Tuesday, September 30, 2008

Floyd Norris

Back in the tent -- same game. Party on!

September 30, 2008, 5:17 pm — Updated: 5:24 pm -->
Fair Value Follies 2
The Securities and Exchange Commission and the Financial Accounting Standards Board are out with their guidance on fair value accounting, and it appears to indicate that managements can ignore market values more than most accountants had thought possible.
That may help to satisfy politicians who think the problem is that the banks show their losses when there is hope that the assets will someday regain value, rather than the policies that led them to incur the losses.
You can read the statement here.
In the following excerpts, the italics are mine.
Can management’s internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?
Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.
That is not new policy, but it does state it more strongly than it has been stated. More interesting, perhaps, is the question of how you determine a market is not active, or a sale is distressed and can be ignored:
Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?
The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment.
Can transactions in an inactive market affect fair value measurements?
Yes. A quoted market price in an active market for the identical asset is most representative of fair value and thus is required to be used (generally without adjustment). Transactions in inactive markets may be inputs when measuring fair value, but would likely not be determinative. If they are orderly, transactions should be considered in management’s estimate of fair value. However, if prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value.
At first glance, this appears to open the way for companies to ignore more market prices than they had been doing, and to put pressure on auditors to approve such departures. If that is correct, we should see an increase in so-called Tier 3 valuations in the next quarter’s reports.
This is not inconsistent with previous guidance, but the emphasis seems to be placed more on finding exceptions to the rules that require the use of market prices.
One phrase that caught my attention is: “involves market participants that are willing to transact and allows for adequate exposure to the market.”
I wonder if someone will interpret that to say a sale made pursuant to a margin call does not involve participants that were “wiiling to transact,” and thus can be ignored by banks that own the same security, or a similar one. Could the part about “adequate exposure to the market” mean that a private sale — one in which a security is not offered to other possible buyers — is a sale that can be ignored?
A few years from now, long after some bank has failed, there will probably be an S.E.C. enforcement action claiming that fraud was committed when a bank ignored market prices in valuing assets, and the defense will be that the bank used the judgment required by this statement to exclude all the sales that indicated it was overvaluing assets.
If such a case goes to trial, we might find out that the bank was quite happy to rely on prices in inactive markets when the price was rising, but concluded the market was not worthy of attention when the price began to fall.

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The next president will likely have to deal with some major financial emergencies. Barack Obama seems well informed. John McCain, on the other hand, scares me.
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September 29, 2008 7:12 am
Krugman calls it a "shame" that Obama "didn’t show more leadership in the debate over the bailout bill, choosing instead to leave the issue in the hands of Congressional Democrats" -but Obama isn't running for the position of majority whip or Speaker of the House. He's running for President -- and I think he did exactly what a President should do -- he kept informed on a daily basis, talking to the relevant cabinet officials and Congressional leadership, he very quickly and clearly enunciated a set of four conditions he wanted included in the bill -- and then he backed off and let Congress do its job of crafting the details. I will be very happy next January to have President who respects the powers and duties of Congress and the limits on the Executive Branch.
— AMarshall, California
Recommend Recommended by 543 Readers
EDITORS' SELECTIONS (what's this?)
September 29, 2008 10:37 am
Phil Gramm, one of Senator McCain's most trusted advisors, co-authored the Gramm-Leach-Billey Act, repealing Glass-Steagall. Senator Gramm said at the time "We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom." He further goes on to state "I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future, and I am awfully proud to have been a part of making it a reality." Later Senator Gramm went on to support a bill he was largely responsible for, the Commodity Futures Modernization Act, which, according to David Leonardt in this newspaper, "unleashed the derivatives market and paved the way for banks to become more aggressive about investing in mortgages."Senator McCain voted for the Gramm-Leach-Billey Act and he has always been in support of de-regulation, which is at the core of our current financial problems. No thanks.
— Jordan Davies, Vermont
Recommend Recommended by 84 Readers
EDITORS' SELECTIONS (what's this?)
September 29, 2008 12:06 pm
If we eliminate capital gains, reduce corporate tax rates and let markets work, there will be no 3am calls, just the opening bell.
— Peterson, Westchester
Recommend Recommended by 14 Readers
EDITORS' SELECTIONS (what's this?)
September 29, 2008 1:08 pm
The economic disaster that is on going on today, should be no surprise to anyone, and from a historic point of view, this was predictable. All great empires eventually collapse. It’s not a matter of if; it’s only a matter of when. In the last century we saw the collapse of the Soviet Union, British, Japanese, Ottoman and Spanish empires. In the antiquity there were the Roman, Byzantine, Egyptian, Mayan and Chinese empires. While some collapsed through war, others fell through neglect. When it was neglect, it was due to the exploitation of those who were least likely to defend themselves. The wealthier classes extracted from the lower, until there was no more to give.When Ronald Reagan was running for President back in 1980, I was a believer in “trickle down economics.” I fell for that line, hook-line-and-sinker, but when Ronald Reagan fired the aircraft controllers, I knew that his new vision for American didn’t include working class, blue collar union workers like myself. From then on, things got worse for the American working class, through union busting and the exportation of high wage manufacturing jobs.While this is certainly not the end of the United States, it should be a wake up call. Sub-prime loans were used to exploit those who could not afford to pay them back. This set the wheels in motion for a giant pyramid scheme that was decades in the making.To get a basic understanding of what led up to this debacle, I suggest you read “Shock Doctrine” by Naomi Klein. While it’s not the end all book of economics, it does provide insight to the history of the free market principles of Milton Friedman and the Money Culture that lead to the recent economic crisis.I’m not an authority on economics, but I do follow economic issues frequently and have a good foundation of the basics to at least allow me plan my family’s future. But as much as I follow the market and economic issues, it’s not enough, because even the smartest people in finance, do not seem to understand why this crisis happened.
— Larry Dwyer, Queen, NY
Recommend Recommended by 31 Readers

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September 30, 2008 6:54 am
It was blind ideological deregulation that allowed investment and insurance executives to take as personal bonuses money that should have been held in reserve against changes in the market.The people that run Wall St companies acknowledge they are greedy. They described the derivates they sold as “pure profit” to their boards of directors. Calling them “pure profit” meant far bigger personal bonuses. Why did the counterparties to these derivatives spend money on them if there was no risk.Paulson was largely responsible for implementing the Republican ideology that caused this mess.The banks and finance companies that bought the derivatives did so to mitigate risk.The executives of the bank and finance companies that were counter-parties to these derivatives told their boards of directors and investors that there was no risk. There for all the interest and premiums were pure profit.All the interest supposedly being “pure profits” meant extravagant bonuses.If the interest and premiums had been held as reserve against the changing market conditions, instead of being paid out as bonuses, no bail out would have been required.You have to restrain the arsonist and put out the fire before you rebuild the kitchen.If we bailout before we do a first aid fix on the causes of the problem we are just wasting $700 billion.We’d still have the problem, but we would no longer have $700 billion to fix it with.We have to do a quick fix on the causes of the problem before we can do the bailout.Unbelievably, the bailout would reward Paulson’s failure in management and oversight, by giving him increased power, giving him the ability to bailout his friends, and not bailout others, as he chooses.The "bailout" left restrictions on executive pay and golden parachutes to the discretion of Paulson to impose for each company.The agreement gave Paulson discretion to pick and choose who he bailed out.
— Keith T, Winnipeg Canada
Recommend Recommended by 13 Readers
September 30, 2008 6:54 am
This is very simple. we shouldn't let the arsonists (Bush, Paulson) put out their own fires with their only tools: gasoline.The sky did not fall, as bush predicted. His dire proclamations sound fishily similar to the ones he came up with leading up to the 2002 mid term elections, when he said that if we didn’t immediately invade Iraq, the whole world would end on that day too, and there would only be mushroom clouds to prove he was right.The more time we have to calmly step back and think about this latest bush debacle, this huge attempted robbery, this prime example of the bush shock doctrine, the more time we have to calmly entertain ideas that hopefully come from as far from the bush administration as possible. We can think about ideas that will actually benefit the country instead of strangling it.Author Thom Hartmann had some thoughtful ideas that I think would actually take this bush created mess and fix it.The money is out there. It is just a matter of tweaking some of the rules that have fallen away under the last few, deregulatory administrations.In his article, "How Wall Street Can Bail Itself Out Without Destroying The Dollar," which you can find here http://www.commondreams.org/view/2008/09/26 Thom Hartmann lays out whose policies brought us to this moment--Grover "drown the government in a bathtub" Norquist, for one.Mr. Hartmann suggests that we do some of the things FDR did in the 1930's--the last time republicans brought us to this point financially.Instead of giving all sorts of money with no strings attached to the very culprits that started this, he suggests we create an agency to fund the bailout, loan that agency the money from the treasury, then have that agency tax wall street to pay us (the treasury) back.That is much more palatable than just borrowing and throwing more good money after bad, because all that will happen is they will run out of that too, and at some point there won't be anybody left in the world to borrow it from and then we'll be in for a serious collapse.
— davekliman, Glen Cove, NY
Recommend Recommended by 6 Readers
September 30, 2008 6:54 am
This year the self-deprecating motto of our presidential candidates ought to be: "It's not the economy stupid; it's the stupid people in charge of the economy."
— MJM, Denver, CO
Recommend Recommended by 10 Readers
September 30, 2008 6:54 am
How about they dig up the idea that you don't get something for nothing. Interesting reading some of the world media's take on the U.S. bailout plan that just sunk in comparison with the idea of fully nationalizing failing banks, as is just happened in the UK. Here's a direct quote:"But many banking analysts argue that the nationalization of the bank could be a boon to taxpayers one day, unlike the U.S. bailout plan, in which the government is simply buying up bad debts."Well now there's an idea. Instead of privatizing gains and socializing losses, let's have it be all one or the other. We'll even let the bankers choose which they prefer. Now that's got to be fair.
— Dutton, CA
Recommend Recommended by 5 Readers
September 30, 2008 6:54 am
Here's the rescue plan: The banks start lending money to each other and to credit-worthy borrowers. The banks write dowwn their bad debt and stop crying about their losses. American investors lost big time during the collapse of the dot-com bubble and the world did not end. Allowing some banks to fail and others to take their losses will not be the end of civilization.Once banks demonstate that they trust one another, the public will again trust the banks.Let our leaders lead the way and stop whining about having the taxpayer buy their bad debt for greater than it's worth. The American saver/investor is no longer that stupid.
— jojo1232, San Francisco, CA
Recommend Recommended by 9 Readers
September 30, 2008 6:57 am
One question. Paulsen claims that there isn't sufficient liquidity for investors to buy up these mortgage backed securities even at the current depressed prices.But today, investors sold billions worth of stock in the DOW. That means they have cash on hand now. What is preventing them from buying up these securities, now that they have sold off a lot of stock in other companies?Just fear? How about providing some incentives to buy off these distressed assets, like a tax break, or something.Here's another idea. Lets raffle off Air Force One. Everyone who buys $1,000,000 in mortgage backed securities gets one ticket. What jet-setting hedge-fund manager wouldn't like that?
— Theresa, Arizona
Recommend Recommended by 4 Readers
September 30, 2008 6:57 am
Cheers to our United States Representatives! They served their constituents well today. They listened to the people and it wasn't too difficult to understand that the people are angry and will not be fleeced. What was difficult was taking a stand against tremendous pressure applied to them by Wall Street con men and their government cronies who just want to maintain their status quo. But our Representatives withstood the pressure and did the right thing. Now they must hold their stand while the markets fall, as market forces do what is their nature, and then, as investors see bargains, they rise again. Good job U.S. Representatives! Stand strong!
— Acorn1, Phoenix, AZ
Recommend Recommended by 11 Readers
September 30, 2008 6:57 am
One question. Paulsen claims that there isn't sufficient liquidity for investors to buy up these mortgage backed securities even at the current depressed prices.But today, investors sold billions worth of stock in the DOW. That means they have cash on hand now. What is preventing them from buying up these securities, now that they have sold off a lot of stock in other companies?Just fear? How about providing some incentives to buy off these distressed assets, like a tax break, or something.Here's another idea. Lets raffle off Air Force One. Everyone who buys $1,000,000 in mortgage backed securities gets one ticket. What jet-setting hedge-fund manager wouldn't like that?
— Theresa, Arizona
Recommend Recommended by 4 Readers
September 30, 2008 6:57 am
That last paragraph says it all. For that reason alone, some sort of bailout plan needs to be approved, as distasteful as it may be to some of us. Now, it's not just the U.S. economy that waits for Congress - it's the rest of the world.
— Jaime Herrera, El Paso
Recommend Recommended by 2 Readers
September 30, 2008 6:57 am
Here's another idea.Require everyone who buys treasury bills to also buy 5%-10% of the value worth of mortgage-backed securities. That way the same people who are flying into a panic about them end up being the owners of them. Poetic justice.
— Theresa, Arizona
Recommend Recommended by 3 Readers
September 30, 2008 6:57 am
Enough is enough. We are bankrupt. We are borrowing from China to pay for a plan that many economists are convinced will not work. These guys took the money, do you understand? They TOOK IT. It's in their off-shore accounts. Now, middle class people are being asked to clean up the mess. THAT JUST WON'T STAND. Prohibit the OTC derivatives market that got us into this mess to start with. Raise taxes on the wealthy to 75% to pay for any bailout and I'll consider it. Raise taxes on hedge fund management fees to 50% while you're at it. Impose a tax on trades. Give judges the right to cram down mortgages. Start with that, and then ask me to support throwing good public money after bad private bets. It's time to let the gamblers fail and to learn our lessons.
— joe (new york), New York
Recommend Recommended by 16 Readers
September 30, 2008 6:57 am
I would like an explanation of the timing of this generalized "meltdown". All the necessary conditions for this meltdown were present twelve months ago.Why now? Why five weeks before an election?
— David Healy, Montpelier VT
Recommend Recommended by 11 Readers
September 30, 2008 6:57 am
What gets lost in the New York Time coverage is that the COUNTRY doesn't support the bailout and is it pushed down our throat. BRAVO to the US Congress who voted NO with their constituency. Bravo to all the Representatives who had guts to withstand the pressure. Taxpayers are already burdened with paying trillions for a war they didn't want that benefited only a few. We are sick to do the same with this bailout. It's time for WS to taste the challenges of real life with no huge bonuses for trading air and creating no lasting value.
— Alex G., New York, New York
Recommend Recommended by 19 Readers
September 30, 2008 6:57 am
"WE have nothing to fear but fear itself!" Relax America, the worthless paper shuffler economy is dying. We will be fine without Credit Default Swaps and SIV's, you will see. Our Parents did pretty well without them.
— Cynical Yes, Midwest
Recommend Recommended by 8 Readers
September 30, 2008 6:57 am
Your reporters assume that the bailout is needed. American economists presume we're ignorant if we're against it. But it's our economists, trained under Federal Reserve sponsorship, who are ignorant. The bailout won't help: we got where we are because the Federal Reserve system and the fiat dollar allow our politicians to keep spending more than they have, and allow the financial system to create more credit than the economy needs, thus distorting the free market while making believe they're giving us a free lunch. Things will get better faster if goverment stops meddling and keeps within its budget. Americans have to choose between deluding themselves with a free lunch and living without the Federal Reserve system and the fiat dollar, neither of which will last beyond the collapse they've been destined to bring about.
— hugues da mousse, chapel hill
Recommend Recommended by 4 Readers
September 30, 2008 6:57 am
Now, imagine a similar crisis next year (not hard to imagine), at a point when McCain is disabled (or gone) and Palin is president.Talk about faltering leadership?If that prospect doesn't disturb you, go ahead, vote for McCain/Palin.
— RWeber, Geneva
Recommend Recommended by 7 Readers
September 30, 2008 6:57 am
1) In a credit squeeze, it would be politically convenient to point out that the Fed's discount window is available as a lender of last resort. This calamity is not due to the lack of money at the banks, it is due to a chaotic financial miasma that has arisen due to an archaic accounting system. Banks can not close the books for the fiscal year since they do not know what the valuation of their MBS and derivatives are.2) It is important to increase the limits of FDIC coverage for deposit accounts to reflect the current reality. Most people do not have deposits over the limit, but those who do would be encouraged to move their money from "papers" with no legs to real monetary deposits, at whatever interest rate. If the banks have deposits on their books, they can presumably resume their normal lending.3) Reducing the reserve requirement for banks may provide an immediate boost to the credit market. In theory, this may pose a danger, since this measure is meant to provide solvency to counter a "run" on the banks, but is it really necessary, given the FDIC backup, and the new flexibility in bank mergers? As a measure of last resort, we could limit cash withdrawals to $100.- a day per account, both at the ATM's and at the teller windows.4) We can flat line both the real and the virtual mortgages at their origination date, by rewinding the computer tapes as it were and rebuilding the balance sheets based on an accounting concordat that is legally binding. Banks can close out with a valid result, because both the MBS underlying nominals and the real mortgages are symmetrical. See the article at vantari.com/economic. Insurance could be issued to cover mortgage payments at this valuation level until the MBS expires, because the actuarial formula can be computed using the fixed property valuation that has been agreed to, by law.The "balloon" resulting from a drop in assessed valuation is a homeowner liability that is due when he sells the property, not before, giving us time to work them off when valuations once again increase, or to roll them over as legally registered liens, for the new owners to dispose of. This speculative "balloon" becomes a deferred payment that can be passed along to the MBS trunches for each mortgage that is in trouble since the total indebtedness does change at that level. The assessed valuation of the underlying real estate in the MBS trunches and of the real estate mortgagees themselves would remain as it was at loan origination, for those loans which were underwritten during the period of speculation.Dean H Steelehttp://www.vantari.com/
— Dean Vantari, Atlanta, GA
Recommend Recommended by 0 Readers
September 30, 2008 6:57 am
All of these things including the mother of all bailouts seem like colorful kiddie bandaids put on some mangled body hit by a roadside bomb.It seems that the US economy has to rebuild itself from the ground up. That's only going to happen with genuine leadership and a comprehensive, intelligent and fully modern master plan for our economic, cultural and political future.
— Don, Madrid
Recommend Recommended by 8 Readers
September 30, 2008 6:57 am
So starts the New Great Depression. The Republicans didn’t learn from the 1920s and all of us, apparently, are destined to repeat that mistake. We’ve had trickle down, deregulation, tax breaks for the very wealthy, endless war and now the bill is due. There are plenty of names to name, but what it amounts to is the ghost of Herbert Hoover. Let’s not forget all of those little people preaching from rightwing think tanks and lobbying on K Street. Oh, yeah! The geniuses on Wall Street, too. Oh, yeah, again! The voters who go to the polls wearing their designer blinders.So thanks a lot, fellows. See you in the soup line. Except that, because you’ve had your hands in the till for the past twenty something years, we won’t.
— Spence, Bellingham, WA
Recommend Recommended by 4 Readers
September 30, 2008 6:57 am
Europe is bailing out it's banks.Why is the congress not in usa ?Democrats control congress.They must be responsible.
— P.A.Pointon, USA
Recommend Recommended by 0 Readers
September 30, 2008 6:57 am
The vote failed because it has been presented to the people as a "bailout of Wall Street" The Man on the Street" who have been calling their representatives does not understand that this affects him as well as us all. Needs a better PR person that can tell it like it is! Not George Bush--he's not trusted!
— Anna L, Pinehurst, NC
Recommend Recommended by 5 Readers
September 30, 2008 6:57 am
Treasury secretary Henry Paulson and Federal Reserve chief Ben Bernanke, having led us into this mess, should be fired immediately -- and should in no case be trusted to solve the enormous mess they allowed to happen on their watch.
— polymath, British Columbia
Recommend Recommended by 3 Readers
September 30, 2008 6:57 am
Putting this whole battle in terms of “Wall Street versus Main Street” ignores the fact that “Wall Street IS Main Street”. I hope everyone who was concerned about having their taxes raised $2400 a year realizes they probably lost that much from their 401K in one day with yesterday’s drop on the Dow. And to hear Fox News and other voices of the right blaming Democrats for not rallying every one of their House members to support what is essentially a Bush plan is particularly galling. The populist voices on both the right and the left seem so intent on sticking it to the Wall Street whiz kids that they’re willing to sacrifice their families’ economic security to do it. And I envy executives’ compensation packages as much as the next person, but that money is a small drop in the bucket compared to the hundreds of billions the recovery package includes. The bottom-line lesson I hope everyone learns from this is that 25+ years of Republican opposition to regulation, oversight and government intervention has come home to roost in the form of this crisis. I’d like as much as anyone to rub their noses in their mess, but not at the expense of my family, my job and any hopes I have for living off of my diminishing retirement savings.Fiftysomethingman.blogspot.com
— Davis Whiteman, SC
Recommend Recommended by 12 Readers
September 30, 2008 6:57 am
Great! (sarcasm) So now the Treasury is printing more money? You know what this means, don't you? They are out of "fixes" for this financial meltdown, and are using the only weapon left in their arsenal. This action is only going to lead to more world-wide inflation of prices. It isn't going to change the fact that nobody knows the worth of their paper assets anymore, and bankers aren't loaning money to other bankers. Simply putting more money into circulation isn't going to help much with these issues, if at all.Everybody needs to take a few deep breaths, have a few stiff drinks and ride this thing out. Things will be rough for awhile. But it is going to take a minimum of a year to know where the financial dead bodies are buried, then to figure out what the remaining paper assets are worth, if they are worth anything at all.So, good: we get back to tangible basics: houses, buildings, infrastructure, machinery, gold, metals, commmodities, etc. We have needed to do this for the past 10 years, or more. Now is the time to take stock in the things we can see, eat and build capacity with.Stop with the phony, short-term, hysterical financial bail-out "fixes", which are only going to put the U.S. taxpayer on the hook for something that is going to happen anyway: a world-wide recession/correction. Perhaps a good recession will force a return to instituting intelligent financial regulations, and to stopping shoddy, predatory lending practices. One can only hope.BUT NO MORE BAIL-OUTS OF FINANCIAL CORPORATIONS BY U.S. TAXPAYERS! STOP WITH THIS GARBAGE NOW!
— Rob L, N Myrtle Beach, SC
Recommend Recommended by 7 Readers
September 30, 2008 6:57 am
Paulson and others are running about shouting "The sky is falling, the sky is falling..." without explaining clearly what that means. What, exactly, are the consequences of doing nothing? They say that the $700bn bailout will save the day (year?). How, exactly, will it do that? No mumbo jumbo, please! Just the facts and the possible scenarios!
— Stephen White, San Clemente, CA
Recommend Recommended by 7 Readers
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Published: September 29, 2008
The crisis gripping the nation’s banks took a troubling turn on Monday as investors’ confidence in even the largest and strongest institutions spiraled lower.
Financial shares plunged 16 percent on one of the darkest days for the American stock market since the 1987 crash.
After the House of Representatives rejected a rescue for the financial industry Monday, fears grew that more banks, particularly small and midsize lenders, could run into trouble unless a new plan emerged quickly.
Even shares in the three banks that have survived the crisis as the largest in the industry — Bank of America, JPMorgan Chase and Citigroup — fell more than 10 percent Monday as anxiety gripped markets. Goldman Sachs and Morgan Stanley, which transformed into bank holding companies last week, fell more than 12 percent.
Regional banks were punished even more severely as investors scrambled to figure out which of them might fall next in the absence of a bailout plan. National City Corporation, Downey Financial Corporation and Sovereign Bancorp, lenders pressured by substantial exposure to soured mortgages, were especially hard-hit, falling 63 percent, 48 percent and 36 percent respectively on the heels of the government’s seizure Thursday of Washington Mutual, the largest savings and loan.
“With the credit markets drying up and bank-to-bank lending rates through the roof, the ability of these banks to weather the storm is being called into question,” said Jim Eckenrode, a banking analyst at TowerGroup, a financial services consulting firm.
Wachovia plunged more than 70 percent after it was sold to Citigroup on Monday. Citigroup will pay $1 a share, or about $2.2 billion, for Wachovia’s banking operations. Citigroup will assume the first $42 billion of losses from Wachovia’s riskiest mortgages and transfer to the Federal Insurance Deposit Corporation $12 billion in preferred stock and warrants. In exchange, the F.D.I.C. will absorb all losses above that level.
The reshaping of Wall Street since the collapse of Lehman Brothers just two weeks ago has also touched off a wave of shotgun mergers among the nation’s commercial banks. Those with relatively deep pools of financing are scouring the landscape for weak targets that they believe can give them a more dominant position in the marketplace when the dust from the present financial crisis settles.
“What we have gotten is 10 years of consolidation in the last 10 days,” said Michael Poulos, a partner at Oliver Wyman, a financial services consulting firm. “The current situation has created opportunities for acquirers that are really unprecedented.”
The past decade, in many ways, has been a golden age of banking. Profits were high, buoyed by fat lending margins and relatively few loan losses. Plenty of money was sloshing around in the financial system. And Wall Street’s loan packaging machine helped ensure it would not go dry.
Now, that has all changed. Only the strongest banks are bound to survive. “Over the next two years, we are going to see a lot of consolidation,” said Jimmy Dunne, the senior managing principal of Sandler O’Neill & Partners in New York. “There will be the forced consolidation that we are seeing. There will be bank failures that will follow it up. And then, after a while you will see a large amount of consolidation among smaller and midsize banks.”
Bankers say that the industry is quickly headed to a new era dominated by two types of banks. On the one hand, there will be small community banks and credit unions that offer personalized service and take advantage of their local ties. On the other, there will be behemoths like Bank of America, Citigroup and JPMorgan Chase that compete on the breadth of their products and potential cost savings from their size.
But the towering presence of the biggest banks brings heightened concerns. Bank of America, JPMorgan Chase and Citigroup now sit on more than 30 percent of the industry’s deposits. For consumers, that may turn out to be good news. “They can afford to pay higher rates for deposits and be more aggressive on going after business,” said John Kanas, the former chief executive of North Fork Bank, which he sold to Capital One Financial in 2006. And the bigger the balance sheet, analysts say, the safer customers’ deposits are, because the government will be less likely to allow the institution to fail.
Charles Geisst, a Wall Street historian at Manhattan College, said that belief was now firmly embedded in the financial culture. “Bank of America, Citi, and JPMorgan are going to be quasi-state entities now. They will never be allowed to fail, and they will be closely monitored,” he said. “They are surrogates for the American economy.”
Americans have long had deep reservations about a concentration of corporate power, and for decades reined in banks for just this reason. The McFadden Act of 1927 permanently established the Federal Reserve system, but in a political compromise, imposed a ban on banks opening new branches across state lines. As a result, retail banking was fragmented across the nation.
That remained the case until 1994, when banks won a battle to change the law to permit the creation of national franchises. The result was a wave of consolidation in the late 1990s, paving the way for the formation of the banking industry’s current giants and a handful of big regional lenders.
At a state level, the same thing had occurred in Texas’s banking industry in the late 1980s which, in many ways, may turn out to be a model for today’s nationwide mess. For years, Texas banks lent aggressively to oil and gas partnerships and real estate developers on the belief they would always get paid back. But with a sharp decline in oil prices and a sudden change in the tax laws, the market collapsed.
The result was that virtually all of the largest banks in Texas — names like Republic Bank, InterFirst Bank, First National City Bank, and Texas Commerce Bank — either failed or were snapped up by bigger, out-of-state institutions. Crippled by their widening losses, they pulled back on the amount of money they lent. North Carolina National Bank, which acquired several ailing Texas banks during this period and was Bank of America’s predecessor, earned the nickname “No Cash for Nobody” for its reputation as a stingy lender.
But as the economy rebounded, the bigger banks began gaining a bigger share of the Texas market. Community banks, offering personalized service, saw an opening as a popular alternative. Today, the Texas market is dominated by Bank of America, Wells Fargo, and JPMorgan Chase. But Frost Bank of San Antonio is the only midsize Texas bank left standing, along with a number of smaller lenders.
Ben White contributed reporting.


What’s Worse Than a Flawed Bailout?
Published: September 29, 2008
After nearly eight years of voting in virtual lock step with President Bush on everything from tax cuts to torture, House Republicans decided on Monday to break ranks on the survival of the nation’s financial system.
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The rejected bailout bill that was on the floor after a weekend of hard negotiating was objectionable in many ways, but it was a Republican-generated bill and was improved from the administration’s original version. Sixty percent of House Democrats voted for the bill, enough to easily pass the measure if the Republicans had not decided to put on their display of pique and disarray.
The question now is whether the stock-market plunge that followed the House’s failure to lead — and a renewed credit freeze — will be enough to get the 133 Republicans who voted against the measure to change their minds. And, more important, whether the damage that the no vote has inflicted is readily reversible.
Republican no votes were rooted less in analysis or principle than in political posturing and ideological rigidity. The House minority leader, John Boehner, conceded as much: “While we were able to move the bill drastically to the right, it wasn’t good enough for our members.”
It’s not clear what would be good enough for the Republicans since there was very little talk of substance on Monday after the bill died on the floor of the House. Instead, the Republicans tried to blame their revolt on a speech given before the vote by House Speaker Nancy Pelosi, who connected the current crisis to the fiscal and economic mismanagement of the Bush years. It may not have been the perfect moment to say that, but it was true.
Republicans were also upset that serial bailouts represent a rejection of free-market principles. They do. That’s because the free market in finance, unregulated and unsupervised, has failed. And, in its failure, it is inflicting greater damage on an already weak economy.
No amount of amendments to the bailout package will change the administration’s disastrous economic record or erase the manifest failure of the Republicans’ free-markets-above-all ideology.
Since last week, this page has urged Congress to take the time to get the bailout right. Over all, lawmakers have given too little consideration, in public at least, to alternatives to the Treasury’s plan to buy up the bad assets from various financial firms.
In the bill rejected on Monday, the unlimited powers that the Treasury Department had initially sought were curbed, and Congressional oversight was added. But judicial review of Treasury’s purchases was not adequately ensured. The courthouse door was not closed entirely; lawyers could still seek effective remedies for actions that violate the Constitution. But that’s a much higher hurdle than the already formidable barriers in place to discourage lawsuits against the government.
Homeowners were also given short shrift with provisions that mainly urged lenders and the Treasury to do more to help them. That’s unconscionable. The financial crisis is as much a problem for homeowners as for Wall Street investment bankers. Appeals to lenders’ better natures have not worked to bring lasting relief to homeowners. If they are still not working in the coming months, Congress will have to revisit the issue.
Taxpayer protections are also iffy, such as a requirement that in five years, the president must give Congress a plan for recouping any losses from financial firms. What will happen then is anyone’s guess. Lawmakers could decide at that point that taxpayers are the only pit bottomless enough to absorb those losses.
Still, the imperfections in this bill are the result of a democratic process that can be rethought, revisited and reworked. It is better than nothing, which is what some backward-looking House Republicans gave Americans on Monday.


Op-Ed Columnist
When Madmen Reign
Published: September 29, 2008
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I’m not holding my breath, but I would like to see the self-proclaimed conservative, small government, anti-regulation, free-market zealots step up and take responsibility for wrecking the American economy and bringing about the worst financial crisis since the Depression.
Even now, with the house on fire, the most extreme among them won’t pick up the fire hoses and try to put it out.
With the fate of the Bush administration’s desperate $700 billion bailout of the financial industry hanging in the balance, Representative Darrell Issa, a Republican from California, stuck to his political playbook like a man covered in Krazy Glue. He pronounced himself “resolute” in his opposition to the bailout because to be otherwise would amount to a betrayal of party principles.
To deviate from those principles, in Mr. Issa’s view, would be like placing “a coffin on top of Ronald Reagan’s coffin.”
We are in very strange territory here.
George H.W. Bush warned us about “voodoo economics” in 1980, but the ideologues clamped a gag on him and put him on the Gipper’s ticket. For much of the time since then, the madmen of the right have carried the day. They were freed of their remaining few restraints with the ascendance of George W. Bush in 2000.
These were the reckless clowns who led us into the foolish multitrillion-dollar debacle in Iraq and who crafted tax policies that enormously benefited millionaires and billionaires while at the same time ran up staggering amounts of government debt. This is the crowd that contributed mightily to the greatest disparities in wealth in the U.S. since the gilded age.
This was the crowd that cut the cords of corporate and financial regulations and in myriad other ways gleefully hacked away at the best interests of the United States.
Now we’re looking into the abyss.
When President Bush went on television last week to drum up support for the bailout package, he looked almost dazed, like someone who’d just climbed out of an auto wreck.
“Our entire economy is in danger,” he said.
He should have said that he, along with his irresponsible Republican colleagues and their running buddies in the corporate and financial sectors, put the entire economy in danger. John McCain and his economic main man, Phil (“this is a mental recession”) Gramm, were right there running with them.
Credit markets have frozen almost solid, banks are toppling like dominoes and brokerage houses are vanishing like props in a magic act. And who was one of the paramount leaders of the manic anti-regulatory charge that led to this sorry state of affairs? None other than Mr. Gramm himself, a former chairman of the Senate Banking Committee.
Where is Mr. Gramm now? Would you believe that he’s the vice chairman of UBS Securities, the investment banking arm of the Swiss bank UBS? Of course you would. A New York Times article last spring noted that the “elite private bankers” of UBS “built a lucrative business in recent years by discreetly tending the fortunes of American millionaires and billionaires.”
Toadying to the rich while sabotaging the interests of working people was always Mr. Gramm’s specialty. He was considered a likely choice to be treasury secretary in a McCain administration until he made his impolitic “mental recession” comment. He also said the U.S. was a “nation of whiners.”
The tone-deaf remarks in the midst of severe economic hard times undermined Senator McCain’s convoluted efforts to reinvent himself as some kind of populist. But they were wholly in keeping with the economic worldview of conservative Republicans.
The inescapable disconnect between rhetoric and reality is often stark. Senator McCain has been ranting recently about the excessive pay and “bloated golden parachutes” of failed corporate executives. And yet one of his closest advisers on economic matters is Carly Fiorina, who was forced out as chief executive of Hewlett-Packard. Her golden parachute was an estimated $42 million.
Voters have to shoulder a great deal of the blame for the economic mess the country is in. Too many were willing, for whatever reasons, to support politicians who spat in the eye of economic common sense. Now the voodoo that permeated conservative economic policies for so many years has come back to haunt us big-time.
The question voters should be asking John McCain is whether he has stopped serving his party’s economic Kool-Aid, which has taken such a toll on working families, and is ready to change his ways. Is his sudden populist transformation the real thing or just a mirage?
In the gale force winds of a full-fledged economic hurricane, it’s fair to ask Senator McCain whether he still considers himself a conservative, small government, anti-regulation, free-market zealot. Or whether he’s seen the light.

Monday, September 29, 2008

He's a Gambler


Published: September 27, 2008
Senator John McCain was on a roll. In a room reserved for high-stakes gamblers at the Foxwoods Resort Casino in Connecticut, he tossed $100 chips around a hot craps table. When the marathon session ended around 2:30 a.m., the Arizona senator and his entourage emerged with thousands of dollars in winnings.
BETS Mr. McCain supported tax breaks for casinos over the years, including one that helped Foxwoods in Connecticut. He has also gambled there.
A lifelong gambler, Mr. McCain takes risks, both on and off the craps table. He was throwing dice that night not long after his failed 2000 presidential bid, in which he was skewered by the Republican Party’s evangelical base, opponents of gambling. Mr. McCain was betting at a casino he oversaw as a member of the Senate Indian Affairs Committee, and he was doing so with the lobbyist who represents that casino, according to three associates of Mr. McCain.
The visit had been arranged by the lobbyist, Scott Reed, who works for the Mashantucket Pequot, a tribe that has contributed heavily to Mr. McCain’s campaigns and built Foxwoods into the world’s second-largest casino. Joining them was Rick Davis, Mr. McCain’s current campaign manager. Their night of good fortune epitomized not just Mr. McCain’s affection for gambling, but also the close relationship he has built with the gambling industry and its lobbyists during his 25-year career in Congress.
As a two-time chairman of the Indian Affairs Committee, Mr. McCain has done more than any other member of Congress to shape the laws governing America’s casinos, helping to transform the once-sleepy Indian gambling business into a $26-billion-a-year behemoth with 423 casinos across the country. He has won praise as a champion of economic development and self-governance on reservations.
“One of the founding fathers of Indian gaming” is what Steven Light, a University of North Dakota professor and a leading Indian gambling expert, called Mr. McCain.
As factions of the ferociously competitive gambling industry have vied for an edge, they have found it advantageous to cultivate a relationship with Mr. McCain or hire someone who has one, according to an examination based on more than 70 interviews and thousands of pages of documents.
Mr. McCain portrays himself as a Washington maverick unswayed by special interests, referring recently to lobbyists as “birds of prey.” Yet in his current campaign, more than 40 fund-raisers and top advisers have lobbied or worked for an array of gambling interests — including tribal and Las Vegas casinos, lottery companies and online poker purveyors.
When rules being considered by Congress threatened a California tribe’s planned casino in 2005, Mr. McCain helped spare the tribe. Its lobbyist, who had no prior experience in the gambling industry, had a nearly 20-year friendship with Mr. McCain.
In Connecticut that year, when a tribe was looking to open the state’s third casino, staff members on the Indian Affairs Committee provided guidance to lobbyists representing those fighting the casino, e-mail messages and interviews show. The proposed casino, which would have cut into the Pequots’ market share, was opposed by Mr. McCain’s colleagues in Connecticut.
Mr. McCain declined to be interviewed. In written answers to questions, his campaign staff said he was “justifiably proud” of his record on regulating Indian gambling. “Senator McCain has taken positions on policy issues because he believed they are in the public interest,” the campaign said.
Mr. McCain’s spokesman, Tucker Bounds, would not discuss the senator’s night of gambling at Foxwoods, saying: “Your paper has repeatedly attempted to insinuate impropriety on the part of Senator McCain where none exists — and it reveals that your publication is desperately willing to gamble away what little credibility it still has.”
Over his career, Mr. McCain has taken on special interests, like big tobacco, and angered the capital’s powerbrokers by promoting campaign finance reform and pushing to limit gifts that lobbyists can shower on lawmakers. On occasion, he has crossed the gambling industry on issues like regulating slot machines.
Perhaps no episode burnished Mr. McCain’s image as a reformer more than his stewardship three years ago of the Congressional investigation into Jack Abramoff, the disgraced Republican Indian gambling lobbyist who became a national symbol of the pay-to-play culture in Washington. The senator’s leadership during the scandal set the stage for the most sweeping overhaul of lobbying laws since Watergate.
“I’ve fought lobbyists who stole from Indian tribes,” the senator said in his speech accepting the Republican presidential nomination this month.
Kitty Bennett and Griff Palmer contributed to reporting.

CNBC's Worst Moment

Nobody considered the possibility that the vote could be held open and then allow for people to switch votes.

(That didn't happen, but think of those who sold based on the assumption of the CNBC idiots that the vote was impossible to change -- Steve Leasman, for example.)

They all turned to John Harwood from the NBC news department and he was clueless.

Wachovia -- $1 a Share???

The comments on this article are amazingly good.

Citigroup to Buy Wachovia Banking Operations for $1 a ShareSeptember 29, 2008, 7:33 am

Citigroup has agreed to buy Wachovia’s banking operations for $1 a share, a move that that would concentrate power within the nation’s banking industry in the hands of a few giant lenders, The New York Times’s Eric Dash and Andrew Ross Sorkin reported Monday morning.
The Federal Deposit Insurance Corporation said in a statement on Monday that Citigroup will assume Wachovia’s senior subordinated debt, and emphasized that Wachovia did not fail.

Although the Federal Reserve and Treasury Department were pushing for a sale, the government was resisting pressure to provide financial guarantees to the buyer, which both Citigroup and Wells Fargo had sought.
The sale to Citigroup further concentrates Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup would control more than 30 percent of the industry’s deposits.
Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry, The Times said. Only days earlier, federal regulators seized and sold the nation’s largest savings and loan, Washington Mutual, in one of a series of important deals that have reshaped the financial landscape.
As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.
The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks may be unable to compete with these behemoths.
For Citigroup, the deal would be its largest acquisition since the landmark merger of Citicorp and Travelers Group a decade ago. It would also be an important milestone for for Vikram S. Pandit, Citigroup’s new chief executive who has been making the case to employees and investors that Citigroup is a “pillar of strength” in turbulent times.
With Wachovia’s branch network, Citigroup would get the domestic retail banking business that has eluded it for years. It would also give Citigroup a bigger platform to sell home loans and credit cards, and would give Citigroup access to more than $400 billion in more stable customer deposits, reducing its dependence on outside investors for funds.
For Mr. Pandit, the deal has symbolic value, too. Although Citigroup has racked up nearly $50 billion in losses since the crisis began last summer and has watched the value of its shares sharply decline, the bank was also among the first to raise large amounts of capital. Mr. Pandit may point to the Wachovia deal as a sign of progress and an indication that the worst for the bank is behind.
It also will be seen as a stamp of approval from regulators. Only a few years ago, the Federal Reserve took the unusual step of banning Citigroup from making “significant acquisitions.” Gaining their approval to do a big deal on such short notice is likely to be viewed as a big vote of confidence in Mr. Pandit’s management team.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry. Citigroup worked feverishly to cement a deal on Sunday night, with the discussions moving past the midnight hour, according to a person briefed on the talks. Officials from the F.D.I.C. and Treasury Department stayed up late to try to get the transaction done.

Wachovia, like WaMu, has been hobbled by bad mortgages, making a merger more urgent and prompting federal regulators to push for a quick sale. Wachovia’s share price has plunged nearly 74 percent this year.
In the last two weeks, Wachovia had entered into discussions with several possible suitors. After the collapse of Lehman Brothers, Wachovia held talks with Goldman Sachs and Morgan Stanley and put out inquiries to other banks, according to The Times, which cited people close to the situation.
Last week, it held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interested cooled.
As lawmakers worked in Washington on the financial bailout this weekend, Wachovia executives huddled in the Seagram Building offices of Sullivan & Cromwell on Park Avenue.
Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department, who took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker, The Times said. At 8:15 am. on Saturday, Citigroup and Wells reportedly took their first peek at Wachovia’s books.
Regulators pressed the parties to move quickly. Senior officials at the Federal Reserve in Washington, and its branches in New York, Richmond and San Francisco held weekend discussions with all the banks involved. Top officials at the Federal Deposit Insurance Corporation and the Treasury were also in the loop, The Times said.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York, personally reached out to executives involved in the process to assess the situation and spur it along, according to the report. Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial guarantee, as regulators did with JPMorgan’s acquisition of Bear Stearns, The Times said, citing people briefed on and involved with the process.
Both Citigroup and Wells Fargo are deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people told The times. Bankers had little time to assess the risk.
Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday, according to The Times. For Wells Fargo, a deal would extend its branch banking network across the Mississippi River, creating a nationwide franchise that would compete with Bank of America and JPMorgan Chase.
Citigroup executives consider Wachovia a make-or-break deal for their consumer banking ambitions. If Citigroup were to buy Wachovia, it would gain one of the preeminent retail bank operations after struggling to build one for years. It would also give Citigroup access to more stable customer deposits, allowing it to rely less heavily on outside investors for funds. If Citigroup fails to clinch a deal, its domestic retail operations would be far behind Bank of America and JPMorgan Chase. Vikram S. Pandit, Citigroup’s chief executive, was personally overseeing the talks.
With a big presence in California, where home prices have fallen particularly sharply, Wells Fargo has suffered big losses on mortgages and credit card loans. But Wells, unlike many banks, maintained relatively high lending standards, so it has not been crippled by the bust like many of its big competitors.
Wachovia, by contrast, has been ravaged. Its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages, has proved disastrous. The bank also faces mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.

3 comments so far...
September 29th,20087:50 am
Dodd, Frank and Schumer created such a disaster. Schumer set the collapse of the banking system in motion when he killed Barclays acquisition of Lehman by issuing his September 11, 2008, letter declaring that banks should not be allowed to foreclose on homes. Since the value of the debt depends on the ability to enforce the terms, Barclays realized that Schumer and other democrats would wipe out the value of the mortgages. Barclays asked the US Govt to give a guarantee that they would not let Schumer’s plan go forward, but were told they could not stop Congress particularly if Obama got elected. This was the end of Lehman, which triggered AIG and nearly caused the collapse of Goldman.
— Posted by Lyle Vos
September 29th,20087:53 am
So this was the secret plan all along!
Brink the country to the verge of collapse. Then buy up the assets of failing banks and create a gigantic monopoly of banking. Now THEY own the United States.
The trust busters, Teddy Roosevelt and William Howard Taft, are rolling in their graves!
Steffen SchmidtProfessor of Political Science and Public PolicyIowa State University
— Posted by Steffen Schmidt
September 29th,20087:57 am
Why emphasize the rosy potential future for Citigroup? Maybe you might in future discuss percentage foreign ownership of Citigroup.
— Posted by Dr G.

Peter Baker

The difficulty with the interregnum, as I have written about, is shown in this article.

I Do Solemnly . . .
Waiting to Lead (or Not)

Published: September 27, 2008
The winter before Franklin D. Roosevelt took office was among the darkest periods of the Great Depression. With bank runs threatening a fragile financial system, Herbert Hoover tried to recruit his successor to sign a joint declaration closing the banks. The president-elect brushed him off. Two days after Roosevelt was sworn in, he ordered the very bank holiday Hoover had proposed.
Perhaps it was appropriate, then, that 75 years later the White House hosted another awkward political dance of once and future leaders in the face of a crushing economic crisis. This time there were three not-quite presidents sitting at the table in the Cabinet Room — one who still technically has the job but can’t get anyone to listen, and two others who have everyone’s undivided attention but don’t yet have the job.
The session with President Bush, Senator John McCain and Senator Barack Obama illustrated just how much power at the top of the nation’s political hierarchy has already fragmented, leaving a leadership void that complicated the path to consensus last week over the deepening turmoil on Wall Street. If Mr. Bush thought summoning the two major-party nominees would neatly yield bipartisan agreement behind his proposed $700 billion bailout, he quickly learned how steep that climb is with an election around the corner.
What is left, though, is uncertainty about whom to follow. “There’s no leadership; nobody’s leading,” said Pat Caddell, who was an adviser to President Jimmy Carter. “The country’s not looking to him to lead,” he said of Mr. Bush. “And the Congress couldn’t lead an Easter egg hunt.”
The problem for Mr. Bush is that he has all the levers of the Oval Office without all of the authority. Even some of his own advisers concede that the country long ago tuned him out, and last week’s revolt by House Republicans against his initial economic plan demonstrated his trouble asserting command even of his own party. As Ed Rollins, the White House political director under Ronald Reagan, put it cruelly but crisply on CNN on Friday: “This isn’t a lame-duck administration. This is a dead-duck administration.”
If Mr. Bush’s remaining time in office is short, though, it is not that short. Mr. Obama at one point referred to himself or Mr. McCain as “the person who in approximately 40 days will be responsible for dealing with this mess.” Not quite. As of last week, Mr. Bush still had four months left in office, and even after the Nov. 4 election, Mr. Obama or Mr. McCain will be left to hover until Inauguration Day.
So what is the right role in the meantime for a president in waiting? Mr. McCain chose the head-on approach, suspending his campaign briefly to return to Washington, ostensibly to help forge a deal. That worked for him a few weeks ago when he effectively canceled the opening night of his nominating convention and, looking presidential, headed to New Orleans as Hurricane Gustav bore down.
Mr. Obama took a more hands-off approach, attending the White House meeting and offering views of the bailout without asserting himself as de facto leader. If this is Mr. Bush’s mess, Mr. Obama seems willing to let the departing president keep ownership of it. And Mr. Obama is acutely aware that inheriting a $700 billion commitment might cripple his ability to advance his own domestic agenda.
This sense of uncertain leadership has arisen repeatedly in American history, but usually after a presidential election when the next leader has actually been anointed rather than before, as now. The interregnum between Hoover and Roosevelt offers an interesting case study given the financial tumult now confronting the nation.
Roosevelt did not want to take responsibility for Hoover’s problems or his proposals and wanted the country to perceive a sharp break when he took over, even if he would ultimately adopt some of the same strategies for arresting the Depression. Hoover repeatedly reached out to Roosevelt to present a united front after the 1932 election, only to be ignored or rebuffed.
Hoover made a final, futile effort on the eve of the March 1933 inauguration to get Roosevelt’s support for a bank holiday. “Like hell I will,” Roosevelt replied, according to Jonathan Alter in his book “The Defining Moment: F.D.R.’s Hundred Days and the Triumph of Hope.” “If you haven’t the guts to do it yourself, I’ll wait until I’m president to do it.”
Hoover was so angry that he did not speak to Roosevelt during their ride to the Inauguration the next day. Roosevelt then went ahead and ordered a four-day bank closure on his own and went out of his way to keep Hoover in exile for years, even though their two staffs ultimately collaborated on some economic programs.
“Hoover really wanted F.D.R. to be involved and be more active in struggling with the Great Depression,” said John P. Burke, a University of Vermont scholar and author of books on presidential transitions. “It’s a question of distancing yourself from a past administration, particularly if it’s from a different party. I think F.D.R. didn’t want to get enchained by any type of policies coming out of the Hoover administration.”
Roosevelt was hardly alone. Abraham Lincoln essentially kept silent as Southern states peeled away from the Union after he won election in 1860 but before he was sworn in, choosing to leave it to the incumbent to handle until Inauguration Day. “There was a lot of pressure on Lincoln to say something and make his will felt,” said Doris Kearns Goodwin, who has written biographies of both Lincoln and Roosevelt. “But he, too, felt it was very important to wait till he got there to do it his own way even though some people felt it was irresponsible not to say anything.”
The transition period in Lincoln’s and Roosevelt’s day dragged on far longer than it does today, a relic of the years when travel depended on the horse-drawn carriage. After the interminable gap between Roosevelt’s election and Inauguration, the Constitution was changed to move up the beginning of the new president’s term from March 4 to Jan. 20.
Even so, the country has endured uncomfortable overlaps between outgoing and incoming presidents in moments of difficulty. Lyndon B. Johnson was desperately trying to get North Vietnam to the negotiating table right before the 1968 elections, but Richard M. Nixon’s camp sabotaged that by persuading South Vietnam not to participate. Jimmy Carter was desperately trying to get Iran to release American hostages before the 1980 election, and some Democrats have promoted theories about involvement by Reagan supporters.
Edwin Meese III, a longtime Reagan hand who served as counselor and attorney general, said their camp stayed out of the Iran crisis, which ended in split-screen drama as the hostages were released just as the new president was inaugurated. “We made clear to everybody that Carter was the president and would remain president until Jan. 20,” Mr. Meese said. The Reagan camp’s only involvement, he said, was to pass along a message to Iran that “they would not expect any better from Ronald Reagan than they would get from President Carter.”
But to say “not me yet” gets a future president only so far. Voters, activists, the news media and other politicians expect leadership, as Mr. McCain and Mr. Obama saw last week. “The next president will be the person who really imposes the deal” rescuing financial institutions, said Ron Kaufman, who was a top aide to President George H. W. Bush. “You almost have to have them in the room. It wasn’t even a close call.”
Moreover, both Mr. McCain and Mr. Obama are sitting senators who have a role to play beyond their presidential aspirations. And let’s face it, given the complexity of building an administration, both campaigns already have begun transition planning in case they win. In 2000, Dick Cheney opened a transition office outside Washington and began picking top appointees before the Supreme Court ruling that effectively made George W. Bush’s victory official.
For a president in waiting, though, there is risk in looking too much like, well, a president in waiting. Mr. Obama learned that last summer when Republicans mocked him for his faux presidential seal, the “O Force One” nickname for his plane and the much-covered trip to the Middle East and Europe, capped by his speech in Berlin. At one point, it looked as if Mr. Obama was effectively reaching agreement with Iraqi leaders about troop withdrawals.
Of course in the end, cutting a deal with the Iraqis may be easier than cutting a deal with your fellow not-quite presidents.
An earlier version of this article referred incorrectly to the room at the White House where President Bush met with the presidential candidates and other lawmakers to discuss the financial rescue plan. It was the Cabinet Room, not the Roosevelt Room.