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PRESIDENT BARACK HUSSEIN OBAMAObama's Economic PlanObama's senior economic team, the brilliant trio of Tim Geithner, Larry Summers, and Paul Volcker are centrist, experienced, and mainstream. But their principal task is to stabilize the financial system, a highly pragmatic task in which Obama has no particular ideological stake. A functioning financial system is a necessary condition for a successful Obama presidency. As in foreign policy, Obama wants experts and veterans to manage and pacify universes in which he has little experience and less personal commitment. Their job is to keep credit flowing and the world at bay so that Obama can address his real ambition: to effect a domestic transformation as grand and ambitious as Franklin Roosevelt's. As Obama revealingly said just last week, "this painful crisis . . . provides us with an opportunity to transform our economy to improve the lives of ordinary people." Transformation is his mission. Crisis provides the opportunity. The election provides him the power.According to the National Review, "The deepening recession creates the opportunity for federal intervention and government experimentation on a scale unseen since the New Deal. A Republican administration has already done the ideological groundwork with its unprecedented intervention, culminating in the forced partial nationalization of nine of the largest banks — the kind of stuff that happens in Peronist Argentina with a gun on the table. Additionally, Henry Paulson's invention of the number $700 billion forever altered our perception of imaginable government expenditure. Another $20 billion for Citigroup? Lunch money." January 2009Why Obama Will 'Own' the Recession (Jan 2009) For eight decades, Democrats have successfully blamed Republican Herbert Hoover for the decade-long Great Depression. That, even though Franklin Roosevelt's New Deal failed to restore prosperity or dramatically lower unemployment, and his tax increases in 1937 snuffed out a nascent recovery. Now today's Obamacrats are apparently going to try and Hooverize President Bush in an effort to shield themselves from the potential political fallout of a prolonged recession. It will take years to fix the American economy, Obama says, and years of trillion-dollar budget deficits to do it. And everyday it seems that Team Obama tries to lower economic expectations, such as bearishly predicting that unemployment would hit double-digits.The not-so-subtle message in the middle of all these pessimistic prognostications: When ya'll go to vote in 2010 and 2012 and a) unemployment is still as high as it's been in decades, b) income growth is sluggish at best, c) the budget deficit is running at a trillion bucks a year, and d) stock prices remain stubbornly low -- hey, don't blame us, you can't rebuild Rome in a day or even in a first term. Remember, Bush really left us a mess. The incoming administration has apparently learned the lesson of Bush's big mistake when arguing for the Iraq War, that when embarking on a decision that will define your presidency, it's better to underpromise and overdeliver. Of course, Obama has every reason to honestly believe the economy is going to stay on the mat for a good long time. According to the just-released minutes from the Federal Reserve's December meeting, the central bank now thinks the economy will "decline for 2009 as a whole" and that the jobless rate is "likely to rise significantly into 2010." And in its new forecast, the Congressional Budget Office said the U.S. economy is now in a recession that "will probably be the longest and the deepest since World War II." What's more, the CBO says, the economy will shrink 2.2. percent this year and grow a wimpy 1.5 percent next year as unemployment exceeds 9 percent. Finally, respected Harvard University economist Kenneth Rogoff just released a paper demonstrating that the aftermaths of financial crises are usually marked by "deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years, respectively." So the consenus is gloomy. But can a repetitive "Blame Bush" mantra allow Democrats to hold their huge Congressional majorities in 2010 and get Obama reelected in 2012 if they economy is as bad they think it will be? The latest iteration of Obama's stimulus -- I mean "economic recovery" -- package indicates that Team Obama has its doubts about voter patience and the economy. The larger-than-expected tax cuts, even if they are really just disguised government spending, are an effort to rejigger the plan to provide more economic oomph this year. Indeed, as the CBO said when Obama adviser Peter Orszag ran the joint, using infrastructure spending to juice the economy is "totally impractical." There just aren't enough "shovel-ready projects" to make effective use of the hundreds of billions Obama wants to throw at the recession. And Obama has good reason to doubt the patience of voters. Recall that bad economies propelled Ronald Regan and Bill Clinton to the White House -- and both gentlemen saw their respective parties suffer badly in the very next midterm election because of voter economic anxiety. To quote Oscar Rogers, the impatient "financial consultant" on Saturday Night Live, American voters want Washington to "Fix it!" and fix it fast. And, really, how can Obama avoid taking responsibility when he will be so actively meddling in the economy? It will be his decision to forego deep and permanent new tax cuts, his decision to not extend the Bush tax cuts, his decision on how to spend the remaining $350 billion in TARP money, his decision to quasi-nationalize healthcare, his decision to push a cap-and-trade carbon emission program and his decision to spend hundreds of billions on a "green" industrial policy. It might even be his decision to try and reunionize the American laborforce. Obama will "own" the battered economy, perhaps almost literally, given Uncle Sam's bailout binge. So what standard should voters hold Obama to? How about this one: The 1981-82 recession last lasted 16 months and was followed by an explosive recovery thanks largely to the Reagan tax cuts (even though they were slowly implemented). The current downturn, according to the National Bureau of Economic Research, started in December 2007. Mr. Obama better hurry. (Source: US News.) February 2009US economy suffers sharp nosedive (Feb 2009) The US economy shrank by 6.2% in the last three months of 2008, official figures have shown, a far sharper fall than had previously been reported. Plunging exports and the biggest fall in consumer spending in 28 years dragged the annualised figure down from an earlier estimate of 3.8%. The decline was much worse than analysts had expected, sending US stocks spiralling lower. In 2008 as a whole, the economy grew by 1.1%, the slowest pace since 2001.The blue-chip Dow Jones industrial average dropped 119.15 points, or 1.66%, to 7,062.93. The broader Standard & Poor's 500 Index fell 2.36% to 735.09 - a 12-year low. Recession warning Consumer spending, which accounts for about two-thirds of domestic economic activity, fell by a rate of 4.3% in the final quarter - the biggest fall since the second quarter of 1980. This was a revision of the earlier figure of 3.5%. With rising unemployment, sliding home values, increasing numbers of repossessions and the slumping value of investments, observers say many US consumers are hanging on to whatever disposable cash they have. Meanwhile, exports - which had until recently been supporting the economy - fell at the sharpest rate since 1970 at an annual rate of 23.6%, down from 19.7%. Earlier this week, Federal Reserve chief Ben Bernanke warned Congress that without the right policies from the government, the US recession could last into 2010. But he said if the Obama administration and the central bank can restore some measure of financial stability, 2010 could be a year of recovery. President Obama recently signed a $787bn (£556m) recovery package of increased government spending and tax cuts, and unveiled a $75bn scheme to stem repossessions. No good news The latest GDP figures were "just awful" said Matt Esteve, a currency trader at Tempus Consulting in Washington DC. "It shows the weak state of the world's largest economy." And Boris Schlossberg, director of currency research at GFT Forex said there was "doom all over". He predicted that the dollar would not weaken too much against the euro because "there's no good news on the other side of the Atlantic, either". (Source: BBC.)  Recession length -- Recessions lasting longer March 2009When Will the Recession Be Over?' (Mar 2009) Most leading U.S. economists have made grim predictions that the U.S. and the world will not see the economy recover until 2010 or even 2011. The New York Times on Sunday asked 11 economists and corporate CEOs, such as Harvard University professor Niall Ferguson, New York University Stern School of Business professor Nouriel Roubini, and chairman and chief executive of Google Eric Schmidt. They responded to the question "When Will the Recession Be Over?"Ferguson gave his opinion by using the term "Great Recession" instead of "Great Depression." "It won't produce as steep a fall in American output as the Depression did, but it may prove to be as prolonged," he said. "The depression that began in August 1929 did not hit its nadir until 43 months later. The one that started in October 1873 was shallower but lasted 65 months. If the economy were to keep shrinking for that long, we wouldn't start coming out of this until after May 2013." Roubini, a renowned economic pessimist, predicted the recession will last until the end of the year at least -- or as long as 24 months. He said, "Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with unemployment rising toward 10 percent, we will still be stuck in a recession." Steven Roach, chairman of Morgan Stanley Asia, warned against hasty expectations about an economic recovery. He said, "After the unusually steep declines in the economy, a statistical rebound in the second half of 2009 would hardly be shocking. It could be driven by the inventory cycle. Or it might reflect the first digs of the stimulus package's 'shovel-ready' projects. But any such whiffs of growth are likely to herald a false dawn." He added, "It looks to me as if this recession won't end until late 2010 or early 2011." By contrast, Alan Blinder, a professor at Princeton University and a former vice chairman of the Federal Reserve, predicted that "growth will return in the fourth quarter of this year." Schmidt was also optimistic, saying, "And the good news is that Congress and the president are pressing ahead in the knowledge that to stand still is no solution at all." (Source: Chosun Ilbo.)  The Obama Economy -- As the Dow keeps dropping, the President is running out of people to blame. (Mar 2009) As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrial Average closed at 9034 on January 2, its highest level since the autumn panic. Yesterday the Dow fell another 4.24% to 6763, for an overall decline of 25% in two months and to its lowest level since 1997. The dismaying message here is that President Obama's policies have become part of the economy's problem. Americans have welcomed the Obama era in the same spirit of hope the President campaigned on. But after five weeks in office, it's become clear that Mr. Obama's policies are slowing, if not stopping, what would otherwise be the normal process of economic recovery. From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less confidence -- and thus a longer period of recession or subpar growth. The Democrats who now run Washington don't want to hear this, because they benefit from blaming all bad economic news on President Bush. And Mr. Obama has inherited an unusual recession deepened by credit problems, both of which will take time to climb out of. But it's also true that the economy has fallen far enough, and long enough, that much of the excess that led to recession is being worked off. Already 15 months old, the current recession will soon match the average length -- and average job loss -- of the last three postwar downturns. What goes down will come up -- unless destructive policies interfere with the sources of potential recovery. And those sources have been forming for some time. The price of oil and other commodities have fallen by two-thirds since their 2008 summer peak, which has the effect of a major tax cut. The world is awash in liquidity, thanks to monetary ease by the Federal Reserve and other central banks. Monetary policy operates with a lag, but last year's easing will eventually stir economic activity. Housing prices have fallen 27% from their Case-Shiller peak, or some two-thirds of the way back to their historical trend. While still high, credit spreads are far from their peaks during the panic, and corporate borrowers are again able to tap the credit markets. As equities were signaling with their late 2008 rally and January top, growth should under normal circumstances begin to appear in the second half of this year. So what has happened in the last two months? The economy has received no great new outside shock. Exchange rates and other prices have been stable, and there are no security crises of note. The reality of a sharp recession has been known and built into stock prices since last year's fourth quarter. What is new is the unveiling of Mr. Obama's agenda and his approach to governance. Every new President has a finite stock of capital -- financial and political -- to deploy, and amid recession Mr. Obama has more than most. But one negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion. Most of his "stimulus" spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest. His Treasury has been making a similar mistake with its financial bailout plans. The banking system needs to work through its losses, and one necessary use of public capital is to assist in burning down those bad assets as fast as possible. Yet most of Team Obama's ministrations so far have gone toward triage and life support, rather than repair and recovery. AIG yesterday received its fourth "rescue," including $70 billion in Troubled Asset Relief Program cash, without any clear business direction. (See here.) Citigroup's restructuring last week added not a dollar of new capital, and also no clear direction. Perhaps the imminent Treasury "stress tests" will clear the decks, but until they do the banks are all living in fear of becoming the next AIG. All of this squanders public money that could better go toward burning down bank debt. The market has notably plunged since Mr. Obama introduced his budget last week, and that should be no surprise. The document was a declaration of hostility toward capitalists across the economy. Health-care stocks have dived on fears of new government mandates and price controls. Private lenders to students have been told they're no longer wanted. Anyone who uses carbon energy has been warned to expect a huge tax increase from cap and trade. And every risk-taker and investor now knows that another tax increase will slam the economy in 2011, unless Mr. Obama lets Speaker Nancy Pelosi impose one even earlier. The Dow Jones Industrial Average has fallen faster under President Obama than under any new president in at least 90 years, according to a review conducted by Bloomberg. Bloomberg reports that since Inauguration Day, the Dow has fallen 20 percent, leading at least one investor to dub this the "Obama bear market." The Dow has also dropped 31 percent since Election Day. Despite a string of government bailout offers and Obama's advice earlier this week that Americans should be buying stock while shares are low, the Dow has continued to freefall. Bloomberg reported that Obama is at risk of breaking a historical trend -- in which the Dow soars an average of close to 10 percent in the first year after a Democrat wins the presidency. (Source: Fox News.)Meanwhile, Congress demands more bank lending even as it assails lenders and threatens to let judges rewrite mortgage contracts. The powers in Congress -- unrebuked by Mr. Obama -- are ridiculing and punishing the very capitalists who are essential to a sustainable recovery. The result has been a capital strike, and the return of the fear from last year that we could face a far deeper downturn. This is no way to nurture a wounded economy back to health. Listening to Mr. Obama and his chief of staff, Rahm Emanuel, on the weekend, we couldn't help but wonder if they appreciate any of this. They seem preoccupied with going to the barricades against Republicans who wield little power, or picking a fight with Rush Limbaugh, as if this is the kind of economic leadership Americans want. Perhaps they're reading the polls and figure they have two or three years before voters stop blaming Republicans and Mr. Bush for the economy. Even if that's right in the long run, in the meantime their assault on business and investors is delaying a recovery and ensuring that the expansion will be weaker than it should be when it finally does arrive. (Source: Wall Street Journal.)  April 2009Economy's plunge seems to be leveling off (Apr 2009) At last, after a nerve-racking six-month descent, the economy appears to be leveling off. But don't assume the bumps are over. Stock investors, shoppers and home buyers are less jittery. Once-frozen credit markets are slowly thawing. And economic indicators that had been going from bad to worse are showing signs of stabilizing — though still at distressed levels. (SITE NOTE: BUT WAIT!!! Obama's must have Stimulus Package hasn't kicked in yet -- and most of the monies won't be spent until 2010 on. So who gets credit for the leveling out? Obama will take the bows, but economists were yelling and screaming that this was going to happen in Q2 of 2009 anyway -- and Obama's claims were bogus. So who's going to be the first to yell that Obama was a liar who used the economy to pass his Socialism package?)There were fresh signs Thursday that the full force of the recession may be petering out: a strong profit forecast from Wells Fargo, a drop in unemployment benefit filings and several retailers predicting solid April sales. On Wall Street, the Dow Jones industrials rose nearly 250 points. Still, with unemployment rising, it will be at least several months before the country's economic engine pops into a growth gear. Job losses — and the fear of them — act as a headwind against consumer confidence and spending, which account for more than two-thirds of the U.S. economy. "The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall, I think we can be reasonably confident that that is going to end within the next few months, and we will no longer have that sense of a free-fall," President Barack Obama's top economic adviser, Lawrence Summers, said Thursday. But Summers, who spoke at the Economic Club of Washington, said it was too soon to forecast how strong the rebound would be and when it would take hold. The economy shrank at a 6.3 percent rate in the final three months of 2008, the worst showing in a quarter-century. Some economists say it fared about as poorly in the first three months of this year, while others expect a 4 to 5 percent rate of decline. The government releases its initial estimate at the end of April. And the economy is still shrinking in the April-June quarter — perhaps at a rate of 2 to 2.5 percent, some analysts say. When will it grow again? Maybe the final quarter of the year. For now, said Brian Bethune, economist at IHS Global Insight, "I think we can say we've gone through the most terrible part of the recession." The scenarios charted by economists are consistent with Federal Reserve Chairman Ben Bernanke's hope that the recession, now in its second year, will end this year. Bernanke, however, has been quick to caution that this will happen only if the government succeeds in stabilizing financial markets and getting banks to lend money more freely again to both consumers and businesses. To that end, the Fed recently plowed $1.2 trillion into the economy in an attempt to reduce interest rates for mortgages and other loans. Even in the best-case scenario, the unemployment rate — now at a quarter-century high of 8.5 percent — is anticipated to climb to 10 percent by the end of this year. History shows that the jobless rate moves higher well after a recession has ended. That's because companies won't want to ramp up hiring — often their single-biggest expense — until they feel confident any recovery will be lasting. Consumers, whose sharp cutbacks in spending plunged the country into a steep economic tailspin at the end of last year, seem to be gradually spending more freely. On Thursday, Wal-Mart Stores Inc., the world's largest retailer, said sales at stores open at least a year increased 1.4 percent in March. However, discount retailer Target Stores Inc.'s sales fell. The government reported last month that consumer spending rose in February for the second month in a row — after a half-year of declines. Shoppers' appetites to spend should get a lift later this year from tax cuts contained in Obama's $787 billion economic stimulus package. Tax credits of $400 per worker and $800 per couple translate into about $13 a week less withheld from paychecks starting around June. The hope is that the added consumer spending will prompt retailers to replenish inventories, which have been cut nearly to the bone during the recession. That would require factories to boost production, creating a ripple of positive economic activity. Thursday's $3 billion first-quarter profit forecast from Wells Fargo was in part a reflection of the very low interest rates at which banks can borrow money from the government and then lend it out at higher rates to consumers and businesses. Another positive flicker came Thursday from the Labor Department, which reported that the number of newly laid off Americans filing for unemployment benefits dropped by 20,000 last week to 654,000. Although credit and financial conditions have shown some signs of improvement since the worst of the crisis last fall, they are operating far from normally, Fed officials say. "In view of the state of the credit markets, it seems a fair bet that it will take time for momentum to build," Gary Stern, president of the Federal Reserve Bank of Minneapolis said in a speech Thursday. "But with the passage of time — as we get into the middle of 2010 and beyond — I would expect to see a resumption of healthy growth." To be sure, the economy is not out of the woods yet. Another bailout of a troubled bank or other company could easily shatter already fragile confidence and send the economy reeling again. The collapse of General Motors would send many more to the unemployment lines and could jolt the economy into a major backslide. And, there's the risk that consumers will once again shut down as jobs continue to vanish. And, even if the recession were to end later this year, most economists believe economic activity won't return to a more normal pace of around 3 percent to 3.25 percent until late next year. "Yes we have probably seen the worst ... but the shape of the recovery will look more like the Nike swoosh," meaning a gradual — not sharp — rise back to normal, said John Silvia, chief economist at Wachovia Corp. (Source: MSNBC.) Treasury needs record $361B April-June borrowing (Apr 2009) The Treasury Department said Monday it will need to borrow $361 billion in the current April-June quarter, a record amount for that period. It's the third straight quarter the government's borrowing needs have set records for those periods. Treasury also estimated it will need to borrow $515 billion in the July-September quarter, down slightly from the $530 billion borrowed during the year-ago period. The all-time high of $569 billion was set in the October-December period. The huge borrowing needs reflect the soaring costs of the $700 billion financial rescue program and the recession, which is nearing a record as the longest in the post World War II period. The slump has cut sharply into tax revenue and boosted government spending for benefit programs such as unemployment insurance and food stamps. (SITE NOTE: People are "Going Galt" -- figuring out ways NOT to pay taxes. It is not simply cutting back on spending, but also the layoffs that Obama promised to stop. Thus far none of Obama's stimulus package to create jobs has kicked in -- it is scheduled for 2010. The common Joe like us are starting to revolt over the idea of borrowing ourselves out of debt. This is insanity in a Congress out-of-control.) The administration is projecting the federal deficit for the entire budget year ending Sept. 30, will total a record $1.75 trillion. A deficit at that level would nearly quadruple the previous record of $454.8 billion set last year. To cover the government's heavy borrowing needs, Congress in February boosted the limit for the national debt to $12.1 trillion as part of the legislation that enacted President Barack Obama's $787 billion economic stimulus program. The national debt now stands at $11.1 trillion. The government released its estimate of borrowing needs for the quarter before a news conference Wednesday when officials are scheduled provide exact details of how much debt the government plans to sell next week and in what maturity levels as part of Treasury's regular quarterly debt auctions. The $361 billion estimate for borrowing this quarter compared with borrowing needs of just $13 billion in the year-ago period. Normally the government's borrowing needs shrink sharply in the April-June quarter because of all the tax revenue being collected. The government announced in February that it was bringing back the seven-year note and doubling the number of 30-year bond auctions it would hold each year to help finance the surging borrowing needs. (Source: AP.) Watchdogs: Treasury won't disclose bank bailout details (Apr 2009) The massive programs designed to rescue the nation's financial sector are operating without adequate oversight, with vague goals and limited disclosure of their details to the taxpayers who are paying for them, government watchdogs told a Senate panel Tuesday (31 Mar). The Troubled Asset Relief Program, or TARP, was launched in the midst of last fall's collapse of the nation's banking system and is designed to get loans flowing to businesses and individuals. But "without a clearer explanation" about parts of the program, "it is not possible to exercise meaningful oversight over Treasury's actions," said Elizabeth Warren, a Harvard Law School professor who leads a special congressional oversight panel monitoring the TARP program. Her comments came in a Senate Finance Committee hearing on the bailout program. Noting that TARP passed Congress six months ago, Warren said that her group has repeatedly called on the Treasury Department to provide a clear strategy for the program — and that "the absence of such a vision hampers effective oversight." Although she has asked Treasury to explain its strategy, "Congress and the American public have no clear answer to that question." TARP is one of several programs the government has launched in recent months to help ailing institutions and even bolster healthy banks. Warren singled out one program, known as TALF, for appearing to involve "substantial downside risk and high costs for the American taxpayer" while offering big potential rewards for private interests. She said the public information about that program was "contradictory, promoting substantial confusion." The Government Accountability Office shared some of the same concerns, saying in a new report that "Treasury continues to struggle with developing an effective overall communication strategy" for the TARP program. Beyond that, the GAO's report pointed out the difficulty in even measuring whether TARP is working. As of March 27, the Treasury Department had handed out more than $300 billion of the $700 billion in approved TARP funds, the GAO said. The majority of that money went to banks large and small around the country. And there are signs that credit is flowing from those banks; the GAO said that several hundred billion dollars in new loans were processed by the largest TARP recipients in December and January. But crediting TARP for that is difficult, given the range of actions the government has taken since October. "Isolating the effect of TARP's activities continues to be difficult," the GAO's Gene Dodaro said in his prepared testimony. The Treasury Department, in a statement, said that "transparency and accountability are central to ensuring that taxpayer funds are spent wisely," and noted that the department is actively working to respond to the recommendations of GAO and other oversight bodies. Among other things, the department has hired more staff and expanded its survey on bank lending activities. Iowa Sen. Charles Grassley, the panel's ranking Republican, described himself as "disappointed and frustrated" in the amount of information available about the program. "You can't measure effectiveness when you don't know what the goals and objectives of a program are, or how the program is being run," he said. Warren's oversight panel made news earlier this year with its report that Treasury's bailout programs had overpaid by an estimated $78 billion in its transactions with the nation's ailing financial institutions. She said that issue is still under investigation. (Source: McClatchy.) May 2009Worries Rise on the Size of U.S. Debt (May 2009) As the Obama administration racks up an unprecedented spending bill for bank bailouts, Detroit rescues, health care overhauls and stimulus plans, the bond market is starting to push up the cost of trillions of dollars in borrowing for the government. 'Last week, the yield on 10-year Treasury notes rose to its highest level since November, briefly touching 3.17 percent, a sign that investors are demanding larger returns on the masses of United States debt being issued to finance an economic recovery. While that is still low by historical standards — it averaged about 5.7 percent in the late 1990s, as deficits turned to surpluses under President Bill Clinton — investors are starting to wonder whether the United States is headed for a new era of rising market interest rates as the government borrows, borrows and borrows some more. Already, in the first six months of this fiscal year, the federal deficit is running at $956.8 billion, or nearly one seventh of gross domestic product — levels not seen since World War II, according to Wrightson ICAP, a research firm. Debt held by the public is projected by the Congressional Budget Office to rise from 41 percent of gross domestic product in 2008 to 51 percent in 2009 and to a peak of around 54 percent in 2011 before declining again in the following years. For all of 2009, the administration probably needs to borrow about $2 trillion. The rising tab has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion will most likely be breached in the second half of this year. Last week, the Treasury Borrowing Advisory Committee, a group of industry officials that advises the Treasury on its financing needs, warned about the consequences of higher deficits at a time when tax revenues were "collapsing" by 14 percent in the first half of the fiscal year. "Given the outlook for the economy, the cost of restoring a smoothly functioning financial system and the pending entitlement obligations to retiring baby boomers," a report from the committee said, "the fiscal outlook is one of rapidly increasing debt in the years ahead." While the real long-term interest rate will not rise immediately, the committee concluded, "such a fiscal path could force real rates notably higher at some point in the future." In some ways, ballooning deficits should not matter. Deficits are a useful way for governments to use public spending to stimulate the economy when private demand is weak. This works as long as a country closes its deficit and pays back its borrowings after its economy starts to recover. The trouble is that government borrowing risks crowding out private investment, driving up interest rates and potentially slowing a recovery still trying to take hold. That is why the Federal Reserve announced an extraordinary policy this year to buy back existing long-term debt — $300 billion over six months — to drive down yields. The strategy worked for a while, but now the impact of that decision appears to be wearing off as long-term interest rates tick up again. Then there is the concern that the interest the government must pay on its debt obligations may become unsustainable or weigh on future generations. The Congressional Budget Office expects interest payments to more than quadruple in the next decade as Washington borrows and spends, to $806 billion by 2019 from $172 billion next year. "You're just paying more and more interest and having to borrow more and more money to pay the interest," said Charles S. Konigsberg, chief budget counsel for the Concord Coalition, which advocates lower deficits. "It diverts a tremendous amount of resources, of taxpayer dollars." Of course, no one is suggesting the United States will have problems paying the interest on its debt. On Wednesday, even as it announced its huge financing needs for the latest quarter, the Treasury said financial markets could accommodate the flood of new bonds. "We feel confident that we can address these large borrowing needs," said Karthik Ramanathan, the Treasury's acting assistant secretary for financial markets. One worry, however, is that there are fewer eager lenders to buy all that American debt. Most of the world is in recession, and other nations have rising borrowing needs as well. As other nations' surpluses turn to deficits, America will face competition in global financial markets for its borrowing needs. For the moment, the United States is actually benefiting from a flight to quality into Treasuries brought on by the global financial crisis, which helped reduce rates to record lows this winter. But the influx will not continue forever. China has lent immense sums to the United States — about two-thirds of its central bank's $1.95 trillion in foreign reserves is believed to be in United States securities — but it has begun to voice concerns about America's financial health. To calm nerves and fill the deficit hole, the government is getting creative. The Treasury is ramping up its auction calendar, holding more frequent sales of government debt and selling the debt in expanded amounts. It is now holding sales of its 30-year bond each month, up from four times annually. It is also resuscitating previously discontinued bonds, such as the seven-year note and the three-year note, to try to mop up any available money all along the yield curve. There is even talk of issuing billions of dollars of a new 50-year bond, though the idea has not won official approval. On a second front, the Treasury and the Federal Reserve are trying to bolster the mechanics of the market — to make sure every auction goes smoothly. With such enormous sums involved, every extra basis point on the interest rate the government pays could mean extra billions of dollars for the taxpayer. Earlier this year, when demand was hesitant at a Treasury auction and when a British bond auction went poorly, investors grew nervous that the government might struggle to sell its mountain of debt. To avoid such an outcome and to keep borrowing costs low, the government is trying to expand the group of firms that bid at Treasury auctions. After the demise of such names as Lehman Brothers, the number of these firms, called primary dealers, has shrunk to 16, the smallest since this elite club was formed decades ago. Now the government is in discussions with smaller firms like Nomura and MF Global to persuade them to join. (Source: NY Times.)  NATIONALIZING THE BANKING SYSTEM February 2009Are Obama's Policies Ushering in Era of Socialism? (Feb 2009) On 18 Feb 2009, Fox News: had a that voices our concerns. Some pundits are now talking of NATIONALIZING THE BANKS. Things are going to get worse under Obama before it gets better. The problem is that Americans don't like the word "socialism" so the Democrats are packaging this as "stimulus", "recovery" and "revitalization" hype. But it remains the relentless march of Obama to change America into a Socialist state. The Stimulus Package paved the way for a National Health Care plan -- ala Tom Daschle's book -- that is simply "socialized medicine" in its most disagreeable form. The socialist moves on education still haven't been sorted out -- but states are now moving to declare their "sovereignty" under the 10th Amendment.With taxpayers shelling out $700 billion to bail out Wall Street and another $787 billion to jolt the sputtering economy, serious questions are being raised about whether all the government intervention is taking the country down the path to socialism. Numbers show the U.S. is drifting ever closer to the socialist systems popular within the European Union. In 1999, government spending made up 34.3 percent of gross domestic product, or GDP, the broadest barometer used to measure the health of the economy. That number is projected to grow to nearly 40 percent by next year.Time Magazine warns that while the US is going down the tubes, the G7 nations are sitting back and watching -- knowing full well that the health of America will also determine the financial health of their nations. Officials worldwide "don't want to step on the toes of a new President to whom they are favorably disposed. They also don't want to endanger legislation that they hope will help jump-start the global economy." But they are going to make a move on the world scene in a few months. The world view of the global financial crisis is: inadequate and inconsistent financial regulation is uniformly blamed. The G-20 will propose an stronger IMF to prop up the world economy. The next step for Obama is the housing crisis. Of course, no one will hear how in the 1990s, Obama the young lawyer was defending the civil rights of those to obtain home financing even if they were unqualified. No one will credit Bill Clinton with fostering this mess on the US -- though Bush could have stopped it too. The home foreclosure problem is a real mess. The housing crisis is at the heart of the US recession – much of the debt crippling the banking sector is mortgage-related. Last year 2.3 million homes were repossessed across America – an 81 per cent increase on 2007. Another three million are threatened in 2009, meaning that without a drastic rescue about eight million more Americans will lose their homes. By the end of 2008 more than 9 per cent of US mortgages were delinquent or in the process of being repossessed.  March 2009Blindsided by Obama the Radical (Mar 2009) By Andrea Tantaros Republican Political CommentatorIt has become jaw-droppingly clear that Barack Obama seeks to radically shift the alignment of this country — tying its citizens to their government in a dramatic leftward lunge the likes of which America has never seen before. Obama deceitfully billed himself a pragmatist on the campaign trail. He was marketed as a “moderate.” After his November victory, pundits predicted he’d govern from the center. — They couldn’t have been more mistaken. Barack Obama is an extremist progressive who seeks to molest our fiscal values and pumps up our reliance on fruitless government programs. Obama certainly will be successful in his mission for unparalleled historic recognition. But don’t expect his face on the dollar bill in the future. On its face, this appears to confirm that Obama is a tax-and-spend liberal with a heavy socialist marbling. But it’s much more complex than that. Though Obama has proclaimed that “this has never been about me — it’s about you” on the stump, these very actions are all about him and his increasingly apparent obsession with exaltation and a delusional quest for historic grandeur. The cult of personality created by the leftist trifecta of academia, media and the entertainment industry has overtaken Obama’s own self-image. And he believes the hype. Most politicians possess a swollen sense of self-worship. But Obama believes he is the superhero of fanatical Democratic extremism, the green lantern of progressive precept, the Will Smith of left-wing indoctrination. Obama certainly will be successful in his mission for unparalleled historic recognition. But don’t expect his face on the dollar bill in the future. His notoriety will leave a legendary imprint for all the wrong reasons. (Source: Fox Forum.)  Fiscal Obamamania (Mar 2009) Before the ink was dry on the $787 billion American Reinvestment and Recovery Act, President Obama announced plans to ask for an additional $275 billion to bail out as many as 5 million homeowners currently behind on their mortgage payments. Two hundred billion dollars of the proposed total will go directly into the coffers of Freddie Mac and Fannie Mae, the two "government-sponsored entities" that aggressively guaranteed or bought outright many of the sub-prime and Alt-A mortgages that are at the heart of the bursting of the housing bubble. Only months after being declared insolvent and taken into federal receivership, Freddie Mac and Fannie Mae apparently now are to be major players in rescuing the home buyers they themselves helped lead down the garden path. Lending money to people who can't afford to repay it is in line to be rewarded; so much for market discipline. The remaining $75 billion is earmarked for lenders, who will become eligible to be paid $1,000 for every mortgage they "modify" so as to reduce borrowers' monthly payments to 31 percent of income, provided that the borrower thereafter stays current on the loan. One would have thought that lenders already had such an incentive. In a down real-estate market where homes can be resold only at prices below what the current owner owes, banks can either demand compliance with original contract terms and risk nonpayment and foreclosure, or they can cut their losses by renegotiating loan terms. Just as auto workers employed by General Motors and Chrysler can choose between having a job at, say, $25 per hour rather than being unemployed at $45 per hour, mortgage lenders can either watch the values of their loan portfolios evaporate or accept lesser returns. They don't need the carrot of $1,000 _ or the president's threat that if they don't provide relief "voluntarily" he will authorize bankruptcy judges to impose it _ to make the right call. The tens of millions of homeowners who continue to make their monthly mortgage payments should be outraged at the president's planned bailout of people who bought houses they can no longer afford _ and many understandably are. They and America's taxpayers in general should be equally outraged by the $410 billion, earmark-laden omnibus budget bill soon to be considered by Congress. The economy is shrinking and unemployment is approaching double-digit levels, yet Washington is contemplating spending 8.7 percent more on discretionary programs in fiscal year 2009 than it did in 2008. Hard-working Americans can only dream about such a substantial raise. The federal budget deficit next year even now is estimated likely to exceed $1.7 trillion. If the fiscal mania does not stop, America stands to be a debtor nation permanently, and we and our children will face confiscatory tax rates just to pay interest on the federal government's debt. It is by now apparent that financial markets at home and abroad do not think that Washington's ad-hoc responses to an economic crisis that it itself created by an easy money policy and encouragement of risky lending _ and which it will lengthen and deepen by ill-considered fiscal "stimulus" _ is the recipe for a return to prosperity. As a matter of fact, looming tax increases in New York, California, Kansas and other cash-strapped states will go a long way toward neutralizing whatever effects the federal stimulus package might have had. Other states, such as Mississippi, are planning to use at least part of the largesse they expect from the American Reinvestment and Relief Act to fund ordinary government operations. Recovery will be possible only when both Washington and the states get their fiscal houses in order. As John Kennedy and Ronald Reagan most recently proved, across-the-board tax and spending cuts are the path to economic growth. (Source: Trading Markets: William F. Shughart II.) August 2009Geithner Goes on Expletive-Laced Tirade (Aug 2009) Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting. The proposed regulatory revamp is one of President Barack Obama’s top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf. (Source: NY Times.)Move for Nationalization of Banks: Obama: new powers needed in financial area President Barack Obama seeks new powers that would allow his administration to seize troubled companies like the insurer AIG — and take ownership of their toxic assets — if their collapse would threaten the financial system. Obama said Wednesday his administration will soon propose new financial industry oversight that includes a "resolution authority" that would have powers similar to those of the Federal Deposit Insurance Corp., which can seize control of banks, take over their bad assets and sell the good ones to competitors. Administration officials did not provide any details on how the new resolution authority would be financed. That could be a key sticking point in Congress. One official at a banking industry trade group in Washington said the Obama proposal raises concerns about the possible "nationalization" of banks. Further details of the Obama administration's regulatory overhaul package are expected to be unveiled as early as next week, in advance of an April 2 meeting in London the president will attend to discuss the financial crisis with other world leaders. Obama touted the idea Wednesday (17 Mar) as his top officials and members of Congress scrambled to deal with public outrage over millions in employee bonus payments made by American International Group, which has gotten more than $182.5 billion in government support. "This is part of the broader package of financial regulatory steps that we're going to be taking that ensures that, going forward in the future, we're not going to find ourselves in these kinds of terrible positions again," Obama told reporters before departing on a trip to California. One administration official, speaking on condition of anonymity because a detailed plan has not yet been released, said that the proposal would give the treasury secretary the power, after consulting with officials at the Federal Reserve, to take control of a major financial institution and run the company in a type of conservatorship. That is what occurred when the government seized control of mortgage giants Fannie Mae and Freddie Mac last September. The government had the authority to take control of Fannie and Freddie and oust their top executives because those companies were government-sponsored enterprises. However, the government did not have such powers when it came to AIG, forcing the government to pump tens of billions into the company, which then funneled money to its trading partners, such as Goldman Sachs and Deutsche Bank. Obama said it was "outrageous" that the government was being forced to "clean up after AIG's mess." He said it was critical that the government have the "tools to prevent ourselves from getting in a situation where an AIG can pose such enormous vulnerabilities to the system as a whole." (SITE NOTE: Then why did he have a bailout FOUR TIMES.) Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, which represents the country's biggest banks, said his group is skeptical of Obama's proposal. "This could be a large step toward nationalization," he said. The president, who on Wednesday discussed the "resolution authority" idea with House Banking Committee Chairman Barney Frank, said he believed the measure was on a "fast track." Frank was also scheduled to discuss the issue with Treasury Secretary Timothy Geithner, who has been attacked by Republicans for his handling of the AIG bonus issue. On Wednesday, Geithner received an endorsement from Obama, who told reporters he "is making all the right moves in terms of playing a bad hand." European countries have pushed the administration to take a tougher approach to financial regulation, believing it was a weak regulatory structure in the United States that led to the crisis that has now pushed the global economy into recession. The new powers the president seeks would apply to large non-bank financial institutions, such as insurance companies, as well as big bank-holding companies, the administration official said. These kinds of companies have already received billions of dollars of support from the government's $700 billion financial system rescue fund that Congress created last October. Other changes to financial regulation the Obama admistration is expected to seek, include: (1) expanding the powers of the Federal Reserve, giving it authority to oversee financial firms that could pose risks to the entire banking system. (2) expanding the capital reserve requirements for banks. (Source: AP.)\ Emergency Economic Stabilization Act of 2008 (EESA) and Troubled Asset Relief Program (TARP) (Oct 2008)On 23 Sep 2008, the Senate Banking Committee headed by Sen Dodd, (D-Conn) stated:"The landscape of our nation's economy has been radically re-shaped by the United States government over the course of just a few days and in a totally ad hoc manner. Companies that form the foundation of our financial markets are shrinking and disappearing practically overnight. Their insatiable appetite for risk has permeated all sectors of the financial services industry, and has spread beyond our shores. It has felled giants like Bear Stearns and Lehman Brothers; brought others to their knees like Merrill Lynch, A.I.G., Fannie Mae, and Freddie Mac; prompted the largest thrift failure in our history – IndyMac Bank; and eliminated the final two independent investment banks – Morgan Stanley and Goldman Sachs."The subprime mortgage crisis reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $85 billion liquidity facility for American International Group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers. (See Liquidity Crisis (Sep 2008).) But critics are opposed to the bailout. In Sep 2008, the state of the economy was on the verge of collapse -- banks and institutions collapsing and rates of foreclosures skyrocketing. John McCain stopped campaigning to go to Washington during the crisis, but Obama stated that "as President he would be expected to more than two things at once." In the end, Obama sat in on a meeting with President Bush to discuss the actions to resolve the impending disaster. The Emergency Economic Stabilization Act of 2008, commonly referred to as a bailout of the U.S. financial system, is a law authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, and although this wasn't reported in the media or known to many congressmen, make capital injections into banks. The bailed-out banks could be U.S. banks or foreign banks, and they don't even have to be banks, if the Fed arbitrarily decides there are exigent circumstances such as in the case of American Express. The Act was proposed by U.S. President George W. Bush and Treasury Secretary Henry Paulson during the global financial crisis of 2008. The original proposal was three pages, as submitted to the United States House of Representatives. The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets. The text of the proposed law was expanded to 110 pages and was put forward as an amendment to H.R. 3997. The amendment was rejected via a vote of the House of Representatives on September 29, 2008, by a margin of 228-205. On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424. The Senate accepted the amendment and passed the entire amended bill by a vote of 74-25. Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the size of the bill to 451 pages. (See Public Law 110-343 for details on the added provisions.) The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263-171 to enact the bill into law. President Bush signed the bill into law within hours of its enactment, creating a $700 billion Troubled Assets Relief Program to purchase failing bank assets. The intent of the EESA was:Proponents of the bailout plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the massive cost of the sudden plan, pointing to polls that showed little support among the public for bailing out Wall Street investment banks, and claimed that better alternatives were not considered and that the Senate only tried to force the passage of the unpopular but sweetened version of the bailout through the opposing House and was successful in this attempt. Opponents of the rescue plan argue that since the problems of the American economy were created by excess credit and debt, a massive infusion of credit and debt into the economy only excaberates the problems with the economy. The bailout infuses credit and debt into the economy because the government is creating the money out of thin air and thus immediately creating more credit and debt. (Source: Wikipedia.)  November 2008Potential Effects (Nov 2008) Economist Michael Hudson predicts that the bailout would cause hyperinflation and dollar collapse. However, there is no persuasive evidence of prices rising and the U.S. Dollar Index has actually risen to higher levels than before the plan's announcement. Indeed, during the week before and after the EESA was agreed, investment bank UBS was continually flatly rejecting that bailouts such as these were inflationary, emphasizing instead that they were anti-deflationary, not inflationary.The 2008 federal budget submitted by the president is $2,900 billion, meaning a $700 billion bailout would constitute a 24% increase to $3,600 billion, which would in fact far exceed the $3.1 trillion 2009 budget. The total government commitment and proposed commitments so far in its current and proposed bailouts is reportedly $1 trillion compared to the $14 trillion United States economy. (Source: Wikipedia.) The House of Representatives passed a $700 billion bailout package that says the government can lower the interest and loan principal on mortgages of people who cannot pay their monthly mortgage bill – and that policy is "morally wrong," Rep. Ron Paul (R-Tex.) told CNSNews.com. Ron Paul said the bailout would be "morally wrong." (Source: CBS News.) Problems with the EESA and Oversight Hearings (Nov 2008) Senate held hearings intended to examine financial institutions use of funding under the Capital Purchase Program. The hearing examined how financial institutions were using funds granted by the Treasury Department under the recently-passed financial rescue law. As of Nov 2008, it appeared that lending had simply dried up. The monies that were given to the banks to stimulate loans were being held in reserve -- or were being earmarked for the purchase of non-performing banks. CEOs openly remarked that they are going to use the funds to purchase other banks rather than issue loans. This was NOT the intent of the legislation. The intent was to stimulate loans through the capital injection -- and it has NOT occurred. It appears the practice of CEOs guaranteeing their executive compensation -- regardless that their banks or companies are about to default -- has created a groundswell of negative public opinion against the EESA. This in turn caused Congress to hold oversight hearings in November to address this problem. Initially the idea was to give the Secretary of the Treasury unprecedented power to spend -- with Congressional and Judicial oversight. However, this was not allowed. Then Secretary of the Treasury Paulson stated that the Treasury Department was NOT going to buy "toxic assets" (loans ready to default into foreclosure). The problem was that the Treasury could not figure out how to value the assets in a depressed market. Thus the problem exascerbated with approximately 9,000 foreclosures nationwide each day -- and over 2 million foreclosures in the past two years. Then Paulson reversed himself and said he was going to invest directly into banks and other financial institutions. Mr. Dodd (D-Conn), head of the Senate Banking Committee, meanwhile, wants to add foreclosure relief to an economic-stimulus package. He expressed frustration on 13 Nov with efforts to help distressed homeowners by the private sector and the Bush administration, which was supposed to make foreclosure relief a top priority in the $700 billion rescue packaged enacted earlier this fall to stabilize financial markets. Lawmakers sharply criticized the Treasury Department on 14 Nov for saying it intended to buy distressed assets despite having already decided to move away from the concept. The complaints from Capitol Hill came a day after Treasury announced it was abandoning the plan to buy illiquid assets to unfreeze credit markets. Instead, Treasury Secretary Henry Paulson said he intends to focus on investing Treasury funds directly into banks and other financial institutions, and on unclogging markets that fund consumer debt.  TARP Morphs (Nov 2008) When the $700 billion Troubled Asset Relief Program, or TARP, was first authorized, the idea was to use the lion's share of the funds to buy toxic assets on financial companies' balance sheets. That quickly morphed into the Treasury instead opting to buy equity stakes in financial companies and backing off buying the bad assets. Now the Treasury has done an about face and over the past weekend announced it will indeed by toxic assets at least from Citigroup. On 25 Nov, the Treasury Department posted on its Web site details of another new program to save the financial institutions called the Systemically Significant Failing Institutions Program and a third unnamed program to provide the financial institutions with government cash. A Treasury spokesperson told Fox Business Network's Peter Barnes the $20 billion in capital infusion to Citigroup on top of the $25 billion it got when the government bought stakes in the banks, did not come from the Systemically Significant Failing Institutions Program, but the third, unnamed program. The spokesperson said details of the new unnamed program will be forthcoming. "It's a separate program -- neither the capital purchase program or the program AIG was under," said Treasury spokesperson Brookly McLaughlin in an email to Fox Business Network. American International Group's (AIG) $40 billion investment by the Treasury Department fell under the Systemically Significant Failing Institutions Program. When asked for detail on the third program, McLaughin said: "the law required reporting on all that after the transaction closes." Based on the timing for when the Treasury posted details on the program used to help AIG, details on the third program could come in about two weeks. The Systemically Significant Failing Institutions Program, according to the Treasury, is to provide stability and prevent disruption to financial markets. Which financial institutions will be eligible for the program is decided on a case by case basis, according to the Treasury. In determining which banks are systemically significant and are at substantial risk of failure the Treasury could consider the following:
December 2008GAO: TARP Lacks Oversight (Dec 2008) The Government Accountability Office released a report on 2 Dec on the Troubled Asset Relief Program. TARP, as the name implies, was sold to Congress as a plan to provide relief to the financial industry by purchasing troubled assets with federal dollars. It hasn't done that.Instead, it has bought equity stakes in troubled financial institutions (TFIRP?). The GAO report found that oversight of the program is seriously lacking. That should come as little surprise to Congress, which commissioned the report, since the inspector general in charge of oversight has not been confirmed. Why? An anonymous senator has placed a "hold" on his nomination. That ticks off Sen. Max Baucus (D-Mont.), who fought to have the IG included in the bill. "This report proves the immediate need for oversight of the taxpayer dollars being expended right now as part of TARP. Because of one Senator's anonymous block on this nomination, three weeks have been lost — a key element of the TARP oversight program is not in place," he said. (Source: Politico.) Ron Paul (Mar 2009): "We also need to know the source and destination of funds provided through the Fed's emergency funding facilities. Information such as this will provide a more accurate and complete picture of the true cost of these endless bailouts and spending packages, and could very likely affect the decisions being made in Congress. But with so much of the Fed's business cloaked in secrecy, these latest initiatives will not even scratch the surface of the Fed's opaque operations. People are demanding answers and explanations for our economic malaise, and we should settle for nothing less than the whole truth on monetary policy." May 2009Taxpayers May Lose Out in TARP Paybacks (May 2009) Americans were promised a reward for rescuing the nation’s banks. In return for all those bailouts, the banks essentially granted stock options to the government — a potential jackpot for taxpayers once the crisis blew over.But now banks, eager to get Washington out of their hair, are pushing to undo those investments as quickly — and cheaply — as possible. If the Obama administration acquiesces, billions of taxpayer dollars could be left on the table, The New York Times’ Eric Dash writes.At issue are so-called warrants that the government received from the banks last autumn, when the financial world was teetering. Like options, warrants give their owners the right to buy stock at a set price over a certain period of time, in this case, 10 years. Now, with many banks itching to return their bailout money, the warrants are raising some thorny questions. What are these investments worth? Should the government drive a hard bargain, or let the banks off easy? Should it maximize profit for taxpayers, or minimize pain for banks? Many banks want to buy back the warrants and wriggle free of the government. Big banks like JPMorgan Chase, Goldman Sachs and Morgan Stanley have formally notified regulators that they want to return their bailout money, The Times said, citing people briefed on the situation. But as long as the government holds the warrants, it still has some leverage over the industry. For taxpayers, a lot of money is at stake. The government has an option to buy stock in 579 banks. By some estimates, the warrants on JPMorgan alone are currently worth more than $1.1 billion. They could be worth much more if JPMorgan’s share price rose. So far, one publicly traded bank, Old National Bancorp in Indiana, has repaid the government in full by returning its bailout money and repurchasing its warrants. (Two small privately held banks have done the same.) How Old National pulled this off, and the seemingly favorable terms it secured, shows how aggressively banks big and small are pushing, even after they repay money from the Troubled Asset Relief Program, or TARP. Old National paid $1.2 million for its warrants. Analysts estimate the investments might have been worth as much as $6.9 million. “It’s a great deal for Old National,” Linus Wilson, a finance professor at the University of Louisiana, Lafayette, told The Times. “Treasury accepted a lowball offer.” Andrew Williams, a Treasury spokesman, declined to comment about the negotiations, but told The Times that the government “has a robust process in place for valuing warrants.” He added that the Treasury was required by law to sell the warrants once a bank repaid its bailout money. Analysts say that has made it difficult for the government to pursue a goal of maximizing profits for taxpayers, though a recent change to the law might give the Treasury more flexibility. Even if it had the option, it is unclear how successful the government would be at actively managing such a complicated investment portfolio. Mr. Williams said the Treasury’s total warrant holdings were worth more than $5 billion, but the value changes along with the underlying stock prices and other factors. But Prof. Wilson estimated that the warrants on nearly 300 publicly traded banks, which account for more than 95 percent of the government’s investments, were conservatively worth $2.4 billion to $10.9 billion. Some lawmakers worry that taxpayers will lose out. “Taxpayers were there at a critical moment,” Senator Jack Reed, Democrat of Rhode Island and a member of the banking committee, told The Times. “They should enjoy the upside when these institutions recover.” To extinguish the warrants, the banks can let the Treasury auction them off to private investors or can choose to buy them back themselves. As with other bank rescue efforts, like moves to buy banks’ problem assets, the central issue with the repurchases is determining a fair price.“That is the problem in TARP asset purchases, and it is the problem here,” Vincent R. Reinhart, a former Federal Reserve official who is now a resident scholar at the American Enterprise Institute, told The Times. “Do you value it at roughly comparable asset prices or do you acknowledge that the current market prices reflect an unusual uncertainty in markets and aversion to risk?” For the government, the decision is about more than dollars and cents. It may be willing to sell the warrants simply to send a positive message about the stability of the banks. “The U.S. Treasury would be better off rejecting a lot of these bids and selling these warrants to third-party investors,” Prof. Wilson, at the University of Louisiana, told The Times. “Instead of having one buyer, they would have many buyers from all over the world trying to decide what the proper price should be.” Old National’s move to buy back its warrants illustrates how tricky it is to strike the right balance. Executives at the bank, based in Evansville, Ind., and a large community lender with 100 branches and $8 billion in assets, began seeking to exit TARP almost as soon as the Treasury wired it the money in December. By the end of March, Old National had won approval from its regulators to repay its $100 million of bailout funds. But the bank also wanted to repurchase its warrants, fearing it could remain subject to pressure from the government or another outside investor. “We felt more comfortable that we controlled our own destiny rather than have the hands of the Treasury or a third party,” Bob Jones, Old National’s chief executive, told The Times. “We think our stock has plenty of upside and would rather have that in our hands.” On April 20, Old National submitted an initial offer of around $600,000. Ten days later, Treasury officials, after gathering their own estimates from two asset managers and two market participants, rejected the bid as too low. Over the next week, both sides haggled over the price. “We both walked through where we were,” Mr. Jones said. “They held their ground on a number of cases, and clearly we had to compromise.” On May 7, Old National was given approval to buy back its warrants for $1.2 million. The bank wired the money four days later. At Old National’s annual meeting, shareholders were elated by the news. “It was the only applause I drew the whole meeting,” Mr. Jones said. (Source: Dealbook: NY Times Blogs.) Allstate Declines Bailout Offer From U.S. Treasury (May 2009) Allstate Corp., the largest publicly traded U.S. home and auto insurer, declined to take U.S. rescue funds, joining Ameriprise Financial Inc. in turning down federal aid as banks move to exit the bailout program. Government help isn’t needed, “given Allstate’s strong capital and liquidity positions,” Chief Executive Officer Tom Wilson said in a statement today. The Northbrook, Illinois-based insurer said the value of its securities portfolio gained more than $1.5 billion from April 1 to May 13 after investment declines caused net losses in the three prior quarters. Allstate was among six insurers including Prudential Financial Inc. and Hartford Financial Services Group Inc. granted preliminary approval last week to tap the Troubled Asset Relief Program. Insurers, which clamored last year to qualify when the value of fixed-income holdings plunged, have reassessed federal relief as markets improved and banks that took funds last year chafed at the terms. “The financial institutions that took TARP feel they ended up dancing with the devil,” said David Havens, managing director at investment bank Hexagon Securities LLC. “It’s nice to have the option in your back pocket, to have something you can pull out in a last ditch effort, but it’s not the preferred way of raising cash.” Goldman Sachs, JPMorgan Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley applied to refund a combined $45 billion of government funds, people familiar with the matter said, a step that would mark the biggest reimbursement to taxpayers since the program began in October. Banks are seeking to get out from under restrictions on compensation and hiring imposed as part of the bailout in February. Participating in TARP “became a little more of a painful experience,” JPMorgan CEO Jamie Dimon said at the company’s annual shareholder meeting today in New York. Dimon, 53, said he “didn’t know what to expect” when accepting the funds. Wilson said in February that while Allstate was eligible for TARP money, he didn’t “like the terms and conditions,” which include issuing warrants that the federal government can convert to stock. The insurer also maintained its quarterly dividend at 20 cents a share. Allstate cut the payment to that level in February from 41 cents, the first reduction in more than a decade. Allstate rose 65 cents, or 2.5 percent, to $26.50 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has fallen about 47 percent in the past year. Lincoln, Principal Ameriprise said May 15, a day after Treasury announced the six eligible insurers, that it wouldn’t participate. Hartford said it got preliminary approval for $3.4 billion in federal funds. Lincoln National Corp. said it got approval for $2.5 billion, and Principal Financial Group Inc. said it was seeking $2 billion. Prudential said last week it is considering “all options.” Allstate raised $1 billion in a debt offering on May 11, which included 10-year notes priced to yield 430 basis points more than benchmarks when they were issued, Bloomberg data show. The 7.45 percent notes today traded at 104.6 cents on the dollar to yield 6.8 percent, or 356 basis points more than Treasuries of similar maturity, according to Trace, the bond price-reporting system of the Financial Industry Regulatory Authority. “You’re seeing a lot of new issues tightening quite a bit,” Havens said. “The most important thing for financial firms is to show that they can get a deal done. Pricing was probably not a key determinant” for Allstate, he said. (Source: Bloomberg.) (SITE NOTE: "Dancing with the Devil" is a perfect way to describe the Obama Bailout Program. Money to get the nose of the camel into the tent -- and then in comes the Government Camel to take over. Glad many in business are wising up. For GM and Chrysler, it is too late. Ford needs protection. The Federal Reserve and the Treasury Department are the ones that need an audit to track the Bailout funds. There are crooks afoot -- and they're in the government.) June 20092 Banks Exit TARP, With More to Follow (Jun 2009) With the wiring of nearly $10 billion to the United States Treasury, U.S. Bancorp and BB&T on Wednesday became the first large financial institutions to announce that they have repaid the government in full for the preferred shares it bought last fall under the federal bailout program. U.S. Bancorp, based in Minneapolis, said Wednesday morning it redeemed $6.6 billion in preferred stock from the Treasury. BB&T, based in Winston Salem, N.C., said that it had bought back the preferred shares for $3.1 billion plus a final dividend payment of about $13.9 million. Later in the day, JPMorgan Chase and Morgan Stanley also announced the return of their federal aid, signaling that the nation’s top bankers are regaining their confidence after the financial crisis that shook Wall Street last fall.BB&T, U.S. Bancorp, Goldman Sachs, Morgan Stanley and six other large financial firms won approval last week to repay the money they received under the Troubled Asset Relief Program, a move that would bring them close to cutting their financial lifeline from Washington. Among the other banks cleared to exit the TARP were JPMorgan, American Express and Bank of New York Mellon. “This was, in fact, an excellent investment for the American taxpayer,” Kelly King, BB&T’s chief executive, said Wednesday in a press release. “Our strong capital position allowed us to pay back TARP in a very short amount of time. But what’s important today is that we’ve repaid the government, and now we have a singular focus on the business of serving our clients.” Richard K. Davis, the chairman and chief executive of U.S. Bancorp, called his company’s repayment “a significant step forward,” adding that it “allows our company to return to operating from a position of both independent strength and strategic flexibility.” The exits aren’t quite complete: Even after repurchasing the preferred shares, BB&T and U.S. Bancorp must buy back the warrants they issued to the Treasury under the TARP. Both banks said Wednesday they had notified the Treasury of their intent to repurchase the warrants, which give the Treasury the right to buy shares of their common stock. There has been some debate about how the Treasury would set a price for the bank warrants it holds as the repayments continue. Neither BB&T nor U.S. Bancorp said Wednesday how much they would pay for their warrants. Even after buying back preferred shares and warrants, some financial firms will still have a toe in the TARP. For example, Morgan Stanley and several other institutions have issued billions of dollars in debt that is guaranteed by the Federal Deposit Insurance Corporation. (Source: NY Times.) TARP Bailout of Banking SystemDecember 2008How Much is that Bailout in the Window? (Dec 2008) The bailout is ballooning. Imagine that. Some estimates now put the total bill at over 8 trillion dollars. Those of you who thought that the money was going to the poor folks holding bad mortgages need to think again. According to Mike Sunnucks writing for the Sacramento Business Journal:The $8.5 trillion includes the $700 billion bank and Wall Street bailout; federal takeovers of Fannie Mae and Freddie Mac, individualized bailouts for Citigroup Inc. (NYSE: C) and American International Group Inc. (NYSE: AIG); and various cash infusions into financial and lending markets by the Fed. The $700 billion includes federal equity buys into Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM) and other financial institutions.Bloomberg has a much more conservative number. They see the bailout as a measly $7.76 trillion: The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department's $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis. Forbes has the bailout pegged at a paltry $6.3 trillion. No matter which estimate is true, when the government throws a trillion dollars here and a trillion dollars there, pretty soon the government is squandering some real money -- and creating real socialism. Our government is now in the debt buying business -- but only for banks, businesses and (in the near future) unions "too big to fail." For the rest of us ... well, there is always Chapter 11 and the soup lines. (Source: American Thinker.) Barack Obama decried the state of the economy Wednesday for the fifth time in 10 days. But the president-elect and his team are resisting overtures from the Bush Treasury Department to get more involved now in shaping how the rest of the $700 billion in financial-rescue funds are spent. Since his election exactly one month ago, Mr. Obama has maintained a campaign-like approach to the economy, speaking in broad terms about the need for intervention, while refusing to engage in specifics. Treasury officials have grown frustrated with the Obama transition team's unwillingness to engage in specifics. Mr. Paulson has to consult with the Obama team on any big moves, in particular on plans for how the next $350 billion should be used. While Treasury has been in frequent contact with the Obama team, there is uncertainty about what it wants to do with that next batch of money. Many within Treasury believe the next administration is trying to keep its distance in an effort not to be painted as endorsing any of the Bush administration's plans. (Source: Wall Street Journal.) January 2009Fed Refuses to Disclose Recipients of $2 Trillion (Jan 2009) The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral. Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.The Fed responded Dec. 8, saying it's allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests. "If they told us what they held, we would know the potential losses that the government may take and that's what they don't want us to know," said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets. The Fed stepped into a rescue role that was the original purpose of the Treasury's $700 billion Troubled Asset Relief Program. The central bank loans don't have the oversight safeguards that Congress imposed upon the TARP. Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren't rated AAA. 'Been Bamboozled' Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had "been bamboozled." Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn't receive a formal response that would let it file an appeal within the legal time limit. On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It filed suit Nov. 7. In response to Bloomberg's request, the Fed said the U.S. is facing "an unprecedented crisis" in which "loss in confidence in and between financial institutions can occur with lightning speed and devastating effects." Data Provider The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts. While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as "IDC." One of the e-mails' subject lines refers to "Interactive Data -- Auction Rate Security Advisory May 1, 2008." Brian Willinsky, a spokesman for Bedford, Massachusetts- based Interactive Data Corp., a seller of fixed-income securities information, declined to comment. "Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure," Jennifer J. Johnson, the secretary for the Fed's Board of Governors, said in a letter e-mailed to Bloomberg News. 'Dangerous Step' "In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information," she wrote. New York-based Citigroup Inc., which is shrinking its global workforce of 352,000 through asset sales and job cuts, is among the nine biggest banks receiving $125 billion in capital from the TARP since it was signed into law Oct. 3. More than 170 regional lenders are seeking an additional $74 billion. Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system. The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn't seek money damages. 'Right to Know' "There has to be something they can tell the public because we have a right to know what they are doing," said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press. "It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed," she said. The Fed's five-page response to Bloomberg may be "unprecedented" because the board usually doesn't go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington. "This is uncharted territory," said Levine during an interview from his New York office. "The Freedom of Information Act wasn't built to anticipate this situation and that's evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption." The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country's biggest bank by assets. Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month. 'Complete Truth' "Americans don't want to get blindsided anymore," Mendez said in an interview. "They don't want it sugarcoated or whitewashed. They want the complete truth. The truth is we can't take all the pain right now." The Bloomberg lawsuit said the collateral lists "are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression." In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank's customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said. "I understand where they are coming from bureaucratically, but that means it's all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system," Johnson said. The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan). (Source: Bloomberg.) Panel Steps Up Criticism of Treasury Over TARP (Jan 2009) The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners, a report being released Friday charges. In the most scathing criticism yet of Treasury's implementation of the $700 billion financial-rescue package, a draft report being issued by the five-member congressional oversight panel said there appear to be "significant gaps" in Treasury's ability to track hundreds of billions of dollars of taxpayer money. "The panel's initial concerns about the [Troubled Asset Relief Program] have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury," said the draft report, which found that the department has "not yet explained its strategy" for stabilizing the financial markets. The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions. The bipartisan panel, headed by Harvard Law School professor Elizabeth Warren, reserved its most strident criticism for Treasury's approach to dealing with the foreclosure crisis at the root of the economic turmoil. The draft report noted that Treasury hasn't used any of TARP's $700 billion to help borrowers refinance or deal with mortgages that are worth more than the market value of the homes they are tied to. "Treasury needs to be clear as to what, if anything, it has done, and if it insists on taking credit for private sector efforts, it must explain what 'help' means," the draft report said. Treasury is responding to political pressure with a plan to better track what banks are doing with billions of dollars invested by the U.S. government. For banks, it could ratchet up pressure to make loans they consider imprudent given economic uncertainty and the difficulty increasing the number of deposits that underpin their business. Treasury Assistant Secretary Neel Kashkari, who leads the TARP program, said the Treasury plans to use already available quarterly data to compare lending by banks that have received TARP funds and those that haven't. The Treasury plans to collect monthly data from some of the largest banks that have received capital injections from the federal government. Mr. Kashkari, in a speech in Washington, noted that the Treasury still has roughly $75 billion to distribute to banks as part of its $250 billion capital-injection program. "This capital needs to get into the system before it can have the desired effect," he said. A Treasury spokeswoman said there is no time frame for instituting the new measurements and that details of the data to be collected remain uncertain. (Source: Wall Street Journal.)  Bailout gets abysmal assessment (Jan 2009) As Congress mulls release of the second half of their first bailout effort — the $700 billion Wall Street rescue — the reviews are coming in on how it’s gone so far, and they’re abysmal. The scathing assessment of Treasury’s handling of the first $350 billion installment in a report released Friday, is one more reason Democratic leaders intend to add strings and impose greater scrutiny on the second $350 billion outlay — even if it will be managed by their own party leader, President-elect Barack Obama. Some are even threatening not to release it all, which would be the surest way to avoid more waste and incompetency — at least in this program. “You can’t get answers from the Treasury Department; you can’t get answers from recipients of tens of thousands of taxpayer funds as to where those funds have gone,” said Sen. Carl Levin (D-Mich.). "There’s going to be a huge demand for conditionality before we vote, and I don’t see how they’ll get a vote for the second half unless there are very tough conditions.” Frank said Friday that he’s not adamant Obama signs these changes into law. “I hope it will be enacted, but I would say this: If they give us their absolute word that they're going to abide by the bill, I think that will give members a lot of comfort,” he said. Nonetheless, Frank wants the Obama administration to promise to adhere to some very specific directions. The refusal of Treasury Secretary Henry Paulson to use TARP to fight foreclosures is a top grievance among congressional Democrats, and Frank’s legislation conditions the release of the second half on Obama spending at least $50 billion of it on foreclosure mitigation, according to a summary of his bill. Frank told reporters he’d like to see up to $100 million for foreclosures. The legislation gives incoming Treasury Secretary Timothy Geithner a deadline of March 15 to develop this plan to address rising residential foreclosures. It would have to be implemented by April 1. Frank also sets out five elements that must be part of the foreclosure plan, including reducing the costs of the Hope for Homeowners program that Congress created last summer but that has failed to spur more than a handful of modifications. The bill lays out a lot of other directions for Treasury to follow as it administers the TARP. The department would have to require existing and future recipients of bailout money to file quarterly public reports on how it is using the funding. Insured depository institutions would also have to report on how much they’ve increased or decreased their lending. And there would be benchmarks banks must meet to ensure recipients are using their bailout money as intended. The bill also would tighten executive compensation restrictions, direct TARP funds to smaller community institutions and clarify that TARP can be used to help consumers with auto, student and other loans. (Source: Politico.) Bush Prepares Request for Rest Of Bailout Funds -- If Congress Votes Down Measure, Veto Power Could Come Into Play (Jan 2009) Senior Bush administration officials, consulting with the Obama transition team, have prepared a plan to ask lawmakers for the second half of the $700 billion financial rescue package despite intense opposition in Congress, sources familiar with the discussions said. The initiative could create an unusual political scenario straddling the Bush and Obama administrations. If Congress were to vote down the measure, either President Bush or Obama would have to exercise a veto to get the money. Obama officials would prefer that Bush exercise any veto rather than leave the new president with the unsavory task of rebuffing his fellow Democrats in Congress to advance a widely unpopular program, sources said. The White House has declined to say publicly whether Bush would be willing to issue the veto. "There have been discussions between the administration and the transition team on how to proceed should the president-elect determine that he would like President Bush to notify Congress on his behalf of the intent to use the remaining $350 billion so that it will be available early in the new administration," White House press secretary Dana Perino said. "No final decisions have been made." But Democratic Senate aides were notified in a meeting yesterday afternoon that the request could come as soon as this weekend and that a vote could be held as early as next week, said congressional sources, who spoke on the condition of anonymity because no decisions have been made. Under the emergency rescue legislation approved by Congress in October, the administration must inform lawmakers that it wants access to the second installment of $350 billion. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury can begin to tap the funds. If Congress turns down the request, the president could veto the resolution and then the Treasury could proceed. The money would be blocked only if Congress overrides the veto, which would require a two-thirds majority in both chambers. A congressional source said advocates of the plan are exploring whether there are enough votes in the Senate to sustain a veto. The first $350 billion has already been committed. "There have been discussions between the administration and the transition about how to proceed should the president-elect determine that he wants to have those funds available on January 20," said Robert Gibbs, spokesman for President-elect Barack Obama's transition team. "No final decisions have been made, but we want to be ready to act if needed." Both Bush and Obama officials say gaining access to the balance of the rescue funds is crucial to turning the economy around. Without the money, it would be nearly impossible to offer significant help for homeowners facing foreclosure, stabilize the financial system or jump-start the credit markets so more consumers and companies can get loans. The latest sign of the economy's deep malaise was new jobless figures released yesterday showing that unemployment has soared to 7.2 percent, the highest rate in 15 years. Even as senior Bush and Obama officials consulted about how to access the rest of the money, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, unveiled a bill on Capitol Hill aimed at forcing the Treasury to use the money in accordance with lawmakers' wishes. Many of the measure's provisions are being coordinated with Treasury Secretary nominee Timothy F. Geithner, who is planning to expand the scope of the rescue program well beyond the financial system to help ordinary consumers and homeowners, as well small businesses and municipalities. Frank said in a news conference yesterday that his bill might not be needed if the Obama administration promised to abide by its principles. "It doesn't have to be enacted. It would be helpful if it was," Frank said. "We have smart and cooperative people in this [incoming] administration, I'm willing to accept their word that they will act as if it were the law." Frank's bill would mandate that the Treasury allocate at least $40 billion for foreclosure prevention. Banks and other institutions that receive funds from the Troubled Asset Relief Program, or TARP, would be required to account for the use of the money. Clear limits on executive compensation would be imposed on all firms that take federal aid, including those that already received money. The House is expected to vote on Frank's measure on Wednesday, congressional sources said. If the measure is approved, Frank has said that some lawmakers who would otherwise vote against releasing the next round of TARP funds might be persuaded to reconsider. Without Frank's bill, House leaders are convinced that lawmakers would block release of additional funds to the Treasury, which is widely viewed by lawmakers as having rushed the bailout through Congress and then badly mismanaged the program. For Obama, using a veto runs the risk of souring his relationship with rank-and-file lawmakers, especially if it is one of his first official acts in the White House. It carries less risk for Bush, who is leaving office in a matter of days. But the threat of a veto could assure distressed financial markets that more help is on the way. In September, when Treasury secretary Henry M. Paulson Jr. proposed the rescue to Congress, the House at first voted down the plan. Global stock markets plummeted immediately. The initiative eventually passed both chambers and was signed into law in October. Bush officials committed nearly all of the first half of the rescue funds on aiding the financial system and bailing out individual firms. But their programs angered lawmakers on both sides of the aisle. Some were steamed that no help was forthcoming for struggling homeowners. Others said the effort failed to stimulate lending. A majority of lawmakers in both parties are strongly resistant to giving more money to continue the program, Democratic leaders say, adding that a request from either administration is likely to be rejected, making a veto almost unavoidable. (Source: Washington Post.) Frank Seeks TARP Funds for Foreclosures (Jan 2009) Wrapping up a week of efforts by legislators and businesses to stake claims on the Troubled Asset Relief Program and the proposed stimulus package, Mr. Frank said he plans to lay out a series of restrictions on the remaining $350 billion in TARP in a bill the House could vote on as soon as next week. (SITE NOTE: President Bush wants the rest of $350 billion released now to the Treasury and threatened to use his veto power on other plans. Obama wants this as well because there is building opposition in the Democratic camp. If it remains till he takes office, he would have to buck his own party to get the $350 billion in TARP funds released.) Meanwhile, an industry coalition is lobbying for a tax break that would allow companies to renegotiate troubled debt without incurring corporate income taxes, a potential windfall for many companies, including private-equity firms. Mr. Frank said his plan would prevent banks from using government money to buy healthy banks and impose tougher executive-compensation restrictions for new recipients of TARP funds. He is also proposing a permanent increase in the Federal Deposit Insurance Corp.'s insurance limit on deposit accounts to $250,000. Mr. Frank offered several options for stemming foreclosures, including loan guarantees and other incentives to spur loan modifications. Mr. Frank said Democrats want to give Obama administration officials flexibility to craft their own program. In a similar vein Friday, Rep. Earl Blumenauer, (D., Ore.), a member of the House Ways and Means Committee, said lawmakers are considering adding language to stimulus legislation to ensure that firms receiving bailout funds cannot benefit from tax breaks in the stimulus bill. The posturing by Democrats comes amid heightened criticism of the Treasury Department's implementation of the first $350 billion under TARP, which focused mainly on injecting capital into banks and opted against a foreclosure-prevention plan. Earlier in the week, Sen. John Ensign (R., Nev.), a member of the Senate Finance Committee, introduced a bill that would suspend "cancellation of indebtedness" tax rules. The proposal, which supporters hope will wind up as part of the economic-stimulus package, would help corporations "strengthen their balance sheets and be better positioned to withstand the effects of an economic downturn," according to language accompanying the bill. The plan faces uncertain prospects in the Democratic Congress. Under current law, any debt forgiven becomes taxable income. For example, if a company issues $1 billion in debt, but later runs into trouble and exchanges it for new debt worth $600 million, the remaining $400 million counts as taxable income. Under Sen. Ensign's proposal, a company that buys back publicly traded debt at that discount would keep the remaining $400 million but owe no tax. In late 2007, Congress enacted a similar measure to apply to homeowners who renegotiate their mortgages. Private-equity firms have a particular interest in carving out this exception, because of the enormous debt accumulated in the just-ended leveraged-buyout wave. Many of the companies the buyout firms control are running into trouble, and some have been renegotiating their debt. Harrah's Entertainment, owned by buyout firms Apollo Management LP and TPG, has pressed the case for the tax break with both Sen. Ensign and Senate Majority Leader Harry Reid of Nevada, according to people familiar with the matter. The bill includes a provision that extends the tax break to parties related to the original issuer of the debt. That is important to buyout firms, which could get a tax break by buying deeply discounted debt issued by troubled companies they control. (Source: Wall Street Journal.)  Two U.S. banks fail, first casualties in 2009 (Jan 2009) Bank regulators closed two small banks on 16 Jan, the first U.S. banks to fail this year but the latest in an upsurge that began last year as the struggling economy and falling home prices took their toll on financial institutions. The Federal Deposit Insurance Corp said National Bank of Commerce of Berkeley, Illinois and Bank of Clark County of Vancouver, Washington were closing with other banks taking over their insured deposits. In 2008, 25 banks were seized by officials, up from just 3 in 2007. National Bank had $430.9 million in assets and $402.1 million in deposits, with Republic Bank of Chicago assuming its insured deposits, the FDIC said. Republic Bank will also purchase $366.6 million in assets at a discount of $44.9 million, it added. Umpqua Bank, a subsidiary of Umpqua Holdings Corp, agreed to assume insured deposits of the Bank of Clark County, which had $446.5 million in assets and $366.5 million in deposits, the FDIC said. The FDIC insures up to $250,000 per account through 2009 and individual retirement accounts at insured banks. But Bank of Clark County had about $39.3 million in uninsured deposits in 138 accounts that may exceed the insured limit, the FDIC said. It added that "is likely to change once the FDIC obtains additional information from these customers." Bank of Clark County will reopen on 20 Jan as branches of Umpqua Bank. The FDIC said customers at National Bank should continue to use existing branches until Republic Bank can fully integrate National's deposit records. Customers at both National Bank and Bank of Clark County can access their money over the weekend by check, teller machine or debit card, the FDIC said. National Bank's failure will cost the FDIC Deposit Insurance Fund $97.1 million while Bank of Clark County's failure will cost between $120 and $145 million, it said. During the current financial crisis, Seattle-based lender Washington Mutual became the biggest bank to fail in the U.S. history. It was closed in September while suffering from losses from soured mortgages and liquidity problems. The FDIC agency also has a running tally of problem banks that its examiners closely monitor. At the end of the third quarter, 171 undisclosed institutions were on that list. (Source: Reuters.)  February 2009Tim Geithner Rolls Out his National Bank Plan (Feb 2009) Tim Geithner fresh out of his nomination battle where he was allowed to pass despite his failure to pay income tax scandal. Mr. Geithner himself needs to win policy makers' trust as Mr. Obama's point man handling the financial crisis, especially after a tough confirmation process marred by questions about taxes he had neglected to pay. Timothy Geithner's first sales job as Treasury secretary was greeted Tuesday with skepticism from two key constituencies: Wall Street and Capitol Hill. The Dow Jones Industrial Average slid steadily in the hours after Mr. Geithner's morning announcement of the Obama administration's revamp of the financial-sector rescue effort. The Dow ended the day down 4.6%, nearly 400 points. On the Hill, senators from both parties grilled Mr. Geithner for 3½ hours in the afternoon during his first appearance before Congress in his new job, with many complaining about the lack of details in the plan.However, when Treasury Officials went to Congress to brief them on his plan according to Huffington Post, they were greeted with laughter on the plan. Administration officials were greeted with sarcasm and laughter Monday night (9 Feb) when they briefed lawmakers and congressional staff on Treasury Secretary Tim Geithner's new financial-sector bailout project, according to people who were in the room. The laughter was at its height when Obama officials explained that the White House planned to guarantee a wide swath of toxic assets -- which they referred to as "legacy assets" -- but wouldn't be asking Congress for money. Rep. Brad Sherman (D-CA), a bailout opponent in the fall, asked the officials to give Congress the total dollar figure for which they were on the hook. The officials said that they couldn't provide a number, a response met by chuckling that was bipartisan, but tilted toward the GOP side. By guaranteeing the assets, Geithner hopes he can persuade the private sector to purchase a portion of them. (Source: Huffington Post.)HOWEVER, the Congressional amusement will NOT stop Obama. Mr. Geithner's appearance was intended to inform the Senate Banking Committee about the details of the Obama plan. The administration has the power to make the changes on its own and doesn't need lawmakers' approval. The Federal Reserve, in extreme situations, is allowed to intervene in the financial markets in dramatic ways. The Fed jumped into the markets long before the $700 billion bailout passed through Congress by guaranteeing toxic assets held by CitiGroup and Bank of America. The White House still has roughly $350 billion in Congress-appropriated TARP funds to use, and it planned to use $50 billion for foreclosure mitigation and further amounts to shore up bank balance sheets. The officials also said that a review of the bank's books would be undertaken to determine whether they could handle an even more severe economic downturn. The White House proposed expanding the Temporary Asset Lending Facility (TALF) by up to one trillion dollars in order to shore up the market for credit card and auto loans. It would be a joint project of the Federal Deposit Insurance Corporation and the Treasury's TARP funds. (Source: Huffington Post.) But administration officials say it is important they win congressional confidence in their handling of the financial-rescue effort, particularly if they need at some point to request more government funds to supplement the $700 billion Troubled Asset Relief Program, or TARP, authorized last fall. Treasury officials and Mr. Geithner on Tuesday said they have no immediate plan to ask for more money from a skeptical Congress, but did suggest it may be necessary. (Source: Wall Street Journal.) BUT make no bones about it -- TARP II and TARP III are on the way. The administration -- and even Obama -- has been alluding to them all along. Still, Sen. Jon Tester (D., Mont.), Chairman of the Banking Committee, said that any request from Mr. Geithner for more money would be unlikely to get any traction. "I think it would be tough right now," Mr. Tester said. The biggest concern from conservatives with Tim Geithner is the formation of a National Bank -- and the start of nationalizing the banking system. However, until more details of his plan are known, no one can guess where this is headed. The Obama administration on 10 Feb announced a wide-ranging financial sector rescue plan that could send $2 trillion coursing through the financial system. The plan, which is designed to involve a mix of government and private capital, aims to stabilize the U.S. financial system by injecting capital into banks, helping to determine prices of toxic assets weighing on firms' balance sheets and stemming foreclosures. Treasury Secretary Timothy Geithner outlined rules on 10 Feb for $350 billion in bailout funds designed to help the financial industry as well as homeowners facing foreclosure. The details were scarce and the stock market reacted by dropping 382 points and kept on sinking. "By providing the financing the private markets cannot now provide, this will help start a market for the real estate related assets that are at the center of this crisis," he said. "Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets." Mr. Geithner added that the administration is still exploring a range of options for setting up the program and it will seek input from the public on how to design it. While the program will ultimately provide up to $1 trillion in financing capacity, it will start off on a scale of $500 billion. Mr. Geithner presented the moves as a multi-pronged effort to encourage financial institutions to lend again.  CNBC Analyst: No Market Confidence in Stimulus, Banking Bailout; Dow Jones to 6,000 (Feb 2009) Remember how the $789 billion stimulus package and the banking bailout under the direction of Treasury Secretary Tim Geithner were supposed to restore confidence to the economy? Think again. As the Dow Jones Industrial Average (DJIA) dipped to less than 8,000 points in the wake of Geithner's TARP II announcement on Feb. 10, CNBC contributor and UC-Irvine Professor of Economics and Public Policy Peter Navarro warned that it's the sign of a new floor for stock market index. He predicted the Dow to go to 6,000 on CNBC's Feb. 13 "Squawk on the Street." "We got the market top in November 2007 at about 14,000 on the Dow," Navarro explained to co-host Mark Haines. "And we went down to 8,000 over the course of the year. We've been in this sideways pattern since until recently at 8,000. We put the fiscal stimulus in place. We put the bank bailout in place. The market says we don't like it. We break that critical support level." (Source: Newsbusters.) 56% Oppose Any More Government Help For Banks (Feb 2009) While the Obama Administration is pledging up to $2.5 trillion in support for the troubled U.S. financial system, 56% of Americans oppose giving bankers any additional government money or any guarantees backed by the government. Twenty percent (20%) support such assistance, and 24% are not sure in a new Rasmussen Reports national telephone survey. The polling was done Monday and Tuesday nights (9 -10 Feb). Treasury Secretary Timothy Geithner announced the bank bailout plan on 10 Feb, but its contents were widely reported before that. Among those more closely attuned to the workings of the financial industry, opposition is even higher. Fifty-nine percent (59%) of investors oppose the new bailout, compared to 53% of non-investors. The stock market plunged 4.6% in reaction to Geithner’s plan, and consumer confidence as measured by the Rasmussen Consumer Index fell to an all-time low. The Rasmussen Investor Index remains just slightly above the all-time low it hit in December. Sixty-seven percent (67%) of adults believe Wall Street will benefit more from the new bank bailout plan than the average U.S. taxpayer. Just 12% say taxpayers will be the beneficiaries of the government bailout. Twenty-one percent (21%) are not sure who will benefit more. Fifty-nine percent (59%) say they oppose the $700-billion bank bailout plan that was proposed by the Bush Administration and approved by Congress early last October after the highly publicized failure of Lehman Brothers brought Wall Street’s growing problems home to Main Street. Half of that money is being channeled into the new bailout plan. Twenty percent (20%) say the first bailout plan was a good idea, and 21% are undecided. The new numbers represent a jump in opposition to the first plan. Forty-five percent (45%) opposed it at the time it was passed, while 30% supported it. A sizable majority expected Wall Street to benefit more than taxpayers from the bailout, but those numbers also are higher now. The plurality of Americans (46%) say the earlier bailout plan has had no impact on the U.S. economy. Thirty-six percent (36%) think it has made things worse, while just nine percent (9%) say it has helped the economy. The new bailout plan which Geithner outlined yesterday “is far bigger than anyone predicted and envisions a far greater role in markets and banks than at any time since the 1930s,” according to the New York Times. Seventy-two percent (72%) of Republicans and 63% of Americans not affiliated with either major political party are against any additional government money or guarantees for the banking industry as Geithner has proposed. Democrats are almost evenly divided on the question. While 72% of both Republicans and unaffiliated adults say Wall Street will benefit more from the new bailout plan, just 60% of Democrats agree. Seventy percent (70%) of investors say Wall Street will be the chief beneficiary, as do 64% of non-investors. Both Republicans (76%) and unaffiliateds (61%) are highly opposed to the first bailout plan from last October. The plurality of Democrats share that opinion but by a much closer 12-point margin. The plurality of Democrats (47%) and Republicans (48%) say that bailout has had no impact on the economy, although nearly as many Republicans (41%) believe it has had a negative impact. Most unaffiliated adults are evenly divided between no impact and hurting the economy. Fourteen percent (14%) of Democrats think it helped, but only small percentages of Republicans and unaffiliateds agree. Most Americans don’t think their political leaders know what they’re doing anyway as they wrestle with the country’s economic problems. Indicative of Americans’ concerns about the economy is the high level of interest in the banking bailout plan. Thirty-nine percent (39%) say they have followed news stories about the plan very closely, while another 39% say they are following somewhat closely. Just six percent (6%) say they are not following the news at all. The Obama Administraton is proposing perhaps unprecedented government involvement in the banking industry, but 75% of Americans oppose nationalization of the country’s banks. (Source: Rasmussen Report.)  Late Fix In Stimulus Bill Imposes Tighter Limits on Bank Pay (Feb 2009) The economic stimulus bill passed by the Senate on Friday includes curbs on executive pay that go well beyond what Wall Street had been expecting. Sen. Christopher Dodd (D-Conn.), the chairman of the Senate Banking Committee, slipped the provisions into the bill late in the process. The entire stimulus package now heads to President Obama for his signature. From the Washington Post: The bill limits bonuses for executives at all financial institutions receiving government funds to no more than a third of their annual compensation. The bonuses must be paid in company stock that can be redeemed only when the government investment has been repaid. Unlike compensation rules the White House had previously issued for executives of companies getting additional government capital, Dodd made his measure retroactive, the Post said: The limits in the stimulus bill would apply to top executives and the highest-paid employees at all 359 banks that have already received government aid. "This is a big deal. This is a problem," said Scott Talbott, chief lobbyist for the nation's largest financial services firms. "It undermines the current incentive structure." (Source: LA Times.) (SITE NOTE: The retroactive part may be inaccurate. "(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary. (p. 569)) The Stock bonus restriction is as follows: "(D)(i) A prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, except that any prohibition developed under this paragraph shall not apply to the payment of long-term restricted stock by such TARP recipient, provided that such longterm restricted stock-   Largest Banks That Received Aid Cut Lending (Feb 2009) The 20 largest banks that received government rescue funds slightly reduced their lending to consumers and businesses in the last three months of 2008, the government said on 17 Feb. The Treasury Department said the banks reduced their mortgage and business loans by a median of 1 percent each, while credit card lending rose by a median of 2 percent. The median is the point halfway between the banks that lent the most and those that lent the least. The department's report is the latest sign that the bailout has done little to increase bank lending. A quarterly survey by the Federal Reserve earlier this month found that nearly 60 percent of banks said they had tightened lending standards on credit card and other consumer lo ans in the previous three months. Many lawmakers have blasted the banks for not lending more in the wake of the $700 billion financial rescue program approved by Congress last October. The Treasury Department said lending likely would have fallen further without the roughly $200 billion that has been provided to banks so far, given the sharp downturn in the economy. "Loan activity was resilient in the face of the worst economic downturn in decades," the department said. The report also said that banks reduced new commercial real estate loans by 19 percent, while increasing loan renewals by 55 percent. The data is from the first in what the department says will be a series of monthly reports on the banks' lending. The report did not provide total lending amounts in each category. The Treasury Department also said the report is intended to increase the transparency of the widely unpopular bank bailout program, which has provided billions of dollars with few strings attached to large financial institutions like Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. In December, The Associated Press asked 21 banks that received more than $1 billion from the program to describe what has been done with the money. None would provide any specifics. The report said that Bank of America, for example, originated about $44.6 billion in new mortgages and $49 billion of new business loans in last year's fourth quarter, but didn't provide any figures for the same quarter a year earlier. Treasury Secretary Timothy Geithner said in mid-Feb that the Obama administration will continue to provide capital to banks from the remaining $350 billion of the financial rescue program, but the new money will be awarded under tighter restrictions to make sure the recipients use the resources to boost lending to consumers and businesses. The department said less demand for loans and tighter underwriting standards by the banks restrained lending activity in the fourth quarter. Lending dropped from October to November, the department said, and then picked up from November to December. That uptick was partly a result of an increase in mortgage applications, the report said, as mortgage rates fell sharply in response to a Federal Reserve program to make home loans cheaper. The Federal Deposit Insurance Corporation's decision last fall to guarantee new debt issued by financial institutions also likely boosted lending totals, the department said. (Source: Huffington Post.)  March 2009Dow jumps 500 pts as Obama admin. moves on bad bank assets (Mar 2009) The Obama administration aimed squarely at the crisis clogging the nation's credit system Monday with a plan to take over up to $1 trillion in sour mortgage securities with the help of private investors. For once, Wall Street cheered. The announcement, closely stage-managed throughout the day, filled in crucial blanks in the administration's financial rescue package and formed what President Barack Obama called "one more critical element in our recovery."The coordinated effort by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. relies on a mix of government and private money - mostly from institutional investors such as hedge funds - to help banks rid their balance sheets of real-estate related securities that are now extremely difficult to value. The goal, said Obama, is to get banks lending again, so "families can get basic consumer loans, auto loans, student loans, (and so) that small businesses are able to finance themselves, and we can start getting this economy moving again." It was a huge gambit and one that came like a tonic to Wall Street, which had panned an earlier outline of the program that lacked detail. Stocks soared, the Dow Jones industrial average shooting up nearly 500 points, thanks to the bank-assets plan and a report showing an unexpected jump in home sales. The introduction of the plan was closely choreographed so that the president - rather than Geithner - would be the first administration official to appear on camera at midday to discuss it. Geithner met earlier in the day, before markets opened, with a group of reporters at the Treasury Department to go over specifics. But cameras and broadcast-quality audio recorders were barred. It was the reverse of what happened Feb. 10. Then, after Obama had helped raise expectations toward Geithner and the plan, the treasury secretary went before cameras and bombed. The Dow plunged about 300 points amid investor confusion about details. The fleshed-out plan is designed to help fix a value on damaged mortgage loans and other toxic securities. If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses. "This will help banks clean up their balance sheets and make it easier for them to raise capital," Geithner said. The plan will take $75 billion to $100 billion from the government's existing $700 billion Troubled Asset Relief Program. The government will pair this with private investments and loans from the FDIC and the Fed to generate $500 billion in purchasing power. Geithner said purchases eventually could grow to $1 trillion - roughly half of the estimated $2 trillion of toxic assets on bank books now. On the hot seat, Geithner has a lot personally tied to the success of the new program. His performance in the Cabinet, including his slowness in learning about multimillion dollar executive bonuses paid by insurance giant AIG after taking bailout money, has been severely criticized by some in Congress. Geithner testifies on Tuesday before the House Financial Services Committee. Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan. The plan was introduced ahead of a summit next week in London of 20 major and developing economies struggling with the global recession. Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, other countries, particularly ones in Europe, are resisting U.S. calls for more stimulus and would prefer to see more internationally coordinated bank regulation. The administration was expected to outline its plan for financial regulation overhaul later this week. Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans. Bair said the program should help banks clean up their balance sheets and raise fresh capital, though she added that "there may be some banks beyond help." The agency has said before it expects more bank failures, she said. A joint statement by the Federal Reserve and Treasury Department said the Fed should play a "central role" in preventing future financial crises. That implied a wish that Congress expand the Fed's authority in regulating all financial institutions, not just banks. Geithner said taxpayers still could lose money on the deal to soak up bad assets but there was no fixing the system without risk. Other options, such as having the government purchase the securities outright or letting them languish on bank balance sheets, would pose even greater vulnerabilities, he said, and it was important to find the right blend of risk versus reward. "I am very confident this scheme dominates all the alternatives for trying to find that balance," he said. The sentiment was echoed by congressional Democrats, who said risk seemed inevitable with any plan big enough to work. But House Republican Whip Eric Cantor of Virginia called Obama's plan a "shell game" that hid the true cost. He said he hoped the administration would consider instead an earlier Republican proposal to set up a government-sponsored insurance program for mortgage-related securities. The administration plan "seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," Cantor said in a statement. (SITE NOTE: Even the Obama administration that the plan may go higher and may have to ask for more money after the AIG fiasco. Obama and White House spokesman Gibbs all stress that there is a risk to this plan.) The new program marks a return by the government to a strategy of acquiring toxic securities. Henry Paulson, who was treasury secretary in the final days of the Bush administration, abandoned plans to purchase these securities, largely because they were impossible to price. The plan builds on earlier programs to pump money into banks, help some homeowners repay their mortgages and stimulate college, small business and other forms of lending. "There's still great fragility in the financial systems, but we think that we are moving in the right direction," Obama said after meeting Geithner and Fed Chairman Ben Bernanke. Obama said the plan will allow taxpayers to "share in the upside as well as the downside." Treasury officials had no firm forecast on when the government would begin making the asset purchases although market expectations were that the process could begin within weeks. (Source: AP.) Dow soars nearly 500 points on banking plan (Mar 2009) Wall Street got the news it wanted on the economy’s biggest problems — banks and housing — and celebrated by hurtling the Dow Jones industrials up nearly 500 points. Investors added rocket fuel Monday to a two-week-old advance, cheering the government’s plan to help banks remove bad assets from their books and also welcoming a report showing a surprising increase in home sales. Major stock indicators surged about 7 percent, including the Dow, which had its biggest percentage gain since October. Analysts who have seen the market’s recent false starts are still hesitant to say Wall Street is indeed recovering from the collapse that began last fall. But the day’s banking and housing news bolstered the growing belief that the economy is starting to heal, and that is what had investors buying. “It’s just hard to argue that there isn’t an improvement in economic activity on the horizon,” said Jim Dunigan, executive vice president at PNC Wealth Management. The market began turning around two weeks ago on news that Citigroup Inc. was operating at a profit in January and February. A spate of more upbeat economic reports helped the market build on its gains, although the rally stalled last Thursday and Friday. Analysts said they saw more fundamental strength in Monday’s buying than they saw at the start of the rally. Dave Rovelli, managing director of trading at brokerage Canaccord Adams, said there appeared to be less short covering, which occurs when traders are forced to buy to cover misplaced bets that stocks would fall. Short covering contributed to the market’s surge after the Citigroup news. “There is definitely new buying,” he said. Rovelli also said the approaching end of the quarter can make money managers eager to buy into a market to make the statements they send to clients look stronger. Stocks shot higher at the opening and kept going. The Treasury Department said its bad asset cleanup program would tap money from the government’s $700 billion financial rescue fund and involve help from the Federal Reserve, the Federal Deposit Insurance Corp. and the participation of private investors. The market had been waiting for weeks to hear details of the government’s plan for helping banks get rid of bad assets. Treasury Secretary Timothy Geithner announced an outline of the program last month but provided few details then about how it would work, leading to a stock plunge that sliced 380 points from the Dow. But while analysts were pleased with the market’s performance Monday, they were also still cautious; Wall Street more than gave back its big yearend rally and continued falling during January and February. Subodh Kumar, an independent investment strategist in Toronto, said the Fed’s announcement that it would buy government debt and the details on plans to help banks are giving traders hope for recovery. “The market is shedding some of its excess pessimism. That doesn’t mean the market goes straight up,” he said. The National Association of Realtors’ existing home sales report was overwhelmingly positive for investors although it showed a decline in home prices in February. Investors are embracing any sign that a glut in homes for sale may be easing. Monday’s data followed a dose of good housing news last week as housing starts for February came in much better than expected. (Source: MSNBC.) Obama Administration Sending Draft Legislation to Hill to Give Treasury More Power (Mar 2009) Treasury Secretary Tim Geithner hopes to today send draft legislation of a bill to Capitol Hill that will give him more power to take over large financial institutions in serious trouble. The government currently has this authority with banks, but not with other financial institutions such as bank and thrift holding companies, or with holding companies that control insurance companies, futures commission merchants, and broker-dealers. (SITE NOTE: God Help Us!!! This is the first dreaded step to Obama's Nationalization of the Banks.) The draft legislation will be sent to Sen. Chris Dodd, D-Conn., chair of the Senate Banking Committee and Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee. As written, the bill would give the Treasury Department what's called "resolution authority," granting the U.S. government the authority to put a big financial company into receivership or conservatorship. With that authority, the government can either reorganize or shut down the company -- renegotiating or reneging on contracts (such as retention bonuses for AIG executives), transferring the company's assets and liabilities, and dealing with any derivatives portfolio. One possible sticking point: President Obama and Secretary Geithner are seeking sole authority be given to the executive branch to put these companies into conservatorship or receivership. The legislation as written would give the decision making power to the Treasury Secretary and the chair of the Federal Deposit Insurance Corporation (FDIC), though the decision would be "informed" by the advice of the chair of the Federal Reserve Board and any other relevant regulatory agency. "Why do you think the public should sign on for another new, sweeping authority for the government to take over companies?" asked the Associated Press's Jennifer Loven last night at President Obama's second presidential press conference. "It'S precisely because of the lack of this authority that the AIG situation has gotten worse," President Obama said. "Understand that AIG is not a bank, it's an insurance company. If it were a bank and it had effectively collapsed, then the FDIC could step in, as it does with a whole host of banks, as it did with IndyMac, and in a structured way, renegotiate contracts, get rid of bad assets, strengthen capital requirements, resell it on the private marketplace. "Noting that the government currently doesn't "have that same capacity with an institution like AIG," the president asserted that's "part of the reason why it has proved so problematic." Mr. Obama said that when Americans ask questions about the handling of the AIG issue -- "if we're putting all this money in there, and if it's such a big systemic risk to allow AIG to liquidate, why is it that we can't restructure some of these contracts?" he characterized. "Why can't we do some of the things that need to be done in a more orderly way?" -- they need to know that in his view the answer is "because we have not obtained this authority." +Loven followed up: "Why should the public trust the government to handle that authority well?" "If you look at how the FDIC has handled a situation like IndyBank (sic), for example, it actually does these kinds of resolutions effectively when it's got the tools to do it," President Obama said. "We don't have the tools right now." Treasury Department says that as of right now when a massive non-bank financial company is in crisis, there are only two options: to file for bankruptcy (as happened, to ill effect, with Lehman Brothers), or to secure capital from other companies or from the taxpayer (as happened, to ill effect, with AIG.) "Had the government possessed the authorities contained in the proposed legislation, it could have resolved AIG in an orderly manner that shared losses among equity and debt holders in a way that maintained confidence in the institution’s ability to fulfill its obligations to insurance policyholders and other systemically important customers," the Treasury Department said in a press release today. (Source: ABC News.) UPDATE: 26 Mar 2009 In testimony before the House Financial Services committee that just adjourned, Treasury Secretary Tim Geithner just had to defend his institutional takeover plan against charges of radicalism. "Do you realize how radical your proposal is?" Rep. Donald Manzullo (R-Ill.) asked. "It's not radical. . ." Geither began, before Manzullo interrupted him. "You're talking about seizing private businesses and you don't consider that radical?" Manzullo replied, his voice rising. Manzullo is trying to get Geithner to give details of the plan -- that's where Geithner got stung before -- but Geithner doesn't have them yet. If the plan were not radical, Manzullo said to Geithner, "you would have answers to some of my questions, such as, what size business would be subject to this?" (Source: Washington Post: The Ticker.) April 2009US to put conditions on Tarp repayment (Apr 2009) Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times. “Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.” (Source: Financial Times.)More than 250 banks don't want bailout money, report says (Apr 2009) Government board worried that withdrawals could hurt efforts to calm markets More than 250 banks and other financial institutions have withdrawn their applications for capital injections from the Treasury Department, raising concerns among regulators, according to a report released Friday (24 Apr) by the Treasury. According to the report from the Financial Stability Oversight Board, as of March 27, more than 250 institutions receiving preliminary approval to receive funds from the Treasury's Troubled Asset Relief Program, or TARP, decided against taking the money. The report said the withdrawals could have a negative impact on the Treasury's financial stability efforts. "To the extent that such withdrawals reflect a wariness of qualifying financial institutions to seek or receive capital under the TARP, the actions run counter to the purposes of the CPP, which are to make capital available to broad segments of the banking industry in order to promote stability, public confidence in the financial system and support lending to households and businesses," the report stated. The FSOB is made up of top officials from the Federal Reserve and the Treasury Department, Securities and Exchange Commission, Department of Housing and Urban Development and the Federal Housing Finance Agency. (Source: Market Watch.) Troubles With The TARP -- Special Inspector General's report highlights potential for bailout fraud (Apr 2009) Barofsky's worrisome findings: Several key components of the $700 billion TARP pose "significant" risks for fraud. The Treasury Department "adamantly continues to refuse" to require banks to report on how they have used bailout funds. And despite the administration's attention to executive compensation restrictions for firms that receive bailout cash, it hasn't issued long-awaited rules on pay. Treasury officials have seen draft copies of the report but did not respond to requests for comment. Barofsky told Forbes he hopes the Treasury will focus its attention on "central conflicts of interest and price collusion" in the government's plans to remove toxic assets from banks' balance sheets and to stoke consumer lending. Barofsky's office is concerned that fund managers in charge of assets bought from banks have an incentive to drive up the price, then sell those securities for a handsome profit--or that buyers of troubled assets might enter into a secret agreement with sellers to drive up the price and split the profits. The special inspector general is wary that money launderers might try to invest their funds in bailout programs for a profit. The government already has nearly 20 criminal investigations related to the TARP underway. Details aren't being divulged at this point beyond saying they have to deal with securities fraud, insider trading, mortgage fraud and the like. To further combat fraud, Barofsky recommends that the Treasury not allow certain investment funds related to the toxic asset program to buy residential mortgage-backed securities that have been on banks' books. His office wants to see the government implement stern conflict-of-interest rules for its toxic asset plan, and it wants full transparency in all transactions related to these securities. Barofsky is hopeful the Treasury will implement his recommendations, but if the past is any indication, it's not likely. The special inspector general has long argued--unsuccessfully--that the 360-plus recipients of TARP money should be required to document exactly what they're doing with the money. Nonetheless, his office is currently conducting its own analysis of what the TARP money is paying for. A report on that could come as early as June. "The American people have a right to know how their tax dollars are being used," says Barofsky's quarterly report. Meanwhile, the Treasury Department--understaffed since the start of the Obama administration--struggles with management and oversight. The Treasury Department has not hired an asset manager for the TARP's investment portfolio, it hasn't priced its investments, and it hasn't determined whether it will convert its preferred shares in companies to common stock. The department hasn't even issued new rules on executive pay for bailout recipients, even though the stimulus bill signed by President Obama earlier this year calls for specific pay limits and the administration announced its own pay guidelines that month. "Treasury should address the confusion and uncertainty on executive compensation by immediately issuing the required regulations," Barofsky's report says. There appears to be a fair amount of urgency for these rules. Monday, the Washington Post reported that Chrysler Financial had declined a $750 million government loan because of executive pay restrictions. The Congressional Oversight Committee--a third-party group that includes only one current lawmaker--won't deal exclusively with Barofsky's report Tuesday, but the topic is sure to come up. Barofsky himself testifies before a separate panel (consisting entirely of lawmakers) Thursday. Meanwhile, key members of Congress have been given a peek at the report. Could be a rough few weeks for Geithner. (Source: Forbes.) May 2009Timothy Geithner's Bailout Dollar Recycling May Be Illegal (May 2009) In his testimony before the Congressional Oversight Panel on April 21, Treasury Secretary Tim Geithner said that the government's bank bailout program has $134 billion left. Geithner said the figure was boosted by $25 billion that he expects to be paid back by bailed-out firms over the next year.Rep. Brad Sherman says that's a no-no. "If you look at the law, it's pretty clear any money returned from these banks goes into the general fund of the United States and not a revolving bank bailout fund," said the California Democrat in an interview with the Huffington Post. Sherman points to language in the Emergency Economic Stability Act -- the bailout bill that created the Troubled Asset Relief Program -- that specifically states that revenues and proceeds from sales of troubled assets "shall be paid into the general fund of the Treasury for reduction of the public debt." In other words, the taxpayer is supposed to get his money back. Sherman, who voted against the bailout, said he brought up the recycling issue with the Treasury Department a few weeks ago. "They said they'll get back to me," he said. The Department has not yet responded to requests for comment from the Huffington Post, either. It's not clear that Sherman's got an airtight case. Geithner specifically said that the $25 billion would be coming from firms participating in the Capital Purchase Program, which injects capital directly into financial firms by investing in preferred equity securities. It doesn't buy and sell troubled assets. On Tuesday (5 May), the Senate defeated a measure by John Thune (R-S.D.) that would have definitively banned Geithner's recycling. A Thune staffer says the current law doesn't. "Thune's amendment deals with return of principal, not revenue or proceeds," Thune spokesman Kyle Downey told the Huffington Post. "[The current law] is concerned with sale of troubled assets but it's silent on direct capital." Sherman doesn't think it makes a difference from which part of the bailout the money's coming back. The CPP, after all, is part of the Troubled Asset Relief Program. He added that it was his understanding during negotiations with Geithner's predecessor, Henry Paulson, that recycling wouldn't happen. "Paulson, in response to my questions, publicly stated he wasn't intending to recycle," Sherman said. "My guess is that Geithner will get away with it," emailed Dean Baker, an economist with the Center for Economic and Policy Research, in response to a query from the Huffington Post. "That may not have been the intention of Congress, but no one is going to stop it." Here's what the law says: "Revenues of, and proceeds from the sale of troubled assets purchased under this Act, or from the sale, exercise, or surrender of warrants or senior debt instruments acquired under section 113 shall be paid into the general fund of the Treasury for reduction of the public debt." (Source: Huffington Post.) (SITE NOTE: So Geithner is going to openly STEAL the taxpayer money pointedly written in the TARP law to repay the public debt -- and NOBODY (meaning the Democrats) are going to do a thing about it. The Obama administration at its best.) Stress tests find 10 big banks need $75B more (May 2009) The government's long-awaited "stress-test" results have found that 10 of the nation's 19 largest banks need a total of about $75 billion in new capital to withstand losses if the recession worsened. The Federal Reserve's findings, released Thursday, show the financial system, like the overall economy, is healing but not yet healed. Some of the largest banks are stable, the tests found. But others need billions more in capital - a signal by regulators that the industry is vulnerable but viable. Government officials have said a stronger banking system is needed for an economic rebound. Officials hope the tests will restore investors' confidence that not all banks are weak, and that even those that are can be strengthened. They have said none of the banks will be allowed to fail. Five of the nation's largest regional banks are vulnerable to a worsening recession and need to raise a total $8.2 billion in new capital based on results of government "stress tests." The tests found that Birmingham, Ala.-based Regions Financial Corp. needs to raise $2.5 billion; Atlanta-based SunTrust Banks Inc. needs $2.2 billion; Cleveland's KeyCorp. needs $1.8 billion; Fifth Third Bancorp in Cincinnati needs $1.1 billion; and Pittsburgh-based PNC Financial Services Group Inc. needs $600 million. The other two - BB&T Corp. in Winston-Salem, N.C., and Minneapolis-based U.S. Bancorp - came through the tests without being required to raise new money. The tests were designed to gauge whether any of the nation's 19 largest banks would need more capital to survive a deeper recession. (Source: AP.)The banks that need more capital will have until June 8 to develop a plan and have it approved by their regulators. Among the 10 firms that need to raise more capital, the tests said Bank of America Corp. needs by far the most: $33.9 billion. Wells Fargo & Co. requires $13.7 billion, GMAC LLC $11.5 billion and Citigroup Inc. $5.5 billion. Bank of America's CEO Ken Lewis says he is "comfortable" with his bank's current capital position, despite the government saying it needs $33.9 billion more. "We are comfortable with our current capital position in the present economic environment," Lewis said. The Charlotte, N.C.-based bank is one of the nation's large banks that needs to demonstrate it can raise capital if the economy does much worse than expected. Bank of America said it is working on a plan to submit to the government for such a contingency, which is due by June 8. "While it would have a number of components, we will not need any new government money," Lewis said. (Source: AP.)Some of the firms that need more capital already are announcing their strategies. Morgan Stanley, which the government says needs $1.8 billion in new capital, said it plans to raise $5 billion. That will include $2 billion in common stock. The tests found that if the recession were to worsen, losses at the 19 stress-tested firms during 2009 and 2010 could total $600 billion. "Looking at the big picture, you can say that things aren't so bad for the financial industry as a whole," said Kevin Logan, chief U.S. economist at Dresdner Kleinwort. But Logan said attracting fresh capital will be a challenge for banks that need it. "The banking industry is not going to make a lot of money going forward, and that's a dilemma for keeping banks solvent and getting them lending," he said. Financial stocks surged in after-hours trading, after the report was released at 5 p.m. (Source: AP.) (SITE NOTE: Coupled with this report, we still question the criteria for the "stress test." Experts still are asking for what standards the Treasury Department used, but nothing has been forthcoming except Geithner's garbled message. The second thing is we still question why the Congress is NOT listening to the public that said in polls starting in Feb 2009 with 56 percent saying "NO MORE LOANS TO BANKS!!!" The third thing we are questioning is the government's insistence that banks take the money even though they don't want it. What we see is the same strategy as the Obama administration used to take over Chrysler/GM and then like a camel with its nose in the tent -- slowly took over. This is all part of the Obama scheme to nationalize the banks.) Stress Tests Split Financial Landscape (May 2009) At one bank in Alabama, the problem is a construction bust. At two in Ohio, the trouble is real estate. And in San Francisco, at Wells Fargo, the worry is credit cards — a staggering 26 percent of that bank's card loans, federal regulators have concluded, might go bad if the economy takes a turn for the worse. The stress tests released by the Obama administration Thursday painted a broad montage of the troubles in the nation’s banking industry and, for the first time, drew a stark dividing line through the new landscape of American finance. On one side are institutions like JPMorgan Chase and Goldman Sachs, which regulators deemed stronger than their peers — perhaps strong enough to repay billions of bailout dollars and wriggle free of government control. (SITE NOTE: The problem with the stress tests is that no one is sure what the government criteria was. As to the "strong" banks, one needs to explain why they needed the bailout in the first place if they are in a position to repay the billions in bailout dollars. Secondly, there is concern that the "strong" banks will simply write off the debt -- and the taxpayers get left holding the bag.) On the other side are weaker institutions like Bank of America, which now confront the daunting challenge of raising capital on their own or accepting increased government ownership, along with whatever strings might be attached. Time is short: the banks have only until June 8 to draw up their plans for regulators. As the results of the tests streamed in from the Federal Reserve, banks began racing to raise money. (SITE NOTE: Bank of America's CEO says its in fine shape so who is right? The government or the bank?) Broadly speaking, the test results suggested that the banking industry was in better shape than many had feared. Of the nation’s 19 largest banks, which sit atop two-thirds of all deposits, regulators gave nine a clean bill of health. The remaining 10 were ordered to raise a combined $75 billion in equity capital as a buffer against potential losses should the economy deteriorate. That amount is far less than many had forecast. But the potential losses that federal regulators projected, even at the soundest banks, are eye-popping. Under regulators’ worst-case assumptions, the 19 banks might suffer $600 billion in losses through 2010, on top of the hundreds of billions that have already vaporized in this financial crisis. About 9 percent of all loans might sour — a figure that is even higher than it was during the Great Depression. One in five credit card loans could go unpaid, more than double the typical loss rate. Approximately one in 10 mortgages could sour. (SITE NOTE: The Obama administration is using the "worst case" assumptions as a scare tactic. The recession seems to have bottomed out and though it will last a long time into the future, are we really talking about a collapse of America?) The tests also left some crucial questions unanswered, including the big one: What happens if this recession turns out to be even worse than that worst-case situation, and the banks’ losses start growing? The results suggest the big bailouts for the banks are over. But many wonder if banks will be in a position to make the loans needed to revive growth, even under rosier economic assumptions. (SITE NOTE: But by the same token, what about the "best case" that no seems to mention.) “Everybody should breathe a sigh of relief,” said Peter J. Solomon, who runs a boutique investment bank and early in his career worked at Lehman Brothers. “Now the question is, So what? Will they lend?” The results shined an uncomfortable spotlight on the most troubled financial institutions: GMAC, the finance arm of General Motors; Bank of America; Wells Fargo; and Citigroup. Several large regional banks — like Regions Financial in Alabama and SunTrust Banks in Georgia, and Keycorp and Fifth Third in Ohio — were also deemed to need large sums of capital. But many banking executives, free to discuss the results publicly for the first time, sought to put a positive spin on the tests. In a rush of conference calls with analysts, they generally characterized the results as a sign that their institutions could weather another downturn in the economy. Many said federal regulators were overly pessimistic in their assessments and insisted that they would move quickly to repay bailout money. “Our game plan is to get the government out of our bank as quickly as possible,” said Kenneth D. Lewis, the chief executive of Bank of America. But even Mr. Lewis acknowledged that his bank faced some serious challenges. Regulators determined that Bank of America needed to raise about $34 billion in equity capital. The bank hopes to raise half of that by selling common stock and converting preferred shares to common stock. It hopes to raise the rest by selling assets like First Republic Bank and Columbia Management, its Boston-based investment unit, and using its future earnings. If that fails, the bank will have to convert some of the $45 billion of preferred stock that the government owns into common shares, increasing the government’s stake. Even before federal regulators announced the results of its stress tests, Wells Fargo announced that it would offer $6 billion in common stock. The government is requiring the bank to raise an additional $13.7 billion. Wells executives — who balked at accepting bailout money last autumn — said they expected to raise the remainder largely through revenue growth that they say they believe will far exceed the expectations of government regulators. But Wells Fargo officials also disputed the government’s conclusions, arguing that the government’s revenue forecasts were “excessively conservative.” “In our analysis, we thought we didn’t need any capital,” said John Stumpf, the bank’s president and chief executive. Citigroup, which for many has come to symbolize the problems plaguing the financial industry, has already been moving quickly to address its problems. Regulators determined that the bank must raise $5.5 billion, on top of recent efforts to raise capital by selling businesses and converting just over half of the $45 billion in bailout funds to common stock. Vikram S. Pandit, the bank’s chief executive, said he would expand the company’s offer to exchange preferred shares of stock for common stock to a broader assortment of private investors. The moves will severely dilute the bank’s shareholders and will leave the government with a 34 percent ownership stake, slightly less than investors expected. “We have had to make some very tough decisions,” Mr. Pandit said. “We are kind of happy we did them along the way.” But a handful of stronger banks are pulling away from their weaker peers and emerging as institutions that could dominate the industry. (SITE NOTE: Government control epitomized. Take the money and the government gets control.) Goldman Sachs, for instance, has said that it hopes to return the $10 billion it received from the government as soon as possible. On Thursday, regulators said Goldman did not need more capital. (SITE NOTE: Goldman Sachs figured out the ploy -- and wants to break the chain of government control. But the taxpayers need to ask -- how much did it get screwed for in the process?) JPMorgan Chase, which was also deemed to have enough capital, is pushing to return bailout money as well. Yet it, too, took issue with the results, arguing it was in an even stronger position than the results suggested. “We think we can handle an even more significantly negative environment and still make a profit,” Michael J. Cavanagh, chief financial officer, said. For Washington and Wall Street, the main question is whether investors and depositors will take solace from these results. Banks and administration officials are eager to persuade private investors that the banks are stable enough to invest in. “The golden ring here, if you can catch it, is confidence,” said Tanya Azarchs, the bank rating analyst at Standard & Poor’s. (SITE NOTE: Notice that the Obama administration is painting gloom, but people in the financial circles said "confidence" needs to be the catchword. Even Bill Clinton said that Obama was being too gloomy -- but that was part of the plan to get control of the banks. We have not heard the last of Obama's nationalization of the banks scheme yet.) (Source: NY Times.) Jeffrey Sachs: The Geithner-Summers Plan is Even Worse Than We Thought (May 2009) Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks. The same basic arithmetic was later described by Joseph Stiglitz in the New York Times (April 1) and by Peyton Young in the Financial Times (April 1). In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers. Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders. Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total. Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large. The earlier criticisms of the Geithner-Summers plan showed that even outside bidders generally have the incentive to bid far too much for the toxic assets, since they too get a free ride from the government loans. But once we acknowledge the insider-bidding route, the potential to game the plan at the cost of the taxpayers becomes extraordinary. And the gaming of the system doesn't have to be as crude as Citibank setting up its own CPPIF. There are lots of ways that it can do this indirectly, for example, buying assets of other banks which in turn buy Citi's assets. Or other stakeholders in Citi, such as groups of bondholders and shareholders, could do the same. Several news stories suggest some grounding for these fears. Both Business Week and the Financial Times report that the banks themselves might be invited to bid for the toxic assets, which would seem to set up just the scam outline above. What is incredible is that lack of the most minimal transparency so far about the rules, risks, and procedures of this trillion-dollar plan. Also incredible is the apparent lack of any oversight by Congress, reinforcing the sense that the fix is in or that at best we are all sitting ducks. The sad part of all this is that there are now several much better ideas circulating among experts, but none of these seems to get the time of day from the Treasury. The best ideas are forms of corporate reorganization, in which a bank weighed down with toxic assets is divided into two banks -- a "good bank" and a "bad bank" -- with the bad bank left holding the toxic assets and the long-term debts, while owning the equity of the good bank. If the bad assets pay off better than is now feared, the bondholders get repaid and the current bank shares keep their value. If the bad assets in fact default heavily as is now expected, the bondholders and shareholders lose their investments. The key point of the good bank -- bad bank plans is an orderly process to restore healthy banking functions (in the good bank) while divvying up the losses in a fair way among the banks' existing claimants. The taxpayer is not needed for that, except to cover the insured part of the banks' existing liabilities, specifically the banks' deposits and perhaps other short-term liabilities that are key to financial market liquidity. Cynics believe that the Geithner-Summers Plan is exactly what it seems: a naked grab of taxpayer money for Wall Street interests. Geithner and Summers argue that it's the least bad approach to a messy situation, in which we need to restore banking functions but don't have any perfect ways to do that. If they are serious about their justification, let them come forward to confront their critics and to explain to the American people why the other proposals are not being pursued. Let them explain the hidden and not-so-hidden risks to the American taxpayer of the plan that they have put forward. Let them explain why they are so intent on saving the banks' bondholders, even the long-term unsecured creditors who clearly knew they were taking market risks in buying Citibank bonds. Let them work with their critics to fashion a less risky and less costly plan. So far Geithner and Summers tell us that their plan is the only option, but without a word of further explanation as to why. -- Jeffrey Sachs, Director of the Earth Institute, Economics Professor, Columbia University (Source: Huffington Post.) WTF? Banks Don't Need to Raise Equity Funds if they can "Earn" it (May 2009) US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said. The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters. The banks have 28 days to announce their capital-raising plans and until November 9 to implement them. Wells Fargo and other banks that will have to raise capital told the Financial Times that if operating profits were greater than the government’s stress-case forecast for the second and third quarter, they would receive credit for the difference. That, in turn, would reduce the need to raise fresh equity from other sources. (Source: Financial Times.) (SITE NOTE: Let's see if this makes sense. If the government "stress test" is a crock of sh_t and the banks make a profit, then the banks don't need to pay attention to the crock of sh_t stress test equity requirement. In other words, if the annointed Obama administration is wrong, they will "forgive" the bank because Obama is never wrong.) ECON 101: Stress Tests: Drama, Delays and Rose Colored Glasses (May 2009) Delays, leaks and high drama. The Stress Tests had Wall Street waiting with bated breath. But did the tests really deserve all the hoopla? Did the fact that the banks 'passed' mean that we can all breath a sigh of relief? In spite of the fact that the Bulls have taken the test results as an 'all clear' for another run up on the markets, I tend to be more skeptical. Why? Because a test isn't a test if you can negotiate your own results. To be honest, the fact that all the banks would pass was a foregone conclusion. The government couldn't risk a subsequent run on banks and loss of consumer confidence if they failed. So naturally, the criteria had to be massaged accordingly. Take a look at the scenarios: we have already reached the criteria outlined in the 'bad' outlook, as well as many of the criteria for the 'worst case' outlook. If that's so, then obviously the banks are already under capitalized, but how can these tests give us any information about future performance? The fact is that they can't. But even more alarming, from my point of view, is that the results really aren't the results anyway. When the results of the tests were first compiled, the banks didn't like them. Instead of going public with their findings, the government then 'negotiated' the outcome with the banks (hence the delay in the release date). These negotiations allowed the banks to reduce the amount of capital requirements that the government was about to say that they needed. Pretty neat trick. I don't know about you, but in my 'school' a test isn't a test if the test taker can change their final score when they're unhappy about the outcome. But even if the government had stood by their original findings, how reliable could they be? After all, they haven't had a great track record so far in predicting future outcomes based on 'stress scenarios'. As William Black (an Associate Professor of Economics and Law at the University of Missouri and former bank regulator) says, Fannie Mae, Freddie Mac, AIG and IndyMac were deemed to have "passed" much more stringent government stress tests before their respective failures. Let's review the history:
"The examinations and stress tests are shams," says Black. Even the government's own results seem to be contradictory. We have to ask ourselves, if the government sees up to $599 billion in additional bank losses, then why are they requiring banks "only" raise $75 billion? That would suggest that the government thinks the banking sector is currently overcapitalized by $525 billion. That makes no sense. According to Black, "It's in the interest of the financial community to send this propaganda out. [What's] remarkable [is] not that they do it but that it still works." We've been lied to over and over again, but like an ingenue, we remain convinced that 'this time it will be different.' Perhaps it is just our attempt to make optimism triumph over reality. But we had all better hold tightly to those rose colored glasses. Black predicts another wave of foreclosures and future bank losses that could total more than $2.5 trillion as opposed to the government's $599 billion estimate. The question is, how will investors handle the huge losses to their college and retirement savings that could result from investing in banks that the government told them were safe? "Once people learn they're being lied to, they react very badly," Black says. "And of course this is not the first lie." (Source: Econ 101.) (SITE NOTE: God...I can't take it anymore. How stupid are the Obama supporters? Oh, yeah. To paraphrase Econ 101 blog's statements, "They've been lied to over and over again, but like an ingenue, they remain convinced that 'this time it will be different.' Perhaps it is just their attempt to make optimism triumph over reality." Right, Hope and Change in action.) Government Taking over Business: Stocks drop as FDIC chief hints government may start firing CEOs (May 2009) U.S. stocks retreated as concern the government will replace the chief executive officers of some banks snuffed out an early rally spurred by reports signaling the contraction in manufacturing is abating. Zions Bancorporation and Fifth Third Bancorp led declines in all 22 of 24 companies in the KBW Bank Index after Federal Deposit Insurance Corp. Chairman Sheila Bair said some CEOs will be replaced in the next few months. ... “In one camp you have the belief that the government should fire management,” Dan Greenhaus, an equity analyst at Miller Tabak & Co. in New York, wrote in an e-mail message. “The other camp views it as unnecessary government meddling and something that should be avoided and feared at all costs. After all, who wants the government running private enterprise?” The U.S. is scrutinizing lenders subjected to tests to evaluate their financial strength, and “management needs to be evaluated,” Bair said today in an interview for Bloomberg Television’s “Political Capital with Al Hunt,” to be broadcast this weekend. “Have they been doing a good job? Are there people who can do a better job?” Earnings at 444 companies in the S&P 500 that have reported results since April 7 shrank 37 percent, Bloomberg data show. During the period, about two-thirds of those profits beat analysts’ estimates. (Source: APP.com.) (SITE NOTE: These moves are also applied to Americorp which the government has said members of its board of directors should be replaced by more "experienced" people. This gives us a very uneasy feeling where this government is going.) Mark Patterson: "It's A Sham. The Banks Are Insolvent" (May 2009) The chairman of $7 billion distressed Private Equity firm and TARP beneficiary MatlinPatterson calls a spade a spade and in the process exposes the entire Geithner plan for the complete sham that it is. His comments before the Qatar Global Investment Forum were captured by the Daily Telegraph's Evans-Pritchard earlier, and Zero Hedge republishes the piece in its entirety as it presents every nuance of our predicament with masterful simplicity.
Economic contraction better than expected (May 2009) Latest revision to first-quarter GDP less deep than first estimated -- or is Obama playing with the numbers again??? The economy sank at a 5.7 percent pace in the first quarter as the brute force of the recession carried over into this year. However, many analysts believe activity isn't shrinking nearly as much now as the downturn flashes signs of letting up. The Commerce Department's updated reading on gross domestic product, released Friday, showed the economy's contraction from January to March was slightly less deep than the 6.1 percent annualized decline first estimated last month. But the new reading was a tad worse than the 5.5 percent annualized drop economists were forecasting. (SITE NOTE: Despite all the horrible speeches of Obama, there were MANY economists who were predicting the turnaround in the first quarter of 2009 -- meaning the recession would bottom out and start to turnaround. At the same time, Obama was preaching doom and gloom to get his Stimulus Package passed. Now Obama wants everyone to forget what he said to get his package passed. The estimates are made three times -- with the final in June. Many economists are even saying that the recession has bottomed out and there are signs of rises. This estimate does NOT -- and the question is whether Obama's Treasury and the Fed are purposely skewing the numbers.) It was a grim first-quarter performance despite the small upgrade. It marked the second straight quarter where the economy took a huge tumble. At the end of last year, the economy shrank at a staggering 6.3 percent pace, the most in a quarter-century. Economists are hopeful that the economy isn't shrinking nearly as much in the April-to-June quarter as the recession eases its grip. Forecasters at the National Association for Business Economics, or NABE, predict the economy will contract at a 1.8 percent pace. Other analysts think the economic decline could be steeper — around a 3 percent pace. Some think it could be less — about a 1 percent pace. "Things are getting less awful," said Bill Cheney, chief economist at John Hancock Financial Services. Less dramatic cuts by businesses factor into the expected improvement. Consumers, however, are likely to be cautious. There's been encouraging signs recently with gains in orders for big-ticket manufactured goods, some firming in home sales and a slowing in the pace of layoffs. "The speed of the drop will slow," predicted Ian Shepherdson, chief U.S. economist at High Frequency Economics. On Wall Street, though, investors fretted over just how much energy any recovery will have. The Dow Jones industrials lost 19 points in morning trading. The economy's dismal performance over the last two quarters underscored the toll the recession, which started in December 2007 and is now the longest since World War II, has had on the country. Businesses have ratcheted back spending and slashed 5.7 million jobs to survive the fallout. Financial firms have taken huge losses on soured mortgage investments. Banks and other companies have been forced out of business. Home foreclosures have soared.  Weakness in the first quarter mostly reflected massive cuts in spending by businesses on home building, equipment and software and many other things. U.S. exports plunged, so did spending on commercial construction and inventories. But some of those drops — while huge — were a bit less than first estimated, contributing to the tiny upgrade in overall first-quarter GDP. All of those reductions — as well cutbacks in government spending — more than swamped a rebound in consumer spending. However, consumers weren't nearly as energetic as the government first estimated. They boosted spending at a 1.5 percent pace, according to the revised figures. That was less than the 2.2 percent growth rate estimated a month ago. The government makes three estimates of the economy's performance for any given quarter. Each estimate of gross domestic product is based on more complete information. The third one will be released in late June. GDP, which measures the value of all goods and services produced in the United States, is the best gauge of the nation's economic health. Federal Reserve Chairman Ben Bernanke and NABE forecasters say the recession will end later this year, barring any fresh shocks to the economy. NABE forecasters predict the economy could start growing again in the third or fourth quarter. President Barack Obama's stimulus package of increased government spending and tax cuts, along with aggressive action by the Fed to spur lending, should help revive the economy. Still, both the Fed and private economists caution that any recovery will be lethargic and that unemployment — now at 8.9 percent, the highest in 25 years — will continue to march upward in the months ahead. Many economists say the jobless rate will hit 10 percent by the end of this year. Some say it could rise as high as 10.7 percent in the second quarter of next year before making a slow descent. One of the forces that plunged the country into a recession was the financial crisis that struck with force last fall and was the worst since the 1930s. Economists say recoveries after financial crises tend to be slower. (Source: MSNBC.) June 2009Budget deficit hits record for May of $189.7B (Jun 2009) Budget deficit sets May record of $189.7 billion; total for year close to $1 trillion. The federal budget deficit soared to a record for May of $189.7 billion, pushing the tide of red ink close to $1 trillion with four months left in the budget year. The rising deficit reflects increased government spending due to the recession, and billions of dollars spent on bailouts for banks and other troubled companies.The Treasury Department reported Wednesday that the red ink so far this year totals $991.9 billion. The administration is projecting the deficit for the budget year that began Oct. 1, will total a record $1.84 trillion. That would be more than four times the amount of last year's record deficit. As a share of the overall economy, the deficit this year would be the highest since 1945, when the government was borrowing heavily to win World War II. Because of the recession, spending has increased for benefit programs such as unemployment compensation and food stamps. Outlays also have risen because of the $787 billion economic stimulus package that President Barack Obama pushed through Congress earlier this year. The new Treasury report showed government spending totals a record $2.37 trillion through the first eight months of the budget year, 18 percent more than the year-ago period. At the same time, the economic downturn has cut into tax revenues. The report showed that government receipts total $1.67 trillion through May, down 18 percent from last year. Rising unemployment and struggling businesses have meant a drop in both income and corporate taxes. Last month's imbalance compared with a $20.9 billion deficit in April, the first time that happened in 26 years. April is a month when the government normally runs surpluses reflecting tax payments.The $991.9 billion deficit so far this budget year is more than triple the amount of red ink incurred during the year-ago period. Under the administration's budget estimates, the $1.84 trillion deficit for this year will be followed by a $1.26 trillion deficit in 2010, and will never dip below $500 billion over the next decade. The administration estimates the deficits will total $7.1 trillion from 2010 to 2019. Economists are worried that such large borrowing needs could trigger steep increases in interest rates if domestic and foreign investors start demanding a higher return for holding Treasury debt. Treasury Secretary Timothy Geithner traveled to Beijing last week to reassure officials in China, the single-largest holder of U.S. Treasury debt, that the administration is serious about getting control of the deficits once the current downturn and financial crisis have passed. (Source: Yahoo.)  Ed Morrissey: Chart of the Day: The Laffer Spike (Jun 2009) Arthur Laffer, who brought us the Laffer Curve in the 1980s, has another kind of geometric shape for us today in the Wall Street Journal. Let's call it the Laffer Spike, and unfortunately this one isn't hypothetical. It demonstrates the massive boost in monetary supply pushed by the Fed and the government, and its historical singularity (via QandO):  With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs — such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid — are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.Laffer says we don't have a historical model for this kind of action, and cannot accurately predict its effects. That's not entirely true. While the US has never done this before, we do have at least one historical parallel from the 20th century: the Weimar Republic government of Germany that preceded the Nazis. In fact, they deliberately printed money and devalued their currency in order to pay off (in worthless currency, but at face value) the crushing national debt imposed on them by the Treaty of Versailles. Some have suggested that the US will have to follow the same model to rid itself of the massive debt we're incurring now, which makes investors much less enthusiastic about Treasuries. We've already begun to see the effects of this policy on the bond markets, with investors demanding higher yields as a hedge against the runaway inflation of this model. The Financial Times reports that the US had to push yields up to 4% to get buyers this week, and they expect more trouble in today's auction: US long-term interest rates rose to the highest level of the year on Wednesday, threatening the "green shoots" of recovery, after the latest sale of 10-year government debt met with a tepid response from inflation-wary investors.If we have to keep paying higher interest rates for the Treasuries, we're going to see much bigger deficits in the coming years than either the White House or the CBO projected earlier, as our debt service will skyrocket:  Unless we cut spending now, we'll be setting up an inflationary ride like nothing we've seen before. (Source: Hot Air: Ed Morrissey.) TARP payback may not help consumers (Jun 2009) Don't expect TARP-free banks to unleash a torrent of loans to cash-strapped consumers. The Treasury Department told ten big bank holding companies Tuesday that they are healthy enough to repay their federal loans. In turn, the big banks said they would repay $68 billion to Treasury's Troubled Asset Relief Program. JPMorgan Chase (JPM, Fortune 500) will be sending Treasury the biggest check, for $25 billion. Treasury Secretary Tim Geithner told Congress that the planned repayments show the "very tangible benefits" of rescue plans such as TARP. Boosting bank lending is "the ultimate measure of the success" of Treasury's financial rescue programs, Geithner told the Senate Appropriations Committee Tuesday. Still, by that measure, Treasury's efforts have a ways to go. While bank executives will surely enjoy being out from under the thumb of Congress, it's unlikely that freeing these banks from the strictures of TARP will bring as much of a surge in lending to consumers and small businesses as Geithner would like. Two of the firms approved to repay loans -- Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) are primarily investment banks. State Street (STT, Fortune 500), Bank of New York Mellon (BK, Fortune 500) and Northern Trust (NTRS, Fortune 500) are asset managers that do little lending of any sort. Rushing to repay TARP funds "You look at this list and you're not really talking about the big-time lenders, with the exception of JPMorgan Chase," said Anthony Sabino, a professor of law and business at St. John's University in Jamaica, N.Y. Treasury's most recent monthly lending reports confirm this. In March, the five investment firms approved to pay back TARP funds Tuesday, showed average outstanding consumer loan balances of just $38 billion, down from $39 billion in February. That compares with $46 billion in outstanding consumer loans at BB&T (BBT, Fortune 500), the Winston-Salem, N.C., lender that is the smallest of the five commercial banks cleared Tuesday for TARP repayment. In addition to JPMorgan Chase and BB&T, the other banks cleared to repay their TARP funds Tuesday were U.S. Bancorp (USB, Fortune 500) and credit card lenders American Express (AXP, Fortune 500) and Capital One (COF, Fortune 500). The TARP repayment plans come as officials renew their efforts to bolster lending both at banks and in the credit markets. Accomplishing both will continue to be a challenge. Three of the biggest lenders to consumers -- Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) -- still have their TARP funds, and none appears likely to repay their obligations any time soon. Meanwhile, the asset-backed securities market has fallen off a cliff since the credit markets froze in August 2007. Issuance of U.S. asset-backed securities dropped 32% in 2007 before plunging 73% in 2008, according to data from the Securities Industry Financial Markets Association. And the decline hasn't stopped yet. ABS issuance was down 71% from a year ago in the first quarter of 2009, according to SIFMA. That freeze, along with tightening lending standards at banks scarred by poor underwriting, has made it much harder for many borrowers to get credit. But Geithner said in testimony Tuesday (9 Jun) he holds out hope that plans like the Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF, will succeed in restoring some credit flows via the markets. TALF provides financing for holders of highly rated student, credit card and commercial real estate loans. "We have begun to boost new consumer and business lending by re-starting the markets for asset-backed securities that financed almost half of all lending in this country before the crisis," Geithner said. "There were more securities of this type issued the four months after we launched our effort than in the preceding nine." (Source: CNN.) Obama plans sweeping financial regulations (Jun 2009) The Obama administration said Monday it was committed to overhauling the U.S. financial rule book by giving the Federal Reserve increased powers to guard against massive risks. Large institutions, where failure could threaten the stability of the financial system, will be subject to regulation by the Fed, administration officials said. The proposal also would create a council of regulators with broad coordination responsibility across the financial system. And, officials said, the administration will offer a stronger framework for investor protection, including increased oversight of consumer products ranging from credit cards to annuities. Speaking in New York on Monday, Treasury Secretary Timothy Geithner said the regulatory overhaul will eliminate "gaps" in the financial system that encouraged risky behavior leading up to the meltdown. "We had a financial system that was fundamentally too unstable and fragile, and it did a bad job of basic protection of consumers and investors," Geithner said during an economic conference hosted by Time Warner Inc. "Those are things we have to change." The White House said Monday that Obama would unveil his regulatory overhaul plan on Wednesday. An outline of the changes was included in an opinion piece by Geithner and Lawrence Summers, director of the president's National Economic Council, published Monday in The Washington Post. In the Washington Post piece, Geithner and Summers said the administration's overhaul will propose increasing capital and liquidity requirements for all financial institutions and will impose more stringent requirements on the largest and most interconnected firms. Geithner said the administration would seek to ensure that tougher rules don't bog down the banking system with red tape. "You want to have a system where innovation is rich and healthy, so we have to find a balance. We did not get the balance right," he said. The administration was still expected to call for the functions of the Office of Thrift Supervision to be merged into the Office of the Comptroller of the Currency. But it would leave the Fed, the OCC and the Federal Deposit Insurance Corp. as major banking regulators. That suggests the administration has backed away from a more extensive overhaul that would have consolidated all banking regulation into one agency. Supporters of this approach, including Sen. Chuck Schumer, a New York Democrat, have argued that the current system is inefficient. "It does not make sense for up to four different regulatory bodies to retain oversight over the safety and soundness of banks and bank holding companies," Schumer said in a letter to Geithner on Friday. The administration's plan will impose "robust reporting requirements" on issuers of asset-backed securities and require institutions that sell them to retain a financial interest in their performance, Summers and Geithner wrote. The sale of securities backed by subprime mortgages was among the major causes of the financial crisis that struck with force last fall. (Source: MSNBC.) U.S. financial regulation reforms outlined (Jun 2009) The Obama administration will target critical weaknesses in the troubled U.S. financial system, such as thin bank capital cushions and eroded lending standards, when it proposes an overhaul of financial regulation this week, two senior officials said on Monday. In the fullest summary to date of the administration's reform proposal, Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers said the plan will also urge stronger consumer and investor protections and new powers for the Federal Reserve. FLASHING RED LIGHTS The U.S. financial system is far less centralized than other mature economies, according to Geithner, pointing to the between 8,000 and 9,000 banks throughout the country. To hold a vast system accountable, he said that there has to be a more centralized regulation system. "At the core of making the system stronger is to give one place clear accountability and responsibility," he said. (Source: CNN.)The two officials outlined the plan in The Washington Post ahead of the release on Wednesday of a detailed package of proposals that has been under discussion for six months. Months of debate in Congress over the plan lie ahead, with time on the side of the status quo, especially if the economy continues to improve and public outrage at the banks begins to fade. Administration officials have argued a rewrite of U.S. financial rules is needed to prevent future crises. The outline offered few new details on elements of the plan that were already known and sidestepped unanswered questions about streamlining bank supervision, restraining executive pay and regulating over-the-counter (OTC) derivatives. But it did clearly underline the administration's determination to give the Fed a central role, and to create a new way for the federal government to handle troubled firms whose failure could pose a risk to the economy. President Barack Obama will make remarks on Wednesday on "his comprehensive plan for new rules of the road for the financial industry," a White House official said. Geithner will joint him at the event. The Treasury secretary and Summers said that a key administration goal will be "raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms." In addition, they said, large and interconnected firms whose failure could threaten the stability of the system "will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system." These dual proposals -- making the Fed a "systemic risk" regulator and creating a related inter-agency council in the same area -- come amid concerns by some lawmakers and other regulators about the Fed getting too much power. (SITE NOTE: See Federal Reserve Bank for move to audit the Federal Reserve after its refusal to tell which banks received the TARP funds. The Fed is also suspected of have a $9 trillion loss where the money disappeared into a black hole. Ron Paul is leading a call for an audit of the Fed Reserve Bank -- with 270 co-sponsors so far.) NEW RULES FOR SECURITIZED PRODUCTS The officials said the plan will propose new reporting requirements for issuers of asset-backed securities, as well as a rule saying that securitizers must "retain a financial interest" in the performance of the asset-backed securities they are involved in issuing. Securitization, or the packaging and selling of loans as securities, has been blamed by critics for eroding lending standards in the mortgage business. A Treasury spokesman said the administration would propose requiring lenders to retain 5 percent of the risk they securitize. A bill to do this was approved in May by the U.S. House of Representatives, but is languishing in the Senate. FLASHING RED LIGHTS In a commentary published in Monday's Washington Post, Geithner and the director of the National Economic Council, Lawrence Summers, said the proposal would grant the Federal Reserve increased power in the oversight and management of the largest financial companies in the market. It would also create an agency like the Federal Deposit Insurance Corp., to oversee consumer-oriented financial products. The two men wrote that the plan would point to the need for deeper cash reserves at major financial institutions. Those firms -- whose operations affect other, smaller institutions -- will be moderated by a consortium of Federal Reserve leaders.Addressing another market implicated in the crisis, the officials said the Obama plan will urge oversight of OTC derivatives. It will call for unspecified "harmonizing" of futures and securities regulation, and stronger payment and settlement systems, they said. "All derivative contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse," according to the piece in the Post. It also said the plan will call for a new mechanism for "the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system." This "resolution authority" proposal was sketched out earlier by the administration in draft legislation that would confer these powers on the Federal Deposit Insurance Corp. The idea behind the proposal is to create a new way to seize and unwind troubled large firms that are not banks, and avoid on-the-fly approaches such as last year's costly bailout of mega-insurer American International Group. The plan will urge reducing "investors' and regulators' reliance on credit-rating agencies," the officials said, in a provision likely to affect credit rating giants such as Standard & Poor's and Moody's Corp. They also said the United States "will lead the effort to improve regulation and supervision around the world." On bank supervision, Geithner has previously said the administration will "streamline" financial regulation. But he has stopped short of endorsing particular changes. One proposal with some political support is merging the Office of Thrift Supervision, which mainly regulates mortgage lenders, with the Office of the Comptroller of the Currency, which regulates some of the nation's largest banks. No mention was made in the outline of that idea. Nor was any mention made of possibly merging the Securities and Exchange Commission and the Commodity Futures Trading Commission. Such a move was once seen likely, but is off the table, said sources familiar with administration discussions. (Source: Yahoo.) (SITE NOTE: Obama's proposal would require congressional approval. The plan will meet with opposition from those opposed to giving the government a heavier hand in the financial marketplace. Geithner is still playing the scare card: "We are not going to go back to where it was -- we can't," he said Monday. "The damage of the crisis was just too acute." However, some Congressmen are starting to pay attention to the mass of emails -- and the grassroots movement against big government. The tide is turning against Obama getting his way through majority of Democratic votes. The 2010 election is coming and reelection may be a problem for those who do not listen to the will of the people. Sen Arlen Specter learned this very early after his stimulus vote -- and now he's switched parties.) VIDEO: He is former prosecutor, House Democrat Alan Grayson; she is Elizabeth Coleman, Inspector General of the Federal Reserve. The issue is oversight at the Federal Reserve. Watch it and weep. Congressional questioning of the Inspector General of the Fed revealing that NOBODY has investigated the NINE TRILLION DOLLAR off-sheet losses of the Federal Reserve Bank (Source: The Daily Bail.) CHANGE Daily Bail Provides Coverage of the Federal Reserve Fiasco (May 2009) (Source: The Daily Bail.) Obama wants to eliminate industrial banks (Jun 2009) Utah's industrial banking industry has a new and formidable enemy -- President Barack Obama. As part of the president's plan for regulatory reform of the nation's financial services industry, which was unveiled earlier this week in an 85-page white paper, Obama is calling for the elimination of industrial bank charters and wants them all shut down within five years. If successful, the president's plan could deal a hammer blow to Utah's economy, which is the home of 25 industrial banks that employ thousands of the state's residents and hold assets valued in excess of $168 billion. Utah's industrial banking community is upset. "Industrial banks are the safest and soundest financial institutions in the country," Louise Kelly, chief executive of EnerBank, said in a statement issued by the Utah Association of Financial Services. "We did not contribute to the current financial collapse." Industrial banks, also known as industrial loan corporations or ILCs, are state-chartered but federally insured financial institutions that historically have operated in narrow niches, such as issuing credit cards or offering automobile loans. Utah is home to about half of the nation's ILCs but they account for approximately 80 percent of the industry's assets. On Thursday, U.S. Treasury Secretary Timothy Geithner appeared before the Senate Banking Committee and argued that institutions that take deposits and make loans need to come within a common framework of standards and oversight. "If we do not do that, then all the risk in the system will migrate to those parts of the system where you can do similar activities, but not be subject to the same basic standards," he said. Geithner's statements were viewed with skepticism by Utah Sen. Bob Bennett who said that not a single industrial bank contributed to the nation's financial crisis. "And interestingly, when Lehman Brothers went down, one of the bright spots of that bankruptcy was that they had an ILC that was financially sound." Bennett said the president's proposal was overkill. "So we're going to take an area that works, and we're going to abolish it in the name of trying to make the system that hasn't worked a little bit stronger," Bennett said. "I have a very serious problem with that." Bennett pointed out that the Federal Reserve has been pushing for regulation of the ILC's "for as long as they've been around. The Fed seems offended somehow that the regulation of ILCs is left to people like Utah and the FDIC. So as a matter of principle, the Fed wants to control them." Although Ed Leary, commissioner of the Utah Department of Financial Institutions, pointed out the administration's plan is only preliminary and there is not yet any legislation before Congress. Nevertheless, he said, the proposal was disheartening. "It is discouraging they would want to eliminate a charter [for industrial banks] that has never caused problems and didn't contribute to any of the country's financial problems," Leary said. (Source: Salt Lake Tribune.) Government's role starts to chafe Big Business (Jun 2009) It remains an open question whether the much-heralded "green shoots" truly signal a turn toward a U.S. economic recovery. What's clearer is that the business backlash against government is well under way. Not so long ago, business and policymakers alike were calling for Uncle Sam to step in and stop the bleeding — in the financial sector, at the automakers, in the housing and job markets. Most of the sniping that occurred came as various government figures criticized one another for doing too little. Now, however, the grousing is shifting to arguments that the government is overstepping that subjective line between helpful intervention and harmful meddling, including in areas where business only recently welcomed Uncle Sam's dollars. "They're making business decisions in a way that is political," John A. Allison IV, chairman of BB&T Bank, told BusinessWeek at a Beltway gala on June 11. BB&T was cleared this past week to return $3.1 billion in federal bailout money. "Where does it stop? The people making the decisions don't have the knowledge of the industries, of the institutions, to make good business decisions." Certainly, last week brought plenty of revelations about the government's role as an activist investor, both now and at the height of the crisis. The Treasury unveiled broad principles for executive compensation and backed legislation to give the Securities & Exchange Commission and shareholders more say in how compensation policy is shaped; it also appointed a "pay czar" to police compensation at the seven companies that have received repeated federal aid. The Food & Drug Administration got the go-ahead to regulate tobacco as a drug. The Supreme Court stood aside, letting the Obama Administration's plan for Fiat to acquire Chrysler go through, despite arguments by some creditors that it stood on end the usual bankruptcy process. And the Administration's role became clearer in everything from picking board members and top executives to "changing the culture" of also-bankrupt General Motors. On Capitol Hill, indignant lawmakers listened as Bank of America CEO Kenneth Lewis described the pressure he felt late last year at the hands of Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson to go consummate the acquisition of an ever-shakier Merrill Lynch. So perhaps it should come as no surprise that the U.S. Chamber of Commerce — perhaps the business lobby's most persistent voice against government regulation — picked this week to launch its "Campaign for Free Enterprise." Declaring that "capitalism is at a crossroads," Chamber officials called the effort to "defend and advance America's free enterprise values in the face of rapid government growth and attacks by anti-business activists … one of the most important and necessary initiatives in [the Chamber's] nearly 100-year history." Two days later, the Chamber sent an open letter to Senator John Thune (R-S.D.) supporting a "transparent exit strategy to ensure the timely withdrawal of the federal government from these most extreme and unusual forms of intervention." The Republican Party of Florida put it a little more bluntly, headlining its criticism of the Obama Administration's forays into business (and some other issues) "Back in the USSR" and decrying that the Administration has more czars — over health care, autos, executive pay, and more — than did three centuries of Romanov rule. (Never mind that some of the U.S. czars date to GOP Administrations or that the Romanovs and the Union of Soviet Socialist Republics didn't exactly overlap.) The Administration's approach has real dangers. Attempting to reorganize and tinker with the culture of a giant corporation like GM is risky in the best of times. Taxpayers may find themselves hopelessly entangled in lost corporate causes, with billions of loans never returned. Companies that are shackled with pay restrictions may lose top talent to those that aren't. Countless historical examples show the potential for unintended consequences from well-intended policies. (Just one example: the costly distortions in employee titles and pursuit of tax loopholes that followed imposition of government wage and price controls.) Of course, business was happy to get federal funds when they were being doled out by the fistful over the past eight months. The Chamber, for example, lauded Congress for the original $700 billion financial-system bailout; pushed for aid to the automakers; sought borrowing assistance for the nuclear, coal, and other industries; and called for stimulus spending and subsidies for transportation, broadband, housing, auto sales, and small business, as well as exporters. And while Florida state GOP chief Jim Greer criticized the stimulus bill as laden with pork-barrel spending while it was being hammered out, he also made sure to praise its "important funding for certain essential services" and pushed to "ensure that Florida receives its full share and is able to use any federal economic stimulus dollars coming to our state." Some lawmakers, too, are now calling for the government to back off where they once demanded more involvement. As The Washington Post's Steve Pearlstein points out, for example, Senator Steve Corker (R-Tenn.) criticized last fall's plan to aid automakers because it didn't demand enough from the companies in the way of restructuring. But more recently, Corker is pushing legislation to force the auto companies to reimburse dealers whom they want to restructure out of existence. Regardless of where you stand on the political spectrum, you could view this shift as a good sign, a return to something approaching normalcy. With a full-blown crisis raging, after all, it's politically awkward to stand in the way entirely, says Julian E. Zelizer, a political historian with Princeton University's Woodrow Wilson School of Public Affairs. "When everyone's losing their savings, it's hard for business to say the government shouldn't do anything," he says. "Now, there's some sense of calm for business to be more critical again." Similarly, the President's political opponents have an easier time making hay out of what is, after all, a core issue to the GOP. Especially with cultural issues like gay marriage and abortion apparently lacking the traction they once had, "this is an issue Republicans have been able to do well with in the past," Zelizer says. At the same time, the increasingly vocal backlash also illustrates a classic corporate dynamic — albeit with some unusual twists — says Heather Elms, an American University associate professor of international business. Ordinarily, she notes, corporate management is paid to use its discretion in balancing the interests of various stakeholders — shareholders, bondholders, employees, and government, among others. "To some extent, the crises at these companies are evidence that they weren't doing a very good job, so you have all these stakeholders stepping in and saying no, this is how you do it," Elms says. "Now the government is saying we want some strings attached to that, and the managers are saying we don't want you to mess around with our discretion." Of course, the government isn't like other stakeholders. While shareholders, employees, and customers can only vote with their feet, the government can force many of the changes it wants, as it did by statute when it came to limiting pay at banks taking federal aid, and with its deep pockets at the automakers, who might not have found bankruptcy financing elsewhere. Moreover, markets are flexible and can adjust fairly quickly, but statutes tend to linger. "There's an inevitability that things aren't going to work out exactly the way they were intended," Elms adds. "People tend to ascribe great powers of thought and reasoning to executives and politicians, but they're exploring here, they're experimenting, and none of them knows exactly what to do." (Source: MSNBC.) Official: Obama to propose new consumer agency (Jun 2009) An Obama administration official says the Treasury will propose the creation of a regulatory agency to protect consumers in their credit, savings and other banking transactions. The new agency is one of the central elements of President Barack Obama's overhaul of the financial regulatory system. The president is set to announce his broad plan on Wednesday (17 Jun). The administration official described the plan on the condition of anonymity because Obama had not yet made it public. Obama's decision to create the agency is in response to criticism that lenders and credit card companies have taken advantage of unwitting consumers and saddled them with debt. The new agency is likely to be one of the flash points in the administration's proposal because many in the banking industry do not support it. (Source: Breitbart.) Former Fannie Mae head to take over bank bailout (Jun 2009) Herbert Allison, the former head of troubled mortgage giant Fannie Mae, has been confirmed to oversee the government's $700 billion bank bailout program. The Senate voted Friday (19 Jun) to confirm Allison as the Treasury Department's assistant secretary for financial stability. In that role, Allison will oversee the Troubled Asset Relief Program, which was established last fall to inject capital into banks hit hard from the mortgage crisis. "Herb Allison has extraordinary experience strengthening American financial institutions and has demonstrated great leadership in recent months at Fannie Mae," Treasury Secretary Timothy Geithner said in a statement Friday. Earlier this month at his confirmation hearing, Allison told a Senate panel that the bailout program needed more time to work and that the nation shouldn't be fooled into thinking otherwise because some banks have started to repay the money. "I believe this is still a very serious economic time for this country, and much more has to be done to restore stability," Allison told the Senate Banking Committee. "We have to see this program through and make sure it's well-administered all along the way," he later added. Allison said that if confirmed, he would work to increase transparency of the program and share more details with Congress. He also vowed to do more to widen participation of the government's anti-foreclosures effort. "We have to be vigilant. We can't be complacent," Allison said. TARP is set to conclude at the end of the year unless Geithner extends it through fall 2010. "This program is designed to deal with an extremely serious financial crisis," Allison said. "It was not set up to be a long-term permanent program." (SITE NOTE: This of course is the extension notice -- set up the head and then get the extension. But our question is why would we want the man who screwed the US into the mess in the first place to head up the mess that is screwing America into a PLANNED takeover of the banking facilities. Of course, the same Democratic senators led by Barnie Franks who argued that Fannie Mae was sound way back when are still in place now on the banking committees.) (Source: Breitbart.) 10 Banks Allowed to Repay $68B in Bailout Money (Jun 2009) Ten of the nation's largest banks will be allowed to repay $68 billion in federal aid granted at the height of the financial crisis, the Treasury Department announced yesterday (8 Jun). The banks, which could begin to return money this week, include J.P. Morgan Chase, Goldman Sachs and Capital One Financial, according to company statements. The decision is a milestone for the Obama administration's financial rescue plan, reflecting new confidence that some large banks have returned to stable profitability. It is also a victory for the banks, which have pressed for permission to show strength and avoid restrictions including executive pay limits. But senior officials cautioned that the repayments are not a sign of a broader economic revival. "These repayments are an encouraging sign of financial repair, but we still have work to do," Treasury Secretary Timothy F. Geithner said in a statement. The focus of that work increasingly will turn from rescue efforts to addressing the causes of the crisis by overhauling supervision of the financial industry. The administration plans to unveil a blueprint for sweeping reforms next week. President Obama said yesterday that the ability of companies to repay the government does not detract from the need for reform. "The return of these funds does not provide forgiveness for past excesses or permission for future misdeeds," Obama said in remarks at the White House. "It's critical that as our country emerges from this period of crisis, that we learn its lessons, that those who seek reward do not take reckless risk, that short-term gains are not pursued without regard for long-term consequences." The list of banks granted permission to repay the government was longer than many financial analysts had expected, in part because banks have been able to attract billions of dollars in new capital from private investors following the conclusion of government stress tests. The Treasury granted repayment requests from eight banks that received a clean bill of health after the tests, plus Morgan Stanley, which was required to strengthen its capital reserves, and Northern Trust, which was not subjected to a test. The government did not announce the names on the list, allowing each bank to disclose the news on its own. Others are American Express, Bank of New York Mellon, BB&T, State Street and U.S. Bancorp. If all 10 banks return the money, the government will recoup roughly one-third of the $200 billion so far invested in about 600 banks under its financial rescue plan. Capital One, which operates retail branches in the Washington area as Chevy Chase Bank, said in a statement yesterday that it planned to repay the government's $3.5 billion investment "in the coming weeks." BB&T, which has a large retail presence in the Washington area, said it would move immediately to pay the government $3.13 billion. The company's chief executive, Kelly S. King, issued a statement hailing the government's decision. "We will become even more focused on the business of serving our clients, rather than dealing with government distractions," King said. The government already has allowed 22 community banks to repay about $1.8 billion in federal aid, but the announcement yesterday marks the first time large banks have been given permission to return money. Treasury officials say they are comfortable that these banks can weather the recession without direct government support. The government continues to support banks through other less visible programs, including debt guarantees, cheap loans and a pledge that the largest banks will not be allowed to fail. Former Treasury Secretary Henry M. Paulson Jr., who made the decision to invest federal money in the banks last fall, said yesterday that the repayments validated his strategy. "The recovery of our financial system is underway, but the road ahead is not short," Paulson said in a statement. "I look forward to the day when our system and our economy are sufficiently strong that we can end the FDIC debt guarantee, close the Fed's liquidity programs, and resolve the permanent status of Fannie Mae and Freddie Mac." The government will continue to hold warrants in the 10 banks, allowing it to buy shares of their common stock. Administration officials say they do not intend to exercise the warrants, which would give the government ownership stakes. Negotiations are ongoing over how much the banks should pay the government to rip up the warrants. The repayments will create a clear line of demarcation between these banks and their weaker rivals. The stress tests found that 10 banks needed to strengthen their capital reserves against projected losses, including Bank of America and Citigroup. Only one of those companies, Morgan Stanley, has been approved for repayment. (Source: .) (SITE NOTE: Sell your soul to the devil and you pay forever -- even after you repay the debt. This is sick... Obama and Geithner are really some evil men. The only smart banks are those that refused the loans -- even after Paulson, Berneke, Geithner et al in 2008 met to FORCE the banks to accept.) Treasury Secretary's Secret Talking Points Reveal That Banks Were Forced to Surrender Ownership Stakes to Government (Jun 2009) Last October, then-Treasury Secretary Henry Paulson ordered nine banks that the Treasury Department described as "healthy" financial institutions to surrender ownership interests to the government or else face regulatory action that would force them to surrender ownership interests to the government, according to an internal Treasury Department document. Paulson's extraordinary threat culminated in one of the most sweeping government intrusions into the free-enterprise system in the history of the United States. Judicial Watch, a nonpartisan watchdog organization, used the Freedom of Information Act to obtain a copy of the internal Treasury Department "talking points" that were prepared for Paulson to use at his Oct. 13, 2008 meeting with the chief executive officers (CEOs) of the nine banks. At the meeting--to which the bankers were called at short notice--Paulson made a conspicuous display of potential government regulatory power. Paulson was flanked by Federal Reserve Chairman Ben Bernanke; current Treasury Secretary Timothy Geithner (who was then president of the Federal Reserve Bank of New York); Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair and Comptroller of the Currency John C. Dugan. While none of these regulators have responded to inquiries by CNSNews.com, the talking points mention each by first name. The Fed, the FDIC and the Office of the Comptroller of the Currency all regulate various elements of the U.S. banking industry. "Ben, Sheila, John, Tim and I have asked you here this afternoon because we are of the view that the United States needs to take strong and decisive action to arrest the stress in the financial system," Paulson's talking points directed him to tell the assembled bankers. The talking points indicate that Paulson then told the nine bank CEOs that the government was going to use $250 billion of the $700 billion approved by Congress to shore up the financial industry through the "Troubled Asset Relief Program" (TARP) to buy stock in banks all across the country and that the nine banks these CEOs represented had no choice but to allow the government to buy their stock--or else. Paulson assured the CEOs that the government would inform the public that the banks were "healthy institutions, participating in order to support the U.S. economy." In other words, according to the treasury secretary's confidential talking points, the nine banks were not failing financial institutions that had come to the federal government in desperate need of a bailout from the taxpayers to stay in business. Instead, they were healthy institutions that were being compelled to surrender ownership stakes to the government in order to help the government carry out a government policy. "(T)hrough our new TARP authority, Treasury will purchase up to $250 billion in preferred stock of banks and thrifts prior to year-end," said the talking points. "To encourage wide participation, the program is designed to provide an attractive source of capital, on identical terms, to all qualifying financial institutions," Paulson's document said. The document added, "We plan to announce the program tomorrow--and--that your nine firms will be the initial participants. We will state clearly that you are healthy institutions, participating in order to support the U.S. economy. "This is a combined program (bank liability guarantee and capital purchase). Your firms need to agree to both," said Paulson's talking points. Not 'Tenable' to 'Opt Out' Did the banks have a choice? Not according to Paulson's talking points. "We don't believe it is tenable to opt out because doing so would leave you vulnerable and exposed," Paulson told the bankers, according to his talking points. "If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance." The nine CEOs present at the Oct. 13 meeting reportedly included Vikram Pandit of Citigroup, Jamie Dimon of JP Morgan, Richard Kovacevich of Wells Fargo, John Thain of Merrill Lynch, John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs, Robert Kelly of Bank of New York, Kenneth Lewis of Bank of America and Ronald Logue of State Street Bank. The Treasury Department's announcement of the government's action the next day described the capital injection as a "voluntary" program for healthy banks. "I don't think there was any banker in that room who was going to look us in the eye and say they had too much capital," Paulson told The New York Times. "In a relatively short period of time, people came on board." Each of the nine CEOs present at the meeting received an application where they hand wrote the name of their qualifying financial institution "in support of the U.S. financial system and the broader U.S. economy." The banks then agreed to issue "Preferred Shares" in varying amounts, which they wrote by hand into the provided space. State Street took $2 billion, Bank of New York Mellon took $3 billion, and Bank of America took $15 billion. Merrill Lynch, Goldman Sachs, and Morgan Stanley all agreed to take $10 billion and JP Morgan, Wells Fargo, and Citigroup all took the maximum $25 billion in exchange for issuing preferred shares to the U.S. Treasury. In return, the qualifying institutions under the "Capital Purchase Program" agreed to adopt standards dictated by the Treasury Department regarding executive compensation and corporate governance. With the government now determining how banks should spend their money, benefits such as "golden parachute" payments to top executives were terminated, and banks were required to repay any bonus that was based on projected earnings that later proved to be inaccurate. A limit of $500,000 has also been set on the tax deductibility of salaries. While some of the nine banks are still accepting money through TARP, Wells Fargo Chairman Richard Kovacevich has been more vocal about the government restrictions that have come with the TARP package. "Is this America – when you do what your government asks you to do and then retroactively you also have additional conditions?" Kovacevich reportedly said, according to a March 2009 New York Post article. In the same article, the Post reported on Kovacevich's revolt against the required stress tests, saying that he believed that imposing these tests on healthier banks left then open to stock manipulation. "We do stress tests all the time on all of our portfolios," said Kovacevich. "It is absolutely asinine that somebody would announce we're going to do stress tests for banks and we'll give you the answer in 12 weeks." The stress tests were formulated by the U.S. Treasury in an attempt to ensure the countries' most influential banks are well capitalized. According to a USA Today article in May, after the release of the bank stress test results, Goldman Sachs, JP Morgan and Morgan Stanley all expressed a wish to repay capital injections. Government supervision over compensation and benefits will last as long as the Treasury holds equity under the Capital Purchase Program. A month after the meeting, during testimony at a hearing held by the House Financial Services Committee last November, Paulson reiterated: "(T)here are no banks, when the system is under pressure, unless they are ready to fail, that are going to raise their hand and say, 'Please, I need capital, give me some capital.'" Paulson did not return telephone calls and emails from CNSNews.com to comment on the issue. The nine banks that participated in the Oct. 13 meeting were also mum. Morgan Stanley spokeswoman Jeanmarie McFadden declined to answer questions about her bank's attendance. Julia Bernard, a spokeswoman for Wells Fargo, told CNSNews.com, "Wells Fargo does not discuss conversations and interactions with their regulators and government officials." However, Wells Fargo's CEO Richard Kovacevich was candid when speaking about TARP at a Stanford University event. "If we were not forced to take the TARP money, we would have been able to raise private capital at the time," remarked Kovacevich, according to the New York Post. The New York Times reported in article on Oct. 15, 2008 that other bank executives besides Kovacevich objected to being brow-beaten by Paulson at the meeting in question. The Times said that Kenneth D. Lewis, chairman of Bank of America, had "pushed back," arguing that his bank had already raised $10 billion of its own. In addition, the same article reported that, in an interview prior to the meeting, John J. Mack, the chairman of Morgan Stanley stated that his bank did not need aid from the Treasury. According to the Times, Morgan Stanley had just sealed a $9 billion deal with a prominent Japanese bank. "Would the Treasury Department demand some control over management in return for the capital?" the wary CEOs asked, according to the New York Times article. The Times source remained anonymous, the newspaper reported, because the discussions within the meeting were to remain private. "It was a take it or leave it offer," The Times quoted its source as saying. "Everyone knew there was only one answer." Paulson's announcement introducing the Capital Purchase Program under TARP legislation came as a surprise to Congress, where members generally believed they had approved legislation to approve the Treasury's purchase of mortgage-backed securities. Paulson defended his decision to have the government buy ownership interests in teh banks before the House Financial Services Committee in November 2008. "There is no playbook for responding to turmoil we have never faced," Paulson explained before the committee. "We adjusted our strategy to reflect the facts of a severe market crises, always keeping focused on Congress's goal and our goal." Paulson's talking points for the meeting and related documents were obtained under a Freedom of Information Act request filed by Judicial Watch, which sued the government in order to force their release. Judicial Watch President Tom Fitton--in announcing release of the document--said that "despite promises of transparency as part of TARP legislation, the Treasury Department has been evasive regarding the meeting on October 13, 2008." Fitton said that in January 2009, his group filed a FOIA lawsuit against Treasury seeking release of the documents. On Feb. 4, the government agency responded that "a search has been conducted by this office and no records responsive to your request have been located." The documents were not released until May 13. CNSNews.com obtained a copy of the Feb. 4 letter from the Treasury Department through Judicial Watch. (Source: CNS News.) Bernanke: I didn’t bully BofA to buy Merrill -- Fed chief disputes bank CEO Lewis' claim that he was pressured into deal (Jun 2009) Federal Reserve Chairman Ben Bernanke faced an unusual political trial Thursday and disputed accusations that he pressured Bank of America to acquire Merrill Lynch in a deal that cost taxpayers $20 billion. Bernanke denied to a House committee investigating the matter that he threatened action against Bank of America’s CEO Kenneth Lewis or the bank’s board members if they abandoned the takeover. It marked Bernanke’s first public comments since the House committee launched an investigation this year into whether he or other government officials bullied Bank of America to stick with its plan to combine the two financial powers after Lewis learned of Merrill’s financial woes.During the three-hour hearing, Bernanke faced skepticism and often-hostile questioning — unusual for a Fed chairman, who typically commands deference in public settings. Adopting the role of outsider, Republicans in particular have turned aggressive toward Bernanke, trying to link him to the Obama administration as advocates of government meddling in private industry. Many Republicans are suspicious of the administration’s plan to expand the Fed’s regulatory powers. It’s an odd shift, because Bernanke is a Republican appointee, and many of his key advocates are Democrats. And it comes at a pivotal time: Bernanke’s term expires early next year, and President Barack Obama will have to decide whether to pick his own Fed chief or reappoint Bernanke. Earlier this month, Lewis testified that his job had been threatened after he expressed second thoughts about the deal. Lewis said then-Treasury Secretary Henry Paulson and federal regulators made clear that if Charlotte-N.C.-based Bank of America Corp. reneged on its promise, that he and the bank’s board members would be ousted. But in his testimony to the House Oversight and Government Reform Committee, Bernanke said he never told Bank of America executives that the Fed would punish them or the bank’s board if they tried to stop the deal. And he said he never told anyone else to send such a message to the bank. Rep. Jason Chaffetz, R-Utah, said of Bernanke’s denial that he threatened Lewis’ job: “With all due respect, I’m just not buying that.” Bernanke also said no member of the Fed urged Bank of America to keep quiet about Merrill Lynch’s financial problems. “Neither I nor any member of the Federal Reserve ever directed, instructed or advised Bank of America to withhold from public disclosure any information relating to Merrill Lynch, including its losses, compensation packages or bonuses or any other related matter,” the Fed chief said. The committee’s ranking member Darrell Issa, R-Calif., accused the Fed of having “deliberately kept other regulators in the dark regarding the negotiations with Bank of America. The Federal Reserve’s cover-up of important information and willingness to exclude key regulatory partners” such as the Securities and Exchange Commission and the Office of the Comptroller of the Currency “raises troubling questions,” Issa said. (Source: MSNBC.) Paulson Justifies Threatening BofA's CEO (Jul 2009) Former Treasury Secretary Henry Paulson says he was justified last year in suggesting that Bank of America Corp.'s chief executive could lose his job if the bank backed out on plans to buy troubled Merrill Lynch. His admission, included in written testimony for a House of Representatives hearing on Thursday, comes as Congress debates the government's role in managing financial firms that accept billions of dollars in aid. Bank of America Corp., which went through with the merger, ultimately accepted $45 billion in federal aid, including $20 billion to absorb the financial hit it took from acquiring Merrill Lynch & Co. Rep. Darrell Issa, the top Republican on the House Oversight and Government Reform Committee, said Paulson's testimony makes clear that the government became too involved and misused its power. "It is a threat to the foundations of our free society when government officials, acting in the midst of a crisis, use dire predictions of imminent disaster to justify their encroachment on our individual liberty and the rule of law," said Issa. In prepared testimony, Paulson said he told Bank of America CEO Kenneth Lewis last year that reneging on his promise to purchase Merrill would show a "colossal lack of judgment." (Source: Fox News.) $2.7 billion in TARP money went to British Rum maker (Jun 2009) Yep. We taxpayers now have "a little Captain in all of us." Too bad it's because our tax dollars went to the rum distiller who makes Captain Morgan rum. Via Crooks and Liars we get the not surprising news that the $750 billion we shelled out in TARP to save American banks ended up lining the pockets of just about everyone else except our troubled financial institutions. With that much free money floating around, it was bound to happen. Any idiot could have predicted it - which makes Paulson, Bush, Geithner, and Obama certifiable loons if they didn't see this coming. Ryan Donmoyer of Bloomberg has the incredible details: In June 2008, U.S. Virgin Islands Governor John deJongh Jr. agreed to give London-based Diageo Plc billions of dollars in tax incentives to move its production of Captain Morgan rum from one U.S. island -- Puerto Rico -- to another, namely St. Croix. DeJongh says he had no idea his deal would help make the world's largest liquor distiller the most unlikely beneficiary of the emergency Troubled Asset Relief Program approved by Congress just four months later.And this is the tip of the iceberg. Anyone know where the stimulus money is really going? How about the trillions the Federal Reserve has paid out to keep banks in the business of lending short term to corporations so they could pay their employees (supposedly)? The problem with truly eyepopping amounts of money - besides the fact that it adds to the deficit and the long term debt - is that it is virtually impossible to keep track of. Untold billions - perhaps hundreds of billions of dollars - has been handed out to people and companies who don't deserve it and had no business getting it in the first place. It's like piling up stacks and stacks of hundred dollar bills - perhaps several dozen stories high - and just lighting a match to it. Oh well, not to worry. There's more where that came from. The generosity of us taxpayers will see to that - or at least, the generosity of Obama and the Democrats who don't believe your money is yours anyway. They think it is the government's money and that it is their decision just how much of your money you get to keep rather than you deciding how much the government gets. Next time you have a Mojito or a Cuba libra, remember: Your tax dollars are helping the world get sloshed. (Source: American Thinker.) July 2009Rick Moran: TARP Inspector General wants Treasury to track bank use of funds (Jul 2009) You gave US banks more than $200 billion to pull their chestnuts out of the fire with the TARP program. But what did they do with that cash? Inspector General of the TARP program Neil Borofsky thinks that Treasury Secretary Timothy Geithner isn't doing a good enough job in trying to find out according to this story by Rebecca Christie in Bloomberg:Barofsky's survey collected information from 360 banks that have received TARP capital, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. The responses, which the inspector general said it didn't verify independently, showed that 83 percent of banks used TARP money for lending, while 43 percent used funds to add to their capital cushion and 31 percent made new investments.Barofsky has already butted heads with the political appointees at Treasury for looking too closely at the program. This latest attempt to get some accountability from Treasury regarding TARP would appear to put him on a collision course with Geithner again. This bears watching over the next week. (Source: American Thinker: Rick Moran.) August 2009Loophole in government program to buy toxic securities could cost taxpayers (Aug 2009) A controversial $40-billion government program to buy toxic securities from ailing banks has a flaw that law enforcement and financial experts say could allow traders to illegally profit from inside information. Critics of the program say that without adequate safeguards, traders could use the tens of billions of dollars provided by the government to manipulate prices and exploit the price swings in other trades. Because the government is providing 75% of the program's money -- $30 billion -- the manipulations could lead to significant losses by taxpayers. "It is a conflict by design," said Neal Barofsky, the special inspector general for the banking rescue program who has urged tighter controls on the nine trading firms selected to participate.The Treasury Department, which is in charge of the program, says it intends to closely monitor trading activity to prevent illegal insider trading and profiteering at the expense of the public interest. But Barofsky said the government probably stands little chance of beating Wall Street at its own game. "The Treasury cannot possibly match wits with the innovation and aggressiveness of Wall Street," he said. "If you give them a set of rules and there are technicalities and legal loopholes and things we haven't thought of, they are going to find that out, not because they are bad, but because that is what they are supposed to do. They are supposed to seek out profits at all costs." The program, known as the Public Private Investment Partnership, or PPIP, allows the nine investment firms to use the government money and $10 billion in private funds to buy up toxic securities held by banks. The firms, chosen last month from a field of about 100 applicants, have already begun assembling pools of private investors to buy the securities, composed of troubled mortgages that have festered on banks' ledger books and hampered their return to health. The toxic securities, which could total $2 trillion, plummeted in value during last fall's credit crisis and became virtually impossible to sell because of uncertainty over their worth. Under the government's plan, traders would jump-start the market by making offers to banks for the securities, thereby setting fair prices for the securities and trading them on the open market. Sales could begin as soon as this month. The chosen investment firms could earn large profits or bonuses on those trades, but their risk of losses is largely borne by the taxpayers, who are putting up most of the money. The danger is that traders in the government program could wield enormous influence in the market -- and there are no explicit restrictions on how they could use that influence to profit inside deals of their own. For example, a trader could privately buy up groups of toxic mortgages on the cheap then later drive up the price by purchasing similar mortgages using government money. The practice, known as "front running," could be technically illegal, but the firms are not barred from coming into the program with such securities and then trading them, Barofsky said. "If being a trader in the program gives you information that enables you to do trades on the side, that isn't going to go over very well with the public," said Lynn Turner, former chief accountant at the Securities and Exchange Commission. "The inspector general is right." The practice of using side deals strikes many experts as a return to what created the financial crisis in the first place. During the Wall Street boom years, massive profits were made by companies trading in unregulated side deals, while ordinary investors earned a fraction of those profits in regulated markets. Now, the Treasury Department seems to be explicitly creating its own miniature version of that system, said Mark Sunshine, senior consultant at First Capital, a commercial lender based in Florida. "[President] Obama has not required any tougher rules in the PPIP program at a time when he wants tougher rules," Sunshine said. Barofsky said a simple solution would be to construct a "wall" between traders in the public program and those in other parts of the firms, thus preventing the manipulation of prices with inside information. But while the Treasury Department is still finalizing its rules for the program, it has rejected the wall, saying it would dissuade veteran traders from joining because they would be barred from making other trades. The program would be left with junior traders -- the only staff members that investment companies would be willing to isolate from their main businesses. In a letter to the inspector general, Treasury officials said that investment firms privately told the department that they would not get involved in the program if there was an attempt to wall it off. The Times asked all nine firms about their current trading practices in mortgage-backed securities and their plans for internal controls once trading begins using taxpayer money. The firms declined to answer all of the questions, including identifying who would lead their trading teams. (Source: LA Times.) Watchdog: TARP tab could hit $24 trillion -- Estimate is worst-case scenario (Aug 2009) Think last year's $700 billion Wall Street rescue package was beaucoup bucks to spend bailing out the nation's floundering financial system? That's chump change compared to what the overall price tag could be, a government watchdog says. The inspector general in charge of overseeing the Treasury Department's bank-bailout program says the massive endeavor could end up costing taxpayers almost $24 trillion in a worst-case scenario. That's more than six times President Obama's proposed $3.55 trillion budget for 2010. Much of the bailout's attention has focused on the Treasury's $700 billion Troubled Asset Relief Program, or TARP, which Congress hurriedly passed last fall. But about 50 other federal programs that began as early as 2007 could push the government's total financial support of the private financial sector to at least $23.7 trillion, says TARP Special Inspector General Neil Barofsky. The estimate - which the Treasury strongly disputes - was included in Mr. Barofsky's second-quarter review of TARP on Monday. "TARP does not function in a vacuum, but is rather part of the broader government efforts to stabilize the financial system," said Mr. Barofsky in a statement ahead of his appearance Tuesday before the House Oversight and Government Reform Committee to discuss his report. Extra costs include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp. (FDIC), $7.4 trillion in TARP and other aid from the Treasury, and $7.2 trillion in federal money to support Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal guarantee programs, he said. The committee's top Republican, Rep. Darrell Issa of California, said the size and scope of the government's involvement in rescuing the struggling financial sector has reached a mind-boggling level. "If you spent a million dollars a day going back to the birth of Christ, that wouldn't even come close to just $1 trillion; $23.7 trillion is a staggering figure," he said. But the Treasury called Mr. Barofsky's estimate "inflated," saying that less than $2 trillion have been doled out to so far by all the programs he identified in the report. The estimate also doesn't take into account the the repayment of TARP loans, the Treasury says, an increasing tally that so far has reached about $70 billion. The Treasury has committed $643.1 billion of TARP money and has spent $441 billion. In the nine months since Congress authorized TARP, the Treasury has created 12 programs involving funds that may reach almost $3 trillion, Mr. Barofsky said. Although the Treasury is only authorized to spend the $700 billion approved last year by Congress and signed by President George W. Bush, the FDIC and the Federal Reserve are expected to invest up to $1 trillion each in partnering with the Treasury on TARP. Mr. Barofsky complained that while the Treasury has taken some steps toward improving transparency in TARP programs, it repeatedly has failed to adopt many recommendations that his office considers essential to providing "the highest degree of accountability and transparency possible." The Treasury for months has refused his recommendation that TARP recipients be required to reveal exactly what they do with the money, a practice that the Treasury has called "meaningless" in light of the inherent "fungibility" of money. Oversight committee Chairman Edolphus Towns said he was disappointed that the Treasury hasn't done more to increase transparency, adding that Mr. Barofsky's report "demonstrates more than anything why we need" a TARP watchdog. "If the banks can't tell us how they're spending TARP money, then maybe they shouldn't have it," the New York Democrat said. "How can Treasury commit billions - and potentially trillions - of taxpayer dollars, but not ask recipients what they're doing with the money? That takes 'burying your head in the sand' to a new level." The report also shows that the inspector general's office authorized 35 criminal and civil investigations involving TARP money through June 30. These investigations include suspected accounting fraud, securities fraud, insider trading, mortgage-service misconduct, mortgage fraud, public corruption, false statements and tax investigations. Mr. Barofsky told The Washington Times earlier this month that "almost certainly we are going to be seeing a number of [criminal] indictments" coming from the investigations. (Source: Washington Times.) September 2009Rick Moran: TARP IG: Financial system now in a 'far more dangerous place' (Sep 2009) That observation by Neil Barofsky, Inspector General for the nearly $3 trillion in cash the feds have given to banks and generally referred to as the "Troubled Asset Relief Program," sat down with HuffPo's Christine Spolar and Lagan Sebert for an interview.Neil Barofsky is the man who tracks the historic bailout known as the Troubled Asset Relief Program, or TARP. The 39-year-old special inspector general monitors a dozen separate bailout-related programs that now account for nearly $3 trillion in financial commitments. A former federal prosecutor, Barofsky has subpoena power and has launched about three dozen investigations since being named to the post in December 2008. In an audit released in July, Barofsky made clear that he was intent on demanding transparency from all quarters -- including the U.S. Treasury. His next audit is due in October. During an interview with the Huffington Post Investigative Fund, Barofsky made some striking observations. Among them were:First, it appears that Geithner is not only a tax cheat but a liar for telling Congress transparency is impossible. Secondly, it appears that Obama is a liar when he says things are getting better in the loan industry. And third, it isn't only banks that are shaky. The real estate market is still teetering as I point out in a post on my site here. Here's the video of the interview: (Source: American Thinker: Rick Moran.) (SITE NOTE: The interview shows that Treasury's PR blitz to stop the IG audit of funds FAILED. Banks for the most part cooperated -- though they were told that they were under the scrutiny of the law to report truthfully -- they did report that they could track the funds. Obama's lies and his minions lies are starting to bother me and causing me to wonder, What are they trying to cover up?) October 2009Lend to small business, Obama tells big banks (Oct 2009) Big banks that got big bailout bucks should return the favor by lending more to qualified small businesses, President Barack Obama says. In his weekly radio and Internet address Saturday, Obama said too many small business owners remain unable to get credit despite administration steps to jump-start lending, which was virtually frozen when the financial crisis took hold last year. "These are the very taxpayers who stood by America's banks in a crisis, and now it's time for our banks to stand by creditworthy small businesses and make the loans they need to open their doors, grow their operations and create new jobs," Obama said."It's time for those banks to fulfill their responsibility to help ensure a wider recovery, a more secure system and more broadly shared prosperity," said Obama. The president said the administration will "take every appropriate step to encourage them to meet those responsibilities." He did not specify what those steps might be. Obama's were the latest instance of the populist tone he has employed to pressure the financial industry. (SITE NOTE: The problem is that Obama wants to issue ACORN type loans to people who have bad credit and created the Fannie Mae crisis by defaulting on their home loans.) Earlier this week, Obama criticized the banking and finance industries for working through Congress to try to weaken the Consumer Financial Protection Agency he has proposed. He accused them of "using every bit of influence they have to maintain the status quo that has maximized their profits at the expense of American consumers, despite the fact that recently those same American consumers bailed them out as a consequence of the bad decisions that they made." The financial bailout package cost taxpayers $700 billion. In his address Saturday, Obama said small businesses have created nearly two-thirds of the nation's new jobs over the past decade and a half. "They must be at the forefront of our recovery," he said. This year's $787 billion economic stimulus package made $5 billion in tax breaks available to small business and cut the costs of Small Business Administration loans, Obama said. Last week, he asked Congress to increase the size of some SBA loans and announced a plan to provide low interest loans to small banks that agree to lend more money to small businesses. (Source: MSNBC.) Government widens control over paychecks (Oct 2009) The Federal Reserve joined the Treasury Department on Thursday in imposing new limits on executive pay, extending the government's control over compensation at taxpayer-owned companies to institutions that are merely government regulated. The restrictions were the latest in more than a year's worth of government intervention in matters once considered inviolable aspects of the country's free-market economy and represent a signal moment in the history of the American economic experiment. After years of setting minimum wages, the government is now telling some companies how they should structure pay for those who run them. The actions Thursday put the United States more in line with European governments. France and Germany, in particular, have pressed for international standards to limit executive pay, a move that the United States and Britain have resisted. At Treasury, President Obama's pay czar, Kenneth Feinberg, announced sharp cuts in pay for 175 top executives at seven big banks and automakers that received hundreds of billions of dollars in federal bailout money during the financial crisis. The new structures reduced the cash salary paid to some executives by 90 percent and tied more compensation to long-term stock awards. "There is entirely too much reliance on cash, and there's got to be a better way to tie corporate performance to long-term growth," Feinberg said at a media briefing. "I'm hoping that the methodology we developed to determine compensation for these individuals might be voluntarily adopted elsewhere." At the Federal Reserve, Chairman Ben S. Bernanke proposed a broader but less proscribed plan to restrict pay at banks. The aim is to prevent them from rewarding employees for actions that could endanger the firms' long-term financial health. Unlike Feinberg's more limited plan, the Fed's guidance would cover all banks it regulates -- even those that never received a bailout -- as well as U.S. subsidiaries of foreign companies. However, the Fed's proposed rules have wiggle room: The guidelines would let banks set their own compensation but give the Fed veto power over pay practices that it determines could threaten the safety and soundness of a bank. They would extends the regulators' reach into pay practices affecting tens of thousands of bank employees, from senior executives to traders of complex securities. "I've always believed that our system of free enterprise works best when it rewards hard work," Obama said at the White House on Thursday. "But it does offend our values when executives of big financial firms -- firms that are struggling -- pay themselves huge bonuses even as they continue to rely on taxpayer assistance to stay afloat." Since the crisis began, the federal government has used taxpayer money to inject capital into financial firms in exchange for ownership stakes. Failing Fannie Mae and Freddie Mac were taken over by Washington. American International Group, the world's largest insurance company, is 80 percent owned by U.S. taxpayers. The government has picked winners (Bear Stearns) and losers (Lehman Brothers). And a sitting chief executive -- General Motors' Rick Wagoner -- was effectively fired by the White House. Executive compensation has long been linked to company performance -- the higher profits and stock prices go, the bigger the payday for top executives. But Bernanke, other regulators and many on Capitol Hill say that compensation packages were so high that they led executives to put their companies and shareholders at risk solely for the benefit of multimillion-dollar bonuses. "The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system," Bernanke said. The banking industry viewed the Fed's guidelines with ambivalence. Many banks already are moving to revise compensation practices for top executives and other employees who could expose the bank to bet-the-company risks. But industry representatives are wary of the regulations, concerned that they could ensnare even relatively low-level employees of smaller banks. "If it focuses on those who really put institutions at risk, that's fine," said Ed Yingling, chief executive of the American Bankers Association. "But if you get down to the point where you have regulators looking over the shoulders of branch managers, it really does not make sense." Long-simmering resentment over executive compensation boiled over in March when it was revealed that AIG, the recipient of a taxpayer-fueled bailout package worth up to $180 billion, was paying hundreds of millions of dollars in bonuses to a trading division that nearly brought the company and the global financial system to their knees. The seven companies included in the Feinberg's cash crackdown are AIG, Citigroup, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial. The new pay ceilings are low by Wall Street standards, and they are by no means watertight. They still allow for hefty compensation. For instance: Feinberg reduced the cash salary of 13 top Bank of America executives by $89 million for 2009. But the total compensation for each of the 12 executives beneath outgoing chief executive Kenneth D. Lewis still averages $6.5 million this year. Feinberg's actions do nothing to stop Lewis's $70 million retirement compensation. And the companies escape the pay curbs if they pay back all of the bailout money they have received. Still, Feinberg managed to slash about $879 million in total 2009 compensation at the seven companies, compared with 2008 levels. Sen. Charles E. Schumer (D-N.Y.) said Feinberg did not go far enough. He urged Feinberg to push the government deeper into corporate boardrooms via a number of proposals, such as forcing companies to split the jobs of chief executive and chairman. Daniel J. Mitchell, senior fellow at the libertarian Cato Institute, says he worries about the slippery slope. "I fear as politicians get a taste for interfering with executive pay for one little subset of companies where you actually could have sympathy for the approach, what's going to stop them from saying, 'Hey, this was popular. Let's do a little demagoguery before the next election and go after all the CEOs.' " (Source: Washington Post.) (SITE NOTE: The pay caps are disclaimed by the White House as their idea -- leaving it all to Kenneth Feinberg's policy.)   CREDIT CARDS AND CONSUMER PROTECTIONApril 2009Credit card legislation faces Senate test (Apr 2009) Propelled through the House by antibusiness sentiment in tough economic times, legislation putting new reins on the credit card industry now goes to the Senate, where the bill's prospects appear promising. The legislation, which has President Barack Obama's backing, would eliminate abrupt increases in interest rates and other practices decried by consumer advocates. It could be taken up in the Senate as early as next week.Supporters want to get a final congressional package to Obama's desk by the Memorial Day holiday. They acknowledged, though, that House passage of the measure on Thursday was just an opening salvo and that industry interests could succeed in getting restrictions weakened during the legislative slog ahead. Signaling an aggressive campaign, Edward Yingling, president and CEO of the American Bankers Association, said the group "strongly believes that any additional legislative efforts should strive to achieve the right balance between enhancing consumer protection and ensuring that credit remains available to consumers and small businesses at a reasonable cost." "We continue to believe that more work needs to be done to achieve that balance," he said in a statement. The House measure, called the Credit Card Holders' Bill of Rights, passed on a bipartisan vote of 357-70 following lobbying by Obama and members of his administration. The bill would prohibit so-called double-cycle billing and retroactive rate hikes and would prevent companies from giving credit cards to anyone under 18. If they become law, the new House provisions won't take effect for a year, except for a requirement that customers get 45 days' notice before their interest rates are increased. That would take effect in 90 days. Consumer advocates and some Democrats have sought for years to bring new rules to the industry. "This is a unique opportunity to end abusive practices that afflict millions of families across the nation, to contribute to our economic recovery and to take a stand for American consumers," Sen. Christopher Dodd, chairman of the Senate Banking Committee and the bill's primary sponsor, said after the House vote. "Now it is the Senate's turn to act." The bill's boosters are tapping into public anger over corporate excesses and the conduct of banks and other companies receiving billions of dollars in taxpayer money. Obama's engagement in the issue diverged sharply from his handling of a plan to spare hundreds of thousands of homeowners from foreclosure through bankruptcy, which met defeat in the Democratic-controlled Senate Thursday on a 51-45 vote. Obama had embraced the plan, but facing stiff opposition from the banking industry he did little to pressure lawmakers who worried it would encourage bankruptcy filings and catapult interest rates higher. Obama met at the White House last week with executives of the credit card industry and made clear he wants to sign a bill into law. And a day before the House vote, Treasury Secretary Timothy Geithner convened a meeting with Rep. Carolyn Maloney, D-N.Y., the bill's chief sponsor, and representatives of consumer and civil rights groups. The administration is pushing for stricter practices that could crimp banks' revenue at the same time the government is shoring up the financial institutions with hundreds of billions of dollars in bailout aid. "The administration supports Congress' efforts to ... provide additional strong and reliable protections for consumers that ban unfair and abusive practices," the White House said in a statement following the House vote. "The nation's credit card system must have more accountability, including more effective oversight and more effective enforcement of credit card issuers who violate the law." Before approving the credit card bill, the House adopted a series of amendments - some of which were pressed by the White House - that amplified the restrictions on industry practices. The House measure incorporates Federal Reserve regulations due to take effect in July 2010 but goes further by adding restrictions for credit cards for college students as well as other changes. Consumers would have to be notified 30 days before their accounts are closed. Double-cycle billing eliminates the interest-free period for consumers who move from paying the full balance monthly to carrying a balance. Opponents tried vainly on the House floor to temper a fast-moving bill with amendments that would have given credit card issuers some openings to raise rates within the proposed restraints. "We shouldn't take credit opportunities away," said Rep. Jeb Hensarling, R-Texas. "I just want consumers to have choices. I want there to be a competitive marketplace." Hensarling and other Republican opponents endorsed the bill's requirements for clearer disclosure in the fine print of credit card agreements. But they said the legislation overall could prompt lenders to restrict credit in an already tight market to compensate for the new requirements. House bill: H.R.627 --- Senate bill: S.235 --- On the Net: Congress: http://thomas.loc.gov/ (Source: AP.) (SITE NOTE: According to the Democrats in May 2009, credit card companies are notorious for back-handed maneuvers such as raising interest rates without notice. And they've been doing this for so long, it almost feels hopeless to protest. According to the Democrats trying to polish Obama's image as St. George out to slay the evil bank dragon, Obama has now pushed the Senate into considering a bill to outlaw what he considers the most egregious abuses. The House bill passed by a big margin, but the Senate bill, sponsored by Senator Chris Dodd, is significantly tougher on the banks. However, according to MoveOn.org, "But the bill isn't moving, and too many senators are scared to take truly bold action against the banks. If enough of us speak out together quickly, we can make sure Congress knows we expect them to protect voters, not banks." We wonder how much is because of Sen Dodd's recent setbacks in his image within the Senate. We're not too smart on this subject. Early on the White House proposed expanding the Temporary Asset Lending Facility (TALF) by up to one trillion dollars in order to shore up the market for credit card and auto loans. It would be a joint project of the Federal Deposit Insurance Corporation and the Treasury's TARP funds. Then the Treasury Department said the banks reduced their mortgage and business loans by a median of 1 percent each, while credit card lending rose by a median of 2 percent. The reason is simple. The banks make money on credit card loans. But this torqued the Obama administration since they loaned the monies to shore up the "toxic assets" -- loans by the Obama constituents from ACORN who were not qualified for loans in the first place. The banks didn't lend the monies for housing starts, but kept the credit card markets going because it was profitable. But then came the report from a quarterly survey by the Federal Reserve found that nearly 60 percent of banks said they had tightened lending standards on credit card and other consumer loans in the previous three months. So what we see is the banks making more credit card loans, but the deadbeats who qualified before on high-interest credit cards were no longer getting the cards. This is the Obama black and latino welfare voting base. In other words, they were still lending in the credit card market vigorously to those who had good credit, but were locking out those with bad credit. So what's the problem? We watched the meltdown in Credit Cards in 1997-2004 in Korea. People committing suicide and worse. It was horrible on a personal level as people who never had credit cards before overextended themselves -- and unlike the US, Korea had no safety net. It was not pretty. The banks loaning to unqualified borrowers with credit cards was the problem. Thus our opinion is that the banks tightening their lending to QUALIFIED borrowers is very prudent. The days of Fannie May-type credit card lending are over. This is what Obama is angry about. His poor black and latino welfare constituents can't qualify for the credit cards anymore. And yes, there are some really high interest rate cards for people with bad credit. But these folks don't have the money to afford credit cards in the first place. Their option is debit cards -- pre-paid credit cards. Oh, and these cards interests DO shoot up unexpectedly. But for solid credit borrowers, there really is NOT a problem. Shopping for credit cards is like shopping for a car. You find the best rates. Just look on the internet. What Obama wants to again open up the credit card market to HIGH RISK loan participants. JUST OUR OPINION. But Obama is playing this like usual politics as it's a good sell to the "common folk." We do NOT consider this legislation as overwhelmingly important -- only a show piece for Obama to show he has the power to cram whatever he wants through Congress. It'll get passed and the banks will be screwed into accepting credit bad risks (Obama constituents) -- and interest rates will go up from all the bad credit debt. The banks will find workarounds to eliminate bad risk applicants and it will be back to business as usual. Charges will increase on "loophole" services attached to the cards. The Republicans in the Senate can go back to their "oh, well we tried" stance. Nothing will change.) May 2009Credit Card Industry Aims to Profit From Sterling Payers (May 2009) Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years. Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups. "It will be a different business," said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation's biggest banks. "Those that manage their credit well will in some degree subsidize those that have credit problems." (SITE NOTE: This is Obama's ideal of spreading the wealth. If you pay your cards off on time, you are penalized by subsidizing those who do not do so accruing higher amounts of interest payments. Ain't Obama's class vision great??? Screw the responsible to pay for the irresponsible.) As they thin their ranks of risky cardholders to deal with an economic downturn, major banks including American Express, Citigroup, Bank of America and a long list of others have already begun to raise interest rates, and some have set their sights on consumers who pay their bills on time. The legislation scheduled for a Senate vote on Tuesday does not cap interest rates, so banks can continue to lift them, albeit at a slower pace and with greater disclosure. "There will be one-size-fits-all pricing, and as a result, you'll see the industry will be more egalitarian in terms of its revenue base," said David Robertson, publisher of the Nilson Report, which tracks the credit card business. People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks. "Despite all the terrible things that have been said, you're making out like a bandit," he said. "That's a third of credit card customers, 50 million people who have gotten a great deal." Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders — "deadbeats" in industry parlance, because they generate scant fee revenue. "They aren't charities. They have shareholders to report to," he said, referring to banks and credit card companies. "Whatever is left in the model to work from, they will start to maneuver." Banks used to give credit cards only to the best consumers and charge them a flat interest rate of about 20 percent and an annual fee. But with the relaxing of usury laws in some states, and the ready availability of credit scores in the late 1980s, banks began offering cards with a variety of different interest rates and fees, tying the pricing to the credit risk of the cardholder. That helped push interest rates down for many consumers, but they soared for riskier cardholders, who became a significant source of revenue for the industry. The recent economic downturn challenged that formula, and banks started dumping the riskiest customers and lowering their credit limits in earnest as the recession accelerated. Now, consumers who pay their bills off every month are issuing a rising chorus of complaints about shortened grace periods, new hidden fees and higher interest rates. The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders. Citigroup and Capital One referred comments to the A.B.A. Discover and American Express declined to comment. Bank of America intends to "provide credit to the largest number of creditworthy customers possible, while also remaining prudent in our lending practices," said Betty Riess, a spokeswoman. Together with JPMorgan Chase, which has said the changes will force it to limit credit availability and raise fees, these banks account for 80 percent of the credit card industry. Banks are not required to publicly reveal how much money they make from penalty interest rates and fees, though government officials and industry consultants estimate they constitute a growing portion of revenue. For instance, Mr. Hammer said the amount of money generated by penalty fees like late charges and exceeding credit limits had increased by about $1 billion annually in recent years, and should top $20 billion this year. Regulations passed by the Federal Reserve in December to curb unexpected interest charges would cost issuers about $12 billion a year in lost fees and income, according to industry calculations. The legislation before Congress would build on the Fed rules and would further squeeze banks' revenue when they are being hit with a high rate of credit card charge-offs. The government's stress tests showed that the nation's 19 biggest banks will take on $82 billion in credit card losses in the next two years. A 2005 report by the Government Accountability Office estimated that 70 percent of card issuers' revenue came from interest charges, and the portion from penalty rates appeared to be growing. The remainder came from fees on cardholders as well as retailers for processing transactions. Many retailers are angry at the high fees and plan to pass them on to shoppers once the Congressional legislation takes effect. Consumer advocates say they have little sympathy for credit card issuers, arguing that they have made billions in recent years with unfair and sometimes deceptive practices. "The business model will change because the business model doesn't work for the public," said Gail Hillebrand, a senior lawyer at Consumers Union. "In order to do business under the new rules, they'll actually have to tell you how much it's going to cost," she said. With many consumers mired in debt and angry at what they consider gouging by credit card companies, the issue of credit card reform has broad populist appeal. Members of Congress and the Obama administration have seized on the discontent to push reforms that the industry succeeded in tamping down when the economy was flying high. Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to "a series of carjackings.""The card industry is giving the argument that if you didn't want to be carjacked, why weren't you locking your doors or taking a different road?" Mr. Goolsbee said. (Source: NY Times.) Senate passes credit card reform bill (May 2009) The Senate voted overwhelmingly on Tuesday to rein in credit card rate increases and excessive fees, hoping to give voters some breathing room amid a recession that has left hundreds of thousands of Americans jobless or facing foreclosure. The House was on track to pass the measure as early as Wednesday (20 May), paving the way for President Barack Obama to see the bill on his desk by week's end. "This is a victory for every American consumer who has ever suffered at the hands of a credit card company," said Sen. Christopher Dodd, D-Conn., chairman of the Banking Committee. The bill passed the Senate 90-5. If enacted into law as expected, the credit card industry would have nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone without an added fee. They'd also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased. Some of these changes are already on track to take effect in July 2010, under new rules being imposed by the Federal Reserve. But the Senate bill would put these changes into law and go further in restricting the types of bank fees and who can get a card. For example, the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default. Bankers warned the measure would restrict credit at a time when Americans need it most. They defended their existing interest rates and fees on grounds that their business — lending money to consumers with no collateral and little more than a promise to pay it back — is very risky. "What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky," said Edward Yingling, president and CEO of the American Bankers Association. "It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate," Yingling added. Voting against the Senate measure were GOP Sens. Lamar Alexander of Tennessee, Robert Bennett of Utah, Jon Kyl of Arizona and John Thune of South Dakota, as well as Democratic Sen. Tim Johnson of South Dakota. But other senators didn't want to face voters in the 2010 election without proof that they are listening to constituents crushed by foreclosure rates and joblessness. Recent reports show that the number of foreclosures jumped 32 percent in April compared with the same month last year, while the jobless rate that month rose to 8.9 percent. The legislation would not cap interest rates as some lawmakers had hoped. It also wouldn't prevent lenders from finding new ways to drain customers' bank accounts or keep consumers from spending money they don't have. But it would give spenders more flexibility and outlaw many of the surprise costs associated with credit cards at a time when money is tight in most households. For example, under the bill, a cardholder would have to opt to be allowed to go over a credit limit. If customers don't agree and the bank authorizes a charge that would push them over their limit, the lender couldn't levy an over-limit fee. Another boon for consumers is limiting a practice known as "universal default," when a lender sharply increases a cardholder's interest rate on an existing balance because the customer is late paying that bill or other, unrelated bills. Under the new legislation, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance. Even then, the credit card company would be required to restore the previous, lower rate after six months if the cardholder pays the minimum balance on time. House Democratic leaders said they planned to move quickly. Last month, the House approved, by 357-70, a similar credit card bill by Rep. Carolyn Maloney, D-N.Y. (Source: MSNBC.) Obama Sign Credit Card Bill (May 2009) President Barack Obama is scheduled to sign the credit card reform bill on Friday (21 May). The quick turnaround signals the importance the administration attaches to granting relief to consumers who have been buffeted by what the president has called the credit industry's "anything goes" mentality. But this high-profile, high-priority event clashes with what once was deemed another top presidential priority: Obama's campaign promise that he would "not sign any nonemergency bill without giving the American public an opportunity to review and comment on the White House website for five days." Obama's scheduled signing of the credit card bill on Friday doesn't meet that promise, since the Senate passed the bill on Tuesday and the House passed it Wednesday, leaving fewer than two days for public review. (Source: Politico.) (SITE NOTE: Forget about the 5-day promise. Obama has already figured out that he doesn't have to abide by this promise and numerous bills have already been passed without the 5-day wait. Just chalk it up to another Flim-flam promise of the machiavellian politician.) June 2009Official: Obama to propose new consumer agency (Jun 2009) An Obama administration official says the Treasury will propose the creation of a regulatory agency to protect consumers in their credit, savings and other banking transactions. The new agency is one of the central elements of President Barack Obama's overhaul of the financial regulatory system. The president is set to announce his broad plan on Wednesday (17 Jun). The administration official described the plan on the condition of anonymity because Obama had not yet made it public.Obama's decision to create the agency is in response to criticism that lenders and credit card companies have taken advantage of unwitting consumers and saddled them with debt. The new agency is likely to be one of the flash points in the administration's proposal because many in the banking industry do not support it. (Source: Breitbart.) September 2009Credit card defaults up at major lenders (Sep 2009) Over the past few months, banks had been releasing some promising figures regarding credit card defaults – but new data suggests that any signs of improvement may not be lasting. The latest figures from major lenders implies that previous progress could be more accurately credited to seasonal factors and Americans paying down credit card debt with their tax refunds, according to Bloomberg.Banks including JPMogan Chase, Bank of America, Citigroup and Discover all reported an increase in credit card defaults – also known as charge-offs – during August. Charge-offs reflect credit card accounts that issuers deem uncollectable. In particular, BofA reported that charge-offs climbed from 13.8 percent to 14.5 percent last month, while Citigroup saw a rise from 10 percent to 12.1 percent during the same period. (Source: Credit.com.) 14.5%? 13.8%? That is more than twice a normal or healthy default rate.
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