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By Jennifer Yousfi
U.S. stocks dropped for the third straight day yesterday (Wednesday) on worries that increasingly rancorous debates will squelch a proposed $700 billion bailout of the U.S. financial system even as Federal Reserve Chairman Ben S. Bernanke warned Congressional leaders that the credit crisis was already damaging the American economy.
As part of his most dire commentary about the U.S. economy since he became the central bank chief two years ago, Bernanke said the credit crisis posed "grave threats" to American financial stability and urged Congress to pass U.S. Treasury Secretary Henry M. Paulson's $700 billion plan to excise devalued – and even worthless – assets from the banking system, Bloomberg News reported. Noting that "economic activity appears to have decelerated broadly," Bernanke told members of the Senate's Joint Economic Committee that "stabilization of our financial system is an essential precondition for economic recovery."
Without the bailout, "credit will be restricted further for homeownership, for small business, for individual consumers and so on, but that is not just an inconvenience," Bernanke said. "What that is going to do is affect spending and economic activity and it will cause the economy as a whole to decline and be much weaker than it otherwise would be."
All three major U.S. stock indices declined – shrugging off earlier gains after investing icon Warren Buffett's vote of confidence in Goldman Sachs Group Inc. (GS) prompted a rally – when investors realized there will likely be no quick passage of Paulson's bailout plan. [A related report in today's issue of Money Morning analyzes Warren Buffett's investment in Goldman Sachs Group].
The blue-chip Dow Jones Industrial Average Index posted a loss of 161.52 points (-1.47%), closing at 10,854.17. The tech-laden Nasdaq Composite Index dropped 25.64 points (-1.18%), to 2,153.34. And the broader Standard & Poor's 500 Index lost 18.87 points (-1.56%), to settle at 1,188.22.
"I think investors are sitting back and waiting to see what Congress does," Fred Dickson, director of private client research and chief market strategist for DA Davidson, told TheStreet.com. "Hopefully, we'll see something by the end of the week."
While uncertainty over the outcome of the bailout plan remains, the market will trade with a great deal of volatility, Dickson added.
In other credit-crisis-related developments yesterday:
- Bernanke pleaded before the Senate's Joint Economic Committee for Congress to act quickly, while U.S. Treasury Secretary Henry M. "Hank" Paulson relented on some of the taxpayer safeguards Congress sought to add to his original plan.
- President George Bush's planned to address the nation last night as Republican Presidential hopeful John McCain proposed a halt to campaign activities to focus on the ongoing bailout debate in the Senate.
- And the Federal Bureau of Investigation (FBI) continued its ongoing investigation into some of the biggest corporate casualties of the current credit crisis.
Bernanke and Paulson's Congressional Push
In his second day of Congressional testimony, the Fed chair appeared before the Joint Economic Committee to urge lawmakers to quickly pass the proposed legislation that would allow Paulson's $700 billion bailout to take effect.
"Despite the efforts of the Federal Reserve, the Treasury and other agencies, global financial markets remain under extraordinary stress," Bernanke said, predicting that the U.S. economy would likely contract even with the plan's approval, the International Herald Tribune reported. But without it, he warned, the situation would be far worse.
"Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and our economy," Bernanke said.
"With the exception of a few outliers on either side, there is clear recognition among members of both parties that we must act and act soon," said U.S. Sen. Charles Schumer, D-NY, and the chairman of the Joint Economic Committee.
But without adequate safeguards, "then we risk the plan failing," Schumer said.
According to The New York Times, Schumer said Congress must keep in mind the opinions of the constituents who have reacted with "amazement, astonishment and intense anger" at the bailout in its original form. Debate over the details continues as lawmakers argue for more provisions to safeguard the public interest.
Paulson has relented on executive compensation caps for companies that participate in the bailout, one of the most contentious amendments proposed by Congress, according to several media reports.
Meanwhile, Buffett endorsed Paulson's plan in an interview yesterday morning on CNBC, saying it was "absolutely necessary" to stem an "economic Pearl Harbor."
"The market could not have taken another week" like last week, Buffett told the news channel, Bloomberg News reported. "It was the last thing Hank Paulson wanted to do, but there's no Plan B for this."
President to Speak
As the Congressional debate continues, President Bush announced he would address the American people.
"The president believes it is important for the American people to fully understand the depths of the crisis affecting our country, how that affects them," Dana Perino, the president's chief spokeswoman, said yesterday..
Bush planned to address the nation from the White House at 9 p.m. EDT for 12 to 14 minutes, Perino said.
Speaking from the Senate floor, Sen. Harry Reid, D-Nev., said the country today faces "what economists call the gravest economic danger since the Great Depression. We've come to this point after President Bush waging a war on fiscal responsibility. His Republican philosophy of removing all accountability from big business – and expecting no responsibility from them in return – has created this crisis that now threatens to devastate America's working families."
"It is time for him to explain how eight years of deregulation policies have brought us to this dangerous ground," Reid said. "And most importantly, it is time for him to explain how his plan – drafted literally under cover of darkness – will help America weather this storm."
Meanwhile, McCain, R-Ariz., proposed a halt to presidential campaigning in order to join the discussion in the Senate over the proposed bailout. McCain even suggested that the first presidential debate, which had been scheduled for tomorrow (Friday), be postponed so that both he and the Democratic nominee, Sen. Barack Obama, D-Ill., could take part in the bailout legislation process, MarketWatch reported
FBI Mortgage Market Probe
As politicians struggle to find a way out of the current credit crisis, the FBI is busy investigating the root causes. While declining to comment on the actual companies under investigation, agency spokesman Richard Kolko said the FBI is probing 26 cases of potential corporate fraud related to the collapse of the U.S. mortgage lending industry, Reuters reported.
The FBI is currently looking at four of the highest profile victims of the mortgage market collapse including:
- Fannie Mae (FNM)
- Freddie Mac (FRE)
- Lehman Bros. Holdings Inc. (OTC: LEHMQ)
- American International Group Inc. (AIG)
While the investigation is still in early stages, FBI Director Robert Mueller pledged to take a close look at the companies that triggered the government's $700 bailout plan, with a special focus on executive-level management.
U.S. Justice Department officials would not comment on the investigation – especially because of concerns an errant remark could damage the stock market, or derail the ongoing bailout debate.
According to Reuters, an AIGspokesman said the company doesn't "have details about the FBI investigation. Of course we will cooperate with the FBI."
A spokeswoman for Lehman Brothers declined comment. Officials at Fannie Mae and Freddie Mac were not immediately available.
News and Related Story Links:
Bernanke: Grave threat demands plan's passage
- International Herald Tribune:
A U.S. financial rescue plan, with modifications, seen as likely
- The New York Times:
Paulson Said to Give Way on C.E.O. Pay; Bush to Speak
McCain to 'suspend' campaign, join bailout talks
- Bloomberg News:
U.S. Stocks Drop on Concern Over $700 Billion Bank Bailout Plan
FBI probing firms at heart of meltdown: report.
- Bloomberg News:
Bernanke Sees `Grave Threats' to Financial Stability.