Tag Archives: TARP

Bankers Get $4 Trillion Gift From Barney Frank by David Reilly

Dec. 30 (Bloomberg) — To close out 2009, I decided to do something I bet no member of Congress has done — actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.

Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.

I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)

The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.

If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.

Nuggets Gleaned

Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:

— For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.

— Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

— Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.

More Bailouts

The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy — there are more bailouts to come.

— The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.

— Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.

— This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”

Managing Bonuses

— The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds.

— The bill kills the Office of Thrift Supervision, a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency. Further proof that government never really disappears.

— Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage.

— Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation.

Consumer Protection

— The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.

— Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad.

Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills.


Stimulus Checkup – 100 Ridiculous Projects Funded by the American Recovery Act

One Man’s Thoughts Has Moved To


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Thank You, Vytautas

CIT Bankruptcy Filing Will Cost US Taxpayers Another $2.3 Billion

CIT group, America’s leading specialist lender to small business, filed for Chapter 11 November 1st night in the fifth biggest bankruptcy in US history.

The collapse of the 101-year-old Utah-based lender, which trails behind only those of Lehman Brothers, Washington Mutual, Worldcom and General Motors in size, will leave US taxpayers with a $2.3 billion bill.

It is believed the board of CIT, which has $71 billion of loans, approved the filing after its creditors agreed a pre-packaged plan designed to ensure it emerges from bankruptcy with the core of its business intact.

Only last year, US financial regulators judged CIT sufficiently well-capitalized to survive. The lender was given access to $2.3 billion of funding under the Troubled Asset Relief Program (Tarp).

The bank’s collapse will be a blow for its million small and medium-sized customers, many in the retail sector, for whom sources of debt are scarce. Experts believe that, even if CIT can emerge intact from Chapter 11, its lending capacity could fall by 20 per cent.

The entire $2.3 billion Tarp loan is expected to be wiped out by the bankruptcy process. While the US Government helped other big non-bank lenders, including GMAC, General Motor’s finance arm, it rebuffed CIT’s subsequent bailout requests in July, concluding that its demise would not threaten the broad financial system.

Congress Pushing for Federal Reserve Audit

A majority of the U.S. House of Representatives is now in support of a historic bill by Republican lawmaker Ron Paul to audit the Federal Reserve (the Fed), the privately run central bank that sets monetary policy for the United States.

A similar bill in the U.S. Senate was proposed by Democratic Socialist Sen. Bernie Sanders, and has three Republican co-sponsors.

Meanwhile, a House committee recently approved an amendment offered by leftist Democrat Dennis Kucinich to a bill granting more oversight to the Government Accountability Office, which would audit the Fed’s response to the economic crisis specifically.

Notably, the amendment passed committee unanimously, with broad bipartisan support, and now heads to the full House for action.

“The Fed has taken a number of extraordinary and unprecedented steps to address the financial crisis,” Kucinich said in an email. “In so doing, it has committed over one trillion dollars to the purchase and financing of many different kinds of assets. It has selectively intervened in certain economic sectors, while it has ignored others.”

“All of these interventions mark a departure from traditional monetary policy, raise significant public policy questions, and impact taxpayers considerably,” Kucinich said.

Fed Chairman Ben Bernanke is “not revealing what they did with the two trillion dollars they created on their books. It was loans to banks for sure. There have been several actions under the Freedom of Information Act to get them to say who they were to and what the terms were, but they won’t do it,” Ellen Brown, author of ‘Web of Debt’, said.

Most people in the United States do not understand what the Federal Reserve is or what it does, except some know the Fed sets a federal interest rate, which in turn affects interest rates on some variable private loans.

However, the Fed’s impact is much greater than this. Essentially, the Fed, which is made up of private bank representatives, can determine how much money is in the nation’s money supply.

“The money supply helps determine the general level of interest rates paid for the use of money, employment, prices, and economic growth. Many economists believe the money supply is the most important determinant of these variables,” according to a 1964 Congressional report, “Money Facts,” by the Committee on Banking and Currency.

One way the Fed impacts the money supply is by taking actions that open or restrict credit.

The vast majority of money in the U.S. economy was created through the issuance of loans by private banks. “Created” might seem like a strong word, but in fact, banks typically create money as a bookkeeping entry that did not exist before. Because of what is called “fractional reserve lending”, banks can create up to 10 times more money than they have on deposit with the central bank.

“How does the Federal Reserve change the money supply?” the Congressional report notes. “By regulations which tell the member banks the maximum amount of bank deposits they may create per dollar of reserves.”

It may seem obscure, but author Ellen Brown argues that “reserve ratio” decisions by the Fed may have preceded several economic crises in U.S. history, including the Great Depression in the 1930s.

“When the Federal Reserve raised the reserve requirements [from 10 percent] to 20 percent right before the Depression, that’s what brought on the Depression,” she argued.

“Let’s say you have a reserve requirement of 10 percent, and for every 10 dollars of reserves, you’ve got 100 dollars on loans. If they suddenly change the reserve requirement, they have to call in 50 dollars of loans. That caused the Depression. They have the power to shrink the money supply,” Brown explained.

Meanwhile, in the last year, the Fed has taken on incredible new powers, including managing the Troubled Asset Relief Program (TARP); purchasing parts of new federal debt; and issuing funds to unknown parties.

“There is a large number of members of Congress and Americans in general who believe that such an extraordinary and unprecedented commitment of taxpayer money demands Congressional oversight. That is why my amendment was adopted unanimously in committee when I introduced it in the committee of jurisdiction of the GAO,” Kucinich said.

“Reforms may be necessary, but first it is critical to shine a light in the shadows. The Fed’s actions have ballooned their balance sheet from 874 billion dollars to more than two trillion dollars. This is more than double the cost of TARP and we still do not really know where the money went. That’s unacceptable,” Kucinich said.

“The Constitution provides ‘the Congress shall have power to coin money, regulate the value thereof,‘” the Congressional report notes. “The Supreme Court interpreted this clause, again and again over a period of 150 years, to mean that ‘whatever power there is over the currency is vested in the Congress.'”

Congress delegated its authority to create and regulate money to the Federal Reserve, an independent agency it created in 1913. The “independence” of the Fed creates two problems, according to the report.

“Since the Federal Reserve is independent it is not accountable to anyone for the economic policies it chooses to pursue. But this runs counter to normally accepted democratic principles,” it says.

“The President and Congress are responsible to the people on election day for their past economic decisions. But the Federal Reserve is responsible, neither to the people directly nor indirectly through the people’s elected representatives. Yet the Federal Reserve exercises great power in controlling the money-creating activities of the commercial banks,” the report notes.

“With an ‘independent’ Federal Reserve, Congress and the President can be moving in one direction while the Federal Reserve is moving in the other,” it says.

Prior to 1913, the U.S. went through several different phases of monetary policy, including President Abraham Lincoln’s decision to print whatever funds he needed to fight the War of Northern Aggression, rather than relying on private banks.

It is remarkable that the Fed has purchased part of the federal debt in the last year, Brown says, although the public is mostly unaware of this development.

Treasury Secretary’s Secret Talking Points Reveal That Banks Were Forced to Surrender Ownership Stakes to Government

Last October, then-Treasury Secretary Henry Paulson ordered nine banks that the Treasury Department described as “healthy” financial institutions to surrender ownership interests to the government or else face regulatory action that would force them to surrender ownership interests to the government, according to an internal Treasury Department document.

Paulson’s extraordinary threat culminated in one of the most sweeping government intrusions into the free-enterprise system in the history of the United States.

Judicial Watch, a nonpartisan watchdog organization, used the Freedom of Information Act to obtain a copy of the internal Treasury Department “talking points” that were prepared for Paulson to use at his Oct. 13, 2008 meeting with the chief executive officers (CEOs) of the nine banks.

At the meeting–to which the bankers were called at short notice–Paulson made a conspicuous display of potential government regulatory power.

Paulson was flanked by Federal Reserve Chairman Ben Bernanke; current Treasury Secretary Timothy Geithner (who was then president of the Federal Reserve Bank of New York); Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair and Comptroller of the Currency John C. Dugan.

While none of these regulators have responded to inquiries by CNSNews.com, the talking points mention each by first name.

The Fed, the FDIC and the Office of the Comptroller of the Currency all regulate various elements of the U.S. banking industry.

“Ben, Sheila, John, Tim and I have asked you here this afternoon because we are of the view that the United States needs to take strong and decisive action to arrest the stress in the financial system,” Paulson’s talking points directed him to tell the assembled bankers.

The talking points indicate that Paulson then told the nine bank CEOs that the government was going to use $250 billion of the $700 billion approved by Congress to shore up the financial industry through the “Troubled Asset Relief Program” (TARP) to buy stock in banks all across the country and that the nine banks these CEOs represented had no choice but to allow the government to buy their stock–or else.

Paulson assured the CEOs that the government would inform the public that the banks were “healthy institutions, participating in order to support the U.S. economy.”

In other words, according to the treasury secretary’s confidential talking points, the nine banks were not failing financial institutions that had come to the federal government in desperate need of a bailout from the taxpayers to stay in business.

Instead, they were healthy institutions that were being compelled to surrender ownership stakes to the government in order to help the government carry out a government policy.

To read the rest of this article go to http://www.cnsnews.com/public/content/article.aspx?RsrcID=49004

Something Bad And Dangerous Is Happening In Obama’s America.

The powers that the Obama administration claimed in order to arrest the financial crisis and mitigate the recession are being used and abused in ways that are undermining the legal and financial stability of the United States. Investors:

You are warned.

The first warning was the attempt to snatch Chrysler’s assets away from their rightful owners to pay off administration friends and supporters.

The Obama plan to save Chrysler would have sold Chrysler’s most valuable assets into a new company co-owned by the U. S. and Canadian governments, Fiat and the United Auto Workers (UAW) — with the UAW getting the biggest piece, 55%.

The trouble was: those assets belonged to somebody else. They belonged to the company’s bondholders, who had a legal first claim. Under the administration’s plan, those senior-secured creditors would have received just 29¢ on the dollar.

For a failing company to shuffle assets so as to favor some creditors over others with a stronger claim is a very serious wrong, potentially even a crime. There’s a sound economic reason for this rule of law: Bondholders accept lower returns in good times in exchange for greater security in bad times. Protecting bondholders in bad times ensures that future borrowers will be able to borrow in good times.

The bondholders squawked. Well — not all the bondholders. Bondholders who had previously taken government bailouts for themselves, via the Troubled Asset Relief Program (TARP), kept quiet. That’s bad enough. It means that these major lenders were breaching their fiduciary duty to their shareholders in order to placate their new masters in Washington.

But what happened to the non-TARP bondholders was even worse. When they squawked, the administration tried to muscle them. Lawyers for the bondholders contend that senior representatives of the Obama administration threatened them. Michael Barone, the ultra-knowledgeable (and normally unflappable) editor of the Almanac of American Politics called it “gangster government.”

The Obama administration denies it threatened anyone. And yet over the past week, one by one, formerly protesting bondholders have abruptly gone silent. Last week, the non-TARP group represented bondholders holding $1-billion in Chrysler bonds. By the end of this week, the group had shrunk to represent only $300-million in bonds. As one commenter observed: that shrinkage suggests that the threats were real.

Then, on Thursday, another alarm sounded.

The state of California faces a desperate fiscal situation. California now has the worst credit rating of any American state. Governor Arnold Schwarzenegger and the Democratic majority legislature have struggled to balance the books, as they are constitutionally obliged to do. They have raised taxes dramatically, but they have also cut some programs. Among the cuts: a $2-an-hour cut in the wages of home health-care workers.

Those workers were unionized, and their union — the Service Employees International Union – carries clout in Obama’s Washington. On Thursday, California state officials told the Los Angeles Times that they had received a warning: The federal government would deny California $6.8-billion in stimulus funds unless the wage cut was rescinded. Since the wage cut will save only about $74-million, the state will have little choice but to surrender.

That missing money will have to be compensated for. Already, California’s budget plans rely overwhelmingly on a mix of accounting tricks (selling future lottery revenues for an up-front payment) and tax increases. Now the state will need more tricks and more tax increases.

And so will the other states, as they too get the message: no pay cuts for unionized workers will be tolerated by Obama’s Washington.

So, result:

In barely four months, Obama has nudged the United States toward a future in which government will be bigger and more assertive — where taxes will be higher and government unions more powerful — where legal rights are less secure and contracts more uncertain.

In California, he is pushing a state toward the fiscal edge in order to favor a union ally. At Chrysler, he has put at risk the security of every contract in the country to please another union.

Meanwhile, his administration is planning changes to the regulation of finance that are likely to leave the United States less dynamic and less innovative in the years ahead — at the same time as taxes rise and educational levels decline. (Already the Educational Testing Service– the people who run America’s SAT exam — predicts a less skilled U. S. workforce in 2030 than today, with literacy rates declining by an average of 5% as unskilled immigration and rising rates of single parenthood take their toll.)

It’s easy to lose sight of these wrong and costly choices in the turmoil of the immediate crisis. But it is these decisions of today that are preparing the crisis of tomorrow.


Some Thoughts From John Galt

The end of the Bush Era was greeted in January as a blessing by all except those with more than two functioning brain cells.

While we are watching the dissection of our capitalist system by a bunch of academic weenies, our political leadership in both parties are playing quarters drinking at the taxpayer’s expense.

We have witnessed blatant takeovers of American corporations, extortion using the tax code, evasion of the tax code by potential government nominees and oh, that’s right, we found out that President Barry can also handle Human Resource duties as well as act like all of the stockholders by selecting CEO’s of private corporations at a whim. Too bad there is no law to allow that, but silly us, who gives a crap about the “rule of law?”

It was just “sex” and “perjury” after all and hell, we were in a bull market so who cares about the “law” then or now?

Let us take a quick look ahead as to what could be coming our way in Q2 2009:

1. GM bankruptcy-A mortal lock unless we elect to continue perpetual government financing of these clowns. Even Obama isn’t that stupid. I hope. For Change. Quickly.

2. Large bank failures – Somebody has to die for the others to survive and with HSBC all but telling America “you suck” and saying goodbye, do not be shocked if more Euro banks pull out and some large regionals finally recognize real losses and say buh-bye. CNB got a private equity bailout today but when you see the real estate that some of the regionals own down here in the land of sunshine and collapse, you realize that there will be some CRE hell to pay along with the Residential crap which is failing at a faster rate.

3. Fiat = Forget It American Taxpayers after they find out the Obamanation plans on how government will oversea their strategic planning for Chrysler. They become the largest bankruptcy in recent automotive history causing John DeLorean’s skeleton to poke out his middle finger from the grave at the former “Big 3″ and Americans understand that private-public partnerships are total horsecrap.

4. TARP II passes – Putting more pressure on the Fed to double its balance sheet and buy more 2-5-10 year paper to keep the yields and interest rates artificially low.

5. The S&P hits my target possibly in April (600-650) then after some more “initiatives” (Translation: Socialism) the market stabilizes by mid-May and we probably see a finish in the 890-930 range, Dow might actually top 9000 to finish the quarter.

6. The wave of municipal bankruptcies begin prompting a new bailout program for cities being allowed to trade their muni debts for Treasury paper in straight swaps at low cost.

7. Personal bankruptcies approach the numbers of 2005 just before the law changes.

8. OPEC allows members to accept payment in Dollars, Euros or Yuan.

9. Farmers begin to rebel against a new wave of environmental regulations and further reduce plantings for this year’s major harvest.

10. Beef is banned in a public school in California for ‘the childrun’s sake’…..

That’s it for my wild prognostications for Q2 and I still stand behind my annual predictions from DOOMAGGEDON 2009 on January 2nd. Wouldn’t it be cool if Monica Lewinsky was named Ambassador to Latvia? Come on Obama, that would be fun, especially when Hillary swore her in!

To read the entire article go to: http://johngaltfla.com/blog2/2009/03/31/obamarket-update-51-for-tuesday-march-31-2009-the-quarter-ends-and-our-leaders-are-playing-quarters/