David Herrera and Melissa Giaimo
Staff Writer and Assistant News Editor
The $700 billion bailout plan in Washington and the Stock Market’s nearly 800-point drop in the Dow Jones average Monday may seem far away from Malibu, but the country’s economic disaster is creating a sense of urgency on campus.
Last night, the modified rescue bill passed the Senate 74-25 after previously failing in the House on Monday. The bill includes changes aimed at attracting more votes in the House and protecting taxpayers. The bill now moves to the House for a vote, likely on Friday. If the bill passes, then it awaits approval by President Bush who has endorsed the bailout plan.
In a mass e-mail Tuesday, President Andrew K. Benton encouraged faculty and staff to be cautious in these precarious financial times, but reassured them that the University is financially stable. Although these events “have our rapt attention,” he told members of the Pepperdine community not to worry about the security of the University’s endowment, investments and credit rating. However, he said the challenge for Pepperdine, and the rest of the nation, is liquidity, the measure of the ability to pay one’s debts.
In light of the credit crunch, Benton advised faculty and staff to reevaluate each major expenditure through the end of the year.
“Let me explain why: Our cash does not sit in a vault; it is invested in short-term, financial instruments yielding revenue,” he wrote in the e-mail. “Those who hold those instruments may not have the ready cash to liquidate them on the schedule we require. In other words, we need to prepare for the problems that may well be experienced by others.”
Benton said Pepperdine will begin paying its bills on time, rather than early. The University will also carefully examine new contracts for good sand services, as well as vendor requests for prepayments or deposits.
“Succinctly, we need to increase our ‘inflow’ and slow and reduce our
outflow,’” Benton said.
Despite Benton’s assurance about the strength of University endowment, times of increased economic hardship results in a decreasing amount of donations available, according to Keith Hinkle, chief development officer and vice president for Advancement and Public Affairs. He speculated that happenings in Congress and Wall Street can stifle the inflow of charitable donations from organizations, alumni and friends.
“Any time the economy is challenged, it causes people to rethink their giving,” Hinkle said. “We are beginning to see the impact at some level, just in terms of the number of donors … We are hearing from other organizations that are seeing some [decrease] in donor count, as well as the dollar value.”
Wall Street closed Monday after sustaining the biggest point drop in the history of the United States, amounting in a $1.2 trillion loss in the market. This fallout resulted from the loss of confidence in Wall Street after the White House’s $700 billion financial rescue package was rejected in the House of Representatives in a narrow vote of 228-205.
Regardless of what Monday’s effects are on Pepperdine University, Hinkle agrees that “[Monday] was a fairly painful day, and it has been a fairly painful couple of weeks.”
The Dow jumped 485 points on Tuesday due to expectations that the bill would eventually get passed. Stocks faced slight losses Wednesday with a 0.18% drop in the Dow.
Aside from provisions for protecting taxpayers, the bill is designed to ignite lending money by buying up bad mortgage debts and assets that financial institutions were left with after the housing bubble burst.
Some lawmakers and business people call this bill essential in restoring confidence in Wall Street and preventing a painful recession. Financial institutions are increasingly unable to lend money because of the lack of funds from unconfident investors and money tied up in bad loans. Difficulty in attaining funds may cause businesses to raise prices or cut back on operations, adversely affecting the consumer and economy. Without bank capital, standard economic operations grind to a halt.
However, the bill failed to pass the first time because some lawmakers were unsure whether it was the correct course of action, and also many had received strong opposition against it from constituents.
Pepperdine economics professor Robert Sexton said the bailout plan might not be the best answer.
“There are other things the government can do to fix the problem that might cost a lot less than $700 billion,” Sexton said. “For example, if business spending weakens how about a tax credit for business investment. Also, the government could implement a tax rebate for first time buyers of new homes which could help eliminate the surplus of new housing stock.”
10-02-2008