Congress tries to Rescue the Rescue Plan!

Written by OTCPicks.com

Investors have been watching and waiting for more than a week as Congress tried to hammer out a financial rescue plan for the U.S. banking system and the economy. On Monday the markets were shocked when the bailout plan failed a vote in the House of Representatives. The Dow Jones industrial average lost 500 points in mere minutes as the vote took place and ended up down 777 points. The 777 point drop represented the biggest single-day fall ever outpacing the 684 point drop the first trading day after the September 11, 2008 terrorist attacks.

Citigroup agreed on Monday to purchase Wachovia’s banking operations for $2.1 billion. The buyout was arranged by federal regulators, making Wachovia the latest casualty of the widening global financial crisis.

The deal greatly expands Citigroup’s retail banking operations now totalling more than 4,300 U.S. branches and $600 billion in deposits. It secures Citigroup’s place among the U.S. banking industry’s Big Three, along with Bank of America Corp. and JPMorgan Chase & Co.

Credit markets that provide the day-to-day lending, to finance business in the U.S, froze up even further after the market free fall. While investors didn’t believe the plan was necessarily a cure-all, most market watchers believed it was at least a start toward turning the economy around and freeing up credit. Credit markets are barely functioning because of fears that those lending money may never be paid back.

Tuesday morning stocks clawed back from their staggering Monday losses with the Dow Jones industrial average up 485 points (4.68%) to close the day on Tuesday. Investors bet that House and Senate members would get back together in the next few days to hammer out a revised financial rescue plan. There is a hope that lawmakers will put aside political partisanship, in a bitter election year, to do the right thing for the American people and the economy.

A report on consumer confidence also helped out. The Conference Board said Tuesday that its Consumer Confidence Index is now at 59.8, up from a revised 58.5 in August. Economists expected a reading of 55.5.

Lawmakers on both sides of the aisle scrambled Tuesday to more changes for the financial rescue plan to sell it to their rank-and-file members. John McCain and Barack Obama were still out on the campaign trail but were prodding their congress members on their sides of the aisle from afar.

Both candidates are backing a plan to raise the federal deposit insurance limit from $100,000 to $250,000 to reassure nervous Americans and safeguard their savings. This FDIC proposal might be attractive to some conservatives who want to help small business owners and avert potential runs on banks. House leaders require a dozen or more new votes to pass the next iteration of the financial rescue bill.

Credit is getting very, very tight and this could put the brakes on full force on the economy. Loans to small businesses are the grease that drives much of our economy. Lines of credit drying up for small businesses are a major problem for the economy. Who’s going to buy up the housing inventory out there in the market that is sitting empty or being foreclosed upon if no one can qualify for loans? Who’s going to buy new cars when you can’t qualify if you have not paid off the loan on your trade-in and can’t come up with an $8,000 down payment? How can businesses fund their operations and buy materials to build their products, or buy equipment needed to build those products?

Liquidity is the key that drives our economy. If the market freezes up and no one will make loans and no one can borrow money, we will be looking at far worse than a recession. I won’t say the “D” word because lawmakers just can’t let it come to that.

These politicians need to get their heads out of their partisan posterior regions and realize that something has to be done. We don’t necessarily like the idea of the government becoming owners of AIG and getting into the insurance business. We don’t like the thought of the government becoming landlords and owning tens or hundreds of thousands of homes and properties. But years of deregulation of the banking industry and regulatory oversight failures have led us to where we are today and it is an ugly mess for sure. Time to take our medicine and start on the road to recovery.

Chances are that this $700B in proposed funds to buy distressed properties will be rewarded handsomely back to the U.S. taxpayers. The government steps in and buys up these toxic loans at reasonable rates relative to the current market and over the next 5 to 10 years real estate will rebound, the government sells off the properties and hopefully pockets a nice windfall for the U.S. taxpayer. Maybe they can apply that back to saving Social Security as baby boomers retire.

For now, investors are anxious and worries abound at this point. Have we hit the market low? That’s hard to answer at this point. If lawmakers don’t get their act together and pass the legislation needed to put some confidence back in the markets, then a new low is still probably ahead of us. If they rally this week and get a bill in place that will take some of these toxic loans out of the market and create liquidity to help with the credit crunch, then things might turn around for the better in the near future.