Sure we are no longer in control of our sovereignty
HSBC In the News
1. Foreign Banks Hope An American Bailout Will Be Global (The New York
Times)
2. Capitalism can be incredibly unstable and state intervention is back,
big time (The Independent)
Industry/Regulatory News
3. Lawmakers Battle Over Rescue Plan (The Wall Street Journal)
4. Wall Street Fastens Its Seatbelt, Preparing for This Week's Ride (The
New York Times)
5. Goldman, Morgan Scrap Wall Street Model, Become Banks in Bid to Ride
Out Crisis (The Wall Street Journal)
6. Paulson charts new path; Treasury secretary gains powers with bailout
plan (Chicago Tribune)
7. McCain has not indicated whether he might keep Paulson. From
Candidates, Conflicting Stances on Mortgage Mess (American Banker)
8. Who will bail out American families? (Chicago Tribune)
HSBC In the News
1. Foreign Banks Hope An American Bailout Will Be Global
The New York Times
By Nelson D. Schwartz and Carter Dougherty; Eric Dash contributed
reporting from New York, Keith Bradsher from Hong Kong and Julia
Werdigier from London.
22 September 2008
PARIS -- The financial crisis that began in the United States spread to
many corners of the globe. Now, the American bailout looks as if it is
going global, too, a move that could raise its cost and intensify
scrutiny by Congress and critics.
Foreign banks, which were initially excluded from the plan, lobbied
successfully over the weekend to be able to sell the toxic American
mortgage debt owned by their American units to the Treasury, getting the
same treatment as United States banks.
On Sunday, the Treasury secretary, Henry M. Paulson Jr., indicated in a
series of appearances on morning talk shows that an original proposal
introduced on Saturday had been widened. 'It's a distinction without a
difference whether it's a foreign or a U.S. one,' he said in an
interview with Fox News.
The prospect of being locked out of the bailout set off alarm bells
among chief executives of overseas banks whose American affiliates also
hold distressed mortgage-related assets, like Barclays and UBS. The
original text provided access to the $700 billion bailout for any
financial institution based in the United States.
As the day wore on, some raised their concerns with the Treasury
Department, arguing that foreign institutions were both big employers
and major players in the American capital markets. By Saturday evening,
the language had been changed to allow any financial institution
'having significant operations' in the United States.
While Mr. Paulson has agreed with that argument, the Bush administration
is also leaning on foreign governments to pitch in with bailout programs
of their own as needed. 'We have a global financial system and we are
talking very aggressively with other countries around the world, and
encouraging them to do similar things, and I believe a number of them
will,' Mr. Paulson said on Sunday.
The request is expected to be discussed during a conference call among
Group of 7 finance ministries scheduled for Sunday evening, a European
official said.
Allowing foreign banks to participate in the federal rescue package has
not yet drawn widespread scrutiny in Congress, where a number of
lawmakers, including Senator Christopher J. Dodd, Democrat of
Connecticut, have acknowledged that millions of American citizens do
business with UBS, the Royal Bank of Scotland, and many other
foreign-based banks in the United States.
But a number of lawmakers are wary that such an extension may worsen
what could ultimately turn out to be a trillion-dollar bailout for Wall
Street.
'I'm skeptical of the bailout, the whole bill is only a couple of pages
long,' said Representative Scott Garrett, Republican of New Jersey, who
is a member of the House Financial Services Committee. As for the
participation of foreign banks, Mr. Garrett said: 'I have a concern
with it, they probably should be treated differently, but Congress is
really not getting any say.'
Christopher Whalen, a managing partner at Institutional Risk Analytics,
said that Mr. Paulson needed to justify why a wider bailout was in the
national interest.
'Can you imagine the Congress floating a bailout for Deutsche Bank or
UBS? It is the responsibility of the German or Swiss government,' he
said. 'We shouldn't be bailing them out.'
While politicians in the United States may emphasize the benefits for
banks based overseas, the definition of what is a European or American
bank has blurred in recent years with the growth of global giants like
HSBC, Barclays and Deutsche Bank.
Deutsche Bank, for example, became a major player in the United States
with its acquisition of Bankers Trust in 2001. It has written down more
than $11 billion in investments linked to the subprime crisis.
Barclays, meanwhile, is on course to buy a significant portion of the
North American operations of Lehman Brothers, the 158-year-old firm that
filed for bankruptcy protection last week, helping to set off the global
financial panic that forced Washington to act.
Gaining access to the relief was a top priority for European foreign
financial institutions with banking operations in the United States,
according to officials in industry and government.
They argued that the reputation of Wall Street and the United States
government would suffer immensely if properly licensed foreign banks in
the United States were shut out of the system.
'Who would open a bank again in the United States?' asked one
executive of a major European bank who has been following the
discussions.
At the same time, it was unclear how much European governments would bow
to the Treasury Department's encouragement to set up national programs
to deal with their own vast mortgage problems. Real estate markets in
Britain, Spain and Ireland have been particularly hard-hit as their own
housing market bubbles -- which grew in tandem with America's -- have
collapsed.
Other governments have struggled to get budget deficits under control in
the last few years. The German government, for example, has discouraged
talk of a stimulus package, and British officials said Sunday that they
were not working on a plan like that of the United States.
Robert Kelly, chief executive of the Bank of New York Mellon, said the
central bankers around the world would probably be scrutinizing the
American bailout proposal. 'I would expect every finance minister is
looking closely at what is happening in the United States, trying to
hypothesize what the impact will be, and is thinking about the tools the
Fed and Treasury have used,' he said. 'I would not be surprised, and
probably expect, some of those tools to be used in Europe as well.'
If the plan is approved in Congress and is signed into law, the benefits
would be large for European banks with licensed operations in the United
States, which incurred major losses from mortgage-linked securities.
UBS, the Swiss giant, has been among the hardest-hit institutions in the
world; both its chairman and chief executive left amid more than $40
billion in write-downs. Even so, it still retains roughly $20 billion
more in potential exposure to the troubled American housing market.
If a battle does develop in Congress over foreign participation, UBS,
among others, is poised to make just these arguments. Officials at the
Zurich-based giant point out the bank employs more than 30,000
Americans, is listed on the New York Stock Exchange, and owns two
broker-dealers registered under United States laws, UBS Securities and
UBS Financial Services, better known to Americans as the former Paine
Webber unit.
'These are Americans who work in New York,' said one executive who
requested anonymity because the American plan was still in development.
'And they are working for a bank that was incorporated in the United
States.' One senior Wall Street executive said he believed that the
proposal would apply to other institutions with regulated American
entities. Credit Suisse, for example, includes the old First Boston
Corporation, though that name was dropped years ago. He said the biggest
issue being debated was what securities would be included in the
proposal, and how the actual mechanism to buy them would work.
In Asia, the plan to purchase distressed assets drew little reaction
over the weekend. Asian banks generally have not invested significant
assets in American mortgage-backed securities.
The bigger question in Asia, bankers said, lies in how the American
legislation will affect HSBC, the large British-based bank with
significant operations in Asia. The bank's American subsidiary was a
large buyer of mortgages over the last decade, and kept many of these
mortgages on its books instead of trying to repackage and resell them as
mortgage-backed securities.
Richard Lindsay, a spokesman for HSBC, said that senior management was
still evaluating the situation and said it was a 'positive step forward
but it won't solve the problems of an overleveraged industry.'
2. Capitalism can be incredibly unstable and state intervention is back,
big time
The Independent
By Stephen King, HSBC Group Chief Economist
22 September 2008
Phew! That was some week. Lehman Brothers, the American investment bank
which opened for business back in the 1840s, has gone. Merrill Lynch has
been swallowed up by Bank of America.
Manchester United's shirts and AIG are owned by the US government.
Lloyds TSB has taken over HBOS. And, on Wednesday and Thursday, it
looked like we were on the verge of another Great Depression, with
shares in all manner of companies in freefall, and banks the world over
on the point of capitulation.
Then, as if finally to provide meaning to the over-used phrase that it's
always darkest before the dawn, markets on Friday staged a remarkable
recovery. The UK stock market, for example, rose almost 9 per cent on
the day. The previously beleaguered banks led the way: HBOS and RBS up
30 per cent, Lloyds up 20 per cent and HSBC up 15 per cent. From
apocalypse to acid trip in five trading days. Has the world gone mad?
Not quite. Over the past few days, though, we've had a sobering reminder
that capitalism can be incredibly unstable. The belief in free markets
has taken a beating. State intervention is back, big time.
For students of economic history, none of this should be too surprising.
Booms and busts are a persistent, if unpredictable, feature of free (and
not so free) markets ("no more boom and bust" was always, frankly, a bit
of a joke). Last week's threatened bust, though, was on a scale way
bigger than anything in living memory. It looked like the financial
system would completely implode. Japan may have had problems with its
bank failures in the 1990s. The Asian crisis of 1997-98 was a truly
awful experience for those involved. You have to go back to the 1930s,
though, to find a situation resembling the experiences of the past few
days.
Most people think the Great Depression was a consequence of the Wall
Street Crash in October 1929. While partially true, it is not anything
like the whole truth. The Crash triggered a desire to hold cash as
opposed to riskier assets. This left banks, which typically raise liquid
funds to invest in illiquid assets, in a vulnerable position. As panic
spread, so more banks went bust. In total, there were four separate
banking crises in the early 1930s, leaving the US economy starved of
credit. Demand collapsed and unemployment soared; 9,000 banks went bust.
At the peak, a quarter of the American workforce was out of a job.
Academic studies suggest that, had the banks not failed, the human cost
of the Great Depression would have been much diminished. While there
would still have been a deep recession, it would have been nothing like
as big as the 30 per cent fall in output which actually occurred.
In another, academic, life, Ben Bernanke became one of the world's
foremost experts on the Great Depression. It is, therefore, fortunate
that he's in charge of US monetary policy today. It is also very good
news that the Federal Reserve and US Treasury are working together to
deal with the problem. In the early 1930s, the Federal Reserve jealously
guarded its independence, refusing on moral hazard grounds to re-liquefy
the financial system, a view which doubtless contributed to the
subsequent economic collapse. It wasn't until the election of Franklin D
Roosevelt at the end of 1932 that fiscal and monetary heads were banged
together and it was only then that the US economy began to recover.
The scars left by the Great Depression span the generations. Mr Bernanke
and Hank Paulson, his brother-in-arms at the US Treasury, have no
intention of going down the same route again.
Having spent the past year or so worrying about the balance between
moral hazard and a banking bail-out, they have accepted that, for the
time being, moral hazard will have to be put to one side. In Mr
Paulson's own words: "We must now take further, decisive action to ...
address the root cause of our financial system's stresses. The
underlying weakness in our financial system today is the illiquid
mortgage assets that have lost value as the housing correction has
proceeded. These illiquid assets are choking off the flow of credit that
is so vitally important to our economy." Mr Paulson is proposing to use
American taxpayers' money to buy up those illiquid assets, hoping that
banks and other institutions will be able to trust one another again,
thereby easing the credit squeeze which has done so much to imperil
economies the world over.
That, at least, is the long-term ambition. In the short term – days, not
months – the US authorities were terrified about the possibility of
further bank runs. As levels of mistrust rose ever higher, bank failures
were becoming a self-fulfilling prophecy.
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