERMS OF FEES AND TUITION. WE'RE ONE OF THE LOWEST, IN FACT, OUR UNIVERSITY, THERE ARE ONLY FIVE OTHERS IN THE UNITED STATES OF 4,000 THAT CHARGE LESS THAN WE DO. WE'RE FIGHTING THE GOOD FIGHT. WE NEED MORE PEOPLE TO REALIZE THE INVESTMENT VALUE OF WHAT WE'RE HOPING TO ACCOMPLISH AND WHAT WE DO ACCOMPLISH EACH AND EVERY YEAR. THE STATE WE'RE IN THIS, IN OUR EARLIER DISCUSSIONS OF CSU, WE'RE LOOKING AT REALLY ABOUT A TWO YEAR RECOVERY OUT OF THIS, SIX MONTHS WAS QUITE OPTIMISTIC UNTIL WE START SEEING REVENUE PATTERNS START GENERATING. WHAT WE LOSE IN ALL THIS IS AS ENERGY COSTS GO UP, AS HEALTH CARE COSTS GO UP, AS SALARY ISSUES IMPACT OUR FACULTY AND STAFF VERY LITTLE DISCUSSION YOU HEAR IN THE LEGISLATIVE HALLS IN SACRAMENTO WITH REGARD TO INVESTMENT IN EDUCATION. IN FACT, I'VE BEEN QUITE DISAPPOINTED IN THE DEBATES AND THE CAMPAIGN TRAIL DURING THE LAST YEAR AND A HALF THAT ONE OF THE BIG CHALLENGES OF THIS IS THAT EDUCATION IS BECOME A BACKSEAT ISSUE -- BACKSEAT ISSUE OF SIGNIFICANCE, BEHIND AFGHANISTAN, BEHIND IRAQ, BEHIND HEALTHCARE, BEHIND SOCIAL SECURITY, BEHIND MEDICAID AND NOW BEHIND WALL STREET AND WE FIND VERY LITTLE ATTENTION TO THE THING THAT IS PERHAPS THE MOST FOUNDATIONAL ISSUE THAT WE DEAL WITH AS A SOCIETY AND 70 PERCENT OF EVERY STATE'S INVESTMENT -- 70 PERCENT OF EVERY STATE DOLLAR, STATE NATIONWIDE, GOES INTO EDUCATION BECAUSE IT IS SUCH A GOOD INVESTMENT THAT MAKES US VERY SUSCEPTIBLE TO THESE TURNS, IT MAKES US VERY SUSCEPTIBLE TO THESE ISSUES. THE GOOD NEWS IS THE FEDERAL LOAN SYSTEM THAT MANY OF OUR STUDENTS ARE CONTINGENT UPON TO GET THROUGH COLLEGE, TWO YEARS AGO THE -- THE WE WERE ABLE TO WORK A BILL THROUGH CONGRESS THAT PULLED $20 BILLION OUT OF THE BANKS THAT WAS NOTHING BUT PROFIT OVER THE NEXT FOUR YEARS. THE RECONCILIATION ACT WENT THROUGH TWO YEARS AGO. WHAT THAT DOES IS ESSENTIALLY DROPS DOWN, CAPS THE LOAN AMOUNT THAT, IF YOU'RE USING FEDERAL DIRECT STUDENT AID LOANS WHICH I HIGHLY ENCOURAGE BEFORE YOU EVER DROPOUT BECAUSE OF THE -- BECAUSE A PART-TIME JOB MAY SEEM MORE ATTRACTIVE AT THE TIME, TAKE ADVANTAGE OF THE FEDERAL DIRECT STUDENT AID LOAN PROGRAM. THOSE RATES WILL DROP TO THREE AND A HALF PERCENT BY THE YEAR 2012 AND ARE CONTINUALLY GOING DOWN. THEY HAVE INCOME CONTINGENT REPAYMENT PROGRAM THAT ARE ALSO EMBEDDED WITHIN THIS SYSTEM AND THOSE DOLLARS THAT ARE AVAILABLE FOR YOU TO GET THROUGH COLLEGE ARE THERE AND THEY'RE PROTECTED. THEY'RE NOT GOING TO FLUCTUATE WITH THE CREDIT MARKETS. THEY'RE NOT GOING TO FLUCTUATE WITH WHAT A BANK DECIDES TO DO BECAUSE THEY WANT HIGHER INTEREST RATES. NOW, IF YOU'RE RELYING ON PRIVATE LOANS TO GET THROUGH, I ENCOURAGE YOU TO BAIL OUT OF THE PRIVATE LOANS BECAUSE THOSE RATES CAN CHANGE ON YOU ON AN ANNUAL BASIS, THESE WILL NOT. THEY'RE PROTECTED BY THE DEPARTMENT OF EDUCATION AND WE'VE GOT ANOTHER BACKUP SYSTEM IN THE DEPARTMENT OF EDUCATION WHICH IS DIRECT LENDING WHICH OVER HALF OF AMERICAN HIGHER EDUCATION INSTITUTIONS ALREADY HAVE ADOPTED TO EVEN GET THE LENDERS, THE PRIVATE LENDERS, OUT OF THE MIDDLE OF THE DIRECT LOAN INDUSTRY WHICH IS WORTH $50 BILLION A YEAR. THESE STUDENTS NEED -- OUR STUDENTS NEED THIS TYPE OF ASSISTANCE, THESE ARE GOOD INVESTMENTS VERSUS BAD INVESTMENTS AND THERE IS A DEFINITE DIFFERENCE BETWEEN CREDIT CARD DEBT AND THEN STUDENT LOAN DEBT BECAUSE YOU'RE INVESTING IN YOURSELF, AND AS I POINTED OUT TO YOU EARLIER THAT'S STILL BRINGING YOU 12 TO 14 PERCENT RETURN RATE EVERY YEAR FOR THE REST OF YOUR LIFE. KNOW THE DIFFERENCE, WORK WITH THE UNIVERSITY WHETHER YOU'RE ON OUR CAMPUS OR OTHER CAMPUSES, MAKE SURE THAT YOU'RE UTILIZING WHAT'S AVAILABLE TO YOU. STUDENTS ARE IN A RELATIVELY PROTECTED ZONE HERE, THOSE THAT ARE MOVING ON INTO THE CAREER MARKET WHO ARE GRADUATING, I ENCOURAGE YOU TO KNOW YOUR FIELD WELL. OUR ENGINEERS THERE'S MORE JOBS THAN YOU NEED OUT THERE, OUR NURSES THERE ARE MORE JOBS THAN YOU NEED OUT THERE, OTHERS THAT ARE HEARING FROM OTHER GRADUATES THAT THE MARKETS ARE TIGHTENING AND THE UNEMPLOYMENT HAS HIT THOSE AREAS AND YOU'RE DECIDING ON WHETHER TO GO TO GRAD SCHOOL OR TO GO INTO FULL-TIME EMPLOYMENT, IT MIGHT BE A GOOD TIME TO CONSIDER GRAD SCHOOL A LITTLE MORE SERIOUSLY UNTIL YOU CAN WAIT THIS OUT FOR ONE OR TWO MORE YEARS. IT'S A GOOD -- BECAUSE THE RESOURCES ARE AVAILABLE FOR YOU TO GO TO GRAD SCHOOL, AND IT'S A GOOD TIME TO WAIT OUT A BAD ECONOMY BECAUSE THE INCOMES ARE COMING DOWN IN MANY FIELDS WHILE OTHERS ARE STILL IN SUCH HIGH DEMAND THAT THOSE JOBS ARE STILL THERE. KNOW YOUR FIELD, TALK TO YOUR PROFESSORS, TALK TO YOUR FACULTY ABOUT WHAT'S GOING ON IN THE MARKETPLACE, ARE THE GRADUATES THAT WENT BEFORE ME GETTING GOOD JOBS OR ARE THEY COMING BACK TO GRAD SCHOOL BECAUSE THAT MAY BE A GOOD INDICATION WHETHER YOU SHOULD GO ONTO GRAD SCHOOL OR NOT RIGHT AWAY. >> THANK YOU. [INAUDIBLE] AND NOW FOR ONE OF THE MOST INTERESTING PARTS OF OUR PROGRAM, THE QUESTIONS FROM YOU. WE SHOULD HAVE A COUPLE OF PEOPLE WANDERING AROUND, WE HAVE THEM WITH MICROPHONES AND I WANT TO SAY THAT WE'RE PARTICULARLY INTERESTED IN HEARING THOUGHTFUL QUESTIONS FROM BUSINESS STUDENTS WOULD BE OF PARTICULAR INTEREST -- WE'VE GOT ONE RIGHT HERE, SHEILA, IF YOU CAN GET TO HER. >> [INAUDIBLE] I UNDERSTAND THAT THE TOP FIGURE ON THE BAILOUT FROM THE SAVINGS AND LOANS SCANDAL UNDER CHARLES KEATING MANY YEARS AGO WAS $200 BILLION THAT FIGURE RAISES THE QUESTION AND THAT ACTUALLY IS THE QUESTION BUT WHAT KIND OF SAFEGUARDS WOULD YOU LIKE TO SEE PUT IN PLACE IN THE FUTURE TO STOP THE KINDS OF THINGS WE SEE HAPPENING GOING BACK BEFORE THAT AND ACTUALLY, OBVIOUSLY, SINCE? >> WHO'D LIKE TO TAKE THAT -- >> -- KEN? >> I'M NOT SURE I COULD REALLY WEIGH IN ON THAT ONE. >> I APOLOGIZE THE -- AS I -- I HAD A LITTLE HARD TIME HEARING IT BUT EVERYBODY -- ARE YOU TALKING ABOUT THE GREED THAT WAS PART OF THIS WHOLE THING? THERE IS PLENTY OF GREED TO GO AROUND, IT STARTED WITH THE BORROWERS WHO IN MANY CASES KNEW THEY WERE TAKING OUT LOANS THAT WERE WAY OVER THEIR HEAD WHEN THE INTEREST RATES INCREASED. THEY KNEW THEY DIDN'T HAVE THE DOWN PAYMENT, QUITE OFTEN THEY KNEW THAT THEY DIDN'T HAVE A JOB BUT THEY WERE TELLING PEOPLE THEY DID, SO THERE'S A CERTAIN ELEMENT IN THE SUBPRIME MESS OF THIS GREED ON THE BORROWERS PART. THE MORTGAGE BROKERS KNEW WHAT THEY WERE DOING AND THEY WERE GENERATING THESE LOANS, THEY HAD NO SKIN IN THE GAME, THEY WERE JUST PACKAGED UP, MAKE THE LOAN, HAND IT OFF TO AN INVESTMENT BANK IN SOME SORT AND -- OR TO THEIR COMPANY WHO WOULD PACKAGED THEM UP WITH 1,000 OTHERS AND SELL IT TO WALL STREET, AND THEY'D GO OUT AND MIX AND MATCH THESE THINGS AND GET AN S&P RATING OR ONE OF THE OTHER RATINGS THAT SAID THIS WAS, YOU KNOW, THIS WAS AN A RATED SECURITY AND SO EVERYBODY, YOU KNOW, THE INVESTORS DIDN'T DO THEIR HOMEWORK, THEY WERE LAZY AND -- AND SEARCHING FOR YOU LIKE CRAZY SO THEY WERE GREEDY. SO, HOW DO YOU LEGISLATE AGAINST GREED; FORGET ABOUT IT. WHAT YOU DO, HOWEVER, IS YOU -- WE NEED TO UNSCRAMBLE THIS REGULATORY SYSTEM. THERE WAS A GREAT ARTICLE IN THE NEW YORK TIMES SUNDAY THAT HAD WHAT LOOKED LIKE A RUBIK'S CUBE AND THEY WERE TRYING TO SAY WHO ALL THE REGULATORS WERE AND I CAN TELL YOU FROM FIRSTHAND EXPERIENCE THAT'S A FACT. WE NEED TO UNSCRAMBLE THAT. GET ONE GROUP IN THERE THAT KNOWS WHAT THEY'RE DOING. WE JUST HAD AN FDIC EXAM, I CAN TELL YOU WE PASSED WITH FLYING COLORS, IT WAS FABULOUS, THESE WERE GOOD PEOPLE, THEY UNDERSTOOD THEIR STUFF AND -- BUT THEY'RE ALWAYS GOING TO BE BEHIND THE CURVE FROM FINANCIAL INNOVATION. SO IF -- CAN YOU EVER -- WE TRIED WITH SARBANES-OXLEY TO GET RID OF CORPORATE GREED AND ACCOUNTING SHENANIGANS AND ALL THAT KIND OF THING THAT'S A BUST. IT SURE DIDN'T PROTECT US FROM THIS THING. SO, WHAT WE NEED TO DO IS NOT ABANDON THE CAPITAL SYSTEM, IT IS THE MESSIEST SYSTEM ON EARTH, IT IS, BUT IN TERMS OF LONG-TERM PERSONAL GROWTH AND HAPPINESS PARTICULARLY WITH THE AMERICAN CULTURE IT'S MUCH BETTER THAN A CENTRALIZED PLANNING THING. CENTRALIZED FINANCIAL PLANNING IS VERY NEAT AND TIDY, YOU CAN GET THINGS DONE IN NO TIME BUT THERE'S NO INCENTIVE THERE, THERE'S NO REAL LIFE THERE. SO, IT'S A TERRIBLE ANSWER BUT -- SO BUT WE NEED TO GET BACK TO BASICS WHICH EVERYBODY IS GOING TO DO IN SPADES NOW, AND WE NEED TO HAVE ADEQUATE OVERSIGHT AS THIS THING BEGINS TO DEVOLVE AGAIN. WALL STREET AS WE KNEW IT IS GONE, THE LAST TWO BIG INVESTMENT BANKS ARE NOW COMMERCIAL BANKS. THE HEDGE FUNDS WILL PROBABLY TAKE THEIR PLACE IN TERMS OF FINANCIAL INNOVATION BUT THEY'RE PRIVATELY OWNED, AND SO IT'S ALREADY EVOLVING BACK TO SOMETHING THAT WE KIND OF UNDERSTAND. AFTER THIS BAILOUT DOES WHATEVER IT'S SUPPOSED TO DO AND I PREDICT IT IS GOING TO -- ONCE THE BIDS START HAPPENING FOR THESE ASSETS THAT NO ONE IS BIDDING FOR, THERE'S TREMENDOUS AMOUNT OF LIQUIDITY THAT'S SITTING ON THE SIDELINES. YOU AND I WILL START PULLING MONEY OUT OF OUR MATTRESS, FIGURATIVELY, AND I THINK THIS COULD TAKE KIND OF A RAPID -- RAPIDLY LIQUIFY SOME OF THESE ASSETS AND THEN WE'RE GOING TO BE FACING AN OLD FASHIONED RECESSION WHICH I THINK IS [INAUDIBLE] IT DOESN'T REALLY ANSWER YOUR QUESTION BUT IT'S THE BEST I CAN DO. >> OKAY. WELL, LOTS OF PEOPLE ON THEIR WAY IN BUT WE'VE GOT LOTS MORE QUESTIONS AND QUICKLY. >> TWO PARTS FOR SAFEGUARDS -- IS THIS ON? >> YEAH. >> WHAT A LOT OF US TALKED ABOUT IS AT THE TIME THE LOANS ORIGINATED, THE MORTGAGE BROKERS GET A FEE SO THEY HAVE AN INCENTIVE TO WRITE EVERY CONTRACT THAT THEY CAN. THE LENDING STANDARDS WERE SUCH THERE WERE THINGS CALLED NO INCOME VERIFICATION LOANS. YOU SAY YOU HAVE INCOME, THEY WRITE IT DOWN, YOU GET A LOAN. SO TIGHTEN THE LENDING STANDARDS THERE AND THEN, AFTER THE LOANS WERE PACKAGED AND SOLD OFF, THERE NEEDS -- IT'S INTO AN UNREGULATED MARKET FOR A FINANCIAL DERIVATIVES. BANKS ARE REGULATED, FIRMS ARE REGULATED, THEY HAVE TO FOLLOW SARBANES-OXLEY, SO MORE REGULATION ON THE DERIVATIVES MARKETS, MORE REGULATION ON LENDING STANDARDS, MORE REGULATION ON THE DERIVATIVES MARKETS. >> OKAY. WE'VE GOT ONE RIGHT HERE. >> HELLO. MY NAME IS HILLY BRANDT [PHONETIC]. I AM A GRADUATE STUDENT IN THE ECONOMICS DEPARTMENT HERE AT CAL STATE LONG BEACH. I KNOW DR. GROBAR VERY WELL. MY QUESTION, WE TALKED ABOUT THE LIQUIDITY CRISIS AND WE'VE ALSO TALKED ABOUT STUDENT LOANS AND HOW NECESSARY THEY ARE. PRESIDENT ALEXANDER YOU MENTIONED FOR THOSE PEOPLE WHO HAVE PRIVATE LOANS MAYBE THEY SHOULD, YOU KNOW, GET OUT OF THOSE AND GO INTO PUBLIC LOANS. I HAVE A NUMBER OF FRIENDS IN LAW SCHOOL WHO ARE ABSOLUTELY -- THEY RELY ON PRIVATE LOANS ESPECIALLY. FIRST OF ALL, BECAUSE OF THE LIQUIDITY PROBLEM, IS THE MONEY NECESSARILY GOING TO BE THERE FOR THESE STUDENT LOANS AND ALSO FOR THE PEOPLE WHO CAN'T GET OUT OF THEM, IS THERE GOING TO BE SOME SORT OF PROBLEM THAT THEY NEED TO WORRY ABOUT. >> THEY'RE IN GREATER JEOPARDY WITHIN THE PRIVATE LOAN BECAUSE MANY OF THE SAME BANKS THAT THEY'RE GETTING PRIVATE LOANS ARE GETTING OUT OF THE BUSINESS BECAUSE OF THE 20 BILLION THAT WAS TAKEN OUT IN THE RECONCILIATION ACT. IT'S NOT AS LUCRATIVE FOR BANKS AND SAVINGS -- LENDERS TO BE IN THE STUDENT LOAN MARKET ANYMORE, SO IT WOULDN'T SURPRISE ME TO SEE MANY MORE OF THESE BANKS FOLD AND MOVE OUT. NOW, RECENT LEGISLATION PROTECTED SOME OF THOSE. I THINK THE ISSUES STUDENTS REALLY NEED TO CAREFULLY WEIGH, WHERE THEY'RE GOING TO LAW SCHOOL, WHAT TYPES OF COSTS THEY'RE INCURRING. MANY INSTITUTIONS WILL TELL YOU UPFRONT THEY WILL TELL YOU THAT DON'T WORRY, IT'LL BE WORTH IT IF YOU COME HERE. PAY WHAT WE ASK YOU TO PAY. AND WE'VE BEEN TRYING TO MAKE THESE -- THESE TYPE OF STUDENT LOAN ISSUES TRANSPARENT AND GETTING UNIVERSITIES TO REPORT THEM ALL OVER THE UNITED STATES OF WHICH WE REPORT OURS ON OUR HOMEPAGE; WHAT THE AVERAGE UNDERGRADUATE GRADUATES WITH AND WHAT PERCENTAGE OF OUR STUDENT BODY. WE ACTUALLY HAVE PUSHED TO GET IT LEGISLATED AT THE FEDERAL GOVERNMENT LEVEL. NOW, A LOT OF IT IS CHOICE TOO, CHOICE TO GO INTO SIGNIFICANT DEBT BECAUSE I SUSPECT, IF THEY ARE RELYING VERY HEAVILY ON PRIVATE LOANS TO GET THEM THROUGH LAW SCHOOL, THAT THEY'RE GOING TO VERY EXPENSIVE PLACES; IS THAT RIGHT? >> YEAH [INAUDIBLE] >> YEAH. DON'T BUY AT THE STICKER PRICES, HIGHER EDUCATION HAS NOT BEEN TRANSPARENT, INSTITUTIONS HAVE BEEN MANIPULATING THEIR PRICING ON STUDENTS FOR THE LAST 25 YEARS AND STUDENTS HAVE BEEN SUCKERED INTO MANY INSTITUTIONS BECAUSE THEY HAVE BEEN LED TO BELIEVE BECAUSE THEY CHARGE A LOT THEY MUST BE GOOD. THIS IS THE CHIVAS REGAL AFFECT OF HIGHER EDUCATION. THE BOTTLE LOOKS GOOD BUT IT TASTES THE SAME ON THE INSIDE. THEIR EARNINGS CAPACITY, PAY CLOSE ATTENTION, WE'RE PUSHING TO GET EARNINGS CAPACITY, I SUSPECT THAT THE EARNINGS CAPACITY OF A GRADUATE OF A HIGH COST INSTITUTION, ALLEN KRUEGER'S WORK AT PRINCETON AND OTHERS ARE POINTING OUT THAT THE EARNINGS CAPACITY OF A STUDENT WHO GRADUATES FROM LOW COST INSTITUTION IS VERY LITTLE DIFFERENT -- VERY LITTLE DIFFERENCE THEN THOSE THAT ARE GETTING SUCKERED INTO PAYING A FORTUNE TO GET HIGH COST INSTITUTION GRADUATE DEGREES AND OTHER THINGS. PAY CLOSE ATTENTION TO THE MARKET, PAY CLOSE ATTENTION TO THE DETAILS AND THE ECONOMIC DATA THAT IS COMING OUT AND FIND OUT FROM GRADUATES WAS IT WORTH IT WHEN THEY'RE PAYING BACK $100 THOUSAND WORTH OF DEBT AND THEN THEY SO CHOOSE TO FIND A SPOUSE THAT WENT TO THAT INSTITUTION WHO'S ALSO $100,000 IN DEBT. [LAUGHTER] >> OKAY. ANOTHER QUESTION, WE'VE GOT ONE BACK HERE. >> I CAN TALK. >> OKAY. >> YES, ACTUALLY I UNDERSTAND WHY WE ARE SO ANGRY BECAUSE I HAVE THE SAME FRUSTRATION AND I ASSUME THAT WE ARE SOME OF THE MORE INTELLIGENT PEOPLE AND, IF WE DON'T UNDERSTAND WHAT'S GOING ON, I UNDERSTAND WHY THE AVERAGE PERSON DOESN'T UNDERSTAND WHAT'S GOING ON. I HAVE A COUPLE OF QUESTIONS AND MAYBE THE PANEL CAN ANSWER ME. NUMBER ONE, IF WE PAID OUT $700 BILLION TO THIS BANK, WAS IT JUST BECAUSE WE WANTED TO MAKE A CREDIT MARKET -- [INAUDIBLE] SO WHAT HAPPENED, THEY GOT THE MONEY, THEY WANT TO HAVE THE BAILOUT AND THEN THEY DON'T WANT TO, YOU KNOW, TO LOAN THEIR MONEY AGAIN? SO BASICALLY WHAT WE DID WE JUST PAID OFF THEIR OWN BAD DEBT AND NOT, YOU KNOW, THEY DID NOT PUT THE MONEY BACK INTO THE MARKET. >> OKAY. >> AND TWO, LET ME ALSO ASK MY SECOND QUESTION AND THEN YOU CAN ANSWER, IF WE ARE GOING TO PAY $700 BILLION DOLLARS WOULD IT NOT MAKE MORE, YOU KNOW, SENSE IF YOU PAID THEM A LITTLE BIT JUST TO MAKE SURE THAT THEY HAVE ENOUGH, YOU KNOW, SO THEY CAN GO ON FOR A FEW MONTHS AND CLEAN UP THEIR ACT AND PUT THE REST OF THE MONEY BACK INTO WHERE IT'S REALLY -- THE AVERAGE PERSON, YOU KNOW, CAN BENEFIT FROM IT LIKE EDUCATION LIKE RENEWABLE ENERGY AND ALL THOSE OF THOSE ACTIVITIES. >> THANK YOU. DR. GROBAR, I THINK YOU WANTED TO GO -- >> YEAH, WELL I THINK I CAN ADDRESS SOME OF IT, THIS TROUBLED ASSETS RELIEF PROGRAM AS IT HAS BEEN DESIGNED IS REALLY DESIGNED TO GET SOME OF THESE ASSETS OFF THE BOOKS OF FINANCIAL INSTITUTIONS. AND YOU ARE RIGHT IN THE SENSE THAT THERE'S NO GUARANTEE THAT THESE FINANCIAL INSTITUTIONS ARE GOING TO LEND BUT IT IS FELT THAT THAT'S GOING TO BE REALLY IMPORTANT STEP IN, YOU KNOW, RESTORING NORMALCY TO FINANCIAL MARKETS AND REDUCING SORT OF THIS SUSPICION THAT THIS FINANCIAL INSTITUTIONS HAVE OF EACH OTHER'S BALANCE SHEETS. I SHOULD ALSO MENTION THAT THE COST OF THIS PROGRAM IS GOING TO BE DEFINITELY WELL BELOW THE $800 BILLION THAT'S MENTIONED. BASICALLY WHAT THEY'RE DOING IS THEY'RE GOING TO HOLD ONTO THESE ASSETS MANY OF WHICH ARE ACTUALLY PERFORMING MUCH BETTER THAN PEOPLE ANTICIPATE AND, ONCE SORT OF THE DUST CLEARS IN THIS MARKET AND PEOPLE REALIZE THAT, THESE ASSETS ARE GOING TO GO UP IN VALUE, THE TREASURY IS GOING TO BE ABLE TO RESELL THEM AT A HIGHER PRICE. THE ULTIMATE COST TO TAXPAYERS IS REALLY UNKNOWN BUT I THINK THERE IS AN OPTIMISTIC SCENARIO THAT THIS COULD END UP COSTING TAXPAYERS VERY LITTLE. ON THE ONE HAND THE TREASURY CAN BORROW FOR, AS YOU MENTION, ALMOST NOTHING THESE DAYS; IT'S NOT COSTING US TO RAISE FUNDS THROUGH THE TREASURY. IF WE END UP BUYING ASSETS THAT THEN GO UP IN VALUE, IT DOESN'T COST US VERY MUCH TO HOLD THEM, THE NET COST TO THE TAXPAYER MAY BE LOW BUT, OF COURSE, IT IS A RISK AND THERE ARE NO GUARANTEES. I WILL TELL YOU THAT THIS PROGRAM HAS A COUPLE OF NEAR PRECEDENTS, THE RESOLUTION TRUST CORPORATION OF THE EARLY 1990'S AND ALSO THE HOMEOWNER'S LOAN CORPORATION OF THE 1930'S WERE SIMILAR TYPES OF PROGRAMS. THE RESOLUTION TRUST CORPORATION DID COST TAXPAYERS IT'S ESTIMATED ABOUT $125 BILLION BUT THAT WAS LESS THAN THE 400 BILLION THAT WAS SPENT ON THE PROGRAM AND THE PROGRAM IN THE 1930'S WAS LIQUIDATED IN 1951 WITH A NET PROFIT RETURNED $14 MILLION BACK TO THE TREASURY. SO, WE DON'T KNOW, YOU KNOW, WHAT THE NET COST WILL BE BUT I AM CONFIDENT THAT IT WILL BE A LOT LESS THEN THE $800 BILLION. >> THANK YOU. WE HAVE A QUESTION RIGHT HERE. >> [INAUDIBLE] OKAY. WITH THE -- DURING THE GREAT DEPRESSION YOU SAID THE MONEY SUPPLY WAS -- IT WAS LIKE DECREASED. RIGHT NOW IT SEEMS -- KIND OF SEEMS LIKE THE OPPOSITE AND IT SEEMS LIKE WITH THE FED LIKE -- LIKE PUTTING IN ALL THIS LIQUIDITY AND ALSO WITH LIKE THE BAILOUT ADDING LIKE $700 BILLION INTO LIKE INTO THIS SYSTEM ALREADY AND THEN ALSO WITH ALL THE COUNTRIES LIKE [INAUDIBLE] THE DOLLAR DON'T YOU SEE LIKE A POSSIBLE LIKE HYPERINFLATIONARY DEPRESSION KIND OF [INAUDIBLE] >> MIKE? >> WELL, WE'RE ALL KENSIANS NOW. [LAUGHTER] SERIOUSLY KENSIAN THEORY CAME OUT AND SHOWED THAT THE GOVERNMENT DONE THE WRONG THING EXACTLY AND BILL FRIEDMAN SORT OF GOT FAMOUS WITH HIS WIFE FOR WRITING A BOOK ABOUT THE GREAT MISTAKES OF THE GREAT DEPRESSION. THE FEDERAL RESERVE CHAIRMAN, BEN BERNANKE, SAYS THAT RIGHT NOW BECAUSE OF FALLING COMMODITY PRICES, FALLING OIL PRICES THAT THE RISK OF INFLATIONARY PRESSURES ARE -- ARE NOT GREAT SO THIS IS A GOOD TIME -- A GOOD POINT IN TIME TO BE ABLE TO SPEND THIS MONEY. BUT I THINK WHAT LISA SAID REALLY RESONATES TRUE, THIS IS LIKE AN INVESTMENT OF $700 BILLION AND THAT MONEY WILL BE TAKEN OUT WHENEVER THOSE ASSETS ARE SOLD, SO I DON'T THINK IT'S GOING TO BE INFLATIONARY. >> JUST -- >> SURE. >> WELL, FIRST THE $800 BILLION IS COMING FROM THE TREASURY SO THAT HAS NO IMPLICATION FOR THE MONEY SUPPLY, IT'S MONEY THAT'S GOING TO BE PROBABLY BORROWED FOR THE U.S. PUBLIC. WHAT DOES HAVE POTENTIAL INFLATIONARY IMPACT ARE THE ACTIONS OF THE FED BECAUSE BASICALLY THE FED IS CREATING MONEY AND USING IT TO BUY UP, FOR EXAMPLE, ASSETS IN THE COMMERCIAL PAPER MARKET AND THINGS LIKE THAT. THERE IS A -- I -- I WOULD ADMIT THERE IS A DEFINITE POTENTIAL FOR HIGH INFLATION TO BE THE RESULT OF THESE ACTIONS AND OCCUR IN THE FUTURE. IT'S NOT GOING TO OCCUR IN THE NEAR TERM, THERE'S TOO MUCH DEFLATIONARY PRESSURE BUT THE FED HAS A LOT OF INSTRUMENTS TO PRETTY MUCH FINELY TUNE THIS LIQUIDITY, IF THEY'RE SMART AND I BELIEVE THEY'RE VERY SMART, WHAT THEY'RE GOING TO DO IS, WHEN THE ECONOMY STARTS TO RETURN BACK TO NORMAL, THEY'RE GOING TO TAKE THAT LIQUIDITY BACK OUT OF THE SYSTEM AND DO IT FAIRLY RAPIDLY AND, IF THEY ACHIEVE THAT RESULT, WE CAN AVOID A HIGH RATE OF INFLATION RESULTING FROM THIS PERIOD BUT I THINK IT IS A RISK. >> THANK YOU. QUESTION RIGHT HERE. >> HI, MY NAME IS ALLISON CLARK. I'M AN ENVIRONMENTAL SCIENCE AND POLICY MAJOR, AND I'M REALLY CONFUSED WITH THE TERM COMMERCIAL PAPER MARKET AND REALLY UNSURE ABOUT THE INCENTIVE FOR THE FEDERAL GOVERNMENT GETTING IN ON THIS. >> WHO WANTS TO TAKE THAT ONE? >> I CAN START IT. COMMERCIAL PAPER IS BASICALLY SHORT-TERM DEBT OBLIGATIONS THAT CAN BE TRADED, SO THEY'RE AN ASSET, AND THE REASON THE GOVERNMENT IS GETTING INTO THIS PARTICULAR SITUATION, AT LEAST FROM OUR PERSPECTIVE, IS AND WE'VE ALLUDED TO THIS A COUPLE OF TIMES THROUGHOUT THE DISCUSSION THEY CAN HOLD THESE ASSETS WHERE THEY'RE ACTUALLY COLLECTING ABOUT 90 PERCENT OF THE MONEY THAT THEY EXPECTED TO COLLECT WHEN THEY PURCHASED THE SECURITY BUT THEY'RE NOT SUBJECT TO THE ACCOUNTING RULES THAT'S REALLY THE BASIC THING IS THAT GIVES THIS THING A CHANCE TO WORK THAT'S THE BASIC FACTOR THAT GIVES THIS THING A CHANCE TO WORK. THEY CAN BUY ASSETS PRESUMABLY AT A DISCOUNT AND I CONCUR THAT THEY'RE PROBABLY NOT GOING TO SPEND THE WHOLE AMOUNT ALLOCATED TO IT BECAUSE YOU'RE NOT GOING TO PAY BOOK VALUE OR PAR VALUE TO THESE THINGS. THEY'RE GOING TO BUY THEM AT A DISCOUNT, BUT THEY'RE WORTH A LOT MORE, SO THAT'S A SHORT ANSWER. ANYBODY ELSE WANT TO? >> YEAH. GOING BACK TO WHAT REALLY THE DEFINITION OF COMMERCIAL PAPER, THE OLD DAYS 1980 [LAUGHTER] YOU KNOW, COMPANIES USED TO GO TO BANKS TO BORROW, THEY WERE THE LENDERS. AND THEN THROUGH FINANCIAL INNOVATION AND A LOT OF COMPETITION IN THE GLOBAL ECONOMY KIND OF [INAUDIBLE] START UP COMPANIES FOUND THEMSELVES WITH DEPOSITS OR A LOT OF CASH AND THEY WERE HAVING -- THEY WOULD DEPOSIT THE CASH IN THE BANK AND THE BANK WOULD TAKE IT AND LEND IT TO SOMEBODY ELSE AND THEY'D MAKE THE PROFIT. SO WHAT HAPPENS IS THAT SOME SMART FOLKS OUT THERE SAID WELL, I'LL JUST ARRANGE TO -- FOR BERKSHIRE HATHAWAY TO TAKE -- I'LL ARRANGE FOR YOU, BERKSHIRE HATHAWAY, TO LOAN YOU MONEY TO WHATEVER THEY NEED FOR OVERNIGHT MONEY AT GE, SO THAT COMPLETELY CUT THE BANKS OUT OF THE DEAL AND THAT'S HOW COMMERCIAL PAPER -- THAT'S A FUNCTION OF COMMERCIAL PAPER. IT'S ONE DAY TO 270 DAYS, TECHNICALLY, VERY SHORT-TERM IN NATURE TYPICALLY IT RUNS ONE TO 14 DAYS SO BASICALLY IT'S, IF YOU'RE RUNNING A BUSINESS YOU HAVE TO MAKE PAYROLL FRIDAY YOU KNOW YOU HAVE A RECEIVABLE COMING IN NEXT WEEK, YOU'LL BORROW THIS WEEK, MAKE YOUR PAYROLL AND THEN PAY THE BORROWINGS BACK. YOU DO THAT WITH COMMERCIAL PAPER, YOU JUST PAY BERKSHIRE HATHAWAY BACK INSTEAD OF THE BANK. NOW, WHY ARE THEY BUYING THIS? BECAUSE COMPANIES WEREN'T LOANING ANY MONEY TO EACH OTHER AT ALL, THE MAGNITUDE OF THE COMMERCIAL PAPER MARKET WAS LARGER THAN THE COMMERCIAL BANKS WOULD BE ABLE TO STEP IN AND TAKE AND SO THIS ACTUALLY FREES UP THEN THE MONEY FLOWING ON A DAY-TO-DAY BASIS BETWEEN THE COMPANIES THAT'S HOW TIGHT THIS GOT AND, IF YOU CAN'T MAKE PAYROLL AS A COMPANY, YOU'RE OUT OF BUSINESS AND SO THAT, I HOPE THAT KIND OF SIMPLIFIES THAT A LITTLE BIT. >> WE HAVE A QUESTION BACK THERE. >> I GOT A COUPLE OF QUESTIONS HERE, ONE IS KIND OF BASIC, IN ECONOMICS THERE HAS BEEN A GREAT DEAL OF CONTROVERSIES OVER THE EFFECTIVENESS OF MONEY -- MONEY -- MONEY SAFE POLICY AND SOME HAVE SUGGESTED THE [INAUDIBLE] THAT THE FEDERAL RESERVE SHOULD PAD THE RATE OF GROWTH IN MONEY SUPPLY AT THE RATE OF GROWTH OF PRODUCTIVITY IN THE COUNTRY. NOW, AT THIS TIME BY ALLOWING THE DEPARTMENT OF TREASURY TO HANDLE THE BAILOUT PLAN, HAVEN'T WE REALLY CREATED ANOTHER GOVERNMENT BUREAUCRATS, ANOTHER AGENCY THAT COMPETES WITH THE FEDERAL RESERVE BANK? NOW, I FEEL LIKE WE HAVE TWO MONETARY POLICY INSTITUTIONS, ONE IS FEDERAL RESERVE AND THE OTHER ONE IS DEPARTMENT OF TREASURY AND I LIKE TO KNOW FROM THE PANELISTS HERE TO SEE IF THIS IS THE DIRECTION THAT THIS COUNTRY IS GOING, THAT'S NUMBER ONE. NUMBER TWO, WHY DOES THE GOVERNMENT HAVE TO COME IN WITH $700 BILLION? FIRST OF ALL THIS COUNTRY HAS 350 MILLION PEOPLE, EACH ONE OF US COULD HAVE RECEIVED $20,000 EXTRA MONEY AND WITH THE $20,000 WE COULD HAVE DONE A WHOLE BUNCH OF OTHER THINGS. IN FACT, GOVERNMENT ALL THE GOVERNMENT HAD TO DO WAS COME UP WITH A GUARANTEE TO [INAUDIBLE] THEREBY INCREASING THE LIQUIDITY. IN OTHER WORDS, THE REASON WHY THE THIS PAPERS NOT BEING LEGAL IS BECAUSE THESE PAPERS WERE PERCEIVED AS VERY RISKY PAPER, NOBODY WANTED TO BUY, WHY WOULD THE GOVERNMENT COME UP WITH -- >> THIS IS A QUESTION NOT A SPEAKING -- >> -- MUCH CHEAPER. >> -- SO IF SOMEONE WOULD TAKE THAT QUICKLY BECAUSE WE'RE RUNNING OUT OF TIME, LISA? >> I'LL TAKE PART ONE. A COUPLE THINGS, FIRST JUST TO EMPHASIZE AGAIN THESE ACTIONS BY THE TREASURY, THE BAILOUT PLAN, WILL HAVE NO IMPLICATION FOR THE MONEY SUPPLY BECAUSE THE TREASURY CANNOT CREATE MONEY, THE ONLY ENTITY THAT CAN CREATE MONEY IS THE FEDERAL RESERVE. THE TREASURY WILL IMPLEMENT THE BAILOUT PLAN THROUGH BORROWING AND THAT HAS NO IMPLICATION FOR THE MONEY SUPPLY. ON THE FIRST PART OF THE FIRST QUESTION, THE EFFECTIVENESS OF THE MONETARY POLICY, THERE HAS BEEN A RAGING DEBATE WITHIN MACROECONOMICS ABOUT THE ROLE OF THE FED, THE APPROPRIATE ROLE OF THE FED, AND ON ONE SIDE OF THE DEBATE HAVE BEEN ECONOMISTS WHO HAVE SAID THE FED SHOULD TAKE A VERY NONINTERVENTIONIST PASSIVE APPROACH AND INCREASE THE MONEY SUPPLY AT A STEADY RATE AND THAT'S THE BEST -- THAT'S GOING TO GIVE US THE BEST OUTCOME IN TERMS OF ECONOMIC STABILITY. ON THE OTHER SIDE HAVE BEEN THE MORE, I GUESS YOU MIGHT SAY KENSIAN OR ACTIVIST APPROACH. WE'RE CLEARLY SEEING A KENSIAN, ACTIVIST, APPROACH TO MONETARY POLICY. IN MY OPINION I THINK IT'S ABSOLUTELY THE RIGHT APPROACH. I THINK, IF WE WERE TO MAINTAIN -- TRY TO MAINTAIN A STABLE MONEY SUPPLY, WE WOULD END UP WITH A HUGE RECESSION AND DEFLATION WHICH IS NOT THE OBJECTIVE OF THE FED. THE OBJECTIVE OF THE FED IS TO KEEP THE PRICE LEVEL STABLE. >> THANK YOU. WE'LL TAKE ONE MORE QUICK QUESTION AND THEN WE WILL -- >> I'M PROFESSOR [INAUDIBLE] ELECTRICAL ENGINEER BUT I WILL DARE TALK ECONOMICS FOR A LITTLE WHILE. >> BRIEFLY PLEASE. >> SURE, VERY BRIEF. I THINK CORE OF THE PROBLEM IS THAT THE BUSINESSES AND THE BANKS ARE NOT REALISTIC IN DEALING WITH THE ACTUAL NUMBERS AND THE ACTUAL CAPABILITIES OF THE PEOPLE BECAUSE ON MOST EXTREMES THE ONES WHO WANT TO BUY HOMES ARE OVER REPRESENTED SOMETIMES IN TERMS OF THEIR CAPABILITIES, IN FACT, THEY ARE NOT ABLE TO BUY HOMES BUT THEY PRESENT FAKE INFORMATION SO THAT THEY QUALIFY. ON THE OTHER HAND THERE IS -- >> CAN YOU GET TO THE QUESTION, PLEASE. >> YES, I AM GOING TO GET TO THAT. THE OTHER SIDE OF THE STORY IS THAT THE BOOK VALUE OF SOME OF THE HOUSES IS ZERO WHEN, IN FACT, IT HAS A REAL VALUE SO THERE IS A MISREPRESENTATION ON BOTH EXTREMES. MY POINT IS THAT WHOLE THE CRISIS INDICATES THAT THE 100 PERCENT CAPITALISM DOESN'T WORK. YOU HAVE TO HAVE SOME KIND OF GOVERNMENT INTERVENTION SO THAT THIS THING GETS REGULATED. THANK YOU VERY MUCH. [LAUGHTER] >> THAT SOUNDED LIKE A SPEECH. >> WELL, I'M LOOKING FOR COMMENTS BY THE HONORABLE COMMITTEE FOR WHAT I PROPOSE, A GOVERNMENT INTERVENTION. >> DOES ANYONE WANT TO RESPOND TO THAT AS IF IT WERE A QUESTION? >> I THINK I TALKED ABOUT [INAUDIBLE] >> LET'S TAKE ONE MORE QUESTION. THIS GENTLEMAN HAD HIS HAND UP PATIENTLY, WE'LL TAKE HIS AS THE LAST QUESTION. >> HI, GOOD AFTERNOON. I'M JASON [INAUDIBLE] I'M A GRAD STUDENT IN HEALTHCARE ADMINISTRATION. MY QUESTION, YOU KNOW, WE TALK ABOUT KEEPING CAPITAL INVESTMENT BUT YOU ALSO DISCUSSED THE DECREASING EMPLOYMENT AS WELL AS EMPLOYMENT PAYROLL, HOW WILL THIS TREND ESSENTIALLY EFFECT THE JOB MARKET ASIDE FOR THE NEED FOR RNS AND ENGINEERS AS YOU MENTIONED IN THE SHORT AND LONG-TERM? >> IS THAT THE -- >> I'LL TAKE IT. >> LISA. >> YOU KNOW, THE NEAR TERM OUTLOOK FOR THE JOB MARKET IS DEFINITELY DOWN. THERE ARE CERTAIN BRIGHT SECTORS OF THE ECONOMY, YOU MENTIONED HEALTHCARE AND THAT IS ONE OF THE FEW SECTORS THAT I THINK IS GOING TO CONTINUE TO ADD JOBS IN THE NEAR TERM BUT, YOU KNOW, RECESSIONS ARE SHORT-TERM EVENTS AND I THINK AS STUDENTS, I MEAN, THE BEST THING -- ADVICE I CAN GIVE IS YOU'RE PLANNING A CAREER FOR YOUR LIFETIME NOT THE NEXT TWO OR THREE YEARS. YOU WANT A JOB THAT'S GOING TO STIMULATE AND EXCITE YOU AND TO GET INTO SOMETHING THAT YOU ARE GOING TO FIND FULFILLING FOR A LIFETIME, SO I WOULD NOT BE TOO DISCOURAGED BY THE NEAR-TERM, YOU KNOW, UPS AND DOWNS OF THE ECONOMY. IF YOU WANT TO BECOME A NURSE, HEY, GREAT AND IT'S -- JUST ABOUT ANYTIME IS A GREAT TIME TO BECOME A NURSE BUT, IF YOU HAVE YOUR SIGHTS SET ON ANOTHER CAREER, I WOULD ENCOURAGE YOU TO PURSUE THOSE INTERESTS AND ALSO, YOU KNOW, GRADUATE SCHOOL IS, YOU KNOW, IF THE OPPORTUNITY COSTS IS LOW OF YOUR TIME MEANING YOU MIGHT BE UNEMPLOYED, IT'S NOT A BAD OUTCOME. I, MYSELF, WENT TO GRADUATE SCHOOL, I WAS CLASS OF 1982, BIG RECESSION. >> I'M A REAL LIFE EXAMPLE OF WHAT HAPPENS WHEN YOU GRADUATE INTO A RECESSION THAT'S WHY I WENT TO GRAD SCHOOL. [LAUGHTER] SO THINGS WERE SO DARK THEN AND I'LL TELL YOU SOMETHING THIS IS THE BEST DEAL IN TOWN, SPEND WHAT YOU SPEND TO GET THIS EDUCATION [INAUDIBLE] BECAUSE THERE IS NO INVESTMENT YOU'RE GOING TO MAKE IN YOUR WHOLE LIFETIME THAT'S GOING TO BE AS GOOD AS THIS ONE. SO, IF YOU FIND YOURSELF LOOKING INTO A JOB MARKET THAT'S KIND OF TOUGH, GO TO GRAD SCHOOL, THE PRICE IS RIGHT, THREE AND A HALF PERCENT YOU'RE BORROWING ON TREASURY RATES FOR CRYING OUT LOUD. SO JUST GO FOR IT BECAUSE AND STUDY THIS WHOLE RECESSION THIS WHOLE THING THAT'S GOING ON RIGHT NOW BECAUSE YOU'LL BENEFIT FROM IT DOWN THE ROAD AS AN INVESTOR OR AS A BUSINESS PERSON OR WHATEVER. >> JOIN ME IN THANKING OUR EXCELLENT -- [ APPLAUSE ]

Contents

History

The legislation had its origin in early 2008, Secretary of the Treasury Henry Paulson directed two of his aides, Neel Kashkari and Phillip Swagel, to write a plan to recapitalize the U.S. financial system in case of total collapse. The plan, which was also presented to Federal Reserve Chairman Ben Bernanke, called for the U.S. government to purchase about $500 billion in distressed assets from financial institutions.[3]

The original proposal was submitted to the United States House of Representatives, with the purpose of purchasing bad assets, reducing uncertainty regarding the worth of the remaining assets, and restoring confidence in the credit markets. The bill was then expanded and put forth as an amendment to H.R. 3997.[4] The amendment was rejected via a vote of the House of Representatives on September 29, 2008, voting 205–228.[5]

Supporters of the plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the plan's cost and rapidity, pointing to polls that showed little support among the public for "bailing out" Wall Street investment banks,[6] claimed that better alternatives were not considered,[7] and that the Senate forced passage of the unpopular version through the opposing house by "sweetening" the bailout package.[8]

On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424.[9][10] The Senate accepted the amendment and passed the entire amended bill, voting 74–25.[11] Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the length of the bill to 451 pages.[12][13] (See Public Law 110-343 for details on the added provisions.) The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263–171 to enact the bill into law.[9][14][15] President George W. Bush signed the bill into law within hours of its congressional enactment, creating the $700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets.[16]

On October 8, the British announced their bank rescue package consisting of funding, debt guarantees and infusing capital into banks via preferred stock. This model was closely followed by the rest of Europe, as well as the U.S Government, who on the October 14 announced a $250bn (£143bn) Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $700bn Troubled Asset Relief Program.[17][18]

Over the next six months, TARP was dwarfed by other guarantees and lending limits; analysis by Bloomberg found the Federal Reserve had, by March 2009, committed $7.77 trillion to rescuing the financial system, more than half the value of everything produced in the U.S. that year.[19]

Economic background

After the freeing up of world capital markets in the 1970s and the repeal of the Glass–Steagall Act in 1999, the banking practices (mostly Greenspan inspired "self-regulation") along with monetized subprime mortgages sold as no risk investments, reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets[20] and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $85 billion liquidity facility for American International Group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers.

On Monday, October 6, the Dow Jones Industrial Average dropped more than 700 points and fell below 10,000 for the first time in four years.[21] The same day, CNN reported these worldwide stock market events:[22]

  • Britain's FTSE 100 Index was down 7.9%
  • Germany's DAX down 7.1%
  • France's CAC 40 dropping 9%
  • In Russia, trading in shares was suspended after the RTS stock index fell more than 20%.
  • Iceland halted trading in six bank stocks while the government drafted a crisis plan.

Paulson proposal

U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities.[23] The plan was immediately backed by President George W. Bush and negotiations began with leaders in the U.S. Congress to draft appropriate legislation.

President Bush meets with Congressional members, including presidential candidates John McCain and Barack Obama, at the White House to discuss the bailout, September 25, 2008.[24]
President Bush meets with Congressional members, including presidential candidates John McCain and Barack Obama, at the White House to discuss the bailout, September 25, 2008.[24]

Consultations among Treasury Secretary Henry Paulson, Chairman of the Federal Reserve Ben Bernanke, U.S. Securities and Exchange Commission chairman Christopher Cox, congressional leaders, and President Bush, moved forward efforts to draft a proposal for a comprehensive solution to the problems created by illiquid assets. News of the coming plan resulted in some stock, bond, and currency markets stability on September 19, 2008.[25][26]

The proposal called for the federal government to buy up to US$700 billion of illiquid mortgage-backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal was received favorably by investors in the stock market, but caused the U.S. dollar to fall against gold, the Euro, and petroleum. The plan was not immediately approved by Congress; debate and amendments were seen as likely before the plan was to receive legislative enactment.[27][28][29]

Throughout the week of September 20, 2008, there was contentious wrangling among members of Congress over the terms and scope of the bailout,[30] amplified by continued failures of institutions like Washington Mutual, and the upcoming November 4 national election.

  • On September 21, Paulson announced that the original proposal, which would have excluded foreign banks, had been revised to include foreign financial institutions with a presence in the United States. The U.S. administration pressured other countries to set up similar bailout plans.[31]
  • On September 23, the plan was presented by Paulson and Bernanke to the Senate Banking Committee, who rejected it as unacceptable.[32]
  • On September 24, President Bush addressed the nation on prime time television, describing how serious the financial crisis could become if action was not taken promptly by Congress.[33]
  • Also on September 24, 2008, Republican Party nominee for President, John McCain, and Democratic Party nominee for President, Barack Obama, issued a joint statement describing their shared view that "The effort to protect the American economy must not fail."[34]

The plan was introduced on September 20, by Paulson. Named the Troubled Asset Relief Program,[23] but also known as the Paulson Proposal or Paulson Plan, it should not be confused with Paulson's earlier 212-page plan, the Blueprint for a Modernized Financial Regulatory Reform,[35] that was released on March 31, 2008.

The proposal was only three pages long, intentionally short on details to facilitate quick passage by Congress.[36]

Mortgage asset purchases

A key part of the proposal is the federal government's plan to buy up to $700 billion of illiquid mortgage-backed securities (MBS) with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market.[27][28]

This plan can be described as a risky investment, as opposed to an expense. The MBS within the scope of the purchase program have rights to the cash flows from the underlying mortgages. As such, the initial outflow of government funds to purchase the MBS would be offset by ongoing cash inflows represented by the monthly mortgage payments. Further, the government eventually may be able to sell the assets, though whether at a gain or loss will remain to be seen. While incremental borrowing to obtain the funds necessary to purchase the MBS may add to the United States public debt, the net effect will be considerably less as the incremental debt will be offset to a large extent by the MBS assets.[37][38]

A key challenge would be valuing the purchase price of the MBS, which is a complex exercise subject to a multitude of variables related to the housing market and the credit quality of the underlying mortgages.[39] The ability of the government to offset the purchase price (through mortgage collections over the long-run) depends on the valuation assigned to the MBS at the time of purchase. For example, Merrill Lynch wrote down the value of its MBS to approximately 22 cents on the dollar in Q2 2008.[40] Whether the government is ultimately able to resell the assets above the purchase price or will continue to merely collect the mortgage payments is an open item.

On February 10, 2009, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the $300 billion or so dollars remaining in the TARP funds. He mentioned that the U.S. Treasury and Federal Reserve wanted to help fund private investors to buy toxic assets from banks, but few details have yet been released.[41] There is still some scepticism about the premise that taxpayers can buy troubled assets without having to overpay. Oppenheimer & Company analyst Meridith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs.[42] Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is a call option on a firm's assets, this lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.[43]

On April 6, 2008, the State Foreclosure Prevention Working Group reported that the pace of foreclosures exceeded the capacity of homeowner rescue programs, such as the Hope Now Alliance, in the first quarter of 2008.[44]

Sweeping powers

The original plan would have granted the Secretary of the Treasury unlimited power to spend,[30] proofing his or her actions against congressional or judicial review. Section 8 of the Paulson proposal states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."[23] This provision was not included in the final version.

Potential effects

The maximum cost of a $700 billion bailout would be $2,295 estimated cost per American (based on an estimate of 305 million Americans), or $4,635 per working American (based on an estimate of 151 million in the work force).[45] The bulk of this money would be spent to purchase mortgage backed securities, ultimately backed by American homeowners, which possibly could be sold later at a profit, by the government. Economist Michael Hudson predicted that the bailout would cause hyperinflation and dollar collapse.[46][47][48][clarification needed]

However, there is no persuasive evidence of prices rising and the U.S. Dollar Index has actually risen to higher levels than before the plan's announcement.[49] Indeed, during the week before and after the EESA was agreed, investment bank UBS was continually flatly rejecting that bailouts such as these were inflationary, emphasizing instead that they were anti-deflationary, not inflationary.[50][51][52]

The 2008 federal budget submitted by the president is $2.9 trillion, meaning a $700 billion bailout would constitute a 24% increase to $3.6 trillion, which would exceed the $3.1 trillion 2009 budget. The total government commitment and proposed commitments so far in its current and proposed bailouts is reportedly $1 trillion compared to the $14 trillion United States economy.[53]

Rationale for the bailout

Government officials

In his testimony before the U.S. Senate, Treasury Secretary Henry Paulson summarized the rationale for the bailout:[54]

  • Stabilize the economy: "We must... avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy."
  • Improve liquidity: "These bad loans have created a chain reaction and last week our credit markets froze – even some Main Street non-financial companies had trouble financing their normal business operations. If that situation were to persist, it would threaten all parts of our economy."
  • Comprehensive strategy: "We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil. And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth."
  • Immediate and significant: "This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively."
  • Broad impact: "This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy."

In his testimony before the U.S. Senate on September 23, 2008, Fed Chairman Ben Bernanke also summarized the rationale for the bailout:[55]

  • Investor confidence: "Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply." He also stated: "Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth."
  • Impact on the economy and GDP: "Extraordinarily turbulent conditions in global financial markets... these conditions caused equity prices to fall sharply, the cost of short-term credit—where available—to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets—a flight to quality—sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth."

Regarding the $700 billion number, Forbes.com quoted a Treasury spokeswoman: "It's not based on any particular data point. We just wanted to choose a really large number."[56]

Journalists

According to CNBC commentator Jim Cramer, large corporations, institutions, and wealthy investors were pulling their money out of bank money market funds, in favor of government-backed Treasury bills. Cramer called it "an invisible run on the banks," one that has no lines in the lobby but pushes banks to the breaking point nonetheless. As a bank's capital reserve of deposits evaporate, so too does its ability to lend and correspondingly make money. "The lack of confidence inspired by Lehman's demise, the general poor health of many banks, this is going to turn this into an intractable moment," Cramer said, "if someone in the government doesn't start pushing for more deposit insurance."[57]

Reaction to the initial proposal

Skepticism regarding the plan occurred early on in the House. Many members of Congress, including the House of Representatives, did not support the plan initially, mainly conservative free-market Republicans and liberal anti-corporate Democrats.[58] Alabama Republican Spencer Bachus has called the proposal "a gun to our head."[59]

Immediate market reactions

On September 19, 2008, when news of the bailout proposal emerged, the U.S. stock market rose by 3%. Foreign stock markets also surged, and foreign currencies corrected slightly, after having dropped earlier in the month. The value of the U.S. dollar dropped compared to other world currencies after the plan was announced.[60][61] The front end oil futures contract spiked more than $25 a barrel during the day Monday September 22, ending the day up over $16. This was a record for the biggest one-day gain.[62] However, there are other factors that caused the massive spike in oil prices. Traders who got "caught" at the end of the October contract session were forced to purchase oil in large batches to cover themselves, adding to the surge in prices.[63] Further out, oil futures contracts rose by about $5 per barrel. Mortgage rates increased following the news of the bailout plan. The 30-year fixed-rate mortgage averaged 5.78% in the week before the plan was announced; for the week ending September 25, the average rate was 6.09%,[64] still far below the average rate during the early 1990s recession, when it topped 9.0%.[65]

Potential conflict of interest

There was concern that the current plan created a conflict of interest for Paulson. Paulson was a former CEO of Goldman Sachs, which stood to benefit from the bailout. Paulson had hired Goldman executives as advisors and Paulson's former advisors had joined banks that were also to benefit from the bailout. Furthermore, the original proposal exempted Paulson from judicial oversight. Thus, there was concern that former illegal activity by a financial institution or its executives might be hidden.[66][67][68]

The Treasury staff member responsible for administering the bailout funds was Neel Kashkari, a former vice-president at Goldman Sachs.[citation needed]

In the Senate, Senator Judd Gregg (R-NH) was the leading Republican author of the TARP program while he had a multimillion-dollar investment in the Bank of America.[69][70]

Views from the public, politicians, financiers, economists, and journalists

The public

Protests opposing the bailout occurred in over 100 cities across the United States on Thursday September 25.[71] Grassroots group TrueMajority said its members organized over 251 events in more than 41 states.[72] The largest gathering has been in New York City, where more than 1,000 protesters gathered near the New York Stock Exchange along with labor union members organized by New York Central Labor Council.[73][74] Other grassroots groups have planned rallies to protest against the bailout,[75] while outraged citizens continue to express their opposition online through blogs and dedicated web sites.[76]

  • In a survey conducted September 19–22 by the Pew Research Center, by a margin of 57 percent to 30 percent, Americans supported the bailout when asked "As you may know, the government is potentially investing billions to try and keep financial institutions and markets secure. Do you think this is the right thing or the wrong thing for the government to be doing?"[77]
  • In a survey conducted September 19–22 by Bloomberg/Los Angeles Times, by a margin of 55 percent to 31 percent, Americans opposed the bailout when asked whether "the government should use taxpayers' dollars to rescue ailing private financial firms whose collapse could have adverse effects on the economy and market, or is it not the government's responsibility to bail out private companies with taxpayers' dollars?".[78][79]
  • In a survey conducted September 24 by USA Today/Gallup, when asked "As you may know, the Bush administration has proposed a plan that would allow the Treasury Department to buy and re-sell up to $700 billion of distressed assets from financial companies. What would you like to see Congress do?", 56 percent of respondents wanted Congress to pass a plan different from the original Paulson proposal, 22 percent supported the Paulson proposal in its initial form, and 11 percent wanted Congress to take no action.[80]
  • Senator Sherrod Brown said he had been getting 2,000 e-mail messages and telephone calls a day, roughly 95 percent opposed.[81]
  • As of Thursday September 25, Senator Dianne Feinstein's (D-Calif.) offices had received a total of 39,180 e-mails, calls and letters on the bailout, with the overwhelming majority of constituents against it.[74]

Politicians

Then-senator Barack Obama addresses the Senate on the financial crisis and argues in favor of the bailout bill. View clip on commons. "Barack Obama support of Bailout". Retrieved October 16, 2008.

Supporters of the plan included presidential candidates Barack Obama and John McCain, and British Prime Minister Gordon Brown.[82][83]

Critics included Former Arkansas Governor Mike Huckabee, Congressman Ron Paul, Libertarian presidential candidate Bob Barr, and Senators Christopher Dodd, Richard Shelby, and Jim Bunning.[84][85][86][87][88]

In a Wall Street Journal opinion piece, Senator Hillary Clinton advocated addressing the rate of mortgage defaults and foreclosures that ignited this crisis, not just bailing out Wall Street firms: "If we do not take action to address the crisis facing borrowers, we'll never solve the crisis facing lenders." She proposed a new Home Owners' Loan Corporation (HOLC), similar to that used after the Depression and which was launched in 1933. The new HOLC was to administer a national program to help homeowners refinance their mortgages. She also called for a moratorium on foreclosures and freezing of rate hikes in adjustable-rate mortgages.[89]

Barack Obama, the Democratic presidential candidate, said that any bailout had to include plans to recover the money, protect working families and big financial institutions, and be crafted to prevent such a crisis from happening again.[90]

Financiers

Former Federal Reserve Chairman Alan Greenspan supported the Paulson plan.[91]

Investor Warren Buffett says he could put in $10B plus $90B nonrecourse debt; that is, without having to repay beyond $10B if mortgages did not repay. (This is 10 to 1 leverage, 10 times upside with 1 times downside.) He also said that the government should pay market price, which may be below the carry value.[92] Buffett says "I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years. They should, maybe, eliminate bonuses." Buffett says "...if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, ... . You don't want the Treasury to be a patsy."[93] Mr. Buffett's company owns financial companies which will benefit directly or indirectly.

Investor George Soros opposed the original Paulson plan: "Mr Paulson's proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief." – but called Barack Obama's list of conditions for the plan "the right principles".[94]

Other critics included Carl Icahn[91] Jim Rogers,[95] and William Seidman. Seidman compared the bailout with action he and his team at the Resolution Trust Corporation took during the savings and loan crisis of the 1980s: "What we did, we took over the bank, nationalized it, fired the management, took out the bad assets and put a good bank back in the system."[96]

Economists

  • In an open letter sent to Congress on September 24, over 100 university economists expressed "great concern for the plan proposed by Treasury Secretary Paulson". The letter, endorsed within a few days by 231 economists at American universities, has been described as "the emerging consensus from academic economists".[97] Its authors described three "fatal pitfalls" they perceived in the plan as it was initially proposed:
    1. Its fairness. The plan is a subsidy to investors at taxpayers' expense. Investors who took risks to earn profits must also bear the losses. [...] The government can ensure a well-functioning financial industry [...] without bailing out particular investors and institutions whose choices proved unwise.
    2. Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
    3. Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.[98]
  • Nobel Prize-winning economist Joseph Stiglitz strongly criticized the bill in an article written for The Nation.[99]
  • Economist, The New York Times columnist and Nobel laureate Paul Krugman recommended that, instead of purchasing the assets, equity capital could be provided to the banks directly in exchange for preferred stock. This would strengthen the financial position of the banks, encouraging them to lend. Dividends would be paid to the government on the preferred shares. This would be similar to what happened during the savings and loan crisis and with the GSE bailout. This avoids the valuation questions involved in the direct purchase of MBS.[100] This is an approach based on the 1990s Swedish banking rescue.[101]
  • The first half of the bailout money was primarily used to buy preferred stock in banks instead of troubled mortgage assets. This has led some economists to argue that buying preferred stock will be far less effective in getting banks to lend efficiently than buying common stock.[102][103]
  • A recent study shows that market's reaction to the announcement of a rescue plan is positive independently to the type of the intervention. It indicates that a timely bad plan could be better than an untimely good one.[104]

Journalists

  • The Economist magazine said that although "Mr Paulson's plan is not perfect ... it is good enough" and that "Congress should pass it—and soon."[105]
  • "The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc." - Robert Kuttner[106]
  • Journalist Rosalind Resnick favors a hypothetical scenario in which "consumers and businesses would be able to borrow at the fed funds rate at 2 percent, just like the big banks do. This means that every cash-strapped homeowner would be able to refinance his mortgage and cut his payments in half, saving thousands of homes from foreclosure. Consumers could also refinance their credit card balances, auto loans and other debt at interest rates they can afford" and that this plan "would cost U.S. taxpayers absolutely nothing."[107] She does not address how the Federal Reserve would manage the US population's mortgages, credit cards and auto loans in practice.

Alternative proposals

Suggested alternative approaches to address the issues underlying the financial crisis include: mortgage assistance proposals try to increase the value of the asset base while limiting the disruption of foreclosure; bank recapitalization through equity investment by the government; asset liquidity approaches to engage market mechanisms for valuing troubled assets; and financial market reforms promoting transparency and conservatism to restore trust by market investors.

Mortgage assistance

  • Conservative Republican Representatives had offered a mortgage insurance plan as an alternative to the bailout.[108] There had been speculation that U.S. Senator John McCain may have supported this plan[109] but this was not confirmed.
  • Senator Hillary Clinton has proposed a new Home Owners' Loan Corporation (HOLC), similar to that used after the Depression, which was launched in 1933. The new HOLC would administer a national program to help homeowners refinance their mortgages. She is also calling for a moratorium on foreclosures and freezing of rate hikes in adjustable rate mortgages.[89]
  • Jonathan Koppell, Associate Professor of Politics and Management at the Yale School of Management, recommends assisting homeowners by lowering interest rates on loans in default. The money spent would be repaid from profits when the homes eventually sell after the housing market has recovered.[110][111]

Bank recapitalization

  • A ten-point plan by New York University economist Nouriel Roubini goes beyond a Home Owners' Loan Corporation to include recreating a combination of a Resolution Trust Corporation, and a Reconstruction Finance Corporation.[112] Roubini has advocated bank recapitalization (by providing cash in exchange for preferred shares) and suspending all dividend payments.[113]
  • Economist Paul Krugman recommended equity investments in the banks, an approach similar to what happened during the S&L crisis, the GSE bailout, and the 1990s Swedish banking rescue. This avoids the valuation questions involved in the direct purchase of MBS.[100][101]
  • The first half of the bailout money was primarily used to buy preferred stock in banks instead of troubled mortgage assets. This has led some economists to argue that buying preferred stock will be far less effective than buying common stock.[102][103]
  • Luigi Zingales, Professor of Entrepreneurship and Finance at the University of Chicago, has proposed a special chapter of the bankruptcy code to convert banks' debt to equity which would improve capital adequacy ratios and enable a return to lending.[114]
  • Janet Tavakoli, a financial consultant and a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business, criticizes the bailout because in her view it hides problems and continues price uncertainty. She also advocates forced restructuring, with a combination of debt forgiveness and debt for equity swaps, rather than a bailout.[115][116]

Asset liquidity

  • Christopher Ricciardi, former Merrill Lynch banker, wrote a letter to Treasury Secretary Henry M. Paulson Jr. proposing alternatively that the government should be backing some troubled assets to encourage private investors to purchase them — as opposed to the direct purchase of troubled assets from financial institutions.[117]
  • Investor Warren Buffett believes the government should pay market price for the assets rather than an artificially high hold-to-maturity price. The market price would be determined by selling a portion of the assets to private investors.[118]

Financial market reform

  • Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, has recommended three near-term actions to assist banks: provision of liquidity, purchase of distressed assets, and recapitalization. In addition, he argues for addressing the structural issues with more prudential regulation, better accounting rules, and more transparency.[119]

Monetary consensus reform

This process consisted of nationalizing most of the private industries.[citation needed] The short-term effects were evidently costly, but the beneficiary repercussions were vastly favorable to a sustainable economic future.[citation needed]

  1. Nationalize the federal reserve.
  2. Deregulate the corporate image of the United States.
  3. The rest of the proposal were equated with different variables and would have been acted upon according to the circumstances.

According to Jon Daemon, the proposal was dismissed by bureaucrats and lobbyist in accordance to the private banks and federal reserve dispatchers.[113]

Legislative history

Over the weekend (September 27–28), Congress continued to develop the proposal. That next Monday, the House put the resulting effort, the Emergency Economic Stabilization Act of 2008, to a vote. It did not pass. US stock markets dropped 8 percent, the largest percentage drop since Black Monday in 1987.

Congressional leaders, including both presidential candidates, started working with the Bush Administration and the Treasury department on key negotiation points as they worked to finalize the plan. Key items under discussion included:[120][121]

  • Additional foreclosure avoidance and homeowner assistance
  • Executive pay limits
  • Government equity interests in firms participating in program, to provide additional taxpayer protection
  • Judicial review, Congressional oversight and right to audit
  • Structure and authority of the entities that will manage the program

First House vote, September 29

Just after midnight Sunday, September 28, leaders of the Senate and House, along with Treasury Secretary Paulson, announced a tentative deal had been reached to permit the government purchase of up to $700 billion in mortgage backed securities to provide liquidity to the security holders, and to stabilize U.S. financial firms and markets. The bill was made final later that Monday morning.[4][122] A debate and vote was scheduled for the House for Monday, September 29, to be followed by a Senate debate on Wednesday.[123] In an early morning news conference, on Monday September 29, President George W. Bush expressed confidence that the bill would pass Congress, and that it would provide relief to the U.S. economy. A number of House Republicans remained opposed to the deal and intended to vote against it.[124][125][126]

That same day, the legislation for the bailout was put before the United States House of Representatives and failed 205–228, with one not voting. Democrats voted 140–95 in favor of the legislation, while Republicans voted 133–65 against it.[127][128][129] During the legislative session, at the conclusion of the vote, the presiding chair declared the measure, HR3997, to be unfinished business.[130]

House Speaker Nancy Pelosi said at a press conference after the vote: "The legislation has failed. The crisis has not gone away. We must continue to work in a bipartisan manner."[131] Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, appearing at a joint press conference with Senator Judd Gregg, a New Hampshire Republican, said a bailout plan could still pass Congress. Dodd said: "We don't intend to leave here without the job being done. While it may take another few days, we're confident that can happen."[127]

Market reaction to September 29 vote

Following the House vote, the Dow Jones Industrial Average dropped over 777 points in a single day, its largest single-day point drop until 2018.[132] The $1.2 trillion loss in market value received much media attention, although it still does not rank among the index's ten largest drops in percentage terms. The S & P lost 8.8%, its seventh worst day in percentage terms and its worst day since Black Monday in 1987. The NASDAQ composite also had its worst day since Black Monday, losing 9.1% in its third worst day ever. The TED spread, the difference between what banks charge each other for a three-month loan and what the Treasury charges, hit a 26-year high of 3.58%; a higher rate for inter bank loans than Treasury loans is a sign that banks fear that their fellow banks won't be able to pay off their debts. Meanwhile, the price of U.S. light crude oil for November delivery fell $10.52 to $96.37 a barrel, its second largest one-day drop ever, on expectations of an economic slowdown reducing oil consumption and demand.[133] The Dow Jones industrial average recovered 485 points or about 62% of the entire loss the very next day.[134]

Markets which had expected the bill to pass and had moved on to debating whether it would be sufficient were already skittish after news that Wachovia Bank was being bought out by Citigroup to avoid collapse. The events were compounded by news from Europe that Dutch-Belgian Fortis Bank was given a $16.4 billion lifeline to avoid collapse, failing British bank Bradford & Bingley was nationalized, and Germany extended banking and real estate giant Hypo Real Estate billions to ensure its survival.[133]

Later in October, after the bill had been passed, the Dow Jones Industrial Average would drop by more in percentage terms, and market volatility remained at historically high levels, as measured by the VIX.

Senate vote October 1

74 yea – 21 nay
74 yea – 21 nay

On Wednesday evening, October 1, 2008, the Senate debated and voted on a revised version of the Emergency Economic Stabilization Act of 2008 (EESA 2008). The legislation was framed as an amendment to HR1424, substituting the entire bill with the newly revised text of the EESA 2008.[10] (the amendment being the text of the Emergency Economic Stabilization Act of 2008) Senate Committee on Banking, Housing and Urban Affairs (CBHUA) (October 1, 2008) ( Retrieved October 1, 2008)
See also the Senate CBHUA web page[12][135] The amendment was approved by a 74–25 vote, and the entire bill was also passed by the same margin, 74–25 (R: 34-15, D: 40-10).[136][137] Only cancer-stricken Senator Ted Kennedy did not vote. Under the legislative rule for the bill, sixty votes were required to approve the amendment and the bill.[12][134] A House leader accused the Senate of legislating "by blunt force" without public consent.[138]

Describing the Senate's reason for passing the bill, former Senator Evan Bayh "described a scene from 2008 where Ben Bernanke warned senators that the sky would collapse if the banks weren't rescued. 'We looked at each other,' said Bayh, 'and said, okay, what do we need.'"[139]

Second House vote, October 3

263 yea – 171 nay
263 yea – 171 nay

The revised HR1424 was received from the Senate by the House, and on October 3, it voted 263-171 to enact the bill into law. Democrats voted 172 to 63 in favor of the legislation, while Republicans voted 108 to 91 against it; overall, 33 Democrats and 24 Republicans who had previously voted against the bill supported it on the second vote.[9][15]

President Bush signed the bill into law within hours of its enactment, creating a $700 billion dollar Treasury fund to purchase failing bank assets.[140]

The revised plan left the $700 billion bailout intact and appended a stalled tax bill.[134] The law has three major divisions, Division A: the Emergency Economic Stabilization Act of 2008; Division B: Energy Improvement and Extension Act of 2008, and Division C: the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.[9] The tax part of the law has provisions that will have a net expenditure of $100 billion over 10 years. It had been stalled due to a disagreement between Democrats that did not want to increase spending without a corresponding increase in taxes and Republicans, who were adamantly opposed to any tax increases.

Key items in the legislation

On October 3, 2008, the Emergency Economic Stabilization Act became law with the signing of Public Law 110-343, which included the act.[141] Below is a list of key items and how the legislation deals with them.

Interest on bank deposits held by the Federal Reserve

Reserve balances began increasing at the beginning of September 2008, just after the Democratic and Republican national conventions, and just before the Wall Street meltdown and the presidential debates.
Reserve balances began increasing at the beginning of September 2008, just after the Democratic and Republican national conventions, and just before the Wall Street meltdown and the presidential debates.

Although the original bill proposed as late as September 20 contained no such provision,[23] Section 128 of the Act allowed the Federal Reserve System (the Fed) to begin paying banks a high interest rate on their deposits held for reserve requirements. It reads:

SEC. 128. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461) is amended by striking `October 1, 2011' and inserting `October 1, 2008'.
Reserve balances with U.S. Federal Reserve Banks, 1995-2008 and 2008, in billions of U.S. dollars
Reserve balances with U.S. Federal Reserve Banks, 1995-2008 and 2008, in billions of U.S. dollars

The Fed announced that it would begin paying such increased interest on both reserve and excess reserve balances on October 6, 2008.[142] Banks immediately increased the amount of their money on deposit with the Fed, up from about $10 billion total at the end of August 2008, to $880 billion by the end of the second week of January 2009.[143][144] In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. The U.S. Treasury Department explained the changes, saying:

The Federal Reserve will continue to take a leadership role with respect to liquidity in our markets. It is committed to using all of the tools at its disposal to provide the increased liquidity that is now required for the effective functioning of financial markets. In this regard, the authority to pay interest on reserves that was provided by EESA is essential, because it allows the Federal Reserve to expand its balance sheet as necessary to support financial stability while conducting a monetary policy that promotes the Federal Reserve's macroeconomic objectives of maximum employment and stable prices. The Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets.[145]

Reactions to the change were mixed, with banks generally approving of their new ability to earn high interest without risk on funds that they would otherwise need to use to extend credit in order to make a profit for their shareholders, while those involved in the commercial paper markets, the primary and secondary sectors of the goods and services economy, shipping, and others depending on the liquidity of credit from banks were more skeptical of the further pressure against credit availability in the midst of the ongoing credit liquidity crisis.[146][147]

The day after the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."[148] The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target,[148][149] and again on November 5 for the same reason.[150] Beginning December 18, the Fed directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate.[151][152][153]

The government issued $400 billion of short-term debt intended to help replace the $1.8 trillion commercial paper market which was wiped out by the change,[154] (exacerbated by money market funds' sudden refusal to support commercial paper as well) but the world economy began to deflate as international shipping, dependent on commercial paper, slowed in some regions to a few percent of levels prior to the change.[155][156] The FDIC announced a new program on October 14, under which newly issued senior unsecured debt issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy.[157] The FDIC program is expected to cover about $1.4 trillion of bank debt.[158]

The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:

Estimated budgetary effects[159]
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Millions of dollars 0 -192 -192 -202 -212 -221 -242 -253 -266 -293 -308
(Negative numbers represent expenditures; losses in revenue not included.)

Those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreasing economic activity due to damage to the short-term commercial paper and associated credit markets.

On January 7, 2009, the Federal Open Market Committee decided that, "the size of the balance sheet and level of excess reserves would need to be reduced."[160] On January 13, Ben Bernanke said, "In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed. In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime, and other factors. However, as excess reserves decline, financial conditions normalize, and banks adapt to the new regime, we expect the interest rate paid on reserves to become an effective instrument for controlling the federal funds rate."[161] The same day, Financial Week said Mr. Bernanke admitted that a huge increase in banks' excess reserves is stifling the Fed's monetary policy moves and its efforts to revive private sector lending.[162]

On January 15, Chicago Fed president and Federal Open Market Committee member Charles Evans said, "once the economy recovers and financial conditions stabilize, the Fed will return to its traditional focus on the federal funds rate. It also will have to scale back the use of emergency lending programs and reduce the size of the balance sheet and level of excess reserves. 'Some of this scaling back will occur naturally as market conditions improve on account of how these programs have been designed. Still, financial market participants need to be prepared for the eventual dismantling of the facilities that have been put in place during the financial turmoil,' he said."[163]

At the end of January 2009, excess reserve balances at the Fed stood at $793 billion[164] but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion, and late November 2009, they stood at $1.16 trillion.[165]

Management of the Troubled Asset Relief Program

The bill authorizes the Secretary of the Treasury to establish the Troubled Assets Relief Program to purchase troubled assets from financial institutions. The Office of Financial Stability is created within the Treasury Department as the agency through which the Secretary will run the program. The Secretary is required to consult with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, and the Secretary of Housing and Urban Development when running the program.[166][167]

Funding

The bill authorizes $700 billion for the program. The Treasury Secretary has immediate access to the first $250 billion. Following that, an additional $100 billion can be authorized by the President. For the last $350 billion, the President must notify Congress of the intention to grant the additional funding to the Treasury; Congress then has 15 days to pass a resolution disallowing the authority. If Congress fails to pass a resolution opposing the funding within 15 days, or if the resolution passes, but is vetoed by the President, and Congress does not have enough votes to override the veto, the Treasury will receive the final $350 billion.[168][169]

Government equity interests in participating firms

The Treasury Secretary is required to obtain a financial warrant guaranteeing the right to purchase non-voting stock or, if the company is unable to issue a warrant, senior debt from any firm participating in the program. The Secretary is allowed to make a de minimis exception to the rule, but that exception may not exceed $100 million.[170][171]

Executive pay limits

If the Treasury purchases assets directly from a company, and also receives a meaningful equity or debt position in that company, the company is not allowed to offer incentives that encourage "unnecessary and excessive risks" to its senior executives (that is, the top five executives).[172] Also, the company is prohibited from making golden parachute payments to a senior executive. Both of these prohibitions expire when the Treasury no longer holds an equity or debt position in that company. The company also is given "clawback" permission; that is, the opportunity to recover senior executive bonus or incentive pay based on earnings, gains, or other data that proves to be inaccurate.[173][174]

If the Treasury purchases assets via auction, and that purchase exceeds $300 million, any new employment contract for a senior officer may not include a golden parachute provision in the case of involuntary termination, bankruptcy filing, insolvency, or receivership. This prohibition only applies to future contracts; golden parachutes already in place will remain unaffected.[173][174]

In either scenario, no limits are placed on executive salary, and existing golden parachutes will not be altered.[175]

Foreclosure avoidance and homeowner assistance

For mortgages involved in assets purchased by the Treasury Department, the Treasury Secretary is required to (1) implement a plan that seeks to maximize assistance for homeowners, and (2) encourage the servicers of the underlying mortgages to take advantage of the HOPE for Homeowners Program of the National Housing Act or other available programs to minimize foreclosures.[170] Furthermore, the Secretary is allowed to use loan guarantees and credit enhancements to encourage loan modifications to avert foreclosure.[176] The bill does not provide a mechanism to change the terms of a mortgage without the consent of any company holding a stake in that mortgage.[177] Section 110: Assistance to Homeowners of the Emergency Economic Stabilization Act of 2008 "requires federal entities that hold mortgages and mortgage-backed securities to develop plans to minimize foreclosures".[178]

This $24 billion asset detoxification plan was requested by Federal Deposit Insurance Corporation Chair Sheila Bair,[179] but the Treasury did not use the provision. "The primary purpose of the bill was to protect our financial system from collapse," Secretary Henry Paulson told the House Financial Services Committee, "The rescue package was not intended to be an economic stimulus or an economic recovery package."[180]

Judicial review

The bill establishes that actions taken by the Treasury Secretary regarding this program are subject to judicial review,[170][181] reversing the request for immunity made in the original Paulson proposal.[182]

Oversight

Several oversight mechanisms are established by the bill. Contractors were also used to help manage the TARP funds.[183][184]

Financial Stability Oversight Board

The Financial Stability Oversight Board is created to review and make recommendations regarding the Treasury's actions.[185][186] The members of the board are:

Congressional Oversight Panel

A Congressional Oversight Panel is created by the bill to review the state of the markets, current regulatory system, and the Treasury Department's management of the Troubled Asset Relief Program. The panel is required to report their findings to Congress every 30 days, counting from the first asset purchase made under the program. The panel must also submit a special report to Congress about regulatory reform on or before January 20, 2009.[185][187]

The panel consists of five outside experts appointed as follows:

Comptroller General oversight requirement

The Comptroller General (director of the Government Accountability Office) is required to monitor the performance of the program, and report findings to Congress every 60 days. The Comptroller General is also required to audit the program annually. The bill grants the Comptroller General access to all information, records, reports, data, etc. belonging to or in use by the program.[188][189]

Office of the Special Inspector General

The bill creates the Office of the Special Inspector General for the Troubled Asset Relief Program, appointed by the President and confirmed by the Senate. The Special Inspector General's purpose is to monitor, audit and investigate the activities of the Treasury in the administration of the program, and report findings to Congress every quarter.[188][190]

FDIC insurance

From the date of enactment of the bill (October 3, 2008) until December 31, 2009, the amount of deposit insurance provided by the FDIC is increased from $100,000 to $250,000.[185][191]

Budget-related provisions

Title II sets out guidelines for consultation and reporting between the Treasury Secretary, the Office of Management and Budget, and the Congressional Budget Office.

Tax provisions

The bill makes the following changes to tax law.

  • Qualified financial institutions may count losses on FNMA and FHLMC preferred stock against ordinary income, rather than capital gain income.
  • New limitations are added on deductibility of executive compensation by corporations participating in the bailout.
  • The mortgage debt forgiveness provision of the Mortgage Forgiveness Debt Relief Act of 2007 is extended by three years, so that it applies to debts forgiven through the year 2012.
  • Extend the expiration date of the section 41 Research & Development Tax Credit from December 31, 2007, to December 31, 2009; also, increase the Alternative Simplified Credit percentage from 12% to 14%.

Administration of the law

CAMELS ratings are being used by the United States government to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the Emergency Economic Stabilization Act of 2008.[192]

The New York Times states: "The criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive" because the criteria appears to favor the financially best off banks and banks too big to let fail. Some lawmakers are upset that the capitalization program will end up culling banks in their districts.[192]

Known aspects of the capitalization program "suggest that the government may be loosely defining what constitutes healthy institutions. [... Banks] that have been profitable over the last year are the most likely to receive capital. Banks that have lost money over the last year, however, must pass additional tests. [...] They are also asking if a bank has enough capital and reserves to withstand severe losses to its construction loan portfolio, nonperforming loans and other troubled assets."[192] Some banks received capital with the understanding the banks would try to find a merger partner. To receive capital under the program banks are also "required to provide a specific business plan for the next two or three years and explain how they plan to deploy the capital."[192]

Effects on national debt

The United States annual budget deficit for fiscal year 2009 surpassed $1 trillion. The original Paulson proposal would lift the United States federal debt ceiling by $700 billion, to $11.3 trillion from the current $10.6 trillion.[193]

Other information

A review of investor presentations and conference calls by executives of some two dozen US-based banks by The New York Times found that "few [banks] cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses, or invest for the future." [194]

See also

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