Today's Papers

Fed Takes Out the Big Guns

The Los Angeles Times, Washington Post, and New York Timeslead with, and the Wall Street Journalbanners, the Federal Reserve’s surprise announcement that it would inject the financial system with an additional $1.15 trillion to push down interest rates on mortgages and other consumer and business loans. The central bank said it would purchase government bonds and more than double what it planned to buy in mortgage-related securities in the hopes of spurring economic activity by, essentially, printing more money. The Post says the announcement “amounts to a recognition by Fed leaders that the economy has gotten much worse than they had forecast at their last policymaking meeting.” The Fed’s latest aggressive strategy “makes it more likely that the country’s 15-month-old recession will be over by the end of this year,” notes the LAT. The markets liked it, but the move does carry significant inflationary risks.

USA Todayleads with, and everybody else fronts, the continuing outrage over the $165 million in bonuses that American International Group paid out to members of its disgraced financial-products unit. AIG’s chief executive, Edward Liddy, was grilled by lawmakers yesterday who demanded the money be returned. Liddy said he had asked those who received $100,000 or more to give back at least half. Republicans also criticized Democrats for changing legislation that would have limited executive compensation at companies that received taxpayer money.

To recap, the Fed usually combats recessions by lowering interest rates. But seeing as though the key interest rate is already effectively zero, the central bank has been turning to alternative methods to try to stimulate the economy, and yesterday’s announcement marked a big expansion of those efforts. Adding it all up, the Fed said it would buy as much as $300 billion of longer-term U.S. Treasury securities in the next six months as well as purchase an additional $750 billion in mortgage-backed securities, which is on top of the $500 billion that the central bank already said it would buy. In addition, the central bank would double, to $200 billion, the purchase of Fannie Mae and Freddie Mac debt. “I’ve never known when the Fed has taken a move this powerful in easing monetary policy,” a former Fed economist tells the LAT.

These latest actions mean the Fed’s balance sheet continues to grow. Before September, the Fed barely had $900 billion in assets, but after it makes the purchases announced yesterday, and assuming it won’t cut back in other areas, that figure will rise to more than $3 trillion. One economist tells the NYT that the Fed has decided to adopt a “kitchen sink” strategy. “They are trying to fire absolutely every weapon they can,” one economist tells the LAT. The WSJ points out that the Fed’s announcement “highlighted the central bank’s ability to move aggressively on the financial crisis without approval from Congress,” which is particularly important now that Washington politicians are reluctant to approve more money for bailouts.

Investors certainly liked the announcement. The stock market was down for the day but quickly shot up after the Fed’s announcement, and the Standard & Poor’s 500 stock index surged 2.1 percent. The yield on 10-year Treasury notes sharply decreased to 2.53 percent from more than 3 percent, “the largest one-day drop since the aftermath of the 1987 market crash,” notes the WSJ, suggesting that mortgage rates will soon follow suit. Even assuming that the new measures will work as intended, they’re hardly risk-free moves. The value of the dollar sank yet again, illustrating fears that all this money-printing could reduce the value of the U.S. currency in the long term. There’s also the very real risk of inflation since the Fed might find it difficult to get such a huge amount of money out of the financial system once the economy recovers. “The challenge is the exit strategy,” an economist tells the Post.

When testifying before Congress yesterday, Liddy said several of the AIG employees have returned their bonuses but refused to specify how many. Liddy also said he didn’t want to provide the names of those who kept the money because he feared for their safety. The WSJ hears word that the AIG employee who received the biggest bonus—$6.4 million—has returned the money. As could be expected, lawmakers were on full-on outrage mode and weren’t satisfied with the news that some employees would be giving back their bonuses. The House is scheduled to vote today on a measure to set a tax rate of 90 percent on bonuses that AIG employees receive this year.

Meanwhile, Sen. Christopher Dodd tried to explain how a measure in the economic recovery bill that would have limited executive compensation was changed at the last minute to allow certain bonuses. As the NYT points out, “it is far from clear that the change mattered in the case of AIG.” But that little detail didn’t seem to be of any concern to Republicans who said Democrats could have prevented this mess. Dodd at first said he didn’t know how the change was made but then told an interviewer that it came at the request from officials at the Treasury Department.

Even as he said that employees were asked to give back their bonuses, Liddy defended the thinking behind making the payments, saying that they were needed to prevent key employees from leaving and creating huge losses for the company. In a front-page piece, the WP says that may not be entirely accurate. By the end of December, AIG had already gotten rid of a large chunk of its riskiest bets. Two executives at AIG’s financial-products division said the hardest work has already been completed, and employees are now focused on unwinding a portfolio that is still large but far less risky. Still, the executives said that losing experienced employees would reduce AIG’s ability to get the best price in negotiations with other financial companies. But one former executive says AIG employees aren’t exactly haggling, particularly since government officials are encouraging employees to perform the deals at a price point that would help the other financial firms.

The controversy over AIG has now moved well beyond the bonuses, notes the LAT. Lawmakers are raising questions about why AIG used taxpayer money to repay some of Wall Street’s largest firms and even some foreign banks. Several lawmakers said the actions once again demonstrated the cozy ties between Washington and Wall Street. Democrats blamed the Bush administration, but Republicans focused their ire on Treasury Secretary Timothy Geithner, and two lawmakers called for his resignation. President Obama said Geithner “is making the right moves in terms of playing a bad hand” and emphasized that he still has “complete confidence” in his treasury secretary.

Of course, as any observer of Washington’s ways knows already, “complete confidence” can soon turn into a resignation “to spend more time with my family.” In a front-page piece, the NYT calls this a “defining moment” for the treasury secretary. In defense of Geithner, the NYT points out that he “is shouldering more crises on his slight frame than most Treasury secretaries ever have” and has to do it without a number of assistants who still haven’t passed the administration’s vetting process. Still, questions surrounding why he didn’t know about the bonuses earlier and didn’t do anything to stop them “threaten to overwhelm his achievements and undermine Mr. Obama’s overall economic agenda.” Right now, it’s all about what he knew and when he knew it, a question that is also the subject of a separate WP front-page piece. AIG apparently told the Fed about the bonuses three months ago, but the Treasury and White House say they weren’t informed until a few days before the payments were due. But one WP source says senior Treasury officials were told at least a month ago, and Time reports that they were informed on Feb. 28. It’s all very unclear, to say the least. What does seem obvious is that Fed officials failed to fully appreciate what a huge controversy the bonuses would create.

One of the reasons why it has been hard for many to believe that Geithner didn’t know about the bonuses is that he played such a key role in the initial AIG bailout as president of the Federal Reserve Bank of New York. But, in his defense, some say that at the time he was worried about the big picture of preventing a collapse of the financial system and not compensation, a topic that was barely ever discussed.

The NYT and USAT front, and everyone else covers, the results of two large studies that conclude screening for prostate cancer saves few, if any, lives and can lead to much harm by pushing men to undergo aggressive treatments that can cause impotence and incontinence, among other side effects. Whether to screen for prostate cancer has always been a controversial topic, but the results of these two major studies, one in Europe and the other in the United States, are astounding. The American study found no survival benefit to screening while “the European study tells us is that, if you are a man who chooses screening, you are 47 times more likely to be harmed … than to have your life saved,” the chief medical officer of the American cancer society tells the LAT.