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/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 po