The U.S. Treasury Department today announced it will allocate $20 billion to back a lending facility for the consumer asset backed securities market established by the Federal Reserve Bank of New York.
The asset backed securities market provides liquidity to financial institutions that provide small business loans and consumer lending such as auto loans, student loans, and credit cards. While ABS issuance's in these categories were roughly $240 billion in 2007, issuance of consumer ABS declined precipitously in the third quarter of 2008 before essentially coming to a halt in October. Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally.
This facility, the Term Asset Backed Securities Loan Facility, is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of ABS and improving ABS market conditions. The underlying credit exposures of eligible securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration. The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.
Under the new facility, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department will provide a $20 billion of credit protection to the Federal Reserve in connection with the facility, using its authorities in the Emergency Economic Stabilization Act of 2008. The attached term sheet describes the basic terms and operational details of the facility.
Saturday, November 29, 2008
Tuesday, November 25, 2008
Here We Go Again
The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.
Can We Spend Our Way Out?
The politicians are banking on turning the economy around though use of a stimulus package. The theory behind economic stimulus programs is that if you put money in the consumers pocket they will spend it. What would you do if the government sent you back $1,000 of the previous money you paid in then added $1,000 to the national debt?
President Bush enacted a stimulus package in his first term. 1 out of 5 people spent the stimulus while 4 people either paid down debt or saved the money. If people are loosing faith in the economy don’t you think most would save as much as they can? Consider that over 60% of Americans plan on spending less this Christmas. What makes the government think that if they send us money that we’re going to run out and spend it?
What Else Is In Your Hat of Tricks? When I listen to the politicians speak about turning the economy around the solutions suggested are nothing new that hasn’t already been tried in the past. Our politicians have tried stimulus packages, tax cuts, tax increases, deficit spending and the list of tricks goes on and on. However, the dynamics of today’s economic crisis are not common ills that require common prescriptions to cure the virus that has spread globally. While the politicians point to remedies that were used during the great depression and suggest their actions will help avoid an economic meltdown globally they have no historical reference point or model to suggest their theories are correct. A lot of old talk spun against new problems which are systemically connected to everything and everyone globally. We’ve never had this condition before.
Throw Money At the Problem? The current deficit estimates of cost for all the currently planned bailouts, stimulus packages as well as the rising cost of supporting basic government, federal and state, operating plans etc exceed $7 Trillion. Did you hear me? $7 Trillion!
Throwing money at problems as complex as the current global economy and expecting us to stimulate the economy by spending more is not sound fiscal policy or clear thinking. Maybe I am not smart enough to understand economic policy however I am smart enough to add and to use common sense. Consider:
*Everyone is coming to the government for a bailout and you’re having trouble saying no
*You tell the auto industry you want a plan yet you haven’t showed your own plan to the American people
*You are using words like “hope, possibilities, creativity, resolve etc. etc.” while we the people use words like “foolishness, stupidity, selfish politicians, economic depression and despair.
*We see main street businesses going out of business. You see Fortune 500 Executives flying in for a handout in a private jet.
*We see friends wondering how and where to get a job so they can support their family. You see special interest groups wishing to protect their positions and their institutions.
The money our officials are throwing at the problems is debt. OK, so the message for the American public is just increase your debt and everything will be OK. Business owner’s, just borrow more money and everything will be OK. Don’t worry we the government will just print more money so there will be plenty to borrow. So you ask how will we pay it back? The government’s response: By spending more! And you wonder why we the people have no faith in your decisions. Maybe we should call it The Spend Economy.
President Bush enacted a stimulus package in his first term. 1 out of 5 people spent the stimulus while 4 people either paid down debt or saved the money. If people are loosing faith in the economy don’t you think most would save as much as they can? Consider that over 60% of Americans plan on spending less this Christmas. What makes the government think that if they send us money that we’re going to run out and spend it?
What Else Is In Your Hat of Tricks? When I listen to the politicians speak about turning the economy around the solutions suggested are nothing new that hasn’t already been tried in the past. Our politicians have tried stimulus packages, tax cuts, tax increases, deficit spending and the list of tricks goes on and on. However, the dynamics of today’s economic crisis are not common ills that require common prescriptions to cure the virus that has spread globally. While the politicians point to remedies that were used during the great depression and suggest their actions will help avoid an economic meltdown globally they have no historical reference point or model to suggest their theories are correct. A lot of old talk spun against new problems which are systemically connected to everything and everyone globally. We’ve never had this condition before.
Throw Money At the Problem? The current deficit estimates of cost for all the currently planned bailouts, stimulus packages as well as the rising cost of supporting basic government, federal and state, operating plans etc exceed $7 Trillion. Did you hear me? $7 Trillion!
Throwing money at problems as complex as the current global economy and expecting us to stimulate the economy by spending more is not sound fiscal policy or clear thinking. Maybe I am not smart enough to understand economic policy however I am smart enough to add and to use common sense. Consider:
*Everyone is coming to the government for a bailout and you’re having trouble saying no
*You tell the auto industry you want a plan yet you haven’t showed your own plan to the American people
*You are using words like “hope, possibilities, creativity, resolve etc. etc.” while we the people use words like “foolishness, stupidity, selfish politicians, economic depression and despair.
*We see main street businesses going out of business. You see Fortune 500 Executives flying in for a handout in a private jet.
*We see friends wondering how and where to get a job so they can support their family. You see special interest groups wishing to protect their positions and their institutions.
The money our officials are throwing at the problems is debt. OK, so the message for the American public is just increase your debt and everything will be OK. Business owner’s, just borrow more money and everything will be OK. Don’t worry we the government will just print more money so there will be plenty to borrow. So you ask how will we pay it back? The government’s response: By spending more! And you wonder why we the people have no faith in your decisions. Maybe we should call it The Spend Economy.
Saturday, November 22, 2008
Yet Another Bailout
The U.S. Treasury Department announced today that it agreed to assist with the liquidation of The Reserve Fund's U.S. Government Fund, due to unique and extraordinary circumstances.
The fund, which Treasury accepted into its temporary guarantee program for money market funds, has made a claim to Treasury under the program. In a separate agreement with the fund, the Treasury has agreed to serve as a buyer of last resort for the fund's securities, which consist of short-term U.S. government and government sponsored enterprise securities.
This action is being taken to ensure that the fund is liquidated in an orderly and timely fashion.
The agreement grants the fund a 45-day period where it will continue to sell assets. At the conclusion of this period, Treasury's Exchange Stabilization Fund will purchase any remaining securities at amortized cost, up to an amount required to ensure that each shareholder receives $1 for every share they own.
This extraordinary action is in response to the unique situation of the money market fund. This fund was permitted to suspend share redemptions as of September 17, in accordance with an order issued by the Securities and Exchange Commission.
The fund, which Treasury accepted into its temporary guarantee program for money market funds, has made a claim to Treasury under the program. In a separate agreement with the fund, the Treasury has agreed to serve as a buyer of last resort for the fund's securities, which consist of short-term U.S. government and government sponsored enterprise securities.
This action is being taken to ensure that the fund is liquidated in an orderly and timely fashion.
The agreement grants the fund a 45-day period where it will continue to sell assets. At the conclusion of this period, Treasury's Exchange Stabilization Fund will purchase any remaining securities at amortized cost, up to an amount required to ensure that each shareholder receives $1 for every share they own.
This extraordinary action is in response to the unique situation of the money market fund. This fund was permitted to suspend share redemptions as of September 17, in accordance with an order issued by the Securities and Exchange Commission.
Paulson Does What He Wants
We recognized that a troubled asset purchase program, to be effective, would require a massive commitment of TARP funds. It became clear that, while in mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. Half of that sum, in a worse economy, simply isn't enough firepower.
If we have learned anything throughout this year we have learned that this financial crisis is unpredictable and difficult to counteract. So early last week, we concluded it was only prudent to reserve our TARP capacity, maintaining not only our flexibility, but that of the next Administration.
We have identified other priorities that I believe the government will need to address through the TARP and other existing authorities. In particular, by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.
And we need to continue our efforts to use a variety of authorities to reduce avoidable foreclosures. The government has made substantial progress on that front, through HUD programs, through the FDIC's program with IndyMac, through our support and leadership of the HOPE NOW Alliance, and through the new GSE servicer guidelines announced last week that will set a new standard for the entire industry. While I understand the interest in spending TARP resources on other approaches, the efforts already underway will do more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP.
If we have learned anything throughout this year we have learned that this financial crisis is unpredictable and difficult to counteract. So early last week, we concluded it was only prudent to reserve our TARP capacity, maintaining not only our flexibility, but that of the next Administration.
We have identified other priorities that I believe the government will need to address through the TARP and other existing authorities. In particular, by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.
And we need to continue our efforts to use a variety of authorities to reduce avoidable foreclosures. The government has made substantial progress on that front, through HUD programs, through the FDIC's program with IndyMac, through our support and leadership of the HOPE NOW Alliance, and through the new GSE servicer guidelines announced last week that will set a new standard for the entire industry. While I understand the interest in spending TARP resources on other approaches, the efforts already underway will do more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP.
Sunday, November 16, 2008
Central Bankers Ready for More Actions
Federal Reserve Chairman Ben S. Bernanke said central bankers worldwide are prepared to take additional actions as needed to unfreeze credit markets, citing continued strains even amid ”tentative improvements.''
“The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,'' Bernanke said today at a panel discussion hosted by the European Central Bank in Frankfurt. ``For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.''
Bernanke led the ECB and other central banks last month in the broadest coordinated interest-rate cut in history. The Fed also removed limits on currency-exchange programs with four of its counterparts, including the ECB, and agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore.
“Monetary policy actions have not resolved the ongoing strains in financial markets,'' Bernanke said in prepared remarks at the ECB conference, which is marking the 10th anniversary of the euro. Bernanke said “financial markets remain under severe strain,'' while noting “tentative improvements in credit-market functioning.''
He didn't specify what new steps central banks could take. The Fed, ECB, Bank of England and other central banks have all lowered rates since the coordinated cut on Oct. 8. While the governments probably won't coordinate fiscal policy, their actions will likely become increasingly similar, Bernanke said.
Central banks created the currency swap lines in response to ``strong demand for dollar funding'' in the U.S. and other countries, Bernanke said. The ``recent sharp deterioration'' in interbank and other funding markets, where some financial institutions normally got dollars, left some companies ``without adequate access to short-term dollar financing,'' he said.
Since the coordinated rate reduction, the Fed has cut its benchmark rate another half-point to 1 percent. The central bank has provided more than $1 trillion in loans to financial institutions to mitigate the worst credit crunch in seven decades and head off a global recession. The Federal Open Market Committee next meets Dec. 16. “Bernanke's remarks make us think another coordinated rate cut cannot be ruled out,'' there is “no hint that the Fed has run out of bullets,'' he said.
“Central bankers and other policy makers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy,'' Bernanke said.
“The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,'' Bernanke said today at a panel discussion hosted by the European Central Bank in Frankfurt. ``For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.''
Bernanke led the ECB and other central banks last month in the broadest coordinated interest-rate cut in history. The Fed also removed limits on currency-exchange programs with four of its counterparts, including the ECB, and agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore.
“Monetary policy actions have not resolved the ongoing strains in financial markets,'' Bernanke said in prepared remarks at the ECB conference, which is marking the 10th anniversary of the euro. Bernanke said “financial markets remain under severe strain,'' while noting “tentative improvements in credit-market functioning.''
He didn't specify what new steps central banks could take. The Fed, ECB, Bank of England and other central banks have all lowered rates since the coordinated cut on Oct. 8. While the governments probably won't coordinate fiscal policy, their actions will likely become increasingly similar, Bernanke said.
Central banks created the currency swap lines in response to ``strong demand for dollar funding'' in the U.S. and other countries, Bernanke said. The ``recent sharp deterioration'' in interbank and other funding markets, where some financial institutions normally got dollars, left some companies ``without adequate access to short-term dollar financing,'' he said.
Since the coordinated rate reduction, the Fed has cut its benchmark rate another half-point to 1 percent. The central bank has provided more than $1 trillion in loans to financial institutions to mitigate the worst credit crunch in seven decades and head off a global recession. The Federal Open Market Committee next meets Dec. 16. “Bernanke's remarks make us think another coordinated rate cut cannot be ruled out,'' there is “no hint that the Fed has run out of bullets,'' he said.
“Central bankers and other policy makers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy,'' Bernanke said.
Wednesday, November 12, 2008
Bailout plan remains a gamble
There's been a helter- skelter quality to the Bush administration’s efforts to rescue Wall Street, restore consumer and investor confidence and save a sinking economy.
It began with Treasury Secretary Henry Paulson's too quickly concocted bailout bill, which was promptly and properly rejected by Congress. What followed was a massive rewrite on Capitol Hill to provide some protection for taxpayers, thwart a blatant power grab by Paulson and prevent an oversight-free giveaway to embattled banks and investment houses.
Fairly or unfairly, the impression was one of haste by Bush administration refugees from Wall Street looking out for their former (and perhaps future) colleagues in the battered financial industry. It's an impression reinforced now by news that the bailout process has produced a little-advertised tax windfall of up to $140 billion for U.S. banks.
The bonanza, disclosed this week by the Washington Post, is regulatory mischief by elves (presumably conservative ones) in the Treasury Department that, in effect, repeals a 22-year-old law limiting the extent to which banks can use losses in acquired firms to offset profits.
Is it legal? Washington seems unsure. A more immediate question is whether it's economically wise to challenge the tax change, since it apparently has facilitated several mergers that may help stabilize the economy.
Several prominent congressional leaders, including Republican Sen. Charles Grassley of Iowa, are described as irate over the Treasury Department's raid on, well, the treasury itself. They've been sandbagged and want an explanation from the White House. Lotsa luck.
It's the latest in a series of fumbled starts and hasty fixes that raise questions about just how sure-footed the Bush team's fiscal managers are and where their loyalties lie -- with Wall Street or the taxpaying public. And whether they'll cure the nation's credit crunch and right the economy or just drive federal deficits ever higher.
Planned and proposed bailouts (e.g., of the auto industry) are expected to drive the federal deficit to $1 trillion, maybe more.
The administration's initial effort, a $700 billion bailout bill thrown together in the first hours of the crisis, was only three pages long, meager in detail and lacking in protection for taxpayers. Moreover, in a piece of incredible arrogance, it provided that Paulson's bailout actions were not subject to review by "any court or administrative agency."
Congress, with President Bush's own party leading the way, rejected Paulson's audacious bid to save Wall Street from itself as he alone saw fit -- no visible restraints on the managers of the banks and big investment houses who spawned the collapse.
In the weeks since, against the background of a historic election, virtually every provision of Paulson's handiwork has been revised except the total tab, $700 billion. And even that is to be doled out in segments, beginning with roughly $250 billion as the first installment. Let's see how that much works, Congress decided.
In the process, the original Paulson proposal has grown from three pages to 110 and finally to 451. More important, the changes have hedged the money with taxpayer protections.
Instead of no review, Paul son and the Treasury Department agency created to administer the money -- the Office of Financial Stability -- are now specifically subject to court and agency oversight.
The "golden parachute," a perk most prized in the world of high-flying finance, has been made a no-no in companies taking the federal handout. Another provision prohibits executives from encouraging "unnecessary and excessive risks." There's even a "clawback" provision that seems to allow the recovery of some compensation from the bosses of mismanaged or failed companies.
It's too early to conclude that these changes make the legislation airtight against misuse of the bailout money. But they're a needed first step.
The progress of the bailout process -- from Paulson's power grab to the congressional rewrite -- has been messy and confidence-shaking, a does-anyone-know-what's-really-going-on journey. "Feckless" is a word often applied to the process, especially in the beginning.
It began with Treasury Secretary Henry Paulson's too quickly concocted bailout bill, which was promptly and properly rejected by Congress. What followed was a massive rewrite on Capitol Hill to provide some protection for taxpayers, thwart a blatant power grab by Paulson and prevent an oversight-free giveaway to embattled banks and investment houses.
Fairly or unfairly, the impression was one of haste by Bush administration refugees from Wall Street looking out for their former (and perhaps future) colleagues in the battered financial industry. It's an impression reinforced now by news that the bailout process has produced a little-advertised tax windfall of up to $140 billion for U.S. banks.
The bonanza, disclosed this week by the Washington Post, is regulatory mischief by elves (presumably conservative ones) in the Treasury Department that, in effect, repeals a 22-year-old law limiting the extent to which banks can use losses in acquired firms to offset profits.
Is it legal? Washington seems unsure. A more immediate question is whether it's economically wise to challenge the tax change, since it apparently has facilitated several mergers that may help stabilize the economy.
Several prominent congressional leaders, including Republican Sen. Charles Grassley of Iowa, are described as irate over the Treasury Department's raid on, well, the treasury itself. They've been sandbagged and want an explanation from the White House. Lotsa luck.
It's the latest in a series of fumbled starts and hasty fixes that raise questions about just how sure-footed the Bush team's fiscal managers are and where their loyalties lie -- with Wall Street or the taxpaying public. And whether they'll cure the nation's credit crunch and right the economy or just drive federal deficits ever higher.
Planned and proposed bailouts (e.g., of the auto industry) are expected to drive the federal deficit to $1 trillion, maybe more.
The administration's initial effort, a $700 billion bailout bill thrown together in the first hours of the crisis, was only three pages long, meager in detail and lacking in protection for taxpayers. Moreover, in a piece of incredible arrogance, it provided that Paulson's bailout actions were not subject to review by "any court or administrative agency."
Congress, with President Bush's own party leading the way, rejected Paulson's audacious bid to save Wall Street from itself as he alone saw fit -- no visible restraints on the managers of the banks and big investment houses who spawned the collapse.
In the weeks since, against the background of a historic election, virtually every provision of Paulson's handiwork has been revised except the total tab, $700 billion. And even that is to be doled out in segments, beginning with roughly $250 billion as the first installment. Let's see how that much works, Congress decided.
In the process, the original Paulson proposal has grown from three pages to 110 and finally to 451. More important, the changes have hedged the money with taxpayer protections.
Instead of no review, Paul son and the Treasury Department agency created to administer the money -- the Office of Financial Stability -- are now specifically subject to court and agency oversight.
The "golden parachute," a perk most prized in the world of high-flying finance, has been made a no-no in companies taking the federal handout. Another provision prohibits executives from encouraging "unnecessary and excessive risks." There's even a "clawback" provision that seems to allow the recovery of some compensation from the bosses of mismanaged or failed companies.
It's too early to conclude that these changes make the legislation airtight against misuse of the bailout money. But they're a needed first step.
The progress of the bailout process -- from Paulson's power grab to the congressional rewrite -- has been messy and confidence-shaking, a does-anyone-know-what's-really-going-on journey. "Feckless" is a word often applied to the process, especially in the beginning.
Tuesday, November 11, 2008
It's your money; not the Fed's money - What Are They Hiding?
Fed Defies Transparency Aim in Refusal to Disclose. The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.
``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''
The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.
The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.
Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.
``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''
The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.
The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.
Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.
American Express gets in on the feeding frenzy
The Federal Reserve Board on Monday announced its approval of the applications and notices under sections 3 and 4 of the Bank Holding Company Act by American Express Company and American Express Travel Related Services Company, Inc., both of New York, New York, to become bank holding companies on conversion of American Express Centurion Bank, Salt Lake City, Utah, to a bank, and to retain certain nonbanking subsidiaries, including American Express Bank, FSB, Salt Lake City, Utah.
By doing this AMEX can accept deposits which will then be used to cover losses from their credit card operations. Isn't this nice, the Federal Reserve will use taxpayer money to cover losses by this company. Why don't they tighten up their credit policies and accept their losses as others must do. What is next for the other credit card issuers or they just out of luck as the Federal Reserve and Treasury play favorites. What is their interest and stake in this?
By doing this AMEX can accept deposits which will then be used to cover losses from their credit card operations. Isn't this nice, the Federal Reserve will use taxpayer money to cover losses by this company. Why don't they tighten up their credit policies and accept their losses as others must do. What is next for the other credit card issuers or they just out of luck as the Federal Reserve and Treasury play favorites. What is their interest and stake in this?
AIG Feeding at the Fed's Trough Again
AIG must need more money to support their lavish meetings. They are once again feeding at the federal trough filled with taxpayer dollars to go to lavish resorts for bogus meetings with financial analysts, this time in Phoenix at a cost to the taxpayer. Apparently the Treasury or Federal Reserve could care less about those supplying the funds and are participating in these supposed meeting. This is just another fleece job.
The Treasury Department today announced that it will purchase $40 billion in senior preferred stock from the American International Group (AIG) as part of a comprehensive plan to restructure federal assistance to the systemically important company. Together with steps taken by the Federal Reserve, this restructuring will improve the ability of the firm to execute its asset disposition plan in an orderly manner. AIG will use the equity to pay down $40 billion of the Federal Reserve's secured lending facility. Under the agreement AIG must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act. AIG must comply with the most stringent limitations on executive compensation for its top five senior executive officers as required under the Emergency Economic Stabilization Act. Treasury is also requiring golden parachute limitations and a freeze on the size of the annual bonus pool for the top 70 company executives.
Additionally, AIG must continue to maintain and enforce newly adopted restrictions put in place by the new management on corporate expenses and lobbying as well as corporate governance requirements, including formation of a risk management committee under the board of directors.
The Treasury Department today announced that it will purchase $40 billion in senior preferred stock from the American International Group (AIG) as part of a comprehensive plan to restructure federal assistance to the systemically important company. Together with steps taken by the Federal Reserve, this restructuring will improve the ability of the firm to execute its asset disposition plan in an orderly manner. AIG will use the equity to pay down $40 billion of the Federal Reserve's secured lending facility. Under the agreement AIG must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act. AIG must comply with the most stringent limitations on executive compensation for its top five senior executive officers as required under the Emergency Economic Stabilization Act. Treasury is also requiring golden parachute limitations and a freeze on the size of the annual bonus pool for the top 70 company executives.
Additionally, AIG must continue to maintain and enforce newly adopted restrictions put in place by the new management on corporate expenses and lobbying as well as corporate governance requirements, including formation of a risk management committee under the board of directors.
Monday, November 10, 2008
A Quiet Windfall For U.S. BanksWith Attention on Bailout Debate
The financial world was fixated onCapitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury issued a five-sentence notice that attracted almost no public attention.
But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.
The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.
"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."
The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Paulson in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.
The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.
The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.
More than a dozen tax lawyers interviewed for this story -- including several representing banks that stand to reap billions from the change -- said the Treasury had no authority to issue the notice.
Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.
But from the beginning, some conservative economists and Republican administration officials criticized the new law as unwieldy and unnecessary meddling by the government in the business world.
The opposition to Section 382 is part of a broader ideological battle over how the tax code deals with a company's losses. Some conservative economists argue that not only should a firm be able to use losses to offset gains, but that in a year when a company only loses money, it should be entitled to a cash refund from the government.
The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.
The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.
The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.
The tax world, meanwhile, was rushing to figure out the full impact of the notice and who was responsible for the change.
Jones Day released a widely circulated commentary that concluded that the change could cost taxpayers about $140 billion. Robert L. Willens, a prominent corporate tax expert in New York City, said the price is more likely to be $105 billion to $110 billion.
Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Willens said. Banco Santander, which took over Sovereign Bancorp, netted an extra $2 billion because of the change, he said. A spokesman for PNC said Willens's estimate was too high but declined to provide an alternate one; Santander declined to comment.
Attorneys representing banks celebrated the notice. The week after it was issued, former Treasury officials now in private practice met with Solomon, the department's top tax policy official. They asked him to relax the limitations on banks even further, so that foreign banks could benefit from the tax break, too.
No one in the Treasury informed the tax-writing committees of Congress about this move, which could reduce revenue by tens of billions of dollars. Legislators learned about the notice only days later.
In an off-the-record conference call on Oct. 7, nearly a dozen Capitol Hill staffers demanded answers from Solomon for about an hour. Several of the participants left the call even more convinced that the administration had overstepped its authority, according to people familiar with the conversation.
But lawmakers worried about discussing their concerns publicly. "We're all nervous about saying that this was illegal because of our fears about the marketplace," said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. "To the extent we want to try to publicly stop this, we're going to be gumming up some important deals."
Lawmakers are considering legislation to undo the change. According to tax attorneys, no one would have legal standing to file a lawsuit challenging the Treasury notice, so only Congress or Treasury could reverse it. Such action could undo the notice going forward or make it clear that it was never legal, a move that experts say would be unlikely.
But several aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy. "None of us wants to be blamed for ruining these mergers and creating a new Great Depression," one said.
But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.
The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.
"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."
The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Paulson in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.
The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.
The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.
More than a dozen tax lawyers interviewed for this story -- including several representing banks that stand to reap billions from the change -- said the Treasury had no authority to issue the notice.
Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.
But from the beginning, some conservative economists and Republican administration officials criticized the new law as unwieldy and unnecessary meddling by the government in the business world.
The opposition to Section 382 is part of a broader ideological battle over how the tax code deals with a company's losses. Some conservative economists argue that not only should a firm be able to use losses to offset gains, but that in a year when a company only loses money, it should be entitled to a cash refund from the government.
The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.
The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.
The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.
The tax world, meanwhile, was rushing to figure out the full impact of the notice and who was responsible for the change.
Jones Day released a widely circulated commentary that concluded that the change could cost taxpayers about $140 billion. Robert L. Willens, a prominent corporate tax expert in New York City, said the price is more likely to be $105 billion to $110 billion.
Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Willens said. Banco Santander, which took over Sovereign Bancorp, netted an extra $2 billion because of the change, he said. A spokesman for PNC said Willens's estimate was too high but declined to provide an alternate one; Santander declined to comment.
Attorneys representing banks celebrated the notice. The week after it was issued, former Treasury officials now in private practice met with Solomon, the department's top tax policy official. They asked him to relax the limitations on banks even further, so that foreign banks could benefit from the tax break, too.
No one in the Treasury informed the tax-writing committees of Congress about this move, which could reduce revenue by tens of billions of dollars. Legislators learned about the notice only days later.
In an off-the-record conference call on Oct. 7, nearly a dozen Capitol Hill staffers demanded answers from Solomon for about an hour. Several of the participants left the call even more convinced that the administration had overstepped its authority, according to people familiar with the conversation.
But lawmakers worried about discussing their concerns publicly. "We're all nervous about saying that this was illegal because of our fears about the marketplace," said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. "To the extent we want to try to publicly stop this, we're going to be gumming up some important deals."
Lawmakers are considering legislation to undo the change. According to tax attorneys, no one would have legal standing to file a lawsuit challenging the Treasury notice, so only Congress or Treasury could reverse it. Such action could undo the notice going forward or make it clear that it was never legal, a move that experts say would be unlikely.
But several aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy. "None of us wants to be blamed for ruining these mergers and creating a new Great Depression," one said.
Federal Reserve Board and Treasury Department announce restructuring of financial support to AIG
Here we go again, changing terms of a bailout to help incompetent and crooked executives enrich themselves at the expense of the American taxpayer. Who authorized this and why hasn't congress who is supposedly protecting us, remaining silent on the issue? No one cares about us taxpayers, just keep taking our money and wasting it.
The Federal Reserve Board and the U.S. Treasury on Monday announced the restructuring of the government's financial support to the American International Group (AIG) in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.
Equity Purchase: The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008.
Credit Facility: Certain other terms of the existing New York Fed credit facility, established on September 16, will be modified to help achieve the objectives described above. In particular, the interest rate on the facility will be reduced to three-month Libor plus 300 basis points from the current rate of three-month Libor plus 850 basis points, and the fee on undrawn funds will be reduced to 75 basis points from the current rate of 850 basis points. The length of the facility will be extended from two years to five years. The other material terms of the facility remain unchanged. The facility will continue to be secured by a lien on many of the assets of AIG and of its subsidiaries.
Additional Lending Facilities: The Federal Reserve Board has authorized the New York Fed to establish two new lending facilities relating to AIG under section 13(3) of the Federal Reserve Act. These facilities are designed to alleviate capital and liquidity pressures on AIG associated with two distinct portfolios of mortgage-related securities.
Residential Mortgage-Backed Securities Facility; In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC's purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.
Proceeds from this facility, together with other AIG internal resources, will be used to return all cash collateral posted for securities loans outstanding under AIG's U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated.
Collateralized Debt Obligations Facility; In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. In connection with the purchase of the CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. The loans will be secured by all of the LLC's assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.
The Federal Reserve Board and the U.S. Treasury on Monday announced the restructuring of the government's financial support to the American International Group (AIG) in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.
Equity Purchase: The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008.
Credit Facility: Certain other terms of the existing New York Fed credit facility, established on September 16, will be modified to help achieve the objectives described above. In particular, the interest rate on the facility will be reduced to three-month Libor plus 300 basis points from the current rate of three-month Libor plus 850 basis points, and the fee on undrawn funds will be reduced to 75 basis points from the current rate of 850 basis points. The length of the facility will be extended from two years to five years. The other material terms of the facility remain unchanged. The facility will continue to be secured by a lien on many of the assets of AIG and of its subsidiaries.
Additional Lending Facilities: The Federal Reserve Board has authorized the New York Fed to establish two new lending facilities relating to AIG under section 13(3) of the Federal Reserve Act. These facilities are designed to alleviate capital and liquidity pressures on AIG associated with two distinct portfolios of mortgage-related securities.
Residential Mortgage-Backed Securities Facility; In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC's purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.
Proceeds from this facility, together with other AIG internal resources, will be used to return all cash collateral posted for securities loans outstanding under AIG's U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated.
Collateralized Debt Obligations Facility; In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. In connection with the purchase of the CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. The loans will be secured by all of the LLC's assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.
Friday, November 7, 2008
NY Fed President Might Be Next Sec. Treasury?
Treasury issued the following statement by Secretary Henry M. Paulson, Jr. following President Bush's Cabinet meeting this morning to discuss efforts to ensure a seamless transition to the next Administration: "I congratulate Senator Obama on the election and look forward to working with his team to ensure that there is a smooth and effective transition. A methodical and orderly transition is in the best interests of the financial markets and Treasury is committed to making sure that the incoming team can hit the ground running in January. The next Secretary will also benefit from the support of an exceptional staff of hard-working career employees at Treasury who are critical to the important work before the Department."
How nice that his successor might be the current president of the New York Fed Tim Geitner. He is the one who orchestrated the collapse and sale of Bear Sterns to Chase backing it with taxpayer dollars. This is not his only mistake but he is on the short list to succeed Paulson.
How nice that his successor might be the current president of the New York Fed Tim Geitner. He is the one who orchestrated the collapse and sale of Bear Sterns to Chase backing it with taxpayer dollars. This is not his only mistake but he is on the short list to succeed Paulson.
Tuesday, November 4, 2008
The Trillion Dollar Deficit
The government, raising cash to pay for the array of financial rescue packages, said yesterday it plans to borrow $550 billion in the last three months of this year -- and that's just a down payment.
Treasury Department officials also projected the government would need to borrow $368 billion more in the first three months of 2009, meaning the next president will confront an ocean of red ink.
The nonpartisan Committee for a Responsible Budget estimates all the government economic and rescue initiatives, starting with the $168 billion in stimulus checks issued earlier this year, total even more -- an eye-popping $2.6 trillion.
In addition to the borrowing numbers, Treasury released estimates by major Wall Street bond firms projecting total borrowing for this budget year, which began Oct. 1, will total $1.4 trillion, nearly double the previous record.
Major Wall Street firms were equally pessimistic about the size of the federal deficit this year. They projected it will hit $988 billion for the current budget year, more than twice the record. In July, the administration projected a deficit for this year of $482 billion, but that was before the financial crisis erupted in September.
Supporters of the government rescue packages argue the ultimate cost to taxpayers should end up being a lot smaller, partly because the Federal Reserve is extending loans to banks that should be paid back.
And in the case of the $700 billion rescue package, the government is buying assets -- either bank stock or distressed mortgage-backed assets -- that it hopes will rebound in value once the crisis has passed. What happens if this does not come to pass? Who will be holding the bag then.
But the government still needs to borrow massive amounts to buy the assets, an effort that has driven up borrowing costs to levels never before contemplated. What is going to be the debt service on these borrowings? We are only told of the amount borrowed, once again having the true cost hidden from those paying the bill.
Meanwhile, the Bush administration is moving to get parts of the rescue package up and running. Two New York law firms -- Hughes, Hubbard & Reed and Squire Sanders & Dempsey -- were announced to process the mountains of paperwork banks will be required to file. That will allow the government to monitor the operation of the $250 billion program to buy bank stock. Each law firm will receive up to $5.5 million for its work through April 28.
The law firms will be responsible for monitoring the filings of up to 1,800 eligible banks with publicly traded stock. In addition, 6,000 other banks whose stock is not publicly traded can apply for government purchases of their stock. The government distributed the first $125 billion to nine of the biggest banks in the country last week.
Treasury Department officials also projected the government would need to borrow $368 billion more in the first three months of 2009, meaning the next president will confront an ocean of red ink.
The nonpartisan Committee for a Responsible Budget estimates all the government economic and rescue initiatives, starting with the $168 billion in stimulus checks issued earlier this year, total even more -- an eye-popping $2.6 trillion.
In addition to the borrowing numbers, Treasury released estimates by major Wall Street bond firms projecting total borrowing for this budget year, which began Oct. 1, will total $1.4 trillion, nearly double the previous record.
Major Wall Street firms were equally pessimistic about the size of the federal deficit this year. They projected it will hit $988 billion for the current budget year, more than twice the record. In July, the administration projected a deficit for this year of $482 billion, but that was before the financial crisis erupted in September.
Supporters of the government rescue packages argue the ultimate cost to taxpayers should end up being a lot smaller, partly because the Federal Reserve is extending loans to banks that should be paid back.
And in the case of the $700 billion rescue package, the government is buying assets -- either bank stock or distressed mortgage-backed assets -- that it hopes will rebound in value once the crisis has passed. What happens if this does not come to pass? Who will be holding the bag then.
But the government still needs to borrow massive amounts to buy the assets, an effort that has driven up borrowing costs to levels never before contemplated. What is going to be the debt service on these borrowings? We are only told of the amount borrowed, once again having the true cost hidden from those paying the bill.
Meanwhile, the Bush administration is moving to get parts of the rescue package up and running. Two New York law firms -- Hughes, Hubbard & Reed and Squire Sanders & Dempsey -- were announced to process the mountains of paperwork banks will be required to file. That will allow the government to monitor the operation of the $250 billion program to buy bank stock. Each law firm will receive up to $5.5 million for its work through April 28.
The law firms will be responsible for monitoring the filings of up to 1,800 eligible banks with publicly traded stock. In addition, 6,000 other banks whose stock is not publicly traded can apply for government purchases of their stock. The government distributed the first $125 billion to nine of the biggest banks in the country last week.
Treasury Announces Deficit Busting Borrowing Estimates
Treasury announced its current estimates of marketable borrowing today for the October – December 2008 and January – March 2009 quarters: Over the October – December 2008 quarter, the Treasury expects to borrow $550 billion of marketable debt, assuming an end-of-December cash balance of $300 billion, which includes $260 billion for the Supplementary Financing Program (SFP). Without the SFP, the end-of-December cash balance is expected to be $40 billion. This borrowing estimate is $408 billion higher than announced in July 2008. The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuance's of State and Local Government Series securities.Over the January – March 2009 quarter, the Treasury expects to borrow $368 billion of marketable debt, assuming an end-of-March cash balance of $75 billion.During the July – September 2008 quarter, Treasury borrowed $530 billion of marketable debt, including $300 billion for the SFP, and finished with a cash balance of $372 billion at the end of September. Without the SFP, the end of September cash balance was $72 billion. In July 2008, Treasury estimated $171 billion in marketable borrowing, assuming an end-of-September cash balance of $45 billion. The increase in borrowing was related to the SFP, lower receipts, higher outlays, and lower net issuance's of State and Local Government Series securities.
Monday, November 3, 2008
Helping The Wrong Areas Again
The Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.
In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies.
Let us for a change worry about our own economic and financial systems first. What are we helping these foreign central banks in the hope we will somehow benefit from these actions. While there are interconnections in the global financial systems and intertwines economies, could not these monies and efforts be better used here rather than abroad? Lets hope that eventually someone comes to their senses and corrects the situation.
In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies.
Let us for a change worry about our own economic and financial systems first. What are we helping these foreign central banks in the hope we will somehow benefit from these actions. While there are interconnections in the global financial systems and intertwines economies, could not these monies and efforts be better used here rather than abroad? Lets hope that eventually someone comes to their senses and corrects the situation.
Sunday, November 2, 2008
Bailout Activity Not What Congress Anticipated
The Treasury Department today issued additional documents for publicly traded financial institutions applying for the capital purchase program authorized by the Emergency Economic Stabilization Act. This program is designed to attract broad participation by healthy institutions, to stabilize the financial system and increase lending for the benefit of the U.S. economy and the American people.
After the battle to get this deficit busting bailout passed it has now been used by one institution PNC Financial Services to purchase another bank. So as taxpayers we gain an equity stake in PNC so that that they can expand and help themselves, but not where help is needed or was intended. We can expect to see more of this as congress seeks to help those that keep them in office. Who or what are the taxpayers going to bailout next, I doubt it will have anything to do with mortgage assistance or be remotely connected to the sub-prime mess.
Stockholders in institutions such as PNC are now using taxpayers money to pay dividends to shareholders. So instead of helping to promote new lending by the banks it is going to those who can afford to invest in bank stocks instead of those struggling to pay their mortgages, other bills and just plain survive. So much for the bill of goods given the public when Paulson and Bernanke were trying to sell this plan, rescuing banks and homeowners. The average citizen loses yet once again.
The next thing we will be seeing are other large businesses somehow reconstituting themselves as a bank holding company so that they can get their hands on some of this free cash. Those responsible for safeguarding our financial system and economy are doing just the opposite. Thanks for nothing - Bernanke, Paulson and Congress.
After the battle to get this deficit busting bailout passed it has now been used by one institution PNC Financial Services to purchase another bank. So as taxpayers we gain an equity stake in PNC so that that they can expand and help themselves, but not where help is needed or was intended. We can expect to see more of this as congress seeks to help those that keep them in office. Who or what are the taxpayers going to bailout next, I doubt it will have anything to do with mortgage assistance or be remotely connected to the sub-prime mess.
Stockholders in institutions such as PNC are now using taxpayers money to pay dividends to shareholders. So instead of helping to promote new lending by the banks it is going to those who can afford to invest in bank stocks instead of those struggling to pay their mortgages, other bills and just plain survive. So much for the bill of goods given the public when Paulson and Bernanke were trying to sell this plan, rescuing banks and homeowners. The average citizen loses yet once again.
The next thing we will be seeing are other large businesses somehow reconstituting themselves as a bank holding company so that they can get their hands on some of this free cash. Those responsible for safeguarding our financial system and economy are doing just the opposite. Thanks for nothing - Bernanke, Paulson and Congress.
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