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Obama's words do little to spur Wall Street

The president tries casting the financial crisis as a stock opportunity as the Treasury and Fed launch the TALF investor lending program to bolster credit markets.

March 04, 2009|Maura Reynolds and Jim Puzzanghera

WASHINGTON — With the stock market dropping to new lows, President Obama urged Americans on Tuesday to look past "day-to-day gyrations," set their sights on a rosier, long-term horizon -- and consider getting into the stock market.

"Buying stocks is a potentially good deal if you've got a long-term perspective on it," Obama said, seeking to cast at least one part of the economic crisis as an opportunity instead of a debacle.

The president's words did little to inspire Wall Street, however. The S&P 500 closed under 700 for the first time since October 1996 and the Dow Jones industrial average sank for the fifth day in a row, closing down 37.27 points at 6,726.02.

Still, from the president to the secretary of the Treasury and the chairman of the Federal Reserve, senior policymakers insisted that the economy would eventually post a robust recovery.

"I do think the American people in the past have shown an excellent ability to respond to adversity," Fed Chairman Ben S. Bernanke told members of the Senate Budget Committee. "And I believe it's going to happen this time and that we're going to see a much stronger economy, not that far in the future."

To hasten that day, the Fed and the Treasury launched their long-awaited program to jump-start the market for consumer loans, including financing for small businesses, students and car buyers.

Under the program, known by the acronym TALF, the Fed will provide loans to investors who buy securities backed by newly issued consumer loans. The idea is to revive the market for asset-backed securities, which provides funding for a large portion of consumer lending.

"In our system, banks are important, but typically 40% of lending comes through the securitization markets. And those markets are not functioning well," Treasury Secretary Timothy F. Geithner told the House Ways and Means Committee.

"So we're going around banks . . . by doing something only the government can do, which, on appropriate terms to protect the taxpayer, is to try to get those credit markets opening up again," he said.

The $200-billion TALF program was announced last fall, but it took more than four months to implement because of the problem's complexity.

The program is open only to new loans made under more stringent terms than the loans that contributed to the present credit crunch. The government is still drawing up its plan for dealing with "toxic" assets still on bank balance sheets.

Vincent Reinhart, a former director of the Fed's division of monetary affairs, said the program would aid ordinary consumers.

"For new lending to get made, banks have to know that they can sell those obligations. But the market for those asset-backed securities is frozen," Reinhart said. "The pipeline has been blocked. Now that the Fed will be opening the pipeline, new lending will be possible. So this will directly help households."

Bernanke acknowledged growing public anger over continued government efforts to shore up the financial sector but said the economy would not recover unless banks and other financial institutions were restored to health.

"Historical experience strongly suggests that without a reasonable degree of financial stability, a sustainable recovery will not occur," Bernanke said.

In a rare outburst, Bernanke said he shared lawmakers' ire over the mounting losses at insurance giant American International Group Inc., which was seized by the government last fall and which posted a $62-billion loss Monday -- the largest corporate quarterly loss in U.S. history.

"I think if there's a single episode in the entire 18 months that has made me more angry . . . [it's] AIG," Bernanke said. "AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division.

"This was a huge hedge fund, basically, that was attached to a large and stable insurance company," he said, and it made "huge numbers of irresponsible bets and took huge losses."

Nonetheless, Bernanke said: "We had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system. We really had no choice."

Senate Majority Leader Harry Reid (D-Nev.) defended the Obama administration's handling of the AIG bailout, echoing Bernanke's criticism of the company's decisions.

"AIG has to be handled, because if it hadn't been handled, this country, in my opinion, would have been in a depression," he said.

Sen. Bob Corker (R-Tenn.) said the continued expansion and revisions of bailouts for AIG and other large institutions was confusing investors and causing the market slide.

"I understand this is a very complex matter and whatever is done needs to be done right," he said. "But at some point, and hopefully that some point is soon, the American people, our economy, all of us here need to understand where the administration is going on these bailouts.

"It seems like they just keep throwing things out, seeing if something will stick."

Sens. Byron L. Dorgan (D-N.D.) and John McCain (R-Ariz.) called for the Senate to create a select committee with subpoena power to investigate the causes of the financial crisis and recommend how to avoid a repeat.

"Every place I go in my home state of Arizona, people are confused, upset and angry. They want to know what happened. They want to know how we got into this ditch, the worst economic crisis since the Great Depression," McCain said. "They have a right to know. So far, answers have not been forthcoming."

Neither McCain nor Dorgan criticized the Obama administration for its attempts to address the crisis.

"None of us have ever traveled this path; this includes the president, the secretary of the Treasury and every single member of the Congress," Dorgan said. "All of us are struggling to try to figure out, how do you catch this as it's falling?"

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maura.reynolds@latimes.com

jim.puzzanghera@latimes.com

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