Finance and Economic

The fate of the government’s $700 billion financial bailout plan was thrown into doubt Monday as the House rejected the controversial measure.

The next steps were unclear. The abrupt defeat left the Bush administration and congressional leaders scrambling to figure out whether to renegotiate the bill and introduce it again as soon as Thursday or to try other options.

Stock markets reacted violently. Investors who had been counting on the rescue plan’s passage sent the Dow Jones industrial average down well over 700 points. The stock gauge closed 778 points lower - nearly 7%. (Full coverage)

The measure, which is designed to get battered lending markets working normally again, needed 218 votes for passage. But it came up 13 votes short of that target, with a final vote of 228 to 205 against. Two-thirds of Democrats and one-third of Republicans voted for the measure.

President Bush, who earlier in the day said he was confident the bill would pass, said he was "very disappointed" by the House vote. Treasury Secretary Henry Paulson, speaking at the White House, said he will continue to "use all the tools available to protect" the economy.

Republican leaders, who had pushed their reluctant members to vote for the bill, pointed the finger for the failure at a speech given Monday by Speaker Nancy Pelosi, D-Calif.

Pelosi, speaking on the House floor, had blamed the nation’s economic problems on "failed Bush economic policies."

House minority leader John Boehner, R-Ohio, said after the vote that passage would have been possible if it had not been for Pelosi’s "partisan speech."

Rep. Barney Frank, D-Mass., one of the main congressional negotiators, dismissed the GOP claim that Pelosi’s speech was responsible for Republicans voting against the bill. "Because somebody hurt their feelings, they decided to hurt the country," Frank said. "That’s not plausible."

The four-hour debate that preceded Monday’s vote included impassioned pleas for and against the measure from Democrats and Republicans alike. Party leaders told members that the only way to protect the economy from a spreading credit crunch was to vote for the difficult-to-swallow measure.

"Our time has run out," said Rep. Spencer Bachus, R-Ala., the ranking Republican on the House Financial Services Committee. "We’re going make a decision. There are no other choices, no other alternatives."

Added Frank: "Today is the decision day. If we defeat this bill today, it will be a very bad day for the financial sector of the American economy."

Boehner told his members, many of whom objected to the measure, that they had to accept something he and many of them found distasteful.

"If I didn’t think we were on the brink of an economic disaster, it would be the easiest thing to say no to this," Boehner said. But he said lawmakers needed to do what was in the best interest of the country.

One lawmaker who voted against the bill, Rep. John Culberson, R-Texas, said the measure would leave a huge burden on taxpayers. "This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions," he said. Culberson voted against the bill.

Other conservative Republicans who voted "no" argued the bill would be a blow against economic freedom.

Thaddeus McCotter, R-Mich., said the bill posed a choice between the loss of prosperity in the short term or economic freedom in the long term payday loans. He said once the federal government enters the financial marketplace, it will not leave. "The choice is stark," he said.

Some Democrats voted against the bill for not doing enough to help taxpayers facing foreclosure or unemployment and accused proponents of moving too fast.

"Like the Iraq war and Patriot Act, this bill is fueled by fear and haste," said Lloyd Doggett, D-Texas.

The debate followed a weekend of marathon negotiations between lawmakers and administration officials to hammer out legislation.

Leading House Republicans signed on to the proposal on Sunday after expressing earlier reservations.

The core of the bill is based on Paulson’s request for the authority to purchase troubled assets from financial institutions, so banks can resume lending and the credit markets, now virtually frozen, can begin to operate more normally.

Democrats and Republicans - concerned about the potential cost - added several conditions and restrictions to protect taxpayers on the downside and give them a chance at some of the potential upside if the companies benefit from the plan.

The turmoil in Washington comes amid great upheaval in the nation’s financial system.

Banks and Wall Street firms, worried about both their own needs for cash and the condition of other institutions, essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans and other consumer borrowing.

The crisis stems from problems in mortgage-backed securities, which saw their value plunge as home prices have gone into their worst slide since the Great Depression and foreclosures have soared to record levels.

In turn, the market for trillion of dollars worth of those securities held by major firms evaporated, sending them down to fire-sale prices and raising the risk of widespread failures among the nation’s major financial firms.

On Monday, the Federal Deposit Insurance Corp., which insures deposits at failed banks, arranged for the sale of the banking assets of Wachovia (WB, Fortune 500), the nation’s No. 4 bank holding company, to Citigroup (C, Fortune 500) for $2.2 billion in stock.

That follows three weeks of other shocks: the Treasury Department’s seizure of mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500); Wall Street firm Lehman Brothers’ bankruptcy filing; rival Merrill Lynch (MER, Fortune 500) purchase by Bank of America (BAC, Fortune 500).

In addition, the Fed bailed out insurance giant American International Group (AIG, Fortune 500), loaning it $85 billion in return for a nearly 80% stake. Washington Mutual (WM, Fortune 500), the nation’s largest savings and loan, became the largest bank failure in history.

After months of attempts by regulators to fix the problems, the bailout was seen by many as the most comprehensive effort yet. Proponents vowed late Monday to keep trying.

Sen. Judd Gregg, R-N.H., a lead negotiator in the bailout bill negotiations said, "If we don’t act promptly and effectively, then many people are going to lose their jobs." 

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U.S. lawmakers prepared to vote on Monday on a $700 billion fund to buy toxic debt as the global financial crisis produced Europe’s biggest bank rescue to date.

Investors around the world hung on every twist and turn in Washington as Benelux governments moved to part-nationalise

Belgian-Dutch group Fortis.

In Britain, mortgage lender Bradford & Bingley became the second British bank to be taken under the government’s wing since the crisis began last year. Shares in French bank Dexia tumbled more than 20 percent on a

newspaper report that it might launch an emergency capital increase.

Fortis is the first major euro zone bank to buckle under the financial turmoil triggered in August last year by U.S credit reports. mortgage defaults, and an early relief rally in markets at news of progress in Washington soon fizzled out.

Stock markets in Japan, South Korea and Hong Kong all retreated 1-2 percent, giving up initial gains led by financial shares. U.S. stock futures pointed to a drop at the opening bell and Europe’s FTSEurofirst fell 2.5 percent.

The dollar climbed, mainly due to the euro and pound sliding about 1 percent, as the toll on financial firms spread across the Atlantic and stirred expectations that central banks may have to respond by cutting interest rates. 

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Local auto dealer Robert Tieman has been dismissed from a lawsuit filed last week by GMAC LLC, the financing arm of General Motors Corp., against Feld Chevrolet Co. in Bridgeton.

Tieman, the owner of South County Auto Center in Weldon Spring, was named as a defendant in a lawsuit filed Wednesday in St. Louis County Circuit Court.

The suit said Feld Chevrolet closed its sales office and lot at 11200 St. Charles Rock Road, and sold used vehicles to Tieman in ways that violated financing agreements between Feld Chevrolet and GMAC. Auto dealers who sell GM vehicles borrow money through GMAC to finance their inventory.

According to the filing, GMAC did not receive money for the vehicles that Feld Chevrolet sold to Tieman.

However, Tieman corrected the situation by paying GMAC for the vehicles, and the financing company dropped legal action against him.

Tieman, a local auto dealer for nearly 20 years, told the Post-Dispatch on Monday that he has been a longtime buyer from Feld Chevrolet. When he bought vehicles — which included Chevrolet Trailblazers, Cobalts and Impalas — on Sept. 12, Tieman didn’t see any red flags with the deal, he said Monday.

After GMAC contacted Tieman last week about its agreements with Feld Chevrolet, Tieman rewired $472,850 he had paid to Feld Chevrolet and sent that money to GMAC for the vehicles.

Mike Stoller, a spokesman for GMAC, said Tieman was still named in the lawsuit Wednesday, the same day he wired the money, because lawyers filed the petition before the money was received.

"Mr free credit report instantly. Tieman responded and acted appropriately," Stoller said this week.

Tieman officially was dismissed from the lawsuit on Friday, according to a court document.

Meanwhile, GMAC’s lawsuits against Feld Chevrolet continue.

Feld Chevrolet President Andrew Wolfson, whose family has been in the St. Louis auto industry for about 60 years, said Monday that his dealership and GMAC "still have some issues to deal with" and declined to elaborate.

Wolfson told the Post-Dispatch that he had to close the Chevrolet dealership because the location had been losing money, which led GMAC to cancel its credit agreement. He said he couldn’t find a new credit source in the tough credit markets and couldn’t finance his inventory of vehicles.

Wolfson said he does not plan to re-enter the auto sales business.

atablac@post-dispatch.com | 314-340-8140

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A bankruptcy judge approved a plan early Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s Midtown Manhattan office tower.

Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays (BCS) declined to buy the investment bank in its entirety.

The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.

"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.

Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays’ main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.

"It’s unimaginable to me that they can run the business without people," said Lehman’s financial adviser, Barry Ridings, of Lazard Ltd.

Barclays had little competition to land the deal.

Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA (BAC, Fortune 500) instead announced Monday that it would buy Merrill Lynch & Co., (MER, Fortune 500) saving it from a fate similar to Lehman’s. That deal was originally valued at $50 billion.

Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.

Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. ET Friday and continued well past midnight.

Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.

Barclays also said it would buy three additional units - Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA pay day loans. The two South American entities are part of Lehman’s money management business. Barclays is not paying extra to get the three units.

There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman’s investment management business Neuberger Berman was not bought by Barclays.

The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts - about 130,000 of which are owned by individual investors - to Barclays accounts.

"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.

The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in lower Manhattan.

In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.

"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.

"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."

Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.

"This is a tragedy - maybe we missed the RTC by a week," Miller said.

"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets." 

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The federal government, in what will be its most far-reaching attempt yet to contain the financial crisis, is poised to establish a program to let banks get rid of mortgage-related assets that have been hard to value and harder to trade.

Treasury Secretary Henry Paulson announced the framework of the plan on Friday morning. "The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," said Paulson.

Many details of the plan remained unclear, but Paulson acknowledged the government would take on "hundreds of billions of dollars" in obligations.

Paulson and other officials expect to work through the weekend with congressional leaders to finalize details.

"We hope to move very quickly - time is of the essence," said House Speaker Nancy Pelosi, D-Calif., late Thursday night.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said he believes legislation could be acted on next week.

On Friday morning, Sen. Richard Shelby, R-Ala., who is the ranking member on the Senate Banking Committee, told CNN that the latest plan from Treasury could cost $500 billion. If so, combined with all the other monies committed by the Federal Reserve and Treasury in the form of loans and investments, that brings the headline figure on their attempts to stem the credit crisis to $1.3 trillion. But that doesn’t mean that’s the cost to taxpayers. (Here’s why.)

The announcement on Thursday is the latest stunning turn in an extraordinary six days that have rocked Wall Street. A widening banking crisis has toppled two major firms - Lehman Brothers and Merrill Lynch - and prompted an $85 billion government loan to stem the sudden collapse of insurance giant American International Group.

Meanwhile, mainstay financial institutions are scrambling to raise cash or find merger partners - because of a freeze-up in lending and sinking investor confidence stemming from a collapse of the home mortgage market.

International and U.S. stock markets soared following news of the large government program on Thursday afternoon. On Friday morning, U.S. stocks were close to 3% higher.

The Treasury has been talking about the concept of an agency to take on bad debts of financial institutions "for several months," a source with knowledge of discussions on the issue told CNN.

There’s precedent for the federal government taking on troubled assets from the private sector. In the 1930s, the Home Owners Loan Corp. was set up to issue bonds to refinance borrowers. Then during the S&L crisis Congress set up the Resolution Trust Corp savings account payday advance. to sell assets of failed banks.

One way the agency under discussion could work is by setting up bulk auctions to buy mortgage assets from financial institutions. The auctions would be for set dollar amount purchases. Companies that want to offload the hard-to-sell assets from their balance sheets bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins.

The government would then be able to sell the assets back into the market when it wanted.

According to policy research firm the Stanford Group, such a setup would allow the government to refinance borrowers in the loans owned by the government, thereby lowering the risk of their defaulting and eventually boosting the price of the mortgage security in which those loans are packaged.

The agency and auction facility is one that House Financial Services Chairman Barney Frank, D-Mass., and Senate Banking Committee Chairman Christopher Dodd have supported.

Jaret Seiberg, a financial services analyst at the Stanford Group, said he believes there is bipartisan support for allowing the Bush administration to take short-term action to "get us through the immediate crisis."

The expectation is that whatever program is decided on would only last through the presidential inauguration. "You don’t want a program that will last for several years because that would limit what the next administration could do," Seiberg said.

On Friday, both presidential nominees are expected to detail their own plans to address the crisis.

Not everyone supports the idea that the government should buy up assets that the market currently can’t value and isn’t trading.

Sen. Charles Schumer, D-N.Y., on Thursday proposed his own plan that would involve the government providing a cash infusion to financial institutions in exchange for stock in the companies and let the institutions offload their mortgage investments.

Banking consultant Bert Ely is skeptical about the government getting involved at all. If the government chooses to "prop up the institutions or allows the institutions to offload asset onto a government entity, who’s going to take the losses? It’s financial insanity. The markets have to clear. Our fundamental problem: an oversupply of housing."

CNN senior correspondent Alan Chernoff, CNN White House correspondent Elaine Quijano and Washington producer Deirdre Walsh contributed to this report. 

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The U.S. economy was heading for a deeper slowdown than forecast even before this month’s collapse in financial markets, a gauge of its future performance showed.

The Conference Board’s index of leading indicators, which points to the direction of the economy over the next three to six months, fell 0.5 percent. Separately, the Labor Department reported that more Americans than forecast filed first-time claims for unemployment insurance last week because of the impact of Hurricane Gustav in Louisiana.

The August leading indicators figure was propped up by gains in the stock market that have since evaporated after the failure of Lehman Brothers Holdings Inc. and takeover of American International Group Inc. this week.

"The Wall Street crunch has definitely rolled over into Main Street," said Lindsey Piegza, a market analyst at FTN Financial, which correctly forecast the decline in leading indicators. "It’s a very dismal picture all around."
The leading-indicator index fell at a 2.1 percent annual pace over the past six months. A decline of around 4 percent to 4.5 percent at an annual pace is one signal a recession is imminent, according to the Conference Board payday advance. The gauge met that requirement in January, when it dropped at a 4.7 percent pace.

The New York-based private research group’s leading index was forecast to decline 0.2 percent, according to the median of 57 economists in a Bloomberg News survey.

The Labor Department reported initial jobless claims last week rose 10,000 to 455,000, led by a jump in Louisiana reflecting job losses in the wake of Hurricane Gustav. While the Labor Department said claims would have fallen excluding the state, the overall trend in applications still points to deterioration in the labor market, economists said.

Economists surveyed by Bloomberg in the first week of September anticipated the longest expansion in consumer spending on record will come to an end this quarter. Purchases probably will stall, according to the survey median, the weakest reading since the last three months of 1991.

The economy has lost 605,000 jobs so far this year, and the jobless rate reached a five-year high of 6.1 percent last month.

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The International Monetary Fund's No. 2 official urged policy makers in the U.S. and elsewhere to consider sweeping, “more proactive'' solutions to a financial market crisis that has reached “historic proportions.''

“The essentially reactive and inevitably case-specific nature of many of these measures raises the questions whether broader and more proactive approaches have become warranted,'' said IMF First Deputy Managing Director John Lipsky in a speech in Washington.

Lipsky, the former chief economist at JPMorgan Chase & Co., said the credit crunch and financial turmoil in markets has “expanded suddenly to historic proportions'' and there is now “an almost universal consensus that the global economy is set to weaken.'' Still, a worldwide recession may be avoided.

“This storm can be weathered without a damaging global recession, but attaining such an outcome will require clear and coherent policy responses,'' Lipsky said.

In the U.S., lawmakers are weighing responses to a crisis that prompted Treasury Secretary Henry Paulson to seize Fannie Mae and Freddie Mac and caused the bankruptcy of Lehman Brothers Holdings Inc. in the past two weeks. Earlier this week, the Federal Reserve announced an $85 billion takeover of American International Group Inc.

`More May be Needed'

“Notwithstanding the recent use of innovative and unconventional measures, more may be needed,'' Lipsky said http://payday-faxless.com. “The implication is that a more systematic approach may be needed to deal with such basic issues as the disposition of distressed assets, the degree of protection offered to depositors, and the scale and scope of liquidity support that is offered to institutions and markets.''

Lipsky said “it would not be surprising if some additional'' banks disappear. The challenge for policy makers is to “strike the right balance'' between bailouts and letting markets resolve the instability, he said.

The IMF is forecasting global growth will average 4 percent in 2008 and “somewhat under 4 percent'' in 2009, he said. Lipsky warned that the financial services sector was “facing the prospect of a much-reduced revenue stream.'' Pessimism in the financial sector, he added, should be partly offset by promising indications of recovery in the U.S. housing market starting next year.

“It is plausible to anticipate that the U.S. housing market will find a bottom in 2009,'' Lipsky said. “Already the inventory overhang is diminishing, while affordability measures are returning to levels that appear much more consistent with past experience.''

He said the U.S. dollar is “still somewhat on the strong side'' relative to economic fundamentals.

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The financial crisis entered a potentially dangerous new phase Wednesday when many credit markets stopped working normally as investors around the world frantically moved their money into the safest investments, like Treasury bills.

As a result, the Dow Jones industrial average fell nearly 450 points, or more than 4 percent, compounding Monday’s loss of more than 500 points. The broader Standard & Poor’s 500 and Nasdaq indexes saw similar percentage losses.

The stocks of Wall Street firms like Goldman Sachs and Morgan Stanley that only a couple of weeks ago were considered relatively strong came under assault by waves of selling. The fear factor was so strong that investors snapped up three-month Treasury bills with virtually no yield and pushed gold to its biggest one-day gain in nearly 10 years.

The stunning flight to safety, away from other kinds of debt as well as stocks, could cause serious damage to an already weakened economy by making it more expensive for businesses to finance their day-to-day operations.

Some economists worry that a psychology of fear has gripped investors, not only in the United States but also in Europe and Asia. While investors’ decision to protect themselves may be perfectly rational, the crowd behavior could cause a downward spiral that has broader ramifications.

"It’s like having a fire in a cinema," said Hyun Song Shin, an economics professor at Princeton. "Everybody is rushing to the door. You are rushing to the door because everyone is rushing to the door. Clearly, as a collective action, it is a disaster."

Faltering confidence could have an infectious effect in Asia, whose savings have essentially bankrolled America for decades. "Asia, perhaps more than other markets, is a bit more volatile, a bit more based on sentiment," said Dan Parr, the head of Asia-Pacific for brandRapport, a marketing consulting agency with an office in Hong Kong. "It doesn’t take much for the man on the street to become very, very concerned." In early trading today, Japan’s major stock index fell 3 percent.

Despite government efforts to reassure investors over the last 10 days by rescuing some giant institutions — Fannie Mae, Freddie Mac and American International Group — many investors remain worried that the financial system has been badly battered and that more firms may fail as Lehman Brothers did.

The Federal Reserve has greatly expanded its lending to banks and securities firms this year and is continuing to relax rules that govern financial companies in hopes of alleviating the credit squeeze. Central banks around the world are also injecting more money into their economies and lowering reserve requirements for their own institutions out of concern that the problems in the U.S. financial system will inflict further damage.

If the problems in the financial system persist, businesses will have less money to put to work, job cuts will spread, and consumers, already fearful, will have less money to spend, knocking the economy down another notch. High borrowing costs will further weaken the housing market, which has yet to show signs of life cash advance in one hour. The Commerce Department reported Wednesday that housing starts fell to their lowest level since early 1991.

Flashes of fear were evident Wednesday as investors clamored for government debt. When investors bid up the price, the yield falls, and it sank on three-month Treasury bills to 0.061 percent, from 1.644 percent a week ago. The yield was the lowest in more than 50 years.

In the stock market, the S&P 500 stock index fell 4.71 percent, to 1,156.39, the lowest close in more than three years. Worries over financial investments hammered even the venerable Wall Street firms of Goldman Sachs, whose shares fell nearly 14 percent, to $114.50, and Morgan Stanley, whose shares dropped more than 24 percent, to $21.75, causing both firms to reconsider what their best strategies might be in such a fearful market.

The cost of borrowing shot up for corporations and banks. One key overnight lending rate was above 5 percent Wednesday, more than double its level a week earlier. GMAC, the auto finance company owned in part by General Motors, had to pay interest of 5.25 percent Wednesday for a form of short-term financing known as one-week commercial paper, up from 4 percent the previous day.

Businesses stung by the high cost and without ready access to bank loans will be forced to look for ways to trim their costs, an ominous turn in a slowing economy with the unemployment rate on the rise.

Local governments and other enterprises will feel pressure, too. The city of Chicago and Lincoln Center in New York postponed debt offerings because they would have to pay such high interest rates to investors, said Daniel Solender, director of municipal bond management at Lord Abbett & Co.

"This is throwing sands in the gears of the economy," said G. David MacEwen, chief investment officer for the bond department of American Century Investments. "The economy depends on credit to finance homes, automobiles, student loans and inventories."

Money market funds braced for possible fallout from the disclosure that one big fund’s net assets fell below $1 a share, because it had held securities issued by Lehman Brothers. It is so rare for money market funds to fall below that threshold that many investors consider them as safe as cash or a checking account.

Some mutual fund companies reported that customers were moving money from broader money market funds that have had higher yields to more conservative funds within the same company, said Peter Rizzo, a senior director of Standard & Poor’s, late Wednesday afternoon. The overall effect is to reduce the appetite for securities of companies with anything other than the most stellar reputations.

Governments around the world stepped up their efforts to ease the strain on the global financial system. The Bank of England extended a special bank lending program for another three months, while central banks in Japan and Australia injected more money into their banking system. Russia lowered reserve requirements to assist its banks.

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Wall Street is a long way from St. Louis, in more ways than one.

So it’ll take some time to sort out just how the financial turmoil that shook lower Manhattan on Monday will play out in our local economy.

But one effect from the collapse of Lehman Bros. will happen fast, experts say: Borrowing money will get harder.

Mortgage credit already has been tight for months, as big banks unwind years of risky lending. That tightness likely will spread further into business lending, experts say, as the pool of money available at the top of the system shrinks, and borrowing becomes more expensive.

Banks are already paying more to borrow from each other. LIBOR, the interest rate they pay other banks, jumped nearly a full percentage point overnight Monday on the news of Lehman’s imminent bankruptcy filing. And several experts Monday said they expect the interest rates banks charge borrowers will go up, too.

Meanwhile, there will be less money to go around, said Todd Gormley, an assistant professor of finance at Washington University, as not just Lehman but every bank with a similar portfolio watches its assets lose value, giving it less to lend out. The risk is that credit markets grind to a halt.

"You just keep going down and down and down," Gormley said. "It sort of creates this cycle, and what’s happening with Lehman has the potential to push this even further."

It likely will do just that, said Scott Colbert, director of fixed income investments at Commerce Trust Co. in Clayton. Lehman supported some $600 billion in lending, most of which will be wiped out in its bankruptcy. But it’s a direct result of the over-expansion of borrowing that fueled much growth over the past decade.

"We have to cleanse ourselves of the excess in the financial market," said Colbert, who noted that the cleansing began with the forced merger of Bear Stearns to JPMorgan Chase & Co., continued last week with the takeover of mortgage giants Fannie Mae and Freddie Mac, and expanded with Lehman’s collapse no checking account payday advance. "It’s only through what is basically financial credit destruction that we get this back on track."

Along the way, small businesses will suffer, said Jack Strauss, an economics professor at St. Louis University. It’ll be harder for them to borrow, and thus to hire people and buy materials and expand.

"A lot of entrepreneurs are going to be hurt," Strauss said. "They’re not going to be able to get credit from a bank. Small business owners and large businesses are going to find their cost of capital increase, and maybe even dry up."

But there is still growth, said Chuck Leuck, regional vice president for Enterprise Bank & Trust Co. in Clayton. Deals are still getting done, banks are just being more cautious about them.

"For people who are doing their homework, access to capital is there," Leuck said.

A lot depends on the type of business, and how well-established it is, said Bob Cockrell, a commercial relationship manager with Montgomery Bank in Des Peres.

Most money doesn’t come from Wall Street, he noted. There’s still plenty of cash flowing through local banks that take in deposits from local customers and lend it to local businesses. And solid local companies can still access it.

"If you’re a strong borrower with (good) credit you’re not going to have any trouble getting a loan," Cockrell said.

"Will you have to shop around a little? Maybe. But I don’t think Lehman Bros. is going to have any impact at all on that market."

tlogan@post-dispatch.com | 314-340-8291

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American International Group, the nation’s largest insurer, plans to unveil a restructuring plan as soon as Monday morning that will include selling off part of its business to raise desperately needed cash and boost investors’ confidence, according to published reports.

AIG has been rocked by the subprime mortgage crisis, losing more than $18 billion in the past nine months, and faces the possibility of having its credit ratings cut if it does not raise capital soon.

The company, which is a component of the benchmark Dow Jones Industrial Average, is also said to have turned to the Federal Reserve for an emergency loan.

The New York Times reported late Sunday night that the company is seeking a $40 billion bridge loan from the Federal Reserve. A source close to the firm said that if AIG does not raise cash and is downgraded by ratings agencies, it may have only 48 to 72 hours to survive.

Separately, The Wall Street Journal reported Sunday that AIG is likely to sell its annuities unit and shed its domestic auto insurance business. It may also look to dispose of its aircraft-leasing arm, International Lease Finance Corp., which has a fleet of more than 900 airplanes valued at more than $50 billion.

The aircraft unit is the largest single customer of both Boeing Co. (BA, Fortune 500) and European Aeronautic Defence & Space Co.’s Airbus.

AIG may also shift assets from its insurance company to its holding company to help the company respond to customer demands, the Journal reported. All told, these measures involve between $40 billion and $50 billion in capital raising and reallocation.

AIG spokesman Nicholas Ashooh told CNNMoney.com on Sunday: "We’re working hard on a range of options, but have not announced anything and don’t know when we will."

The ailing company, which had planned to announce a turnaround strategy on Sept. 25, is being forced to accelerate the announcement after investors fled the stock last week.

Shares fell 31% on Friday after plummeting earlier in the week. The company’s stock is down a total of 79% this year.

AIG (AIG, Fortune 500), which already raised $20 billion in fresh capital earlier this year, has been pummeled by three quarters of huge losses and writedowns. The company has reported more than $18 billion in losses in the past nine months.

Its troubles stem from its sales of credit default swaps - insurance-like contracts that guarantee against a company defaulting on its debt - and from its subprime mortgage-backed securities holdings.

AIG has written down the value of the credit default swaps by $14.7 billion, pre-tax, in the first two quarters of this year and has had to write down the value of its mortgage-backed securities as the housing market soured.

This year’s results have also included $12.2 billion in pre-tax write downs, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

Credit ratings agency Standard & Poor’s warned late Friday that it might downgrade AIG’s debt, citing concerns about the company’s access to capital following its share price decline http://payday-nofax.com.

A downgrade would make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

"We believe that AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements, which are significantly greater than the expected cash losses on the mortgage-related assets," said Standard & Poor’s credit analyst Rodney Clark. "However, additional market value losses will place some strain on the company’s resources."

AIG has struggled all year as the Wall Street credit crunch took its toll.

In June, the company tossed out its chief executive, Martin Sullivan, who had been charged with turning the company around after directors removed longtime CEO Hank Greenberg in 2005. Greenberg was the target of one of then-Attorney General Eliot Spitzer’s investigations.

The board named AIG chairman Robert B. Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), to replace Sullivan as chief executive officer.

Though AIG’s problems have been apparent for months, it is coming under fire now because of Wall Street’s increasing skittishness over Lehman Brothers, also a big player in credit default swaps, said Chip MacDonald, partner in the capital markets group at Jones Day, a law firm.

"It’s the lack of transparency and clarity about their business," MacDonald said. "In today’s environment, everyone is assuming the worst so they are forcing AIG to come out with a plan sooner rather than later."

However, McDonald noted, AIG is not in as vulnerable a position as other financial institutions because of its core insurance business. Customers cannot simply withdraw their deposits, as they can at a bank.

"It’s a little harder to make a run on an insurance company," McDonald said. 

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