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<DIV><FONT size=2><FONT size=3><SPAN class=news_story_title><STRONG><FONT
size=6>U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit
(Update2)</FONT></STRONG> </SPAN><BR></FONT>
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<P>By Mark Pittman and Bob Ivry</P>
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<P>Nov. 24 (Bloomberg) -- <STRONG><FONT color=#ff0000 size=4>The U.S. government
is prepared to provide more than $7.76 trillion on behalf of American taxpayers
after guaranteeing $306 billion of Citigroup Inc. debt
yesterday.</FONT></STRONG> The pledges, amounting to half the value of
everything produced in the nation last year, are intended to rescue the
financial system after the credit markets seized up 15 months ago. </P>
<P>The unprecedented pledge of funds includes $3.18 trillion already tapped by
financial institutions in the biggest response to an economic emergency since
the New Deal of the 1930s, according to data compiled by Bloomberg. The
commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700
billion Troubled Asset Relief Program. Federal Reserve <A
onmouseover="return escape( popwQuoteShort( this, 'FARBPMDW:IND' ))"
href="http://bloomberg.com/apps/quote?ticker=FARBPMDW%3AIND">lending</A> last
week was 1,900 times the weekly average for the three years before the crisis.
</P>
<P>When Congress approved the <A
onmouseover="return escape( popwOpenWebSite( this ))"
href="http://www.ustreas.gov/press/releases/hp1207.htm" target=_blank>TARP</A>
on Oct. 3, Fed Chairman <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Ben%0AS.+Bernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Ben
S. Bernanke</A> and Treasury Secretary <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Henry+Paulson&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Henry
Paulson</A> acknowledged the need for transparency and oversight. Now, as
regulators commit far more money while refusing to disclose loan recipients or
reveal the collateral they are taking in return, some Congress members are
calling for the Fed to be reined in. </P>
<P>“Whether it’s lending or spending, it’s tax dollars that are going out the
window and we end up holding collateral we don’t know anything about,” said
Congressman <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Scott+Garrett&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Scott
Garrett</A>, a New Jersey Republican who serves on the House Financial Services
Committee. “The time has come that we consider what sort of limitations we
should be placing on the Fed so that authority returns to elected officials as
opposed to appointed ones.” </P>
<P>Too Big to Fail </P>
<P>Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit
Insurance Corp. and interviewed regulatory officials, economists and academic
researchers to gauge the full extent of the government’s rescue effort. </P>
<P>The bailout includes a Fed program to buy as much as $2.4 trillion in
short-term notes, called commercial paper, that companies use to pay bills,
begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans,
started Oct. 14. </P>
<P><A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=William+Poole&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">William
Poole</A>, former president of the Federal Reserve Bank of St. Louis, said the
two programs are unlikely to lose money. The bigger risk comes from rescuing
companies perceived as “too big to fail,” he said. </P>
<P>‘Credit Risk’ </P>
<P>The government committed $29 billion to help engineer the takeover in March
of Bear Stearns Cos. by New York-based <A
onmouseover="return escape( popwQuoteShort( this, 'JPM:US' ))"
href="http://bloomberg.com/apps/quote?ticker=JPM%3AUS">JPMorgan Chase &
Co.</A> and $122.8 billion in addition to TARP allocations to bail out New
York-based American International Group Inc., once the world’s largest insurer.
</P>
<P>Citigroup received $306 billion of government guarantees for troubled
mortgages and toxic assets. The Treasury Department also will inject $20 billion
into the bank after its stock fell 60 percent last week. </P>
<P>“No question there is some credit risk there,” Poole said. </P>
<P>Congressman <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Darrell+Issa&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Darrell
Issa</A>, a California Republican on the Oversight and Government Reform
Committee, said risk is lurking in the programs that Poole thinks are safe. </P>
<P>“The thing that people don’t understand is it’s not how likely that the
exposure becomes a reality, but what if it does?” Issa said. “There’s no
transparency to it so who’s to say they’re right?” </P>
<P>The worst financial crisis in two generations has erased $23 trillion, or 38
percent, of the <A
onmouseover="return escape( popwQuoteShort( this, 'WCAUWRLD:IND' ))"
href="http://bloomberg.com/apps/quote?ticker=WCAUWRLD%3AIND">value</A> of the
world’s companies and brought down three of the biggest Wall Street firms. </P>
<P>Markets Down </P>
<P>The <A onmouseover="return escape( popwQuoteShort( this, 'INDU:IND' ))"
href="http://bloomberg.com/apps/quote?ticker=INDU%3AIND">Dow Jones Industrial
Average</A> through Friday is down 38 percent since the beginning of the year
and 43 percent from its peak on Oct. 9, 2007. The <A
onmouseover="return escape( popwQuoteShort( this, 'SPX:IND' ))"
href="http://bloomberg.com/apps/quote?ticker=SPX%3AIND">S&P 500</A> fell 45
percent from the beginning of the year through Friday and 49 percent from its
peak on Oct. 9, 2007. The <A
onmouseover="return escape( popwQuoteShort( this, 'NKY:IND' ))"
href="http://bloomberg.com/apps/quote?ticker=NKY%3AIND">Nikkei 225 Index</A> has
fallen 46 percent from the beginning of the year through Friday and 57 percent
from its most recent peak of 18,261.98 on July 9, 2007. <A
onmouseover="return escape( popwQuoteShort( this, 'GS:US' ))"
href="http://bloomberg.com/apps/quote?ticker=GS%3AUS">Goldman Sachs Group
Inc.</A> is down 78 percent, to $53.31, on Friday from its peak of $247.92 on
Oct. 31, 2007, and 75 percent this year. </P>
<P>Regulators hope the rescue will contain the damage and keep banks providing
the credit that is the lifeblood of the U.S. economy. </P>
<P>Most of the spending programs are run out of the New York Fed, whose
president, <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Timothy+Geithner&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Timothy
Geithner</A>, is said to be President- elect <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Barack+Obama&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Barack
Obama</A>’s choice to be Treasury Secretary. </P>
<P>‘They Got Snookered’ </P>
<P>The money that’s been pledged is equivalent to $24,000 for every man, woman
and child in the country. It’s <A
onmouseover="return escape( popwOpenWebSite( this ))"
href="http://www.cbo.gov/ftpdocs/89xx/doc8971/Letter.2.1.shtml"
target=_blank>nine times</A> what the U.S. has spent so far on wars in Iraq and
Afghanistan, according to <A
onmouseover="return escape( popwOpenWebSite( this ))" href="http://www.cbo.gov/"
target=_blank>Congressional Budget Office</A> figures. It could pay off more
than half the country’s mortgages. </P>
<P>“It’s unprecedented,” said <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Bob+Eisenbeis&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Bob
Eisenbeis</A>, chief monetary economist at Vineland, New Jersey-based Cumberland
Advisors Inc. and an economist for the Atlanta Fed for 10 years until January.
“The backlash has begun already. Congress is taking a lot of hits from their
constituents because they got snookered on the TARP big time. There’s a lot of
supposedly smart people who look to be totally incompetent and it’s all going to
fall on the taxpayer.” </P>
<P>President <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Franklin+D.+Roosevelt&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Franklin
D. Roosevelt</A>’s New Deal of the 1930s, when almost 10,000 banks failed and
there was no mechanism to bolster them with cash, is the only rival to the
government’s current response. The savings and loan bailout of the 1990s cost
$209.5 billion in inflation-adjusted numbers, of which $173 billion came from
taxpayers, according to a July 1996 <A
onmouseover="return escape( popwOpenWebSite( this ))"
href="http://www.gao.gov/archive/1996/ai96123.pdf" target=_blank>report</A> by
the U.S. General Accounting Office, now called the Government Accountability
Office. </P>
<P>‘Worst Crisis’ </P>
<P>The 1979 U.S. government bailout of Chrysler consisted of bond guarantees,
adjusted for inflation, of $4.2 billion, according to a Heritage Foundation <A
onmouseover="return escape( popwOpenWebSite( this ))"
href="http://www.heritage.org/research/regulation/bg276.cfm"
target=_blank>report</A>. </P>
<P>The commitment of public money is appropriate to the peril, said <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Ethan+Harris&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Ethan
Harris</A>, co-head of U.S. economic research at Barclays Capital Inc. and a
former economist at the New York Fed. U.S. financial firms have taken writedowns
and losses of $666.1 billion since the beginning of 2007, according to Bloomberg
data. </P>
<P>“This is the worst capital markets crisis in modern history,” Harris said.
“So you have the biggest intervention in modern history.” </P>
<P>Bloomberg has requested details of Fed lending under the U.S. Freedom of
Information Act and filed a federal lawsuit against the central bank Nov. 7
seeking to force disclosure of borrower banks and their collateral. </P>
<P>Collateral is an asset pledged to a lender in the event a loan payment isn’t
made. </P>
<P>‘That’s Counterproductive’ </P>
<P>“Some have asked us to reveal the names of the banks that are borrowing, how
much they are borrowing, what collateral they are posting,” Bernanke said Nov.
18 to the <A onmouseover="return escape( popwOpenWebSite( this ))"
href="http://www.financialservices.house.gov/" target=_blank>House Financial
Services Committee</A>. “We think that’s counterproductive.” </P>
<P>The Fed should account for the collateral it takes in exchange for loans to
banks, said <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Paul+Kasriel&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Paul
Kasriel</A>, chief economist at Chicago-based Northern Trust Corp. and a former
research economist at the Federal Reserve Bank of Chicago. </P>
<P>“There is a lack of transparency here and, given that the Fed is taking on a
huge amount of credit risk now, it would seem to me as a taxpayer there should
be more transparency,” Kasriel said. </P>
<P>Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of
the total commitment of $7.76 trillion, based on data compiled by Bloomberg
concerning U.S. bailout steps started a year ago. </P>
<P>“Too often the public is focused on the wrong piece of that number, the $700
billion that Congress approved,” said J.D. Foster, a former staff member of the
Council of Economic Advisers who is now a senior fellow at the Heritage
Foundation in Washington. “The other areas are quite a bit larger.” </P>
<P>Fed Rescue Efforts </P>
<P>The Fed’s rescue attempts began last December with the creation of the Term
Auction Facility to allow lending to dealers for collateral. After Bear
Stearns’s collapse in March, the central bank started making direct loans to
securities firms at the same discount rate it charges commercial banks, which
take customer deposits. </P>
<P>In the three years before the crisis, such average weekly borrowing by banks
was $48 million, according to the central bank. Last week it was $91.5 billion.
</P>
<P>The failure of a second securities firm, Lehman Brothers Holdings Inc., in
September, led to the creation of the Commercial Paper Funding Facility and the
Money Market Investor Funding Facility, or MMIFF. The two programs, which have
pledged $2.3 trillion, are designed to restore calm in the money markets, which
deal in certificates of deposit, commercial paper and Treasury bills. </P>
<P>Lehman Failure </P>
<P>“Money markets seized up after Lehman failed,” said <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Neal%0ASoss&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Neal
Soss</A>, chief economist at Credit Suisse Group in New York and a former aide
to Fed chief <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Paul+Volcker&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Paul
Volcker</A>. “Lehman failing made a lot of subsequent actions necessary.” </P>
<P>The FDIC, chaired by <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Sheila+Bair&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Sheila
Bair</A>, is contributing 20 percent of total rescue commitments. The FDIC’s
$1.4 trillion in guarantees will amount to a bank subsidy of as much as $54
billion over three years, or $18 billion a year, because borrowers will pay a
lower interest rate than they would on the open market, according to Raghu
Sundurum and <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Viral+Acharya&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Viral
Acharya</A> of New York University and the London Business School. </P>
<P>Congress and the Treasury have ponied up $892 billion in TARP and other
funding, or 11.5 percent. </P>
<P>The Federal Housing Administration, overseen by Department of Housing and
Urban Development Secretary <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Steven+Preston&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Steven
Preston</A>, was given the authority to guarantee $300 billion of mortgages, or
about 4 percent of the total commitment, with its Hope for Homeowners program,
designed to keep distressed borrowers from foreclosure. </P>
<P>Federal Guarantees </P>
<P>Most of the federal guarantees reduce interest rates on loans to banks and
securities firms, which would create a subsidy of at least $6.6 billion annually
for the financial industry, according to data compiled by Bloomberg comparing
rates charged by the Fed against market interest currently paid by banks. </P>
<P>Not included in the calculation of pledged funds is an FDIC proposal to
prevent foreclosures by guaranteeing modifications on $444 billion in mortgages
at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC
spokesman <A onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=David+Barr&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">David
Barr</A>. The Treasury Department hasn’t approved the program. </P>
<P>Bernanke and Paulson, former chief executive officer of Goldman Sachs, have
also promised as much as $200 billion to shore up nationalized mortgage finance
companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any
agency. The FDIC arranged for $139 billion in loan guarantees for General
Electric Co.’s finance unit. </P>
<P>Automakers Struggle </P>
<P>The tally doesn’t include money to General Motors Corp., Ford Motor Co. and
Chrysler LLC. Obama has said he favors financial assistance to keep them from
collapse. </P>
<P>Paulson told the House Financial Services Committee Nov. 18 that the $250
billion already allocated to banks through the TARP is an investment, not an
expenditure. </P>
<P>“I think it would be extraordinarily unusual if the government did not get
that money back and more,” Paulson said. </P>
<P>In his Nov. 18 testimony, Bernanke told the House Financial Services
Committee that the central bank wouldn’t lose money. </P>
<P>“We take collateral, we haircut it, it is a short-term loan, it is very safe,
we have never lost a penny in these various <A
onmouseover="return escape( popwOpenWebSite( this ))"
href="http://www.newyorkfed.org/markets/Forms_of_Fed_Lending.pdf"
target=_blank>lending programs</A>,” he said. </P>
<P>A haircut refers to the practice of lending less money than the collateral’s
current market value. </P>
<P>Requiring the Fed to disclose loan recipients might set off panic, said <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=David+Tobin&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">David
Tobin</A>, principal of New York-based loan-sale consultants and investment bank
<A onmouseover="return escape( popwOpenWebSite( this ))"
href="http://www.missioncap.com/" target=_blank>Mission Capital Advisors
LLC</A>. </P>
<P>‘Mark to Market’ </P>
<P>“If you mark to market today, the banking system is bankrupt,” Tobin said.
“So what do you do? You try to keep it going as best you can.” </P>
<P>“Mark to market” means adjusting the value of an asset, such as a
mortgage-backed security, to reflect current prices. </P>
<P>Some of the bailout assistance could come from tax breaks in the future. The
Treasury Department changed the tax code on Sept. 30 to allow banks to expand
the deductions on the losses banks they were buying, according to <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Robert+Willens&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Robert
Willens</A>, a former Lehman Brothers tax and accounting analyst who teaches at
Columbia University Business School in New York. </P>
<P><A onmouseover="return escape( popwQuoteShort( this, 'WFC:US' ))"
href="http://bloomberg.com/apps/quote?ticker=WFC%3AUS">Wells Fargo &
Co.</A>, which is buying Charlotte, North Carolina-based Wachovia Corp., will be
able to deduct $22 billion, Willens said. Adding in other banks, the code change
will cost $29 billion, he said. </P>
<P>“The rule is now popularly known among tax lawyers as the ‘Wells Fargo
Notice,’” Willens said. </P>
<P>The regulation was changed to make it easier for healthy banks to buy
troubled ones, said Treasury Department spokesman <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Andrew+DeSouza&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Andrew
DeSouza</A>. </P>
<P>House Financial Services Committee Chairman <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Barney+Frank&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Barney
Frank</A> said he was angry that banks used the money for acquisitions. </P>
<P>“The only purpose for this money is to lend,” said Frank, a Massachusetts
Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not
for bonuses. There better be a showing of increased lending roughly in the
amount of the capital infusions” or Congress may not approve the second half of
the TARP money. </P>
<P>To contact the reporters on this story: <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Mark+Pittman&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Mark
Pittman</A> in New York at <A
onmouseover="return escape( popwSendEmail( this ))"
href="mailto:mpittman@bloomberg.net">mpittman@bloomberg.net</A>; <A
onmouseover="return escape( popwSearchNews( this ))"
href="http://search.bloomberg.com/search?q=Bob+Ivry&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Bob
Ivry</A> in New York at <A onmouseover="return escape( popwSendEmail( this ))"
href="mailto:bivry@bloomberg.net">bivry@bloomberg.net</A>. </P><I>Last Updated:
November 24, 2008 13:26 EST</I> </FONT></DIV></BODY></HTML>