By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Thursday, October 9, 2008
Treasury officials said yesterday that the government now has the necessary tools to address the financial crisis and that the Bush administration has no plans to announce coordinated initiatives with other nations at a meeting this weekend of finance ministers from the world's leading economies.
The statements aimed to build investor confidence in the U.S. government's response and to cool expectations that the weekend meeting, convening as economic conditions rapidly deteriorate around the world, would succeed only if the gathered nations could agree on a big new plan.
"We have already taken a number of extraordinary bold actions on the liquidity front that I am convinced have been exactly the right policy steps," said Treasury Secretary Henry M. Paulson Jr.
He went on to plead for patience, acknowledging that it would take weeks to implement some of the programs authorized by Congress and more weeks before conditions improve. And even as he spoke, Treasury and Federal Reserve officials continued to develop plans for new steps if the financial markets continue to disintegrate. One of several options under consideration is taking ownership stakes in troubled banks.
It was by coincidence that leaders of the Group of Seven economic powers had scheduled a meeting in Washington as the global contagion spread. But the new administration line was greeted with skepticism and disappointment by a growing chorus of experts and world officials who thought the meeting offered a crucial opportunity to calm the markets.
"If these guys come to town and don't do anything significant, it will be a downer for confidence," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "It's almost like if Congress had gone home without approving the rescue package. If they go away without contributing a substantive response, I think it's a negative."
Dominique Strauss-Kahn, managing director of the International Monetary Fund, yesterday issued a statement saying the IMF would endorse additional coordinated steps, such as restoring the ability of banks to borrow money, helping banks raise capital to support new lending and protecting their depositors.
"These actions should help to restore trust and confidence in financial markets needed to break the negative feedback loop to the real economy," Strauss-Kahn said.
The global situation continues to unravel. Iceland's economy appeared to enter a free fall, with its banking sector collapsing and its central bank abandoning a failed effort to shore up its plunging currency. Australia's dollar fell 6 percent in one day against the U.S. dollar. South Korea saw a sharp acceleration of the recent run on the won, with the currency falling 5 percent to a near 10-year low against the dollar. South Korean corporations appear to be hoarding dollars, as the export-driven economy there braces for a slowdown from declining global demand, particularly from the United States.
President Lee Myung-bak said South Korea's $260 billion in cash reserves would insulate it from the kind of meltdown it went through in the late 1990s, when a currency and debt crisis spread across Asia. But he called on corporations and investors to cease stockpiling dollars.
"Dollar hoarding appears to be rampant amid the scarcity of the U.S. currency," Lee said yesterday, according to the Yonhap News Service. "Some businesses and individuals seem to think they can get rich quickly by hoarding dollars amid the won's crash in value. But individual greed should be put aside in times of national crisis."
The concern among experts is that similar problems in other nations will exacerbate the challenges facing the United States and could lead to a global recession.
"The U.S. got its act together, and now they need to do it on a global scale," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "We live in one global economy; there are no isolationists. What happens in China affects us. What happens in Italy affects England."
Paulson emphasized in his remarks yesterday that the United States will coordinate its response with other nations. He called for a meeting of a broader group of nations, the Group of 20, that includes emerging countries such as Brazil, to discuss the global economic contagion. And administration officials cautioned that plans for the weekend summit could change quickly depending on market events during the rest of the week.
After Paulson ended his remarks, investors dropped the Dow Jones industrial average more than 300 points in the last hour of trading.
Even as Paulson put a brave face on the government's efforts, Treasury and Fed officials continued to work long hours hammering out new steps the government could take. And government officials continue to check regularly with bank executives to see whether those steps have become necessary.
"They're trying to monitor, to do what is necessary, without going too far too fast," said a former Fed official who has participated in conversations with regulators. He spoke on condition of anonymity because he is not authorized to comment publicly on the matter. "You want to do what it takes to get the job done, but every time the government intervenes in the private economy, there is going to be a price to pay in the long run."
Authorities are most concerned that financial institutions are starved for cash. Even banks that have enough capital to cover their projected losses are increasingly unable to borrow the money they need to fund daily operations. This lack of liquidity is choking otherwise healthy banks, forcing them to cut back on lending.
One option under consideration is an expanded program for the government to buy the debt that financial institutions issue to raise money. The Federal Reserve announced Tuesday that it would buy short-term debt, known as commercial paper. The program functions as a kind of insurance on the short-term debt, giving investors confidence that they can get their money back.
The government is considering a similar program to insure the long-term debt of financial institutions in the hope of getting banks to lend to one another again, according to sources familiar with the deliberations. The resumption of interbank lending is critical to getting banks to increase lending to consumers.
A second option under consideration by the government is to recapitalize banks by investing federal money in exchange for preferred shares. Vast losses on loans have sapped the reserves of many institutions, and it is nearly impossible for banks to raise additional money. Treasury has the authority to buy preferred shares under the rescue package passed by Congress last week, but officials said it would take several weeks to develop ground rules for this kind of action.
A report yesterday from the Boston Consulting Group found that banks worldwide have lost $2.6 trillion in market value, about a third of the total value of their shares, since the beginning of the year. Bank of America tried to raise $10 billion Tuesday by selling shares of its stock at $28. The company was eventually forced to sell the shares at $22 after investors refused to bite.
The British government yesterday said it would inject up to $88 billion into eight of the nation's largest banks, taking preferred shares in return, if the banks were unable to raise the money themselves by year's end.
But any domestic plan is likely to focus only on the most troubled institutions. Industry groups strongly oppose a broad plan on the English model, arguing that most of the nation's banks have plenty of capital and will be in good health once they are able to borrow again.
"We have no interest, nor is there any need," said Ed Yingling, chief executive of the American Bankers Association. "The banking industry in the United States is very well capitalized. The thing that is messed up are the credit markets."
Another idea being pushed by outside experts is for the United States to guarantee all bank deposits to discourage sudden patterns of large withdrawals by panicked depositors. The United States now guarantees the first $250,000 in any deposit account, covering about 77 percent of deposits. But Germany and Ireland have begun to guarantee every penny on deposit at their banks, and some experts say the United States should issue a similar blanket guarantee for the duration of the financial crisis.
There are continued signs that the banking industry faces growing problems, unrelated to residential real estate, where the crisis started. An annual report released yesterday by federal regulators examined an important subcategory of all loans -- loans above $20 million that involve funds from several banks. The report found problems with 13.4 percent of the $2.8 trillion in outstanding loans in that category, compared with 5 percent of loans found to have problems last year.
The report found that lenders took little care to make sure companies could repay loans. The problems echo the failures of mortgage lenders, but these were loans made by the nation's largest banks to some of the nation's largest companies. The resulting losses continue to accumulate.
Staff writers Anthony Faiola and Lori Montgomery contributed.