Busted: Bankers and The Global Economy

November 23, 2008

Citigroup Saved by Federal Reserve and TARP

citigroup1In headier times a mere six months ago, Citigroup was discussing the sale of assets to raise cash flow and liquidity. With the stock market value of Citigroup plummeting, one of the larger international bank groups has now been saved this morning through the Federal Reserve. This is undoubtedly designed to build confidence in the markets this week as the economy continues to flag amid record job losses in America.

Citigroup is one of the world’s largest owners of toxic collateralized debt obligations (CDOs). This pool of bonds has created one of the largest victims in the financial crisis.

The U.S. Treasury and the Federal Deposit Insurance Corporation is providing liquidity against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the U.S. Treasury and FDIC.

The U.S. Treasury has invested $20 billion in Citigroup from the Troubled Asset Relief Program (TARP) in exchange for preferred stock with an 8% dividend to the U.S. Treasury. ~ E. Manning

November 1, 2008

Economic Drain from IMF on Prime Economies

The International Monetary Fund has been bailing out emerging and secondary economies, putting prime economies like the U.S. and Britain in line to fork over more major funding. If you thought national deficits and crisis spending were enough, now prime economies have the IMF funding of lesser nations to consider. “Hundreds of millions of dollars” are needed now to support the sagging support structure of the IMF. This is relevant and an important dragging force on prime economies. If you live in the U.S. or Europe, that probably means you.

The cooling economic climate is resulting in economies across the globe taking evasive action to the degree possible, usually using the same methods employed in the United States like lowering central bank interest rates in order to sustain their banks and encourage lending. The IMF is acting as an insurance policy to shore up foundering economies. Prime Minister Gordon Brown is recommending a better insurance system to assist distressed nations, a topic that will doubtless be near the top of the Global Financial Summit in New York City this month. Financial security is now a global watch word.

Banks globally have been racing to bolster their balance sheets after a bevy of collapses and hastily arranged mergers were prompted by heavy losses from bad mortgage and financial derivatives. In the meantime, surface signs indicate a slight lessening in the immediate stability crisis as far as the current market is concerned. The U.S. government is tiptoeing quietly as the presidential election is only days away. More bad news will likely affect the election and most possibly the results. Until then, the U.S. will try to enforce an all quiet on the economic front. Will the stock markets cooperate after a banner week? Ah, there’s the rub. ~ E. Manning

September 29, 2008

A Bailout Draft Without Details

government efficiency

government efficiency

Once the new Wall Street bailout legislation was released to the public by Congress, pundits and citizens alike plowed into the house.gov website. Sunday afternoon, presumably because of high traffic, the website was not accessible for many. In the late evening only a summary file was available. The actual legislation file was not viewable, duly noted with the stately notice “the file is damaged and could not be repaired.” So much for getting any real news direct from the source or the media. Other “helpful” media links merely directed John Q. Public to the same official document with the same result. Does anyone have a copy of the draft legislation? Heaven forbid that such a thing was intentional. Perhaps Chinese hackers are to blame.

The summary of the Emergency Economic Stabilization Act of 2008 was short on details, in which unquestionably the devil resides. The old news is that $700 billion will be designated to the Secretary of the U.S. Treasury for buy bad mortgage securities. The recent Republican contribution “allows” companies to insure troubled assets.

The legislation requires the Treasury to modify the troubled loans involved in the failed securities to allow some Americans to keep their homes. This process has been widely discussed for more than six months with little real result or prospect of streamlining the process. How will the U.S. Treasury manage such a large job and save homeowners in foreclosure from losing their homes? “Wherever possible” is the key word of the day, insuring that very little will be done by the Treasury. Instead, homeowners have hope through improving the HOPE for Homeowners program through HUD. The idea, once again, is to help more families to keep their homes. Once again, we are classicly short on details or provisional government motivation.

can of worms?

can of worms?

Part 3 highlights taxpayer protection with idea that taxpayers should not be expected to pay for Wall Street’s mistakes. This statement prevents a tea party. As a bonus for being bailed out, warrants will insure that taxpayers will benefit from future growth enjoyed as a result of participation in the program. Interestingly, the draft legislation intends that the President is responsible to submit legislation to cover losses to taxpayers resulting from the program.

Part 4 covers windfalls or golden parachutes for executives. They won’t walk away with millions in bonuses. Companies are projected to lose “certain tax benefits” and may be required to limit executive pay. Unearned bonuses must be returned. What determines “unearned” and the resulting enforcement is a huge question mark.

Finally, the federal government assures strong oversight in the draft legislation. Financial provisions indicate that the U.S. Treasury will not receive the funds at one time, starting with $250 billion, and followed up by the president as funds are needed. The Treasury is required to issue a report every sixty days. EESA establishes an Oversight Board that cannot act in an arbitrary manner and includes a special Inspector General to secure against fraud, waste and abuse.

Obviously, the legislation has good points and seems to take plenty of precautions. The reality is that the liquidity crisis is an accounting crisis bolstered by destructive decisions and pandering politics. More troubling is that trusting the government to properly handle legislation once it has passed has become a large question mark based on past performance. Trust has to be built and the nation is short on that right now. The morally-bankrupt weak-kneed Congress wants to restore that trust. Just considering that the nation must elect a Senator to be President is enough to give one pause to think. ~ E. Manning

Read First Amendment of rejected Congressional Bailout 

August 8, 2008

Bankers Seek to Buy Out Uncle Sam on Fraud

Regulators have been investigating Wall Street firms for their role in the sales and marketing of auction-rate investments.

Wall Street agreed to buy back more than $17 billion in securities that they fraudulently sold to retail customers paving the way for other banks and brokerage firms to do the same.

Merrill Lynch jumped ahead of regulator investigatory scrutiny, announcing that they will buy back about $10 billion in auction-rate investments that it sold to retail investors.

Citigroup reached a settled with state and federal regulators, agreeing to buy back about $7.3 billion of auction-rate securities that it sold to retail customers. As recompense for misconduct, Citigroup will pay a $100 million fine for its misconduct. The securities are essentially worthless, even though the buyers were told that the securities were safe and easy to cash in.

Even Bank of America is under attack with subpoenas related to securities sales. Taking on responsibility of bank instruments in bank bailouts has likely posed an additional headache.

At this time, institutional investors are still out in the cold, but both firms claim to be working on a resolution on problems with institutional investors in the hopes of avoiding more heat and gaining brownie points from the federal government. A rush of settlements are expected in the next few months as Wall Street aims to absolve itself.

Regulators are starting to pile on in a sort of informational and investigational bankers bloodletting. The Securities and Exchange Commission has elected to stay out the recent penalties as they expect to weigh in on their own investigation. From all appearance, Wall Street’s troubles have only just begun. Bankers know their guilt. Can they distract the investigations to avoid the embarassment as the propensity of their fraud is exposed to the nation? Seeking to buy out authorities may be seen as an easy way out as the financial onslaught on Wall Street and for banking in general continues.

July 25, 2008

Everybody Talking About U.S. Foreclosures

Everybody is into reporting foreclosures, but little is being done about the foreclosure frenzy until October 1st. Matters are made worse by the fact that system is not easily reformable in its current configuration. The best answer rests in trying to cleanse the market of problem loans through refinancing, which the U.S. government has taken on as their task. 220,000 homes were lost to bank repossessions in the second quarter as the banking and mortgage securities collapse continues.

A report form the National Association of Realtors revealed that existing home sales had declined again as the number of homes for sale continued to rise. The U.S. government reported home prices dropped again in May. Congress struggles to pass a housing rescue bill that will make FHA-insured loans available to many at-risk borrowers through Fannie Mae and Freddie Mac, putting the government on the line for any continued failures. Hopefully, Fannie and Freddie will no longer involve themselves in securitized mortgage loans. However, the Fed and U.S. Government have declined to state that these kinds of securities should be avoided by the industry and like it or not, they are part of the industry. (more…)

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