Economy

The $700 billion bailout failed in Congress. ASU Finance professor Anthony Sanders of the W.P. Carey School of Business.

Transcript:

Ted Simons:
It was a disastrous day on Wall Street. Congress failed to pass a bail-out plan for the financial industry. Stocks tumbled 777 points, biggest one-day point drop ever. Although it was the biggest drop ever in raw numbers, today's seven-point drop was well below the 20% fall of black Monday in 1987 and back in the depression. Here to talk about the financial markets is Anthony Sanders, professor of finance in the W.B. Carey's school of finance in Arizona. Good to see you again, Anthony. Today's drop, first of all, it was a surprise?

Anthony Sanders:
>> It wasn't a surprise it wasn't even in the top 10 of major percentage drops in the market but once the congress didn't end up passing the bail-out, I think people had expectations propped up they would, it let the gas out of the market and the market fell, as you pointed out.

Ted Simons:
>> More of the same if the same thing happens tomorrow and the next day or the next day and there's no talk of a plan?

Anthony Sanders:
>> It's hard to do in capital markets. Capital markets, being stock markets, generally adjust very rapidly to information. So i don't want to take bets on tomorrow but it opens up and nothing happens, i wouldn't be surprised until there's a new announcement of the bill they're currently working on.

Ted Simons:
>> The bill they're currently working on, the one that failed, what was wrong with what they voted on? What were the complaints? It seemed to have the caps on executive pay. It seemed not to give all the money in one fell swoop. It seemed to even talk about, you know, making sure that government was in some way reassured that they would be paid back at a later date provided these companies made money. Weren't all those concerns met?

Anthony Sanders:
>> No they weren't. In fact, one could argue one of the reasons the stock market fell was that Paulson, if you'll remember, he originally asked for $700 billion. That's a big price tag! When they came back it dribbles. They said, you get half of it then you have to come back to congress and beg for it later. I think that may have actually scared some people in the market thinking we weren't serious about the bail-out. And there's another question whether we should be bailing out the banks anyway that caused a lot of this mess.

Ted Simons:
>> And to that second question, could the market -- could the credit market in particular fix itself?

Anthony Sanders:
>> Well, the credit market will eventually fix itself. It's a question of how much pain do we want to go through? I think what scared Paulson and Bernanke both was the list of banks on the endangered list almost. As we know, Wachovia, we've seen, you know, wamu go. National cities really got plastered today. A whole bunch of banks are lining up to kind of freeze up and go away.

Ted Simons:
>> Doesn't that get to the point where whether or not this is the -- I don't think anyone thought it was the panacea or the perfect plan but it was something eventually someone is going to have to lend money with some kind of reassurance they're going to get that money back.

Anthony Sanders:
>> The question is, they have to get capital in the system. Liquidity. That's what it's all about. The question, what's the best way to do this? They rushed through a plan. They got turned over. They didn't go for it. Republicans came back with an insurance plan which I got to admit, it's a better idea. But, we -- you know, they need to kind think this out and have probably a hearing. So it'll be awhile, i think, before they actually hammer something out on this.

Ted Simons:
>> We have the president. We have relatively moderate republicans and democrats all saying economic pearl harbor. Something has to be done. Do this. Do it now. Let's get going and then you've got most Americans, the vast majority of Americans who are say don't do it! What's the disconnect? What's going on here?



Anthony Sanders:
>> the disconnect is a lot of people, I think, don't realize -- really realize what terrible straits our banks are in.

Ted Simons:
>> oh.

Anthony Sanders:
>> It's their own fault. Let's be honest. The question is that on the one hand, we can let them collapse and have a revisit of the great depression. I frankly don't really want to go through that myself. So, you know, i think trying to work out something that's more moderate play, but then they also have to put in whatever legislation they do to bail out the banks, they have to do something to the banks and legislation in congress that doesn't allow this to repeat itself such as extending lots of credit to people who can't afford to repay it.

Ted Simons:
>> is there a sense that congress simply isn't taking this issue seriously enough?

Anthony Sanders:
>> Well, when I was listening to some of the debates on the floor of congress, i was scratching my head and saying, "oh come on! You've got to be kidding!" i think they -- i think some of them understand this is a real problem here but, again, it's -- you know, we have 30 days or more until the presidential election. There's a lot of things that were said that were disjoint from the economy. I think the average person that's -- that looks at the $700 billion bill -- and it could be higher, by the way it could be $1.5 trillion is my prediction by the time we start bundling everything together, I don't think -- again, I'm sympathetic. I think bail-outs are a terrible way to do business but if we don't do something to get liquidity back into the market, we'll have systemic fail which means a lot of stuff fails.

Ted Simons:
>> You mentioned Wachovia earlier. Talk about ContiGroup's rescue of Wachovia. Difficult for me to say. Rescue of Wachovia. What's it mean?

Anthony Sanders:
>> Well, again, you know, the good news about all of this -- and there is good news -- the good news is we're kind of what they call calling the herd. We're taking the weaker members of the herd and killing them off for all intents and purposes merging them with the bank to result in a stronger bank. It'll reduce competition. It'll result -- you want to get some of the weaker banks if that's true. How many do you want to get rid of? That's the question.

Ted Simons:
>> Indeed. What about foreign banks? How do they play in this?
Anthony Sanders:
>> Foreign banks are coming in. Mitsubishi made a play for Morgan Stanley. They'll be stepping in and providing capital. The ones that have it. Again, with the global -- this is a global crisis. Brazil was down, i think, 8% or 9% today. This is a global crisis. I don't know how much foreign banks capital have to pump into our system. That's the problem.

Ted Simons:
>> Indeed. I heard about a bank in England. I heard about a bank in Germany looking for folks to rescue them. It's going across the pond.

Anthony Sanders:
>> I heard of a few European banks failing. It's all over the place.

Ted Simons:
>> Hedge funds the next domino?

Anthony Sanders:
>> Well, hedge funds are a funny thing. They are not really hedge. They don't hedge risk. If they did, we wouldn't be talking about this. They just talk about super highly leveraged positions. Things like 99% debt and 1% equity. Yeah, well in a downturn market like that with no liquidity, yes. A lot of hedge funds going to blow up.

Ted Simons:
>> Last question, if a plan, a rescue plan, whatever form, is delayed, does that necessarily delay recovery of this crisis?

Anthony Sanders:
>> Well, it depends on what they want to do. Paulson and Bernanke's notion is flood the market with liquidity. Get tons of cash in there -- that they did today -- put tons of cash in there. If there's money, the market may start rebounding. Maybe that might work. We have to see. Give it a couple of days. One thing viewers should understand is even if we promise a $700 billion bail-out of banks for bad loans, that's going to take a heck of a long time to implement. They can't just walk into the bank and say here, give me all of your loans. They have to go and cherry pick. They have to figure out which ones of the banks are trying to sell and which ones the government wants to buy. It'll take awhile. So everyone has to show more patience.

Ted Simons:
>> All right, Tony thanks for joining us. We appreciate it.

Anthony Sanders:
>> Thanks a lot for having me, Ted.