Wednesday, October 15, 2008

It was a Take It or Take It offer.

WASHINGTON — The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left. (NY Times)
Some of the CEO's protested stating that their bank was not in trouble and did not need a bailout. But by 6:30, all nine chief executives had signed. This sets in motion the largest government intervention in the American banking system since the Depression and is not in accordance with the rescue plan Mr. Paulson himself had successfully fought to get through Congress only two weeks earlier. Mr. Paulson even admits that this move is "objectionable and we regret having to take these actions." Somehow I doubt that. I feel that this may have been the plan all along because it sure sounds as if these CEO's were forced to sign the agreement regardless of the necessity.
All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks. (NY Times)
The concern here is whether or not banks are being targeted due to size and investment opportunity. Not all the institutions on its list are in a unhealthy position. He is punishing some institutions for the irresponsible actions of others and reassuring the "too big to fail" idea. I do not think I am the only one who is scared by this. I'm scared for the future because once the government sets a precedent they continue to take and take, extending their powers even further with follow-up legislation. And in this case the taxpayers have absolutely no say.

Tuesday, October 14, 2008

I thought you were buying “toxic assets” with my money?

The Fed has plans for the first $250 billion of the $700 billion we loaned them a few weeks ago. Buying stock in private banks and expanding protections for the U.S. financial system. This idea comes after a Treasury Department meeting between top government economic officials and executives of the largest banks in the country. Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon, and Bank of America Corp. CEO Kenneth Lewis were all asked to attend. A who’s who of very powerful men with an agenda all their own convening with a Government official to discuss the economic future of our country. Following the meeting President Bush, the Fed’s biggest puppet, “was to be briefed early Tuesday by economic advisers and then announce the plan which the Treasury said was designed to restore functioning of our credit markets.” We have granted the Secretary of the Treasury the ability to do what he sees fit with our hard earned money and then he briefs the President on what to tell the public after he has made his decision. Sounds a tad backwards does it not? Plus, I was under the impression that the purpose of the bailout was to buy up the “toxic assets” weighing down the balance sheets of these financial institutions. You guys intimidated us with the gravity of the situation, convinced enough Congressmen of the severity, were somehow permitted the money to buy these assets, and then just decided to “devote a significant part to direct government purchases of stock in banks.”(Associated Press) This is an idea that Paulson brought up only last week, subsequent to the approval of the bill for its intended purpose and I’m sure after many a conversation with his old banking buddies.

The plan would also provide a way for the government to insure loans that banks make to each other, a critical part of the credit system. This move alone eased the minds of many bankers and the market responded accordingly with the largest single day gain ever. Again, let me stress that I am no economist and am unable to guess if this may be what the financial sector needs in order to sustain itself. I do know enough to understand that the “frozen” credit markets could have been thawed out weeks ago as a result of this insurance from the Fed. We only decided to do it now in order to “catch up to Europe in what has become a footrace between countries to reassure investors that their banks will not default or that other countries will not one-up their rescue plans.”(NY Times) They were afraid that investors from here might move their money to a safer place since Europe had already guaranteed their bank’s loans. “We’re trying to prevent wholesale carnage in the financial system,” stated Kenneth S. Rogoff, a professor of economics at Harvard.

All the while, we are pumping dollar after dollar of money we seriously do not have into these institutions. I have always heard that the market fears uncertainty and that is all that is surrounding us. Perhaps the problem is not just that the credit markets are supposedly frozen and toxic assets are obviously everywhere. Maybe the problem is that investors are uncertain of our future and the government got involved in an area they should not have with a solution that is causing more problems than it is solving. Maybe they are scared because in less than one month we will be choosing a new President, when neither of the candidates has revealed any meaningful suggestion for our current economic situation. Or maybe, just maybe, we are feeling the repercussions of our government pushing “spending” down our throats for so many years, encouraging us that credit rather than savings is what our economy thrives on. We do not have to borrow in order to prosper. Our personal, and national, credit limit is maxed out and it is time for a change (Please excuse the unintended Obama slogan).

Friday, October 10, 2008

Free Enterprise Just Became Kinda-Free Enterprise.

The Bush administration is taking into consideration a partial nationalization of banks, buying up part of their shares in order restore confidence in the failing markets. This goes against everything the government has been promoting for years. The United States has been the model for the global economy crusading to lift the “heavy hand of government from finance and industry.” Numerous countries have emulated our behaviors and prospered well because of it. Nobel Prize-winning economist Joseph Stiglitz explains how “people around the world once admired us for our economy, and we told them if you wanted to be like us, here's what you have to do -- hand over power to the market. The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility.” The reason our credibility is in question is because our government has done a complete 180° turn. Contemplating the intervention into the private sector by acquiring ownership stakes in banks, the taking over of Fannie Mae and Freddie Mac, and the bailout of AIG clearly shows the governments new economic platform—direct involvement. With the takeover of Fannie and Freddie and the bailout of AIG our government is, in effect, now responsible for providing home mortgages and life insurance to tens of millions of Americans. It sounds even more ridiculous as I actually type this line out, but it is true.

“Many economists are asking whether it remains a free market if the government is so deeply enmeshed in the financial system.” I say no. This recent shift could be seen as proof that Washington remains a slave to Wall Street. And the countries that admired our theories are following suit. In Britain, the government has moved to partly nationalize the ailing banking system. In Asia, where they once embraced our example of free-market theories, resentment now grows over America's brand of capitalism. According to Anthony Faiola at the Washington Post this “change could shift the balance of how governments around the globe conduct free enterprise.” I have never doubted our economy but there have been times, including now, where I have doubted whether or not government intervention is the proper solution. I am unable to see how an entity that caused the problem can also be the body that creates the solution. That is why failing businesses hire consultants for an outside and unbiased judgment on the cause of their breakdown. The major shift that is occurring right now is far larger than anyone can envision because it has been proven that once our government has their hand in something they can never step away. They will just continue to try option after option, regulation, and legislation, refusing to admit defeat. Once an organization or sector becomes nationalized it will never again be privatized.

Tuesday, October 7, 2008

Get out your calculator. The Fed is now discussing the purchase of companies’ unsecured debt, as if the bailout bill was not enough.

I think most would agree that $700 billion should be an adequate amount Mr. Bernanke. Are you really considering putting more taxpayer dollars at risk? I read in the New York Times article the Fed Considers Plan to Buy Companies’ Unsecured Debt that the Federal Reserve was taking into consideration a drastic new plan aimed at “jump-starting the engine of the financial system.” This plan is intended to get credit flowing again by purchasing unsecured commercial paper, basically I.O.U.’s from banks, businesses, and municipalities. These short-term loans are used to finance day-to-day operations of many companies. In doing this the Federal Reserve would inch closer than ever to actually lending money directly to businesses. What happened to encouraging a free-market society? Now the government would have a serious conflict of interest in addition to spending more tax dollars. Already the Fed announced it would “once again redouble one of its key emergency lending programs, increasing the size of its Term Auction Facility to $600 billion, from $300 billion. On top of that, the central bank plans to provide an additional $300 billion to banks to meet their end-of-the-year cash needs.” I don’t remember seeing that in the bailout plan so where is that money coming from? Oh wait; they can just print more money, I forgot. In fact they have no choice but to print more according to the article. To stop that flow of newly printed money from lowering the central bank’s overnight interest rate to zero, “the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.” By paying interest on reserves the Fed can set a floor on interest rates and retain at least some control over monetary policy.(NY Times)

Policy makers signaled that they now want to intervene directly in the credit markets. Officials said on Monday evening that they wanted to finish a plan as quickly as possible, perhaps as early as Tuesday. Again the rush is on proving that this initial rescue plan was not well thought out and almost certainly not the answer to the problem. “People are slowly but surely coming to the realization that playing ‘Whack-a-Mole’ with each of these issues as they arise doesn’t get the job done,” said Max Bublitz, chief strategist at SCM Advisors. In buying these unsecured loans the Fed faces yet another problem, violating policies that restrict it from buying assets that have the potential to lose money. Not to worry though, they can get around that by establishing a legal entity to purchase the assets on the Fed’s behalf. Why be prohibited from legally doing something if you have the capability of creating another entity that is not at all prohibited from doing the same thing on your behalf? Would you please just grant yourself the power to buy these loans and try to save us some of our tax dollars by not paying someone an unruly amount of money to head this newly formed organization you would need to create. We can at least be assured that in regards to the new plan being considered our government is willing to take their time to ensure the results will be successful because President Bush stated ” we don’t want to rush into this situation and have the program not be effective.” I completely agree Mr. President, I would sure hate to see your guys do the same thing two weeks in a row.

Thursday, October 2, 2008

Panic can cause a prudent person to do rational things that can contribute to the failure of an institution.

Panic is being spread by the President, the Fed, and every proponent of this bill. Bush stressed today that “this is an issue that’s affecting hard-working people. They’re worried about their savings; they’re worried about their jobs; they’re worried about their houses; they’re worried about their small businesses.” I know I am only one homeowner out of millions but I’m not worried about my home. Maybe that is due to the fact I did not agree to some adjustable-rate mortgage because I had the ability to calculate the maximum amount I could afford monthly on a mortgage payment. Owning a home is not a right here in America it is a privilege. Crafting numerous ways to give unqualified or risky mortgage seekers access to NINJA loans (No Income, No Job, and No Assets) is not only unethical on the bank’s part but also irresponsible and shortsighted of the buyer. The bank should not have lent out the money without proper underwriting and documentation of income and consumers should not have purchased a house just because they could afford the payment for the first year before the rates adjusted. The resulting amount of defaulted loans and huge drop in market value of homes everywhere is not the sole cause of the “credit crisis,” but it the largest catalyst of this whole mess. The “credit freeze” is only a term for banks wising up and being cautious who they now lend to. Struggling to convince us that we must now give up billions of dollars we would rather see spent elsewhere in order to stimulate the economy and unfreeze these credit markets is absurd. I would rather the banks be cautious who they lend to and save us Americans the cash.

Having said that, the Senate shrewdly took a three page proposal and turned it into a four-hundred and fifty page bill with saccharine. I have a feeling they may have done just enough to sway the few voters they needed to so that this bill passes the second time around. Let’s look at what they added and why. First, they tacked on what even they refer to as sweeteners which are provisions that make it difficult for any lawmaker to resist. “This bill has been packaged with a lot of very popular things to give it even more momentum,” said Senator Jeff Sessions. Added was a $150 billion in new tax breaks and increased insurance on deposits from the FDIC. They are slow to tell us that new items being added would substantially increase the burden on taxpayers and the Senate version of the tax plan adds most of the cost to the deficit over the next decade. Representative Joe Barton, Republican of Texas said it best when he stated that “the bailout legislation that the Senate is sending back to the House is a fraternal twin to the one I voted against on Monday — meet the new bill, same as the old bill.” At the heart of this is still the same $700 billion dollars regardless of what other good legislation gets attached to it but now instead of agreeing with the bailout lawmakers “could now say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools."(NY Times) All we are doing is “trying to get this thing passed” said Senator Harry Reid. Appears like they will do whatever they are told unless the order comes from their constituents.

Wednesday, October 1, 2008

Brace yourself. The government is going to take care of us.

The Senate majority voted yes tonight on a bill very similar to the one that was just rejected by the House. I'm not a legislator so I do not know the full process but I would venture to say that rewriting a bill in order to reduce the powers it grants to the Treasury and to better protect the taxpayers should take more than a day. According to CNN Money what they did instead was attach Senate add-ons causing “the bill's initial price tag will be higher than the $700 billion dollar” figure we were just starting to get comfortable with. The bill now includes “elements designed to attract House Republican votes - particularly popular tax measures that have garnered bipartisan support.” They took the same principles from one bill and added power windows and power seats to make it more appealing to the Representatives that denied it the first time. They didn’t even change the name. The Senate voted tonight on H.R. 1424; the H.R. stands for House of Representatives. "Fails in the House, just give it to the Senate they know how to sweeten it up, then send it back." These tax breaks may be very beneficial to those they are intended to help and they are probably a long time coming. It is a crime that our government is only allowing us these tax breaks in exchange for $700 billion dollars. I have a strong feeling they are going to get more money than we are. No matter how you try and spin this thing Washington is taking money out of our pockets people not putting money in. Think about this logically. Would $700 billion dollars have a better chance of stimulating the economy if it was left in our wallets and pumped into the markets by us, the consumers, or if that money was taken out of our pocket by the government to spend how they see fit?

White House Spokesman Tony Fratto passed on this message today. "This morning we're seeing increased evidence of the credit squeeze on small businesses and municipalities all across the country. So it's critically important that we approve legislation this week and limit further damage to our economy." There are still the undertones of impending doom in his words. Washington now knows that we are aware of the fact they were trying everything they could to sell us this “plan.” They are even admitting it now stating that “the hurdle is overcoming the word ‘bailout.’ ” The New York Times even wrote an article titled Labeled as a Bailout, Plan Was Hard to Sell to a Skeptical Public. Well of course it was hard to sell to us because you are asking for over $700 billion dollars and we do not like letting you take that money from other programs where it would be better spent. This “taxpayer” money is not going to be collected door to door by the government it is going to be taken from places where it has already been allocated. Places we worked hard to get that money to. We vote for local representatives and governors and we watch them make it to Congress all the time hoping they will do with our money what they said they would. And as soon as we get close they try a trick like this. Good thing the Federal Reserve can just print more money anytime it needs to. Just create some more currency out of thin air for this purpose at least then the only thing Americans will suffer from is devaluation.

Tuesday, September 30, 2008

Operation Fear 2008

The Bush Administration rolled out its latest installment in their policy of fear. Good thing they are horrible salesmen. They have tried to convince us that this bailout must happen immediately or the consequences will be felt by the pocketbook of every American and we just may never recover. Well we aren’t buying it. This proposal is being forced through with five weeks until the next election and there is a reason for that. Since Congress shot down the bill, requiring a new draft to be written, the gift of time has been given to the lobbyists for the financial industry. I know the lobbyists must have been working the phones yesterday calling their favorite representatives in Congress, on their day off mind you, persuading them to somehow protect their turf in this new proposal. Politico reporter Chris Franks stated that in the first six months of this year alone lobbyists for the financial companies (credit cards and banks) have spent over $230 million dollars trying to get their voices heard. These institutions are major players and they get listened to. We are talking about $700 billion dollars up for grabs. These institutions want their piece of the pie, are willing to try to persuade anyone to get it, and if successful just may put themselves at the top of the list for a cut of the “winnings.” Does the Countrywide mortgage scandal ring a bell? James A. Johnson, who led mortgage buyer Fannie Mae from 1991 to 1998, received more than $5 million in loans from Countrywide that were arranged outside its ordinary underwriting process. Senator Chris Dodd and Senator Kent Conrad both received special “VIP” treatment from Countrywide, refinancing their homes with special deals from Countrywide that the average American did not have access to.

The race to pass this legislation just may be a last ditch effort by the Bush Administration to take care of their buddies before the holidays. Let’s give the Secretary of the Treasury far reaching and unheard of authority, and a cozy sweater. However; the charge is being presented to us as Armageddon. Similar to the campaign they previously led to create panic in every home in America. When is the last time you checked the “Terrorist Threat Color of the Day” before you went to work? Not once. But the "I Smell B.S. Color of the Day" today is red. Operation Fear worked on us once, you need a new tactic and offensive to overrun us this time.

Do you need bailed out too? Well so do I. If you have "bad assests" that you would like the government to buy from you go to ( and put them up for auction.