The Washington Postleads with a look at how things haven't gone quite as planned for Fannie Mae and American International Group after the government took them over. Both say the government set up such strict terms when it effectively nationalized the companies that it's impossible for them to succeed. As was already reported yesterday, the government unveiled a new investment in AIG. In its lead story, the Los Angeles Timespoignantly wonders: "Will $700 billion be enough?" When an individual company gets so much money, it's bound to get other industries to wonder why they can't get a piece of the pie as well.
The New York Timesand the Wall Street Journal's world-wide newsbox lead with President-elect Barack Obama urging President Bush to extend financial support to the U.S. auto industry and to back a new financial stimulus package. Bush said he might be willing to support those measures if Democrats agree to drop their opposition to the Colombia free-trade deal. USA Todayleads with a look at how many state and local governments continue to spend heavily despite the ongoing economic slump. In the third quarter, state and local spending increased 7.4 percent while the governments continued to increase hiring at a pace not seen in the vast majority of the private sector. Some insist the increased spending is helping to soften the economic downturn, but it also means states will be facing some steep budget shortfalls next year.
The troubles that AIG and Fannie Mae have faced since the government took a controlling stake in the companies demonstrates the difficulty that the government faces in trying to find the right balance between protecting the taxpayer-funded investment while also making sure the rescue works as intended. Yesterday, the government not only poured an extra $40 billion into the ailing insurance company, but it also eased up on its repayment terms.
For its part, Fannie Mae reported that it had a loss of $29 billion for the third quarter and said it might need an injection of cash from the Treasury before the end of the year. While the federal takeover "has largely stabilized Fannie Mae," as the WP reports, it has so far been unable to pour money into the mortgage market because of the strict conditions attached to the capital that the government made available to the mortgage giant. So far, the Treasury has proved unwilling to renegotiate the terms of its agreement with Fannie Mae.
In a front-page piece, the WSJ points out that there was another clear example of the troubles befalling financial-services companies in the decision by American Express to become a bank-holding company, which would make it eligible to receive cash from the Treasury. General Motors, which has been trying to convince the government to hand over some money, said yesterday that it might not be able to fulfill its debt obligations unless it manages to stabilize its finances.
The government has already committed to use all but $60 billion of the initial $350 billion that was authorized by Congress. As the WSJ notes, this means it's likely that Treasury Secretary Henry Paulson will soon have to go back to Congress to ask for the second half of the $700 billion bailout. But even that might not be enough. "The money could go quickly," one expert tells the LAT.
As an interesting side note, the WSJ points out that the problems with AIG's bailout could cloud the chances of Federal Reserve Bank of New York President Timothy Geithner becoming the next Treasury secretary. He's widely viewed as a top candidate for the job, but he was a key architect of all the bailouts this year and the New York Fed has been overseeing AIG for the past two months.
As Democrats continue to pressure the Bush administration to extend a helping hand to Detroit's Big Three, the president-elect took the message directly to the sitting president in their first post-election meeting. Democrats want the Treasury to approve an additional $25 billion to auto makers, which would bring the total federal assistance to $50 billion. Many key Democrats insist the bailout package is worded broadly enough to allow help for Detroit's Big Three, but the Treasury isn't so sure and is allegedly looking into the issue. Democratic congressional leaders said they have no intention of calling a lame-duck session for next week unless they get some assurance that Bush would support a stimulus package. The NYT says Democrats aren't too keen on the idea of giving in to Bush on the Colombia free-trade pact, so they might just wait until Obama takes office to get what they want.
Speaking of the president-elect, the WP gets an inside look at Obama's broad plans for Afghanistan and says the Democrat wants to pursue a more regional strategy, which could include talks with Iran. As was clear before the election, Obama supports the already progressing move for dialogue between the Afghan government and some elements of the Taliban and wants to step up the search for Osama Bin Laden. Besides supporting an increase of troops in Afghanistan, Obama's advisers think the Bush administration has spent too much time trying to build a modern democracy there, instead of just a stable nation that rejects extremism and doesn't threaten the United States. There are also hints that an Obama administration might have more luck in trying to persuade NATO allies to step up their commitment to Afghanistan.
Who will direct the nation's wars under Obama? There are still more signs that Obama might ask Defense Secretary Robert Gates to stay in his job for at least a year, notes the WSJ. Gates has made it clear he's likely to accept the offer. Of course, no decision has been made and some prominent Democrats are also being considered for the position. But, conveniently enough, Gates pretty much agrees with Obama on Afghanistan, although he has often spoken up against the idea of setting a firm timetable to withdraw troops from Iraq.
The LAT fronts word that Goldman Sachs urged investors to bet against California bonds even though it also made millions of dollars helping the state sell some of the same bonds. The piece was reported jointly with investigative journalism nonprofit ProPublica, which got its hands on a report that Goldman presented to investors in September in which it advised clients on how they could "profit from California's deepening financial misery," as the LAT puts it. This strategy could effectively result in an increase in the interest rate the state would have to pay to borrow money. Although the move isn't illegal, some describe it as inappropriate and it provides an example of how these companies can profit several different ways from a financial instrument. Not only did Goldman make millions by bringing the bonds to market, it also put forth credit default swaps that are supposed to protect against a default, even though that almost never happens with municipal bonds.
The NYT's David Brooks and the LAT's Jonah Goldberg both take a look at the future of the Republican Party from slightly different perspectives. They both basically agree that the GOP is now divided between traditionalists and reformers. Goldberg insists both sides "agree on a lot more than they disagree" yet are now hampered by "an elephant named George in the room" that is "blocking each side from seeing what the other is all about." Once Bush is out of the picture, it'll be easier for the sides to come together. Brooks is far less optimistic and says the only thing he's sure of is that the traditionalists will win the short-term battle. This isn't just because the majority of congressional Republicans are traditionalists, but also because they rule the public policy institutions. "In short, the Republican Party will probably veer right in the years ahead, and suffer more defeats." Then the reformers will be able to start building new institutions and putting forward new ideas, "and the cycle of conservative ascendance will begin again."