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Of times of crisis and opportunity: From the Washington Times, Study: Bernanke, Paulson misled public on bailouts
Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson Jr. misled the public about the financial weakness of Bank of America and other early recipients of the government’s $700 billion Wall Street bailout, creating “unrealistic expectations” about the companies and damaging the program’s credibility, according to a report by the program’s independent watchdog.
Image from Text Artist
In other words, they lied to sell that takeover to the public:
The rationale for giving money to stable banks and not failing ones, regulators said, was that such institutions would be better able to lend money and thus unfreeze tight credit markets – a major factor in last year’s Wall Street losses.
But an audit released Monday by TARP Special Inspector General Neil Barofsky says senior government officials and Wall Street regulators, including Mr. Bernanke and Mr. Paulson, had “affirmative concerns” that several of the nine institutions were financially shaky.
“By stating expressly that the ‘healthy’ institutions would be able to increase overall lending, Treasury may have created unrealistic expectations about the institutions’ condition and their ability to increase lending,” the audit says.
“Treasury and the TARP program lost credibility when lending at those institutions did not in fact increase and when subsequent events – the further assistance needed by Citigroup and Bank of America being the most significant examples – demonstrated that at least some of those institutions were not in fact healthy.”
The report makes no recommendations but argues that Treasury, the Federal Reserve and other federal agencies “should take more care in publicly characterizing the nature and objectives of their initiatives.”
And pigs will fly. Washington still has healthcare “reform” to get off the shelves.
Corporate welfare on a massive scale. From the Washington Post, How a Loophole Benefits GE in Bank Rescue
Industrial Giant Becomes Top Recipient in Debt-Guarantee Program
General Electric, the world’s largest industrial company, has quietly become the biggest beneficiary of one of the government’s key rescue programs for banks.
At the same time, GE has avoided many of the restrictions facing other financial giants getting help from the government.
The company did not initially qualify for the program, under which the government sought to unfreeze credit markets by guaranteeing debt sold by banking firms. But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE.
As a result, GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company’s massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government’s actions have been “powerful and helpful” to the company, GE chief executive Jeffrey Immelt acknowledged in December.
GE’s finance arm is not classified as a bank. Rather, it worked its way into the rescue program by owning two relatively small Utah banking institutions, illustrating how the loopholes in the U.S. regulatory system are manifest in the government’s historic intervention in the financial crisis.
The Obama administration now wants to close such loopholes as it works to overhaul the financial system. The plan would reaffirm and strengthen the wall between banking and commerce, forcing companies like GE to essentially choose one or the other.
“We’d like to regulate companies according to what they do, rather than what they call themselves or how they charter themselves,” said Andrew Williams, a Treasury spokesman.
It seems not only politicians know how to turn a crisis into an opportunity.
A look at one of the results a massively-centralized government produces in a country’s economy: Financial controls backfire in Venezuela
General Motors Corp. is halting production in Venezuela for three months starting Friday. Ford Motor Co.’s subsidiary announced 10 percent cutbacks last week. Other automakers also are shrinking their business, but not because Venezuelans don’t want to buy cars.
They are closing down because the government won’t give them enough dollars to import parts.
It’s a crisis entirely brought on by the currency controls imposed by President Hugo Chavez, Gabriel Lopez, president of Ford Motors for Venezuela and the Andean region, told the Associated Press…
Apparently Mr. Chavez didn’t see this coming:
These controls have backfired with a vengeance – businessmen, companies and private citizens transferred about $72.7 billion out of Venezuela over the past six years – nearly double the outflow of the six years before that, according to the Central Bank of Venezuela – distorting the economy, fueling inflation and discouraging private investment.
Trickle down sacrifice:
Many will be affected, including transport worker Franklin Gonzalez, 40. He said his employer, Tegma Venezuela, a subsidiary of Brazilian firm Tegma Gestao Logistica SA, will have to find business elsewhere or its roughly 20 drivers will see their salaries slashed by 60 percent or more.
“How is one supposed to work?” asked Mr. Gonzalez, who stopped supporting Mr. Chavez years ago because he thinks the president’s policies have strangled private business.
Mr. Chavez has assured that “Venezuela won’t go under,” but said spending must be regulated carefully until oil revenues rebound.
Even hair salons – a weekly staple for many Venezuelan women – have been affected.
“You try to get one hair dye and you get another. Or you ask for 10 shades and you get six,” said hairdresser Judy Morales, 42, whose salon is now using more local products than those from France, Brazil or other countries.
“We’re not used to this in Venezuela,” she said.
It is an accepted fact that the political goal of affordable housing for everyone was one of the drivers of last fall’s financial meltdown, because so many home loans were made to people who had no hope of repaying them. The Treasury Secretary admits it. So what does the President do? From OpenMarket.org, Obama Seeks to Mandate More Risky, Low-Income Loans by Banks, in New Financial Rules
The President has just announced proposals for a major overhaul of the financial system. The proposals would force banks to make even MORE risky loans to low-income people. Even liberal newspapers like the Village Voice have admitted that “affordable housing” mandates are a key reason for the housing crisis and the massive number of defaulting borrowers. But Obama will not accept this reality. Instead, he wants to create a new “Consumer Financial Protection Agency” to rigorously enforce regulations pressuring banks to make loans to low-income borrowers, such as the Community Reinvestment Act. (Obama once represented ACORN, which pressures banks to make risky loans).
In explaining why there is supposedly a need for this new agency, when other agencies already enforce the Community Reinvestment Act and fair-lending laws, his regulatory blueprint complains that “State and federal bank supervisory agencies’ primary mission is to ensure that financial institutions act prudently, a mission that, in appearance if not always in practice, often conflicts with their consumer protection responsibilities.” (Pg. 54).
In other words, the power to force banks to make low-income loans should be given to an agency that has no duty to ensure prudent lending or to take into account the effects of such requirements on banks’ stability or viability.
Federal regulators did such a good job last time, he wants to give them even more power:
The President also wants to give financial regulators the power to seize key companies to prevent real or imagined “systemic risks” to the financial system. These are the same federal regulators who used the AIG bailout to give billions in unnecessary payments to Goldman Sachs, which neither needed nor expected that much money, and forced Freddie Mac to run up $30 billion in losses to bail out deadbeat mortgage borrowers. This is the same federal government that took over Chrysler and General Motors, and then used them to rip off pension funds and taxpayers and enrich the UAW union.
Banks are between a rock and a hard place when it comes to making loans in low-income areas:
Banks get sued for discrimination no matter what they do. If they don’t make enough loans in low-income, predominantly minority neighborhoods, they get accused of “redlining,” and are subject to sanctions under politically-correct laws like the Community Reinvestment Act, which contributed to the financial crisis by pressuring lenders to make risky mortgage loans.
But if they do make such loans, they get accused of “reverse redlining,” and get sued by the liberal special-interest groups and municipalities that encouraged them to make such loans during the mortgage bubble. Baltimore and various borrowers have also brought “reverse redlining” lawsuits against banks.
The Washington Post reported that bond-rating agencies like Moody’s and Fitch are now getting sued, too, for “reverse redlining,” under the theory that they encouraged risky loans to low-income minorities (who subsequently regretted taking out those loans) by giving respectable ratings to the mortgage-backed securities produced by packaging those mortgage loans. The plaintiffs include the National Community Reinvestment Coalition, which has been pressuring lenders to make risky loans to low-income minorities for years. They blame the ratings-agencies for allowing lenders to make loans to minorities with “insufficient borrower income levels.”
And Obama’s plan will perpetuate all that. It’s as if he wants to ensure he has a pitchfork-ready project when round two of the blame game gets underway, after the economy doesn’t improve after all his spending and stimulating, by being able to blame those greedy Wall Street types and predatory lenders again. It’s another peek into the White House’s mindset regarding the proper role of government in the housing and financial industry. He wants to be in control, and he doesn’t mind setting the stage for another crisis to get there.
Now this comes as a shock: Obama Blueprint Deepens Federal Role in Markets
…The plan seeks to overhaul the nation’s outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect’s blueprint for modernizing a creaky old building. …
The key points:
The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.
It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.
Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.
The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.
And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.
The plan includes provision for creating a Consumer Financial Protection Agency. It’s purpose:
The agency would have broad authority to overhaul a tangled mess of federal regulations, such as the various laws that compel lenders to give mortgage borrowers a massive stack of paperwork at closing that includes several calculations of the true cost of the loan itself.
“Consumers should have clear disclosure regarding the consequences of their financial decisions,” the plan states.
The agency also would have the authority to change the way that loans are sold…
There’s this little bit:
And the agency would have a mandate to increase the availability of financial products in lower-income communities and other underserved areas, in part by enforcing the Community Reinvestment Act, which requires banks to make loans everywhere that they collect deposits.
Doesn’t that sound like the kind of action that caused the financial meltdown last fall, banks being mandated to make home loans to make Congress’s dream of affordable housing for everyone come true?
Critics of centralization say it will stifle innovation and restrict consumer choice:
Regulatory agencies and industry groups acknowledge failures in recent years. But they say the existing model remains the best way to protect consumers, arguing that the agencies can identify problems more easily because of their close engagement with firms. They also are concerned that a consumer agency could be overly restrictive, limiting access to loans and constraining the development of new types of accounts, loans and other financial services.
“This consumer protection agency would be deciding how people get to live as opposed to people getting to decide for themselves,” said Kelly King, chief executive of BB&T, a large commercial bank based in North Carolina.
The White House document is here (PDF).
Much more at the link.
So how’s the economy looking today? Not so hot.
The price of oil is expected to continue to rise for the rest of the year.
The private sector lost over 530,000 jobs last month.
The current unemployment rate is 8.9%, with no end in sight.
The Federal Government is hiring at a good clip.
The recession is driving the safety net of government benefits to a historic high, as one of every six dollars of Americans’ income is now coming in the form of a federal or state check or voucher.
Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports. That’s the highest percentage since the government began compiling records in 1929.
In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show. Benefits rose at a 19% annual rate in the first quarter compared to the last three months of 2008.
The White House says this year’s budget deficit will be nearly $2 trillion.
Today the national debt clocks in at $ 11,389,630,874,095.46.
The estimated population of the United States is 306,306,828, so each citizen’s share of this debt is $37,183.73.
Deficit spending means government borrowing. The Foundry warns of a global government debt bubble:
As governments worldwide try to spend their way out of recession, many countries are finding themselves in the same situation as embattled consumers: paying higher interest rates on their rapidly expanding debt.
Increased rates could translate into hundreds of billions of dollars more in government spending for countries like the United States, Britain and Germany.
Even a single percentage point increase could cost the Treasury an additional $50 billion annually over a few years — and, eventually, an additional $170 billion annually.
…The long-term situation is particularly perilous, because the added interest costs will worsen what have become record deficits as Washington has rushed to bail out industries and stimulate the economy.
Making this no surprise: Bernanke Warns Deficits Threaten Financial Stability
Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”
Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending.
…“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”
Congress agrees, they say:
House Majority Leader Steny Hoyer told reporters that Bernanke “is absolutely right, we need to be very concerned about incurring additional indebtedness.” The House plans to pass legislation before its July 4 recess to cut spending in one category before increasing it in another, he said. In addition, “we need to address entitlements.”
They can start by scrapping plans for universal healthcare, which would be the mother of all entitlements. And that legislation he’s talking about sounds like it would just shift spending, not decrease it overall. No word on Congress’s attitude toward raising taxes in the article.
The Financial Times says he’s on target:
The bottom line is that we should come away from Mr Bernanke’s testimony with at least two conclusions: the chairman seems more cautious about the growth outlook when compared with other recent public statements; and he wants to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration. He is correct on both counts. He would have been justified on Wednesday in being even more forceful; and he mostly probably will be in the next few months.
Not a good day in the neighborhood.
Much of the blame for the demise of the financial system as we knew it can be placed on the doorsteps of Fannie Mae and Freddie Mac. Both of them are shareholder-owned companies with political missions, such as keeping mortgage interest rates low and encouraging affordable housing. So why did they collapse and why did the government have to take them over? In a September, 2008, article The American Enterprise Institute tells the tale: The Last Trillion-Dollar Commitment
The government takeover of Fannie Mae and Freddie Mac was necessary because of their massive losses on more than $1 trillion of subprime and Alt-A investments, almost all of which were added to their single-family book of business between 2005 and 2007. The most plausible explanation for the sudden adoption of this disastrous course–disastrous for them and for the U.S. financial markets–is their desire to continue to retain the support of Congress after their accounting scandals in 2003 and 2004 and the challenges to their business model that ensued. Although the strategy worked–Congress did not adopt strong government-sponsored enterprise (GSE) reform legislation until the Republicans demanded it as the price for Senate passage of a housing bill in July 2008–it led inevitably to the government takeover and the enormous junk loan losses still to come.
The collision of politics and sound business practice resulted in the present financial carnage:
As GSEs, Fannie and Freddie were serving two masters in two different ways. The first was an inherent conflict between their government mission and their private ownership. The government mission required them to keep mortgage interest rates low and to increase their support for affordable housing. Their shareholder ownership, however, required them to fight increases in their capital requirements and regulation that would raise their costs and reduce their risk-taking and profitability. But there were two other parties–Congress and the taxpayers–that also had a stake in the choices that Fannie and Freddie made. Congress got some benefits in the form of political support from the GSEs’ ability to hold down mortgage rates, but it garnered even more political benefits from GSE support for affordable housing. The taxpayers got highly attenuated benefits from both affordable housing and lower mortgage rates but ultimately faced enormous liabilities associated with GSE risk-taking. This Outlook tells the disheartening story of how the GSEs sold out the taxpayers by taking huge risks on substandard mortgages, primarily to retain congressional support for the weak regulation and special benefits that fueled their high profits and profligate executive compensation. As if that were not enough, in the process, the GSEs’ operations promoted a risky subprime mortgage binge in the United States that has caused a worldwide financial crisis.
The special relationship with Congress was the GSEs’ undoing because it allowed them to escape the market discipline–the wariness of lenders–that keeps corporate managements from taking unacceptable risks.
There’s much more at the link, including the history of Fannie Mae and Freddie Mac and the political purposes their creation was meant to fulfill.
The article concludes,
Unfortunately, the sad saga of Fannie and Freddie is not over. Some of their supporters in Congress prefer to blame the Fannie and Freddie mess on deregulation or private market failure, perhaps hoping to use such false diagnoses to lay the groundwork for reviving the GSEs for extra constitutional expenditure and political benefit in the future. As the future of the GSEs is debated over the coming months and years, it will be important to remember how and why Fannie and Freddie failed. The primary policy objective should be to prevent a repeat of this disaster by preventing the restoration of the GSE model.
It seems to me that there are similarities with the saga of Fannie Mae and the current federal takeover of General Motors. While GM is not a government-sponsored enterprise in terms of Congressional legislation, it has a lot in common with it, in that the government is essentially managing the company through the appointment of its officers, finances it and has announced GM’s mission to produce environmentally-friendly cars, a political purpose. This doesn’t bode well for taxpayers, if the history related in this article is any guide.
Got it in writing. Documents: Paulson forced 9 bank CEOs into bailout
NEW YORK (AP) – The chief executives of the country’s nine largest banks had no choice but to accept capital infusions from the Treasury Department in October, government documents released Wednesday have confirmed.
Obtained and released by Judicial Watch, a nonpartisan educational foundation, the documents revealed “talking points” used by former Treasury Secretary Henry Paulson during the October 13 meeting between federal officials and the executives that stressed the investments would be required “in any circumstance,” whether the banks found them appealing or not.
Paulson also told the bankers it would not be prudent to opt out of the program because doing so “would leave you vulnerable and exposed.”
Exposed to what? Pitchforks? The White House press corps? The SEC and IRS?
It’s no secret that some of the banks had to be pressured to participate in the program, with several bank CEOs saying they had been strongly encouraged to take the funds. But the documents are the first proof of the government’s insistence.
“These documents show our government exercising unrestrained power over the private sector,” said Judicial Watch President Tom Fitton in a statement.
Paulson wanted healthy institutions that did not necessarily need capital from the government to participate in the program first to remove any stigma that might be associated with a bailout. He told reporters during a news conference that the intervention was “what we must do to restore confidence in our financial system.”
I imagine mob enforcers think of their leg-breaking duties in the same terms.
HEDGE-FUND BOSS Crispin Odey has threatened to move his firm out of Britain to avoid the 50% income-tax rate on high-earners.
He joins a growing list of Britain’s wealthy businessmen and City financiers, including Hugh Osmond and Peter Hargreaves, who have become disenchanted at the new tax rate and the European Union’s proposed changes to regulation of private equity and hedge funds.
“We are seriously considering leaving,” said Odey, who runs the £3 billion Odey Asset Management. “This government is not interested in keeping London alive as a financial centre. Hedge funds are not yet flying but they are fluttering. Everyone is thinking about leaving.”
Where will they go?
He fears Geneva, Europe’s second hedge-fund hub after London, is “almost closed” as firms scramble to expand offices or secure new ones in the Swiss canton. Zurich, Monaco, Gibraltar, Hong Kong and Singapore are seen as possible destinations.
Thanks to Open Europe