Geithner's Plan Falls Flat

Yesterday Treasury Secretary Timothy Geithner presented the Obama’s administration’s Financial Stability Plan to deal with the financial system’s toxic asset overhang and ease, if not reverse, the ongoing decline in bank lending to households and corporations.

To say that it went over like a lead balloon would be an understatement.

Out of the three broad strategies that most economists say are available - nationalization, ‘good / bad bank’, backstop guarantee on ring-fenced toxic assets - the administration plan offers elements of all three.

I am always wary of a plan that offers a little bit of everything.

Geithner’s first program involves a mandatory ‘stress test’ for all banks with $100bn-plus assets which should also shed some clarity on the individual banks exposures and valuations of toxic assets. This I like because there is still too much we do not know about the financial crisis. A major part of this whole economic meltdown has been fear of the unknown. Safe investments and secure loans have been damaged by fear of toxic assets.

According to the plan Geithner laid out yesterday, after the stress test the Treasury’s Capital Assistance Program would stand ready with preferred shares / warrants injections where needed, only this time with clear lending requirements and strict limits on dividends, stock repurchases and acquisitions next to a $500,000 compensation cap. This solves some of the problems with the original $350 billion that Paulson injected into the financial markets late last year.

Geithner claims that any capital investments made by Treasury under the CAP would be placed in the Financial Stability Trust. However, Geithner left unclear what other options are there for institutions that are severely undercapitalized or fail to attract public capital on a recurring basis (Bank of America and Citigroup are two examples) Yes the program aims at ensuring that there is full transparency disclosing all relevant information on capital recipients at www.FinancialStability.gov; but is that enough to give Geithner our trust?

The second program Geithner spoke about was the Public-Private Investment Fund (PPP). This program aims at setting up a new lending/guarantee facility (the so called Bad Bank solution). This program would work by leveraging an initial private capital commitment with government funds to an initial scale of up to $500 billion (and if you look at the fine print it can be expanded to a maximum of $1 trillion.) The aim of this idea is to involve private capital on a large scale that sits currently on the sidelines while also allowing private market forces to determine the price for currently troubled and illiquid assets.

Personally I think yesterday’s tanking of the Dow was because Geithner mentioned using private capitol in his plan.

A similar experiment was tried before with the private sector sponsored M-LEC vehicle that ultimately proved unviable due to asymmetric toxic asset exposures of participating banks and due to still unresolved asset valuation issues. Commentators agree that for a similar plan to work this time, the government will have to assume a potentially substantial downside in order to induce otherwise unwilling investors to participate in view of the size of potential losses.

Renowned distressed debt experts such as Edward Altman and Martin Fridson note that the best time to invest in distressed debt is when default rates peak. Mind that high-yield default rates are set to rise to 15-20% sometime in 2010 from currently 4-5% due to very bad credit quality at the outset of the cycle.

Yet this again is putting all the risk on the public and all the reward for those who got us in this message.

The third program put forth by Secretary Geithner is an expanded version of the previously $200bn Federal Reserve Term Asset Backed Securities Loan Facility (TALF) program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.

Geithner points out that securitization created about 40% of the demand for new loans extended to consumers, students, and auto buyers. The decline of securitized lending to the tune of $1.2 trillion between 2006 and 2008 leaves a hole that needs to be filled if a severe lending contraction should be prevented.

Economist Nouriel Roubini in his latest writing It Is Time to Nationalize Insolvent Banking Systems argues that, ultimately, nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer. Moreover, it bypasses the asset valuation issue as any overpayment goes back into taxpayers pockets. “With the government starting stress tests to figure out which institutions are so massively undercapitalized that they need to be taken over by the FDIC the administration is putting in place the steps for the eventual and necessary takeover of the insolvent banks.” This might well explain some of the negative market reaction.

The Treasury has stressed that while the ongoing price correction will stimulate home demand, there is a need to reduce foreclosures, which otherwise adding to the excess overhang of homes pose the risk of price over-correction, pushing more homeowners into negative equity. The Treasury plans to announce a Housing Program in the next few weeks to help refinance mortgages and contain foreclosures by reducing monthly payments for homeowners. The program will be financed by using $50 billion from the remaining TARP funds. To increase lender participation, the plan makes it compulsory for banks using government funds under the Financial Stability Plan to participate in foreclosure mitigation. In order to stimulate home demand and help the current homeowners refinance, the Treasury and Fed will continue with their November 2008 plans use $600 billion to buy MBSs and debt of the GSEs using and reduce mortgage rates to the 4-4.5% range. More importantly, the plan will increase flexibility to modify loans under the Hope Now and FHA Programs started in 2007-08 to help increase participation and foreclosure prevention.

Efforts to stimulate demand reducing mortgage rates and offering tax incentives will be largely ineffective as they are a small factor in determining home demand relative to factors such as tighter lending standards, changing dynamics for households - job and income loss, wealth erosion, rising savings rate, and low expectations of income or asset appreciation. These factors will constrain home demand in the short run while potential buyers await further price correction and banks don’t see the viability in offering mortgage for a house whose value is expected to fall.

As a result, the government needs to focus on the supply side of the market by refinancing at-risk mortgages and preventing foreclosures that will only add to the existing overhang of houses. Moreover, government’s loan modification program should reduce mortgage principal rather than just reducing the mortgage rate or extending the loan maturity, which has been the case in past government programs. Unless the problem of insolvency among a large number of households is addressed, default on modified mortgages will also continue. Also, given the large number of homeowners with negative home equity, the program will need much larger funds - over $600 billion to $1 trillion though the actual cost might be much less, since the government will receive a share from future home appreciation. Monetary incentives for servicers are also low and ineffective. Even the number of homeowners the program plans to target, 1.5-2 million is a very small fraction of the over 12 million homeowners with negative equity. In fact, several Democrats are pushing a legislation to allow bankruptcy judges to change mortgage terms that would allow lenders to reduce the mortgage principal for primary homes and bring down monthly payments. To increase participation, they support offering monetary incentives for servicers while lenders will be entitled to a share if the homeowner sells the house and also have the government share any losses on the modified mortgage.

Looking at the shortcomings of past government programs such as the Hope Now, Housing Retention and FDIC programs, the new program should be mandatory for lenders in order to increase participation.

The government will also need to share the cost of modifying the loan, by matching the principal or the interest rate cut in a proportionate or less than proportionate amount. By guaranteeing the loans, the government will be the senior debt holder. The new interest rate should be based on the risk assessment of the borrower and all three parties – homeowner, lenders and servicers, and the government should share the cost of modification. However, determining the extent of principal reduction based on the true value of the house, and dealing with second lien mortgages and the diverging interests of mortgage servicers will be challenging.

Under the new guidelines for compensation issued by the Treasury, firms receiving federal aid will be subject to shareholder say on pay and will be required to cap executive compensation at $500,000 with any additional compensation given out in restricted stocks which can be cashed only after the government has been repaid or the bank has satisfied repayment obligations, and met lending and stability standards. Moreover, bonuses and compensation for other top executives will also be reduced. At the very least the Treasury is going to require disclosure of the compensation structure and strategy, and expenditure on luxury items. Still, while the government's intervention is warranted, the compensation reform being put forward does little to align risks with rewards. Sadly reports are that Geithner fought for real compensation reform.

A large share of the compensation can and will be given out in restricted stocks including compensation for several traders and funds managers who are not under the lenses of the current plan. These measures also give a green light to those who have already received large compensation and severance packages at the troubled banks. More importantly, the measures might act a disincentive in attracting credible executive talent to these troubled institutions in the future who can help deal with the bank losses and overhaul. Wall Street compensation is determined in a competitive market with CEOs joining a firm offering the most attractive pay packages and perks. Many banks are already reluctant to seek capital injection from the Treasury or are contemplating to payback past borrowings in order to avoid government scrutiny over their compensation packages. There is too much voluntary action on the part of the banks. The government needs to be much more forceful. These companies caused the financial crisis, and should not have the luxery of choosing to take part in this package.

To reduce excessive risk-taking in the short-run, compensation, bonuses and even severance packages should be based on the long-term performance of the employee relative to the risk undertaken with large part of the payments given out in restricted stocks that can be redeemed over a longer period of time.

Geithner to Announce New Plan

Treasury Secretary Timothy Geithner is scheduled to unveil a plan to handle the government's second half of the $700 billion financial rescue program today. The plan as it is being leaked is to impose tough new standards on future payments to banks. It also calls for greatly expanding an effort to unclog credit markets to provide loans to consumers and businesses. The administration also announced that the program would be expanded beyond consumer and small business loans to provide aid to the troubled commercial real estate sector.


The administration's new plan will include a government-private sector partnership aimed at removing toxic assets from banks' balance sheets, although the details on how this program would operate were still being worked out.

The Obama administration is promising an aggressive effort to combat the worst financial crisis in seven decades, unveiling a program that could mobilize well over $1 trillion in public and private support to get the frozen credit markets functioning again.

The new plan would greatly expand an effort to unclog credit markets that provide loans to consumers and businesses. Funding for this effort would see a huge increase — from $20 billion up to $100 billion.

President-Elect Obama's Weekly Address - 01/10/09

President-elect Barack Obama gave his weekly address this morning. In this week's address Obama highlighted the challenges facing the nation's struggling economy and introduced a new report (pdf) that has been drafted by Christina Romer and Jared Bernstein. This report outlined the expected effects of its economic rescue package.

In his weekly radio/internet address, President-elect Obama explained:

"I asked my nominee for Chair of the Council of Economic Advisers, Dr. Christina Romer, and the Vice President-Elect's Chief Economic Adviser, Dr. Jared Bernstein, to conduct a rigorous analysis of this plan and come up with projections of how many jobs it will create, and what kind of jobs they will be. Today, I am releasing a report of their findings so that the American people can see exactly what this plan will mean for their families, their communities, and our economy.

"The report confirms that our plan will likely save or create three to four million jobs. 90 percent of these jobs will be created in the private sector -- the remaining 10 percent are mainly public sector jobs we save, like the teachers, police officers, firefighters and others who provide vital services in our communities.

"The jobs we create will be in businesses large and small across a wide range of industries. And they'll be the kind of jobs that don't just put people to work in the short term, but position our economy to lead the world in the long-term."

You can watch the address here:

LibertyAir Blog

Elizabeth Warren interview on CNN

Elizabeth Warren gave an interview to CNN on the state of the TARP and the Treasury Department's job of handling the bailout.

For those of you who don't remember, Ms. Warren was appointed by Senate Majority Leader Harry Reid to chair the five-member Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act.

During the interview Ms. Warren stated categorically that the Treasury Department isn't tracking its bailout spending. Ms. Warren also laid out the intriguing idea of establishing a product safety commission for financial products, just as we have for toasters, car seats, and other consumer products.

Watch the interview here:

Republicans May Have Lost On Auto Bailout

The White House is moving forward with a rescue plan for the automakers. Congressional Republicans are not happy about it. What was first declared a tactical victory for the GOP leadership by the likes of MSNBC's First Read, is now looking like a loss. Because Senate Republicans failed to reach a deal with Democrats and their union allies, it now looks like they will get none of the conditions they were pushing for. In a post from the New Republic, Jonathan Chait notes that the White House is poised to bailout the automakers anyway, suggesting that the "GOP maneuver will have been a total disaster" for the party. If the White House uses the TARP funds its doubtful that the carmakers will be required to accept all of the restructuring conditions the Republicans were pushing for Thursday. This is because if the White House does use TARP funds the Republicans will have lost most of their leverage. Right now they have 49 Senate, in January they will have at most 42 seats, maybe only 41, their ability to block a closure vote. When that happens the Democrats will cut a much better deal for themselves, for the union, and for the auto companies. There will be more protections for the workers and there will be tougher environmental standards. Thus Mitch McConnell who was pretty much being hailed as a genius as a leader of the opposition, will have won nothing.

Republicans had a chance to make this bill as appealing as possible, but they didn't want want to concede anything. They didn't want to concede anything on environmental standards. They didn't want to concede anything on worker rights. They wouldn't negotiate in good faith.

GOP's Strategy for Blocking Bailout Revealed

On today's Countdown guest host David Schuester revealed a new memo that explains the GOP's strategy for blocking a bridge loan to the auto industry:

Countdown has obtained a memo entitled "Action Alert - Auto Bailout," and sent Wednesday at 9:12am, to Senate Republicans. The names of the sender(s) and recipient(s) have been redacted in the copy Countdown obtained.

The Los Angeles Times reported that it was circulated among Senate Republicans. The brief memo outlines internal political strategy on the bailout, including the view that defeating the bailout represents a "first shot against organized labor." Senate Republicans blocked passage of the bailout late Thursday night, over its insistence on an immediate union pay cut.

From: Sent: Wednesday, December 10, 2008 9:12 AM To: Subject: Action Alert -- Auto Bailout

Today at noon, Senators Ensign, Shelby, Coburn and DeMint will hold a press conference in the Senate Radio/TV Gallery. They would appreciate our support through messaging and attending the press conference, if possible. The message they want us to deliver is:

1. This is the democrats first opportunity to payoff organized labor after the election. This is a precursor to card check and other items. Republicans should stand firm and take their first shot against organized labor, instead of taking their first blow from it.

2. This rush to judgment is the same thing that happened with the TARP. Members did not have an opportunity to read or digest the legislation and therefore could not understand the consequences of it. We should not rush to pass this because Detroit says the sky is falling.

The sooner you can have press releases and documents like this in the hands of members and the press, the better. Please contact me if you need additional information. Again, the hardest thing for the democrats to do is get 60 votes. If we can hold the Republicans, we can beat this.

Watch David fill in for Keith Olbermann here:


The GOP is showing their true colors, and letting everyone know they will not work with the Obama administration to fix the problems of this nation. They killed the auto rescue plan Thursday night for purely partisan reasons. It never was about trying to help the automakers or the economy, but an effort to crush the working class and punish unions. There are many more people in line to suffer if the Big 3 go out of business, but Shelby and his band of brothers couldn't care less.

"Union Busting" is a high priority for these Conservatives fools that have allowed our country to be run into the ground. Can you name anything good that has come out of the eight years of Bush and Conservative dominance? So what is their solution? To take it out on the blue collars of America.

If anything this memo should be used as a reminder that the Employee Free Choice Act should be one of Obama's "high priorities" just after he takes office. Check out this video that explains a few things about it.

Update: Think Progress obtained the 20 senators who bailed out Wall Street but refused to rescue auto workers.»

Last night, the Senate failed to approve the auto rescue package, voting 52-35 in favor of the bill – just eight short of the 60 votes that were needed. Over on the Wonk Room, Dan Weiss takes a look at the 20 senators who voted for the Wall Street bailout but voted against the auto rescue last night (as well as the 10 others who skipped the vote last night, but voted for the financial bailout):

Yes to TARP, No to auto
Sen. Max Baucus (D-MT)
Sen. Robert Bennett (R-UT)
Sen. Richard Burr (R-NC)
Sen. Saxby Chambliss (R-GA)
Sen. Tom Coburn (R-OK)
Sen. Norm Coleman (R-MN)
Sen. Bob Corker (R-TN)
Sen. John Ensign (R-NV)
Sen. Chuck Grassley (R-IA)
Sen. Judd Gregg (R-NH)
Sen. Orrin Hatch (R-UT)
Sen. Kay Hutchison (R-TX)
Sen. John Isakson (R-GA)
Sen. Jon Kyl (R-AZ)
Sen. Blanche Lincoln (D-AR)
Sen. Mel Martinez (R-FL)
Sen. John McCain (R-AZ)
Sen. Mitch McConnell (R-KY)
Sen. Lisa Murkowski (R-AK)
Sen. John Thune (R-SD)

Yes to TARP, Absent for auto
Sen. Lamar Alexander (R-TN)
Sen. Joe Biden (D-DE)
Sen. John Cornyn (R-TX)
Sen. Larry Craig (R-ID)
Sen. Lindsey Graham (R-SC)
Sen. Chuck Hagel (R-NE)
Sen. John Kerry (D-MA)
Sen. Gordon Smith (R-OR)
Sen.Ted Stevens (R-AK)
Sen. John Sununu (R-NH)

Senator Biden was tending to transition duties, while John Kerry was in Poznan, Poland, participating in U.N. climate change talks. Alexander was home recovering from surgery.

Why did these other Senators feel auto workers weren’t as deserving as Wall Street? We’d like to know.

More on the Bailout

If you have been reading this blog, you know I have supported the idea of this bailout. Even though the management of the three companies has been bad, and I would have demanded change at the top, I would have supported this bailout. I also know that I would not have supported a bailout if these were normal times, but that's the thing these are not normal times. The dirty fact is that the three companies would not be in this much trouble if not for the financial crisis on Wall Street, and the credit crisis. This is why when that idiot Mitch McConnell comes on the air and says that the U.S. auto industry have only themselves to blame, her is either lying or an idiot. Actually they are not mutually exclusive.

Under the circumstances of today it is an extraordinarily irresponsible thing to do. The Senate Republicans were not, let me make this clear, WERE NOT trying to do things responsibly. They did not ever seem to consider extending the kind of financing that would allow GM and Chrysler to go through Chapter 11 bankruptcy rather than liquidation. That financing would have involved loans, not gifts. It would have allowed an orderly reorganization that they kept claiming they wanted. Instead Republicans are willing to let a million jobs to go down because they wanted to break the UAW.

We are in a recession. We already have millions losing their jobs. We already have an economy on the brink. We have a party of idiots in congress, what is worse the other party is one of weaklings.

In the middle of the worst downturn in half a century the idiots who make up the leadership of the Republican party decide to prove that they care about fiscal responsibility. This after years of being willing to spend money on whatever George W. Bush wanted. This after years of being willing to spend money on whatever lobbyists have written into laws for them. This after years of being willing to spend money like there was no tomorrow, putting this nation so far in debt we may never see it paid off.

The consequences to our economy sound delightful:

"With Congress failing to agree on a bailout for Detroit, the odds that General Motors and Chrysler will be insolvent by year's end are growing rapidly.

The companies have been warning that they would run out of money for some time, but crushing bills from their suppliers are coming due. It appeared unlikely that they could hold on until President-elect Barack Obama takes office next month, when he and a new Congress might be able to provide a lifeline, as a Congressional rescue this year looked increasingly unlikely. (...)

General Motors and Chrysler, for example, owe their suppliers a total of roughly $10
billion for parts that have been delivered. G.M. has held off paying them for weeks, and Chrysler is paying in small increments. But the cash shortages at G.M. and Chrysler are getting more severe, according to their top executives and other officials. (...)

Many of their suppliers are teetering on the verge of bankruptcy themselves, and do not have the luxury of extending credit much longer. (...)

When suppliers big and small start failing, the flow of parts to every automaker in the country will be disrupted because as suppliers typically sell their products to both American and foreign brands with plants in the United States."

"There's no question it will hit Toyota, Honda and Nissan too," said John Casesa, principal in the auto consulting firm Casesa Shapiro Group.

"Many of the small suppliers will simply liquidate because they don't have the resources to go reorganize in Chapter 11 bankruptcy," Mr. Casesa said.

"They'll just go away."

Here was what Rachel Maddow reported on this story before the Republicans fully sank the deal:

LibertyAir Blog

Why Do I Think Republicans Are Idiots

Senate Republican leader Mitch McConnell joined other Republican lawmakers in opposition to the White House-backed rescue bill passed by the House of Representatives on Wednesday.
He and other Republicans said wages and benefits for employees of Detroit's Big Three should be renegotiated to bring them in line with those paid by Japanese carmakers Toyota, Honda and Nissan in the United States.

This is a stupid argument, and dishonest. Hourly wages for UAW workers at GM factories are actually less than those paid by Toyota Motor Corp at its older U.S. factories. GM says the average union laborer makes $29.78 per hour, while Toyota says it pays about $30 per hour. But the unionized factories have far higher benefit costs. So the Republicans are asking UAW workers to take wage cuts that put them even further behind. Could this be because they want more workers to migrate south? There are plans for 18 more state subsidized factories to be built in the south, could they be trying to build their pool of workers?

GM says its total hourly labor costs are now $69, including wages, pensions and health care for active workers, plus the pension and health care costs of more than 432,000 retirees and spouses. Toyota says its total costs are around $48. The Japanese automaker has far fewer retirees and its pension and health care benefits are not as rich as those paid to UAW workers. In fact the only country that Toyota has to pay health care benefits is the United States, so they are working at great advantage over GM. Toyota's plants in the U.S. are so new they have few pensions to deal with.

So when you see those sanctimonious windbags of the right on the cable shows, know they are lying assholes who are threatening the economy of the country to break an ally of the Democratic party.

Here is what Katrina Vanden Heuvel of the Nation Magazine had to say about it on MSNBC's Morning Joe:


LibertyAir Blog

Get Ready

It is going to be a bad day on Wall Street. This is what we can expect now that the $14-billion emergency bailout for U.S. automakers collapsed in the Senate. The deal to help the auto industry fell a part last night as Republicans tried to break the UAW. Don't believe those lying Repuglicans, this had nothing to do with some principle, it is all about breaking the union. The collapse came after bipartisan talks broke down over union wage cuts, the Repugs wanted the union to basically handover the farm.

Markets oversea's are already falling hard on the news. U.S. Markets are expected to fall. Harry Reid has said he hopes Bush will tap the $700 billion Wall Street bailout fund for emergency aid to the automakers. General Motors Corp. and Chrysler LLC have said they could be weeks from collapse. Ford Motor Co. says it does not need federal help now, but its survival is far from certain, and if GM and Chrysler fall it will need help.

The implosion followed an unprecedented marathon negotiations in Washington among labor, the auto industry and lawmakers who bargained into the night in efforts to salvage the auto bailout at a time of soaring job losses and widespread economic turmoil.

The group came close to agreement, but it stalled over the union's refusal to agree to wage cuts before their current contract expires in 2011. Republicans, in turn, balked at giving the automakers federal aid.

Leave it to the Repuglicans to put ideology above country.

Senate Republicans Threaten to Throw Nation into another Great Depression

Republicans are idiots.

Its that simple.

Only these idiots could think that this is a wise course for the nation. If I have to listen to one more sanctimonious windbag from the right come onto the radio or TV and say that the auto companies should just file for bankruptcy, I am going to scream. Do any of these idiots even know the laws that govern bankruptcy? To file for Chapter 11 you have to be able to get banks to offer lines of credit to back up the company. If these companies could get lines of credit, they would not be asking for the bailout.

Now the idiots in the Republican party are ready to force this nation to lose another 2 million jobs, while in the throes of a massive recession, so they can break the unions. And that's what this is about folks, this is a play to break the unions. Remeber these are the same Republican idiots who were happy to throw the stock market into a tail spin because they didn't want to bail out the banks, which lead to the credit crisis that is now bringing down the auto industry. Now they don't want to bail out the car industry.

Yesterday the House passed a bill to speed $14 billion in loans to Detroit's automakers. But it does not look like it will get past the Senate because Republican opposition could derail the emergency aid in the Senate. The Republicans still hold 49 seats, and it looks like they plan to use this number to challenging lame-duck President George W. Bush on the package. They are lamely arguing that any support for the domestic auto industry should carry significant concessions from autoworkers and creditors and reject tougher environmental rules imposed by House Democrats.

See this has nothing to do about the economy, or basic values, it's all about destroying the unions and the environment.

Barack Obama's Radio Address: "Aggressive Growth Measures"

In his weekly radio address today, President-elect Barack Obama unveiled some of the specific ideas in his plan. Reuters calls the proposals "aggressive growth measures."

In today's address the President-elect discusses the job losses that our nation continues to endure and offers his solutions to the challenges we face. The plan he outlines is to create at least 2.5 million new jobs as part of the largest infrastructure investment since the the Eisenhower Administration. A huge part of this effort is to reduce U.S. government energy use and to expand access to high-speed Internet and modernize school buildings across the country.

As the President-elect says, "We need action -- and action now."

For more information, visit http://change.gov/.

Watch his address here:

LibertyAir Blog

Anatomy of a Meltdown

Read this first draft of history from the New Yorker called "The Anatomy of a Meltdown" by John Cassidy. Be sure you're sitting down.

Ben Bernanke and the financial crisis.

At Princeton, where Bernanke taught economics for many years, he was known for his retiring manner and his statistics-laden research on the Great Depression. For more than a year after he was appointed by President George W. Bush to chair the Fed, in February, 2006, he faithfully upheld the policies of his immediate redecessor, the charismatic free-market conservative Alan Greenspan, and he adhered to the central bank’s formal mandates: controlling inflation and maintaining employment. But since the market for subprime mortgages collapsed, in the summer of 2007, the growing financial crisis has forced Bernanke to intervene on Wall Street in ways never before contemplated by the Fed. He has slashed interest rates, established new lending programs, extended hundreds of billions of dollars to troubled financial firms, bought debt issued by industrial corporations such as General Electric, and even taken distressed mortgage assets onto the Fed’s books. (In March, to facilitate the takeover by J. P. Morgan of Bear Stearns, a Wall Street investment bank that was facing bankruptcy, the Fed acquired twenty-nine billion dollars’ worth of Bear Stearns’s bad mortgage assets.) These moves hardly amount to a Marxist revolution, but, in the eyes of many economists, including supporters and opponents of the measures, they represent a watershed in American economic and political history.

Ben Bernanke, who seemed to have been selected as much for his predictability as for his economic expertise, is now engaged in the boldest use of the Fed’s authority since its inception, in 1913.

Bernanke, working closely with Henry (Hank) Paulson, the Treasury Secretary, a voluble former investment banker, was determined to keep the financial sector operating long enough so that it could repair itself—a policy that he and his Fed colleagues referred to as the “finger-in-the-dike” strategy. As recently as Labor Day, he believed that the strategy was working. The credit markets remained open; the economy was still expanding, if slowly; oil prices were dropping; and there were tentative signs that house prices were stabilizing. “A lot can still go wrong, but at least I can see a path that will bring us out of this entire episode relatively intact,” he told a visitor to his office in August.

By mid-September, however, the outlook was much grimmer. On Monday, September 15th, Lehman Brothers, another Wall Street investment bank that had made bad bets on subprime mortgage securities, filed for bankruptcy protection, after Bernanke, Paulson, and the bank’s senior executives failed to find a way to save it or to sell it to a healthier firm. During the next forty-eight hours, the Dow Jones Industrial Average fell nearly four hundred points; Bank of America announced its purchase of Merrill Lynch; and American International Group, the country’s biggest insurance company, began talks with the New York Fed about a possible rescue. Goldman Sachs and Morgan Stanley, the two wealthiest investment banks on Wall Street, were also in trouble. Their stock prices tumbled as rumors circulated that they were having difficulty borrowing money. “Both Goldman and Morgan were having a run on the bank,” a senior Wall Street executive told me. “People started withdrawing their balances. Counterparties started insisting that they post more collateral.”

The Fed talked with Wall Street executives about creating a “lifeline” for Goldman Sachs and Morgan Stanley, which would have given the firms greater access to central-bank funds. But Bernanke decided that even more drastic action was needed. On Wednesday, September 17th, a day after the Fed agreed to inject eighty-five billion dollars of taxpayers’ money into A.I.G., Bernanke asked Paulson to accompany him to Capitol Hill and make the case for a congressional bailout of the entire banking industry. “We can’t keep doing this,” Bernanke told Paulson. “Both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation.”

Paulson agreed. A bailout ran counter to the Bush Administration’s free-market principles and to his own belief that reckless behavior should not be rewarded, but he had worked on Wall Street for thirty-two years, most recently as the C.E.O. of Goldman Sachs, and had never seen a financial crisis of this magnitude. He had come to respect Bernanke’s judgment, and he shared his conviction that, in an emergency, pragmatism trumps ideology. The next day, the men decided, they would go see President Bush.

On October 3rd, Congress passed an amended bailout bill, giving the Secretary of the Treasury broad authority to purchase from banks up to seven hundred billion dollars in mortgage assets, but the turmoil on Wall Street continued. Between October 6th and October 10th, the Dow suffered its worst week in a hundred years, falling eighteen per cent. As the selling spread to overseas markets, the Fed’s failure to save Lehman Brothers was roundly condemned. Christine Lagarde, the French finance minister, described it as a “horrendous” error that threatened the global financial system. Richard Portes, an economist at the London Business School, wrote in the Financial Times, “The U.S. authorities’ decision to let Lehman Brothers fail will be severely criticised by financial historians—the next generation of Bernankes.” Even Alan Blinder, an old friend and former colleague of Bernanke’s in the economics department at Princeton, who served as vice-chairman of the Fed from 1994 to 1996, was critical. “Maybe there were arguments on either side before the decision,” he told me. “After the fact, it is extremely clear that everything fell apart on the day Lehman went under.”

The most serious charge against Bernanke and Paulson is that their response to the crisis has been ad hoc and contradictory: they rescued Bear Stearns but allowed Lehman Brothers to fail; for months, they dismissed the danger from the subprime crisis and then suddenly announced that it was grave enough to justify a huge bailout; they said they needed seven hundred billion dollars to buy up distressed mortgage securities and then, in October, used the money to purchase stock in banks instead. Summing up the widespread frustration with Bernanke, Dean Baker, the co-director of the Center for Economic and Policy Research, a liberal think tank in Washington, told me, “He was behind the curve at every stage of the story. He didn’t see the housing bubble until after it burst. Until as late as this summer, he downplayed all the risks involved. In terms of policy, he has not presented a clear view. On a number of occasions, he has pointed in one direction and then turned around and acted differently. I would be surprised if Obama wanted to reappoint him when his term ends”—in January, 2010.

Bernanke and Paulson’s reversals have been deeply unsettling, perhaps especially so for the millions of Americans who have lost jobs or defaulted on mortgages so far this year. And yet, for the past year and a half, the government has confronted a financial debacle of unprecedented size and complexity. “Everyone knew there were issues and potential problems,” John Mack, the chairman and chief executive of Morgan Stanley, told me. “Nobody knew the enormity of it, how global it was and how deep it was.” In responding to the crisis, Bernanke has effectively transformed the Fed into an Atlas for the financial sector, extending more than $1.5 trillion in loans to troubled banks and investment firms, and providing financial guarantees worth roughly another $1.5 trillion, making it global capitalism’s lender of first and last (and sometimes only) resort.

“Under Ben’s leadership, we have felt compelled to create a new playbook for the Fed,” Kevin Warsh, a Fed governor who has worked closely with Bernanke, told me. “The circumstances of the last year caused us to cross more lines than this institution has crossed in the previous seventy years.” Paul Krugman, the Times columnist, a former colleague of Bernanke’s at Princeton, and the winner of this year’s Nobel Prize in Economics, said, “I don’t think any other central banker in the world would have done as much by way of expanding credit, putting the Fed into unconventional assets, and so on. Now, you might say that it all hasn’t been enough. But I guess I think that’s more a reflection of the limits to the Fed’s power than of Bernanke getting it wrong. And things could have been much worse.”

Read more here.

Dow ends up nearly 400 points after bailout of Citigroup

Wall Street soared Monday for the second straight session as investors reacted to news that government had agreed to bail out Citigroup. The Dow finished up nearly 400 points today. This, combined with Friday's gains, marked the Dow's biggest two-day percentage gain since October 1987. The Dow's 891-point climb over the two sessions also wiped out the 872-point plunge it suffered on Wednesday and Thursday, when investors were anguished over the fate of Citigroup Inc. and financial companies in general, and the future of the nation's automakers.

All the major indexes jumped more than 4.5 percent.

Paul Krugman: Citigroup Bailout Outrageous

Paul Krugman notes this morning that a Citigroup bailout, under the circumstances, may have been worthwhile, but this bailout is outrageous: "a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more. Amazing how much damage the lame ducks can do in the time remaining."

I would like to point out that this mismanaged company is worth $20.5 billion. It's already received $25 billion from the TARP rescue plan, and now Treasury is poised to inject another $20 billion, on top of generous asset guarantees. Yet for some reason Paulson is unwilling to help the auto industry? Now I agree with the Democrats that the Big Three needed to come back with a plan on how they are going to use this loan from the government, but now

Government Looks to Bailout Citigroup

It looks like Citigroup is the newest financial institution that is in need of saving by the government. News reports are that Citigroup is nearing an agreement with U.S. government to create a structure that would house some of the financial giant's risky assets.

Didn't Paulson say the financial crisis was behind us, that we were no longer having to worry about what the next bank would be that would go under?

Guess the crisis isn't over.

Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.

$3,800,000.000.000

The U.S. government bailout of Corporate America is three-point eight trillion dollars. That’s $3,800,000.000.000. CNBC is keeping tabs on the amount that the federal government has been forced to spend on the bailout.

Check out CNBC’s line-by-line breakdown of where the taxpayer funds are going here.

Bailout Czar Grilled On the Hill

Assistant Secretary of Treasury Neel Kashkari, the “bailout czar”, the man who Henry Paulson placed in charge of the bailout, went to Washington, DC, yesterday to testify before Congress. He sat down in front of the Domestic Policy Subcommittee of the House Oversight Committee — chaired by Rep. Dennis Kucinich. It was not a pretty picture. Representative Elijah Cummings (D-MD) excoriated the “bailout czar” as he brought up the reports that AIG has doled out $503 million to top executives.

Noting the financial troubles in his Baltimore district, Representative Cummings asked rhetorically whether his constituents would think Kashkari is a “chump” after learning of the AIG bonuses:

CUMMINGS: I’m just wondering how you feel about an AIG giving $503 million worth of bonuses on the one hand, and accepting $154 billion from hard-working taxpayers. You know, because I’m trying to make sure you get it. What really bothers me is all these other people who are lined up. They say, well, is Kashkari a chump?

“I wouldn’t want to be asking my friend for some money to stay afloat. … Then my friend, who can barely afford to go to McDonald’s sees me in a restaurant costing $150 a meal. There’s absolutely something wrong with that picture!” exclaimed Cummings.

Watch it:

Representative Kucinich questioned Kashkari as to why the Treasury has not focused more on helping homeowners facing foreclosure. When Kashkari replied that the Treasury Secretary is “passionate” about helping homeowners, Kucinich asked “He is? Where? What country?”

Watch it here:

LibertyAir Blog

OVERSIGHT

Oversight... O V E R S I G H T

Oversight - Watchful care or management; supervision.

I just want to make sure people understand what the word means, and how to spell it, because I am absolutely sure that the Bush Administration has no clue what it means or even how to spell it.

When Congress approved the Treasury's massive bailout of financial firms they mandated all kinds of oversight on the Bush administration

This shouldn't be a surprise. The Bush administration took years to provide any real oversight of the situation in Iraq. They have provided no oversight of the reconstruction of New Orleans. There was no oversight of the economy as it slipped into a financial crisis. Basically for the last 8 years there has been no oversight of the country. So, it should not come as a surprise that there has been no oversight of the bailout:

In the six weeks since lawmakers approved the Treasury's massive bailout of financial firms, the government has poured money into the country's largest banks, recruited smaller banks into the program and repeatedly widened its scope to cover yet other types of businesses, from insurers to consumer lenders.

Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.

Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.

"It's a mess," said Eric M. Thorson, the Treasury Department's inspector general, who has been working to oversee the bailout program until the newly created position of special inspector general is filled.

"I don't think anyone understands right now how we're going to do proper oversight of this thing."

Congress put into law that there should be layers of oversight and scrutiny, including a special inspector general who was to be nominated by the White House and a congressional oversight panel to be named by lawmakers themselves. I understand there was an election, but it is time to get to work and get oversight of this process. Treasury Secretary Henry Paulson is proving that this job is beyond him (though to be fair it is probably beyond pretty much everyone), and we as a nation are spending a lot of money, there needs to be oversight of this. The special inspector general's position needs to be filled, and nominations need to be made for the five-member Congressional Oversight Panel. Time is passing us by, and billions are being wasted.

Fed Won't Identify Recipients of $2 trillion

The Federal Reserve is refusing to identify all of the recipients of $2 trillion.

What???

Bloomberg is reporting:

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 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.''

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.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.

"It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

The $2 trillion is taxpayer money, and taxpayers have a right to know where that money is going, and what sweetheart deals Bernanke is giving out, and who's getting what. Bernanke needs to go, and either before or after he goes, the Fed needs to come clean about who it has given 2 trillion in loans to, and what the collateral is.

Another $40 billion

AIG has closed a deal for another $40 billion. The U.S. government on Monday provided new financial assistance to the troubled insurance giant, American International Group. This assistance package included another $40 billion into the company in return for partial ownership.

And McCain accused Obama of being a socialist?

The action was announced jointly by the Federal Reserve and the Treasury Department. All told, this move boosts total aid to AIG to around $150 billion.

The $40 billion infusion comes from the recently enacted $700 billion financial bailout package. The government is buying preferred shares of AIG stock, giving it an ownership stake in the company.

As part of the new arrangement, the Federal Reserve is reducing a $85 billion loan it is had made available to AIG to $60 billion. The Fed also is replacing a separate $37.8 billion loan to the insurance company with a $52 billion aid package.