Economic woes mean boom time for lawyers. -&- A broad, single, simplified new regulatory environment may be passed in 2009.

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"Economic woes mean boom time for lawyers"
By Carol J. Williams, Los Angeles Times, October 31, 2008

LOS ANGELES - The loose-leaf binders on Beverly Hills attorney Paul Kiesel's shelves contain hundreds of stories alleging deception, loss, and heartache.

Kiesel is representing struggling homeowners who say they were misled about the terms of their mortgages. He is far from the only lawyer finding himself busy these days as a result of the hard economic times.

In addition to lawyers suing lenders, there are others providing counsel for companies that are downsizing or have been pushed into bankruptcy. Others are representing clients in fraud lawsuits against banks and Wall Street investment firms.

And there are lawyers guiding banks and others seeking a piece of the $700 billion government bailout for the financial system.

The country may be slipping into recession, but it's shaping up to be boom time for lawyers.

"From here on out, we're going to see huge opportunity as credit fans out and everyone tries to use the tools available from recent legislation," said Karen Garrett, a lawyer in Kansas City.

The bailout legislation also includes new rules on executive compensation that will create even more work for lawyers, said Scott Sinder, head of Steptoe & Johnson's government affairs and public policy practice in Washington.

In this year's Litigation Trends Survey by the international law firm Fulbright & Jaworski, 43 percent of corporate counsel surveyed said they expected an upswing in lawsuits, largely spurred by the economic crises.

But Michael B. Dorff, associate dean and law professor at Southwestern Law School in Los Angeles, sounds a more cautionary note about the financial future for law firms, noting lawyers may be facing tougher times.

"If you look industrywide, the recession is going to hurt lawyers more than any kind of benefit they would derive from the legal work," he said.

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"Financial regulatory overhaul likely under Obama"
By Associated Press, Wednesday, November 5, 2008, www.bostonherald.com, 2008 Campaign

NEW YORK - Financial services firms will likely face a broad new regulatory environment in 2009 that could help regain at least a portion of the profitability enjoyed earlier this decade, analysts said today.

Exactly how that new landscape will shape up under President-elect Barack Obama and how much of a boost it will be to firms’ bottom lines is still a question.

Still, most analysts agreed that Wednesday’s stock market sell-off was more tied to concerns about a recession as opposed to the future of regulation in the sector. Financial firms broadly fell with shares of Citigroup Inc. tumbling more than 12 percent, Goldman Sachs Group Inc. sliding more than 6 percent and insurer Genworth Financial Inc. declining more than 8 percent by late afternoon. The Dow Jones industrial average fell more than 400 points.

While it’s not the biggest issue on investors’ minds, regulatory changes are sure to come under the new administration.

"I see an overhaul in regulation similar to what we saw in the 1930s," said Octavio Marenzi, head of consulting firm Celent. "I see a rethinking of the landscape in the next couple of years on that scale."

Oversight will likely be consolidated under one major federal regulator, instead of the piecemeal system of state and federal regulation currently in place, said Gary DeWaal, a senior managing director and general counsel for Newedge, a joint venture brokerage firm owned by Societe Generale and Calyon.

In the past, financial firms focused on one area of business such as commercial banking or insurance and were regulated separately. More recently, firms have delved into a variety of areas lessening the need for as many regulatory groups.

"Financial institutions and products are basically the same regardless of name," DeWaal said.

After a regulatory overhaul, profitability is not likely to be as strong as it was earlier this decade, because rules will be tighter and some of the broad economic conditions in place since the 1980s are no longer available to spur growth, Marenzi said.

A consistent, broad decline in interest rates from peaks in the 1980s have provided a "tailwind" for bank earnings, Marenzi said. Now that rates have fallen so low, that boost is gone, and with tighter regulations, profits may be only half the size of profits earlier in the decade, he said.

DeWaal is a bit more optimistic, saying a single, simplified regulatory agency could allow financial firms to thrive and build their businesses. If properly put in place, new regulations could make the U.S. a more attractive place for foreign financial firms to do business, he said.

Obama’s administration will likely get input for from current Treasury Secretary Henry Paulson’s plan, laid out earlier in the year, to consolidate and centralize financial regulations; international groups; and professional groups and academia. Changes could be swift given the market’s recent turbulence.

The market is "likely to see an acceleration to a harmonized regulatory landscape," DeWaal said.

A single agency providing broad oversight that does not micromanage the financial services sector would allow for a recovery and be positive for business, DeWaal said. A new regulator would also allow the Federal Reserve to get back to its primary focus dealing with broader economic issues, he added.

Companies could be regulated by size, said Roy Smith, a professor of finance at New York University’s Stern School of Business. The largest financial firms might face increased scrutiny to ensure survival. Worries about systemic risk — one financial firm failing and setting off problems elsewhere — will need to be addressed, he said.

One area that will likely face immediate change is the derivatives market, said Michele Gambera, chief economist of Ibbotson Associates, a unit of Morningstar Inc.

Gambera said derivatives, especially complex insurance-like instruments called credit default swaps, have played a large role in the credit crisis and led to investment bank Lehman Brothers Holdings Inc.’s bankruptcy and the government bailout of insurer American International Group Inc.

Banks are afraid to lend to each other now because the current structure makes it hard to evaluate risk, Gambera said. Regulating derivatives markets would create greater transparency.

Better transparency leads to calmer markets and would allow banks to be more comfortable lending to each other and help free up credit markets, Gambera said.

"While there might be a moment of adjustment, there is more trust," Gambera said. Trust is vital to improving the ongoing problem, he said.
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Article URL: www.bostonherald.com/news/politics/2008/view.bg?articleid=1130305
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"US automakers hope Obama will bring financial aid"
By Associated Press, Wednesday, November 5, 2008, www.bostonherald.com

DETROIT - Detroit automakers and their allies in Congress said Wednesday Barack Obama’s victory could help U.S. automakers line up federal funding needed for them to survive a terrible economic slump.

Obama made it clear during his campaign that he understood the automakers’ problems and would work to preserve the industry, Sen. Carl Levin, a Michigan Democrat, said Wednesday.

"I’m very optimistic that we’re going to have a fighter in the White House for manufacturers, and that’s what we need," Levin said.

Levin said he was told Wednesday by Jason Furman, Obama’s senior economic adviser, that government aid is atop Obama’s agenda. Levin said the Obama adviser did not commit to a specific funding path for the industry but was supportive.

Obama has said he would meet with industry leaders and the United Auto Workers immediately to talk about helping automakers, but auto industry officials said a meeting had not yet been scheduled.

Levin noted that Obama expressed support for doubling an Energy Department loan program for automakers to develop fuel-saving technology to $50 billion from $25 billion.

The senator said he and members of Michigan’s congressional delegation would pursue several funding options to help the industry, including the $700 billion Wall Street bailout or access to capital from the Federal Reserve.

Obama’s victory over Republican John McCain came just three days before General Motors Corp. and Ford Motor Co. are to release their third-quarter results, which almost certainly will show billions in losses and cash burn rates that will push the companies closer to emptying out their treasuries if auto sales don’t bounce back soon.

Further cuts by both automakers are expected on Friday, and GM’s top executives sent an e-mail to other executives Wednesday saying that "important changes" will be announced just after the quarterly results are made public.

Spokesman Tom Wilkinson called the announcement a routine update. The e-mail did not give specifics and Wilkinson said he could not comment on them.

"We need to talk about what we’ll do to face the challenges," he said.

Industry analysts expect GM and Ford to make further factory job cuts to match an ever-dwindling U.S. market.

Analysts say GM could close more plants, but Ford said it likely will do temporary factory shutdowns and overtime cuts at some of its car plants.

GM is talking with Chrysler majority owner Cerberus Capital Management LP about GM acquiring Chrysler. GM reportedly is after Chrysler’s roughly $11 billion cash stockpile and is seeking federal aid to make the deal happen.

But a person briefed on the GM-Chrysler talks said Wednesday that no announcement of a deal is imminent because much of it hinges on federal aid. The person asked not to be identified because the talks are private.

A further indication of GM’s woes came Wednesday when its auto financing arm, GMAC Financial Services, reported a $2.52 billion third-quarter loss. GMAC is 51 percent owned by private equity firm Cerberus, while Detroit-based GM holds the rest.

Also Wednesday, House Speaker Nancy Pelosi again called for a lame-duck session of Congress to enact a stimulus program to shore up the sinking economy. It was unclear whether aid for the troubled automakers would be part of that package.

Automakers and their congressional allies say some sort of government funding is necessary to bail out the troubled industry. They have been lobbying to speed up loans from the $25 billion Energy Department pot, and for access to part of the $700 billion Wall Street bailout plan and perhaps other funding.

Also on Wednesday, the Center for Automotive Research published a report estimating that about 2.5 million jobs across the economy would disappear in the first year if the U.S. auto industry shrinks by 50 percent.

Only 239,000 of those job losses would be at the Detroit Three — the remainder would be at parts suppliers and other related industries, the Ann Arbor, Michigan-based center said.

Cerberus Chairman John Snow said Wednesday that Obama and his treasury secretary need a bipartisan plan to counter the worst economic downturn in about 50 years.

"What we need is to make sure that a vital industry like autos ... which is such a big part of the overall economy, doesn’t lead us into a deeper and harsher downturn," Snow said in an interview on the CNBC cable channel. "The collapse of the auto industry at this time would be devastating for a new president."

Snow, who served as treasury secretary under President George W. Bush from 2003 to 2006, said the economy likely is in a recession that could be serious and long due to the credit crisis and a severe economic contraction in and out of the U.S.

GM is burning through more than $1 billion per month and analysts have said the company could reach the minimum cash levels required to operate sometime next year. They say Chrysler could go into bankruptcy next year if it doesn’t take on a partner or isn’t acquired by another automaker, raising the specter of tens of thousands of lost jobs or the need for the government to take over the company’s pension obligations.

GMAC has said it is having discussions with U.S. federal regulators about becoming a bank holding company, a move that could help it access government funding and be part of a potential acquisition of Chrysler.

GM, in a statement issued Wednesday, said it welcomes Obama’s pledge to support the domestic auto industry and efforts to develop new technology.

"This support comes at an especially critical time as our industry confronts one of the most difficult economic periods in our nation’s history, caused by the global financial crisis," the statement said.

A GM-Chrysler deal could lead to job cuts of 24,000 to 35,000, according to industry analysts. They have predicted GM could close half of Chrysler’s 14 manufacturing plants and consolidate engineering, design, finance and other operations. Another 50,000 auto supplier jobs could also be lost.

Most of the losses would be in Michigan, but analysts say the alternative of Chrysler being sold in pieces would result in many more job cuts than a GM acquisition.
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www.bostonherald.com/business/automotive/view.bg?articleid=1130308
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Automotive Photo: 2009 Ford F-150 trucks are ready to leave the assembly line at the Dearborn Truck Assembly in Dearborn, Mich., Thursday, Oct. 30, 2008. (Photo by AP)
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"Planned layoffs jump to near five-year high"
By Pedro Nicolaci da Costa, November 5, 2008

NEW YORK (Reuters) - Planned layoffs at U.S. firms surged to their highest in nearly five years during October, with cuts in the financial and auto sectors leading the charge as the economic outlook worsened, a report by outplacement firm Challenger, Gray & Christmas said on Wednesday.

Job cuts announced in October totaled 112,884, up 19 percent from September, the report said, citing evidence of widespread economic malaise as troubles that began in housing and banking infect the rest of the economy.

"The fact that nearly three out of four industry categories are cutting more jobs is proof of how widely the impact of this downturn has spread," said John Challenger, chief executive officer of Challenger, Gray & Christmas.

"A year ago, job cuts were concentrated in the financial sector and home-building industries. Job cuts are now rising across the board."

October represented the year's worst month for job cuts for several industries, said Challenger, including industrial goods manufacturing, consumer products, pharmaceutical, food and electronics.

The report comes as the government is expected to report 200,000 jobs were lost in October, bringing the total this year to nearly 1 million.

The unemployment rate is also seen rising to 6.3 percent from 6.1 percent. Economists forecast that the jobless rate will rise to more than 8 percent before the job market recovers.

The U.S. economy shrank 0.3 percent in the third quarter after a robust, stimulus-driven second quarter. The housing market continued to exert a tremendous drag, with the decline in residential investment actually accelerating between July and September.

Challenger said the data pointed to a prolonged slump, with few hints of any immediate comeback.

"Year-end job cuts are typically higher than at other times of the year, but the fact that October was significantly higher than recent years suggests that companies not only have been hit hard by this downturn, but they do not see a rebound any time in the near future," said Challenger.

"Even if the economy begins to rebound in the spring or summer, it could be months before we start to see net gains in employment and a decline in the unemployment rate."
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(Reporting by Pedro Nicolaci da Costa; Editing by Tom Hals)
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www.boston.com/business/specials/marketopportunity/
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"Business groups urge Obama to push stimulus"
By Christopher S. Rugaber, AP Economics Writer, November 5, 2008

WASHINGTON --Barack Obama rode a wave of economic discontent to the White House and now faces the daunting task of turning the weakening economy around.

Business groups wary of Obama's populist campaign rhetoric hope to make common cause with the Illinois senator and other congressional Democrats by pushing for an economic stimulus package, possibly as early as this year.

Groups such as the U.S. Chamber of Commerce hope to include corporate tax breaks in the stimulus, along with the spending on roads and bridges intended to create jobs that is likely to be the cornerstone of his plan.

"We start off with a shared and very strong and mutual interest," said Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce. "The number one issue today is ... the economy."

Still, Obama has promised tougher government regulation for a range of industries, including financial services, energy and health care, and he is likely to be a strong ally for labor unions.

Wall Street "will be surprised by the speed and degree to which the corporatist agenda is replaced by 1970s-style economic populism," wrote Andrew Parmentier, an analyst at FBR Capital Markets, in a note to clients.

Concerns about the budget deficit, which could approach $1 trillion in the budget year that began Oct. 1, will likely take a back seat in the short term, economists said.

"It's going to be 'damn the deficit and full speed ahead on the stimulus,'" said Stuart Hoffman, chief economist at PNC Financial Services. Hoffman expects the package to include an extension of unemployment benefits and new spending on roads, bridges and other infrastructure.

Obama supported a $50 billion stimulus during the campaign that included funds for infrastructure spending and grants to state and local governments.

House Speaker Nancy Pelosi, D-Calif., on Wednesday called for Congress to approve a new stimulus bill in a lame duck session before the end of the year. House Democratic Leader Steny Hoyer said in a television interview the package would likely be in the "neighborhood" of $100 billion.

Whatever the amount, Josten said the Chamber will push to include tax breaks for business investment, which has slowed in the face of tight credit.

The economy, which many analysts believe is already in a recession, was foremost on most voters' minds Tuesday. Six in 10 voters said it was the most important issue facing the country.

The country's gross domestic product -- a measure of the overall economy -- shrank by 0.3 percent in the July-September quarter, the government said last week.

More bad economic news is likely this week. Wall Street economists expect the Labor Department to report Friday that companies cut 200,000 jobs in October, sending the unemployment rate to 6.3 percent. Unemployment stood at 4.9 percent at the beginning of this year.

The stock markets, after rallying on election day, fell Wednesday. The Dow Jones industrial average dropped 327 points, or 3.4 percent, to 9,297.9 while the broader S&P 500 fell more than 3 percent.

Economists are urging Obama to quickly put a team in place to oversee the $700 billion financial system rescue approved by Congress last month.

But any honeymoon between the Obama administration and Wall Street and the rest of corporate America could be short-lived.

Obama and Congress could toughen oversight of banks and other financial services companies, enforce environmental rules more strictly, and impose new surcharges on electric utilities and other companies that emit greenhouse gases, Parmentier wrote.

Unregulated corners of the financial industry, such as hedge funds, credit ratings agencies and the derivative instruments known as credit default swaps will likely come under government oversight as part of a broader overhaul of the financial regulatory system, analysts have said.

That overhaul could also place insurers such as Allstate Corp. and MetLife Inc., which are currently regulated at the state level, under federal supervision.

Obama also promised to take a more pro-consumer focus toward the housing and credit card industries. He supports a controversial measure that would allow bankruptcy judges to alter mortgages, which was strongly opposed by the financial industry, as well as a measure to limit the ability of credit card issuers to unilaterally impose new fees and other terms.

Obama's reputation as a conciliator, meanwhile, will be sorely tested by the labor-backed Employee Free Choice Act, which would allow workers to form unions by getting a majority of employees to sign a card in support of a union, rather than through a secret ballot election.

Business groups such as the Chamber of Commerce fiercely oppose the bill because they say the elimination of the secret ballot would open up workers to intimidation and harassment.

The measure, supported by Obama and most Democrats in Congress, was approved in the House last year but stalled in the Senate. Josten said the Chamber hopes to continue to block the proposal in the Senate, where Democrats appear to have fallen short of the 60 votes that would allow them to force votes on controversial bills.

Oil and gas companies such as Exxon Mobil Corp. and Chevron Corp., meanwhile, could face a windfall profits tax, which Obama has promised to impose to pay for a $1,000 "emergency energy rebate" for families.

Also on energy, Obama proposes spending $150 billion over 10 years to speed the development of plug-in hybrid cars and "commercial-scale" renewables, such as wind and solar.

Obama's election could mean tougher terms under the Medicare drug benefit program for pharmaceutical companies such as Pfizer Inc. and Merck & Co. Inc. Obama has promised to negotiate prices directly with the companies, which could save between $10 billion and $30 billion, under one estimate. Industry groups have long opposed such a move.

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"Stocks plunge as investors ponder Obama presidency"
By Sara Lepro and Tim Paradis, AP Business Writer, November 5, 2008

NEW YORK --A case of postelection nerves sent Wall Street plunging Wednesday as investors absorbed a stream of bad economic news and wondered how a Barack Obama presidency will help the country weather a possibly severe recession. Volatility returned to the market, with the Dow Jones industrials falling nearly 500 points and all the major indexes tumbling more than 5 percent.

The market was expected to give back some gains after a six-day runup that lifted the Standard & Poor's 500 index more than 18 percent. But investors lost their recent confidence about the economy and began dumping stocks again; light volume helped exaggerate the price swings.

"The market has really gotten ahead of itself, and falsely priced in that this recession wasn't going to be as prolonged as thought," said Ryan Larson, head of equity trading at Voyageur Asset Management, a subsidiary of RBC Dain Rauscher.

"We're in a really bad recession, period," he said. "Wall Street can spin it anyway they want to, but this is likely going to be more prolonged than people anticipated. People are locking in profits and realizing we're not out of the woods."

Beyond broad economic concerns, worries about the financial sector intensified after Goldman Sachs Group Inc. began to notify about 3,200 employees globally that they have been lost their jobs as part of a broader plan to slash 10 percent of the investment bank's work force, a person familiar with the situation said. The cuts were first reported last month. Goldman fell 8 percent, while other financial names also fell; Citigroup Inc. dropped 14 percent.

Commodities stocks also fell after steelmaker ArcelorMittal said it would slash production because of weakening demand. Its stock plunged 21.5 percent.

Although the market expected Obama to win the election, as the session wore on investors were clearly worrying about the weakness of the economy and pondered what the Obama administration might do to help it. Analysts said the market is already anxious about who Obama selects as the next Treasury Secretary, as well as who he picks for other Cabinet positions.

"The celebration is over. Today we saw a bit of reality," said Al Goldman, chief market strategist at Wachovia Securities in St. Louis. "President-elect Obama is coming into a situation with limited experience, having to handle an economy in serious trouble, a couple of wars and terrorism. It's an extremely tough job."

Analysts said investors were also uneasy in advance of the Labor Department's October employment report, to be issued Friday. Economists, on average, expect a 200,000 drop in payrolls, according to Thomson/IFR.

Late-day selling by hedge funds helped deepen the market's losses during the last hour. More selling by the funds is expected to weigh on the market ahead of a Nov. 15 cutoff for shareholders to notify fund managers of their intent to cash out investments before year-end.

The Dow fell 486.01, or 5.05 percent, to 9,139.27.

The S&P 500 index fell 52.98, or 5.27 percent, to 952.77. Through the six sessions that ended Tuesday, the index, the one most closely watched by market professionals, rose 18.3 percent.

The Nasdaq composite index fell 98.48, or 5.53 percent, to 1,681.64, while the Russell 2000 index of smaller companies fell 31.33, or 5.74 percent, to 514.64.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to a light 1.31 billion shares.

Wednesday's trading, which followed a 300-point jump in the Dow on Tuesday, showed that the market is living up to expectations of continued volatility as it tries to recover from the devastating losses of the last two months.

Bill Stone, chief investment strategist at PNC Wealth Management, said the uncertainty over the direction the government's financial bailout plan will take under the next administration likely weighed on financial stocks Wednesday.

Analysts agree that Obama's most immediate priority will be dealing with the nation's financial crisis and deciding how to further implement the $700 billion rescue package passed by Congress last month.

Goldman said trading could remain turbulent as investors begin assessing the shape and direction of Obama's forthcoming economic policies.

"The market has to go through a period of figuring out if they are going to gain confidence in Obama and the Congress or lose it," he said, adding that investors will be paying close attention to who will be appointed to top economic posts.

Obama's victory means that industries such as oil and gas producers, utilities and pharmaceuticals may face greater regulation and even taxes, while labor unions and automakers are expected to benefit.

In addition, banks, insurance companies, hedge funds and the rest of the financial sector will almost certainly face attempts at a regulatory overhaul by the Democratic Congress next year.

Bank of America Corp. dropped $2.78, or 11.3 percent, to $21.75. Citigroup fell $2.05, or 14 percent, to $12.63. Morgan Stanley, meanwhile, tumbled $1.84, or 9.7 percent, to $17.06. Goldman Sachs fell $7.57, or 8 percent, to $87.43.

In addition to monitoring the direction the next administration will take, investors continue to heed the state of the credit markets. The paralysis in the credit markets that began after the bankruptcy of Lehman Brothers Holdings Inc. in mid-September has been alleviated somewhat by a series of government interventions, but they still show some signs of strain.

Banks continued to ratchet down the rates they charge one another for borrowing on Wednesday, but the key interbank lending rate -- the London Interbank Offered Rate, or Libor -- remains well above the Federal Reserve's target interest rate of 1 percent. Libor for three-month dollar loans fell to 2.51 percent from 2.71 percent Tuesday.

And the bid for Treasury bills remains high. The three-month bill, considered one of the safest assets around, fell to 0.40 percent from 0.48 percent late Tuesday. A low yield indicates high demand.

The yield on the benchmark 10-year Treasury note fell slightly to 3.71 percent from 3.73 percent late Tuesday.

The dollar was mixed against other major currencies, while gold prices fell.

Other sectors that are being closely watched in light of the election results are pharmaceuticals and alternative energy, analysts said.

Merck & Co. fell $2.41, or 7.7 percent, to $28.72. Pfizer Inc., meanwhile, dipped $1.09, or 6 percent, to $17. SunTech Power Holdings Co. was among the alternative energy stocks that declined, falling $6.82, or 21.5 percent, to $24.88.

Light, sweet crude dropped $5.23 to $65.30 a barrel on the New York Mercantile Exchange.

In Asian trading, Japan's Nikkei index rose 4.46 percent, and Hong Kong's Hang Seng Index rose 3.17 percent. Britain's FTSE 100 fell 2.34 percent, Germany's DAX index fell 2.11 percent, and France's CAC-40 fell 1.98 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

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A specilaist works at his post on the floor of the New York Stock Exchange Tuesday, Nov. 4, 2008. (AP Photo/Richard Drew)
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www.boston.com/business/markets/articles/2008/11/05/stocks_tumble_as_investors_shift_focus_to_economy/
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"Bush picks federal prosecutor to oversee bailout"
By Deb Riechmann, Associated Press Writer, November 14, 2008

WASHINGTON --President George W. Bush on Friday picked a federal prosecutor in New York to be a Treasury-based special inspector general to oversee the massive $700 billion financial rescue plan.

If confirmed by Senate, Neil Barofsky, an assistant U.S. attorney in the Southern District of New York, will be responsible for conducting audits and investigations of how the government spends the bailout money. He will also will report on the value of any assets acquired by the government and why they were purchased.

Currently, the job is being handled by the Treasury Department's inspector general -- Eric Thorson -- who has expressed concerns about the difficulty of properly overseeing the complex program in addition to his regular responsibilities.

Prior to his job as assistant U.S. attorney and chief of the Southern District's mortgage fraud group, Barofsky was a lead prosecutor in the district's securities fraud unit. Previously, he worked the district's international narcotics trafficking unit. Barofsky earned two bachelor's degrees from the University of Pennsylvania and a law degree from the New York University School of Law.

The establishment of a special inspector general dedicated to the program was one of the provisions added to the bailout legislation to secure its passage. Other provisions intended to boost oversight of the massive program included a special oversight board and regular government audits.

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"Buffett says automakers need bailout or bankruptcy"
By Associated Press, Friday, November 21, 2008, www.bostonherald.com, Automotive

OMAHA, Neb. - Billionaire investor Warren Buffett said U.S. automakers need a new business model to better compete, whether it takes bankruptcy or a government bailout to achieve.

Buffett also said he would never serve as U.S. treasury secretary because he loves his current job too much. The Berkshire Hathaway Inc. chairman and CEO is a member of President-elect Barack Obama’s transition economic advisers.

Buffett said any automaker bailout package should include a business solution and be negotiated by the president, not Congress. Buffett spoke to Fox Business News in an interview scheduled to air this afternoon.

Buffett’s spokeswoman said he was not available Friday morning to comment further.

The government should insist top executives at Ford Motor Co., General Motors Corp. and Chrysler LLC invest a significant percentage of their own net worths in the Detroit-based companies, Buffett said, ensuring both executives and taxpayers would share in any profits or losses.

Buffett said the government should be able to drive a deal like one of the ones he makes when Berkshire buys businesses, because automakers appear on the brink of bankruptcy.

Buffett said he’d tell the auto executives, "’We’ll give you more upside (than bankruptcy), but you’re going to lose if we lose.’"

Bankruptcy would be a poor solution for the auto industry, Buffett said, so he hopes a better way can be found to work out the union contracts and other issues the companies face.

He reiterated his belief that the U.S. economy will eventually recover from its current problems, but he predicted there will be more pain first.

"There are going to be more people unemployed. And I mean, I can’t think of anything worse than going home to a family, saying, ’I lost my job today,’" Buffett said.

He said he expects the unemployment rate to continue climbing past 8 percent and he doesn’t expect the rate to start falling anytime soon.

Buffett said he thinks the current treasury secretary, Hank Paulson, is a "high-grade guy" doing a good job with an extremely tough situation as he tries to reinvigorate the economy.

"I don’t think I could have done a better job, and I don’t think most of the congressmen could do a better job," Buffett said.

He said he doesn’t regret agreeing in September to invest $5 billion in Goldman Sachs, because he doesn’t think the investment bank would still agree to pay Berkshire the 10 percent annual dividend Goldman promised. Since Goldman announced Berkshire’s investment, it received $10 billion in assistance as part of the government’s $700 billion bailout plan.

Shares of Buffett’s Omaha-based company have fallen significantly this month since Berkshire reported a 77 percent drop in this year’s third-quarter profit. His report cited unrealized investment losses of about $1 billion weighed on the results.

Class A shares of Berkshire, which are still the most expensive U.S. stock, were selling for $81,900 Friday afternoon. The stock set a new high of $151,650 last December after an exceptionally profitable third quarter that was helped by a $2 billion investment gain.

Buffett said he’s not bothered by the recent share price decline, because he’s been through similar drops before and he values Berkshire based on its underlying businesses.

Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.

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On the Net:

Berkshire Hathaway Inc.: www.berkshirehathaway.com

Fox Business News: http://www.foxbusiness.com

Article URL: www.bostonherald.com/business/automotive/view.bg?articleid=1134002

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"Lawmakers' interests not idle"
The Boston Globe, Letters, November 21, 2008

IN EVALUATING the congressional positions on the automobile bailout, it would be helpful if the Globe noted the presence of the industry in those states that the debate participants represent. For instance, it's common knowledge that Senators Carl Levin and Debbie Stabenow, who are in favor of helping automakers, are from Michigan, but it's not pointed out that opposition has been from congressmen who come from states that have a high percentage of foreign auto manufacture. For instance, Senator Richard Shelby, a leading voice in opposition, is from Alabama, where foreign car manufacture is a leading industry, as it is in Mississippi and Kentucky. What's more, their opposition to aid is not entirely consistent, as the foreign car makers were induced to settle in their states by significant cost concessions and outright fiscal incentives. Where is the record of opposition to these concessions?

Bernard Moller
Jamaica Plain, Massachusetts

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In order to be eligible for the government's $700 billion rescue program, several insurers have announced plans to buy banks and attain approval to become savings and loan companies. Testifying before Congress Tuesday, Treasury Secretary Henry Paulson said he wasn't sure that was "a successful strategy."
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"Insurance Bailout Requests Raise Concerns: Is Your Insurance Policy in Danger? Experts Say No."
By ALICE GOMSTYN, ABC NEWS Business Unit, November 19, 2008 —

About two months after the government first announced its multibillion-dollar bailout of insurance giant AIG, more insurance companies are lining up for federal dollars, leaving some consumers worried about their insurance policies.

In recent days, the Hartford Financial Services Group, Lincoln Financial Group, Genworth Financial and Aegon have all announced plans to apply for the U.S. Treasury Department's Capital Purchase Program, part of the government's $700 billion financial rescue package (also known as the Troubled Asset Relief Program, or TARP).

Insurance companies "are suffering very badly because of the losses in their investment portfolios," said Neena Mishra, a senior financial analyst who covers banking and insurance at the investment research firm Zacks.

The government, she said, "is a very attractive source of capital."

The news has led to an uptick in phone calls from concerned consumers to the National Organization of Life and Health Insurance Guaranty Associations, which represents life insurance guaranty funds that pay consumers' claims if an insurance company fails.

Worried callers are asking what would happen to their insurance policies if their insurers went under, according to the group's president, Peter Gallanis. They "want some reassurance on the condition of the investment or the contract that they've purchased," he said.

Exactly how worried should consumers be?

A Genworth Financial spokesman declined to comment on the issue. Lincoln Financial Group and Aegon did not return calls for comment.

Shannon Lapierre, a spokeswoman for Hartford, which has millions of policyholders in the United States, said that while the company is "financially strong and well-capitalized," the insurer decided that requesting a TARP investment was a prudent move given "the potential for more extreme market volatility."

Life Insurance Industry Hit Hard

Bob Hunter, the director of insurance at the Consumer Federation of America, said that while this year has been a bad one for insurance companies, the years before it have been good, allowing companies to shore up their balance sheets.

Hunter said life insurance companies, in particular, have been hard hit this year because they were more likely to make investments in mortgage-backed securities. Still, he said, while at least one small life insurance company could buckle under its investment losses, the majority of companies are not in as much danger.

"Most of the regulated industry will stay solvent," he said.

Gallanis, meanwhile, cautioned against comparing insurance companies in the news today to AIG, which is receiving a total of $150 billion in investments and loans from the federal government.

AIG's "business model is not followed by any other company in the industry," Gallanis said.

"I think the industry's actually in pretty good shape," he said.

Most Customers Won't Be Affected

If one or more insurance companies go under, insurance guaranty fund organizations say they're prepared to step in to ensure that most consumers continue receiving the benefits guaranteed by their policies.

"In any situation where you've got a number of insolvencies or a huge major insolvency, funds have proven themselves to be flexible," said Barbara Cox, the vice president of legal and regulatory affairs at the National Conference of Insurance Guaranty Funds.

Every state has at least two guaranty funds that cover claims associated with insurance companies that have shut down. One fund covers property and casualty claims, including workers' compensation, and another handles life insurance, health insurance and annuities. The funds are supported by assessments charged to insurance companies.

In the last six years, guaranty funds in the United States have paid a total of about $10 billion in claims, according to the guaranty funds group.

In the past, there's been criticism of guaranty funds for taking too long -- in at least one case, years -- to address claims, but Gallanis said the process is much faster today.

"We continue [customers'] coverage from the time the company fails," he said. "You never miss a beat."

Government Assistance Not Guaranteed

Whether insurance companies will succeed in their efforts to get federal TARP money remains uncertain.

In order to be eligible for the program, Hartford Financial Services Group, Lincoln Financial Group, Genworth Financial and Aegon have all announced plans to buy banks and attain approval to become savings and loan companies.

Testifying before Congress Tuesday, Treasury Secretary Henry Paulson said he wasn't sure that was "a successful strategy."

"We are going to look only at applications that we think make sense," he said. But Paulson added that a number of insurance companies are already bank holding companies.

"It may make sense to put capital into those institutions that are playing a vital role in lending and keeping our economy going," he said.

Proponents of directing TARP money to insurance companies argue that, by buying corporate debt, insurance companies have played a major role in the U.S. financial system.

Jack Dolan, of the American Council of Life Insurers, said that lately, the "irrational markets" have led insurance companies to hoard cash instead of investing it. TARP funds, he said, would help insurance companies return to the corporate debt market.

"It provides something of a safety net to allow us to continue or to get back more aggressively into our ways of providing capital and liquidity to companies and corporations," he said.

If insurance companies with newly acquired banks succeed in their TARP applications, they could see capital injections that are many times greater than the amount they originally spent on buying banks.

Hartford, which plans to spend $10 million to buy Federal Trust Corp. in Sanford, Fla., estimates that it could receive between $1.1 billion and $3.4 billion from the rescue plan.

That, said Zacks' Mishra, "is a very handsome return."

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"The Beautiful Machine"

First of three parts

Greed on Wall Street and blindness in Washington certainly helped cause the financial system's crash. But a deeper explanation begins 20 years ago with a bold experiment to master the variable that has defeated so many visionaries: Risk.

By Robert O'Harrow Jr. and Brady Dennis
Washington Post Staff Writers
Monday, December 29, 2008; A01

Howard Sosin and Randy Rackson conceived their financial revolution as they walked along the Manhattan waterfront during lunchtime outings. They refined their ideas at late-night dinners and during breaks in their busy days as traders at the junk-bond firm of Drexel Burnham Lambert.

Sosin, a 35-year-old reserved finance scholar who had honed his theories at the famed Bell Labs, projected an aura of brilliance and fierce determination. Rackson, a 30-year-old soft-spoken computer wizard and art lover, arrived on Wall Street with a Wharton School pedigree and a desire to create something memorable.

They combined forces with Barry Goldman, a Drexel colleague with a PhD in economics and a genius for constructing complex financial transactions. "Imagine what we could do," Sosin would tell Rackson and Goldman as they brainstormed in the spring of 1986.

The three men had earned plenty of money through short-term deals known as interest-rate swaps, a clever transaction designed to protect banks, corporations and other clients from swings in interest rates that threw uncertainty into the cost of borrowing the money necessary for their business operations.

They believed their revolution could never happen if they stayed at Drexel. Swaps in those days typically lasted no longer than two or three years. The trio envisioned deals lasting decades that would lock in profits and manage risks with unprecedented precision. But the junk-bond firm's inferior credit rating sharply raised its borrowing costs, making it a dubious and risky partner for such long-term deals.

Sosin and his team needed the backing of a company with deep pockets, a burnished reputation and the very top credit rating, a Triple A institution as unlikely to default as the U.S. Treasury itself. One name topped their wish list that fall: American International Group, or AIG, the global insurance conglomerate considered one of the world's safest bets.

They would find a partner for their venture. They would create an elegant and powerful system that earned billions of dollars, operating in the seams and gaps of the market and federal regulation. They and their firm would alter the way Wall Street did business, particularly in the use of derivatives, and eventually test Washington's growing belief that capitalism could safely thrive with little oversight.

Then, they would watch in disbelief as their creation -- by then in the hands of others -- led to the most costly rescue of a private company in U.S. history, triggering a federal investigation into AIG's near-collapse and making AIG synonymous not with safety and security, but with risk and ruin.

Over the past two decades, their enterprise, AIG Financial Products, evolved into an indispensable aid to such investment banks as Goldman Sachs and Merrill Lynch, as well as governments, municipalities and corporations around the world. The firm developed innovative solutions for its clients, including new methods to free up cash, get rid of debt and guard against rising interest rates or currency fluctuations.

Financial Products unleashed techniques that others on Wall Street rushed to emulate, creating vast, interlocking deals that bound together financial institutions in ways that no one fully understood and contributed to the demise of its parent company as a private enterprise. In the panic of mid-September's crash, the Bush administration said that AIG had grown too intertwined with the global economy to fail and made the extraordinary decision to take over the reeling giant. The bailout stands at $152 billion and counting -- almost 10 times as large as the rescue for the American auto industry.

Many of the most compelling aspects of the economic cataclysm can be seen through the story of AIG and its Financial Products unit: the failure of credit-rating firms, the absence of meaningful federal regulation, the mistaken belief that private contracts did not pose systemic risk, the veneration of computer models and quantitative analysis.

At the end, though, the story of Financial Products is not about math and financial formulas. It is a parable about people who thought they could outwit competitors and market forces alike, and who behaved as though they were uniquely positioned to sidestep the disasters that had destroyed so many financial dreams before them.

2: 'We Are The Tide'

Sosin, Rackson and Goldman could hardly contain themselves as they labored over a business plan at Sosin's kitchen table in his apartment on Manhattan's Upper East Side. Their timing happened to be exquisite. The staid Wall Street of their fathers' generation was gone, replaced by an anything-goes culture that applauded the kind of path they were charting during the final months of 1986.

Their plan fit perfectly with another revolution they saw unfolding in Washington. Ronald Reagan's unwavering belief in free markets -- and his distaste for regulation that put hurdles in the way of entrepreneurs -- had steadily spread through the government. "The United States believes the greatest contribution we can make to world prosperity is the continued advocacy of the magic of the marketplace," Reagan told a U.N. audience that fall.

As eager as the three dreamers were, they had to confront certain realities. They had no backing, no inside track to the top levels of the corporate world that controlled the money they needed.

They had passed AIG headquarters at 70 Pine St., a few blocks from Drexel's offices, many times. Now, they wanted an entrée to the 18th floor, where legendary 61-year-old chairman and chief executive Maurice "Hank" Greenberg presided over the nation's largest insurance company, with operations in scores of countries. Greenberg was proud and protective of his company's AAA credit rating, one of only a handful in the world.

The AAA, awarded after an examination by the bond-rating firms, sent a resounding signal to clients that they could always sleep well at night, that AIG was in no danger of failing. The more secure a company, the more cheaply it could borrow money -- a fact that would be pivotal to Financial Products' success.

AIG's roots went back to 1919 and Shanghai, where founder Cornelius V. Starr built a business around a lucrative, relatively untapped insurance market. Starr's company later received an unorthodox boost when he worked with the U.S. Office of Strategic Services during World War II to create an intelligence unit that gleaned information from insurance documents.

When Greenberg took the reins in 1968, AIG was a privately held company. Greenberg, a compactly built son of a taxi cab driver, eventually became a figure in both New York and Washington, where he counted Henry Kissinger and Reagan CIA director Bill Casey among his confidantes. The World War II and Korean War veteran had a temper, a gift for growth and a restless mind. He had transformed AIG into a global titan and now wanted to do more.

Few people thought of AIG as a financial innovator. Greenberg kept his stockholders happy by striving for an annual 15 percent increase in profits. He instructed his deputy, vice chairman Edward E. Matthews, to explore how AIG could get more involved in Wall Street's realm.

"This is never going to get any better than it is today," Greenberg told Matthews. "We're so big, we're never going to swim against the tide. We are the tide."

3: 'It Wasn't The Money'

At the law offices of Kaye Scholer in Midtown Manhattan, former Sen. Abraham Ribicoff had a match to make.

Sosin had come to the firm -- where the 76-year-old Ribicoff was a senior adviser -- seeking guidance on how to leave Drexel. As he mentioned his interest in getting AIG's backing for a new venture, a Kaye Scholer lawyer told him to see Ribicoff, an old Greenberg friend.

Ribicoff was happy to introduce the inventive Sosin to the ambitious Greenberg, and let them figure out whether they could do business together. But he warned Sosin that any partnership, no matter how productive, can sour. "I'll only call Greenberg if you let us plan your divorce while we're planning your marriage," Sosin remembers Ribicoff saying.

Sosin came to the negotiation with conditions. He wanted the kind of autonomy that Greenberg rarely granted. Greenberg wanted assurances that Sosin's venture would do nothing to harm the gold-plated rating he had spent two decades building.

Greenberg had little extra time for the nuts-and-bolts details that Sosin sought to negotiate. "I don't really know much about this," he told Matthews. "You go talk to these people."

The morning after AIG and Sosin signed their joint venture agreement, Jan. 27, 1987, word spread rapidly through Drexel's trading floor in lower Manhattan: Sosin, Rackson and Goldman were leaving. Discreetly, the three men had invited some of their colleagues to a recruitment meeting. Ten eventually signed up for the ride.

Michael Milken, the junk-bond king who was Drexel's star trader, tried to stop the breakaways. But the pull of innovation, and the promise of even greater pay, was too strong.

At Drexel, Sosin, Rackson and their band of brainy followers didn't have much say in how bonuses were doled out. At Financial Products, they would keep 38 percent of the profits, with Greenberg and AIG getting 62 percent. (Greenberg remembers AIG's share as 65 percent.)

Their revolution began with a whisper. They set up shop in a windowless, makeshift room at an accounting firm on Third Avenue. Until the rental furniture arrived, they sat on cardboard boxes. When it finally showed up, someone had made a mistake and so for a short time, they perched on children's chairs and worked at tiny tables. When Matthews escorted Greenberg there for a visit, the chief executive chewed him out. "You can't have them in such terrible quarters," Greenberg said.

Sosin and Rackson hoped that everyone would get rich, but they had their sights set on something more. They wanted to tear down walls they saw as impediments to innovation, the "fiefdoms" that were standard practice at other Wall Street firms. Their vision required a collaborative culture and a computer system that no one else had. For six months, the group worked on constructing "the position analysis and storage system," or PASS. They called it simply "the system."

It enabled Financial Products to bring a rare discipline to complex trades. By maintaining market, accounting and transaction details in one place, Sosin and his people could track the constantly changing value of a trade's components in a way no other firm could.

Put more simply, they could see opportunities in the marketplace for taking on risk that others couldn't, squeeze out profits where no one had before and protect themselves in the process.

They exploited the developing realm of derivatives, financial jargon for a contract settling in the future that is based on something trading now. A futures contract is a common derivative: A farmer might agree to sell wheat next spring for a price set today. If the price goes up, the farmer misses out on greater profits; if it goes down, the farmer is protected against loss. Essentially, the contract guarantees enough money to keep the farm going.

For its clients, Financial Products found ways to create more lucrative and longer-term derivative deals tied to all sorts of underlying assets, neutralizing the constant gyrations of prices in stocks, currencies and commodities. Behind each transaction was the cushion of AIG's AAA rating.

Precision was the key to tamping down the risk of these derivatives to the firm. Using another computer program to monitor the minute fluctuations in various rates, Financial Products could place offsetting trades on all sides of a transaction, so it almost didn't matter what the markets did. That was the beauty of their evolving machine: The firm won either way, as long as it stuck to its commitment to keep hedging its bets.

But it took more than technology to realize their vision. It took a culture of skepticism. The firm set up a committee to examine all transactions at the end of each workday, searching for flaws in logic, pricing and hedges. "Everyone kind of understood what the nature of the game was. . . . This was not a company that involved speculating," said Tom Savage, a mathematician from Drexel who joined the firm in 1988. "So it was everybody's job to criticize and double-check other people's opinions about what was appropriate business and what wasn't."

Sosin and his colleagues worked to create a finely balanced system that married technology, intelligence, verve and cultural discipline.

"We were all kind of artists," Rackson said recently. "The excitement of it wasn't the money. The money was the scorecard. The drive behind it was creating something new."

4: 'We Regret to Inform You . . .'

In July 1987, Sosin phoned Ed Matthews at his vacation house in the Adirondacks, where the AIG executive often went to escape Manhattan's summer heat. It was a phone call both would remember for a long time.

Financial Products was about to close its first significant deal, a $1 billion interest-rate swap with the Italian government, 10 times larger than the typical Wall Street swaps deal in those days.

The elements of the transaction might seem arcane to those outside the financial world. The contract involved an exchange of floating and fixed rates that gave Italy advantages in how it paid bondholders. Financial Products engaged in a separate set of transactions to offset the risk it was taking on. As Sosin explained to Matthews, the firm made money, over the life of the contract, on the spread between the cost of the deal and the cost of its hedge.

This one swap, Sosin told him, would pay the firm more than $3 million -- as much as AIG's two other small financial operations each earned in a year.

"I was stunned," Matthews said.

That first year, Financial Products brought in millions for the company -- $60 million in the first six months alone, as Sosin recalls. He and his team left behind their ad hoc digs for a swanky Madison Avenue address, a temporary stop en route to their eventual headquarters in suburban Connecticut.

Competitors hustled to keep pace. Sosin pressed to find niches where others weren't playing and provide cost-saving solutions for clients. Standard interest-rate swaps were no longer enough. The firm moved into more exotic deals, involving stocks, currency and municipal bonds.

By 1990, Financial Products had offices in London and Tokyo. It would soon set up a small bank in Paris to improve its image and lower the cost of some European deals.

As in the Italian deal, the transactions were hedged and, if necessary, hedged again. The hedges involved precisely calibrated transactions, including the purchase of Treasury bonds or other swaps, that brought a cash flow in almost direct proportion to the money going out.

But with success came tension. Greenberg's love of his joint venture's revenue could not overcome his desire for greater control. He chafed at the deal, worrying that he had given Sosin too much freedom.

One detail in particular nagged at Greenberg. Under the joint-venture agreement, Financial Products received its profits upfront, even if the transactions took 30 years to play out. AIG would be on the hook if something went wrong down the road, not Sosin and his team, who took their pay immediately.

Greenberg's uneasiness grew into distrust, and not just about the numbers. Greenberg was a wink-and-handshake guy, while Sosin relied on the written agreement as his Bible. If Greenberg asked for something that wasn't stipulated, Sosin wouldn't comply.

"We ran our company very openly," Greenberg said. "Our word was our bond."

For his part, Sosin said the agreement gave both sides a clear understanding of the arrangement.

Early in 1990, Greenberg summoned Sosin to his office. Drexel had just imploded amid allegations of fraud and insider trading, and Greenberg had recruited several executives to start an AIG unit specializing in currency trading. That was a problem: Sosin interpreted the joint agreement as giving his firm exclusive rights to that business. Greenberg disagreed, and hoped to finesse the conflict.

"Howard, I'm sure you won't mind," Greenberg said.

"Mr. Greenberg, I mind very much," Sosin said.

"Howard, that isn't wise," Greenberg responded.

Days later, on March 13, 1990, Matthews sent Sosin a letter on Greenberg's behalf announcing their intention to terminate the agreement. "We regret to inform you. . . " the letter began.

Under the agreement, Sosin could take a duplicate of his computer system and his team with him. He began looking for backing from another AAA company. Greenberg heard about Sosin's efforts and got cold feet. After a series of meetings, including one at Greenberg's Florida retreat in Ocean Reef, they patched it back together, reasoning that there was too much money still to be made.

Greenberg's next letter had a different tone. "It is with great pleasure that, with this letter, we revoke any and all of our prior notices of termination," he wrote on May 31, 1990.

The peace wouldn't last.

5: 'Cave or Terminate'

In late 1992, Greenberg once again summoned Sosin to AIG headquarters. He was livid over two recent Financial Products deals with entities controlled by the Edper Group, a giant Canadian holding company owned by billionaires Edward and Peter Bronfman.

The first involved the purchase of bonds, which amounted to a loan to one of the Edper entities. The firm occasionally ventured into such credit deals as part of larger transactions, but only with highly rated companies and with provisions that opened an exit ramp if the bonds started to default. "We want to be the first rat to leave the sinking ship," Sosin told his troops, reflecting his unease with credit deals, which their system couldn't tame.

When this particular ship sank, Financial Products sold out as quickly as it could, but not before it lost $100 million. The second deal, involving a swap with extra layers of complexity, was going fine. But the $100 million loss in the first deal and the intricate machinations in the other had spooked Greenberg.

Sitting in an anteroom to his office, in a favorite red leather chair, Greenberg demanded that Sosin stop doing some of the deals that had made Financial Products a Wall Street darling.

Greenberg handed Sosin a document that would change the terms of their joint venture. Greenberg was daring Sosin to flinch. Instead, Sosin walked out.

He visited his lawyer, Ronald Rolfe, at Cravath Swaine & Moore in New York.

"I said, 'What can I do?' And he said, "Cave or terminate.' "

6: No Reconciliation Possible

Under the agreement, either man had the right to terminate the joint venture. Sosin notified Greenberg that he wanted out.

Greenberg knew that Sosin's departure could cost him and AIG millions. But that wasn't his main concern. He didn't have a thorough understanding of how Sosin's system worked, and he wasn't going to let him get away without finding out.

In March 1993, as the two sides commenced a bitter arbitration battle, Greenberg formed what came to be known as a "shadow group." It verged on a covert operation. The group included AIG's auditors, now known as PricewaterhouseCoopers, which set up an office near Financial Products -- now in Connecticut -- and built a parallel computer system to track the firm's trades. Greenberg also held surreptitious conversations with some of Sosin's colleagues, recruiting them to stay.

Years later, Greenberg and Matthews still chafe visibly at the mention of Sosin. "One of the most difficult individuals I have ever dealt with in my entire life. Hands down," Matthews said. "Howard was in it for Howard."

Sosin, too, remains sensitive about what happened. "Greenberg took this very personally," he said. "He likes to be able to step in at any point and change things at his whim."

In Sosin's view, Greenberg and Matthews were envious of the profits that he and his colleagues were keeping for themselves. "It was peculiar to have something go so well," Sosin said, "and for him to have such suspicion."

In August 1993, with no reconciliation possible this time, the AIG board of directors installed a new leadership team. Sosin and Rackson took some employees with them to start another firm. Sosin later settled with AIG for a reported payout of more than $150 million; Rackson later received a share of the settlement.

Greenberg and AIG gained control of Financial Products and the beautiful machine. In the coming years, the firm would accelerate its profit-making ability, while forging into uncharted -- and ever riskier -- financial territory.

7: 'Honor the Trust'

Tom Savage stood before a room of anxious colleagues at the Four Seasons resort in Dallas, eager to reassure them that Greenberg was not going to pull the plug on their money-making machine.

Savage, a 44-year-old Midwestern math whiz, had just been named the new president of Financial Products. With the honor came explicit expectations, which Greenberg made clear: "You guys up at FP ever do anything to my Triple A rating, and I'm coming after you with a pitchfork."

It was spring 1994 and, on the surface, nothing much had changed since Sosin left the previous summer. Financial Products had come a long way from the days of sitting on cardboard boxes. The Dallas meeting was opulent in a way that had become customary for the firm: Lavish meals, open bars, luxurious rooms and rounds of golf, which was Savage's particular passion. Dallas's international airport allowed dozens of associates to fly direct from the firm's far-flung outposts.

The employees couldn't understand why there was any doubt about the firm's future. In just seven years, it had grown into a 125-person operation with annual profits comfortably above $100 million.

Like his predecessors, Savage knew the enterprise could not thrive without AIG's AAA rating, which continued to provide the leverage it needed to stay ahead.

"AIG has given us the license to work," Savage told his colleagues that day. "We have to honor the trust they have given us."

The catch? Financial Products would have to take more direction than ever from Greenberg.

8: 24 Hours A Day

Greenberg called Savage most days that first year. "I'd be changing a diaper at home," Savage recalled. "He'd say, 'What are you doing?' I'd say, 'Changing the diaper.' He'd say, 'Well, I don't think I can help you with that.' But he would say, 'What are you thinking about? What's going on?' He was always taking my temperature."

Savage knew that Greenberg hadn't been 100 percent sure about his ability to run Financial Products. Greenberg had told him as much when they sealed the deal at a Vermont ski resort that AIG owned in Stowe. "I don't know if you have all the buttons for this job," the AIG chairman had said. Greenberg managed the company by both charming and intimidating his subordinates. He said of himself recently, "I suffer fools very badly."

Greenberg also had no patience for anyone who didn't share his relentless work ethic. "You don't build a company like AIG from nine to five, five days a week. It just doesn't happen," Greenberg said recently. "And you've got to surround yourself with a group of people who share the same values, the same aspirations that you do. When I traveled, I could call somebody, I don't care what time it was, maybe two, three in the morning. As far as I'm concerned, I'm working 24 hours, they're working 24 hours."

Savage understood that, but he came at the job with a mathematician's love of the numbers and how they worked. He was among a growing number of "quants" -- short for quantitative thinkers -- who had worked their way into the heart of Wall Street. With a PhD from Claremont Graduate University in California, Savage had started his career at First Boston in 1983, where he wrote computer models for a then-arcane type of security called a collateralized mortgage obligation, or CMO. It is the kind of asset-backed security at the core of the current meltdown.

Savage respected Sosin, but saw no reason to follow Sosin and Rackson out the door. "I think what was clear was that, however things should work out, there was a business at AIG Financial Products and Sosin didn't need to be there for it to be successful," Savage said.

Immediately after Sosin's ouster, Savage and three others -- soon dubbed the Gang of Four -- ran Financial Products on an interim basis, with Matthews assigned to keep tabs on them. Savage remained committed to running the place under the same rigorous, risk-reducing code that Sosin's group had cultivated.

But not everything stayed the same. Under a new operating agreement imposed by Greenberg, AIG owned Financial Products as a subsidiary, and the parent company received 70 percent of the profits, up from 62 percent.

Greenberg also wanted to change the way Financial Products' employees divvied up its share of the profits. Under the previous arrangement, Sosin and his crew had the right to book immediate profits on the long-term deals. Greenberg thought there was a powerful incentive to go after millions of dollars in short-term gains while leaving AIG and its shareholders responsible for potential losses for years to come.

Savage agreed with Greenberg that Financial Products employees should defer half of their compensation for several years, depending on the length of the deals being done -- an arrangement that would still yield hefty paychecks as the firm's profits soared in the coming years.

Savage said he welcomed Greenberg's input. "I would give Greenberg a lot of deference," Savage said. "Hank Greenberg's a great man. And I'm willing, when I talk to him, to say, you know, I'm in the presence of a great man and that's worth something."

9: 'We're Not Hiding Anything'

Financial Products found its profit margins shrinking on some transactions as competitors succeeded in duplicating its services. Like Sosin, Savage urged his talented team to devise ever more complicated transactions, often in untapped areas.

Financial Products was becoming a chameleon, taking on the coloration of whatever problem it was solving for its diverse clients. The firm pushed further into structured investments, hedge fund deals and guaranteed investment contracts, or GICs. The GIC deals involved loans from municipalities that had temporary surpluses of cash. Financial Products reckoned that it could borrow that cash, pay state and local governments more than they could make otherwise and then use the money for lucrative deals for itself, somewhat like a bank.

The firm also began applying its complex formulas to the movement of single stocks. Using such structured finance enabled clients, such as Microsoft, to better manage their stock prices. It also helped Financial Products to more than double its profits in three years -- to $323 million in 1998, from $140 million in 1995.

A new unit, called the Transaction Development Group, did its part by taking advantage of gaps between securities regulation and tax laws in the United States as well as in other countries. Financial Products associates noticed, for instance, they could make money by exploiting differences between the U.S. and British definitions of stocks and bonds. A security that met the definition of stock in Britain could pay tax-free dividends to shareholders. The same security in the United States was regarded as a bond that provided tax-deductible payments. A Financial Products client would get both tax breaks. The firm used the capital raised from that line of business, in part, to finance other operations.

"We're the guys there who are going to try to exploit that," Savage said. "We dot our i's, we cross our t's, we tell everybody what we're doing. We're not hiding anything. . . . However, we're getting different treatments in different jurisdictions and we're making money as a result."

But even as Financial Products experimented, Savage said, he continued to stress the need to minimize risk. "That was one of the things that really marked this company, was the rigor with which it looked at the business of trading. . . . There was an academic rigor to it that very few companies match," he said.

"It was Howard Sosin who said, 'You know, we're not going to do trades that we can't correctly model, value, provide hedges for and account for.' "

Though the language of caution was the same, the firm's drive toward novel and ever more lucrative deals led down the path of greater risk. The beautiful machine was about to crack.
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Staff writer Bob Woodward contributed to this report.
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For more, go to: www.washingtonpost.com/wp-srv/business/risk/index.html
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The Boston Globe
BUSINESS INTELLIGENCE
"What will business as usual look like?"
By Robert Weisman, Boston Globe Staff, March 15, 2009

Are you ready for the new normal?

Even as the casualties pile up, business leaders are sifting through the rubble of the current economic crisis for clues to what the postrecession business landscape might look like, what role their companies might play, and how to manage going forward.

"People are going to be in a rebuilding mode," said Alan Trefler, founder and chief executive of business software company Pegasystems Inc. in Cambridge, who predicted a swing back to business basics. "Both people and companies are going to spend the next couple of years looking at, and reinforcing, their core."

In an essay titled "The new normal" in McKinsey Quarterly, the online journal of strategy consulting firm McKinsey & Co., the firm's worldwide managing director Ian Davis suggested the coming era would be characterized by much less financial leverage, much more government regulation, a new wave of technological innovation, and a shift away from US consumption as the global growth engine.

"It is increasingly clear that the current downturn is fundamentally different from reces sions of recent decades," Davis contended. "We are experiencing not merely another turn of the business cycle, but a restructuring of the economic order."

Other captains of commerce, whether focused on survival or positioning themselves for renewed expansion, have taken to calling the economic tumult a "reset." That was the word used by Steve Ballmer, chief executive of software giant Microsoft Corp. on a recent visit to the company's New England Research and Development Center in Cambridge. Ballmer, like Davis, said there will be substantially less debt in the economy when it finally snaps back to growth mode.

"I think everybody understands there was too much borrowing," Ballmer said in an interview. "That borrowing's going to come out of the economy. Debt as a percentage of GDP [gross domestic product] is coming down. I don't think anybody thinks that money's coming back into the economy. So we're going to reset, and then productivity and innovation will drive GDP off that new level."

The wringing of debt from the financial system will be a sobering change, especially for businesses - like banks and real estate - that ballooned with the credit bubble. But even more wrenching for many will be stepped-up regulation, especially of Wall Street investment firms and their portfolios of arcane financial instruments. Accounting reforms like the Sarbanes Oxley Act, passed in the aftermath of dotcom-era abuses, did little to shield investors from the packaged scourges of mortgage-backed securities and collateralized debt obligations.

"Asset-based securities turned out to be critical in increasing the velocity of lending," Harvard Business School professor William A. Sahlman told students during the school's first Research in Action Day, a series of informal faculty presentations earlier this month. "Through alchemy, basically, people were able to make a profit."

For regulators, the trick will be to rein in the excesses without smothering economic recovery. They'll need an overarching regulatory framework, and the help of managers and corporate boards who must patch up a business model that is badly broken, Sahlman maintained. That will mean more transparency and disclosure, along with better incentives and controls that align behavior with outcomes.

As debt deflates to healthier levels and regulators police financial transactions, it will be up to the innovators - the same folks who brought us personal computers and the Internet - to reignite the economy through new products, services, and efficiency advances. The breakthroughs this time could arise from emerging fields like genetics and alternative energy, as well as information technology.

Businesses will use technology to boost productivity and fuel their growth. "Organizations will figure out a way to squeeze out profit by increasing scale," said Trefler at Pegasystems. "We will see a return of entrepreneurs, but we will not again see the open checkbooks of the mega-venture funds. The new entrepreneurs will be scrappy and pragmatic about how they engage with customers."

They will also have to be global, because tapped-out US consumers will no longer be able to power world economic growth to the extent they have in the past. "Consumption depends on income growth, and US income growth since 1985 had been boosted by a series of one-time factors - such as the entry of women into the workforce, an increase in the number of college graduates - that have now played themselves out," Davis wrote in his McKinsey Quarterly essay.

American companies will need a rebound of economies in Asia and others regions, most of which have been brought low by the global slump, to drive their future expansion.

Depending on growth engines beyond our borders - like other aspects of the new normal - will take some getting used to. But business leaders understand that there will be no going back to the debt-fueled bubble economy.

"Things had been frothy for a while, frankly," Trefler said.
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Robert Weisman can be reached at weisman@globe.com.
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"Lobbyists boost D.C. spending"
By Casey Ross, Boston Globe Staff, June 9, 2009

Despite the recession, Massachusetts companies and interest groups have sharply increased spending in Washington, D.C., to influence how federal officials distribute more than $1 trillion to revive the lagging economy.

In the first three months of the year, local firms spent $14.4 million to lobby the US government, according to federal records, 21 percent more than in the first quarter of 2008. Also, the number of Massachusetts companies hiring lobbyists increased 14 percent this year, to 320.

"That spending is up this year is a telling reminder that lobbying is a very different kind of industry," said Sheila Krumholz, executive director of the Center for Responsive Politics, which monitors the influence of money in politics. "It may seem counterintuitive during an economic decline, but many companies feel it's a good way to maximize their chances at shaping legislation that will affect them."

Industry specialists gave several reasons for the increased spending on lobbying, including a change in presidential administration that brought new faces to the seats of power and a new bounty of government spending initiatives, most prominently the $787 billion stimulus package.

Companies and other parties that lobby the US government are required to disclose their activities quarterly to the US Senate. But the disclosure forms provide few details on the filer's interests, other than to indicate generally which areas of federal policy or certain proposed laws or rules they are lobbying on.

Still the forms show that some firms have nearly doubled their spending over last year, while others were compelled to hire lobbyists for the first time because of conditions in their sector.

First Wind Energy LLC, a Newton-based firm that runs wind farms nationwide, hired Washington lobbyists after the market for tax credits that finance its projects collapsed during the larger credit crisis last year, according to the records. First Wind spent $120,000 to get access to US lawmakers who were working on a proposal to revive the use of tax credits for renewable-energy projects.

"This is absolutely critical both to our company and to the growth of renewable energy across the country," said Carol Grant, vice president of external affairs for the company, which is seeking funding to build four wind farms in New England.

Grant said First Wind representatives met with lawmakers to discuss problems with the financial markets and ways to restore credit. The Obama administration is still developing guidelines for the energy incentives approved in the legislation.

The top spender in the first three months of the year was Waltham-based Raytheon, which reported its lobbying costs increased to $1.36 million, 24 percent higher than in the first quarter of 2008, according to disclosure forms filed with the US Senate. The firm reported lobbying numerous agencies, from the Department of Defense to the Federal Aviation Administration to the CIA, on defense and transportation matters, as well as on the economic stimulus bill.

A Raytheon spokesman said the company would not comment on its lobbying spending.

Massachusetts Mutual Life Insurance Co. reported one of the largest increases in lobbying costs: $790,000 in the first quarter, 41 percent higher than the $560,000 it spent a year earlier. MassMutual indicated it lobbied lawmakers, the Department of Labor, the Federal Reserve, and other agencies on economic stabilization proposals and issues related to pension reform and taxation.

A spokesman declined to discuss the firm's lobbying activities. A financial services powerhouse, MassMutual did not apply for or receive any of the funds the US government set aside to revive the ailing sector.

Lobbying activity typically increases with the arrival of a new president, as the incoming administration launches an array of policy initiatives and spending programs.

About 60 Massachusetts entities, ranging from energy companies to local governments to universities, reported lobbying officials on the stimulus program, although it is difficult to get an accurate count because of the vagueness of the information on the disclosure forms.

Sensitive to concerns that lobbyists would influence the course of the stimulus package, President Obama issued an executive order requiring federal agencies to post online their contacts with lobbyists over the $787 billion plan. He also created a federal oversight board to monitor how the money is spent.

Other matters Massachusetts firms lobbied on include healthcare reform and regulations affecting drug companies, the $700 billion financial industry bailout, and energy and environmental issues.

Among other firms that increased lobbying activity were:

. Sepracor Inc., a pharmaceutical company based in Marlborough, spent $1.3 million, up from $20,000 in the first quarter of 2008. The firm indicated it lobbied members of Congress on Medicare and Medicaid reimbursement, according to federal disclosure forms.

Sepracor officials did not return a call seeking comment. The company makes drugs for the treatment of allergies and asthma. In 2008, the federal agency that oversees Medicare cut the reimbursement rate for Xopenex, its main asthma medication.

. State Street Corp. reported spending $210,000 on lobbyists, a 24 percent increase, according to Senate records. State Street said its records indicate its lobbying expenses were flat.

The firm reported lobbying members of Congress on international tax policies, economic recovery legislation, and banking regulations. A spokeswoman said the firm also lobbied lawmakers on rules relating to pensions and investment funds. The company has applied to return the $2 billion it received from the US Treasury last fall as part of the government's program to inject capital into the financial system.

. Vertex Pharmaceuticals Inc. of Cambridge increased lobbying by $80,000, to $180,000, citing interest in legislation related to drug safety and hepatitis C.
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Casey Ross can be reached at cross@globe.com.
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"Subprime brokers resurface as loan adjusters"
By Peter S. Goodman, New York Times, July 20, 2009

LOS ANGELES - Jack Soussana delivered staggering numbers of mortgages to homeowners during the real estate boom, amassing a fortune.

By Soussana’s own account, his customers fared less happily. He specialized in the exotic mortgages that have proved most prone to sliding into foreclosure.

Yet the dangers assailing Soussana’s clients have yielded fresh business for him: Late last year, he and his team - ensconced in the same office where they used to broker mortgages - began working for a loan modification company. For fees reaching $3,495, with most of the money collected up front, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,’’ said Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. “You know, ‘You got screwed. Now, we’re able to help you out because we understand your lender.’ ’’

Soussana’s partners at FedMod, as the company is known, were also products of the formerly lucrative world of high-risk lending. The managing partner, Nabile Anz, previously co-owned Mortgage Link, a California subprime lender, now defunct.

Jeffrey Broughton, one of FedMod’s initial partners, served as director of business development at Pacific First Mortgage, a lender that extended so-called Alt-A mortgages for borrowers with tarnished credit for Countrywide Financial, which lost billions of dollars on bad mortgages before being rescued in an acquisition.

FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

FedMod and other profit-making loan-modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company.

The suit asserts FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans, and failed to promptly refund fees.

Anz, who is challenging the FTC lawsuit, acknowledged FedMod’s business went “horribly wrong’’ but maintains it made genuine efforts to help. He said FedMod has refunded fees to 3,000 dissatisfied customers, while modifying 1,500 mortgages.

FedMod is among dozens of similar companies that have been accused by state and federal authorities of fraudulent practices.

Many of the companies formerly operated as mortgage brokers. Since October, California has ordered 210 businesses and individuals to stop offering loan modification or foreclosure prevention services, because they lacked a real estate license, as required by the state.

The California Department of Real Estate warns consumers that many dubious loan modification companies have organized themselves as law firms solely to allow them to collect upfront fees, even though the lawyers have little, if anything, to do with the services provided.

The department cautions consumers against hiring such companies.

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The Corporate Elite & Uncle Sam at their WORST!

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www.pbs.org/moyers/journal/04032009/profile.html
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Ben Bernanke has played a central role in the government's massive intervention to stimulate the economy.
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www.boston.com/business/gallery/bernanketimeline/
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www.boston.com/business/gallery/2_5_09_CEO_pay/
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10/26/2008

"Jonathan Melle", who lives in the bottom 10% of America's income & wealth set, via the U.S. Government, which has over $10 trillion (nominal) and counting higher in federal government national debt, now owns shares in my nation's corporate elite financial institutions, including, but not limited to, the following list of America's nine biggest banks:

1. Citigroup

2. Bank of New York Mellon

3. Goldman Sachs

4. Morgan Stanley

5. JPMorgan Chase

6. Bank of America

7. Merrill Lynch

8. Wells Fargo & Co.

9. State Street

So, where did my ownership stake go? Did it go to the average American in the bottom 90% of wealth & income? Answer: NO! Did it go to pay raises to the already wealthy corporate executives and the top 10% of Americans in the top 10% of wealth & income? Answer: Yes.

Our "respresentatives" on Capitol Hill placed a gigantic LOOPHOLE in the record setting corporate bail out law: There are no restrictions in place on across the board pay! That means that "I, Jonathan Melle" just redistributed my "wealth" & income to already wealthy & high income people!

My government just took money from "me" and gave it to "the guy who owns 2+ homes". I am very unhappy that I am a "have not" whose government redistributed my income to the corporate elite!

In Dissent!
Jonathan Melle

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The New Hampshire Union Leader, Saturday, October 25, 2008, Nation, Page A3

"Biggest banks planning bonuses anyway"

New York City, New York (AP) -

Despite the Wall Street meltdown, the nation's biggest banks are preparing to pay their workers as much as last year or more, including bonuses tied to personal and company performance.

So far this year, nine of the largest U.S. banks, including some that have cut thousands of jobs, have seen total costs for salaries, benefits and bonuses grow by an average of 3 percent from a year ago, according to an Associated Press review.

Taxpayers have lost their life savings, and now they are being asked to bail out corporations," New York Attorney General Andrew Cuomo said of the AP findings. "It is adding insult to injury to continue to pay outsized bonuses and exorbinant compensation."

Banks will decide what to pay out in bonuses in the coming months. Just because they have been accruing money for incentive pay does not mean they will pay it out in full.

That there is a rise in pay, or at least not a pronounced dropoff, from 2007 is surprising because many of the same companies were doing some of their best business ever, at least in the first half of last year. In 2008, each quarter has been weaker than the last.

"There are, of course, expectations that the payouts should be going down," David Schmidt, a senior compensation consultant at James F. Reda & Associates. "But we have not seen that show up yet."

Some banks are setting aside large amounts.

At Citigroup, which has cut 23,000 jobs this year amid the crisis, pay expenses for the first nine months of this year came to $25.9 billion, 4 percent more than the same period last year.

Even if you subtract what the bank has shelled out in severance pay and other costs related to the job cuts, overall pay is only slightly lower this year.

Typically, about 60 percent of Wall Street pay goes to salary and benefits, while about 40 percent goes to end-of-the-year cash and stock bonuses that hinge on performance, both for the individual and the company, said Brad Hintz, a securities industry analyst at Sanford Bernstein and a former chief financial officer at Lehman Brothers.

"The fundamental goal of the compensation plan is to allow an employee to get wealthy," Hintz said. He also pointed out that the workers' pay is supposed to be "exposed to the risk of the parent company."

This should be the year where that structure is tested.

The financial crisis, brought about by mountains of bad mortgage-related assets, caused banks to falter and fail and lending to dry up and prompted Congress to pass a $700 billion bailout package.

As part of that, government is pouring $125 billion through stock purchases into the nine large financial companies cited in AP's review of compensation.

Besides Citigroup, those include Bank of New York Mellon, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Merrill Lynch, Wells Fargo & Co., and State Street. Another $125 billion will be made available to other banks.

Those taking cash from Uncle Sam must follow guidelines limiting executive pay, including a ban on golden parachutes for departing executives. No restrictions are placed on across the board pay.

In total, those nine banks had pay-related costs of $108 billion for the first three quarters of the year.

The average increase came to just shy of 3%, according to AP figures.

Some banks have set aside less.

Merrill Lynch's costs for pay were $11.2 billion for the first nine months of the year, 3 percent less than last year. That nearly matches the company's $11.7 billion in overall loss so far this year.

Merrill spokesman William Halldin told the AP that the company thought a better measure would be to compare the 2008 compensation expense with the first three quarters of 2006.

That would reflect an 18% decline from Merrill's last profitable year, he said.

Bank of New York Mellon sharply curtailed its bonus expenses in the third quarter.

That cost was $242 million for the three months, down 30 percent from the second quarter and off 37 percent from last year.

Spokesman Ron Gruendl said the decline was "due to operating results and a reaction to the current market environment."

But at the same time, the bank's total compensation cost has climbed 44 percent to nearly $4 billion because of higher salaries.

If companies decide to reduce bonuses, that could be a boon to the banks' finances, because that would help the bottom line, said Jack Ciesielski, who writes the financial newsletter the Analyst's Accounting Observer.

Already, lawmakers are doing all they can to shame the banks out of paying anything. House Financial Service Committee Chairman Barney Frank, D-Massachusetts, has called for a freeze on all Wall Street bonuses. Senator Carl Levin, D-Michigan, wrote this week to U.S. Treasury Secretary Henry Paulson saying it was "unacceptable for financial institutions ... to maintain past levels of compensation."

On Wednesday (10/22/2008), insurer American International Group agreed to freeze payouts from a $600 million bonus pool and compensation packages for the company's chief executive and chief financial officers, as well as cancel unnecessary corporate trips and junkets.

AIG, which is not part of the AP review of bank compensation costs, has received government loans topping $120 billion to keep it from collapse. Cuomo calls it a "test case" for stopping unfair pay.

Certainly, workers are uneasy about whether the bonus money will really come. Many traders, bankers and financial advisers have received little or no word about how big their bonuses might be, or whether they will come at all.

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"It's No Joke: Fed Hires Failed Bank Executive: Heckuva Job, Fed?"
By JUSTIN ROOD, abcnews.go.com, November 4, 2008

The Federal Reserve Bank is drawing jeers for hiring a former top executive from the now-defunct investment bank Bear Stearns to help it gauge the health of other banks.

"How's this for sweet irony?" business publication Portfolio.com needled the pick.

Michael Alix was head of risk management for Bear Stearns for two years until the institution imploded this spring, a victim of its (risky) subprime-mortgage related investments.

Last Friday, the Federal Reserve Bank of New York quietly announced it had hired Alix to advise it on bank supervision.

"You're kidding me," said economic policy expert Dean Baker, of the Washington, D.C.-based Center for Economic Policy and Research. While he didn't know Alix personally, he said, "You would think [his record] would be a big strike against him."

The collapse of Bear Stearns led to its pennies-on-the-dollar buyout by J.P. Morgan Chase; the bank's shareholders saw their wealth plummet. To facilitate the buyout, the Fed agreed to assume potential billions in losses on bad Bear Stearns investments.

"[Alix] was the guy on the mast charged with yelling 'iceberg' just before the Titanic introducted its bow to a floating chunk of ice," wrote financial expert and blogger John Carney on the web site Clusterstock.com, where he flagged the hire.

The Fed's move "is sure to put to rest the notion that there are no second acts in American life," Carney observed drily.

A spokesman for the Federal Reserve declined to comment.

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"Treasury Is Working To Widen the Rescue: A Dramatic Expansion Beyond Banking"
By David Cho, Peter Whoriskey and Neil Irwin, Washington Post Staff Writers, Friday, November 7, 2008; A01

The federal government is preparing to take tens of billions of dollars in ownership stakes in an array of companies outside the banking sector, dramatically widening the scope of the Treasury Department's rescue effort beyond the $250 billion set aside for traditional financial firms, government and industry officials said.

Treasury officials are finalizing the new program, which could ultimately involve hundreds of billions of the $700 billion rescue package, though the initiative is unlikely to be announced until the end of next week at the earliest.

Two industry sources familiar with the planning said the Treasury is holding off because it wants to make sure President-elect Barack Obama is on board and will not reverse the course once he takes office in January. But an administration official contested that explanation, saying the Treasury simply wants to give its initial bank plan a chance before injecting more money into the financial system.

Since the announcement of the program to inject capital into banks, a number of industries, including automakers, insurers and specialty lenders for small businesses have approached the Treasury with hat in hand. Some have been turned away because they are not banks and thus not eligible for capital.

The new initiative would make it easier for the Treasury to aid a wider variety of firms if their troubles put the wider financial system at risk, government and industry officials said. These companies would still have to be financial firms that fall under federal regulators.

Several companies, including GMAC, an auto financing company, and CapitalSource, a commercial lender in Bethesda, are seeking ways to restructure themselves as banks or thrifts, which entails submitting to much tighter federal regulation. If other firms follow suit, the trend would vastly expand government oversight into a variety of industries.

The Treasury is also making progress on an initiative that would provide relief to homeowners at risk of foreclosure. Several proposals are on the table, including one crafted by Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., who wants to spend about $40 billion to modify the mortgages for as many as 3 million homeowners. But several government and industry sources close to the matter said Treasury officials view Bair's plan as flawed and are seeking ways to revise it.

Designing these new programs is difficult because the Treasury will have to hand off the $700 billion rescue package, approved by Congress last month, to the new administration before officials have finished mapping out how to use the money.

Treasury officials said they have reserved space within its imposing building directly east of the White House for the Obama economic team to coordinate efforts but have not yet heard from his camp on who will staff the office. Obama has planned an emergency meeting of his senior economic team in Chicago today to discuss the global financial crisis.

Industry sources and a former senior Treasury official said the department deliberately slowed the decision-making process on new rescue programs two weeks ago to accommodate the interests of the incoming administration. The complexity of the issues and a tremendous volume of input and requests for money from all kinds of industries also have complicated matters.

"The last thing you want to do is start something and have the new guys unravel it in 60 days. It sends mixed messages to the markets," the former Treasury official said. "So I think the thinking was, 'Let's kick the can down the road to make sure we are on the right track.' "

A Treasury official said the department has been briefing Obama on the crisis since late July and explaining the administration's approach to the crisis. But his position on the crisis is only one factor among many being considered by the Treasury, the official said.

"Continuity is in the best interests of the markets and the economy," Treasury spokeswoman Michele Davis said. "But a change in an administration is likely to bring some changes, and we all recognize that."

Treasury also wants to give its initial $250 billion program a chance to work, government officials said. Those who engineered this strategy think it is far too early to say whether it has worked but say it has shown enough promise to continue expanding the effort.

The efforts have tentatively improved conditions in financial markets compared with the paralysis that was taking hold in the middle of last month. And while many on Capitol Hill have criticized decisions by some banks to use the federal money to take over weaker competitors, leaders of the Treasury and Federal Reserve see benefits to that activity because this has reduced uncertainty in the marketplace by resolving the fate of banks that otherwise would have failed.

But officials at the Treasury and the Fed face a challenge in deciding who to help outside the traditional banking sector. With banks, the determination is simpler for regulators because they are more familiar with the operations of these firms. Officials have less experience overseeing other kinds of companies.

The companies that have the best chance to receive government capital could be those that resemble banks -- in that they borrow money and then lend it to businesses or consumers -- even if these financial firms are not chartered as banks. Treasury officials are trying to evaluate which companies could become a bank or thrift holding company and be viable in the long run with government help, as opposed to those fated to fail.

Normally, the process of acquiring a charter as a bank or thrift holding company takes at least one month. But the Fed has shown a willingness to act much faster. Two months ago, it approved the conversion of investment banks Goldman Sachs and Morgan Stanley into bank holding companies in a matter of hours.

Toni Simonetti, a spokeswoman for GMAC, said her company has few options for raising money other than from the government and is now applying to become a bank holding company. The company's financial troubles mean it cannot lend to dealerships that need loans to buy vehicles for their lots or to people who want to buy cars.

"We've had such a difficult time getting access to funding," Simonetti said. "All of these financing tools are now at the government, but you have to be a bank holding company to have access to them. . . . We are definitely at the government's mercy." GMAC has been in close consultation with the Treasury and Fed about its plans to restructure, she said.

GMAC and other firms could face difficulties because of a long-standing rule that a commercial business cannot own more than 24.9 percent of a bank. General Motors owns a 49 percent stake in GMAC.

Moreover, to become a bank holding company, firms would be required to raise more capital. The Fed would prefer they raise at least some private money in addition to any injection from the Treasury. Yet the troubled markets make it hard for a financial company to raise private capital.

Some insurers, such as Prudential and MetLife, are organized as a bank or thrift and would be permitted to receive a capital injection from the government. Insurers that do not fit the definition, however, would have to restructure themselves to participate. Those who do not could be placed at a disadvantage.

The Hartford Financial Services Group, the large Connecticut-based insurer, is not a thrift or a bank, but a spokeswoman said it would consider participating in a federal capital injection program.

"We would evaluate participating, should it be available to us," Hartford spokeswoman Shannon LaPierre said.

Likewise, executives with insurer Lincoln Financial Services Group signaled they would consider restructuring as well. In an earnings call last week, president and chief executive Dennis R. Glass was asked whether he'd be reluctant to become a bank holding company to participate in the federal program.

"Based on what I know," he said, "the answer is we would do that."

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"THE INFLUENCE GAME: Lobbyists adapt to power shift"
By SHARON THEIMER and PETE YOST, AP, Friday, 11/14/2008

WASHINGTON – Wanted: Democratic congressional aide seeking new career. Must have strong powers of persuasion, excellent connections and good marksmanship. Contact the National Rifle Association's government affairs office for details.

It's clear times have changed in Washington when the nation's biggest gun-rights lobby — long considered Republican-leaning — points out the Democrats on its team and only half-jokingly talks about hiring more.

"We're always looking for good ones," NRA executive vice president Wayne LaPierre said when asked if he's seeing Democratic staffers leaving Capitol Hill to fill a growing demand for Democratic lobbyists. "If they do, give us a call."

The Democrats' election sweep — they gained the White House and increased their majorities in the House and Senate — is shaking up the capital's $3 billion-a-year lobbying industry. After eight years of a Republican administration and shifting power in Congress, Washington's 16,000 registered lobbyists must now work to capitalize on, or cope with, one-party control.

"We look at any new administration as a time of opportunity in the lobbying community, and certainly here," said Gregg Hartley, vice chairman and CEO of the bipartisan lobbying firm Cassidy & Associates. He said he would love to see an influx of applications from Democratic aides. "We have shopped to add very high quality, strong individuals, but they are enjoying being in the new majority."

Jim Albertine, a longtime Washington lobbyist and former president of the American League of Lobbyists, said there's no question that lobbying firms will load up with Democrats, if they haven't already.

"Having said that, however, with the new lobby rules, no matter if you come from D or R, you're still going to be restricted in what you're doing in the first year," Albertine said. That could give established lobbyists an edge over newcomers from Capitol Hill: As the new administration moves on its agenda, "if you have a new hire, you're not going to be able to use that person in the way you want to," he said.

Many lobbyists began positioning themselves before the election. President-elect Barack Obama's stated antipathy toward lobbyists may keep many of them from winning high-profile posts in his administration, but it hasn't kept them from promoting their policy positions to Obama's team.

The American Farm Bureau Federation, like most major trade groups, tries to keep a bipartisan balance. It has staff members who worked and volunteered in the campaigns of Obama and his Republican rival, Sen. John McCain. The federation and its state farm bureaus already are talking to Obama's transition team about its priorities, including energy production, trade and how government carries out the new farm bill, chief lobbyist Mark Maslyn said.

"It starts long before this moment. And many of the people we have known for years and years," Maslyn said. "Because we regularly work with both sides of the aisle, we work with lawmakers who want to see those positions advance as well: members of the Democratic caucus as well as the Republican caucus. As I tell a lot of people, this is a relational business."

Likewise, the Edison Electric Institute, a lobbying group for electric utilities, talked with both campaigns and already has been in touch with Obama's transition team. Issues it is trying to get on the Obama team's radar include the need for more power lines.

The Obama agenda of change may apply to lobbying tactics as well.

"Lobbying a Democratic government is different because in most instances it's predisposed to be skeptical of what business interests are advocating," said Mark Irion, CEO of Dutko Worldwide. "It's not enough to say Corporate Titan Inc. supports something." With Democrats, it helps to show grassroots support from coalitions of people, he said.

Offering a glimpse of how the Edison Electric Institute may promote one of its top priorities, spokesman Jim Owen said the group sees renewable energy as a way to create the kind of "green jobs" Obama championed during the campaign. To use the renewable energy that utilities generate, transmission lines are needed to connect it to the power grid, he said.

Though seldom willing to name names, lobbyists are weighing in on potential Obama appointees, in some cases describing the kinds of people they would like to see in key jobs or going so far as offering to help recruit and vet candidates.

Key posts for the Farm Bureau include the agriculture and energy secretaries, Environmental Protection Agency administrator, U.S. trade representative and second- and third-tier appointments, the "sub-Cabinet" positions such as deputy secretaries and deputy administrators, assistant administrators and undersecretaries that tend to be the point people and experts on specific industry issues.

Top lobbying goals for the American Association for Justice, formerly the Association of Trial Lawyers of America, include asking the Obama administration to undo any rules the outgoing Bush administration adopts to try to limit lawsuits. It wants Congress and Obama to outlaw mandatory binding arbitration in consumer contracts and reverse a Supreme Court decision making it harder for consumers to sue the makers of FDA-regulated medical devices.

The American Medical Association's Washington office communicated with both presidential campaigns and now is talking to Obama's transition team about key issues such as Medicare reimbursement, preventive health care and the uninsured, said its incoming president, Dr. Jim Rohack, a physician in Temple, Texas.

Though Democrats control Congress, AMA lobbyists won't ignore Republicans, Rohack said, noting that Senate Democrats lack a filibuster-proof 60 votes. The Financial Services Roundtable plans to do the same.

Some lobbyists are now seeing people they worked with in government years ago back in positions of power. Dan Glickman, chief executive of the Motion Picture Association of America, was agriculture secretary under President Bill Clinton, whose administration is being tapped by Obama for expertise as he prepares to take office.

Others are not so well-positioned with Obama's team, and are making their views known through other channels.

The NRA, which endorsed McCain, is lobbying sympathetic congressional Democrats to try to head off any move toward new gun controls. When it comes to lobbying Obama's transition team, "we're talking to whoever we know who talks to them," LaPierre said.

The current climate will make it difficult for new Republican lobbyists, but could prove lucrative for those who represent business.

Wright Andrews, a former Democratic congressional aide who lobbies on banking issues, said the power shift will require Republican lobbyists to hunker down, working at the margins of legislation to make modest changes and forming coalitions between GOP lawmakers and conservative Democrats to play a more defensive game.

"We are looking at more government regulation," Andrews said. "I would certainly expect that after many people see the new administration's agendas and proposals, they will come clamoring to K Street, saying, 'Save us.' You will see business interests socked like they haven't been in a long time."
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Associated Press writer Jim Drinkard contributed to this report.
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"Hold greedy executives accountable"
The Berkshire Eagle - Letters
Monday, November 17, 2008

I urge all senators and representatives to hold bank, corporate and financial institution executives accountable for knowingly and incompetently negotiating high risk and fraudulent mortgage transactions, often against the advice of a few honest colleagues, for the purpose of stuffing their own bank accounts and excessively accumulating material wealth.

Gretchen Morgenson, business and financial editor of the New York Times, describes the decline and collapse of Merrill Lynch, as well as mentioning other troubled institutions, in her Nov. 8 article, "How the thundering herd faltered and fell." Gretchen could also be heard on the Nov. 13 airing of NPR's "Fresh Air." She talked about a mortgage underwriter from Washing Mutual who was pressured to approve loans which the underwriter deemed unacceptable.

These executives are criminals and should be held accountable. They need to pay for the financial mess which they have created as a result of their fraudulent and incompetent practices. I encourage citizens to write letters urging representatives and senators to create legislation requiring executives to be held accountable and pay large fines and possibly incur prison sentences for their greed-mongering acts which have caused great hardship to millions of hard working low and middle-income citizens.

DEBORAH SALEM
Great Barrington, Massachusetts

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"Treasury Pays $33.56 Billion to 21 Banks in Second Round of Disbursements From Rescue Fund"
By MARTIN CRUTSINGER, The Associated Press, WASHINGTON, 11/17/2008

The government said Monday it has supplied $33.56 billion to 21 banks in a second round of payments from the $700 billion rescue program, and announced a deadline for another 3,800 banks to apply for funds.

The Treasury Department said a category of privately held banks will have until Dec. 8 to apply for the government to purchase shares of their stock as a way to bolster their balance sheets. The deadline for the larger publicly traded banks was Nov. 14.

The new Dec. 8 deadline will apply to about 3,800 banks that are so-called C-Corps institutions for the part of the tax code that applies to them. Another 2,500 S-Corps institutions also will be able to apply for money, but Treasury has not set the deadline for their applications.

The new deadline was announced as Treasury confirmed a second round of government stock purchases that follow the initial $125 billion it allocated to nine of the country's largest banks. The rescue program now has earmarked payments of $158.56 billion to banks.

Treasury Secretary Henry Paulson announced last week the administration was abandoning the initial centerpiece of the rescue program, the purchase of troubled mortgage-backed securities from banks in an effort to bolster their balance sheets.

That was the only program Paulson mentioned as Congress debated the rescue package, which was approved on Oct. 3. However, Paulson later said the severity of the financial crisis made him realize it would take too long to get the troubled asset program into operation.

In its place, he announced on Oct. 14 that the government would buy shares of bank stock as a way to quickly inject fresh capital into the institutions.

He pressured nine of the largest banks to participate in the program during an Oct. 13 meeting at the Treasury Department, arguing that they should go along with the idea to remove the stigma other banks might feel in getting money from the government.

The rescue program has drawn a significant amount of criticism from lawmakers who have objected to the sudden switch in emphasis and what they see as a lack of restrictions on the funds. The critics contend that banks can simply hoard the fresh capital or use it to pay dividends to their shareholders or acquire other institutions rather than using it to boost their lending.

Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to testify Tuesday before the House Financial Services Committee to answer questions that have been raised about the bailout program.

The Treasury announcement on Monday said the largest stock purchase in the second round was $6.6 billion paid to U.S. Bancorp of Minneapolis. The smallest stock purchase was $9 million paid to Broadway Financial Corp. of Los Angeles.

Many of the banks in the second group of 21 already announced that the government was purchasing stock after they had reached preliminary agreements. Treasury does not make any announcement until after the final legal documents are signed, a process that can take a month from when the preliminary agreements are reached.

The department noted that the $10 billion scheduled to be paid to Merrill Lynch & Co. has been deferred pending the completion of that company's acquisition by Bank of America Corp.

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A BOSTON GLOBE EDITORIAL
"Memo to Congress: Act now"
November 18, 2008

HOUSE Financial Services Committee chairman Barney Frank describes the economic recovery plan as a three-legged stool: thaw the credit markets; stop the hemorrhage of foreclosures; and stimulate the economy. Without all three legs standing, the recovery will be shaky, at best. So it is worrisome that so far the $700 billion bailout plan for distressed financial institutions is falling short of its goal.

Banks that are getting bailout money haven't been quick enough to lend it out to companies and consumers. Some of the banks are hoarding the cash, or are using it to buy up weaker rivals or repair their own balance sheets.

Plans to help people threatened with foreclosure also have foundered. Some troubled mortgages have been sliced into new products and traded as securities so many times that they can't be reassembled to take advantage of new terms even if mortgage servicers were willing to refinance. Meanwhile, a record 1.2 million homes were in foreclosure during the second quarter of 2008.

And now we learn that congressional Democrats do not believe they can pass even a modest $50 billion stimulus package that would immediately create jobs and help states that have been slashing their own budgets. At best, the lame-duck session convening this week will address expiring unemployment benefits, but an aggressive infusion of cash may be put off until President-elect Barack Obama and a new Congress take office in a little over two months.

That is too long to wait. Postponing action on the economy will only prolong and deepen the recession and further erode consumer confidence, already at historic lows. The situation is urgent. Last week, three American cities - Philadelphia, Phoenix, and Atlanta - asked Treasury Secretary Henry Paulson for another $50 billion in emergency funding to avoid budget defaults.

On Friday, a frustrated Federal Deposit Insurance Corp. chairwoman Sheila Bair offered her own plan to encourage mortgage servicers to lower interest rates on troubled loans to as low as 3 percent, which she said could help 1.5 million distressed homeowners avoid foreclosure. Unfortunately, Paulson is resisting using any of the bailout money for direct aid to homeowners. Frank plans to call Paulson, Bair, and several others to a hearing today to review the progress of the recovery plan.

When he visited the Globe last month, Frank was cautiously optimistic that if a stimulus plan of $150 billion could be passed in mid-November, and if mortgage servicers aggressively reduced foreclosures, the economy could hit the bottom of the recession next summer, and then turn around. That is too many ifs for comfort.

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Thomas Sowell: "Politicians could worsen economic woes"
By THOMAS SOWELL, Op-Ed, The NH Union Leader, 11/26/2008

Barack Obama says that we have to "jolt" the economy. That certainly makes sense, if you take the media's account of the economy seriously -- but should the media be taken seriously?

Amid all the political and media hysteria, national output has declined by less than one-half of one percent. In fact, it may not have declined even that much -- or at all -- when the statistics are revised later, as they often are.


Click for Editorials & Op-EdsWe are not talking about the Great Depression, when output dropped by one-third and unemployment soared to 25 percent.

What we are talking about is a golden political opportunity for politicians to use the current financial crisis to fundamentally change an economy that has been successful for more than two centuries, so that politicians can henceforth micromanage all sorts of businesses and play Robin Hood, taking from those who are not likely to vote for them and transferring part of their earnings to those who will.

For that, the politicians need lots of hype, and that is being generously supplied by the media.

Whatever the merits of trying to shore up some financial institutions to prevent a major disruption of the credit flows that keep the whole economy going, what has in fact been done has been to create a huge pot of money -- hundreds of billions of dollars -- that politicians can use to give out goodies hither and yon, to whomever they please for whatever reason they please.

No doubt we could all use a few billion dollars every now and then. But the question of who actually gets it will be strictly in the hands of Barack Obama, Nancy Pelosi and Harry Reid. It is one of the few parts of the legacy of the Bush administration that the Democrats are not likely to criticize.

Much as we may deplore partisanship in Washington, bipartisan disasters are often twice as bad as partisan disasters -- and this is a bipartisan disaster in the making.

Too many people who argue that there is a beneficial role for the government to play in the economy glide swiftly from that to the conclusion that the government will, in fact, confine itself to playing such a role.

In the light of history, this is a faith which passeth all understanding. Even in the case of the Great Depression of the 1930s, increasing numbers of economists and historians who have looked back at that era have concluded that, on net balance, government intervention prolonged the Great Depression.

Many of those who have, over the years, praised the fact that this was the first time that the federal government took responsibility for trying to get the country out of a depression do not ask what seems like the logical follow-up question: Did this depression therefore end faster than other depressions where the government stood by and did nothing?

The Great Depression of the 1930s was in fact the longest-lasting of all our depressions.

Government policy in the 1930s was another bipartisan disaster. Despite a myth that Herbert Hoover was a "do nothing" President, he was the first President of the United States to step in to try to put the economy back on track.

With the passing years, it has increasingly been recognized that what FDR did was largely a further extension of what Hoover had done. Where Hoover made things worse, FDR made them much worse.

Herbert Hoover did what Barack Obama is proposing to do. Hoover raised taxes on high-income people and put restrictions on international trade to try to save American jobs. It didn't work then, and it is not likely to work now.

Perhaps the most disastrous of all the counterproductive policies of the federal government was FDR's National Industrial Recovery Act, which set out to do exactly what the politicians today want to do -- micromanage businesses.

Fortunately, the Supreme Court declared that act unconstitutional, sparing the country an even bigger disaster.

Today, it is unlikely that the courts will let anything as old-fashioned as the Constitution stand in the way of "change." In short, the economy today has some serious problems, but things are not desperate, though they can be made desperate by politicians.
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Thomas Sowell is the Rose and Milton Friedman senior fellow at the Hoover Institution at Stanford University.
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READERS' COMMENTS:
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Spike the CRA isn't even an issue. But that won't stop the the likes of Rush Limbaugh, Faux News, and others from saying it over and over again until all sorts of people believe it.

First of all the CRA was signed into law in 1977 -- almost 30 years ago. So, what do you think the possibilities of a law passed 30 years ago causing the lending problems now? That's one heck of a law to have that kind of effect. Yes, Clinton changed the law in the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity largely came to an end by 2001.

Second of all the Community Reinvestment Act only applies to banks and thrifts. The vast majority of the subprime loans over the last 8 years did not originate from banks or thrifts.

Nice try though.
- Mike Lane, Manchester

All government decision have consequences. The decisions are not always beneficial. Government can make things a lot worse.

Government can make things better by regulating properly. If Congress had required down payments on homes and fixed rate mortgages, the mortage mess might have not taken place.

If government wants more savings and investment, it needs to stop punishing savings and investment. The least that should be done to grow the economy and create jobs is the indexing for inflation of capital gains, interest from savings accounts, and dividends. If the capital gains tax is not indexed for inflation, people may pay the capital gains tax when they have actually lost money because of inflation.

If the federal government is serious about creating jobs and growing the economy, it should stop taxing capital gains, interest from savings accounts, and dividends. Businesses will have an easier time obtaining loans and investments for hiring workers and plant & equipment. People will have an easier time saving for retirement.
- Ken Stremsky, Manchester, NH

Robert of Deerfield

If these Friedman economists you so vehemently malign--that is, those who embrace the business sector--are so inept and delusional, why is it that our new president is appointing economists of this genus to his team? It seems the only one who's recreating history here is you.
- Susie Nickerson, Horseshoe Bay, Texas (NH native)

No, Mike Lane, the CRA didn't require risky loans; it took Jamie Gorelick and the Clinton Administration to put banks on notice that their licensing hearings would go poorly if they didn't comply with the CRA--as judged by numerically equal outcomes for neighborhoods full of deadbeats. The role of Freddie and Fannie was, in the name of encouraging mortgages by making them resaleable, to hide information on which were the good ones and which were the bad ones.

CNBC just had an interview about what happened to Japan when it took money from people in successful business combinations and gave it to people in unsuccessful business combinations (such as carmakers with unsustainable contracts with the UAW): A "lost decade" that still hasn't ended. It is remarkable that Bush and Sununu have made the Republican Party the party of the bailout.

Mike Lane and "William" are name-calling and dishing vitriol to support preconceived notions. A lot of heat but never any light.
- Spike, Brentwood NH

"Politicians could worsen economic woes."

In other shocking news, scientists have announced water is most certainly wet.
Stay tuned for the latest news concerning the Popes religious affiliation.
(sarcasm/off)

Are we expecting some of the very same players who, at best, drove us to the doorstep of economic ruin, to now be our saviors?

Madness!
- Mike P., Manchester

Oh save us lord from these Freidman free marketeers. Next you'll be quoting Amity Sheas. If you don't like history then distort it. If the only thing that FDR did was to get people to have confidence with his little chats, that is worth more than the $700 billion and all the faux swooning done at the Freidman Institute for Hoovering Money Out of Our Pockets. Republican sly foot work running up the first three trillion under Reagan and the next nine ten or eleven under the current occupant while preaching (and I do mean preaching) the crap known as trickle down economics makes me spew. Krugman crammed this revisionist crap down Will's craw last week. Go see it and think up some new reason to recreate history. The only coaching Sowell should be allowed to do is local pee wee hockey. That's about the correct size for his vision.
- William, Deerfield

Mike--there is no denying that our economic crisis is real. The point is, we should take our lessons from the Great Depression. What were those lessons? That extensive government intervention only deepened and prolonged the depression, making it "great." Most economists concur on this. Five years into the New Deal, unemployment continued to hover between 13-17%. Then, in 1937, "Black Tuesday" came again, along with a devastating drought. The war pulled us out of this mess, not Hoover's protectionist tariffs nor FDR's government-sponsored public works programs and tax-the-rich campaigns.

So the message Sowell is trying to convey is that our leaders need to exercise caution and take these lessons into account, rather than act rashly just for the sake of appearing to be "doing something."
- Susie Nickerson, Horseshoe Bay, Texas (NH native)

Andy it's amazing the contortions you right wingers put yourself through to avoid any kind of responsibility.

Nothing in the Community Redevelopment Act required institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner.

"CRA activities should be undertaken in a safe and sound manner" (and)"avoid lending activities that may be abusive or otherwise unsuitable" (to) "provide small, unsecured consumer loans in a safe and sound manner (i.e., based on the borrower’s ability to repay) and with reasonable terms" (and) "consistent with safe and sound lending practices."

Republicans, the party of non-accountability. Give them control of all three branches of government and they still cast about desperately for scapegoats.
- Mike Lane, Manchester

As Dr. Sowell points out, Obama is going to use the pretext of a "crisis" to create the Mother of All Pork Barrel Projects. Rather than remove corruption and the lobbyists from Washington, as Obama promised, this will propel both to an unprecedented scale. Oh, and it will add an absurd amount to our already obscene national debt.

But this is a "crisis" - there's no time for debate, we must act now. Didn't President Bush allegedly "fool" us into going into Iraq using similar tactics? Didn't Obama, Bush and Congress force the first $700 bailout upon us using similar tactics? Have we learned nothing?
- Tom, Campton

yes we are in a resession the result of a false economy based on phoney investment schemes over the last 20 years.
- benbarr, nowilkesboronc

Mike,
If you want honest questions. Then ask why Barney Frank hasn't resigned becuase of his outright fraud he helped with Fannie Mae and Fannie Mac. Why not indict Ted Raines he was the CEO. Oh wait he's advising Obama now... Seriously there is enough blame with both parties. But you need to look with an honest eye not some partisan Bush Derangement Syndrome outlook.
- Andy, Milford

I'm sure Wall Street, Detroit, and the millions of victims of the subprime meltdown will be relieved to find out that this crisis is a figment of their imaginations.

Expect the markets to soar tomorrow once they find out that the God of Economics, Thomas Sowell, has debunked the myth that our economy is in crisis.

Seriously, is this what passes for honest analysis these days?
- Mike Lane, Manchester

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"Fed's emergency loan program increases activity"
By MARTIN CRUTSINGER, AP Economics Writer, Friday, November 28, 2008, 6:50 pm ET

WASHINGTON – The Federal Reserve boosted its lending to commercial banks and investment firms over the past week, indicating that a severe credit crisis was still squeezing the financial system.

The Fed released a report Friday saying commercial banks averaged $93.6 billion in daily borrowing for the week ending Wednesday. That was up from an average of $91.6 billion for the week ending Nov. 19.

The report also said investment firms borrowed an average of $52.4 billion from the Fed's emergency loan program over the week ending Wednesday, up from an average of $50.2 billion the previous week.

The Fed said its net holdings of business loans known as commercial paper over the week ending Wednesday averaged $282.2 billion, an increase of $16.5 billion from the previous week.

Financial firms are borrowing from the Fed because they are having trouble raising money through normal channels as the financial system endures its worst crisis since the Great Depression.

Banks are hoarding cash rather than making loans out of fear that they won't be repaid. The Fed and the Treasury have been flooding the financial system with money in hopes that banks can return lending operations to more normal levels.

The central bank on Oct. 27 began buying commercial paper, the short-term debt that companies use to pay everyday expenses. It was one of a series of moves the Fed has made to try to unfreeze credit markets.

The Fed's goal is to raise demand in this area as a way to boost the availability of commercial paper, which has been seriously constrained since the financial crisis hit with force in September.

The report said insurance giant American International Group's loan from the Fed averaged $79.6 billion for the week ending Wednesday. That was down by $5.6 billion from the average the previous week.

The reduction reflected a modification of the government's support program for AIG earlier this month. Under that change, Treasury stepped in with a $40 billion purchase of stock in AIG, using money from the government's $700 billion financial system rescue package. The increased support from Treasury allowed the Fed to reduce slightly the size of its total loans to AIG.

The Fed unveiled two new programs Tuesday in a further effort to get consumer credit flowing again.

It said it would begin buying mortgage-backed securities from mortgage giants such as Fannie Mae and Freddie Mac. And it announced a program to lend to financial firms that buy securities backed by various types of consumer debt, from credit cards to auto and student loans.

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"GAO Report Says Bailout Program Needs More Oversight: Auditors Say It Is Too Soon to Tell if Treasury Plan Is Working"
By Amit R. Paley, Washington Post Staff Writer, Tuesday, December 2, 2008; 4:08 PM

The Bush administration has failed to establish sufficient oversight over its $700 billion program and must move rapidly to guarantee that banks are complying with the plan's limits on conflicts of interest and lavish executive compensation, congressional investigators said today.

The new report by the Government Accountability Office, the non-partisan investigative arm of Congress, said the Treasury Department has yet to impose necessary internal controls or decide how to determine if the bailout program is achieving its goals. The auditors said it was too soon for them to tell whether the bailout was working.

"Without a strong oversight and monitoring function, Treasury's ability to help ensure an appropriate level of accountability and transparency will be limited," the report concluded.

The audit, which is the first in a series of Congressionally mandated reports on the bailout, comes amidst growing concern on Capitol Hill that the government's gigantic rescue program is being implemented without sufficient oversight. President Bush's nominee for special inspector general over the bailout has yet to begin his work because his confirmation is tied up in the Senate. And another oversight panel created by Congress only met for the first time last week.

In a response to the report, the Treasury department agreed that it needed to do more develop internal controls over the plan but emphasized that less than 60 days have passed since the legislation authorizing the bailout took effect.

"We believe that Treasury has made significant efforts to ensure transparency and good communication," Neel Kashkari, the head of the department's bailout program, said in a letter, "but more can and will be done in these areas."

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Subject: NO oversight on $700B bailout?
Date: Thursday, December 4, 2008, 10:59 AM
From: "Darcy Scott Martin, TrueMajority"
To: jonathan_a_melle@yahoo.com

TrueMajority

Dear Jonathan Melle:

This week the Government Accounting office discovered that the Wall Street bailout does not require banks to even "track or report how they plan to use, or do use" our tax money. 1 There's literally no one watching where our money goes.

Congress is trying to fix that by appointing an Inspector General to start watching what's happening, but one Senator is anonymously preventing his confirmation.2

Tell your Senators: The Inspector General for the Bailout Program must be confirmed. All Senators need to support accountability and demand their colleagues remove any holds on this nomination.

Our government needs to be more involved in restoring the economy. But, we need an economic recovery package for Main Street instead of more giveaways to Secretary Paulson's buddies on Wall Street.

It's on us to provide that oversight and make sure taxpayer money isn't wasted.

Thanks for continuing to be vigilant,

-Darcy

Darcy Scott Martin
TrueMajority Washington Director

1

tpmmuckraker(dot)talkingpointsmemo(dot)com/bailout/washingtonpost(dot)com/wp-dyn/content/story/2008/12/02/ST2008120202264.html

2

tpmmuckraker(dot)talkingpointsmemo(dot)com/2008/11/unnamed_gop_senator_blocking_a.php

TrueMajority.org is a grassroots group of citizens who believe in America's true values of openness, fairness and compassion. We believe participating in an effective government is the best way to be mutually responsible for our community. TrueMajority is a project of USAction, a 501(c)(4) organization under the IRS tax code.

TrueMajority.org / USAction, 1825 K St. NW, Suite 210, Washington, DC 20006 (802) 860-6858

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"The bailout gets bigger, but not better"
By JONAH GOLDBERG, A Jonah Goldberg Column, December 4, 2008

The costs of Washington's bailout fiesta are now so huge, you can see them from space.

The latest number, which includes the Citigroup rescue, is $7.7 trillion. That's roughly half of America's gross domestic product.

In fairness, it's impossible at this point to know the full costs of the various financial rescue efforts because, for example, some of them involve mere loan guarantees, which may cost nothing.

Still, any way you slice it, we are talking about really, really large amounts of money here. Barry Ritholtz, a financial blogger and Wall Street analyst, offers some perspective. Adjusting for inflation, the Marshall Plan cost $115.3 billion. The Louisiana Purchase: $217 billion. The race to the moon: $237 billion. The New Deal: $500 billion (estimated). The Korean War: $454 billion. The Iraq war: $597 billion.

You can add all of these things together and still not come close to what taxpayers are on the hook for already. You could even throw in the savings and loan bailout ($256 billion), the Vietnam War ($698 billion) and all of NASA ($851 billion) and still come up short.

Why the fire hose of cash? One reason is that Federal Reserve Chairman Ben Bernanke is a serious student of the Great Depression, and it's his belief that the federal government should have thrown piles of money at the deflationary crisis of the 1930s. That's in effect what he's doing now.

But when you look at the pickle we're in, a host of conclusions -- never mind gripes, grievances and grumbles -- comes to mind. The first is that pretty much no one in Washington or on Wall Street can truly claim to deserve their job anymore. That goes for the Bush team, nearly everyone in Congress -- particularly Barney Frank, Christopher Dodd and the rest of that motley crew -- and also the Clinton-era all-stars Barack Obama is tapping for his administration.

George Will famously wrote of the 1988 Baltimore Orioles, who lost 107 games that season, "They were somewhat like today's Congress -- expensive and incompetent." So, Will wrote, "Orioles' management had a thought: Hey, we can lose 107 games with inexpensive rookies."

One needn't be a populist to think a similar principle applies now.

Indeed, one of the most astounding aspects of the jelling Obama administration is how completely it's relying on the same old people Obama once said he was going to ignore in his pursuit of cosmic "change."

As a conservative, I'm grateful that Obama isn't picking the sorts of people I feared he would. Some of us half expected Che Guevara T-shirts to be the unofficial dress code of the Obama cabinet. Yet, so far, with all of the Wall Street cronies, Clinton retreads and Bush holdovers, it appears Obama's far more of an agent of the status quo than an agent of change. That's a relief compared with how bad it might have been, but it's also a shame considering what could be.

For example, Obama says he doesn't want spending as usual when it comes to formulating his impending mother of all stimulus packages. (Estimates vary from $500 billion to $700 billion, but who knows how high that number will go?)

So far, all we know for sure is that he wants massive increases in infrastructure "investment." That's fine with me, so long as it's the infrastructure we need (though history shows such expenditures usually come online well after a recession is already over).

But rather than blow money on a lavish re-enactment of the New Deal or continue bailing out undeserving corporations, why not really think outside the box? U.S. Rep. Louie Gohmert, R-Texas, suggests an across-the-board reprieve on paying 2008 income taxes. This would leave an extra $1.2 trillion in the hands of Americans, who are the best stewards of their own money.

Nobel Prize-winning economist Robert Mundell proposes a one-year moratorium on corporate income taxes to stimulate investment, job creation and the like. That wouldn't be as popular, for understandable reasons.

The details can be negotiated, but this sort of approach would certainly create more jobs and spur more consumer demand than paying for a lot of asphalt. It would buy a lot more prosperity than any corporate bailout. Politically, it could buy Obama and Congress a year to formulate a serious tax-reform proposal. And -- here's the amazing part -- it would be much cheaper than what we've spent already.
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Jonah Goldberg's e-mail is JonahsColumn@aol.com.
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NH Union Leader READERS' COMMENTS:
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(Union-Leader, I thought you were in the pocket of the Extreme Right Wing! But this column skewers both parties when appropriate. What happened?)

Pete of Swanzey, not only have they already allocated money for the southern barrier but voted to bypass most environmental review. All that is left is will. Unfortunately, Bush, Gregg, and Obama all view the foreign invasion as a challenge for new, bilingual social work. Given that lack of will, the barrier is wasted makework. And no barrier is adequate given the magnet of freebies.

Now, Bernanke/Paulson announce a new program that uses Freddie and Fanny to "decrease the cost of mortgages"--that is, induce people to borrow money on false pretenses to achieve politically-mandated goals--exactly what started the meltdown!
- Spike, Brentwood NH

Democrats, the party of big business giving trillions of our children's future tax dollars to failing big corporations...
How Liberal
- JS, Nashua

If the government had given each of the taxpaying households in this country $200,000, it would have done a heck of a lot more for the economy than bailing out corporations that don't deserve it and probably cost less. American people spending money is 3/4 of the economy. The banking industry got into trouble because of their greed, let them fail and maybe the next banking house will do a lot better.
- Ruth, Fremont

One very big infrastructure investment that would put thousands back to work would be to erect a wall across the southern border of our country. The money is there already. Every few miles we could put a one way door that opens only to the south. Waive all of the environmental laws and regulations being used to slow the current wall building process and have someone in Israel send a few photos of their wall; the one that stopped the suicide bombers.
- Pete, Swanzey

This bailout will go from priming the lending market to cronyism real soon. Before you know it ACORN will be getting a bailout.
- Chris, Merrimack

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"Monday Is Payday for Chrysler, GM: Industry Trackers Predict Eventual Bailout Total Will Top $100 Billion"
By JOHN HENDREN, abcnews.go.com, December 29, 2008

Today is payday for two of Detroit's Big Three automakers, due to receive over $13 billion in taxpayer funds to keep the American auto industry running, and analysts say the bailout is likely to be just the beginning.

The U.S. Treasury is expected to transfer $9.3 billion to General Motors and $4 billion to Chrysler, but Mark Zandi, chief economist with Moody's Economy.com, predicts that over the next few years taxpayers will pay a total of $75-$125 billion to keep the Big Three out of bankruptcy.

"The bailout will likely cost $100 billion or more before we're through," University of Maryland economist Peter Morici told ABC News, adding that much of that money, technically loans, might never be paid back.

The automakers are stalled in launching the restructuring the Bush administration wants. G.M. has put off negotiations with creditors until Jan. 5. And the United Auto Workers Union doesn't want to go along with the wage and benefit cuts the bailout agreement calls for, in hopes that the Obama administration will drop a target in the bailout that calls for the Big Three to make wages competitive with transplanted Japanese carmakers operating in southern states. The initial installment of funds is not expected to carry GM past February.

Analysts say it's not a question of whether they'll be back to ask for more money -- but when.

"Given the depressed state of the auto market, General Motors and Chrysler will certainly be back again for more aid," Morici said. "It's just a matter of time."

With more than a million jobs at stake, economists say Congress, the Bush administration and later the Obama administration will likely do what new car buyers do: complain about the price, and then pay it.

But first, Congress would have to overcome a bad case of bailout fatigue after the first half of the $700 billion financial industry rescue, as Sen. Sherrod Brown, D-Ohio, told ABC's "This Week With George Stephanopoulos" on Sunday.

"The money has not been accounted for. It made the auto situation much more difficult, because people -- it really poisoned the well for government involvement," Brown said.

Bailout fatigue or not, conditions are ripe for the automakers to garner more loans. President-elect Barack Obama, and a larger Democratic majority in Congress, were elected in no small part with the support of union workers, who will undoubtedly remind them after the new president enters the Oval Office Jan. 20.

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"Where Did Taxpayer Money Go? Panel Slams Treasury: Congressional Panel Leader: 'I'm Shocked That We Have to Ask These Questions'"
By DANIEL ARNALL and ALICE GOMSTYN, ABC NEWS Business Unit, Jan. 9, 2009 —

A scathing new report by a congressional watchdog panel blames the Treasury Department for failing to track how banks are spending taxpayer money provided through the government's $700 billion financial rescue package, also known as the Troubled Asset Relief Program, or TARP.

The panel, which has been charged with overseeing TARP and is led by Harvard Law professor Elizabeth Warren, said in its report that it "still does not know what the banks are doing with taxpayer money."

By investing in banks that have refused "to provide any accounting of how they are using taxpayer money," the Treasury Department has "eroded" public confidence, the report stated.

The panel also asked whether the Treasury Department, which has allocated more than $350 billion from the rescue package so far, failed to comply with Congress' instructions to tackle the country's foreclosure crisis.

The department took "no steps to use any of [the $700 billion rescue package] to alleviate the foreclosure crisis," and that "raises questions about whether Treasury has complied with Congress' intent that Treasury develop a 'plan that seeks to maximize assistance for homeowners,'" the report said.

"I'll be perfectly blunt with you, I'm shocked that we have to ask these questions, but what I will say is I'm not giving up on this," Warren told Chris Cuomo in an exclusive interview today on "Good Morning America."

But Warren added that it falls to Congress to "take a very hard look" at whether the Treasury Department has too much discretion in spending TARP funds.

"Ultimately [I] don't have a badge, don't have a gun," she said. "It's up to Congress [to decide] what they're going to do about making more requirements in how Treasury uses this money."

The good news, Warren said, "is that these questions have gotten a lot of attention and a lot of people are demanding answers and when a lot of people start to demand answers, things start to change."

Treasury Secretary Henry Paulson today defended the TARP program while acknowledging that challenges remain.

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Paulson Defends TARP

"The TARP has been essential and I believe that the decisions we've made with 20/20 hindsight will prove to be the right ones with the TARP, but there's a lot more that still needs to be done," he said in an interview this afternoon with Bloomberg television.

Paulson made no direct reference to the Warren report, but he did speak about at least one issue highlighted by the report: the lack of TARP spending in helping homeowners facing foreclosure.

The government's initial focus, he said, was stabilizing the financial system through investments in banks. Paulson said he was "reluctant to move ahead with a foreclosure plan immediately" because he was concerned about getting "the maximum bang for the buck" and the initial results of early home loan modification "were not encouraging."

He suggested that it would be up to the incoming Obama Administration to deal with the foreclosure crisis.

"I think this is something that Congress and the American people want and I'm going to look with interest at what the next team does here because I think it's important," he said.

The Congressional Oversight Panel plans to issue another report with recommendations on stemming foreclosures.

Among the other issues raised in today's report:

Executive Compensation: The panel asked why the Treasury Department hasn't developed a "uniform program" to limit executive compensation at banks receiving TARP funds, noting that there have been "extensive conditions" imposed on auto companies that are receiving TARP money.

"Healthy" Banks, "Overvalued" Assets? The report noted that the Treasury Department initially said that it would invest funds in "healthy" banks, naming Citigroup among them and providing the bank with $25 billion. But less than a month later, Treasury gave Citi $20 billion in additional financing "apparently to avoid systemic failure."

"These events suggest that the marketplace assesses the assets of some banks well below Treasury's assessment," the report said. "Until asset valuation is more transparent and until the market is confident that the banks have written down bad loans and accurately priced their assets, efforts to restore stability and confidence in the financial system may fail."

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TARP Oversight Issues

Strategy Behind Who Receives TARP Money: Though TARP originally was conceived as a bank rescue plan, the dozens of companies that have received preliminary or full approval for TARP funds include the credit card company American Express and insurance giant AIG.

The panel said that Treasury should "clearly identify the types of institutions it believes fall under the purview" of the rescue package.

"The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs and families unable to pay their credit cards," the report said.

Unanswered Questions: Of the 44 questions the panel presented earlier to the Treasury Department, the department responded to 19. The report suggests that some of the answers the Treasury provided were inadequate.

"While Treasury's letter provided responses to some of the panel's questions and shed some light on Treasury's decision-making process, it did not provide complete answers to several of the questions and failed to address some of the questions at all," the report said.

"The panel is concerned that Treasury's initial response to our questions is not comprehensive and seems largely derived from earlier Treasury public statements," it said.

The Origins of the Credit Crisis: The panel said that the Treasury should "provide an analysis of the origins of the credit crisis and the factors that exacerbated it."

"Only then," the report said, "will Congress be able to determine the appropriate legislative responses."

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"[US Rep Barney] Frank presses for limits on bailout: Conditions include ban on bonuses, private jets"
By Marcy Gordon, Associated Press, January 10, 2009

WASHINGTON - US Representative Barney Frank said yesterday he expects the House to act soon to impose conditions on any new release of the second $350 billion in federal bailout funds, with a mandate that $40 billion to $100 billion go to help struggling borrowers avoid foreclosure.

The Massachusetts Democrat, who heads the House Financial Services Committee, issued an outline of his proposal to attach strings to spending the money by either the Bush administration or the incoming Obama government. It also slaps strict limits on executive compensation - both for companies receiving new federal money and those that already have - including a ban on any bonuses for the 25 highest-paid executives.

The banning of some bonuses, and relinquishing of private jets, would be applied to all banks and other institutions receiving bailout money, as they were in the loan agreements with General Motors Corp. and Chrysler LLC last month.

The new conditions also would include a better method for the government to track whether banks are using the money to boost lending.

"We will trust but verify," Frank told reporters on Capitol Hill.

In addition, the Treasury Department would be required to quickly make funds available for smaller community banks, which Frank says have gotten short shrift under the federal program.

For months, Democrats in Congress have lashed out at the Bush administration's mortgage aid programs, saying the government needs to do more to help tens of thousands of home borrowers avert foreclosure. Rather than just spending more bil lions to inject capital into banks, they have argued, the federal rescue dollars also should support programs that modify mortgages into more affordable loans.

Frank said yesterday that President-elect Barack Obama's team had indicated to him they plan to retain Sheila Bair as chairwoman of the Federal Deposit Insurance Corp. Bair, a Bush appointee, also had criticized as insufficient the administration's mortgage programs. Frank's proposal would expand the role of the FDIC in overseeing the government programs.

Frank said his bill could be voted on by the House as soon as next week.

Frank acknowledged that the proposal may not clear the Senate or be accepted by the Bush White House.

Earlier yesterday, the head of a congressional panel overseeing the Treasury's $700 billion bailout program said lawmakers need to "take a very hard look" at how the banks have used the money.

"I'm shocked that we have to ask these questions," said Harvard law professor Elizabeth Warren, "but what I will say is that I'm not giving up on this. The best news is that these questions have gotten a lot of attention and a lot of people are demanding answers and when a lot of people demand answers, things start to change."

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Britain's Prime Minister Gordon Brown, left, talks with US Federal Reserve chairman Ben Bernanke, during a meeting at at 10 Downing Street, in London, Tuesday Jan. 13, 2009. (AP Photo/Shaun Curry, pool) (Shaun Curry - AP)
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"Bernanke Indicates Support for Stimulus, Capital Injections"
By Neil Irwin, Washington Post Staff Writer, Tuesday, January 13, 2009; 10:47 AM

The government may need to inject more money into the nation's banks, Federal Reserve Chairman Ben S. Bernanke said today, as he called on broad new steps to bolster the financial system and the economy.

Bernanke also endorsed the use of further fiscal stimulus to support the economy, called for new steps to take troubled assets off the books of financial institutions and spoke approvingly of using government money to reduce the number of home foreclosures.

"In the near term, the highest priority is to promote a global economic recovery," Bernanke said in a speech at the London School of Economics. The Fed will use its policy tools "aggressively" to help achieve this objective, he added. "Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit."

Bernanke was laying out the measures he argues are needed to try to contain what is shaping up to be the deepest recession in at least a generation. In line with his past approach, he recommended that the government pull out all possible stops, hoping that together they cushion the economy.

Those included his strongest endorsement to date of actions to use higher government spending and lower taxes to try to bolster the economy.

"The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity," he said. Bernanke had already given a more tentative endorsement to the idea of large-scale government spending last year, but with these comments gave his seal of approval to the type of stimulus package that the incoming Obama administration and Congress are now considering.

"More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets," said Bernanke, essentially endorsing the Bush administration's request that Congress grant president-elect Obama the second $350 billion of a $700 billion rescue package that was first approved last year.

But Bernanke indicated he believes that government investments in banks alone aren't enough to stabilize the financial system, and he proposed an idea that is a throwback to the original debate over that rescue package in September: Government action to protect banks from further losses on hard-to-value, troubled assets.

That was the approach that Bernanke and Treasury Secretary Henry M. Paulson Jr. argued for in the congressional debate over the rescue, before abruptly changing direction in mid-October and using the money to invest in banks instead.

"A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions' balance sheets," Bernanke said. He laid out several options for dealing with the problem. The first, as Paulson had originally argued, would be for the government to buy the assets directly through auctions. Another would be for the government to take on the risk of further losses on the mortgage and other assets, in exchange for warrants or other compensation from the banks. Another would be for the government to set up "bad banks," institutions that would buy up the bad assets.

In a speech at Georgetown University this morning, Treasury official Neel Kashkari -- the man in charge of dispensing the $700 billion government bailout -- said that Treasury is working with banking regulators to develop a set of tools to track bank lending, responding to critics who say that there's no systematic way to tell if banks are loaning bailout money they've been given or hoarding it.

At the same time, Kashkari said that banks must not be forced to give bad loans.

"Our banks' role as provider of credit in our economy is even more important now," Kashkari said. "But we must not attempt to force them to make loans whose risks they are not comfortable with."

In his speech, Bernanke also endorsed, as he has before, steps to prevent foreclosures, a top priority of many Democrats. "Efforts to reduce preventable foreclosures, among other benefits, could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability," Bernanke said.

The speech were his first comments since a policymaking meeting last month at which the Fed cut short-term interest rates to nearly zero and indicated it will use other, unconventional tools to try to stimulate the economy.

Bernanke made a spirited defense of the government's efforts to stabilize the financial system against criticism by Congress and the public.

Noting that many object to the way authorities have rescued some financial institutions while letting businesses in other segments of the economy fail, he said that "this disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt."

Bernanke also said that institutions that are "too big to fail" deserve special oversight and regulation. "It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period," he said. "In the future, financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking."

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"Citigroup, Morgan Stanley Merge Brokerages: Citigroup, Trying to Slim Down, Will Combine Brokerage Business With Morgan Stanley's"
By MADLEN READ, The Associated Press
NEW YORK

Citigroup Inc. and Morgan Stanley agreed Tuesday to combine their brokerages in a deal that shows how much Citigroup wants to slim down and build up cash.

Morgan Stanley is paying Citigroup $2.7 billion for a 51 percent stake in the joint venture. Citigroup will have a 49 percent stake.

Citigroup's retail brokerage, Smith Barney, was once the crown jewel in its wealth management business.

The new unit, to be called Morgan Stanley Smith Barney, will have more than 20,000 advisors, $1.7 trillion in client assets; and serve 6.8 million households around the world, the companies said.

Citigroup will recognize a pretax gain of about $9.5 billion because of the deal, or about $5.8 billion after taxes, the companies said. The joint venture is expected to achieve total cost savings for the two companies of around $1.1 billion.

The deal was announced after the market closed. Shares of Citigroup rose 30 cents, or 5.4 percent, to $5.90 on Tuesday, and Morgan Stanley shares rose 7 cents to $18.86.

CEO Vikram Pandit has been saying for months that he plans to sell assets to raise cash, but the executive, according to media reports, is getting ready to announce that Citigroup is abandoning the financial "supermarket" model. That term described the aim of Citigroup — created over the last couple decades by former CEO Sandy Weill — to service all of individuals' and businesses' financial needs, from saving to borrowing to investing to deal-making.

Citigroup has fared worse than other banks in recent years, particularly during the recent credit crisis. The New York-based company is expected to post a fifth straight quarterly loss next week. The government has already lent it $45 billion — more than other large banks received — and agreed to absorb losses on a huge pool of Citigroup's mortgages and other soured assets.

Some investors believe Citigroup is headed for a larger-scale breakup now that the government is involved and that President-elect Barack Obama is rethinking how to dole out the remaining $350 billion of bailout money.

The new administration could "come to the realization that the whole economy does not hinge on the banks," said Octavio Marenzi, head of financial consultancy Celent. "Banking is important. The banks themselves are not."

William Smith of Smith Asset Management, who still owns shares of Citigroup, has been calling for a breakup of Citigroup for years and believes the government will force that fate, in piecemeal fashion, over the coming year.

"I think within 12 months, Citigroup no longer exists," Smith said. "The new CEO of this company is the government."

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Some banks are quietly helping their executives to six-figure awards -- some object to the word "bonus" -- even as they take many millions in taxpayer bailout funds, a review of business filings shows. (ABC News)
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"Don't Call It a Bonus: Bailout Banks Still Generous to Execs: Lawmaker: Banks 'Need to Be Suspending These Bonuses'"
By JUSTIN ROOD, abcnews.go.com, Jan. 13, 2008—

Some banks are quietly helping their executives to six-figure awards -- some object to the word "bonus" -- even as they take many millions in taxpayer bailout funds, a review of business filings shows.

First Horizon Bank in Tennessee gave its incoming Chief Financial Officer a $350,000 award in mid-November, according to a filing with the Securities and Exchange Commission. Just three weeks earlier, the bank announced it would take $866 million from the Treasury Department's Troubled Assets Relief Program.

The award was a signing bonus for the new CFO, William C. "BJ" Losch III, who had just joined the Tennessee bank, according to its filing. John Daniel, executive vice president of human resources for First Horizon, explained Monday the amount was not a bonus, but meant to compensate Losch for money and stocks he forfeited when leaving Wachovia Bank , his previous employer.

First Horizon executives would forgo performance bonuses this year, Daniel said, although "it's conceivable" that certain executives could receive other cash awards or stock, to keep them from leaving the bank.

Lawmaker Objects to Cash Awards for Execs at Bailed Out Banks

On Capitol Hill, Rep. Elijah Cummings, D-Md., has led the charge in Congress against cash awards for executives at bailed-out banks. He says these banks "need to be suspending these bonuses."

"When folks come to the government for money, I want them understanding they have to live by new rules, or don't come at all," said Cummings. "This is a time when all of America must come together to sacrifice. . . Everybody, all of us, needs to be a part of that sacrifice."

That message isn't meant just for First Horizon. Virginia-based Hampton Roads Bankshares handed out nearly $1 million in cash to two top executives at the end of last year. Hampton Roads took $80.3 million in TARP funds in early December; on Dec. 31, it announced it had awarded signing bonuses to two executives of a bank it had bought.

D. Ben Berry, who was chosen to be president of Hampton Roads, received $500,000 in "consideration" for signing a non-compete agreement, according to the filing and the bank's general counsel; David R. Twiddy, who signed on to remain a top executive of the subsidiary bank, received $425,000. The payments were first reported by the business blog footnoted.org.

Bonuses and Other Perks Are Burning Issues for Shareholders

Douglas Glenn, executive vice president and general counsel for Hampton Roads Bankshares, said the payments "were not bonuses in any way, shape or form," but compensation for signing the employment agreements.

Bonuses, awards, "consideration" -- executive pay and perks are a burning issue for shareholders, the Wall Street Journal reported Monday. Shareholder activists are preparing to push limits on executive compensation far stricter than what the Treasury has built into its TARP program.

The prevalence of executive bonuses among bailed-out banks isn't yet clear, say experts. Nell Minow, co-founder of the independent research group the Corporate Library, says banks don't report typical executive bonuses awarded at years' end until March or April at the earliest. And even then, says Michelle Leder of footnoted.org, they will only be required to report bonuses for their top five officers.

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"Report: Bank of America Could Get More Government Aid: Bank of America Could Get Billions in Additional Government Money"
The Associated Press
NEW YORK

The U.S. government is nearing a deal to inject Bank of America Corp. with billions of dollars in more aid, The Wall Street Journal reported late Wednesday, citing people familiar with the situation.

The nation's biggest bank by assets acquired Merrill Lynch & Co. on Jan. 1. Bank of America received $25 billion from the government's $700 financial rescue fund, including $10 billion that would have gone to Merrill had it not been acquired.

Bank of America and the U.S. Treasury spokesmen declined to comment in response to inquiries made by The Associated Press.

The Journal, citing a person familiar with the talks, reported that the discussion between the government and Bank of America began in mid-December when the Charlotte, N.C., bank said it wasn't likely to go through with its acquisition of New York-based Merrill because the losses at the troubled company were larger than expected.

Treasury Department officials grew concerned that the stability of the U.S. financial markets would be at risk if the deal fell apart, the newspaper reported. Officials said they would work on "formulation of a plan" that includes new money from the government, the Journal said, citing the person familiar with the talks.

Details of a possible agreement, the Journal said, are likely to come out with the company's quarterly results, which are expected Tuesday.

The Journal reported that any possible plan could shield Bank of America from the bad assets on Merrill's books. One person familiar with the situation told the paper that there could be a limit to how much Bank of America might have to be liable for, with the government covering the remainder.

Banks are struggling to mend their balance sheets after bad bets on mortgages spread to other forms of debt. Some analysts and economist are saying the U.S. government will have to spend far more than the $700 billion it has already approved to aid the financial industry. Only the first half of the $700 billion has been allocated and Congress has not released the second half of the funds.

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"Bank Losses Complicate U.S. Rescue: Pressure Grows on Obama to Allocate More Money for Distressed Financial Firms"
By David Cho, Binyamin Appelbaum and Lori Montgomery, Washington Post Staff Writers,
Thursday, January 15, 2009; A01

A new wave of bank losses is overwhelming the federal government's emergency response, as financial firms struggle with the souring U.S. economy, the rapid deterioration of global markets and the unexpectedly high costs of shotgun mergers arranged by federal officials last year.

The problems are intensifying the pressure on the incoming Obama administration to allocate more of the $700 billion rescue program to financial firms even as Democratic leaders have urged more help for distressed homeowners, small businesses and municipalities. Senior Federal Reserve officials said this week that the bulk of the money should go to banks.

Some Fed officials suggested that even more than $700 billion may be required, and financial analysts at Goldman Sachs and elsewhere say banks will have to raise hundreds of billions of dollars from public or private sources.

This year is expected to be worse for banks than last year, senior government officials and analysts say. The money from the first half of the rescue program helped banks replace most of the money they lost during the first nine months of 2008. But the firms are beginning to report fourth-quarter losses that are larger than analysts expected, and the economic environment continues to worsen quickly.

The markets got a taste yesterday of just how badly the year ended. European giant Deutsche Bank revealed an unexpected estimated loss of about $6.3 billion for the fourth quarter. HSBC, which has not yet raised capital during the financial crisis, may need $30 billion from investors, according to Morgan Stanley analysts.

Global stock markets reacted by plummeting, with financial shares falling the hardest. The Dow Jones industrial average dropped nearly 3 percent.

Meanwhile, Bank of America was on the verge of receiving billions more in federal aid to help it absorb troubled investment bank Merrill Lynch, whose losses had outpaced expectations, according to people familiar with the matter. That money would come on top of the $25 billion the government has already invested in Bank of America, including $10 billion specifically in connection with the Merrill Lynch deal.

Senior economic advisers to President-elect Barack Obama have said that restoring health to financial markets and the slumping economy requires the second half of the $700 billion rescue program as well as a massive stimulus package with a price tag approaching $850 billion.

On Tuesday, Federal Reserve chairman Ben S. Bernanke, suggested that more help for banks could be needed. "History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively," he said, adding that both the stimulus and the rescue package were essential to restoring health to financial firms.

Yet it remained unclear yesterday whether Congress would approve the release of the last $350 billion in the program known as the Troubled Asset Relief Program, or TARP. Obama's transition team asked lawmakers to do so Monday, saying it was urgently needed. But Democrats are growing increasingly concerned about their ability to quickly deliver the money to Obama.

In the Senate, Republican support for release of the funds has evaporated in the face of public anger over the Bush administration's management of the program. With more than a handful of Democrats also opposed, Senate leaders scrambled yesterday to rally support.

The Senate is set to vote today on a resolution to block the release of the money.

Late yesterday, Lawrence H. Summers, Obama's top economic adviser, and Rahm Emanuel, Obama's incoming chief of staff, met with Senate Republicans to try to persuade them to come aboard. But even many Republicans who voted to create the bailout program in October now say they are unlikely to back the release of the money.

If Congress votes to block the cash, Obama has the power to veto the resolution, all but ensuring the money would be in place early in his administration. Some Republicans said they see no point in casting an unpopular vote simply to spare Obama the discomfort of issuing a veto against the Democratic Congress as one of his first acts as president.

"The Republican base hates this. So a lot of people are saying why anger the base in the name of good policy when it's going to happen anyway?" said Sen. Robert F. Bennett (R-Utah), a senior member of the Senate Banking Committee, which was at the center of negotiations during the TARP's creation.

Republicans -- and many Democrats -- also say they are dissatisfied with Obama's pledges to dramatically reshape the rescue package to more directly assist distressed homeowners, small business and other consumers in search of credit, as well as to bolster oversight.

Republicans, in particular, want assurances that the money would be reserved to help ease the credit crisis in the financial system. They do not want the funds to go to other sectors, such as the faltering auto industry, which last month won a small share of the money from the Bush administration. That decision, said Sen. Bob Corker (R-Tenn.) turned the program into a "$350 billion slush fund."

After an hour-long meeting with Summers and Emanuel, many Republicans, even those who supported the TARP last fall, said they remained skeptical.

"They probably haven't said quite enough yet for most Republicans," said Minority Leader Mitch McConnell (R-Ky.).

Lawmakers were initially swayed to vote for the bailout program in October because of evidence that some banks were in extreme trouble. At that time, the government pushed healthier banks to acquire faltering rivals.

Now the buyers, which included Bank of America, J.P. Morgan Chase and other major banks, are struggling to make the mergers work. The prices they paid seemed like bargains at the time, but losses have been greater than the banks expected.

J.P. Morgan Chase will be the first of several major U.S. institutions to report earnings in coming days. Last year, it acquired two troubled firms, Bear Stearns and Washington Mutual. Analysts expect J.P. Morgan to report a narrow profit after a very tough year-end quarter.

Citigroup, which has received $45 billion in government aid, is expected to report a loss of more than $3 billion on Friday. The company also plans to announce that it will sell several major units to raise capital.

Bank of America, which reports earnings next week, has had enough capital to support its own operations but not enough to absorb Merrill Lynch's losses, according to two people familiar with the situation. Losses at Merrill Lynch have outpaced expectations since the merger was announced in September.

The banks closed the deal Jan. 1 after the Treasury Department committed in principle to making an additional investment, the sources said.

Bank of America and the Treasury declined to comment.

In total, banks raised about $456 billion in 2008, of which 41 percent came from the U.S. government, according to investment bank Keefe, Bruyette & Woods. But most of the money from private sources was raised in the first half of the year. As the crisis has worsened, the institutions have come to rely almost entirely on government help.
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Staff writer Paul Kane contributed to this report.
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Bank of America and many other banks have yet to publicly explain how they are using the billions of dollars from the government's bailout program. (AP Photo)
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"Taxpayers' Billions: How Banks Are Using It: ABC News Questions Banks on How They Are Spending Bailout Money"
By DANIEL ARNALL, CHARLES HERMAN, SCOTT MAYEROWITZ and ZUNAIRA ZAKI
ABC NEWS Business Unit, Jan. 16, 2009—

The U.S. government has provided $45 billion to Bank of America through the Troubled Assets Relief Program, but how that money has been used remains unclear.

When ABC News asked for details as part of a larger, ongoing project, a bank spokesman said the questions -- almost identical to inquiries made by a congressional oversight panel of the Treasury Department -- "show a fundamental lack of understanding about the TARP program, what it was intended to do and how it works."

Just today, Bank of America received $20 billion in new taxpayer dollars -- bring its total government aid to $45 billion -- to finalize its hastily arranged purchase of investment bank Merrill Lynch.

"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the Treasury said in a statement overnight. "As was stated in November when the first transaction under the Targeted Investment Program was announced, the U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks."

The ABC News Business Unit posed the same five questions to Bank of America and 23 other banks that received at least $1 billion in TARP funds. The questions covered topics including lending activity, foreclosure assistance and bonuses. Four banks that received a total of $31 billion in TARP funds chose not to reply, including JPMorgan Chase, which received $25 billion and did not reply to similar questions in December.

Of the 20 banks that did respond, only five provided details about increased lending activity. Six banks gave some indication of the steps they are taking to help people in danger of losing their homes to foreclosure. Only a quarter of the banks surveyed said TARP funds would not be used to pay for bonuses.

The lack of details mirrors the responses provided by the Treasury Department, which is overseeing the TARP program, to a congressional oversight panel.

How Is TARP Being Spent?

In a sharply worded report released last week, the panel said it "still does not know what the banks are doing with taxpayer money."

These are the five questions asked by ABC News:

Since you received TARP funds has there been an increase in lending activity by your bank, if so by how much?

What amount of TARP funds have been used to help homeowners who are behind on their payments or facing foreclosure?

Does your bank need the TARP infusion? If not have you considered returning the funds?

What will be the total amount awarded in bonuses at your institution this year?

If Congress passes retroactive compensation requirements for TARP Capital Purchase Program participants, will your bank give back the money?

Citigroup said it will make the $45 billion it has received available to "existing and new customers for mortgages, personal loans, student loans, small business and corporate loans and credit card lines."

Wells Fargo & Co. said the $25 billion it received would be used "to make more loans to credit-worthy customers and to find solutions for our mortgage customers late on their payments or facing foreclosure."

Morgan Stanley said, "TARP capital has allowed Morgan Stanley to make several multi-billion dollar loan commitments to leading American companies."

GMAC Financial Services received $5 billion through the TARP and said it "immediately increased its automotive lending activity" and that the additional funds have allowed the company to "expand our loan servicing center to meet rising consumer demand for refinances and loan modifications"

Over half of the $3.1 billion received by BB&T has already been used to provide loans to qualified borrowers, the bank said.

To date, the Treasury Department has committed more than $378 billion of the $700 billion TARP fund, which was created to stabilize the nation's financial system. The Bush administration, on behalf of President-elect Barack Obama, informed Congress earlier this week that the new president could use the remaining TARP funds if necessary. "I felt that it would be irresponsible for me with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system," Obama said on Monday.

More Accountability: Banks Respond

The Senate last night cleared the way for the release of those funds.
His economic team has reassured members of Congress unhappy with how the rescue fund has been used so far that assistance for homeowners facing foreclosure would be the top priority moving forward. In addition, Obama's administration pledged greater accountability as to how banks are using taxpayer dollars. In an ABC News poll conducted in December, 69 percent of respondents said they were not confident adequate controls had been put in place to avoid waste and fraud in the use of the funds.

Paul Krugman, a Nobel Prize-winning economist at Princeton University, told ABC News: "One hopes that with the remainder of the bailout money, that it will be used with strings attached. That there will be demands that the banks have to do more with the money."

To read the responses from the banks, click on each bank name listed below: Citigroup, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley, PNC Financial, US Banc, GMAC, Sun Trust Banks, Capital One, Regions Financial, Fifth Third Banc, BB&T, Bank of New York Mellon, KeyCorp, State Street, Marhsall & Ilsley, Northern Trust, Huntington Bancshares and Synovus Financial.

CIT Group, JP Morgan Chase and Zions Bancorp did not reply. Comerica declined to answer.
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With reports by Mary Kate Burke.
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My Daily Work: "Bank accounts"
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Posted by Dan Wasserman, January 29, 2009, 5:24 PM
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"Unapologetic CEOs: What Did the Banks Do With Your Cash?: Bank CEOs, With $125 Billion in Taxpayer Money in Hand, Testify and Defend Before Congress"
By MATTHEW JAFFE and SCOTT MAYEROWITZ, ABC NEWS Business Unit, February 11, 2009—

The heads of eight major banks that received $125 billion in taxpayer bailout funds were largely unapologetic for their role in helping to create the worst financial crisis since the Great Depression as they testified before Congress this morning.

The CEOs said they are trying to lend out more money and pledged to return to profit, be more transparent and repay taxpayers as soon as possible.

Yet they warned that there was still much work to do and that it would take time for the financial system to right itself.

"We are doing our best to balance the interests of customers, shareholders and taxpayers," said Bank of America CEO Kenneth D. Lewis. "There is simply no ready substitute for government support of this size, and so in its absence, our only choice would be to lend less and thereby shrink our balance sheet."

Citigroup CEO Vikram Pandit echoed those comments, saying: "The American people are right to expect that we use TARP funds responsibly, quickly and transparently to help American families, businesses and communities."

But for the most part, the CEOs in their prepared testimony shrugged off recent criticism about the high level of pay within their firms, the use of luxury jets and posh trips to Las Vegas or Monte Carlo.

Lewis said that he knows the public will not always agree with his decisions, adding that some questionable expenses are good for the long-term growth of his company.

"There has been no shortage of examples of executives or companies spending money in ways that did not have a direct benefit to the business," Lewis said. "In other instances, I think banks have been criticized for activities that, in fact, have very serious, and very effective, business purposes. Marketing activities, which drive sales and business growth, are just one example."

He then reminded the committee that the investors who will profit from Bank of America's growth now include the American taxpayer.

Bank of America took heat recently for sponsoring a five-day carnival-like affair outside the Super Bowl. The event -- known as the "NFL experience" -- included 850,000 square feet of sports games and interactive entertainment attractions for football fans and was blanketed in Bank of America logos and marketing calls to sign up for football-themed banking products.

Perhaps the most contrite CEO in today's testimony was Morgan Stanley's John J. Mack.

"We didn't do everything right. Far from it," Mack said. "And make no mistake, as the head of this firm, I take responsibility for our performance."

"I believe that both our firm and our industry have far to go to regain the trust of taxpayers, investors and public officials," he said.

Mack recognized that the American public is "outraged" by some compensation practices on Wall Street.

"I can understand why," he said. "At Morgan Stanley, the most senior members of the firm, including myself, didn't receive any year-end bonus in 2008. I didn't receive a bonus in 2007 either."

True, Mack didn't get a bonus in either year. But in 2007 he did get a cash salary of $800,000 and was awarded stock options worth $40.2 million.

Today's hearing was called by House Financial Services Committee chairman Barney Frank, D-Mass.

"There has to be a sense of the American people that you understand their anger & and that you're willing to make some sacrifices to get this working," Frank said.

Goldman Sachs CEO Lloyd C. Blankfien acknowledged the "broad public anger" directed at the financial industry.

"In my 26 years at Goldman Sachs, I have never seen a wider gulf between the financial services industry and the public," Blankfien said. "Many people believe -- and, in many cases, justifiably so -- that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system's stability."

Blankfien said in prepared remarks that the entire industry is suffering right along with Main Street.

"The fact is that all of us are contending with the consequences of a deteriorating economy; lost jobs, lost orders, and lost confidence," he said.

JP Morgan Chase CEO Jamie Dimon praised the government for taking "bold and necessary steps" to keep the crisis from becoming something "none of us would want to imagine."

Dimon also said that a "fragmented and overly complex" government regulation system is partly to blame for the crisis.

"Long-term recovery will elude the financial industry unless we modernize our financial regulatory system and address the regulatory weaknesses that recent events have uncovered," Dimon said.

The CEOs did provide some details about how they used the TARP money, particularly how it was loaned out. JP Morgan, for instance, increased its consumer loan balances by 2.1 percent in the forth quarter. Dimon noted this happened at a time when consumer are spending less.

Last week, Citi published a report detailing how it used the TARP funds to date. It promised to update the report each quarter. Other banks pledged to make similar information publicly available.

Other CEOs present were from Wells Fargo, Bank of New York Mellon and State Street. The eight financial firms received a combined total of $125 billion since October through the Troubled Asset Relief Program, commonly referred to as TARP.

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Lawmakers Angry at Banks

Lawmakers have expressed outrage that the funds are not fulfilling their purpose of increasing the flow of credit to consumers. They point to a report released last month by the New York state comptroller that said Wall Street firms had handed out $18 billion in bonuses last year.

That news led President Obama to impose new restrictions on executive compensation for banks that receive money through the TARP in the future.

In the face of pressure from Washington, Citigroup recently scrapped plans to purchase a $50 million luxury jet.

After news broke that Wells Fargo was planning an annual trip for many of its top employees in Las Vegas, the company cancelled the outing.

"These financial institutions on the brink of extinction come to the American taxpayer for hundreds and billions of dollars," McCaskill said. "At the very same time, they think they're going to buy a $50 million corporate jet. They're going to pay out $18 billion in bonuses. They paid an average of $2.6 million to every executive at the first 116 banks that got taxpayer money under TARP."

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Government Conflict of Interest?

But just as lawmakers have questions for the executives, there are also questions for lawmakers to answer.

In the 2008 election cycle, House Financial Services Committee members received more than $26 million in campaign donations from the finance, insurance, and real estate sector, including $5.3 million from the securities and investment industry and $3.3 million from commercial banking, according to the non-partisan Center for Responsive Politics.

Part of that $26 million is $984,148 that Frank received, including $224,000 from the securities and investment industry and $110,000 from commercial banks. Almost $2 million that the committee members received came from the very eight banks represented at the hearing, the center states.

Their report states that these financial institutions gave a total of $1.8 million to committee lawmakers in the 2008 election cycle.

The chairman himself, Frank, received $63,250 from these banks. Ranking member Rep. Spencer Bachus, R-Ala., almost doubled that sum, having collected $116,950.

Over time, one bank alone, JP Morgan, has given Bachus more than $96,000. Frank has received more funds from JP Morgan than any other company, union, or organization since 1989.

But Bachus and Frank are not alone in their dealings with these companies. A total of 18 committee lawmakers have their own personal funds invested in the eight banks at the hearing.

In all, the 111th Congress had between $12.7 million and $25.8 million invested in these firms in 2007.

When policymakers were designing the TARP bill, Frank intervened to secure money for a home-state bank, OneUnited Bank in Boston, the Wall Street Journal reported.

"At no point did I ask federal officials or bank regulators for any relaxation in the oversight of the banks or withhold any decision given the bank's activities," Frank said in a statement. "I continue to believe that the existence of minority owned banks is an important social goal and our communities will suffer without them."

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Banks Spend on Lobbying and Campaign Contributions

The Center for Responsive Politics also found that the companies receiving TARP funds had spent a total of $114 million last year in an effort to curry federal favor. The government watchdog group's report showed these companies spent $77 million on lobbying and $37 million on federal campaign contributions and later received $295 billion from the TARP.

"Even in the best economic times, you won't find an investment with a greater payoff than what these companies have been getting," said Sheila Krumholz, executive director at the center.

According to the report, JP MorganChase spent about $10.1 million combined on lobbying and campaign contributions, Citigroup approximately $12.4 million, and Bank of America about $14.5 million, including data for Merrill Lynch, which it acquired last year.

New Treasury Secretary Timothy Geithner recently said that in the future, companies that receive TARP funds won't be allowed to lobby the government.

But Geithner has also come in for criticism as he seeks to revive the embattled program launched under his predecessor Henry Paulson.

Sen. Jim Bunning, R-Ky., questioned whether the former chairman of the Federal Reserve in New York can improve the program because he "had a seat at the table when all this original TARP was designed."

"The American people are screaming because they think that the TARP money was designed for one reason -- to relieve the credit crunch -- and it was being used to take care completely of friends and others on Wall Street," Bunning said last week at a Senate Banking Committee hearing.

Geithner's chief of staff, Mark Patterson, comes to the Treasury Department after years as a lobbyist for Goldman Sachs.

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Executives Called Before Congress

When the executives come to Congress, they will be the latest in a long line of industry leaders called to Capitol Hill in times of trouble.

In an infamous 1994 hearing, tobacco executives testified that nicotine was not addictive.

Last spring, oil executives were grilled for answers on how their companies were raking in record-high profits while consumers paid record-high prices at the pump.

In November, auto executives came under fire for requesting billons of government aid even as they flew to Washington in private jets.

Let the Public Relations Battle Begin
Even before coming to Washington, some executives have already launched public relations campaigns, with some deciding to forgo bonuses this year.

Goldman Sachs has announced that seven executives, including CEO Lloyd Blankfein, will not get a bonus.

JP Morgan Chase CEO James Dimon has said he will not seek a bonus.

Morgan Stanley CEO John Mack and two other two top executives will also not receive bonuses, although that did not stop an angry group of protesters from demonstrating outside his New York home Monday morning.

Just days before the hearing, Wells Fargo CEO John Stumpf took out full-page ads in Sunday's New York Times and Washington Post to argue that media reports of their planned trip to Las Vegas were "deliberately misleading."

Stumpf said that the Vegas event was not a junket, but rather a weekend to recognize employee performance.

Citigroup and Bank of America took similar approaches, also unveiling full-page ads in the newspapers to state that they were "taking the trust and faith that America has put in us and getting to work -- by lending and investing."

Citigroup's CEO Vikram Pandit and Bank of America's CEO Ken Lewis have waived their bonuses this year, but Stumpf has not. According to a Wells Fargo official, bonus decisions are up to the board of directors and those decisions are typically made in February.

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"Congress imposes stricter limits on bonuses for firms receiving US aid"
By Tomoeh Murakami Tse, Washington Post, February 14, 2009

WASHINGTON - The stimulus package crafted by Congress this week imposes new limits on executive compensation that could significantly curb multimillion-dollar pay packages on Wall Street and go much further than restrictions imposed by the Obama administration.

The bill, which President Obama is expected to sign into law, limits bonuses for executives at all financial institutions receiving government funds to no more than a third of their annual compensation. The bonuses must be paid in company stock that can only be redeemed once the government investment has been repaid.

Unlike the rules issued by the White House, the limits in the stimulus bill would apply to top executives and the highest-paid employees at all 359 banks that have received government aid.

"This is a big deal. This is a problem," said Scott Talbott, chief lobbyist for the largest financial services firms. "It undermines the current incentive structure."

Talbott said banking executives expected certain restrictions would be applied to them but are concerned that some of the most highly paid employees, such as top traders, who bring in hefty sums of money for the company, would flee to hedge funds or foreign banks that have not accepted US government funds.

The White House restrictions capped executive pay at $500,000 and allowed companies to award unlimited stock. Those rules applied only to institutions that receive government funds in the future and under limited circumstances.

Bonuses make up much of financial executives' take-home pay, so the new rules could significantly diminish their compensation. For example, Lloyd Blankfein, the chief executive at Goldman Sachs, made $68.5 million in 2007 - a Wall Street record - but $67.9 million of that was in bonus and other incentive pay that analysts said would be subject to the new rules.

Citigroup's top executive, Vikram Pandit, has voluntarily agreed to a $1 salary until his company returns to profitability. In theory, this means that Pandit would be allowed an annual bonus of pennies.

Critics of executive pay assert that companies have always found ways around compensation rules. Yesterday, they noted that more stringent measures - such as a $400,000 cap on all forms of compensation - did not survive last-minute wrangling by House and Senate leaders on the final compromise stimulus bill. To offset the new rules, inserted by Senator Chris Dodd, Democrat of Connecticut, compensation boards could just significantly raise the base salary of executives, the critics said.

The bonus restrictions would apply to a varying number of employees at each firm, depending on how much money the firm has taken in government assistance. At banks receiving less than $25 million, the limits would apply to only the highest-paid employee. For those receiving between $25 million and $250 million, the restriction would apply to the five most highly-paid employees. The top five executives and 10 highest-paid employees would be affected at firms receiving between $250 million and $500 million. At firms getting more than a half-billion dollars, which would include all of the Wall Street giants, the rules would apply to the top five executives and the 20 highest-paid employees.

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"Cut executive pay? It'll cost you plenty"
By Jim Kuhnhenn, Associated Press Writer, February 13, 2009

WASHINGTON --Turns out there is a problem with limiting the pay of highly compensated bankers: the Wall Street high flyers pay taxes, too.

Imagine this: Capping top bank executives at $400,000 a year, as the Senate version of the $800-plus billion economic stimulus had called for, would have cost the government $11 billion in lost tax revenue by 2019. That's more than $1 billion a year, according to an estimate this week by the Congressional Budget Office.

Ouch.

Eager to lower the price of the stimulus package, congressional negotiators working on the final bill made the pay cap disappear.

But the legislation still imposes compensation restrictions on banks that receive money under a financial sector bailout program. And they are tougher than the ones that the Obama administration unveiled with much fanfare last week.

The administration's restrictions applied only to banks that receive "exceptional assistance" from the government. It set a $500,000 cap on pay for top executives and limited bonuses or additional compensation to restricted stock that could only be claimed after the firm had paid the government back.

The stimulus bill, however, sets executive bonus limits on all banks that receive infusions from the government's $700 billion financial rescue fund. The number of executives affected depends on the amount of government assistance they receive. But as a rule, top executives will be prohibited from getting bonuses or incentives except as restricted stock that vests only after bailout funds are repaid and that is no greater than one-third of the executive's annual compensation.

The prohibition would not apply to bonuses that are spelled out in an executive's contract signed before Feb. 11, 2009.

At banks that received $25 million or less, the bonus restriction would apply only to the highest paid executives. At banks that receive $500 million or more, all senior executives and at least 20 of the next most highly compensated employees would fall under the bonus limits.

Sen. Christopher Dodd of Connecticut, the Democratic chairman of the Senate banking committee and the author of the bonus limitations, said the restrictions are crucial, especially if the Obama administration asks Congress for more money to rescue the financial sector.

"It will never happen as long as the public perceives that there are people getting rich," he said in an interview. "Save their pay, or save capitalism."

But critics complained that the compromise did too little -- or too much.

Sarah Anderson, an expert of executive compensation at the liberal Institute for Policy Studies, said eliminating the $400,000 pay cap because it reduced revenues "is not a winning argument with taxpayers." She argued that companies could find ways around the bonus restriction by increasing salaries or even changing job titles.

Irv Becker, a compensation authority at the Hay Group, a global management consulting firm, said bonuses and other incentives account for a major portion of the compensation of financial industry executives.

"The concern that we have is the unintended consequences," Becker said. "You're likely to be driving some of these talented executives out of the industry."

Dodd said that even though the salary cap had been removed from the final bill, he was still hearing objections from major financial institutions.

"I just find it incredible that people are calling up and bellowing about this," he said on the Senate floor. "We're in the deepest economic crisis in the lifetime of any living American, and they're worried about their pay."

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"Jumbo loan limits eased in stimulus"
By Jenifer B. McKim, Boston Globe Staff, February 14, 2009

Frustrated about paying high interest rates for your jumbo mortgage? Some Massachusetts homeowners will be able to take advantage of better interest rates because of a provision included in the federal stimulus package passed by Congress yesterday.

The provision again increases the limit on the size of loans that qualify for lower rates under a special category of loans known as "expanded conforming." These are loans above the $417,000 limit for conforming loans, but below the current threshold in the Boston area of $465,750 for jumbo loans. The stimulus package raises that limit to $523,750. The limit is higher on Martha's Vineyard and Nantucket, at $729,750.

Qualifying borrowers could get rates as much as 1 percentage point below prevailing jumbo mortgage rates. Last week the average rate for a 30-year fixed expanded conforming loan was 5.74 percent, while a jumbo loan was averaging about 6.83 percent, according to data-tracker HSH Associates.

The legislation also gives US housing officials discretion to set higher loan limits in smaller regions, which should help borrowers who live in communities with higher housing prices than those in neighboring towns. Dukes and Nantucket counties would have higher limits of $729,750.

Meanwhile, the stimulus also includes $2.25 billion in grants for low-income housing tax credits to help with the construction of affordable housing. Aaron Gornstein, executive director of the Citizens' Housing and Planning Association, said the funding and a new flexibility to exchange tax credits for cash should help launch 31 shovel-ready developments, adding 1,580 apartments in Massachusetts.

"This will enable them to move into construction and create much needed affordable rental housing and construction jobs," Gornstein said.
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Jenifer McKim can be reached at jmckim@globe.com.
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"Government Moves to Shore Up Banking System"
By Binyamin Appelbaum, Washington Post Staff Writer, Monday, February 23, 2009; 10:24 A.M.

The federal government will ease the terms of its investments in more than 350 financial institutions to increase the benefit of the taxpayer dollars while reducing the cost to the banks, regulators announced this morning.

The change also applies to new investments, and regulators said they will begin Wednesday to test the health of the nation's largest banks to determine how much more government money those banks might need to weather the crisis.

"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," said a joint statement issued by the Treasury Department, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and Federal Reserve.

The change in the investment terms was sought by Citigroup and other banks that are trying to convince investors they can survive their financial problems.

In exchange for its investments, the government required the banks to issue preferred shares that pay interest and are designed to encourage repayment after a few years. Under the changes announced this morning, companies instead can give the government preferred shares that can be converted into shares of the company's common stock.

The conversion would be at the discretion of the companies in consultation with regulators.

Swapping preferred shares for common shares has several benefits. It would reduce required dividend payments and ease repayment pressure. It could encourage more people to invest alongside the government. And there is a significant but technical accounting benefit. The swap would significantly improve banks' performance on a measure of health used by financial analysts called tangible common equity, which basically judges a bank's reserves against future losses.

The government would take a larger ownership stake in companies that completed the swaps. But that might not give the government increased control, simply because regulators already are taking a heavy hand in the affairs of the most troubled banks. At Citigroup, for example, regulators now play a key role in the company's decision-making.

Initial reaction from the banking industry was positive. Scott Talbott, a spokesman for the Financial Services Roundtable, said the changes showed the government's support for the industry.

"This is a signal that the government believes the financial institutions are strong and provides them with the flexibility of terms should the economy worsen," Talbott said.

The changes apply to the government's existing investments of almost $300 billion in more than 350 financial firms. Companies can replace the shares they already have issued to the government with the new kind of preferred shares. Talbott said he expected many of the largest banks to make the switch.

One company expected to act quickly is Citigroup, the troubled New York giant whose executives had encouraged the government to make these changes.

Citigroup executives had approached federal regulators to discuss steps the government could take to strengthen the troubled company, according to two people familiar with the matter.

The giant New York bank is under mounting pressure to convince investors that it can survive its financial problems. The government already has invested $45 billion in Citigroup and promised to limit its losses on a portfolio of more than $300 billion of loans and other troubled assets. But investors remain nonplused, and the company's stock price has dropped 71 percent this year.

Regulators also gave more details about plans announced by Treasury Secretary Timothy F. Geithner this month to perform "stress tests" on banks.

The tests are designed to assess how banks would fare if the recession continues to deepen, regulators said. The goal is to see whether banks have enough capital to weather a downturn in which unemployment and other economic indicators become much worse, driving up the level of defaults on loans and the losses that banks would sustain.

The tests will be performed on about 20 of the nation's largest banks. The results will show whether the companies need more capital as a buffer against possible losses. Companies that need additional capital will be given a chance to raise the money from private investors, regulators said this morning. If they cannot, they might be required to accept an additional investment from the government.

"This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated," the agencies said.

The two steps announced this morning create a clear scenario in which the government could emerge as the majority owner of some of the nation's largest banks.

The Obama administration has said repeatedly that it does not plan to nationalize a large number of banks, but senior officials have privately said that some of the most troubled banks could be taken over as a last resort.

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"AIG in Talks With U.S. Government, Sees $60 Billion Loss: Source - Loss Dwarfs Previous Single-Quarter Loss Records"
By PARITOSH BANSAL, Reuters, abcnews.go.com
NEW YORK, NEW YORK

American International Group, rescued twice last year by the U.S. government, is asking for more aid and bracing for a fourth-quarter loss of roughly $60 billion, a source familiar with the matter said. It would be the biggest loss in a quarter in corporate history.

The $60 billion would exceed Time Warner's $54 billion single-quarter loss in 2002 and dwarf the $24.5 billion loss AIG posted in the third quarter, when the government increased its rescue package for the insurer to about $150 billion.

By contrast, two analysts polled by Reuters Estimates have forecast on average a net loss of $5.46 billion.

The latest round of talks with the government include the possibility of additional funds for the insurer and trading debt for equity, another source said on Monday.

The situation is fluid and other options are being discussed, this second source said, adding that it was unclear where the talks would lead.

AIG may look to convert preferred shares held by the government into common stock, Bloomberg reported, citing an unnamed source.

The discussions are going on as U.S. financial authorities try to put out other fires, as well. Citigroup Inc, whose stock has been pounded by fears that the government may seize the bank and wipe out shareholders, is also in talks to give the government a larger stake, a person familiar with the matter told Reuters.

CNBC, which first reported AIG's discussions, said the losses to be announced next Monday were due to writedowns on commercial real estate and other assets. It said the insurer's board will meet next Sunday to work out an agreement with the government.

In case they do not reach a deal, AIG's lawyers at Weil, Gotshal & Manges LLP were preparing for the possibility of bankruptcy, CNBC said.

But the first source told Reuters that while AIG has retained Weil Gotshal, the insurer has no plans to file for bankruptcy.

"Is it likely that $60 billion more of capital has been destroyed? Or is it likely that they are just accounting for that which already happened?" said Thomas Russo, a partner at Gardner, Russo & Gardner, which manages more than $2 billion. "I suspect it's more of the latter than the former."

AIG said in a statement it had not yet reported results and would provide an update when it does so in the near future.

"We continue to work with the U.S. government to evaluate potential new alternatives for addressing AIG's financial challenges," AIG said.

U.S. Treasury officials declined to comment. Weil could not be reached immediately for comment.

AIG shares closed down 1 cent at 53 cents on the New York Stock Exchange on Monday.

AIG was first rescued in September after bad mortgage bets left it on the verge of collapse. The government stepped in with $85 billion in bailout financing, as the credit crisis peaked with Lehman Brothers Holdings Inc filing for bankruptcy and Merrill Lynch agreeing to be bought by Bank of America Corp.

The rescue swelled in November as AIG posted its then-largest ever loss, hurt by writedowns on assets linked to subprime mortgages and capital losses. The Federal Reserve and U.S. Treasury stepped in with even more money to buy mortgage assets that had left AIG deeply in the red, and eased the terms of its loan repayment.

AIG has said it plans to sell all assets except its U.S. property and casualty business, foreign general insurance, and an ownership interest in some foreign life operations, as it looks to raise money to pay back the government.

Although AIG has announced some sales, it is trying to sell assets at a time when buyers are often dealing with their own problems and credit for acquisitions is scarce. The insurer's ongoing troubles are likely making things harder.

"The seller is in a rather perilous position," Russo said. "And buyers typically appreciate the amount of leverage they have."
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(Additional reporting by Chris Kaufman and Euan rocha; Editing by Richard Chang, Jeffrey Benkoe, Tim Dobbyn, Gary Hill)
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"Caught on Tape: Bank Parties On After Bailout: Congress Asking Northern Trust to Return the Cost of Golf Weekend to Taxpayers"
By MADDY SAUER, abcnews.go.com, February 24, 2009 —

The Chicago-based Northern Trust bank may have received $1.6 billion in federal bailout funds, but that did not dampen the lavish long weekend featuring a golf tournament and headliner music the bank threw in Los Angeles last week, much of which was caught on tape by the celebrity news outlet TMZ. Critics are up in arms over yet another apparent boondoggle hosted by a bank that received federal bailout funds.

Members of Congress are now asking Northern Trust for their money back, saying the bank should "immediately return to the federal government the equivalent of what Northern Trust frittered away on these lavish events", according to a letter sent by Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, along with 17 Democrats on the committee, to Northern Trust's CEO.

"At a time when millions of homeowners are facing foreclosure, businesses and consumers are in dire need of credit, and the government is trying to keep financial institutions - including yours - alive with billions in taxpayer funds, this behavior demonstrates extraordinary levels of irresponsibility and arrogance," the letter states.

"They didn't get the message," said Tom Schatz, President of the watchdog group Citizens Against Government Waste. "Somewhere along the line they have to be more accountable."

This is the second year in a row that the bank has hosted the Northern Trust Open, a golf tournament held at the Riviera Country Club in Pacific Palisades. The bank described it as "an integral part of Northern Trust's global marketing activities". But according to TMZ, the parties surrounding the event featured multiple rock concerts, gift bags from Tiffany's, and private dinner parties at luxury hotels.

TMZ's cameras were rolling when Sheryl Crow took the stage at the House of Blues in West Hollywood for a small private party.

They also took video of the band Chicago performing at the Ritz-Carlton after a dinner hosted by Northern Trust.

Northern Trust says it did not approach the federal government for bailout funds, but rather "agreed to the government's goal of gaining the participation of all major banks in the United States."

"The key point is Northern Trust is a business that earned an operating net income of $641 million last year," said senior vice-president Douglas Holt. "We paid for these events ourselves. They were paid for as part of a business decision regarding an annual event to show appreciation for clients. Northern Trust is not a bank that was or is losing money and therefore had to go to the government for assistance."

Northern Trust Recently Cut 450 Jobs

But the bank took a strikingly different tone in December when it announced it would eliminate 450 jobs.

"The macroeconomic environment has been extraordinarily difficult and has impacted all segments of the global economy," said the bank's CEO Frederick Waddell.

"Our decisions, while difficult, will further enhance Northern Trust's position amid challenging conditions, while maintaining our focus on clients and those activities in which we have significant competitive advantage and continue to see opportunities for growth," said Waddell.

Some in Congress say whether or not the bank sought the funding, once they accepted it they have a responsibility to the taxpayer.

"This type of spending is outrageous and disgraceful. The government did not hand over $1.6 billion for Northern Trust to go off partying or give away taxpayer-subsidized trinkets from Tiffany's," said Rep. Elijah Cummings (D-Md.) who sits on the House oversight committee.

"This is money that should be used to expand lending or pay the salaries of the hundreds of employees that the company recently laid off," said Rep. Cummings.

Northern Trust says it is using the bailout money to support lending and that the expenses for the golf weekend came from their operating expenses, which do not include the federal funds.

"The CPP [Capital Purchase Program] capital is also supporting high quality loan growth, benefitting clients and institutions. As of December 31, 2008, our loans and leases totaled $30.8 billion, a 21% increase from 12/31/07 and a 3% increase from 9/30/08," said Holt.

Critics Say Bank Could Have Cut the Costs of the Event

Northern Trust did not reply to ABC News' inquiries about the cost of the performances nor about the costs of the accommodations for Northern Trust's clients and executives. A spokesperson did issue a statement saying the bank signed a five year contract to host the golf open in the fall of 2007, a year before the bank accepted federal funds, but made no comment on when the concert commitments were made.

Critics say even if the bank has contractual obligations, money could have been saved by canceling concerts or staying in budget accommodations.

"That's really the issue more than prior commitments," said Schatz. "You can cancel a concert."

"You've recently fired 450 employees," said Schatz, "so this certainly isn't great for the morale of other employees or for the morale of taxpayers."

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Related Links:
www.tmz.com/2009/02/24/northern-trust-bank-bailout/

(Click here to see TMZ's video of the Sheryl Crow concert):
abcnews.go.com/video/playerIndex?id=6948983

(Click here to see TMZ's video of the Chicago concert):
abcnews.go.com/video/playerIndex?id=6948928

(Click here to read Northern Trust's full statement):
abcnews.go.com/images/Blotter/The%20Northern%20Trust.pdf
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My Daily Work: Selling nationalization
Posted by Dan Wasserman, February 25, 2009, 2:45 P.M.
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"Stressing Solvency: No one wants to talk about bank nationalization. But is it inevitable?"
The Washington Post, Editorial, Thursday, February 26, 2009; A18

WE CAN UNDERSTAND why talk of bank nationalization freaks out the stock market: The very notion is so, well, French. An increasing government stake in the banks dilutes the value of privately owned shares, and outright takeovers can wipe out creditors, too. Federal ownership and operation of large institutions, even temporarily, could lead to politicized lending -- if it doesn't simply overwhelm government's managerial capacity. True, the Federal Deposit Insurance Corp. takes over insolvent banks all the time. Rarely, however, has Washington contemplated taking over not just one large bank but possibly several, including giants such as Bank of America and Citigroup. The biggest previous FDIC takeover involved Continental Illinois, a bank less than a fifth the size of Citigroup, a quarter-century ago. The process lasted seven years. So we agree with Federal Reserve Chairman Ben S. Bernanke, who told the Senate Banking Committee on Tuesday: "I do not see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just is not necessary."

The question, though, is whether nationalization, in some form, can be avoided. And the answer is: It depends. It depends on how deep the recession becomes, and on how well-equipped the banks are to survive it. Lately, the stock market has been beating up bank stocks, reflecting market mavens' pessimism on both counts. Soon, however, we may get a somewhat more objective take from the Obama administration, which yesterday rolled out its "stress test" of 19 big banks with more than $100 billion each in assets. It will assess solvency under alternative scenarios, a "baseline" forecast under which unemployment averages 8.8 percent in 2010 and an "adverse" one in which joblessness hits 10.3 percent next year. On the basis of the results, the Treasury Department would make additional capital injections, in the form of preferred shares that convert to common stock as needed.

As President Obama hinted to Congress on Tuesday night, this would almost certainly require funding over and above the $190 billion or so remaining in the Troubled Assets Relief Program. It seems likely that Citigroup, and possibly Bank of America, would fall under quasi-governmental ownership, albeit with continued private management. Meanwhile, regulators would pressure the banks to reduce leverage and risk, and Treasury Secretary Timothy F. Geithner's public-private partnership could gradually buy up their toxic assets. Taxpayers might even break even in the long term, if the banks -- and their common share prices -- recover. The dreaded Japan "lost decade" scenario would be avoided.

The administration argues that by declaring loudly that the government will stand behind the banks even in a horrific economic environment, it can restore market confidence at the least possible upfront cost to the taxpayers -- and perhaps even spur some private investment. This is not an unreasonable strategy, but it hinges on a certain amount of luck. If the stress test's "adverse" scenario for the economy turns out to be too rosy, large-scale nationalizations may be unavoidable. Not only that, but they could be more expensive for having been postponed.

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BOSTON GLOBE EDITORIALS, February 26, 2009

"A time to take action..."

IF FANS of President Obama's soaring campaign rhetoric hoped to be lifted into the stratosphere by his first address to Congress Tuesday night, the plunging economy demanded a much sterner approach. Obama traced the current economic crisis to a long era of irresponsibility - an era of vast public and private debts, of dependence on imported oil, of unchecked health costs, of Americans looking no further than the next mortgage payment or the next election.

But now the "day of reckoning," as he put it, is upon us. Obama noted steps already taken to lessen the pain: a massive economic stimulus bill; a plan to slow foreclosures. More important, he began preparing the ground for the long-term changes needed to ensure prosperity in the future. Some of those are matters of public investment in neglected areas, such as alternative energy. Politically, that's the easy sell.

But Obama also understands that, at some point in the near future, he and Congress will need to bring back the fiscal restraint lost during eight years of borrow-and-spend economics. With the federal government running up debt rapidly, it's all the more urgent to show Americans - not to mention foreign lenders - a plan to avoid leaving subsequent generations with "mountains of debt," as Obama put it.

Pointing out the problem isn't enough. Obama needs to push for specific fixes. He at least hinted at an approach Tuesday. He would close the gap between revenue and spending by undoing past tax cuts for the wealthy, and promote private thrift through tax-free universal savings accounts. He also vowed, in broad terms, to address the growing costs of Social Security and Medicare.

The president cannot make these things happen on his own. Despite Obama's many overtures, most GOP lawmakers checked out of the stimulus debate by reflexively opposing the measure. And Republicans watching in the House chamber Tuesday could not bring themselves to applaud even for extending healthcare to poor children.

And Republicans aren't the only ones capable of intransigence. Many Democrats weren't pleased when an Obama economic summit Monday flirted with the subject of entitlement reform. And perhaps Medicare reforms are best bundled, as Obama suggested in his speech, with a larger overhaul of the healthcare system. But Obama's glancing treatment of the subject bespoke little confidence that he can bring his own party to a point of compromise on the issue.

Polls suggest that voters are willing to give Obama the benefit of the doubt. Given the severity of the economic crisis, bold reforms - in the financial sector, in government budgeting, in the larger economy - will do far more to restore public confidence than any half-measures.

"...and take over failing banks"

THE OBAMA administration inched further toward taking over troubled banks this week, when it said the government would accept repayment in the form of common stock rather than cash from companies that got federal bailouts. In some cases, the federal government could end up with a controlling stake in some institutions. Yet administration spokesman Robert Gibbs still insisted that "nobody imagines nationalizing banks."

Call it what you like, but some form of government receivership looks like the best way to revive a zombified financial sector.

Right now, some banks deemed too big to fail are also too paralyzed to lend. As the administration begins subjecting banks to stress tests, it should take temporary control of those that aren't solvent and can't raise private capital to save themselves. The government could put money into them, get rid of their toxic securities from bad loans, and then sell off the cleaned-up institutions.

Treasury Secretary Timothy Geithner took some well-earned lumps earlier this month, when his emergency plan for the financial sector turned out to involve $2.5 trillion but not a lot of detail. Geithner's approach was intended precisely to keep the government out of the bank-management business. And that was the problem. By tiptoeing around nationalization, the government still puts a lot of taxpayer dollars at stake, but without giving public institutions power to restructure failing banks and without replacing the managers who created the current mess.

There is some risk that, once the government took banks over, they would be subject to political pressure. But the risks of a nonfunctioning financial system are far greater. The administration shouldn't allow Wall Street's fear of the taboo word "nationalization" to close off its options.

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Citigroup Center is seen in New York, Monday, Feb. 23, 2009. Citigroup Inc. has approached banking regulators about ways the government could help strengthen the bank, including the stock conversion plan, according to people familiar with the discussions. (AP Photo/Seth Wenig)
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"Citigroup reaches aid deal with government"
By Martin Crutsinger, AP Economics Writer, February 27, 2009

WASHINGTON --The U.S. government will exchange up to $25 billion in emergency bailout money it provided Citigroup Inc. for as much as a 36 percent equity stake in the struggling bank, greatly increasing the risks to taxpayers as voter unhappiness about the broader bailout program rises.

The deal announced Friday by the company and the Treasury Department represents the third rescue attempt for Citigroup in the past five months. It's contingent on private investors agreeing to a similar swap.

The administration decided to restructure the bailout package for Citigroup again in the hopes that converting $25 billion of preferred shares into common stock would give investors more confidence the bank has sufficient capital reserves to withstand mounting losses on its holdings of mortgages and other loans. While the conversion to common stock will dilute current shareholders' investments, a wider equity base could calm investors since there would be more reserves in place to guard against further losses as the economy sours.

Besides a stronger capital base, the company is getting a critical boost to its cash flow as it forgoes its 4 cent annual dividend on its common shares. That is giving Citi an additional $2.18 billion a year.

But the deal doesn't affect one of Citi's greatest problems, the billions of dollars in failed mortgage-backed securities that still sit on its books. As those investments have fallen in value, they have exacerbated Citi's losses.

The plan comes one day after the Obama administration laid the groundwork in its first budget request for greatly increasing the size of the $700 billion bailout program that Congress passed in October. Administration officials said no decisions had been made yet but suggested the size of the effort could be expanded by as much as another $750 billion.

The swap of $25 billion of preferred shares into common stock will expose the government to the same risks facing other holders of the bank's common stock. Shares of Citigroup and many other financial companies have plunged as the sector undergoes its worst crisis in seven decades.

But the administration is mindful about growing unhappiness among voters and lawmakers in the huge sums that have been provided to the nation's banks, money that so far seems to have done little to stabilize the situation.

In his first address to a joint session of Congress on Tuesday, President Barack Obama stressed that the government effort was not aimed at bailing out bank executives who had made bad loans, but instead in getting credit flowing again to consumers and businesses.

"I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions," Obama said. "I promise you -- I get it."

The aim of the government's rescue effort is to keep the New York bank holding company alive and bolster its capital as it faces growing losses amid the intensifying global recession. Existing Citi shareholders would see their ownership stake shrink to as little as 26 percent.

Investors appeared disappointed in the deal and expected dilution of their stake, sending shares plummeting 91 cents, or 37 percent, to a new 52-week low of $1.55 in afternoon trading. Stocks tumbled early but pulled off their lows as the Dow Jones industrial average came within 34 points of breaching the 7,000 mark for the first time in more than 11 years.

Underscoring its precarious nature, the company also disclosed that it recorded a goodwill impairment charge of about $9.6 billion due to deterioration in the financial markets.

The Treasury Department said the transaction requires no new federal funds. But it left the door open for Citigroup to seek additional government funding or for the conversion to common shares of the remaining $20 billion in federal bailout money it received late last year. The government currently holds about an 8 percent stake in Citi.

For now, that $20 billion in government funding will be converted into a new class of preferred shares that will be senior to other bank debt and it will continue to pay a yearly 8 percent cash dividend. As part of the deal, the payout for all other preferred shares will be suspended.

Citi will offer to exchange up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 per share. That's a 32 percent premium over Thursday's closing price of $2.46.

The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange.

The conversion will help provide Citi the mix of capital to withstand further weakening in the economy. The stock-conversion option was laid out by the administration earlier this week as an option for providing relief to banks. It gives the government greater flexibility in dealing with ailing banks. It also gives the government voting shares, and therefore more say in a bank's operations.

But common shares absorb losses before preferred shares do, which means taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.

On the other hand, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price goes up.

One of the hardest hit banks by the ongoing credit crisis, Citi has also received guarantees from the government protecting it from the bulk of losses on $300 billion of risky investments. Citi has been especially hit hard by investments in the mortgage market, which began to collapse in 2007.

The deal comes as Citi is in the process of shedding assets and cutting staff as it looks to reduce costs and streamline operations ahead of splitting its traditional banking businesses from its riskier operations. Citi last month reached a deal to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley.

Citi also will reshape its board of directors, Richard Parsons, the bank's chairman, said in a statement Friday. The board, which currently has 15 members, will have a majority of new independent directors as soon as possible, he said.

Three board members in recent weeks have said they would not seek re-election as the company's annual shareholders meeting in April. Two others will reach the mandatory retirement age by the time of the meeting.

Roberto Hernandez Ramirez earlier this month said he would not stay on beyond his current term. Last month, Robert Rubin, a former Treasury secretary who was a longtime Citigroup board member, and Win Bischoff, most recently chairman at Citigroup, announced their retirements from the company.

The goodwill charge announced Friday was added to Citi's 2008 results along with a $374 million impairment charge tied to its Nikko Asset Management unit. The charges resulted in Citi revising its 2008 loss to $27.7 billion, or $5.59 per share.
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AP Business Writers Stephen Bernard and Madlen Read in New York, and Christopher S. Rugaber and Jeannine Aversa in Washington contributed to this report.
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A Banker's Warning: "The Taxpayer Will Pay One Way Or Another"
The World Newser: World News' Daily Blog, ABC News Blog, February 27, 2009

ABC's Tom Johnson from New York:

It is an eye grabbing memo. The kind of memo you don't think you're supposed to be reading. A few weeks ago the chief US economist for Deutsche Bank wrote a memo (that slipped out) all about the bail out of the banks and the real cost to you and me. Here's an excerpt from what Joseph LaVorgna wrote:

"Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives. We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers."

In short, the argument is we all should disabuse ourselves of the fiction that we can somehow "bail out" the ailing banks without feeling the pain. This idea that we the taxpayers will somehow make money off of our huge infusions of cash into these banks is bogus.

On NPR this morning, a reporter from Morning Edition and one from This American Life conferenced in the memo's author with Simon Johnson, an economist from MIT. Johnson called the memo a "robbery note", in that it's essentially saying to the government either you pay up now, and pay the real cost, or these banks (and the economy) are going to continue to sputter. What was especially interesting in the conversation was that Johnson praised LaVorgna for the memo saying, "I think, Joe, I found it refreshingly honest. But it also took my breath away." LaVorgna's reply, "...This is the issue: We're delaying the pain. You've got to deal with the problem."

On the day in which we learn how the taxpayer is taking a much more robust share of Citigroup the memo is a reminder. Few things in life are free. We are all in this mess together. Such is the nature of a modern, interconnected economy. And bailing out the banks is going to come at a cost.

Memo: www.talkingpointsmemo.com/docs/toxicassets/

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"Underwater Stock Options Get a Lifeline From Firms"
By Tomoeh Murakami Tse, Washington Post Staff Writer, D01, Saturday, March 7, 2009

Nearly 100 companies have undertaken programs that allow employees, many of them executives, to exchange sharply depreciated stock options for new awards with more generous terms.

The companies, from Google to Silver Spring-based United Therapeutics, argue that the exchange -- which increases the chances that executives will be able to collect rewards even though the company stock has plummeted -- is necessary to retain and motivate personnel.

Critics say the practice undermines the purpose of performance-based bonuses and puts the company's executives and workers on a different plane from ordinary shareholders who have no choice but to hold on to battered stocks or sell them at a loss.

"It goes to a sense of entitlement, which I think is misplaced," said Con Hitchcock, a lawyer who advises activist investors on corporate governance. "There are a lot of people other than executives who could use good-performing stock in their portfolio."

Stock options can account for a significant portion of pay for some employees, especially executives. They give the holder the right to buy stock at a future date for a specified price. For example, 100,000 vested stock options with a "strike price" of $30 would translate to a $2 million profit if the company's stock is trading at $50. The strike price is typically the price of the stock on the day the options are awarded.

The collapse of the stock market has dimmed prospects for cashing in existing options. Since the beginning of last year, at least 96 companies have implemented or proposed option repricing or exchange programs, according to Equilar, a compensation research firm.

As of late last year, nearly 99 percent of Fortune 500 chief executives held options with strike prices above the current stock price, Equilar said. Such options are "under water."

As a result, Equilar expects 21 companies will implement exchange or repricing programs in the first quarter of 2009, compared with only seven during the same period last year. An additional 24 companies, including Starbucks and chipmaker giant Advanced Micro Systems, have proposed such programs, most of which are subject to shareholder approval.

Many other companies are expected to take similar action, compensation advisers and directors say. As the recession deepens, they say, shareholders should expect a surge in the number of companies repricing options.

Google is in the process of implementing a program that allows holders to exchange their options for new ones with a strike price equal to the closing price Friday of $308.57. It reached a high of $741.79 about 15 months ago.

"It just makes sense given our goal to retain employees," said Google spokeswoman Jane Penner, adding that 85 percent of employees had options that are under water. "We just want to reward people and keep them engaged and focused on serving users. This is a great way to do it."

Google is expected to take a $460 million charge on the options exchange program.

United Therapeutics undertook an options exchange approved by the compensation committee of the board of directors shortly after the company announced that a drug it was developing had produced unfavorable results in a clinical trial.

The company's stock plunged on the Nov. 17 news, although it has recovered some since. A spokesman said this week that the exchange was appropriate given the market environment and the company's continued desire to utilize stock options as a retention tool.

Options that are way under water do little to encourage employees to stay or work harder, advocates of option repricing say, but companies still must take a charge for them on their books under new accounting rules.

Patrick McGurn, special counsel for proxy adviser RiskMetrics Group, said exchange programs are "never a good thing." But, he added, "If everybody is walking out the door, what are you going to do? Hold back on principle? Or find something that's workable in a shareholder-friendly way?"

To that end, companies such as Starbucks have excluded executives and directors from its proposed program. It also seeks to minimize the cost to shareholders by making employees turn in more than one outstanding option for every replacement option. The Starbucks program is scheduled for a shareholder vote later this month.

Home builder Toll Brothers last year implemented a program with some features similar to the Starbucks plan. "At a time when you have troubles in the industry and you have cuts, you don't want to lose (employees) to someone else," said Joel Rassman, Toll Brothers's chief financial officer.

"We're in a three-and-a-half year recession in home building," he added. "It's a little hard to say we can do anything to improve the stock price compared to where we were."

After the dot-com bubble burst, companies took similar steps to accommodate employees with underwater options. This time around, however, companies that decide to put forth such programs will be dealing with a public sensitive to compensation issues. Populist sentiment is running high after disclosures that Wall Street, which received billions in taxpayer funds, doled out billions in year-end bonuses. None of the institutions that took the funds have implemented or proposed option exchange programs.

"We don't get to exchange our stock," said Richard Ferlauto, director of pension-investment policy at the American Federation of State, County and Municipal Employees. "I think it just shows lack of sensitivity to their shareholder base."

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Bank Failures
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Forty-two banks have failed since the beginning of 2008.
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"Every Bank Failure Is Also a Beginning: Seizure, Sale Clear Way for New Lending"
By Binyamin Appelbaum, Washington Post Staff Writer, D01, Saturday, March 7, 2009

The Community Bank of Loganville, Ga., helped to fund the transformation of rural Walton County to a booming Atlanta suburb. It lent hundreds of millions of dollars to people building houses, building churches, building strip malls.

When federal regulators seized the bank in November, it appeared that Loganville had lost an engine of its economic growth.

But participants in this episode and experts said the bank's failure is more accurately described as a restart. More than a third of the Community Bank's loans were not being repaid, starving it of money to make new loans. When the government seized the bank, officials stripped away those loans, then sold the branches and deposits to a Virginia company, Bank of Essex, creating what amounts to a new bank with abundant money for lending.

"Communities suffer more from an ailing bank than from a failed bank," said Gary A. Simanson, vice chairman of Community Bankers Trust, which owns Bank of Essex. The company also bought the failed Suburban Federal Savings Bank of Crofton, in January. "When a bank fails, it gives someone else the chance to start fresh. Now we're here, and we want to lend."

Regulators have seized 42 banks since the beginning of 2008, including another in Georgia last night. The rapid increase often is portrayed as a sign of the nation's economic distress. It is also a first step toward revival. Restarting a bank is expensive and painful for many, including the former owners and borrowers. Economists say the transition takes a measurable toll on local economies, for example by requiring businesses to win the trust of new bankers. But in wiping away problem loans and bringing in new investors, the government is creating the necessary conditions for new lending.

"That's one of the most positive things that we do," said Mitchell Glassman, director of resolutions and receivership at the Federal Deposit Insurance Corp., which handles bank failures. "This is our way of trying to help communities and businesses."

A bank failure is a ritual process. Government officials walk into the lobby on Friday afternoon, about five minutes before closing time. When the last customer leaves, a state or federal regulator announces that the bank has been seized. An FDIC official announces that it has been sold. The new owner, generally another bank, is introduced. The rest of the weekend is a race to reopen the branches Monday morning.

Regions Bank bought two failed banks in the past six months, both in the Atlanta area. On a Friday in early February, Bill Linginfelter, the top Atlanta executive for Regions, walked into FirstBank Financial Services in McDonough, Ga., shortly before 5 p.m. and tried to reassure the gathered employees. Ninety minutes later, a crew arrived to raise temporary Regions signs. Another crew reprogrammed the ATMs. New computers were installed.

On Saturday, Linginfelter stationed employees in the parking lots outside each branch. "People would drive by and roll down the window and say: 'What's going on? Is my money safe?' And we'd say, 'Yes,' and they'd keep driving," Linginfelter said.

On Sunday afternoon, Regions held a meeting for its new employees. A manager at another failed bank acquired last fall by Regions had volunteered to speak. Then Linginfelter answered questions, assuring employees that they could keep serving popcorn in the lobby.

The next morning, Regions opened its new branches.

The process was not always so smooth. During the Great Depression, bank failures ripped holes in local economies. Depositors lost money. Businesses lost access to loans. A famous 1983 paper by Ben S. Bernanke, now chairman of the Federal Reserve, argued that bank failures were a key reason for the depth of the nation's economic suffering. Bernanke, then a professor at Stanford University, wrote that businesses were unable to borrow money just when they needed it most.

The government responded to the crisis by creating the Federal Deposit Insurance Corp., which guarantees most deposits against loss. The agency also takes possession of failed banks and sells as much as it can of the branches, deposits and loans to healthy banks.

The FDIC's insurance fund is filled by an assessment on all banks, distributing the cost of failure across the industry. The 42 banks that have failed since the start of 2008 held about $160 billion in deposits. More than 97 percent of the money was immediately available, allowing those depositors to keep spending and reassuring depositors at other banks that their money was safe. The remaining deposits are temporarily frozen while the FDIC determines whether they are insured. Some uninsured deposits also are repaid with the proceeds from the sale of the bank's assets.

The FDIC also tries to shift borrowers to the acquiring bank. The agency is not equipped to perform the basic functions of a bank, such as extending lines of credit and rolling over loans. Its employees lack the necessary local knowledge. And its ability to modify loans or help borrowers with problems is restricted by its primary obligation, to return maximum value to the bank's creditors.

In 2008, buyers agreed to take ownership of about 77 percent of the assets held by failed banks, excluding the massive and unique failure of Washington Mutual.

To sweeten its sales pitch, the FDIC has increasingly promised banks that if they agree to take control of loans, the government will share in any losses. When Bank of Essex bought Suburban Federal, it agreed to take control of almost 97 percent of the bank's loans and assets in exchange for a loss-sharing agreement.

Transferring borrowers to a new bank, however, is only a partial solution. Carlos Ramirez, an economics professor at George Mason University who has studied bank failures, said it takes months for borrowers to explain their businesses to the new bank and build trust. His research shows that lending remains restricted and more expensive for about nine months after a failure.

"A new bank comes in, they have to get to know the clientele. They cannot just give away money willy-nilly. The relationships take time to build up," Ramirez said. "In the early stages of the relationship, the lending is a little bit more expensive because they have to protect themselves against their lack of knowledge."

The Bank of Essex hired a new team of lenders for the Community Bank, but Simanson said they are still getting adjusted to the area. Regions Bank already had a loan officer working the area around McDonough, and Linginfelter said he is starting to make a stronger sales pitch to businesses in the area.

The loans rejected by the acquiring bank stay with the FDIC, which now holds about $16 billion in assets. It tries to sell the loans to other investors within three to four months.

The Bank of Essex agreed to take only 12 percent of the loans from Community Bank of Loganville. The remainder include mortgages on half a dozen churches, a hotel and an apartment complex and a small-business loan for a children's day care center. Those loans and others, about $38 million in all, will be sold March 17 in an online auction conducted by the Debt Exchange, a Boston company hired by the FDIC to sell assets from failed banks.

Selling loans to new owners can help borrowers by clearing the way for a compromise, said Debt Exchange chief executive J. Kingsley Greenland II. If a bank lends a dollar and the borrower offers to pay back 65 cents, the bank is unlikely to agree. But if the loan is sold to a new owner for 50 cents, then 65 cents looks like a good deal, he said.

"Our observation across 20 years has been that once this process starts in a market, that market recovers much faster because you move the assets of the bank's balance sheet that's paralyzed into the private sector, where speedy resolution is the name of the game," Greenland said.

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"No Good Deed: The Fed's unappreciated bailout of a miscreant Swiss bank"
The Washington Post, Editorial, A12, Saturday, March 7, 2009

NOT NORMALLY a hotbed of anti-Americanism -- or of any other political sentiment, for that matter -- Switzerland is experiencing an unusually exciting relationship with the United States right now. At issue: U.S. demands that the Swiss help root out a massive alleged conspiracy in which the Zurich-based bank UBS, Switzerland's largest, helped wealthy Americans avoid taxes through secret accounts. To stave off a potentially devastating Justice Department prosecution, UBS agreed last month to pay $780 million and name about 300 U.S. clients. But U.S. authorities have since filed a civil lawsuit seeking data on 52,000 Americans who the U.S. government says are hiding about $14.8 billion in Swiss accounts.

If U.S. authorities succeed, they will have closed a big loophole in tax enforcement. But Swiss banking secrecy could be finished -- and, with it, the competitive advantage of the Swiss banking industry. Not surprisingly, Swiss public opinion is annoyed, and the Swiss government is pushing back diplomatically -- most recently in a meeting Monday between Swiss and U.S. law enforcement officials. Some of the louder voices in Swiss politics want broader retaliation. The right-wing Swiss People's Party, for example, has said that Switzerland should refuse to take in detainees from Guantanamo Bay, Cuba, when the prison there is closed; repatriate Swiss official gold supplies stored in the United States; or kick the U.S. Interests Section out of the Swiss Embassy in Cuba.

What you don't often hear the Swiss say is that UBS might have been bankrupt today if not for a bailout from -- you guessed it -- the United States. Last fall, the bank was facing $60 billion in losses on mortgage-backed securities. The Swiss National Bank, Switzerland's central bank, agreed to take the toxic assets off UBS's hands. To do that, however, the SNB needed $54 billion -- which it got from the Federal Reserve in exchange for an equivalent amount of Swiss francs. This "currency swap" between the two central banks amounted to more than 10 percent of Swiss GDP.

One of several such swaps between the Fed and its counterparts around the world, the Fed-SNB deal was conceived separately from the tax investigation, we are told. The Fed believed that the swap was in the interest of the United States, since a UBS meltdown might have exacerbated the global financial crisis. As U.S.-Swiss tensions have grown, the Swiss central bank has decided to take only about two-thirds of the original $54 billion and has begun displacing the remaining Fed cash by selling dollar-denominated bonds in Europe. For now, though, UBS and the Swiss government remain dependent on the Fed's willingness to renew the currency swap periodically.

In short, all things considered, Uncle Sam has been a pretty good sport about UBS. The denunciations of U.S. policy in Switzerland simply show that no good deed goes unpunished. Well, retaliation can be a two-way street. The Obama administration hasn't used the Fed's lifeline as leverage on the tax issue, and no doubt there are good and high-minded reasons not to do so. Still, as bilateral negotiations proceed, it might be worth a quiet mention or two.

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"UBS Trial Delayed Again; U.S., Swiss Seek Settlement"

By David S. Hilzenrath, Washington Post Staff Writer, Saturday, August 8, 2009

The trial in the U.S. government's landmark challenge to Swiss bank secrecy was postponed Friday for a third time as the United States and Switzerland continue to pursue a negotiated settlement.

The action came one week after the Justice Department declared that the two sides were on the verge of a deal and aimed to have a final deal by Friday.

The government has been seeking a federal court order compelling Switzerland's largest bank, UBS, to turn over the names of Americans suspected of using 52,000 secret accounts to dodge taxes. The government has been fighting to recapture lost tax revenue, punish tax evaders, and deter others hiding money overseas.

Switzerland has resisted the U.S. demand, vowing that it would block UBS from complying even if a U.S. court ordered the disclosure.

Switzerland has been fighting to preserve the reputation for secrecy that has helped make banks there a magnet for global deposits and a major source of Swiss wealth.

Though the two sides have staked out what seem to be irreconcilable positions, a Justice Department lawyer last week told the judge presiding over the case that they had reached "an agreement in principle on the major issues."

In an update Friday for Judge Alan S. Gold, Justice Department lawyer Stuart D. Gibson said, "There are still some issues that remain to be resolved."

"The parties are working through these issues and plan to continue talking," Gibson added.

The judge scheduled another update for Aug. 12 and postponed until Aug. 17 the trial that was provisionally scheduled to begin Monday in a Miami court.

UBS admitted in February that it schemed to defraud the United States by helping American clients hide money from the Internal Revenue Service. To avoid a potentially devastating criminal indictment of the firm, it also agreed to pay $780 million. But it gave up only 200 to 300 of the tens of thousands of client names the United States was seeking, on the grounds that those relative few forfeited protection by allegedly crossing a line in Swiss law between simple tax evasion and outright fraud.

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"UBS to divulge secret accounts"
By Reuters, August 17, 2009

GENEVA - The deal initialed last week between the United States and Switzerland over UBS will involve the disclosure of about 5,000 holders of secret Swiss accounts, the weekly newspaper NZZ am Sonntag said yesterday. Another Swiss weekly, Sonntag, said 4,500 names would be handed over.

The landmark deal, ending a dispute in which US authorities had sued to force UBS to disclose 52,000 US clients suspected of tax evasion, removes a big cloud hanging over the world’s second-biggest wealth manager.

It also formally leaves Switzerland’s cherished banking secrecy intact, though many Swiss private bankers say it has been badly damaged.

NZZ am Sonntag said the deal would be based on the existing US-Swiss double taxation agreement of 1996, and therefore not require any changes to Swiss law.

UBS will also escape having to pay a fine, it said.

The deal will probably be signed this week, a source familiar with the situation told Reuters on Friday. Spokesmen for the Swiss and US justice department declined to comment.

Account-holders threatened with disclosure would be able to challenge the move in Swiss courts, NZZ am Sonntag said.

The newspaper said the US government had backed off from the original demands of the Internal Revenue Service because the US Treasury secretary did not want to provoke another financial crisis by pushing UBS over the edge.

Under a previous agreement, UBS settled criminal charges it had facilitated tax fraud by paying $780 million and handing over data on about 250 US clients.

US prosecutors said Friday that a California client of UBS would plead guilty to criminal charges arising from an investigation into tax evasion at UBS, the fourth prosecution arising from that deal.

Criminal charges arising from that case, and the disclosure of additional names from the latest deal, are keeping pressure on suspected offenders to report themselves voluntarily under an amnesty program running to September 23, 2009.

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"Swiss Bank UBS to Divulge at Least 4,450 Account Names"
By David S. Hilzenrath, Washington Post Staff Writer, Wednesday, August 19, 2009

The Swiss government will turn over names of suspected tax-dodgers who have held 4,450 secret accounts at banking giant UBS, accounts that at one point held as much as $18 billion, U.S. officials said Wednesday morning.

The settlement follows a long-running effort by the U.S. government to penetrate Swiss bank secrecy and catch tax evaders. The United States had been seeking a federal court order demanding that UBS identify the American holders of 52,000 accounts. The Swiss government vowed to prevent such a disclosure, leading to weeks of negotiations and Wednesday's announcement.

"We will be receiving an unprecedented amount of information," IRS Commissioner Doug Shulman said Wednesday morning. "This agreement represents a major step forward with the IRS's efforts to pierce the veil of bank secrecy and combat offshore tax evasion."

The process could take a year.

Schulman said the deal sends an "unmistakable message" to tax dodgers: "Wealthy Americans who have hidden their money offshore will find themselves in a jam," he said.

The Swiss government has agreed to work with the United States on similar requests for disclosure involving other Swiss banks, Schulman said in a conference call with reporters.

IRS officials offered no estimate of how much the agency might recoup in back taxes and penalties.

"This agreement helps resolve one of UBS's most pressing issues," UBS chairman Kaspar Villiger said in a statement. "I am confident that the agreement will allow the bank to continue moving forward to rebuild its reputation through solid performance and client service. UBS welcomes the fact that the information-exchange objectives of the settlement can be achieved in a lawful manner under the existing treaty framework between Switzerland and the United States."

UBS will pay no penalties under the deal, the bank said.

Switzerland was fighting to preserve the reputation for privacy that has made its banking industry a global powerhouse and a pillar of the Swiss economy.

The deal includes potentially face-saving concessions for Switzerland, as it attempts to argue that its tradition of secrecy survived the battle. The United States agreed to narrow its request for names to those considered most likely to have engaged in tax evasion.

More importantly, the United States agreed to drop its federal lawsuit against UBS and pursue the information through a Swiss legal channel under a tax treaty between the two countries.

The U.S. government tried to use that channel last year but got nowhere. To settle the lawsuit, Switzerland agreed to handle the request more expeditiously this time, and apparently on different terms. In predicting that the new deal will expose identities of the 4,450 accounts, Schulman's comments imply that the request is mainly a formality.

If the Swiss don't follow through as expected, the U.S. can resume its battle in the U.S. courts.

"I have every reason to trust the Swiss government and expect that we will get these accounts," Shulman said.

Swiss law already allowed the release of client information under certain egregious circumstances, such as fraud. But the threshold for disclosing the information has been a point of contention.

Asked how the agreement has changed Switzerland's bank-secrecy standards, an IRS official who briefed reporters on condition of anonymity said, "Under this agreement, there has been a recognition of standards that are somewhat broader than [there] had been at the beginning of this process. But we don't want to get into the specifics of that" until additional details of the settlement are released in 90 days.

In Washington, the Swiss Embassy issued a statement saying the United States committed to "refrain from unilateral information-gathering measures that infringe Switzerland's sovereignty and rule of law."

Under Swiss law, the affected depositors would have the opportunity to contest the release of their names and account information. But that, too, could be a hollow exercise. Under U.S. law and the agreement, they would be required to disclose such appeals to the Justice Department, potentially rendering moot any attempt to remain anonymous.

In February, to avoid criminal prosecution, UBS agreed to pay the U.S. government $780 million and admit that it schemed to defraud the United States by helping Americans hide money from the IRS. At that time, the Swiss provided the names of 200 to 300 American depositors, and UBS said that Swiss law prohibited it from disclosing any more.

Some details of the settlement were not disclosed. The criteria the U.S. government used to narrow its request remain under wraps. That leaves UBS depositors guessing as to their personal risk of exposure and keeps them under pressure to seek leniency by turning themselves in to the IRS.

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"A Light on Zurich: A U.S.-Swiss agreement pierces banking secrecy."
The Washington Post, Editorial, Friday, August 21, 2009

THERE WILL BE no breakdown in relations between the United States and Switzerland after all. This week the two countries announced a settlement of their dispute over U.S. access to information on thousands of Swiss bank accounts believed to have been set up by U.S. tax cheats. That's the good news; the better news is that the agreement promises to secure the Internal Revenue Service much of the information it legitimately seeks, including about 4,450 names of the worst violators -- while poking a potentially durable hole in the shroud that has traditionally enveloped Swiss banking.

The Swiss take pride in that discreet tradition; they live off it, too, since secrecy has helped build banking into an industry that supports a tenth of the tiny country's economy. In truth, though, the Swiss did not occupy the moral high ground in this case. It began when an American employee of the largest Swiss bank, Zurich-based UBS, told U.S. authorities of UBS's massive covert scheme to help wealthy U.S. citizens and legal residents park their taxable cash in secret accounts, in flat violation of U.S. law. UBS pleaded guilty in federal court, agreed to pay $780 million in fines and turned over the names of 300 U.S. clients. Individual criminal convictions followed, as did a U.S. civil lawsuit seeking data on thousands more American-held UBS accounts. It was this demand that the government of Switzerland denounced as a fishing expedition -- but which ultimately forced it to the bargaining table on behalf not only of UBS but, in effect, all of the country's banks.

The precise impact of the agreement is still impossible to gauge. Details are being withheld by mutual agreement, for two apparent purposes. The first is to sow uncertainty among U.S. tax evaders, thus encouraging them to come clean voluntarily while an IRS offer of leniency is still available, rather than risk harsher penalties if their names turn up on the UBS list later on. In this sense, the agreement cleverly maximizes the information -- and money -- the IRS can obtain while minimizing costs to the agency.

The second purpose, undoubtedly, is to help Switzerland save face. The Swiss don't have to spell out the terms under which they will agree to surrender U.S. names to the IRS, at least not immediately, so the magnitude of their concession remains obscure. But it is not trivial. Essentially, the Swiss appear to have accepted real teeth in a new tax treaty between the two countries, so that it can be used to pursue a wider category of alleged offenders than was possible previously. The Swiss government has also agreed to cooperate on similar requests for disclosure involving other Swiss banks. It is, perhaps, not the full disclosure the United States demanded. But tax cheats thrive in the dark, and now that darkness is no longer total.

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"Ex-UBS banker turned informant sentenced to jail"
By Tom Brown, Reuters, Friday, August 21, 2009

FORT LAUDERDALE, Florida (Reuters) - A former UBS banker and key informant in the U.S. tax evasion case against Swiss bank UBS AG was sentenced to three years and four months in prison on Friday for helping a billionaire hide assets from U.S. tax authorities.

The sentence for Bradley Birkenfeld, handed down by federal Judge William Zloch in a Fort Lauderdale court, was harsher than his attorney and prosecutors had expected.

Citing Birkenfeld's cooperation in the U.S. government tax evasion investigation of UBS, prosecutors had asked that his sentence be reduced to 2-1/2 years in prison from the five years he had originally faced.

His lawyers had pleaded for probation, which would have kept Birkenfeld, a 44-year-old U.S. citizen, out of jail.

Birkenfeld was sentenced for conspiring to defraud the United States by helping a billionaire U.S. real estate developer create sham corporations and entities to hide $200 million in assets from U.S. tax authorities.

But he had been credited with providing information in a sweeping U.S. investigation of UBS over its private banking business, involving wealthy Americans who used their Swiss bank accounts to hide money overseas to evade taxes.

His sentencing, delayed four times since it was originally set for August last year, came two days after U.S. and Swiss authorities signed a pact in which Switzerland agreed to reveal the names of about 4,450 wealthy American clients of UBS to U.S. tax investigators.

Birkenfeld's defense attorney, David Meier, called the prison sentence "disappointing" but said his client would continue to work with U.S. investigators.

"Mr. Birkenfeld intends to continue to fully cooperate with the government in its ongoing and expanding investigation," Meier told reporters.

MESSAGE TO TAX CHEATS

Birkenfeld, who has admitted to once smuggling a customer's diamonds into the United States in a toothpaste tube, appeared in the wood-paneled courtroom in a gray pinstripe suit, blue shirt and red tie.

Appealing for leniency, his attorney Meier said Birkenfeld had helped U.S. authorities uncover a massive tax fraud scheme involving UBS. He asked for five years probation for Birkenfeld.

"The world of international taxes has drastically changed," Meier said, citing statements by U.S. Internal Revenue Service (IRS) officials who said that Wednesday's Swiss-U.S. agreement was prising open Switzerland's jealously guarded bank secrecy.

"He (Birkenfeld) is the individual who started this change," Meier said. "He has continued to provide as much information as he possibly, humanly can on private U.S. bankers."

U.S. officials said Birkenfeld's sentencing would send a powerful message to U.S. tax offenders hiding undisclosed assets in Swiss bank accounts to give themselves up under a voluntary disclosure program.

"To those taxpayers who have illegally hidden their income in foreign bank accounts and to those who have illegally helped clients hide income and assets, today's sentencing serves as notice: come in and completely come clean," said John A. DiCicco, Acting Assistant Attorney General of the Justice Department's Tax Division.

Kevin Downing, a senior attorney with the Department of Justice tax division, said an additional sentence reduction may be requested by the government based on Birkenfeld's continuing cooperation in the UBS tax fraud probe over the next 90 days.

Taking this into account, Zloch deferred the date for Birkenfeld to report to prison until January 8, 2010.

It was clear through questions the judge asked in court that he thought Birkenfeld warranted jail time because he had initially concealed his involvement in tax fraud involving both UBS and its clients.

But Stephen Kohn, executive director of the National Whistleblower Center in Washington, D.C., which has sought to encourage and protect insiders who disclose corporate corruption, said Birkenfeld's sentence sent the wrong message to potential informants.

"It is counterproductive and will have a chilling effect on other whistleblowers. The government has to induce insiders to come out, and you don't do that by throwing them in jail," Kohn said in a statement.

In comments to Zloch before sentence was passed, Birkenfeld expressed regret for his actions and said he and other U.S. bankers had been "pressured and incentivized" by UBS to engage in illicit business practices.

U.S. tax officials said the accord with Switzerland would help to peel back Swiss banking secrecy and their investigation has now widened to bring other Swiss banks under scrutiny from U.S. prosecutors.
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(Reporting by Tom Brown; Writing by Pascal Fletcher; Editing by Toni Reinhold)
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"IRS Tax Probe Targets Lawyers, Banks as UBS Data Shred Secrecy"
By Ryan Donmoyer, David Voreacos and Carlyn Kolker

August 20, 2009 - (Bloomberg) -- An agreement by UBS AG, Switzerland’s largest bank, to reveal data on 4,450 accounts may lead to a larger crackdown on tax evasion by banks and lawyers, said U.S. Internal Revenue Service Commissioner Douglas Shulman.

UBS agreed yesterday to hand over the information to settle a U.S. lawsuit seeking the names of Americans suspected of evading taxes through 52,000 Swiss accounts. The bank will give the material to the Swiss government, which would then determine how much will go to the IRS.

The U.S. sued UBS on Feb. 19, a day after the bank agreed to provide the names of 250 account holders and pay $780 million to avoid prosecution for helping wealthy Americans evade taxes. UBS clients have until Sept. 23 to disclose their accounts and avoid prosecution. The U.S. lawsuit and voluntary disclosures have helped the IRS widen its net beyond UBS, Shulman said.

“We’re finding out about financial institutions that facilitated tax evasion and we’re going to pursue them,” he said in an interview with Bloomberg Television. “We’re finding out about other intermediaries, like law firms and others who promoted tax evasion.”

The six-month legal battle put unprecedented pressure on the Swiss government, which had said the U.S. lawsuit could force UBS to violate national laws making disclosure of secret account data a crime.

“Getting 5,000 names from one financial institution blows a big hole in bank secrecy,” Shulman said. “It’s clearly a victory for the U.S. government to gain access to a nook and cranny of the financial system that we haven’t been able to gain access to in the past.”

Risk Prosecution

Thousands of Americans now must choose whether to disclose accounts to the IRS, paying back taxes, fines and penalties, or keep their assets undeclared and risk criminal prosecution.

The IRS agreement follows the bank’s admission on Feb. 18 that it helped Americans evade taxes, and the prosecution of two UBS bankers and four U.S. clients. One of those bankers, Bradley Birkenfeld, 44, pleaded guilty to conspiracy and has cooperated with prosecutors. He faces up to five years in prison when he is sentenced tomorrow in Fort Lauderdale, Florida.

In recommending a three-year prison term for Birkenfeld, the Justice Department said in a court filing this week that it is criminally investigating 150 UBS clients. Three have pleaded guilty to filing false tax returns and a fourth was charged last week with failing to file a tax report for an offshore account.

Pursue Wrongdoing

Shulman said the IRS has “been given hundreds more attorneys, investigators, agents to pursue wrongdoing.” He urged Americans with offshore accounts to come clean by Sept. 23 or risk prosecution.

“If in the past you’ve been hiding assets overseas and thought those assets were safe and we weren’t going to find them, those days are coming to an end pretty quickly,” he said.

He declined to say how many have volunteered the information so far. As for the 4,450 accounts covered by the accord, he said they had assets worth about $18 billion at one time and included a range of securities, commodities and cash.

A pair of agreements signed yesterday outline the process by which the U.S. will make a treaty request for the data, UBS will hand it to the Swiss government, and the Swiss will decide whether to give it to the IRS. That process will take up to a year and allows UBS clients to appeal the determination.

UBS will inform affected customers they have a right under Swiss law to appeal to the Swiss Federal Administrative Court to keep their accounts secret. The account holders also will be told they are required by U.S. law to notify the Justice Department of any appeal.

Tax Fraud

The agreement also broadens the definition of tax fraud, a crime in Switzerland. Tax evasion isn’t a crime there. The settlement also lets the U.S. seek unnamed account holders, a move to help override the current prohibition against such blanket inquiries.

Michigan Democrat Carl Levin, who heads the Senate Permanent Subcommittee on Investigations, said the accord doesn’t do enough. It “is at most a modest advance in the effort to end bank secrecy abuses,” he said. “It will take a long time before we know whether this settlement will produce meaningful gains.”

“This has cracked open a window that’s been shut for a long time,” said former IRS Commissioner Charles Rossotti, a senior adviser at the Carlyle Group. He urged the Obama administration to give the IRS “the resources it needs to solve this huge problem.”

The agreement lets the U.S., the Swiss and UBS claim victory, said Charles Falk, a lawyer in Mendham, New Jersey, who represents 35 UBS clients.

“It gives the U.S. what it wants, which is names,” he said. “It gives the Swiss what it wants, which is an affirmation of bank secrecy. It gives UBS the ability to now go out and deal with its other issues, which are many.”

The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).
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To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.netDavid Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; Carlyn Kolker in New York at ckolker@bloomberg.net.
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"As banks falter, more critics call for receivership"
By Michael Kranish, Boston Globe Staff, March 7, 2009

WASHINGTON - With major banks flailing and criticism swelling in some quarters over how President Obama is handling the crisis, a growing chorus of economists, former top government officials, and analysts is calling on the Obama administration to put the institutions into federal receivership and closely follow the model of how the government dealt with the savings and loan crisis.

They avoid the word "nationalization," but say that some major institutions that have received billions in taxpayer money might otherwise be insolvent.

Those voices, from both parties, include a Republican senator, a Nobel-winning economist who backed Obama, and a former top banking regulator given a starring role by Obama's team during the height of last year's presidential campaign.

William K. Black - the regulator featured in an Obama video questioning John McCain's ability to deal with the looming bank meltdown - now says that Obama is mishandling the financial crisis by pouring hundreds of billions of dollars into institutions without any assurance that taxpayers will get the money back.

Black says the federal government should take over the banks, sack their executives, unload "toxic" assets, then auction the viable parts of the companies.

"What they are doing hasn't worked and is vastly more expensive," said Black, whose regulatory jobs included being deputy director of the Federal Savings and Loan Insurance Corp.

Black, who said he voted for Obama, said in an interview that he worried the administration's policies are "not only going to be devastatingly bad for the nation but I feel they will destroy the Obama presidency."

But Mark Zandi, the chief economist at Moody's Economy.com, rejected Black's proposal, saying it would be "catastrophic" for the companies be taken over by the government because that would devastate shareholders and debt holders.

Zandi is among those who praise the administration's rescue plan, in part because it relies on a private-public partnership to buy toxic assets. He said that if Obama's plan fails, the president can still go to a "plan B" in which the government acquires the "toxic" assets without taking over the companies.

The opposing views of Zandi and Black underscore the divide of opinion over whether Obama's financial rescue plan can succeed. While injecting huge amounts of taxpayer money into the banks - $242 billion so far - has always been controversial, the criticism has intensified in recent days amid the latest efforts to keep afloat financial behemoths such as AIG and Citigroup.

Citigroup, which has received $45 billion in taxpayer assistance, had its stock sink below $1 for the first time ever during trading Thursday (it ended the week at $1.03 after rising a penny yesterday), raising new questions about whether the federal investment is working.

On top of the bank rescue money, the Obama administration this week put another $30 billion into AIG, bringing the potential taxpayer aid to $180 billion for the giant insurance company, leading some lawmakers to question whether there was any end in sight.

The Obama administration says companies such as AIG and Citigroup cannot be allowed to fail because they have so many ties to other major companies that their demise would threaten the entire financial system.

So far, the White House has rejected the receivership approach, saying it would be far more expensive than propping up the banks. It also rejects emulating the savings and loan bailout strategy because the banks now at risk make up a far larger part of the economy.

The Treasury Department says the largest bank previously taken over by the government - Continental Illinois in 1984 - represented about two percent of the nation's banking assets, while the four largest banks in the current crisis - Citigroup, Bank of America, Wells Fargo, and JP Morgan - represent about 60 percent of such assets.

But Black, a top regulator in the 1980s when hundreds of savings and loans failed, said the response to that crisis is relevant. The government took over many of the thrifts, put their bad assets in an entity called the Resolution Trust Corp., and later resold many of them. By some estimates, the total cost to taxpayers to handle the crisis was $160 billion.

During the S&L crisis, Black learned McCain was complaining about a government investigation of a thrift run by one of the senator's major campaign donors. Black accused McCain of political interference, and McCain was admonished by the Senate Ethics Committee for using "poor judgment."

A spokeswoman said McCain was not available to comment on the receivership idea.

In a political twist, Black's thinking now is more closely aligned with that of Senator Lindsey Graham, a South Carolina Republican who has long been one of McCain's closest allies. Graham said he believes that the Obama administration should seriously consider putting AIG and other institutions that have received huge infusions of federal money into receivership and selling their assets.

"The middle ground to me is controlled liquidation," Graham said in an interview, stressing he wasn't in favor of letting the banks and AIG simply fail. Like Black, he said that the liquidation should be based on the process used in the savings and loan crisis.

But Senator John F. Kerry of Massachusetts said that the government should not take over banks, saying that federal officials would not be the best managers. In an interview airing this weekend on Bloomberg Television, Kerry acknowledged, however, that the cost of the bank rescue will be "clearly over a trillion dollars and maybe over two."

But as more money is poured into the institutions, more questions are being raised about the strategy from high-profile observers across the political spectrum.

Nobel-prize winning economist Joseph Stiglitz, former chairman of the Council of Economic Advisers in the Clinton administration, has called on Obama to consider taking over the banks. In an interview, Stiglitz called the Obama administration's policy a "foolish" gamble in which "the probability of it paying off was very, very low."

Stiglitz, who said he strongly backed Obama during the campaign, said the president is being poorly advised by a Treasury Department that he says is too closely tied to Wall Street. He agrees with Black that it would be cheaper for the government to immediately take over failing financial institutions.

James A. Baker III, the former Reagan administration Treasury secretary, wrote this week that he feared that the United States was repeating the mistake made by Japan in the 1990s, when that economic powerhouse pumped huge amounts of money into failing banks - which had been hit hard when a housing bubble burst - in hopes that they would recover, only to descend into a prolonged economic slump known as its "lost decade."

Baker wrote in a Financial Times column that "the US may be repeating Japan's mistake . . . We risk perpetuating US zombie banks and suffering a lost American decade."

Treasury officials dispute Baker's analogy, saying the US has acted much faster than Japan in shoring up banks. At a congressional hearing this week, Federal Reserve Board Chairman Ben Bernanke said he didn't know of any "large zombie institutions in the US financial system."

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"GM CEO's 2008 compensation valued at $14.9 million"
Associated Press, Saturday, March 07, 2009

DETROIT (AP) - The man who has been General Motors Corp.'s CEO for more than eight years received a pay package last year worth $14.9 million despite a $30.9 billion annual loss, a share price below $2 and a balance sheet propped up by government loans.

But don't get too angry just yet. Roughly $11.9 million of Chairman and CEO Rick Wagoner's compensation was in stock and options that have plummeted in value to $682,000.

GM, which has lost $82 billion over the last three years, disclosed the figures in its annual report filed Thursday with the Securities and Exchange Commission.

The report also said GM's auditors have serious doubts about the company's ability to keep operating, and it may have to seek bankruptcy protection if it can't execute its turnaround plan.

Wagoner's total compensation last year was 5.5 percent less than his $15.7 million package in 2007.

He received no cash incentive compensation last year, but his salary increased 35 percent from $1.6 million in 2007 because it was restored to its level before 2006, when he agreed to reduce his salary for two years as part of the company's restructuring efforts.

This year, Wagoner agreed to accept a salary of $1 as part of GM's request for government help. The Detroit-based company has received $13.4 billion in federal loans and is seeking up to $30 billion as it tries to weather the worst auto sales downturn in 27 years.

Wagoner, 55, received $2.1 million in salary last year, $836,000 in other compensation, and stock and options that the company valued at $11.9 million when they were granted in March 2008.

But 1 million options that had been valued at more than $7.1 million are now worthless because GM shares are trading well below the $23.13 price at which Wagoner could buy the shares. Other shares granted as part of long-term incentive programs also lost most of their value.

GM's stock price, which plunged 87 percent in 2008 from its level of $24.89 at the end of 2007, fell 34 cents, or 15.5 percent, to $1.86 Thursday.

An additional 4.7 million options that Wagoner received in earlier years also are worthless unless GM's stock price rises above the exercise price before the options expire. Hundreds of thousands of Wagoner's options, with exercise prices as high as $75.50, are set to expire each year through 2018.

Wagoner's compensation is fair because he received nothing based on his performance, said James E. Schrager, clinical professor of entrepreneurship and strategy at the University of Chicago Graduate School of Business.

Schrager, a Wagoner critic who says the CEO moved to slowly to shed unprofitable brands, restructure debt and cut labor costs, said Wagoner's $2.1 million cash salary is reasonable considering the size and complexity of GM.

"I've never had a beef with what he's made," Schrager said. "But I have major concern about his failure or success at the company. Is he the right guy to run GM at this time?"

David Cole, chairman of the Center for Automotive Research in Ann Arbor, noted that Wagoner is the CEO, but he now has another boss: the government.

"If they don't think it's a smart thing to do, he won't do it," Cole said.

Wagoner's other compensation included $160,000 for personal use of corporate aircraft, $270,000 for personal security, $11,500 for use of company vehicles, and $12,000 for financial and estate planning.

Use of the aircraft drew the ire of many in Congress late last year when Wagoner and his counterparts at Chrysler LLC and Ford Motor Co. flew to Washington on separate corporate jets to seek government loans. When GM signed its government loan agreement Dec. 31, it agreed to get rid of the private aircraft that it had been leasing.

Wagoner, Chief Operating Officer Fritz Henderson and Chief Financial Officer Ray Young now fly first-class on commercial airlines. Other senior leadership executives fly business class for international travel and coach for domestic flights, GM said in its annual report.

The Associated Press calculations of total pay include executives' salary, bonus, incentives, perks, above-market returns on deferred compensation and the estimated value of stock options and awards granted during the year. The calculations don't include changes in the present value of pension benefits, and they sometimes differ from the totals companies list in the summary compensation table of proxy statements filed with the Securities and Exchange Commission.
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Associated Press Writer Ken Thomas in Washington, D.C., and AP Auto Writer Kimberly S. Johnson in Detroit contributed to this report.
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"Now-needy FDIC collected little in premiums: With fund going strong, banks didn't pay for decade"
By Michael Kranish, Boston Globe Staff, March 11, 2009

WASHINGTON - The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade, according to banking officials and analysts.

Now with 25 banks having failed last year, 17 so far this year, and many more expected in the coming months, the FDIC has proposed large new premiums for banks at the very time when many can least afford to pay. The agency collected $3 billion in the fees last year and has proposed collecting up to $27 billion this year, prompting an outcry from some banks that say it will force them to raise consumer fees and curtail lending.

To possibly reduce the fee increase, the FDIC has asked Congress for the temporary authority to borrow as much as $500 billion from the US Treasury - up from the current $30 billion limit - in case the number of bank failures increases even more dramatically. If Congress approves the measure, to borrow more than $100 billion, the FDIC would still need permission from the Federal Reserve, the Treasury Department, and the White House.

As of Dec. 31, the FDIC had $18.9 billion in its insurance fund - down from $52.4 billion a year earlier - in addition to $22 billion that it has set aside for pending bank failures. The agency has projected it will need $65 billion to take over failed banks through 2013.

But if the FDIC suddenly had to take over a giant bank such as Citigroup or Bank of America, the fund would be drained "in a flash," said Cornelius Hurley, director of the Boston University law school's Morin Center for Banking and Financial Law.

Last week, FDIC chairwoman Sheila Bair wrote to Senate Banking Committee chairman Christopher Dodd, a Connecticut Democrat, that her agency could need more money because the existing fund "provides a thin margin of error" given the government's responsibility "to cover unforeseen losses." The March 5 letter, provided to the Globe, said the additional borrowing authority is necessary to "leave no doubt" that the FDIC can "fulfill the government's commitment to protect insured depositors against loss."

Bair said yesterday that the agency's failure to collect premiums from most banks "was surprising to me and of concern." As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

"That is five years of very healthy good times in banking that could have been used to build up the reserve," Bair, a former professor at the University of Massachusetts at Amherst, said in an interview. "That is how we find ourselves where we are today. An important lesson going forward is we need to be building up these funds in good times so you can draw down upon them in bad times."

Hurley agreed with Bair's analysis of the FDIC's dilemma. "Typically you would build up a reserve during the halcyon days to protect yourselves during a recession," he said, calling the decision to stop collecting most premiums "a political one" that was pushed by banks and not based on strict accounting principles.

But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because "the fund became so large that interest income on the fund was covering the premiums for almost a decade." There were relatively few bank failures and no projection of the current economic collapse, he said.

"Obviously hindsight is 20-20," Chessen said.

House Financial Services Committee chairman Barney Frank agreed that officials believed at the time that the good times would last and that bank failures would not be a problem.

"We had this period where we had no failures," the Massachusetts Democrat said in an interview yesterday. "The banks were saying, 'Don't charge us anything.' "

Last October, to help restore confidence during the financial meltdown, Congress and then-President Bush agreed to raise the insured amount from $100,000 to $250,000 per depositor until Dec. 31, 2009. A small portion of the new fees on banks will go toward supporting that increase.

The FDIC has never failed to make good on its promise to pay for the insured deposits when a bank fails, and officials said that will not change. The fund ran short of money during the savings and loan crisis of the 1980s, prompting the agency to increase fees to make up for the shortfall.

Then, a booming economy left banks flush with cash, and by 1996 the insurance fund was considered so large that it could grow through interest payments and fees charged only to banks with high credit risk. Congress agreed that premiums didn't need to be collected if the fund was sustained at a level that was considered safe. Thus, about 95 percent of banks paid no premiums from 1996 to 2006, including some new ones that did not have to pay a premium, the FDIC said.

Congress mandates that the insurance fund must stay between 1.15 percent and 1.5 percent of all insured deposits. The reserve ratio on Dec. 31 was 0.40 percent, down from 1.22 percent at the end of 2007. The FDIC has increased premiums to increase the reserve ratio, as well as proposing a one-time emergency assessment that could raise as much as $15 billion.
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Globe correspondent Jillian Jorgensen contributed to this report.
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"SEC Chairman Says Agency Faces Cuts Without Additional Funding"
By Zachary A. Goldfarb and Frank Ahrens, Washington Post Staff Writers, Wednesday, March 11, 2009; 1:56 P.M.

The Securities and Exchange Commission will have "to make significant cuts in its current operations" this year unless Congress authorizes the agency to spend more money, SEC chairman Mary Schapiro testified this morning before a House appropriations panel.

Schapiro said the agency is working to move ahead on a variety of programs to improve its collection of tips and whistleblower complaints, aggressively enforce securities laws and detect potential wrongdoing in the financial markets. "I do not believe it would be wise for the SEC to retrench during such perilous times in our markets," she said.

Schapiro requested that Congress authorize the agency to use $17 million this year in money that went unspent in previous years. The Obama administration has proposed to hike the SEC budget 9 percent to $1.03 billion in 2010.

With the money, Schapiro said she plans to add staff to the SEC's enforcement division to pursue tips and complaints. She said the examination office would receive new positions to inspect credit rating agencies and investment advisers, which have skyrocketed in number over the past few years. Finally, she said, she plans to increase staff in the SEC's Office of Risk Assessment, which seeks to find potential wrongdoing in the market early on by looking through market data, disclosures and examination results for patterns.

Many of these steps address problems at the SEC identified over the past year as the financial crisis escalated. Among other things, the Bernard L. Madoff case showed the SEC was ill-equipped to handle tips and complaints and the failures of credit rating agencies to judge the quality of mortgage-related securities raised questions about that industry.

Schapiro also told the panel that new guidance in mark-to-market accounting -- which should give firms holding distressed assets some flexibility in accounting for them -- ought to be coming in the second quarter of this year.

Many banks are suffering because current accounting rules force them to value their toxic assets at near-zero.

Schapiro said her agency has pushed the Financial Accounting Standards Board (FASB) -- which, with the SEC, oversees corporate accounting -- to provide new guidance to accountants "that will help people understand how to value illiquid assets in distressed markets."

Schapiro said that current mark-to-market rules -- which force firms to value assets on their books at the price they would bring if they were sold today -- have created "a situation of really dire consequences" because so many big banks are holding toxic assets that will be worth something at some point but today, are worth almost nothing.

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"Bank of America CEO warns against nationalization"
By Denise Lavoie, Associated Press Writer, March 12, 2009

BOSTON --Nationalization of banks would be a "nightmare" that would further undermine confidence in the nation's financial system, Bank of America Chief Executive Officer Kenneth Lewis said Thursday.

Lewis said a full-scale government takeover in which shareholders would be wiped out would "send shudders" through the investment community and is not necessary to stabilize the country's banking system.

"It would also give the false impression that all banks are insolvent and investors would immediately start betting on which banks would be next, possibly creating a self-fulfilling prophecy," Lewis told about 450 corporate leaders at a luncheon sponsored by Boston College's Chief Executives' Club of Boston.

He said government control of large banks would "politicize lending decisions" and damage the economy.

Lewis, who has been criticized for large bonuses Merrill Lynch executives collected as the government was providing billions in bailout money, said he understands the outrage felt by taxpayers. Bank of America acquired New York-based Merrill on Jan. 1.

Lewis said because of the decline in its 2008 earnings, Bank of America paid no year-end bonuses to members of its executive management team.

But he said extending such caps deeper into an organization could prompt non-executive associates to go to work for foreign banks.

"Such a loss hurts our company and our shareholders," Lewis said.

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The Boston Globe, ROBERT KUTTNER
"Surviving the Great Collapse"
By Robert Kuttner, March 12, 2009

THIS ECONOMIC CRISIS doesn't have to be a second Great Depression - if government does nearly everything right, and soon. But if government doesn't do more, and fast, this could be worse than the 1930s. Why? Three big reasons:

Finance: A Doomsday Machine. The financial system is in far worse shape than it was when the stock market crashed in October 1929. In the 1920s, there was a stock market bubble, mainly because people could play the market "on margin," borrowing to invest in stocks. There were also scams like the original Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to enable the game, with low interest rates and few rules.

But today, thanks to "securitization" of loans and the ability of insiders to create exotic and unfathomable financial instruments, the speculative system makes buying stocks on margin look like child's play. In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do.

We are not even clear who owns what. The wise guys on Wall Street invented a doomsday machine from which there is no market escape.

In 1929 when the stock market crashed, the banking system was relatively healthy. Bank customers played these speculative games and took the losses, not banks. This time, the banks drank their own Kool-aid.

It took until the awful winter of 1932-'33 for the general depression to fully infect the banking system, and cause over 7,000 banks to fail. But Roosevelt's cure - deposit insurance and a temporary bank holiday to sort out good banks from bad - quickly got the financial system up and running again. Today, the banking mess is still dragging down the real economy, with no effective cure in sight.

Wealth, Deficits, and Demand. The economy now bears all the hallmarks of a depression. Between the housing collapse and the stock market crash, American households are out several trillion dollars (in the 1920s, there were no 401(k) plans and less than 2 percent of Americans owned stock).

When people are suddenly out a lot of money, they spend less. Weak demand in one sector is cascading into other sectors. People spend less on autos, air travel, hotels, restaurants, clothing - any optional purchase. Business sales and profits are down, which causes other layoffs, and the cycle deepens.

Roosevelt was said to be a big spender, but his biggest peacetime deficit was only about 6 percent of GDP. This year, the deficit will exceed 11 percent, and the recession will deepen all year. It took the truly massive deficits of World War II - nearly 30 percent of GDP - to finally end the Great Depression

A Debtor Nation. America in 1929 was a major international creditor. Today, we are the world's biggest debtor. The financial bubble created the illusion of prosperity.

During the bubble years, the foreign borrowing disguised domestic weaknesses, such as our much-diminished manufacturing sector. For now, foreigners are still willing to lend us vast sums, but that may not continue indefinitely.

All these economic calamities have solutions, but each is more radical than what's currently on offer. The government will have to temporarily nationalize major banks, sort out good assets from bad ones, and then return banks to responsible private ownership. To cure the housing collapse, government should directly refinance mortgages, rather than bribing banks to ease terms.

Deficits will have to be a lot larger before they can get smaller. That should not require a war; this is just as grave a national emergency. Those deficits could purchase much broader prosperity.

This crisis doesn't yet have a name. It has all the hallmarks of a depression, but people are understandably reluctant to use the D-word. So let me suggest one: The Great Collapse, since this was both a financial collapse and an ideological one.

Can America recover from a Great Collapse? Can we avert a second Great Depression? To coin a phrase, yes we can. But we need the right strategies and we don't have much time.
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Robert Kuttner is co-editor of The American Prospect and author of "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."
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In the face of dramatic losses to the Bank of America's stock price, CEO Ken Lewis, 61, remains bullishly optimistic, but many shareholders and observers are far less certain that the bank can weather the storm of the financial crisis.
(ABC News Photo Illustration)
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"Bank of America's Ken Lewis Says He's Not Going Anywhere: As Bank of America's Stock Plummets, CEO Resists Some Calls That He Step Down"
By RUSSELL GOLDMAN, abcnews.go.com, March 13, 2009 —

Six months ago, Ken Lewis, chairman and CEO of Bank of America, was heralded as a Wall Street savior, snapping up a tottering Merrill Lynch in a high-stakes deal and ensuring the future of his company while some of the country's most storied financial institutions fell apart around him.

In September, Bank of America acquired Merrill for $29 a share, or about $44 billion, and a seemingly ascendant Lewis bragged to reporters: "We are good at this."

What a difference a few months makes. Despite a good day Thursday, Bank of America shares have fallen 84 percent since Oct. 1. The Merrill deal has been scrutinized by Congress and the New York attorney general, and -- adding insult to injury -- the bank, like some of its top competitors, risks a takeover by the federal government.

In the face of dramatic losses to the company's stock price, Lewis, 61, remains bullishly optimistic. But many shareholders and observers are far less certain that the bank can weather the storm of the financial crisis.

Laying the blame squarely on Lewis, who succeeded the larger-than-life Hugh McColl in 2002, some doubt the current CEO will be able to keep his job if the company continues to hemorrhage money, while other investors are calling for his resignation outright.

"It is going to be very difficult to watch the stock price go from $40 to $5 and be able to survive that," said Paul Miller, a banking analyst at Friedman, Billings, Ramsey & Co. "This is his baby. He did the acquisitions of Merrill, Countrywide and LaSalle Bank. How anyone can make the decisions he made and survive is baffling."

Beginning last summer, as pillars of the economy fell, from Countrywide -- then the nation's largest mortgage lender -- to Merrill -- a stalwart of the financial services industry -- Lewis bought them up, putting a damper on the bank's balance sheet.

Some shareholders believe the government's funding gives the bank enough revenue to protect it from exposure to risky mortgage assets from Countrywide and Merrill. The bank, they say, is also insulated by a steady stream of capital from depositors. Furthermore, they argue, had Lewis not acquired Countrywide and Merrill Lynch, the impact to the overall economy would be devastating.

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Supporters Say Lewis Kept the Bank Liquid

For those supporters, Lewis' bullish optimism expressed in the Op-Ed pages of the Wall Street Journal and in the halls of Congress buoys their confidence in the market, the bank, and the man.

Offering a comment only once ABCNews.com had published this story, bank spokesman Scott Silvestri said, " We made $4 billion last year. We've had a profit in every quarter for 17 years except for the fourth quarter of 2008."

Not everyone agrees with that sentiment. Just because the bank is liquid does not mean Lewis is running the company properly, said James Ellman, a former Merrill Lynch money manager and current president of Seacliff Capital, a San Francisco-based investment firm.

"Every bank in the country can operate and open for business even if the share is a penny instead of $10 dollars, because they're backed by the FDIC and full faith and credit of the government," he said. "But shareholders should be upset. Lewis entered several deals -- LaSalle, Countrywide, Merrill -- despite being on record saying no one should invest during the second half of 2008."

Lewis joined the company in 1969 when it was North Carolina National Bank, operating solely in that state. By the time he became CEO, the bank was the third largest in the country, with branches in 20 states and 190 countries, thanks in part to his plan, which stressed opening branches rather than acquiring outside companies.

His supporters credit him with keeping the bank liquid and are confident he can steer the bank through the storm of the recession. Lewis has repeatedly said the bank would not need to be nationalized. At a speech to CEOs in Boston on Thursday, Lewis called nationalization a "nightmare" and said he strongly agreed with SEC Chairman Ben Bernanke that "nationalization is not necessary to stabilize the banking system."

But some shareholders are wary of Lewis' bullish comments on the economy's health and accuse him of lying to Congress and shareholders about the Merrill deal. They are particularly angry about the last-minute payout of $3.6 billion in bonuses to Merrill executives.

Those investors, including a group that represents the Teamsters and six other labor unions, accuse Lewis of abrogating his fiduciary responsibility and want to see him fired.

They have lambasted Lewis for making unwise investments and accuse him of lying to shareholders and displaying the worst in corporate excess. Last week, Lewis arrived in New York aboard a $50 million corporate jet to answer questions from Attorney General Andrew Cuomo about the $3.6 billion in bonuses Merrill Lynch gave its executives just before Bank of America acquired the company.

Change to Win Investment Group manages 33 million Bank of America shares, or about one half of one percent of the bank's stock, for the Teamsters, the Service Employees International Union and other trade groups.

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CEO Ken Lewis Says He's Not Going Anywhere

In a letter last week to the bank's lead director, O. Temple Sloan, Change to Win called on the bank's board to "immediately seek the resignation of chairman and CEO Ken Lewis."

"Lewis has made disastrous decisions in the past five months," Change to Win spokesman Rich Clayton told ABC News.com.

The investment group holds Lewis responsible for allowing Merrill to pay the $3.6 billion in bonuses just before the deal was done, failing to disclose more than $20 billion in pre-tax losses and failing to protect shareholders from those losses.

"Lewis failed to put shareholders first and he failed to be honest," Clayton said.

Silvestri would not comment on Change to Win's request, but both Lewis and the bank's board of directors have previously said the CEO is not going anywhere -- at least for another two years.

Coming off one of the worst weeks on Wall Street, Lewis and other bank leaders have launched a public relations offensive to calm national fears about the economy. In an interview with the Financial Times last week, Lewis acknowledged that asking the federal government for $20 billion to help pay for Merrill Lynch was a "tactical mistake" because it made the bank appear weak.

In the March 2 interview, Lewis gave his first hint of when he might leave the company, vowing to stay on as CEO until the bank paid back the $45 billion in taxpayer aid it received through the Treasury department. He estimated that it would take two to three years.

Miller, the analyst, doubted Lewis would last that long

"I don't think they'll pay back the government in two years," he said. "I think it will be difficult for him to stick around."

In January, Sloan, the bank's lead director, reiterated the board's support for Lewis.

"The board today during [its] regular meeting expressed support for Ken Lewis and the management team, noting their experience in managing through challenging environments and in assimilating mergers," he said.

At the time, Sloan also told the Wall Street Journal that the question of Lewis' job security "is not expected to be reopened."

Lewis, however, has made a point to let shareholders and the government know that the bank is not Citigroup, which nows counts taxpayers as the single largest shareholder after a government bailout.

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'No One Had a Gun to His Head'

Last month, he told Congress that Bank of America's core "business is strong." In a memo to employees written in February, he said the bank would no longer need government assistance and that "our company has more than enough capital, liquidity and earnings power to make it through this downturn on our own from here on out."

Lewis' supporters echoed that sentiment to ABC News.com.

"The bank has got tons of liquidity and a huge branch network with loyal depositors," said a derivatives banker who requested anonymity because of a professional relationship with Lewis. "It can ride out any temporary downturn in value of assets, even if it lasts a couple of years."

The banker said Lewis' bullish statements could be reconciled with the declining stock price because despite the bad mortgages it took on when it acquired Countrywide -- once the country's largest mortgage lender -- the bank still had people walking into its branches every day and depositing money.

"People can still go to Bank of America, rather than lining up outside Countrywide and trying to get their money," the banker said. "Lewis took a bullet for a lot of other creditors. Shareholders might not be very happy but society owes him a debt."

Lewis, he said, could not be blamed for Merrill's paying its employees bonuses before he had control of the company.

But Lewis' detractors say the bank chief has to accept responsibility for the bank's current situation, and that its ability to survive the recession is not reason enough to keep him at the helm of the company after he has caused so much damage, said Ellman, the former Merrill Lynch employee.

Lewis, Ellman said, was "dumb enough" to buy Merrill and agree to the bonus payout without doing adequate due diligence.

"If Bank of American goes down, he has to bear that responsibility. No one had a gun to his head."
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Related news article link: http://a.abcnews.com/Blotter/Story?id=6967584&page=1
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"After $170b US bailout, AIG to pay $100m in bonuses"
By Edmund L. Andrews and Peter Baker, New York Times, March 15, 2009

WASHINGTON - Despite being bailed out with more than $170 billion from the Treasury and Federal Reserve, American International Group is preparing to pay about $100 million in bonuses to executives in the same unit that brought the company to the brink of collapse last year.

An official in the Obama administration said yesterday that Treasury Secretary Timothy F. Geithner had called AIG's government-appointed chairman, Edward M. Liddy, on Wednesday and asked that the company renegotiate the bonuses.

Administration officials said they had managed to reduce some of the bonuses but had allowed most of them to go forward after the company's chief executive said AIG was contractually obligated to pay them.

In a letter to Geithner, Liddy wrote: "Needless to say, in the current circumstances, I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them."

The bonuses will be paid to executives at American International Group's Financial Products division, the unit that wrote trillions of dollars' worth of credit-default swaps that protected investors from defaults on bond backed by subprime mortgages.

An AIG spokeswoman said the company had no comment beyond the text of the letter.

In his letter to the Treasury, Liddy said AIG hoped to reduce its retention bonuses for 2009 by 30 percent. He said the top 25 executives at the Financial Products division had also agreed to reduce their salary for the rest of 2009 to $1.

But Liddy defended the need to continue paying bonuses if AIG was going to unwind the rest of its disastrous mortgage-related business at the lowest possible cost to taxpayers.

"We cannot attract and retain the best and the brightest talent to lead and staff the AIG businesses - which are now being operated principally on behalf of American taxpayers - if employees believe their compensation is subject to continued arbitrary adjustment by the US Treasury," he wrote Geithner. The government owns nearly 80 percent of the company.

The bonuses were first reported by The Washington Post.

Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than AIG and none has infuriated lawmakers more with practices that policy makers have called reckless.

Liddy, whom Federal Reserve and Treasury officials recruited after AIG faltered last fall and received its first round of bailout money, said the bonuses and "retention pay" had been agreed to in early 2008 and were for the most part legally required.

The company told the Treasury that there were two categories of bonus payments, with the first to be given to senior executives. The administration official said Geithner had told AIG to revise them to protect taxpayer dollars and tie future payments to performance.

The second group of bonuses cover some 2008 retention payments from contracts entered into before government involvement in AIG that the company says it is legally obligated to fulfill. The official said Treasury concluded that those contracts could not be broken.

Ever since it was to be bailed out by the government last fall, AIG has faced accusations that it was compensating people who caused perhaps the biggest financial crisis in American history.

AIG's main business is insurance, but it had a unit called AIG Financial Products that sold hundreds of billions of dollars' worth of derivatives - the notorious credit-default swaps that nearly toppled the company last fall.

In his letter to the Treasury, Liddy said that AIG was required to pay about $165 million in bonuses on or before March 15. The company had already paid $55 million in December, but the rest was about to come due.

The bonus plan covers 400 employees, and the bonuses range from $1,000 to $6.5 million. About seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.

Under a deal reached last week, AIG agreed that the top 50 executives in the financial products division would get half of the $9.6 million they were supposed to get by March 15. The second of their bonuses would be paid out in two installments in July in September. To get the rest, Treasury officials said, AIG would have to show that it had made progress toward its goal of selling off business units and repaying the government.

AIG had set up a special bonus pool for the financial products unit early in 2008, before the company's near collapse, when problems stemming from the mortgage crisis were becoming clear and there were concerns that some of the best-informed derivatives specialists might leave. It locked in a total amount, $450 million, for the financial products unit.

Only part of the payments had been made by last fall, when AIG nearly collapsed. Another installment is due this month - to people who, it is now clear, were at the very heart of AIG's worldwide conflagration.

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Rep. Maxine Waters (D-Calif.) set up a meeting with Treasury Department officials and a group that represents minority- and women-owned banks. The discussion focused on OneUnited Bank, in which her husband invests. (2007 Photo By Damian Dovarganes -- Associated Press)
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"Lawmaker Tried to Aid Bank Partly Owned by Husband"
By Binyamin Appelbaum, Washington Post Staff Writer, Saturday, March 14, 2009; A03

A California congresswoman who this fall helped a bank partly owned by her husband seek government money has said she previously intervened with federal regulators to help clear the way for that bank to buy another firm.

Rep. Maxine Waters (D-Calif.) has said she arranged a September meeting at the Treasury Department, where executives of OneUnited Bank of Massachusetts asked the government for money. In December, Treasury selected OneUnited, the nation's largest minority-owned bank, as an early participant in the bank bailout program, injecting $12.1 million.

Waters's husband, Sidney Williams, until recently sat on OneUnited's board of directors and owned company shares worth at least $500,000.

Waters said yesterday that both the investments and her advocacy were rooted in a commitment to minority-owned banks. She noted that she has disclosed her financial ties to OneUnited in required annual filings. And she said her actions this fall were intended to benefit all minority-owned banks.

Responding to articles in the New York Times and the Wall Street Journal about her role in setting up the Treasury meeting, Waters said in a statement, "These articles have revealed only one thing: I am indeed an advocate for minority banks."

Waters's involvement with the bank dates at least to 2001, when the company, then called Boston Bank of Commerce, bought a minority-owned institution based in Los Angeles. Waters's husband owned shares in the latter firm and, after the acquisition, became a shareholder in Boston Bank of Commerce, according to Waters's congressional financial disclosure files.

The following year, Boston Bank of Commerce tried to buy a second minority-owned bank in Los Angeles. But that Los Angeles bank decided to sell to a bank from Illinois. Waters tried to block the deal. She said she did so because the Illinois bank was not minority-owned, and she argued publicly that the Los Angeles bank should remain minority-owned.

Waters said she contacted regulators at the Federal Deposit Insurance Corp. to see whether the merger could be staved off.

"And I want you to know that I was involved in reaching out to the FDIC in particular when there was another bank that was about to be acquired by a major white bank out of Illinois," Waters said at a congressional hearing in 2007. "And basically, I was told that there was nothing that could be done."

Waters and other community leaders launched a campaign of public pressure that proved more successful. The Los Angeles bank, Family Savings, ultimately agreed to be acquired by Boston Bank of Commerce. The combined company renamed itself OneUnited.

In 2004, Waters and her husband both bought new shares in OneUnited. Waters sold her investment after half a year, according to her annual financial disclosure, but Williams maintained an investment and joined the company's board of directors. He remained on the board until recently.

Waters disclosed in May 2008 that her husband held two investments in OneUnited at the end of 2007, each valued at between $250,000 and $500,000. She reported that the investments had produced income of as much as $65,000 during 2007. Members of Congress have not yet filed financial disclosures for 2008, but Waters said in her statement yesterday that her husband remains an investor in the company.

Waters's advocacy is part of a broader pattern in which members of Congress have pressed Treasury to invest in their local banks, in part because of frustration with Treasury's slow and secretive selection process. Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, also pressed regulators to help OneUnited.

Waters's recent efforts on behalf of OneUnited began in September, when the government took control of mortgage financiers Fannie Mae and Freddie Mac, wiping out the companies' shareholders. Hundreds of banks held those shares as investments, a practice that was encouraged by regulators. The holdings were particularly common among banks that focus on community development, a category that includes many minority-owned banks.

The losses left some, including OneUnited, with less than the amount of capital required by regulators in their financial reserves.

Waters has acknowledged she arranged a meeting between Treasury officials and a group that represents minority- and women-owned banks, the National Bankers Association. A person who attended said the discussion focused on OneUnited, which had lost about $50 million.

In attendance was the chairman of the NBA, who was also the general counsel at OneUnited. The company's chief executive, Kevin Cohee, also was there. They wanted the government to replace the bank's loss, according to a letter NBA sent to Treasury.

Treasury officials say they had granted the meeting at Waters's request, and they were not aware at the time of her ties to OneUnited.

The following month, Congress gave Treasury $700 billion to aid the banking industry. OneUnited got a boost from Frank, who included language in the legislation directing Treasury to consider helping the bank. The bank does not operate in Frank's district, but he said he inserted the language because aiding the only minority-owned bank in Massachusetts was right. Frank said he also called regulators to urge support for the company.

On Dec. 19, Treasury agreed to invest $12.1 million in OneUnited, provided the bank raised $20 million from private investors.

Treasury officials said the advocacy did not affect their decision. Neel Kashkari, the senior Treasury official overseeing the financial rescue program, testified this week before Congress that the decisions to aid banks were made on the merits of their cases. He maintained that the process has not been subject to "undue influence."

During the same period, Treasury chose not to invest in a Virginia bank crippled by the takeover of Fannie and Freddie. Gateway Financial Holdings of Virginia Beach lost $37.4 million on its investment in preferred shares in the two companies. The company applied for Treasury's bailout program but did not receive any money. At the end of December, Gateway sold itself to a local rival, Hampton Roads Bankshares.
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Staff writer David Cho contributed to this report.
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Maxine Waters
http://projects.washingtonpost.com/congress/members/w000187/
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Barney Frank
http://projects.washingtonpost.com/congress/members/f000339/
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"Frank assails bonuses paid to executives at AIG"
AP, March 16, 2009

WASHINGTON --Rep. Barney Frank charged Monday that a decision by financially-strapped insurance giant AIG to pay millions in executive bonuses amounts to "rewarding incompetence."

Echoing outrage expressed on both sides of the political aisle in the wake of revelations that American International Group will pay roughly $165 million in bonuses, Frank said he believes it's time to shake up the company.

"These people may have a right to their bonuses. They don't have a right to their jobs forever," said Frank, a Massachusetts Democrat who is chairman of the House Financial Services Committee.

Appearing on NBC's "Today" show, Frank noted that the Federal Reserve Board, using a Depression-era statute, was the institution that gave AIG its initial government bailout, before Congress passed legislation providing for additional assistance. He said he did not think sufficient safeguards were built into that initial bailout by the Fed.

The $165 million was payable to executives by Sunday and was part of a larger total payout reportedly valued at $450 million. The company has benefited from more than $170 billion in a federal rescue.

Said Frank: "These people may have a right to their bonuses. They don't have a right to their jobs forever." He added on NBC's "Today" show that "it does appear to be that we're rewarding incompetence."

AIG reported this month that it had lost $61.7 billion for the fourth quarter of last year, the largest corporate loss in history. The bulk of the payments at issue cover AIG Financial Products, the unit of the company that sold credit default swaps, the risky contracts that caused massive losses for the insurer.

On ABC's "Good Morning America" Monday, Sen. Richard Shelby said Congress must do everything it can to make sure the government money going to AIG is handled appropriately. The Alabama Republican, who is the ranking member of his party on the Banking Committee, also said he was angry.

"We ought to explore everything that we can through the government to make sure that this money is not wasted," Shelby said. "These people brought this on themselves. Now you're rewarding failure. A lot of these people should be fired, not awarded bonuses. This is horrible. It's outrageous."

Frank said he was disgusted, asserting that "these bonuses are going to people who screwed this thing up enormously."

"Maybe it's time to fire some people," he said. "We can't keep them from getting bonuses but we can keep them from having their jobs. ... In high school, they wouldn't have gotten retention (bonuses), they would have gotten detention."

Frank said Congress intends to make very clear that it will not stand for "any more abuses of this nature."

AIG has agreed to Obama administration requests to restrain future payments. Treasury Secretary Timothy Geithner pressed the president's case with AIG's chairman, Edward Liddy, last week.

"He stepped in and berated them, got them to reduce the bonuses following every legal means he has to do this," said Austan Goolsbee, staff director of President Barack Obama's Economic Recovery Advisory Board.

"I don't know why they would follow a policy that's really not sensible, is obviously going to ignite the ire of millions of people, and we've done exactly what we can do to prevent this kind of thing from happening again," Goolsbee said.

Lawrence Summers, a leading Obama economic adviser, said Sunday: "The easy thing would be to just say ... off with their heads, violate the contracts. But you have to think about the consequences of breaking contracts for the overall system of law, for the overall financial system." Summers said that Geithner used all his power, "both legal and moral, to reduce the level of these bonus payments."

The Democratic administration's argument about the sanctity of contracts didn't sell very well with Senate Republican leader Mitch McConnell of Kentucky.

"For them to simply sit there and blame it on the previous administration or claim contract -- we all know that contracts are valid in this country, but they need to be looked at," McConnell said. "Did they enter into these contracts knowing full well that, as a practical matter, the taxpayers of the United States were going to be reimbursing their employees? Particularly employees who got them into this mess in the first place? I think it's an outrage."

In an interview that aired Sunday on CBS' "60 Minutes," Federal Reserve Chairman Ben Bernanke did not address the bonuses but expressed his frustration with the AIG intervention.

"It makes me angry. I slammed the phone more than a few times on discussing AIG," Bernanke said. "It's -- it's just absolutely -- I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets -- that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy."

In a letter to Geithner dated Saturday, Liddy said outside lawyers had informed the company that AIG had contractual obligations to make the bonus payments and could face lawsuits if it did not do so.

Liddy said in his letter that "quite frankly, AIG's hands are tied," although he said that in light of the company's current situation he found it "distasteful and difficult" to recommend going forward with the payments.

Liddy said the company had entered into the bonus agreements in early 2008 before AIG got into severe financial straits and was forced to obtain a government bailout last fall.

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"Mad as Hell at AIG"
ABC News Business Headlines, March 16, 2009
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"Former CEO Hank Greenberg Piles on AIG for Bonuses" - "Former CEO Joins Obama in Pillorying Payout for AIG Derivative Traders"
By SARAH NETTER, MATT JAFFE, KATE BARRETT, JOHN HENDREN and ALICE GOMSTYN, ABC News, March 16, 2009 —

Add former AIG chief executive Hank Greenberg to the growing list of public figures fuming about the $165 million in retention bonuses awarded to executives at the bailed-out insurance giant.

Greenberg, who stepped down as CEO in 2005, told ABCNews.com that it was "mind-boggling" that AIG executives were promised retention pay in the first place.

Given how much the company has lost, "why would you make it up in bonuses? It's hard to understand," he said.

"I think many of the people who received bonuses did not deserve them."

Greenberg has been criticized for supposedly helping to create the financial problems plaguing AIG today. It's an accusation that Greenberg vigorously denies, saying that the investments leading to the company's decline were made after his departure. (Read more about Greenberg's response to critics here.)

During his time at the company, Greenberg said, retention packages did not exist at AIG Financial Products, the Connecticut-based division of AIG now under fire for the bonuses.

"We would never have been blackmailed into such an arrangement," he said.

"I know from long experience that you don't retain people by buying them. You don't buy loyalty," he said.

A company achieves loyalty, Greenberg said, when "people believe and share the same values as you do." It's an issue of leadership, he said.

Meanwhile, President Obama said today that he has asked his Treasury secretary to "pursue every single legal avenue" to block the AIG bonuses.

"This is a corporation that finds itself in financial distress due to recklessness and greed," the president said.

"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said today during a news conference announcing an aid program for small businesses. "How do they justify this outrage to the taxpayers who are keeping the company afloat?"

At one point, Obama coughed and said half-jokingly, "I'm choked up with anger."

Obama said Treasury Secretary Timothy Geithner was working to resolve the conflict with AIG CEO Edward Liddy, who took the company's reins after the contracts allowing the bonuses were agreed to last year.

"I know he's working to resolve this matter with the new CEO, Edward Liddy, who came onboard after the contracts that led to these bonuses were agreed to last year," Obama said.

"This isn't just a matter of dollars and cents. It's about our fundamental values," he said. "All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multimillion-dollar bonuses. All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules."

Obama said the bonuses underscore a need for overall financial regulatory reform to prevent a similar situation in the future, and "so we have greater authority to protect the American taxpayer and our financial system in cases such as this."

New York Attorney General Andrew Cuomo, who has been investigating AIG's executive compensation, sent a letter today to Liddy saying he was "disturbed" to learn of the scheduled bonuses and asked again for the names of executives who had received extra cash.

"We need this information immediately in order to investigate and determine ... whether any of the individuals receiving such payments were involved in the conduct that led to AIG's demise and subsequent bailout ... and whether such contracts may be unenforceable for fraud or other reasons," Cuomo wrote.

A source close to the beleaguered company told ABC News, "AIG gets it."

Liddy "doesn't blame people for being angry," the source said. "It's not like he woke up in October and said, 'Let's pay millions to these people!'" It's a point that Liddy will make when he testifies before Congress Wednesday.

"Everyone gets that this doesn't look good," the source added.

Not only are people outside AIG upset, but also within the company, because the same people who "tarnished" the whole company are now receiving millions, the source said.

Federal Reserve Chairman Ben Bernanke also criticized the AIG contracts in a rare interview Sunday on "60 Minutes."

But he gave Americans a glimmer of hope, saying that the recession could wind down as early as this year.

"We do have a plan. We're working on it," Bernanke said in rare interview on "60 Minutes" Sunday. "And I do think that we will get it stabilized, and we'll see the recession coming to an end, probably this year."

"We'll see recovery beginning next year," he continued. "And it will pick up steam over time."

That progress, he said, would hinge on whether the government can keep the banks from failing and if the banks, in turn, could start to lend more freely.

Outrage over AIG hasn't seemed to dampen Wall Street's spirits: The Dow Jones industrial average was up more than 40 points by the mid-morning, continuing an upswing that began early last week after Citigroup reported strong performance for the current quarter.

But Bernanke's optimism didn't take away from his anger over AIG's spending of $165 million in bonuses.

He told CBS' "60 Minutes" Sunday that out of all the events in the last 18 months, the federal government's intervention with AIG makes him the angriest, saying the company made "unconscionable bets."

'Fooled by AIG'
While there's seemingly no shortage of outrage AIG's plan to pay the bonuses, it may turn out that the best the country can hope for in response is to learn its lesson for next time and make sure it doesn't happen again.

Sen. Richard Shelby, R-Ala., told "Good Morning America" today that the American people had been "fooled by AIG."

"These people brought this on themselves, now you're rewarding [them,]" he said. "A lot of these people should be fired."

AIG has refused to comment on the contracts' specifics, including how it could allow for such bonuses after losing $61 billion in a single quarter, while taking $170 billion in government bailout money.

"It's ridiculous," U.S. Rep. Elijah Cummings, D-Md., told "GMA," adding that he doesn't buy the notion that the government doesn't have enough control over taxpayer dollars to stop bonuses like these.

Even though they may not like it, the nation's top financial officials can't seem to do much to stop it, citing AIG's position that they it's contractually obligated to pay the bonuses.

"We are a country of law," Lawrence Summers, chairman of the White House National Economic Council, said on ABC's "This Week With George Stephanopoulos." "There are contracts. The government cannot just abrogate contracts."

AIG CEO Edward Liddy said in a letter to Treasury Secretary Timothy Geithner that the payments can't be stopped and that his "hands are tied."

Cummings admitted that the stimulus package was moved through Congress so quickly that there may be room for improvement going forward, including add-ons that would prevent failing banks and institutions from using government money to reward the same executives who were responsible for the company's failure in the first place, such was the case with AIG.

"We have to be very careful ... we don't allow these things to happen again," Cummings said.

Lawmakers Furious About AIG: 'This Is an Outrage'
"There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," Summers said this morning on ABC's "This Week With George Stephanopoulos." "What that company did, the way it was not regulated, the way no one was watching, what's proved necessary, it is outrageous."

Summers repeated the characterization several times on the morning talk show circuit.

Lawmakers, too, are furious at the payout of big bonuses at a company that has so far eaten up $170 billion in taxpayer money, and whose risky behavior has helped push the economy into one of the biggest financial crises in American history.

"The message here, I'm afraid, to any business out there that's thinking about taking government money, is let's enter into a bunch of contracts real quick, and we'll have the taxpayers pay bonuses to our employees," Senate Minority Leader Mitch McConnell, R-Ky., said on "This Week." "This is an outrage."

Sen. Russ Feingold, D-Wis., sent a letter to Treasury Secretary Timothy Geithner saying he "would like to know what legal options have been explored for canceling the bonuses or recouping the money from the recipients, and in particular whether the Administration has considered holding AIG executives accountable in court for any breaches of their fiduciary duties to the shareholders."

An angry Geithner called AIG chief executive Edward Liddy Wednesday, demanding he slash the bombshell bonuses.

"AIG'S hands are tied," Liddy replied. In a letter to Geithner yesterday, Liddy said he found the bonuses "distasteful" but he added, "These are legal, binding obligations" and "we must proceed with them."

Obama's top economics adviser agreed that despite committing $170 billion in bailout money to AIG, the government was limited in its power to stop the bonuses.

"This is an example of people at the commanding heights of the economy misbehaving, abusing the system," Rep. Barney Frank of Massachusetts said on "Fox News Sunday."

"I do think it's inappropriate for those people to stay in power at that company," Frank said.

Rep. Cummings Harsh Criticism of AIG: 'You Got to Help Me Screw You'
AIG's Liddy was recruited last year by the Bush Administration to run the company, and the bonuses were negotiated before he arrived.

Cummings cites AIG's lavish corporate parties and historic losses and says Liddy should step down. He said he can't believe most of the bonuses are to retain the executives who have been leading AIG.

"It's like, OK, you got to help me screw you," Cummings said. "And by the way I'm going to take your money and I'm going to slap you with it. As I walk into this $1,500-a-night hotel to have fun."

Liddy will face soon more questions about the bonus backlash as well. He'll be in the hot seat at a House hearing this week to explain how American taxpayers ended up paying millions more to executives who have already cost them billions.
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ABC News' Matthew Jaffe and The Associated Press contributed to this report.
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"Obama adds outrage on AIG bonuses"
Posted by Foon Rhee, deputy national political editor, March 16, 2009

President Obama said this afternoon that the White House will use the "leverage" from federal aid and "every single legal avenue" to try to block the AIG bonuses that have outraged politicians of all stripes.

"This is a corporation that finds itself in financial distress due to recklessness and greed," he said at an event to announce more aid for small businesses. "Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?"

The bonuses, which were in contracts with executives last year, were to be paid by Sunday, mostly to executives at AIG Financial Products, the unit that put the insurance giant on the brink of bankruptcy with risky bets on securities linked to the housing bubble. AIG has received more than $170 billion in a series of federal rescues that have put the government stake at about 80 percent.

Obama said that Treasury Secretary Timothy Geithner is on the case, trying to resolve the matter with AIG's CEO, Edward Liddy.

"This not just a matter of dollars and cents. It’s about our fundamental values," the president said. "All across the country, there are people who are working hard and meeting their responsibilities every day, without the benefit of government bailouts or multi-million dollar bonuses....All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules.

"That is an ethic that we have to demand," Obama added. "What this situation also underscores is the need for overall financial regulatory reform, so we don’t find ourselves in this position again, and for some form of resolution mechanism in dealing with troubled financial institutions, so we've got greater authority to protect the American taxpayer and our financial system in cases such as this."

It's the second time that Obama has publicly, angrily blasted Wall Street for greed. After the last time, the White House and Congress imposed limits on bonuses and pay for executives in companies receiving federal aid.

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If AIG had attempted to abrogate its retention bonus contracts, legal experts say that employees could have sued -- leaving AIG, and ultimately, taxpayers, with an even larger bill: at least $330 billion. (ABC News Photo Illustration)
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"Could Be Worse: AIG Double Bonus Jeopardy: Not Paying $165M Bonuses Could Open AIG -- and Taxpayers -- to $330M Lawsuit", By ALICE GOMSTYN and LAUREN PEARLE, ABC News, March 17, 2009—

When AIG chief executive officer Edward M. Liddy argued that legal obligations made it nearly impossible for the bailed-out firm not to pay $165 million in retention bonuses, critics found it hard to imagine a worse scenario for taxpayers whose money has already been used to keep the company afloat.

But AIG and legal experts agree that, as far as payouts to employees go, it could indeed be worse -- twice as bad, to be exact.

If the crumbling insurance giant didn't make good on its retention packages, employees could sue the firm for at least $330 million -- double the total size of the bonuses.

And, some say, a successful lawsuit could ultimately mean a higher tab for taxpayers, who are already footing the bill for $162.5 billion in rescue loans and investments into AIG from the federal government.

"If our tax dollars are being used to fund these payouts and the payouts end up being double, then we're paying double," said Joshua Hawks-Ladds, the vice chair of the Connecticut Bar Association labor and employment section executive committee.

The potential for a costly lawsuit stems in part from state law in Connecticut, where AIG's now-infamous financial products division -- the arm of the company that employs the 400-some employees awarded the $165 million bonuses -- is based.

In a document submitted by AIG to Treasury Secretary Timothy Geithner, the company argues that were it to renege on contractual agreements to make retention payments -- which were set in early 2008, before the government enacted compensation limits under its Troubled Asset Relief Plan -- the firm could be liable for "double damages and attorneys' fees" under the Connecticut Wage Act.

There "are legal, binding obligations of AIG, and there are serious legal, as well as business, consequences for not paying," Liddy wrote in a recent letter to Geithner.

Lawyers who spoke to ABCNews.com said AIG's concerns are legitimate.

"If we're talking about the possibility of violating the Connecticut or other states' wage act, then there is a real risk that one needs to be concerned about. ... Some of these states are fairly punitive," said Donald P. Carleen, of the law firm Fried, Frank, Harris, Shriver & Jacobson LLP. "For AIG to do what the public seems to want them to do and certainly what Congress would like them to do could in theory expose them to liability."

What Can the Government Do?
It's unclear whether AIG's contracts with employees might allow the firm to attempt to recoup or stop the bonuses, but at this point, it's a decision that might be left up to the federal government, said Randall S. Thomas, a professor of law and business at Vanderbilt University Law School.

"I think the question will be whether or not the federal government has the power to abrogate the contracts irrespective of what the terms of the contracts provide," Thomas said. "I think that comes down to a constitutional argument."

In remarks Monday, President Obama said that he would ask Geithner to "pursue every single legal avenue" to block AIG bonuses.

But the government also appears to be planning for the contingency that blocking the bonuses won't work: The Treasury Department will be making arrangements for AIG to pay the government back for the "excessive retention payments" made to AIG employees, a Treasury official told ABC News.

Meanwhile, New York Attorney General Andrew Cuomo said Monday that he was looking at using New York state law to recoup the bonuses -- something legal experts say will be difficult to do.

Retention in a Time of Uncertainty
Why AIG would provide retention bonuses for employees in the unit blamed for the company's decline -- the company's financial products unit was the one that wrote the credit default swaps that ultimately proved disastrous to AIG -- might be traced back to the early days of the financial crisis.

A source close to AIG told ABC News that AIG believed that the company needed to put retention programs in place for two reasons: When Joe Cassano, chief of the financial products unit, left in early 2008, the company was worried that other employees would follow; and at the time, around $800 million in deferred compensation had been lost, so AIG's employees had not only seen their boss leave, but they'd also lost millions.

Ultimately, the retention program worked: Employees stayed with the company.

Should AIG Employees Stay?
While critics like Rep. Barney Frank, D-Mass., argue that the time has come to fire AIGFP employees, Russell Miller, the managing director of Executive Compensation Advisors, said there may still be reason to retain them.

"The difficulty here is that the same people who got us into this mess, we need them to help us turn it around, and we're doing that with taxpayer dollars," he said.

"We need to develop a plan that recognizes that: 1) this is a legal obligation and 2) these employees are needed to help turn the company around and 3) these employees likely want to continue working at AIG given the current market environment," Miller said.

But former AIG chief executive officer Hank Greenberg argues that retention bonuses should never have been used to entice employees in the first place.

"I know from long experience that you don't retain people by buying them. You don't buy loyalty," said Greenberg, who left the company in 2005.

A company achieves loyalty, he said, when "people believe and share the same values as you do."
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With reports from ABC News' Matt Jaffe and Charles Herman.
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Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., left, and the committee's ranking Republican Sen. Richard Shelby, R-Ala., listen during a hearing on modernizing insurance regulations, Tuesday, March 17, 2009, on Capitol Hill in Washington. (AP Photo/Susan Walsh)
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"Congress looking at huge taxes on AIG bonuses"
By Laurie Kellman, Associated Press Writer, March 17, 2009

WASHINGTON --Congressional Democrats vowed Tuesday to all but strip AIG executives of their $165 million in bonuses as expressions of outrage swelled in Congress over eye-catching extra income for employees of a firm that has received billions in taxpayer bailout funds.

"Recipients of these bonuses will not be able to keep all of their money," declared Senate Majority Leader Harry Reid in an unusually strong threat delivered on the Senate floor.

"If you don't return it on your own, we will do it for you," said Chuck Schumer of New York.

The bonuses were paid under legal contracts, part of a program that had been disclosed in advance filings that American International Group Inc. made with the government.

Republicans said President Barack Obama and his administration should have leaned harder on AIG executives to reject the bonuses. The complaints sparked a low level hum about whether Treasury Secretary Timothy Geithner could or should survive this latest political storm.

"I don't know if he should resign over this," said Sen. Richard Shelby, R-Ala. "He works for the president of the United States. But I can tell you, this is just another example of where he seems to be out of the loop. Treasury should have let the American people know about this."

If he tried to stop AIG from paying out the full bonuses beforehand, as presidential economic adviser Lawrence Summers told The Associated Press, Geithner obviously failed.

For now, congressional Democrats weren't calling for Geithner's resignation, but they weren't volunteering much confidence in him, either. White House press secretary Robert Gibbs did say that Obama had confidence in his treasury secretary, and Gibbs sought to switch the focus to changes that are in the works. He said Obama wants both financial regulation reform and a new "resolution authority" to deal with giants like AIG that get into complex financial trouble.

New York Attorney General Andrew Cuomo said the company last week had paid bonuses of $1 million or more to 73 employees, including 11 who no longer work for the failed insurance giant.

As lawmakers raised their voices on TV, administration officials moved to reassure Congress, the markets and the nation that Geithner had urged AIG chief executive Edward Liddy last week to find a way to renegotiate contracts that called for the bonuses.

"He recognized that you can't just abrogate contracts willy-nilly, but he moved to do what could be done," Summers, Obama's chief economic adviser, told The Associated Press in an interview Tuesday.

Even though AIG's bonus plans were disclosed last year, populist outrage and threats poured forth from Capitol Hill on Tuesday.

House and Senate Democrats were crafting separate bills to tax up to 100 percent of the big bonuses awarded by companies that were rescued by taxpayer money.

Separately, House Financial Services Committee Chairman Barney Frank, D-Mass., said the government should assert its rights as the owner of about 80 percent of AIG and sue to recover the bonuses.

"The time has come to exercise our ownership rights. We own most of the company. And then say, as owner, 'No, I'm not paying you the bonus. You didn't perform. You didn't live up to this contract,'" Frank told reporters.

AIG would not be the only firm named by legislation in either the Senate or the House, but there was no question whose executives were the inspiration.

"They're not going to get the financial benefit of those bonuses," said Senate Finance Committee Chairman Max Baucus, D-Mont.

In the House, Reps. Steve Israel, D-N.Y., and Tim Ryan, D-Ohio, introduced a bill that would that would tax at 100 percent bonuses above $100,000 paid by companies that have received federal bailout money.

"We will use any means necessary," said Ryan. "It boggles my mind how these executives can be so unaware of what the American people are going through."

The Internal Revenue Service currently withholds 25 percent from bonuses less than $1 million and 35 percent for bonuses more than $1 million.

The Obama administration said it was trying to put strict limits on how future government bailout dollars could be used. But sharp questions have been raised about what the administration knew about the bonuses -- and when.

AIG also was singed at a banking committee hearing on regulating the insurance industry.

"One way or another, we're going to try to figure out how to get these resources back," said Christopher Dodd, D-Conn., the panel's chairman.

Sen. Jon Tester, D-Mont., said AIG executives "need to understand that the only reason they even have a job is because of the taxpayers."

Liddy is to testify Wednesday before a House subcommittee.

On Monday, Obama lambasted the insurance giant for "recklessness and greed" and pledged to try to block payment of the bonuses. Obama said he had directed Geithner to determine whether there was any way to retrieve or stop the bonus money.

The financial bailout program remains politically unpopular and has been a drag on Obama's new presidency, even though the plan began under his predecessor, President George W. Bush. The White House is aware of the nation's bailout fatigue; hundreds of billions of taxpayer dollars have gone to prop up financial institutions that made poor decisions, while many others who have done no wrong have paid the price.

Sen. Charles Grassley suggested in an Iowa City radio interview on Monday that AIG executives should take a Japanese approach toward accepting responsibility by resigning or killing themselves.

"Obviously, maybe they ought to be removed," the Iowa Republican said. "But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide."

Grassley said Tuesday he didn't actually mean for AIG employees to kill themselves.

AIG reported this month that it lost $61.7 billion in the fourth quarter of last year, the largest corporate loss in history, and it has benefited from more than $170 billion in a federal rescue.
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Associated Press Writers Jim Kuhnhenn, Martin Crutsinger, Julie Hirschfeld Davis and Deb Riechmann contributed to this story.
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"Financial services executives reap big retirement benefits: Some banks aided by federal bailout"
By Ross Kerber, Boston Globe Staff, March 21, 2009

While top executives at some financial services companies gave up raises and bonuses in the face of public anger over taxpayer bailouts, one of their perks is holding up: huge retirement benefits.

Several Massachusetts banks and financial companies last year added hundreds of thousands of dollars, in one case millions, to support the retirement benefits of their top officers, according to annual securities filings the institutions have made in recent days. The huge sums mostly are for special supplemental retirement plans that are available only to top executives at these companies, and not rank-and-file employees.

These are not a backdoor raise or reward for executives who did not get bonuses and other compensation because of a bad year. Rather they are long-existing commitments by companies to pay their executives a set benefit at retirement. To build up toward that amount, the companies usually have to make sizable commitments, regardless of how well or poorly those executives performed in a given year.

In some cases, companies have to increase the amounts toward executive retirement funds to compensate for lower returns in those accounts if, for example, interest rates decline as they did last year.

The furor over bonuses for some employees at AIG International Group has focused public attention on the sizable checks employees received at firms that were bailed out by the federal government or received some taxpayer support. Less noticed, though, are the rich retirement benefits. That's partly because firms only recently began to disclose the value of executive retirement benefits in their annual proxy statements, which are filed this time of year ahead of yearly shareholder meetings.

Equilar, a California compensation consulting company, said the average additional value in 2008 to a chief executive's retirement plan was $1.23 million, based on its review of those firms that have filed proxy statements. In 2007, the average was $1.38 million.

These executives continue to accumulate enormous benefits while fewer rank-and-file workers have guaranteed retirement benefits. Just one-third of workers in mid- to large-size companies were in so-called defined benefit plans in 2007, down from 52 percent in 1995, according to the Employee Benefit Research Institute.

Some compensation specialists say the executives' sums are far more than what any individual needs for retirement.

"Retirement packages are supposed to help you if you're unable to save for retirement. I don't believe any of these guys could have spent all the cash they've earned in their careers as CEOs," said Paul Hodgson, senior researcher at the Corporate Library in Portland, Maine, which researches executive compensation and corporate governance issues for shareholders and insurers.

At State Street Corp., chief executive Ronald L. Logue did not get a boost in his $1 million salary, nor a bonus in 2008, a year in which the company laid off roughly 1,800 people and its stock fell by 52 percent because of its exposure to billions in potential losses. But the company added $7.8 million to support his retirement benefits in 2008, $368,965 more than it did the year before.

The Boston financial services company also received $2 billion in taxpayer funding last year as part of the federal government's efforts to shore up credit markets.

Logue participates in State Street's basic pension plan, available to all eligible employees. But federal law limits how much companies can contribute and employees can receive from these basic pensions. To provide additional compensation to their top executives, companies such as State Street create additional, or supplemental, retirement plans that are not subject to contribution and benefit limits. Logue has not one, but two such supplemental retirement plans.

In 2007, State Street froze the basic pension plan for all its workers and said it would instead increase contributions to their 401(k) plans, which are subject to the ups and downs of investment markets.

Logue's benefits under the standard pension plan are valued at $277,813. Meanwhile, the value of one of his supplemental plans is $1.8 million, and the second is $23.2 million.

The pension benefits were disclosed in the proxy statement State Street filed last week.

A State Street spokeswoman, Carolyn Cichon, said the executive retirement benefits are intended to help the company retain its top talent. Contributions for Logue, she added, are high because he has worked 19 years at the company.

This month, the British parent of Citizens Bank, the Royal Bank of Scotland, disclosed that longtime former Citizens chief executive Lawrence Fish, who stepped down in 2007 after 15 years, has a pension worth $27 million. Royal Bank, which is now majority owned by the British government because of its poor financial condition, recently posted a $34 billion loss for 2008.

Like regular pension plans, the supplemental plans are typically based on the executives' years of service and compensation over time. The longer the tenure, and the higher the pay as the executive serves, the bigger the retirement benefit. The plans typically aim to match 65 percent to 70 percent of an executive's total preretirement yearly income, similar to what rank-and-file employees are advised to plan on saving for, said John Gagnon, an executive compensation consultant in Reading.

The traditional versions of these plans promise to pay the executives a set amount at retirement, regardless of how the company performs.

That promise goes against the prevailing trend of executive compensation, so-called pay for performance, in which much of the executives' overall pay, including bonuses and stock awards, are based on company performance.

In 2002, Bank of America Corp. froze its supplemental executive retirement plan because it did not conform to the company's "pay for performance" philosophy.

For chief executive Ken Lewis, the value of his accrued benefits in the frozen plan is $50.3 million.

However, Bank of America has a second supplemental account for its executives, a so-called pension restoration plan, which limits company contributions to the first $250,000 of an employee's yearly compensation.

The value of Lewis's benefits in that account is currently $2.5 million.

Lewis, 61, has been at the company 40 years. Bank of America received $45 billion in taxpayer funds under the government-investment program.

Timothy Vaill has also been at his firm, Boston Private Financial Holdings, for a long time, more than 15 years. But unlike other CEOs, Vaill did not have a supplemental retirement plan until recently.

As Vaill, 67, approached retirement, Boston Private said it has to accrue a large amount each year in order to fully fund the new account in a short period of time. In 2008, the bank accrued $610,728 to Vaill's account, which is now valued at $5.4 million.

Last year was difficult for Boston Private, which reported a fourth-quarter net loss of almost $25 million because of declining values of holdings and reserves for larger loan losses. Its management team, including Vaill, did not receive bonuses. Boston Private also received $154 million in taxpayer money in November.

The parent of Rockland Trust, Independent Bank Corp., added $166,386 to chief executive Christopher Oddleifson's supplemental benefit plan last year, compared to $104,184 in 2007.

Spokesman Ralph Valente said the bank had to increase its contribution to make up for lower returns from falling interest rates.

Also, Valente said the bank recently began using new mortality tables that forecast a longer lifespan for Oddleifson, 50, and thus more years in which his pension would have to be funded.

Independent received $78 million in taxpayer funds.

Another local company that received federal aid is LSB Corp. of Andover, the parent of RiverBank, which got $15 million in taxpayer funds.

LSB chief executive Gerald T. Mulligan, is enrolled only in the small bank's 401(k) plan and does not get a supplemental retirement package.

Mulligan said such supplemental plans aren't appropriate for a public company because they don't align the interests of the chief executive with shareholders.

"The stock price doesn't have to do anything, and the executive still receives the benefit," he said.
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Ross Kerber can be reached at kerber@globe.com.
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"Citigroup Plans Big Bonuses Despite Rules Against Them"
TIME Magazine (in partnership with CNN), By Stephen Gandel, Friday, March 20, 2009

AIG isn't the only bailed-out financial firm paying big bucks to managers who helped steer their company to near collapse. Citigroup has pledged millions of dollars in bonuses to senior executives for the next few years, despite lawmakers efforts to eliminate such payments.

It's not clear whether the bonuses, which Citigroup says are for 2008 but won't start paying out until 2010, will be allowed. Under compensation rules passed by Congress in mid-February, cash bonuses are barred for top executives at bailed-out banks.

But Citi finalized its bonus program shortly before the new rules were introduced. That might make the payments permissible, though they could be made almost worthless by new tax rules just passed by the House of Representatives and headed for consideration in the Senate. Even so, Citigroup's move in January to set in place bonus payments for years to come raises questions about whether it was trying to evade compensation rules it knew were coming.

"If an executive legitimately earns a bonus, then paying it out over a number of years makes a lot of sense,' says Paul Hodgson, a senior research associate at the Corporate Library, which examines issues of corporate governance. "But I find it hard to believe that any top executive at a bailed-out bank would have had the performance in 2008 to generate a multimillion-dollar bonus."

Under Citi's proposed compensation plan, three of the company's top five executives would be paid a total of nearly $12.5 million in cash bonuses over the next five years. One of the executives, James Forese, is a co-head of Citi's Institutional Client Group, which lost $20 billion in 2008. Forese is rewarded $5 million under the plan. At least 15 other Citi executives are in line for multimillion-dollar payouts. Citi declined to say how much in total it has promised under the plan.

According to a proxy statement Citi filed with the Securities and Exchange Commission, the company finalized its bonus plan on Jan. 14. Twelve days later an amendment barring such payments was inserted by the House of Representatives into the $787 billion fiscal stimulus bill, which went into effect on Feb. 17.

A Citigroup spokesman denied that the company did anything wrong, noting the pay packages in question were set a month before the bonus ban became law. "Overall executive compensation [at Citigroup] substantially decreased from 2007 to 2008," the spokesman said. "CEO Vikram Pandit and CFO Gary Crittenden declined any bonus for last year as well. As always, we will comply with the new restrictions on compensation ... in addition to continued adherence to the substantial changes we already have made to our compensation structure.'

The revelations about Citi's bonus plan come at a time when anger over executive pay, particularly in the troubled financial sector, is boiling over. On Thursday, the House overwhelmingly passed a bill that would impose a 90% income tax on all compensation over $250,000 earned by employees at banks that have received more than $5 billion in bailout funds. The Senate is working on its own bill to raise taxes on highly compensated bankers. President Barack Obama indicated he would sign legislation that curtails bonuses.

"In the end, this is a symptom of a larger problem, a bubble-and-bust economy that valued reckless speculation over responsibility and hard work," Obama said in a statement released by the White House. "That is what we must ultimately repair to build a lasting and widespread prosperity."

Citi has also been criticized this week for an estimated $10 million renovation of its executive offices, and reports that the firm was considering boosting salaries for its top executives.

The bonuses for top executives at Citi are particularly surprising because the company is typically seen as the most in danger of failing among the nation's largest banks. Citi has received more government assistance than any other bank: $45 billion in cash infusions and over $300 billion in loan guarantees since late October. By comparison, none of Bank of America's top five executives will receive a cash bonus for 2008.

"There is no question [Citigroup] is violating the spirit of executive-compensation rules,' says Heather Slavkin, who studies executive-pay issues for the AFL-CIO. "Hopefully by the time Citi tries to pay these out we will have gotten over this idea about the sacredness of contracts, and these bonuses won't be allowed either.'

Citi has long deferred the payment of stock options that are granted at the end of the year. Cash bonuses, though, have always been paid at the time they were granted, typically in January for prior-year performance. But this year Citi decided to defer bonus payments for the first time. Instead of paying a lump sum in early 2009 for 2008 performance, payouts would be spread over four years, with the first payouts in January 2010.

For example, Forese, the Institutional Client Group executive, received a salary of $225,000 and was awarded a cash bonus of $5,265,000 for 2008. But he won't get any of his millions yet. Instead, he has a promise from Citi that he will get a check for $1.3 million in January 2010 and three checks for the same amount over the following three years.

On the surface, the plan looks like a good public relations move. At a time when people are angry about bonuses, Citi can say it isn't currently handing out bonuses to its top executives for work they did in 2008. What's more, the Citi bonuses include a provision that allows the bank to "claw back" the money if it is found that an executive made false statements to the company.

The problem is that Citi's payment plan is not consistent with executive-compensation rules put into place by the stimulus package. The American Recovery and Reinvestment Act signed by Obama on Feb. 17 says banks that have received money from the government's $700 billion Troubled Asset Relief Fund are barred from paying cash bonuses to their top executives. They can pay stock bonuses equal to as much as a third of an employee's salary, but the employee is not allowed to sell those shares until the government's money is paid back by their company.

The rub is that a provision was inserted into the stimulus package that says the rules do not apply to any bonuses contained in employment contracts signed before Feb. 11. (It is this provision that AIG has cited in defending its controversial bonuses to top executives.) Citi finalized its plan for paying 2008 bonuses in January. But it's unclear whether Citi's deferred-payout plan would be considered a valid employment contract under the rules set out in the stimulus package. The law leaves that up to Treasury Secretary Tim Geithner to decide.

Compensation experts say that as the government increases its efforts to curtail executive pay, companies will come up with more and more creative ways to keep their employees happy. "Citi may have bent the rules a bit,' says top compensation consultant Alan Johnson. "But if these firms don't come up with some way to pay their people, they are going to be out of business.'

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"Transparent Obfuscation: A Rescue Plan With the Clarity of a Credit Default Swap"
By Michael Kinsley, The Washington Post Online, Friday, March 27, 2009; A17

"The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction."

Got that? It's a sentence, chosen more or less at random, from the most recent (2002) Master Agreement of the International Swap and Derivatives Association. These are the people who brought you the "credit default swap," the mysterious financial transaction that almost destroyed the world, and might yet do so if the Obama administration's rescue plan doesn't work. The Master Agreement is used for credit default swaps the way a standard real estate broker's lease is used for renting a one-bedroom apartment.

Except that we all know what a one-bedroom apartment is. How many of us know what a credit-default swap is? The media do their best to explain it, often using attractive drawings with arrows showing money going hither and thither. Or sometimes they throw up their hands, as I'm doing, and simply describe them as "exotic financial instruments," and leave it at that. Part of the hostility that banks and Wall Street now enjoy comes from a popular suspicion that the mystery and complexity are part of the point -- that these things are made impossible to explain on purpose, as a way of avoiding scrutiny. "Don't criticize what you can't understand," as the financier Bob Dylan once put it in another context.

One problem with the Obama financial rescue plan is that it is almost as complicated and obscure as the problem it is designed to solve. Treasury Secretary Tim Geithner, testifying yesterday on Capitol Hill, called for greater simplicity in financial regulation. Good luck with that. Here is a sample passage from one of the explanatory documents released by Treasury this week. "Private investors may be given voluntary withdrawal rights at the level of a Private Vehicle, subject to limitations to be agreed with Treasury including that no private investor may have the right to voluntarily withdraw from a Private Vehicle prior to the third anniversary of the first investment by such Private Vehicle." All this talk of getting into and out of private vehicles may be a sly reference to the car and driver that did in Tom Daschle. Otherwise, who knows?

The government's most urgent goal is to cleanse the financial system of "toxic assets." These used to be known as "bad debts" until somebody decided that a more hysterical term was needed to reflect the gravity of the situation. Nobody gives a hoot about bad debts anymore. The government could have just swallowed hard and bought up these toxic assets itself. Then it could have buried them at Yucca Mountain in Nevada, where it has almost completed a $13.5 billion nuclear waste dump, just in time to promise never to use it, at least not for nuclear waste. Unlike nuclear waste, credit default swaps are unlikely to leach into the groundwater. And even if they do, there is no detectable difference between trading in derivatives such as credit default swaps and Nevada's principal industry anyway. Except that the amounts involved in Nevada-style recreational gambling are much smaller. Oh, and the government doesn't bail out petty gamblers. Yet.

But the administration decided that it would be more exciting to let private financiers in on the fun. This is an odd echo of what created the mess in the first place. Government-chartered entities such as Fannie Mae and Freddie Mac operated with an implicit government guarantee, whereas firms we all thought were private, like AIG and Citicorp, were deemed "too big to fail." One way or another, the government got sucked in against its will. It felt it had no choice. The private firms now pondering whether to join the party do have a choice, so they will have to be subsidized.

The plan is very, very clever. Maybe too clever. It depends on convincing smart financiers that there is a killing to be made investing, with government help, in toxic assets. Inevitably, when the dust settles, it will turn out that some private firms and individuals actually have made a killing, which will cause another eruption of populist resentment like the one over the AIG bonuses. Fear of such an eruption, and any retrospective mischief coming out of Congress as a result, is going to make private money harder to entice, which means the subsidies will have to be larger, which means the killings will even be greater.

It's good, in most ways, to have populist resentment back where it belongs, aimed at financial targets rather than frittering its energy on absurd culture wars over issues such as flag burning. Most people, I suspect, would happily sacrifice a few flags for an equal number of percentage points subtracted from the unemployment rate. But if that resentment boils over into protectionism, for example, it won't be so good.

The cure for everything these days, especially in the business world and also in the government, is thought to be "transparency": no secrets. Let people know everything, and abuses will self-correct. But transparency requires more than just supplying the information. What good is putting it all out there if it's too complicated to understand?
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kinsleym@washpost.com
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From: "Democrats.com" activist@democrats.com
To: jonathan_a_melle@yahoo.com
Subject: Tell Congress to Break Up the Banks
Date: Sunday, March 29, 2009, 11:06 A.M.

Dear Jonathan,

Treasury Secretary Geithner proposed a $1 trillion plan to help Wall Street make a killing buying "toxic assets" with our tax dollars and guarantees. And he proposed a complex regulatory scheme to keep huge financial institutions from wrecking our economy once again.

But there's a better and simpler solution: break up those huge financial institutions. If they're "too big to fail," then they're too big to exist.

Sign our petition to Congress: www.democrats.com/break-up-the-banks

Returning to the banks and insurance companies that existed before the Reagan era would not hurt our economy. As Paul Krugman writes, "that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation."

Our friends at A New Way Forward have a plan:

NATIONALIZE: Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts.

REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.

DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place - new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function.

Sign our petition to Congress: www.democrats.com/break-up-the-banks

On Saturday April 11, 2009, A New Way Forward will lead protests all across the country to demand these changes. Find one near you: www.anewwayforward.org/rally-list.php

And if you're in New York City on Friday April 3, 2009, join the National March on Wall Street: www.bailoutpeople.org/april3-4.shtml

Thanks for all you do!
Bob Fertik

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On the six month anniversary of the passage of the bill that created the Treasury Department's $700 billion to bail out the financial sector, the congressional panel charged with overseeing the bailout released a report predicting prolonged weakness for the U.S. economy. (ABC News Photo Illustration).
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"Financial Crisis 'Far From Over,' Panel Says: Government May Spend More than $4 Trillion but Economy Faces 'Prolonged Weakness,' Oversight Panel Reports"
By CHARLES HERMAN and ALICE GOMSTYN, ABC NEWS Business Unit, April 7, 2009 —

Though some economic measures are improving, the financial crisis "is far from over" and "appears to be taking root in the larger economy."

This, despite the government's commitment to spend trillions of taxpayer dollars on a massive bailout of the financial system.

These were the findings released in a report today by the Congressional Oversight Panel, the body charged with overseeing the government's Troubled Asset Relief Program, the $700 billion plan aimed at bailing out the country's financial sector.

"We still have a long way to go. A very long way," Elizabeth Warren, the Harvard Law School professor who chairs the panel, said in an interview today with Bloomberg News.

The panel reported that the government has spent, lent or set aside more than $4 trillion through the Troubled Asset Relief Program, the Federal Reserve and the Federal Deposit Insurance Corporation.

Today, the "credit markets no longer face an acute systemic crisis in confidence that threatens the functioning of the economy," the report said.

But, it said, the economy now faces an "apparently prolonged period of weakness" with regard to financial firms and lending.

It noted, for instance, that Citigroup and Bank of America received multiple injections of capital from the government while borrowing costs remain high for businesses and individuals. The panel also cited increasing numbers of home foreclosures and lower home prices as reasons for concern.

The panel criticized the Treasury Department for failing to identify what measurements it will use to determine whether its rescue programs are working.

"If you don't articulate what the metrics are going out ... you can't know if anything succeeded or failed," Warren said.

Not Enough Spending Transparency?
Warren also criticized the Treasury for its lack of openness on its rescue efforts as it first began the TARP program last year.

"As Treasury started this program," she said, "they really had the notion that they would spend the money the way they wanted, and not only were they not going to tell the public, I don't think they were going to tell the Congressional Oversight Panel."

The Treasury Department recently unveiled a Web site dedicated to detailing the government's financial stability efforts. On the site, the department promises that the government's financial stability plan "will institute a new era of accountability, transparency and conditions on the financial institutions receiving funds."
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"Fed to banks: Keep mum on stress test results"
Daniel Wagner, Ap Business Writer, April 10, 2009

WASHINGTON – Federal regulators have told the nation's largest banks to keep quiet about their performance on government stress tests. They fear investors could punish companies with nothing to brag about.

In letters to the 19 banks undergoing tests of their financial strength, regulators told the companies not to disclose their performance during upcoming earnings announcements, according to industry and government officials who requested anonymity because they are not authorized to discuss the process.

The order was the latest in a series of government moves designed to keep good news about strong banks from dooming others to a downward spiral of falling share prices and financial weakness. If banks receiving the highest marks trumpet their results, the fear is investors might push down share prices of those companies that make no such announcements.

Government officials want to announce the results all at once, at the end of the month.

The stress tests are a centerpiece of the Obama administration's ongoing effort to stabilize the banking industry. They subject the banks' books to a series of negative scenarios, including double-digit unemployment and further drops in home values.

The test results will help regulators determine which banks are strong enough with current subsidies, which need more money from the government or private investors, and those not worth saving.

The letters follow public statements from bank executives about the tests, including Wells Fargo & Co. Chief Executive Richard Kovacevich's calling the process "asinine." Bank of America Corp. CEO Kenneth Lewis and Citigroup Inc. CEO Vikram Pandit both have alluded to strong performance on separate, internal stress tests in recent memos seeking to build employee confidence.

Lewis also told reporters last month he expects Bank of America to pass the government's tests.

Wells Fargo has received a $25 billion government bailout; Bank of America and Citigroup each received $45 billion.

Spokesmen for the Federal Reserve, Bank of America and Citigroup would not comment on the issue. Wells Fargo spokeswoman Julia Tunis Bernard said the company doesn't comment on discussions with regulators.

The letter echoes earlier government moves to use strong banks as cover for those that need more help. For example, then-Treasury Secretary Henry Paulson forced the nine largest banks to take capital injections all at once last fall so the neediest banks wouldn't be stigmatized.

The Securities and Exchange Commission on Wednesday opened a public debate on how to prevent downward pressure on stocks from investors betting against their performance — a practice called "short selling." Critics of the practice, including many in the financial industry, blame short sellers for causing much of the panic that engulfed financial markets last fall.

Industry groups also have groused about regulators forcing healthy banks to take bailouts. Some smaller banks already have returned the government's money — plus interest — because they were unhappy with new conditions Congress had imposed. Large banks, including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc., have said they want to return the bailout money as soon as possible.

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THE BOSTON GLOBE: LISTENOP - ELIZABETH WARREN
"Keeping tabs on the bailout"
By Elizabeth Warren, April 12, 2009

Until last year, Harvard Law School professor Elizabeth Warren was perhaps best known for her writing on bankruptcy and consumer finance. But last fall, she was appointed chair of a newly created Congressional Oversight Panel, which is charged with keeping tabs on the $700 billion bailout of the financial sector - an effort formally known as the Troubled Assets Relief Program. Warren was recently interviewed by Globe deputy editorial page editor Dante Ramos, who prepared the following edited excerpts.

Q: You've been quite critical of the Treasury. What troubles you most about what you're getting and what you're not getting?

A: There's no discussion of the overall policy. Instead, there are specific programs that are announced, and from that, it's necessary to reason backwards to figure out what the goal must have been. It's like a "Jeopardy!" game. If this is the answer, what was the question? It's frustrating because without a clearly articulated goal and identified metrics to determine whether the goal is being accomplished, it's almost impossible to tell if a program is successful.

Q: Do you have a clear sense of what the overall TARP plan at this point is supposed to do? Are you capable of summarizing what it's supposed to be doing?

A: No. And neither is Treasury. Treasury has given us multiple contradictory explanations for what it's trying to accomplish.

There's a major problem and a minor problem. The minor problem is documentation. I've spent four weeks now looking for someone who can give me the details of the stress test so that we can do an independent evaluation of whether the stress test is any good.

We get: "someone will call [you] right back." Only the call doesn't come.

The major problem is that Treasury has not articulated its goals. And without that, we can't have a robust debate about whether they're headed in the right direction; instead, we're stuck with this more technical argument about the implementation of the [Term Asset-Backed Securities Loan Facility] or the details of the Capital Acquisition Program. And that misses the central question of, should we be subsidizing failing banks or liquidating them? When we acquire capital, should we exercise more control over the institutions that take the money or less control? Those are the central policy issues that the American public has a right to participate in.

Q: What [is] the underlying problem? Is it that there aren't the right people at Treasury? Or is the lack of transparency and the lack of resolution on the conceptual front, is that an unspoken part of the policy?

A: I can only look at the evidence. When the panel asked [Bush administration Treasury Secretary Henry] Paulson in December whether or not the American taxpayer was getting full value when it invested billions of dollars of the original TARP money, he sent a letter back to me that said, "Yes. These are par transactions." That means, in effect, for every $100 of taxpayer money that went into those banks, the US taxpayer was getting back $100 worth of stock and warrants.

We did an independent valuation of the transactions, crunched a lot of numbers, used a lot of different approaches for how to value the transactions. And we discovered that for every $100 of taxpayer money put into the financial institutions, the taxpayer got back about $66 in current value.

Q: So what accounts for the $34 difference?

A: Treasury specifically designed a program that had the effect of subsidizing the financial institutions, and simultaneously represented to the panel and to the American people that there was no subsidization.

Q: So they weren't really telling you the truth?

A: They said one thing and did another.

Q: It seems that there's a culture clash. The public-policy culture says there should be public participation, and the goal is to allocate the benefits and the pain as fairly as you can. And then there's the Wall Street culture, which is built upon self-interested institutions maximizing benefit without a lot of outside interference. Those two things clash pretty strongly in the AIG case.

A: I see this as an insiders/outsiders problem.

The insiders, the investment bankers and other financial services specialists, have a system that works very well for them. The problem is they're now using the outsiders' money to fund that system. Their system has collapsed. AIG is not functional without substantial taxpayer dollars. And the insiders don't seem to have appreciated the seismic shift in their world when they need money, gifts, subsidies from outsiders.

Anyone who thinks that they can take tens of billions of dollars of taxpayer money and continue to operate business as usual lives in a fantasy world that I don't understand. Culture clash? No! This is not a culture clash. This is not about taxpayers who don't get it. This is about people who think [in a] fantasy, that their world is prosperous and continues to create value that can be parsed out privately, when they are relying on huge subsidies from the taxpayer. It's just wrong!

Q: What's the connection between the squeeze that consumers are feeling and the financial bailout that you're now charged with trying to scrutinize?

A: I bring a very different perspective to the bailout than those who spent the last dozen years in the financial services industry. I believe that ultimately, the banks exist to serve the American people. Not vice versa. We cannot have a vibrant economy without a strong and reliable banking system, but it is impossible to save the banking system independently of saving the American family.

The whole Treasury program began as a top-down analysis: Large financial institutions are at risk of failing; how can we prop them up? We might have asked a different series of questions: Large financial institutions are failing; how do we make sure that there are some financial institutions to keep the economy going forward while we let the failures go? There was a real focus on saving all of the institutions rather than a focus on saving enough of a system to keep it workable for the underlying economy.

Saving everyone is a lot more expensive than saving the minimal number to keep the economy functional.

Every time I do the paperwork for the panel and note a $10 billion expenditure, I think about how many schools that might have built, how many hospitals that might have updated. Those dollars are not just ink on a page. They're real.

Q: If at the end of all of this you and your panel have done a good job, what does that look like?

A: Wow, that's a tough one. I suspect it will be a comparative measure. We will have wasted comparatively less money, and spent more on comparatively more successful programs. If as the result of our panel's work, Treasury takes a more comprehensive perspective on how to commit $3 trillion of taxpayer money, then we succeed.

Q: And what happens if they keep being unresponsive? What can you do?

A: They've already changed. Secretary Paulson asked for $700 billion announcing one program, and within weeks had changed directions entirely. The current Treasury has recognized that as a strategy that will not be tolerated.

Q: Is there anything else that you would want people to understand?

A: I don't have a badge and a gun. The power of this panel is derived entirely from the voice of the American people. If they stay out of the policy debates, then Treasury can spend at will and reshape the American economy with no one in the room but insiders. If they are involved, the policies will look different.

It's the design of the rules going forward that will tell us or that will determine whether we are moving to a cyclical economy with high wealth, high risk, and crashes every 10 to 15 years. Or whether we will emerge, as we did following the new regulatory reforms in the Great Depression, with a more stable economic system that benefits people across the economic spectrum. It's an amazing moment in history.

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"Bailed Out Banks Jacking Up Credit Card Rates"
ABC News - The World Newser - April 13, 2009

Have you gotten anything in the mail lately from your credit card company? Perhaps a letter informing you that your interest rates are going up? Or that there's a new fee for something that used to be free of charge? You are not alone.

The Wall Street Journal reports today that the committee charged with watching the dollars and cents of the bail effort is now investigating how these banks are treating their customers -- the fees, the special charges, the rates going up. Bank of America will be raising rates on 4 million. Bank of America received $45 billion from tax payers to stay afloat.

Have you seen your rates go up recently? Did you miss a payment or was this out of the blue?

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Learn to shop for lower-rate credit cards the right way. (Getty)
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"Credit Card Rate Soaring? What to Do: Learn to Shop for Better Credit Cards the Smart Way"
By ELISABETH LEAMY, ABC NEWS Consumer Correspondent, April 13, 2009 —

Bank of America is the latest bank to announce that it plans to raise interest rates on some credit card accounts. B of A says the move will affect 4 million cardholders -- less than 10 percent of its card customers. Basically, people who carry a balance and currently enjoy a rate of less than 10 percent will see their rate rise.

Citigroup, JP Morgan Chase and American Express had already announced similar moves. You may recall that the Federal Reserve created new rules that will protect cardholders from some interest rate hikes, but those rules don't go into effect until next year. Congress is considering legislation that would impose similar rules sooner, but it's still winding its way through the House and Senate.

So, it's self-reliance time. Here's what you do.

If you receive a notice saying your bank is raising your credit card interest rate, call the customer service number and opt out. Sounds liberating, but there's a catch. You won't be able to use your card to make any new purchases. If you have had the card for many years, you should keep it open because longstanding accounts are good for your credit score. Pay down the balance but don't make any new charges. New charges trigger the new, higher interest rate. If you haven't had the card long, just cancel it. Pay off the balance or transfer it to another card.

There are still banks out there offering zero percent introductory offers for balance transfers. Just be prepared to do some fancy footwork if you are about to do the introductory rate dance. This is a dicey proposition, but it can be done.

Basically, you transfer your balance from one card to another as introductory rates expire. The key is finding cards that offer a low rate, a long introductory period and few fees.

Some credit card companies charge you so much to transfer balances that it wipes out the benefit of the low interest rate. Read the fine print. Make a note on your calendar of when the introductory rate expires and switch to another card before it does. If you fail to transfer before the higher rate kicks in, the bank will charge you that rate on your entire existing debt.

As you shop around for credit cards with low rates, keep in mind that applying for a whole bunch of credit at once can ding your credit score. Soon after college, I was trying to get a better credit card deal, so I found a list of low interest cards and applied for all of them, hoping one would approve me. I was turned down by every single card company! Why? Simply because I had applied for so many at once!

Bankers get suspicious when somebody suddenly applies for a ton of credit, so statistical scoring models take that into account. In fact, "inquiries" about your credit make up 10 percent of your credit score. (Ordering your own credit report doesn't hurt you and unsolicited inquiries when a credit card company is considering offering you a card don't hurt you.) But "hard" inquiries, where banks pull your credit report because you have applied for credit, can shave up to five points off your score.

So, before you apply for a new credit card, find out what your credit score is. Unfortunately, credit scores are not available for free like credit reports are. Try www.myfico.com to learn your true FICO score, developed by industry pioneer Fair Isaac.

If your score is in the high 700s, a few points lost because of a credit application won't matter. But if it's lower than that, every point matters. So, identify several credit cards you are interested in and research what their qualifications are. Then, once you have found one you believe you will be approved for, apply. If and only if you are rejected, apply for another.

Here are some resources to help you find low interest credit cards:

The Federal Reserve surveys credit card companies and publishes their interest rates, etc.

Card Trak is a consumer advocacy group that tracks credit card rates and fees.

Creditcards.com profiles scores of low interest cards.

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The country's major banks have reportely seen profits in 2009, but that hasn't stopped them from raising interest rates on credit card customers.
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How do you feel about credit card interest rate hikes? Tell ABC News.
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"Danger Lurks Behind Banks' Results
Reuters - By Jonathan Stempel - NEW YORK

U.S. banks' first-quarter results will show that losses from credit cards and commercial and real estate loans have not yet peaked, and perhaps dash hopes that the worst of the banking crisis has passed.

The January-to-March period is the first full quarter since the industry got hundreds of billions of dollars of taxpayer bailout money and mergers weeded out several troubled lenders.

Results at large banks such as Bank of America Corp , JPMorgan Chase & Co , Citigroup Inc , Wells Fargo & Co are expected to improve from the fourth quarter, helped in part by a surge in mortgage refinancings, lower deposit costs and fewer writedowns.

But investors will approach with abundant caution as bank results stream in over the next two weeks. They know the bottom lines will reflect a new accounting rule that may further limit writedowns without actually improving bank balance sheets. And the government is conducting "stress tests" to see which of the 19 biggest lenders may need more capital.

"It's going to be such a muddy picture, which will keep a lot of investors on the sidelines," said Michael Nix, who helps invest $650 million at Greenwood Capital Associates LLC in Greenwood, South Carolina. "There is an expectation that we see a more favorable earnings environment, but that's relative -- it's a question of whether we've caught the falling knife."

The fourth quarter was the sector's first in the red since 1990. Banks now face a deep recession that may not end before 2010, worry over how much new capital they need, and conjecture over how long executives will keep their jobs.

Chief executives of Bank of America, JPMorgan and Citigroup -- Kenneth Lewis, Jamie Dimon and Vikram Pandit, respectively -- said their banks made money in January and February, though Lewis and Dimon said trading results ebbed in March.

Oppenheimer & Co analyst Chris Kotowski wrote that large commercial and investment banks may have "reasonably stable 'core' revenues, expenses and earnings" before loan losses and writedowns, but credit deterioration will likely "continue in full swing.

Regional banks may fare worse than big banks, given their large relative exposure to accelerating losses from consumer loans such as credit cards, commercial and industrial loans, and commercial real estate.

Analysts expect Comerica Inc , Fifth Third Bancorp , KeyCorp , Regions Financial Corp , SunTrust Banks Inc and Zions Bancorp to lose money in every quarter in 2009, Reuters Estimates said.

And yet bank shares have rallied, gaining roughly 50 percent since March 6, though they have still lost roughly three-quarters of their value over the past two years.

"The rally in bank stocks got way ahead of itself," said Michael Mullaney, who helps invest $9 billion at Fiduciary Trust Co in Boston. "We would expect a pullback as earnings announcements come in, pretty morose for the most part."

CATCH-22

Goldman Sachs Group Inc is expected to kick off earnings season on April 14 and return to profit after its first quarterly loss as a public company. Smaller rival Morgan Stanley may report results the following week; analysts expect a small profit.

Some banks will need to show they properly assessed the risk in buying lenders felled by mortgages and troubled debt.

Among these: takeovers of Merrill Lynch & Co by Bank of America, Wachovia Corp by Wells Fargo & Co , much of Washington Mutual Inc by JPMorgan, and National City Corp by PNC Financial Services Group Inc .

Bottom lines may be inflated by a new Financial Accounting Standards Board rule that gives lenders more freedom to value holdings as they would in normal markets, rather than at lower values because current markets are distressed.

There is reason for lenders not to do that.

It may make it harder to sell assets under the government's $1 trillion Public-Private Investment Program if banks write up assets too far. Meanwhile, the government may decide after conducting the stress tests that the assets should not be written up so high and must be written back down.

While the Obama administration hopes to avoid major intervention, it may push undercapitalized banks to raise money privately or take new capital from the government.

"The industry is in a Catch-22," the often bearish Calyon Securities USA Inc analyst Mike Mayo wrote on Monday. "Either (regulatory) efforts go easy on banks and leave the toxic assets on balance sheet, or go hard and require large, new dilutive capital raises."

The Treasury plans not to reveal stress test results until after earnings season to avoid spooking equity investors, a person familiar with the process said on Tuesday. The source spoke anonymously because no final decision has been made.

"I don't expect a lot of color around the stress tests," Greenwood's Nix said, "apart from banks saying they will be comfortable coming out of it."

EARNING THEIR WAY OUT

Perhaps no CEO is on the hotseat more than Bank of America's Lewis. Some shareholders are demanding his ouster because of the bank's shrunken share price, the $3.62 billion of bonuses awarded to Merrill workers, and a perception that Merrill was one takeover too many.

Lewis wants to stay until his bank repays the $45 billion it took from TARP and makes $30 billion a year after taxes. Citigroup also took $45 billion from TARP. Treasury Secretary Timothy Geithner this week said he would not hesitate to oust management at big banks that need "exceptional assistance."

Some banks that got TARP money have repaid it and others want to, noting that the government can (and does) retroactively impose new restrictions on banks that received funds, and a perception that banks on the dole might be too sick to survive on their own.

But Robert Albertson, chief strategist of Sandler O'Neill & Partners LP, suggested in an April 7 report that banks do not need TARP money as an incentive to lend more.

"We can think of no stronger, healthier motive for new lending than knowing you have to earn your way out of past mistakes," he wrote.
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(Reporting by Jonathan Stempel; Additional reporting by Karey Wutkowski in Washington; editing by John Wallace)
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A pedestrian walks by a sign outside of a Wells Fargo bank branch on January 28, 2009, in Oakland, California. Wells Fargo & Co. said Thursday it expects record first-quarter earnings of $3 billion, easily surpassing analysts' estimates and providing an encouraging sign for the banking industry. (Justin Sullivan/Getty Images)
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"Wells Fargo Projects Record $3 Billion 1Q Profit: Wells Fargo says it expects 1st-quarter profit of $3B, easily surpassing expectations"
By STEPHEN BERNARD, The Associated Press - NEW YORK

Wells Fargo & Co. said Thursday it expects record first-quarter earnings of $3 billion, easily surpassing analysts' estimates and providing an encouraging sign for the banking industry.

Wells Fargo is the first major bank to give an indication of how the first-quarter looked. Several pessimistic forecasts about potential loan losses have jolted the market in recent days, and investors have been anxious as Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. all report next week.

Wells Fargo's stock surged $4.72, or 31.7 percent, to close at $19.61. Broader markets also rose on the Wells Fargo report, with the Dow Jones industrial average gaining more than 246 points to 8,083.38.

San Francisco-based Wells Fargo, which has received $25 billion in funds as part of the government's bank bailout plan, anticipates earnings after preferred dividends of about 55 cents per share. Revenue for the period ended March 31 is expected to climb 16 percent to $20 billion.

Analysts polled by Thomson Reuters forecast profit of 23 cents per share on revenue of $19 billion. Analysts' estimates typically exclude one-time items.

Wells Fargo earned $2 billion during the first quarter last year.

The bank's chief financial officer, however, did caution that the economy hasn't necessarily recovered yet.

"It's premature to conclude the economy has turned," said Howard Atkins, Wells Fargo's CFO. "All I can tell you is we're seeing a lot of business."

Revenue at Wells Fargo, which has been one of the strongest banks during the ongoing credit crisis and recession, was bolstered by strong mortgage banking and capital markets business, Atkins told The Associated Press. During the first quarter, Wells Fargo received about $190 billion in mortgage applications, a 64 percent jump from the previous quarter. More than 40 percent of that volume came in March.

Most of that business was refinance applications, but about 25 percent came from customers looking to purchase homes, Atkins said, noting the recent quarter's mortgage activity has been among the strongest quarters since the housing market began to collapse in 2007.

The government has been implementing many new programs in an effort to cut interest rates, hoping to bolster the beleaguered housing market, and those programs have definitely helped, Atkins said.

"For sure the reduction in interest rates is having an impact on the wave of activity in the mortgage market," Atkins said.

The company also credited its Wachovia acquisition, which was completed Jan. 1, for helping boost revenue. Atkins said Wachovia accounted for about 40 percent of revenue during the first quarter, and that business at Wachovia has steadily improved since Wells Fargo announced it would acquire the Charlotte, N.C.-based bank last fall.

Wells Fargo said charge-offs are expected to total $3.3 billion for the first quarter, compared with a combined $6.1 billion between Wells Fargo and Wachovia during the fourth quarter. Charge-offs are loans written off as not being repaid.

The bank is still facing loan losses as customers fall behind on repaying loans during the recession. It said its loan-loss provision will total about $4.6 billion for the first quarter, including adding $1.3 billion to its credit reserves. Wells Fargo now has $23 billion in reserves to cover future loan losses.

Signs of improvement from one of the nation's largest banks gave investors reason to rally around the banking sector amid hopes that the worst of the credit crisis is ending. The KBW Bank Index, which tracks 24 of the nation's largest banks, surged 20.1 percent to 33.81. Some of the nation's hardest hit banks have also rallied, with Citigroup Inc. gaining 34 cents, or 12.6 percent, to $3.04. Shares of Bank of America Corp. rose $2.49, or 35.3 percent, to $9.55.

Over the past month, investors have clung to encouraging announcements from banks to send their shares higher. The market's recent rally was initially sparked by CEOs at Citigroup and Bank of America announcing their banks were operating at a profit during the first two months of the year.

Wells Fargo is scheduled to report full quarterly results on April 22, 2009.

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AP Business Writer Michelle Chapman in New York contributed to this report.
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"Goldman Sachs Puts December Under a Mattress?"
ABC News - The World Newser - blogs.abcnews.com - April 15, 2009

ABC News Kristi Berner reports:

After Monday's stock market close, banking giant Goldman Sachs reported better-than–expected earnings for the first quarter: $1.66 billion for the quarter-ending in March, which was more than double analysts expectations. But the news buried in yesterday's glowing news stories on Goldman's profits is that Tuesday Goldman filed a report with the Securities and Exchange Commission reporting a one-month after-tax loss of about $780 million for December.

That's because Goldman, as part of its conversion to a bank holding company last fall, switched to a calendar year fiscal year from a fiscal year that ended in November. So the bank's fourth quarter earnings were reported for September through November 2008 and Goldman's first quarter earnings were reported for January through March 2009.

So what happened to December? It's called an "orphan" month and Goldman, not surprisingly, chose to use the accounting quirk to bury a good number of their write-offs in the month not included in either quarter.

Today, William D. Cohen from the New York Times mentions the convenient accounting procedure his Op-Ed "Big Profits, Big Questions."

Goldman apparently was forthright about the December losses with reporters on a conference call yesterday, even though the topic was not mentioned in the bank's first quarter earnings press release.

Ryan Chittum of the Columbia Journalism Review compares how much of the press may have under-reported the Goldman earnings story yesterday.

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READERS' COMMENTS:

Posted by: "artb" on April 15, 2009 -

Let's not forget that AIG bought back billions of devalued derivatives at 100% (at taxpayers expense). I'm sure other institutions will also be showing profits after they also dump their derivatives on the taxpayers.

Posted by: Ed on April 15, 2009

I thought Sarbanes-Oxley, other regulations, and Obama was going to "change" these accounting tricks that, in part, helped lead to this crisis?! And how much of Goldman's "profits" are related to former Goldman-Sach man Hank Paulson's or Robert Rubin's positions in government? Or from bailouts? Or from their ability to aggrandise and buy out others (because the government only bails out a few connected players)?

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"Goldman Revamp Puts Dec. Losses Off Books: Calendar Shift Left 1 Month Unreported"
By David S. Hilzenrath, Washington Post Staff Writer, Wednesday, April 15, 2009; A15

December was a disastrous month for Goldman Sachs, producing a loss of $780 million, but you wouldn't know it from looking at the company's bottom line for the last quarter of 2008 -- or the first quarter of 2009.

December fell through the cracks as the big investment-banking firm moved from a fiscal year ending in November to a fiscal year beginning in January. Billions of dollars of write-downs in the value of commercial real estate loans and other assets showed up in neither period.

The result was that Goldman was able to report a first-quarter profit of $1.81 billion Monday, just as it was gearing up to raise $5 billion from investors yesterday through a new stock offering.

The $1.81 billion profit, in turn, helped Lloyd C. Blankfein, Goldman's chairman and chief executive, offer a positive view of the company's performance in a Monday news release.

"Given the difficult market conditions, we are pleased with this quarter's performance," Blankfein said as the company disclosed results for the three-month period that ended March 27. "Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people," he said.

Goldman spokesman Lucas van Praag said the firm was required to shift to a calendar year as a result of its decision in September to become a bank holding company.

"We didn't make the rules," he said.

The company included a page of charts in its Monday news release showing its December results, but it didn't include a narrative description of those results as it did for the January-through-March period. In a conference call with analysts yesterday, Chief Financial Officer David A. Viniar said the firm incurred $2.7 billion in "fair value losses" in December, meaning losses related to declines in the value of assets it holds. Among those write-downs were $1 billion for "non-investment grade loans," Viniar said, according to a transcript.

Viniar told analysts that the company faced "a difficult market environment" in December.

Michael Williams, director of research at Gradient Analytics, which specializes in examining corporate accounting, said companies have a lot of discretion in deciding when to recognize gains and losses.

"It does seem rather remarkable that they ended up with such a large amount of losses in December itself, just in that four-week period," Williams said. "You're just left scratching your head to a large extent about what's underlying the numbers for the month," he said.

Given the scale of the December losses, and considering that March was so strong for the financial markets, it seems possible that Goldman's first-quarter profit would have been a loss if it were still reporting on the old schedule, Williams said.

The change in Goldman's financial reporting schedule made it more difficult for investors to track the company's performance over time, and it would have been helpful if the firm provided more information, analyst Steve Stelmach of FBR Capital Markets said.

The Goldman spokesman rejected the notion that the firm shifted losses into December. Goldman did not supplement its latest earnings release by showing past results on a comparable basis because its business isn't seasonal "and we didn't think it was material or significant," Van Praag said.

Goldman raised $5 billion yesterday by selling new stock at $123 per share. The firm has said it plans to use the money to repay the government for public funds it received under the Troubled Assets Relief Program.

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"Treasury says bank lending declined in February"
By Martin Crutsinger, AP Economics Writer, April 15, 2009

WASHINGTON --Bank lending to consumers and businesses for many types of loans fell in February despite the billions of dollars in government support the banks received.

The Treasury Department said Wednesday its latest monthly survey of lending activities at the nation's biggest banks showed nine reported increases and 12 posted declines. The median, or midpoint, for lending activity dipped 2.2 percent in February.

While the median level of activity in mortgage lending rose 35.4 percent and home equity lines of credit grew 17.7 percent, lending to businesses for commercial and industrial loans plunged 47 percent.

"Against a difficult economic backdrop, banks extended approximately the same level of loan originations in February as January," the Treasury report said. "The relatively steady overall lending levels observed in February likely would have been lower absent the capital provided by Treasury."

The findings on loan levels were based on reports filed by the top 21 recipients of rescue money from the government's $700 billion bailout fund.

Critics of the rescue effort have complained the government has not done enough to ensure that the money banks receive is being used for its intended purposes -- to resume more normal lending to businesses and consumers.

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"Treasury Plans to Tap Fannie Mae Chief to Run Bailout"
By Zachary A. Goldfarb, Washington Post Staff Writer, Tuesday, April 14, 2009; A14

The Treasury Department is moving closer to naming Fannie Mae chief executive Herbert M. Allison Jr. to run its financial recovery program, according to people familiar with the matter.

Allison, who has led Fannie Mae since the government seized the firm in September, for weeks has been a candidate to run the Troubled Assets Relief Program, the $700 billion federal initiative to stabilize banks, keep struggling borrowers in their homes and spur lending. Other candidates for the post have dropped from contention.

"He will be asked by Obama," said a financial industry executive who discussed the nomination with Treasury officials and spoke on condition of anonymity.

Treasury and Fannie Mae spokesmen declined to comment on Allison's potential appointment, which was not finalized last night.

If named to the Treasury, Allison would replace current TARP head Neel Kashkari. Kashkari has stayed on from the Bush administration, becoming an influential figure under Treasury Secretary Timothy F. Geithner.

Allison, 65, has been close to Geithner for years. Allison served on an advisory committee to the Federal Reserve Bank of New York, of which Geithner was president. Allison formerly was vice chairman of Merrill Lynch and chief executive of TIAA-CREF.

The new head of TARP would take over at a key moment. The largest 19 banks are undergoing "stress tests" by the government to see how much more in private or public capital they might need. Meanwhile, one program to spur lending backed by tens of billions in TARP funds is getting underway, and officials are putting the final touches on another, to remove troubled assets from banks' balance sheets.

Allison would have a more influential role at the Treasury than at Fannie Mae. As head of the District-based mortgage finance company, he answers to a board, which answers to a federal regulator, which in turn takes its cues largely from the Treasury. Allison also may be in line for a pay hike if he wins the government job. He has forsworn a salary at Fannie Mae.

At Fannie Mae, Allison was quick to say that the company would be putting the goal of housing recovery ahead of maintaining profitability as a shareholder-owned corporation.

But his departure could complicate matters at the company, which is struggling to retain top talent. Many employees have started to search for jobs after lawmakers criticized bonuses paid at the firm.

Allison's departure would leave both government-run mortgage companies without permanent chief executives.

David Moffett, who was also appointed by the government, left McLean-based Freddie Mac last month amid squabbling with the company's regulator. The temporary chief executive is John A. Koskinen, who was previously Freddie Mac's chairman.
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Staff writer David Cho and staff writer Tomoeh Murakami Tse, in New York, contributed to this report.
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"How Bernanke Staged a Revolution: This chairman set out to lead as a civil servant rather than a celebrity economist. Facing a thundering financial collapse, he has reinvented the Federal Reserve."
By Neil Irwin, Washington Post Staff Writer, Thursday, April 9, 2009; A01

Every six weeks or so, around a giant mahogany table in an ornate room overlooking the National Mall, 16 people, one after another, give their take on how the U.S. economy is doing and what they, the leaders of the Federal Reserve, want to do about it.

Then there's a coffee break. While most of the policymakers make small talk in the hallway, their chairman, Ben S. Bernanke, pops into his office next-door and types out a few lines on his computer.

When the Federal Open Market Committee reconvenes, Bernanke speaks from the notes he printed moments earlier. "Here's what I think I heard," he'll say, before running through the range of views. He sometimes articulates the views of dissenters more persuasively than they did.

"Did I get it right?" he says.

The answer, in recent months, has been a resounding yes. And Bernanke's ability to understand and synthesize the views of his colleagues goes a long way toward explaining how he has revolutionized the Federal Reserve, which under his leadership has deployed trillions of dollars to try to contain the worst economic downturn in 80 years.

Famously soft-spoken, Bernanke is an unlikely revolutionary. He is, after all, a career economics professor who lacks the charisma of a skilled politician. He also happens to run an organization designed for inertia: Decision-making authority is shared with four other governors in Washington appointed by the president; the heads of regional Fed banks in 12 cities who answer to their own boards of directors; and a staff of 2,000 that is led by economists who spent decades working their way through a rigid hierarchy.

Yet in the past 18 months, Bernanke has transformed that stodgy organization, invoking rarely used emergency authorities. His decision to do so has drawn criticism -- he has transcended traditional limits on the role of a central bank, stretched the Fed's legal authority and to some, usurped the responsibility of political authorities in committing vast sums of taxpayer dollars.

The Fed's actions put the economy on a "perilous" course, said James Grant, editor of Grant's Interest Rate Observer.

"The real risk is that he will wind up instigating rampant inflation" once the recession has passed, he said. "A related possibility is that the Fed has created incentives to overdo it in borrowing and lending . . . which is what got us into this mess in the first place."

What strikes many who have worked with Bernanke, though, is that he has pulled it all off without grand speeches, arm-twisting or Machiavellian games. Rather, according to interviews with more than a dozen current and former Fed officials and others familiar with the workings of the central bank, he has enacted bold policy moves through measured, intellectual debates and by making even those who are resistant to some of the new actions feel that their concerns are understood.

To many Fed veterans, his leadership style is a stark contrast with that of his predecessor, Alan Greenspan, whose tenure was characterized by tightly controlled decision-making with only rare open disagreement.

"It's not Ben's personality to pound the table and scream and say you're going to agree with me or else," said Alan Blinder, a former Fed vice chairman and longtime colleague of Bernanke's at Princeton University. "It's not his way. I've known him for 25 years. He succeeds at persuading people by respecting their points of view and through the force of his own intellect. He doesn't say you're a jerk for disagreeing."

In other words, Bernanke has remade the Federal Reserve not in spite of his low-key style and proclivity for consensus-building. He has been able to remake the Fed because of it.

Looking High and Low

More than a few times over the past year, senior Fed staff members have logged into their e-mail accounts to find an unusual message. Subject: Blue Sky. Sender: Ben S. Bernanke.

The point of the e-mails has been to encourage them to think of creative ways that the Fed can guard the economy from the downdraft of a financial collapse.

This is an institution that not long ago could spend the better part of a two-day policymaking meeting deciding whether its target for short-term interest rates should be 5.25 percent or 5 percent. But in this crisis, rate cuts, the most common tool for helping the economy, have lacked their usual punch. The Fed already has dropped the rate it controls essentially to zero, meaning there is no room left to cut.

That's why Bernanke's Fed has been trying to dream up ideas out of the clear blue sky. The result has been 15 Fed lending programs, many with four-letter acronyms, most of them unthinkable before the current crisis.

Under one unconventional program, the Fed is providing money for auto loans and credit card loans. Under another, it is making money available for home mortgages.

Many of the programs have required legal and financial gymnastics to enact, with the central bank being forced to invoke an emergency authority that allows it to lend to most any institution in "unusual and exigent circumstances." In the end, though, they have allowed the Fed to effectively create money to keep lending going.

Bernanke, 55, has said his academic research, especially about the Great Depression, convinced him that the Fed has no choice but to move forcefully during a financial crisis, even if doing so means it crosses conventional boundaries.

"Everyone is encouraged to come up with ideas that are a little bit out of the ordinary, to try to encourage creative approaches and to think outside of the box, which is not the usual central bank approach," Bernanke said in an interview. "But in the current climate I think it is necessary."

Dozens of staff members have been involved in figuring out how to execute the programs, but for many, Bernanke has been the catalyst.

In November, for instance, the Fed moved to push down mortgage rates by buying $600 billion in mortgage-related securities; in March, it increased that number by another $850 billion.

But sources said Bernanke raised the possibility internally more than a year ago, and he pushed to make sure the Fed was prepared to act.

"For many months, the chairman was asking 'how can we escalate?' " said William C. Dudley, president of the New York Fed. "There was a general consensus that we were getting to the point where traditional monetary policy tools might not be sufficient."

Into the Mortgage Market

The decision to flood money into the mortgage market was not Bernanke's alone; the power to do so belonged to the Federal Open Market Committee, which he leads. The four other governors serve on it, as does a rotating group of five of the 12 presidents of regional Fed banks.

In November, Bernanke called individual committee members to see whether they would be open to the Fed inserting itself into the mortgage market.

At the time, some committee members viewed the purchase of mortgage securities as a way to lower mortgage rates, encourage home sales and thus find a bottom for the housing market. Others said that buyers were irrationally avoiding even safe mortgage assets and that the Fed needed to act to make the markets to function more normally. Still others wanted the Fed to boost confidence in Fannie Mae and Freddie Mac by making more explicit the idea that the U.S. government stood behind the mortgage finance giants.

There were worries, too, that buying mortgage-related securities could make it hard for the Fed to suck money out of the economy once it began to recover, which could lead to inflation, or that doing so could put the government in the role of favoring housing over other sectors.

Bernanke guided the group toward a conclusion. Even though members had differences, most agreed that the economy was in bad shape and that the Fed's purchase of mortgage debt would likely help matters.

"The chair of any committee can respond to comments that challenge his view in ways that essentially inform the committee that the issue isn't worth discussing. This chairman doesn't do that," said Jeffrey M. Lacker, president of the Richmond Fed, who worried that the Fed was putting itself in the uncomfortable position of allocating capital in the economy. "He takes other views seriously."
'Some Thoughts of My Own'

At the Federal Open Market Committee meetings, after reading from his notes that synthesize the views of participants around the table, he turns to a second sheet of paper. "Having heard that," he might say, "let me add some thoughts of my own."

In December, Bernanke came into the meeting looking to take steps to indicate to the world that the basic framework of policy had changed. Cut the interest rate the Fed controls to roughly zero, he argued. And lay out publicly the options the Fed could exercise to support the economy further, such as buying long-term Treasury bonds.

He also promised to involve the Fed leaders broadly in future decisions.

Given the Fed's peculiar structure, some decisions involving its emergency efforts to expand credit are made by the full FOMC while others are made by the Board of Governors in Washington. When the Fed decided to bail out Bear Stearns last spring and American International Group in the fall, presidents of regional Fed banks found out not long before the public did.

Bernanke essentially promised to engage senior officials across the Fed in that decision-making process, even in areas where they have no official say.

In recent months, sources said, he has conducted a videoconference every couple of weeks with members of the FOMC, briefing them on the latest Fed programs.

Bernanke has also adjusted the schedule to make all FOMC meetings last two days, instead of alternating between one- and two-day meetings. One-day meetings follow a rigid schedule, leaving little time for more open-ended discussion.

"He tries to bring as much input as possible," said Kansas City Fed President Thomas Hoenig. "He's always been willing to ask questions, accept input and be responsive to that input."

That strategy has paid dividends. At the December meeting, Dallas Fed President Richard Fisher didn't want to cut rates and initially dissented from the decision, sources said. At the last minute, in the spirit of public unanimity, he changed his vote.
A Common Conversation

Leaders of regional Fed banks aren't the only constituency Bernanke has rallied around a set of bold actions. Staff members at the Fed in Washington are known for their high-octane intellects and spirit of political independence. But they also tend to be insular and disinclined to rush into decisions.

One midlevel staffer working on financial rescue issues said recently, "I've been here 20 years, and before the last few months never really dealt with anyone outside this building." One Fed governor, when he began, was expected to go through layers of bureaucracy just to get a daily update on the Treasury bond market; now he calls directly the lower-level staff who monitor those markets.

From the day he became chairman three years ago, Bernanke has tried to make the culture less hierarchical. Senior staff members now commonly refer to governors by first names, instead of addressing them with the title "Governor," as they did previously. (The big boss is still Chairman Bernanke.)

And whereas Greenspan once was briefed before policymaking meetings in ritualistic sessions with staff, Bernanke presides over sessions with more debate and discussion, often involving anyone on the staff with expertise on an issue rather than just top-level directors.

A decade ago, when the Fed wanted to know how it might deal with technical issues created by the government's need for fewer Treasury bonds, a study of the issue took 18 months and involved 73 economists across the Fed system. The result was a 165-page report.

This year, the Fed has made decisions of similar complexity and importance over a single weekend.

The pressure to act fast has, by all accounts, come from Bernanke himself. His relationships with staff members are warm, dating to his days as a Fed governor when he ran the equivalent of faculty seminars to help young economists develop their research. But sources who have been in contact with Fed staffers also say that he has prodded economists and lawyers to move faster and think more creatively to execute new programs being enacted.

The Fed's actions have not gone unquestioned -- its inspector general is reviewing all the programs it has launched under its emergency lending authority, and members of Congress have become increasingly skeptical toward the central bank.

"In a crisis, the task a chairman assigns is 'Find a way to do this.' It's not a question of 'Can we do this?' " said Vincent Reinhart, who was a senior Fed staffer until 2007 and is now a resident scholar at the American Enterprise Institute.

In developing responses to the crisis, Bernanke collaborated extensively with the Bush administration, and has done so under the Obama administration, even though the Fed traditionally maintains its distance from political authorities.

His inclination to build consensus has extended internationally as well. In October, he played a leading role in engineering a joint global interest rate cut with the European Central Bank and the central banks of Britain, Canada, Switzerland and Sweden. He is particularly close with Bank of England Governor Mervyn King, who shares his academic background, and has quietly urged European Central Bank President Jean-Claude Trichet to move more aggressively to stimulate the economies of Europe.
The Bureaucrat Steps Forth

Bernanke came into office aiming to depersonalize the role of Fed chairman. As Greenspan's successor, he aspired to be more anonymous bureaucrat than celebrity economist.

But people who have worked with him say he has become more politically savvy over the past 18 months, developing a better sense for what's palatable to Congress. In the early days of the crisis, sources said, he suggested solutions to the foreclosure problem that would have been more expensive than lawmakers would have ever considered.

He has also learned how to make his case publicly. In a first for a Fed chairman, he appeared at a de facto news conference, responding to questions from reporters at the National Press Club after a speech. Then, in another first, he sat for an interview with "60 Minutes," arguing that the biggest risk to the economy would be a lack of "political will" to solve the financial crisis.

Fisher, the president of the Dallas Fed, said the television interview was important. It gave Americans some reassurance about the economy, and Bernanke came across as thoughtful and deliberate.

"We all know Ben is not a publicity seeker," Fisher said. "All of us, in the world of central bankers, are meant to be felt but not seen. But these are unusual times."

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"Treasury Weighs Investment in Life Insurers: Department Says Some Firms Are Eligible for TARP Funds"
By David S. Hilzenrath and Brady Dennis, Washington Post Staff Writers, Thursday, April 9, 2009; A11

The Treasury Department is considering opening another front in the effort to manage the financial crisis, saying that some life insurance companies qualify for a potential investment of taxpayer dollars.

Treasury has determined that a small number of insurers are eligible for funds under the Troubled Assets Relief Program, and it is evaluating their requests on a case-by-case basis using the same criteria it applies to banks.

"These are among the hundreds of financial institutions in the . . . pipeline that will be will be reviewed and funded as appropriate on a rolling basis," Treasury spokesman Andrew Williams said yesterday by e-mail.

Although Congress last year granted the Treasury the authority to buy stakes in life insurers, the department has been slow to do so, partly because the federal government does not regulate life insurance companies and has limited ability to monitor their financial condition. Life insurers are regulated by the states.

To make sure that the federal government had at least a limited window into the affairs of TARP recipients, the Treasury declared last year that insurers would qualify only if they owned banks or thrifts, which would put their holding companies under the purview of Washington regulators such as the Office of Thrift Supervision. To meet that test, some insurers bought thrifts. Still, during the Bush administration, Treasury officials warned that such maneuvers might not be sufficient.

Now, the Treasury Department appears to have gotten past some of the earlier qualms.

"There are a number of life insurers who met the requirements for the Capital Purchase Program because of their thrift or bank holding status and applied within appropriate deadlines," Williams said.

The Wall Street Journal reported yesterday that the Treasury has decided to extend bailout funds to a number of struggling insurers. The Treasury didn't go that far in its public comments yesterday, and industry officials said they were unaware of such a decision.

TARP money could help keep insurance companies out of financial trouble and could enable them to provide greater support for the broader economy.

Insurers help fund American business by plowing money into an array of investments, such as corporate bonds, home mortgages and commercial real estate loans. The recession has eroded the industry's financial strength and left it vulnerable to further deterioration.

The result is that insurers could be forced to raise cash by selling assets at depressed prices and to raise capital at great cost. Making matters worse, as the bonds they hold are downgraded by credit rating agencies, it becomes harder for them to maintain the financial cushions regulators require to safeguard policyholders.

Taking capital from the government could ease the pressure, but it could also dilute the value of current shareholders' stock and subject the insurers to government restraints.

State regulators have tried to give relief to many insurance companies in recent months by changing how they measure capital and reserves. Instead of giving companies more capital, the state actions give insurers the appearance of more capital.

The Obama administration has proposed creating a federal regulator that would oversee institutions that have the ability to threaten the financial system, including insurers. The Treasury appears willing to give the insurers money even without that backstop in place.

"I surely hope they have the ability to see what they're getting into," said Peter Larson, an analyst at Gradient Analytics, adding that the capital needs of some insurance companies may be greater than meets the eye.

For insights into the financial condition of insurers seeking TARP funds, the Treasury has been talking to state regulators, said Therese M. Vaughan, chief executive of the National Association of Insurance Commissioners.

Vaughan predicted an increase in insurance company failures, but she said she doesn't expect any major insurers to fail and she doesn't expect widespread failures. She predicted that an industry safety net would be capable of handling any insolvencies that arise.

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"Recession pits small banks against big banks"
By Deb Riechmann, Associated Press Writer, April 20, 2009

WASHINGTON – First they felt their reputations were stained by the financial meltdown. Now they're paying a price they protest is unfair.

Small bankers are complaining loudly that they had nothing to do with the excesses of big Wall Street firms, freewheeling deals in the mortgage market and risky investments that precipitated the economic crisis.

Still, in the meltdown's wake, community bankers find themselves under tighter scrutiny from federal regulators. They say the $700 billion financial bailout has favored large institutions. And they are upset about a special assessment the government wants to charge to shore up the Federal Deposit Insurance Fund, which failed banks are draining.

This all comes as the government, trying to stimulate the economy, is pleading with banks — big and small — to lend, lend, lend.

"People on the street should be interested because community banks account for 45 percent of all small business loans," said Camden Fine, president of the Independent Community Bankers of America. "They really are the engines of Main Street, and if you have an overly aggressive and overly harsh examining atmosphere, then that causes the community banks to pull in their horns."

"Criticism of loan portfolios in community banks has become so harsh that community bankers say, `I'll just stop making loans until this thunderstorm passes,'" Fine said. He said small banks can turn to other revenue-making practices for a time and wait out the harsh examination environment.

The big bankers say banking examiners have become more prickly with them, too.

"We're hearing from Congress that we need to lend and we're hearing from examiners to shore up the balance sheets," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, which represents large financial firms. "We are subject to incredible amounts of scrutiny."

Bank consultant Bert Ely said he sees a disconnect between Washington and the banks across America. "The bankers are saying that they're getting criticized on a lot of loans and that the examiners have gotten tougher," Ely said. "Bankers are telling me that they are lending, but that a lot of the better borrowers don't want to borrow — that people are pulling back, projects are getting postponed, people don't want to buy a new car."

Some small banks did get involved in risky lending practice that led to their demise. Other small banks were too weak to survive the recession. Most of the 40-plus banks that have failed since January 2008 had less than $10 billion in assets. But Fine said they represent only a fraction of the country's 8,000 community banks.

He notes that more than $10 billion of the $17.8 billion in losses to the FDIC fund last year came from just one large bank — IndyMac in Pasadena, Calif. On the other hand, while Seattle-based Washington Mutual Inc. caused a loud thud in September when it became the largest U.S. bank failure, JPMorgan Chase & Co took it over. The deal was brokered by the FDIC and didn't cost the deposit insurance fund a dime.

What's really raised the ire of the community bankers, however, is the one-time, emergency assessment that all banks are being asked to pay to shore up the FDIC fund, which is struggling to back deposits in a rising number of failed institutions.

The FDIC board expects bank failures will cost the fund about $65 billion through 2013. The law requires the insurance fund to be maintained at a certain minimum level of 1.15 percent of total insured deposits. Bank failures have sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level since 1987. That compares with $52.4 billion at the end of 2007.

"Why are community banks paying for the sins of Wall Street banks?" Dean Anderson, vice president of Lake Elmo Bank in Lake Elmo, Minn., wrote in one of thousands of protest letters the FDIC received over the assessment. "Some community banks will not survive this outrageous assessment. I know it will cost our institution almost $400,000 for this unbudgeted item. ... The little guy is always the one who gets hammered and no one seems to care!"

Connie Rohde, vice president at Brenham National Bank in Brenham, Texas, wrote: "For years we community bankers have fiercely competed with the big guys for every deposit we could get to remain in business. These irresponsible banks were making the big profits, while we struggled to stay alive — honestly. And now you are demanding us to bail them out! Can you not feel our frustration?"

The new emergency premium, to be assessed on the 8,305 federally insured institutions on June 30, will be 20 cents for every $100 of their insured deposits. That compares with an average premium of 6.3 cents paid by banks and thrifts last year.

Fine said the problem with the FDIC assessment lies with how it's calculated. It's partly based on the amount of domestic deposits an institution needs insured. Fine said more than 85 percent of the money that a community bank uses to conduct its business is from domestic deposits while the percentage is much lower for larger banks.

"We're getting the short end of the stick," Fine said.

The assessment comes on top of an increase in regular premiums the FDIC charges institutions every year to insure regular accounts up to $250,000. Starting this month, the FDIC raised the regular insurance premiums to between 12 cents and 16 cents for every $100 in deposits, from a range of 12 cents to 14 cents.

Large banks don't like the proposed FDIC assessment either, but they say every bank, regardless of size, must pay to insure their deposits. They say large banks already are putting more in the pot because some of the fees from two new programs aimed at easing the financial crisis are being diverted into the FDIC fund. And they point out that more small banks than big banks are failing and draining the fund.

"There is a statutory requirement for the FDIC that says they have to treat all institutions of every size fairly. You can't disadvantage one over the other," said Diane Casey-Landry, chief operating officer of the American Bankers Association, which represents both big and little banks. "The reality is that the losses in banks that have been failing and the banks that are slated to fail and cost the deposit insurance fund going forward unfortunately are community banks."

The multibillion-dollar financial bailout is another touchy subject for the small bankers who say the program has favored big financial institutions over smaller community banks. A majority of the bailout money is in just about 10 percent of the banks, but it was the bigger institutions that were the first priority for the program.

"Community banks weren't even allowed to try to get the money until about the first of the year," Fine said. "I knew community banks that had applications pending for two and three months that didn't hear anything."

Now, however, some community banks have decided not to apply, and some are even giving bailout money back.

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On the Net:

Independent Community Bankers of America: www.icba.org/

American Bankers Association: www.aba.com

Federal Deposit Insurance Corp.: www.fdic.gov/regulations/laws/federal/2009/09comAD35.html
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"US may turn its loans to banks into stock"
By Edmund L. Andrews, New York Times, April 20, 2009

WASHINGTON - President Obama's top economic advisers have determined they can shore up the banking system without having to ask Congress for more money any time soon, administration officials said. White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they expected, simply by converting the government's existing loans to the nation's 19 biggest banks into common stock.

That would turn the government aid into available capital for a bank - and give the government a large equity stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

Taxpayers would also be taking on more risk, because there is no telling what the common shares might be worth when it's time to sell them.

Treasury officials estimate they will have about $135 billion left after they follow through on all the loans that have already been announced. But banks are believed to need far more than that to maintain enough capital to absorb all their losses.

In his budget proposal for next year, Obama included $250 billion in additional spending to prop up the financial system. Because of the way the government accounts for such spending, the budget actually implied that Obama might ask for as much as $750 billion.

The most immediate expense will come in the next several weeks, when regulators complete "stress tests" on the 19 biggest banks. The tests are expected to show that at least several major institutions, probably including Bank of America, need to increase their capital cushions by billions of dollars each.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion.

White House chief of staff Rahm Emanuel alluded to the strategy yesterday on the ABC program "This Week With George Stephanopoulos." Emanuel flatly asserted the government had enough money to shore up the 19 banks without asking Congress for more.

"If they need capital, we have that capacity," he said.

Obama would gain important political maneuvering room because Democratic leaders in Congress have warned they cannot muster enough votes any time soon in support of spending more money to bail out some of the same financial institutions whose aggressive lending precipitated the financial crisis.

Administration officials acknowledged they might still have to ask Congress for extra money in the future. Beyond the 19 big banks, the Treasury has also injected capital into hundreds of regional and community banks.

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"Geithner defends bank rescue program amid warnings"
By Jim Kuhnhenn, Associated Press Writer, 4/21/2009

WASHINGTON – Treasury Secretary Timothy Geithner defended the bank rescue program devised by the Obama administration Tuesday as the International Monetary Fund predicted U.S. financial institutions could lose $2.7 trillion from the global credit crisis.

Geithner, testifying before the rescue plan's Congressional Oversight Panel, faced several questions about how Treasury is using the $700 billion Troubled Asset Relief Program and how it intends to help rid financial institutions of their bad loans and securities.

His testimony came in the wake of a watchdog agency report that warned Obama administration initiatives could increasingly expose taxpayers to losses and make the government more vulnerable to fraud.

A special inspector general assigned to the bailout program concluded in a 250-page quarterly report to Congress that a private-public partnership designed to buy up bad assets is tilted in favor of private investors and creates "potential unfairness to the taxpayer."

Geithner said the new plan "strikes the right balance" by letting taxpayers share the risk with the private sector while at the same time letting private industry use competition to set market prices for the assets.

"If the government alone purchased these legacy assets from banks, it would assume the entire share of the losses and risk overpaying," Geithner said in his remarks. "Alternatively, if we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time."

Geithner said "the vast majority of banks" have more capital than they need to be considered well-capitalized. But he said the economic crisis and the bad assets have created uncertainty about the health of individual banks and reduced lending across the system.

"For every dollar that banks are short of the capital they need, they will be forced to shrink their lending by $8 to $12," he said.

While credit conditions have improved in the past few months, "reports on bank lending show significant declines in consumer loans, including credit card loans, and commercial and industrial loans," Geithner said.

In a letter Tuesday to oversight panel chairwoman Elizabeth Warren, Geithner said that $109.6 billion in resources remain in the rescue fund. But officials expect the fund will be boosted over the next year by about $25 billion as some institutions pay back money they have received.

But under questioning from panel members, Geithner said that even if banks want to pay back the money, that doesn't mean the government would necessarily accept the payment.

"Ultimately we have to look at two things, one is do the institutions themselves have enough capital to be able to lend and does the system as a whole, is it working for the American people for recovery," Geithner said.

The government's effort to stabilize the financial sector and unclog the credit markets has come under heavy scrutiny. Treasury officials say the Obama administration has been holding participants more accountable. Geithner sent key members of Congress six-page letters last week spelling out his department's measures.

Still, Inspector General Neil Barofksy, using blunt language, offered a series of recommendations to protect the public and took the Treasury to task for not implementing previous advice.

Overall, the report said the public-private partnership — using Treasury, Federal Reserve and private investor money — could total $2 trillion. "The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives," the report stated.

In particular, the report cited funds that would be used to purchase troubled real estate-related securities from financial institutions. Under plans unveiled by Treasury, for every $1 of private investment, Treasury would invest $1 and could provide another dollar in a nonrecourse loan. That money could then leverage a loan from another government fund backed mostly by the Federal Reserve, a step that Barofsky said would dilute the incentive for private fund managers to exercise due diligence.

Barofsky recommended that Treasury not allow the use of Fed loans "unless significant mitigating measures are included to address these dangers."

Among Barofsky's recommendations:

_Treasury should set tough conflict of interest rules on public-private fund managers to prevent investment decisions that benefit them at taxpayer expense.

_Treasury should disclose the owners of all private equity stakes in a public-private fund.

_Fund managers should have "investor-screening" procedures to prevent asset purchase transactions from being used for money laundering.

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"GM, Chrysler to get $5.5B more in government loans"
The Associated Press (AP), April 21, 2009

DETROIT – General Motors Corp. could get as much as $5 billion more in federal loans, while Chrysler LLC could get $500 million as they race against government-imposed deadlines to restructure, according to a government report filed Tuesday.

The quarterly report by a special inspector general on the auto industry and bank bailout programs says the money will be made available for working capital. GM has until June 1 to complete restructuring plans that satisfy the government's auto task force, while Chrysler has until April 30.

A person briefed on the plans said Tuesday that the exact amount of the loans have not been finalized and will be worked out with the companies. The person asked not to be identified because the negotiations are confidential.

GM already has received $13.4 billion in government loans, while Chrysler has received $4 billion.

The government's auto task force rejected both companies' restructuring plans on March 30 and gave Chrysler until the end of April to make further cuts and take on a partner or face liquidation. If GM doesn't meet its deadline, it will be forced to restructure under bankruptcy protection.

GM CEO Fritz Henderson said last week that the automaker would need $4.6 billion during the second quarter. A Chrysler spokeswoman said only that the company has not received any more money beyond the initial $4 billion.

The inspector general's report filed Tuesday says that as of March 31, the Treasury Department had spent $24.8 billion for the Auto Industry Financing Program, out of a projected initial total of $25 billion. The money includes aid to Chrysler and GM, plus their financial arms, Chrysler Financial and GMAC Financial Services.

The Treasury also has estimated that it will spend up to $1.25 billion to guarantee warranties for people who buy Chrysler or GM vehicles during the restructuring period. The program is designed to reassure consumers that their warranties will be honored, according to the report, which was prepared for Congress.

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"Firms Infused With Rescue Cash Find Money to Fund Lobbying: GM, Financial Companies Are Among Biggest Spenders"
By Dan Eggen, Washington Post Staff Writer, Wednesday, April 22, 2009

Top recipients of federal bailout money spent more than $10 million on political lobbying in the first three months of this year, including aggressive efforts aimed at blocking executive pay limits and tougher financial regulations, according to newly filed disclosure records.

The biggest spenders among major firms in the group included General Motors, which spent nearly $1 million a month on lobbying, and Citigroup and J.P. Morgan Chase, which together spent more than $2.5 million in their efforts to sway lawmakers and Obama administration officials on a wide range of financial issues. In all, major bailout recipients have spent more than $22 million on lobbying in the six months since the government began doling out rescue funds, Senate disclosure records show.

The new lobbying totals come at a time of mounting anger in Congress and among the public over the actions of many bailed-out firms, which have bristled at attempts to cap excessive bonuses and have loudly complained about the restrictions placed on hundreds of billions of dollars in government loans. Administration officials said this week that top officials at Chrysler Financial turned away a $750 million government loan in favor of pricier private financing because executives didn't want to abide by new federal limits on pay.

The reports revived objections from advocacy groups and some lawmakers, who say firms should not be lobbying against stricter oversight at the same time they are receiving billions from the government through the Troubled Assets Relief Program, or TARP.

"Taxpayers are subsidizing a legislative agenda that is inimical to their interests and offensive to what the whole TARP program is about," said William Patterson, executive director of CtW Investment Group, which is affiliated with a coalition of labor unions. "It's business as usual with taxpayers picking up the bill."

But several company representatives said yesterday that none of the money borrowed from the government has been used to fund lobbying activities -- though there is no mechanism to verify that. Financial firms have successfully quashed proposed legislation that would explicitly ban the use of TARP money for lobbying or campaign contributions.

GM spokesman Greg Martin said that maintaining a lobbying presence is vital to ensure that the automaker has a say when major policy decisions are made. "We are part of what is arguably one of the most regulated industries, and we provide a voice in very complicated policy debates," Martin said.

According to quarterly lobbying reports that were due Monday, more than a dozen financial firms and carmakers that have received TARP assistance spent money on lobbying during the first three months of this year. After Citigroup and J.P. Morgan Chase, top lobbyists included American Express, Wells Fargo Bank, Goldman Sachs and Morgan Stanley.

Most of the companies spent less on lobbying this year than they did during the first quarter of 2008. J.P. Morgan, for example, spent $1.43 million in early 2008, compared with $1.31 million this year. Others, however, showed increased spending, including Capital One Financial, which doubled its quarterly lobbying expenditures to more than $400,000.

The lobbying records do not yet include campaign contributions by corporate lobbyists. Bank of America, for example, which spent $660,000 on lobbying in the first quarter, also gave more than $218,000 in campaign contributions through its PAC, according to the Federal Election Commission.

The Citigroup lobbying report provides a glimpse of the troubled company's interests in Washington, including credit card rules, student loan policies, and patent and trademark issues. Citigroup chief executive Vikram S. Pandit and other company officials lobbied fiercely against a House bill approved in March that would have placed a 90 percent tax on bonuses for traders, executives and bankers earning more than $250,000 at firms that had been bailed out by taxpayers. The proposal stalled in the Senate.

Citigroup spokeswoman Molly Meiners said the company "specifically prohibits the use of TARP funds for lobbying-related activities" and said the funds "are subject to an oversight and approvals process."
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Database editor Sarah Cohen contributed to this report.
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FILE - In this March 30, 2009 file photo, the exterior view of General Motors' world headquarters in Detroit, is shown. The Treasury Department said Friday, April 24, it has provided General Motors Corp. with another $2 billion in federal loans as the giant automaker struggles to restructure. (AP Photo/Carlos Osorio, file)
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"Treasury lends $2 billion more to General Motors"
The Associated Press, April 24, 2009

WASHINGTON --Taxpayers invested another $2 billion in General Motors Corp. this week as the struggling auto giant continued efforts to restructure and avoid bankruptcy court.

The Treasury Department said Friday it lent the additional money to GM on Wednesday to provide working capital. The loan pushes the total amount of GM's government aid to $15.4 billion after the company said it would need more money in the second quarter to stay afloat.

A government report revealed earlier this week that the Treasury was prepared to provide GM with up to $5 billion more in federal loans and Chrysler with up to $500 million more in bailout support as they race against deadlines to restructure.

GM has until June 1 to complete restructuring plans that satisfy the government's auto task force, while Chrysler has until Thursday to finish restructuring and ink an alliance with Italy's Fiat Group SpA.

GM, in a restructuring plan filed with the government in February, had said it would need $2 billion more in federal loans in March and another $2.6 billion in April. But last month Chief Financial Officer Ray Young said the company's expense cuts helped to hold off the need for the March installment.

GM CEO Fritz Henderson said last week that the automaker would need $4.6 billion during the second quarter.

In addition to the $15.4 billion, the automaker's financial arm, GMAC Financial Services, has received $5 billion in government aid, plus GM received a $1 billion loan to buy more equity in GMAC.

GM had requested a total of $30 billion, and it's unclear just how much of that the government is willing to give.

The company said in a statement that it appreciates the Obama administration's support "as we undertake the difficult but necessary actions to reinvent our company."

In order to get more loans, the government's auto task force is requiring GM and Chrysler to swap part of their large debt for equity, cut unprofitable models, reduce labor costs and complete other restructuring steps.

GM faces a June 1 deadline to complete the tasks for enter bankruptcy protection. Chrysler's deadline is Thursday. If Chrysler can't reach a deal with Fiat by then, it likely will be auctioned off in pieces because no more government funding would be made available.

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"Lewis Out? Calls Intensify for Bank of America Chief's Resignation
Bank of America CEO Ken Lewis Faces New Criticism After Testifying That the Government Pressured Him to Seal Merrill Lynch Purchase"
By RUSSELL GOLDMAN, ABC News, April 24, 2009—

Bank of America CEO Ken Lewis is facing renewed calls for his resignation after testifying that threats by the Bush administration forced him to keep shareholders in the dark about the dangers of purchasing a hemorrhaging Merrill Lynch.

In his testimony to the New York attorney general, Lewis said then-Treasury Secretary Henry Paulson threatened him on Dec. 21, 2008, with the prospect of removing the management and board of directors of the bank if Lewis refused to complete the merger with Merrill Lynch even though Merrill was losing money.

Some shareholders have been angry at Lewis for months, claiming the Merrill takeover pushed the stock down more than 70 percent in 12 months. They also hold him responsible for allowing Merrill Lynch to pay its executives $3.6 billion in bonuses just prior to the merger.

But Thursday's allegations added a new layer of anger, contributing to a sense among shareholders that Lewis was dishonest about the company's fiscal health and put his own interests before those of the shareholders.

"There is absolutely no question he had an obligation to be honest to the shareholders," said Richard W. Clayton, spokesman for the Change to Win Investment Group, which manages 33 million Bank of America shares, or about one half of one percent of the bank's stock, for the Teamsters, the Service Employees International Union and other trade groups.

With an eye to a shareholders meeting scheduled for next week, CTW called again for Lewis and other executives to step down.

"Bank of America needs a CEO and board of directors that will put the interests of shareholders ahead of their own interest in self-preservation," CTW said in a written statement.

" Voting against Chairman and CEO Ken Lewis, Lead Director O. Temple Sloan and Governance Committee chair Thomas Ryan at the bank's April 29 annual meeting is the necessary first step in this process," the statement read.

"Mr. Lewis and the board owe their fiduciary obligation to the corporation and its shareholders, not to the regulators who reportedly pressed them to close the deal and who may or may not have also pressed them not to disclose manifestly material facts," the statement read.

In January, Sloan, the bank's lead director, reiterated the board's support for Lewis.

"The board today during [its] regular meeting expressed support for Ken Lewis and the management team, noting their experience in managing through challenging environments and in assimilating mergers," he said.

At the time, Sloan also told the Wall Street Journal that the question of Lewis' job security "is not expected to be reopened."

Lewis's admission that he was pressured into the deal is a stark contrast from his comments at the time.

In September, Bank of America announced it would acquire Merrill for $29 a share, or about $44 billion, and a seemingly ascendant Lewis, who briefly appeared to be saving Wall Street, bragged to reporters: "We are good at this."

In reality, Lewis, now says the government forced him to go through with the merger.

On Dec. 14, Lewis's chief financial officer had told him that Merrill's projected fourth quarter losses had "skyrocketed" from $9 billion to $12 billion in just six days, according to a cover letter Cuomo sent along with the testimony and other documents to senior government officials overseeing the bank bailout.

The documents lay out in detail a troubling set of conversations, e-mails and meetings in which federal regulators and senior bank officials admit that they agreed not to alert shareholders at Bank of America to circumstances that could materially affect their investments, admitted not having alerted the Securities and Exchange Commission to discussions which came within its regulatory scope, and in which Lewis admitted he went forward with a deal knowing full well that it could have a negative impact on a large number of shareholders.

The Federal Reserve released a statement late Wednesday denying any allegations that officials there were involved in any decisions over disclosure.

"No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure. It has long been the Federal Reserve's view that questions of this nature are best addressed by individual institutions and their legal counsel, as they are in a position to understand clearly their obligations and responsibilities, said spokesperson Michelle Smith.

Calls to Bank of America for comment were not returned.

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"Fed says gov't ready to save stress-tested banks"
By Daniel Wagner, Ap Business Writer, April 24, 2009

WASHINGTON – The Federal Reserve on Friday said the government is prepared to rescue any of the banks that underwent "stress tests" and were deemed vulnerable if the recession worsened sharply.

The Fed, in outlining the tests' methodology, said the 19 companies that hold one-half of the loans in the U.S. banking system won't be allowed to fail — even if they fared poorly on the stress tests.

Separately, bank executives were being briefed on their test results in meetings across the country. By law, the banks cannot publicize the results without the government's permission, but Wall Street buzzed with anticipation and most financial stocks rose. The Dow Jones industrial average added more than 153 points to about 8,111 in afternoon trading.

The stress tests were designed to gauge how banks would fare during a much worse recession than most economists expect. But the Fed said that a bank needing more capital to cushion against loan losses under its "adverse" economic scenario should not be considered insolvent.

Rather, such a bank — if it could not raise additional money from private investors — could get financing from the Treasury's bailout fund.

Even if the tests showed a bank needs more capital, that "is not a measure of the current solvency or viability of the firm," the Fed said in a description of the tests' methodology.

Battling the worst financial crisis since the 1930s, the government has committed more than $11 trillion in loans, investments and other measures to prop up troubled institutions and stabilize the banking system.

For months, officials have put off questions about the banking system by saying they're awaiting the stress-test results.

The delays have led investors to fret: If the tests show every bank to be strong, they will look like a whitewash and won't be taken seriously. Yet once investors can distinguish stronger from weaker banks, they could start selling off weaker banks that remain stable but might falter if the recession got much worse.

The banks will have a few days to review the government's stress tests results and appeal any findings they disagree with. Regulators will give them the final results next Friday, according to two people familiar with the matter who spoke on condition of anonymity because they were not authorized to discuss it publicly.

In a conference call with journalists, senior Fed officials said regulators will be keeping a close eye on banks to make sure they have adequate capital to withstand likely losses on mortgages and other assets as the recession drags on.

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The Federal Reserve Bank of Philadelphia. Yesterday the Fed released the methodology of the bank stress tests it conducted. (Joseph Kaczmarek/Associated Press)
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"Fed says it would save big banks"
By Daniel Wagner, Associated Press, April 25, 2009

WASHINGTON - The Federal Reserve yesterday said the government is prepared to rescue any of the banks that underwent stress tests and were deemed vulnerable if the recession worsened sharply.

Outlining the tests' methodology, the Fed said the 19 companies that hold one-half of the loans in the US banking system won't be allowed to fail - even if they fared poorly on the tests.

The disclosure reinforced the Fed's view that major financial firms are "too big to fail," and that the government must do whatever is necessary to save them, said former Fed examiner Mark Williams.

"It appears 'too big to fail' is a fundamental philosophy - it's a philosophical principle," said Williams, a finance professor at Boston University.

In extreme cases, a rescue could include a government-backed merger, similar to what regulators did in helping Bank of America to buy Merrill Lynch and JPMorgan Chase & Co. to buy Bear Stearns.

Critics say that policy has put taxpayer money at risk to give banks billions in government bailouts and guarantees.

Separately yesterday, bank executives were being briefed on their test results in meetings across the country. By law, the banks cannot publicize the results without the government's permission.

The Fed release contained little new or concrete information. But Fed officials said in a conference call with reporters that banks will be required to keep an extra capital buffer beyond current requirements in case losses continue to mount.

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"Bank of America, Citigroup Need More Cash - Report: Feds Tell Bank of America, Citi Stress Tests Show They May Need Capital"

The Associated Press, April 28, 2009

NEW YORK

Bank of America Corp. and Citigroup Inc., which have each received $45 billion in government bailout funds, have been told by regulators that "stress test" results show they may need to raise additional capital, The Wall Street Journal said Tuesday.

Charlotte, N.C.-based Bank of America is looking at a shortfall in the billions of dollars, the paper said, citing people familiar with the situation. Both banks plan to rebut the preliminary findings, according to the paper, with Bank of America expected to respond Tuesday ahead of its shareholder meeting Wednesday.

Fed officials told reporters Friday that all 19 banks that took its "stress tests" will be required to keep an extra buffer of capital reserves beyond what is required now in case losses continue to mount. That would mean some banks will likely have to raise additional cash. But the Fed stressed in a statement that a bank's need for more capital reserves to meet the requirements should not be considered a measure of the "current solvency or viability of the firm."

Federal Reserve officials held top-secret meetings with bank executives last week to give them preliminary findings of how each bank would fare if the recession got much worse. The government plans to announce the results of the tests May 4, and banks will have the opportunity to appeal the findings.

By law, the banks cannot publicize the results without the government's permission.
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Related link:
http://abcnews.go.com/Business/Economy/story?id=7421449&page=1
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"No question it was a trial," Neel Kashkari says of his time as interim head of Treasury's bailout program.
Photo Credit: By Chip Somodevilla -- Getty Images
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"After Months on Hot Seat, Bailout Director Nears Exit"
By David Cho, Washington Post Staff Writer, Wednesday, April 29, 2009

The first time Neel Kashkari, the head of the Treasury Department's bailout operations, was called to testify before an oversight committee on Capitol Hill, he placed an index card on the table in front of him with the words: "The louder he yells at me, the calmer I will be."

Indeed, the chairman of the committee, Rep. Dennis J. Kucinich, laid into Kashkari repeatedly over nearly four hours.

For the past six months, Kashkari, has been a face of the government's financial rescue and a sponge for congressional anger over the program. Although he scrambled to get the rescue's operations running, often sleeping in his office and working seven days a week, during hearings lawmakers questioned his competence. Rep. Elijah E. Cummings (D-Md.) once called him "a chump."

As Kashkari prepares to leave the Treasury -- Friday is probably his last day, he says -- some of the Democrats who excoriated him during hearings acknowledge that Kashkari played a vital role in arresting a meltdown of the nation's financial system.

"Don't take it personally," Kucinich (D-Ohio) told Kashkari behind closed doors after grilling him during a separate marathon session on Capitol Hill, according to people who were present. "I think you're doing a great job."

Kashkari, a Republican who had aspired to work in the Bush White House before coming to the Treasury in 2006, also got high marks from Obama officials for quickly building a financial rescue operation, which is now up to 135 staff members and growing.

"I deeply admire the guy," Treasury Secretary Timothy F. Geithner said in an interview. "I think he's a person of integrity. He's creative, pragmatic and gets stuff done. I think he's an A-plus public servant."

Kashkari, who was named interim assistant secretary for financial stability under Bush and continued on a temporary basis in the Obama administration, leaves behind programs that have intertwined the government more deeply with the financial sector than perhaps ever before.

"No question it was a trial," Kashkari said of his time at the Treasury. "But I'm incredibly fortunate to serve at this important time in our history, no question about that. I also learned about myself, how to bring a team together and to get the team to perform under unbelievably trying circumstances."

But some lawmakers say Kashkari and former Treasury Secretary Henry M. Paulson Jr. sullied the government's rescue efforts because they focused on bailouts for Wall Street, but failed to explain their actions well or keep big banks accountable for how the firms used government money.

Kashkari acknowledged that public relations was the issue that the Paulson team "struggled with the most." In the fall, the Treasury's objective was to keep the financial system from collapsing, Kashkari said. But the team failed to clearly explain how it was spending the money.

"Explaining our actions and our rationale is by far the hardest thing we've had to do because these programs are so complicated," Kashkari said. "We definitely could have done that better."

At 35, he has built an enviable résumé. A former aerospace engineer who used to design NASA satellites, Kashkari went to business school and got a coveted job at a Goldman Sachs office in San Francisco. He applied for a prestigious White House fellowship, but in 2006, when he heard that Paulson was going to Washington, Kashkari called his former boss and said: "If you are putting together a team, I want to come with you." The two men started at the Treasury the same day.

Paulson said he did not know Kashkari well at first, but quickly noticed his intelligence and boldness. During Kashkari's first meeting in the White House with President Bush and his senior team, Paulson had expected Kashkari to sit quietly and observe. Instead, when a senior member of the president's team asked a question about energy policy, Kashkari piped up from one of the back rows with the answer.

"He's got a lot of courage, a very strong leader," Paulson said. "I think the story that hasn't been told is how Neel built out the [financial rescue] group at the same time we were developing programs. It was it was a real challenge, and I think Neel was very adept at it."

After Congress approved the $700 billion bailout package in October, Paulson tasked Kashkari with building the operations. But Kashkari faced a basic problem: The Treasury had a lot of staffers who could develop and write policy papers, but not many who could be part of a new government investment initiative.

Kashkari began to recruit senior officials from across Washington and industry. At first, many applied to join an effort to solve one of the greatest financial crises in generations. But some, after grasping the grueling hours and pressures of the job, withdrew their names.

Kashkari planned to leave when the new Democratic administration took over in January, along with the rest of the Paulson's political appointees. But Geithner asked him to stay on to make sure there would be a smooth transition.

Now that he is facing his last days at the Treasury, Kashkari said part of him finds it hard to leave "because the mission is not finished." But with his replacement, former Fannie Mae chief executive Herbert M. Allison Jr., now at the Treasury and awaiting confirmation, Kashkari said he can safely step aside.

He said he has no immediate plans except to disappear with his wife for several months to their cabin near Lake Tahoe.

"I don't think any of us could see what this job was going to entail," said Don McLellan, a former Motorola executive Kashkari recruited to develop the program for injecting public money into banks. "It was like asking Neel to jump off a high dive, and I don't think any of us could have told him whether there was water under him."

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"US House pushes for inquiry into Wall Street crisis"
By Mark Pittman and Laura Litvan, Bloomberg News, May 2, 2009

NEW YORK - The US House plans to take up legislation next week to authorize the broadest congressional investigation of Wall Street practices since the 1929 stock market crash.

House Speaker Nancy Pelosi has been pushing for an investigation modeled after the Senate Banking Committee's 1933 probe into the causes of the stock market crash four years earlier and the Great Depression that followed. Recommendations by the Pecora Commission, named after chief counsel Ferdinand Pecora, led to creation of the Securities and Exchange Commission.

Katie Grant, a spokeswoman for House majority leader Steny Hoyer of Maryland, said yesterday a House vote is expected next week.

The Senate passed its own plan for a bipartisan investigation of the financial crisis on April 22. Pelosi has said three-fourths of Americans want to know the causes of the crisis. Representative John Larson of Connecticut, the House's fourth-ranking Democrat, said yesterday that many lawmakers heard that message during Congress's two-week break in April.

"People went home over the break and when they were asked repeatedly, 'How did we get to this point?' it struck a chord," said Larson, who sponsored one of the first bills to create a commission.

Specifics, including how members will be chosen, should be worked out within the next two weeks, said Pelosi spokesman Nadeam Elshami.

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"Stress tests find 10 big banks need $75B more"
By Daniel Wagner And Jeannine Aversa, Ap Business Writers, May 7, 2009

WASHINGTON – The government's long-awaited "stress-test" results have found that 10 of the nation's 19 largest banks need a total of about $75 billion in new capital to withstand losses if the recession worsened. The Federal Reserve's findings, released Thursday, show the financial system, like the overall economy, is healing but not yet healed.

Some of the largest banks are stable, the tests found. But others need billions more in capital — a signal by regulators that the industry is vulnerable but viable. Government officials have said a stronger banking system is needed for an economic rebound.

Officials hope the tests will restore investors' confidence that not all banks are weak, and that even those that are can be strengthened. They have said none of the banks will be allowed to fail.

The banks that need more capital will have until June 8 to develop a plan and have it approved by their regulators.

Among the 10 banks that need to raise more capital, the tests said Bank of America Corp. needs by far the most: $33.9 billion. Wells Fargo & Co. requires $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. $5.5 billion and Morgan Stanley $1.8 billion.

The other five requiring capital are all regional banks: Regions Financial Corp. of Birmingham, Ala., needs to raise $2.5 billion; SunTrust Banks Inc. of Atlanta $2.2 billion; KeyCorp of Cleveland $1.8 billion; Fifth Third Bancorp of Cincinnati $1.1 billion; and PNC Financial Services Group Inc. of Pittsburgh $600 million.

Some of the firms that need more capital already are announcing their strategies. Morgan Stanley, which the government says needs $1.8 billion in new capital, said it plans to raise $5 billion. That will include $2 billion in common stock.

The tests found that if the recession were to worsen, losses at the 19 stress-tested firms during 2009 and 2010 could total $600 billion.

"Looking at the big picture, you can say that things aren't so bad for the financial industry as a whole," said Kevin Logan, chief U.S. economist at Dresdner Kleinwort.

But Logan said attracting fresh capital will be a challenge for banks that need it.

"The banking industry is not going to make a lot of money going forward, and that's a dilemma for keeping banks solvent and getting them lending," he said.

Financial stocks surged in after-hours trading, after the report was released at 5 p.m. Citigroup shares jumped 8.4 percent to $4.13, while State Street rose 7.3 percent to $40.60. Earlier, the markets had been down.

The government's unprecedented decision to publicly release bank exams has led some critics to question whether the findings are credible. Some said regulators seemed so intent on sustaining public confidence in the banks that the results would have to find the banks basically healthy, even if some need to raise more capital.

Jaidev Iyer, a former risk management chief at Citigroup, said regulators are playing to public expectations, which could put the government in the role of creating "winners and losers."

Because the government has said it won't let any firm fold, that could put taxpayers on the hook more than a confidential test would have, he said.

"If there is in fact no appetite to let losers fail, then the real losers are the market at large, the government and the taxpayers," Iyer said.

In the tests, the Fed put banks through two scenarios for what might happen to the economy.

One reflected forecasters' current expectations about the recession. It assumed unemployment will reach 8.8 percent in 2010 and house prices would decline by 14 percent this year.

The second scenario imagined a worse-than-expected downturn: Unemployment would hit 10.3 percent and house prices would drop 22 percent.

The steeper downturn would make it harder for consumers and businesses to repay loans, which would cause banks' assets to lose value. The government is forcing the banks to keep their capital reserves up so they can keep lending even if the economic picture darkens.

But some analysts questioned whether the tests were rigorous enough. Economic assumptions have changed since the test was designed in February. The U.S. jobless rate has risen to 8.5 percent and is projected to go higher this year.

"The assumptions the government has used are likely not to be completely accurate," said Jason O'Donnell, a bank analyst with Boenning & Scattergood Inc.

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"State Street to raise funds to repay TARP"
By Stephen Bernard, AP Business Writer, May 18, 2009

NEW YORK --State Street Corp., a bank that specializes in serving institutional investors and wealthy customers, said Monday it plans to raise new funds through common stock and senior note offerings as part of an effort to repay a government loan.

Boston-based State Street had received a $2 billion loan as part of the government's Troubled Asset Relief Program last fall.

It said it expects to raise $1.45 billion from the stock offer alone. The bank did not disclose how much it expects to raise from the senior note offering.

Shares of State Street fell $1.61, or 4.2 percent, to $36.90 in premarket trading.

To receive approval to pay back the loan, State Street must demonstrate it can raise capital without government support. The stock and note offers would provide that evidence, while also giving the bank capital to repay the loan.

State Street was also among 19 banks that underwent the government's "stress test," but was found to have enough capital to handle additional losses should the economy worsen. Without having to raise new capital for reserves, State Street can instead focus on repaying the government loan.

Several financial firms that were told they have enough capital have been raising cash to repay the loans, including Capital One Financial Corp., Bank of New York Mellon Corp., U.S. Bancorp and BB&T Corp.

As part of the stress test, the Federal Reserve assumed State Street would consolidate asset-backed commercial paper conduits onto its balance sheet in 2009. The bank said it brought those conduits onto its balance sheet on Friday.

Commercial paper is short-term debt that companies issue to help cover daily operations. Amid the credit crisis, the demand for commercial paper dried up and the value of the debt declined. By adding the commercial paper conduits onto the balance sheet, State Street recorded an after-tax loss of $3.7 billion to reduce the value of the holdings. Accounting rules require the assets are priced at their current trading value.

The conduits were added to the balance sheet at a fair value of $16.6 billion, compared with a book value of $22.7 billion.

State Street said it expects the majority of those losses will eventually be reversed while it collects interest revenue as the commercial paper debt is repaid. It projects $475 million in pretax interest revenue from their repayment in 2009 alone.

The bank said it expects operating earnings to range between $4.25 per share and $4.50 per share for 2009, including the effects of the stock and note offerings and interest gained on the commercial paper. The estimate, however, does not include the $3.7 billion after-tax charge initially taken while adding the commercial paper assets to its balance sheet.

Analysts polled by Thomson Reuters, on average, forecast earnings of $3.83 per share for the year.

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"Economy dips at a 5.7 percent pace in 1Q"
By Associated Press, Friday, May 29, 2009, www.bostonherald.com - Business & Markets

WASHINGTON — The economy sank at a 5.7 percent pace as the brute force of the recession carried over into the start of the year. However, many analysts believe activity isn’t shrinking nearly as much now as the downturn flashes signs of letting up.

The Commerce Department’s updated reading on gross domestic product, released Friday, showed the economy’s contraction from January to March was slightly less deep than the 6.1 percent annualized decline first estimated last month. But the new reading was a tad worse than the 5.5 percent annualized drop economists were forecasting.

It was a grim first-quarter performance despite the small upgrade. It marked the second straight quarter where the economy took a huge tumble. At the end of last year, the economy shrank at a staggering 6.3 percent pace, the most in a quarter-century.

The economy’s performance over the last two quarters underscored the grim toll the recession, which started in December 2007 and is now the longest since World War II, has had on the country. Businesses have ratcheted back spending and slashed 5.7 million jobs to survive the fallout. Financial firms have taken huge losses on soured mortgage investments. Banks and other companies have been forced out of business. Home foreclosures have soared.

Weakness in the first quarter mostly reflected massive cuts in spending by businesses on home building, equipment and many other things. U.S. exports plunged, so did spending on commercial construction and inventories. But those cuts — while huge — were a bit less than first estimated, contributing to the tiny upgrade in overall first quarter GDP.

All of those reductions — as well cutbacks in government spending — more than swamped a rebound in consumer spending. However, consumers weren’t nearly as energetic as the government first estimated. They boosted spending at a 1.5 percent pace, according to the revised figures. That was less than the 2.2 percent growth rate estimated a month ago.

The government makes three estimates of the economy’s performance for any given quarter. Each estimate of gross domestic product is based on more complete information. The third one will be released in late June. GDP, which measures the value of all goods and services produced in the United States, is the best gauge of the nation’s economic health.

Economists are hopeful that the economy isn’t shrinking nearly as much in the April-to-June quarter as the recession eases its grip. Forecasters at the National Association for Business Economics, or NABE, predict the economy will contract at a 1.8 percent pace.

Other analysts think the economic decline could be steeper — around a 3 percent pace. Some think it could be less — about a 1 percent pace.

Less dramatic cuts by businesses factor into the expected improvement. Consumers, however, are likely to be cautious. There’s been encouraging signs recently with gains in orders for big-ticket manufactured goods, some firming in home sales and a slowing in the pace of layoffs.

Federal Reserve Chairman Ben Bernanke and NABE forecasters say the recession will end later this year, barring any fresh shocks to the economy. NABE forecasters predict the economy could start growing again in the third or fourth quarter.

President Barack Obama’s stimulus package of increased government spending and tax cuts, along with aggressive action by the Fed to spur lending, should help revive the economy.

Still, both the Fed and private economists caution that any recovery will be lethargic and that unemployment — now at 8.9 percent, the highest in 25 years — will continue to march upward in the months ahead.

Many economists say the jobless rate will hit 10 percent by the end of this year. Some say it could rise as high as 10.7 percent in the second quarter of next year before making a slow descent.

One of the forces that plunged the country into a recession was the financial crisis that struck with force last fall and was the worst since the 1930s. Economists say recoveries after financial crises tend to be slower.

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"AIG spokesman defends bailout"
By DENIS PAISTE, New Hampshire Union Leader, June 9, 2009

MANCHESTER – American International Group Inc. spokesman Nicholas J. Ashooh yesterday defended the federal government's potentially $170 billion bailout of the insurance giant and said it intends to pay back government loans.

"We originally had an $85 billion credit line, if you will. It's now been redone, so that the overall credit line is about $65 billion and of that we have about $40 billion outstanding.

"So we need to pay back that $40 billion," he said.

"Then the government invested $40 billion in our preferred stock with TARP funds, and that we want to pay back, so that's roughly $80 billion," he said.

Ashooh, a Manchester native and Marquette University graduate, has been senior vice president for communications for AIG since September 2006. He spoke to an audience of about 45 at a Rotary Club of Manchester luncheon yesterday before speaking with the New Hampshire Union Leader. He is a past president of the Rotary Club.

He has also worked for Public Service of New Hampshire and was its spokesman during the building of the Seabrook nuclear power plant.

'Greater value'
Since it fell into near bankruptcy last fall, AIG has received aid from the Federal Reserve Bank of New York and the U.S. Treasury that could total about $170 billion.

Two special-purpose entities, Maiden Lane II and Maiden Lane III, were created last fall through the Federal Reserve to take failing assets off AIG's books.

Maiden Lane II drew $22.5 billion funds from the New York Fed to purchase the residential mortgage-backed securities from U.S. insurance subsidiaries of AIG.

Maiden Lane III received $30 billion to fund the purchase of multi-sector collateralized debt obligations from certain business partners of AIG Financial Products Corp.

Theoretically, the Federal Reserve Bank of New York could make money off the Maiden Lane investments, Ashooh said. "They went out and bought the underlying CDOs, so they negotiated the price for those CDOs, probably about 50 cents on the dollar. They can end up realizing greater value in those securities," he said.

Additionally, AIG received $69.8 billion from the U.S. Treasury under the Troubled Asset Relief Program, part of last fall's bank bailout that authorized purchase of preferred stock and warrants from AIG, according to a Treasury Department report.

AIG's problems were limited to a unit of about 400 employees out of AIG's global total of 119,000-plus workers in about 130 countries and jurisdictions, he said.

"AIG is still the largest U.S. property and casualty insurer, the largest global property/casualty network, the leading worker's compensation insurer in the United States, the largest provider of directors and officers insurance, the largest term life insurer, the largest seller of fixed annuities in the United States, the largest life insurer in Southeast Asia, the Middle East, Hong Kong, the Philippines, Singapore and Thailand, and the number one retirement services provider for primary and secondary education workers, the second largest to health care workers , and third largest to higher education, the number one foreign insurer Japan; and the largest investor in corporate bonds in the United States," he said.

Unlike its troubled unregulated risky investment vehicles, Ashooh said AIG's state-regulated insurance products are sound. The insurance products are backed by reserves. The credit default swaps and residential mortgage-backed securities were not.

What triggered AIG's financial crisis last fall were $18 billion in collateral calls that AIG couldn't cover, Ashooh said.

AIG had $1 trillion in assets but couldn't raise cash, he said. "The credit line was frozen, no ability to borrow money, AIG couldn't unload commercial paper, there was no commercial paper market functioning," he said.

"The Fed stepped in to prevent systemic risk," he said. The Fed provided an $85 billion emergency loan secured by a 79.9 percent ownership interest in AIG.

READERS' COMMENTS:

Mr. Ashooh as member of a prominent republican family evidently thinks it was his due to get a government handout from the Bush administration. Many of us have to pay the bill think otherwise.
- LJC, Manchester

If it was up to me AIG would not have gotten a dime.
Is anyone going to step for the little guys?
All I need is 60k to pay my mortgage off. My guess is that 270 billion could have paid off a lot of mortgages and would have helped both the large lenders and the little guys.
- Paul, Milford

need current information of market
- paramjit heir, surrey bc

Mr Ashooh must have overlooked interest payments in his calculations. You received roughly 266 dollars on behalf of every man woman and child in this country. I find it ironic that AIG is being sued for supporting an islamic organization with suspected terrorist links. In Islam one is not allowed to charge interest. Fortunately in the USA we believe in separation of church and state, so take that 80 billion and add a reasonable 10 percent annual interest compounded daily, just like you do on your mortgages.
- Michael Layon, Derry

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House of Representatives Majority Leader Steny Hoyer speaks at a press conference on Capitol Hill in Washington, March 18, 2009. (REUTERS/Joshua Roberts)
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"U.S. must be open to second economic stimulus: Hoyer"
By Susan Cornwell And Jeremy Pelofsky, Tuesday, July 7, 2009

WASHINGTON (Reuters) – U.S. leaders should be open to the possibility of a second stimulus package to jolt the economy out of a recession still causing job losses, House of Representatives Majority Leader Steny Hoyer said on Tuesday.

But in the Senate, Majority Leader Harry Reid was more skeptical of the need for more stimulus spending -- an idea that rattled markets fearful that the economy is far from well and corporate earnings could suffer.

Reid said he saw no evidence another stimulus was needed, saying the "shoots" of economic recovery "are now appearing above the ground."

President Barack Obama led the charge for a two-year $787 billion stimulus package that his fellow Democrats who control Congress pushed through the House and Senate in February and he has argued it would help create or save up to 4 million jobs.

Despite continued large job losses, both Reid and Hoyer -- who spoke at separate news conferences -- said not enough time had passed since first package was approved for it to have the full impact on the U.S. economy, which has been in a recession since December 2007.

"It's certainly too early right now ... to say it's not working," Hoyer said of the initial stimulus package. "In fact we believe it is working. We believe there are a lot of people who otherwise would have been laid off, lost their jobs, who haven't done that."

The rate of job losses was slowing, but "it's not where it ought to be," he added. Some areas of the economy were still in trouble, he said, "housing being the leading sector."

"I think we need to be open to whether we need additional action," Hoyer said. Last month employers shed some 467,000 jobs, which sent the unemployment rate up to 9.5 percent, the highest in nearly 26 years.

However, the jobs outlook is expected to get worse in coming months, with Obama and many economists predicting it will surge past 10 percent.

In the Senate, Reid said only a little over 10 percent of the initial stimulus money had been spent so far. The rest, he said, is "going to move more quickly now.

"As far as I am concerned there is no showing to me that another stimulus is needed," Reid told reporters.

REPUBLICAN SCORN

Suggestions of a second stimulus have been bubbling up amid criticism by Republicans who have argued that the first package was misdirected and wasted money on programs that so far have not sufficiently boosted the economy and created jobs.

To that end, a Government Accountability Office report due out on Wednesday found that while the Department of Transportation has committed $15.9 billion of the $26.7 billion set for highway and other projects, only $233 million has been paid out.

"States are just beginning to get projects awarded so that contractors can begin work," according to a copy of the report obtained on Tuesday by Reuters.

Senate Republican Leader Mitch McConnell poured scorn on the very idea of another economic stimulus package.

"I think a second stimulus is an even worse idea than the first stimulus, which has been demonstrably proven to have failed," he told reporters.

"And we're -- we're spending $100 million a day on interest on the first stimulus," he added. "Rush and spend is what this administration is about, rush and spend. This needs to stop."

Debt prices dropped on Tuesday in part because of concerns about further federal borrowing and appetite by investors. The deficit is expected to hit an eye-popping $1.8 trillion in the 2009 fiscal year, which ends September 30.

U.S. stocks also fell sharply to a 10-week low on Tuesday amid talk of a second stimulus.

Laura D'Andrea Tyson, an economist who advised Obama during the 2008 campaign and a member of his economic advisory panel, said on Tuesday in Singapore that the United States should be planning for a possible second round of fiscal stimulus and focused on infrastructure investment.

(Additional reporting by Vidya Ranganathan in Singapore, Editing by Chizu Nomiyama and Cynthia Osterman)

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U.S. Federal Reserve Chairman Ben Bernanke gestures during testimony about his role in Bank of America's acquisition of Merrill Lynch, at a hearing of the House Oversight and Government Reform Committee on Capitol Hill in Washington June 25, 2009. (REUTERS/Jonathan Ernst)
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"Bernanke very likely to get 2nd Fed term: poll"
By Alister Bull, Reuters - via Boston.com - July 10, 2009

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke will very likely win reappointment next year, according to an influential poll released on Friday, hardening market expectations that might prove costly for President Barack Obama to disappoint if he chose someone else.

The July Blue Chip survey of professional economists found an 80 percent likelihood that Bernanke will be asked to stay on for another four years when his current term at the head of the U.S. central bank expires on January 31, 2010.

Some worry that changing the Fed chairman as the economy battles the most severe recession in a generation could spook financial markets. Investors might shun dollars and U.S. bonds because of the uncertainty a change could create, driving up U.S. borrowing costs and negatively impacting growth and jobs.

Obama, when asked about his Fed pick last month, praised Bernanke, but declined to tip his hand on whether he would grant the former Princeton University economics professor another term.

"He has done a fine job under very difficult circumstances," Obama told a news conference on June 23. "I'm not going to make news about Ben Bernanke."

A Reuters poll last month found that economists rated Bernanke at 8 out of 10 for his handling of the crisis, compared with a slightly lower grade of 7 out of 10 when the poll was conducted in mid-December.

The Fed has cut interest rates almost to zero and pumped a trillion dollars into credit markets to fight panic after the September failure of investment bank Lehman Brothers.

"Speculation is intensifying on the reappointment of Fed Chairman Bernanke. ... The odds favor reappointment but it is not a 'sure thing,'" wrote Societe Generale economists Stephen Gallagher and Aneta Markowska in a note to clients.

They said that if Obama wanted to quell market speculation he would decide sooner rather than later. But this balance will tip away from Bernanke if the White House feels that policy steps so far to restore growth are not working fast enough.

"A faltering economic or financial market could hasten a change, not so much as a disapproval of Bernanke, but as a way to inject fresh air into the policy responses and in turn encourage hope for change," they said.

In addition, Bernanke was appointed by Republican President George W. Bush in 2006, replacing long-time Fed chief Alan Greenspan, who was also a Republican, and Democrat Obama may prefer to pick a new Fed chairman from his own party.

If that proved to be the case, the Blue Chip poll of around 50 top forecasters ranked former U.S. Treasury Secretary Lawrence Summers, who is now a top Obama economic adviser, as the most probable person to get the job.

Ranking behind Summers in the poll as a possible choice for the chairmanship were Janet Yellen, president of the San Francisco Federal Reserve Bank; Christina Romer, chairwoman of the White House Council of Economic Advisers; and former Fed Vice Chairman Alan Blinder.
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(Editing by Leslie Adler)
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ALL BUSINESS: "More toxic loans could haunt banks"
By Rachel Beck, AP Business Writer, July 10, 2009

NEW YORK --Japan's economy was paralyzed for a decade as banks failed to deal with their troubled loans. That's why it's nothing short of stunning to discover some U.S. banks are doing the same thing now.

Despite all the tough talk out of Washington and Wall Street about how the U.S. can't repeat what happened in Japan, the reality is that banks are granting extensions to borrowers in one key category, commercial real-estate loans, so they don't default. It's a bet that economic conditions will improve before the loans come due.

"They are kicking the can down the road, hoping things will be better soon," said Barry Ritholtz, head of the financial research firm FusionIQ and author of the new book "Bailout Nation."

This maneuvering is being called "extend and pretend" in financial circles, reflecting banks' willingness to extend loan maturities because they believe -- or hope-- rental rates and building values could come back to levels seen during the peak of the real-estate market in 2007.

Ritholtz and other financial experts worry that banks are just delaying the inevitable by not dealing with troubled loans now. And since commercial loans are such an important part of the portfolio of many small and midsized banks, it also could constrain their ability to make other new loans. An average of 20 percent of local and regional banks' loan exposure is in commercial real estate vs 4 percent for the nation's biggest banks, according to data from Deutsche Bank.

"This is a bad strategy," said Bryan Marsal, CEO of the corporate restructuring firm Alvarez & Marsal. "It is really about not facing up to where you are today."

Unlike fixed-rate home mortgages, most commercial property loans are structured as balloon notes. Borrowers pay only interest for the first five or 10 years until the loans mature, and then the entire amount must be paid back.

In the boom years, rising rents and property values made it easy for borrowers to find multiple lenders willing to roll over these loans into new and often larger principal amounts that allowed owners to take out millions of dollars in cash to buy other properties.

That game has come to a crashing halt. Cash flows are down on many properties as rental and occupancy rates have fallen, causing the value of many properties to drop significantly. That's made it tougher for owners to refinance their loans.

Delinquency rates on commercial loans have doubled in the past year to 7 percent as more companies downsize and retailers close their doors, according to the Federal Reserve.

In some cases, banks are offering a temporary fix by granting borrowers an extension on loan maturities. On paper, that looks like a plus for the bank because the borrower pays a fee or agrees to pay a higher interest rate, or both. This allows banks to avoid having to foreclose or write down these loans as impaired assets. They also can keep the loans on their books as if nothing were amiss.

"This lets the banks post results that are misleading because the loans have more risk to them than they are disclosing," said Len Blum, managing partner at the investment-bank Westwood Capital. "They can pretend things are better than they are."

That's just what banks in Japan did back in the 1990s. After its debt-fed real estate bubble burst, Japan slid into what has come to be known the "lost decade" because of its drawn out economic and financial malaise.

Even though the Japanese government injected trillions of yen into its banking system, new lending was constrained because troubled loans clogged banks' balance sheets. In some cases, banks refused to foreclose when owners couldn't even pay the interest. Instead, they added the unpaid interest to the loan's principal in the hope that borrowers' problems would be alleviated by an improving economic climate, which never materialized.

What's worrisome is the lack of transparency about how often this is happening now in the United States. Due to privacy issues, banks aren't required to disclose details of specific loan extensions, and most news that does trickle out comes from public companies announcing that they have reached accommodations with their lenders.

Just this week, Bluegreen Corp., a Boca Raton, Fla.-based timeshare resort developer, said it had gotten the maturity dates of a combined $130.1 million in liabilities extended. Others getting loan extensions in recent months were Toys R Us, Tanger Factory Outlets and Washington Real Estate Investment Trust.

The Federal Deposit Insurance Corp. believes that extending the maturity on commercial real-estate loans can be a "value-maximizing and prudent approach," said FDIC spokesman Andrew Gray.

Gray said that its examiners are trying to make sure the loan extensions are being done prudently, and that credit losses are being recognized appropriately. The FDIC directly examines and supervises about 5,160 banks and savings banks.

Bob Seiwert, who heads the Center for Commercial Lending and Business Banking at the American Bankers Association, said loan extensions should be done on a case-by-case basis and aren't necessarily a bad thing. Banks need to assess the chances of the principal amount being repaid and evaluate the viability on the loan on an ongoing basis, he said.

"It may still be a good project," Seiwert said. "It just may need more time."

There are already clear signs that worries about the commercial real estate market have constrained lending. The latest Federal Reserve Senior Loan Officer Opinion Survey, from April, showed almost two-thirds of domestic banks had reported tightening lending standards and terms on commercial real estate loans over the previous three months.

"When lenders do the 'extend and pretend' routine because they don't want to deal with the problem ... what that causes them to do is to restrict their future lending. They pull back into their shell," said Marsal, who is also leading the liquidation of Lehman Brothers. "When and if we do have an economic recovery, what it will do is slow the pace."

Now imagine if the loans that are being extended turn up rotten a year or two from now. That could further hamper lending at local banks -- the backbone of many small-town economies -- meaning companies wouldn't be able to get loans to build new facilities or do renovations or repairs. Hiring would be curbed or more jobs cut, slowing consumer spending.

"The banks seem to think it is OK to hide their head in the sand and keep these kinds of loans on their balance sheets," said Westwood Capital's Blum. "Until the banks really clean up their books, we risk repeating what happened in Japan."
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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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"AIG Seeks Clearance For More Bonuses: $2.4 Million in Executive Payments Due Next Week"
By Brady Dennis and David Cho, Washington Post Staff Writers, Friday, July 10, 2009

American International Group is preparing to pay millions of dollars more in bonuses to several dozen top corporate executives after an earlier round of payments four months ago set off a national furor.

The troubled insurance giant has been pressing the federal government to bless the payments in hopes of shielding itself from renewed public outrage.

The request puts the administration's new compensation czar on the spot by seeking his opinion about bonuses that were promised long before he took his post.

AIG doesn't actually need the permission of Kenneth R. Feinberg, who President Obama appointed last month to oversee the compensation of top executives at seven firms that have received large federal bailouts. But officials at AIG, whose federal rescue package stands at $180 billion, have been reluctant to move forward without political cover from the government.

"Anytime we write a check to anybody" it is highly scrutinized, said an AIG official, who declined to speak on the record because the negotiations with Feinberg are ongoing. "We would want to feel comfortable that the government is comfortable with what we are doing."

The payments coming due next week include $2.4 million in bonuses for about 40 high-ranking executives at AIG, according to administration documents from earlier this year. Though the actual sum may have changed since then, the payments are much smaller than those that caused the upheaval in March.

Still, officials at AIG and within the government see them as a land mine.

Feinberg, who previously managed the government's efforts to compensate the families of those killed in the Sept. 11 attacks, has the power to determine salaries, bonuses and retirement packages for all executive officers and the 100 most highly paid employees at firms such as Citigroup, Bank of America, General Motors and AIG.

AIG's upcoming payments do not fall under Feinberg's official purview, as they involve bonuses delayed from 2008. Feinberg is charged with shaping only current and future compensation. As a result, some Treasury Department officials believe they are under no obligation to offer an advisory opinion in this case, which could leave AIG officials to decide the matter on their own, according to a person familiar with the talks.

In November, AIG's top seven executives, including Chairman Edward M. Liddy, agreed to forgo their bonuses through 2009. Then, in March, facing pressure from Treasury Secretary Timothy F. Geithner and other government officials, the company restructured its corporate bonus plans for the remaining top 50 executives. As part of this agreement, the senior executives were to receive half their 2008 bonuses -- which totaled $9.6 million -- in the spring, with another quarter disbursed on July 15 and the rest on Sept. 15. The last two payments would depend on whether the company made progress in revamping its business and paying back bailout money to taxpayers.

The exact range of the payments due this month to AIG executives was unclear in company disclosure filings.

AIG's proxy statement filed last month explains why AIG initially instituted the retention payments. The company stated that after the federal bailout began in September, "we needed to confront the fact that many of our employees, perhaps the majority, knew that their long-term future with us was limited, and our competitors knew that our key producers could perhaps be lured away. . . . Allowing departures to erode the strength of our businesses would have damaged our ability to repay taxpayers for their assistance."

The Treasury declined to comment specifically on the bonuses due this month. In a statement, a department spokesman said, "Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives. . . . We are not going to provide a running commentary on that process, but it's clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance."

Feinberg did not respond to an e-mail seeking comment.

The recent discussions between the company and Feinberg illustrate how politically sensitive the bonuses have become, both for AIG and for the Obama administration. No development in the government's bailout of financial firms has angered lawmakers and ordinary Americans more than the disclosure in mid-March that the global insurer was paying more than $165 million in retention bonuses. They were aimed at retaining 400 employees at AIG Financial Products, the troubled unit whose complex derivative contracts nearly wrecked the global insurance giant.

Ultimately, some of these employees vowed to return more than $50 million -- but not before the resulting firestorm threatened to undermine the government's effort to rescue the financial system. Lawmakers, including key allies of the administration, sponsored bills that would have levied harsh taxes on AIG and other bailout recipients offering bonuses to their executives.

Afraid of such congressional action, firms rushed to pay back federal aid, while others shied away from cooperating with the government in some of its bailout programs. Some initiatives had to be scaled down as a result.

The issue of bonuses, which had earlier been viewed by officials as minor relative to the larger problems in the financial system, began to consume the attention of top officials within the Treasury and Federal Reserve. Geithner attended long meetings to review payments, even those for low-ranking AIG executives.

Separately this week, a Citigroup analyst warned that AIG might be worthless to shareholders if or when it ever pays back the billions it owes the U.S. government.

"Our valuation includes a 70 percent chance that the equity at AIG is zero," Joshua Shanker of Citigroup wrote in a note to investors. He cites the continuing risks posed by the company's exotic derivative contracts, called credit-default swaps, and its sale of assets at low prices. AIG's stock plummeted by more than 25 percent yesterday.

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Former Treasury Secretary Hank Paulson, who prior was the CEO of...you guest it...Goldman Sachs!
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Wall Street winners
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A Boston Globe Editorial Cartoon by Dan Wasserman. Published on July 15, 2009.
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"Goldman stuns with $3.44b profit"
By New York Times, July 15, 2009

NEW YORK - Even on Wall Street, the land of six- and seven-figure incomes, jaws dropped at the news yesterday: After all that federal aid, a resurgent Goldman Sachs is on course to dole out bonuses that could rival the record paydays of the heady bull-market years.

Goldman posted the richest quarterly profit in its 140-year history and, to the envy of its rivals, said it had earmarked $11.4 billion so far this year to compensate its workers.

At that rate, Goldman employees could, on average, earn roughly $770,000 each this year - or nearly what they did at the height of the boom.

Senior Goldman executives and bankers would be paid considerably more. Only three years ago, Goldman paid more than 50 employees above $20 million each. In 2007, its chief executive, Lloyd C. Blankfein, collected one of the biggest bonuses in corporate history. The latest headline results - $3.44 billion in profits - were powered by earnings from the bank’s secretive trading operations and exceeded even the most optimistic predictions.

But Goldman’s sudden good fortune, coming only a month after the bank repaid billions of bailout dollars, raises questions for Washington policymakers. Goldman, analysts warned, is embracing financial risks that many of its competitors are unable or unwilling to take. While Goldman managed those risks this time, its strategy could backfire if the markets turn against it.

Another concern is that the blowout profits might encourage rivals to try to match Goldman in the markets so they, too, can return to paying hefty bonuses. Wall Street’s bonus culture is widely seen as having encouraged the excessive risk-taking that set off the financial crisis.

“I find this disconcerting,’’ said Lucian A. Bebchuk, a Harvard law professor. “My main concern is that it seems to be a return to some of the flawed short-term compensation structures that played an important role in the run-up to the financial crisis.’’

Even inside Goldman, executives acknowledged that the bank’s stunning profits, coming at a time when so many Americans are grappling with a deep, painful recession, presents something of a PR challenge.

“We are cognizant of it,’’ said David A. Viniar, Goldman’s chief financial officer. “We understand that we are living in a very uncertain world where a lot of people are out of work.’’

In Washington, some lawmakers warned that a quick return to such high pay would stoke public anger as the Obama administration tried to overhaul financial regulation.

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"Goldman Sachs"
Boston.com - July 16, 2009

As recently as the end of last year, Goldman Sachs Group Inc. was in the red. But on Tuesday, the bank posted net earnings of $3.4 billion for the quarter ended June 26, far better than expected. And the stock has rebounded, up about 77 percent since the start of the year, though still below its peak of $250 in 2007. Yesterday, Goldman hit its highest price since Sept. 11. And Citigroup Global Markets, citing New York-based Goldman’s “stellar’’ quarter, raised its share-price estimate to $175, from $160.

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"Paulson Admits Pressuring Bank of America: In Testimony Before Congress, Former Treasury Secretary Admits Telling Bank CEO Board Might Be Dumped"
By MATTHEW JAFFE, abcnews.go.com - July 15, 2009

In prepared remarks for a Congressional hearing obtained today by ABC News, former Treasury Secretary Hank Paulson admits telling Bank of America CEO Ken Lewis that the Federal Reserve could remove the bank's board members if they backed out of their proposed merger with Merrill Lynch last December.

On Thursday morning, Paulson will defend his actions before the House Oversight Committee in the last of three hearings that the panel has conducted on the controversial merger.

When Bank of America considered scuttling the merger last December after discovering a $12 billion loss at Merrill, Paulson told Lewis that such a decision, citing the "material adverse change" -- or MAC -- clause, would damage the entire financial system and could result in government-imposed changes in management.

"I mentioned the possibility that the Federal Reserve could remove management and the board of Bank of America if the bank invoked the MAC clause. I believe my remarks to Mr. Lewis were appropriate," he says.

"I explained to him that the government was supportive of Bank of America, but that it felt very strongly that if Bank of America exercised the MAC clause, such an action would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system," Paulson continues. "I intended to send a strong message."

However, Paulson emphasizes that Fed Reserve Chairman Ben Bernanke never asked him to indicate "any specific action the Federal Reserve might take." Rather, Paulson says he was simply expressing what he believed was "the strong opinion" held by the Fed -- and shared by the Treasury -- that a Bank of America pull-out was "not a legally viable option & threatened significant harm to Bank of America and to the financial system & [and] would raise serious questions about the competence and judgment of Bank of America's management and board."

The distinction is crucial because Bernanke told the House panel on June 25 that he had never personally threatened to remove Lewis or the bank's board members. In what became to some extent a question of semantics, Bernanke acknowledged that he did have concerns about the bank's management. In response, Rep. Jason Chaffetz, R-Utah, stated, "I'm just not buying that. I think that's a threat."

So did the government's actions constitute a threat? An aide to the House panel's majority staff said that Paulson's testimony "supports the theory that Lewis was engaged in a shakedown."

In the panel's first hearing on the matter, held June 11, Lewis gave the committee his impression of the government's actions. "I would say they strongly advised and they spoke in strong terms, but I thought it was with good intention," he said. Ultimately, Bank of America agreed to proceed with the deal and eventually received another $20 billion in taxpayer bailout money.

Whatever took place, Bernanke, Lewis, and Paulson all appear to agree on one thing: the merger was the right move.

"It's protected our economy and it was a good deal for taxpayers," Bernanke told the committee last month. "I have nothing to regret about the whole transaction."

In his prepared testimony, Paulson echoes those views. "Bank of America's completion of the merger, and the subsequent assistance from the government, not only protected our country's financial system, but also was in the best interest of the shareholders, customers, employees, and creditors of Bank of America and Merrill Lynch," he says.

Another question is when do the ends justify the means?

"What we can take away from Mr. Paulson's testimony is that his threat of removing management and the board of Bank of America was a strong message that he believed was consistent with the beliefs of the Treasury and the Fed," said Kurt Bardella, spokesperson for Republicans on the House committee. "The question that remains now is do committee Democrats believe that Secretary Paulson's use of threats and intimidation were inappropriate or justified?"

The committee's ranking member Darrell Issa, R-Ohio, has accused the Fed of orchestrating a "shotgun wedding" and engaging in a "cover-up" to hide its involvement in the merger talks from other government agencies.

Overall, Paulson says that while the government's responses "were not perfect," but he adds, "I am confident that our responses were substantially correct and that they saved this nation from great peril."

"Without the actions taken in 2008, that suffering would have been far more profound and disturbing," he says, noting, "The most dire of consequences were averted."

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"SEC says it’s a better agency"
By Marcy Gordon, Associated Press, July 15, 2009

WASHINGTON - House lawmakers voiced approval yesterday for recent changes at the Securities and Exchange Commission since the Madoff scandal, though some Republicans chafed at proposed rules.

Chairwoman Mary Schapiro said the SEC has been revamping itself, buttressing enforcement efforts and taking steps to protect investors. The agency failed to uncover the massive Madoff fraud, despite red flags.

Fundamental changes made in recent months “will reinforce our focus on investor protection and market integrity,’’ Schapiro told a House Financial Services subcommittee.

Proposals made by the SEC include restricting short selling in down markets, strengthening oversight of mutual funds, tightening scrutiny of investment advisers, and making it easier for shareholders to seat directors on company boards.

The SEC also is working to identify emerging risks to investors, including so-called dark pools, or automated trading systems that don’t publicly provide price quotes.

The agency may look to prevent companies from “shopping’’ for favorable ratings of their securities - possibly by requiring them to disclose all preliminary assessments.

It’s a “great start,’’ said Representative Paul Kanjorski, Democrat of Pennsylvania, but the SEC “must continue to take bold and assertive action.’’

Three of the five high-ranking officials lambasted by the same panel in February over the Madoff affair, including the enforcement director and the head of inspections, have left the SEC.

Several Republicans expressed concern over recent SEC initiatives. Representative Jeb Hensarling, Republican of Texas, warned against “overkill.’’

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"JPMorgan Chase Earns $2.7 Billion: Jubilant Wall Street: Two Major Banks This Week Shocked Investors With Their Earnings; Is a Recovery Here?"
By SCOTT MAYEROWITZ, ABC NEWS Business Unit, July 16, 2009

Wall Street got another pleasant surprise this morning, when JPMorgan Chase reported a second-quarter profit of $2.7 billion, an increase of 36 percent from the same period last year.

That's right --the nation's largest bank ( by market capitalization) posted a profit, leading some to see this as a strong sign that the battered banking industry, and the U.S. economy as a whole, might finally be on the road to recovery.

Today's earnings report, which exceeded analyst expectations, comes two days after Goldman Sachs reported a $3.44 billion profit in the second quarter. Investors now look ahead to tomorrow's earnings reports from Bank of America, Citigroup and General Electric, which has a large lending arm.

"While we do not know if the economy will deteriorate further, we feel confident" that "we can continue to reinvest in our businesses and do well for our clients, communities and shareholders over the long term," JP Morgan CEO Jamie Dimon said in a statement this morning.

"During the quarter, we maintained our efforts to support economic recovery and to help keep people in their homes," Dimon added.

Both JP Morgan and Goldman Sachs -- as well as all other major U.S. banks -- borrowed money at the end of last year from the federal government to help shore up their balance sheets. JP Morgan received $25 billion in TARP funds last fall and Goldman received $10 billion.

"Banks are finally doing what they are supposed to be doing: they're making a lot of money," ABC's "Good Morning America" Correspondent Bianna Golodryga said this morning from the floor of the New York Stock Exchange.

Banks and Wall Street's Good Sign
But the big question is: does a reversal in the bank system really mean that we are going to see a reversal for consumers and in the economy in general?

"And the answer is: not really. The two aren't really directly related," Golodryga said. "If you look at where banks are still suffering, they are suffering on the consumer side. JP Morgan announced they saw credit losses nearly double from a year ago. Where they are making a ton of money, however, is in their investment banking and trading divisions. And that in itself is a good sign because it's showing that the credit markets are starting to ease."

JP Morgan said strength in its core consumer and investment banking businesses offset a jump in credit losses during the quarter. Second-quarter net income rose to $2.72 billion from $2 billion a year earlier. Profit per share fell to 28 cents from 53 cents. Net revenue jumped 41 percent to $27.71 billion.

Wall Street however seems to like the news this week, with the Dow Jones industrial average closing yesterday up 256 points. Stock futures were essentially flat this morning after JP Morgan's announcement.

There are also other fresh signs of both recovery and that things will get worse for some before they get better.

"We're seeing two sides of the story here," Golodryga said. "On the one had we did get some positive news. We saw that credit card delinquencies actually went down for the first time in a long time during the month of June. The Federal Reserve actually came out and said they revised their outlook for the economy. Instead of contracting 2 percent, now they expect it to contract by 1.5 percent. But they also expect unemployment to hit 10.1 percent by the end of the year. That is a hard number to swallow: one out of every 10 Americans without a job."
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With reports from ABC News' Zunaira Zaki
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July 17, 2009

Breaking News from ABCNEWS.com:

Citigroup Reports $3 Billion Earnings in Second Quarter, Beating Expectations

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"TARP funds misused, report says: Bailout overseer calls for more info"
By Binyamin Appelbaum, The Washington Post, July 20, 2009

Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government's financial rescue program.

The report, which will be published today, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.

Roughly 80 percent of respondents, or 300 banks, also said at least some of the money had supported new lending.

The report by special inspector general Neil Barofsky calls on the Treasury Department to require regular, more detailed information from banks about their use of federal aid provided under the Troubled Asset Relief Program, or TARP.

The Treasury has refused to collect such information.

Doing so is "essential to meet Treasury's stated goal of bringing transparency to the TARP program and informing the American people and their representatives in Congress about what is being done with their money," the report said.
In a written response, the Treasury again rejected that call. Officials have taken the view that the exact use of the federal aid cannot be tracked because money given to a bank is like water poured into an ocean.

"Although it might be tempting to do so, it is not possible to say that investment of TARP dollars resulted in particular loans, investments or other activities by the recipient," Herbert Allison, the assistant Treasury secretary who administers the rescue program, wrote in a letter to Barofsky.

The Treasury has required 21 of the nation's largest banks to file public reports each month showing the dollar volume of their new lending.

The government so far has invested more than $200 billion in more than 600 banks under a program that began in October with investments in nine of the largest banks. Some banks have started to repay the aid even as others continue to apply for it.

Officials said the program intended to increase the capital reserves of healthy banks, allowing them to make more loans. From the beginning, however, the government invested in troubled banks - most prominently Citigroup - that had publicly announced intentions to reduce lending.

The government has also used the money to encourage mergers, such as Bank of America's acquisition of Merrill Lynch and PNC's deal for National City.

The report provides the most comprehensive look to date at how banks have used the money, based on voluntary responses to a March survey.

Banks were asked to describe how they used the money, but they were not asked to break down the amounts.

One response, which the report described as typical, said the money had been used "to make loans to credit worthy customers, and to facilitate resolution of problem assets on our books."

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Related link:

http://bucknakedpolitics.typepad.com/buck_naked_politics/2009/07/banks-used-tarp-funds-to-defray-expenses-increase-investments-buy-new-assets-everything-but-increase.html

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Ron Bloom, right, head of the Obama administration's task force on the auto industry, talks to Rep. Stephen I. Cohen (D-Tenn.) before a congressional hearing. (By Dennis Brack -- Bloomberg News)
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"Bailouts Prompt Bipartisan Outcry: GOP Lawmakers Assail Federal Meddling on Autos; Dealers Defended in Both Parties"
By Peter Whoriskey, Washington Post Staff Writer, Wednesday, July 22, 2009

The government bailout of General Motors and Chrysler was roundly criticized by both Republicans and Democrats on Tuesday as a House subcommittee heard testimony from the chief of the Obama administration's auto task force.

It was the Republicans on the House Judiciary Committee's administrative-law panel, however, who raised the gravest alarms over the aid to the automakers, depicting the bailout as an abandonment of the rule of law and the practice of capitalism.

The government-led bankruptcy reorganizations of the companies "have been the leading edge of the Obama administration's war on capitalism," said Rep. Lamar Smith (R-Tex.).

When government gets involved in a company, "the disaster that follows is predictable," said Rep. Trent Franks (R-Ariz.).

The closing of more than 2,000 dealerships amounts to an "unprecedented taking," said Rep. Darrell Issa (R-Calif.).

The bailouts, in which the government invested billions in the companies in exchange for equity stakes and other compensation, has raised furious complaints from some of the companies' creditors who lost money in the reorganizations, the dealers whose showrooms are being closed and philosophical critics who say the government should have simply let the companies fail.

Ron Bloom, chief of the administration's auto task force, rebutted the criticism by noting that the bailout saved the companies and "literally hundreds of thousands of jobs." Moreover, he said, the creditors and dealers have received more under the bankruptcy reorganization than they would have if the companies had been liquidated.

As for the questions of fairness and the rule of law, Bloom noted that the reorganizations done through bankruptcy proceedings have received repeated court approvals.

Issa discounted the court rulings, comparing the dealer closings to the internment of Japanese Americans in the 1940s.

"The courts have made mistakes. I think back during World War II, the Japanese internment. Everyone thought it was okay from a court standpoint until long after the war."

After the hearing, GM spokesman Greg Martin said, "That type of rhetoric is unfortunate and does not match the dignified setting of Congress."

The driving political force behind much of the congressional criticism of the bailout, however, arises from the auto dealers who say they have been wrongly targeted by the automakers for closing.

Bloom, as well as the auto companies, argue that the automakers must reduce the number of stores -- that way, each remaining dealer can sell more cars and make more money. With higher profits, they say, the independently owned dealerships will be able to improve their stores, hire better salespeople and provide better service.

Accordingly, the government-approved plans for GM and Chrysler call for the closure of more than 2,000 dealerships.

But dealerships have proved to be politically powerful, and many Republicans and Democrats appear keen to help them.

The House has already approved a measure that would restore the closed dealerships. With the Obama administration opposing such a move, the two sides have been discussing a compromise, though there was no indication at the hearing yesterday of what shape that might take.

The dealers' supporters reject the administration's position that all must accept sacrifices for the companies' survival.

"There's a difference between making a sacrifice and being sacrificed," Rep. Hank Johnson (D-Ga.) told Bloom.

"It isn't just about a business. It's about a vital piece of the community," said Rep. Bill Delahunt (D-Mass.).

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AP INVESTIGATION: "Main Street's soaring sour loans"
By Frank Bass And Rita Beamish, Associated Press Writers, 7/26/2009

REDWOOD CITY, California – As the effects of the economic collapse began pouring down Main Street, the government last year was left holding a record $2.1 billion in write-offs of small business loans it had guaranteed. Officials expect the number of defaults to rise as the nation continues to climb out of the recession.

Records obtained under the federal Freedom of Information Act show the public is paying to offset bank losses on small business loans across the country, from a convenience store in the tiny Canadian border town of Houlton, Maine, to a graphic arts design company on the island of Hawaii, more than 5,000 miles away.

Despite having loans written off, little companies such as Caffe Sportivo, an espresso shop and small gym in Redwood City, Calif., are barely scraping by.

"I just couldn't make any payments. I was barely making rent or payroll," owner Chris Sakelarios said on a recent afternoon when her cafe stood empty except for two patrons who read as they sipped coffee. "The same as everyone else. We're in a hovering pattern."

It's a sign that even as record profits re-emerge on Wall Street, thanks to massive government loans and guarantees for banks deemed too big to fail, the pain on Main Street is as profound as it's been in half a century. The companies that were not too big to fail are failing.

Their plight is a shift from previous recessions when small business bounced back ahead of big employers, said Todd McCracken, president of the lobby group National Small Business Association.

"This could be the first economic recovery we've seen in a long time that hits small business the hardest the longest," he said.

The Small Business Administration purchased $2.1 billion in bad loans from lenders last year. Agency officials say it's likely that this year will see another high as the recession nears the two-year mark.

"It's frustrating when (banks) are getting bailed out for bad decisions they made, that there isn't more assistance for the small business," said Eric Geedey, who manages Caffe Sportivo for Sakelarios.

Sakelarios obtained a $20,000 SBA loan from Union Bank in late 2007 to start her business when the economic outlook was brighter on the affluent San Francisco Peninsula. Within a year, however, she was scraping by with the help of a landlord and vendors who let her adjust payments. She has reduced the hours of her seven employees and relies on her brother and a friend to help keep the doors open on weekends. The balance of the loan was written off in early January.

In addition to being dogged by bad credit, the cafe will have to report the loan charge-off as taxable income, Geedey said.

Sakelarios isn't the only recession victim and she won't be the last.

SBA loan defaults generally occur in two stages. The first is when the bank decides it won't get its money back and asks the government for the guaranteed portion of the loan. In the second, the government decides it won't get any more collateral or money from the borrower.

Years can elapse between the time that the borrower stops paying and the government writes off the loan.

In 2008, for example, the government concluded it wouldn't be able to recover $1.3 billion in defaulted bank loans it had guaranteed. Many loans were part of a backlog, according to SBA officials.

But an AP analysis found that the time between loan approvals and loan defaults is narrowing. According to the analysis:

_More than $235 million in restaurant loans have been charged off since 2007. The 2,586 restaurant charge-offs make up the largest number of defaulted loans, according to the SBA. More than 150 loans made to Quiznos franchises — worth nearly $15.5 million — have been written off since 2007.

_The Gulf Coast fishing industry, battered by two major hurricanes in 2005, has been hit especially hard. Half of the 10 cities with the highest industry-specific write-offs are in Biloxi, Miss.; New Orleans; Ocean Springs, Miss.; Lafayette, La.; and Abbeville, La. All told, the shellfish fishing industry had 45 loans charged off, at a total cost of $19.5 million.

_The banks making the loans have also been hit hard by the recession. Bank of America Corp., which has received $52.5 billion in government aid, has had nearly 7,000 loans worth $238 million charged off since 2007. More than 660 loans worth $174 million have been charged off by CIT Group Inc., a major commercial lender forced to turn to bondholders in an effort to try to avoid bankruptcy protection after the government refused to save the company.

JPMorgan Chase & Co., which repaid $25 billion in taxpayer loans last month, has written off nearly 2,300 loans worth $117 million.

"I have never seen it as rough as it is right now," said Scott Hauge, president of Small Business California, a business advocacy group.

Small businesses account for half of all private-sector workers and have created roughly half of the nation's jobs over the past decade. They received some help from the $787 billion federal stimulus package in February, including higher microlending amounts and federal loan guarantees. Congress also authorized the U.S. Treasury to purchase $15 billion in pooled loans to encourage lenders to provide money to small companies. The SBA recently announced it will guarantee short-term bank loans to help small businesses pay off existing bills.

The White House has floated a proposal to take money from a $700 billion bailout of the financial system and provide small companies with working capital, allowing them to add inventory and employees. If it happens, the White House said, help might arrive by fall.

That's too late for thousands of defunct companies with shuttered windows, disconnected phones and broken dreams.

Diego Garcia's soccer supply store in the modest Northern California city of Richmond has shrunk to one small location after Garcia was forced to close his two larger stores last year. Garcia started the business after launching a youth program and soccer league in gang-ridden Richmond. He had turned away from his own gang lifestyle after being shot in the chest at age 18.

Garcia expanded fast, never imagining how quickly his booming business would decline. When he couldn't pay up, his bank wrote off nearly all of his $45,000 loan. He lost rental property to foreclosure at the same time.

"It's too much of a loss," he said. "We had to get loans to get bigger. Then everything went the opposite way."

Eric Zarnikow, SBA's associate administrator for capital access, said the bad numbers probably will continue to rise as the agency receives charged-off loans in the future from defaults occurring now.

Sakelarios, a breast cancer survivor without health insurance, tries to stay optimistic.

"Anytime anyone asks me how it's going, I say the same thing. It's going really good."

___

On the Net:

Small Business Administration, www.sba.gov

National Small Business Association, www.nsba.biz

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New York State Attorney General Andrew Cuomo answers questions during a news conference held on Wall Street in New York October 15, 2008. (REUTERS/Brendan McDermid)
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"Some banks paid bonuses bigger than income: Cuomo"
By Grant McCool, Yahoo! News, July 30, 2009

NEW YORK (Reuters) – Bonuses paid to executives at nine banks that received U.S. government bailout money in 2008 were greater than net income at some of the banks, the office of New York Attorney General Andrew Cuomo said on Thursday.

Cuomo, in a report on months of investigation into compensation paid by the banks, said employee pay "has become unmoored from the banks' financial performance."

Representatives of the banks either declined comment on the report or could not comment immediately.

"There is no clear rhyme or reason to the way banks compensate and reward their employees," said the report by Cuomo, New York's top legal officer, who began his probe last October amid taxpayer complaints about Wall Street pay.

He argued that, if firms followed "a more principled" bonus system, they would be less susceptible to poaching of their employees by other firms offering more pay.

"This rationalization of the compensation and bonus system must be accomplished now," said the report, which was sent to U.S. House of Representatives Oversight and Government Reform Committee Chairman Edolphus Towns, a Democrat from New York.

Since nine banks received a total of $125 billion last October in taxpayer money under the Troubled Asset Relief Program (TARP) to help them survive the financial crisis, Cuomo has pressed them for details on billions of dollars paid to executives amid huge losses.

SUBSTANTIALLY GREATER

The report said bonuses for Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and JPMorgan Chase & Co (JPM.N) were "substantially greater" than the banks' net income.

Goldman earned $2.3 billion, paid out $4.8 billion in bonuses and received $10 billion in TARP funding, the report said.

Morgan Stanley earned $1.7 billion, paid $4.475 billion in bonuses and received $10 billion in TARP funding, while JP Morgan Chase earned $5.6 billion, paid $8.69 billion in bonuses and received $25 billion in TARP funding.

Cuomo said his office studied historical financial filings and found that at many banks compensation increased in the 2003-2006 bull market years, but stayed at those levels as the mortgage crisis and recession hit.

"Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.

"Bonuses and overall compensation did not vary significantly as profits diminished."

While Citigroup Inc (C.N) and Merrill Lynch, bought by Bank of America Corp (BAC.N), lost more than $27 billion each, Citigroup paid $5.33 billion in bonuses and Merrill paid $3.6 billion, the report said. TARP paid the two banks a combined $55 billion.

A spokesman for Bank of America said bonuses were paid to 200,000 bank employees and 30,000 Merrill legacy employees.

"The repeated explanation from bank executives that bonuses are tied to performance in a manner designed to promote (national economic) growth does not appear to be accurate," Cuomo said.

Much of Cuomo's investigation and publicity had been focused on Merrill Lynch, but Thursday's report covered all nine banks that received initial TARP money. The office has also investigated bonuses paid by giant insurer American International Group Inc (AIG.N), but it was not included here.

Wells Fargo & Co (WFC.N) paid bonuses of $977,500, while losing $42.93 billion according to the report.

It said State Street Corp's (STT.N) State Street Bank and Bank of New York Mellon Corp (BK.N) "paid bonuses that were more in line with their net income, which is certainly what one would expect in a difficult year like 2008."

State Street earned $1.8 billion, paid bonuses totaling about $470 million and received $2 billion in TARP funding. Bank of New York Mellon earned $1.4 billion, paid out $945,000 and received $3 billion from TARP.
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(Reporting by Grant McCool; editing by Tim Dobbyn and Andre Grenon)
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"Biggest banks in US reward stars with huge bonuses"
By Adam Geller, AP National Writer, August 1, 2009

NEW YORK --Even when their profits dried up and they turned to taxpayers to stay afloat, the nation's biggest banks kept paying huge bonuses. But much of the money went not to top executives, but to star traders and salesmen, even as the economy battled through the worst recession in a generation.

The bonuses -- including $1 million or more for each of nearly 4,800 bankers at nine of the largest firms -- were paid for 2008, along with scores of smaller checks to thousands of rank-and-file employees. But their revelation this week has renewed criticism of companies relying on government aid.

The House of Representatives voted Friday to sharply restrict how Wall Street pays its executives and workers, barring compensation that rewards excessive risk-taking. But the bill only applies to future payments and do not cover the bonuses for last year, revealed in a report by New York Attorney General Andrew Cuomo.

That report, based on information subpoenaed from the banks, does not identify individual bonus recipients or their jobs. But it makes clear that a relatively small number of people enjoyed the largest payouts. Experts on Wall Street compensation said that, in many cases, the biggest bonuses went to star producers, whose work generated substantial profits even as their companies were struggling.

"Most of the money doesn't go to what we usually call executives," said Alan Johnson of Johnson Associates, a New York compensation consultant to companies including large banks. "It's going to highly paid production workers."

At Bank of New York Mellon, for example, none of the company's top five executives was paid a bonus. But the bank still paid 74 of its worker bonuses of at least $1 million each. Senior executives at Wells Fargo & Co. -- which lost $43 billion last year -- also did not pocket bonuses, even as the firm paid bonuses of at least $1 million to 62 of its employees.

The biggest bonus pool was paid out by J.P. Morgan Chase & Co., where $8.7 billion was distributed, a sum far larger than the $5.6 billion in earnings the bank reported. More than 1,600 Morgan Chase employees took home bonuses of $1 million or more.

Johnson, the pay consultant, said many of the traders and salesmen receiving big bonuses count on the checks for 75 percent of their yearly pay. Those employees have long been paid for individual performance -- how many bonds a bond salesman sold and how much money those deals generated for the company -- rather than on the overall results that are supposed to be used to set pay for top executives.

Banks have continued to pay even as some lost money, fearful a rival will woo their highest producers away.

"For Wall Street banks, their main assets are their people," said Broc Romanek, editor of CompensationStandards.com, a Web site providing advice to corporate boards. "The ones that are performing year to year, they don't want to lose them."

But the recession and large losses at many of the banks paying big bonuses has exposed the weaknesses of the system.

Banks distribute bonuses far down the corporate ladder, but the payments are much smaller for rank-and-file employees. A secretary to a trader might make $50,000 a year and get a $5,000 or $10,000 bonus, Johnson said.

Overall, the banks are on track to pay out more than they did before the recession began. If current patterns hold, the biggest banks will pay their workers $156 billion in 2009, compared to the $143 billion paid in 2006, adjusted for inflation, said Lucian Bebchuk, a Harvard University professor and leading expert on corporate pay.

"The good days of compensation are back," Bebchuk said Friday.

Cuomo and other critics say the bonuses are excessive and show banks have abandoned their long-stated practice of basing pay on corporate results.

"Even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the bank's financial performance," the New York attorney general said in the report released by his office Wednesday.

But Johnson said Cuomo is incorrectly focused on a link between pay and corporate performance when it's individual performance that guides bonus payments.

"The most uncomfortable position for that kind of (pay) model is when a small group of people -- the mortgage unit, for example -- blows the whole firm up, and the majority of people have done what you've asked them to do," he said.

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"Ethical questions raised about Paulson’s actions during crisis: He was often in contact with Goldman chief"
By Gretchen Morgenson and Don Van Natta Jr., New York Times, August 9, 2009

NEW YORK - Before he became Treasury secretary in 2006, Henry M. Paulson Jr. agreed to hold himself to a higher ethical standard than his predecessors. He sold all his holdings in Goldman Sachs, the investment bank he had run, and said he would avoid any substantive interaction with Goldman executives unless he first obtained an ethics waiver from the government.

But today, seven months after Paulson left office, questions are being asked about his part in decisions last fall to prop up the teetering financial system with taxpayer dollars, including aid that benefited his former firm.

Last month in Washington, answering questions from members of Congress about his relationship with Goldman, Paulson testified: “I operated very consistently within the ethic guidelines I had as secretary of the Treasury.’’

He added that he had asked for a waiver involving his interactions with the bank “when it became clear that we had some very significant issues with Goldman Sachs.’’ Copies of two waivers he received - from the White House counsel and the Treasury Department - show they were issued on Sept. 17, 2008.

That was a day after the government agreed to lend $85 billion to the American International Group, which used the money to pay off Goldman and other banks financially threatened by AIG’s potential collapse.

While Paulson spoke to many Wall Street executives during that period, he was in very frequent contact with Lloyd C. Blankfein, Goldman’s chief executive, according to a copy of Paulson’s calendars acquired by The New York Times through a Freedom of Information Act request. During the week of the AIG bailout alone, they spoke two dozen times, far more frequently than Paulson did with other Wall Street executives.

Michele Davis, a spokeswoman for Paulson, said Federal Reserve officials, not Paulson, had played the lead role in shaping and financing the AIG bailout.

But Paulson was closely involved in decisions to rescue AIG, according to two senior government officials who requested anonymity.

Ethics specialists said the circumstances of Paulson’s waivers were troubling.

“I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly, and on the fly,’’ said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity.

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The Boston Globe, Op-Ed - ROBERT KUTTNER
"A new abuse on Wall Street"
By Robert Kuttner, August 11, 2009

EVER SINCE the financial crisis began in 2007, there has been a tension between recovery and reform. It seems to make sense to get the economy back on track now and worry about reforms later.

But a time of financial crisis, when Wall Street needs big-time government help, is the rare moment when government has the leverage to demand fundamental change. Otherwise, the moment is lost and the cycle of risky practices and taxpayer bailouts continues.

Despite the infusion of massive taxpayer funds, however, it’s back to business as usual on Wall Street - huge executive bonuses even at firms like Citigroup that lost fortunes on bad strategies and had to be rescued out by government; electronic trading gimmicks that make billions for outfits like Goldman Sachs at the expense of ordinary small investors; disgraced bankers spending fortunes on lobbying to head off Obama’s proposed Consumer Financial Protection Agency; and the same speculators bottom-fishing for bargains in troubled waters.

Here’s one new abuse that should be stopped before it spreads: Big private equity companies, which are largely unregulated, are hungry to take over failed banks. Their argument is that the banks need new capital, and the private equity firms have it. But this is a profoundly bad idea.

A fundamental economic doctrine holds that banks should be strictly separated from ordinary commerce. Banks exist, with government help, to finance the rest of the economy. But if a regular business also owns a bank, it can get access to capital on preferential terms and disadvantage its competitors.

A private equity company, which typically seeks returns of at least 15 to 20 percent a year, takes big risks. It’s fine to do that with your own money, but not with bank deposits guaranteed by the government. The crash caused a cascade of bank failures. So far this year, 68 federally insured banks have failed, compared with 25 all of last year and just three in 2007. When an insured bank fails, the Federal Deposit Insurance Corporation takes it over, protects the depositors, sells off the bad assets for whatever it can get, and tries to find a buyer to get the bank back in normal operation. Today, the FDIC is sitting on an inventory of failed banks that it needs to unload, and an insurance fund that it needs to replenish. Enter shadowy and unregulated private equity outfits like the Carlyle Group and Blackstone Capital, who are circling like vultures. The FDIC has done the hard part-at taxpayer expense. It has eaten the losses and cleaned up the failed banks’ balance sheets, making them appetizing targets.

“The private equity companies hope to buy the banks cheap and sell them for a big profit in a few years,’’ says an FDIC source, “or use them as funding vehicles to finance their other business activities. That business model is incompatible with the responsibilities of a bank.’’

In earlier deals the FDIC has bent its own rules somewhat. It doesn’t permit any single private firm to own a bank, but in the $32 billion collapse of Indy Mac last year, the agency permitted a consortium of private equity firms to be the buyer.

Last month, the FDIC proposed to toughen its policy. It put out a draft policy statement for comment, signaling that it would prefer to merge failed banks with other banks, or to find investors other than private equity conglomerates. It proposed to prohibit self-dealing by firms acquiring failed banks, and to exclude firms based in offshore tax-havens. And if a private equity firm acquired a bank, it would be required to have higher ratios of capital because of its inherently riskier business strategies.

The private-equity companies have mounted a fierce lobbying campaign to soften the terms, arguing that the banking industry needs the capital. But the FDIC, the rare agency in this whole crisis that has put the public interest first, should hold the line. In financial crises, conflicts of interests by insiders tend to mutate. We got into this mess, after all, because federally guaranteed banks were behaving like compulsive gamblers. Let’s not repeat these abuses in new forms.
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Robert Kuttner is co-editor of The American Prospect and author of “Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.’’
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"Failed banks need private capital"
The Boston Globe, Letters, August 19, 2009

ROBERT KUTTNER’S opposition to private equity investment in failed banks is based on the claim that private investors will use the new institution as a piggy bank for high-risk investments that mix the traditional business of banking with commerce (op-ed, “A new abuse on Wall Street,’’ Aug. 11). Here’s the flaw in his reasoning: Federal Reserve Board regulations already prohibit and tightly regulate the kind of behavior Kuttner fears. Moreover, because private equity firms put their own equity at risk in a failed bank investment, they have a strong incentive not to take on excess risk to achieve return objectives. In fact, the higher capital premium proposed by the Federal Deposit Insurance Corp. may create the very risk it seeks to avoid as a new owner may feel compelled to take on more credit or other risk to increase returns on equity.

As to the claim that private equity firms are furiously lobbying against the recent FDIC guidelines governing private equity investment in failed banks - that’s wrong too. We welcome the guidelines but believe they must strike the right balance between protecting the taxpayers and attracting desperately needed capital to banks. The FDIC has identified more than 300 failed banks with total insured deposits of $120 billion. It has but $13 billion in its Deposit Insurance Fund. Do the math. Absent private capital, taxpayers will probably be on the hook for cleaning up even more of the banking mess.

ROBERT STEWART
Washington, D.C.
The writer is a vice president for the Private Equity Council in Washington, D.C.

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Elizabeth Warren, chairman of the Troubled Asset Relief Program Congressional Oversight Panel, testifies at a hearing on Capitol Hill, in this July 2009 file photo. A report by the panel warns that toxic assets still present a serious threat, especially for small banks. (Brendan Hoffman/Getty Images)
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"Watchdog Warns Toxic Assets Remain a Major Danger to Financial System: Report by Congressional Oversight Panel Says the Troubled Asset Relief Program Never Bought Any Troubled Assets"
By MATTHEW JAFFE and CHARLIE HERMAN - abcnews.go.com - August 11, 2009

Signs abound that the worst of the recession is over: Stocks have been surging, the rate of job losses has slowed, so it seems that the economic apocalypse has been averted.

Government programs such as the $787 billion stimulus and last fall's $700 billion Troubled Asset Relief Program have so far been successful, the Obama administration says.

Except, the Congressional Oversight Panel warns in its August report, TARP never actually bought any troubled assets.

"It is likely that an overwhelming portion of the troubled assets from last October remain on bank balance sheets today," the panel's report says.

Those bad assets are still there, rotting away on banks' books, making banks reluctant to ratchet up lending, and maybe, the watchdog warns, paving the way for another financial meltdown.

"We are now 10 months into TARP," the panel's report notes, "and troubled assets remain a substantial danger to the financial system."

Even hundreds of billions of taxpayer dollars later, they say, the country could still be susceptible to the same problems that existed in the first place -- especially if the economic situation deteriorates again.

"If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value," the report says. "Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix."

True Extent of Banks' Troubled Asset Problems Unclear
On top of that, the report says, no one knows the true extent of the troubled asset problem. The International Monetary Fund, for example, estimated that toxic asset losses could total $4 trillion.

"There is no doubt that the banks holding these assets expect substantial losses, but the scale of those losses is far from clear," notes the Panel.

The Treasury Department has already taken steps to deal with the problems posed by toxic assets, but with little tangible success.

Earlier this year the administration unveiled the Public-Private Investment Program, a two-pronged approach to address both toxic securities and toxic loans. Under the plan, the government would match public capital with private capital in an effort to jumpstart the market for these bad assets. But the plan has yet to get off the ground.

In fact, the FDIC recently postponed the toxic loans program, saying that the banks' ability to raise capital -- as evidenced by the federal regulators' stress tests for the country's 19 biggest banks -- made it unnecessary.

Toxic Assets Still a Threat to Small Banks, Panel Warns
But the Congressional Oversight Panel warns that toxic assets still present a serious threat, especially for small banks. The bad assets for small banks are usually whole loans, not addressed by the PPIP.

Moreover, small banks have a tougher time accessing capital than their larger banking counterparts and carry a greater number of commercial real estate loans, which have a higher chance of going bad. Therefore, the watchdog suggests, "vigilance is essential." The panel also reiterates their view that the stress tests should be repeated if economic conditions deteriorate.

"In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem," the Panel proposes.

Troubled Assets Still a Threat to Economic Stability, Report Says
"Treasury and relevant government agencies should work together to move financial institutions toward sufficient disclosure of the terms and volume of troubled assets on institutions' books so that markets can function more effectively."

Ultimately, the panel says, "Financial stability remains at risk if the underlying problem of troubled assets remains unresolved."
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Obama administration pay czar Kenneth Feinberg, shown in this file photo, this week will start reviewing compensation plans for the highest paid executives at the seven firms that have received the most money from the government: AIG, Citigroup, Bank of America, GM, GMAC, Chrysler and Chrysler Financial. (AP Photo/ABC Graphic).
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"So Much for the Pay Czar? Wall Street Paydays Keep Coming: Big Paydays Persist Even as Banks Prepare for Scrutiny by Compensation Czar Kenneth Feinberg"
By ALICE GOMSTYN, ABC NEWS Business Unit, August 11, 2009

Who will get to keep his or her multimillion-dollar pay package and who will have to settle for less? It's a question that will face Obama administration pay czar Kenneth Feinberg this week as he starts reviewing compensation plans for the 100 highest paid executives at AIG, Citigroup, Bank of America, General Motors, GMAC, Chrysler and Chrysler Financial.

The seven firms, which have received the most in bailout funds from the government, must submit the plans to Feinberg by Thursday.

Feinberg, who will focus on the companies' 25 highest paid executives first, will have the power to scale back pay packages except for those set in contracts dated before Feb. 12, which will be "grandfathered" out of the government's compensation restrictions and Feinberg's authority.

Nevertheless, some say, even if Feinberg can't use the the law to force compensation down, he can still employ public pressure to convince firms to voluntarily renegotiate pay packages.

So whose packages might catch Feinberg's eye? Below are a few of the Wall Street heavyweights at Bank of America and Citigroup who have made news in recent months for their seven-, eight- and, in at least one case, nine-figure deals:

Andrew Hall: As the head of Citigroup's Phibro L.L.C., a small but highly profitable commodities trading unit, Hall, who owns a castle in Germany, is now famous for commanding $100 million in compensation under a profit-sharing agreement with Citigroup. Though Hall's unit made some $2 billion for Citigroup in the last five years, Citi is now considering selling Phibro, the New York Times reported.

Late last month, White House spokesman Robert Gibbs said the $100 million payday was "probably a bit out of whack on any pay scale."

Sanaz Zaimi: Zaimi, a partner at Goldman Sachs, recently signed a two-year, $30 million contract to join Bank of America, according to the Times. Zaimi, who was stationed at Goldman's London office, will move to Bank of America's London office in 2010 to handle European, Middle Eastern and African business.

Bank of America, Citigroup Dole Out Millions
Fares Noujaim: A former Bear Stearns executive, Noujaim joined Merrill Lynch last year as a president overseeing business in the Middle East and North Africa. Months after Bank of America bought Merrill, Noujaim was appointed as Bank of America's vice chairman of investment banking. The New York Post reported that Noujaim was offered at least $5 million to stay at Bank of America in addition to a two-year, $15 million package he received when joining Merrill Lynch.

Bryan Weadock: Weadock, a former JPMorgan Chase bond salesman, joined Bank of America in exchange for a two-year contract, with the first year attached to a compensation package valued at $6 million in cash and stock, according to the Wall Street Journal.

Harry McMahon: Like Noujaim, McMahon has been offered a large payout to stay at Bank of America after working at Merrlll Lynch, according to the New York Post, but the size of the payout is unclear. McMahon is a 26-year-veteran of Merrill Lynch.

Stefanos Bitzakidis, Rachel Lord and Dan Petherick: Bitzakidis, Lord and Petherick are all senior traders whom Citigroup managed to hire away from JPMorgan Chase in recent months by offering multimillion-dollar guaranteed compensation over several years, according to the New York Times.

Banks Use Pay Packages to Recruit Top Talent
As Bank of America and Citigroup struggle against a tide of negative perceptions, experts say the banks are relying on large pay packages to keep or recruit top talent at firms with better reputations like JPMorgan and Goldman Sachs, both of which have returned the Troubled Asset Relief Program funds provided to them by the federal government. Bank of America and Citi, in contrast, are viewed as having weaker balance sheets and they continue to hold on to tens of billions in TARP funds.

"We have a very quickly emerging two-tier system, with Goldman and JPMorgan at the top, and eveyone else beneath them," said Sydney Finkelstein, a professor of management at the Tuck School of Business at Dartmouth College. "That enables Goldman and JPMorgan to cherry pick some great talent. ... Anyone who has a big investment in trading and investment banking has no choice but to ante up to stay in the game."

CEOs and Top Performers
A report by New York State Attorney General Andrew Cuomo earlier this month spurred fresh furor over compensation excesses. Cuomo's report, which didn't name names, found that 28 Bank of America employees, 149 Merrill Lynch employees and 124 Citigroup employees received compensation of more than $3 million while the banks floundered in 2008.

According to the Wall Street Journal, bank executives earning tens of millions included Merrill Lynch's Andrea Orcel and Thomas Montag, who received cash and stock packages of $33.8 million and $39.4 million, respectively. Both now work for Bank of America.

Orcel and Montag's reported 2008 compensation actually dwarfed that of Bank of America CEO Ken Lewis, who received a total of just over $9 million, according to Equilar, Inc., an information services firm specializing in executive compensation.

Setting Aside Less, Paying More?
Lewis' pay was also several times smaller than that of his Citigroup peer, CEO Vikram Pandit, who received $38.2 million in 2008, according to Equilar.

Will last year's Citi and Bank of America top earners be due similar pay packages this year? That remains unclear -- Bank of America declined to comment on compensation for any specific employees, as did Citigroup.

"I can tell you that we are taking the steps necessary to attract and retain key talent and respond to competitive pressures," Bank of America spokeswoman Kelly Sapp said in an e-mail.

The amount that Citi and Bank of America set aside in compensation thus far this year provides only limited clues. Citi has set aside substantially less, $12.8 billion, than it did by this time last year, when it accrued $18.3 billion.

Bank of America's total -- $16.6 billion -- is more consistent with last year, when the bank and Merrill Lynch, combined, accrued $16.7 billion, according to Equilar.

"I think on an overall basis, these companies are being more careful about how they're paying their employees," said Equilar associate research manager, David Sasaki.

But the fact that banks are setting aside less money doesn't mean that individual pay will shrink. Sasaki noted that both banks have had layoffs, meaning that fewer people will be drawing from the compensation pool.

"There's certainly still large compensation packages out there," he said.

It also remains unclear how the CEOs at the other five firms under Feinberg's purview will fare. Last year, GMAC chief Alvaro G. de Molina received $17.6 milllion while interim GM chief Fritz Henderson currently makes $105,000 a month, for an annual rate of $1.26 million according to Equilar.

If new AIG CEO Robert Benmosche follows the lead of his successor, Edward Liddy, his would be among the few pay packages that could escape Feinberg's scrutiny. Liddy earned just $1 in salary and roughly $460,000 in other compensation, according to Equilar. Under the Treasury Department's guidelines, packages worth less than $500,000 receive automatic approval.

AIG was at the center of the first compensation maelstrom earlier this year after it was revealed that the troubled insurer, which received $170 billion in bailouts from the federal government, paid $165 million in bonuses to employees of its flailing financial products division, AIG FP.

AIG is still figuring out how to compensate some of its employees. The insurer told ABC News that it would seek clarification from Feinberg on three compensation issues: bonuses for AIG FP employees, retention payments for certain employees and 2008 bonuses for AIG's 40 highest paid employees. Those 40 people received half of the bonuses due to them last year and were supposed to receive the rest later this year.

With reports from ABC News' Charles Herman.

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"Feinberg to Assess Executive Compensation Plans at Companies Receiving Bailout Funds: AIG, Citigroup, Bank of America Among Seven Companies Receiving 'Exceptional Assistance,' Obama Administration Says"
By MATTHEW JAFFE, abcnews.go.com - August 12, 2009

Perhaps no issue has incited more public outrage than companies paying out big bonuses to top executives after receiving billions in taxpayer bailout money. Now the Obama administration's pay czar is preparing to take action.

In recent weeks, Kenneth Feinberg has been meeting with seven companies receiving what the Obama administration calls "exceptional assistance": AIG, Citigroup, Bank of America, GM, GMAC, Chrysler and Chrysler Financial.

By Thursday, these companies must submit to Feinberg this year's pay plans for their top 25 executives. Feinberg will then have 60 days to assess the plans and work with the companies on their compensation structures.

Pay plans for the other top 75 executives at these companies are due at a later date.

The process is sure to be contentious. Critics abound on both sides of the issue. Some people are outraged about companies collecting taxpayer money only to then dish out big bonuses in the midst of a massive recession. Others are fearful of the government delving too far into the affairs of private businesses.

The conflicts inherent in his job are not lost on Feinberg himself.

"Historically, the American people frown on the notion of government insinuating itself into the private marketplace," he told ABC News on June 11, a day after his appointment. "My answer to those critics is I understand that concern, I share that concern, and the question is how do you strike a balance between that legitimate concern and the populist outrage at prior industry compensation practices?"

Even in its first six months in office, the Obama administration has seen first-hand the type of populist outrage that Feinberg hopes to avoid.

In March, insurance company AIG, the recipient of more than $180 billion in taxpayer bailouts, caused an uproar by paying out $165 million in corporate bonuses.

The ensuing furor -- both inside and outside the Beltway -- was directed not just at the company, but at the government that had bailed it out.

Two Republican lawmakers even called for President Obama's Treasury Secretary Tim Geithner to resign.

But the problems presented by the AIG situation were not unique to the insurance giant. Big bonuses are commonplace on Wall Street, where compensation plans are viewed as a key way to attract and retain top talent.

The original nine banks receiving bail-out money paid out nearly $33 billion in bonuses in 2008, according to a recent report from New York Attorney General Andrew Cuomo. Citigroup, the recipient of $45 billion in bailout funds, is reportedly set to dish out $100 million to Andrew Hall, a top trader.

Enter Feinberg. Hoping to avoid more bonus uproars, he has been tasked with overseeing compensation at these seven firms. Companies will have to convince him that their pay plans reward good performance while discouraging excessive risk-taking.

"We are not going to provide a running commentary on that process, but it's clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance" is the oft-repeated line from Treasury Department spokesmen.

Treasury officials note that Feinberg cannot force companies to break contractual obligations entered into before Feb. 12 of this year. But that has not stopped critics from crying foul about excessive government meddling in private businesses.

"This is a huge watershed step towards government involvement in the private sector," warned Scott Talbott of the Financial Services Roundtable.

Feinberg is well aware of all the criticism.

"No matter which way I turn, you're facing criticism either from those who are appalled at what these companies did versus those who question the value of the government getting involved," he said in June.

But Feinberg has been in the eye of the storm before: He was chairman of the compensation fund for the families of victims of the 9/11 attacks.

This week, caught between critics coming at him from all angles, his work will begin in earnest.

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Kenneth Feinberg (AP Photo)
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"What is fair executive pay?"
By The Associated Press, Saturday August 15, 2009

The scrutiny of executive pay in Washington isn't knocking down the compensation of banks' head honchos. It's just changing what form the money comes in.

Just look at Wells Fargo & Co.'s recently altered pay plan. Earlier this month, the San Francisco bank raised CEO John Stumpf's salary to $5.6 million, through a mix of cash and stock. That's more than six times his salary last year.

The generous bump doesn't violate any rules Wells Fargo is bound by under the Treasury Department's Troubled Asset Relief Program, which doled out $25 billion to the bank last fall to shore up its capital base. That's because the new pay scheme doesn't include a bonus, just a guaranteed higher salary.

But the move stretches what's allowed to its limits. It's that tactic the Obama administration's new pay czar Kenneth Feinberg has to be on the lookout for in the coming months as he reviews the compensation plans of seven companies that have received "exceptional assistance" from the government. Feinberg received the pay information over the last week, and his findings due in October are expected to be a blueprint for pay programs throughout the financial industry.

Wells Fargo isn't one of the companies on Feinberg's to-do list, but it well illustrates the struggle to determine what is "fair" pay in today's corporate world.

"There is no denying that some of these executives have really hard jobs," said J. Robert Brown, a professor of business law and corporate governance at the University of Denver. "But there is another element to all this over what is politically acceptable."

Soaring bonus payouts to financial service company executives tied to short-term results clearly played a role in the financial crisis. In recent years, 80 percent to 90 percent of executive compensation was driven solely by annual performance, according to compensation consultant David Wise of the Hay Group.

That led to excessive risk-taking, which ultimately backfired and resulted in losses so large that the government had to step in with multiple rescue plans.

Congress and the White House have been wrangling over how to shift the compensation paradigm. The House on July 31 voted to prohibit pay and bonus packages that encourage bankers and traders to take risks so big they could bring down the entire economy.

The Obama administration has proposed giving shareholders at all public companies a nonbinding vote on compensation packages. In addition, it wants to diminish management's influence on pay decisions by banning members of board compensation committees from having financial relationships with the company and its executives.

Feinberg is the first federal official to have veto power over the how much private-sector executives are to be compensated. Included in his review are pay plans submitted by American International Group, Citigroup, Bank of America, General Motors, Chrysler and the financing arms of the two automakers.

All this political intervention isn't intended to drag down executive pay to nothing. In fact, financial companies will continue to pay sums to executives that will likely astonish average workers.

The goal is to force companies to come up with compensation programs that better align shareholders' and executives' interests. Getting there won't be easy because there isn't a magic metric for fair pay.

The compensation changes at Wells Fargo shows how deciding what's appropriate can get murky.

Its CEO Stumpf will get $900,000 in cash as part of his 2009 salary, the same as last year. But he will also get another $4.7 million in stock that has been labeled as being part of his salary. Stumpf and three other executives who also got large salary increases can't sell these new shares until the company repays the government's bailout money.

Stumpf will also receive 108,528 in restricted share rights this year, valued at $2.8 million when they were granted earlier this month. Those shares will begin to vest in 2011.

That brings his total compensation in stock and cash at the time it was granted to $8.4 million for 2009. Last year, his total compensation in cash and stock options was valued at about $8.8 million when it was granted.

"We are using stock to increase their salaries to keep the pay of these leaders closely tied to the success of the shareholder," said Wells Fargo spokeswoman Melissa Murray. "We must pay our senior leaders competitively for the long-term success of our company."

But another way of looking at this is that Wells Fargo's top brass are getting guaranteed pay not necessarily tied to financial results. At the end of every two-week payroll period, Stumpf will get a portion of that $4.7 million in stock, with the amount of shares determined by where the stock is trading then. If the stock goes down, he gets more shares; if it goes up, he gets fewer.

That means a short-term drop in Wells Fargo stock could actually benefit the bank's executives. They also benefit from the fact that the stock now trades around $28 each, about a third less than what it was last fall.

"How can this be called a well designed plan because all the executives have to do is sit around in order to get paid?" said Paul Hodgson, a senior research associate at The Corporate Library, an independent corporate governance research firm.

Hay Group's Wise said financial companies that took government money don't have many options in how they can structure their pay programs at a time when there is talk of a potential brain drain of top talent. He believes the amount of compensation won't change much, just the makeup-most likely meaning salaries will grow while bonuses could shrink.

"Wells Fargo is doing exactly what the taxpayers were afraid banks would do, and the Treasury led them there," Wise said.

The coming months will be very telling for the future of executive pay, especially for financial firms. Feinberg's recommendations for the seven firms he reviews will be closely watched, and likely mimicked.

What's becoming ever more apparent is the fine line between allowing for competitive compensation and creating imbalanced incentives.

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"Banks luring traders with big bonuses"
By Chanyaporn Chanjaroen and Lars Paulsson, Bloomberg News, August 17, 2009

LONDON - Wall Street firms are again recruiting commodities traders with promises of $1 million bonuses as prices of raw materials rise.

Bank of America Corp. plans to boost its commodities headcount by 25 percent. Barclays PLC will increase staff about 6 percent. Morgan Stanley is recruiting traders in shipping. The banks declined to comment on compensation.

“You are definitely seeing $1 million-or-more guaranteed bonuses coming back for 2009,’’ said George Stein, managing director at the New York-based recruitment firm Commodity Talent LLC. “These bonuses would be for new hires who are movers and shakers, those who can double the size of business within a short period of time.’’

Oil has increased 99 percent and copper has rallied 98 percent since February. The hiring also comes after financial companies cut more than 328,800 jobs, or 4.9 percent of the global total, after credit markets collapsed two years ago.

“The business is picking up, and banks had trimmed so much they are making emergency hires,’’ said Jason Kennedy, chief executive of London-based Kennedy Associates.

Kennedy said he has moved at least 10 people in the past two months with guaranteed bonuses of $1 million, including commodity positions. Banks weren’t making such offers last year, he said.

Compensation is coming under greater scrutiny since the world’s biggest financial companies wracked up almost $1.6 trillion of losses and write-downs. Citigroup Inc., Bank of America, American International Group, and Wells Fargo & Co. were among the biggest recipients of $385 billion of government funds to financial firms contending with the worst global slump since World War II.

JPMorgan, Citigroup, Morgan Stanley, and UBS AG are among banks said to have increased salaries amid restrictions on bonuses. JPMorgan, Goldman Sachs, and Morgan Stanley, all based in New York, repaid the government, removing them from restrictions on compensation.

Some firms have introduced a quarterly “loyalty’’ payout this year in addition to salaries and bonuses to retain top performers, said Jakob Bloch, managing director of Hampshire, England-based Commodity Appointments Ltd.

“It’s a sweetener to keep some of the high profit-and-loss contributors focused and not talking to competitors,’’ he said.

Bonuses paid by banks to their fixed income groups, which typically include commodities, should expand by 40 to 50 percent this year, according to Johnson Associates Inc., a New York compensation consultant.

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The logo of American International Group Inc. outside their office in New York. Bailed-out insurance giant AIG said Monday its board had named insurance industry veteran Robert Benmosche as president and chief executive, replacing the retiring Edward Liddy on August 10, 2009. (AFP/File/Stan Honda).
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"AIG awards new CEO $7 million annual salary"
August 18, 2009

NEW YORK (Reuters) – American International Group Inc (AIG.N), the insurer that received billions of dollars in a U.S. bailout, said on Monday that it will pay newly-appointed Chief Executive Robert Benmosche an annual salary of $7 million.

In a filing with the U.S. Securities and Exchange Commission, AIG said the salary would consist of $3 million in cash and $4 million in fully-vested common stock. He will also be eligible for a performance bonus of up to $3.5 million.

The pay has been approved in principle by Washington's new pay czar Kenneth Feinberg, said AIG.

AIG, as one of the largest recipients of U.S. aid, has to comply with new pay regulations imposed on companies that have received the largest loans under the U.S. Treasury's Troubled Asset Relief Program.

Benmosche, 65, who officially started his new job on August 10, will be eligible to receive a prorated bonus for 2009, the company said.

He will not receive any severance pay if his employment is terminated, in contrast to the healthy exit packages awarded to CEOs of the insurer in the days before AIG's financial troubles.

Once the world's largest insurer, AIG was saved last September by a taxpayer bailout that has grown to as much as $180 billion. The company had teetered on the brink of collapse from losses on credit default swaps, a type of derivative that sank in value as the credit crisis grew worse.

AIG shares were down 3.5 percent to $23.52 in Monday afternoon trade on the New York Stock Exchange.
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(Reporting by Lilla Zuill; Editing by Tim Dobbyn)
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The Newton Democrat at the Dartmouth forum that has drawn more notice than his current task. (Darren McCollester/ Getty Images)
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"Frank focused on reshaping US finance: Congressman relishing pivotal role in overhaul"
By Sasha Issenberg, Boston Globe Correspondent, August 25, 2009

NEW BEDFORD - US Representative Barney Frank became a YouTube star last week after a town-hall meeting in which he likened a constituent to household furniture, but much of his summer has been spent in uncommon quietude.

As chairman of the House Financial Services Committee, Frank is busy assembling a complex bill to give the federal government unprecedented control over the country’s financial institutions. It is as ambitious as any legislation jolting town halls and cable-news programs, and one that calls upon Frank’s lesser-known skills: discreet negotiation instead of the impatient insult showcased last Tuesday night in Dartmouth, when he belittled a woman who accused him of supporting a “Nazi policy’’ on health care.

A few days earlier, Frank lamented that voters had yet to be as engaged by the debate over new proposals intended to help avoid the kind of Wall Street risk-taking that pulled down the banking system and drove the country into recession.

“It’s been eclipsed obviously in the public’s mind by health care, which I am troubled by a little bit, to be honest with you,’’ Frank said during an extensive interview in his district office in downtown New Bedford. “It’s intellectually complex. Politically it’s like five Rubik’s cubes trying to keep the members happy.’’

Two floors beneath him, a senior center bustled with the sounds of midday bingo, and the 69-year old Frank would probably have flunked their dress code. When he leaned back in his chair, he revealed sneakers, baggy brown trousers slouched around his legs like sweatpants, and a long-sleeved T-shirt with a cartoon head of Frankenstein and the words “Be Frank.’’

Frank is stuck behind a desk for much of his August recess, a quiet perch from which he contemplates legislative drafts and monitors the shifting uncertainties of his committee’s 70 members. When Congress returns to session after Labor Day, Frank expects to chair a series of hearings and markup sessions that he hopes will generate a single comprehensive bill on financial reform for a vote in the House.

“He’s got to drive an agenda - not necessarily his own, but the administration’s agenda, some which he may have questions about - and put together a coalition that can get a bill out of committee,’’ said Michael G. Oxley, an Ohio Republican who preceded Frank as chairman and is now retired from Congress.

Frank says the legislation is necessary to help fend off future episodes of financial panic. Hedge funds and derivatives traders would have to operate under new limits. A financial products safety commission would regulate the consumer marketplace, down to payday loans and check-cashing stores. Federal officials would gain new powers to unwind failed financial institutions.

In addition, Frank hopes to secure congressional auditing authority over the secretive Federal Reserve, a proposal he describes with phrases - “Ron Paul agrees with that’’ and “secondly, Ron Paul agrees with this’’ - that are jarring coming from a liberal Democrat. He comes close to smiling when describing his narrow alliance with the cranky Texas libertarian and former presidential candidate who is on the committee and whose distrust for the Federal Reserve has led him to propose abolishing the paper money system.

“I am boasting about this,’’ said Frank. “Being chairman of the committee is different than being an individual member. Your job is to try to get public policy that is going to be workable.’’

Since Obama unveiled his reforms in June and asked that Congress have them ready for his signature by year’s end, administration figures have complained about the languid legislative pace.

Earlier this month, Treasury Secretary Timothy Geithner lashed out at a gathering of federal regulators who he said were slowing the bill’s progress with skeptical comments about a proposal to establish a new authority to monitor investment risk.

Frank, who elsewhere has had kind words for two of George W. Bush’s nominees, Federal Deposit Insurance Commission chairwoman Sheila Bair and Federal Reserve chairman Ben Bernanke, said the administration should not be shocked by the officials’ response.

“They don’t want to lose their control,’’ said Frank. “What a surprise: Regulators don’t want to lose turf.’’

Openly contemptuous of Obama’s constant references to bipartisanship, Frank probably has the votes to pass the bill out of his committee without support from Republicans. A similar bill coming out of the Senate will probably be drafted with more Republican input; negotiators will eventually have to merge the two.

“He knows how to get things done, he knows how to make deals when he has to,’’ said Oxley. “A lot of it is trying to position the House so they can be relevant when that legislation ends up in the Senate.’’

Reordering American finance may be the biggest project Frank has taken on in his nearly three-decade legislative career, but it is far from a lifelong ambition.

After his election to the House in 1980, Frank sought out seats on the Judiciary and Banking committees. They were frequent destinations for ideological liberals seeking sway over civil-rights issues: The banking panel’s jurisdiction included areas of urban policy related to fair housing and urban development.

In the decades since, the committee’s range shifted to cover securities, insurance, and matters of corporate governance, and it was renamed in 2001. Frank became chairman in 2007, just before the world of mortgages, derivatives, and securities dominated the news and focused his attention.

“The financial crisis took over my life,’’ he said.

Frank, a lawyer, could be next in line for the Judiciary Committee gavel, but says recent events have made that ambition moot. He said he has shrunk his political portfolio to only two nonfinance subjects: fisheries issues (due to his coastal district’s economy) and gay concerns (“because there aren’t enough of us to go around’’).

Frank has also turned his attention to raising money for his own reelection and those of Democratic committee members, said spokesman Steven Adamske. Frank has raised more than $750,000 on his own behalf so far this year and has given the bulk to other Democratic campaign committees. Approximately $100,000 of it comes from insurance and finance interests, according to an analysis by the nonpartisan Center for Responsive Politics, but Frank discounts the idea the money has any influence on his work.

“In the area that we work in, it’s not campaign contributions that drive it - it’s votes,’’ he said. “The most important influences are the credit unions, the realtors, the community banks - because there are many of them in everybody’s district.’’

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"Banks 'Too Big to Fail' Have Grown Even Bigger: Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral Hazard"
By David Cho, Washington Post Staff Writer, Friday, August 28, 2009

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

"It is at the top of the list of things that need to be fixed," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "It fed the crisis, and it has gotten worse because of the crisis."

Regulators' concerns are twofold: that consumers will wind up with fewer choices for services and that big banks will assume they always have the government's backing if things go wrong. That presumed guarantee means large companies could return to the risky behavior that led to the crisis if they figure federal officials will clean up their mess.

This problem, known as "moral hazard," is partly why government officials are keeping a tight rein on bailed-out banks -- monitoring executive pay, reviewing sales of major divisions -- and it is driving the Obama administration's efforts to create a new regulatory system to prevent another crisis. That plan would impose higher capital standards on large institutions and empower the government to take over a wide range of troubled financial firms to wind down their businesses in an orderly way.

"The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy," Treasury Secretary Timothy F. Geithner said in an interview.

The worry for consumers is that the bailouts skewed the financial industry in favor of the big and powerful. Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.

Those mergers were largely the government's making. Regulators pushed failing mortgage lenders and Wall Street firms into the arms of even bigger banks and handed out billions of dollars to ensure that the deals would go through. They say they reluctantly arranged the marriages. Their aim was to dull the shock caused by collapses and prevent confidence in the U.S. financial system from crumbling.

Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow, Federal Reserve documents show.

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

Consumer Choice

Federal officials and advocacy groups are just beginning to study the impact of the crisis on consumers, but there is some evidence that the mergers are creating new challenges for ordinary Americans.

In the last quarter, the top four banks raised fees related to deposits by an average of 8 percent, according to research from the Federal Reserve Bank of Dallas. Striving to stay competitive, smaller banks lowered their fees by an average of 12 percent.

"None of us are saying dismember these institutions. But you do want to create a system that allows for others to grow, where no one has an oligopolistic power at the expense of others who might be able to provide financial services to consumers," said Richard Fisher, president of the Federal Reserve Bank of Dallas.

Normally, when faced with price increases, consumers simply switch. But industry officials said that is not so easy when it comes to financial services.

In Santa Cruz, Calif., Wells Fargo, Bank of America and J.P. Morgan Chase hold three-quarters of the deposit market. Each firm was given tens of billions of dollars in bailout funds to help it swallow other banks.

The rest of the market, which consists of a handful of tiny community banks, cannot match the marketing power of the bigger banks. Instead, presidents of the smaller companies said, they must offer more personalized service and adapt to technological changes more quickly to entice customers. Some acknowledged it can be a tough fight.

Wells Fargo is "really, really good at the way they cross-sell and get their tentacles around you," said Richard Hofstetter, president of Lighthouse Bank, whose only branch is in Santa Cruz. "Their customers have multiple areas of their financial life involved with Wells Fargo. If you have a checking account and an ATM and a credit card and a home-equity line and automatic bill payments . . . to change that is a major undertaking."

Wells Fargo, J.P. Morgan and Bank of America declined to comment for this article.

Last October, when the Fed was arranging the merger between Wells Fargo and Wachovia, it identified six other metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. But the central bank thought local competition in each of those places was sufficient to allow the merger to go through, documents show.

Camden Fine, president of the Independent Community Bankers of America, said those comments reveal the government's preferential treatment of big banks. He doubted whether the Fed would approve the merger of community banks if the combined company ended up controlling more a third of the market.

"To favor one class of financial institutions over another class skews the market. You don't have a free market; you have a government-favored market," he said. "We will never have free markets again if you have the government picking winners and losers."

Moral Hazard

Before the crisis, many creditors thought that the big institutions were a relatively safe investment because they were diversified and thus unlikely to fail. If one line of business struggled, each bank had other ventures to keep the franchise afloat. And even if the entire house caught fire, wouldn't the government step in to cover the losses?

With executives comforted by that thinking, risk came unhinged from investment decisions. Wall Street borrowed to make money without having enough in reserves to cover potential losses. The pursuit of profit was put ahead of the regard for safety and soundness.

The federal bailouts only reinforced the thought that government would save big banks, no matter how horrible their decisions.

Today, even with the memory of the crisis fresh in their minds, creditors are granting big institutions more favorable treatment because they know the government is backing them, FDIC officials said.

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

Many of the largest banks reported a surge in profit during the most recent quarter, including J.P. Morgan Chase and Goldman Sachs. They are prospering while many regional and community banks are struggling. Nearly three dozen of the smaller institutions have failed since July 1, including Community Bank of Nevada and Alabama-based Colonial Bank just last week.

If the government continues to back big firms over small, regulators worry that reckless behavior could return to Wall Street.

The administration's regulatory reform plan takes aim at this problem by penalizing banks for being big. It would require large institutions to hold more capital and pay higher regulatory fees, as well as allow the government to liquidate them in an orderly way if they begin to fail. The plan also seeks to bolster nontraditional channels of finance to create competition for large banks. If Congress approves the proposal, Geithner said, it would be clear at launch which financial companies would face these measures.

Economists and officials debate whether these steps would address the too-big-to-fail problem. Some say, for instance, that determining the precise amount of capital big financial companies should hold in their reserves will be difficult.

Geithner acknowledged that difficulty but said the administration would probably lean toward being more strict. Taken together, the combination of reforms would be a powerful counterbalance to big banks, he said.

"Our system is not going to be significantly more concentrated than it is today," Geithner said. "And it's important to remember that even now, our system remains much less concentrated and will continue to provide more choice for consumers and businesses than any other major economy in the world."
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First in an occasional series of articles.
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"Meltdown 101: Why banks' struggles have worsened"
By Marcy Gordon, Ap Business Writer, 8/28/2009

WASHINGTON – Despite signs of an improving economy, the nation's banks are still struggling — in fact, the pace of bank failures has accelerated.

What would it take to turn the banking sector around? And what can people do to protect their savings in the meantime?

Here are some questions and answers about the wave of U.S. bank failures, as the latest quarterly snapshot of the industry painted a grim picture.

Q: How bad is this wave of failures?

A: A cascade of collapses began last year as the financial crisis struck.

Eighty-four banks have fallen so far this year as tumbling home prices and spiking unemployment pushed loan defaults upward. That's the largest number in a year since the early 1990s, at the apex of the savings and loan crisis. It compares with 25 bank failures last year and three in 2007.

The failures have sapped billions from the federal deposit insurance fund, which guarantees account holders' money when banks go under. The fund stood at $10.4 billion in the second quarter, its lowest point since 1992.

The biggest failure this year: Colonial Bank, a heavy regional lender in real estate development based in Montgomery, Ala., which became the sixth-largest bank failure in U.S. history on Aug. 14. The Federal Deposit Insurance Corp. seized Colonial and sold its $20 billion in deposits, 346 branches in five states and about $22 billion of its assets to BB&T Corp.

Some analysts believe another 100 to 300 banks could fail before the crisis runs its course, largely because of souring loans for commercial real estate. The number of institutions on the FDIC's internal "problem list" — those rated by examiners as having very low capital cushions against risk and other deficiencies — jumped to 416 at the end of June from 305 in the first quarter, the agency reported Thursday.

Q: What's behind this?

A: Banks around the country have run into trouble on their loans for construction and development, the fastest-growing category of troubled loans for U.S. banks, especially in overbuilt areas. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans.

Lots of banks have heavy concentrations of these loans in their lending portfolios, and some small banks are considered by regulators to be particularly vulnerable. Delinquent loan payments and defaults by commercial and residential developers have surged to the highest levels since the early 1990s, during the S&L crisis.

At the same time, some recent failures have been smaller banks brought down by garden-variety loans that have soured during the recession. Regulators say they're concerned about growing delinquencies on prime, conventional home loans.

Q: So even though the economy is starting to recover, banks are still struggling?

A: The condition of the banking industry is what economists call a lagging indicator: It falls behind the state of the economy because the problems take longer to percolate through banks, as opposed to other signposts such as consumer spending, gross domestic product or permits for building construction.

That means the pain will continue to weigh on the banking sector while the economy rebounds.

FDIC Chairman Sheila Bair offered a reminder on Thursday: "Banking industry performance is, as always, a lagging indicator."

Q: What will it take to turn the banking industry around?

A: Not much other than time, experts say.

"The only thing you could do is ... to ignore the losses that are already there," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington. That would be a terrible mistake, she said, noting that regulators' blind eye in the 1980s prolonged the S&L crisis.

"The best thing for the banking industry is just to take it on the chin and move on," she said.

Q: What about me? What can I do to protect my money in the bank?

A: Accounts are insured by the FDIC up to $250,000 per depositor per bank. Joint accounts are insured up to that amount for each co-owner of the account; individual retirement accounts, or IRAs, held in banks are also insured.

If you have multiple individual accounts at one bank, it's important to structure them carefully so they don't exceed the limits. The FDIC has a calculator on its Web site called the electronic deposit insurance estimator, or EDIE, that can help determine how much money in deposit accounts, if any, exceeds the insurance limits. You can find it here: http://tinyurl.com/lt3aok.

For any money in a failed bank's deposit accounts that exceeds the insured limits, you become essentially a creditor of the bank. You would eventually recover some of your money, but the amount can range from 40 cents on the dollar up to the full amount. Recovery of the money could take months.

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8/30/2009

Re: Fed fraud

The US Government still has the best AAA bond rating, which means we finance our debt obligations at a low interest rate. When the financial market froze up on credit, and the economy collapsed, the Federal Reserve bailed out the Federal Government via bail outs to big banks and insurance companies with trillions of dollars in credit to stabilize the economy. Had the economy totally collapsed, our nation's best AAA credit rating would have been downgraded, which would have pushed up interest rates on our debt, which would have in turn pushed up inflation and tax hikes (both are inevitable down the road), and our political ruling elite class on Capitol Hill would have been put in jeopardy of losing their otherwise lifetime "elected" seats in U.S. Congress. The bail outs were nothing more than corrupt politics to keep our nation's bond rating at the best AAA level so that we can continue to borrow money on our mounting national debt. President Barack Obama's flawed plan for America is to increase our nominal national debt to $20 trillion from $11 trillion over the next decade. Our nation's political leaders chose a short-term or band-aid solution over comprehensive structural changes in financial management. The big banks and insurance companies were in on the take, and none of the corporate elite's financial insitutions used even $1 of the bail out dollars to end the so-called toxic debts that lead them to their collapse in the early-Autumn of 2008. This whole bail out operation is just another fraud pulled over the eyes of the People by the Federal Government via The Federal Reserve!

- Jonathan Melle
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http://video.google.com/videoplay?docid=6132500997336473908
http://video.google.com/videoplay?docid=7065205277695921912&hl=en
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"As Big Banks Repay Bailout Money, U.S. Sees a Profit"
By ZACHERY KOUWE, The New York Times (Online), August 31, 2009

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

But the mere hint of bailout profits for the nearly year-old Troubled Asset Relief Program has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business.

“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican and a member of the Congressional Oversight Panel examining the relief program, said in an interview.

Profits were hardly high on the list of government priorities last October, when a financial panic was in full swing and the Treasury Department started spending roughly $240 billion to buy preferred shares from hundreds of banks that were facing huge potential losses from troubled mortgages. Bank stocks began teetering after Lehman Brothers collapsed and the government rescued A.I.G., and fear gripped the financial industry around the world.

American taxpayers were told they would eventually make a modest return from these investments, including a 5 percent quarterly dividend on the banks’ preferred shares and warrants to buy stock in the banks at a set price over 10 years.

But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

The figure does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans. The government bought shares in these and many other financial companies last fall, when sinking confidence among investors pushed down many bank stocks to just a few dollars a share. As the banks strengthened and became profitable, the government authorized them to pay back the preferred stock, which had been paying quarterly dividends since October.

But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.

Despite the early proceeds from the bailout program, a debate remains over whether the government could have done even better with its bank investments.

If private investors had taken a stake in the banks last October on par with the government’s, they would have had profits three times as large — about $12 billion, or 44 percent if tallied on an annual basis, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who analyzed the data for The Times.

Why the discrepancy? Finance experts say the government overpaid for the bank assets it bought, because its chief priority was to stabilize the teetering financial system, not to maximize profit.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” said Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions.

A Congressional oversight panel concluded in February that the Treasury paid an average of 34 percent more than the estimated fair value of the assets it received.

Of course, many finance experts suggest that the comparison is academic at best, because there is no way to know what might have become of the banks or the financial system as a whole had the government not acted.

“Taxpayers should heave a sigh of relief that the investment in the banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the Stern School of Business at New York University.

A more direct comparison of profits can be made with the investment performance of other governments that poured money into ailing banks last fall.

The Swiss government, for example, said last week that it had pulled in a handsome profit for taxpayers on a $5.6 billion bailout it gave to UBS, the troubled Swiss bank, at the height of the financial crisis in October. The government netted $1 billion on its investment, a gain equal to a 32 percent annual return.

“They are substantially in the money,” Guy de Blonay, a fund manager at Henderson New Star in London, said after the announcement.

American taxpayers could still collect additional profits on their investments in two other big banks that have repaid their preferred stock but not their warrants: JPMorgan Chase and Capital One. They are expected to yield over $3.1 billion in gains for the Treasury in the next month or so, although the full tally will depend on how much they will pay to buy back their warrants.

And the government is owed about $6.2 billion in interest payments from banks that have not yet repaid their federal money.

But all the profits taxpayers have won could still be wiped out by two deeply troubled institutions. Both Citigroup and Bank of America are still holding mortgages and other loans that were once worth billions of dollars but whose revised values are uncertain. If they prove “toxic” because they cannot attract buyers, they could leave large holes in the banks’ balance sheets.

Neither bank is ready to repay its bailout money anytime soon, even though the banks’ stock prices have surged in the last month, leaving the government sitting on paper profits of about $18 billion between them.
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Eric Dash contributed reporting.
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"U.S. Makes $4B From Big Bailout Banks: Report - Govt. Investments in Goldman Sachs, Morgan Stanley, AmEx and Others Bring Billions"
The Associated Press, ABCNews, 8/31/2009
WASHINGTON

The U.S. government has hauled in about $4 billion in profits from large banks that have repaid their obligations from last year's federal bailout, The New York Times reported Sunday.

Last September, Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson pressed congressional leaders for legislation authorizing a $700 billion financial bailout of some of the nation's largest financial institutions, which were in danger of collapsing. The bill was signed into law in October.

Critics of the bailout were concerned that the Treasury Department would never see a return on its investment. But the government has already claimed profits from eight of the biggest banks.

The Times cited government profits of $1.4 billion from Goldman Sachs, $1.3 billion from Morgan Stanley and $414 million from American Express. It also listed five other banks — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — that each returned profits between $100 million and $334 million.

The government has also collected about $35 million in profits from 14 smaller banks, the Times reported.

Federal investments in some other banks, including Citigroup and Bank of America, are still in question, and the government could still lose much of the money it spent to bail out insurance company American International Group, mortgage lenders Fannie Mae and Freddie Mac, and automakers General Motors and Chrysler.

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American Express CEO Kenneth Chenault and Capital One CEO Richard Fairbank saw the stock options granted to them earlier this year spike by millions during Wall Street's rebound. (ABC News)
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"Wall Street Roller Coaster Means Big CEO Paydays: Two Dozen Bank Execs See Compensation Jump $90M Through Stock Options"
By ALICE GOMSTYN, ABC NEWS Business Unit, September 2, 2009

Getting investments on the cheap earlier this year is yielding big rewards for Wall Street's top brass: Thanks to the rebounding stock market, two credit card company chief executives have seen their compensation jump by more than $34 million while 22 other top bank execs also saw rich gains, according to a new report released today.

A study by the Institute for Policy Studies has found that the value of stock options granted in early 2009 to American Express Chief Executive Kenneth Chenault rose by nearly $18 million as of mid-August. Fellow CEO Richard D. Fairbank, of Capital One, saw his stock options grow by $16.3 million during the same period.

IPS, a liberal think tank, found that Chenault and Fairbank were among two dozen executives at eight major financial institutions to see their 2009 stock options jump by a total of nearly $90 million.

"It's all pretty outrageous how they stand to turn the crisis into more windfalls," said Sarah Anderson, an executive pay analyst and one of the authors of the IPS study.

The banking industry defends stock options, or the right to buy stocks at a set price, as an effective way to give executives incentives to focus on the long-term performance of their companies instead of just short-term gains. Excessive risk-taking by short-sighted bankers is widely viewed as one of the main causes of the current recession.

Most of the stock option packages reviewed by IPS don't actually allow executives to exercise the options -- buy the stocks -- and sell them for three to five years after they were awarded. In the past, such waiting periods were often capped at just six months, said Scott Talbott of the Financial Services Roundtable, the trade group that represents the country's biggest banks.

Today, "it's not the quick quarter-by-quarter profit that executives benefit from -- it's the long-term, sustained growth of the company," Talbott said.

American Express spokeswoman Joanna Lambert said the increase in Chenault's portfolio reflects AmEx's rising share price which, she said, "is a good thing for all shareholders." The company's shares reached a low just under $10 in March and have since rocketed to over $30.

Capital One told ABCNews.com in an e-mail that Fairbank's compensation has been based exclusively on stock awards -- not cash salary, bonuses or retirement contributions -- for the last 11 years.

But critics like Robert Howell say the banks had no business awarding "boatloads of options" in the first place.

Greed or Good Business?
Financial institutions survived as "a result of federal funds being poured into shore it up," said Howell, a visiting professor at the Tuck School of Business at Dartmouth College. "These folks didn't do anything substantial to justify these 80- or 90-million dollars in rewards."

All of the firms reviewed by the IPS have received billions in aid under the government's Troubled Asset Relief Program, though at least four -- JPMorgan, Wells Fargo, Capital One and American Express -- have since returned the cash.

This year's stock "windfall" examined in the IPS report results from the firms awarding of hundreds of thousands of company stock options to top executives when stocks were sinking earlier this year. Their portfolios skyrocketed in value after stocks rebounded, with share prices on some financial stocks, including American Express and Capital One, shooting up 90 percent or more. Shares of JPMorgan, Wells Fargo and Sun Trust more than doubled.

Here is a breakdown, according to the IPS report, of the gains top executives at eight major banks saw in their stock options between early 2009 and Aug. 14 of this year:

. JPMorgan: $20.6 million for four executives
. Wells Fargo: $6.2 milllion for three executives
. PNC: $17.9 million for five executives
. US Bancorp: $1.8 million for three executives
. SunTrust: $7.9 million for three executives
. Capital One: $16.3 million for CEO Richard Fairbank
. Regions Financial: $1.1 million for four executives
. American Express: $18 million for CEO Kenneth Chenault

The chief executive of Comerica, Ralph W. Babb, could also see healthy returns on his stock options -- the firm's shares rose more than 59 percent as of Aug. 14. It has not been disclosed how much Babb received in options earlier this year, the report said.

Howell argues that the banks shouldn't have started awarding stock options to executives until share prices had at least somewhat recovered.

"The idea of granting all these options at bargain basement prices is just another example of financial services industry greed," he said.

Wider Gap Between CEOs, Average Workers
The IPS study also found that last year, when the financial crisis reached its peak, financial firm chief executives still outpaced their counterparts in other businesses: The chief executives of the 20 banks that received the most federal bailout funds had an average compensation of $13.8 million last year, 37 percent more than the average pay earned by CEOs at S&P 500 Companies.

The pay gap between CEOs and rank-and-file employees, meanwhile, continues to widen: in 2008, according to the study, top executives averaged 319 times more in pay than the average American worker, compared to 30 to 40 times in the 1980s. CEOs at the 20 top bailout banks earned 436 times more.

Average Wall Street workers also bested their government counterparts on compensation: Compliance examiners at the U.S. Securities and Exchange Commission and the Federal Deposit Insurance Corporation earned roughly half of the average Wall Street employee's bonus in 2008.

Congress has taken some actions to clamp down on compensation, but most of the measures are limited only to firms that have yet to repay the government's bailout funds.

While the banking industry says compensation caps hurt companies' ability to attract and retain top talent, Anderson argues the government should do more to limit executive pay. A return to '80s pay levels would be best, she said.

"Top executives are not hundreds of times more efficient or brilliant than they were 25 years ago," she said. "It's the pay system that's gotten out of control."

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"Mortgage giants struggle a year after takeover"
By Alan Zibel, Ap Real Estate Writer, Friday, September 4, 2009

WASHINGTON – A year after the near-collapse of Fannie Mae and Freddie Mac, the mortgage giants remain dependent on the government for survival and there is no end in sight.

The companies, created by the government to ensure the availability of home loans, have tapped about $96 billion in government aid since they were seized a year ago this weekend. Without that money, the firms could have gone broke, leaving millions of people unable to get a mortgage.

Many questions remain about Fannie and Freddie's future, but several things are clear: The companies are unlikely to return to their former power and influence, the bailout is sure to cost taxpayers even more money and the government will have a big role in the U.S. mortgage market for years to come.

Fannie Mae was created in 1938 in the aftermath of the Great Depression. It was privatized 30 years later to limit budget deficits during the Vietnam War. In 1970, the government formed its sibling and competitor Freddie Mac.

The companies boomed over the past decade, buying mortgages from lenders, pooling them into bonds and selling them to investors. But critics called them unnecessary, arguing that Wall Street could support the mortgage market itself.

That argument has faded in the wreckage of the failed loans that led to the housing bust. Investors have fled any mortgage investment that doesn't have the government standing behind it.

"No longer is anyone arguing that the private sector can handle this on its own," said Jaret Seiberg, an analyst at Washington Research Group.

The government stepped in to take control of the two companies on the weekend of Sept. 6, after they were unable to raise money to cover soaring losses and their stock prices plunged.

A year later, the government controls nearly 80 percent of each company, and their problems are growing as defaults and foreclosures continue to skyrocket.

The percentage of homeowners who have missed at least three months of payments is normally under 1 percent for both companies. Now it's nearly 4 percent for Fannie and 3 percent for Freddie.

Fannie had nearly $171 billion in troubled loans as of June and had set aside $55 billion to cover those losses, while Freddie had nearly $78 billion in troubled loans and reserves of only $25 billion.

"It's much worse than anybody thought," said Paul Miller, an analyst with FBR Capital Markets.

It could be another year before the final taxpayer tab for Fannie and Freddie is known, and that outcome will depend on when delinquencies and foreclosures finally crest.

Barclays Capital predicts the companies will need anywhere from $160 billion to $200 billion out of a potential $400 billion lifeline, which the Obama administration expanded from the original $200 billion set last fall. Most analysts don't expect the money to be returned anytime soon, if at all.

"What will ultimately end up happening," said Barclays analyst Ajay Rajadhyaksha, "is that the U.S. taxpayer swallows the bill."

Despite federal control, Fannie and Freddie have recently surged on Wall Street. The companies said Friday that they now comply with New York Stock Exchange requirement for an average closing price of $1 a share or more. But most analysts still say the companies' stocks will be worthless in the long term.

The Obama administration doesn't expect to announce its plans for the two companies until early next year, but powerful interest groups aren't waiting until then. The Mortgage Bankers Association on Wednesday offered a detailed plan to replace Fannie and Freddie with several federally-regulated private companies.

That proposal still retained a big government role, giving those companies the ability to issue mortgage bonds formally guaranteed by the federal government.

In the meantime, both Fannie and Freddie have been drafted to implement the Obama administration's effort to attack the foreclosure crisis. Freddie Mac now has about 600 workers either modifying loans or monitoring compliance with the program's rules. Fannie Mae said it has added hundreds of employees to work on foreclosure prevention efforts.

The early results have been disappointing. For example, while Fannie or Freddie refinanced 2.9 million loans from January through July, only about 60,000 were taking advantage of an Obama administration plan to help "underwater" borrowers who owe more than their homes are worth.

At the same time, nearly 70 percent of U.S. mortgages made in the first half of this year went through Fannie or Freddie, up from 62 percent last year, according to Inside Mortgage Finance, a trade publication. That's a big change from three years ago, when the risky lending market was still alive and Fannie and Freddie's share was down to 33 percent.

"We've been the mortgage market," said John Koskinen, Freddie Mac's chairman. "Without that financing availability, people would not have been able to get a mortgage."

Fannie and Freddie don't directly make loans, but they exert enormous influence over the industry by issuing detailed standards for the loans they will purchase. Lenders must feed their borrowers into Fannie and Freddie's computer systems, which evaluate borrowers based on their credit scores and the size of their down payment.

Both companies, facing huge losses, have kept those standards tight, frustrating many. Eric Delgado, a mortgage broker in Rockville, Md., says there's zero flexibility with either company. Either borrowers qualify or they don't. No arguing. No excuses.

But some in the industry say the restrictions are long overdue after several years of lending excesses.

"You needed to bring some reality to the market," said Michael Moskowitz, chief executive of Equity Now, a New York-based mortgage lender, which does about 80 percent of its business with Fannie and Freddie.

Fannie Mae CEO Michael Williams declined an interview request, but said in an e-mailed statement that "it is not enough to help a borrower own a home. We must also help ensure that they will be able to stay in the home over the long term."

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"FHA says won't need congressional support"
September 4, 2009

WASHINGTON (Reuters) – The U.S. Federal Housing Administration said on Friday it would not need a congressional subsidy even if mortgage-related losses push its reserves below a level demanded by Congress.

Rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, raise the possibility its capital reserve ratio could dip below the 2 percent level, and the government might have to support the agency, analysts say.

The Wall Street Journal on Friday reported that government officials believed reserves at the FHA, which provides government guarantees on mortgages for some home buyers, were in danger of breaching the 2 percent mark.

"Even if that level falls below 2 percent, FHA continues to hold more than $30 billion in its reserves today, or more than 5 percent of its insurance in force," FHA Commissioner David Stevens said in a statement. "Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve calculation falls below 2 percent."

Mortgage loans insured by the government have soared to the highest levels in two decades as borrowers take advantage of downpayment requirements for FHA loans, which are lower than those for other mortgages.

Some analysts say the agency may have to tighten lending standards to confront losses.

In his statement responding to the Wall Street Journal article, Stevens noted the mandated FHA reserve ratio measures excess reserves above and beyond projected losses of the next 30 years.

"FHA's full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement," Stevens said, adding that the FHA continued to generate income for taxpayers.

Credit losses at the FHA would not impact Ginnie Mae mortgage-backed securities, according to Arthur Frank, director and head of MBS research at Deutsche Bank in New York.

"It is completely irrelevant to the Ginnie Mae mortgage bond market," he said.

Ginnie Mae mortgage-backed securities, the only mortgage bonds backed by the full faith and credit of the U.S. government, did not react to the news and were outperforming Treasuries in afternoon trading.

Ginnie Mae wraps loans from the FHA, along with loans from the Veterans Administration, into mortgage-backed securities for sale to investors, so they do not take on the credit risk that FHA takes. Ginnie Mae mortgage bonds have a zero risk weighting for banks because the government is obliged to back them.

When an FHA loan defaults, FHA takes most of the loss, while mortgage servicers take on the rest. Ginnie Mae, however, would have to provide a backup if the servicers default on their obligations.
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(Reporting by Tim Ahmann; additional Reporting by Julie Haviv; Editing by Padraic Cassidy)
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"Back to Business: Wall Street Pursues Profit in Bundles of Life Insurance"
By JENNY ANDERSON, The New York Times, September 6, 2009

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.

The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.

In addition to securitizing life settlements, for example, some banks are repackaging their money-losing securities into higher-rated ones, called re-remics (re-securitization of real estate mortgage investment conduits). Morgan Stanley says at least $30 billion in residential re-remics have been done this year.

Financial innovation can be good, of course, by lowering the cost of borrowing for everyone, giving consumers more investment choices and, more broadly, by helping the economy to grow. And the proponents of securitizing life settlements say it would benefit people who want to cash out their policies while they are alive.

But some are dismayed by Wall Street’s quick return to its old ways, chasing profits with complicated new products.

“It’s bittersweet,” said James D. Cox, a professor of corporate and securities law at Duke University. “The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings. The bitter part is it’s a return to the good old days.”

Indeed, what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.

But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.

“When they set their premiums they were basing them on assumptions that were wrong,” said Neil A. Doherty, a professor at Wharton who has studied life settlements.

Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies.

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”

After Mortgages

Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.

Not all policyholders would be interested in selling their policies, of course. And investors are not interested in healthy people’s policies because they would have to pay those premiums for too long, reducing profits on the investment.

But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.

Some financial firms are moving to outpace their rivals. Credit Suisse, for example, is in effect building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities.

The bank bought a company that originates life settlements, and it has set up a group dedicated to structuring deals and one to sell the products.

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

Spokesmen for Credit Suisse and Goldman Sachs declined to comment.

If Wall Street succeeds in securitizing life insurance policies, it would take a controversial business — the buying and selling of policies — that has been around on a smaller scale for a couple of decades and potentially increase it drastically.

Defenders of life settlements argue that creating a market to allow the ill or elderly to sell their policies for cash is a public service. Insurance companies, they note, offer only a “cash surrender value,” typically at a small fraction of the death benefit, when a policyholder wants to cash out, even after paying large premiums for many years.

Enter life settlement companies. Depending on various factors, they will pay 20 to 200 percent more than the surrender value an insurer would pay.

But the industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, have criticized life settlement brokers for coercing the ill and elderly to take out policies with the sole purpose of selling them back to the brokers, called “stranger-owned life insurance.”

In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of the largest life settlement companies, accusing it of engaging in bid-rigging with rivals to keep down prices offered to people who wanted to sell their policies. The case is continuing.

“Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.

Tricky Predictions

In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.

It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.

It happened again last fall when companies that calculate life expectancy determined that people were living longer.

The challenge for Wall Street is to make securitized life insurance policies more predictable — and, ideally, safer — investments. And for any securitized bond to interest big investors, a seal of approval is needed from a credit rating agency that measures the level of risk.

In many ways, banks are seeking to replicate the model of subprime mortgage securities, which became popular after ratings agencies bestowed on them the comfort of a top-tier, triple-A rating. An individual mortgage to a home buyer with poor credit might have been considered risky, because of the possibility of default; but packaging lots of mortgages together limited risk, the theory went, because it was unlikely many would default at the same time.

While that idea was, in retrospect, badly flawed, Wall Street is convinced that it can solve the risk riddle with securitized life settlement policies.

That is why bankers from Credit Suisse and Goldman Sachs have been visiting DBRS, a little known rating agency in lower Manhattan.

In early 2008, the firm published criteria for ways to securitize a life settlements portfolio so that the risks were minimized.

Interest poured in. Hedge funds that have acquired life settlements, for example, are keen to buy and sell policies more easily, so they can cash out both on investments that are losing money and on ones that are profitable. Wall Street banks, beaten down by the financial crisis, are looking to get their securitization machines humming again.

Ms. Tillwitz, an executive overseeing the project for DBRS, said the firm spent nine months getting comfortable with the myriad risks associated with rating a pool of life settlements.

Could a way be found to protect against possible fraud by agents buying insurance policies and reselling them — to avoid problems like those in the subprime mortgage market, where some brokers made fraudulent loans that ended up in packages of securities sold to investors? How could investors be assured that the policies were legitimately acquired, so that the payouts would not be disputed when the original policyholder died?

And how could they make sure that policies being bought were legally sellable, given that some states prohibit the sale of policies until they have been in force two to five years?

Spreading the Risk

To help understand how to manage these risks, Ms. Tillwitz and her colleague Jan Buckler — a mathematics whiz with a Ph.D. in nuclear engineering — traveled the world visiting firms that handle life settlements. “We do not want to rate a deal that blows up,” Ms. Tillwitz said.

The solution? A bond made up of life settlements would ideally have policies from people with a range of diseases — leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.

As an added precaution, DBRS would run background checks on all issuers. Also, a range of quality of life insurers would have to be included.

To test how different mixes of policies would perform, Mr. Buckler has run computer simulations to show what would happen to returns if people lived significantly longer than expected.

But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?

If the computer models were wrong, investors could lose a lot of money.

As unlikely as those assumptions may seem, that is effectively what happened with many securitized subprime loans that were given triple-A ratings.

Investment banks that sold these securities sought to lower the risks by, among other things, packaging mortgages from different regions and with differing credit levels of the borrowers. They thought that if house prices dropped in one region — say Florida, causing widespread defaults in that part of the portfolio — it was highly unlikely that they would fall at the same time in, say, California.

Indeed, economists noted that historically, housing prices had fallen regionally but never nationwide. When they did fall nationwide, investors lost hundreds of billions of dollars.

Both Standard & Poor’s and Moody’s, which gave out many triple-A ratings and were burned by that experience, are approaching life settlements with greater caution.

Standard & Poor’s, which rated a similar deal called Dignity Partners in the 1990s, declined to comment on its plans. Moody’s said it has been approached by financial firms interested in securitizing life settlements, but has not yet seen a portfolio of policies that meets its standards.

Investor Appetite

Despite the mortgage debacle, investors like Andrew Terrell are intrigued.

Mr. Terrell was the co-head of Bear Stearns’s longevity and mortality desk — which traded unrated portfolios of life settlements — and later worked at Goldman Sachs’s Institutional Life Companies, a venture that was introducing a trading platform for life settlements. He thinks securitized life policies have big potential, explaining that investors who want to spread their risks are constantly looking for new investments that do not move in tandem with their other investments.

“It’s an interesting asset class because it’s less correlated to the rest of the market than other asset classes,” Mr. Terrell said.

Some academics who have studied life settlement securitization agree it is a good idea. One difference, they concur, is that death is not correlated to the rise and fall of stocks.

“These assets do not have risks that are difficult to estimate and they are not, for the most part, exposed to broader economic risks,” said Joshua Coval, a professor of finance at the Harvard Business School. “By pooling and tranching, you are not amplifying systemic risks in the underlying assets.”

The insurance industry is girding for a fight. “Just as all mortgage providers have been tarred by subprime mortgages, so too is the concern that all life insurance companies would be tarred with the brush of subprime life insurance settlements,” said Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers, a trade group that represents life insurance companies.

And the industry may find allies in government. Among those expressing concern about life settlements at the Senate committee hearing in April were insurance regulators from Florida and Illinois, who argued that regulation was inadequate.

“The securitization of life settlements adds another element of possible risk to an industry that is already in need of enhanced regulations, more transparency and consumer safeguards,” said Senator Herb Kohl, the Democrat from Wisconsin who is chairman of the Special Committee on Aging.

DBRS agrees on the need to be careful. “We want this market to flourish in a safe way,” Ms. Tillwitz said.

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"Mortgage Market Bound by Major U.S. Role: Classes of Borrowers Cannot Find Loans as Publicly Backed Debt Mounts"
By Zachary A. Goldfarb and Dina ElBoghdady, Washington Post Staff Writers, Monday, September 7, 2009

Second in an occasional series

In the go-go years of the U.S. housing boom, virtually anybody could get a few hundred thousand dollars to buy a home, and private lenders flooded the market, aggressively pursuing borrowers no matter their means or financial history.

Now the pendulum has swung to the other extreme. Only one lender of consequence remains: the federal government, which undertook one of its earliest and most dramatic rescues of the financial crisis by seizing control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac.

While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government's newly dominant role -- nearly 90 percent of all new home loans are funded or guaranteed by taxpayers -- has far-reaching consequences for prospective home buyers and taxpayers.

The government has the power to decide who is qualified for a loan and who is not. As a result, many borrowers among both poor and rich are frozen out of the market.

Nearly one-third of those who obtained home loans during the boom years of 2005 and 2006 couldn't get one today, according to mortgage industry analysts. Many of these borrowers were never really able to afford their homes and should not have gotten loans. But many others could, and borrowers like them are now running into tougher government standards.

At the same time, taxpayers are on the hook for most of the loans that are still being made if they go bad. And they are also on the line for any losses in the massive portfolios of old loans at Fannie Mae and Freddie Mac, which own or back more than $5 trillion in mortgages.

There is growing evidence that many loans being guaranteed by the government have a significant risk of defaulting. Delinquencies are spiking. And the Federal Housing Administration, another source of government support for home loans, is quickly eating through its financial cushion as losses mount.

The outlay has already reached about $1 trillion over the past year and is rising. During that time, the government has pumped more money into the mortgage market than has been spent on Medicare or Social Security or the defense budget, more even than Washington has paid to bail out banks and other struggling companies.

"Absent government intervention, there would be no lending," said Nicolas P. Retsinas, director of Harvard University's center for housing studies.

Government officials generally agree that it would be better for private lenders to resume their traditional role as major providers of finance for home loans. But policymakers now face some tough choices. They must decide how to reduce support for the mortgage market without letting it collapse. And they must decide what kind of support the government should provide in the long run.

"The problem was a long time brewing, and the problems in our mortgage finance system will take a long time to repair," said Michael Barr, the Treasury's assistant secretary for financial institutions.

Government Role

Fannie Mae and Freddie Mac were chartered by Congress four decades ago to create a marketplace where mortgage lenders could sell the loans they made and use that money to make more loans. The two companies were owned by private shareholders and for a fee guaranteed investors in mortgage loans that they would get paid. After the government seized Fannie and Freddie, it offered them an unlimited line of credit and pledged to inject up to $400 billion to keep them solvent.

But this is not the only form that government involvement in housing finance takes.

The Federal Reserve is purchasing hundreds of billions of dollars of mortgages with the aim of ultimately owning $1.25 trillion worth. This buying spree has flooded the mortgage market with money, forcing down interest rates and assuring lenders they have somewhere to sell their loans. The Treasury Department has a similar, though smaller, program.

The Federal Housing Administration, meantime, is dramatically increasing the amount of home loans it insures. Its share of new mortgages jumped from 1.8 percent in 2006 to 18 percent so far this year, according to Inside Mortgage Finance. It expects to insure about $400 billion this year. Several other agencies, such as the Department of Veterans Affairs, also provide mortgage guarantees.

All told, the government now stands behind 86 percent of all new home loans, up from about 30 percent just four years ago, according to Inside Mortgage Finance.

Fannie and Freddie had long played a dominant role in the mortgage market, providing traditional 30-year, fixed-rate loans. But earlier this decade, they faced competition from banks and other lenders promoting exotic mortgages, such as those that did not require proof of income or were available to people with checkered credit histories. With housing prices on the rise, these loans became ever more prevalent, and lenders figured that a struggling borrower could always get out from under a loan by selling or refinancing his home.

For the first time in decades, the rate of home ownership ticked up, reaching 69.2 percent. Many first-time buyers were of lower income, and many such buyers were black or Hispanic. Fannie and Freddie, afraid of losing more market share, also began funding risky loans.

Then, in 2006, the housing market began to tumble and many people couldn't or wouldn't pay their loans. Lenders and mortgage financiers suffered staggering losses. New loans dried up. Interest rates spiked. With investor confidence in Fannie and Freddie crumbling and the global economy at stake, the government seized the firms, nationalizing the U.S. housing finance system.

Niche Markets

Many borrowers had been put into loans they could not afford, and when the mortgages failed the results were catastrophic, precipitating the financial crisis.

The tighter market that emerged -- whether the consequence of stricter government standards or an industry retreat from risky practices -- now excludes some groups of aspiring home buyers.

"People say, 'Well that's good because of lots of people who got loans in the past shouldn't have gotten those loans at all,' " said Keith Gumbinger, a vice president at research firm HSH Associates. "But there were tiny niche markets for whom those products were originally intended, and those people who legitimately need them now won't get them."

Although Fannie and Freddie don't make loans, they effectively set standards for the mortgage industry by detailing what kind of loans they will purchase from lenders and at what cost. The companies, for instance, require documentation of income and have increased fees on loans for people who lack stellar credit and hefty down payments, especially those looking to buy condominiums.

All but gone are subprime mortgages, initially meant to help people with blemished credit until they could get another loan. All but gone are the no-money-down mortgages used by four out of 10 first-time home buyers in 2005 and 2006. Those loans originally catered to wealthy borrowers with great credit who wanted to buy a home without having to liquidate their investments.

And the advances in minority and low-income home ownership recorded earlier this decade have largely proved to be a mirage. The U.S. homeownership rate has declined to 67.4 percent.

Some people who are no longer eligible for loans elsewhere have turned to FHA, which does not demand top-notch credit scores or sizable down payments. But for some consumers, such as Lisa McCracken of Stafford County, the FHA's minimum 3.5 percent down payment can be a stretch.

McCracken, a traveling nurse, has been scrimping to raise the down payment, living with her parents to save money. "I think I can swing it, but it won't be easy," she said. "I'll be wiping out a lot of my savings to buy a house." The self-employed face difficulties because they tend to have a tough time documenting their income, as required by Fannie Mae, Freddie Mac and FHA loans.

Donald Prieto, who owns a roof contracting business in San Diego, has shelved his plans to buy a new home. Five years ago, he and his wife purchased a small home without having to verify his income. They have made their payments on time, have maintained solid credit scores and have plenty of cash in the bank, he said. Now, they have three children. They want a larger home, but several lenders have turned them away because he does not have two years' worth of paychecks to show.

For that reason, Prieto has incorporated his company and started cutting himself formal paychecks. "No bank wants to take risks anymore, and I understand that," Prieto said. "I just have to wait."

Other would-be buyers -- including investors, second-home and condo buyers, and people who need exceptionally large loans dubbed "jumbos" -- have fewer options than before.

Earlier this summer, Philip Zanga, an investor, signed a contract on a $367,000 condo in Bethesda this summer and paid a $15,000 deposit. He planned to put down 60 percent, but his loan was rejected. Investors and loans for condos are both deemed risky by Fannie and Freddie.

"Why turn away someone willing to put 60 percent down?" asked Avi Galanti, Zanga's real estate agent. "What's the risk in that?"

Mountain of Debt

Taxpayers could be hit with a staggering tab even if a small proportion of loans go bad. Fannie and Freddie now own or guarantee more than $5 trillion in home loans. (That equals two-thirds of the debt the U.S. government owes.)

And many could be in trouble. Mortgages owned and backed by the companies often required down payments of no more than 10 percent. With housing prices down sharply, many borrowers are underwater, owing more than their home is worth, so they cannot sell or refinance to pay off troubled loans.

As the economy has deteriorated, delinquencies are spiking and losses are mounting. In the past year and half, the companies have posted more than $150 billion in losses.

Similar risks threaten to engulf FHA. Nearly 8 percent of FHA loans at the end of June were either 30 days late or in the process of foreclosure, according to the Mortgage Bankers Association. That compares with 5.4 percent of such loans a year ago.

As a result, FHA has been exhausting much of its loss reserves, which are funded by premiums paid by borrowers. The reserves currently stand at an estimated 3 percent of all outstanding loans, half of what they were just a year ago. If the reserves fall below the 2 percent threshold set by Congress, they could require a taxpayer bailout.

"Having the government this heavily into the mortgage market is inherently a dangerous thing for taxpayers," said Anthony Sanders, a finance professor at George Mason University. "We've already gone through one big bubble and burst, and right now the taxpayers are on the hook for a substantial amount of money."

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Credit default swaps
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http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_default_swaps/index.html?inline=nyt-classifier
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"The 5 Most Regrettable Bailouts"
September 4, 2009, Rick Newman, usnews.com

Has anything good come from $3 trillion worth of bailouts over the last 18 months? To be fair, probably. After Lehman Brothers failed in September 2008 and other Wall Street firms began to founder, urgent government intervention forestalled a deeper financial panic and perhaps even a depression. Instead of talking about a recovery today, we could be facing steep double-digit unemployment and many more months of misery.

But the Year of the Bailout also entailed some disturbing moments, and there may still be unhappy consequences. Here's my list of the worst bailouts:

AIG. Did the Federal Reserve know what it was getting into on Sept. 16, 2008? That's the day AIG would have collapsed if the Fed hadn't issued $85 billion in credit to the huge insurance company in exchange for a 79.9 percent ownership stake. The problem wasn't AIG's insurance units, which constitute most of the firm, but an internal hedge fund, AIG Financial Products, that was basically backing huge gambles with solid insurance assets. When the hedge fund bet wrong on billions in mortgage-backed securities, it imperiled the entire company.

The Fed's intervention may have prevented deep losses throughout the banking system, but it also committed the government to a tawdry, open-ended bailout that's easily the single-biggest corporate rescue in U.S. history. The March 2009 revelation that AIG paid $165 million in bonuses to executives at the same Financial Products division that sank the firm became the hottest flash point in the Year of the Bailout and the darkest stain on bailout architects like Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke. Barry Ritholtz, author of Bailout Nation, contends that the government could have taken over the Financial Products division and treated it as a failed bank, imposing losses on every firm that did business with the unit. "You're supposed to suffer pain and agony when you put money into a company that's as corrupt as that AIG hedge fund," Ritholtz says. The insurance units, he argues, could have been spun off as a new stand-alone company, freed from the albatross of Financial Products.

Bernanke has argued that since AIG wasn't a bank, the federal government lacked a legal and practical mechanism for taking over and dismantling the company. That's why the Obama administration wants Congress to grant the Fed new powers to take over "systemically significant" institutions like AIG when they fail. Meanwhile, the AIG bailout could wind on for another three or four years, and there's a good chance taxpayers will never get all their money back.

Citigroup. When other banks become insolvent, the Federal Deposit Insurance Corp. swoops in, fires management, zeroes out the stock, pays bondholders a portion of their investment, and either sells off the bank in pieces to other banks or runs it until a buyer is found. But not Citigroup. This lumbering giant would have collapsed on its own, but instead of a takeover, Citigroup got $25 billion in bailout funds in October 2008, then another $20 billion three months later. Plus taxpayers are on the hook for a big chunk of $301 billion in mortgage-backed securities and other dodgy assets on Citigroup's books. It could be years before Citigroup is healthy. CEO Vikram Pandit has said that the fazed bank will pay back the taxpayers in full. But there's no deadline, and Pandit himself could be long gone before taxpayers get a dime back.

Bank of America. If this North Carolina-based bank hadn't picked up ailing brokerage firm Merrill Lynch in September 2008, it might be out of the woods by now. But the Merrill acquisition saddled BofA with billions in losses and made CEO Ken Lewis a corporate pariah. One of the most tawdry episodes in the Year of the Bailout was the battle between Lewis, who reportedly wanted to renege on the Merrill acquisition when he learned that the brokerage would post a $28 billion loss for 2008, and Bernanke, who threatened Lewis with the disapprobation of the Fed if he backed out, which basically equates to death by bank examiner. Lewis caved. Then a couple months later he got to explain why Merrill executives earned $3.6 billion in bonuses while taxpayers were providing $45 billion to keep the firm afloat. Go ahead. Scream.

Goldman Sachs. Wall Street's toniest firm got $10 billion in TARP money in October 2008, along with eight other big banks that got government checks. Eight months later, Goldman was the first big bank to pay back its bailout money, with interest. Hooray for them. But Goldman also got a stealth bailout that will never be returned to taxpayers, courtesy of AIG. When the feds propped up AIG last fall, that allowed Goldman to ease its way out of nearly $6 billion worth of deals with AIG that could have been worth pennies on the dollar in a normal bankruptcy case. And later, Goldman got almost $14 billion of bailout money that went to AIG's trading partners, effectively redeeming Goldman's trading bets with AIG at 100 percent of their face value.

Other banks got a 100 percent redemption out of AIG too, but Goldman got the most. And the fact that Henry Paulson, who was treasury secretary during the first four months of the meltdown, had come straight from a stint as CEO of Goldman Sachs raised the awful prospect that billions in taxpayer money was going to favored Wall Street fat cats. Nobody has ever offered a convincing explanation for the delicate treatment Goldman received, which fuels the worst kind of speculation. Please, say it ain't so.

Bear Stearns. Nobody knew how momentous it was at the time, but the $30 billion deal in March 2008 to keep Bear from completely imploding set the stage for every bailout that followed—and some other disasters as well. Bear was one of the biggest players in the market for mortgage-backed securities, and it fell first when that market began to crumble. The Fed brokered a deal in which JPMorgan bought most of the firm for $1.2 billion, a fraction of Bear's former value, with the Fed taking on $29 billion worth of toxic securities nobody else would touch. The bailout helped calm markets at the time—partly because it created the expectation that the government would rescue any other Wall Street firm that got into trouble.

That led Lehman Brothers to turn down financing offers from Warren Buffett and others when it needed cash, presumably because the firm felt it could hold out for a better deal—from the government, if necessary. When the feds let Lehman fail in September 2008, the chaos that followed partly stemmed from deep confusion over who deserved a bailout and who deserved a bullet. In retrospect, it's plausible that if the feds had let Bear Stearns fail outright, they could have done a better job of forcing Wall Street to work out its own problems—while saving taxpayers several hundred billion dollars. Of course, we'll never know. You only get one chance to get an epic bailout right.

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"5 Bailouts That Did Some Good"
September 4, 2009, Rick Newman, usnews.com

Is there such a thing as a good bailout? If you're the one getting the money, you might think so. But most Americans haven't received a capital infusion from the U.S. Treasury, and they've grown disgusted with the taxpayer funds lavished on failed banks and other companies that helped cause the worst recession in 80 years.

The massive financial rescue that the government began engineering in September 2008 wasn't an immediate turnoff. But billions in bonuses to executives at firms dependent on corporate welfare, like AIG, Citigroup, and Bank of America, have made "bailout" a dirty word. The furor has obscured the probability that government intervention in the economy, no matter how distasteful, most likely prevented a deeper, longer meltdown and far worse unemployment.

All bailouts aren't created equal. Historians will probably identify a number of government giveaways that did little but enrich the unworthy. Others, however, probably saved jobs and eased the pain for millions of Americans. Here are some of the contenders for Most Effective Bailout:

The unpronounceable ones. Most Americans aren't familiar with the Commercial Paper Funding Facility (CPFF), the Temporary Liquidity Guarantee Program (TLGP), or the Term Asset-Backed Securities Loan Facility (TALF). But these programs offered behind-the-scenes assistance that may have done more good than any amount of giveaways--sorry, "capital infusions"--into troubled firms. After lending nearly froze in the fall of 2008, the Federal Deposit Insurance Corp. and the Federal Reserve made guarantees that helped revive the everyday borrowing that allows many companies to buy paper clips and meet payroll. By purchasing huge amounts of securities backed by mortgages and other consumer loans, the Fed helped unfreeze that market too, preventing an even sharper cutback in consumer lending. The downside of these programs is that they've artificially boosted bank profits. But short of nationalizing the banking sector, boosting profitability is a necessary if unsavory step toward reviving lending. An interesting question for historians is whether government liquidity programs like these could have revived the economy on their own, without billions in overt bailouts.

Washington Mutual. On Sept. 25, 2008, federal regulators took over Washington Mutual, the nation's largest thrift, fired management, and sold the assets to JPMorgan Chase for about $2 billion. The rapid seizure came as WaMu was approaching insolvency, with a sinking stock price and thousands of customers withdrawing their money. Stockholders got nothing and debt holders who had lent the firm money were effectively wiped out, while customer accounts were fully protected.

The WaMu takeover wasn't really a bailout, since it cost the government nothing. But it could have served as a model for handling other troubled banks that did get a bailout, such as Citigroup. Instead of a federal takeover and prompt dismantling, however, Citi has been propped up with $45 billion in federal aid and other costly guarantees, with no evidence it will ever return to health. Citi is a lot bigger than WaMu and would have been difficult to roll into another bank. But in retrospect, it seems plausible that the government could have found a way to break up Citi in an orderly way instead of simply pouring taxpayer money into it.

General Motors. Plenty of Americans still bristle at $51 billion in taxpayer aid for a unionized automaker that neglected its own problems for years. But as bailouts go, GM's involved a fair accounting of the company's needs and its importance to the nation. GM's chief executive testified before Congress several times--and endured considerable public scolding--before the company got any federal money. GM also submitted several detailed "viability plans" outlining its problems. So instead of guessing about the condition of the company--the way we've had to with most bailed-out banks--we've known most of the relevant facts about GM.

GM's "prepackaged" bankruptcy filing on June 1 virtually wiped out shareholders and punished bondholders--as a reorganization should after a company fails. And the automaker's emergence from Chapter 11 has gone more smoothly than critics expected. If GM can deliver on key products like the Chevy Volt and reinvigorate its lineup of small cars and family vehicles, it could help revive the devastated American auto industry--and make the GM bailout look like a smart investment.

Chrysler. The No. 3 U.S. automaker probably would have disappeared without government aid, and it's still endangered. At least President Obama admitted that. His automotive task force produced thorough documentation on Chrysler's weaknesses and concluded that "Chrysler is not viable as a stand-alone company," which is why the government forced Chrysler into bankruptcy as a condition for more federal aid. Chrysler's principal owner, the private equity firm Cerberus Capital Management, lost nearly its entire investment, and bondholders got back just 33 cents on the dollar--a much fairer outcome than the favored treatment for stock and bondholders in other bailouts.

The plan for Chrysler to merge with Fiat is a Hail Mary pass that's still sailing through the air, and taxpayers remain on the hook for $14.9 billion. But the government has been more honest about Chrysler's prospects than about corporations like Citigroup and AIG that have sucked up a lot more taxpayer money.

Fannie Mae and Freddie Mac. These federally chartered mortgage-packaging agencies contributing to an overheated housing market that caused the financial meltdown of 2008. Critics accuse Fannie and Freddie of abusing the cheap money that comes with implicit government backing and fanning the market for millions of subprime mortgages--now dubbed "toxic waste"--that borrowers couldn't possibly afford.

The waste hit the fan in September 2008, when both agencies became insolvent and the government took them over. The combined bailout for Freddie and Fannie totals about $96 billion so far. But hold your nose and put up with the stink. The two agencies, with help from the Treasury Department and the Federal Reserve, back almost three quarters of all new mortgages these days, a share that's about 30 points higher than it was between 2004 and 2006. Other government agencies account for about 22 percent of new mortgages, which means that the private markets support less than 5 percent of the new mortgages used to buy homes. Take the government out of the housing market, in other words, and there is no market.

Housing is a huge sector of the economy, and it must recover if the economy is ever going to get healthy. That makes Fannie and Freddie quite important for the foreseeable future. Someday we might not need the government as much. But we're still a long way from that.

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"TARP: Treasury Looks to Shift Rescue's Focus To Small Businesses and Community Banks"
By Neil Irwin and David Cho, Washington Post Staff Writers, Friday, September 11, 2009

The Obama administration is retooling its rescue of the financial system, looking to wind down programs viewed as having run their course while considering new initiatives to address areas of lingering concern, such as small businesses and community banks.

This shift comes as Treasury Secretary Timothy F. Geithner and his colleagues are trumpeting their stewardship of the federal bailout efforts, as they did Thursday in a series of remarks on Capitol Hill and to the press. President Obama is scheduled to give what the White House called a major address on the financial crisis on Monday, the one-year anniversary of Lehman Brothers' collapse.

"The emerging confidence and stability of September 2009 is a far cry from the crippling fear and panic of September 2008," Geithner told an oversight committee Congress created to monitor the $700 billion Troubled Assets Relief Program. It is clear, he said, "that such a turnaround was not inevitable, nor was it an accident. It happened because the Obama administration and Congress put in place a comprehensive strategy."

The federal bailout program is scheduled to expire at the end of the year unless Geithner sends a letter to Congress stating that the efforts must be extended. Geithner is highly likely to make this assertion, though the administration would like to take that step with at least tacit support from Congress, administration officials said.

Geithner and his team are weighing how and when to send the letter and have been in talks with the White House about how to broach the topic with Congress. Administration officials want to be sure their reasoning is made clear. The legislation authorizing the bailout says the Treasury secretary must provide "a justification of why the extension is necessary to assist American families and stabilize financial markets, as well as the expected cost."

As the rescue moves into a new phase, a Treasury Department program to support money-market mutual funds, put in place during the dark days of the financial crisis last fall, is scheduled to expire Sept. 18, and Geithner will not move to extend it, he said Thursday. And the Federal Deposit Insurance Corp. is weighing how to wind down its program to guarantee bank debt, which was a critical support to banks last fall but has become less widely tapped.

The Treasury is beginning the same delicate process the Federal Reserve has already started: trying to pull back from the government's extraordinary involvement in the private sector while not moving so fast as to reignite a crisis.

"Our policies have been sufficiently successful that we can begin planning to reduce the government's direct involvement in the financial sector, but we must move cautiously or risk a relapse," said a Treasury document given to reporters Thursday.

About $365 billion of the bailout has been disbursed for a range of programs, and $70 billion has been returned to the Treasury. The Treasury has also made $12 billion in returns on its investments, and the department expects $50 billion or so more to be returned in the coming months. The administration's calculations do not include potential losses on some of the largest investments, such as those in Citigroup and American International Group.

The administration is weighing what to do with the remaining funds and expects to roll out plans this fall. None of these initiatives, however, is expected to be as expensive as the emergency steps taken last year to save big financial companies, administration officials said. One of the government's priorities is a program to support small-business lending. Though this effort was announced in February, it's taken Treasury officials months to resolve several nettlesome issues. Some top administration officials have been wary of a separate idea of using bailout funds to expand an existing Small Business Administration program to spur lending to businesses.

The administration is also developing an initiative to inject capital into community banks, which have played a crucial role in lending for commercial real estate, according to sources familiar with the planning. But many of those banks, by virtue of their size and lack of diversified business operations, are at greater risk of failure than their larger counterparts. That means a greater chance the government could lose its investment.

The Treasury is also moving forward with a long-delayed program to buy troubled assets from banks, an initiative announced in February. This effort has become less urgent after major banks succeeded in raising private capital this spring. But Treasury officials say the program could still be important in preventing a renewed crisis.

At the oversight hearing Thursday, the tone was more polite than at some of Geithner's previous Capitol Hill appearances. Members of the panel agreed that progress had been made in repairing the financial system. Many focused their questions on understanding the strengths and weaknesses of different rescue programs.

As evidence of the federal rescue efforts' progress, the Treasury pointed to lower rates for businesses and consumers -- the rate on a 30-year, fixed-rate mortgage has dropped 0.75 percentage points in the past year, and rates for auto loans are down six percentage points. Corporate borrowing costs are down 1.8 percentage points.

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"Lessons to Be Learned One Year After Lehman Brothers Collapse Roiled the World: Then and Now: A Year After the Financial Crisis Began"
By MATTHEW JAFFE, ABC News, September 14, 2009 —

On the morning of Saturday, Sept. 13, 2008, Treasury Department official Tony Fratto was talking to a friend at a major New York City investment firm. The offices at every big bank in the city, Fratto's friend told him, were packed with staffers trying to figure out their firms' counterparty risk to Lehman Brothers.

"To me, that was just jaw-dropping," Fratto said.

The legendary investment bank had been teetering on the brink of collapse for months. To think that banks were only now scrambling to assess their vulnerabilities to Lehman was, Fratto felt, "staggering."

Two days later, on Sept. 15, Lehman went bankrupt. Just like that, the world had changed.

Lehman's failure rocked the financial system to its core, sending shockwaves around the world and sparking a global crisis that can still be felt today.

In his address to Congress last week, President Obama said confidently, "We have pulled this economy back from the brink."

On the eve of the one-year anniversary of Lehman's bankruptcy, a look at the past year provides insight into the current economic environment and hints at what lies ahead.

Politics
After Lehman Brothers collapsed, the financial system fell into a state of fear and panic.

"Over the course of 20 years, the financial system had become bigger and much more risk-loving in a way," said Simon Johnson, a professor at MIT and senior fellow at the Peterson Institute. "Sept. 15 is when we woke up to the dangers."

With the system in shambles, the economy started its descent into the deepest recession since the Great Depression.

"It was an intense environment," Fratto recalled. "We were dealing with a whole series of crises ... investment banks collapsing, the takeover of [mortgage giants] Fannie Mae and Freddie Mac, money markets freezing up, auto companies collapsing, the AIG problem.

"The world had in fact changed," he said. "There were things happening that no one could anticipate and no one knew what the next unintended consequence was going to be."

The Bush administration was faced with a choice between letting major firms like Lehman collapse or rescuing the financial system.

If the situation in mid-September had continued to deteriorate, "You would have seen a collapse of the global financial system," Fratto recalled. "That would have been absolutely catastrophic."

The government chose to bail out the financial system, a move made more difficult in the midst of last year's presidential elections -- "the perfect storm," Fratto called it.

Weeks after Lehman failed, Congress passed the $700 billion Troubled Asset Relief Program to rescue the financial system.

"I think it's one of the great achievements of all time that we were able to get Congress to understand the problem and to agree to pass that legislation because in my opinion, there has never been a more reviled piece of legislation to make it through the Congress than the financial rescue legislation. Nothing has ever been less popular and more urgently needed, and in retrospect, it worked."

But some analysts, such as Jim Paulsen, chief investment strategist for Wells Capital Management, contend that the government's sounding the alarm bells only made matters worse.

"This crisis was made far worse than it needed to be because our leadership fostered the environment of fear rather than trying to extinguish it," Paulsen said.

"Everyone understands that if you yell fire in a crowded theater, even if there is no fire just saying that will create fundamental damage," Paulsen said. "But for some reason if we yell fire in the midst of an economic panic, we seem to think that it won't have any detrimental impact."

Since last fall, the $700 billion TARP has now morphed into a much larger bailout. The government has now spent trillions of dollars to bail out a slew of other companies on the brink of collapse, from automakers such as General Motors and Chrysler to insurance behemoth AIG.

Banks
Say the word "banks" today and the word "bailout" springs to mind. Since last October, the $700 billion bailout has become a lightning rod for criticism from lawmakers, economists and the general public.

Even the banks have sought to distance themselves. JPMorgan Chase CEO Jamie Dimon famously called participation in the $700 billion program "a scarlet letter" for banks.

However, almost 12 months after its inception, the bailout is now starting to pay off. At its peak, the Treasury and the Federal Reserve had invested more than $4 trillion in 28 government programs to stem the financial crisis, with an enormous amount of taxpayer dollars at stake. But now, not only has the financial system been stabilized, but taxpayers are seeing a return on their investment. From eight of the biggest banks that have fully repaid government loans, taxpayers have raked in a $4.1 billion profit, according to Linus Wilson, a professor at the University of Louisiana at Lafayette. The Fed's programs have recorded a $16 billion profit from loan programs to various financial firms.

But the profits come amid continued public outrage about big Wall Street firms receiving massive taxpayer bailouts yet still dishing out enormous bonuses.

In March, insurance giant AIG -- the recipient of around $180 billion in government aid -- incited a national furor by paying out $165 million in bonuses. The insurance company had company. Nine of the biggest banks -- receiving a total of $175 billion in taxpayer money -- paid out almost $33 billion in bonuses in 2008, according to a recent report by New York Attorney General Andrew Cuomo. It's a "heads I win, tails you lose" culture.

"How can it make sense that during the greatest crisis since the Great Depression these guys make so much money?" Johnson asked. "The answer is, it doesn't make sense. We have a perverse system of incentives in the financial system, the financial system has gotten too big and too dangerous, and it threatens our future prosperity even today.

"The lesson Wall Street has learned," he continued, "is they can sell their stock to the government at some relatively high price the next time there's a problem. This is going to encourage more crazy irresponsible risk-taking. A big chunk of the financial system has become a giant casino that you really don't need for a productive, functioning economy."

Talbott refuted the charge, stating, "The motivation of the number of companies that have failed and the number of CEOs that have lost their jobs and the number of Americans who have suffered is motivation enough to alter practices."

The Obama administration has taken measures to clamp down on executive compensation. In June, the President appointed pay czar Kenneth Feinberg to oversee executive compensation at seven firms receiving what they called "exceptional assistance," firms such as AIG, Bank of America, Citigroup, General Motors and Chrysler.

While the big banks appear to be bouncing bank, some of their smaller counterparts have not been so fortunate. Many banks of all sizes have seen their balance sheets -- and therefore their lending -- weighed down by soured real estate loans, but bigger banks have an easier time raising capital to overcome the bad loans. Smaller banks, meanwhile, collapse. Ninety-one banks have been shut down by federal regulators so far this year. In all of 2008, there were only 25 bank failures.

Jobs
There may have been no more damaging effect of the current recession than the fact that nearly 6 million Americans lost their jobs in the past year. Job losses, though, are expected to slow down in the coming months.

At the same time, the unemployment front is expected to worsen. Over the course of the last year, the nation's unemployment rate skyrocketed from 6.2 percent one year ago to 9.7 percent today, the highest rate in the last quarter of a century. Nearly 15 million people in this country are currently looking for jobs, but can't find any jobs.

Since unemployment is a lagging indicator, traditionally the last area to turn around after a recession, both government officials and economists expect the unemployment rate to climb into double digits in the coming months.

"Unemployment is high and could stay high for some period of time," Treasury Secretary Tim Geithner warned a congressional oversight hearing Thursday.

"The unemployment factor is the X factor in the recovery effort," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. "It is impossible for the economy to recover without bringing the jobless rate down. Everything flows from the unemployment factor -- that includes mortgages, credit cards, auto loans. It is almost impossible to pay any of your debts if you don't have a job."

Stocks
Millions of Americans invest their money in the stock market, but this past year those investments took a beating. Look no further than the country's most famous investor, Warren Buffett, the great Oracle of Omaha: On paper, Buffett lost an estimated $25 billion during 2008, and with it, his title of the world's richest man.

Overall, the Dow Jones average has fallen nearly 20 percent from last September. The index is more than 30 percent off its peak. But things are looking up. Since the spring, the bulls have been back in control on Wall Street. Stocks are up 47 percent since their lows of March 9.

"The stock market," Talbott said, "is reflecting the strengthening and improving economic conditions in the country."

Some more bearish analysts warn that the country's recession will not take a V shape, but rather a W shape, reflecting more ups and downs.

"The stock market has obviously realized correctly that the risk of a total collapse or a second Great Depression has gone away, but it doesn't mean that everything's going to go smoothly," Johnson cautioned. "We're building up vulnerabilities the way we did in 2004 or 2005."

Housing
One of the root causes of the current recession was the housing crisis. Banks dished out subprime loans to borrowers ill-equipped to take on the burden of homeownership. Everything was predicated on housing values continuing to climb. But in the past year, home values have dropped more than 15 percent. Many homeowners found themselves "underwater," owing more money on their houses than the houses were worth. Foreclosures have soared to record levels. In July, the nation saw a record 360,149 foreclosure filings as the first wave of foreclosures, subprime borrowers, ended and a second wave, newly unemployed homeowners, began. Credit Suisse recently forecast that more than 8 million mortgages will go into foreclosure in the next four years.

To make matters worse, the Obama administration's mortgage modification has struggled to gain traction. As of the end of August, banks had modified loans for only 12 percent of the nearly 3 million eligible homeowners. The Senate's second-most-powerful Democrat, Dick Durbin, called the program "a waste of time" and said its approach had "failed miserably."

However, on the positive side, the fall in home prices has waned, while home sales have increased. In July, there were 571,000 total home sales.

"We're definitely at the end of the beginning and we're somewhere toward the beginning of the end," said Talbott. "There are a number of areas in the country where real estate prices continue to drop: California, Arizona, Las Vegas. In the rest of the country, we're seeing prices stabilize or even start to uptick."

Economic Growth
The broadest measure of the country's economy is gross domestic product. The nation's GDP plunged after last fall's near collapse of the financial system. But in recent months, the economic outlook has shown signs of improving, and government officials and economists believe we will see signs of positive growth in the months ahead. The nation's economy shrank by 2.7 percent during the third quarter of 2008, by 5.4 percent during the fourth quarter of 2008 and by 6.4 percent during the first quarter of 2009.

However, during the second quarter of this year, it shrank by only 1 percent. And 11 of the 12 Federal Reserve regions reported in the latest Fed Beige Book that economic conditions had improved or stabilized in recent weeks.

Still, there is cause for concern. Consumer spending accounts for more than two-thirds of all economic activity. The economy will not grow if consumers do not spend. Consumers will not spend if they do not have money. And consumers will not have money if they don't have jobs. During the current recession, consumers have tightened their purse strings, spending less money and saving more.

But, said Paulsen, as the fear and panic of last year disappears, consumers, just like investors and businesses, will become more optimistic and aggressive.

"The thing's that causing a recovery today is a reversal of the fear," Paulsen said. "People sold too many stocks; they've got to buy them back. People threw too many people out and purged too much inventory; they've got to rebuild that. People didn't buy cars for a year; now they have to buy them. In some regard the thing that made the crisis worse than it had to be -- fear -- is now the thing that's causing a recovery faster than people thought."

The Future
Despite recent improvements, the consensus forecast is that the country's economic recovery will take time. Numerous stumbling blocks stand in the way. Small businesses are the biggest creator of new jobs, but they are struggling to get loans from banks that have tightened up credit. Residential real estate might be showing some signs of improvement, but commercial real estate is seen by many as a huge problem in the near future.

Another issue is the soaring federal deficit. In August, the deficit hit a record $1.38 trillion with one month still to go in the fiscal year. Increased government spending to stop the recession and financial crisis combined with lower government tax revenues have taken a toll on federal coffers. The rising debt has drawn the ire of fiscal conservatives, who caution that future generations could be saddled with unmanageable burdens. It has also increased concerns among key foreign holders of U.S. government debt, such as China.

Johnson stated that the country will face another crisis in the next decade or so because the administration has not done enough to institute sweeping financial regulatory reform measures.

"There are no steps being taken to really solve the fundamental problems of the financial system," he said. "Because of that, I think we'll have another big crisis sometime soon. I don't know if soon is three years, five years or eight years, but it's going to be soon."

The administration, noting that a crisis is a terrible thing to waste, has unveiled an array of proposals currently making their way through Congress. The proposals include a regulator to oversee systemic risks to the economy, a resolution authority to wind down massive, failing companies and a consumer protection agency. But these measures have taken a back seat to health care reform in recent months, prompting skeptics to voice concerns.

"The proposals that they're considering are very weak," blasted Johnson.

Even while touting the progress made since last year's meltdown, including financial reform measures, administration officials such as Geithner have voiced caution about the country's future prospects.

At a CNBC town hall event last week, Geithner said,"If you look at any measure of basic health of the financial system, things are dramatically better today than they were, but we're not there yet."

Some things will never go back to the way they were before. One year ago this month, General Motors celebrated its 100th birthday. Today, that company has gone bust.

Now, in a sign of the times of the past year, a new government-owned General Motors has taken its place.

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"POLL: Deep Damage From Economic Crash One Year On - ABC News-Washington Post Poll: 41 Percent Report a Household Pay Cut"
ANALYSIS By GARY LANGER, ABC News, September 15, 2009 —

A year after the collapse of Lehman Brothers signaled the start of the economic crisis, Americans remain badly bruised, reporting widespread and continued financial woes, significant levels of personal stress and skepticism that lasting reforms are being put in place.

A remarkable 41 percent say that in the last year someone in their household has had their pay or work hours cut. Twenty-seven percent -- one in four -- say a layoff or the loss of a job has hit their home. The total with either a pay cut or job loss is 47 percent, nearly half the country.

Sixty-five percent have been hurt financially; one in three, hurt "a great deal."

And it's a country still on tenterhooks. Fifty-three percent are concerned about a pay cut in the months ahead, and nearly as many, 46 percent, worry about a layoff hitting their household. Those levels of anxiety are unchanged since February, despite reports the recession may have bottomed out.

EFFECTS One result is stress: A majority of Americans, 55 percent, say the current economic situation is a cause of stress in their lives, down a bit from 61 percent early last spring but still a large number. One in three call it "serious" stress.

That soars, naturally, among people who've had a job loss or pay cut in the household. In this group 72 percent report stress, 47 percent, "serious stress." And stress is about as high among those who are worried about a job loss or pay cut in the months ahead.

One of the reasons for stress cuts to the current health care debate. Among people who report a job loss or layoff in the past year, 26 percent -- one in four -- say they don't have health insurance coverage. Among those who report no job losses, far fewer lack coverage, 9 percent.

Another effect is disaffection at the political and policy levels. Just 49 percent of Americans express confidence the federal government is putting measures in place that will make another financial crisis less likely in the future; a mere 10 percent are "very" confident this is happening.

Politics and the Economy
Industry self-regulation fares even worse: Only 41 percent say they're confident the nation's financial institutions themselves will change their business practices to make another meltdown less likely. Fifty-eight percent, instead, think not.
Given their own experience -- and again despite suggestions by economists that the bottom's arrived -- just 32 percent believe the economic stimulus program has improved the economy, and just one in 10 say it's helped "a great deal." Add in those who think the stimulus hasn't helped yet but will in the future, and positive assessments total a tepid 52 percent, no better now than in June, and lower than in April.

POLITICS There are political consequences. Just 51 percent approve of the way President Obama's handling the economy, down from 60 percent a month after he took office; 46 percent now disapprove. And more "strongly" disapprove, 33 percent, than strongly approve, 28 percent.

Obama still leads the Republicans in Congress in trust to handle the economy but by a much-diminished 48-37 percent margin. That's contracted from 61-24 percent in April, which at the time was a record for an incumbent president over the opposition party in polls dating to 1991.

Nonetheless, Obama does escape substantial direct blame for the country's economic condition. Just 27 percent blame his administration for "not doing enough to turn the economy around," while 71 percent don't. Sixty-five percent, by contrast, blame the Bush administration "for inadequate regulation of the financial industry."

The level of discontent's also evident in continued measurements of economic attitudes in the weekly ABC News survey of consumer sentiment. Last week a mere 8 percent of Americans said the economy was in good shape, 30 points below the 23-year average; 25 percent called it a good time to spend money, 12 points below average; and 45 percent said their own finances are in good shape, also 12 points below average. Fewer than half of Americans have rated their own finances positively steadily for 17 weeks, and in all but three weeks this year.

Democrats, Republicans and Economic Stress
GROUPS Views on economic policy and politics are highly partisan, with Democrats far more sanguine than Republicans and independents alike. Seventy-one percent of Democrats, for instance, think the government is taking steps to make the country less vulnerable to another financial crisis. Just 41 percent of independents and 36 percent of Republicans agree.

Financial damage from the recession, though, is nonpartisan. Anywhere from 61 to 68 percent of Democrats, Republicans and independents alike say they've been hurt.

Just short of half of Democrats, rising to 57 percent of independents and 59 percent of Republicans, report personal stress. In other groups, financial stress is notably lower among seniors (38 percent report stress) than among others (59 percent). It's somewhat higher among lower-income adults and women than among men and the better off.

There are differences among groups, as well, in the experience of job losses. Young people are hardest hit: Among those under 30 years old, 42 percent report a layoff or job loss in their household; that falls to 23 percent of those 30 and over. Household job losses also are higher among less-educated and lower-income Americans -- that is, those who least can afford it.

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"FDIC Packages Loans From Failed Banks: Officials Ink First Deal Under New Plan"
By Binyamin Appelbaum, Washington Post Staff Writer, September 17, 2009

The Federal Deposit Insurance Corp. launched a new program Wednesday to subsidize investor purchases of loans that the agency has acquired from failed banks, as it tries to attract more bids and higher prices for its rapidly expanding collection of troubled assets.

The long-awaited program was announced earlier this year as a way to help banks that remained in business get rid of their soured loans, but a lack of interest from banks led the FDIC to focus on its own holdings instead.

The agency said Wednesday that it would form a partnership with a Texas company, Residential Credit Solutions, to take ownership of mortgage loans originally worth $1.3 billion. The company, which will manage the partnership, will pay the FDIC $64.2 million for a half-share of any profits as the loans are repaid or sold.

An FDIC official said a second deal would soon follow, and that he expected others before the end of the year.

The official said that the agency continued to believe that the program could help banks and that the agency in part was moving ahead so that it would be ready if the industry took a turn for the worse.

"We'd be ready to apply this process either on failed bank assets or on open banks," said the official, who conducted a briefing for the media on the condition of anonymity.

The FDIC repays depositors in failed banks and then seeks to recoup as much money as possible from the wreckage. Historically it has relied on the basic approach of immediately selling everything it can to another bank, but 92 failures so far this year have started to sate the appetite of eligible buyers. Increasingly the FDIC has sweetened the deal by guaranteeing to limit any potential losses, but even that sometimes is not enough, leaving the agency with a growing pile of assets that must be sold.

The FDIC said that 12 groups placed bids for the mortgage portfolio, which comes from Franklin Bank, a Houston company that failed in November. An executive with a group that placed an unsuccessful bid said that the FDIC had offered a particularly attractive portfolio in this first auction. Roughly 70 percent of the mortgages are still being paid on time.

An FDIC official said the portfolio sold Wednesday also was chosen because the loans resembled those held by many banks, creating a meaningful dry run for any revival of the program's original focus on helping the industry sell troubled assets.

The winner, Residential Credit Solutions, is a Fort Worth firm that specializes in working with borrowers who have fallen behind on their payments. Under the terms of the deal, the company agreed to modify the mortgages of borrowers who meet federal eligibility standards.

The FDIC will make money on the deal in three ways. First, it plans to sell a note to investors worth $727.7 million, plus interest, against the value of the loans held by the partnership with RCS. The money the partnership collects on the mortgages that it holds will first be used to repay that note.

Second, the FDIC will collect $62.4 million from RCS.

Finally, the FDIC gets to keep the rest of the profits after the note and RCS are paid.

The FDIC originally projected up to a $1.6 billion loss on cleaning up after the failure of Franklin Bank, in part because it expected to recover 50 percent of the value of the loan portfolio sold Wednesday. The agency says the new program should allow it to recover 71 percent of the value. Officials said they did not have an updated estimate of the loss.

There are risks, however. The FDIC will guarantee the value of the note sold to investors. It also plans to match the RCS investment in the partnership. If the value of the loans falls below expectations, the FDIC could lose some or all of its stake.

The government has announced a series of efforts to help banks clear away troubled loans, including the Bush administration's original $700 billion financial rescue program and the Obama administration's idea for investment partnerships.

Administration officials say the need for such purchases has faded because banks have been able to raise new capital from investors.

But the Congressional Oversight Panel, which monitors the federal bailout efforts, warned in a report last month that many smaller banks were still overwhelmed by troubled assets, and it urged the Treasury to launch some kind of program to help banks sell those assets.

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"Facts and the Financial Crisis"
The New York Times, Editorial, September 20, 2009

The Financial Crisis Inquiry Commission, created by Congress to examine the causes of the crisis, held its first public meeting last week. In his opening remarks, the chairman, Phil Angelides, a former California state treasurer, likened the group’s potential impact to that of the Pecora hearings in the 1930s, which examined the stock market crash of 1929 and led to transformational changes in banking, investing and financial regulation.

And yet, last week’s meeting was oddly inauspicious, feeding doubts about the commission’s ability to realize that potential.

For starters, the meeting was a long time coming, and thin on substance. It has been four months since Congress passed a law authorizing the commission and two months since lawmakers selected its 10 commissioners — six chosen by the Democratic leadership and four by the Republican leadership.

Just days before the meeting, Mr. Angelides announced the hiring of the commission’s executive director, Thomas Greene, a chief assistant attorney general in California. Mr. Greene has performed ably in various cases, including those involving antitrust issues against Microsoft and civil prosecutions of Enron. But he will need to hire tough Wall Street experts to assist him. He may also find himself hobbled by restraints on his subpoena power, because the commission rules, written by Congress, require that Democrats and Republicans on the commission agree before subpoenas can be issued.

The meeting itself was mainly prepared statements from commission members, describing the group’s mission and expressing their commitment to a full investigation. In their more enlightening moments, some of the commissioners previewed specific concerns to pursue — like the role in the crisis of derivatives, of Fannie Mae and other too-big-to-fail institutions, and of the Federal Reserve and other regulators.

But the real work — gathering documents and taking testimony from financial executives and government officials — will not start before November. Public hearings are not expected until December. A final report is due to Congress on Dec. 15, 2010.

Is that slow start an early sign of drift? Does it reflect the apparent ambivalence of lawmakers to rein in the banks?

To dispel such questions, the commission will have to start now to mount a rigorous inquiry that explains both the underlying and immediate causes of the crisis. Stretching back decades, which beliefs and policies — especially deregulatory efforts — allowed for the tremendous growth of finance as a share of the economy, and for the increasing reliance on debt as the engine of economic growth?

Providing historical context will be easy compared with investigating more recent events, because near-term events involve people still in power. In the run-up to the crisis, what did regulators, particularly the Federal Reserve, know and do in response to unconstrained lending? What were their thoughts about the way banks and investors worldwide increasingly disregarded risk?

Publicly, they did not act to curb the excesses. But internally, was there contrary analysis or dissent? Were there chances to take another course that we may learn from now in hindsight?

Answers to these questions are in files that are not public and in the heads of the people in positions of responsibility at the time. The commission must be aggressive in its pursuit of documents and unflinching in taking testimony at even the highest levels of government and business.

The commission must also trace the facts and circumstances that connect the implosions of Bear Stearns, Fannie Mae, Lehman Brothers and the American International Group. What were the terms of the derivatives contracts between A.I.G. and its counterparties, like Goldman Sachs, which received $12.9 billion via the A.I.G. bailout? What was revealed in the meetings that resulted in the A.I.G. bailout and in the subsequent $700 billion taxpayer-provided lifeline for financial firms? Why was Citigroup, a failing institution last year, treated more favorably than A.I.G.? And to what extent have the survivors of the crash, like Goldman and JPMorgan Chase, benefited from cheap financing, loan guarantees and other government interventions?

In the months since the inquiry commission was created last May, other significant efforts have been undertaken to get to the bottom of the financial crisis.

Judge Jed Rakoff of the United States District Court in New York has demanded that Bank of America and the Securities and Exchange Commission be more forthcoming about the identities of bank officials who may have withheld from shareholders important information relating to BofA’s purchase of Merrill Lynch at the height of the financial crisis.

Bloomberg News has filed a Freedom of Information suit to learn the identities of banks that took emergency funding from the Fed, the amounts and the collateral they offered. The judge in that case has told the Fed to release the names; the Fed has until the end of September to appeal the decision. The Fed should not appeal. The truth will come out, and in the end, the nation will be better for it.

The commission can take its cue from those efforts. Probing questions, asked in order to advance the public interest and with a goal of ever greater transparency, are what Americans have a right to expect — and what the commission, if it so chooses, can deliver.

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Taxpayers are "extremely unlikely" to recoup the $700 billion the government spent to bail out the nation's banks and other institutions, special inspector general Neil Barofksy says. (ABC News)
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"Critics: TARP Has Failed to Halt Foreclosures or Job Losses - Watchdog Warns Taxpayer Won't Make Back $700B TARP Investment"
By MATTHEW JAFFE, ABC News, September 24, 2009 —

Nearly one year after Congress approved the $700 billion financial bailout, it was attacked by Republicans and fiscal watchdogs as an expensive failure that has not stopped home foreclosures or jobs from disappearing.

"This has been a failed program," Sen. Mike Johanns, R-Neb., said at today's Senate Banking committee hearing. "The very promises made to the taxpayer of what was going to happen with this money, in my judgment, have not been kept."

Johanns cited what he called "very damning" testimony by the bailout's Special Inspector General Neil Barofsky that said it is "extremely unlikely" that American taxpayers will get a full return on their $700 billion investment. Moreover, Barofsky observed, the Troubled Asset Relief Program has failed to increase bank lending, stop rising unemployment, or stem the rash of home foreclosures.

"In the last year," said the Congressional Oversight Panel's Elizabeth Warren, "the apprehension that pervaded this country has turned into something else: frustration and anger. Today's fragile stability has come at an enormous cost to the American people." Barofsky noted that "a lot of this frustration and cynicism and anger comes out of the lack of transparency in the TARP program." This, he said, was his group's "biggest frustration" with the Treasury Department and "one of the great failures of the past year."

Lawmakers on both sides of the aisle today felt that frustration first-hand. Sen. Bob Corker, R-Tenn., denounced as useless and unclear the testimony from Treasury official Herb Allison, who oversees the bailout program.

"This hearing has not been very useful," Corker told Allison about 45 minutes into the witness' testimony. "Maybe that's just the way it is, but I look forward to the next panel."

The panel's chairman, Sen. Chris Dodd, D-Conn., then noted sarcastically, "But the questions are valuable."

"I associate myself with Sen. Corker's thoughts," said Sen. Judd Gregg, R-N.H.

Allison attempted to beat back the criticisms by arguing that the program had helped avert the collapse of the financial system last fall. It should not, he said, be viewed only through the prism of what financial returns are eventually seen by American taxpayers.

"It's too early to say how this is going to turn out," he said. "Some areas will probably see better performance than others, but we also have to look at the overall impact of the financial stability program on the American economy, on the banking system, and on the American public in general. I would shudder to think what the situation would be if the Congress and the administrations hadn't taken strong actions to deal with this crisis by, for example, creating the TARP program."

Dodd echoed that assessment, stating that Congress made the right move in enacting the program last October.

"I think we did the right thing and I think history will prove that to be the case," he said.

Watchdog Gene Dodaro of the Government Accountability Office offered a more mixed review.

"It's had some positive impact on the credit markets, but a lot of the programs have very uncertain outcomes at this particular point in time," he said.

Even the recent improvements of the banks - for many an acknowledged success of the program - were questioned today. Warren said the bailout's original purpose - to buy up the toxic assets weighing down banks' balance sheets - was never fulfilled.

"The toxic assets remain on the books of the banks," she said. "The commercial real estate mortgages are a coming crisis. Small banks are continuing to fail. We were talking a year ago about too big to fail. We are now facing an industry that's more concentrated than it was a year ago and too big to fail is up on us now in a much larger sense."

"Until we get down to dirt, to something that's solid, that we can put our feet on, our financial institutions are standing in a secure place, we can't rebuild and know that we are safely past this crisis," Warren said.

"The question about how we're going to get these toxic assets out of here at a time when the real estate mortgage market is still in trouble and the commercial real estate mortgage market may be getting into more and more trouble I'm not hearing the plan," she said.

Another contentious issue today was whether or not Treasury Secretary Tim Geithner will extend the program until October 2010. At one point, Allison appeared to indicate that the bailout program would likely be extended.

"We still have a long way to go before true economic recovery takes hold," he warned, before later emphasizing on numerous occasions that Geithner has not yet made a decision.

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"Hodes, Shea-Porter Against TARP Extension: Lawmakers Say They're Troubled By Lack Of Oversight"
WMUR.com - September 25, 2009

CONCORD, N.H. -- New Hampshire's two House members have joined other members of Congress in urging the Treasury secretary to not extend the bank bailout fund, saying they are troubled by a lack of oversight.

The rescue plan, known as the Troubled Asset Relief Program, is credited in part with pulling back the financial sector from near collapse. But its infusions of money into huge banks, the giant insurer AIG and the auto industry have been unpopular with the public and in Congress, including Reps. Paul Hodes and Carol Shea-Porter.

In a letter to Treasury Secretary Timothy Geithner, they said billions of dollars have been poorly spent, used to support bonuses to failed executives, or simply gone to uses that banks cannot account for.

The Treasury Department has the option of extending the program to October 2010.

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"Bailing Out a Bailer-Outer: Lessons of the FDIC's predicament"
The Washington Post, Editorial, Saturday, October 3, 2009

AMERICANS have faced scary scenarios during this financial crisis but not, thankfully, the ultimate catastrophe: a run on the banks. Even as bank after bank failed, or came close, depositors remained calmly at home, safe in the knowledge that they would ultimately get their cash. For this, credit the Federal Deposit Insurance Corp., established during the Great Depression to prevent a repetition of the bank runs in that miserable era.

So it is disconcerting to learn that the FDIC has, for all intents and purposes, run out of cash. Buffeted by the greatest number of financial institution failures since the savings and loan crisis of the 1980s and 1990s -- 97 this year -- the FDIC has run through $50 billion in reserves. It projects another $50 billion in losses before the wave crests sometime next year. Consequently, the FDIC has turned to banks themselves for a bailout, seeking $45 billion in accelerated insurance contributions that would otherwise have fallen due over the next three years.

The plan enables the FDIC to reassure taxpayers that it is not hitting them up directly, which it could have done by tapping its line of credit with the Treasury Department. To be sure, some of the biggest projected contributors to the FDIC, such as Bank of America and Citigroup, are themselves being propped up with Treasury funds. Otherwise, they would have crashed and quite possibly brought the FDIC down with them. Also, if things get even worse than the FDIC assumes, it can and probably will turn to the Treasury anyway. One way or another, the U.S. government stands behind the banks and their depositors, up to $250,000 per account.

Now is hardly the time to rethink the FDIC from the ground up. But its parlous situation is a reminder that, for all its success, the institution must adapt to modern circumstances. The FDIC probably should hold bigger reserves; it has addressed that by permanently raising the insurance premiums for banks starting in 2011. One cause of the current crisis was moral hazard: Assuming government would ride to their rescue, investors and managers took too many risks. The FDIC, in its own small and mostly necessary way, contributes to moral hazard by building a safety net under the banks. As part of a regulatory overhaul, Congress should consider a proposal by Gary Stern, the former president of the Minneapolis Federal Reserve: Guarantee the largest depositors -- companies, foundations, government agencies and wealthy individuals -- for slightly less than the amount small depositors are guaranteed. Imposing a modest but meaningful "haircut" on these relatively sophisticated parties would not drive them away from banks; rather, it would give them more incentive to police the soundness of institutions where they park their cash. In that job, government can use all the help it can get.

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"Vote expected next week on tax credit extension"
By Bloomberg News, October 31, 2009

WASHINGTON - Congress could approve extensions of an $8,000 first-time home buyers’ tax credit and unemployment benefits as soon as Tuesday, Senate Majority Leader Harry Reid said.

Reid, a Nevada Democrat, said yesterday he has scheduled a vote late on Monday to bring debate on the issues to a close and clear the way for approval by the Senate, followed by the House.

“The House said that they would accept that and that could be done as early as’’ Tuesday, Reid said on the Senate floor. That “would be a great relief,’’ he said.

The legislation has been delayed by Republican demands for votes on several amendments, including one to ensure the end the Treasury Department’s Troubled Asset Relief Program by the end of the year. Monday’s procedural move, if approved, would enable Democrats to ignore those demands and put the measure to a vote.

Democrats announced plans earlier this week to extend the home buyers’ tax credit, scheduled to expire at the end of November, until April 30. The plan also would let more people qualify for the break.

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“Certainly, our industry is responsible for things. We’re a leader in our industry, and we participated in things that were clearly wrong and we have reasons to regret and apologize for.”

—Lloyd Blankfein, chairman and chief executive, Goldman Sachs, Nov. 17, 2009.


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"Goldman’s Non-Apology"
The New York Times (Online), Editorial, November 22, 2009

We’ll give this to Mr. Blankfein: On some level, he seems to understand that an apology is in order. But his remarks do not come close to an apology. Even if he had said, “we’re sorry,” it would have been hollow since he never actually said what he was sorry for (“things” doesn’t cut it) or to whom he was apologizing.

Outside Wall Street, those blanks are not so hard to fill in. It is widely and correctly understood that Wall Street, with Goldman as a leader and with regulators in thrall, helped to inflate and profited from a credit bubble that burst and cost tens of millions of Americans their jobs, incomes, savings and home equity. American taxpayers continue to stand behind the bailouts and other government interventions that have stabilized the financial system, including Goldman, enabling the firm to post blowout profits in 2009 and to set aside $16.7 billion for bonuses so far this year.

Goldman does not see it that way. It says it never really needed government aid to survive the financial crisis. In that telling, taxpayer dollars have not helped to generate its post-crash profits, and anger over bonuses is jealousy over the good fortune of others.

That is absurd. Goldman has repaid its initial $10 billion bailout allotment, but that is only a sliver of its taxpayer support. The firm was paid $12.9 billion, for example, in the bailout of American International Group, and a report by the bailout’s inspector general refutes Goldman’s claim that it did not need the money. Perhaps the biggest continuing prop is that the government clearly considers Goldman too big to fail, which means that taxpayers are on the hook if Goldman faces the abyss again.

On the day of Mr. Blankfein’s non-apology, Goldman pledged $500 million over five years — crumbs from its table — to help 10,000 small businesses. It is hard to take seriously Goldman’s claim that the program was not motivated by its public relations problems. The money will be welcomed by the recipients, but if Goldman wants to make a meaningful contribution, it would have to be in the billions and aimed more directly at taxpayers.

So, here’s a thought: A multibillion-dollar gift to the federal Bureau of the Public Debt, which accepts tax-deductible donations to reduce the national debt. The donation can come from the bonuses; that way, it would not harm shareholders, because they only get their cut after the bonuses are paid. Goldman’s tax savings from the donation could help finance the small-business initiative.

And a contribution might help Goldman ward off the alternative: serious calls for a windfall tax on bonuses, which would be justified since the profits they are based on are in large part the result of government efforts. One way or another, the taxpayers will demand their due, and one way or another, they just might get it.

Checks can be made out to the Bureau of the Public Debt and sent to Bureau of the Public Debt, Dept. G, P.O. Box 2188, Parkersburg, W.Va., 26106-2188.

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"The 'Volcker Rule' could clarify roles and risks in the financial system"
The Washington Post, Editorial, A12; January 23, 2010

FOR MONTHS, former Federal Reserve chairman Paul Volcker has been advocating a far-reaching repair plan for Wall Street: to re-draw the line between commercial and investment banking. Since the repeal of the New Deal-era Glass-Steagall Act in 2000 (and even, to a large extent, before that) deposit-taking institutions have been allowed to make money not only the old-fashioned way -- lending it out at interest -- but also by running hedge funds and other speculative means. Mr. Volcker argued that, since their deposits are federally insured, the big banks were enabled to take bigger risks for which the taxpayers would ultimately take the hit. He insisted that this incentive structure was not only unfair but also at the root of the current crisis. Correcting it, he argued, is the key to preventing future crises.

For months, Mr. Volcker's ideas made no impact on Obama administration policy. Both the administration's regulatory reform proposal and the House bill based on it took a different approach to "too big to fail": namely to raise capital requirements, set up a prospective government bailout mechanism and empower systemic risk monitors. Then Republican Scott Brown won the Senate race in Massachusetts. Two days later, Mr. Obama embraced both Mr. Volcker and his concept, and he even christened it "the Volcker Rule." No doubt, the embattled president likes the populist resonance of a plan to "break up" Wall Street. But what about the policy merits?

In hindsight, the U.S. financial sector systematically underpriced risk of all kinds. One reason for this -- though hardly the only one -- was the perception, rooted in reality, that certain enterprises were "too big to fail." Under the Volcker Rule, only less-risky commercial banks would in theory enjoy that status. Investment banks, hedge funds and private equity firms would be on their own, subject to market discipline in both good times and bad. Voilà: clear signals to the market.

It's an attractive concept. Alas, the hastily unveiled administration proposal was light on detail. How, exactly, to draw the line between financial operations safe enough for commercial banks and those that are not safe enough? Will a U.S. Volcker Rule drive more banking business to lightly regulated financial centers in other countries? It is not clear that the Volcker Rule would have prevented the current financial crisis, which began with the collapse of a pure investment bank, Lehman Brothers -- which many now say should have been rescued. Two non-commercial banks, Bear Stearns and AIG, did get rescued; their interconnection with other institutions, not size alone, frightened the government into saving them.

The buildup of government-backed risk in Fannie Mae and Freddie Mac -- both based in Washington, not Manhattan -- arguably did the most to inflate the mortgage bubble in the first place. Would the president's proposal apply to them?

Still, Mr. Volcker is right that, more than almost anything else, the financial system needs clarity as to the roles and permissible risk profiles of its component institutions. There is a fighting chance that the Volcker Rule's ambiguities can be ironed out in the debate to come. The president has injected a useful element into the debate. If we have Scott Brown to thank for that, so be it.

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"Bailout Outrage: Will Good News Temper Voters' Anger?: Recovery Has Been Slow; Bailout Could Affect November's Mid-Term Elections"
By MATTHEW JAFFE, ABC News, February 13, 2010

The government's $700 billion rescue of the financial system in 2008 was as popular as "bailing out rattlesnakes," Vice President Joe Biden said Friday in Seattle. "In fact," he quipped, "I like some of the snakes better."

When all is said and done, the program could go down in history as one of the most unpopular government initiatives ever. The Obama administration, which continued what the Bush administration started, is well aware of the program's pitfalls in the eyes of the public. Just last month President Obama dubbed the program "deeply offensive", but he still defended it as "a necessary thing."

On Wall Street today the big banks and financial markets are booming once again. On Main Street, though, where 8.4 million jobs have been lost since the recession started in December of 2007, help has been slower to arrive. Many Americans still believe the bailout only helped save the people who caused the crisis in the first place, not the innocent folks who played no role in the meltdown but have suffered greatly because of it.

But a flurry of positive news about the program in recent weeks could help reduce bailout outrage and that, with mid-term elections approaching in November, could have far-reaching ramifications.

Earlier this week a watchdog group the same one that last year blasted the Obama administration for not getting the highest price possible for stock warrants sold back to banks exiting the program said the government was now raking in higher returns.

The Congressional Oversight Panel found that the Treasury Department had received 92 percent of full market value on the warrant sales, with total receipts from these sales expected to total $9.3 billion.

Taxpayers May Get All Their Money Back from Bailout

Moreover, the administration has proposed a fee on banks that if enacted by Congress would result in taxpayers not losing a single penny from the program. Under the proposal, about 50 of the nation's biggest banks with assets of $50 billion or more would pay a tax, a move that could recoup $90 billion back into government coffers.

"We want our money back and we're going to get it," said President Obama when he announced the proposed bank fee in January.

In a statement this week on the one-year anniversary of the administration's "Financial Stability Plan", Treasury Secretary Tim Geithner said that if Congress approves the measure, "Americans will not have to pay one cent" for the Troubled Asset Relief Program.

Compare that to the administration's budget from last February when the projected cost to the deficit of the government's financial rescue efforts was over $550 billion and it is clear that the situation today is brighter than it was just one year ago. Now the government projects the impact of these rescue efforts to be under $120 billion.

The Treasury has already recouped two-thirds of the bailout's investments in banks. Those investments, the agency says, have helped make $17 billion in income.

Some of the nation's biggest banks, such as Bank of America and Wells Fargo, have now received government approval to pay back their bailout money. Others, such as Goldman Sachs and JPMorgan Chase, had already been granted approval months ago.

"We are committed to repaying every penny of TARP and believe that TARP will continue to generate a profit for the taxpayer," Scott Talbott, chief lobbyist for the Financial Services Roundtable, told ABC News.

The federal officials responsible for the bailout's enactment have also enjoyed a positive few weeks. Federal Reserve chairman Ben Bernanke won Senate reconfirmation for a second term after overcoming some initial doubts among lawmakers on Capitol Hill.

Meanwhile, Geithner's predecessor at Treasury, Henry Paulson, used the release of his new book on the bailout, "On the Brink," to tout the successes of the government's rescue efforts.

"In terms of the actions we took, I have no doubt they helped us avoid disaster," Paulson said in a February 1 interview with "Good Morning America".

But despite such claims, many critics from Washington watchdogs to Capitol Hill lawmakers to Main Street citizens are still angry about the bailout.

"Many of TARP's stated goals&have simply not been met," said Neil Barofsky, the Special Inspector General for the TARP, in a Jan. 31 report to Congress.

Barofsky said consumers and businesses are still struggling to get loans, small businesses are still waiting for an aid program to start, homeowners are still grappling with record levels of foreclosures, and job seekers still face an unemployment rate close to 10 percent. To make matters worse, Barofsky warned, financial regulatory reform measures have failed to make headway on Capitol Hill. While a reform bill passed the House of Representatives late last year, the Senate measure has yet to even emerge from the Banking Committee.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky said.

Most Americans, meanwhile, still point the finger of blame for the meltdown squarely at the same banks that benefited from the bailout. In a Jan. 20 ABC News/Washington Post poll, 79 percent of Americans blamed the economic meltdown on "banks and other financial institutions for taking unnecessary risks." Nearly six in 10 said the banks shoulder a "great deal" of the blame.

"We are working hard to restore consumers' trust in the industry," said Talbott.

Whether the financial sector will manage that remains unclear. What is clear is that nearly a year and a half after the bailout's enactment in the fall of 2008, the controversy swirling around the program shows no sign of letting up. But if nothing else, recent developments may help boost the public's approval of the controversial program or at least quiet the criticism.

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"Financial Reform 101"
By PAUL KRUGMAN, Op-Ed Columnist, The New York Times, April 2, 2010

Let’s face it: Financial reform is a hard issue to follow. It’s not like health reform, which was fairly straightforward once you cut through the nonsense. Reasonable people can and do disagree about exactly what we should do to avert another banking crisis.

So here’s a brief guide to the debate — and an explanation of my own position.

Leave on one side those who don’t really want any reform at all, a group that includes most Republican members of Congress. Whatever such people may say, they will always find reasons to say no to any actual proposal to rein in runaway bankers.

Even among those who really do want reform, however, there’s a major debate about what’s really essential. One side — exemplified by Paul Volcker, the redoubtable former Federal Reserve chairman — sees limiting the size and scope of the biggest banks as the core issue in reform. The other side — a group that includes yours truly — disagrees, and argues that the important thing is to regulate what banks do, not how big they get.

It’s easy to see where concerns about banks that are “too big to fail” come from. In the face of financial crisis, the U.S. government provided cash and guarantees to financial institutions whose failure, it feared, might bring down the whole system. And the rescue operation was mainly focused on a handful of big players: A.I.G., Citigroup, Bank of America, and so on.

This rescue was necessary, but it put taxpayers on the hook for potentially large losses. And it also established a dangerous precedent: big financial institutions, we now know, will be bailed out in times of crisis. And this, it’s argued, will encourage even riskier behavior in the future, since executives at big banks will know that it’s heads they win, tails taxpayers lose.

The solution, say people like Mr. Volcker, is to break big financial institutions into units that aren’t too big to fail, making future bailouts unnecessary and restoring market discipline.

It’s a convincing-sounding argument, but I’m one of those people who doesn’t buy it.

Here’s how I see it. Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions. In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small — small enough that the Federal Reserve believed that it was O.K. to let them fail. As it turned out, the Fed was dead wrong: the wave of small-bank failures was a catastrophe for the wider economy.

The same would be true today. Breaking up big financial institutions wouldn’t prevent future crises, nor would it eliminate the need for bailouts when those crises happen. The next bailout wouldn’t be concentrated on a few big companies — but it would be a bailout all the same. I don’t have any love for financial giants, but I just don’t believe that breaking them up solves the key problem.

So what’s the alternative to breaking up big financial institutions? The answer, I’d argue, is to update and extend old-fashioned bank regulation.

After all, the U.S. banking system had a long period of stability after World War II, based on a combination of deposit insurance, which eliminated the threat of bank runs, and strict regulation of bank balance sheets, including both limits on risky lending and limits on leverage, the extent to which banks were allowed to finance investments with borrowed funds. And Canada — whose financial system is dominated by a handful of big banks, but which maintained effective regulation — has weathered the current crisis notably well.

What ended the era of U.S. stability was the rise of “shadow banking”: institutions that carried out banking functions but operated without a safety net and with minimal regulation. In particular, many businesses began parking their cash, not in bank deposits, but in “repo” — overnight loans to the likes of Lehman Brothers. Unfortunately, repo wasn’t protected and regulated like old-fashioned banking, so it was vulnerable to a pre-1930s-type crisis of confidence. And that, in a nutshell, is what went wrong in 2007-2008.

So why not update traditional regulation to encompass the shadow banks? We already have an implicit form of deposit insurance: It’s clear that creditors of shadow banks will be bailed out in time of crisis. What we need now are two things: (a) regulators need the authority to seize failing shadow banks, the way the Federal Deposit Insurance Corporation already has the authority to seize failing conventional banks, and (b) there have to be prudential limits on shadow banks, above all limits on their leverage.

Does the reform legislation currently on the table do what’s needed? Well, it’s a step in the right direction — but it’s not a big enough step. I’ll explain why in a future column.

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"More Banker Outrage: Protesters Plan Marches on Wall Street Banks: Activists, Union Members Will Take to the Streets Again, but Are They Having any Impact?"
By ALICE GOMSTYN and RACHEL HUMPHRIES, ABC News, April 9, 2010 —

Outrage over bonuses, bailouts and home foreclosures have prompted angry demonstrations at bank office buildings, bank conferences and even bankers' homes since the financial crisis began. With Wall Street reform proposals up for debate in Congress and bank shareholder meetings taking place later this month, protest organizers say they're getting ready to rally the troops again with several new demonstrations expected to draw thousands.

"There's something fundamentally wrong with an economic and political system that allows the big banks to rewrite all the rules to stay afloat while allowing entire communities to collapse in the wake of the disaster caused by Wall Street," Anna Burger, the secretary-treasurer of the Service Employees International Union, said on a conference call with reporters Thursday. "That's why we're escalating and expanding this campaign."

The SEIU, one of the most vocal critics of Wall Street and big U.S. banks, is part of a coalition of at least six groups -- including the AFL-CIO; the National People's Action, a racial and economic justice advocacy group; PICO National Network, a faith-based group; and North Carolina United Power, an organization of religious and community groups -- planning demonstrations across the country later this month.

Organizers are calling on banks to help people stay in their homes, offer more small business loans, stop offering financing to payday lenders and stop attempts to block financial reforms. They say they're targeting their demands at the country's biggest banks: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

The American Bankers Association, one of the banking industry's top lobbying groups, declined to comment on the planned protests. Last October, an ABA conference in Chicago drew 5,000 protesters, organizers say.

A spokeswoman for Bank of America, which will be the target of at least two demonstrations scheduled for later this month, said of the protesters: "While we understand their passion on the issue, we don't necessarily agree with some of their statements and approaches."

On Wall Street itself, news of the planned protests was met with disdain by some of the street's rank and file.

"I mean, there is a lot of excess on Wall Street, you know, with the bonuses, but there are people that deserve it," said Michael Maresca, an information technology employee at JPMorgan Chase. "People down here work very, very hard ... I think there's also a lot to blame outside of Wall Street, with the Federal Reserve, politicians, the Federal Reserve, all those guys that have been involved -- there's a lot of blame to go around, I think. It's directed at the wrong place."

Wall Street Workers Weary of Bank Protests
Alan Valdes, a trader with DMC Securities, said he didn't think bank protests help anyone and have kept people from taking advantage of a lucrative rebound in the stock market.

"We've still got problems, and we've still got a lot of headwinds ahead -- there's no question about it. But (for the market) to be up 75 percent in a year -- that's a great market," he said. "To keep bashing Wall Street, I think, is wrong. It sends the wrong message to the public ... With all this bashing that's going on, a lot of people, I think have stayed away from the market."

Jerry, an employee at a Wall Street law firm who did not want his last name used, said he didn't see the new protests accomplishing much.

"They protest down there all the time," he said, "but it's not going to do nothing."

How effective previous protests have been remains in question.

When it comes to changing public policy, behind-the-scenes moves, including lobbying politicians and bureaucrats , typically work better than "outsider tactics" like demonstrations, said Dean Lacy, a professor of government at Dartmouth College.

While much attention is paid to the massive amounts of cash that banks and lobbying groups pump into political campaigns, Lacy said lobbyists also have an advantage over grassroots protesters because they can make more targeted moves, such as urging a Congressional committee to block a specific provision in a bill or influencing an agency to change its enforcement of an existing policy.

"Protests tend to not have precise targets but seek broad-based change," Lacy said.

Single protests, he said, tend not to be effective. A series of demonstrations like those of the civil rights movement, however, can successfully draw media attention and raise public awareness, which may ultimately lead to policy changes, he said.

Bank protests thus far, he said, "have probably raised public awareness about executive pay and the bailouts of banks and other financial institutions."

Protests are planned for the last week of the month at the Wells Fargo shareholder meeting in San Francisco; at the Bank of America shareholders' meeting in Charlotte, N.C.; outside a Bank of America building in Kansas City; and on Wall Street. Next month, the groups will also converge on K Street in Washington D.C. to protest banks' lobbying of elected officials.

PR Campaign by JPMorgan's Dimon?
When asked about the expected protests at their bank buildings, both Wells Fargo and Bank of America representatives cited their banks' track records in addressing some of the issues raised by activisits.

A Wells Fargo spokeswoman said the bank recognizes that "Americans are demanding more from their financial institutions during these difficult economic times" and that it is "committed to serving the financial needs of businesses and individuals, keeping credit flowing, and working to help those in financial distress find solutions."

The bank, she said in an e-mail, provided $711 billion in loans and lines of credit last year.

A Bank of America spokeswoman said that BofA last year extended $758 billion in credit in both the consumer and commercial sectors, more than any other bank, and that it has invested more than $8 million in grants to tackle hunger and housing needs. Information about the Bank of America's work in these areas, she said, is available in its quarterly impact statement on the bank's Web site.

In Thursday's call, Burger singled out JPMorgan Chase CEO Jamie Dimon as "leading the PR campaign to rebrand Wall Street," noting that the bank spent $6.2 million on lobbying last year.

"The American people aren't buying Jamie's PR campaign," she said.

A JPMorgan Chase spokeswoman declined to comment.

JPMorgan Chase is known, along with Goldman Sachs, for avoiding many of the pitfalls of the financial crisis.

In his annual letter to shareholders earlier this month, Dimon said "punitive efforts" against banks hurts ordinary shareholders and that"vilify(ing) whole industries" denigrates "much of what made this country successful."

"When we reduce the debate over responsibility and regulation to simplistic and inaccurate notions, such as Main Street vs. Wall Street, big business vs. small business or big banks vs. small banks, we are indiscriminately blaming the good and the bad ? this is simply another form of ignorance and prejudice," Dimon wrote.

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"S.E.C. Accuses Goldman Sachs of Fraud on Mortgage Deals"
The New York Times, 4/16/2010

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a deal that helped investors capitalize on collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

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Hedge fund manger John Paulson. (Photo: Tim Sloan/AFP/Getty Images)
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"SEC charges Goldman Sachs with fraud"
By Colin Barr, senior writer, April 16, 2010

(Fortune) -- The Securities and Exchange Commission on Friday charged Wall Street's most gilded firm, Goldman Sachs, with defrauding investors in a sale of securities tied to subprime mortgages.

The SEC said it charged New York-based Goldman (GS, Fortune 500) and a vice president, Fabrice Tourre, for their failure to disclose conflicts in a 2007 sale of a so-called collateralized debt obligation. Investors in the CDO ultimately lost $1 billion, the SEC said.

The SEC's civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. -- run by John Paulson, who made billions of dollars betting on the subprime collapse -- to help select securities in the CDO.

Goldman didn't tell investors that Paulson was shorting the CDO, or betting its value would fall. When the CDO's value plunged within months of its issuance, Paulson walked off with $1 billion, the SEC said.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, director of the Division of Enforcement for the SEC.

A Goldman spokesman didn't immediately return a call seeking comment, but in a statement the bank said that "the SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

Goldman shares tumbled 13% following the midmorning announcement, wiping out $12 billion of shareholder value. Shares of Deutsche Bank (DB), another big player in the structured securities markets of the bubble era, slid 8%.

The shares of JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and other big banks declined between 3% and 5%, as investors all over Wall Street heard the footsteps of an apparently revitalized federal law enforcement apparatus.

"This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another," Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients Friday.

Khuzami said the case was the first brought by a new SEC division investigating the abuses of so-called structured products such as CDOs in the credit crisis. He said the investigation continues but declined to comment further.

"We continue to examine structured products that played a role in the financial crisis," Khuzami said in a phone call with reporters. "We are moving across the entire spectrum of products, entities and investors that might have been involved."

The SEC alleged that Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing the deal, known as Abacus 2007-AC1.

Khuzami said Paulson wasn't charged because, unlike Goldman, which sold the securities to investors, it didn't have a duty to fully disclose conflicts to other investors.

Paulson & Co. wasn't immediately available for comment.

A CDO is a financial instrument backed by pool of assets, typically loans or bonds. In this case, the instrument in question is a so-called synthetic CDO -- which is backed not by actual loans but by a portfolio of credit default swaps referencing residential mortgage-backed securities.

While many CDO deals performed poorly, particularly in the latter stages of the housing bubble, the Abacus CDO at the center of this case blew up particularly quickly.

Within six months of the deal's closing, 83% of the residential mortgage-backed securities in the portfolio had been downgraded, the SEC said. Within nine months, 99% had been downgraded.

Khuzami said the SEC is entitled to disgorgement of ill-gotten gains as well as penalties that will be considered "at the appropriate time."

But it's early yet to say whether Goldman will end up with any liability in the case, said Ron Geffner, a former SEC enforcement attorney who is now a partner with Sadis & Goldberg in New York.

He said the case would hinge on variables including the objectivity of the portfolio designer, what was communicated to investors, what fiduciary duties Goldman may have had and how sophisticated the investors were.

"There is some meat on the bone, but it's too early to determine guilt," he said.

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A BOSTON GLOBE EDITORIAL
"To avoid future bailouts, pass tougher rules now"
April 19, 2010

IF VOTERS ever had reason to seethe over the use of their money, it was in the fall of 2008, when Congress and the Bush administration had to shovel hundreds of billions of taxpayer dollars into financial companies undone by their own recklessness. In response, the Obama administration and Senate committees have been working on legislation to promote stability and avoid a repeat of the recent crisis.

And notwithstanding an unusually shameless disinformation campaign by Republican leaders, the outlines of the reform plan are encouraging.

The final legislation would discourage abuses in a variety of vital ways: tougher capital requirements for financial companies; greater oversight of companies, such as AIG, that aren’t banks but act like them; more stringent oversight over how financial transactions affect consumers; a requirement for “living wills’’ that would force banks to contemplate their own unraveling; and a mechanism for putting failing financial behemoths in receivership. The final legislation may also create a fund, to be raised by a tax on banks, that would pay the costs of receivership.

Financial-services lobbyists want to block these measures. But opponents of the reform bill can’t openly admit that they’re doing Wall Street’s bidding. So Mitch McConnell, the Senate Republican leader, is trying to thwart much-needed reforms by capitalizing on lingering public indignation over the bailouts. The Democratic legislation, he argues, amounts to “endless taxpayer-funded bailouts for big Wall Street banks.’’

McConnell’s argument rests upon a thin reed. If the federal government delineates a way to intervene with troubled financial giants, he and many other Republicans argue, it is effectively acknowledging that such institutions would not simply go out of business. But bipartisan congressional majorities already conceded that point a year and a half ago, when they recognized that the abrupt collapse of the largest banks would freeze up the entire economy. For that reason, the Obama administration is seeking an orderly way to take failing institutions into receivership and liquidate them — without doing further damage to the economy.

If McConnell thinks Obama’s approach doesn’t go far enough, Republicans should propose more radical measures, such as breaking up the biggest financial institutions into smaller pieces that could fail without disrupting the larger market. But the GOP is supporting nothing of the sort.

Since the 2008 bailout bill, the case for closer oversight of Wall Street has only grown stronger. Congressional and media inquiries in the wake of the financial crisis have shown that under-regulated investment firms, far from making the financial system more flexible and dynamic, created and traded unconventional securities in a way that disguised risk and directed vast quantities of money into unsustainable mortgages. But as the sense of crisis has receded, the industry has stepped up its resistance to greater outside supervision.

Doing nothing will only make bailouts more likely. The legislation now taking shape will help prevent future crises — and ensure that when and if big banks falter, they can’t expect the US government to come riding to the rescue again with wagons full of money.
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"The Goldman Sachs Fraud Case: How Risky Business Worked"
By STEPHEN GANDEL Stephen Gandel, TIME, April 22, 2010

The biggest bummer to arise from the allegations that the revered and feared Wall Street puppet master Goldman Sachs had played us all for patsies is this: the dial on the Wall Street capital-formation machine, the engine that was supposed to be the driving force of the greatest economic system on earth, was purposely set to junk - worthless, synthetic junk.

The civil fraud case the Securities and Exchange Commission filed in mid-April against Goldman is based on a single deal, called Abacus 2007-ac1. The investment bank created it so hedge funder John Paulson could line his pockets with cash when the value of American families' most prized asset crashed. But on Wall Street in the late aughts, polyester financing was in fashion everywhere.

Morgan Stanley had the so-called dead-Presidents deals, named Buchanan and Jackson. Another Morgan deal, one called Libertas, defrauded investors in the U.S. Virgin Islands, according to a lawsuit. JPMorgan Chase played procurer for Magnetar, a hedge fund so artful in profiting from the meltdown that Northwestern's Kellogg School of Management praised it last year in a case study. A firm run by Lewis Sachs, until recently a top Treasury Department adviser, and UBS, until recently a tax-cheat favorite, created junky bonds that investors who bought them now claim were going bad even before the deals were closed. Bank of America too is being sued for a deal that was set up by its Merrill Lynch subsidiary with a manager who is now under investigation by the SEC.

In the end, it was in fact all one big scam predicated on rising housing prices. Certainly, greedy consumers played a minor role in feeding the frenzy. But the Street made sure that those of us who are not members of its elite club remained the suckers.

Why didn't we find out about these deals sooner? Because they were encapsulated in one of Wall Street's most opaque investment creations ever: synthetic collateralized debt obligations, or CDOs. Synthetic CDOs are derived from mortgage bonds - hence they are derivatives - but they don't actually hold assets, although you can invest in them as you would in the real thing. And you can also short them, as you would a stock, using insurance contracts called credit-default swaps, or CDSs. In the Goldman case, the investment banks and hedge funds that concocted the CDOs allegedly loaded them with the equivalent of toxic bonds and then bought CDSs for themselves, figuring the CDOs would lose value. They did, which left the unsuspecting investors and counterparties who swallowed the CDOs - including supposedly sophisticated banks such as the Netherlands' ABN Amro Bank and Germany's IKB - wondering what happened to their money.

On the surface, these deals look complicated. They are. But the alleged fraud at the heart of the case against Goldman and its CDO dealings is one of the simplest and oldest forms of deception: lying. According to the SEC, Goldman told one group of investors they were buying a AAA-rated (by lapdog ratings agencies, but that's another story) high-yield investment put together by an independent firm called ACA Management. But the SEC says the person really picking the collateral was Paulson, an investor whose only interest was: Paulson. What Goldman allegedly sold, like any good snake-oil salesman, was a worthless, well-packaged fake.

Only now, in the wake of the SEC suit against Goldman, are investors beginning to suspect they were hoodwinked. According to Thomson Reuters, Wall Street firms underwrote at least $119 billion worth of these deals as the housing market began to crumble, from 2006 until the music stopped. And this number could be low. Many of these deals never get counted, because they are private transactions and not traded on an exchange.

All the firms that set up these deals, and the hedge funds that bet against them, contend they did nothing wrong. A synthetic CDO is at its core a trade, meaning it has a long and short position, and grownup investors are free to take sides. In response to the SEC suit, Goldman says it didn't set up investments to fail and it didn't mislead its clients. It plans to fight the charges aggressively. Some have even argued that these synthetic deals were good for the economy, because they didn't boost lending at a time when the housing market was already overheated.

The reality is that Wall Street's CDO synthesizer set one of the economy's largest sectors off in the direction of creating nothing but waste - pure economic waste. These CDOs didn't help anyone afford a house. No cars were purchased. No one got a loan to go to college. These CDOs were the last stop in a vast transfer of wealth from a large group of American mortgage holders to a much smaller group of already rich traders who profited as the CDOs failed.

Certainly, the folks who lied to get mortgages, and the banks who helped them, deserve what they get. Still, as most of us worked hard to cobble together a down payment for a house in an ever rising market or put money into our still-damaged-from-the-dotcom-bust investment accounts in order to send our kids to college or retire, we assumed the financial system was working its invisible magic to help make all that possible. In fact, just the opposite was going on. Wall Street was busy chartering buses to nowhere, so our jobs and savings could be driven right out of town.

How the Culture Changed
It is easy to think that Wall Street has always been the place for the corrupt and the greedy and that this is nothing new. But that's not really accurate. Of all the causes of the financial crisis, one of the biggest was a power shift on Wall Street that left the traders in charge and the bankers who had traditionally run everything from Broad Street to Maiden Lane sidelined.

Years ago, the investment world and its professionals believed in long-term relationships. That meant nurturing the economy and the companies and people in it. Two decades of cheap money, though, helped turn the Street over to the traders. That led to a very different way of doing business. "With a trader, the goal of every minute of every day is to make money," says Philipp Meyer, who worked for UBS as a trader in the late 1990s and early 2000s before going on to write about his time there. "So if running the economy off the cliff makes you money, you will do it, and you will do it every day of every week."

The question is, now that we know what we know about what has become of Wall Street, what do we do about it? The SEC case against Goldman shows that the agency plans to do more to combat fraud. That's a big change. Under former commissioner Christopher Cox, Wall Street was basically self-regulating and the SEC hands-off, which helped enable the greatest Ponzi schemer of all time, Bernie Madoff.

By picking a fight with Goldman - the "great white whale" of Wall Street, as Eliot Spitzer put it on Monday - the SEC is signaling that it has now adopted a feistier approach. "Goldman got picked out because of its stature. When you take on the biggest kid on the block, you are sending a message to everyone on Wall Street that we're not going to back down," says Peter Henning, a former SEC attorney and a professor at Wayne State University Law School. "It's a very aggressive tactic, and in some ways it breaks with past practice."

So, in fact, does the way Goldman is being run. Perhaps the best illustration of the shift on the Street is the career of Goldman's chief executive, Lloyd Blankfein. Back in 1982, when Blankfein, now 55, joined Goldman with a law degree from Harvard and a few years' experience as a tax attorney, the firm was run by two investment bankers, John Whitehead and John Weinberg. Blankfein landed a job in the firm's commodities-trading unit, which Goldman had acquired less than a year before.

Goldman was pretty typical of Wall Street in the 1980s. Investment bankers ran the business and brought in most of the bucks. Salesmen and brokers did pretty well too, buying and selling stocks for clients. Traders, who placed bets with the bank's money, were generally the low men on the totem pole. The one exception was Salomon Brothers, where a band of traders led by Lewis Ranieri - who were raking in money trading Treasury and mortgage bonds - were quickly making Solly the beast on the Street. At Lehman Brothers too, trader Lewis Glucksman forced out investment banker Pete Peterson, who had been running the firm. But a scandal caused Salomon to flame out in the early 1990s. Trading losses at Lehman nearly bankrupted the firm and pushed it into the arms of American Express. Then Long-Term Capital Management nearly brought down the financial system in 1998 when some of its highly leveraged trades collapsed. After an all-hands rescue, the order of Wall Street was restored, temporarily. (See "The Rage Over Goldman Sachs.")

At Goldman, Blankfein was rising rapidly by taking more and more risks in its commodities- and currency-trading businesses. In 1995, shortly after he was named head of the firm's commodities business, he reportedly left a meeting of Goldman partners after complaining the firm was not taking enough risks and immediately bet multimillions of Goldman's capital that the dollar would rise. It did, and Blankfein and Goldman made a bundle.

Yet during the 1990s, trading remained a side business for Wall Street. The cash cow was equities and, in particular, initial public offerings (IPOs), for which bankers were paid a sweet 7% of the deal for little more than ushering new companies into the market and at very little risk. In 1998, the year before Goldman went public, just 28% of its revenue came from trading and principal investments. By 2009, it was 76%.

The big change on Wall Street and at Goldman came with the collapse of the dotcom bubble in early 2000. The underwriting and mergers-advisory businesses on which the investment banks had minted money dried up completely. It would be years before the M&A market came back. IPOs never really did. Where was money being made? In trading. Low interest rates following the early-2000s recession made borrowing cheap. That pushed profits in trading, a capital-intensive business, to take off. Firms began shifting more capital to their trading desks. In the first half of the decade, Goldman's so-called value at risk, which measured how much the firm was risking in the market each day, zoomed from an average of $28 million in 2000 to $70 million in 2005.

Traders, aided by a new generation of Ph.D.-type rocket scientists trained in the complex math of higher finance, began refocusing their firms on the products that would make them the most money. One of the most popular of the new bunch was the CDO. As with everything else on Wall Street, the rise of the CDO had to do with bonus checks. Traders' pay was based not just on how much money they made for the firm but on the size of the bet. Turn in a $10 million gain on AAA Treasurys and you got paid a lot more than if you made the same amount trading lower-rated, much riskier junk bonds. The problem was that making big bucks in the well-established Treasury market was nearly impossible. It's too transparent.

As a trader, what you needed was to take a market in which bonds were thinly traded and magically fill it with more-tradeable highly rated AAA material. By the magic of CDOs you could do just that. CDOs are often created out of the lowest-rated, seldom-traded portions of other bond offerings. And by the mid-2000s most of those bonds were backed by home loans to borrowers with poor credit ratings - toxic waste, in the parlance. Subprime-mortgage bonds went into the CDO blender BBB and came out AAA. All of a sudden, traders were making big money.

With the money came promotions. In 2005, bond salesman John Mack took the reins of Morgan Stanley, promising to boost the firm's profits by allowing its traders to dial up risk. At Lehman Brothers, Dick Fuld, who had climbed that firm's bond-trading ranks, was firmly in place as CEO. And in 2006, when Goldman's CEO, Hank Paulson, a classic investment banker, was tapped by President Bush to be the Treasury Secretary, Blankfein was named as his replacement. The traders had won. "The industry became so heavily weighted toward risk, it just made sense to let the traders run things," says top Wall Street recruiter Gary Goldstein, who heads up the Whitney Group.

Or so it seemed. Traders got Wall Street firms deeper and deeper into more and more complicated products. Complexity, of course, can beget chicanery. Traders were too often in it to make a killing and an exit and cared little about the hazards they might be creating down the road. The term IBG, YBG became popular on the Street. It stands for "I'll be gone, you'll be gone"; someone else will have to clean up the mess.

Goldman boss Blankfein is an alpha dog in this pack. He hails from Wall Street's roughest neighborhood, the commodities-trading market, which lacks insider-trading rules and many of the other investor protections of other markets. "In the commodities-trading market, when someone is stupid, that's something to be taken advantage of," says Susan Webber, who under the name Yves Smith is the author of ECONned, a book about the financial crisis. "That's the world Blankfein grew up in."

Goldman's Alleged Duplicity
The idea that a 20-something trader with too much power could torpedo the biggest, most profitable firm in finance seems like a plot for a Wall Street parody. But it appears to be exactly what is happening to Goldman, and it is perhaps the logical end of a culture that anointed traders king. In late 2006, Fabrice Tourre, a then 27-year-old Frenchman who had graduated from Stanford's business school in 2001 before joining the firm, got an assignment to help John Paulson place bets against the housing market. (See "Goldman's Profits: Gambling with Taxpayer Money?")

Tourre, known to refer to himself as the "fabulous Fab," figured out how to structure an investment that was sure to suck the last bit of blood out of the few mortgage investors willing to buy into a market that he believed was due to crater. As Tourre was assembling Paulson's CDO in January 2007, he wrote in an e-mail to a buddy: "The whole building is about to collapse anytime now ... Only potential survivor, the fabulous Fab ... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic] !!!"

What Tourre did understand, according to the SEC, was how to trick investors. The SEC case against Tourre and Goldman hinges on the investment bank's omission of the fact that Paulson was selecting most of the assets for Abacus. Tourre got the CDO manager, ACA Management, to claim in the offering statement that it had picked the assets for Abacus. ACA was getting paid to act as independent manager of the deal. The SEC alleges that while ACA understood that Paulson would have sway over asset selection, Tourre maneuvered ACA into thinking that Paulson planned to invest in Abacus, not bet against it. Paulson was never mentioned in the information sent to Abacus investors and Goldman's counterparties, who ended up losing $1 billion on the deal.

For its part, Goldman vigorously denies the charges, arguing it did not structure the portfolio to lose money - in fact, the firm says it lost more than $90 million through its long position - nor did it misrepresent Paulson's short position. "The SEC's complaint accuses the firm of fraud because it didn't disclose to one party of the transaction who was on the other side of that transaction," Goldman said in a press release. "As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor."

In a sense, Goldman is relying on the so-called big-boy defense: There are no victims on Wall Street, just fools. "This is no slam dunk for the SEC," says Henning. "We want every transaction to be fair, but these aren't babes in the woods that got taken. These are two banks [that] invested in a very risky area and got very badly burned ... That's how free markets work. You take your chances."

Making the Case for Regulation
The Goldman case may be the opening salvo as a suddenly muscular SEC takes a gander at other Abacus-like deals. Like Goldman, Deutsche Bank struck deals with Paulson, according to the Wall Street Journal, that were structured to bet against the housing market. Magnetar and Tricadia are also in the spotlight, but even if the two hedge funds played their deals to fail, the investment banks that set them up at least disclosed the role of the hedge funds and the fact that they could take a short position.

Beyond any legal issues, the Goldman case has become the battering ram for financial-reform legislation that congressional Democrats have been looking for. Democrats say it underscores the need to reregulate an industry gone wild. Republicans retort that the reforms on the table would have done little to stop the Goldman trade. The latter point is probably right, at least in part. The bill sponsored by Democratic Senator Christopher Dodd would require transactions like Abacus to be traded on an exchange. Such transparency would give the SEC and other regulators more access to monitor these deals and potentially catch material misstatements. The SEC might have noticed earlier the obvious conflicts of interest inherent in the Abacus-like deals. But there still would have been no way for the SEC, without an investigation, to have known that Goldman was omitting any mention of Paulson's involvement.

Nonetheless, the Goldman case does get the Obama Administration back on its best talking points for financial reform: The lack of regulation has morphed Wall Street into a place that regularly trades against our economy. It's our jobs vs. their bonuses on every trade. And if you think Wall Street is going to protect your interests, then I've got a AAA-rated, subprime-mortgage-based CDO to sell you.

- With reporting by Alex Altman / Washington

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"Goldman Sachs Messages Show It Thrived as Economy Fell"
The New York Times, April 24, 2010

In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making "some serious money" betting against the housing markets.

The e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, appear to contradict some of Goldman's previous statements that left the impression that the firm lost money on mortgage-related investments.

In the e-mails, Lloyd C. Blankfein, the bank's chief executive, acknowledged in November of 2007 that the firm indeed had lost money initially. But it later recovered from those losses by making negative bets, known as short positions, enabling it to profit as housing prices fell and homeowners defaulted on their mortgages. "Of course we didn't dodge the mortgage mess," he wrote. "We lost money, then made more than we lost because of shorts."

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"Political Economy: There Will Be Bailouts"
By John Cranford, CQ [Politics] (Opinion) Columnist, May 2, 2010

It will never happen, but both supporters and opponents of the big bank regulatory bill could just decide to be straight with the American people and concede that there is absolutely no way to eliminate this idea that some financial institutions will always be too big to fail.

Unfortunately, neither side is willing to tell the truth because, like Jack Nicholson in "A Few Good Men," they think we can't handle the truth. So, we're stuck with an argument that has been raging for a quarter-century over how best to put an ugly genie back in the bottle. Unfortunately, the argument cannot be settled because the genie -- modern finance -- is forever free.

Still, supporters of the pending Senate regulatory bill insist they are building an apparatus that will prevent bailouts of giant companies in the future -- never mind whether the money would come from taxpayers or from other banks. They say the new regulatory regime is designed to guard against the sort of excess that led to the recent unpleasantness. And in the unlikely event that some company does get in so deep that its potential failure would jeopardize the entire financial system, there will be a process in place to take it apart in an orderly fashion, sparing the nation another economic nightmare while ensuring that there is no greater moral hazard growing out of a government-managed safety net.

Opponents scoff. Creation of a method to isolate and "wind down" big failing financial companies will merely ensure that some will get favored treatment in the future, they say. Their preference is: Let the next Lehman Brothers that threatens to collapse under the weight of stupid investments go through what the last one did -- bankruptcy. Shareholders and creditors must be punished for their mistakes. If the legal process works for airlines and manufacturers, it surely can work for banks.

The critics' point is both simple and elegant. It appeals to an underlying belief in market discipline that is permeated with the idea that people must be held to account for their business decisions. Politics carries it a step further to say it's expensive, unfair and immoral to require taxpayers to bear costs associated with the bad bets of financiers whose only motive is profit.

The intellectual underpinning of the opponents' case has been articulated by Peter J. Wallison, a Treasury Department counsel in the administration of President Ronald Reagan who's now at the American Enterprise Institute. Writing recently in The Wall Street Journal, Wallison defended the decision to allow Lehman to fail in September 2008. He noted that the company's "creditors, shareholders and management all took severe losses" and that, 18 months to the day after filing its bankruptcy petition, Lehman outlined its escape from Chapter 11. It was, he says, a success.

Inevitable Consequences Wallison's is a conveniently blinkered view. In his Journal article, he ignored the fact that the day after Lehman went bust, the financial world froze, and the Federal Reserve reluctantly concluded that its only option was to write a huge check to keep American International Group afloat. Soon, Congress had enacted the Troubled Asset Relief Program, the Fed had pumped in more than $1 trillion to keep credit flowing and we found ourselves again debating the consequences of "too big to fail."

The unanswered question is whether Lehman's creditors would have been able to withstand their losses if they hadn't benefited individually and collectively from the TARP and Fed rescue efforts.

Critics of the Senate financial regulation bill say the Fed's actions and TARP were mistakes. The world's financial enterprises could have weathered the hurricane force of creditors being hammered for having made questionable loans without performing due diligence. If not, then they, too, should have been allowed to fail.

The aftermath would have been ugly, but not devastating, they say. And the result would have been a sea change in the way we do business. No longer would creditors -- such as, say, Goldman Sachs -- think they could participate in a dubious enterprise knowing that they would be kept whole if the roof fell in.

The problem is that a great many smart people -- from all points on the ideological compass -- don't believe this for a minute. Paul A. Volcker, Alan Greenspan, Henry M. Paulson Jr., Ben S. Bernanke and Timothy F. Geithner have all regarded their jobs as being stewards of the economy as well as of their institutions and the taxpayer. All came to fear "systemic" risk when they held the tiller.

It's easy to say they are merely defending their world. But Bernanke, the student of the Great Depression, didn't want the second one on his watch. His response to the financial crisis was no different than what's being done today to shore up Greece.

What should be evident is that Main Street thrives on the same sources of credit that fuel Wall Street's excesses. Congress can work to rein in the big banks. And it can write protections for taxpayers. But finance is too fast and furious, and too selfish, for us to believe that allowing a Lehman or an AIG to fail will never have broader consequences. There will be more bailouts. It's the world we live in.

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"6 simple steps to fix Wall Street"
By Allan Sloan with Doris Burke Fortune, Washington Post, G01; May 9, 2010

The first thing you learn when you start looking at Wall Street, which I've been doing for 40 years, is to never trust the salesmen. What they promise you isn't necessarily what you get. You need to use common sense, watch out for your own interests and at least make an attempt to understand the fine print.

The same principle applies when you examine plans to reform Wall Street. The Street certainly needs to be fixed, heaven knows. Its excesses are largely responsible for the financial crisis that brought markets crashing down in 2008 and plunged the economy into recession. The government needs to step in: to stop people from being cheated, to help capitalism regain some of the public trust it's lost, and to make markets transparent enough that people other than a handful of elite insiders can figure out what's going on.

Salesmanship, however, isn't confined to Wall Street. President Obama's recent speech at New York City's Cooper Union college, just north of Wall Street, sure was a great pitch. Who can disagree with wanting "a commonsense, reasonable, non-ideological approach to target the root problems that led to the turmoil in our financial sector and ultimately in our entire economy"?

What we'll get from the legislation, however, isn't necessarily what we heard from the Salesman in Chief.

As I write, it's impossible to predict what will emerge from the legislation -- one bill passed by the House, one pending in the Senate -- kicking around in Washington. But something will. Hey, even Goldman Sachs chief executive Lloyd Blankfein seems to think so. "Clearly, the world needs more regulation," he told the Senate. 'Nuff said.

The point of the legislation shouldn't be to do what's easily sellable or to punish Goldman, everyone's favorite whipping boy. It should be to make the financial system work better for all of us.

So with assistance from some of my Fortune colleagues, I'd like to propose six simple steps to help fix the financial system. They would change Wall Street's incentives to make game-playing more expensive for the firms and the players; force both institutions and individuals to put serious amounts of their own money at risk, which would reduce future taxpayer losses; and give regulators, creditors and the general public access to information that Wall Street now hoards to enhance its profit margins.

These proposals aren't a perfect solution -- nothing is -- but had they been in place, AIG might have avoided a meltdown; Lehman Brothers' collapse wouldn't have been as messy; and Goldman's infamous Abacus deal, in which taxpayers in Britain and Germany indirectly forked over $990 million to Goldman might never have taken place. But it did, sending those $990 million to John Paulson's hedge fund.

I'll get to the Simple Six in a minute. But as someone who's seen many "reform" plans -- remember Sarbanes-Oxley? -- fail to achieve their goals, let me offer my negative take on two widely touted ideas that sound great but that just don't seem workable in the real world.

First, it would do more harm than good to create a systemic-risk office. We already have a body that's supposed to guard against risks to the financial systems of the United States and the world. It's called the Federal Reserve. The Fed's primary job, like that of the world's other central banks, is to keep the financial system functioning properly. We don't need a startup bureaucracy trying to do that. The new office and the Fed would end up tripping over each other. Worse, the giant, "systemically important" institutions subject to the riskocrats' rules would carry an implicit federal guarantee against failure. It would give them an unfair advantage by allowing them to raise money more cheaply than smaller institutions, which would not have a federal safety net against failure. That would encourage financial gigantism, which is not good.

Second, we shouldn't adopt the Volcker Rule. Named after former Fed chairman (and current Obama adviser) Paul Volcker, this is a cornerstone of Obama's proposal. But like Obama's speech, the Volcker Rule is better as a sound bite than a solution. Volcker's idea -- separating risk-taking from insured deposits -- sounds great. Implementing it strikes me as impossibly complicated. It's much better to inject more capital -- and more fear of failure -- into the system than to try to define "proprietary trading" and micromanage complex financial companies.

So let's move on to what we should do. Elements of our Simple Six are in the pending legislation. If they're part of what's adopted, we could get true and lasting reform. If they're not, it won't be long before Wall Street is back to business -- and bailouts -- as usual.

1 Increase capital requirements
Any reform plan worth its salt should greatly increase capital requirements -- the amount of money that stockholders have at risk, relative to an institution's assets. This is what people mean when they talk about reducing leverage. Lower leverage would make institutions less likely to fail and any bailout of them less expensive.

Our most recent financial crisis, in which a relative handful of U.S. mortgages metastasized into a worldwide financial cancer, started with loans in which borrowers had nothing or almost nothing at risk. Neither did the companies that made the loans and sold them to other companies that bundled them, turned them into securities and sold the securities to investors. At the end, these players walked away incurring little or no cost from the mess they created, and stuck investors -- and society as a whole -- with a steep bill.

The fix? First, require any institution that turns loans into securities to keep at least 5 percent of each issue in its portfolio. Second, require a cash down payment from the home buyer's own resources of at least 10 percent for any mortgage that's sold as part of a security or package of loans. (Lenders could make and hold lower down-payment loans, but not sell them as securities.)

In addition, Congress should revisit the policy allowing the Federal Housing Administration and the Department of Veterans Affairs to guarantee mortgages made with down payments of as little as 3.5 percent and zero percent, respectively. These programs made sense in the long boom era after World War II, when house prices almost always rose and homeownership was a route to wealth. However, it may not make sense now. If those loans are continued, the government should sharply increase the insurance charged to borrowers, because residential mortgage lending is far riskier than it used to be.

2 Increase fear of too much risk
If any financial institution fails or needs extraordinary help from the government, the United States should be able to claw back five years' worth of stock grants, options profits, and cash salaries and bonuses in excess of $1 million a year. That would apply to the 10 top executives, current and former, with a five-year look-back period. It would also apply to board members, present and past. (People brought in by regulators for rescues that ultimately fail would be exempt.) Anyone subject to the clawback would be permanently barred from executive positions or board seats at any institution that has federal deposit insurance or protection for brokerage customers from the Securities Investor Protection Corp. This provision would give executives and directors a huge incentive to make sure the institutions they supervise don't take on excessive risk.

3 Expose the derivatives trade
Warren Buffett famously called derivatives "financial weapons of mass destruction." My colleague Carol Loomis somewhat less famously calls them "the risk that won't go away." They're both right.

Simply put, derivatives are contracts whose value derives from that of an underlying asset. They were once relatively simple, socially useful things -- instruments that allowed a farmer to lock in the price of wheat or an airline to know how much it would pay for jet fuel. Over the years, the derivatives market has morphed into a monstrous game consisting of speculation piled on speculation piled on speculation. At the end of last year, there were $30.4 trillion of credit-default swaps outstanding -- almost as much as the entire U.S. debt market -- according to the International Swaps and Derivatives Association (ISDA). There were also $426.8 trillion of interest-rate derivatives outstanding. A lot of this is double (or triple or quadruple) counting, but any way you look at it, the numbers are scary.

The market is essentially a vast black box in which no one ever knows who's got what obligations outstanding. So when problems began appearing in mid-2007, fear froze the financial system because many big institutions didn't know who was solvent and who wasn't. Regulators, lenders and stockholders couldn't tell, either.

The near consensus is for derivatives to be handled by clearinghouses that guarantee payment and require collateral to be posted and for them to be traded on exchanges. That way, regulators, creditors and investors can see the price at which the market values them. Derivatives players wouldn't have to worry as much about whether the "counterparties" on the other side of their contracts could make good on their obligations, thus solving much of the too-interconnected- to-be-allowed-to-fail problem.

Under this system, AIG wouldn't have been able to guarantee a staggering $80 billion of subprime (i.e., junk) mortgage loans without posting collateral. So even if AIG had failed -- it also had a huge problem with its "stock loan" business -- it wouldn't have required anything approaching the $180 billion bailout package Uncle Sam gave it.

4 Beef up the bankruptcy laws
In a perfect world, Step 3 would solve the derivatives problem. In the real world, lobbyists are making sure that won't happen. Inevitably, the new rules will let many derivatives players get their contracts deemed "custom." Custom derivatives won't have to trade on exchanges and might not even be subject to clearinghouses. (And, of course, the more custom derivatives there are, the happier Wall Street will be, because the profit margins on them are far larger.)

This means we have to worry about what happens when institutions holding custom derivatives fail. That forces us to fix the flaws in the bankruptcy code that made Lehman Brothers' bankruptcy much worse than it had to be. Because of changes that have crept into the code since the 1980s, Lehman's counterparties could terminate their deals and dump vast numbers of hard-to-unload positions onto the market without being subject to the "automatic stay" of bankruptcy. Chaos ensued.

Stephen Lubben, a bankruptcy professor at Seton Hall Law School, is one of the many academics who say the law needs to be changed. (Among bankruptcy mavens, it is a topic of raging debate.) "Derivatives counterparties should be treated like other secured creditors," he argues, rather than be able to seize and sell collateral without bankruptcy-court permission. Secured lenders get to seize their collateral relatively quickly, but you don't get chaotic messes like the Lehman bankruptcy.

Together, steps 3 and 4 would prompt derivatives players to demand far more collateral, making the markets far smaller and less liquid. The folks at ISDA, the derivatives trade association, argue that forcing derivatives into clearinghouses and exchanges would introduce "excessive rigidity" into the system. They warn, also, that changing the bankruptcy law would have negative consequences. "Reform proposals encourage or require use of collateral, but collateral will only reduce risks if a party can use it when it matters most -- when its counterparty goes bankrupt," ISDA executive vice chairman Robert Pickel says.

Call me a troglodyte, but I think we'd be a lot better off with a lot fewer derivatives, a lot more players' capital at risk and an orderly process rather than a free-for-all when a counterparty goes broke.

5 Create a mortgage-securities database
One of the major problems that led to the meltdown was that it was impossible for many investors to figure out what collateral supported the mortgage-backed securities and derivatives they owned. We can solve that problem by setting up a publicly available database for all mortgage-backed securities that would include up-to-date payment statuses for each mortgage in each security, as well as the estimated market value of each house. Investors, regulators and creditors could use this powerful tool to do their own analysis rather than having to rely on credit-rating agencies. Such a database would help close the information gap between the big players (who have access to customized information through high-priced, high-powered services) and the rest of us.

"We could use some of the [Troubled Assets Relief Program] money like a Superfund and clean up financial toxic waste," says Richard Field of financial consulting firm TYI, who has been trying to get backing for years to set up such a database. There's talk in Washington of adopting the idea. Let's hope it gets done. Quickly and effectively.

6 Truth in credit ratings
A major reason for the worldwide mortgage disaster is that Moody's, Standard & Poor's and Fitch, the big three credit-rating agencies, gave "AAA" ratings to toxic waste securities that should have been rated "ZZZ." Investors at the mercy of the ratings stocked up on this trash, to their detriment.

A widely recognized part of the problem is that the agencies are paid by the issuers of the securities, which want the highest ratings possible. But the bigger problem is that the world has become too complicated and fast-paced for the agencies' formulas to work as well as they once did. They've missed corporate debt problems, been late to downgrade European sovereign debt and so on. When house prices began falling rather than continuing to rise, as rating formulas assumed they would, the ratings were toast.

Washington is flogging the agencies in public, but the dirty little secret is that the government relies on ratings heavily and shows no sign of changing. Regulators use credit ratings to decide how much capital banks should set aside for securitized loans, what qualifies as good collateral under government borrowing programs and what kinds of securities retail money-market funds can own.

If nongovernment investors want to use these ratings rather than doing their own research, good luck to them. But Washington should open the market for government-sensitive ratings to the upstart raters who are paid by investors, not issuers. Let the big three raters and the upstarts compete -- on quality, speed and track record -- for the right to have their ratings used by the government. Competition is better than oligopoly.

Much of what I'm saying is unconventional, maybe heretical. But conventional fixes haven't served us well. We can't just tinker at the margins and set up a new agency or two and expect Wall Street to give up greed. Salesmen will always be salesmen. But if we change incentives and add transparency, they'll be pitching us a less toxic product.
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Allan Sloan is Fortune magazine's senior editor at large. Doris Burke is a senior reporter at Fortune.
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"Senate approves landmark financial overhaul legislation"
The Washington Post - July 15, 2010

In a 60 to 39 vote, the Senate approved landmark financial overhaul legislation. The bill now awaits President Obama's signature.

The passage of the sweeping bill ends more than a year of wrangling over the shape of the new rules. It creates an independent consumer bureau within the Federal Reserve to protect borrowers from lending abuses, establishes oversight of the vast derivatives market and gives the government power to seize and wind down large, troubled financial firms. The legislation places much faith and authority in regulators to spot brewing problems in the financial system and prevent another crisis.

The Boston Globe Online - July 15, 2010



"14 things to know about financial overhaul"

The new financial regulatory bill weighs in at more than 2,000 pages. Its regulations take aim at everything from megabanks to street-corner payday lenders. If the bill is passed, a lot of responsibilities will lie with the regulators tasked to fill in the details.

The House of Representatives approved the bill weeks ago, and the Senate passed the bill with a 60-39 vote today. Massachusetts Senator Scott Brown decided to support the legislation after being successful in getting some provisions in the bill changed, such as one that will allow State Street Corp. and other large banks to continue investing a portion of their money in securities.

Here are 14 things to know about the financial overhaul bill.

Compiled from Associated Press reports



1. A crackdown on 'too big to fail' companies

A 10-member Financial Stability Oversight Council - headed by the treasury secretary - would be created and tasked with monitoring threats to the country's financial system, which would include identifying companies whose failure would compromise the entire financial system.

Once identified, these big interconnected companies would be subject to tougher regulations and would be overseen by the Federal Reserve, who would have the power to liquidate these large institutions if they were in danger of failing.



2. A consumer protection bureau will be created

A new Consumer Financial Protection Bureau would oversee financial products and services such as mortgages, credit cards, and private student loans. The idea is to bring consumer regulation under one roof, rather than spreading it out among seven different agencies. The agency could propose new rules to protect consumers, however these regulations could be blocked by the 10-member oversight council if they are deemed to threaten the financial system.



3. Only big banks will be overseen by the new agency

The Consumer Financial Protection Bureau will enforce regulations at mortgage lenders and banks that have more than $10 billion in assets, which would cover only half of the bank branches in the United States, according to data from the National Community Reinvestment Coalition, a Washington-based consumer group.

That means bigger banks like Bank of America would be regulated by the Consumer Financial Protection Bureau, but smaller institutions such as Eastern Bank would not. Oversight of those smaller banks would remain with their current regulators, however those banks would still need to abide by the consumer bureau's rules.



4. Car dealers would be exempt from bureau's enforcement

Auto dealers, pawn brokers, and others would be exempt from oversight by the Consumer Financial Protection Bureau. That means any loans made by car dealers would not be under the oversight of the new agency.



5. Tougher requirements and more transparency for mortgages

Lenders would have to make sure mortgage borrowers could afford to repay the loans they are given. Lenders will have to verify a borrower's income, credit history, and employment status.

Lenders would have to disclose the highest payment borrowers could face on their adjustable-rate mortgages, and mortgage brokers could no longer receive bonuses for pushing people into high-cost loans.



6. Lower minimums for credit card purchases at stores

Say you walk into a gas station and pick up some soda, candy, and gum. The total is $11, but there's a sign at the register saying you can only pay by credit card if the purchase is $20 or more. Under the new legislation, the minimum can be no more than $10, and only the Federal Reserve can raise it.



7. Limits on debit card fees

The Federal Reserve will have the power to limit the fees that card issuers can collect on debit-card transactions. But the rule applies only to big banks, not to credit-card issuers such as Visa and MasterCard. Right now, banks usually charge stores 1 to 2 percent for each swipe - fees that added up to nearly $20 billion last year. Stores and restaurants say lower fees would allow them to cut prices, and to hire more people. But even if prices do fall at the store, banks might raise fees and rates for their customers. They could also scale back "reward" cards or free checking to make up for the money they'll lose from stores and restaurants.



8. Access to credit scores for turned-down borrowers

Right now, it can be maddeningly difficult to figure out your credit score. While you're entitled to one free credit report a year from each of the three credit reporting agencies under federal law, you almost always have to pay to see your actual score. Under the overhaul rules, any lender that turns down a borrower - whether it's for a mortgage, a department store credit card or an auto loan - because of his or her credit score has to tell the borrower what that score is, and for free.



9. More scrutiny of the Fed

The Fed's relationships with banks would face more scrutiny from the Government Accountability Office, Congress's investigative arm. The GAO could audit emergency lending the Fed made after the 2008 financial crisis emerged. It also could audit the Fed's low-cost loans to banks, and the Fed's buying and selling of securities to implement interest-rate policy.



10. Derivatives will become more transparent

The financial overhaul would provide tighter restrictions on financial instruments known as derivatives, which are used for speculation and helped fuel the financial crisis. Derivatives – which billionaire investor Warren Buffett (right) once called "weapons of financial mass destruction" – are bets between two parties on how the value of an asset will change, and are often used by companies to hedge risks. Under current law, derivatives have been traded out of the sight of regulators, but the new law would force many of those trades onto more transparent exchanges.

Banks would be able to continue trading derivatives related to interest rates, foreign exchanges, gold, and silver. But riskier derivatives could not be traded by banks, and would have to be run through affiliated companies with segregated finances.



11. More focus on executive pay practices

The financial overhaul will allow shareholders in a company to vote on executive pay packages, but the votes wouldn't be binding, meaning that companies could ignore them.

The Federal Reserve would oversee executive compensation to make sure it does not encourage excessive risk-taking. The Fed would issue broad guidelines but no specific rules. If a payout appeared to promote risky business practices, the Fed could intervene to block it.



12. More accountability for credit rating agencies

Credit rating agencies that give recklessly bad advice could be legally liable for investor losses. They would have to register with the Securities and Exchange Commission.

Regulators would also study the conflict of interest at the heart of the rating system: Credit raters are paid by the banks that issue the securities they rate. Before the crisis, they bowed to pressure from the banks, lawmakers say. That's why the agencies gave strong ratings to mortgage investments that were basically worthless.



13. Lenders required to have more 'skin in the game'

Many lenders sell the loans they make to other investors, meaning that if those loans go bad, there is little to no consequence for the banks where the loan originated from. Under the financial overhaul, banks will be required to hold on to at least 5 percent of the loans they make instead of selling them to investors, with the intention that banks will be less likely to make risky loans.



14. Potential for new rules for financial advisers

Regulators will be given the authority to require all financial advisers to act in their clients' best interest - although nothing will be done until after a six-month SEC study into whether current regulations are good enough. The intent of the rules would be to dissuade financial advisers from steering their investors' money into mutual funds or college savings plans that pad their firms' profits or commissions.

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"U.S. bailouts benefited foreign firms, report says"
By Brady Dennis, Washington Post Staff Writer, August 12, 2010; A10

The federal government's effort to stabilize the financial system in 2008 by flooding money into as many banks as possible resulted in a boon to many foreign firms and left the United States shouldering far more risk than governments that took a narrower approach, according to a new report by a panel overseeing the Treasury's $700 billion bailout fund.

Members of the Congressional Oversight Panel, in a report due out Thursday, note that America's broad financial rescues had more impact internationally than the narrower bailout programs of other countries had on U.S. firms.

They cite as a case study the bailout of insurance giant American International Group. While the Treasury committed up to $70 billion to AIG through its Troubled Assets Relief Program, the report states, much of that money ended up in the coffers of foreign trading partners in France, Germany and other countries. The cash that the United States poured into AIG alone equaled twice what France spent on its total capital injection program, and half what Germany spent.

"The point we make forcefully in this report is that there were no data about where this money was going, no information about where this money was going," said panel chair Elizabeth Warren, a Harvard law professor. "Without that information, no one could make a deliberate policy choice" about whether to ask foreign governments to contribute to the financial rescues.

The report urges regulators to gather more information about the international flow of funds in normal times and to document the flow of rescue funds. It also cites the need for the international community to collaborate in responses to future global financial collapses, and it urges U.S. officials to undertake regular crisis planning and "war gaming" for the international financial system.

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"In Financial Crisis, No Prosecutions of Top Figures"
GRETCHEN MORGENSON and LOUISE STORY, N.Y. Times, April 14, 2011

It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.

Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.

Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”

Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.

But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.

Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”

Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.

To be sure, Wall Street’s role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly.

But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could.

Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.

Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems.

Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known.

Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.

But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company’s collapse. Mr. Cassano’s lawyers said that documents they had given to prosecutors refuted accusations that he had misled investors or the company’s board. Mr. Mozilo’s lawyers have said he denies any wrongdoing.

Among the few exceptions so far in civil action against senior bankers is a lawsuit filed last month against top executives of Washington Mutual, the failed bank now owned by JPMorgan Chase. The Federal Deposit Insurance Corporation sued Kerry K. Killinger, the company’s former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. The S.E.C. also extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built, though the S.E.C. did not name executives in that case.

Representatives at the Justice Department and the S.E.C. say they are still pursuing financial crisis cases, but legal experts warn that they become more difficult as time passes.

“If you look at the last couple of years and say, ‘This is the big-ticket prosecution that came out of the crisis,’ you realize we haven’t gotten very much,” said David A. Skeel, a law professor at the University of Pennsylvania. “It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not.”

The Countrywide Puzzle

As nonprosecutions go, perhaps none is more puzzling to legal experts than the case of Countrywide, the nation’s largest mortgage lender. Last month, the office of the United States attorney for Los Angeles dropped its investigation of Mr. Mozilo after the S.E.C. extracted a settlement from him in a civil fraud case. Mr. Mozilo paid $22.5 million in penalties, without admitting or denying the accusations.

White-collar crime lawyers contend that Countrywide exemplifies the difficulties of mounting a criminal case without assistance and documentation from regulators — the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Fed, in Countrywide’s case.

“When regulators don’t believe in regulation and don’t get what is going on at the companies they oversee, there can be no major white-collar crime prosecutions,” said Henry N. Pontell, professor of criminology, law and society in the School of Social Ecology at the University of California, Irvine. “If they don’t understand what we call collective embezzlement, where people are literally looting their own firms, then it’s impossible to bring cases.”

Financial crisis cases can be brought by many parties. Since the big banks’ mortgage machinery involved loans on properties across the country, attorneys general in most states have broad criminal authority over most of these institutions. The Justice Department can bring civil or criminal cases, while the S.E.C. can file only civil lawsuits.

All of these enforcement agencies traditionally depend heavily on referrals from bank regulators, who are more savvy on complex financial matters.

But data supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially fewer cases to criminal investigators than previously.

The university’s Transactional Records Access Clearinghouse indicates that in 1995, bank regulators referred 1,837 cases to the Justice Department. In 2006, that number had fallen to 75. In the four subsequent years, a period encompassing the worst of the crisis, an average of only 72 a year have been referred for criminal prosecution.

Law enforcement officials say financial case referrals began declining under President Clinton as his administration shifted its focus to health care fraud. The trend continued in the Bush administration, except for a spike in prosecutions for Enron, WorldCom, Tyco and others for accounting fraud.

The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions. From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed.

The thrift supervisor, however, has not referred a single case to the Justice Department since 2000, the Syracuse data show. The Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade.

The comptroller’s office declined to comment on its referrals. But a spokesman, Kevin Mukri, noted that bank regulators can and do bring their own civil enforcement actions. But most are against small banks and do not involve the stiff penalties that accompany criminal charges.

Historically, Countrywide’s bank subsidiary was overseen by the comptroller, while the Federal Reserve supervised its home loans unit. But in March 2007, Countrywide switched oversight of both units to the thrift supervisor. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush.

Robert Gnaizda, former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Mr. Reich about Countrywide’s reckless lending.

“We saw that people were getting bad loans,” Mr. Gnaizda recalled. “We focused on Countrywide because they were the largest originator in California and they were the ones with the most exotic mortgages.”

Mr. Gnaizda suggested many times that the thrift supervisor tighten its oversight of the company, he said. He said he advised Mr. Reich to set up a hot line for whistle-blowers inside Countrywide to communicate with regulators.

“I told John, ‘This is what any police chief does if he wants to solve a crime,’ ” Mr. Gnaizda said in an interview. “John was uninterested. He told me he was a good friend of Mozilo’s.”

In an e-mail message, Mr. Reich said he did not recall the conversation with Mr. Gnaizda, and his relationships with the chief executives of banks overseen by his agency were strictly professional. “I met with Mr. Mozilo only a few times, always in a business environment, and any insinuation of a personal friendship is simply false,” he wrote.

After the crisis had subsided, another opportunity to investigate Countrywide and its executives yielded little. The Financial Crisis Inquiry Commission, created by Congress to investigate the origins of the disaster, decided not to make an in-depth examination of the company — though some staff members felt strongly that it should.

In a January 2010 memo, Brad Bondi and Martin Biegelman, two assistant directors of the commission, outlined their recommendations for investigative targets and hearings, according to Tom Krebs, another assistant director of the commission. Countrywide and Mr. Mozilo were specifically named; the memo noted that subprime mortgage executives like Mr. Mozilo received hundreds of millions of dollars in compensation even though their companies collapsed.

However, the two soon received a startling message: Countrywide was off limits. In a staff meeting, deputies to Phil Angelides, the commission’s chairman, said he had told them Countrywide should not be a target or featured at any hearing, said Mr. Krebs, who said he was briefed on that meeting by Mr. Bondi and Mr. Biegelman shortly after it occurred. His account has been confirmed by two other people with direct knowledge of the situation.

Mr. Angelides denied that he had said Countrywide or Mr. Mozilo were off limits. Chris Seefer, the F.C.I.C. official responsible for the Countrywide investigation, also said Countrywide had not been given a pass. Mr. Angelides said a full investigation was done on the company, including 40 interviews, and that a hearing was planned for the fall of 2010 to feature Mr. Mozilo. It was canceled because Republican members of the commission did not want any more hearings, he said.

“It got as full a scrub as A.I.G., Citi, anyone,” Mr. Angelides said of Countrywide. “If you look at the report, it’s extraordinarily condemnatory.”

An F.B.I. Investigation Fizzles

The Justice Department in Washington was abuzz in the spring of 2008. Bear Stearns had collapsed, and some law enforcement insiders were suggesting an in-depth search for fraud throughout the mortgage pipeline.

The F.B.I. had expressed concerns about mortgage improprieties as early as 2004. But it was not until four years later that its officials recommended closing several investigative programs to free agents for financial fraud cases, according to two people briefed on a study by the bureau.

The study identified about two dozen regions where mortgage fraud was believed rampant, and the bureau’s criminal division created a plan to investigate major banks and lenders. Robert S. Mueller III, the director of the F.B.I., approved the plan, which was described in a memo sent in spring 2008 to the bureau’s field offices.

“We were focused on the whole gamut: the individuals, the mortgage brokers and the top of the industry,” said Kenneth W. Kaiser, the former assistant director of the criminal investigations unit. “We were looking at the corporate level.”

Days after the memo was sent, however, prosecutors at some Justice Department offices began to complain that shifting agents to mortgage cases would hurt other investigations, he recalled. “We got told by the D.O.J. not to shift those resources,” he said. About a week later, he said, he was told to send another memo undoing many of the changes. Some of the extra agents were not deployed.

A spokesman for the F.B.I., Michael Kortan, said that a second memo was sent out that allowed field offices to try to opt out of some of the changes in the first memo. Mr. Kaiser’s account of pushback from the Justice Department was confirmed by two other people who were at the F.B.I. in 2008.

Around the same time, the Justice Department also considered setting up a financial fraud task force specifically to scrutinize the mortgage industry. Such task forces had been crucial to winning cases against Enron executives and those who looted savings and loans in the early 1990s.

Michael B. Mukasey, a former federal judge in New York who had been the head of the Justice Department less than a year when Bear Stearns fell, discussed the matter with deputies, three people briefed on the talks said. He decided against a task force and announced his decision in June 2008.

Last year, officials of the Financial Crisis Inquiry Commission interviewed Mr. Mukasey. Asked if he was aware of requests for more resources to be dedicated to mortgage fraud, Mr. Mukasey said he did not recall internal requests.

A spokesman for Mr. Mukasey, who is now at the law firm Debevoise & Plimpton in New York, said he would not comment beyond his F.C.I.C. testimony. He had no knowledge of the F.B.I. memo, his spokesman added.

A year later — with precious time lost — several lawmakers decided that the government needed more people tracking financial crimes. Congress passed a bill, providing a $165 million budget increase to the F.B.I. and Justice Department for investigations in this area. But when lawmakers got around to allocating the budget, only about $30 million in new money was provided.

Subsequently, in late 2009, the Justice Department announced a task force to focus broadly on financial crimes. But it received no additional resources.

A Break for 8 Banks

In July 2008, the staff of the S.E.C. received a phone call from Scott G. Alvarez, general counsel at the Federal Reserve in Washington.

The purpose: to discuss an S.E.C. investigation into improprieties by several of the nation’s largest brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities.

These investments carry interest rates that reset regularly, usually weekly, in auctions overseen by the brokerage firms that sell them. They were popular among investors because the interest rates they received were slightly higher than what they could earn elsewhere.

For years, companies like UBS and Goldman Sachs operated auctions of these securities, promoting them as highly liquid investments. But by mid-February 2008, as the subprime mortgage crisis began to spread, investors holding hundreds of billions of dollars of these securities could no longer cash them in.

As the S.E.C. investigated these events, several of its officials argued that the banks should make all investors whole on the securities, according to three people with knowledge of the negotiations but who were not authorized to speak publicly, because banks had marketed them as safe investments.

But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their “best efforts.”

This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Mr. Alvarez declined to comment, through a spokeswoman.

An S.E.C. spokesman said: “The primary consideration was remedying the alleged wrongdoing and in fashioning that remedy, the emphasis was placed on retail investors because they were suffering the greatest hardship and had the fewest avenues for redress.”

A similar caution emerged in other civil cases after the bank bailouts in the autumn of 2008. The S.E.C.’s investigations of financial institutions began to be questioned by its staff and the agency’s commissioners, who worried that the settlements might be paid using federal bailout money.

Four people briefed on the discussions, who spoke anonymously because they were not authorized to speak publicly, said that in early 2009, the S.E.C. created a broad policy involving settlements with companies that had received taxpayer assistance. In discussions with the Treasury Department, the agency’s division of enforcement devised a guideline stating that the financial health of those banks should be taken into account when the agency negotiated settlements with them.

“This wasn’t a political thing so much as, ‘We don’t know if it makes sense to bring a big penalty against a bank that just got a check from the government,’ ” said one of the people briefed on the discussions.

The people briefed on the S.E.C.’s settlement policy said that, while it did not directly affect many settlements, it slowed down the investigative work on other cases. A spokesman for the S.E.C. declined to comment.

Attorney General Moves On

The final chapter still hasn’t been written about the financial crisis and its aftermath. One thing has been especially challenging for regulators and law enforcement officials: balancing concerns for the state of the financial system even as they pursued immensely complicated cases.

The conundrum was especially clear back in the fall of 2008 when Mr. Geithner visited Mr. Cuomo and discussed A.I.G. Asked for details about the meeting, a spokesman for Mr. Geithner said: “As A.I.G.’s largest creditor, the New York Federal Reserve installed new management at A.I.G. in the fall of 2008 and directed the new C.E.O. to take steps to end wasteful spending by the company in order to protect taxpayers.”

Mr. Cuomo’s office said, “The attorney general went on to lead the most aggressive investigation of A.I.G. and other financial institutions in the nation.” After that meeting, and until he left to become governor, Mr. Cuomo focused on the financial crisis, with mixed success. In late 2010, Mr. Cuomo sued the accounting firm Ernst & Young, accusing it of helping its client Lehman Brothers “engage in massive accounting fraud.”

To date, however, no arm of government has sued Lehman or any of its executives on the same accounting tactic.

Other targets have also avoided legal action. Mr. Cuomo investigated the 2008 bonuses that were paid out by giant banks just after the bailout, and he considered bringing a case to try to claw back some of that money, two people familiar with the matter said. But ultimately he chose to publicly shame the companies by releasing their bonus figures.

Mr. Cuomo took a tough stance on Bank of America. While the S.E.C. settled its case with Bank of America without charging any executives with wrongdoing, Mr. Cuomo filed a civil fraud lawsuit against Kenneth D. Lewis, the former chief executive, and the bank’s former chief financial officer. The suit accuses them of understating the losses of Merrill Lynch to shareholders before the deal was approved; the case is still pending.

Last spring, Mr. Cuomo issued new mortgage-related subpoenas to eight large banks. He was interested in whether the banks had misled the ratings agencies about the quality of the loans they were bundling and asked how many workers they had hired from the ratings agencies. But Mr. Cuomo did not bring a case on this matter before leaving office.

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"Glaring inequities fuel Occupy Wall St."
NashuaTelegraph.com - Editorial - October 12, 2011

Beginning in 2008, when the financial services industry began to implode under the weight of the subprime lending breakdown and several other highly questionable dealing schemes, President George W. Bush and then President Barack Obama committed trillions of taxpayer dollars to stabilize investment markets. Born was the infamous maxim “Too big to fail.”

If the government hadn’t stepped in, the economic damage would have been much worse. Instead of a Great Recession, the nation would now be mired in its second Great Depression in a century.

Although angry, Americans accepted the bailouts assuming that once Wall Street got back on its feet, the economy would begin to grow, jobs would be created and prosperity would return.

Well, it’s three years later, and while Wall Street and much of corporate America are recovering nicely, tens of millions of Americans are struggling to make ends meet with no hope their condition will improve in the near future.

President of the Federal Reserve Board Ben Bernanke capsulized it last week speaking to Congress when he said the economic recovery was on the verge of falling apart.

“Very generally, I think people are quite unhappy with the state of the economy and what’s happening,” he said. “They blame, with some justification, the problems in the financial sector for getting us into this mess, and they’re dissatisfied with the policy response here in Washington.”

That’s why thousands of Americans are taking to the streets across the country in the fledging protest movement Occupy Wall Street. And while tea party members bristle at any comparison with their efforts, the two movements are rooted in a deep frustration with the failure of America’s democratic systems.

Of the two movements, it’s the occupiers who have focused more attention on the worsening condition of the middle class by calling attention to the nation’s staggering inequities in the distribution of wealth. In 2007, the top 10 percent of Americans controlled more than 70 percent of the wealth and the bottom half just 2.5 percent. It’s doubtful it has gotten better since then.

The Census Bureau reported last month that in 2010 middle class median household incomes fell to the lowest levels since 1996. It’s the longest stretch over which inflation-adjusted median income hasn’t improved since the Great Depression.

More than 45 percent of unemployed Americans – more than 6 million people – have been out of work for more than six months, a rate not seen since 1948.

Americans are losing faith in the notion America is a land of opportunity where through hard work and perseverance anyone can improve his or her life and the lives of their children. Instead, a growing number of Americans believe the deck is stacked against them in favor of corporate special interests that manipulate a corrupt political system with legalized graft in the form of boundless campaign contributions.

The question facing the Occupy Wall Street movement is whether it can coalesce around a set of core values that can broaden its popular appeal and political influence much like the tea party has done.

If it can’t, then it will end up like countless other fledging movements that wither away. Twenty years ago, independent candidate Ross Perot won nearly 19 percent of the popular vote in the 1996 presidential election and was emboldened to create the reform party. How long did that last?

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"DOJ Will Not Prosecute Goldman Sachs in Financial Crisis Probe"
By Jason Ryan | ABC OTUS News – August 9, 2012

The Justice Department has decided it will not prosecute Goldman Sachs or its employees for their role in the financial crisis, following an investigation by senators Carl Levin (D-MI) and Tom Coburn (R-OK). The congressional investigation found problems with the credit rating agencies and poor oversight from regulators, and highlighted abuses by Goldman Sachs and other large investment banks. Senator Levin sent a formal referral to the Justice Department for a criminal investigation in April 2011.

The investigative report by the Senate's Permanent Subcommittee on Investigations, chaired by Levin, found that Goldman Sachs "used net short positions to benefit from the downturn in the mortgage market, and designed, marketed, and sold CDOs in ways that created conflicts of interest with the firm's clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients."

A statement from the Justice Department issued late on Thursday evening noted, "Based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report."

"The department and its investigative partners conducted an exhaustive review of the report and its exhibits, independently gathered and scrutinized a large volume of other documents, and tenaciously pursued potential evidentiary leads, including conducting numerous witness interviews," the Justice Department's statement continued. "While the department and investigative agencies ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time, we commend the hard work of those involved in preparing the report and thank the Senate's Permanent Subcommittee on Investigations for its cooperation in regard to the criminal investigation."

"We are pleased that this matter is behind us," Goldman Sachs spokesman David Wells said when contacted by ABC News.

The Justice Department statement noted that if additional information emerges, the cases could be prosecuted in the future.

This most recent decision follows other high-profile investigations that Justice decided not to prosecute: There was the collapse of AIG and the role of the top executive at AIG Financial Products division, Joseph Cassano, and former Countrywide CEO Anthony Mozillo, who was fined by the SEC in an insider trading case. Citibank and JP Morgan both had multi-million-dollar settlements with the SEC over collateralized debt obligations, or CDOs, tied to the U.S. housing market, but Justice has not brought any criminal cases. Freddie Mac was subpoenaed in a grand jury investigation in 2008 but the firm disclosed in an Aug. 8, 2011, SEC filing that the Justice investigation was closed.

Attorney General Eric Holder defended the Justice Department's record in pursuing high profile financial fraud cases. "There have been, I guess, 2,100 or so mortgage-related matters that we have brought here at United State Department of Justice. Our state counterparts have done a variety of things. The notion that there has been inactivity over the course of the last three years is belied by a troublesome little thing called facts."

Goldman has faced stiff penalties from the Securities and Exchange Commission. In April 2010 the SEC filed a civil charge against Goldman Sachs and Fabrice Tourre, a vice president, for making misstatements and omissions from financial records in connection with CDOs that Goldman Sachs marketed to their investors. CDOs played a significant part in the financial crisis in 2008.

ABACUS 2007-AC1 was tied to the performance of subprime residential mortgage-backed securities and was composed of investment choices hedge fund manager John Paulson had a financial interest in selecting, although Tourre never disclosed to potential investors that Paulson & Co. had a short-interest position in seeing ABACUS go down. Investors in ABACUS allegedly lost an estimated $1 billion.

According to the SEC complaint Tourre, who called himself "Fabulous Fab" wrote to a friend in a January 23, 2007, email: "More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre] … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities(sic)."

Goldman Sachs reached a settlement with the SEC in July 2010, paying a $550 million fine for admitting that they should have included information about Paulson's investment position. Tourre is currently in ongoing litigation with the SEC over the case.

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August 10, 2012

I disagree with the U.S. Department of Justice's decision not to prosecute Goldman Sachs for their role in the financial crisis of 2007 - 2008. I feel that corporate elites like Goldman Sachs are treated like they are above the law. Goldman Sachs made money off of the financial losses of its investors or clients. Goldman Sachs contributed to the economic downturn that costs millions of Americans their jobs and financial well being. I believe the federal government is corrupt to let corporate elites get away with financial fraud.

- Jonathan Melle

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"House Approves Derivatives Deregulation Bills That Would Open More Loopholes For Wall Street"
By Zach Carter and Shahien Nasiripour, HuffingtonPost.com - June 12, 2013

WASHINGTON -- The U.S. House of Representatives passed a slate of bills Wednesday intended to roll back recent financial reforms and deregulate derivatives, the complex financial products at the heart of the 2008 financial crisis.

The legislation aimed at the 2010 overhaul of financial regulation known as Dodd-Frank cleared with broad bipartisan backing. One bill passed despite strenuous objections from the White House, leading regulators and senior lawmakers such as Maxine Waters (D-Calif), the top Democrat on the House Financial Services Committee. Nearly two-thirds of House Democrats opposed that measure, which aims to curb U.S. supervision of overseas activities by U.S. banks, even though nearly two-thirds of Democrats on the banking committee voted for it last month.

The measures are unlikely to advance in the Senate or be signed into law by President Barack Obama. Still, House approval increases the odds. It also puts further pressure on regulators, such as the Commodity Futures Trading Commission, that rely on Congress for funding.

The most significant derivatives measure approved by the House has been derisively referred to on Capitol Hill as the "London Whale Loophole Act" -- a reference to the $6 billion trading loss on wrong-way derivatives bets placed by a group of London-based traders at JPMorgan Chase, the largest U.S. bank by assets. The bill targets swaps, a type of derivative, and it effectively exempts overseas activities by U.S. financial groups from U.S. oversight.

The measure would place roadblocks in front of the Commodity Futures Trading Commission and the Securities and Exchange Commission if they tried to supervise overseas swaps trading by U.S. institutions, activities they are trying to regulate on the belief that U.S.-based financial institutions -- and possibly taxpayers -- ultimately would be on the hook if swaps trading led to massive losses. Instead, it would allow for overseas activities to be regulated by foreign jurisdictions.

Some nations with major financial centers are working to finalize their own reforms of the swaps market, including the European Union. The U.S. is considered to be far ahead in implementing its proposals. U.S. rules also are considered to be the strictest.

The biggest U.S. and foreign financial groups enthusiastically support the deregulation measures, in part because swaps trading is among the most lucrative on Wall Street. Swaps are used to hedge risk or speculate on movements in financial markets, such as in interest rates and creditworthiness. The financial groups that dominate the market record more than $30 billion in annual profit, estimated Oliver Wyman, a consultancy.

Dodd-Frank's swaps reforms "will collectively strengthen the weak and outdated regulatory regime that played a significant role in the crisis that caused devastating damage to the U.S. economy and the financial well-being of American families.," the White House said this week. The London Whale Act would be "disruptive" and would "slow the implementation of these vital reforms."

Rep. Michael Capuano (D-Mass.) said: "This bill is not about American jobs. This bill is all about foreign swaps. If they're going to create jobs, they're going to be in foreign countries."

Some Democrats said that the measure creates incentives for U.S. banks to move their swaps activities overseas in order to escape stringent new U.S. rules. Last month, Treasury Secretary Jack Lew warned House Democrats against voting for swaps measures intended to weaken Dodd-Frank.

Last week, Gary Gensler, CFTC chairman, warned that the U.S. government’s efforts to reform the swaps market “could be undone” if U.S. banks’ foreign affiliates and branches whose activities are guaranteed by their U.S. parent companies “are allowed to operate outside of these important requirements.”

Other CFTC officials, including Scott O'Malia, one of five CFTC commissioners, have argued that overseas units of U.S. financial groups must be allowed to comply with foreign rules if they are comparable to U.S. measures, rather than imposing U.S. rules on overseas activities that may conflict with foreign regulators' rules.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said Wednesday's overseas proposal would prevent the government from regulating away the ability of hardworking Americans to "go down to the 7-Eleven and buy a six-pack" after a hard day's work. Many derivatives are tied to the prices of commodities, including grain and metals.

Finance watchdogs said they fear the legislation's bipartisan support may ultimately lead to political support for passage in the Senate -- the same fate that befell the deregulatory JOBS Act in 2012.

"I hope this bill passes with a large majority that cannot be ignored by the Senate," Rep. Michael Grimm (R-N.Y.) said on the House floor Wednesday, referring to a separate bill exempting some non-banks companies that enter into swaps contracts from banks from stumping up collateral to prove they can make good on the deal. Grimm's bill was opposed by the Obama administration, and just a dozen lawmakers voted against its overwhelming passage.

The CFTC already is implementing the measures that Grimm's bill hopes to achieve. The proposed legislation would remove the agency's ability to reverse course, something regulators acknowledge is highly unlikely to ever occur.

Less than a handful of Republicans voted against the derivatives bills. One of the bills, which attempts to ease the transfer of data between U.S. and overseas authorities and has the backing of regulators, received just two votes against it.

Taken together, the votes underscore a deepening tension between different traditionally progressive factions of the Democratic Party over the Dodd-Frank Act, which Democrats like to call "Wall Street Reform."

Leaders of the Congressional Progressive Caucus, including co-Chair Keith Ellison (D-Minn.) have been outspoken opponents of legislation intended to roll back parts of Dodd-Frank, voting against proposals at the committee level and publicly blasting them.

"Dodd-Frank said that if you're an American company that has a swap business, you'll be regulated by the United States. [H.R. 1256] says if you're an American company, you can send your swap business overseas to wherever there's a lighter regulatory regime," Ellison said.

Other liberal stalwarts, including Rep. Alan Grayson (D-Fla.), who chairs the Congressional Progressive Caucus Political Action Committee, have been more blunt.

"The road to hell is paved with these bills," Grayson said in March, referring to a slate of financial deregulatory legislation that included the bills approved by the House on Wednesday.

By contrast, the Congressional Black Caucus, a typically robust nexus of progressive strength in the House, has urged its members to back a weakening of Dodd-Frank's derivatives measures. Some cosponsors of such legislation, including Reps. Gwen Moore (D-Wis.) and David Scott (D-Ga.), are members of the caucus, and the group's chair, Rep. Marcia Fudge (D-Ohio), has penned a separate bill deregulating other aspects of the derivatives market. Her bill wasn't voted on Wednesday. The group urged its members to vote for three of the four bills considered Wednesday, though it did not take a position on the overseas measure.

The Congressional Black Caucus is one of only a handful of organizations on Capitol Hill that can exert significant political influence without corporate backing. Not taking a position on legislation gives its members a green light to vote, for example, in favor of corporate subsidies -- a signal many politicians are eager to accept.

Fudge declined to comment. When asked about the disparity between the Progressive Caucus and the Black Caucus, Ellison -- a member of both -- demurred.

"I can't speak to it," Ellison said. "You're asking me a tough question. I will freely admit I have no answer for that. All I will say is, I respect my colleagues in the CBC, but the ones who are voting for this, I disagree with them."

Fudge and Moore also are members of both groups. Prior to Wednesday's vote, 13 Democratic lawmakers including senior members of the Congressional Black Caucus urged their colleagues to vote against the overseas legislation.

Two other bills deregulating derivatives markets that opponents claim would weaken Dodd-Frank have been voted out of their respective committees, and are expected to be voted on by the full House in the coming weeks.

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June 13, 2013

Re: Wall Street Lobbies U.S. Congress

I read that the U.S. House of Representatives passed legislation that will deregulate derivatives swaps. I oppose this bill because risky bets on financial assets is part of what caused our economy to collapse in 2007. I also read that Wall Street's 5 biggest financial institutions are bigger than they were before the recession that began in 2007 - 2008. The federal government bailed out these same big Wall Street banks with trillions of dollars of taxpayer money. I oppose big Wall Street banks that are too big to fail because it has become Socialism for the Corporate Elite. It is heads they win, tails the taxpayers lose. I don't understand why the Corporate Elite has become more powerful than ever before, especially when they tanked the economy in 2007 - 2008, and the taxpayers had to bail them out with trillions of public dollars. I believe the Corporate Elite is hurting our economy and society. And the U.S. Congress is not doing anything about it. Now, the U.S. House is deregulating the derivatives swap laws. I hope the U.S. Senate opposes the U.S. House's bill. I hope that U.S. President Barack Obama vetoes any measure that deregulates Wall Street's big banks.

- Jonathan Melle

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"Senators Introduce New Glass-Steagall Act"
By Dunstan Prial, July 11, 2013, FOXBusiness

A bipartisan group of U.S. Senators on Thursday introduced a bill that would revive the dormant Glass-Steagall Act, which for decades separated the primary banking functions of holding depositors’ savings and making investments.

The legislators, led by Senators Elizabeth Warren (D-MA) and John McCain (R-AZ), say repeal of the Glass-Steagall Act in 1999 played a significant role in ramping up the kind of excessive risk-taking by banks that led to the financial crisis of 2008.

In addition, the bill aims to reduce the size of so-called “too big to fail” banks which would in turn reduce the likelihood of future government bank bailouts.

The Senate bill would draw a line between traditional banks that hold customers’ savings and checking accounts and are insured by the Federal Deposit Insurance Corporation and “riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities,” the legislators said in a statement.

“Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer,” McCain said in a statement.

Warren noted that the four largest U.S. banks – JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) – are 30% larger now than at the beginning of the financial crisis five years ago.

"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," Warren said.

A fact sheet describing the legislation said banks would be given five years to separate out traditional banking activities, such as offering savings accounts, from investment banking and broker-dealer activities.

The original Glass-Steagall legislation, introduced during the height of the Great Depression, separated depository banks from investment banks in an effort to divide the riskier activities of investment banks from the core depository functions that help consumers save. Significant portions of the bill were repealed in 1999 as the government sought to deregulate the banking sector.

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"US banks earn record $42.2B in 2nd quarter"
By MARCY GORDON | Associated Press – August 29, 2013

WASHINGTON (AP) — U.S. banks earned more from April through June than during any quarter on record, aided by a steep drop in losses from bad loans.

The Federal Deposit Insurance Corp. says the banking industry earned $42.2 billion in the second quarter, up 23 percent from the second quarter of 2012. About 54 percent of U.S. banks reported improved earnings from a year earlier.

Banks' losses on loans tumbled 30.7 percent from a year earlier to $14.2 billion, the lowest in six years. And bank lending increased 1 percent from the first quarter. Greater lending helps boost consumer and business spending, leading to more jobs and faster economic growth.

Still, the report shows that the largest banks continue to drive the industry's profits while smaller institutions have struggled. Banks with assets exceeding $10 billion make up only 1.5 percent of U.S. banks. Yet they accounted for about 82 percent of the industry's earnings in the April-June quarter.

Those banks include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most have recovered with help from federal bailout money and record-low borrowing rates.

Overall, FDIC Chairman Martin Gruenberg said the second-quarter results "show a continuation of the recovery in the banking industry."

One concern is the recent spike in interest rates. Rates have risen since Chairman Ben Bernanke indicated this spring that the Federal Reserve could slow its bond purchases later this year, if the economy continues to show improvement. The bond purchases have kept long-term interest rates low.

Higher interest rates could have mixed impact on banks. On one hand, they make it more expensive for banks to borrow. But they also enable banks to charge more for loans.

"It's a tricky balance to strike," Gruenberg said at a news conference.

Losses on loans fell to the lowest level since the third quarter of 2007. Home equity loans showed the greatest declines in losses.

Another sign of the industry's health is that fewer banks are at risk of failure. The number of banks on the FDIC's "problem" list fell to 553 as of June 30 from 612 in the first quarter.

And so far this year, only 20 banks have failed. That follows 51 closures last year, 92 in 2011 and 157 in 2010. The 2010 closures were the most in one year since the height of the savings and loan crisis in 1992.

The FDIC is backed by the government, and its deposits are guaranteed up to $250,000 per account. Apart from its deposit insurance fund, the agency also has tens of billions in loss reserves.

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OPINION
“Don’t take credit for risky debt loads”
By Boston Herald Editorial Staff, January 5, 2020

In addition to those many unhappy returns of ill-fitting gifts, the post-Christmas period also heralds the arrival of those dreaded credit card bills rung up during the holiday season.

They’re a sobering reminder of the price we pay for the convenience of postponing the day of reckoning by swiping that plastic card in lieu of cash.

It also might be time to take stock of the debt-dependent society in which we live.

Americans have accumulated near-record levels of credit card debt over the last year, despite increases in interest rates and fees.

JPMorgan Chase, the country’s largest bank by assets, and Citigroup reported that credit card sales were up 10% and 5% respectively in the third quarter. Profits at Visa were up 17% in its most recent fiscal year, while Mastercard reported an 11% profit jump in its most recent quarter.

Those profits came on the backs of U.S. households, which carry an average credit card debt of $8,500; that translates into an overall credit card load of $1.088 trillion, which exceeds the pre-recession record of $1.02 trillion reached in 2008.

A record 182 million Americans have credit cards, compared with 147.5 million in 2010, according to TransUnion.

Credit card interest charges continue to rise, despite several Federal Reserve rate cuts. The current average interest rate is 17.3%, but consumers with lower credit scores pay an average of 25%.

And even if the Federal Reserve lowers rates further, credit card companies aren’t likely to follow suit. Credit card profits have become that industry’s cash cow, which it wants to retain and expand.

While bulging credit card debt might be great for a bank’s bottom line, that doesn’t hold true for the economy as a whole.

Credit cards account for one of the four main drivers of consumer debt. Only one of those four actually supports an appreciating, physical asset, which should sound a solvency alarm in everyone one of those U.S. households.

The most common debt, home mortgages, has risen to $9.4 trillion, but at least in most cases, that mortgage sustains property that increases in value over time, in addition to providing shelter and some tax benefits.

The worst value comes with an auto loan. That debt has climbed to $1.3 trillion, even though that vehicle’s price plummets as soon as it exits the dealership. However, you’ll continue to pay the same loan amount every month for the next three to five years.

The most problematic borrowing comes with student loans. That has continued to escalate, growing to a record $1.48 trillion in the second quarter of 2019. Many college grads find themselves saddled with mortgage-sized debt that they can’t repay, leading to alarming increases in loan defaults.

Since our economy relies on a healthy consumer base, we don’t expect any momentous changes in Americans’ spending habits.

Low savings rates and high credit card rates will likely remain the norm.

But wise consumers in our view should seek value in the debt they acquire, whether it’s the convenience of waiting a month to pay that credit card balance in full, or seriously weighing the cost/benefit equation of that college loan.

Credit — and our ability to pay for it — has its limits.

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Milton Friedman wearing a suit and tie: Milton Friedman spearheaded shareholder primacy economics. Jon Hargest/South China Morning Post via Getty Images©

BUSINESS INSIDER - Better Capitalism

"As the pandemic, fires, and inequity all rage, free market icon Milton Friedman's declaration that the sole responsibility of business 'is to increase its profits' sounds emptier than ever"

insider@insider.com (Marguerite Ward) September 13, 2020

In 1970, Milton Friedman wrote an influential essay in The New York Times Magazine declaring the primary purpose of a company is to maximize profits for its shareholders.

He disagreed that businesses had any responsibility to provide employment, eliminate discrimination, or avoid pollution, among other 'catchwords of the contemporary crop of reformers.'

From regular media appearances to advising President Ronald Reagan, Friedman’s influence cannot be understated. Waves of financial deregulation in the ‘70s and ‘80s followed his famous essay.

Today, amid rising inequality, massive fires in California, and calls for racial justice, Friedman's theory of shareholder primacy seems more out of touch than ever before.

More Americans and business leaders are calling for a shift in mindset toward stakeholder capitalism, which dictates that companies are responsible to all stakeholders, including employees, customers, and the communities in which they operate.

Fifty years ago Sunday, an economist by the name of Milton Friedman wrote an essay in The New York Times Magazine that would profoundly influence business leaders up to the present. 

He argued that the sole purpose of a company is to serve its shareholders and lampooned the idea that business has any responsibility for "providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers."

In the essay, Friedman pitted the idea of "social responsibility" against the interests of shareholders in a zero-sum game, with shareholders winning. Business leaders listened, and took note. 

Responsibility and primacy 

Today, while climate change is causing California's biggest forest fire in an era rife with them, Americans protest racial injustice in unprecedented numbers, and even corporate leaders sound the alarm on economic inequality, more and more voices are declaring Friedman's shareholder primacy what it is: dangerous. The surprise now is that these voices include many of the leading executives that embraced the theory in past decades.

Eroding business regulations and worker protections accompanied the rise of Friedman's philosophy in the '70s and '80s. Many laws passed during those decades chipped away at collective bargaining rights, which undermined pay growth for the middle class, according to the Economic Policy Institute, a left-leaning think tank. But a whole host of analyses have found that inequality has risen over the same period. 

Friedman became a regular on TV, appearing in a 10-part show on PBS, and he advised President Ronald Reagan, who largely opposed federal environmental regulation and research. In a move heavy with symbolism, Regan removed the solar panels that President Carter had installed on the White House's roof.

Along with the president, the business community at large embraced shareholder primacy. Academic research published at the time suggested that to ensure CEOs focus on making money for their shareholders, they be awarded large amounts of stock, something executives welcomed, Steve Jennings, author of "The Age of Agile," writes in Forbes. 

General Electric CEO Jack Welch, a dominant figure in '80s business, was an exemplar of the theory in practice, aggressively cutting costs (and jobs) to maximize shareholder profits. Business Insider's Shana Lebowitz reported upon Welch's death earlier this year that other executives are only now starting to move on from the Friedman-Welch legacy.

"In his two decades at the helm, GE met Wall Street expectations almost every single quarter. A $14 billion company became a more than $400 billion behemoth. Welch himself made nearly a billion dollars," Marketplace reports. 

After he left GE, Welch renounced the theory, calling shareholder primacy "the world's dumbest idea," saying in a 2009 interview with The Financial Times, that a company must also value its customers and its employees, and strive for long-term growth. 

But Friedman's ideas continued to influence policy nevertheless. 

President George W. Bush, in a 2002 speech celebrating the economist, said, "His work demonstrated that free markets are the great engines of economic development." In 2016, The Economist called Friedman's theory "the biggest idea in business."

Capitalism is at a crossroads

Friedman's worldview has brought us to where we are today: a time when the American capitalism made in his image seems more dysfunctional than ever. 

At least that's what business leaders, top economists, and the majority of Americans think. 

Only 25% of Americans believe our current form of capitalism ensures the greater good of society, according to a June survey of 1,000 people by The Harris Poll and Just Capital, an independent research firm founded by the billionaire investor Paul Tudor Jones. 

The top 0.1% of American households hold the same amount of wealth as the bottom 90%. 

Leo Strine, former chief justice of the Delaware Supreme Court, and Allbirds CEO Joey Zwillinger examined inequality further in a recent essay in The New York Times, the same paper that printed Friedman's famous essay in the first place.

"From 1948 to 1979, worker productivity grew by 108.1%  and wages grew by 93.2%, with the stock market growing by 603%," they write. 

Between 1979 to 2018, however, worker pay only rose by 11.6% as productivity rose by 69.6%. Over the same period, compensation for chief executives grew by an enormous 940% and the stock market grew by 2,200%.

Without any responsibility to the environment under Friedman's tenets, companies wrote off environmental risk as a public concern. Meanwhile environmental regulation was stymied. 

Since 1970, summers have continued to get hotter. Americans today want the government to take more action to reduce climate change and regulate carbon emissions (which companies by and large produce), Pew Research shows.  

And more Americans are calling for higher wages for hourly and contract employees, health insurance for all workers, as well as for more CEOs to speak out against racial injustice. 

Leaders are calling for reform, too, especially in the wake of the massive racial inequity the coronavirus pandemic has exposed.  

JPMorgan CEO Jamie Dimon called the coronavirus pandemic "a wake-up call" for leaders to address inequality in the US in a memo to stakeholders. Dallas Mavericks owner and investor Mark Cuban has urged business leaders to tackle income inequality.

"The possible silver lining of this pandemic is that it's an opportunity to change. Everything's on the table. People can see the need for change. We really need to grab this," Rebecca Henderson, a Harvard economist and author of "Reimagining Capitalism," previously told Business Insider.

The path forward 

To reverse inequality, companies must embrace stakeholder capitalism, Henderson said. She suggested that doing so could also help a business' profits, contrary to Friedman's argument. 

Friedman would argue that prioritizing employee wellbeing is not a corporation's concern. But a stakeholder approach challenges that. Indeed, at first glance it may seem financially counterproductive to offer employees more paid time off than legally required. But giving workers paid time off makes workers happier and increases employee loyalty. And Oxford University research shows that happier workers are more productive, increasing your bottom line in terms of worker output and reducing costs associated with employee turnover. 

Friedman would also argue that it's petty for a corporation to think about the environment. But consider the financial impact of investing in cleaner technology, like switching to all energy-efficient light bulbs in a company's headquarters. 

At today's average electricity rates, an energy-efficient light bulb can save you about $40 in energy savings before it burns out, according to the US Environmental Protection Agency. (They also emit less heat, which reduces cooling costs, Zack's Research, an independent research firm, points out). When considering the amount of lighting it takes to illuminate your average workspace, that's significant savings. 

Friedman would also laugh off claims that leaders have a moral obligation to promote social justice. Yet, research shows that customers today want to align themselves with brands that walk the walk when it comes to issues like climate change and racial equality. 

Corporate leaders can no longer afford, literally, to sit out movements like Black Lives Matter, now that Gen Z (consumers between the ages of 8 to 23) has $143 billion of spending power and will account for about 40% of global consumers this year alone, Business Insider's Dominic-Madori Davis reported. This cohort, of course, overwhelmingly supports racial equity. 

"Consumers vote with their dollars more so than ever before," diversity strategist and author Lenora Billings-Harris told Business Insider. 

"For an organization," she said, "silence is not acceptable."

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caption: Under shareholder primacy, businesses can write off air pollution and environmental degradation as "externalities."

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