In The Irish Independent Group Business editor Brendan Keenan writes that the Government will have to find an additional €2.4bn in 2010 to meet its three-year objective of bringing the public finances back within EU rules, the official projections show.
This money would be needed before any additional Budget measures -- the most obvious of which is an annual package of social welfare increases.
A further €850m will have to be found in 2011, to get the general government deficit back below the 3pc of output (GDP) allowed under the rules of the Stability & Growth Pact.
The estimates are based on a good recovery by the economy from 2010.
The Department of Finance forecasts are that GDP will grow by 2.7pc that year (after shrinking 0.8pc next year) and by 3.7pc in 2011. That would bring the economy back to what is widely regarded as its current normal growth rates.
If the economy does worse than that, the Government would either have to postpone the return to the 3pc limit or find even more tax and spending adjustments.
Equally, if the economy did better than expected, the objective could be achieved earlier and more easily.
Many economists already feel that the Budget forecasts for next year are too optimistic.
They see a decline in GDP of 1.3pc in 2008.
And they forecast a 0.8pc fall next year.
"We think the Department of Finance is being overly-optimistic on both fronts," said Alan McQuaid of Bloxham Stockbrokers.
"We see GDP falling by 2.5pc this year and a further 2pc in 2009. The end result of all this is that the Government is unlikely to meet its Budget targets next year, with the deficit likely to be closer to 7.5pc of GDP than the 6.5pc set out in the Budget."
The Irish Independent also reports that in an effort to urgently generate revenue for the Exchequer coffers, Minister Lenihan yesterday said he would be able to generate a cash flow yield of €350m during 2009 by forcing companies with a tax liability normally more than €200,000 per annum to pay at least some of that money earlier than usual.
Next June, such companies, which will include the largest indigenous and multinational players in the State, will be faced with paying either 50pc of their 2008 liability, or 45pc of their projected full-year liability for 2009 -- if their accounting period runs on a calendar year basis.
In the current economic climate, attempting to predict the 2009 tax liability could be a major headache for many such companies. Others have cyclical annual business patterns, with revenue often skewed towards specific parts of the year, compounding the difficulties in determining their tax obligation.
"It's unfortunate that this has been done at a time when companies should be focusing on securing their business in difficult circumstances," said Padraig Cronin, head of tax with Deloitte & Touche.
"It's going to place a very high compliance burden on the firms affected."
Vague
The minister was forced to plug the hole in the Government's finances, but as economic circumstances deteriorate, the end result may not be wholly in line with what Mr Lenihan expects. Additionally, it could put pressure on some companies as they will now have to re-analyse their annual cash flows to ensure that they can meet their liabilities.
Mr Cronin said he was also concerned at the decision to levy €200 on employees who are provided car parking spaces by their employers.
"It was a bit vague, in that it will be levied on spaces in main urban centres, but what exactly does that mean?"asked Mr Cronin.
It also raised questions about non-designated car-parking spaces, he said.
"What happens in firms where not everyone gets a space every day and customers or clients are also using the same spaces?
"It's something that still has to be made clear."
The Irish Times reports that the harshest Budget in a generation was unveiled yesterday by the Minister for Finance, Brian Lenihan. The measures will impact on the living standards of all taxpayers, with a 1 per cent levy on income up to €100,100 rising to 2 per cent on salaries over that amount.
Mr Lenihan told the Dáil that he needed to raise an extra € 2 billion in taxation and to make savings of €1 billion in public spending to deal with the crisis in the public finances.
Last night, the Minister defended the income levy as “fair and reasonable”, saying those on higher incomes, particularly those earning over € 100,000, would pay the bulk of the money raised. The income levy will bring almost € 1.2 billion into the exchequer.
On the savings side, the Minister announced a range of controversial measures, including the abolition of the automatic entitlement of people over 70 to a medical card.
Those who lose the card will become eligible for a € 400 annual cash grant. There was a lot of opposition to the measure expressed by backbench TDs at a Fianna Fáil parliamentary party meeting last night.
The uncosted measure was announced in the 2001 budget and was widely perceived to have played a significant part in Fianna Fáil’s election victory the following year.
Other controversial cuts in the Budget include restrictions on tax relief for medical expenses, the raising of hospital accident and emergency charges to €100, an increase in Dirt tax on savings, adjustments in child benefit and an increase of 8 cent in the tax on a litre of petrol. Tax on cigarettes will go up by 50 cent, with the same increase in the price of a bottle of wine.
Outlining his Budget to the Dáil, the Minister said gross national product (GNP) would decline by 1.5 per cent this year and would decline by another 1 per cent next year. To deal with this situation he had to reduce public expenditure as much as possible and to increase borrowing substantially.
‘‘The time for corrective action is now. By moving to restore stability we will ensure that the Irish economy stands to benefit from the next global upturn. We are a small nation facing a major challenge in these uncertain times. We must all pull together if we are to return to more prosperous times,”he said.
Mr Lenihan announced that Ministers and Ministers of State would take a pay cut of 10 per cent to set an example. Top civil servants at secretary general level had also volunteered to take a 10 per cent cut and Mr Lenihan expressed the hope that other public servants in leadership positions would volunteer to follow their example.
Fine Gael deputy leader and finance spokesman, Richard Bruton, accused Mr Lenihan of hitting the most vulnerable people in the country with the range of measures he had adopted.
“I have carried out a simple calculation of how this Budget affects families on €60,000 per annum. God knows, that is not a great deal of money, and those families will be eligible for affordable housing if the Minister’s plan goes ahead. These are very ordinary families struggling to get by, but today’s Budget amounts to €2,300 in extra taxes, charges and levies on those families,’’he said.
Labour Party spokeswoman on finance, Joan Burton, accused the Government of making ordinary people suffer for its mistakes. “Middle-class and working families have not just taken a hit, they have been mugged by the Minister.
“Whether we are referring to the income levy or the restriction in terms of health costs, we should make no mistake about the fact that the coping classes, the PAYE sector, are the Minister’s main targets today.
While this Budget will eat into the income of the average PAYE family, the ultra-wealthy, the tax exiles and those who made a killing from the Celtic Tiger will suffer relatively little pain,”she said.
Among other controversial measures announced by Mr Lenihan were an increase in third level registration fees to € 1,500, the introduction of an air travel tax of €10 and a new €200-a-year tax on holiday homes and investment property which local authorities will be entitled to levy.
One of the major revenue-raising devices adopted by the Minister was to bring forward payment of corporation tax and capital gains tax next year. This will yield a once-off payment of €550 million.
Significant changes in the eligibility criteria for a number of social welfare payments were also announced. Those signing on for jobseeker’s benefit, illness benefit and health and safety benefits will now have to have 104 paid contributions rather than 52, as at present.
The jobseeker’s benefit will in future be paid for a maximum of 12 rather than 15 months, while new claimants for illness benefit will only be entitled to payments for two years.
An expected redundancy package for the public service was not announced. Instead, the Minister said the Government would consider an action plan on the issue next month.
He added that a decision had been made to implement a targeted redundancy scheme in the HSE. The Minister announced significant savings through the ending of the decentralisation programme.
While the road building programme will continue, there was no mention in his speech about the fate of the metro but the Minister for Transport inidicated it would proceed. Mr Lenihan said he was budgeting for a deficit of 6.5 per cent of Gross Domestic Product (GDP) next year, well above the EU limit of 3 per cent. The deficit for this year is estimated at 5.5 per cent of GDP.
The Irish Times also includes an analysis by Maynooth University lecturer and former economist at Davy Stockbrokers, Jim O'Leary.
He writes: let's start with 8 per cent. This is Brian Lenihan's estimate of the percentage of gross domestic product (GDP) that the Budget deficit would have spiralled to next year if the Government had sat on its hands and done nothing. His Budget speech of yesterday marked the culmination of a process that managed to reduce that figure to 6.5 per cent.
The first question is: was this reduction enough? Where does a 6.5 per cent of GDP deficit sit between the risk of appearing too relaxed about the deterioration in the public finances and the risk of adding to the already strong recessionary influences that are at work in the economy?
My judgment is that it sits closer to the first than the second. This is all the more so since the economic forecasts and tax revenue projections on which the Budget is based indicate a relatively optimistic view of the world. It is much easier to envisage receipts falling several billion euro short of forecast again next year than to see them outstrip the target. It is eminently possible therefore that, in the absence of some kind of mini-budget during the course of 2009, the deficit will reach the 8 per cent value that so much energy has been expended on averting.
The reduction in the deficit from 8 per cent to 6.5 per cent occurred in two stages, the first of which was marked by the publication of the White Paper on Receipts and Expenditure last Saturday, and the second of which was the Budget proper.
In money terms, the adjustment amounted to roughly €3 billion net. How was this adjustment accomplished as between cuts in spending and increases in taxation? Well, the contribution of tax increases is clear enough: in net terms the measures announced yesterday had the effect of raising tax receipts by about €1.6 billion, that is €2 billion of increases in gross terms, less about €400 million of"negative buoyancy".
Net reductions in aggregate spending account for roughly another €1.5 billion. How to apportion this between current and capital is not straightforward. What is clear though is that far and away the greater part is accounted for by capital spending. This repeats a familiar pattern and confirms what has long been known, namely that reducing capital budgets is much easier than cutting day-to-day spending.
After yesterday's Budget, current spending is set to increase again in 2009 by all available measures. Of course, part of the reason for the especially chunky increase in the most inclusive measures (6.5-7 per cent) is the sharp projected rise in interest payments on a rapidly growing Government debt. This phenomenon underlines the importance of bringing the deficit back down again as quickly as possible.
Another important contributory factor to the rise in current spending is the growth in the live register, a feature that underlines the need to avoid an unduly restrictive fiscal stance.
The aspect of the Budget that is likely to draw the most hostile reaction will be its heavy reliance on tax increases. One criticism will be that tax hikes are deflationary. Well, as far as their deflationary effect is concerned, I'm not convinced that there is much to choose between tax increases per se and reductions in Government spending. After all, public sector pay and social welfare payments enter into the calculation of household disposable income just as taxes do. A more valid basis for concern about the scale of the tax increases announced has to do with the economy's long-term competitiveness. Here the argument turns on the efficiency of the public sector. There is no doubt that spending cuts that preserve the volume and quality of public services are infinitely preferable to tax hikes. That said, in the short-term it is difficult to effect spending cuts with such surgical precision. The key question then is whether there was enough effort made on this front in the context of yesterday's Budget. One suspects that the answer is no. That being the case, the conclusion must be that at least some (though probably not all) of the tax increases announced could have been averted by a more determined pursuit of waste and inefficiency.
At the end of the day, tax hikes, though unpopular, represent an easy option. Herein lies another danger with the balance struck in yesterday's Budget: the risk that it transmits to the public the signal that, faced with the myriad difficult choices that will be a feature of the next few years, the Government will too readily default to the tax-raising option. If that's the message that's picked up, confidence across the household and business sectors of the economy will be damaged. In this respect, it is important that the Government brings forward credible and comprehensive plans for serious efficiency reforms of the public service as soon as possible.
The Government envisages the problem with the public finances getting worse before it gets better. Hence next year's projected deficit is significantly higher than this year's forecast. But how does the Government see the deficit being eliminated thereafter? This is as important an issue as the shape of the 2009 Budget itself, and addressing it requires the adoption of a credible medium-term fiscal framework that would articulate a realistic set of macroeconomic forecasts and specify a trajectory for the deficit and the main spending and revenue aggregates for the period 2010-2013.
Yesterday's Budget documentation incorporates an exercise that could be represented as such a framework, but it falls somewhat short of what is required. In the first instance, the economic forecasts on which it is based seem rather hopeful: the current recession is seen ending in 2009 (with GDP growth averaging over 3.2 per cent in 2010 and 2011) and unemployment is seen peaking next year at 7.3 per cent. Secondly, the forecast horizon extends only as far as 2011, when the budget deficit (by sheer coincidence!) dips just below the Growth and Stability Pact ceiling.
But, most importantly, a large chunk of the adjustment required to get to that point (amounting to €3.3 billion, or 1.6 per cent of 2011 GDP) is completely unspecified in the sense that it is identified as neither a spending cut nor a tax increase. Instead, in a path-breaking piece of fiscal bureaucratese it is described as a "Cumulative Fiscal Consolidation Objective"! Who said this Budget was bereft of innovation?
The Irish Examiner reports that Brian Lenihan hit the pockets of the poor, vulnerable and middle classes yesterday in a savage budget that increased taxes, hospital charges and the cost of education.
As the Finance Minister signalled next year’s budget could be even harsher, he snatched about €1bn from workers in what he described as “a call to patriotic action” and solidarity.
The move forced everyone earning up to €100,000 a year to pay an extra 1% levy to the Exchequer, with the charge rising to 2% for those above €100,000. And in a breathtaking across-the-board ram-raid on family finances, Mr Lenihan:
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Raised A&E charges by 50% to €100.
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Introduced means testing for the over-70s medical card.
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Reduced the numbers eligible for the childcare supplement.
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Slashed tax relief on medical expenses back to the standard rate.
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Increased VAT to 21.5%.
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Slapped a €200 charge on second homes.
Fine Gael’s finance spokesperson Richard Bruton warned the measures could yet tip the country from recession to depression. “You are looking to tax any family, every family, any business, every business,” he said.
Labour finance spokesperson Joan Burton said the budget targeted the vulnerable. “Middle-income families have been mugged by the minister,” she said.
Taoiseach Brian Cowen said the action, though stark, was needed: “Unpalatable choices have been made in relation to this budget which were necessary; I can assure you the other choices were even more difficult.”
Mr Lenihan drew particular opposition fire for not protecting workers on the minimum wage from the income levy. He defended the move saying they were exempt from income tax and pointed to the fact that ministers had taken a 10% pay cut. “We realise the solidarity it demands of all taxpayers, but there is too much at stake, we all have too much to lose by not taking action now,” he told the Dáil.
Unions expressed alarm at the impact of the budget battering on schools which would see 400 teaching jobs axed, college registration fees up 66% to €1,500 euro, student grants frozen, school bus fees rising by up to 80% and no payment to schools for substitute teachers to cover uncertified sick leave.
The weekly pension was boosted by €7, but as it was below inflation, campaigners warned it was a real terms cut that would not be helped by a meagre €2 a week boost to the fuel allowance. Duty on wine, cigarettes and petrol increased steeply, while child benefit will be halved for 18-year-olds as a €10 tax on air travel was brought in to raise €150m per year.
While the construction industry seemed pleased with measures such as a reduction in commercial stamp duty, elsewhere it was a good day to bury bad news as 250 people were let go at Wyeth Medica, Kildare, and 280 jobs went at Waterford Crystal. In a nod to the Green Government partners, Mr Lenihan indicated he may introduce a carbon tax in next year’s budget.
Mr Lenihan also insisted that a clampdown on bank bonuses would be imposed when the bail-out goes into operation.
The Financial Times reports that the world banking system showed signs of pulling back from the brink of disaster on Tuesday with a tangible easing of stress in credit markets as the US government unveiled a historic rescue plan for its banks.
The planincluded $250bn for bank recapitalisation and a sovereign guarantee for new bank debt – the most sweeping government intervention in the US financial sector since the Great Depression.
“Government owning a stake in any private US company is objectionable to most Americans, me included,” said Hank Paulson, US Treasury secretary. “Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”
Ben Bernanke, Federal Reserve chairman, said even the massive intervention announced on Tuesday may not be the final word. “Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks.”
He added: “We will not step down until we have achieved our goals of repairing and reforming our financial system, and thereby restoring prosperity.”
Investors signalled growing confidence that the biggest US banks would survive the crisis. The cost of buying insurance against defaults by some big US banks fell by record amounts, while remaining above normal levels.
Interbank loanr ates starting on Wednesday also eased, though modestly, while the yield on safe short-term US Treasuries moved higher, as risk appetite improved.
However, the stock market failed to build on its historic rally on Monday amid concerns that the financial rescue might have come too late to prevent a deep recession. The S&P 500 fell 0.53 per cent. The head of a leading financial firm told the FT: “I still expect a severe recession, but this may be enough to unclog the financial system.”
US Banking Recapitalisation Program
|
Bank Name |
Funds to be expected received |
| Citigroup |
$25bn |
| JP Morgan Chase |
$25bn |
| Bank of America* |
$20bn |
| Merrill Lynch* |
$5bn |
| Wells Fargo |
$25bn |
| Goldman Sachs |
$10bn |
| Morgan Stanley |
$10bn |
| Bank of New York Mellon |
$2-3bn |
| State Street |
$2-3bn |
| Source: Banks and regulators |
*Bank of America is acquiring Merrill Lynch |
As part of the plan, the government will inject half the total, $125bn, into nine banks – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street.
Under the government’s take-it-or-leave-it offer, Bank of America (including Merrill Lynch, which it is acquiring), JPMorgan Chase, Citigroup and Wells Fargo, will each get $25bn in government funds, Goldman Sachs and Morgan Stanley $10bn each, and Bank of New York Mellon and State Street between $2bn and $3bn each.
In return, the US government will take non-voting preference shares paying 5 per cent interest, stepping up to 9 per cent after five years, and will also take warrants for common stock equal to 15 per cent of its preference share investment.
All institutions will get cash on the same terms, and the cost of securing loan guarantees will also be the same for stronger and weaker banks. Banks taking government equity will be subject to some mild executive pay constraints.
However, they will be able to carry on paying dividends, unlike in the UK, although they will not be able to increase them.
All other US financial institutions eligible for the plan have to decide by November 14 whether to participate on these terms.
US legislators were broadly supportive of the move, even though it marked a radical shift from the original focus of the $700bn US rescue plan signed into law this month, which was sold as a troubled asset purchase plan.
The US announcement followed similar moves by the UK and by European governments . Equity markets in Europe continued their advance on Tuesday. The FTSE 100 and the FTSE Eurofirst 300 closed up 3.2 and 3.1 per cent, respectively.
The dollar, which fell sharply on Monday, declined further.
The FT also reports that European governments have so far announced spending of nearly €200bn ($268bn, £157bn) on arms-length vehicles to inject funds into banks and a further €1,250bn in guarantees of bank funding, with more to come, raising fears that the financial crisis will land a huge blow to Europe’s public finances.
There is no doubt that taxpayers could be saddled with huge debts for years. But European policymakers say they have introduced the measures to protect taxpayers from genuine losses that would have arisen had the financial system collapsed.
Christine Lagarde, French finance minister, could have been speaking for all ministers when she said on Monday that “there will be no cost and there will even be benefits for the state”.
The eventual costs and benefits for taxpayers will be determined by the success of the schemes in shoring up the financial system but they are also affected by arcane common rules for public finance accounting.
Buying preference shares or common stock in a bank is considered a financial transaction, rather than the purchase of goods or services, even though governments will borrow hundreds of billions to fund the capital injections, and these will not raise public deficits.
In addition, some eurozone countries do not expect to use the funds available for recapitalising banks. The Netherlands finance ministry, for example, says it does not expect its €20bn fund to be widely used. “The purpose of the system is to increase confidence,” it says.
But because the issuance of government bonds will increase, measured public sector debt will rise in many European countries.
In France, public debt is predicted to hit 65.3 per cent of gross domestic product in 2008 and 66 per cent next year. If the €40bn earmarked for bank recapitalisation were all taken up, this would add 2 percentage points of GDP to the debt figure. In Britain, £50bn of capital injections would raise public sector net debt by more than 3 per cent of GDP.
But any additional interest payable on the debt is likely to be more than offset with higher payments by banks through coupons on preference shares and dividends on common stock, so taxpayers are likely to gain.
The guarantees are easier to account for since they count on government books only if they are called, which ministers expect not to happen. Otherwise they classify as contingent liabilities.
For all this relatively good news for taxpayers, who now have huge potential liabilities alongside reasonable expectations of small gains from fees charged to banks, there is little doubt public finances across Europe will deteriorate rapidly because of a slowing economy.
Speaking about Britain, Ben Broadbent of Goldman Sachs says: “The cost [of the rescue] is a fraction of the damage the slowdown is already doing directly to the public finances and an even smaller fraction of what would have happened to public-sector debt issuance without a scheme.” Economists expect the UK deficit to rise to about 6 per cent of GDP in 2009-10 and 2010-11.
Gilles Moec, European economist at Bank of America, says France and Italy will also adopt stimulative budgetary policies to head-off the worst effects of looming recessions. “This could bring the deficit to 4 per cent of GDP in 2009 in France and 3.2 per cent in Italy.”
Even if the government rescues do not break European limits on deficit and debt, the slowdown will keep the scrutiny on weakening public finances for years.
The New York Times reports that the euphoria that swept Wall Street on Monday gave way to a sober reality on Tuesday: a recession, perhaps the deepest one in decades, may be unavoidable.
A day after the stock market staged one of its biggest rallies in history, buoyed by the government’s plan to rescue banks, investors retreated once again. Worries about the economy came to the fore. Many people fear that corporations — and by extension their workers and shareholders — will face harder times in the months ahead.
“Everything the government has done is not going to prevent further deterioration in the economy,”said Stuart Hoffman, chief economist at PNC Bank.“At the end of all this, what matters is what the economy does.”
The flow of credit, which has been choked for weeks, began to trickle through the financial system on Tuesday. But the credit markets remained shut to many companies and municipalities. Home mortgage rates, which some had hoped might decline once the government’s plans became clear, rose instead. The fear is that the financial rescue will add to an already-swelling federal budget deficit and force the Treasury to borrow heavily in the capital markets.
Beaten-down financial shares soared, but shares of many big blue-chip corporations sank as the outlook for profits and employment darkened. PepsiCo, the soft drink maker, said it would cut 3,300 jobs and close six plants.
The Dow Jones industrial average fell 76.62 points, or 0.8 percent, to 9,310.99 points. Earlier in the day, the Dow surged 4.3 percent after the Bush administration confirmed that it would invest $250 billion in banks, with about half going to nine large national companies.
In addition, the government said it would insure more bank deposits and debt issued by big financial firms. But worries about profits at technology companies sent the Nasdaq composite index down 3.5 percent, to 1,779.01. The decline, however, came before the Intel Corporation, the world’s largest semiconductor maker, issued a strong earnings report after the market closed, easing some of the concern that an economic slowdown had hurt its sales. The broader Standard & Poor’s 500 stock index fell 0.5 percent, to 998.01.
Asian stocks were down in trading on Wednesday morning. The Nikkei 225 index fell 1.5 percent, while the Hang Seng index in Hong Kong was off 2.3 percent.
Investors said the United States government intervention should help avert a crisis in the financial system by preventing cataclysmic bank failures like the recent bankruptcy of Lehman Brothers. But they added that even if the effort were successful at getting banks to lend more freely than they had in recent months, the initiative would not avert a recession.
“Everybody expects the government to do something and have the economy pick up in a quarter or two,”said Ira Jersey, an interest rate strategist at Credit Suisse. “All of this will stabilize the markets, but the real economic issues remain.”
The questions now are how weak the economy will get and how far corporate profits will fall. Economists estimate that the gross domestic product — the broadest measure of the nation’s economic output — barely grew in the third quarter. The Commerce Department will release that number on Oct. 30, just before the election.
Companies are just starting to report about their performance in the third quarter, and so far, many blue-chip names have delivered bad news.
PepsiCo said on Tuesday that its North American beverage sales fell during the quarter, hurting its profit. Shares of the company fell nearly 12 percent, to $54.40. Shares of other companies that cater to consumers also fell.
Concerns about technology spending hurt stocks like Microsoft, Intel and Dell, the computer maker. On Monday, Bill Gates, the chairman of Microsoft, warned of a “fairly significant recession” that might drive the unemployment rate to 9 percent, from its current 6.1 percent.
But on Tuesday after the market closed, Intel reported quarterly earnings that were higher than analysts had expected. Still, the company said demand was weakening in some places. Shares of Intel recouped much of its 6 percent loss for the day in after-market trading.
Analysts see a long, tough slog for the economy, because credit will remain harder to get and more expensive for businesses and consumers, relative to the recent years of easy money.
Conditions have improved in some parts of the credit market with interbank lending rates and yields on corporate bonds falling from near-record levels.
But in other areas of the market, new concerns surfaced. As investors focused on the prospect of more borrowing by the federal government, they drove down the price of Treasuries and mortgage-backed securities, the biggest source of financing for home loans. On Tuesday, the Treasury said the federal government ran a budget deficit of $454.8 billion in the 2008 fiscal year, up from $161.5 billion in 2007.
The yield on the 10-year Treasury note, which moves in the opposite direction from the price, jumped to 4.08 percent, from 3.87 on Friday. Yields on Fannie Mae mortgage securities increased to 6.09 percent, from 5.92 on Friday. (Bond markets were closed on Monday.) If sustained, that rise in yields could significantly increase the interest rates on home loans.
The average rate 30-year fixed-rate mortgages on Tuesday was 6.6 percent, up from 6.06 percent a week ago, according to HSH Associates, a publisher of data.
Those rates might come down once some new policies kick in. Regulators have said Fannie Mae and Freddie Mac, the mortgage finance giants that the government took over in September, will buy more mortgages and lower fees on loans. And the government investment in banks should prompt them to lend more.
Another corner of the market, municipal finance, was also struggling on Tuesday. Several borrowers like the Metropolitan Transportation Authority in New York and the states of Ohio and Hawaii put off debt sales because they could not lure enough investors. Municipal bonds have struggled since Lehman’s bankruptcy caused a panic among investors and led to forced selling.
California has had difficulty raising the short-term debt that it needs to tide the state government over until tax receipts come in this spring. The state is raising $4 billion and is offering interest rates as high as 4.5 percent. The state’s big offering, which the state plans for Thursday, has made it difficult for other states and cities to raise money.
“Other than that special situation the market is closed,” said John Miller, chief investment officer at Nuveen Asset Management, an investment firm that specializes in municipal debt.
Yields on municipal bonds jumped to 6.74 percent on Tuesday, up from 5.44 percent a month earlier, according to the Bond Buyer. Because interest payments on most municipal debt is tax free, Mr. Miller and others are hoping retail investors will jump into the market to buy state and local debt for the higher returns they can now earn.
On Tuesday afternoon, California officials said they had secured commitments from retail investors for $1.84 billion.
The NYT also reports that the chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr.said they must sign it before they left.
The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.
But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.
What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.
Mr. Paulson announced the plan Tuesday, saying “we regret having to take these actions.” Pouring billions in public money into the banks, he said, was “objectionable,” but unavoidable to restore confidence in the markets and persuade the banks to start lending again.
In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.
All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.
Analysts say the United States was forced to shift policy in part because Britain and other European countries announced plans to recapitalize their banks and backstop bank lending. But unlike in Britain, the Treasury secretary presented his plan as an offer the banks could not refuse.
“It was a take it or take it offer,”said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private.“Everyone knew there was only one answer.”
Getting to that point, however, necessitated sometimes tense exchanges between Mr. Paulson, a onetime chairman of Goldman Sachs, and his former colleagues and competitors, who sat across a dark wood table from him, sipping coffee and Cokes under a soaring rose and sage green ceiling.
This account is based on interviews with government officials and bank executives who attended the meeting or were briefed on it.
Mr. Paulson began calling the bankers personally Sunday afternoon. Some were already in Washington for a meeting of the International Monetary Fund.
The executives did not have an inkling of Mr. Paulson’s plans. Some speculated that he would brief them about the government’s latest bailout program, or perhaps sound them out about a voluntary initiative. No one expected him to present his plan as an ultimatum.
Mr. Paulson, according to his own account, presented his case in blunt terms. The nation’s largest banks needed to begin lending to each other for the good of the financial system, he said in a telephone interview, recalling his remarks. To do that, they needed to be better capitalized.
“I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital,”Mr. Paulson said. “In a relatively short period of time, people came on board.”
Indeed, several of the banks represented in the room are in need of capital. And analysts said the terms of the government’s investment are attractive for the banks, certainly compared with the terms that Warren E. Buffett extracted from Goldman Sachs for his $5 billion investment.
The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years. It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment. But the Treasury said it would not exercise its right to vote those common shares.
The terms, officials said, were devised so as not to be punitive. The rising dividend and the warrants are meant to give banks an incentive to raise private capital and buy out the government after a few years. Still, it took some cajoling.
Mr. Kovacevich of Wells Fargo objected that his bank, based in San Francisco, had avoided the mortgage-related woes of its Wall Street rivals. He said the investment could come at the expense of his shareholders.
Mr. Kovacevich is also said to have expressed concern about restrictions on executive compensation at banks that receive capital injections. If he steps down from Wells Fargo after completing a planned takeover of Wachovia, he would be entitled to retirement benefits worth about $43 million, and $140 million in accumulated stock and options, according to James F. Reda & Associates, a executive pay consulting firm. Pay experts say the new Treasury limits would probably not affect his exit package.
Mr. Kovacevich declined to be interviewed about the meeting.
Kenneth D. Lewis, the chairman of Bank of America, also pushed back, saying his bank had just raised $10 billion on its own. Later, Mr. Lewis urged his colleagues not to quibble with the plan’s restrictions on executive compensation for the top executives. These include a ban on the payment of golden parachutes, repayment of any bonus based on earnings that prove to be inaccurate, and a limit of $500,000 on the tax deductibility of salaries.
If we let executive compensation block this, “we are out of our minds,” he said, according to a person briefed on the meeting.
In an interview on Monday, before the meeting, John J. Mack said his bank, Morgan Stanley, did not need capital from the Treasury. It had just sealed a $9 billion deal with a large Japanese bank. During the meeting, Mr. Mack, Morgan Stanley’s chief executive, said little, according to participants.
Mr. Paulson, however, was peppered with questions about the terms of the investment by other chief executives with experience in deal-making: Lloyd C. Blankfein of Goldman Sachs, Vikram S. Pandit of Citigroup, John A. Thain of Merrill Lynch and Mr. Dimon.
Among their concerns were: How would the government’s stake affect other preferred shareholders? Would the Treasury Department demand some control over management in return for the capital? How would the warrants work?
With the discussion becoming heated, the chairman of the Federal Reserve, Ben S. Bernanke, who was seated next to Mr. Paulson, interceded. He told the bankers that the session need not be combative, since both the banks and the broader economy stood to benefit from the program. Without such measures, he added, the situation of even healthy banks could deteriorate.
The president of the Federal Reserve Bank of New York, Timothy F. Geithner, then proceeded to outline the details of the investment program. When the bankers heard the amount of money the government planned to invest, they were stunned by its size, according to several people.
As they heard more of the details, some of the bankers began to realize how attractive the program was for them.
Even as they insisted that they did not need the money, bankers recognized that the extra capital could be helpful if the economy became shakier. Besides, many of these banks’ biggest businesses are tied to the stock and credit markets; the quicker they improve, the better their results.
Later, Mr. Pandit told colleagues that the investment would give Citigroup more flexibility to borrow and lend. Mr. Dimon told colleagues he believed the relatively cheap capital was a fair deal for his bank. Mr. Lewis said he recognized the prospects of his bank were closely aligned with the American economy.
Mr. Thain was intrigued by the terms of the guarantee by the Federal Deposit Insurance Corporation on new senior debt issued by banks, participants said. He mentally calculated the maturities on debt issued by Merrill Lynch, to determine how the program could benefit his bank.
For Mr. Paulson, selling the bankers on capital injections may not have been as difficult as overhauling a rescue program that had originally focused on asset purchases from banks. In the interview, Mr. Paulson said the worsening conditions made a change in focus imperative.
“I’ve always said to everyone that ever worked for me, if you get too dug in on a position, the facts change, and you don’t change to adapt to the facts, you will never be successful,”he said in the interview.
Mr. Paulson insisted that purchases of distressed assets would remain a big part of the program. But having allocated $250 billion to direct investments, the Treasury has only $100 billion left from its initial allotment of $350 billion from Congress to spend on those purchases.
As the meeting wound down, participants said, the bankers focused more on contacting their boards before signing the agreement with the Treasury Department. With time running short and private space limited, some of the bankers left the Treasury building, heading for their limousines while speaking urgently into cellphones.
“I don’t think we need to be talking about this a whole lot more,” Mr. Lewis said, according to a person briefed on the meeting. “We all know that we are going to sign.”
