Bailout Watchdog: TARP Has Increased Risk of Another Crisis

As we all know bailouts accomplish nothing but making matters worse, create false incentives, and make all of us poorer. Thus, as can be expected, the TARP watchdog reports:

The government’s response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” Barofsky wrote.

Since Congress passed $700 billion financial bailout, the remaining institutions considered “too big to fail” have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

One case concerns apparent self-dealing by one of the private fund managers Treasury picked to buy bad assets from banks at discounted prices. A portfolio manager at the firm apparently sold a bond out of a private fund, then repurchased it at a higher price for a government-backed fund. A rating agency had just downgraded the bond, so it likely was worth less, not more, when the government fund bought it. The company is not being named pending the outcome of Barofsky’s investigation.

Barofsky renewed a call for Treasury to enact clearer walls so that such apparent conflicts are less likely.

Treasury said it welcomed Barofsky’s oversight but resisted the call to erect new barriers against conflicts of interest. The new rules “would be detrimental to the program,” Treasury spokeswoman Meg Reilly said in a statement. The existing compliance rules “are a rigorous and effective method of protecting taxpayers,” she said.

Much of Barofsky’s report focused on the government’s growing role in the housing market, which he said has increased the risk of another housing bubble.

Over the past year, the federal government has spent hundreds of billions propping up the housing market. About 90 percent of home loans are backed by government controlled entities, mainly Fannie Mae, Freddie Mac and the Federal Housing Administration.

The Federal Reserve is spending $1.25 trillion to hold down mortgage rates, and millions of homeowners have refinanced at lower rates.

“The government has stepped in where the private players have gone away,” Barofsky said in an interview. “If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of” artificially pushing up home prices in the coming years.

The report warned that these supports mean the government “has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.”

Barofsky’s report echoed concerns raised by housing experts in recent months, as home sales and prices rebounded. They warn that the primary reason for the turnaround last year has been billions of dollars in federal spending to lower mortgage rates and prop up demand.

Once that spigot of cash is turned off, they caution, the market will be vulnerable to a dramatic turn for the worse. Daniel Alpert, managing partner of investment bank Westwood Capital, wrote in a report that national home prices are bound to fall 8 to 10 percent below the lows of last spring.

“The lion’s share of the remaining decline will occur in markets that saw sizable bubbles but have not yet retrenched,” he wrote.

Officials from the Obama administration counter that massive federal intervention has helped the housing market stabilize and prevented more dire consequences.

Barofsky’s report also disclosed that, while the Obama administration has pledged to spend $75 billion to prevent foreclosures, only a tiny fraction — just over $15 million — has been spent so far. Under the Making Home Affordable program, only about 66,500 borrowers, or 7 percent of those who signed up, had completed the process as of December.

He said the key to preventing future crises is to reform Fannie Mae and Freddie Mac, create and improve loan underwriting and supervision of banks. He stopped short of endorsing specific proposals for overhauling financial regulation, but said many of the proposals would go far to improving the system.

Sorry, but that conclusion is just hilarious. This really is akin to a woman in an abusive relationship who continues to believe her boyfriend will change and continues to run back to him, no matter how many times she gets beaten up.

The entire article points out how incapable of solving any one problem the government is and concludes with the solutions of “reforming” nationalized banks, “creating” loan underwriting, and doing some more bank supervision. Who does all these things? Of course, that same government! That is supposed to solve the structural problems in the financial system?

No, what needs to happen is to bring down what has brought about the financial crisis in the first place.

Who has created all the excess fiat money that flowed into the system to blow up price bubbles? The Federal Reserve Bank – so just close it down already!

Who has created all the excess credit that blew up the bubble? The fractional reserve banks – so just end the system of fractional reserve banking already!

Who has granted oligopoly status to the rating agencies who one after another failed to assess credit risk appropriately? The SEC – so end the credit rating cartel already!

In fact who has taken away oversight from the stock exchange companies  to try and oversee all stock exchanges in the country, missing one giant fraud after another? Which organization was close to Making Bernie Madoff their chairman?? The SEC – so get rid of it already!

Even after some of the worst excesses of subprime lending, who proudly remains the sole subprime lender in the country? The government owned banks! – So close them down already!

Who has been propping up financial markets in secret over decades with taxpayer money, creating malinvestments and false incentives left and right? The mighty President’s Working Group on Financial Markets! – So get rid of it already!!

What is it that made the common man put so much money into the stock market? It comes to a large degree from the incentive through tax savings for retirement accounts. If the taxes weren’t there in the first place, surely people would think twice about transferring their hard earned and saved money over to Wall St.

On top of that a policy manipulating and suppressing interest rates makes it completely unattractive to put money into savings accounts, and encourages people to be foolish. – So again, stop meddling with the credit markets, get rid of the central bank and with it would go all fractional reserve lending.

Why do you think it is so hard for honest small businesses to obtain funding in a flexible and straightforward manner? Why does it feel to most people like they are secluded from the majority of the action while Wall St. thrives? It is because every single government policy aiming at financial regulation has been designed to herd money into the stock market and lock it up in there for the kids to play with.

Which institution, out of all, is the least capable to be responsible about its finances, stay out of debt, live within its means? … it is of course the government itself.

Folks, wake up to reality, leave fantasy island. Come to your senses and work toward closing down that institution which is the root cause of all your problems: Close down the government and all the things I pointed out above  and many more evils would automatically go with it.

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CIT Files For Bankruptcy; Taxpayers Lose $2.3 Billion

The New York Times writes:

Three months ago, the CIT Group barely averted what it considered to be a ruinous bankruptcy filing that would likely have put the 101-year-old lender out of business.

On Sunday afternoon, the company filed for Chapter 11 — but under a so-called prepackaged bankruptcy plan that will enable it to emerge from court protection by the end of the year, under the control of its debtholders. (Read the filing after the jump.)

The filing, made in a federal court in Manhattan, will still mean much pain for many parties, beginning with taxpayers. CIT received $2.3 billion in government aid last year, a bailout that came in the form of preferred stock. That will almost certainly be wiped out in the bankruptcy process, the first realized loss in the government’s rescue of the financial system.

While several firms that have received bailout money, including Goldman Sachs and Morgan Stanley, have repaid the government, others — including the American International Group, General Motors and Chrysler — are expected to lead to losses.

CIT’s filing will test whether a financial company can survive the Chapter 11 process. Bankruptcy has long been considered a death knell for lenders, whose very existence depends on the confidence of its creditors and customers. The company’s struggles have been watched with interest and trepidation by analysts and the thousands of small and midsize businesses that borrow from CIT.

CIT was the nation’s largest provider of what is known as factoring, a type of lending used heavily by retailers. The company has spent months trying to reassure its clients that it will remain open for business as stores ramp up for the holiday season. Relatively few other companies serve as factors, and among them are other embattled lenders like GMAC.

The filing on Sunday capped months of efforts by CIT to stay alive. After being denied another bailout by the federal government, the company bargained with its creditors over a restructuring plan that would keep it operating and cut $10 billion in unsecured debt.

“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” Jeffrey M. Peek, CIT’s outgoing chairman and chief executive, said in a statement. “This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence.”

While CIT had hoped to stay out of bankruptcy court through a bond exchange offer, that plan failed to win enough support from bondholders, the company said in a statement.

With $71 billion in assets and nearly $65 billion in liabilities, CIT is among the largest corporate bankruptcies on record, though it is dwarfed by the likes of Lehman Brothers and Washington Mutual. The company said in its bankruptcy petition that it had $800 million in bonds maturing from Sunday through Tuesday.

CIT said that only its holding company would file for bankruptcy, and that most of its important operating subsidiaries, including its Utah bank, would continue to operate normally.

Mr. Peek, the architect of its push to grow beyond its sleepy industrial-lending roots into a major new financial player, will step down by the end of the year. People briefed on the matter said the search for his replacement was continuing and ultimately remained up to the company’s new board of directors.

Bondholders will receive about 70 cents on the dollar through the prepackaged bankruptcy, though the company warned that investors could receive as little as 6 cents on the dollar in the alternative, a free-fall bankruptcy that lacked a preapproved reorganization plan.

Last month, CIT unveiled its debt-exchange offer, which would have let bondholders tender their holdings for new, longer-dated bonds and preferred stock. But it also began soliciting votes for the prepackaged bankruptcy option. Under federal bankruptcy law, approval of such a plan requires the support of more than 51 percent of the number of creditors voting and more than two-thirds of the dollar value of those bonds.

CIT said in a statement that holders of about 85 percent of its $30 billion in bond debt participated in the voting. Those investors voted almost unanimously to support the prepackaged bankruptcy plan.

Last week, the company secured several important agreements to aid its prepackaged bankruptcy plan. It obtained a $4.5 billion loan from several investors, including bondholders who lent it $3 billion in the summer. It also reached an accord with Goldman Sachs that would preserve a $2.13 billion loan even through bankruptcy protection, while paying only a portion of a $1 billion termination fee.

CIT also ended a fight with the investor Carl Icahn, who had offered to pay bondholders 60 cents on the dollar if they rejected the company’s prepackaged bankruptcy offering. Mr. Icahn instead offered a $1 billion loan, although people close to CIT said the company did not expect to use the financing.

The company will be represented in bankruptcy by the investment bank Evercore Partners, the law firm Skadden, Arps, Slate, Meagher & Flom and the turnaround consulting firm FTI Consulting.

The most important piece of information to get out of this: This is the first honest and outright example of how TARP taxpayer money is beginning to evaporate.

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New Bank Bonus Releases – Heads: Bankers Win, Tails : Taxpayers Lose

And more unsurprising news on the TARP front. Cuomo releases ugly details on bank bonuses:

NY Attorney General Andrew Cuomo released his report on bonuses at the TARP Top 9.  At these firms alone, over 800 people made north of $3 million in 2008.  That’s a lot of scharole.  See Appendix B for the bonus breakdown at each bank.

The key info is in one particular table, however:

(Click to enlarge in new window)

picture-1

The columns to the right list the number of employees that received bonuses in excess of $3 mil/$2 mil/ $1 mil.

Banks that are still sitting on their TARP money (Citi, BofA, Wells among them) have no business paying out big bonuses before paying back the government. For that matter, neither do the others, who all continue to benefit from FDIC guarantees on debt and Fed lending facilities through which they’ve traded toxic loans in exchange for perfectly liquid Treasuries. They can use the Treasuries for repo collateral, get cash and then put that on deposit at the Fed where they now get paid interest on their excess reserves. It’s a great scam. One that feeds lots of cash into the 2009 bonus pool.

And GazetteOnline writes:

Citigroup Inc., one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008, New York’s attorney general said Thursday in a report detailing the payouts by nine big banks.

The report from Attorney General Andrew Cuomo’s office focused on 2008 bonuses paid to the initial nine banks that received loans under the government’s Troubled Asset Relief Program last fall. Cuomo has joined other government officials in criticizing the banks for paying out big bonuses while accepting taxpayer money.

Comparisons to historical payouts weren’t available, as the banks are not required to disclose the information publicly. They provided 2008 details to Cuomo’s office under subpoena.

Cuomo’s office found that the companies, which also included Bank of America Corp., Merrill Lynch & Co., JPMorgan Chase & Co. and Goldman Sachs Group Inc., awarded nearly 4,800 million-dollar-plus bonuses, with much of the money going to Wall Street investment bankers.

Citigroup, which is now one-third owned by the government as a result of the bailout, gave 738 of its employees bonuses of at least $1 million, even after it lost $18.7 billion during the year, Cuomo’s office said. The bank’s top four recipients received a combined $43.7 million.

The New York-based bank received $45 billion in government money and guarantees to protect it against hundreds of billions of dollars on potential losses from risky investments.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” Cuomo said in the report, noting banks have not in recent years actually tied pay to performance as they claim when describing their compensation programs. Cuomo added that when banks’ performance deteriorated significantly, “they were bailed out by taxpayers and their employees were still paid well.”

Bank of America, which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million and the top four recipients receiving a combined $64 million. Merrill Lynch, which Charlotte, N.C.-based Bank of America acquired during the credit crisis, paid out $3.6 billion, including a combined $121 million to four top employees.

Bank of America earned $2.56 billion in 2008, while Merrill lost $30.48 billion. Cuomo’s office said Merrill Lynch doled out 696 bonuses of at least $1 million for 2008.

Bank of America has been sharply criticized for its acquisition of Merrill Lynch because of mounting losses at the Wall Street bank and the size of bonuses Merrill paid its employees. Of the $45 billion in bailout funds Bank of America received, $20 billion was to support the acquisition of Merrill. Neither Bank of America nor Citigroup have repaid their TARP loans.

A Bank of America spokesman declined to comment on the report. A spokesman for Citigroup did not return repeated calls for comment.

The truth is: The public has no business discussing and quarreling about how much banks decide to pay their employees in bonuses. Legislators had the choice to unconditionally reject the TARP bailout ripoff. Many tried to talks sense into people. They didn’t listen. They rewarded companies whose financial irresponsibility led them to collapse, so they could continue their adventures in screw-up land. What did they expect to see happen? Now these clowns are running around, trying to find scapegoats for their own incompetence and cluelessness. What a circus!

Paola Sapienza and Luigi Zingales appropriately call for the government to Stop Subsidizing the Street:

The word for “crisis” in Chinese, weiji, is written with two characters: one (wei) means danger; the other, ji, means opportunity. That’s because every crisis challenges the status quo and in so doing creates the opportunity for something new to emerge. “This process of Creative Destruction,” wrote economist Joseph Schumpeter, “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

We have experienced the destruction wrought by the financial crisis. Now it’s time to focus on the opportunities it brings. The first place to look is the site of the greatest destruction: the banking sector. While finance will remain a pillar of a well-functioning economy, it’s unlikely that banking will survive for long in its current form. The current banking model is broken. Citigroup has been on the verge of failing in three of the last four downturns: This is hardly a viable business model.

Even more important is that Americans are rapidly losing trust in their banks. A survey we conducted at the end of March showed that only 29% of Americans trusted banks, down from 34% three months earlier and 42% a year ago. Twenty percent of respondents felt that a bank had cheated or misled them in the previous 12 months, while 10% had withdrawn their FDIC-insured deposits and squirreled away the cash. The word “credit,” speaking of telling etymologies, comes from the Latin credere, which means “to trust.” Trust is essential in banking, and it’s unlikely that banks can restore it. It’s always difficult to regain trust; it’s easier to start anew.

Luckily, starting anew is exactly what’s happening in the banking sector, with the launch of several start-ups with innovative ideas. They range from new ways to insure mortgages to new models of lending to reliable consumers by bypassing the current banking system. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy. It’s too early to tell if these attempts will succeed, but it’s vital that they occur. Through trial and error, a new world of banking will rise from the ashes of the old one.

Should the government subsidize these efforts? In a New York Times column this spring, Tom Friedman said yes, suggesting that it should dedicate a fraction of the Troubled Asset Relief Program (TARP) money to promote innovation. Fortunately, several venture capitalists have rejected the idea online, and with good reason: The government’s record as a venture capitalist is rather poor.

Nevertheless, the government can foster the new and innovative in a crucial way: by ceasing to subsidize the banking dinosaurs. The evidence shows that subsidies to failing companies not only waste resources in keeping obsolete and inefficient firms alive, but also delay the entry of new and more efficient organizational models.

TARP was sold as a way to keep credit flowing, but it could wind up delaying the success of new ventures that could help revive credit in the economy. For finance to begin allocating resources efficiently again, the government must stop propping up Wall Street.

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TARP Inspector General – Treasury Failed at Transparency

The AP writes:

The watchdog overseeing the federal government financial bailout says the government’s maximum exposure to financial institutions since 2007 could total nearly $24 trillion, or about $80,000 for every American.

The whopping amount compiled by the inspector general for the $700 billion Troubled Asset Relief Program takes into account about 50 initiatives and programs set up by the Bush and Obama administrations as well as by the Federal Reserve.

Many of the programs are backed by collateral and the $23.7 trillion represents the gross, not net, exposure that the government could face. No one has suggested that the full amount, in fact, will be used.

The government’s main watchdog over the federal financial bailout says the Treasury Department has repeatedly failed to adopt recommendations aimed at making the $700 billion program more accountable and transparent.

Neil Barofsky (buh-RAHF’-skee), the inspector general for the Troubled Asset Relief Program, says in a report to Congress that Treasury’s inaction means taxpayers have not been told what the financial institutions that have received assistance are doing with the money.

…what a surprise.

Barack Obama Lied:

Flashback. Here’s what President Obama said in February 09:

Visit msnbc.com for Breaking News, World News, and News about the Economy

Here’s the important part. When asked if the cost for the bank bailouts could go as high as $4 trillion, Obama replied:

“No, we’re not gonna be spending $4 trillion worth of taxpayer money.”

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Geithnerish Translated into English

In case people are still trying to make sense of  Tim Geithner’s statements, here an attempt to provide some help – another day of superficial answers to superficial questions:

Most U.S. banks have enough capital to keep lending but a pile of bad debts is fostering doubts about their health and slowing a recovery, U.S. Treasury Secretary Timothy Geithner said on Tuesday.

English: “The most relevant banks have absolutely no capital left but we will try to help them obscure their true numbers for as long as we can. By ‘most’ banks I am referring to the banks by number, not by relevance. This way I can make you all think that the banking industry is ‘mostly’ fine.”

Testifying before the Congressional Oversight Panel, which monitors the Treasury’s efforts to bail out troubled banks, he said toxic assets were “congesting” the U.S. financial system and hindering efforts to get credit flowing normally.

“Uncertainty about the value of legacy assets is constraining the ability of financial institutions to raise private capital,” Geithner said, adding that he hoped a public-private investment program will improve the ability to put a price on troubled mortgage and other assets.

English: “I ‘hope’ that no one will figure out that these toxic assets are worth nothing and I am confident that we will somehow be able to bail out their owners by making the taxpayer guarantee 97% of all assets acquired in the PPIP.”

Earlier, the special inspector general for the government’s bailout effort said the toxic-asset plan offered opportunities for fraud and abuse and warned it should be bolstered by tough conflict-of-interest rules.

English: The toxic asset plan WILL be abused and fraud will be rampant. We intend to act surprised once we find out.

Neil Barofsky also said subsidies for the public-private partnerships to buy assets could expose taxpayers to higher losses without matching increases in the potential for profit. He called for tough screening of investors as well as forced disclosure of ownership stakes and any dealings by the funds.

English: The taxpayer is cooked. He will lose billions, once again.

The government has injected hundreds of billions of dollars into banks to help them weather the damage from bad mortgage loans and is running stress tests on 19 of the largest banks to see whether they are prepared to deal with a further downturn.

English: The banks are getting a free ride. We intend to do everything to shield them from the real stress test, the market, no matter how much it will cost the taxpayer.

In a letter to panel chairman Elizabeth Warren, Geithner said the Treasury still has about $134.5 billion available out of an originally approved $700 billion for bolstering banks’ capital and said he wouldn’t need to ask Congress for more.

English: Geithner will ask Congress for more. Either the Treasury will do it directly, or the underfunded FDIC will collapse under the obligations of Geithner’s Public Private Investment Program and ask Congress for more funding.

STOCKS GET A LIFT
“Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” Geithner said, a comment that gave stocks a lift in morning trading.

English: “Currently, by market standards the banks absolutely don’t have sufficient capital left. But we don’t care what the market says, we let the “regulators” decide. In doing so, we minimize true regulation but maintain the appearance of it.”

But he conceded there were persistent worries about the health of the banking system and said that was impeding a broader economic recovery.

“Concerns about economic conditions — combined with the destabilizing impact of distressed ‘legacy assets’ — have created an environment under which uncertainty about the health of individual banks has sharply reduced lending across the financial system,” he said.

If the stress tests — parts of which are expected to be made public next month — show some banks need to raise more capital, then they will have options for doing so.

“Those banks that need more capital will have an opportunity to raise that capital from private sources or request capital from the Treasury in the form of convertible preferred stock,” Geithner said.

English: “No matter how lousy the banks, no matter how useless, they will get money from the taxpayer, even if private investors don’t want to touch them with a 10 foot pole.”

Some of the biggest banks have said they want to quickly repay money that they received under the government’s Troubled Asset Relief Program, or TARP, in part to avoid constraints on pay set out as a condition for getting the money.

GLAD TO TAKE MONEY

Geithner said if regulators certify that a bank would be sound without government help, the Treasury would gladly take the money back.

“It helps to underscore the basic point that the institutions of our financial system are in very different circumstances,” Geithner said.

But he hedged on whether he thought it would be good for the banking system if some banks returned the TARP money early, and he specified that regulators, not he, would decide whether to take bailout money back.

English: “Banks are in a Tarp Trap. We’ll let them out at our whim. I prefer to alleviate myself of any responsibility by shifting it to the regulators, whoever they may be.”

“My basic obligation and our responsibility is to make sure that system as a whole … has the ability to provide the credit that recovery requires,” Geithner said, “So we need to make a careful judgment about what policies are going to best promote that objective.”

English: “My basic responsibility is to do everything I can to force lending again, no matter how destructive credit has been to our economy, no matter how broke we are, and no matter how sick and tired of debt individuals are.”

Some analysts question whether letting some banks return the TARP money would add to investors’ and borrowers’ doubts about dealing with banks that still need government help, potentially making them more vulnerable to failure.

In response to questions, Geithner said it will be important for people to see what stress tests on major banks show, though he did not shed any further light on how extensive the publicly issued comments on banks’ health will be.

Transparency is vital, he said, adding “Without that, they are going to live with a deeper cloud of uncertainty over their financial health than they need to.”

English: “Transparency is terrible. With it, we would remove the cloud of uncertainty that currently covers up the truth about how this fractional reserve banking system and its credit expansion has brought about our demise.”

Geithner said the scope of the current crisis is unprecedented, so the government has no guide to follow in its efforts to ease the situation. But he insisted there were some signs of progress.

“Indicators on interbank lending, corporate issuance and credit spreads generally suggest improvements in confidence in the stability of the system and some thawing in credit markets,” he said.

English: “I have absolutely no clue what is going on. I will cover it up with platitutes since none of you seem to have a problem with it.”

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