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09/19/2008

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Follow the news all day at WSJ.com

By Deborah Solomon

And Damian Paletta

WASHINGTON—The federalgovernment is working on asweeping series of programs thatwould represent perhaps the big-gest intervention in financialmarkets since the 1930s, embrac-ing the need for a comprehensiveapproachtothefinancial crisisaf-ter a series of ad hoc rescues.

At the center of the potentialplan is a mechanism that wouldtake bad assets off the balancesheets of financial companies,saidpeople familiarwith the mat-ter, a device that echoes similarmoves taken in past financial cri-ses. The size of the entity couldreach hundreds of billions of dol-lars, one person said.

Another proposal would be thecreationof federal insuranceforin-vestors in money-market mutualfunds, coverage akin to the insur-ance that currently safeguardsbank deposits. The move is de-signed to stem an outflow of fundsas consumers start to worry abouteven the safest of investments, asignofhowthecrisisisspreadingtoMainStreet.Thereis $3.4trillion inmoney-market funds outstanding.

In addition, the Securities andExchangeCommissionissettopro-poseatemporarybanonshort-sell-ing. It’s not clear how broadly the

ban might extend, but it could ap-ply only to financial stocks.

Details ofthe planwere still be-ing worked out Thursday nightandcouldbedeliveredtoCongressin “hours,” said Senate MajorityLeader Harry Reid of Nevada.

The administration had beentaking a patchwork approach tothe financial crisis, putting outfires as they ignited. The newmoves represent an effort to take amore systematic approach, after aspiral of bad debts, credit down-

grades and tumbling stocksbrought down venerable namesfrom investment bank LehmanBrothers Holdings Inc. to insur-ance giant American InternationalGroup Inc. Banks have grown un-willing to lend to one another, a

sign of extreme stress, because fi-nancialmarketsworkonlywhenin-stitutionshavefaithineachother’sability to meet their obligations.(See articles on Pages A9 and C1.)

Word of the plan came thePlease turn to page A10

History has thrown a handfulof men together this week with atask that they themselves mighthave brushed off as unthinkablejust days ago: Give the U.S. finan-cial system its biggest makeover

since the 1930s. And do itquickly.

They hail from all parts of thefinancial world, a banker fromNorth Carolina, a London finan-cial executive, the U.S. Treasurychieftain who himself once ruleda Wall Street powerhouse. Alongwith small cadre of other men,they are struggling to shore upthe foundations of Wall Street,on the fly.

It’s too early to know whetherthechoices they’ve made—rapid-fire acquisitions of Wall Street

iconsMerrillLynch &Co.andLeh-man Brothers Holdings Inc., gov-ernment seizure of one of theworld’s biggest insurers, Ameri-can International GroupInc.—were the right ones. Rarelyare decisions on the trillion-dol-lar scale made so hastily and with

so little vetting.Now, the government ap-

pears ready to embark on yet an-other attempt to stem the finan-cial carnage. The Treasury De-partment and the Federal Re-serve are considering ways to

Please turn to page A7

7 7

What’s News–Street Scenes: The PlayersRemaking Financial World

7 7

By Jennifer Levitz,

Ilan Brat

And Nicholas Casey

Bradford Roth, the 56-year-oldchairman of a Chicago law firm,had a clear strategy for dealingwith Wall Street’s gyrations whenhe stopped by a local Fidelity In-vestments branch Wednesday.

He’d makea depositto his cash-management account, but he

wasn’t going to check the balanceof his retirement account.

“The less you know,” he said,“thebetteryoufeel.There’snothingwrong with working in your 80s.”

The crisis gripping global fi-nance is filtering into the every-day lives of Americans, spawn-ing confusion and denial, avariceand anxiety, stoicism and blackhumor. For some, it has meantputting off retirement or long-

planned moves. For others, itmeant moving their money outof stocks and bonds and into fore-closed homes, gold, livestock oreven just having a good time.

“I’ve been talking to mybanker and telling him to get allmy money out of the market,”said Pat Hurley, a 57-year-oldelectrical contractor from Phoe-nix. “I’m really worried—I thinkthe stock market is going to get

worse and worse,” he said.Mr. Hurley has $440,000 in

his retirement fund, a sizablechunk but not nearly the milliondollars he was hoping for. “I fi-nally got back to where I was in2001 and now the stock market’sdiving again,” he said.

BobConrad,a59-year-oldbud-get director at the U.S. DistrictCourt in Dallas, sees his chance

Please turn to the next page

President George W. Bush arrives to make a statement regarding the economy in the Oval Office Colonnade at the White House Thursday.

HenryPaulson, right,and JohnThainontheNYSEtradingfloorduringbetterdays.

s Copyright 2008 Dow Jones & Company. All Rights Reserved

DJIA 11019.69 s 410.03 3.9% NASDAQ 2199.10 s 4.8% NIKKEI 11489.30 t 2.2% DJ STOXX 50 2569.45 t 1.1% 10-YR TREAS t 7/32, yield 3.436% OIL $97.88 s $0.72 GOLD $892.70 s $46.10 EURO $1.4305 YEN 105.65

T he government is workingon a sweeping series of

programs that could mark thebiggest intervention in finan-cial markets since the 1930s.At the center of the potentialplan is a mechanism to takebad assets off balance sheetsof financial companies. Fed-eral insurance for investors inmoney-market mutual fundsis also being considered. A1n The SEC plans to tempo-rarily ban investors from mak-ing bets on stock declines,joining a similar move by theU.K. to halt short selling. A1

n The Fed expanded its cur-rency-swap lines by $180 bil-lion and unveiled new pro-grams to give foreign centralbanks access to dollars. A4n Actions by central banksdid little to alleviate lendingmarkets as banks held ontothe newly injected funds. A9

n The Dow industrials soared410.03 points, or 3.9%, to11019.69, boosted by reportsthat a plan is being consideredto bail out troubled banks. C1n Russia unveiled an ex-panded $120 billion rescuepackage for the nation’s finan-cial system as fears of an eco-nomic slowdown grew. A8n China plans to buy sharesand take other measures tohalt a stock-market slide andboost investor sentiment. A8

n Turmoil in the U.S. finan-cial sector is showing signs ofspreading to other industries.The index of leading indica-tors fell by 0.5% in August. A3

n AIG’s new CEO said in aninterview that he hopes tokeep large insurance opera-tions intact after selling assetsto pay back the government. A3

n Citigroup is consideringmaking a bid for WaMu,while other suitors are re-viewing the thrift’s books. C1

n Morgan Stanley CEO JohnMack went on the offensive,lobbying for intervention andrule changes targeting shortselling. Shares rose 3.7%. C3

n Freddie Mac said Lehmanhasn’t made principal pay-ments of $1.2 billion plus inter-est on short-term loans. A4

n Buffett’s MidAmerican En-ergy is paying $4.7 billion forConstellation Energy. B1, C12

n Dow Jones said KraftFoods will join the DowJones Industrial Average onMonday, replacing AIG. C5

CONTENTSCampaign ’08 ..... A14,15Currents ....................... A18Health ................................... B10Heard on the Street ... C12Letters to Editor ... A22Media & Marketing .. B7

Opinion .................... A21-23Stocks in the News .. C5Technology ................. B10U.S. News .............. A11-13Weather Watch ...... B12Who’s News ................. B4World News .. A16,17,20

The House Takes a Hit as CasinosBan Cigarette Smoking

i i i

Several States Are Kicking the Habit,

But Gamblers Leave Slots for Nicotine

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Business&Finance

Bailout BrigadeGovernments have spearheaded unprecedented efforts to prop up financial markets this month.

Sept.2

Aug.29 3 4 5 8 9 10 11 12 15 16 17 18

Sept. 7: U.S. says it will shore up Fannie Mae and Freddie Mac(not trading day)

U.S. bailsout AIG

Central banks offer credit

10600

10800

11000

11200

11400

11600

Infusions and amounts, in billions

The Dow Jones Industrial Average,daily data

$200$85

$180

Source: WSJ Market Data Group (DJIA); central banks; published reports

Wall Street’s Ills Seep Into Everyday Lives

Weekend Journal: Dancing on Gehry’s Rooftops

The Securities and ExchangeCommission prepared an aggres-sive assault against short-sell-ers, saying it would temporarilyprevent investors from makingbets on stock declines in an at-tempt to stem some of the worst

stock-market slides in years, ac-cording to people briefed on theproposal.

The SEC was convening alate-night commission meetingto consider several items, someof which could be announced asearly as today, a person familiarwith the matter said. It’s un-clear whether the halt will belimited to a certain number of fi-nancial stocks or how long itwould last.

Following a late meeting withCongress, Mr. Cox said, “We’regoing back to work tonight andin fact the entire commission isin formal meeting right now.”

He declined to comment onthe temporary ban on shortsales. In short selling, tradersborrow shares of stock and sellthem, hoping the price of theshares declines and they canprofit by buying them back at alower price. Short sellers havebecome scapegoats for the bigdeclines in the share prices ofweakened companies includingLehman Brothers Holdings Inc.and American InternationalGroup Inc., though it is unclearwhether they were the cause ofthe declines.

Earlier Thursday, the U.K.’s Fi-nancial Services Authority said itwould ban short selling in finan-cial stocks until January. The FSAsaid it would review the ban in 30days. The FSA also announced ad-ditional disclosure requirementsfrom hedge funds of short sales ifa certain threshold is met.

U.K. Treasury Chief AlistairDarling, who was involved in theFSA’s decision, said in a state-

Please turn to page A20

U.S. Drafts Sweeping Plan to Fight CrisisAs Turmoil Worsens in Credit MarketsPaulson Briefs Congress on Idea to Buy Bad Assets From Banks, Insure Money-Market Funds; Stocks Rebound Sharply

By Kara Scannell, DeborahSolomon, Craig Karminand Gregory Zuckerman

By Susanne Craig,Carrick Mollenkamp,

Deborah Solomon andDan Fitzpatrick

By Tamara Audi

JOLIET, Ill.—At one point dur-ing her Saturday evening on Har-rah’s casino barge anchored out-side Chicago, Tensi Beaversneeded a cigarette. But Illinoishad recently banned smoking incasinos. So Ms. Beavers didsomething that is making gam-bling executives choke on theirsmoke-free casino air: Shewalked away from her game.

“I like to play and smoke, butyou can’t, so…,” Ms. Beaverssaid, clutching a pack of ciga-rettes and searching for thesmokers’ lounge, located justoff the casino floor but too farfrom the nearest slot machineto gamble.

To players like Ms. Beavers,smoking and gambling go handin hand—cigarette in one hand,slot-machine button in theother. “You take a pull and hopeyou hit it,” Ms. Beavers said.

Now, that ritual is being up-ended in several states where ca-sino smoking bans have been im-plemented or are on the way. Thebans are hitting casinos at a timewhen larger economic woes—such as airline flight reductions,cash-strapped consumers andthe credit crisis—are drivingdown casino revenues from LasVegas to Connecticut.

“The smoking ban is having amajor impact,” said Tom Swoik,head of the Illinois Casino Gam-ing Association. Casinos in Illi-nois have posted double-digit de-clines in revenue since the smok-ing ban took effect in January.

Casino officials say steep rev-enue losses threaten to forcestaff cuts, and drastically reducestate tax revenues generated bycasinos. They point to a 2005 re-search paper by the Federal Re-serve Bank of St. Louis that saysDelaware’s “racinos”—race-

Please turn to page A20

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SEC Is SetTo IssueTemporaryBan AgainstShortSelling

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World-Wide

n Bush sought to reassurethe public about markets.In a live-TV statement on thefinancial crisis, the presidentdefended the government’s re-cent moves and said “marketsare adjusting.” His commentshad little immediate effect onfinancial markets, thoughstocks surged on suggestionsthe White House is consider-ing bigger bailout steps. Demo-crats blasted Bush’s com-ments as insufficient. A6, A7

McCain said he would firethe SEC chairman if he werepresident, blaming Cox forpoor handling of the crisis.

n House Democrats are mov-ing to include a narrowed listof stimulus proposals in astopgap spending bill. A13

n Israel’s foreign ministerbegan efforts to build a coali-tion government after her partychose her as prime minister. A16

n Pakistan’s foreign ministersaid the U.S. hadn’t informedIslamabad before it launcheda drone missile attack. A17n The White House is review-ing its Afghan strategy asviolence spreads, Gates said.

n Gov. Schwarzenegger andleaders of California’s Democrat-run Legislature struck a dealto end a budget standoff. A12

n The Pentagon said a mal-function likely caused a helicop-ter crash in southern Iraq thatkilled seven U.S. soldiers. A17

n At least 25 militants withsuspected al Qaeda ties werearrested in the deadly attackon the U.S. Embassy in Yemen.

n Palin’s husband refused totestify in the Alaska Legisla-ture’s investigation of his wife’salleged abuse of power. A12

n The FDA proposed rules onregulating genetically engi-neered animals, likely paving theway for their sale as food. A12

n North Korea appears to betaking a harder line in nucleartalks with its leader’s health inquestion, U.S. officials said. A16

n A commuter-train engineerwas apparently text-messagingshortly before last week’s fatalcrash near Los Angeles. A11

n A U.S. psychologists’ groupvoted to ban members from tak-ing part in interrogations thatviolate international law. A13

n Crane operators will have topass a certification test underproposed rules, OSHA said. A13

with epa estimated 20 mpg cit y

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