Bush Signs Extension For Jobless Benefits
WASHINGTON — Federal regulators will guarantee as much as $1.4 trillion in U.S. banks' debt in a bid to get the distressed financial system pumping again. They also took steps Friday to make it easier for private investors to buy banks seized by the government.
Against that bleak economic backdrop, news that New York Federal Reserve President Timothy Geithner is President-elect Barack Obama's choice for Treasury secretary gave battered Wall Street a shot in the arm. The Dow Jones industrials zoomed nearly 500 points as stocks erased roughly half the losses racked up the prior two days. Investors have been seeking a clear message from Obama on who will lead his economic brain trust during the financial crisis.
Directors of the Federal Deposit Insurance Corp. voted to approve the bank-debt guarantee program, which is part of the government's financial rescue package. The FDIC program is meant to break the crippling logjam in bank-to-bank lending by guaranteeing the new debt in the event of payment default by the borrowing bank.
"This step by the FDIC is a significant step in the right direction," said Oliver Ireland, an attorney specializing in banking law at Morrison & Foerster who was an associate general counsel at the Federal Reserve. While the program itself can't restore confidence in the financial system, "I think this is a significant contribution to containing the problem," Ireland said.
Some analysts have said that freeing up bank-to-bank lending with the guarantees won't necessarily translate into a thaw in broader lending as banks are still wary of making loans to businesses and consumers.
The FDIC also will guarantee deposits in non-interest-bearing "transaction" accounts by removing the current $250,000 insurance limit on them through the end of next year. That could add as much as $500 billion to FDIC-backed deposits.
Short-term debt issued by banks _ for 30 days or less _ is not covered as to avoid creating more volatility for the Federal Reserve's primary interest rate. The Fed on Oct. 29 slashed the rate to 1 percent, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again next month at its last meeting of the year.
Treasury Department spokeswoman Brookly McLaughlin on Friday called the FDIC action "an important step to strengthen the financial system by increasing confidence in the markets."
Elsewhere, the Office of the Comptroller of the Currency, which oversees national banks, issued its first approval of a new kind of bank charter intended to increase the "pool of potential buyers" of failed banks. The Treasury Department agency said the new charter is intended for private investors interested in bidding on troubled banks that have been taken over by the FDIC.
The first preliminary approval went to Ford Group Bank, whose owners include Hilltop Holdings, Inc., an investment vehicle for Texas billionaire Gerald J. Ford.
Twenty federally-insured banks and thrifts have failed this year, compared with three for all of 2007. It's expected that many more banks won't survive the next year of economic tumult.
While the FDIC threw a blanket of guarantees over the nation's banks, President George W. Bush ensured that millions of laid-off workers will keep getting their unemployment checks as the year-end holidays approach. Bush signed an extension of jobless benefits into law just before 8 a.m., as he was preparing to leave the White House for a morning flight to Lima, Peru, to attend the 21-nation Asia-Pacific Economic Cooperation forum.
About 1.2 million people would exhaust their unemployment insurance by the end of the year without the extension, sponsors said. The measure is estimated to cost about $5.7 billion, although economists put the positive impact at $1.64 for every dollar spent on jobless benefits because the money helps sustain other jobs and restores consumer confidence.
The legislation provides seven additional weeks of payments to people who have exhausted their benefits or will exhaust them soon. Those in states where the unemployment rate is above 6 percent will be entitled to an additional 13 weeks above the 26 weeks of regular benefits. Benefit checks average about $300 a week nationwide.
The benefits provided would be in addition to 13 weeks of federally funded extended benefits Congress approved last June.
Still, a Federal Reserve official warned Friday that the economy's weakness will stretch well into next year. "We likely are in for a protracted period of poor economic performance," said Charles Evans, president of the Federal Reserve Bank of Chicago.
Many analysts believe the economy will continue to shrink through the rest of this year and into the next, more than meeting a classic definition of recession.
Investors were discouraged earlier this week by the inability of the White House and Congress to agree on a plan to provide relief to the battered auto industry.
Democrats had sought to carve out $25 billion from the $700 billion financial rescue plan to keep the auto industry in business through next spring, but the White House and Senate Republicans objected.
The heads of General Motors Corp., Ford Motor Co. and Chrysler LLC warned that automakers are perilously low on cash. In a letter to the auto executives released Friday afternoon, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid demanded a detailed accounting by Dec. 2 of the companies' financial condition and short-term cash needs, as well as how they would achieve long-term viability.
Hearings are expected the week after next and lawmakers could consider legislation during the week of Dec. 8, but only if the industry shows that taxpayers and auto workers would be protected, congressional leaders said.
Other federal actions to resuscitate an economy crippled by home foreclosures, a credit freeze and confusion in financial markets will probably have to wait until January.
Obama has pledged to make economic recovery the immediate focus of his new administration, and both the House and Senate will have increased Democratic majorities eager to support him.
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Associated Press Writers Jim Abrams, Jeannine Aversa, Ken Thomas and Christopher S. Rugaber contributed to this report.
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MARCY GORDON | November 21, 2008 06:41 PM EST |
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