Heavy Agenda

Events of yesterday continued to demonstrate how major elements of the current financial crisis are interrelated. First, with the world waiting to see how a new administration in Washington will approach the financial crisis, President Bush's announcement of a November 15 summit of international leaders puts the discussion of a new regulatory regime for the financial sector squarely in the middle of the U.S. presidential transition. While both Sens. John McCain and Barack Obama praised the summit, it will present the winner of the November 4 election with an interesting quandary—how to participate in and/or react to the event. It may also force the hand of the President-Elect to name his economic team before the summit takes place. Doing so will allow the administration-in-waiting to have a more organized response to the events of the summit.

Second, the impacts of the financial crisis on the U.S. auto industry may be putting additional pressure on the $700 billion rescue package enacted on October 3. As potential car buyers continue to face a credit crunch, bipartisan leaders of the Michigan congressional delegation yesterday urged the Treasury to make a portion of the funds available to back auto loans. The request came from House Energy and Commerce Committee Chair John Dingell (D-MI) and Rep. Fred Upton (R-MI). If Treasury takes up that suggestion, funds available to supply capital to community banks or purchased troubled mortgages would be reduced.

Third, a House hearing yesterday took testimony from the leaders of the three major bond rating agencies—Moody's, Standard & Poor's, and Fitch. The hearing examined the extent to which those firms’ participation in the mortgage-backed securities market may have created conflicts of interest for them that call into question all of their work—including their rating of municipal debt. As the cost of borrowing for state and local government becomes a potential drag on their ability to undertake countercyclical projects, a lack of confidence in the ratings system would only exacerbate the problem.

With jobless claims up by 15,000 from last week and many well known U.S. companies projecting significant layoffs, economic pressures continue to worsen. The Dow Jones Industrial Average dropped over 500 points yesterday. The Senate Banking Committee will hear today from FDIC Chairman Sheila Bair and Neel Kashkari, the Treasury’s interim assistant secretary for financial stability, charged with overseeing the implementation of the Emergency Economic Stabilization Act of 2008. Given all the bad news, it will be interesting to see if these officials have any positive developments to report.

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