Treasury Secretary Henry Paulson speaks during a news conference at the Treasury Department in Washington, Nov. 12, 2008. (AP Photo/Susan Walsh)

by Frank James

It took Treasury Secretary Henry Paulson awhile to acknowledge what many experts said from the beginning, that it was a bad idea to use taxpayer money to purchase toxic assets from financial institutions. That the better idea was to inject capital into banks directly while receiving an ownership stake in return. But that's what he essentially did today.

His comments came in a press conference he had this morning to update the nation on the $700 billion Troubled Assets Relief Program, known as TARP, one of the best acronyms Washington has invented in a long time.

Paulson said:

Over these past weeks we have continued -- continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role relative to other potential uses of TARP resources in helping to strengthen our financial system and support lending.

by Frank James

We actually may have more than one president at a time, despite what President-elect Obama and his aides have persistently said since Election Day.

That's the only way to interpret some reporting that indicates Obama's transition is fully engaged in drafting a rescue plan for the Big Three automakers.

As The Wall Street Journal reports, Obama and his aides, like congressional Democrats, are working on ways to use taxpayer money to prop up U.S. auto manufacturers.

Mr. Obama, after some initial hesitation to become publicly involved, is pressing the Bush administration to immediately free up funding through the Treasury, the Energy Department and the Federal Reserve. It is also studying other options, including installing new board members at car companies that receive assistance to ensure compliance with the strings attached to a bailout, including the adoption of a more advanced, fuel-efficient product line.

by Frank James

A lot of experts have argued that the financial crisis and the larger economic woes the nation is encountering will only be reversed when the unending cascade of home foreclosures is finally stopped.

So the Treasury Department, along with the federal agency that now oversees Fannie Mae and Freddie Mac, have announced a new program to speed up loan modifications for strapped homeowners facing foreclosure whose loans are either in the housing giants' portfolios or guaranteed by Fannie or Freddie.

James Lockhart, director of the Federal Home Finance Agency which took control of Fannie and Freddie a few months ago, said this at the announcement:

Today we are announcing a major program designed to greatly reduce preventable foreclosures with a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford. It is an achievable goal if homeowners, banks, mortgage servicers, investors, Fannie Mae and Freddie Mac all work together.

by Frank James

In digging out of their part of the global financial hole, the British may have an advantage over the U.S. in that they have a prime minister who, prior to his current job, was the Chancellor of the Exchequer, the equivalent of our Treasury secretary.

Gordon Brown is so confident of his understanding in areas of economics and financial markets that he actually is having press conferences like one he had yesterday, to discuss his nation's partial nationalization of British banks.

Compare that with what we've seen this morning in the Washington. President Bush stepped out of the White House to read a short speech about his administration's plan to inject capital in exchange for ownership stakes in U.S. banks, then popped back in the White House, prarie dog like, without taking questions.

Over at the Treasury building, Treasury Secretary Henry Paulson Jr., Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairwoman Sheila Bair, emerged from a door in the Cash Room, read their statements, then marched back through the door, also without taking questions.

We assume they did this in part because they didn't want to say anything during an unscripted question and answer session which might spook the financial markets.

But we also assume they didn't want to take questions because it, frankly, could've been a little embarrassing for them. They are conservative Republicans whose philosophy has been that free markets are self-correcting and Big Government can only get in the way. They might've been asked to explain why they've all of a sudden become Franklin Roosevelt-style New Dealers, at least when it comes to the financial markets.

Another potential embarrassment was that the very plan that they were unveiling, they were opposed to a few weeks ago. They might've had to answer why didn't they see the light sooner, possibly sparing the financial markets several tumultuous days in which investors lost trillions of dollars.

by Frank James

It took the Bush Administration longer than many experts believe it should have taken to get there, but today's big news is that the administration has finally arrived at the point many economists weeks ago urged it to get to: direct injections of cash into the banking system and in turn taking ownership stakes in some of the nation's largest banks.

The administration had to twist some bankers' arms to arrive at this point, since there were top banking executives who didn't want the federal government taking ownership in their institutions.

But banks aren't exactly in the strongest negotiating position right now. Nine of the nation's largest banks were told they didn't have a choice.

Here's an excerpt from the story from the Chicago Tribune:

WASHINGTON -- Initiating what amounts to the partial nationalization of the U.S. banking system, the Bush administration Tuesday will announce plans to sink $250 billion into nine large U.S. banking companies and possibly some smaller ones, a congressional source said.

Financial stocks led the way, but the broader S&P 500 and the technology-laden Nasdaq both jumped more than 11.5 percent, powered by a late-afternoon buying binge.

We'll be hearing more about the Bush Administration's plans today with President Bush, Treasury Secretary Henry Paulson Jr. and Federal Reserve Chairman Ben Bernanke taking to the cameras and microphones to explain what they're doing.

by Mark Silva

For the record, the federal budget defict reached a new record in the 2008 budget year, which ended last week: $438 billion.

For the new year, the president's Office of Management and Budget already has projected another new record of more than $480 billion. And that projection is likely to be shelved soon, in the midst of a $700-billion bailout of the financial system authorized by Congress.

But for the year past, the government has surpassed its past record of $422 billion, according to the Congressional Budget Office. The reason: Spending. The war and more.

The estimated 2008 budget deficit of $438 billion well surpasses the deficit of $276 billion last year. It had been declining after reaching its peak of $422 billion under President Bush.

"Relative to the size of the economy, that deficit was equal to 3.1 percent of Gross Domestic Product, up from 1.2 percent in 2007, CBO Director Peter Orszag reports.

(The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.)

The big expenses that helped drive the deficit highher: $62 billion in tax rebates (from the economic stimulus legislation) that were recorded as offsets to revenues. In contrast, receipts of social insurance (payroll) taxes rose by about $31 billion (or 3.5 percent), and other receipts increased by about $9 billion (or 5.4 percent).

"Spending rose by about 8 percent,'' Orszag notes. "Contributing significantly to the growth in spending were outlays for tax rebates (those rebates that were recorded on the spending side of the budget because they exceeded the recipients' income tax liability), for deposit insurance, and for national defense.

Also for the record, Bush promised to cut the budget deficit in half by the end of his final term. Bush also inherited a budget surplus from President Clinton, but is preparing to hand his successor a runaway new record in the deficit.

by Frank James

Treasury Secretary Henry Paulson Jr., whose bald pate has become a fixture on our TV screens in recent weeks, has tapped his similarly bald protege Neel Kashkari as bailout czar.

Kashkari, like Paulson, is a former Goldman Sachs investment banker, as well. And it's impressive that so much trust is being placed in the 35 year old assistant Treasury secretary for international affairs.

Here's an excerpt from the Wall Street Journal's story on Kashkari:

Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a former Goldman Sachs Group Inc. banker, is expected to be named interim head of Treasury's new Office of Financial Stability as early as Monday. The position confers substantial power on Mr. Kashkari, who will oversee Treasury's effort to buy bad loans and other distressed securities clogging the books of financial institutions and making them reluctant to lend...

Mr. Kashkari was part of the Treasury team that negotiated the asset-repurchase program with Congress, putting in marathon sessions along with Robert Hoyt, Treasury's general counsel, and Kevin Fromer, the head of legislative affairs. He was also one of the originators of the plan. Last year, he and Phillip Swagel, assistant secretary for economic policy, crafted a proposal called "break the glass" -- referring to the emergency nature of using such a tool -- which envisioned Treasury buying bad loans and other assets.

by Frank James

After nearly every disaster involving Americans, there's the usual investigation to figure out why the plane crashed or the ship sank and to affix blame. The difference between most calamities and the present financial-markets meltdown is that the investigation of the latter can actually occur while the disaster is still unfolding.

Stephen Labaton's New York Times story is part of the examination of how the financial markets were laid so low. After reading the piece, I predict many people will join Sen. John McCain in calling for Securities and Exchange Commission Chair Christopher Cox's firing. Treasury Secretary Henry Paulson Jr. will look a whole lot worse, too.

In a nutshell, in 2004 before Cox took over the SEC, in a public meeting that was largely ignored at the time, the commission responded to heavy lobbying by Wall Street's large investment banks by changing a critical rule that required Wall Street's big five investment banks to maintain large enough cash cushions in their brokerage units to withstand periods of market turmoil.

By jettisoning that requirement, the investment bank giants, including Goldman Sachs, run at that time by Paulson, were able to use the freed-up cash to buy many of the risky assets that are at the heart of the present crisis.

Bad enough, right? It gets worse.

In exchange for this liberalized cash-reserve requirement, the SEC was supposed to pay closer attention to the debt levels at the investment banks.

This is where Cox comes in. When he became SEC chairman in 2005, he not only didn't appear to care much about this enforcement responsibility, he actually reduced the number of SEC cops on the beat. Also, the investment banks were supposed to self-regulate. We all know how that went.

by James Oliphant

ABOARD THE AMTRAK ACELA--Okay, I always wanted to type one of those datelines.

Of course, I'm not on a battleship in Sea of Japan or anything like that. Your correspondent is aboard the Acela, rushing from Wilmington, Del. to Washington.

Sen. Joseph Biden is taking a break from prepping for Thursday night's debate with Sarah Palin to work his day job a little. He's heading for Capitol Hill to vote for "the rescue plan.'' (Didn't you get the memo? No one calls it a bailout anymore.)

Tuesday, Biden warned there would "real trouble" if Congress failed to pass a bill this week. Talking to diners at a restaurant in Wilmington, Biden said. "What people are going to do if they don't get this done, people are going to lose their jobs, their pensions."

"That why we've got to have this package," he told another voter. "This is not a $700 billion check we're writing out. We'll get this money back."

But nothing will come easy. Sen. Richard Shelby (R-Ala.), a fierce critic of the proposal, just announced his opposition to the bailou--er, the "Emergency Economic Stabilization Act of 2008.

The vote will come after sundown Wednesday in observance of the Jewish holiday Rosh Hashanah.

Biden spent the day preparing for the debate and held no public events.

by Frank James

The conventional wisdom in Washington is that one reason the Bush Administration's proposal to buy toxic assets from financial institutions failed in the House earlier this week is because of bad marketing. The administration allowed the plan to be described as a "bailout" and that word by itself outraged many Americans.

So the language has been changed. The proposal is now being described as an economic, financial or national "rescue plan."

Here's President Bush this afternoon:

I appreciate Senator Harry Reid's leadership in the United States Senate when it comes to the financial rescue plan. I also appreciate Mitch McConnell's leadership as well. The Senate will be voting on a very important measure tonight. It's -- the rescue plan bill has been improved by raising, by other things, raising, temporarily raising the cap of FDIC insurance.

Sen. Mitch McConnell, the Senate Minority Leader said:

I'm optimistic that we're going to have a significant bipartisan victory on the rescue plan here in the Senate tonight.

Speaking to the media outside the Senate chamber, Sen. Harry Reid, the Senate Majority Leader used the word bailout but tried to give it a different twist:

This is not a bailout for Wall Street. It's bailout for a country.

But later in the chamber, Reid was on message:

Senators Bennett, Corker and Gregg on the Republican side, as well as Senators Dodd, Baucus, Conrad, Durbin, Jack Reed and Schumer have done an exceptional bipartisan job to move the rescue legislation forward here in the Senate, and their work continues.

(Photo: SAUL LOEB/AFP/Getty Images)

by Frank James

As the fingerpointing continues following the House's failure to pass the $700 billion bailout, a lot of blame is going to Treasury Secretary Henry Paulson Jr. for first trying to run roughshod over Congress and the sensibilities of taxpayers until he realized that approach was doomed to failure.

Paulson is being singled out for crafting an initial proposal that was so offensive to many Americans and members of Congress in how it sought vast new and unreviewable powers for the Treasury Secretary.

With the controversial three-page proposal he dropped on Congress last week, he wound up creating a wave of outrage so huge it couldn't be overcome by the time yesterday's vote occured.

The very same hard-charging qualities that led him to be such major success and riches on Wall Street as investment bank Goldman Sachs' chairman and chief executive, it's thought, caused him to be insensitive to how consensus is formed in Washington and how major legislation must be marketed to the American people.

Interviewed on CNBC this morning, Steve Forbes, chairman and CEO of Forbes Inc., said "Paulson, with House Republicans, has been about as effective as an angry drill sergeant talking to raw recruits."

Meanwhile, Paulson is also being blamed for the worsening condition of the credit markets, especially in the short-term lending area called commercial-paper, resulting from the decision to allow Lehman Brothers to go belly up.

Here's an excerpt from yesterday's Wall Street Journal:

by Frank James

The Justice Department's Inspector General released a magnum opus of a report on the Bush Administration's controversial firings of nine U.S. attorneys.

Few people have had the chance to read the entire 356-page report. But if you read it from the back, you get the conclusions which sum up the findings.

The Justice Department investigators place much of the blame for the firings on Kyle Sampson, former Attorney General Alberto Gonzales's chief of staff, who conducted the firings pretty much on his own and apparently for no good reasons, according to the report.

But they don't let Gonzales and company off the hook. They blame Gonzales and his then Deputy Attorney General Paul McNulty for failing to oversee the process and then not telling the full truth about it.

The investigators do call for a special counsel to probe the firing of former U.S. Attorney David Iglesias saying that the circumstances of his firing, with allegations that he was fired for not pursuing voter fraud and public corruption charges against Democrats, requires an examination into whether criminal charges are required.

Attorney General Michael Mukasey announced that he was following the recommendation and naming the U.S. Attorney for Connecticut, Nora R. Dannehy, to run the investigation.

Mukasey said:

"Today's report is an important step toward acknowledging what happened, and holding the responsible officials to proper account. I hope the report provides a measure of relief to those U.S. Attorneys whose reputations were unfairly tainted by the removals and their aftermath. They did not deserve the treatment they received.

"The Report leaves some important questions unanswered and recommends that I appoint an attorney to assess the facts uncovered, to conduct further investigation as needed, and ultimately to determine whether any prosecutable offense was committed with regard to the removal of a U.S. Attorney or the testimony of any witness related to the U.S. Attorney removals. In the normal course, a report recommending further investigation would not be released until after the investigation and any resulting prosecution had been completed, for fear that disclosing publicly relevant facts and witness statements would hinder the investigation or prosecution. In this instance, the Offices of Inspector General and Professional Responsibility have made the judgment that the circumstances warrant a departure from this usual practice.

by Frank James

Used to be talking down the economy was something government officials weren't supposed to do, especially senior U.S. officials.

Conservatives often bashed liberals who they frequently perceived as trying to talk the economy into recession for political reasons. And on occasion liberals even attacked conservatives for allegedly cynically talking down the economy for the same reasons.

Now its open season on the economy. Everyone seems to be talking it down, particularly those top government officials who are usually so guarded in their public comments they won't even discuss in detail U.S. policy towards the value of the dollar for fear of affecting markets.

From President Bush, to Treasury Secretary Henry Paulson Jr. to Federal Reserve Chair Ben Bernanke, the message is the economy will essentially go down the tubes if Congress don't pass the $700 billion bailout "national rescue plan" quick, fast and in a hurry.

Republican vice presidential nominee Sarah Palin even raised the stakes yesterday when she warned the nation could slide into a "depression" if the Bush Administration package weren't passed. Think about that for a moment--a would-be vice president during a hotly contested presidential race raising the specter of the D word.

Question: Are top federal officials (and those who would like to join that group) exacerbating the problem with their doom and gloom warnings?

As many have said in recent weeks, trust or faith, as in "full faith and credit" is a big part of what makes the U.S. economy possible. So much of what makes the economy work, consumer spending, is psychological. The president understands this. That's why in the weekend after the 9/11 attacks, he told Americans to continue shopping.

It could be argued that in his push to stampede Congress into passing its proposal quickly, Bush and other officials are eroding much of any trust that may be left in the U.S. economy.

It's hard to have keep one's faith in the economy up and not think about going into survivalist mode with larder stocked and shotgun loaded when you've got the president of the U.S. on prime time TV saying:

As a result, our entire economy is in danger... More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

This is clearly not a time for happy talk about the economy. But whatever happened to those fears about not talking down the economy? So much for we have nothing to fear but fear itself.

by Frank James

It's a safe bet that the legislative proposal by Treasury Secretary Henry Paulson Jr. to buy up bad Wall Street assets is going to undergo some fundamental revision.

Troubling to many critics is the breathtaking extraconstitutionality of the proposal which would give the Treasury secretary unusual powers that couldn't be countermanded by Congress or the courts.

That appears on its face to violate the Constitution's assertion of a balance of powers where no one branch is unchecked by the others.

On the Diane Rheem Show on public radio this morning, Alan Blinder, former Federal Reserve vice chair and normally a mild-mannered, live-and-let-live Princeton University economics professor, said Paulson should be fired for his proposal.

Here's Blinder from the program:

"I'm speaking now as one of the earliest advocates of creating an institution like this, many, many months ago. And it's a crying shame to see the way the Treasury has written this. I think the secretary of the Treasury should be dismissed, frankly. ... Asking for the authority to buy anything, with no review, with no court review, with no limits practically as to quantity or scope, with almost no congressional oversight. We have something more precious at stake than our precious financial system and that's our precious Constitution. And frankly, if I were a member of Congress, having advocated for this for nine or ten months, I would vote against this unless it's changed, dramatically..."

The administration should know its proposal is in deep trouble when both Paul Krugman and William Kristol agree the plan goes too far.

by Frank James

The not-so-invisible-hand of Washington reached out on Sunday and snatched the last two remaining big Wall Street investment banking firms into the world of increased federal regulation with the announcement that Morgan Stanley and Goldman Sachs have decided to become commercial banks.

This is how the Federal Reserve announced it last night:

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.

Now they'll be able to go out and get deposits from people like you and me which will help to stabilize their capital base.

Those deposits will be federally insured by the Federal Deposit Insurance Corp. which will give the companies the kind of insulation from capital flight they've lacked until now.

We'll be keeping our eyes open for those new Morgan Stanley and Goldman Sachs bank branches.