AIG Posts Record Loss, As Crisis Continues Taking Toll
By LIAM PLEVENMay 9, 2008; Page A1
In a sign that crisis continues to reverberate through the financial sector, American International Group Inc. reported multibillion-dollar losses Thursday. The giant insurer also announced that it would raise $12.5 billion in capital to replenish its balance sheet.
AIG's results show that while the credit crunch may be easing on Wall Street, it appears to be tightening elsewhere. In the past week, U.S. regional banks have reported big losses and announced plans to raise fresh capital. Sovereign Bancorp, one of the nation's largest savings and loans, is looking to raise $1 billion after suffering rising loan delinquencies, people familiar with the situation said Thursday.
The AIG news comes even as some on Wall Street are saying the financial crisis, touched off last year by the fall in housing prices and rising foreclosures, is winding down. Earlier Thursday, James Dimon, chief executive of J.P. Morgan Chase & Co., said in a speech that the cleanup from the subprime-mortgage mess is 75% to 85% complete. "We know about most of the bad stuff now," he said.
Following the market's close Thursday, AIG reported its record $7.8 billion loss, eclipsing the $5.3 billion loss it recorded in the fourth quarter. AIG said credit-market woes, weakness in housing and stock-market volatility "had a substantial adverse effect" on its results. "The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," said AIG Chief Executive Martin Sullivan.
The New York-based insurance behemoth took a $9.1 billion write-down for the first quarter on credit derivatives designed to protect against losses on a variety of investments, including subprime mortgages. It booked an additional $6.1 billion in losses in its investment portfolio.
The results increase the pressure on Mr. Sullivan, who took over as CEO in 2005 after the departure of Maurice R. "Hank" Greenberg, who built AIG into a globe-spanning giant over four decades. The company's shares have fallen by just under 40% in the past year. After falling 2% Thursday to close at $44.15 on the New York Stock Exchange, shares fell a further 5% in after-hours trading, priced just above a 10-year low.
Strong-Willed Executives
As it sputters, AIG is looking increasingly like other huge businesses built by strong-willed executives. Sanford Weill's successor at Citigroup Inc., Charles Prince, struggled to manage the unwieldy company and was ultimately forced out because of huge losses on subprime mortgages. Asset manager Legg Mason posted its first loss ever earlier this week as its new CEO tries to manage a decentralized firm created by Raymond "Chip" Mason.
AIG said it was looking for a new chief financial officer to replace Steven Bensinger, who was named vice chairman of financial services. Some members of AIG's board have felt that Mr. Sullivan hasn't moved fast enough to hire better finance executives and get rid of weak executives, said a person familiar with the matter. An AIG spokesman said: "Under Steve Bensinger, AIG has made tremendous strides in bringing on board terrific financial talent."
AIG also disclosed a dispute with the Internal Revenue Service over a cross-border tax transaction. The matter has potentially far-reaching implications for the company and other firms on Wall Street that were involved in similar deals. The company said it had received a notice from the IRS asserting it owes $329 million in back taxes and penalties, a portion of which related to "the disallowance of foreign tax credits associated with cross-border financing transactions."
The financial results prompted ratings agency Standard & Poor's to downgrade AIG's credit rating by one notch. S&P cited the loss, but also pointed to weaker performance in several of the company's businesses. S&P also said it was lowering the credit rating of several AIG subsidiaries, including its airplane-leasing unit, International Lease Finance Corp.
The challenge to Mr. Sullivan, whose background is not in finance, is to run an immensely complicated company built by his dominant predecessor. So far investors have had patience with Mr. Sullivan, arguing that investment decisions that caused the losses were made before he took control. But as the struggles continue, the question will become whether Mr. Sullivan is the right person to navigate the crisis.
The AIG spokesman said Mr. Sullivan has already led the company through crisis, including the accounting problems that led to Mr. Greenberg's departure and a subsequent $1.6 billion settlement with authorities. "Any CEO of any corporation is always under pressure to perform," the AIG spokesman said.
AIG plans to raise $7.5 billion in capital through both a common-stock offering and "equity units" that combine contracts to make future stock purchases and junior debt. AIG said it expects to issue hybrid securities "at a later date" to raise an additional $5 billion.
"Just a few months ago, management seemed to think they had an excess capital position," said Cliff Gallant, an analyst at Keefe Bruyette & Woods, who owns shares of AIG and called the results "a very disappointing quarter." For the same quarter a year ago, AIG earned $4.1 billion.
One reason AIG could need capital is that the firm has to post collateral to banks under the credit-default swap agreements it wrote. That has forced AIG to fork over cash as the prices of their credit-default swaps fall.
The S&P downgrade could allow counterparties to demand that AIG post up to $1.8 billion in collateral, according to an SEC filing. AIG says it still has $2.5 billion to $7.5 billion in excess capital.
Raising Dividends
Also on Thursday, AIG said announced its 23rd consecutive year of dividend growth, saying it was raising its dividend by 10% to 22 cents a share. That's about half of the 20% annual dividend increases AIG said last year it planned "under ordinary circumstances."
In addition to the losses associated with derivatives and investments, Mr. Gallant said he was concerned by some of the results in AIG's main insurance businesses. For each dollar AIG brings in as premiums, it is paying out a greater amount on losses and expenses in its property and casualty operations. That percentage, known as the combined ratio, rose from 87.5% in the first quarter last year to 96.9% in the first quarter of this year.
The tax dispute between AIG and the IRS involves cross-border financing transactions that were popular for years on Wall Street. In general, such transactions have permitted U.S. companies to shift assets overseas, pay foreign taxes and then split credit for paying those taxes with lenders that in turn will lower their financing costs.
Such transactions were the subject of testimony by former IRS Commissioner Mark Everson in 2006, who called them "abusive." The IRS issued proposed regulations last year that have effectively shut down new transactions, according to a person who has worked on such deals.
The IRS challenged transactions dating from 1997 to 1999. AIG indicated in its SEC filing that it expects the IRS to challenge similar transactions from later years, although it gave no indication of the potential size of those disputes. The company said it plans to contest the notice. While AIG may soon be writing a large check to the government, the company said it believes that it "is adequately reserved for any liability that could result from the IRS actions."
Sunday, May 11, 2008
Citigroup Looks to Slim Down, Shed Over $400 Billion in Assets
Citigroup Looks to Slim Down, Shed Over $400 Billion in Assets
By KEVIN KINGSBURYMay 9, 2008 11:47 a.m.
Citigroup Inc. plans to wind down more than $400 billion in assets over the next two to three years as the financial-services giant moves to slim down under new Chief Executive Vikram Pandit.
The disclosure is part of the company's presentation at its annual investor & analyst day.
Citi has recorded some $40 billion in write-downs the past three quarters amid the fallout from the credit crunch and seen credit costs surge amid increased delinquencies and charge-offs. As a result, the company has raised roughly $40 billion in new capital in recent months, including some $12 billion the past several weeks.
Citi said it had nearly $500 billion in so-called legacy assets as of the first quarter, nearly half of which being low-return. Nearly two-thirds is in consumer banking and one-third in securities and banking segment. The company plans to shed all those assets from securities and banking -- excluding alternative investments -- and more than 50% at consumer banking. The company plans to cut the amount to under $100 billion in two to three years.
Beyond reducing legacy assets, Mr. Pandit's plan calls for focusing on returns, increasing asset productivity, managing risk and re-engineering the company's cost base. Citi has long been criticized for having a bloated cost structure, as expenses long surpassed revenue growth under former CEO Chuck Prince.
The company is also targeting annual revenue growth of about 9% a year, annual earnings of at least $20 billion and return on equity -- an important measure of profitability at financial-services firms -- of 16% to 18%.
Mr. Pandit said he envisions the bank's return to profitability will last through three phases, during which he says Citi must "get fit," then "restructure," and finally "maximize." As if to head off investor restlessness, Mr. Pandit said that the phases "could" overlap, and quicken the bank's progress.
Mr. Pandit also addresses the recent shake-ups at the firm's securities and banking unit -- the very business that has cost Citi tens of billions in losses from bad bets on subprime mortgages.
"We're looking at everything," Mr. Pandit said of the unit's long-term prospects, but added that Citi intends its securities business to eventually produce a return on equity of "18-20%."
Mr. Pandit stressed that such progress won't come quickly, however. The unit's performance will be "lower, clearly, for the next couple of years," he said.
By KEVIN KINGSBURYMay 9, 2008 11:47 a.m.
Citigroup Inc. plans to wind down more than $400 billion in assets over the next two to three years as the financial-services giant moves to slim down under new Chief Executive Vikram Pandit.
The disclosure is part of the company's presentation at its annual investor & analyst day.
Citi has recorded some $40 billion in write-downs the past three quarters amid the fallout from the credit crunch and seen credit costs surge amid increased delinquencies and charge-offs. As a result, the company has raised roughly $40 billion in new capital in recent months, including some $12 billion the past several weeks.
Citi said it had nearly $500 billion in so-called legacy assets as of the first quarter, nearly half of which being low-return. Nearly two-thirds is in consumer banking and one-third in securities and banking segment. The company plans to shed all those assets from securities and banking -- excluding alternative investments -- and more than 50% at consumer banking. The company plans to cut the amount to under $100 billion in two to three years.
Beyond reducing legacy assets, Mr. Pandit's plan calls for focusing on returns, increasing asset productivity, managing risk and re-engineering the company's cost base. Citi has long been criticized for having a bloated cost structure, as expenses long surpassed revenue growth under former CEO Chuck Prince.
The company is also targeting annual revenue growth of about 9% a year, annual earnings of at least $20 billion and return on equity -- an important measure of profitability at financial-services firms -- of 16% to 18%.
Mr. Pandit said he envisions the bank's return to profitability will last through three phases, during which he says Citi must "get fit," then "restructure," and finally "maximize." As if to head off investor restlessness, Mr. Pandit said that the phases "could" overlap, and quicken the bank's progress.
Mr. Pandit also addresses the recent shake-ups at the firm's securities and banking unit -- the very business that has cost Citi tens of billions in losses from bad bets on subprime mortgages.
"We're looking at everything," Mr. Pandit said of the unit's long-term prospects, but added that Citi intends its securities business to eventually produce a return on equity of "18-20%."
Mr. Pandit stressed that such progress won't come quickly, however. The unit's performance will be "lower, clearly, for the next couple of years," he said.
Wednesday, May 7, 2008
Shoeshine Boys In La Paz Need A Good Lawyer
Shoeshine Boys In La Paz Need A Good Lawyer
Legal Project in Bolivia Empowers Outcast Kids; Mr. Cooper Gets Creative
By MATT MOFFETTMay 8, 2008; Page A1
LA PAZ, Bolivia -- Shoeshine boys have such lowly status in this Andean metropolis that they hide their faces in shame behind ski masks. The children, known as lustrabotas, dart around like phantoms, dodging shop owners who shake them down and motorists who try to run them into the gutter.
But when American law professor James Cooper looks at these young outcasts, he sees foot soldiers for a revolution in Latin American justice. Mr. Cooper heads Proyecto Acceso, Project Access, a nonprofit group that uses innovative tactics to try to improve Latin America's notoriously weak legal systems and make the law work for the region's humblest citizens.
Mr. Cooper recently brought together 30 shoeshiners, between the ages of 8 and 17, for a know-your-rights seminar from a Bolivian Supreme Court justice and a banker who had once been a shoeshine boy himself. Each of the children got a pair of slick-looking pants with superhero emblems. If the boys continue attending Acceso seminars and learn enough to chat up customers on the basics of the law, they'll get shirts and baseball caps emblazoned with human-rights slogans.
For the lustrabotas, receiving a gift was a big deal. Some of the children had been sent home or harassed by schoolteachers because their hands were stained with polish, or beaten by their parents for not bringing home enough money. Clutching his new pants to his chest after the first seminar, Carlos Mamani, a 15-year-old who has had to contend with bullies on the job, said he had learned something about property rights. "No one has the right to mess with anyone else's shoeshine box," he explained.
Acceso, which provides specialized training for Latin legal professionals as well as basic education on the law for the general public, is headquartered at the California Western School of Law in San Diego, where Mr. Cooper is an assistant dean. Acceso is a Spanish acronym that translates as: "Creative Lawyers Collaborating to Find Optimal Solutions."
Reality TV
Mr. Cooper, who goes by Jamie, takes the "creative" part of the title seriously. To highlight deficiencies in legal protections for Mexican workers under the North American Free Trade Agreement, he produced a reality TV show -- which has run on TV in San Diego and at Acceso conferences -- featuring U.S. law students laboring at a Tijuana toy-making factory. The students earned $60 a week for enduring harsh assembly-line conditions and environmental hazards.
Acceso
People watched a fashion show that Mr. Cooper organized inside a woman's prison in Bolivia.
In Paraguay, Mr. Cooper put on puppet shows to illustrate lawyering techniques. In Bolivia, he organized a fashion show in a women's prison -- with inmates themselves strutting on a catwalk in the exercise yard -- as part of a prisoners' rights project. Another time, he put lawyers from Bolivia and Chile, countries that are historical enemies, together for a training seminar aboard a "Justice Train" traveling from La Paz across the Andes to the Chilean coast.
Before co-founding Acceso a decade ago, Mr. Cooper, a 42-year-old Canadian who has a master of law degree from the University of Cambridge, had worked for 15 months at the mammoth corporate law firm Baker & McKenzie. It wasn't long before he had grown disenchanted with "making the world safe for McDonald's, Coca-Cola and Levis," he says.
Mr. Cooper's campaign to foster greater regard for the law in Latin America seems almost quixotic. In the barrios ringing La Paz, the police and courts are so discredited that residents hang dummies from light poles as warnings that lawbreakers will be lynched. Bribery and intimidation by drug traffickers are so commonplace that judges sometimes face an ultimatum: plata o plomo, silver or lead, meaning they can either accept money for a favorable decision or get shot.
Acceso has been in the thick of promoting one of the few hopeful trends in Latin justice: the adoption in several countries of the more open, U.S.-style adversarial trial system. Acceso has trained 2,500 judges, prosecutors and public defenders in 15 Latin countries in oral-advocacy techniques used in the new system, such as cross-examination and the handling of expert witnesses. Such procedures seem exotic in a region where trials were long carried out with written filings to an all-powerful judge -- and where aggressive questioning is considered unmannerly.
Acceso training sessions combine comic-book touches with case law, as many of Mr. Cooper's 20-odd multinational trainers and advisers take on superhero personas. For instance, Lilia Velasquez, a San Diego immigration attorney who teaches oral advocacy, is billed as "The Flame of Justice," and dresses in bright red from her pants to her beret.
Chile has made the most progress adopting the adversarial system. "Jamie Cooper was very, very important in training the first group of lawyers in a system that was initially very strange to them," says Jaime Camus, an erstwhile Acceso student who is chief of an office of 22 public defenders in northern Chile.
Pop Music
Mr. Cooper, an amateur drummer, also used pop music to explain the new system to the general Chilean public. In 2005, Acceso, the German government-aid agency and the Chilean Justice Ministry produced a CD of justice-related songs, "Súbele el Volumen a la Reforma," or "Turn up the Volume on the Reform." One tune took its title from a legal concept that wasn't very familiar to Chileans: "Presunción de Inocencia," or "Presumption of Innocence."
The songs, written by lawyers and played by professional musicians, aired on radio, and one was performed by a local band opening for pop star Shakira before 50,000 fans at Chile's National Stadium.
"Jamie's got more energy than 10 people combined," says Irma Gonzalez, chief U.S. judge for the Southern District of California and a California Western trustee. "He's out there."
Sometimes, Mr. Cooper is a little too far out there. A man pulled a gun on him in Paraguay while he was working on a documentary about organized crime. In coup-ridden Ecuador, an Acceso training event was disrupted by an anonymous bomb threat, though that didn't halt the postseminar "Rule of Law Rave."
The shoeshiners in Bolivia weren't an easy audience. One of the children dozed off during a video presentation by Mr. Cooper. During the lunch break, it became known that the boy had barely eaten in a day.
Bolivian Supreme Court Justice José Luis Baptista, the main speaker, said he was pleased that some of the lustrabotas asked him pointed questions about children's rights. "It's important to make these kids see that they aren't some excluded class," he said.
But it is also hard to change the shoeshiners' deeply ingrained world view. When a Bolivian newspaper photographer barged into the closing ceremony, about half of the kids instinctively pulled their ski masks over their faces in embarrassment.
One youth who continued showing his face was 13-year-old Santos Candore. He said he was keen to continue the course, "because I've learned that everyone has rights, even lustrabotas."
Legal Project in Bolivia Empowers Outcast Kids; Mr. Cooper Gets Creative
By MATT MOFFETTMay 8, 2008; Page A1
LA PAZ, Bolivia -- Shoeshine boys have such lowly status in this Andean metropolis that they hide their faces in shame behind ski masks. The children, known as lustrabotas, dart around like phantoms, dodging shop owners who shake them down and motorists who try to run them into the gutter.
But when American law professor James Cooper looks at these young outcasts, he sees foot soldiers for a revolution in Latin American justice. Mr. Cooper heads Proyecto Acceso, Project Access, a nonprofit group that uses innovative tactics to try to improve Latin America's notoriously weak legal systems and make the law work for the region's humblest citizens.
Mr. Cooper recently brought together 30 shoeshiners, between the ages of 8 and 17, for a know-your-rights seminar from a Bolivian Supreme Court justice and a banker who had once been a shoeshine boy himself. Each of the children got a pair of slick-looking pants with superhero emblems. If the boys continue attending Acceso seminars and learn enough to chat up customers on the basics of the law, they'll get shirts and baseball caps emblazoned with human-rights slogans.
For the lustrabotas, receiving a gift was a big deal. Some of the children had been sent home or harassed by schoolteachers because their hands were stained with polish, or beaten by their parents for not bringing home enough money. Clutching his new pants to his chest after the first seminar, Carlos Mamani, a 15-year-old who has had to contend with bullies on the job, said he had learned something about property rights. "No one has the right to mess with anyone else's shoeshine box," he explained.
Acceso, which provides specialized training for Latin legal professionals as well as basic education on the law for the general public, is headquartered at the California Western School of Law in San Diego, where Mr. Cooper is an assistant dean. Acceso is a Spanish acronym that translates as: "Creative Lawyers Collaborating to Find Optimal Solutions."
Reality TV
Mr. Cooper, who goes by Jamie, takes the "creative" part of the title seriously. To highlight deficiencies in legal protections for Mexican workers under the North American Free Trade Agreement, he produced a reality TV show -- which has run on TV in San Diego and at Acceso conferences -- featuring U.S. law students laboring at a Tijuana toy-making factory. The students earned $60 a week for enduring harsh assembly-line conditions and environmental hazards.
Acceso
People watched a fashion show that Mr. Cooper organized inside a woman's prison in Bolivia.
In Paraguay, Mr. Cooper put on puppet shows to illustrate lawyering techniques. In Bolivia, he organized a fashion show in a women's prison -- with inmates themselves strutting on a catwalk in the exercise yard -- as part of a prisoners' rights project. Another time, he put lawyers from Bolivia and Chile, countries that are historical enemies, together for a training seminar aboard a "Justice Train" traveling from La Paz across the Andes to the Chilean coast.
Before co-founding Acceso a decade ago, Mr. Cooper, a 42-year-old Canadian who has a master of law degree from the University of Cambridge, had worked for 15 months at the mammoth corporate law firm Baker & McKenzie. It wasn't long before he had grown disenchanted with "making the world safe for McDonald's, Coca-Cola and Levis," he says.
Mr. Cooper's campaign to foster greater regard for the law in Latin America seems almost quixotic. In the barrios ringing La Paz, the police and courts are so discredited that residents hang dummies from light poles as warnings that lawbreakers will be lynched. Bribery and intimidation by drug traffickers are so commonplace that judges sometimes face an ultimatum: plata o plomo, silver or lead, meaning they can either accept money for a favorable decision or get shot.
Acceso has been in the thick of promoting one of the few hopeful trends in Latin justice: the adoption in several countries of the more open, U.S.-style adversarial trial system. Acceso has trained 2,500 judges, prosecutors and public defenders in 15 Latin countries in oral-advocacy techniques used in the new system, such as cross-examination and the handling of expert witnesses. Such procedures seem exotic in a region where trials were long carried out with written filings to an all-powerful judge -- and where aggressive questioning is considered unmannerly.
Acceso training sessions combine comic-book touches with case law, as many of Mr. Cooper's 20-odd multinational trainers and advisers take on superhero personas. For instance, Lilia Velasquez, a San Diego immigration attorney who teaches oral advocacy, is billed as "The Flame of Justice," and dresses in bright red from her pants to her beret.
Chile has made the most progress adopting the adversarial system. "Jamie Cooper was very, very important in training the first group of lawyers in a system that was initially very strange to them," says Jaime Camus, an erstwhile Acceso student who is chief of an office of 22 public defenders in northern Chile.
Pop Music
Mr. Cooper, an amateur drummer, also used pop music to explain the new system to the general Chilean public. In 2005, Acceso, the German government-aid agency and the Chilean Justice Ministry produced a CD of justice-related songs, "Súbele el Volumen a la Reforma," or "Turn up the Volume on the Reform." One tune took its title from a legal concept that wasn't very familiar to Chileans: "Presunción de Inocencia," or "Presumption of Innocence."
The songs, written by lawyers and played by professional musicians, aired on radio, and one was performed by a local band opening for pop star Shakira before 50,000 fans at Chile's National Stadium.
"Jamie's got more energy than 10 people combined," says Irma Gonzalez, chief U.S. judge for the Southern District of California and a California Western trustee. "He's out there."
Sometimes, Mr. Cooper is a little too far out there. A man pulled a gun on him in Paraguay while he was working on a documentary about organized crime. In coup-ridden Ecuador, an Acceso training event was disrupted by an anonymous bomb threat, though that didn't halt the postseminar "Rule of Law Rave."
The shoeshiners in Bolivia weren't an easy audience. One of the children dozed off during a video presentation by Mr. Cooper. During the lunch break, it became known that the boy had barely eaten in a day.
Bolivian Supreme Court Justice José Luis Baptista, the main speaker, said he was pleased that some of the lustrabotas asked him pointed questions about children's rights. "It's important to make these kids see that they aren't some excluded class," he said.
But it is also hard to change the shoeshiners' deeply ingrained world view. When a Bolivian newspaper photographer barged into the closing ceremony, about half of the kids instinctively pulled their ski masks over their faces in embarrassment.
One youth who continued showing his face was 13-year-old Santos Candore. He said he was keen to continue the course, "because I've learned that everyone has rights, even lustrabotas."
Moody's Investors President Steps Down
Moody's Investors President Steps Down
Clarkson's Exit Marks Highest-Profile Casualty to Date Over Role of Credit-Rating Firms in Subprime Rout
By AARON LUCCHETTIMay 8, 2008; Page C1
Brian Clarkson, the driving force behind Moody's Investors Service's push into lucrative but riskier businesses, is stepping down as president and chief operating officer of the oldest bond-rating firm, the company announced Wednesday.
Mr. Clarkson's exit, effective by July, marks the highest-profile casualty to date in the controversy over the complicity of credit-rating firms in the subprime meltdown. Mr. Clarkson, 52 years old, once ran the group overseeing mortgages and other structured-finance products, and his stature rose as Moody's became a major player in analyzing complex securities based on home mortgages.
Last year, he was promoted to president and chief operating officer of the firm, the largest unit of Moody's Corp. But his standing was tarnished when many of the products he oversaw suffered heavy losses.
"Challenging credit-market conditions, combined with Moody's role and function in those markets, have created scrutiny and criticism from numerous external sources about various aspects of our business," Moody's Corp. Chief Executive Raymond McDaniel said in a letter to employees Wednesday.
"While much of the criticism aimed at Moody's is unfounded, Brian believes that the time is right for new leadership to drive forward the changes we have been making in recent months," the letter said.
In recent weeks, Mr. Clarkson discussed with Mr. McDaniel whether a change in leadership was needed to restore confidence, according to a person briefed on the discussions. Moody's said Mr. Clarkson made the decision to leave, though Mr. McDaniel informed the board, a person familiar with the matter added. Moody's has made "great strides" in the past two decades, Mr. Clarkson said in a statement. He couldn't be reached for comment.
Mr. Clarkson is being succeeded by Michel Madelain, also 52. Mr. Madelain runs Moody's fundamental ratings business, which includes the older units that rate simpler corporate and government bonds. Mr. Madelain will continue to work from London, though the parent company will continue to be based in New York.
The resignation comes amid heightened scrutiny by investors, regulators and lawmakers into the role of Moody's and its rivals in the meltdown of complex mortgage-related securities, many of which received top triple-A ratings from the credit raters, only to be downgraded sharply in the past 12 months when the housing downturn worsened.
Mr. Clarkson, a lawyer who grew up near Detroit, joined Moody's as an analyst in 1991. Energetic and hard-driving, he earned promotions and encouraged Moody's analysts to work harder at treating bond issuers better.
Since bond issuers usually push for higher ratings and determine which ratings firm is used for a particular mortgage deal, Moody's and other raters face pressure to use methodologies that lead to high ratings.
In the early 2000s, Mr. Clarkson overhauled the residential-mortgage team and ushered in a new methodology that led to higher ratings for some mortgage bonds and more market share for Moody's in the area. While the bonds performed well, in later years, people who worked under Mr. Clarkson assigned ratings to complex mortgage bonds that didn't take into account the likelihood of a national housing price decline and the widespread nature of fraudulent loans that backed some subprime mortgage bonds.
"We were preparing for a rainstorm and it was a tsunami," Mr. Clarkson said in an interview in late 2007.
As Mr. Clarkson's divisions rated more deals amid the housing boom, Moody's revenue, profit and stock price soared.
But the downturn has sparked a public outcry that has put pressure on rating firms to bring in new management.
"This departure offers Moody's a fresh chance to root out the practices which presented blatant conflicts of interest," said New York Sen. Charles Schumer in a statement Wednesday. "Hopefully, new management will bring new vigilance to the rating system at Moody's."
A Moody's spokesman said "new management is absolutely committed to further enhancing ratings independence and credibility."
Sen. Schumer recalled Mr. Clarkson told him in a September 2007 meeting that the company had done nothing wrong during the mortgage crisis.
Clarkson's Exit Marks Highest-Profile Casualty to Date Over Role of Credit-Rating Firms in Subprime Rout
By AARON LUCCHETTIMay 8, 2008; Page C1
Brian Clarkson, the driving force behind Moody's Investors Service's push into lucrative but riskier businesses, is stepping down as president and chief operating officer of the oldest bond-rating firm, the company announced Wednesday.
Mr. Clarkson's exit, effective by July, marks the highest-profile casualty to date in the controversy over the complicity of credit-rating firms in the subprime meltdown. Mr. Clarkson, 52 years old, once ran the group overseeing mortgages and other structured-finance products, and his stature rose as Moody's became a major player in analyzing complex securities based on home mortgages.
Last year, he was promoted to president and chief operating officer of the firm, the largest unit of Moody's Corp. But his standing was tarnished when many of the products he oversaw suffered heavy losses.
"Challenging credit-market conditions, combined with Moody's role and function in those markets, have created scrutiny and criticism from numerous external sources about various aspects of our business," Moody's Corp. Chief Executive Raymond McDaniel said in a letter to employees Wednesday.
"While much of the criticism aimed at Moody's is unfounded, Brian believes that the time is right for new leadership to drive forward the changes we have been making in recent months," the letter said.
In recent weeks, Mr. Clarkson discussed with Mr. McDaniel whether a change in leadership was needed to restore confidence, according to a person briefed on the discussions. Moody's said Mr. Clarkson made the decision to leave, though Mr. McDaniel informed the board, a person familiar with the matter added. Moody's has made "great strides" in the past two decades, Mr. Clarkson said in a statement. He couldn't be reached for comment.
Mr. Clarkson is being succeeded by Michel Madelain, also 52. Mr. Madelain runs Moody's fundamental ratings business, which includes the older units that rate simpler corporate and government bonds. Mr. Madelain will continue to work from London, though the parent company will continue to be based in New York.
The resignation comes amid heightened scrutiny by investors, regulators and lawmakers into the role of Moody's and its rivals in the meltdown of complex mortgage-related securities, many of which received top triple-A ratings from the credit raters, only to be downgraded sharply in the past 12 months when the housing downturn worsened.
Mr. Clarkson, a lawyer who grew up near Detroit, joined Moody's as an analyst in 1991. Energetic and hard-driving, he earned promotions and encouraged Moody's analysts to work harder at treating bond issuers better.
Since bond issuers usually push for higher ratings and determine which ratings firm is used for a particular mortgage deal, Moody's and other raters face pressure to use methodologies that lead to high ratings.
In the early 2000s, Mr. Clarkson overhauled the residential-mortgage team and ushered in a new methodology that led to higher ratings for some mortgage bonds and more market share for Moody's in the area. While the bonds performed well, in later years, people who worked under Mr. Clarkson assigned ratings to complex mortgage bonds that didn't take into account the likelihood of a national housing price decline and the widespread nature of fraudulent loans that backed some subprime mortgage bonds.
"We were preparing for a rainstorm and it was a tsunami," Mr. Clarkson said in an interview in late 2007.
As Mr. Clarkson's divisions rated more deals amid the housing boom, Moody's revenue, profit and stock price soared.
But the downturn has sparked a public outcry that has put pressure on rating firms to bring in new management.
"This departure offers Moody's a fresh chance to root out the practices which presented blatant conflicts of interest," said New York Sen. Charles Schumer in a statement Wednesday. "Hopefully, new management will bring new vigilance to the rating system at Moody's."
A Moody's spokesman said "new management is absolutely committed to further enhancing ratings independence and credibility."
Sen. Schumer recalled Mr. Clarkson told him in a September 2007 meeting that the company had done nothing wrong during the mortgage crisis.
Consumer borrowing unexpectedly surges in March
Consumer borrowing unexpectedly surges in MarchWednesday May 7, 5:09 pm ET By Martin Crutsinger, AP Economics Writer
Consumers increase their borrowing in March at the fastest pace in 4 months
WASHINGTON (AP) -- Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month, in what was seen as a sign of rising economic stress.
The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.
ADVERTISEMENT
if(window.yzq_d==null)window.yzq_d=new Object();
window.yzq_d['2fQsCUJe5tg-']='&U=13b3970eq%2fN%3d2fQsCUJe5tg-%2fC%3d628474.12634496.12960149.1383221%2fD%3dLREC%2fB%3d5140298';
The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans. The increase in consumer debt totaled $15.3 billion at an annual rate in March, much bigger than the $6 billion increase that economists had been expecting.
Economists said consumers were being forced to make greater use of their credit cards during hard economic times when they are being battered by job losses, soaring gasoline prices and higher food costs.
"This represents distressed borrowing. Consumers need cash and they have turned back to their credit cards to fill the void left by lost jobs and weaker incomes," said Mark Zandi, chief economist at Moody's Economy.com.
Borrowing on credit cards was up at an annual rate of 7.9 percent, compared to a 5 percent gain in February, while borrowing in the category that includes auto loans jumped by 6.8 percent, compared to a 2 percent increase in February.
The overall growth in debt of 7.2 percent at an annual rate was the biggest gain since an increase of 8.25 percent last November.
Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.
The Fed's measure of consumer borrowing, which does not include any debt secured by real estate such as mortgages or home equity loans, stood at a record $2.558 trillion in March
Consumers increase their borrowing in March at the fastest pace in 4 months
WASHINGTON (AP) -- Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month, in what was seen as a sign of rising economic stress.
The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.
ADVERTISEMENT
if(window.yzq_d==null)window.yzq_d=new Object();
window.yzq_d['2fQsCUJe5tg-']='&U=13b3970eq%2fN%3d2fQsCUJe5tg-%2fC%3d628474.12634496.12960149.1383221%2fD%3dLREC%2fB%3d5140298';
The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans. The increase in consumer debt totaled $15.3 billion at an annual rate in March, much bigger than the $6 billion increase that economists had been expecting.
Economists said consumers were being forced to make greater use of their credit cards during hard economic times when they are being battered by job losses, soaring gasoline prices and higher food costs.
"This represents distressed borrowing. Consumers need cash and they have turned back to their credit cards to fill the void left by lost jobs and weaker incomes," said Mark Zandi, chief economist at Moody's Economy.com.
Borrowing on credit cards was up at an annual rate of 7.9 percent, compared to a 5 percent gain in February, while borrowing in the category that includes auto loans jumped by 6.8 percent, compared to a 2 percent increase in February.
The overall growth in debt of 7.2 percent at an annual rate was the biggest gain since an increase of 8.25 percent last November.
Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.
The Fed's measure of consumer borrowing, which does not include any debt secured by real estate such as mortgages or home equity loans, stood at a record $2.558 trillion in March
Paulson Sees Credit Crisis Waning
Paulson Sees Credit Crisis Waning
Treasury Secretary Calls Fed's Moves 'Inflection Point'
By MICHAEL M. PHILLIPS and DAMIAN PALETTA
May 7, 2008; Page A2
WASHINGTON -- Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.
Getty Images
U.S. Treasury Secretary Henry Paulson pauses as he testifies during a hearing before the Senate Finance Committee on Capitol Hill in February.
Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.
"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.
The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.
The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.
Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.
House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.
But in threatening to veto the bill, the White House has upped the ante, reversing its earlier, more restrained reaction. It said the FHA program would constitute a "bailout" and also objected to a provision that would permanently increase the size of loans that Fannie Mae and Freddie Mac are allowed to purchase.
It is possible both sides could reach a compromise. Nonetheless, the move drew a sharp response from Rep. Barney Frank (D., Mass.), the bill's main author. "It proves that ideology has triumphed in the White House over needed compassion and good economics," said the congressman's spokesman, Steven Adamske.
Despite his growing optimism, even Mr. Paulson has expressed some impatience with the pace at which the mortgage industry has implemented a Bush-backed plan to loosen terms for some borrowers before they lose their homes. On Tuesday, senior Treasury officials met for most of the day with some top mortgage firms and discussed ways to expedite loan modifications for struggling homeowners.
Paulson Sees Credit Crisis Waning
');
clickSet = 1;
}
//-->
window.onerror=function(){clickURL=document.location.href;return true;}
if(!self.clickURL) clickURL=parent.location.href;
');
digg_click = 1;
}
function GetThis(T, C, U, L) {
var targetUrl = 'http://www.myspace.com/Modules/PostTo/Pages/?' + 't=' + encodeURIComponent(T) + '&c=' + encodeURIComponent(C) + '&u=' + encodeURIComponent(U) + '&l=' + L;
window.open(targetUrl);
}
//-->
');
//-->
wsj:'+digg_url+'');
//-->
wsj:http://online.wsj.com/article/SB121011652297872261.html
Yahoo! Buzz DIGG THIS
');}
//-->
MY SPACE GET RSS FEEDS
MSN Money Homepage
MSN Money Investing
0) {
for (var i=0; i -1 ) {
localMod = partners[i];
break;
}
}
}
return ( (localMod==null localMod.lengthpromo_pre_oh_idev&&todaypromo_pre_oh&&today';
var adURL = 'http://ad.doubleclick.net/adi/'+((GetCookie('etsFlag'))?'ets.wsj.com':'interactive.wsj.com')+'/openhouse;!category=;msrc=' + msrc + ';' + segQS + ';sz=185x99;';
if ( isSafari ) {
tempHTML += '';
} else {
tempHTML += '';
ListOfIframes.adP= adURL;
}
tempHTML += 'tempHTML += '';
tempHTML += '';
document.write(tempHTML);
}
}
//-->
advertisement
';
} else {
tempHTML += '';
ListOfIframes.adW= adURL;
}
tempHTML += 'tempHTML += '';
document.write(tempHTML);
// -->
TODAY'S MOST POPULAR
1. Flying Foul: Passengers Behaving Badly
2. FBI Seizes Special-Counsel Data
3. Opinion: The Housing Crisis Is Over
4. Opinion: Dartmouth's 'Hostile' Environment
5. Opinion: Canadian Invasion
MORE
div.loomia_recommendations ul {
height:1%;
}
div.loomia_recommendations ul {;list-style-type: none;height:1%;}')
}
//-->
PEOPLE WHO READ THIS...
Also read these stories:
People who like this also like...
Fed Seeks Approval to Pay Interest to Banks16990266
The Fed is formally asking Congress for authority to pay interest on commercial-bank reser...
Analysts Forecast Oil at $150 a Barrel16990245
Crude notched another record, rising $1.87 to $121.84 a barrel, a surge that is prompting ...
Countrywide Promises to Improve16990153
Countrywide promised to improve its practices in a Senate panel hearing amid criticism of ...
Wachovia's Big-Loan Executive Is Leaving16990130
Wachovia's Robert Verrone, known for his deal making, is expected to leave. The bank's fir...
History Suggests Long Economic Pain16961738
The worst of the financial pain may have passed, but the U.S. economic pain could be just ...
NEW! Are you on Facebook?See what content on this site is popular with your friends! Learn more »
Your Facebook Friends Are Reading
Apple Changes iPhone Strategy16988294
Apple is allowing two carriers to sell its iPhone in Italy, a change from past deals that ...
Seen by 5 friends
3 groups
Popular with people in the groups:
Facebook for UNICEF
Investment Banking
Day Traders
Harvard
Nightmares Still Haunt Sleep Aids16974611
An analysis of adverse-event reports filed with WHO suggests that the current generation o...
Seen by 4 friends
3 groups
Popular with people in the groups:
Day Traders
Investment Banking
Finance Club
Washington D.C.
History Suggests Long Economic Pain16961738
The worst of the financial pain may have passed, but the U.S. economic pain could be just ...
Seen by 7 friends
Finance Club
Stanford
What's This?
[x] close
You're seeing a preview of SeenThis? — a Facebook application that helps you discover the latest news, videos and more by showing you what's popular with your friends — both on Facebook, and on sites like this one.
Have a Facebook account? Get recommendations for content popular with your friends by adding the SeenThis? app.
Once you've added it, look for the "Your Facebook Friends Are Reading" section in the sidebar with your name and photo above it (only you can see your photo.)
Click to add SeenThis? now »
About SeenThis? Privacy Feedback
E-MAIL SIGN-UP
NEW: Sign up now for Keyword or Symbol Alerts. Click here
Find out the latest market movements and trends in our e-mail alerts. Check the boxes below to subscribe.
Newshound Quiz
The Morning Brief
The Afternoon Report
The Evening Wrap
To view all or change any of your e-mail settings, click to the E-Mail Setup Center
COMPANIES
Dow Jones, Reuters
Bear Stearns Cos. (BSC)
PRICECHANGE
10.840.145/6
Fannie Mae (FNM)
PRICECHANGE
30.812.525/6
Freddie Mac (FRE)
PRICECHANGE
27.331.815/6
* At Market Close
Personalized Home Page Setup
Put headlines on your homepage about the companies, industries and topics that interest you most.
Paulson Sees Credit Crisis Waning
Treasury Secretary Calls Fed's Moves 'Inflection Point'
By MICHAEL M. PHILLIPS and DAMIAN PALETTAMay 7, 2008; Page A2
WASHINGTON -- Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.
Getty Images
U.S. Treasury Secretary Henry Paulson pauses as he testifies during a hearing before the Senate Finance Committee on Capitol Hill in February.
Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.
"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.
The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.
The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.
Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.
House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.
But in threatening to veto the bill, the White House has upped the ante, reversing its earlier, more restrained reaction. It said the FHA program would constitute a "bailout" and also objected to a provision that would permanently increase the size of loans that Fannie Mae and Freddie Mac are allowed to purchase.
It is possible both sides could reach a compromise. Nonetheless, the move drew a sharp response from Rep. Barney Frank (D., Mass.), the bill's main author. "It proves that ideology has triumphed in the White House over needed compassion and good economics," said the congressman's spokesman, Steven Adamske.
Despite his growing optimism, even Mr. Paulson has expressed some impatience with the pace at which the mortgage industry has implemented a Bush-backed plan to loosen terms for some borrowers before they lose their homes. On Tuesday, senior Treasury officials met for most of the day with some top mortgage firms and discussed ways to expedite loan modifications for struggling homeowners.
clickSet = 1;
}
//-->
window.onerror=function(){clickURL=document.location.href;return true;}
if(!self.clickURL) clickURL=parent.location.href;
');
digg_click = 1;
}
function GetThis(T, C, U, L) {
var targetUrl = 'http://www.myspace.com/Modules/PostTo/Pages/?' + 't=' + encodeURIComponent(T) + '&c=' + encodeURIComponent(C) + '&u=' + encodeURIComponent(U) + '&l=' + L;
window.open(targetUrl);
}
//-->
');
//-->
wsj:'+digg_url+'');
//-->
wsj:http://online.wsj.com/article/SB121011652297872261.html
Yahoo! Buzz DIGG THIS
');}
//-->
MY SPACE GET RSS FEEDS
MSN Money Homepage
MSN Money Investing
0) {
for (var i=0; i -1 ) {
localMod = partners[i];
break;
}
}
}
return ( (localMod==null localMod.lengthpromo_pre_oh_idev&&todaypromo_pre_oh&&today';
var adURL = 'http://ad.doubleclick.net/adi/'+((GetCookie('etsFlag'))?'ets.wsj.com':'interactive.wsj.com')+'/openhouse;!category=;msrc=' + msrc + ';' + segQS + ';sz=185x99;';
if ( isSafari ) {
tempHTML += '';
} else {
tempHTML += '';
ListOfIframes.adP= adURL;
}
tempHTML += 'tempHTML += '';
tempHTML += '';
document.write(tempHTML);
}
}
//-->
advertisement
';
} else {
tempHTML += '';
ListOfIframes.adW= adURL;
}
tempHTML += 'tempHTML += '';
document.write(tempHTML);
// -->
TODAY'S MOST POPULAR
1. Flying Foul: Passengers Behaving Badly
2. FBI Seizes Special-Counsel Data
3. Opinion: The Housing Crisis Is Over
4. Opinion: Dartmouth's 'Hostile' Environment
5. Opinion: Canadian Invasion
MORE
div.loomia_recommendations ul {
height:1%;
}
div.loomia_recommendations ul {;list-style-type: none;height:1%;}')
}
//-->
PEOPLE WHO READ THIS...
Also read these stories:
People who like this also like...
Fed Seeks Approval to Pay Interest to Banks16990266
The Fed is formally asking Congress for authority to pay interest on commercial-bank reser...
Analysts Forecast Oil at $150 a Barrel16990245
Crude notched another record, rising $1.87 to $121.84 a barrel, a surge that is prompting ...
Countrywide Promises to Improve16990153
Countrywide promised to improve its practices in a Senate panel hearing amid criticism of ...
Wachovia's Big-Loan Executive Is Leaving16990130
Wachovia's Robert Verrone, known for his deal making, is expected to leave. The bank's fir...
History Suggests Long Economic Pain16961738
The worst of the financial pain may have passed, but the U.S. economic pain could be just ...
NEW! Are you on Facebook?See what content on this site is popular with your friends! Learn more »
Your Facebook Friends Are Reading
Apple Changes iPhone Strategy16988294
Apple is allowing two carriers to sell its iPhone in Italy, a change from past deals that ...
Seen by 5 friends
3 groups
Popular with people in the groups:
Facebook for UNICEF
Investment Banking
Day Traders
Harvard
Nightmares Still Haunt Sleep Aids16974611
An analysis of adverse-event reports filed with WHO suggests that the current generation o...
Seen by 4 friends
3 groups
Popular with people in the groups:
Day Traders
Investment Banking
Finance Club
Washington D.C.
History Suggests Long Economic Pain16961738
The worst of the financial pain may have passed, but the U.S. economic pain could be just ...
Seen by 7 friends
Finance Club
Stanford
What's This?
[x] close
You're seeing a preview of SeenThis? — a Facebook application that helps you discover the latest news, videos and more by showing you what's popular with your friends — both on Facebook, and on sites like this one.
Have a Facebook account? Get recommendations for content popular with your friends by adding the SeenThis? app.
Once you've added it, look for the "Your Facebook Friends Are Reading" section in the sidebar with your name and photo above it (only you can see your photo.)
Click to add SeenThis? now »
About SeenThis? Privacy Feedback
E-MAIL SIGN-UP
NEW: Sign up now for Keyword or Symbol Alerts. Click here
Find out the latest market movements and trends in our e-mail alerts. Check the boxes below to subscribe.
Newshound Quiz
The Morning Brief
The Afternoon Report
The Evening Wrap
To view all or change any of your e-mail settings, click to the E-Mail Setup Center
COMPANIES
Dow Jones, Reuters
Bear Stearns Cos. (BSC)
PRICECHANGE
10.840.145/6
Fannie Mae (FNM)
PRICECHANGE
30.812.525/6
Freddie Mac (FRE)
PRICECHANGE
27.331.815/6
* At Market Close
Personalized Home Page Setup
Put headlines on your homepage about the companies, industries and topics that interest you most.
Paulson Sees Credit Crisis Waning
Treasury Secretary Calls Fed's Moves 'Inflection Point'
By MICHAEL M. PHILLIPS and DAMIAN PALETTAMay 7, 2008; Page A2
WASHINGTON -- Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.
Getty Images
U.S. Treasury Secretary Henry Paulson pauses as he testifies during a hearing before the Senate Finance Committee on Capitol Hill in February.
Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.
"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.
The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.
The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.
Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.
House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.
But in threatening to veto the bill, the White House has upped the ante, reversing its earlier, more restrained reaction. It said the FHA program would constitute a "bailout" and also objected to a provision that would permanently increase the size of loans that Fannie Mae and Freddie Mac are allowed to purchase.
It is possible both sides could reach a compromise. Nonetheless, the move drew a sharp response from Rep. Barney Frank (D., Mass.), the bill's main author. "It proves that ideology has triumphed in the White House over needed compassion and good economics," said the congressman's spokesman, Steven Adamske.
Despite his growing optimism, even Mr. Paulson has expressed some impatience with the pace at which the mortgage industry has implemented a Bush-backed plan to loosen terms for some borrowers before they lose their homes. On Tuesday, senior Treasury officials met for most of the day with some top mortgage firms and discussed ways to expedite loan modifications for struggling homeowners.
Subscribe to:
Posts (Atom)