This post first appeared on Minyanville.
Even the Treasury Department's best attempts at statistical obfuscation can't hide the truth that credit remains off limits for most Americans. Banks -- despite billions in government handouts -- still aren't lending.
A Wall Street Journal study of lending data supplied by the 19 biggest recipients of TARP funds paints a decidedly less-rosy picture than does the Treasury's analysis of the same information.
New lending, as measured by aggregate loans made in February compared to last October -- which was the month then-Treasury Secretary Hank Paulson poured tens of billions of dollars into Goldman Sachs (GS), Bank of America (BAC), Citigroup (C) and other big American banks -- is down 23%. This tally, arrived at by the Journal, contrasts Treasury Department figures that measure the change in lending by looking at the median amount of new loans made by the same group of banks.
No surprise, government methodology arrives at numbers that make things markedly better.
And while no one data point can truly claim to be the best measure of the entire US lending environment, that government officials chose the method that supports their claim that borrowing is still possible for the most creditworthy Americans, shouldn't be surprising.
Even as the Treasury, Federal Reserve, FDIC and even Congress urge banks to make new loans, loudly assuring the American people the government has their best interests in mind, the borrowing public isn't listening: Americans continue to shun credit.
A spokesperson for JPMorgan Chase (JPM) said the bank aggressively made credit available "despite the fact that loan demand has dropped dramatically." This assessment is consistent with reports from community banks that consumers simply don't want to take on new debt.
About the only corner of the lending market that's booming is mortgages. Artificially low interest rates, falling home prices and aggressive marketing from the National Association of Realtors has led to a spike in new home loan originations.
Yet, as property values continue to spiral downward, banks like Wells Fargo (WFC), who tout their mortgage division as a strong earnings driver, are lending against an asset class that continues to tumble in value.
Increasingly, Americans are reassessing their own personal income statements. And with an economic future that's cloudy at best, taking on more debt isn't sounding like a great idea.
Not convinced? Examine the lengths to which automakers like Ford (F) are going to get buyers to open their wallets: payment insurance against job losses.
These sorts of marketing tricks are not dissimilar to teaser rates and no-money-down loans that were so prevalent during the mortgage boom. And we see how well that turned out.
Until Washington accepts the new reality -- that credit is driven not just by supply, but also demand -- we'll keep reading suspect analysis of data ostensibly supporting crackpot theories that credit markets have thawed, and a return to the go-go years of unsustainable economic growth is just around the corner.
Showing posts with label TARP. Show all posts
Showing posts with label TARP. Show all posts
Thursday, April 23, 2009
Saturday, March 7, 2009
Foreclosure By Design
This post first appeared on Minyanville and Cirios Real Estate.
Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.
Alas, it was not to be.
Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.
He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.
The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) - or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer's hard-earned nest egg would be used to forestall the inevitable day of reckoning.
We now know how that sad story ends.
Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.
Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.
Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.
Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.
It should come as no surprise that housing prices keep falling -- indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.
Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.
Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.
Alas, it was not to be.
Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.
He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.
The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) - or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer's hard-earned nest egg would be used to forestall the inevitable day of reckoning.
We now know how that sad story ends.
Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.
Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.
Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.
Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.
It should come as no surprise that housing prices keep falling -- indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.
Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.
Friday, December 19, 2008
Bush Bails Out Detroit
This post first appeared on Minyanville.
The holidays just got a bit brighter for Detroit.
This morning, President Bush authorized up to $17.4 billion in loans to rescue General Motors (GM) and Chrysler from imminent collapse. The 2 troubled automakers had asserted they'd run out of money by year's end without government assistance.
According to Bloomberg, the bailout money, which will come from the Troubled Asset Relief Program, or TARP, will provide a 3-month window for the 2 firms to devise a restructuring plan to ensure their long-term viability. At the end of March 2009, the loans are callable if the government doesn't feel its demands have been met, forcing GM and Chrysler to immediately pay the money back.
Ford (F), which said it didn't need an emergency loan, wasn't included in the proposal.
In exchange for the cash, the government will receive warrants on non-voting stock, in addition to the right to block transactions of $100 million or more. Both companies must limit executive pay, give lawmakers access to their financial records, and are barred from issuing dividends until the debt is repaid. Debt must be slashed by two-thirds.
Detroit's powerful union lobby, the United Auto Workers, accepted concessions on retirement contributions and payouts for downtime.
Bush, in saving the US auto industry at a time when the economy can ill-afford further job losses, told CNN "I have abandoned free-market principles to save the free-market system."
Rumors swirled in recent weeks about the possibility of an "orderly bankruptcy," after Congress failed to agree on terms for a bailout. The President said this morning that allowing the carmakers to collapse, given the ongoing financial turmoil and recession, would "not be a responsible course of action."
Evaluating the relative success of the industry's turnaround plans will largely be left up to the incoming Obama administration. The Wall Street Journal reports metrics for determining the firms' financial viability are "relatively lenient." And though the agreement doesn't specifically refer to a so-called "car czar," it does say the government must put someone in charge of ensuring the terms of the bailout are being met.
After months of pleading for money, GM CEO Rick Wagoner and Chrysler boss Robert Nardelli can finally return to Detroit with their pockets bulging. Payrolls can be met, vendors paid, and the books closed in January without a visit to bankruptcy court.
However, for 2 firms that seem inordinately adept at losing money -- and lots of it -- one would be hard-pressed to find too many people surprised if, before March, Wagoner and Nardelli are back on Capitol Hill explaining why they deserve a second chance.
The holidays just got a bit brighter for Detroit.
This morning, President Bush authorized up to $17.4 billion in loans to rescue General Motors (GM) and Chrysler from imminent collapse. The 2 troubled automakers had asserted they'd run out of money by year's end without government assistance.
According to Bloomberg, the bailout money, which will come from the Troubled Asset Relief Program, or TARP, will provide a 3-month window for the 2 firms to devise a restructuring plan to ensure their long-term viability. At the end of March 2009, the loans are callable if the government doesn't feel its demands have been met, forcing GM and Chrysler to immediately pay the money back.
Ford (F), which said it didn't need an emergency loan, wasn't included in the proposal.
In exchange for the cash, the government will receive warrants on non-voting stock, in addition to the right to block transactions of $100 million or more. Both companies must limit executive pay, give lawmakers access to their financial records, and are barred from issuing dividends until the debt is repaid. Debt must be slashed by two-thirds.
Detroit's powerful union lobby, the United Auto Workers, accepted concessions on retirement contributions and payouts for downtime.
Bush, in saving the US auto industry at a time when the economy can ill-afford further job losses, told CNN "I have abandoned free-market principles to save the free-market system."
Rumors swirled in recent weeks about the possibility of an "orderly bankruptcy," after Congress failed to agree on terms for a bailout. The President said this morning that allowing the carmakers to collapse, given the ongoing financial turmoil and recession, would "not be a responsible course of action."
Evaluating the relative success of the industry's turnaround plans will largely be left up to the incoming Obama administration. The Wall Street Journal reports metrics for determining the firms' financial viability are "relatively lenient." And though the agreement doesn't specifically refer to a so-called "car czar," it does say the government must put someone in charge of ensuring the terms of the bailout are being met.
After months of pleading for money, GM CEO Rick Wagoner and Chrysler boss Robert Nardelli can finally return to Detroit with their pockets bulging. Payrolls can be met, vendors paid, and the books closed in January without a visit to bankruptcy court.
However, for 2 firms that seem inordinately adept at losing money -- and lots of it -- one would be hard-pressed to find too many people surprised if, before March, Wagoner and Nardelli are back on Capitol Hill explaining why they deserve a second chance.
Wednesday, December 3, 2008
Paulson Rolling Out Rest of TARP?
This post first appeared on Minyanville.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
Tuesday, November 25, 2008
What's Another $200 Billion?
This post first appeared on Minyanville.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
Tuesday, November 18, 2008
Insurance Companies Position Themselves for Bailout
This post first appeared on Minyanville.
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Thursday, November 13, 2008
Obama Floats $50 Billion Automaker Bailout
This post first appeared on Minyanville.
So much for one president at a time.
Bloomberg reports President-Elect Obama is urging lawmakers to rush through a $50 billion bailout for the struggling U.S. automakers.
With no formal executive power until January, Obama is asking Democratic friends in the House and Senate to get their Republican counterparts behind a rescue plan. Any plan would also require the support of President Bush, according to Bloomberg.
Also at issue is whether the money would come from TARP -- essentially depleting the first $350 billion installment of bailout funds -- or from fresh legislation.
General Motors' (GM) situation is particularly dire, as many analysts believe that the once-largest carmaker in the world won't survive through January without federal funds.
Obama also wants to see emergency loans extended to GM, Ford (F) and Chrysler to buoy their weakening financial position. The President-Elect would appoint a czar or independent board to oversee the companies if the rescue plan becomes law.
A GM failure, which many argue would likely push Ford and Chrysler towards a similar fate, would have dire consequences for the American economy. Parts suppliers, dealers and Rust Belt communities already reeling from the housing slump; years of already lackluster economic growth would be decimated.
It appears the alternative to a bailout is too terrifying to even consider. There is, however, a precedent for bankrupt industries operating their way through restructuring efforts.
After September 11th, United (UAUA) and other defunct airlines flew throughout their bankruptcy. Service was shoddy at best, layoffs were severe, but the industry did not die.
Economic conditions are admittedly more dire now than in 2001, but at some point, the bailout parade must stop. Each company that fails, only to be saved from collapse by Washington, simply pushes genuine economic recovery further into the future.
As Minyanville's Kevin Depew wrote Monday,
"With continued bailouts we will emerge from a lost decade with an economy and society crippled by the cost of bailng out businesses that operated with irresponsibility and a near total disregard for not just taxpayers but for their very own shareholders."
Taxpayers watched the pricetag of AIG's (AIG) $80 billion bailout double in a matter of months. With Ford and GM collectively bleeding over $4 billion in cash every month, it's not unreasonble to think any automaker handout would similarly expand.
At some point, our elected officials may actually have to take a stand. Unfortunately, holding one's breath for that to happen should be considered a serious hazard to one's health.
So much for one president at a time.
Bloomberg reports President-Elect Obama is urging lawmakers to rush through a $50 billion bailout for the struggling U.S. automakers.
With no formal executive power until January, Obama is asking Democratic friends in the House and Senate to get their Republican counterparts behind a rescue plan. Any plan would also require the support of President Bush, according to Bloomberg.
Also at issue is whether the money would come from TARP -- essentially depleting the first $350 billion installment of bailout funds -- or from fresh legislation.
General Motors' (GM) situation is particularly dire, as many analysts believe that the once-largest carmaker in the world won't survive through January without federal funds.
Obama also wants to see emergency loans extended to GM, Ford (F) and Chrysler to buoy their weakening financial position. The President-Elect would appoint a czar or independent board to oversee the companies if the rescue plan becomes law.
A GM failure, which many argue would likely push Ford and Chrysler towards a similar fate, would have dire consequences for the American economy. Parts suppliers, dealers and Rust Belt communities already reeling from the housing slump; years of already lackluster economic growth would be decimated.
It appears the alternative to a bailout is too terrifying to even consider. There is, however, a precedent for bankrupt industries operating their way through restructuring efforts.
After September 11th, United (UAUA) and other defunct airlines flew throughout their bankruptcy. Service was shoddy at best, layoffs were severe, but the industry did not die.
Economic conditions are admittedly more dire now than in 2001, but at some point, the bailout parade must stop. Each company that fails, only to be saved from collapse by Washington, simply pushes genuine economic recovery further into the future.
As Minyanville's Kevin Depew wrote Monday,
"With continued bailouts we will emerge from a lost decade with an economy and society crippled by the cost of bailng out businesses that operated with irresponsibility and a near total disregard for not just taxpayers but for their very own shareholders."
Taxpayers watched the pricetag of AIG's (AIG) $80 billion bailout double in a matter of months. With Ford and GM collectively bleeding over $4 billion in cash every month, it's not unreasonble to think any automaker handout would similarly expand.
At some point, our elected officials may actually have to take a stand. Unfortunately, holding one's breath for that to happen should be considered a serious hazard to one's health.
Monday, November 10, 2008
Fed Lends $1.1 Trillion, Won't Say to Whom
This post first appeared on Minyanville.
So much for transparency.
Since September 14th, when the Federal Reserve relaxed collateral requirements for new lending, it’s doled out over $1.1 trillion to faltering financial institutions. Now, Chairman Ben Bernanke and company won’t say where the money went.
Bloomberg reports the Fed is refusing to release details on which banks took out loans, fearing such disclosure would be blood in the water for short sellers and other financial mercenaries. Bloomberg News even went so far as to file a lawsuit on November 7th under the Freedom of Information Act to try to force disclosure.
Speaking to the Senate Banking Committee on September 23rd, Treasury Secretary Hank Paulson said of the $700 billion Troubled Asset Relief Program, or TARP: “We need oversight. We need protection. We need transparency. I want it. We all want it.”
However, since the Fed’s 11 new lending programs fall outside the scope of the bailout -- and indeed outside any federal supervision at all -- it can pretty much do whatever it wants, accountability be damned.
Regulators fear knowledge of which banks are short of cash could spark short-selling and additional runs on deposits, which arguably contributed to the demise of Bear Stearns, Lehman Brothers and Washington Mutual. Market participants, however, argue disclosure of the Fed’s pricing methods could help unclog dangerously illiquid markets.
Ever one to shed light into opaque government actions, House Financial Services Committee Chairman Barney Frank told Bloomberg, “[Disclosure would] give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” I believe, Mr. Frank, that’s precisely the point of disclosure.
Last month, the biggest banks in the country -- Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) -- soaked up over $100 billion in capital injections from the Treasury Department under TARP. In order to obscure who needed the money most, Paulson forced the banks to accept similarly sized investments.
At a time when record amounts of taxpayer money are being put on the line to prop up the economy, elected and non-elected officials alike deem it necessary to keep us in the dark. Their concern for the integrity of the system and their desire to protect us from nefarious market participants seems to have blinded them to the concepts of accountability, transparency and simple honesty.
We're witnessing a dangerous period in which information is tightly controlled, available only to the privileged few, while the many wander aimlessly, groping for half-truths and innuendo transmitted via an elaborate game of telephone.
Some would argue this has always been the case, and this may very well be true. However, never have the stakes been higher; never have our livelihoods been so completely in control of the handful of people we've blithely sent up to Washington to control our collective fate.
This is a disturbing trend - one which we can only hope will be reversed come January.
So much for transparency.
Since September 14th, when the Federal Reserve relaxed collateral requirements for new lending, it’s doled out over $1.1 trillion to faltering financial institutions. Now, Chairman Ben Bernanke and company won’t say where the money went.
Bloomberg reports the Fed is refusing to release details on which banks took out loans, fearing such disclosure would be blood in the water for short sellers and other financial mercenaries. Bloomberg News even went so far as to file a lawsuit on November 7th under the Freedom of Information Act to try to force disclosure.
Speaking to the Senate Banking Committee on September 23rd, Treasury Secretary Hank Paulson said of the $700 billion Troubled Asset Relief Program, or TARP: “We need oversight. We need protection. We need transparency. I want it. We all want it.”
However, since the Fed’s 11 new lending programs fall outside the scope of the bailout -- and indeed outside any federal supervision at all -- it can pretty much do whatever it wants, accountability be damned.
Regulators fear knowledge of which banks are short of cash could spark short-selling and additional runs on deposits, which arguably contributed to the demise of Bear Stearns, Lehman Brothers and Washington Mutual. Market participants, however, argue disclosure of the Fed’s pricing methods could help unclog dangerously illiquid markets.
Ever one to shed light into opaque government actions, House Financial Services Committee Chairman Barney Frank told Bloomberg, “[Disclosure would] give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” I believe, Mr. Frank, that’s precisely the point of disclosure.
Last month, the biggest banks in the country -- Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) -- soaked up over $100 billion in capital injections from the Treasury Department under TARP. In order to obscure who needed the money most, Paulson forced the banks to accept similarly sized investments.
At a time when record amounts of taxpayer money are being put on the line to prop up the economy, elected and non-elected officials alike deem it necessary to keep us in the dark. Their concern for the integrity of the system and their desire to protect us from nefarious market participants seems to have blinded them to the concepts of accountability, transparency and simple honesty.
We're witnessing a dangerous period in which information is tightly controlled, available only to the privileged few, while the many wander aimlessly, groping for half-truths and innuendo transmitted via an elaborate game of telephone.
Some would argue this has always been the case, and this may very well be true. However, never have the stakes been higher; never have our livelihoods been so completely in control of the handful of people we've blithely sent up to Washington to control our collective fate.
This is a disturbing trend - one which we can only hope will be reversed come January.
Monday, November 3, 2008
National Debt Gets More Expensive
This post first appeared on Minyanville.
The national debt is getting more expensive.
Over the past 15 months, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have unleashed a litany of programs aimed at averting wide-scale collapse of the American -- and indeed the global -- financial system. They go by the acronyms we've all come to know and love: TARP, CPFF, TAF, PDCF, TSFL, etc.
For all their nuances and complexities, the aim of each is to pump more cash into the American economy. Many of these programs are financed with Treasury debt, which is sold on the open market to domestic and international investors alike.
Bloomberg reports that, despite aggressive interest-rate cuts, the cost of US debt is rising - and will likely continue to do so.
Recently, as markets swooned, investors flocked to Treasuries as a safe haven. Yields -- which move in inverse relation to prices -- became almost non-existent as protecting capital trumped earning returns. Now, as credit markets slowly heal and the appetite for risk cautiously returns, many doubt existing demand will be enough to sop up the massive supply of American debt set to be issued in coming months.
Bureaucrats and regulators have pledged billions in support for our struggling economy: The money has to come from somewhere.
Foreign investors -- particularly Japan and China -- are the largest holders of our government-backed debt, and, as their economies stumble, federal budgets will become strained. Lower tax receipts and mounting costs means these countries will demand a higher return on their investments abroad.
This dynamic, coupled with increasing supply, is likely to push up yields on US Treasury debt. That means American taxpayers, gazing down the double barrel of the $700 billion bailout package and a likely second round of stimulus checks, will see their debt costs rise.
Credit costs throughout the economy are similarly moving north. Credit card companies like American Express (AXP) and Capital One (COF) are slashing lines and hiking up interest rates. Mortgage rates stubbornly continue to move higher, and corporate borrowing is as expensive as it’s ever been. That’s all after more than 400 basis points in Federal Reserve easing in less than a year-and-a-half.
Meanwhile, taxpayers wait eagerly to see if this increasingly expensive debt will be put to good use. In the past week, both Bank of America (BAC) and JPMorgan (JPM) have announced plans to step efforts to modify troubled mortgages. This is encouraging - but with 1800 banks lined up at the government trough, that $700 billion isn’t likely to last long.
For a group that would implore their fellow Americans to get out of debt and live within their means, Congress and their regulatory counterparts certainly don’t set a very good example.
The national debt is getting more expensive.
Over the past 15 months, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have unleashed a litany of programs aimed at averting wide-scale collapse of the American -- and indeed the global -- financial system. They go by the acronyms we've all come to know and love: TARP, CPFF, TAF, PDCF, TSFL, etc.
For all their nuances and complexities, the aim of each is to pump more cash into the American economy. Many of these programs are financed with Treasury debt, which is sold on the open market to domestic and international investors alike.
Bloomberg reports that, despite aggressive interest-rate cuts, the cost of US debt is rising - and will likely continue to do so.
Recently, as markets swooned, investors flocked to Treasuries as a safe haven. Yields -- which move in inverse relation to prices -- became almost non-existent as protecting capital trumped earning returns. Now, as credit markets slowly heal and the appetite for risk cautiously returns, many doubt existing demand will be enough to sop up the massive supply of American debt set to be issued in coming months.
Bureaucrats and regulators have pledged billions in support for our struggling economy: The money has to come from somewhere.
Foreign investors -- particularly Japan and China -- are the largest holders of our government-backed debt, and, as their economies stumble, federal budgets will become strained. Lower tax receipts and mounting costs means these countries will demand a higher return on their investments abroad.
This dynamic, coupled with increasing supply, is likely to push up yields on US Treasury debt. That means American taxpayers, gazing down the double barrel of the $700 billion bailout package and a likely second round of stimulus checks, will see their debt costs rise.
Credit costs throughout the economy are similarly moving north. Credit card companies like American Express (AXP) and Capital One (COF) are slashing lines and hiking up interest rates. Mortgage rates stubbornly continue to move higher, and corporate borrowing is as expensive as it’s ever been. That’s all after more than 400 basis points in Federal Reserve easing in less than a year-and-a-half.
Meanwhile, taxpayers wait eagerly to see if this increasingly expensive debt will be put to good use. In the past week, both Bank of America (BAC) and JPMorgan (JPM) have announced plans to step efforts to modify troubled mortgages. This is encouraging - but with 1800 banks lined up at the government trough, that $700 billion isn’t likely to last long.
For a group that would implore their fellow Americans to get out of debt and live within their means, Congress and their regulatory counterparts certainly don’t set a very good example.
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