*Thats just great, giving more money to the corporate
criminals on Wall Street while $25 billion to save 2.3 million jobs
is such a big deal.
Fed Pledges Top $7.4 Trillion to Ease
Frozen Credit
By Mark Pittman and Bob Ivry
http://bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home
Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend
more than $7.4 trillion on behalf of American taxpayers, or half
the value of everything produced in the nation last year, to rescue
the financial system since the credit markets seized up 15 months
ago.
The unprecedented pledge of funds includes $2.8 trillion already
tapped by financial institutions in the biggest response to an
economic emergency since the New Deal of the 1930s, according to
data compiled by Bloomberg. The commitment dwarfs the only plan
approved by lawmakers, the Treasury Department’s $700 billion
Troubled Asset Relief Program. Federal Reserve lending
last week was 1,900 times the weekly average for the three years
before the crisis.
When Congress approved the TARP on Oct.
3, Fed Chairman
Ben S. Bernanke and Treasury Secretary
Henry Paulson acknowledged the need for transparency and
oversight. Now, as regulators commit far more money while refusing
to disclose loan recipients or reveal the collateral they are
taking in return, some Congress members are calling for the Fed to
be reined in.
“Whether it’s lending or spending, it’s tax dollars that are
going out the window and we end up holding collateral we don’t know
anything about,” said Congressman
Scott Garrett, a New Jersey Republican who serves on the House
Financial Services Committee. “The time has come that we consider
what sort of limitations we should be placing on the Fed so that
authority returns to elected officials as opposed to appointed
ones.”
Too Big to Fail
Bloomberg News tabulated data from the Fed, Treasury and Federal
Deposit Insurance Corp. and interviewed regulatory officials,
economists and academic researchers to gauge the full extent of the
government’s rescue effort.
The bailout includes a Fed program to buy as much as $2.4
trillion in short-term notes, called commercial paper, that
companies use to pay bills, begun Oct. 27, and $1.4 trillion from
the FDIC to guarantee bank-to-bank loans, started Oct. 14.
William Poole, former president of the Federal Reserve Bank of
St. Louis, said the two programs are unlikely to lose money. The
bigger risk comes from rescuing companies perceived as “too big to
fail,” he said.
The government committed $29 billion to help engineer the
takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase
& Co. and $122.8 billion in addition to TARP allocations to
bail out New York-based American International Group Inc., once the
world’s largest insurer. Yesterday, Citigroup Inc. received $306
billion of government guarantees for troubled mortgages and toxic
assets. The Treasury Department also will inject $20 billion into
the bank after its stock fell 60 percent last week.
“No question there is some credit risk there,” Poole said.
Exposure
Congressman
Darrell Issa, a California Republican on the Financial Services
Committee, said risk is lurking in the programs that Poole thinks
are safe.
“The thing that people don’t understand is it’s not how likely
that the exposure becomes a reality, but what if it does?” Issa
said. “There’s no transparency to it so who’s to say they’re
right?”
The worst financial crisis in two generations has erased $23
trillion, or 38 percent, of the value
of the world’s companies and brought down three of the biggest Wall
Street firms.
The Dow Jones
Industrial Average through Friday is down 38 percent since the
beginning of the year and 43 percent from its peak on Oct. 9, 2007.
The S&P 500
fell 45 percent from the beginning of the year through Friday and
49 percent from its peak on Oct. 9, 2007. The Nikkei 225
Index has fallen 46 percent from the beginning of the year
through Friday and 57 percent from its most recent peak of
18,261.98 on July 9, 2007. Goldman Sachs
Group Inc. is down 78 percent, to $53.31, on Friday from its
peak of $247.92 on Oct. 31, 2007, and 75 percent this year.
‘Snookered’
Regulators hope the rescue will contain the damage and keep
banks providing the credit that is the lifeblood of the U.S.
economy.
Most of the spending programs are run out of the New York Fed,
whose president,
Timothy Geithner, is said to be President- elect
Barack Obama’s choice to be Treasury Secretary.
The money that’s been pledged is equivalent to $24,000 for every
man, woman and child in the country. It’s nine
times what the U.S. has spent so far on wars in Iraq and
Afghanistan, according to Congressional Budget Office figures. It
could pay off more than half the country’s mortgages.
“It’s unprecedented,” said
Bob Eisenbeis, chief monetary economist at Vineland, New
Jersey-based Cumberland Advisors Inc. and an economist for the
Atlanta Fed for 10 years until January. “The backlash has begun
already. Congress is taking a lot of hits from their constituents
because they got snookered on the TARP big time. There’s a lot of
supposedly smart people who look to be totally incompetent and it’s
all going to fall on the taxpayer.”
New Deal
President
Franklin D. Roosevelt’s New Deal of the 1930s, when almost
10,000 banks failed and there was no mechanism to bolster them with
cash, is the only rival to the government’s current response. The
savings and loan bailout of the 1990s cost $209.5 billion in
inflation-adjusted numbers, of which $173 billion came from
taxpayers, according to a July 1996 report by the
U.S. General Accounting Office.
The 1979 U.S. government bailout of Chrysler consisted of bond
guarantees, adjusted for inflation, of $4.2 billion, according to a
Heritage Foundation report.
The commitment of public money is appropriate to the peril, said
Ethan Harris, co-head of U.S. economic research at Barclays
Capital Inc. and a former economist at the New York Fed. U.S.
financial firms have taken writedowns and losses of $666.1 billion
since the beginning of 2007, according to Bloomberg data.
“This is the worst capital markets crisis in modern history,”
Harris said. “So you have the biggest intervention in modern
history.”
Federal Lawsuit
Bloomberg has requested details of Fed lending under the U.S.
Freedom of Information Act and filed a federal lawsuit against the
central bank Nov. 7 seeking to force disclosure of borrower banks
and their collateral.
Collateral is an asset pledged to a lender in the event a loan
payment isn’t made.
“Some have asked us to reveal the names of the banks that are
borrowing, how much they are borrowing, what collateral they are
posting,” Bernanke said Nov. 18 to the House Financial Services
Committee. “We think that’s counterproductive.”
The Fed should account for the collateral it takes in exchange
for loans to banks, said
Paul Kasriel, chief economist at Chicago-based Northern Trust
Co. and a former research economist at the Federal Reserve Bank of
Chicago.
“There is a lack of transparency here and, given that the Fed is
taking on a huge amount of credit risk now, it would seem to me as
a taxpayer there should be more transparency,” Kasriel said.
$4.4 Trillion
Bernanke’s Fed is responsible for $4.4 trillion of pledges, or
60 percent of the total commitment of $7.4 trillion, based on data
compiled by Bloomberg concerning U.S. bailout steps started a year
ago.
“Too often the public is focused on the wrong piece of that
number, the $700 billion that Congress approved,” said J.D. Foster,
a former staff member of the Council of Economic Advisers who is
now a senior fellow at the Heritage Foundation in Washington. “The
other areas are quite a bit larger.”
The Fed’s rescue attempts began last December with the creation
of the Term Auction Facility to allow lending to dealers for
collateral. After Bear Stearns’s collapse in March, the central
bank started making direct loans to securities firms at the same
discount rate it charges commercial banks, which take customer
deposits.
In the three years before the crisis, such average weekly
borrowing by banks was $48 million, according to the central bank.
Last week it was $91.5 billion.
Lehman Failure
The failure of a second securities firm, Lehman Brothers
Holdings Inc., in September, led to the creation of the Commercial
Paper Funding Facility and the Money Market Investor Funding
Facility, or MMIFF. The two programs, which have pledged $2.3
trillion, are designed to restore calm in the money markets, which
deal in certificates of deposit, commercial paper and Treasury
bills.
“Money markets seized up after Lehman failed,” said
Neal Soss, chief economist at Credit Suisse Group in New York
and a former aide to Fed chief
Paul Volcker. “Lehman failing made a lot of subsequent actions
necessary.”
The FDIC, chaired by
Sheila Bair, is contributing 20 percent of total rescue
commitments. The FDIC’s $1.4 trillion in guarantees will amount to
a bank subsidy of as much as $54 billion over three years, or $18
billion a year, because borrowers will pay a lower interest rate
than they would on the open market, according to Raghu Sundurum and
Viral Acharya of New York University and the London Business
School.
Bank Subsidy
Congress and the Treasury have ponied up $892 billion in TARP
and other funding, or 12 percent.
The Federal Housing Administration, overseen by Department of
Housing and Urban Development Secretary
Steven Preston, was given the authority to guarantee $300
billion of mortgages, or about 4 percent of the total commitment,
with its Hope for Homeowners program, designed to keep distressed
borrowers from foreclosure.
Most of the federal guarantees reduce interest rates on loans to
banks and securities firms, which would create a subsidy of at
least $6.6 billion annually for the financial industry, according
to data compiled by Bloomberg comparing rates charged by the Fed
against market interest currently paid by banks.
Not included in the calculation of pledged funds is an FDIC
proposal to prevent foreclosures by guaranteeing modifications on
$444 billion in mortgages at an expected cost of $24.4 billion to
be paid from the TARP, according to FDIC spokesman
David Barr. The Treasury Department hasn’t approved the
program.
Automakers
Bernanke and Paulson, former chief executive officer of Goldman
Sachs, have also promised as much as $200 billion to shore up
nationalized mortgage finance companies Fannie Mae and Freddie Mac.
The FDIC arranged for $139 billion in loan guarantees for General
Electric Co.’s finance unit.
The tally doesn’t include money to General Motors Corp., Ford
Motor Co. and Chrysler LLC. Obama has said he favors financial
assistance to keep them from collapse.
Paulson told the House Financial Services Committee Nov. 18 that
the $250 billion already allocated to banks through the TARP is an
investment, not an expenditure.
“I think it would be extraordinarily unusual if the government
did not get that money back and more,” Paulson said.
‘We Haircut It’
In his Nov. 18 testimony, Bernanke told the House Financial
Services Committee that the central bank wouldn’t lose money.
“We take collateral, we haircut it, it is a short-term loan, it
is very safe, we have never lost a penny in these various lending
programs,” he said.
A haircut refers to the practice of lending less money than the
collateral’s current market value.
Requiring the Fed to disclose loan recipients might set off
panic, said
David Tobin, principal of New York-based loan-sale consultants
and investment bank Mission Capital Advisors LLC.
“If you mark to market today, the banking system is bankrupt,”
Tobin said. “So what do you do? You try to keep it going as best
you can.”
“Mark to market” means adjusting the value of an asset, such as
a mortgage-backed security, to reflect current prices.
Some of the bailout assistance could come from tax breaks in the
future. The Treasury Department changed the tax code on Sept. 30 to
allow banks to expand the deductions on the losses banks they were
buying, according to
Robert Willens, a former Lehman Brothers tax and accounting
analyst who teaches at Columbia University Business School in New
York.
‘Wells Fargo Notice’
Wells Fargo &
Co., which is buying Charlotte, North Carolina-based Wachovia
Corp., will be able to deduct $22 billion, Willens said. Adding in
other banks, the code change will cost $29 billion, he said.
“The rule is now popularly known among tax lawyers as the ‘Wells
Fargo Notice,’” Willens said.
The regulation was changed to make it easier for healthy banks
to buy troubled ones, said Treasury Department spokesman
Andrew DeSouza.
House Financial Services Committee Chairman
Barney Frank said he was angry that banks used the money for
acquisitions.
“The only purpose for this money is to lend,” said Frank, a
Massachusetts Democrat. “It’s not for dividends, it’s not for
purchases of new banks, it’s not for bonuses. There better be a
showing of increased lending roughly in the amount of the capital
infusions” or Congress may not approve the second half of the TARP
money.