Gas prices sink 5 cents in 2 days

NEW YORK (CNNMoney.com) -- Gas prices fell for the second-straight day Friday, after rising for eight consecutive days following the refinery-battering Hurricanes Gustav and Ike, according to a nationwide survey of credit card swipes at gasoline stations.

The average price of unleaded regular dropped 2.8 cents to $3.807 a gallon, according to the survey released by motorist group AAA.

That decrease followed eight days of increases totalling 18.7 cents. Sunday's jump of 6.2 cents marked the biggest one-day spike for gas prices since Hurricane Katrina hit the Gulf Coast in 2005.

As many as 33 oil refineries, which convert crude oil into usable gasoline, had been shut down or operating with reduced capacity in the Gulf region in the wake of the recent hurricanes. That number dwindled to around 18 Friday, restoring the supply of gasoline to retailers and helping bring down the price for consumers.

While prices have remained under $4 for some time, they are still much higher than a year ago, when gas was selling for just $2.79 a gallon. Current prices are about 36% higher from a year earlier at this time.

Still, prices are 30.7 cents, or 7.5%, down from the record high price of $4.114 a gallon set on July 17.

Retail gas prices have benefited from lower oil prices. Crude has been trending lower since mid-July amid weakening demand, losing more than a third of its value since it reached a record of near $150 just two months ago.

Six states reported gas prices above $4 a gallon in the AAA survey: Alaska, Georgia, Hawaii, Illinois, Indiana, and Michigan.

Alaska continues to be the state with the most expensive gas prices, at $4.334 a gallon. The cheapest gas can be found in New Jersey, where gas cost $3.50 a gallon, according to AAA's Web site. 


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Lawmakers promise fast action

WASHINGTON (AP) -- Senate Banking Committee Chairman Chris Dodd says the United States may be "days away from a complete meltdown of our financial system" and Congress is working quickly to prevent that.

Dodd said Friday that Democrats and Republicans on the Hill are coming together to support the Bush administration's developing plan to buy up bad debt from financial institutions and get the credit system working again. Dodd told ABC's "Good Morning America" that the nation's credit is seizing up and people can't get loans.

The ranking Republican on the Banking Committee, Senator Richard Shelby, predicts the new bailout plan will cost at least half a trillion dollars.

"We hope to move very quickly. Time is of the essence," House Speaker Nancy Pelosi, D-Calif., said after Paulson and Bernanke briefed congressional leaders Thursday night.

Shelby says the nation has "been lurching from one crisis to another." Both veteran lawmakers say this is the most serious financial crisis they've seen in their years in Congress.

"I don't say any prudent money manager would say we're out of the woods, but right in this moment it all seems positive and leading toward an upward move for the market going into Friday session," said Scott Fullman, director of derivative investment strategy for New York-based institutional broker WJB Capital Group.

Fullman said the biggest bonus of any potential government plan is that it is being put together to help the banking industry as a whole. Until now, the Treasury and Fed have selectively bailed out institutions that were the most vulnerable.  


Big bailout: Where things stand
New bailout planned

SEC bans short-selling

NEW YORK (CNNMoney.com) -- The U.S. Securities and Exchange Commission took what it called "emergency action" Friday and temporarily banned investors from short-selling 799 financial companies.

The temporary ban, aimed at helping restore falling stock prices that have shattered confidence in the financial markets, takes effect immediately.

"This will absolutely make a difference," said Peter Cardillo, chief market economists at Avalon Partners. "Short sellers are going to have to cover their positions very heavily."

Short sellers borrow stock with the aim of selling it, then buy it back at a lower price, hoping to pocket the difference. The commission said short sellers add liquidity to the markets during normal conditions, but recent unbridled short-selling has contributed to the recent tailspin in the stock market.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," said SEC Chairman Christopher Cox in a statement. "The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets."

Cox said the action "would not be necessary in a well-functioning market," and is just one of many actions being taken by the government to jump-start the embattled financial markets.

The SEC also said it would temporarily ease restrictions on companies' ability to repurchase their stock, and force money managers to report their short positions in certain stocks that are not included in the 799 banned companies.

Some market observers have also blamed short sellers for the punishing declines in bank stock prices over the past few days. Critics of short sellers have argued that some had been spreading rumors about a company while "shorting" the stock in order to drive the price lower.

"In the marketplace, we need both sides of the equation," Cardillo said. "But the relaxed regulation of the SEC has led to abuses of short selling that have destroyed many, many companies."

As panic began to permeate the financial markets, many investors took short positions on already battered financial companies regardless of the news that came out of the companies or the government. For instance, investment banks Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) reported better-than-expected earnings Wednesday, but dropped significantly in trading.

"This decision will squeeze the shorts," Cardillo added. "Now, if there is any good news, shorts will have to cover."

The ruling comes after the SEC decided Wednesday to ban the practice of so-called "naked" short-selling, in which investors short the stock without actually borrowing it.

On Thursday, Britain's Financial Services Authority also temporarily banned short-selling for financial companies. The SEC said it is consulting the FSA in the matter. 


Why Wall Street loves the bailout

New bailout planned

NEW YORK (CNNMoney.com) -- The federal government, in what will be its most far-reaching attempt yet to contain the financial crisis, is poised to establish a program to let banks get rid of mortgage-related assets that have been hard to value and harder to trade.

Treasury Secretary Henry Paulson announced the framework of the plan on Friday morning. "The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," said Paulson.

Many details of the plan remained unclear, but Paulson acknowledged the government would take on "hundreds of billions of dollars" in obligations.

Paulson and other officials expect to work through the weekend with congressional leaders to finalize details.

"We hope to move very quickly - time is of the essence," said House Speaker Nancy Pelosi, D-Calif., late Thursday night.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said he believes legislation could be acted on next week.

On Friday morning, Sen. Richard Shelby, R-Ala., who is the ranking member on the Senate Banking Committee, told CNN that the latest plan from Treasury could cost $500 billion. If so, combined with all the other monies committed by the Federal Reserve and Treasury in the form of loans and investments, that brings the headline figure on their attempts to stem the credit crisis to $1.3 trillion. But that doesn't mean that's the cost to taxpayers. (Here's why.)

The announcement on Thursday is the latest stunning turn in an extraordinary six days that have rocked Wall Street. A widening banking crisis has toppled two major firms - Lehman Brothers and Merrill Lynch - and prompted an $85 billion government loan to stem the sudden collapse of insurance giant American International Group.

Meanwhile, mainstay financial institutions are scrambling to raise cash or find merger partners - because of a freeze-up in lending and sinking investor confidence stemming from a collapse of the home mortgage market.

Talk of plan energizes markets

International and U.S. stock markets soared following news of the large government program on Thursday afternoon. On Friday morning, U.S. stocks were close to 3% higher.

The Treasury has been talking about the concept of an agency to take on bad debts of financial institutions "for several months," a source with knowledge of discussions on the issue told CNN.

There's precedent for the federal government taking on troubled assets from the private sector. In the 1930s, the Home Owners Loan Corp. was set up to issue bonds to refinance borrowers. Then during the S&L crisis Congress set up the Resolution Trust Corp. to sell assets of failed banks.

One way the agency under discussion could work is by setting up bulk auctions to buy mortgage assets from financial institutions. The auctions would be for set dollar amount purchases. Companies that want to offload the hard-to-sell assets from their balance sheets bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins.

The government would then be able to sell the assets back into the market when it wanted.

According to policy research firm the Stanford Group, such a setup would allow the government to refinance borrowers in the loans owned by the government, thereby lowering the risk of their defaulting and eventually boosting the price of the mortgage security in which those loans are packaged.

The agency and auction facility is one that House Financial Services Chairman Barney Frank, D-Mass., and Senate Banking Committee Chairman Christopher Dodd have supported.

Jaret Seiberg, a financial services analyst at the Stanford Group, said he believes there is bipartisan support for allowing the Bush administration to take short-term action to "get us through the immediate crisis."

The expectation is that whatever program is decided on would only last through the presidential inauguration. "You don't want a program that will last for several years because that would limit what the next administration could do," Seiberg said.

Candidates to weigh in

On Friday, both presidential nominees are expected to detail their own plans to address the crisis.

Not everyone supports the idea that the government should buy up assets that the market currently can't value and isn't trading.

Sen. Charles Schumer, D-N.Y., on Thursday proposed his own plan that would involve the government providing a cash infusion to financial institutions in exchange for stock in the companies and let the institutions offload their mortgage investments.

Banking consultant Bert Ely is skeptical about the government getting involved at all. If the government chooses to "prop up the institutions or allows the institutions to offload asset onto a government entity, who's going to take the losses? It's financial insanity. The markets have to clear. Our fundamental problem: an oversupply of housing."

CNN senior correspondent Alan Chernoff, CNN White House correspondent Elaine Quijano and Washington producer Deirdre Walsh contributed to this report. 


Big bailout: Where things stand
Auto industry seeks $50B in loans from Congress

Big bailout: Where things stand

NEW YORK (CNNMoney.com) -- The federal government is on the verge of instituting the most sweeping intervention in the financial markets since the Great Depression.

Details remain scarce as the Bush administration and Congress work to hammer out the final plan, which is aimed at stemming the credit crisis that's roiling Wall Street and threatening the global markets.

It was reported late Friday that the Bush administration had sent those details to members of Congress.

Here's what we know so far:

The plan: The federal government would buy up "hundreds of billions of dollars" of illiquid mortgage assets at a deep discount from banks. The Treasury Department is likely to run the program directly, unlike the savings and loan crisis of the 1990s that led to the creation of the Resolution Trust Company.

"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," said Paulson.

What remains to be seen is how the Treasury Department will structure the purchases and what price they'll pay.

The cost: While the proposal calls for the purchase of "hundreds of billions of dollars" of bad loans, it's unknown what taxpayers will ultimately pay for the bailout.

The government will likely buy the assets at below-market rates and hold onto them until the market recovers. Ideally, the loans could then be sold at a gain.

"The government could make a profit, a substantial profit," said Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm. "The pricing mechanism is going to be central."

Will it work: The jury is still out, although experts are cautiously optimistic the plan will help the housing crisis.

The plan will help banks shore up their balance sheets by removing hard-to-value assets. This would address the seemingly endless rounds of writedowns and capital raising that have been rocking the financial sector.

Without these bad loans weighing on their books, banks may be more willing to lend. Or at least that's the goal.

The problem is that the bailout will not automatically make banks profitable, nor will it stop the slide in home values that is wreaking havoc on the economy.

Will it help homeowners: It's unclear at this point. If the government buys an entire securitized loan, it could opt to help struggling homeowners by modifying the terms. This could include reducing a loan's interest rate or principal balance.

But it could prove difficult to snap up all the securities sold on a mortgage, experts said. And as long as investors still hold a piece, they could block any changes to the loan.

If the plan doesn't stem the tide of foreclosures, home prices will not stabilize and the economy will not recover, experts said.

Next steps: Lawmakers have said they'll review the plan over the weekend and plan to hold hearings on the matter next week. A deal could be hammered out as soon as next week. 


New bailout planned

Central banks pump up the dollars

NEW YORK (CNNMoney.com) -- The Federal Reserve and five other central banks around the globe announced joint efforts early Thursday to try to pump an additional $180 billion into the battered global financial system.

The Fed joined with the European Central Bank, the Swiss National Bank, the Bank of Japan, Bank of England and Bank of Canada in the coordinated effort.

"These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets," said the Fed's statement. "The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures."

The bankruptcy of Lehman Brothers and the Fed rescue of insurance giant American International Group (AIG, Fortune 500) this week has led to a tightening of credit in global markets.

Major banks have become even more reluctant to lend to each other on an overnight basis because of worries about unknown financial problems with other institutions and a desire to hoard cash to protect themselves.

Even money market managers are reluctant to loan money to banks, preferring to buy short-term Treasurys instead. That demand has driven up the price of Treasurys and driven down the yield, or interest rate, that those government instruments pay.

The yield on the 3-month Treasury bill fell briefly into negative territory for the first time since 1940 and closed Wednesday at 0.04%.

"Liquidity has never been in shorter supply in the credit markets during this painful episode," said Kevin Giddis, managing director and head of fixed income for investment bank Morgan Keegan.

Bond prices slipped narrowly, lifting yields only slightly. The three-month had a yield of 0.105% in early trading. Giddis said the markets are looking for a more permanent solution than the one announced by the central banks Thursday.

"Based on nearly every metric that's used in our business, a clear message has emerged over the last couple of days' of trading activity: those with capital are reluctant to lend until the near term visibility becomes a little more certain," he added.

The New York Federal Reserve Bank Thursday also pumped $55 billion into the nation's financial system. That comes on top of $70 billion that it pumped into the system Tuesday.

The announcement of coordinated action Thursday helps provide dollars to foreign banks that needed the U.S. currency to transact business, but had been unable to access the Fed directly the way U.S. banks can. While the Bank of England and European Central had pumped money into their own financial systems earlier this week, that had been in the own currency, not dollars.

The ECB will get a $55 billion increase in the dollars it can loan out, doubling what it had already received under an earlier swap program, while the Swiss National Bank will receive an additional $15 billion on top of an earlier $12 billion program.

The Bank of Japan, Bank of England and Bank of Canada set up new swap programs with the Fed, with Japan getting $60 billion, England getting $50 billion and Canada getting $10 billion.

The swap program provides essentially no risk for the Fed since the U.S. central bank is receiving the same amount of cash back from its foreign counterparts.  


Regulators can’t quantify oil speculators

Yet another bailout - Taxpayer tally

NEW YORK (CNNMoney.com) -- The numbers are big. That much is certain.

The Federal Reserve has backstopped the purchase of Bear Stearns to the tune of $29 billion. It will loan $85 billion to insurer AIG. It's letting banks borrow up to $150 billion using risky mortgage-backed securities as collateral. And it's letting investment banks, which it doesn't regulate, get short-term loans using the central bank's discount window.

The Treasury, meanwhile, has pledged to backstop Fannie and Freddie up to $200 billion. Lawmakers passed legislation allowing the Federal Housing Administration to insure up to $300 billion in loans for troubled borrowers. They're likely to loan $25 billion to the auto industry.

And the government might not be finished. Some Democrats on Capitol Hill are arguing for an expansion of the FHA program for troubled borrowers. And talk is building that the government might have to set up a fund - similar to efforts in the 1930s and 1980s - to buy bad securities clogging up the financial system.

If you add up how much the Treasury and Fed have pledged or made available for loans so far, it's close to $800 billion.

So what's the real cost to taxpayers for all these interventions? No one can say for sure, and probably won't be able to for some time. The Savings & Loan crisis of the early 1990s cost taxpayers a net of $124 billion in 1999 dollars, according to the FDIC - more than initially estimated but below projections made during the height of the crisis.

But one thing is certain: The price tags on today's bailouts bear "no direct translation to the taxpayer cost," said Lyle Gramley, a former Fed governor now with the Stanford Group, a Washington policy research firm.

Indeed, he said, "None of us knows yet if there'll be any cost to the taxpayer at all."

Here's why: The bailouts are, in one form or another, loans or investments. How much they end up costing (or making) depends on a number of factors including how the economy holds up and when the real estate market recovers.

"A lot depends on whether or not we get in a severe recession and how quickly we turn things around in housing," Gramley said.

In exchange for their stepping in, the Fed and Treasury are getting assets as collateral (in some cases, income-producing assets and saleable assets) as well as majority ownership stakes in AIG, Fannie and Freddie. They've also claimed veto power for corporate decisions and a No. 1 spot among stakeholders who get paid first.

In the case of the Fed's $85 billion loan to AIG, the central bank is charging what are essentially double-digit interest rates: specifically, the 3-month Libor (around 2.88% currently) plus 850 basis points.

So what gains or losses the Treasury and Fed realize will depend on the performance of those assets and stocks, and the companies' ability to pay back their loans. Ultimately those performances rest on how soon confidence is restored to the markets and how the economy fares.

And if there is a cost, it's very likely to be well below the caps the Treasury and Fed have set on their loans and backstops, say Gramley and Rudy Penner, a former director of the Congressional Budget Office and now a senior fellow with the Urban Institute

What's the real risk?

Some assume "taxpayer risk" means if the government puts up cash, the taxpayer has to pony up more in taxes if the government loses money on the deal. That's not impossible, but usually it's not that direct.

When the Fed steps in to help with cash infusions, it usually produces the money by redeeming the Treasurys in its portfolio. That's not money that has to be raised by taxes or money that adds to the country's deficit, said Diane Lim Rogers, chief economist at the Concord Coalition, a deficit watchdog group, and former chief economist of the House Budget Committee.

But because the Fed pays about 95% of its earnings to the Treasury, booking a loss on an investment reduces the central bank's profits - and that, in turn, reduces how much the Fed can pay the Treasury, Gramley said. So the net effect would be a loss to taxpayers because there would be less revenue in government coffers. That means less to fund programs unless policymakers raise taxes, cut spending or borrow more money.

When Treasury borrows money to finance something (including its promises to help Fannie and Freddie, for instance), the interest it promises to pay is added to the deficit, which is already climbing to record levels.

And long-term, the deficit can hurt taxpayers because it can constrain policymakers' choices and curb economic growth since the government will have to devote more and more of its budget to paying interest on its debt.

One piece of context: The price tags on the recent bailouts are not nearly as scary when compared to the unfunded liabilities the government is facing from say, Medicare, because they're one-time expenditures, said Bob Carroll, a former Treasury official and now vice president for economic policy at the Tax Foundation.

What's the risk of not stepping in?

The government stepped in to help Fannie, Freddie and AIG on the premise that their demise would cripple the economy.

One concern was that if they fell, the noose on lending would tighten further. "The last thing we want is to have the banks cut back on lending," Gramley said.

But the knock-on effects could be more widespread. If Fannie and Freddie went under, for instance, the housing industry could seize up, causing the loss of millions of jobs, Gramley said. "The stakes are that big. These measures taken are absolutely essential to keep the economy from utter chaos."

If that's the case, let's hope the economy will be in turnaround sooner rather than later. 


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