Where are they going to get the money? Debt peonage for centuries??? Why not claw it back from the insiders who got away with the ill-gotten cash????
http://www.expatica.com/nl/news/dutch-rss-news/iceland-to-pay-back-duped-savers_13980.html
31/12/2009
Iceland to pay back duped savers
The Icelandic parliament has voted in favour of paying back the money lost by savers when internet back Icesave fell in October 2008.
More than 300,000 savers in the Netherlands and Great Britain saw their saving melt away together with the demise of the high-interest virtual bank.
Reykjavik has agreed to pay back the total sum of 3.8 billion euros, 1.3 billion will go to Dutch account holders.
Icesave, a subsidiary of Landsbanki bank, was one of the first banks to fall at the beginning of the world economic crisis. Dutch savers were able to retrieve up to 100,000 euros of their savings as their accounts were guaranteed by the Dutch government.
Thursday, December 31, 2009
Wednesday, December 30, 2009
Bankers Get $4 Trillion Gift From Barney Frank: David Reilly
http://www.bloomberg.com/apps/news?pid=20601039&sid=a48c8UpUMxKQ
Dec. 30 (Bloomberg) -- To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.
Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.
I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)
The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.
If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.
Nuggets Gleaned
Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:
-- For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.
-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.
-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.
More Bailouts
-- The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy -- there are more bailouts to come.
-- The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.
-- Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.
-- This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”
Managing Bonuses
-- The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds.
-- The bill kills the Office of Thrift Supervision, a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency. Further proof that government never really disappears.
-- Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage.
-- Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation.
Consumer Protection
-- The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.
-- Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad.
Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
Dec. 30 (Bloomberg) -- To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.
Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.
I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)
The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.
If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.
Nuggets Gleaned
Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:
-- For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.
-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.
-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.
More Bailouts
-- The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy -- there are more bailouts to come.
-- The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.
-- Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.
-- This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”
Managing Bonuses
-- The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds.
-- The bill kills the Office of Thrift Supervision, a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency. Further proof that government never really disappears.
-- Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage.
-- Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation.
Consumer Protection
-- The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.
-- Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad.
Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
2009: The Year Wall Street Bounced Back and Main Street Got Shafted
http://robertreich.blogspot.com/2009/12/2009-year-wall-street-bounced-back-and.html
SUNDAY, DECEMBER 27, 2009
2009: The Year Wall Street Bounced Back and Main Street Got Shafted
In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: "This sucker could go down." Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that "if we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying."
In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people's money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street's exuberance.
But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.
It is commonplace among policymakers to fervently and sincerely believe that Wall Street's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.
Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.
It's easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.
But if 2009 has proved anything, it's that the bailout of Wall Street didn't trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can't get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs' decision, made with an eye toward public relations, to defer bonuses for its 30 top players).
The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That's because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.
President Obama and his economic team have been telling Americans we'll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to "rebalance" global financial flows. China has saved too much and consumed too little, while we have done the reverse.
In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up -- had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share -- most Americans would not have felt the necessity to borrow so much.
The year 2009 will be remembered as the year when Main Street got hit hard. Don't expect 2010 to be much better -- that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we'll be in a recovery. I hope they're right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won't have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can't get out of the doldrums.
As long as income and wealth keep concentrating at the top, and the great divide between America's have-mores and have-lesses continues to widen, the Great Recession won't end -- at least not in the real economy.
SUNDAY, DECEMBER 27, 2009
2009: The Year Wall Street Bounced Back and Main Street Got Shafted
In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: "This sucker could go down." Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that "if we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying."
In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people's money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street's exuberance.
But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.
It is commonplace among policymakers to fervently and sincerely believe that Wall Street's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.
Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.
It's easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.
But if 2009 has proved anything, it's that the bailout of Wall Street didn't trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can't get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs' decision, made with an eye toward public relations, to defer bonuses for its 30 top players).
The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That's because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.
President Obama and his economic team have been telling Americans we'll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to "rebalance" global financial flows. China has saved too much and consumed too little, while we have done the reverse.
In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up -- had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share -- most Americans would not have felt the necessity to borrow so much.
The year 2009 will be remembered as the year when Main Street got hit hard. Don't expect 2010 to be much better -- that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we'll be in a recovery. I hope they're right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won't have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can't get out of the doldrums.
As long as income and wealth keep concentrating at the top, and the great divide between America's have-mores and have-lesses continues to widen, the Great Recession won't end -- at least not in the real economy.
$250,000 in bank? Check deposit insurance
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/12/29/BU3K1BAGUB.DTL&type=printable
$250,000 in bank? Check deposit insurance
Kathleen Pender
Tuesday, December 29, 2009
Businesses and individuals with more than $250,000 in a checking account should check to see whether they will continue to be fully insured.
After the end of this year, many banks, including some of the nation's largest, will no longer participate in a temporary program that provides unlimited federal deposit insurance on non-interest-bearing checking and other transaction accounts.
Deposits at all banks will still be insured up to $250,000 through 2013 under the FDIC's general deposit insurance rules, so the vast majority of consumers don't need to worry. But starting Friday, checking account balances that exceed $250,000 will no longer be covered under the FDIC's Transaction Account Guarantee Program at some banks.
This temporary program was created in October 2008 to restore faith in the banking system.
Although few individuals keep more than $250,000 in a checking account, many businesses and nonprofits do to handle payroll, accounts receivable and other cash-flow needs. Even a small business might occasionally have a balance exceeding $250,000 when a large payment comes in or a big bill is coming due.
When it looked like the financial system might melt down, businesses got nervous about their uninsured accounts. To reassure them, the FDIC said it would temporarily guarantee all deposits in non-interest-bearing transactional accounts, even those exceeding $250,000. The guarantee also covered Negotiable Order of Withdrawal or NOW accounts with interest rates no higher than 0.50 percent.
To participate, banks had to pay a fee equal to 10 cents a year for every $100 insured under the program. Banks could opt out, but about 87 percent of eligible institutions stayed in the program initially, FDIC spokesman David Barr says.
The program was supposed to expire at the end of this year, but in August the FDIC announced it would continue through June 30. However, starting Friday the fee will jump to 15, 20 or 25 cents per $100 in insured deposits, depending on the bank's risk category.
Banks had until Nov. 2 to tell the FDIC if they would opt out of the program at the end of this year. The FDIC could not say how many banks did, but many large ones - including Citibank, Bank of America, Chase and Wells Fargo - have disclosed they are dropping out.
Banks opting out must post a notice in their main office and each domestic branch and on their Web sites (if they accept Internet deposits) indicating that after Dec. 31, funds held in non-interest-bearing transaction accounts will no longer be guaranteed in full under the program, but will be insured up to $250,000 under the FDIC's general deposit insurance rules.
(For details on deposit insurance, see links.sfgate.com/ZIZS)
A spokesman for Citibank said it dropped out because the fee increase "would have been meaningful. We also got to a point where, as we have raised capital and solidified our balance sheet, there was not a need to" continue participating.
Wells Fargo spokeswoman Richele Messick said, "This was always set up as a temporary program to help customers regain confidence in the stability and financial health of the U.S. financial system. Because our confidence in the U.S. financial system has improved, we believe participating in the program for (another six months) is not necessary."
Messick says Wells has also notified its business customers of the change by direct mail or through "relationship managers."
Banking consultant Bert Ely says that safer banks are more likely to opt out. "The riskier ones pretty much have to stay in," he says. But he warns customers "not to read too much into a bank's decision to stay in or opt out. Risk tolerance varies from bank to bank."
Businesses that have more than $250,000 in a bank should understand its financial condition or find someone who can, he adds.
$250,000 in bank? Check deposit insurance
Kathleen Pender
Tuesday, December 29, 2009
Businesses and individuals with more than $250,000 in a checking account should check to see whether they will continue to be fully insured.
After the end of this year, many banks, including some of the nation's largest, will no longer participate in a temporary program that provides unlimited federal deposit insurance on non-interest-bearing checking and other transaction accounts.
Deposits at all banks will still be insured up to $250,000 through 2013 under the FDIC's general deposit insurance rules, so the vast majority of consumers don't need to worry. But starting Friday, checking account balances that exceed $250,000 will no longer be covered under the FDIC's Transaction Account Guarantee Program at some banks.
This temporary program was created in October 2008 to restore faith in the banking system.
Although few individuals keep more than $250,000 in a checking account, many businesses and nonprofits do to handle payroll, accounts receivable and other cash-flow needs. Even a small business might occasionally have a balance exceeding $250,000 when a large payment comes in or a big bill is coming due.
When it looked like the financial system might melt down, businesses got nervous about their uninsured accounts. To reassure them, the FDIC said it would temporarily guarantee all deposits in non-interest-bearing transactional accounts, even those exceeding $250,000. The guarantee also covered Negotiable Order of Withdrawal or NOW accounts with interest rates no higher than 0.50 percent.
To participate, banks had to pay a fee equal to 10 cents a year for every $100 insured under the program. Banks could opt out, but about 87 percent of eligible institutions stayed in the program initially, FDIC spokesman David Barr says.
The program was supposed to expire at the end of this year, but in August the FDIC announced it would continue through June 30. However, starting Friday the fee will jump to 15, 20 or 25 cents per $100 in insured deposits, depending on the bank's risk category.
Banks had until Nov. 2 to tell the FDIC if they would opt out of the program at the end of this year. The FDIC could not say how many banks did, but many large ones - including Citibank, Bank of America, Chase and Wells Fargo - have disclosed they are dropping out.
Banks opting out must post a notice in their main office and each domestic branch and on their Web sites (if they accept Internet deposits) indicating that after Dec. 31, funds held in non-interest-bearing transaction accounts will no longer be guaranteed in full under the program, but will be insured up to $250,000 under the FDIC's general deposit insurance rules.
(For details on deposit insurance, see links.sfgate.com/ZIZS)
A spokesman for Citibank said it dropped out because the fee increase "would have been meaningful. We also got to a point where, as we have raised capital and solidified our balance sheet, there was not a need to" continue participating.
Wells Fargo spokeswoman Richele Messick said, "This was always set up as a temporary program to help customers regain confidence in the stability and financial health of the U.S. financial system. Because our confidence in the U.S. financial system has improved, we believe participating in the program for (another six months) is not necessary."
Messick says Wells has also notified its business customers of the change by direct mail or through "relationship managers."
Banking consultant Bert Ely says that safer banks are more likely to opt out. "The riskier ones pretty much have to stay in," he says. But he warns customers "not to read too much into a bank's decision to stay in or opt out. Risk tolerance varies from bank to bank."
Businesses that have more than $250,000 in a bank should understand its financial condition or find someone who can, he adds.
Monday, December 28, 2009
Christmas Presents for Bankers
http://www.guardian.co.uk/commentisfree/cifamerica/2009/dec/28/freddie-mac-fannie-mae-gift
December 28, 2009 by The Guardian/UK
Christmas Presents for Bankers
by Dean Baker
On Christmas night in 1776, George Washington led a surprise attack on a group of Hessian mercenaries employed by the British to suppress the American revolution. This was one of the biggest military victories of the Revolutionary War.
In the same spirit of surprise, the Obama administration announced on Christmas eve that it was removing the $400bn cap on Fannie Mae and Freddie Mac's access to the US Treasury. The new draw is limitless. It also announced that the chief executives of the two government-controlled mortgage giants would be getting compensation packages worth $6m a year. This was another big blow for the financial sector in its effort to sap every last cent from the productive economy.
After throwing the economy into the worst downturn since the Great Depression and bringing the whole sector to the edge of collapse, the financial industry has used its political power to succor itself back to life. It is now stronger than ever.
In the last quarter, the financial sector accounted for 34% of all corporate profits, dwarfing the share reached in the mad days at the peak of the housing bubble. The economy might look bleak on Main Street, with double-digit unemployment rates and nearly 200,000 foreclosures a month, but they were dividing up $13bn in bonuses at Goldman Sachs this Christmas.
Most people already knows the various public pots that Goldman and the rest tapped to make themselves healthy and rich again. There was the $700bn troubled asset relief programme (Tarp) loan fund, the hundreds of billions of dollars worth of guarantees that the FDIC provided to cover their borrowing at the peak of the crisis, and the trillions of dollars lent out by the Fed. However, the bottomless line of credit for Fannie and Freddie could prove to be the biggest pot of gold of all.
Fannie and Freddie both collapsed in September of 2008 when the bad mortgage debt they purchased at the peak of the bubble overwhelmed their reserves. The Treasury Department put them into conservatorship and gave each of the mortgage giants a $100bn line of credit to cover future losses. This level was raised to $200bn each earlier this year as losses ran higher than expected.
However, this increase was supposed to be just a safeguard. We were assured that actual losses would never approach these levels. That seems reasonable since the bulk of Fannie and Freddie's loans were prime, meaning that they came with either a 20% down payment or mortgage insurance. Even with a collapsing housing bubble it is difficult to lose too much on prime mortgages.
If 10% of Fannie and Freddie's mortgages (held or insured) defaulted, this would amount to $550bn in bad mortgages. If they lost an average of 25% on these mortgages, this still only leads to losses of $163 billion, less than half of their $400 billion line of credit. And, this is before taking into account their prior reserves and profits on ongoing operations. As it stands, Fannie and Freddie had drawn just over $100bn of their line of credit, so it is difficult to understand the need for raising their borrowing limit from an amount almost four times this level.
There is one possible reason that Fannie and Freddie could see much higher losses. Suppose that they deliberately buy up mortgages from banks at inflated prices. This was the initial purpose of the Tarp, but it quickly got sidetracked into lending capital to banks. This was the better policy, but it still left the banks with huge amounts of bad loans.
Perhaps Fannie and Freddie are now acting as a "backdoor Tarp". This could easily lead to losses in excess of $400bn. It also is the type of policy that you might want to announce on Christmas eve when no one is paying much attention.
This goes along with the $6m pay package for the people who now run these government controlled entities. Is this really what we have to pay for good help? The Treasury secretary gets paid $191,300 a year. Should we infer, based on this fact, that he must be incompetent?
The folks running Fannie and Freddie prior to their collapse pocketed tens of millions of dollars in compensation. The Treasury now tells us that their incompetence could end up costing taxpayers more than $400bn.
If nothing else, the great recession should teach us that paying executives lots of money obviously does not ensure that we will get competent people in charge. But, this is not a story about doing what is best for the economy and the country. This is a story about doing what's best for the financial industry. That was the name of game in Washington DC before the collapse and that is still the name of the game – until people get pissed off enough to do something about it.
December 28, 2009 by The Guardian/UK
Christmas Presents for Bankers
by Dean Baker
On Christmas night in 1776, George Washington led a surprise attack on a group of Hessian mercenaries employed by the British to suppress the American revolution. This was one of the biggest military victories of the Revolutionary War.
In the same spirit of surprise, the Obama administration announced on Christmas eve that it was removing the $400bn cap on Fannie Mae and Freddie Mac's access to the US Treasury. The new draw is limitless. It also announced that the chief executives of the two government-controlled mortgage giants would be getting compensation packages worth $6m a year. This was another big blow for the financial sector in its effort to sap every last cent from the productive economy.
After throwing the economy into the worst downturn since the Great Depression and bringing the whole sector to the edge of collapse, the financial industry has used its political power to succor itself back to life. It is now stronger than ever.
In the last quarter, the financial sector accounted for 34% of all corporate profits, dwarfing the share reached in the mad days at the peak of the housing bubble. The economy might look bleak on Main Street, with double-digit unemployment rates and nearly 200,000 foreclosures a month, but they were dividing up $13bn in bonuses at Goldman Sachs this Christmas.
Most people already knows the various public pots that Goldman and the rest tapped to make themselves healthy and rich again. There was the $700bn troubled asset relief programme (Tarp) loan fund, the hundreds of billions of dollars worth of guarantees that the FDIC provided to cover their borrowing at the peak of the crisis, and the trillions of dollars lent out by the Fed. However, the bottomless line of credit for Fannie and Freddie could prove to be the biggest pot of gold of all.
Fannie and Freddie both collapsed in September of 2008 when the bad mortgage debt they purchased at the peak of the bubble overwhelmed their reserves. The Treasury Department put them into conservatorship and gave each of the mortgage giants a $100bn line of credit to cover future losses. This level was raised to $200bn each earlier this year as losses ran higher than expected.
However, this increase was supposed to be just a safeguard. We were assured that actual losses would never approach these levels. That seems reasonable since the bulk of Fannie and Freddie's loans were prime, meaning that they came with either a 20% down payment or mortgage insurance. Even with a collapsing housing bubble it is difficult to lose too much on prime mortgages.
If 10% of Fannie and Freddie's mortgages (held or insured) defaulted, this would amount to $550bn in bad mortgages. If they lost an average of 25% on these mortgages, this still only leads to losses of $163 billion, less than half of their $400 billion line of credit. And, this is before taking into account their prior reserves and profits on ongoing operations. As it stands, Fannie and Freddie had drawn just over $100bn of their line of credit, so it is difficult to understand the need for raising their borrowing limit from an amount almost four times this level.
There is one possible reason that Fannie and Freddie could see much higher losses. Suppose that they deliberately buy up mortgages from banks at inflated prices. This was the initial purpose of the Tarp, but it quickly got sidetracked into lending capital to banks. This was the better policy, but it still left the banks with huge amounts of bad loans.
Perhaps Fannie and Freddie are now acting as a "backdoor Tarp". This could easily lead to losses in excess of $400bn. It also is the type of policy that you might want to announce on Christmas eve when no one is paying much attention.
This goes along with the $6m pay package for the people who now run these government controlled entities. Is this really what we have to pay for good help? The Treasury secretary gets paid $191,300 a year. Should we infer, based on this fact, that he must be incompetent?
The folks running Fannie and Freddie prior to their collapse pocketed tens of millions of dollars in compensation. The Treasury now tells us that their incompetence could end up costing taxpayers more than $400bn.
If nothing else, the great recession should teach us that paying executives lots of money obviously does not ensure that we will get competent people in charge. But, this is not a story about doing what is best for the economy and the country. This is a story about doing what's best for the financial industry. That was the name of game in Washington DC before the collapse and that is still the name of the game – until people get pissed off enough to do something about it.
Feds probe banker Allen Stanford's ties to Congress
http://www.miamiherald.com/news/southflorida/v-fullstory/story/1399470.html
Feds probe banker Allen Stanford's ties to Congress
Michael Sallah amd Rob Barry
Miami Herald
Sun, 27 Dec 2009 09:41 EST
The ties between indicted banker Allen Stanford and members of Congress -- including millions in contributions and weekends in five-star Caribbean resorts -- are now the subject of a sweeping federal investigation.
Just hours after federal agents charged banker Allen Stanford with fleecing investors of $7 billion, the disgraced financier received a message from one of Congress' most powerful members, Pete Sessions.
''I love you and believe in you,'' said the e-mail sent on Feb. 17. ''If you want my ear/voice -- e-mail,'' it said, signed ''Pete.''
The message from the chair of the National Republican Congressional Committee represents one of the many ties between members of Congress and the indicted banker that have caught the attention of federal agents.
The Justice Department is investigating millions of dollars Stanford and his staff contributed to lawmakers over the past decade to determine if the banker received special favors from politicians while building his spectacular offshore bank in Antigua, The Miami Herald has learned.
Agents are examining campaign dollars, as well as lavish Caribbean trips funded by Stanford for politicians and their spouses, feting them with lobster dinners and caviar.
The money Stanford gave Sessions and other lawmakers was stolen from his clients while he carried out what prosecutors now say was one of the nation's largest Ponzi schemes.
Sessions, 54, a longtime House member from Dallas who met with Stanford during two trips to the Caribbean, did not respond to interview requests.
Supporters say the lawmaker, who received $44,375 from Stanford and his staff, was not assigned to any of the committees with oversight over Stanford's bank and brokerages.
His press secretary, Emily Davis, said she was unable to comment on the e-mail sent at 11:31 a.m. on the day Stanford was charged by the U.S. Securities and Exchange Commission. ''I haven't seen it, so I can't verify its authenticity at this time,'' she said.
But the message found on Stanford's computer servers and the contributions he made to Sessions and other lawmakers -- totaling $2.3 million -- are now part of the government's inquiry.
Records show Stanford also doled out $5 million on lobbying since 2001, setting up his own Washington firm last year with expensive furnishings and artwork -- the money plundered from his customers' accounts.
D.C. Connections
Over the years, he took on battles to protect his banking network while fending off regulators.
In 2001, he pressed successfully to kill a bill that would have exposed the flow of millions into his secretive offshore bank in Antigua.
The next year, he helped block legislation that would have drawn more government scrutiny to his bank.
While he was fighting reforms to financial secrecy and offshore banking laws, Stanford was hobnobbing with dozens of lawmakers.
Stanford hosted New York Congressman John Sweeney's wedding dinner at his five-star restaurant in Antigua in 2004 -- toasting the couple for photographers -- and staged a cocktail fundraiser for now-disgraced Ohio congressman Bob Ney at his bayfront Miami office.
''He legitimized himself by having himself vetted by powerful members of Congress,'' said Steven Riger, a former vice president at Stanford's Miami brokerage. ''It was all about the public's perception.''
Kent Schaffer, Stanford's court-appointed attorney, said his client never asked for special favors. ''Stanford gave contributions to politicians, but there was nothing criminal behind it,'' he said.
The federal investigation comes after months of criticism from victims' groups complaining that elected leaders failed to vet Stanford before accepting money from him the past 10 years. If they had, they would have discovered that the U.S. State Department in 1999 concluded that Stanford helped create a haven for money-laundering in Antigua.
Most members of Congress contacted by The Herald declined to discuss their ties to the banker, other than to say they have since returned the contributions.
Fighting Reforms
Stanford's foray into the Washington power game began in 2001, shortly after he was allowed to open a controversial trust office in Miami.
The special office was a boon to Stanford's bank, generating millions in the sale of certificates of deposit -- the money stuffed in pouches and sent on jets to his banking headquarters in Antigua.
But when a bill was created to compel offshore bankers to reveal the sources of money flowing into their banks, Stanford jumped into the fight to kill it.
The measure would have forced Stanford -- who was moving millions illegally through his Miami trust office -- to open his books to federal regulators.
''He wanted the complete freedom to move money offshore without any threat,'' said Jack Blum, a lawyer who testified before Congress supporting the legislation. ''He was cheerleading for the offshore tax havens.''
To combat the bill, Stanford launched a strategy he would use for the next eight years: He gave money to the party in power, including $40,000 to the Senate Republican Campaign Committee and $100,000 to the inaugural committee of George W. Bush, records show.
By summer of 2001, the bill was dead.
In the ensuing years, Stanford's banking empire flourished, with the Miami office generating hundreds of millions of dollars, records show.
In late 2001, Stanford confronted another threat: A bill allowing state and federal regulators to share details about fraud cases -- which would have brought Stanford's brokerages under closer scrutiny -- landed in the Senate Banking Committee.
Though the Senate was now controlled by Democrats, Stanford was prepared: He had given $500,000 to the Democratic Senatorial Campaign Committee in 2002 -- his largest-ever contribution.
''I told him that the Democrats were going to take over, and he needed to make friends with them,'' recalled his lobbyist Ben Barnes, once Texas' lieutenant governor.
Stanford also doled out $100,000 to a national lobbying group to fight the measure.
The bill, which sparked sweeping opposition from brokerages and insurers, never made it to a vote.
Action in Antiqua
While he was scoring points in Washington, Stanford was squaring off for a crisis at his banking headquarters in Antigua.
In 2003, investors began questioning the legitimacy of his certificates of deposit, which generated higher returns than major U.S. banks, and articles began appearing in news magazines about money-laundering in Antigua.
In addition, Stanford was drawing the scrutiny of the SEC, which was demanding to know where his bank was investing customers' money.
In the ensuing years, Stanford would play a dual role of staving off regulators -- paying $200,000 in bribes to Antiguan banking chief Leroy King -- while forging ties with members of Congress, court records show.
Those connections deepened when Stanford started hosting a series of congressional visits to Antigua.
It began in 2003, when lawmakers including Sessions, Ney, Sweeney, Gregory Meeks, Donald Payne, Max Sandlin and Phil Crane arrived in Antigua on a mission to ''promote relations'' with the Caribbean nation.
The cost of the January trip -- including nights in luxury hotels and two Stanford jets for travel -- came to $39,500, records show.
For four days, they gathered for talks on business in the Caribbean, trading jokes with Prime Minister Lester Bird and touring the island.
In time, the group of lawmakers, which became known as the ''Caribbean Caucus,'' would take 11 more trips -- the costs picked up by the Inter-American Economic Council, a nonprofit funded by Stanford.
A total of $311,307 was spent on the trips to places like Montego Bay, St. Croix and Key Biscayne. ''We were rolling out food, caviar, wine, lobster,'' recalled Stanford's personal chef, Jonas Hagg.
During a 2004 Antiguan trip, Sweeney and his 34-year-old girlfriend were married, with Stanford hosting the ceremony and reception for the New York Republican at the famed Pavilion Restaurant.
''If it wasn't for Allen, I certainly would not be here today,'' Sweeney told Stanford's newspaper, The Antigua Sun. ''He has done a tremendous job of promoting and raising the awareness of Antigua in the United States, and people take notice of a man of his standing and stature in the halls of Washington.''
Photos of Stanford and caucus members were splashed in company publications and press releases. ''You looked and you saw all these important people,'' Riger said. ''That legitimacy allowed him to go out and collect a lot of money.''
Stanford was not only funding the trips -- the money looted from his customers -- but also staging fundraisers.
He held an event at his office on the 21st floor of the Miami Center for Ohio house member Ney, who was later sentenced to 30 months in prison after admitting to accepting gifts and money from clients of lobbyist Jack Abramoff.
He rallied his brokers when Sessions was in a tight race with Democrat Martin Frost in Texas in 2004.
''He got on the speakerphone and told everyone to give to Pete Sessions,'' said Riger. ''He said Sessions was good for our company and we needed to give to him.'' Stanford raised $38,875 in the final weeks of the campaign for Sessions, who defeated Frost.
The Investigations
While he was forging ties in Washington, he was getting into deeper trouble with the SEC. By 2006, the agency had sent two confidential letters to the Antiguan government demanding information about the solvency of Stanford's bank, records show.
Both times, Stanford was aided by lead regulator King, who managed to keep the bank's finances secret while accepting thousands in bribes from Stanford -- their pledge sealed in a blood oath in Stanford's airplane hangar in Antigua, according to court records and interviews.
With pressure mounting from the SEC, Stanford increased his lobbying in Washington.
In 2008, he started his own lobby firm on 14th Street and New York Avenue, spending $2.2 million -- more than he spent the previous four years combined, records show.
''He was spreading his money around,'' said Blum, the Washington expert on money-laundering.
''It was a way of gaining legitimacy and getting people to say, 'Hey, I'm OK.' ''
Just one month before the FBI launched a criminal probe into his banking empire, Stanford hosted a lavish gathering of powerful Washington insiders, with keynote speeches from Madeleine Albright, former secretary of state, and Paul Wolfowitz, former deputy secretary of defense.
Also co-hosting the May event: Miami lawyer Yolanda Suarez, Stanford's longtime chief of staff.
The topic: the global financial crisis, and the private sector's need to work with government.
But Stanford's own crisis was about to explode.
On Feb. 17, armed with court orders, federal agents swarmed into his offices across the country, shutting down his operations and declaring that Stanford was running a massive fraud.
In his Houston headquarters, agents found reams of company documents, electronic records and e-mails received by Stanford in his final days, including the message from Sessions.
Running For Cover
As the scandal unfolded, members of the Caribbean Caucus began returning their contributions.
Nineteen lawmakers gave back a total of $87,800 to the court-appointed receiver as of August. Others, including Meeks, Sessions, Sandlin, Sweeney and Crane, said they turned some of the money over to charities.
In addition, Democratic House member Charlie Rangel returned $11,800 to charities, and Democratic Florida Sen. Bill Nelson $45,000 to charities, half of which came from a fundraiser at Stanford's Miami office in 2006.
''Just like a number of people, [they] started to run for cover the minute Allen was under scrutiny,'' said Schaffer, Stanford's attorney.
''People he had been very close to -- and never asked anything of -- all of a sudden are distancing themselves. Whether he's innocent or guilty, they don't really care. They worry about how it affects their image.''
As federal agents examine Stanford's political contributions, victims' groups have criticized lawmakers for failing to vet Stanford before accepting his donations and trips.
The State Department had singled out Stanford in a 1999 report for using his influence to weaken the Antiguan banking laws, creating ''one of the most attractive financial centers in the Caribbean for money launderers.''
''None of this was difficult to ascertain,'' said Bill Branscum, a former U.S. Treasury agent who investigated laundering in the Caribbean. ''With the position of public trust comes a consummate responsibility. They should have made it their business to figure out what was going on.''
''You've got to give [Stanford] credit, he got the best bang for his buck.''
Feds probe banker Allen Stanford's ties to Congress
Michael Sallah amd Rob Barry
Miami Herald
Sun, 27 Dec 2009 09:41 EST
The ties between indicted banker Allen Stanford and members of Congress -- including millions in contributions and weekends in five-star Caribbean resorts -- are now the subject of a sweeping federal investigation.
Just hours after federal agents charged banker Allen Stanford with fleecing investors of $7 billion, the disgraced financier received a message from one of Congress' most powerful members, Pete Sessions.
''I love you and believe in you,'' said the e-mail sent on Feb. 17. ''If you want my ear/voice -- e-mail,'' it said, signed ''Pete.''
The message from the chair of the National Republican Congressional Committee represents one of the many ties between members of Congress and the indicted banker that have caught the attention of federal agents.
The Justice Department is investigating millions of dollars Stanford and his staff contributed to lawmakers over the past decade to determine if the banker received special favors from politicians while building his spectacular offshore bank in Antigua, The Miami Herald has learned.
Agents are examining campaign dollars, as well as lavish Caribbean trips funded by Stanford for politicians and their spouses, feting them with lobster dinners and caviar.
The money Stanford gave Sessions and other lawmakers was stolen from his clients while he carried out what prosecutors now say was one of the nation's largest Ponzi schemes.
Sessions, 54, a longtime House member from Dallas who met with Stanford during two trips to the Caribbean, did not respond to interview requests.
Supporters say the lawmaker, who received $44,375 from Stanford and his staff, was not assigned to any of the committees with oversight over Stanford's bank and brokerages.
His press secretary, Emily Davis, said she was unable to comment on the e-mail sent at 11:31 a.m. on the day Stanford was charged by the U.S. Securities and Exchange Commission. ''I haven't seen it, so I can't verify its authenticity at this time,'' she said.
But the message found on Stanford's computer servers and the contributions he made to Sessions and other lawmakers -- totaling $2.3 million -- are now part of the government's inquiry.
Records show Stanford also doled out $5 million on lobbying since 2001, setting up his own Washington firm last year with expensive furnishings and artwork -- the money plundered from his customers' accounts.
D.C. Connections
Over the years, he took on battles to protect his banking network while fending off regulators.
In 2001, he pressed successfully to kill a bill that would have exposed the flow of millions into his secretive offshore bank in Antigua.
The next year, he helped block legislation that would have drawn more government scrutiny to his bank.
While he was fighting reforms to financial secrecy and offshore banking laws, Stanford was hobnobbing with dozens of lawmakers.
Stanford hosted New York Congressman John Sweeney's wedding dinner at his five-star restaurant in Antigua in 2004 -- toasting the couple for photographers -- and staged a cocktail fundraiser for now-disgraced Ohio congressman Bob Ney at his bayfront Miami office.
''He legitimized himself by having himself vetted by powerful members of Congress,'' said Steven Riger, a former vice president at Stanford's Miami brokerage. ''It was all about the public's perception.''
Kent Schaffer, Stanford's court-appointed attorney, said his client never asked for special favors. ''Stanford gave contributions to politicians, but there was nothing criminal behind it,'' he said.
The federal investigation comes after months of criticism from victims' groups complaining that elected leaders failed to vet Stanford before accepting money from him the past 10 years. If they had, they would have discovered that the U.S. State Department in 1999 concluded that Stanford helped create a haven for money-laundering in Antigua.
Most members of Congress contacted by The Herald declined to discuss their ties to the banker, other than to say they have since returned the contributions.
Fighting Reforms
Stanford's foray into the Washington power game began in 2001, shortly after he was allowed to open a controversial trust office in Miami.
The special office was a boon to Stanford's bank, generating millions in the sale of certificates of deposit -- the money stuffed in pouches and sent on jets to his banking headquarters in Antigua.
But when a bill was created to compel offshore bankers to reveal the sources of money flowing into their banks, Stanford jumped into the fight to kill it.
The measure would have forced Stanford -- who was moving millions illegally through his Miami trust office -- to open his books to federal regulators.
''He wanted the complete freedom to move money offshore without any threat,'' said Jack Blum, a lawyer who testified before Congress supporting the legislation. ''He was cheerleading for the offshore tax havens.''
To combat the bill, Stanford launched a strategy he would use for the next eight years: He gave money to the party in power, including $40,000 to the Senate Republican Campaign Committee and $100,000 to the inaugural committee of George W. Bush, records show.
By summer of 2001, the bill was dead.
In the ensuing years, Stanford's banking empire flourished, with the Miami office generating hundreds of millions of dollars, records show.
In late 2001, Stanford confronted another threat: A bill allowing state and federal regulators to share details about fraud cases -- which would have brought Stanford's brokerages under closer scrutiny -- landed in the Senate Banking Committee.
Though the Senate was now controlled by Democrats, Stanford was prepared: He had given $500,000 to the Democratic Senatorial Campaign Committee in 2002 -- his largest-ever contribution.
''I told him that the Democrats were going to take over, and he needed to make friends with them,'' recalled his lobbyist Ben Barnes, once Texas' lieutenant governor.
Stanford also doled out $100,000 to a national lobbying group to fight the measure.
The bill, which sparked sweeping opposition from brokerages and insurers, never made it to a vote.
Action in Antiqua
While he was scoring points in Washington, Stanford was squaring off for a crisis at his banking headquarters in Antigua.
In 2003, investors began questioning the legitimacy of his certificates of deposit, which generated higher returns than major U.S. banks, and articles began appearing in news magazines about money-laundering in Antigua.
In addition, Stanford was drawing the scrutiny of the SEC, which was demanding to know where his bank was investing customers' money.
In the ensuing years, Stanford would play a dual role of staving off regulators -- paying $200,000 in bribes to Antiguan banking chief Leroy King -- while forging ties with members of Congress, court records show.
Those connections deepened when Stanford started hosting a series of congressional visits to Antigua.
It began in 2003, when lawmakers including Sessions, Ney, Sweeney, Gregory Meeks, Donald Payne, Max Sandlin and Phil Crane arrived in Antigua on a mission to ''promote relations'' with the Caribbean nation.
The cost of the January trip -- including nights in luxury hotels and two Stanford jets for travel -- came to $39,500, records show.
For four days, they gathered for talks on business in the Caribbean, trading jokes with Prime Minister Lester Bird and touring the island.
In time, the group of lawmakers, which became known as the ''Caribbean Caucus,'' would take 11 more trips -- the costs picked up by the Inter-American Economic Council, a nonprofit funded by Stanford.
A total of $311,307 was spent on the trips to places like Montego Bay, St. Croix and Key Biscayne. ''We were rolling out food, caviar, wine, lobster,'' recalled Stanford's personal chef, Jonas Hagg.
During a 2004 Antiguan trip, Sweeney and his 34-year-old girlfriend were married, with Stanford hosting the ceremony and reception for the New York Republican at the famed Pavilion Restaurant.
''If it wasn't for Allen, I certainly would not be here today,'' Sweeney told Stanford's newspaper, The Antigua Sun. ''He has done a tremendous job of promoting and raising the awareness of Antigua in the United States, and people take notice of a man of his standing and stature in the halls of Washington.''
Photos of Stanford and caucus members were splashed in company publications and press releases. ''You looked and you saw all these important people,'' Riger said. ''That legitimacy allowed him to go out and collect a lot of money.''
Stanford was not only funding the trips -- the money looted from his customers -- but also staging fundraisers.
He held an event at his office on the 21st floor of the Miami Center for Ohio house member Ney, who was later sentenced to 30 months in prison after admitting to accepting gifts and money from clients of lobbyist Jack Abramoff.
He rallied his brokers when Sessions was in a tight race with Democrat Martin Frost in Texas in 2004.
''He got on the speakerphone and told everyone to give to Pete Sessions,'' said Riger. ''He said Sessions was good for our company and we needed to give to him.'' Stanford raised $38,875 in the final weeks of the campaign for Sessions, who defeated Frost.
The Investigations
While he was forging ties in Washington, he was getting into deeper trouble with the SEC. By 2006, the agency had sent two confidential letters to the Antiguan government demanding information about the solvency of Stanford's bank, records show.
Both times, Stanford was aided by lead regulator King, who managed to keep the bank's finances secret while accepting thousands in bribes from Stanford -- their pledge sealed in a blood oath in Stanford's airplane hangar in Antigua, according to court records and interviews.
With pressure mounting from the SEC, Stanford increased his lobbying in Washington.
In 2008, he started his own lobby firm on 14th Street and New York Avenue, spending $2.2 million -- more than he spent the previous four years combined, records show.
''He was spreading his money around,'' said Blum, the Washington expert on money-laundering.
''It was a way of gaining legitimacy and getting people to say, 'Hey, I'm OK.' ''
Just one month before the FBI launched a criminal probe into his banking empire, Stanford hosted a lavish gathering of powerful Washington insiders, with keynote speeches from Madeleine Albright, former secretary of state, and Paul Wolfowitz, former deputy secretary of defense.
Also co-hosting the May event: Miami lawyer Yolanda Suarez, Stanford's longtime chief of staff.
The topic: the global financial crisis, and the private sector's need to work with government.
But Stanford's own crisis was about to explode.
On Feb. 17, armed with court orders, federal agents swarmed into his offices across the country, shutting down his operations and declaring that Stanford was running a massive fraud.
In his Houston headquarters, agents found reams of company documents, electronic records and e-mails received by Stanford in his final days, including the message from Sessions.
Running For Cover
As the scandal unfolded, members of the Caribbean Caucus began returning their contributions.
Nineteen lawmakers gave back a total of $87,800 to the court-appointed receiver as of August. Others, including Meeks, Sessions, Sandlin, Sweeney and Crane, said they turned some of the money over to charities.
In addition, Democratic House member Charlie Rangel returned $11,800 to charities, and Democratic Florida Sen. Bill Nelson $45,000 to charities, half of which came from a fundraiser at Stanford's Miami office in 2006.
''Just like a number of people, [they] started to run for cover the minute Allen was under scrutiny,'' said Schaffer, Stanford's attorney.
''People he had been very close to -- and never asked anything of -- all of a sudden are distancing themselves. Whether he's innocent or guilty, they don't really care. They worry about how it affects their image.''
As federal agents examine Stanford's political contributions, victims' groups have criticized lawmakers for failing to vet Stanford before accepting his donations and trips.
The State Department had singled out Stanford in a 1999 report for using his influence to weaken the Antiguan banking laws, creating ''one of the most attractive financial centers in the Caribbean for money launderers.''
''None of this was difficult to ascertain,'' said Bill Branscum, a former U.S. Treasury agent who investigated laundering in the Caribbean. ''With the position of public trust comes a consummate responsibility. They should have made it their business to figure out what was going on.''
''You've got to give [Stanford] credit, he got the best bang for his buck.''
Saturday, December 26, 2009
Banks Bundled Bad Debt, Bet Against It and Won
Isn't this called racketeering? Isn't this against the law????
http://www.nytimes.com/2009/12/24/business/24trading.html
December 24, 2009
Banks Bundled Bad Debt, Bet Against It and Won
By GRETCHEN MORGENSON and LOUISE STORY
In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.
Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.
Goldman’s own clients who bought them, however, were less fortunate.
Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.
Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.
How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.
While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.
One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.
Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.
Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.
But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.
“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”
Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.
Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.
The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.
From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.
Goldman Saw It Coming
Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses.
A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall Street had introduced a new index, called the ABX, that became a way to invest in the direction of mortgage securities. The index allowed traders to bet on or against pools of mortgages with different risk characteristics, just as stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.
Goldman, among others on Wall Street, has said since the collapse that it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.
Even before then, however, pockets of the investment bank had also started using C.D.O.’s to place bets against mortgage securities, in some cases to hedge the firm’s mortgage investments, as protection against a fall in housing prices and an increase in defaults.
Mr. Egol was a prime mover behind these securities. Beginning in 2004, with housing prices soaring and the mortgage mania in full swing, Mr. Egol began creating the deals known as Abacus. From 2004 to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9 billion.
Abacus allowed investors to bet for or against the mortgage securities that were linked to the deal. The C.D.O.’s didn’t contain actual mortgages. Instead, they consisted of credit-default swaps, a type of insurance that pays out when a borrower defaults. These swaps made it much easier to place large bets on mortgage failures.
Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity. On occasion, he allowed some hedge funds to take some of the short trades.
Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start in trying to make the assets in Abacus deals look better than they were, according to notes taken by a Wall Street investor during a phone call with Mr. Tourre and another Goldman employee in May 2005.
On the call, the two traders noted that they were trying to persuade analysts at Moody’s Investors Service, a credit rating agency, to assign a higher rating to one part of an Abacus C.D.O. but were having trouble, according to the investor’s notes, which were provided by a colleague who asked for anonymity because he was not authorized to release them. Goldman declined to discuss the selection of the assets in the C.D.O.’s, but a spokesman said investors could have rejected the C.D.O. if they did not like the assets.
Goldman’s bets against the performances of the Abacus C.D.O.’s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a group promoted to managing director on Oct. 24, 2007.
“Egol and Fabrice were way ahead of their time,” said one of the former Goldman workers. “They saw the writing on the wall in this market as early as 2005.” By creating the Abacus C.D.O.’s, they helped protect Goldman against losses that others would suffer.
As early as the summer of 2006, Goldman’s sales desk began marketing short bets using the ABX index to hedge funds like Paulson & Company, Magnetar and Soros Fund Management, which invests for the billionaire George Soros. John Paulson, the founder of Paulson & Company, also would later take some of the shorts from the Abacus deals, helping him profit when mortgage bonds collapsed. He declined to comment.
A Deal Gone Bad, for Some
The woeful performance of some C.D.O.’s issued by Goldman made them ideal for betting against. As of September 2007, for example, just five months after Goldman had sold a new Abacus C.D.O., the ratings on 84 percent of the mortgages underlying it had been downgraded, indicating growing concerns about borrowers’ ability to repay the loans, according to research from UBS, the big Swiss bank. Of more than 500 C.D.O.’s analyzed by UBS, only two were worse than the Abacus deal.
Goldman created other mortgage-linked C.D.O.’s that performed poorly, too. One, in October 2006, was a $800 million C.D.O. known as Hudson Mezzanine. It included credit insurance on mortgage and subprime mortgage bonds that were in the ABX index; Hudson buyers would make money if the housing market stayed healthy — but lose money if it collapsed. Goldman kept a significant amount of the financial bets against securities in Hudson, so it would profit if they failed, according to three of the former Goldman employees.
A Goldman salesman involved in Hudson said the deal was one of the earliest in which outside investors raised questions about Goldman’s incentives. “Here we are selling this, but we think the market is going the other way,” he said.
A hedge fund investor in Hudson, who spoke on the condition of anonymity, said that because Goldman was betting against the deal, he wondered whether the bank built Hudson with “bonds they really think are going to get into trouble.”
Indeed, Hudson investors suffered large losses. In March 2008, just 18 months after Goldman created that C.D.O., so many borrowers had defaulted that holders of the security paid out about $310 million to Goldman and others who had bet against it, according to correspondence sent to Hudson investors.
The Goldman salesman said that C.D.O. buyers were not misled because they were advised that Goldman was placing large bets against the securities. “We were very open with all the risks that we thought we sold. When you’re facing a tidal wave of people who want to invest, it’s hard to stop them,” he said. The salesman added that investors could have placed bets against Abacus and similar C.D.O.’s if they had wanted to.
A Goldman spokesman said the firm’s negative bets didn’t keep it from suffering losses on its mortgage assets, taking $1.7 billion in write-downs on them in 2008; but he would not say how much the bank had since earned on its short positions, which former Goldman workers say will be far more lucrative over time. For instance, Goldman profited to the tune of $1.5 billion from one series of mortgage-related trades by Mr. Egol with Wall Street rival Morgan Stanley, which had to book a steep loss, according to people at both firms.
Tetsuya Ishikawa, a salesman on several Abacus and Hudson deals, left Goldman and later published a novel, “How I Caused the Credit Crunch.” In it, he wrote that bankers deserted their clients who had bought mortgage bonds when that market collapsed: “We had moved on to hurting others in our quest for self-preservation.” Mr. Ishikawa, who now works for another financial firm in London, declined to comment on his work at Goldman.
Profits From a Collapse
Just as synthetic C.D.O.’s began growing rapidly, some Wall Street banks pushed for technical modifications governing how they worked in ways that made it possible for C.D.O.’s to expand even faster, and also tilted the playing field in favor of banks and hedge funds that bet against C.D.O.’s, according to investors.
In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly. The traders then went to the International Swaps and Derivatives Association, the group that governs trading in derivatives like C.D.O.’s. The new system was presented as a fait accompli, and adopted.
Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked. Previously, investors took losses only in certain dire “credit events,” as when the mortgages associated with the C.D.O. defaulted or their issuers went bankrupt.
But the new rules meant that C.D.O. holders would have to make payments to short sellers under less onerous outcomes, or “triggers,” like a ratings downgrade on a bond. This meant that anyone who bet against a C.D.O. could collect on the bet more easily.
“In the early deals you see none of these triggers,” said one investor who asked for anonymity to preserve relationships. “These things were built in to provide the dealers with a big payoff when something bad happened.”
Banks also set up ever more complex deals that favored those betting against C.D.O.’s. Morgan Stanley established a series of C.D.O.’s named after United States presidents (Buchanan and Jackson) with an unusual feature: short-sellers could lock in very cheap bets against mortgages, even beyond the life of the mortgage bonds. It was akin to allowing someone paying a low insurance premium for coverage on one automobile to pay the same on another one even if premiums over all had increased because of high accident rates.
At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.
Selling Bad Debt
Other Wall Street firms also created risky mortgage-related securities that they bet against.
At Deutsche Bank, the point man on betting against the mortgage market was Greg Lippmann, a trader. Mr. Lippmann made his pitch to select hedge fund clients, arguing they should short the mortgage market. He sometimes distributed a T-shirt that read “I’m Short Your House!!!” in black and red letters.
Deutsche, which declined to comment, at the same time was selling synthetic C.D.O.’s to its clients, and those deals created more short-selling opportunities for traders like Mr. Lippmann.
Among the most aggressive C.D.O. creators was Tricadia, a management company that was a unit of Mariner Investment Group. Until he became a senior adviser to the Treasury secretary early this year, Lewis Sachs was Mariner’s vice chairman. Mr. Sachs oversaw about 20 portfolios there, including Tricadia, and its documents also show that Mr. Sachs sat atop the firm’s C.D.O. management committee.
From 2003 to 2007, Tricadia issued 14 mortgage-linked C.D.O.’s, which it called TABS. Even when the market was starting to implode, Tricadia continued to create TABS deals in early 2007 to sell to investors. The deal documents referring to conflicts of interest stated that affiliates and clients of Tricadia might place bets against the types of securities in the TABS deal.
Even so, the sales material also boasted that the mortgages linked to C.D.O.’s had historically low default rates, citing a “recently completed” study by Standard & Poor’s ratings agency — though fine print indicated that the date of the study was September 2002, almost five years earlier.
At a financial symposium in New York in September 2006, Michael Barnes, the co-head of Tricadia, described how a hedge fund could put on a negative mortgage bet by shorting assets to C.D.O. investors, according to his presentation, which was reviewed by The New York Times.
Mr. Barnes declined to comment. James E. McKee, general counsel at Tricadia, said, “Tricadia has never shorted assets into the TABS deals, and Tricadia has always acted in the best interests of its clients and investors.”
Mr. Sachs, through a spokesman at the Treasury Department, declined to comment.
Like investors in some of Goldman’s Abacus deals, buyers of some TABS experienced heavy losses. By the end of 2007, UBS research showed that two TABS deals were the eighth- and ninth-worst performing C.D.O.’s. Both had been downgraded on at least 75 percent of their associated assets within a year of being issued.
Tricadia’s hedge fund did far better, earning roughly a 50 percent return in 2007 and similar profits in 2008, in part from the short bets.
http://www.nytimes.com/2009/12/24/business/24trading.html
December 24, 2009
Banks Bundled Bad Debt, Bet Against It and Won
By GRETCHEN MORGENSON and LOUISE STORY
In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.
Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.
Goldman’s own clients who bought them, however, were less fortunate.
Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.
Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.
How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.
While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.
One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.
Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.
Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.
But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.
“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”
Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.
Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.
The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.
From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.
Goldman Saw It Coming
Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses.
A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall Street had introduced a new index, called the ABX, that became a way to invest in the direction of mortgage securities. The index allowed traders to bet on or against pools of mortgages with different risk characteristics, just as stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.
Goldman, among others on Wall Street, has said since the collapse that it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.
Even before then, however, pockets of the investment bank had also started using C.D.O.’s to place bets against mortgage securities, in some cases to hedge the firm’s mortgage investments, as protection against a fall in housing prices and an increase in defaults.
Mr. Egol was a prime mover behind these securities. Beginning in 2004, with housing prices soaring and the mortgage mania in full swing, Mr. Egol began creating the deals known as Abacus. From 2004 to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9 billion.
Abacus allowed investors to bet for or against the mortgage securities that were linked to the deal. The C.D.O.’s didn’t contain actual mortgages. Instead, they consisted of credit-default swaps, a type of insurance that pays out when a borrower defaults. These swaps made it much easier to place large bets on mortgage failures.
Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity. On occasion, he allowed some hedge funds to take some of the short trades.
Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start in trying to make the assets in Abacus deals look better than they were, according to notes taken by a Wall Street investor during a phone call with Mr. Tourre and another Goldman employee in May 2005.
On the call, the two traders noted that they were trying to persuade analysts at Moody’s Investors Service, a credit rating agency, to assign a higher rating to one part of an Abacus C.D.O. but were having trouble, according to the investor’s notes, which were provided by a colleague who asked for anonymity because he was not authorized to release them. Goldman declined to discuss the selection of the assets in the C.D.O.’s, but a spokesman said investors could have rejected the C.D.O. if they did not like the assets.
Goldman’s bets against the performances of the Abacus C.D.O.’s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a group promoted to managing director on Oct. 24, 2007.
“Egol and Fabrice were way ahead of their time,” said one of the former Goldman workers. “They saw the writing on the wall in this market as early as 2005.” By creating the Abacus C.D.O.’s, they helped protect Goldman against losses that others would suffer.
As early as the summer of 2006, Goldman’s sales desk began marketing short bets using the ABX index to hedge funds like Paulson & Company, Magnetar and Soros Fund Management, which invests for the billionaire George Soros. John Paulson, the founder of Paulson & Company, also would later take some of the shorts from the Abacus deals, helping him profit when mortgage bonds collapsed. He declined to comment.
A Deal Gone Bad, for Some
The woeful performance of some C.D.O.’s issued by Goldman made them ideal for betting against. As of September 2007, for example, just five months after Goldman had sold a new Abacus C.D.O., the ratings on 84 percent of the mortgages underlying it had been downgraded, indicating growing concerns about borrowers’ ability to repay the loans, according to research from UBS, the big Swiss bank. Of more than 500 C.D.O.’s analyzed by UBS, only two were worse than the Abacus deal.
Goldman created other mortgage-linked C.D.O.’s that performed poorly, too. One, in October 2006, was a $800 million C.D.O. known as Hudson Mezzanine. It included credit insurance on mortgage and subprime mortgage bonds that were in the ABX index; Hudson buyers would make money if the housing market stayed healthy — but lose money if it collapsed. Goldman kept a significant amount of the financial bets against securities in Hudson, so it would profit if they failed, according to three of the former Goldman employees.
A Goldman salesman involved in Hudson said the deal was one of the earliest in which outside investors raised questions about Goldman’s incentives. “Here we are selling this, but we think the market is going the other way,” he said.
A hedge fund investor in Hudson, who spoke on the condition of anonymity, said that because Goldman was betting against the deal, he wondered whether the bank built Hudson with “bonds they really think are going to get into trouble.”
Indeed, Hudson investors suffered large losses. In March 2008, just 18 months after Goldman created that C.D.O., so many borrowers had defaulted that holders of the security paid out about $310 million to Goldman and others who had bet against it, according to correspondence sent to Hudson investors.
The Goldman salesman said that C.D.O. buyers were not misled because they were advised that Goldman was placing large bets against the securities. “We were very open with all the risks that we thought we sold. When you’re facing a tidal wave of people who want to invest, it’s hard to stop them,” he said. The salesman added that investors could have placed bets against Abacus and similar C.D.O.’s if they had wanted to.
A Goldman spokesman said the firm’s negative bets didn’t keep it from suffering losses on its mortgage assets, taking $1.7 billion in write-downs on them in 2008; but he would not say how much the bank had since earned on its short positions, which former Goldman workers say will be far more lucrative over time. For instance, Goldman profited to the tune of $1.5 billion from one series of mortgage-related trades by Mr. Egol with Wall Street rival Morgan Stanley, which had to book a steep loss, according to people at both firms.
Tetsuya Ishikawa, a salesman on several Abacus and Hudson deals, left Goldman and later published a novel, “How I Caused the Credit Crunch.” In it, he wrote that bankers deserted their clients who had bought mortgage bonds when that market collapsed: “We had moved on to hurting others in our quest for self-preservation.” Mr. Ishikawa, who now works for another financial firm in London, declined to comment on his work at Goldman.
Profits From a Collapse
Just as synthetic C.D.O.’s began growing rapidly, some Wall Street banks pushed for technical modifications governing how they worked in ways that made it possible for C.D.O.’s to expand even faster, and also tilted the playing field in favor of banks and hedge funds that bet against C.D.O.’s, according to investors.
In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly. The traders then went to the International Swaps and Derivatives Association, the group that governs trading in derivatives like C.D.O.’s. The new system was presented as a fait accompli, and adopted.
Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked. Previously, investors took losses only in certain dire “credit events,” as when the mortgages associated with the C.D.O. defaulted or their issuers went bankrupt.
But the new rules meant that C.D.O. holders would have to make payments to short sellers under less onerous outcomes, or “triggers,” like a ratings downgrade on a bond. This meant that anyone who bet against a C.D.O. could collect on the bet more easily.
“In the early deals you see none of these triggers,” said one investor who asked for anonymity to preserve relationships. “These things were built in to provide the dealers with a big payoff when something bad happened.”
Banks also set up ever more complex deals that favored those betting against C.D.O.’s. Morgan Stanley established a series of C.D.O.’s named after United States presidents (Buchanan and Jackson) with an unusual feature: short-sellers could lock in very cheap bets against mortgages, even beyond the life of the mortgage bonds. It was akin to allowing someone paying a low insurance premium for coverage on one automobile to pay the same on another one even if premiums over all had increased because of high accident rates.
At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.
Selling Bad Debt
Other Wall Street firms also created risky mortgage-related securities that they bet against.
At Deutsche Bank, the point man on betting against the mortgage market was Greg Lippmann, a trader. Mr. Lippmann made his pitch to select hedge fund clients, arguing they should short the mortgage market. He sometimes distributed a T-shirt that read “I’m Short Your House!!!” in black and red letters.
Deutsche, which declined to comment, at the same time was selling synthetic C.D.O.’s to its clients, and those deals created more short-selling opportunities for traders like Mr. Lippmann.
Among the most aggressive C.D.O. creators was Tricadia, a management company that was a unit of Mariner Investment Group. Until he became a senior adviser to the Treasury secretary early this year, Lewis Sachs was Mariner’s vice chairman. Mr. Sachs oversaw about 20 portfolios there, including Tricadia, and its documents also show that Mr. Sachs sat atop the firm’s C.D.O. management committee.
From 2003 to 2007, Tricadia issued 14 mortgage-linked C.D.O.’s, which it called TABS. Even when the market was starting to implode, Tricadia continued to create TABS deals in early 2007 to sell to investors. The deal documents referring to conflicts of interest stated that affiliates and clients of Tricadia might place bets against the types of securities in the TABS deal.
Even so, the sales material also boasted that the mortgages linked to C.D.O.’s had historically low default rates, citing a “recently completed” study by Standard & Poor’s ratings agency — though fine print indicated that the date of the study was September 2002, almost five years earlier.
At a financial symposium in New York in September 2006, Michael Barnes, the co-head of Tricadia, described how a hedge fund could put on a negative mortgage bet by shorting assets to C.D.O. investors, according to his presentation, which was reviewed by The New York Times.
Mr. Barnes declined to comment. James E. McKee, general counsel at Tricadia, said, “Tricadia has never shorted assets into the TABS deals, and Tricadia has always acted in the best interests of its clients and investors.”
Mr. Sachs, through a spokesman at the Treasury Department, declined to comment.
Like investors in some of Goldman’s Abacus deals, buyers of some TABS experienced heavy losses. By the end of 2007, UBS research showed that two TABS deals were the eighth- and ninth-worst performing C.D.O.’s. Both had been downgraded on at least 75 percent of their associated assets within a year of being issued.
Tricadia’s hedge fund did far better, earning roughly a 50 percent return in 2007 and similar profits in 2008, in part from the short bets.
How Goldman Secretly Bet on the U.S. Housing Crash
Proves the markets are fixed in favor of Goldman Sachs!
How Goldman Secretly Bet on the U.S. Housing Crash
By Staff, AlterNet
December 25, 2009
http://www.alternet.org/bloggers/www.alternet.org/144810/
From McClatchy -- (h/t Crooks & Liars) In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk....
How Goldman Secretly Bet on the U.S. Housing Crash
By Staff, AlterNet
December 25, 2009
http://www.alternet.org/bloggers/www.alternet.org/144810/
From McClatchy -- (h/t Crooks & Liars) In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk....
Barclays investment bankers in line for 150% pay rises to ease bonus tax pain
These ruthless, greedy, conscienceless, evil guys always find a loophole to profit off the people!
http://www.dailymail.co.uk/money/article-1238246/Barclays-investment-bankers-line-150-pay-rises-ease-bonus-tax-pain.html
UK Daily Mail
Fri, 25 Dec 2009 08:12 EST
Softening the blow: The bank, led by John Varley, can save money by shifting staff pay to salary rather than bonuses.
Bankers at Barclays are being given massive pay rises to compensate for the 50 per cent bonus tax.
Up to 23,000 investment bankers have been awarded rises of as much as 150 per cent - apparently planned before the bonus tax was announced in Alastair Darling's Pre-Budget report.
Barclays president, Bob Diamond, has led the bank during its takeover of Lehman Brothers' New York operations, and points out it has not received Government bailout cash, unlike rivals Lloyds and RBS.
Barclays Capital should have a much larger bonus pool to share out this year on the back of plentiful highly lucrative rights issues.
The main beneficiaries are likely to be middle ranking and junior staff, whose salary caps have been lifted. Big-deal bankers who will earn seven figure bonuses will benefit less from a rise in basic pay.
The bank itself should benefit as it will pay less in tax overall - as the bonus tax is paid by the bank, not the individuals.
http://www.dailymail.co.uk/money/article-1238246/Barclays-investment-bankers-line-150-pay-rises-ease-bonus-tax-pain.html
UK Daily Mail
Fri, 25 Dec 2009 08:12 EST
Softening the blow: The bank, led by John Varley, can save money by shifting staff pay to salary rather than bonuses.
Bankers at Barclays are being given massive pay rises to compensate for the 50 per cent bonus tax.
Up to 23,000 investment bankers have been awarded rises of as much as 150 per cent - apparently planned before the bonus tax was announced in Alastair Darling's Pre-Budget report.
Barclays president, Bob Diamond, has led the bank during its takeover of Lehman Brothers' New York operations, and points out it has not received Government bailout cash, unlike rivals Lloyds and RBS.
Barclays Capital should have a much larger bonus pool to share out this year on the back of plentiful highly lucrative rights issues.
The main beneficiaries are likely to be middle ranking and junior staff, whose salary caps have been lifted. Big-deal bankers who will earn seven figure bonuses will benefit less from a rise in basic pay.
The bank itself should benefit as it will pay less in tax overall - as the bonus tax is paid by the bank, not the individuals.
National Irish Bank Stop Handling Cash
http://breakingnews.iol.ie/news/business/nib-to-stop-handling-cash-439227.html
National Irish Bank Stop Handling Cash
December 22, 2009
Ireland Online
One of the country's larger banks has told to its customers that it is to stop handling cash in its branches.
National Irish Bank says it is moving to a Scandinavian model of "cashless banking" - with an increased reliance on ATMs and debit cards.
NIB has told customers that its branches will no longer handle cash withdrawals or lodgements, nightsafe lodgements or foreign exchange cash.
They are instead urging customers to use ATMs or get cash back on their laser cards if they need notes. Branches will continue to accept cheques and postal orders.
The bank says the idea of "cashless banking" will be rolled out over the next 18 months, and that the model is that used by its Danish parent company.
NIB says Irish dependence on cash is amongst the highest in Europe.
National Irish Bank Stop Handling Cash
December 22, 2009
Ireland Online
One of the country's larger banks has told to its customers that it is to stop handling cash in its branches.
National Irish Bank says it is moving to a Scandinavian model of "cashless banking" - with an increased reliance on ATMs and debit cards.
NIB has told customers that its branches will no longer handle cash withdrawals or lodgements, nightsafe lodgements or foreign exchange cash.
They are instead urging customers to use ATMs or get cash back on their laser cards if they need notes. Branches will continue to accept cheques and postal orders.
The bank says the idea of "cashless banking" will be rolled out over the next 18 months, and that the model is that used by its Danish parent company.
NIB says Irish dependence on cash is amongst the highest in Europe.
Friday, December 25, 2009
Wells Fargo, Citigroup repay TARP
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/12/24/BUTL1B8QVI.DTL&type=printable
Wells Fargo, Citigroup repay TARP
Alistair Barr, MarketWatch
Thursday, December 24, 2009
Wells Fargo & Co. and Citigroup Inc. said Wednesday that they repaid $45 billion they received from the Troubled Asset Relief Program in the midst of the financial crisis last year, freeing them from government restrictions on compensation.
Wells Fargo said that it redeemed the $25 billion in preferred stock that it had sold to the Treasury Department under TARP's Capital Purchase Program.
As part of the repurchase, the San Francisco bank said, it also paid accrued dividends of nearly $132 million, bringing its total dividends paid to U.S. taxpayers to $1.44 billion since it accepted government support in October 2008.
Repaying the bailout funds means Wells Fargo won't have to pay $1.25 billion in preferred-stock dividends. However, the Treasury Department continues to hold warrants to purchase approximately 110 million shares of Wells common stock at $34.01 per share.
Wells was in the first group of large U.S. banks to get TARP money, although it was reluctant to take it and became more uncomfortable with the program as it became clearer that tough compensation limits would accompany government support.
Citigroup said it repurchased $20 billion of preferred securities it had sold to Treasury under the Capital Purchase Program.
Citi also ended a large loss-sharing program with the government, which canceled $1.8 billion of preferred securities that were part of the $7.1 billion Citi paid for the extra support.
The Treasury Department continues to own 7.7 billion shares of Citi common stock, worth more than $20 billion. It was planning to sell roughly $5 billion of that earlier this month, but backed off after Citi shares fell under pressure from a huge offering of new stock by the bank.
It also continues to hold warrants to buy Citi common stock, and the government still owns $5.3 billion in Citi securities.
Despite those stakes, Citi will no longer be deemed a beneficiary of TARP's exceptional financial assistance in 2010. That means the bank will be free from strict government limits of compensation of its top employees.
Wells Fargo, Citigroup repay TARP
Alistair Barr, MarketWatch
Thursday, December 24, 2009
Wells Fargo & Co. and Citigroup Inc. said Wednesday that they repaid $45 billion they received from the Troubled Asset Relief Program in the midst of the financial crisis last year, freeing them from government restrictions on compensation.
Wells Fargo said that it redeemed the $25 billion in preferred stock that it had sold to the Treasury Department under TARP's Capital Purchase Program.
As part of the repurchase, the San Francisco bank said, it also paid accrued dividends of nearly $132 million, bringing its total dividends paid to U.S. taxpayers to $1.44 billion since it accepted government support in October 2008.
Repaying the bailout funds means Wells Fargo won't have to pay $1.25 billion in preferred-stock dividends. However, the Treasury Department continues to hold warrants to purchase approximately 110 million shares of Wells common stock at $34.01 per share.
Wells was in the first group of large U.S. banks to get TARP money, although it was reluctant to take it and became more uncomfortable with the program as it became clearer that tough compensation limits would accompany government support.
Citigroup said it repurchased $20 billion of preferred securities it had sold to Treasury under the Capital Purchase Program.
Citi also ended a large loss-sharing program with the government, which canceled $1.8 billion of preferred securities that were part of the $7.1 billion Citi paid for the extra support.
The Treasury Department continues to own 7.7 billion shares of Citi common stock, worth more than $20 billion. It was planning to sell roughly $5 billion of that earlier this month, but backed off after Citi shares fell under pressure from a huge offering of new stock by the bank.
It also continues to hold warrants to buy Citi common stock, and the government still owns $5.3 billion in Citi securities.
Despite those stakes, Citi will no longer be deemed a beneficiary of TARP's exceptional financial assistance in 2010. That means the bank will be free from strict government limits of compensation of its top employees.
Obama vows to cut red tape for small banks
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/12/23/BUUK1B855O.DTL&type=printable
Obama vows to cut red tape for small banks
Ronald D. Orol, MarketWatch
Wednesday, December 23, 2009
(12-23) 04:00 PST Washington - --
Meeting with 12 executives representing small banks, President Obama vowed Tuesday to press federal agencies to "cut some of the regulatory red tape" that may be limiting the ability of community bankers to lend more as the economy recovers.
"Some small bankers still have some regulatory constraints," Obama explained in remarks made in conjunction with the meeting. "In some ways, the pendulum may have swung too much in the direction of not lending after decades of too much of a focus on getting money out the door."
Obama, who sat down with top executives of the largest U.S. banks in a heavily publicized event last week, met with the small and community bank executives at the White House to press the group to increase lending to small businesses and to discuss the foreclosure crisis in housing as well as the importance of passing bank regulatory reform.
"There are businesses that are looking for loans that are profitable, and the key is to match them up with healthy lenders," the president said.
Small bankers discussed concerns that bank examiners are pressuring them to increase their capital, effectively restricting their ability to lend more at the same time that small businesses are cutting back on their borrowing, said Chris Cole, regulatory counsel at the Independent Community Bankers of America.
Cole said the group also is discussing concerns that the small banks have with what they consider to be overly restrictive limitations on access to bailout funds under the government's Troubled Asset Relief Program, or TARP.
"TARP is requiring small banks pay too high dividends to the government," Cole said.
"They are arguing that small banks need more access to the TARP program and that the terms are not attractive enough," he said of the group that met with Obama on Tuesday.
Experts now predict that as many as 1,000 small banks may fail before the economy fully recovers, and community bankers have intensified their efforts to have the Obama administration launch a program that would direct more TARP funds to troubled institutions.
Will pleas go unheeded?
So far this year, 139 small banks have failed, according to the Federal Deposit Insurance Corp., which has 552 institutions on its list of troubled banks.
Jaret Seiberg, analyst at Concept Capital in Washington, argues that even though community banks are a powerful lobby in Washington, the meeting isn't expected to result in major policy changes.
"Community banks have enormous political clout, and this meeting is intended to make up for the fact that they were not invited to last week's White House confab," Seiberg wrote.
Obama vows to cut red tape for small banks
Ronald D. Orol, MarketWatch
Wednesday, December 23, 2009
(12-23) 04:00 PST Washington - --
Meeting with 12 executives representing small banks, President Obama vowed Tuesday to press federal agencies to "cut some of the regulatory red tape" that may be limiting the ability of community bankers to lend more as the economy recovers.
"Some small bankers still have some regulatory constraints," Obama explained in remarks made in conjunction with the meeting. "In some ways, the pendulum may have swung too much in the direction of not lending after decades of too much of a focus on getting money out the door."
Obama, who sat down with top executives of the largest U.S. banks in a heavily publicized event last week, met with the small and community bank executives at the White House to press the group to increase lending to small businesses and to discuss the foreclosure crisis in housing as well as the importance of passing bank regulatory reform.
"There are businesses that are looking for loans that are profitable, and the key is to match them up with healthy lenders," the president said.
Small bankers discussed concerns that bank examiners are pressuring them to increase their capital, effectively restricting their ability to lend more at the same time that small businesses are cutting back on their borrowing, said Chris Cole, regulatory counsel at the Independent Community Bankers of America.
Cole said the group also is discussing concerns that the small banks have with what they consider to be overly restrictive limitations on access to bailout funds under the government's Troubled Asset Relief Program, or TARP.
"TARP is requiring small banks pay too high dividends to the government," Cole said.
"They are arguing that small banks need more access to the TARP program and that the terms are not attractive enough," he said of the group that met with Obama on Tuesday.
Experts now predict that as many as 1,000 small banks may fail before the economy fully recovers, and community bankers have intensified their efforts to have the Obama administration launch a program that would direct more TARP funds to troubled institutions.
Will pleas go unheeded?
So far this year, 139 small banks have failed, according to the Federal Deposit Insurance Corp., which has 552 institutions on its list of troubled banks.
Jaret Seiberg, analyst at Concept Capital in Washington, argues that even though community banks are a powerful lobby in Washington, the meeting isn't expected to result in major policy changes.
"Community banks have enormous political clout, and this meeting is intended to make up for the fact that they were not invited to last week's White House confab," Seiberg wrote.
Thursday, December 24, 2009
Compulsory Private Health Insurance: Just Another Bailout for the Financial Sector?
http://www.opednews.com/articles/Compulsory-Private-Health-by-Ellen-Brown-091223-58.html
December 23, 2009
Compulsory Private Health Insurance: Just Another Bailout for the Financial Sector?
By Ellen Brown
Dr. Benjamin Rush, a signer of the Declaration of Independence, is quoted as warning two centuries ago:
"Unless we put medical freedom into the Constitution, the time will come when medicine will organize into an underground dictatorship. . . . The Constitution of this republic should make special privilege for medical freedom as well as religious freedom."
That time seems to have come, but the dictatorship we are facing is not the sort that Dr. Rush was apparently envisioning. It is not a dictatorship by medical doctors, many of whom are as distressed by the proposed legislation as the squeezed middle class is. The new dictatorship is not by doctors but by Wall Street -- the FIRE (finance, insurance, and real estate) sector that now claims 40% of corporate profits.
Economist L. Randall Wray observes that ever since Congress threw out the Glass-Steagall Act separating commercial banking from investment banking, insurance and Wall Street finance have been "two peas in a pod." He writes:
"[T] here is a huge untapped market of some 50 million people who are not paying insurance premiums--and the number grows every year because employers drop coverage and people can't afford premiums. Solution? Health insurance "reform' that requires everyone to turn over their pay to Wall Street. . . . This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough."
The health reform bills now coming through Congress are not focused on how to make health care cheaper or more effective, how to eliminate waste and fraud, or how to cut out expensive middlemen. As originally envisioned, the public option would have pursued those goals. But the public option has been dropped from the Senate bill and radically watered down in the House bill. Rather than focusing on making health care affordable, the bills focus on how to force people either to buy health insurance if they don't have it, or to pay more for it if they do. If you don't have insurance and don't purchase it, you will be subject to a hefty fine. And if you do purchase it, premiums, co-pays, co-insurance payments and deductibles are liable to keep health care cripplingly expensive. Most of the people who don't have health care can't afford to pay the deductibles, so they will never use the plans they are forced to buy.
To subsidize those who can't pay, the Senate bill would make families earning two to four times the poverty level who don't have employer-sponsored insurance surrender 8% to 12% of their income to insurance payments, or pay a fine. In another effort to make the insurance payments "affordable," the Senate bill calls for the lowest cost plan to cover only sixty percent of health care costs. "In other words," wrote Dr. Andrew Coates in a November 23 article, "a guarantee of insurance industry dominance and the continued privatization of health care in every arena."
An excellent analysis was posted on December 22 by a national organization of 17,000 physicians called Physicians for a National Health Program. The authors observed:
"Some paint the Senate bill as a flawed first step to reform that will be improved over time, citing historical examples such as Social Security. But where Social Security established the nidus of a public institution that grew over time, the Senate bill proscribes any such new public institution. Instead, it channels vast new resources including funds diverted from Medicare into the very private insurers who caused today's health care crisis. Social Security's first step was not a mandate that payroll taxes which fund pensions be turned over to Goldman Sachs! . . .
"The bill would drain $43 billion from Medicare payments to safety-net hospitals, threatening the care of the 23 million who will remain uninsured even if the bill works as planned. . . . The bill would leave hundreds of millions of Americans with inadequate insurance an "actuarial value' as low as 60 percent of actual health costs. . . . The bill would inflate the already crushing burden of insurance-related paperwork that currently siphons $400 billion from care annually. . . . [T]he bill will cause U.S. health costs to increase even more rapidly than presently, and budget neutrality is to be achieved by draining funds from Medicare and an accounting trick front-loading the new revenues while delaying most new coverage until 2014."
The Right to Sovereignty Over Our Own Bodies
Compulsory health insurance is like compulsory selective military service (the draft), except that all of our numbers have come up. The argument has been made that auto insurance is compulsory, so why not health insurance? But the obvious response is that you can choose to drive a car. The only way to escape the vehicle we call a body is to give up the ghost.
And that brings up another issue alluded to by Dr. Rush: the matter of freedom of choice in health care, which some people would equate with freedom of religion. Not everyone believes in Modern Medicine. If we the people have a right to choose what we believe about life after death, we should have the right to choose what we believe about life before death, by choosing how to maintain our own bodies.
The conventional treatment promoted by the medical/pharmaceutical complex is an aggressive approach that can wind up killing the patient as collateral damage in its war on the disease. Among other researchers questioning the wisdom of this approach is Gary Null, who reported the results of an exhaustive independent review by the Nutrition Institute of America in 2004. The reviewers concluded that the number one killer is not heart disease or cancer but conventional medicine itself. Conventional medicine was found to be responsible for an estimated 783,936 deaths annually, including 106,000 deaths from adverse drug reactions, 98,000 from medical errors, and 88,000 from infection; and those figures were conservative, since no more than 20 percent of iatrogenic (doctor- or drug-caused) mishaps are ever reported.
There are more natural, less invasive alternatives, but most are not covered by insurance; and even such simple remedies as healthy organic food may be too expensive for people forced to use a major portion of their incomes for medical insurance. A true public option of the Medicare-for-all variety could have solved the problem by keeping health care affordable. If other industrialized countries can find the money for a national health service, we could too. For a model, we could follow the lead of Canada, which originally obtained the funds for its national health service from its own publicly-owned central bank. But that will be the subject of another article. Stay tuned.
December 23, 2009
Compulsory Private Health Insurance: Just Another Bailout for the Financial Sector?
By Ellen Brown
Dr. Benjamin Rush, a signer of the Declaration of Independence, is quoted as warning two centuries ago:
"Unless we put medical freedom into the Constitution, the time will come when medicine will organize into an underground dictatorship. . . . The Constitution of this republic should make special privilege for medical freedom as well as religious freedom."
That time seems to have come, but the dictatorship we are facing is not the sort that Dr. Rush was apparently envisioning. It is not a dictatorship by medical doctors, many of whom are as distressed by the proposed legislation as the squeezed middle class is. The new dictatorship is not by doctors but by Wall Street -- the FIRE (finance, insurance, and real estate) sector that now claims 40% of corporate profits.
Economist L. Randall Wray observes that ever since Congress threw out the Glass-Steagall Act separating commercial banking from investment banking, insurance and Wall Street finance have been "two peas in a pod." He writes:
"[T] here is a huge untapped market of some 50 million people who are not paying insurance premiums--and the number grows every year because employers drop coverage and people can't afford premiums. Solution? Health insurance "reform' that requires everyone to turn over their pay to Wall Street. . . . This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough."
The health reform bills now coming through Congress are not focused on how to make health care cheaper or more effective, how to eliminate waste and fraud, or how to cut out expensive middlemen. As originally envisioned, the public option would have pursued those goals. But the public option has been dropped from the Senate bill and radically watered down in the House bill. Rather than focusing on making health care affordable, the bills focus on how to force people either to buy health insurance if they don't have it, or to pay more for it if they do. If you don't have insurance and don't purchase it, you will be subject to a hefty fine. And if you do purchase it, premiums, co-pays, co-insurance payments and deductibles are liable to keep health care cripplingly expensive. Most of the people who don't have health care can't afford to pay the deductibles, so they will never use the plans they are forced to buy.
To subsidize those who can't pay, the Senate bill would make families earning two to four times the poverty level who don't have employer-sponsored insurance surrender 8% to 12% of their income to insurance payments, or pay a fine. In another effort to make the insurance payments "affordable," the Senate bill calls for the lowest cost plan to cover only sixty percent of health care costs. "In other words," wrote Dr. Andrew Coates in a November 23 article, "a guarantee of insurance industry dominance and the continued privatization of health care in every arena."
An excellent analysis was posted on December 22 by a national organization of 17,000 physicians called Physicians for a National Health Program. The authors observed:
"Some paint the Senate bill as a flawed first step to reform that will be improved over time, citing historical examples such as Social Security. But where Social Security established the nidus of a public institution that grew over time, the Senate bill proscribes any such new public institution. Instead, it channels vast new resources including funds diverted from Medicare into the very private insurers who caused today's health care crisis. Social Security's first step was not a mandate that payroll taxes which fund pensions be turned over to Goldman Sachs! . . .
"The bill would drain $43 billion from Medicare payments to safety-net hospitals, threatening the care of the 23 million who will remain uninsured even if the bill works as planned. . . . The bill would leave hundreds of millions of Americans with inadequate insurance an "actuarial value' as low as 60 percent of actual health costs. . . . The bill would inflate the already crushing burden of insurance-related paperwork that currently siphons $400 billion from care annually. . . . [T]he bill will cause U.S. health costs to increase even more rapidly than presently, and budget neutrality is to be achieved by draining funds from Medicare and an accounting trick front-loading the new revenues while delaying most new coverage until 2014."
The Right to Sovereignty Over Our Own Bodies
Compulsory health insurance is like compulsory selective military service (the draft), except that all of our numbers have come up. The argument has been made that auto insurance is compulsory, so why not health insurance? But the obvious response is that you can choose to drive a car. The only way to escape the vehicle we call a body is to give up the ghost.
And that brings up another issue alluded to by Dr. Rush: the matter of freedom of choice in health care, which some people would equate with freedom of religion. Not everyone believes in Modern Medicine. If we the people have a right to choose what we believe about life after death, we should have the right to choose what we believe about life before death, by choosing how to maintain our own bodies.
The conventional treatment promoted by the medical/pharmaceutical complex is an aggressive approach that can wind up killing the patient as collateral damage in its war on the disease. Among other researchers questioning the wisdom of this approach is Gary Null, who reported the results of an exhaustive independent review by the Nutrition Institute of America in 2004. The reviewers concluded that the number one killer is not heart disease or cancer but conventional medicine itself. Conventional medicine was found to be responsible for an estimated 783,936 deaths annually, including 106,000 deaths from adverse drug reactions, 98,000 from medical errors, and 88,000 from infection; and those figures were conservative, since no more than 20 percent of iatrogenic (doctor- or drug-caused) mishaps are ever reported.
There are more natural, less invasive alternatives, but most are not covered by insurance; and even such simple remedies as healthy organic food may be too expensive for people forced to use a major portion of their incomes for medical insurance. A true public option of the Medicare-for-all variety could have solved the problem by keeping health care affordable. If other industrialized countries can find the money for a national health service, we could too. For a model, we could follow the lead of Canada, which originally obtained the funds for its national health service from its own publicly-owned central bank. But that will be the subject of another article. Stay tuned.
Wednesday, December 23, 2009
Wall Street’s Economic Rampage
http://www.commondreams.org/view/2009/12/22-2
December 22, 2009 by The Media Consortium
Wall Street’s Economic Rampage
by Zach Carter
Over the past year, Wall Street’s excess has helped push the unemployment rate to epic levels and created millions of foreclosures. Yet the rules of the financial road remain unchanged. As 2009 draws to a close, it’s astonishing that so little progress towards financial reform has been made.
President Obama, Congress and federal regulators have not been tough enough on the nation’s financial elite. As Monika Bauerlein and Clara Jeffery emphasize for Mother Jones, the government has committed about $14 trillion in bailout funds to save the banking system without demanding much of anything in return. Goldman Sachs and other big banks are now planning to pay giant bonuses that come straight from taxpayer giveaways rather than invest that money in socially constructive banking.
“Bankers aren’t being rewarded for pulling the economy out of the doldrums,” Bauerlein and Jeffery write. “Nope, they’re simply skimming from the trillions we’ve shoveled at them.”
The major banks are even spending our bailout money to lobby against reform. When President Obama called a meeting for leaders of the nation’s largest banks to scold them for their lobbying, the heads of Morgan Stanley, Goldman Sachs and Citigroup didn’t even bother to show up, as Matthew Rothschild describes in a podcast for The Progressive.
It’s easy to see why the bank execs are so indifferent, Rothschild argues, even to the president. Now that almost all of these banks have repaid the loans they received under the Troubled Asset Relief Program (TARP), Obama has no negotiating leverage and the bankers know it. Even though it represents just a tiny fraction of the $14 trillion bailout, TARP was the only program that attached any strings to that money. Prior to those TARP repayments, Obama could have demanded that banks do more lending to help the economy, work harder to keep troubled borrowers in their homes—or face executive compensation restrictions or other penalties.
And many of the same regulators who helped bring about today’s economic disaster are still in power. As Sen. Bernie Sanders (I-VT) explains for Brave New Films (video below), Federal Reserve Chairman Ben Bernanke blew just about every major policy decision he faced in the years leading up to the crisis. Bernanke, who was recently named person of the year by Time magazine, failed to rein in reckless mortgage speculation, predatory lending or excessive compensation packages. Nevertheless, President Obama has appointed him to another term.
“This recession was precipitated by the greed, recklessness and illegal behavior on Wall Street,” Sanders says. “One of the key responsibilities of the Fed is to maintain the safety and soundness of our financial institutions … The Fed was asleep at the wheel, Bernanke did not do the job.”
Sanders notes that even Bernanke’s financial clean-up operations have been deeply flawed. Bernanke has helped make today’s too-big-to-fail banks even bigger. If we want to stop the lobbying and policy deference that politicians grant to Wall Street, we have to break up the biggest banks into smaller firms that do not endanger the economy if they fail.
Bernanke is not the only holdover from the Bush administration that wields significant economic power under Obama. As I note in a piece for The Nation, John Dugan, the top bank regulator appointed by President George W. Bush, remains in office today, despite failing to ensure the financial health of our largest banks and actively working to undermine consumer protection.
Campaign contributions from the bank lobby will not be enough to counter the voter outrage that President Obama and members of Congress are facing, nor should they. If our leaders want a serious shot at re-election, they need to recognize the need for significant change on Wall Street. That means breaking up the big banks and setting economic policy that helps all of our citizens, not just financiers.
© The Media Consortium, 2005 - 2009
December 22, 2009 by The Media Consortium
Wall Street’s Economic Rampage
by Zach Carter
Over the past year, Wall Street’s excess has helped push the unemployment rate to epic levels and created millions of foreclosures. Yet the rules of the financial road remain unchanged. As 2009 draws to a close, it’s astonishing that so little progress towards financial reform has been made.
President Obama, Congress and federal regulators have not been tough enough on the nation’s financial elite. As Monika Bauerlein and Clara Jeffery emphasize for Mother Jones, the government has committed about $14 trillion in bailout funds to save the banking system without demanding much of anything in return. Goldman Sachs and other big banks are now planning to pay giant bonuses that come straight from taxpayer giveaways rather than invest that money in socially constructive banking.
“Bankers aren’t being rewarded for pulling the economy out of the doldrums,” Bauerlein and Jeffery write. “Nope, they’re simply skimming from the trillions we’ve shoveled at them.”
The major banks are even spending our bailout money to lobby against reform. When President Obama called a meeting for leaders of the nation’s largest banks to scold them for their lobbying, the heads of Morgan Stanley, Goldman Sachs and Citigroup didn’t even bother to show up, as Matthew Rothschild describes in a podcast for The Progressive.
It’s easy to see why the bank execs are so indifferent, Rothschild argues, even to the president. Now that almost all of these banks have repaid the loans they received under the Troubled Asset Relief Program (TARP), Obama has no negotiating leverage and the bankers know it. Even though it represents just a tiny fraction of the $14 trillion bailout, TARP was the only program that attached any strings to that money. Prior to those TARP repayments, Obama could have demanded that banks do more lending to help the economy, work harder to keep troubled borrowers in their homes—or face executive compensation restrictions or other penalties.
And many of the same regulators who helped bring about today’s economic disaster are still in power. As Sen. Bernie Sanders (I-VT) explains for Brave New Films (video below), Federal Reserve Chairman Ben Bernanke blew just about every major policy decision he faced in the years leading up to the crisis. Bernanke, who was recently named person of the year by Time magazine, failed to rein in reckless mortgage speculation, predatory lending or excessive compensation packages. Nevertheless, President Obama has appointed him to another term.
“This recession was precipitated by the greed, recklessness and illegal behavior on Wall Street,” Sanders says. “One of the key responsibilities of the Fed is to maintain the safety and soundness of our financial institutions … The Fed was asleep at the wheel, Bernanke did not do the job.”
Sanders notes that even Bernanke’s financial clean-up operations have been deeply flawed. Bernanke has helped make today’s too-big-to-fail banks even bigger. If we want to stop the lobbying and policy deference that politicians grant to Wall Street, we have to break up the biggest banks into smaller firms that do not endanger the economy if they fail.
Bernanke is not the only holdover from the Bush administration that wields significant economic power under Obama. As I note in a piece for The Nation, John Dugan, the top bank regulator appointed by President George W. Bush, remains in office today, despite failing to ensure the financial health of our largest banks and actively working to undermine consumer protection.
Campaign contributions from the bank lobby will not be enough to counter the voter outrage that President Obama and members of Congress are facing, nor should they. If our leaders want a serious shot at re-election, they need to recognize the need for significant change on Wall Street. That means breaking up the big banks and setting economic policy that helps all of our citizens, not just financiers.
© The Media Consortium, 2005 - 2009
Bernanke Tightens the Noose
http://www.counterpunch.org/whitney12212009.html
December 21, 2009
Brace Yourself for a Hard Landing
Bernanke Tightens the Noose
By MIKE WHITNEY
Ben Bernanke has been a bigger disaster than Hurricane Katrina. But the senate is about to re-up him for another four-year term. What are they thinking? Bernanke helped Greenspan inflate the biggest speculative bubble of all time, and still maintains that he never saw it growing. Right. How can retail housing leap from $12 trillion to $21 trillion in 7 years (1999 to 2006) without popping up on the Fed's radar?
Bernanke was also a staunch supporter of the low interest rate madness which led to the crash. Greenspan never believed that it was the Fed's job to deal with credit bubbles. "The free market will fix itself", he thought. He was the nation's chief regulator, but adamantly opposed to the idea of government regulation. It makes no sense at all. Here' a quote from Greenspan in 2002: “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We have tried regulation, none meaningfully worked.” Bernanke is no different than Greenspan; they're two peas in the same pod. Everyone could see what the Fed-duo was up to
Now Bernanke is expected to carry on where his former boss left off, using all the tools at his disposal to offset the atrophy that's endemic to mature capitalist economies. "Stagnation", that the real enemy, which is why Bernanke supports this new galaxy of oddball debt-instruments and bizarre-sounding derivatives; because it creates a world where surplus capital can generate windfall profits despite chronic overcapacity. It's financial nirvana for the parasite class; the relentless transfer of wealth from workers to speculators via paper assets. Marx figured it out. And, now, so has Bernanke.
Bernanke is just following Greenspan's basic blueprint. It's nothing new. Unregulated derivatives trading is just one of the many scams he's thrown his weight behind. The list goes on and on; one swindle after another. Just look what happened when Lehman Bros blew up. Just weeks earlier, Bernanke and Co. had worked out a deal with JP Morgan to buy Bear Stearns with the proviso that the government would guarantee $40 billion in Bear's toxic assets. Fair enough. The whole transaction went by without a hitch. Then Lehman starts teetering, and Bernanke and Treasury Secretary Henry Paulson decide to do a complete policy-flip and let Lehman default. Their reversal stunned the markets and triggered a frenzied run on the money markets that nearly collapsed the global financial system.
Why?It was because Bernanke knew that the big banks were buried under a mountain of bad assets and needed emergency help from Congress. The faux-Lehman crisis was cooked up to extort the $700 billion from taxpayers via the TARP fund. Bernanke and Paulson pulled off the biggest heist in history and there's never even been an investigation.
Bernanke was in the wheelhouse when the subprime bubble blew and carved $13 trillion from aggregate household wealth. Consumers are now so deeply underwater that personal credit is shrinking for the first time in 50 years while unemployment is hovering at 10 per cent. If Bernanke isn't responsible, than who is?
Take a look at Bernanke's so-called lending facilities. They are all designed with one object in mind, to support financial markets at the expense of workers. The media praises the Troubled asset-backed security lending facility (TALF) as a way to restart the wholesale credit system (securitzation). But is it? Under the TALF, the government provides up to 92 per cent of the funding for investors willing to buy assets backed by auto, credit card, or student loans. In other words, the Fed is putting the taxpayer on the hook for another trillion dollars (without congressional authorization or oversight) to produce more of the same high-risk assets which investors still refuse to purchase two years after the two Bear Stearns hedge funds defaulted in July 2007. Fortunately, the TALF turned out to be another Fed boondoggle that fizzled on the launchpad. Taxpayers were lucky to dodge a bullet.
Bernanke's latest stealth-ripoff is called quantitative easing (QE) which is being touted as a way to increase consumer lending by building up banks reserves. In fact, it doesn't do that at all and Bernanke knows it. As an "expert" on the Great Depression, he knows that stuffing the banks with reserves was tried in the 1930s, but it did nothing. Nor will it today. Here's how economist James Galbraith explains it:
"The New Deal rebuilt America physically, providing a foundation from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving....
“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended..... the relaunching of private finance took twenty years, and the war besides.
“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around." ("No Return to Normal:Why the economic crisis, and its solution, are bigger than you think" James K. Galbraith, Washington Monthly)
Bernanke QE is a joke. He's just creating a diversion so he can shovel more money into insolvent banks, pump-up the stock markets, and recycle Treasuries. Otherwise why would Obama's Chief Economic Advisor, Lawrence Summers say this:
"In the current circumstances the case for fiscal stimulus... is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration." ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)
QE is monetary policy writ large and--by Summers’ own admission--it won't work. It won't reduce unemployment or spark a credit expansion. That's why total consumer spending is falling, retail sales are flat, and wages are beginning to tank. Everywhere businesses are trimming hours and cutting salaries. Bernanke's $1 trillion in excess bank reserves has had no material effect on lending, credit expansion or jobs. It's been a dead loss. Here's Damian Paletta of the Wall Street Journal:
"U.S. lenders saw loans fall by the largest amount since the government began tracking such data, suggesting that nervousness among banks continues to hamper economic recovery.
Total loan balances fell by $210.4 billion, or 3 per cent, in the third quarter, the biggest decline since data collection began in 1984, according to a report released Tuesday by the Federal Deposit Insurance Corp. The FDIC also said its fund to backstop deposits fell into negative territory for just the second time in its history, pushed down by a wave of bank failures.
“The decline in total loans showed how banks remain reluctant to lend, despite the hundreds of billions of dollars the government has spent to prop up ailing banks and jump-start lending. The issue has taken on greater urgency with the U.S. unemployment rate hitting 10.2 per cent in October, even as the economy appears to be stabilizing.
“The total of commercial and industrial loans, a category that includes business loans, fell to $1.28 trillion at the end of September, from $1.36 trillion at the end of June. The outstanding total of construction loans, credit cards and mortgages also fell. ("Lending Declines as Bank Jitters Persist" Damian Paletta, Wall Street Journal)
Bernanke, Summers, Geithner and Obama have all misrepresented quantitative easing (QE) so they can improve the liquidity position of the banks without the public knowing what's going on. The fact is, the banks are not "capital constrained" by lack of reserves. Therefore, extra reserves won't lead to increased lending. Billy Blog clarifies how the banking system really works and how that relates to QE: "Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualization suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending. But this is a completely incorrect depiction of how banks operate. Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards.”
So, if bank lending is not constrained by lack of reserves, then what does QE actually do? Not much, apparently. All quantitative easing does is exchange one type of financial asset (long-term bonds) with another (reserve balances). "The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns." (Bill Mitchell) The net result of Bernanke's meddling is just this: Quantitative easing and the lending facilities have kept the price of financial assets artificially high, which has minimized financial sector deleveraging. (Financial sector debt is currently $16.4 trillion, nearly the same as it was a year ago. $16.3 trillion) In contrast, households have lost $13 trillion which has thrust the middle class into an ongoing depression. The soaring unemployment and viscous credit contraction are the result of the Fed's policies, not economics.
Tightening the Noose
The Fed is engaged in various covert-strategies to recapitalize the banking system. At the same time, Bernanke, Summers, Geithner, and Obama have stated repeatedly, that they're committed to slashing the long-term deficits. This means that they plan to reduce liquidity and push the economy back into recession so they can launch a surprise attack on Medicaid, Medicare, and Social Security.
Last Thursday, Bernanke announced that he will begin to tighten the noose as early as March 31 2010, when the Fed ends its $1.65 trillion purchases of agency debt, mortgage-backed securities, and US Treasuries. That's why stock market volatility has picked up since the Fed released its December 16 statement. Here's a clip:
"In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010,... These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral."
By April 1, 2010 the mortgage monetization program will be over; long-term interest rates will rise and housing prices will fall. When the Fed withdraws its support, liquidity will drain from the system, stocks will drop, and the economy will slide back into recession. Obama's second blast of fiscal stimulus--which is a mere $200 billion dollars --won't make a lick of difference.
The Obama administration and the Fed are on the same page. There will be no lifeline for the unemployed or the states. Those days are over. Now it's on to "starve the beast" and crush the middle class. Maestro Greenspan summed up the Fed's approach in a recent appearance on Meet the Press when he opined, "I think the Fed has done an extraordinary job and it's done a huge amount (to bolster employment). There's just so much monetary policy that the central bank can do. And I think they've gone to their limits, at this particular stage."
Indeed. Brace yourself for a hard landing.
Mike Whitney lives in Washoington state. He can be reached at fergiewhitney@msn.com
December 21, 2009
Brace Yourself for a Hard Landing
Bernanke Tightens the Noose
By MIKE WHITNEY
Ben Bernanke has been a bigger disaster than Hurricane Katrina. But the senate is about to re-up him for another four-year term. What are they thinking? Bernanke helped Greenspan inflate the biggest speculative bubble of all time, and still maintains that he never saw it growing. Right. How can retail housing leap from $12 trillion to $21 trillion in 7 years (1999 to 2006) without popping up on the Fed's radar?
Bernanke was also a staunch supporter of the low interest rate madness which led to the crash. Greenspan never believed that it was the Fed's job to deal with credit bubbles. "The free market will fix itself", he thought. He was the nation's chief regulator, but adamantly opposed to the idea of government regulation. It makes no sense at all. Here' a quote from Greenspan in 2002: “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We have tried regulation, none meaningfully worked.” Bernanke is no different than Greenspan; they're two peas in the same pod. Everyone could see what the Fed-duo was up to
Now Bernanke is expected to carry on where his former boss left off, using all the tools at his disposal to offset the atrophy that's endemic to mature capitalist economies. "Stagnation", that the real enemy, which is why Bernanke supports this new galaxy of oddball debt-instruments and bizarre-sounding derivatives; because it creates a world where surplus capital can generate windfall profits despite chronic overcapacity. It's financial nirvana for the parasite class; the relentless transfer of wealth from workers to speculators via paper assets. Marx figured it out. And, now, so has Bernanke.
Bernanke is just following Greenspan's basic blueprint. It's nothing new. Unregulated derivatives trading is just one of the many scams he's thrown his weight behind. The list goes on and on; one swindle after another. Just look what happened when Lehman Bros blew up. Just weeks earlier, Bernanke and Co. had worked out a deal with JP Morgan to buy Bear Stearns with the proviso that the government would guarantee $40 billion in Bear's toxic assets. Fair enough. The whole transaction went by without a hitch. Then Lehman starts teetering, and Bernanke and Treasury Secretary Henry Paulson decide to do a complete policy-flip and let Lehman default. Their reversal stunned the markets and triggered a frenzied run on the money markets that nearly collapsed the global financial system.
Why?It was because Bernanke knew that the big banks were buried under a mountain of bad assets and needed emergency help from Congress. The faux-Lehman crisis was cooked up to extort the $700 billion from taxpayers via the TARP fund. Bernanke and Paulson pulled off the biggest heist in history and there's never even been an investigation.
Bernanke was in the wheelhouse when the subprime bubble blew and carved $13 trillion from aggregate household wealth. Consumers are now so deeply underwater that personal credit is shrinking for the first time in 50 years while unemployment is hovering at 10 per cent. If Bernanke isn't responsible, than who is?
Take a look at Bernanke's so-called lending facilities. They are all designed with one object in mind, to support financial markets at the expense of workers. The media praises the Troubled asset-backed security lending facility (TALF) as a way to restart the wholesale credit system (securitzation). But is it? Under the TALF, the government provides up to 92 per cent of the funding for investors willing to buy assets backed by auto, credit card, or student loans. In other words, the Fed is putting the taxpayer on the hook for another trillion dollars (without congressional authorization or oversight) to produce more of the same high-risk assets which investors still refuse to purchase two years after the two Bear Stearns hedge funds defaulted in July 2007. Fortunately, the TALF turned out to be another Fed boondoggle that fizzled on the launchpad. Taxpayers were lucky to dodge a bullet.
Bernanke's latest stealth-ripoff is called quantitative easing (QE) which is being touted as a way to increase consumer lending by building up banks reserves. In fact, it doesn't do that at all and Bernanke knows it. As an "expert" on the Great Depression, he knows that stuffing the banks with reserves was tried in the 1930s, but it did nothing. Nor will it today. Here's how economist James Galbraith explains it:
"The New Deal rebuilt America physically, providing a foundation from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving....
“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended..... the relaunching of private finance took twenty years, and the war besides.
“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around." ("No Return to Normal:Why the economic crisis, and its solution, are bigger than you think" James K. Galbraith, Washington Monthly)
Bernanke QE is a joke. He's just creating a diversion so he can shovel more money into insolvent banks, pump-up the stock markets, and recycle Treasuries. Otherwise why would Obama's Chief Economic Advisor, Lawrence Summers say this:
"In the current circumstances the case for fiscal stimulus... is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration." ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)
QE is monetary policy writ large and--by Summers’ own admission--it won't work. It won't reduce unemployment or spark a credit expansion. That's why total consumer spending is falling, retail sales are flat, and wages are beginning to tank. Everywhere businesses are trimming hours and cutting salaries. Bernanke's $1 trillion in excess bank reserves has had no material effect on lending, credit expansion or jobs. It's been a dead loss. Here's Damian Paletta of the Wall Street Journal:
"U.S. lenders saw loans fall by the largest amount since the government began tracking such data, suggesting that nervousness among banks continues to hamper economic recovery.
Total loan balances fell by $210.4 billion, or 3 per cent, in the third quarter, the biggest decline since data collection began in 1984, according to a report released Tuesday by the Federal Deposit Insurance Corp. The FDIC also said its fund to backstop deposits fell into negative territory for just the second time in its history, pushed down by a wave of bank failures.
“The decline in total loans showed how banks remain reluctant to lend, despite the hundreds of billions of dollars the government has spent to prop up ailing banks and jump-start lending. The issue has taken on greater urgency with the U.S. unemployment rate hitting 10.2 per cent in October, even as the economy appears to be stabilizing.
“The total of commercial and industrial loans, a category that includes business loans, fell to $1.28 trillion at the end of September, from $1.36 trillion at the end of June. The outstanding total of construction loans, credit cards and mortgages also fell. ("Lending Declines as Bank Jitters Persist" Damian Paletta, Wall Street Journal)
Bernanke, Summers, Geithner and Obama have all misrepresented quantitative easing (QE) so they can improve the liquidity position of the banks without the public knowing what's going on. The fact is, the banks are not "capital constrained" by lack of reserves. Therefore, extra reserves won't lead to increased lending. Billy Blog clarifies how the banking system really works and how that relates to QE: "Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualization suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending. But this is a completely incorrect depiction of how banks operate. Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards.”
So, if bank lending is not constrained by lack of reserves, then what does QE actually do? Not much, apparently. All quantitative easing does is exchange one type of financial asset (long-term bonds) with another (reserve balances). "The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns." (Bill Mitchell) The net result of Bernanke's meddling is just this: Quantitative easing and the lending facilities have kept the price of financial assets artificially high, which has minimized financial sector deleveraging. (Financial sector debt is currently $16.4 trillion, nearly the same as it was a year ago. $16.3 trillion) In contrast, households have lost $13 trillion which has thrust the middle class into an ongoing depression. The soaring unemployment and viscous credit contraction are the result of the Fed's policies, not economics.
Tightening the Noose
The Fed is engaged in various covert-strategies to recapitalize the banking system. At the same time, Bernanke, Summers, Geithner, and Obama have stated repeatedly, that they're committed to slashing the long-term deficits. This means that they plan to reduce liquidity and push the economy back into recession so they can launch a surprise attack on Medicaid, Medicare, and Social Security.
Last Thursday, Bernanke announced that he will begin to tighten the noose as early as March 31 2010, when the Fed ends its $1.65 trillion purchases of agency debt, mortgage-backed securities, and US Treasuries. That's why stock market volatility has picked up since the Fed released its December 16 statement. Here's a clip:
"In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010,... These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral."
By April 1, 2010 the mortgage monetization program will be over; long-term interest rates will rise and housing prices will fall. When the Fed withdraws its support, liquidity will drain from the system, stocks will drop, and the economy will slide back into recession. Obama's second blast of fiscal stimulus--which is a mere $200 billion dollars --won't make a lick of difference.
The Obama administration and the Fed are on the same page. There will be no lifeline for the unemployed or the states. Those days are over. Now it's on to "starve the beast" and crush the middle class. Maestro Greenspan summed up the Fed's approach in a recent appearance on Meet the Press when he opined, "I think the Fed has done an extraordinary job and it's done a huge amount (to bolster employment). There's just so much monetary policy that the central bank can do. And I think they've gone to their limits, at this particular stage."
Indeed. Brace yourself for a hard landing.
Mike Whitney lives in Washoington state. He can be reached at fergiewhitney@msn.com
Tuesday, December 22, 2009
No Surprise: Banks with political ties got bailouts, study shows
http://www.reuters.com/article/idCNN2124009320091221?rpc=44
No Surprise: Banks with political ties got bailouts, study shows
Steve Eder
Reuters
Mon, 21 Dec 2009 01:31 EST
New York - U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.
Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan's Ross School of Business.
Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.
Political influence was most helpful for poorly performing banks, the study found.
"Political connections play an important role in a firm's access to capital," Sosyura, a University of Michigan assistant professor of finance, said in a statement.
Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP's Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.
As of late September, nearly 700 financial institutions had received bailouts of $205 billion under the capital purchase program, the study said.
The banking industry has long been criticized for using political influence to obtain bailouts.
Scott Talbott, a senior vice president with industry lobbying group The Financial Services Roundtable, said the study was skewed because it did not exclude nine of the largest banks that were "strongly asked" by the government to take bailouts.
Those banks included Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N), and Morgan Stanley (MS.N) -- all of which repaid their bailouts in June.
Bank of America Co (BAC.N) and Citigroup Inc (C.N) more recently announced plans to pay back taxpayers.
Talbott also noted that $116 billion has been repaid with interest.
"This demonstrates the banks were excellent stewards of the taxpayer's money," Talbott said.
But a watchdog for the government's bailout, the special inspector general for TARP, said last month that the broader $700 billion bailout program "almost certainly" will result in an overall loss for taxpayers.
President Obama said in October that despite the bailout, there was still too little credit flowing to small businesses.
No Surprise: Banks with political ties got bailouts, study shows
Steve Eder
Reuters
Mon, 21 Dec 2009 01:31 EST
New York - U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.
Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan's Ross School of Business.
Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.
Political influence was most helpful for poorly performing banks, the study found.
"Political connections play an important role in a firm's access to capital," Sosyura, a University of Michigan assistant professor of finance, said in a statement.
Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP's Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.
As of late September, nearly 700 financial institutions had received bailouts of $205 billion under the capital purchase program, the study said.
The banking industry has long been criticized for using political influence to obtain bailouts.
Scott Talbott, a senior vice president with industry lobbying group The Financial Services Roundtable, said the study was skewed because it did not exclude nine of the largest banks that were "strongly asked" by the government to take bailouts.
Those banks included Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N), and Morgan Stanley (MS.N) -- all of which repaid their bailouts in June.
Bank of America Co (BAC.N) and Citigroup Inc (C.N) more recently announced plans to pay back taxpayers.
Talbott also noted that $116 billion has been repaid with interest.
"This demonstrates the banks were excellent stewards of the taxpayer's money," Talbott said.
But a watchdog for the government's bailout, the special inspector general for TARP, said last month that the broader $700 billion bailout program "almost certainly" will result in an overall loss for taxpayers.
President Obama said in October that despite the bailout, there was still too little credit flowing to small businesses.
Sunday, December 20, 2009
Seven U.S. Banks Are Seized, Raising Year's Failure Toll to 140
http://www.cbsnews.com/stories/2009/12/18/business/main5997836.shtml
Seven U.S. Banks Are Seized, Raising Year's Failure Toll to 140
CBS News
Fri, 18 Dec 2009 19:12 EST
Regulators on Friday shut down two big California banks, as well as banks in Alabama, Florida, Georgia, Michigan and Illinois, bringing to 140 the number of U.S. banks brought down this year by the weak economy and mounting loan defaults.
The Federal Deposit Insurance Corp. took over all seven.
Regulators shuttered First Federal Bank of California, based in Santa Monica, with $6.1 billion in assets and $4.5 billion in deposits, as was as Imperial Capital Bank of La Jolla, Calif., with about $4 billion in assets and $2.8 billion in deposits.
California was one of the states hardest hit by the real estate market meltdown and many banks there have suffered under the weight of soured mortgage loans. First Federal and Imperial Capital bring to 17 the number of California banks to fail this year.
Also closing their doors Friday were Atlanta-based RockBridge Commercial Bank, with $294 million in assets and $291.7 million in deposits; and New South Federal Savings Bank, based in Irondale, Ala., with $1.5 billion in assets and $1.2 billion in deposits.
Citizens State Bank of New Baltimore, Mich., with $168.6 million in assets and $157.1 million in deposits, was shut down, along with Peoples First Community Bank of Panama City, Fla., with $1.8 billion in assets and $1.7 billion in deposits.
Regulators also closed Independent Bankers' Bank, based in Springfield, Ill. - a sort of wholesale bank that provided services to 450 client banks in four states - with $585.5 million in assets and $511.5 million in deposits.
OneWest Bank of Pasadena, Calif., agreed to buy all of the deposits and essentially all of the assets of First Federal Bank. All 39 of its branches will reopen on Saturday as branches of OneWest.
Los Angeles-based City National Bank agreed to assume all of Imperial Capital's deposits, as well as $3.3 billion of the failed bank's assets. The FDIC will retain the remaining assets for a later sale. All nine branches of Imperial Capital will reopen Monday as City National Bank branches.
Beal Bank, based in Plano, Texas, agreed to assume the assets and deposits of New South Federal Savings Bank, which only had one branch. Hancock Bank, based in Gulfport, Miss., agreed to assume the deposits and about $1.6 billion of the loans and other assets of Peoples First Community Bank. The FDIC will retain the rest for eventual sale.
The FDIC was unable to find a buyer for RockBridge Commercial Bank, so checks covering insured accounts will be mailed to retail depositors, the agency said.
For Independent Bankers' Bank, the FDIC set up a temporary "bridge bank," which the agency will operate as it continues to seek a buyer. The FDIC also set up a "bridge bank" for Citizens State Bank, which will continue to operate for about 45 days to allow customers access to their deposits and open accounts at other banks. It will be operated by Huntington National Bank of Columbus, Ohio, under a contract with the FDIC.
The FDIC estimates the failure of First Federal Bank of California will cost the deposit insurance fund $146.3 million and Imperial Capital's closing is expected to cost the fund $619.2 million.
The failure of Citizens State Bank will cost $76.6 million; the failure of New South Federal Savings Bank is expected to cost $212.3 million; that of Peoples First Community Bank $556.7 million; Independent Bankers' Bank, $68.4 million; and RockBridge Commercial Bank, $124.2 million.
RockBridge Commercial had about $2.1 million in deposits that exceeded the $250,000 per-account insured limit, an estimate likely to change after more information is gathered from customers, the agency said.
Depositors with funds that exceed the insured limits become essentially creditors of the failed bank. They will eventually recover some of their money, but the amount can range from 40 cents on the dollar up to the full amount. Recovery can take months.
RockBridge Commercial is the 25th Georgia-based bank to fail this year, more than in any other state. Independent Bankers' Bank was the 21st bank in Illinois to fail and Peoples First Community Bank was the 14th bank in Florida.
As the economy has slumped, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have accelerated around the country.
The 140 bank failures are the most in a year since 1992 at the height of the savings-and-loan crisis. They have cost the government-backed deposit insurance fund - which has fallen into the red - more than $30 billion so far this year. The failures compare with 25 last year and three in 2007.
The FDIC expects the cost of bank failures to grow to about $100 billion over the next four years. Banks have been especially hard hit by failed real estate loans, both residential and commercial.
If the economic recovery falters, defaults on the high-risk loans could spike. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.
Last week, the Obama administration extended until next October the $700 billion financial bailout program, saying the fund was still needed to prevent further turmoil in the banking system. Treasury Secretary Timothy Geithner said extending the rescue program also will help homeowners struggling to avoid losing homes to foreclosure and small businesses having trouble getting loans.
Seven U.S. Banks Are Seized, Raising Year's Failure Toll to 140
CBS News
Fri, 18 Dec 2009 19:12 EST
Regulators on Friday shut down two big California banks, as well as banks in Alabama, Florida, Georgia, Michigan and Illinois, bringing to 140 the number of U.S. banks brought down this year by the weak economy and mounting loan defaults.
The Federal Deposit Insurance Corp. took over all seven.
Regulators shuttered First Federal Bank of California, based in Santa Monica, with $6.1 billion in assets and $4.5 billion in deposits, as was as Imperial Capital Bank of La Jolla, Calif., with about $4 billion in assets and $2.8 billion in deposits.
California was one of the states hardest hit by the real estate market meltdown and many banks there have suffered under the weight of soured mortgage loans. First Federal and Imperial Capital bring to 17 the number of California banks to fail this year.
Also closing their doors Friday were Atlanta-based RockBridge Commercial Bank, with $294 million in assets and $291.7 million in deposits; and New South Federal Savings Bank, based in Irondale, Ala., with $1.5 billion in assets and $1.2 billion in deposits.
Citizens State Bank of New Baltimore, Mich., with $168.6 million in assets and $157.1 million in deposits, was shut down, along with Peoples First Community Bank of Panama City, Fla., with $1.8 billion in assets and $1.7 billion in deposits.
Regulators also closed Independent Bankers' Bank, based in Springfield, Ill. - a sort of wholesale bank that provided services to 450 client banks in four states - with $585.5 million in assets and $511.5 million in deposits.
OneWest Bank of Pasadena, Calif., agreed to buy all of the deposits and essentially all of the assets of First Federal Bank. All 39 of its branches will reopen on Saturday as branches of OneWest.
Los Angeles-based City National Bank agreed to assume all of Imperial Capital's deposits, as well as $3.3 billion of the failed bank's assets. The FDIC will retain the remaining assets for a later sale. All nine branches of Imperial Capital will reopen Monday as City National Bank branches.
Beal Bank, based in Plano, Texas, agreed to assume the assets and deposits of New South Federal Savings Bank, which only had one branch. Hancock Bank, based in Gulfport, Miss., agreed to assume the deposits and about $1.6 billion of the loans and other assets of Peoples First Community Bank. The FDIC will retain the rest for eventual sale.
The FDIC was unable to find a buyer for RockBridge Commercial Bank, so checks covering insured accounts will be mailed to retail depositors, the agency said.
For Independent Bankers' Bank, the FDIC set up a temporary "bridge bank," which the agency will operate as it continues to seek a buyer. The FDIC also set up a "bridge bank" for Citizens State Bank, which will continue to operate for about 45 days to allow customers access to their deposits and open accounts at other banks. It will be operated by Huntington National Bank of Columbus, Ohio, under a contract with the FDIC.
The FDIC estimates the failure of First Federal Bank of California will cost the deposit insurance fund $146.3 million and Imperial Capital's closing is expected to cost the fund $619.2 million.
The failure of Citizens State Bank will cost $76.6 million; the failure of New South Federal Savings Bank is expected to cost $212.3 million; that of Peoples First Community Bank $556.7 million; Independent Bankers' Bank, $68.4 million; and RockBridge Commercial Bank, $124.2 million.
RockBridge Commercial had about $2.1 million in deposits that exceeded the $250,000 per-account insured limit, an estimate likely to change after more information is gathered from customers, the agency said.
Depositors with funds that exceed the insured limits become essentially creditors of the failed bank. They will eventually recover some of their money, but the amount can range from 40 cents on the dollar up to the full amount. Recovery can take months.
RockBridge Commercial is the 25th Georgia-based bank to fail this year, more than in any other state. Independent Bankers' Bank was the 21st bank in Illinois to fail and Peoples First Community Bank was the 14th bank in Florida.
As the economy has slumped, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have accelerated around the country.
The 140 bank failures are the most in a year since 1992 at the height of the savings-and-loan crisis. They have cost the government-backed deposit insurance fund - which has fallen into the red - more than $30 billion so far this year. The failures compare with 25 last year and three in 2007.
The FDIC expects the cost of bank failures to grow to about $100 billion over the next four years. Banks have been especially hard hit by failed real estate loans, both residential and commercial.
If the economic recovery falters, defaults on the high-risk loans could spike. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.
Last week, the Obama administration extended until next October the $700 billion financial bailout program, saying the fund was still needed to prevent further turmoil in the banking system. Treasury Secretary Timothy Geithner said extending the rescue program also will help homeowners struggling to avoid losing homes to foreclosure and small businesses having trouble getting loans.
Friday, December 18, 2009
U.S. gave up billions in tax money in deal for Citigroup's bailout repayment
http://www.washingtonpost.com/wp-dyn/content/article/2009/12/15/AR2009121504534.html
U.S. gave up billions in tax money in deal for Citigroup's bailout repayment
DEAL MADE TO RECOVER BAILOUT
Firms exempted from rule when U.S. sells its stake
By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, December 16, 2009; A01
The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis.
The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.
While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.
The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions of dollars from its tax bill by buying the ailing Wachovia.
"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an expert on tax accounting who runs a firm of the same name. "I've been doing taxes for almost 40 years, and I've never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts."
Treasury officials said the most recent change was part of a broader decision initially made last year to shelter companies that accepted federal aid under the Troubled Assets Relief Program from the normal consequences of such an investment. Officials also said the ruling benefited taxpayers because it made shares in Citigroup more valuable and asserted that without the ruling, Citigroup could not have repaid the government at this time.
"This rule was designed to stop corporate raiders from using loss corporations to evade taxes, and was never intended to address the unprecedented situation where the government owned shares in banks," Treasury spokeswoman Nayyera Haq said. "And it was certainly not written to prevent the government from selling its shares for a profit."
Congress, concerned that Treasury was rewriting tax laws, passed legislation earlier this year that reversed the ruling that benefited Wells Fargo and restricted the ability of the IRS to make further changes. A Democratic aide to the Senate Finance Committee, which oversees federal tax policy, said the Obama administration had the legal authority to issue the new exception, but Republican aides to the committee said they were reviewing the issue.
A senior Republican staffer also questioned the government's rationale. "You're manipulating tax rules so that the market value of the stock is higher than it would be under current law," said the aide, speaking on the condition of anonymity. "It inflates the returns that they're showing from TARP and that looks good for them."
The administration and some of the nation's largest banks have hastened to part company in recent weeks. Bank of America, followed by Citigroup and Wells Fargo, agreed to repay federal aid. While the healthiest banks escaped earlier this year, the new round of departures involves banks still facing serious financial problems.
The banks say the strings attached to the bailout, including limits on executive compensation, have restricted their ability to compete and return to health. Executives also have chafed under the stigma of living on the federal dole. President Obama chided bankers at the White House on Monday for not trying hard enough to make small-business loans.
The Obama administration also is eager to wind down a program that has become one of its largest political liabilities. Officials defend the program as necessary and effective, but the president has acknowledged that the bailout is "wildly unpopular" and officials have been at pains to say they do not enjoy helping banks.
Federal regulators initially told Citigroup and other troubled banks that they would be required to hold on to the federal aid for some time as they return to health. But in recent months, the government switched to pushing the companies to repay the money as soon as possible. All nine firms that took federal money last October now have approved plans to pay it back.
This urgency has come despite the lingering concerns of many financial experts about the companies' health. These analysts said they worry that the firms could face rising losses next year as high unemployment and economic weakness continue to drive great numbers of borrowers into default.
"They are rolling the dice big time," said Christopher Whalen, a financial analyst with Institutional Risk Analytics. "My fear is that the banks will definitely have to raise a lot more capital next year. The question is from whom and on what terms."
The Citigroup repayment deal required significant sacrifices by both sides, underscoring the mutual determination to get it done. Citigroup was required to replace its federal aid with an equal amount of money from private investors, more than any other bank. The government concluded that Citigroup needed the IRS ruling because a reduction in the value of its tax breaks would have eroded its capital, forcing the company to raise more money, officials said.
Federal tax law lets companies reduce taxable income in a good year by the amount of losses in bad years. But the law limits the transfer of those benefits to new ownership as a way of preventing profitable companies from buying losers to avoid taxes. Under the law, the government's sale of its 34 percent stake in Citigroup, combined with the company's recent sales of stock to raise money, qualified as a change in ownership.
The IRS notice issued Friday saves Citigroup from the consequences by stipulating that the government's share sale does not count toward the definition of an ownership change. The company, which pushed for the ruling, did not return calls for comment.
At the end of the third quarter, Citigroup said that the value of its past losses was about $38 billion, allowing it to avoid taxes on its next $38 billion in profits. Under normal IRS rules, a change in control would sharply reduce the amount of profits that Citigroup could shelter from taxes in any given year, making it much more difficult for Citigroup to realize the entire benefit before the tax breaks expired.
The precise value of the IRS ruling depends on Citigroup's future profitability and other factors, but two accounting experts said it was fair to estimate that Citigroup would save at least several billion dollars as a result.
Treasury acknowledged that the tax break was significant, but a senior official said the benefit was unavoidable. Either the government changed the rules and parted ways with Citigroup or the company kept the government as a shareholder and kept the tax break anyway.
"The choice is whether Treasury sells or doesn't sell," the official said.
U.S. gave up billions in tax money in deal for Citigroup's bailout repayment
DEAL MADE TO RECOVER BAILOUT
Firms exempted from rule when U.S. sells its stake
By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, December 16, 2009; A01
The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis.
The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.
While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.
The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions of dollars from its tax bill by buying the ailing Wachovia.
"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an expert on tax accounting who runs a firm of the same name. "I've been doing taxes for almost 40 years, and I've never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts."
Treasury officials said the most recent change was part of a broader decision initially made last year to shelter companies that accepted federal aid under the Troubled Assets Relief Program from the normal consequences of such an investment. Officials also said the ruling benefited taxpayers because it made shares in Citigroup more valuable and asserted that without the ruling, Citigroup could not have repaid the government at this time.
"This rule was designed to stop corporate raiders from using loss corporations to evade taxes, and was never intended to address the unprecedented situation where the government owned shares in banks," Treasury spokeswoman Nayyera Haq said. "And it was certainly not written to prevent the government from selling its shares for a profit."
Congress, concerned that Treasury was rewriting tax laws, passed legislation earlier this year that reversed the ruling that benefited Wells Fargo and restricted the ability of the IRS to make further changes. A Democratic aide to the Senate Finance Committee, which oversees federal tax policy, said the Obama administration had the legal authority to issue the new exception, but Republican aides to the committee said they were reviewing the issue.
A senior Republican staffer also questioned the government's rationale. "You're manipulating tax rules so that the market value of the stock is higher than it would be under current law," said the aide, speaking on the condition of anonymity. "It inflates the returns that they're showing from TARP and that looks good for them."
The administration and some of the nation's largest banks have hastened to part company in recent weeks. Bank of America, followed by Citigroup and Wells Fargo, agreed to repay federal aid. While the healthiest banks escaped earlier this year, the new round of departures involves banks still facing serious financial problems.
The banks say the strings attached to the bailout, including limits on executive compensation, have restricted their ability to compete and return to health. Executives also have chafed under the stigma of living on the federal dole. President Obama chided bankers at the White House on Monday for not trying hard enough to make small-business loans.
The Obama administration also is eager to wind down a program that has become one of its largest political liabilities. Officials defend the program as necessary and effective, but the president has acknowledged that the bailout is "wildly unpopular" and officials have been at pains to say they do not enjoy helping banks.
Federal regulators initially told Citigroup and other troubled banks that they would be required to hold on to the federal aid for some time as they return to health. But in recent months, the government switched to pushing the companies to repay the money as soon as possible. All nine firms that took federal money last October now have approved plans to pay it back.
This urgency has come despite the lingering concerns of many financial experts about the companies' health. These analysts said they worry that the firms could face rising losses next year as high unemployment and economic weakness continue to drive great numbers of borrowers into default.
"They are rolling the dice big time," said Christopher Whalen, a financial analyst with Institutional Risk Analytics. "My fear is that the banks will definitely have to raise a lot more capital next year. The question is from whom and on what terms."
The Citigroup repayment deal required significant sacrifices by both sides, underscoring the mutual determination to get it done. Citigroup was required to replace its federal aid with an equal amount of money from private investors, more than any other bank. The government concluded that Citigroup needed the IRS ruling because a reduction in the value of its tax breaks would have eroded its capital, forcing the company to raise more money, officials said.
Federal tax law lets companies reduce taxable income in a good year by the amount of losses in bad years. But the law limits the transfer of those benefits to new ownership as a way of preventing profitable companies from buying losers to avoid taxes. Under the law, the government's sale of its 34 percent stake in Citigroup, combined with the company's recent sales of stock to raise money, qualified as a change in ownership.
The IRS notice issued Friday saves Citigroup from the consequences by stipulating that the government's share sale does not count toward the definition of an ownership change. The company, which pushed for the ruling, did not return calls for comment.
At the end of the third quarter, Citigroup said that the value of its past losses was about $38 billion, allowing it to avoid taxes on its next $38 billion in profits. Under normal IRS rules, a change in control would sharply reduce the amount of profits that Citigroup could shelter from taxes in any given year, making it much more difficult for Citigroup to realize the entire benefit before the tax breaks expired.
The precise value of the IRS ruling depends on Citigroup's future profitability and other factors, but two accounting experts said it was fair to estimate that Citigroup would save at least several billion dollars as a result.
Treasury acknowledged that the tax break was significant, but a senior official said the benefit was unavoidable. Either the government changed the rules and parted ways with Citigroup or the company kept the government as a shareholder and kept the tax break anyway.
"The choice is whether Treasury sells or doesn't sell," the official said.
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