U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit
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By Mark Pittman and Bob Ivry
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Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more
than $7.76 trillion on behalf of American taxpayers after guaranteeing
$306 billion of Citigroup Inc. debt yesterday. The pledges, amounting
to half the value of everything produced in the nation last year, are
intended to rescue the financial system after the credit markets
seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already
tapped by financial institutions in the biggest response to an
economic emergency since the New Deal of the 1930s, according to data
compiled by Bloomberg. The commitment dwarfs the plan approved by
lawmakers, the Treasury Department’s $700 billion Troubled Asset
Relief Program. Federal Reserve lending last week was 1,900 times the
weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S.
Bernanke and Treasury Secretary Henry Paulson acknowledged the need
for transparency and oversight. Now, as regulators commit far more
money while refusing to disclose loan recipients or reveal the
collateral they are taking in return, some Congress members are
calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out
the window and we end up holding collateral we don’t know anything
about,” said Congressman Scott Garrett, a New Jersey Republican who
serves on the House Financial Services Committee. “The time has come
that we consider what sort of limitations we should be placing on the
Fed so that authority returns to elected officials as opposed to
appointed ones.”
Too Big to Fail
Bloomberg News tabulated data from the Fed, Treasury and Federal
Deposit Insurance Corp. and interviewed regulatory officials,
economists and academic researchers to gauge the full extent of the
government’s rescue effort.
The bailout includes a Fed program to buy as much as $2.4 trillion in
short-term notes, called commercial paper, that companies use to pay
bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee
bank-to-bank loans, started Oct. 14.
William Poole, former president of the Federal Reserve Bank of St.
Louis, said the two programs are unlikely to lose money. The bigger
risk comes from rescuing companies perceived as “too big to fail,” he
said.
‘Credit Risk’
The government committed $29 billion to help engineer the takeover in
March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and
$122.8 billion in addition to TARP allocations to bail out New York-
based American International Group Inc., once the world’s largest
insurer.
Citigroup received $306 billion of government guarantees for troubled
mortgages and toxic assets. The Treasury Department also will inject
$20 billion into the bank after its stock fell 60 percent last week.
“No question there is some credit risk there,” Poole said.
Congressman Darrell Issa, a California Republican on the Oversight and
Government Reform Committee, said risk is lurking in the programs that
Poole thinks are safe.
“The thing that people don’t understand is it’s not how likely that
the exposure becomes a reality, but what if it does?” Issa said.
“There’s no transparency to it so who’s to say they’re right?”
The worst financial crisis in two generations has erased $23 trillion,
or 38 percent, of the value of the world’s companies and brought down
three of the biggest Wall Street firms.
Markets Down
The Dow Jones Industrial Average through Friday is down 38 percent
since the beginning of the year and 43 percent from its peak on Oct.
9, 2007. The S&P 500 fell 45 percent from the beginning of the year
through Friday and 49 percent from its peak on Oct. 9, 2007. The
Nikkei 225 Index has fallen 46 percent from the beginning of the year
through Friday and 57 percent from its most recent peak of 18,261.98
on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to
$53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75
percent this year.
Regulators hope the rescue will contain the damage and keep banks
providing the credit that is the lifeblood of the U.S. economy.
Most of the spending programs are run out of the New York Fed, whose
president, Timothy Geithner, is said to be President- elect Barack
Obama’s choice to be Treasury Secretary.
‘They Got Snookered’
The money that’s been pledged is equivalent to $24,000 for every man,
woman and child in the country. It’s nine times what the U.S. has
spent so far on wars in Iraq and Afghanistan, according to
Congressional Budget Office figures. It could pay off more than half
the country’s mortgages.
“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at
Vineland, New Jersey-based Cumberland Advisors Inc. and an economist
for the Atlanta Fed for 10 years until January. “The backlash has
begun already. Congress is taking a lot of hits from their
constituents because they got snookered on the TARP big time. There’s
a lot of supposedly smart people who look to be totally incompetent
and it’s all going to fall on the taxpayer.”
President Franklin D. Roosevelt’s New Deal of the 1930s, when almost
10,000 banks failed and there was no mechanism to bolster them with
cash, is the only rival to the government’s current response. The
savings and loan bailout of the 1990s cost $209.5 billion in inflation-
adjusted numbers, of which $173 billion came from taxpayers, according
to a July 1996 report by the U.S. General Accounting Office, now
called the Government Accountability Office.
‘Worst Crisis’
The 1979 U.S. government bailout of Chrysler consisted of bond
guarantees, adjusted for inflation, of $4.2 billion, according to a
Heritage Foundation report.
The commitment of public money is appropriate to the peril, said Ethan
Harris, co-head of U.S. economic research at Barclays Capital Inc. and
a former economist at the New York Fed. U.S. financial firms have
taken writedowns and losses of $666.1 billion since the beginning of
2007, according to Bloomberg data.
“This is the worst capital markets crisis in modern history,” Harris
said. “So you have the biggest intervention in modern history.”
Bloomberg has requested details of Fed lending under the U.S. Freedom
of Information Act and filed a federal lawsuit against the central
bank Nov. 7 seeking to force disclosure of borrower banks and their
collateral.
Collateral is an asset pledged to a lender in the event a loan payment
isn’t made.
‘That’s Counterproductive’
“Some have asked us to reveal the names of the banks that are
borrowing, how much they are borrowing, what collateral they are
posting,” Bernanke said Nov. 18 to the House Financial Services
Committee. “We think that’s counterproductive.”
The Fed should account for the collateral it takes in exchange for
loans to banks, said Paul Kasriel, chief economist at Chicago-based
Northern Trust Corp. and a former research economist at the Federal
Reserve Bank of Chicago.
“There is a lack of transparency here and, given that the Fed is
taking on a huge amount of credit risk now, it would seem to me as a
taxpayer there should be more transparency,” Kasriel said.
Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61
percent of the total commitment of $7.76 trillion, based on data
compiled by Bloomberg concerning U.S. bailout steps started a year
ago.
“Too often the public is focused on the wrong piece of that number,
the $700 billion that Congress approved,” said J.D. Foster, a former
staff member of the Council of Economic Advisers who is now a senior
fellow at the Heritage Foundation in Washington. “The other areas are
quite a bit larger.”
Fed Rescue Efforts
The Fed’s rescue attempts began last December with the creation of the
Term Auction Facility to allow lending to dealers for collateral.
After Bear Stearns’s collapse in March, the central bank started
making direct loans to securities firms at the same discount rate it
charges commercial banks, which take customer deposits.
In the three years before the crisis, such average weekly borrowing by
banks was $48 million, according to the central bank. Last week it was
$91.5 billion.
The failure of a second securities firm, Lehman Brothers Holdings
Inc., in September, led to the creation of the Commercial Paper
Funding Facility and the Money Market Investor Funding Facility, or
MMIFF. The two programs, which have pledged $2.3 trillion, are
designed to restore calm in the money markets, which deal in
certificates of deposit, commercial paper and Treasury bills.
Lehman Failure
“Money markets seized up after Lehman failed,” said Neal Soss, chief
economist at Credit Suisse Group in New York and a former aide to Fed
chief Paul Volcker. “Lehman failing made a lot of subsequent actions
necessary.”
The FDIC, chaired by Sheila Bair, is contributing 20 percent of total
rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount
to a bank subsidy of as much as $54 billion over three years, or $18
billion a year, because borrowers will pay a lower interest rate than
they would on the open market, according to Raghu Sundurum and Viral
Acharya of New York University and the London Business School.
Congress and the Treasury have ponied up $892 billion in TARP and
other funding, or 11.5 percent.
The Federal Housing Administration, overseen by Department of Housing
and Urban Development Secretary Steven Preston, was given the
authority to guarantee $300 billion of mortgages, or about 4 percent
of the total commitment, with its Hope for Homeowners program,
designed to keep distressed borrowers from foreclosure.
Federal Guarantees
Most of the federal guarantees reduce interest rates on loans to banks
and securities firms, which would create a subsidy of at least $6.6
billion annually for the financial industry, according to data
compiled by Bloomberg comparing rates charged by the Fed against
market interest currently paid by banks.
Not included in the calculation of pledged funds is an FDIC proposal
to prevent foreclosures by guaranteeing modifications on $444 billion
in mortgages at an expected cost of $24.4 billion to be paid from the
TARP, according to FDIC spokesman David Barr. The Treasury Department
hasn’t approved the program.
Bernanke and Paulson, former chief executive officer of Goldman Sachs,
have also promised as much as $200 billion to shore up nationalized
mortgage finance companies Fannie Mae and Freddie Mac, a pledge that
hasn’t been allocated to any agency. The FDIC arranged for $139
billion in loan guarantees for General Electric Co.’s finance unit.
Automakers Struggle
The tally doesn’t include money to General Motors Corp., Ford Motor
Co. and Chrysler LLC. Obama has said he favors financial assistance to
keep them from collapse.
Paulson told the House Financial Services Committee Nov. 18 that the
$250 billion already allocated to banks through the TARP is an
investment, not an expenditure.
“I think it would be extraordinarily unusual if the government did not
get that money back and more,” Paulson said.
In his Nov. 18 testimony, Bernanke told the House Financial Services
Committee that the central bank wouldn’t lose money.
“We take collateral, we haircut it, it is a short-term loan, it is
very safe, we have never lost a penny in these various lending
programs,” he said.
A haircut refers to the practice of lending less money than the
collateral’s current market value.
Requiring the Fed to disclose loan recipients might set off panic,
said David Tobin, principal of New York-based loan-sale consultants
and investment bank Mission Capital Advisors LLC.
‘Mark to Market’
“If you mark to market today, the banking system is bankrupt,” Tobin
said. “So what do you do? You try to keep it going as best you can.”
“Mark to market” means adjusting the value of an asset, such as a
mortgage-backed security, to reflect current prices.
Some of the bailout assistance could come from tax breaks in the
future. The Treasury Department changed the tax code on Sept. 30 to
allow banks to expand the deductions on the losses banks they were
buying, according to Robert Willens, a former Lehman Brothers tax and
accounting analyst who teaches at Columbia University Business School
in New York.
Wells Fargo & Co., which is buying Charlotte, North Carolina-based
Wachovia Corp., will be able to deduct $22 billion, Willens said.
Adding in other banks, the code change will cost $29 billion, he said.
“The rule is now popularly known among tax lawyers as the ‘Wells Fargo
Notice,’” Willens said.
The regulation was changed to make it easier for healthy banks to buy
troubled ones, said Treasury Department spokesman Andrew DeSouza.
House Financial Services Committee Chairman Barney Frank said he was
angry that banks used the money for acquisitions.
“The only purpose for this money is to lend,” said Frank, a
Massachusetts Democrat. “It’s not for dividends, it’s not for
purchases of new banks, it’s not for bonuses. There better be a
showing of increased lending roughly in the amount of the capital
infusions” or Congress may not approve the second half of the TARP
money.
To contact the reporters on this story: Mark Pittman in New York at
mpit...@bloomberg.net; Bob Ivry in New York at bi...@bloomberg.net.
Last Updated: November 24, 2008 13:26 EST
http://bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home
Mr Bubble
4f82-92a4-0...@x16g2000prn.googlegroups.com:
> U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)
>
> By Mark Pittman and Bob Ivry
> Enlarge Image/Details
>
*Total U.S. consumer debt (which includes credit-card debt and non-
credit-card debt but not mortgage debt) reached $2.55 trillion at the end
of 2007, up from $2.42 trillion at the end of 2006. (Source: The Nilson
Report)
Why not just "guarantee" all the US citizens debt,have to pledge less,
and let the banks fall off into the ocean of they cant make it on that.