$700 Billion Bailout

[NorthSideSox72]

http://www.bloomberg.com/apps/news?pid=206...refer=worldwide

 

 

 

of course. it's only 2 trillion dollars.

Jesus. They lent out another $1T+ OUTSIDE of the TARP protections, and aren't disclosing anything about it? I mean, I can see how we may not be able to immediately know all collateral in detail, but NO information at all? And they are doing this outside the regs?

 

Wow. I mean, really, wow.

 

[Balta1701]

Jesus. They lent out another $1T+ OUTSIDE of the TARP protections, and aren't disclosing anything about it? I mean, I can see how we may not be able to immediately know all collateral in detail, but NO information at all? And they are doing this outside the regs?

 

Wow. I mean, really, wow.

Actually, I'm pretty sure they're not... but the reason they're not is that our regulatory environment has gotten that weak. Remember, for the last 20 years, and in particular the period from about 1996-2006, the chairman of the federal reserve was treated as a Quentin who's words and decisions could not be questioned. The Fed has stockpiled money by lending at interest, and it's therefore able to lend that money out for whatever it chooses to lend it for. It's $1 trillion or so, therefore, is entirely in its hands.

 

IT's probably noteworthy that the $2 trillion total there also includes the $500 billion buyouts of FNMA and FDMC.

[southsider2k5]

Jesus. They lent out another $1T+ OUTSIDE of the TARP protections, and aren't disclosing anything about it? I mean, I can see how we may not be able to immediately know all collateral in detail, but NO information at all? And they are doing this outside the regs?

 

Wow. I mean, really, wow.

 

I'm going to use Barney Frank on this issue, because for once he is right. Ask Chuck Shumer how quickly a bank can fail if there is no confidence in it. This isn't as simple as many people are making it out to be, as there are complex banking and accounting rules at play here. It isn't as simple as here is $700 billion, now lend it out, and everything will get back to normal. People have to have confidence in the system, and in the individual planks in the system. If word got out that So and So bank took a large loan from the Feds, odds are pretty favorable there would be a run, and it would fail. That would actually cost taxpayers more than if they just lent them money in the first place. Add in things like SOX that dictate mark to market account, combined with Depression era banking laws that require deposits be a certian percentage of lent monies, and you can have quick failures there as well. Again, it is less risk to lend them a percentage of assets to prop up the bank, than to cover all of the assets in a FDIC failure.

 

http://www.bloomberg.com/apps/news?pid=206...&refer=home

 

Fed Defies Transparency Aim in Refusal to Disclose (Update2)

 

By Mark Pittman, Bob Ivry and Alison Fitzgerald

Enlarge Image/Details

 

Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

 

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

 

``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

 

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.''

 

Treasury, Fed, Obama

 

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn't respond to a phone call and an e-mail seeking comment.

 

President-elect Barack Obama's economic adviser, Jason Furman, also didn't respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to ``make our government open and transparent so that anyone can ensure that our business is the people's business.''

 

The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

 

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

 

Sept. 14 Decision

 

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

 

The plan to purchase distressed securities through TARP called for buying at the ``lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,'' according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

 

The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

 

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

 

`We Need Transparency'

 

``We need oversight,'' Paulson told lawmakers. ``We need protection. We need transparency. I want it. We all want it.''

 

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. ``Transparency is a big issue,'' he said.

 

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

 

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

 

Frank Backs Fed

 

``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''

 

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

 

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

 

``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. ``If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, he said, if the program helps revive the economy.

 

`Unclog the Market'

 

Frank said the Fed shouldn't reveal the assets it holds or how it values them because of ``delicacy with respect to pricing.'' He said such disclosure would ``give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

 

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

 

``I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari said. ``That would unclog the market very quickly.''

 

TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

 

AIG Lending

 

The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.''

 

The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.

 

The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

 

``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

 

Ratings Cuts

 

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

 

Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

 

The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.

 

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

 

To contact the reporters on this story: Mark Pittman in New York at [email protected]; Bob Ivry in New York at [email protected]; Alison Fitzgerald in Washington at [email protected].

[bmags]

Here's an example, check it out.

 

http://www.propublica.org/feature/bailout-...#When:13:08:00Z

 

[Balta1701]

And...once again.

Even as the company was pleading the federal government for another $40 billion dollars in loans, AIG sent top executives to a secret gathering at a luxury resort in Phoenix last week.

 

Reporters for abc15.com (KNXV) caught the AIG executives on hidden cameras poolside and leaving the spa at the Pointe Hilton Squaw Peak Resort, despite apparent efforts by the company to disguise its involvement.

 

"AIG made significant efforts to disguise the conference, making sure there were no AIG logos or signs anywhere on the property," KNXV reported.

 

A hotel employee told KNXV reporter Josh Bernstein, "We can't even say the word [AIG]."

 

A company spokesperson, Nick Ashooh, confirmed AIG instructed the hotel to make sure there were no AIG signs or mention of the company by staff.

 

"We're trying to avoid confrontation, keep our profile low," said Ashooh. "Some of our employees have been harassed."

[kapkomet]

And...once again.

I laugh because this s*** happens everywhere, all of the time. It's always someone else's money.

 

[Texsox]

I laugh because this s*** happens everywhere, all of the time. It's always someone else's money.

 

The hubris to think that some staffer would not make a call is amazing.

[Balta1701]

I laugh because this s*** happens everywhere, all of the time. It's always someone else's money.

But you know, you gotta take care of these guys, because you gotta retain top talent.

[kapkomet]

But you know, you gotta take care of these guys, because you gotta retain top talent.

I guess my company's "lavish" for spending their money too.

 

Like I said, it's everywhere.

 

[lostfan]

My company spends a lot of money, but it makes a lot of money because it has a sound business model and it isn't getting bailed out by the government.

[southsider2k5]

I got to thinking about this a bit, and maybe an example of something would help people understand why the bailout is going the way that is it is going.

 

The first thing to put out there is the reserve ratios. The Federal Reserve sets down a percentage of deposits that a bank is allowed to lend. A long, long time ago, when I was in college this was 80%. So for every $100 in deposits or reserves a bank has, they can lend out $80, and they have to keep $20 as a reserve to ensure their liquidity.

 

The second big thing at play here is mark to market accounting. The Sarbanes Oxley legislation to prevent another Enron scenario dictates that at any moment a company be able to quantify its assets valuations. Most of the time this is easy, but in some cases where there is no liquid marketplace for assets to give a comperable valuation, it gets sketchy.

 

These two things are simple enough on the surface and by themselves.

 

What makes things interesting is when you take these two simple things and start to apply them to real world situations, and even combine the two rules as banks have to follow.

 

The first thing is a bank run. Take the IndyMac/Chuck Shumer situation. Shumer went out and questioned the ability of IndyMac to be able to exist. After this point customers afraid for their deposits safety, go to their local banks and take their money out. Keep in mind the bank already has a set amount of loans out to the public. Now if their amount of deposits falls below that acceptable ratio, this bank is deemed to be insolvent and is closed for business and taken over the federal reserve bank. Usually they find another bank to "take it over", and there is a seemless transition into another bank owning the failed company.

 

The next one that gets interesting is when SOX and the reserve requirements meet each other. Say a bank has a billion dollars in deposits, and with an 80% reserve requirement has made $750 million in loans. So they are sitting with a 75% reserve, or 5%/$50million over minimum requirements. SOX comes in where the valuations of those loans comes into play. Take this housing crisis where the value of houses has fallen steeply in many places. For examples sake, say that this banks loan portfolio which was valued at $750 million drops in value 40% to $450 million. That drop has to be covered by assets in the bank. Now instead of a $50 million cushion, the bank is deemed to only have reserves of $700 million (the $250 in cash still, plus the $450 million valuation of the loan portfolio. This bank is now considered insolvent by the reserve requirements, as it now only has 70% in reserves and it has failed. This is why you see the TARP money going to shore up capital ratios first, before lending is being done. They have to shore up their reserves to make up for the drop in value of their loan portfolio.

 

Another interesting thing at play here is the stock prices of these companies. Stock prices are a direct statement what the market feels is the future value of the earnings a company is going to take in. If a banks stock price starts to fall into the "penny stock" (under $5 per share), or even worse into delisting territory (Under $1) a share, companies and individuals are NOT going to do business with this bank, as the market is pretty directly saying that they feel this company is headed towards a potential bankruptcy. Not only does this start to affect the levels of deposits on hand, (people will withdraw money from a bank they feel is about to fail) but it also has a large effect on the costs of doing business for this bank. Their credit rating starts to slide because people aren't going to lend at prime rates to a bankruptcy candidate. The increase in interest costs is a direct bleed of cash out of the banks, which is why companies are doing things like stock buybacks and paying dividends out of this TARP money. The stock prices are ultra-important to their future existance.

 

Hopefully this helps to clear up some of the common misconceptions about what is going on here. It isn't as simple as many of the pundits are making it out to be. I know I sound like a shill for bad business and government at times, but there are very good reasons for what you see taking place here. Maybe a little fundimental knowledge will help to clear up what you are seeing here. Let me know if this makes sense or there are any questions.

[NorthSideSox72]

Paulson is now saying that they will NOT be buying troubled assets with any of the $700B bailout money. None. This is a fundamental shift from what they had originally said they would do when they asked Congress for the money.

 

Now, this may or may not be good. But regardless, its bait-and-switch, and Treasury and the administration appear to have pulled a fast one on Congress.

 

[Balta1701]

Paulson is now saying that they will NOT be buying troubled assets with any of the $700B bailout money. None. This is a fundamental shift from what they had originally said they would do when they asked Congress for the money.

 

Now, this may or may not be good. But regardless, its bait-and-switch, and Treasury and the administration appear to have pulled a fast one on Congress.

Actually, I'm not sure this is true. One of those additional 400 pages or whatever that they added to the 3 page document that Paulson originally requested was actually in there because there were quite a few economists out there who said "Paulson's plan isn't going to solve the problem, what you really need to do is recapitalize the banks by buying shares in them". So, based on this, in the final bill there was a clause inserted that said Paulson had the authority to do exactly this if he wanted to, because enough people were saying Paulson's original plan was stupid and this would work better. And now, a couple weeks later, Paulson himself is realizing his original plan was stupid and is doing it the right way, and Congress left him a door to do that if he wanted to.

[southsider2k5]

Actually, I'm not sure this is true. One of those additional 400 pages or whatever that they added to the 3 page document that Paulson originally requested was actually in there because there were quite a few economists out there who said "Paulson's plan isn't going to solve the problem, what you really need to do is recapitalize the banks by buying shares in them". So, based on this, in the final bill there was a clause inserted that said Paulson had the authority to do exactly this if he wanted to, because enough people were saying Paulson's original plan was stupid and this would work better. And now, a couple weeks later, Paulson himself is realizing his original plan was stupid and is doing it the right way, and Congress left him a door to do that if he wanted to.

 

Paulson isn't stupid. My guess is that they knew this all along, but didn't have the votes to get it done if they did it this way orignially. That's why the door was left there in the first place.

[NorthSideSox72]

Actually, I'm not sure this is true. One of those additional 400 pages or whatever that they added to the 3 page document that Paulson originally requested was actually in there because there were quite a few economists out there who said "Paulson's plan isn't going to solve the problem, what you really need to do is recapitalize the banks by buying shares in them". So, based on this, in the final bill there was a clause inserted that said Paulson had the authority to do exactly this if he wanted to, because enough people were saying Paulson's original plan was stupid and this would work better. And now, a couple weeks later, Paulson himself is realizing his original plan was stupid and is doing it the right way, and Congress left him a door to do that if he wanted to.

I obviously did not read the 400 page addendum, but I did get the impression that Paulson had broad powers to change the plan. That's fine, but, I still stand by the fact that making a fundamental shift like this is in violation of the spirit of the legislation.

 

[NorthSideSox72]

Paulson isn't stupid. My guess is that they knew this all along, but didn't have the votes to get it done if they did it this way orignially. That's why the door was left there in the first place.

That is more my guess. And its probably the better idea - I don't disagree with that.

 

[bmags]

I thought the door was placed there specifically to allow this to get done because they didn't think buying stupid stuff would work in addition to not knowing what to price it as. I am glad they are doing this, it was the best idea if we were to do a bailout.

[Cknolls]

I'm guessing that Paulson knows that the Treasury has $2 triilion dollars of sh** as collateral and doesn't want to purchase anymore outright. I say let the pigs fail and get to the finish line that much faster. All these programs are doing is pushing the timeline out into the near future.

[bmags]

I have a feeling it was the bank lobbys.

[Cknolls]

Barney Frank says the White House will sign a $25 billion dollar auto aid package. (Bloomberg)

[Balta1701]

Barney Frank says the White House will sign a $25 billion dollar auto aid package. (Bloomberg)

Didn't they already pass the $25 billion one a couple weeks ago, before the Auto industry came back and said they needed $50 billion more?

[lostfan]

Barney Frank says the White House will sign a $25 billion dollar auto aid package. (Bloomberg)

That was fast. I knew it would happen before the Obama administration took over, but not so soon.

[bmags]

Man I wish Bloomberg would've given me that internship.

[southsider2k5]

Barney Frank says the White House will sign a $25 billion dollar auto aid package. (Bloomberg)

 

Next up will be the steel and auto parts companies. To everyone who didn't want to buy a US car, you pretty much just did, except you aren't getting the car out of it.

[NorthSideSox72]

That was fast. I knew it would happen before the Obama administration took over, but not so soon.

GM and Ford are hemorraging cash, and would be looking at operational shutdowns within a few months.