May 19, 2024

US Treasury Calls TARP Repayments A “Milestone” While Ignoring The Elephants In The Room

Treasury’s Victory Call On Financial Bailout Premature

The Treasury Department’s latest public relations effort to highlight the success of the financial system bailout focuses on the amount of TARP repayments versus total debt outstanding.  In addition, the Treasury, which had previously estimated the cost of the TARP program at $341 billion, has now lowered that estimate to only $105 billion.

Wall Street Journal – The U.S. Treasury Department said Friday the total amount repaid to taxpayers for government funds used to bail out U.S. companies has surpassed, for the first time, the amount of outstanding debt.

The Treasury, in its May report to Congress on the Troubled Asset Relief Program, reported TARP repayments reached $194 billion, which has exceeded by $4 billion the total amount of outstanding debt—$190 billion.

Treasury’s assistant secretary for financial stability, Herb Allison, in a statement described the totals as a “milestone” and said this is “further evidence that TARP is achieving its intended objectives: stabilizing our financial system and laying the groundwork for economic recovery.”

Does the general public accept the Treasury’s view that the bailout was a resounding success at a relatively modest cost?  Recent Pew Research data, which reveals overwhelming negative public opinion for both the government and the banks, suggests that the Treasury’s spin on the bailout will be given little credence by the public.

Large majorities of Americans say that Congress (65%) and the federal government (65%) are having a negative effect on the way things are going in this country; somewhat fewer, but still a majority (54%), say the same about the agencies and departments of the federal government.

But opinions about the impact of large corporations and banks and other financial institutions are as negative as are views of government. Fully 69% say that banks and financial institutions have a negative effect on the country while 64% see large corporations as having a negative impact.

In March, during the final debate over health care reform, just 26% of Americans offered a favorable assessment of Congress – by far the lowest in a quarter-century of Pew Research Center polling.

Large majorities across partisan lines see elected officials as not careful with the government’s money, influenced by special interest money, overly concerned about their own careers, unwilling to compromise and out of touch with regular Americans.

The skepticism regarding the ability of government to operate honestly in the public’s best interest is well founded and the latest Treasury report on progress of the TARP program bears this out.  While the Treasury reports on the “success” of repayments under the $700 billion Troubled Asset Relief Program, other government bailouts and guarantees that are far exceed the cost of the TARP program are conveniently ignored.   If the Treasury really wants to provide a comprehensive accounting of what the financial system bailout will cost the American taxpayers,  here’s my short list of additional items to address in their next report.

1.  The amount currently owed under the TARP program does not include amounts committed by the US Treasury but not paid out.   According to the WSJ, “the outstanding debt amount does not include $106.36 billion that has been committed to institutions but has yet to be paid out by the Treasury. Factoring in that amount, the outstanding debt would be roughly $296 billion.”

2.  Two of the biggest ongoing bailouts in history go unmentioned.   The  Housing and Economic Recovery Act of 2008 provided for a $400 billion bailout of Fannie Mae and Freddie Mac.   The Government subsequently granted Fannie and Freddie an unlimited line of credit with the Treasury.   Fannie and Freddie have already drawn $145 billion and according to Bloomberg, the final cost to bailout out the two agencies could approach $1 trillion.

3.  Future banking failures constitute another sizable risk for increasing the cost of bailing out the US financial system.   The FDIC has been able to resolve banking failures to date using premiums collected from the banking industry, including a special assessment of $46 billion at the end of 2009.   While the FDIC has not yet had to tap its $500 billion line of credit with the US Treasury, future banking failures may require it to do so.

In its latest quarterly report, the FDIC reported an increase in the number of problem banks to 775, out of a total of 7,932 FDIC insured banks.  Assets at the problem banks total $431 billion.  Total deposits insured by the FDIC now total $5.5 trillion.   The amount of reserves in the FDIC Deposit Insurance Fund total negative $20.7 billion.   Liquid reserves of the FDIC total a mere $63 billion.   If the US economy weakens and more banks fail, the FDIC’s only option will be a costly bailout by the US Treasury.

The government seems to believe they can fool all of the people all of the time. Whatever happened to “change you can believe in”?

If You Buy A Lottery Ticket In Connecticut Don’t Go On Vacation

Living Beyond Your Means

Connecticut is facing a projected $8 billion dollar plus deficit over the next two years.  In an attempt to prevent raising taxes which are already among the highest in the nation, Connecticut is following the  familiar tactic of borrowing to cover spending that the State’s citizens can’t afford.

Aug. 4 (Bloomberg) –– Connecticut, which faces an $8.55 billion budget deficit over the next two years, may borrow almost $1 billion to close a gap left over from the fiscal year that ended June 30.

“We would agree that it is necessary and appropriate” to borrow to fill the deficit, Jeffrey Beckham, a spokesman for the state’s Office of Policy and Management, which is controlled by the governor, said in a telephone interview yesterday.

Connecticut, in addition to being the wealthiest state, is also the most in hock, with $4,490 in net tax-supported debt per capita as of the end of last year, according to Moody’s. It sold bonds to finance deficits in 2002 and 2003, and was downgraded around that time one step to Aa3 as a result of its finances, said Nicole Johnson, a Moody’s analyst in New York.

Spend more than you earn year after year and the final conclusion is obvious.  At some point, a debt crisis develops as  creditors stop lending.   The debt crisis leads to modest spending cuts and large tax increases which further reduces private economic growth that taxes are ultimately based on.

California Situation Ignored

This should all sound very familiar to citizens of the State of California who are a bit further along the path of economic suicide than Connecticut.    Connecticut has not officially raised the income and sales tax rates but  has imposed a large variety of  fee increases (taxes) on every transaction possible.  Thousands of fee increases  on everything from motor vehicle registrations to business licenses have reduced Connecticut taxpayers’ disposable income.

The State has sought to squeeze money out of their citizens in the most obnoxious ways possible.    Draconian enforcement of traffic laws yield fines in excess of an average person’s weekly paycheck for relatively minor transgressions.   Leave your money in a brokerage or bank account for a couple of years without making a transaction and the State will grab the funds under the pretext of protecting the depositor yet will make little effort to track down the owner of the account.  The list goes on.  Taxpayers being squeezed dry may understandably ask why State spending cannot be cut and exactly who benefits from the huge spending  increases?

Connecticut is leaving no stone unturned in its efforts to increase the effective tax rate on its citizens.  The latest outrage  in the State’s desperate attempt to expropriate every dollar possible is a reduction in the time allowed for lottery winners to claim their winnings.  Any lottery ticket buyers in Connecticut should not take long vacations.  The time limit for claiming prizes has now been reduced to only six months instead of 1 year, effective August 2, 2009.   The change in claim time limitation is expected to cheat Connecticut lottery players out of $6.1 million yearly.  As things currently stand, Connecticut is collecting $13 million of unclaimed winnings each year from winners who do not collect within the one year limitation.

The larger question here is how can individual taxpayers deal with a Government that is out of control, irresponsible and oblivious to the economic destruction they are causing?   The answer may be one that nobody wants to hear.

Stanford Financial Ponzi Scheme – New Fraud, Old Lessons

Stanford Free – Does Crime Pay?

On February 17, 2009 Stanford Financial was accused by the SEC of defrauding investors and engaging in a “massive, ongoing fraud”.  The fraud was perpetrated by seducing investors with “improbable if not impossible” returns on their investments, according to the SEC.  The amount swindled from investors is estimated at $7 billion.

The head of Stanford Financial, Allen Stanford, was finally arrested on June 18th and has been in federal custody since that time.  During a court hearing today in Houston, Mr Stanford entered the standard “not guilty” plea and his attorneys argued for his release on bail.

During the course of the court proceedings it was revealed that:

Texas financier R. Allen Stanford controlled a secret Swiss bank account from which he withdrew roughly $100 million last year, and also tapped the account to pay bribes to the firm auditing his Antigua-based bank, federal prosecutors alleged Thursday during a hearing in federal court.

The billionaire and the executives are accused of orchestrating a massive fraud by misusing most of the $7 billion they advised clients to invest in certificates of deposit from the Stanford International Bank, based on the Caribbean island of Antigua.

Also indicted is Leroy King, the former chief executive officer of Antigua’s Financial Services Regulatory Commission. He was taken into custody by island authorities and will now face extradition proceedings, according to a government official who spoke on condition of anonymity because she was not authorized to discuss the case. King is accused of accepting more than $100,000 in bribes to turn a blind eye to irregularities.

Investigators say even as Stanford claimed healthy returns for those investors, he was secretly diverting more than $1.6 billion in personal loans to himself.

The indictment also says Stanford and the other executives misrepresented the Antigua island bank’s financial condition, its investment strategy and how it was regulated.

Prosecutors argued that Mr Stanford should not be granted bail.

At Stanford’s bond hearing, prosecutors argued he should be held without bond because he might have access to billions of dollars in secret funds.

In court documents filed Thursday, prosecutors also said Stanford faces a potential life sentence, has access to a private jet and has an international network of wealthy acquaintances who would help him, including one who recently agreed to give him $36,000 to pay his lease on a Houston apartment for a year.

Each of the most serious counts that Stanford faces carry prison terms of up to 20 years. But prosecutors say sentencing guidelines could increase his total sentence to life in prison.

Despite the huge financial suffering caused by Stanford Financial to 30,000 investors, as well as the flight of risk, the court set bond at a small $500,000 and gave prosecutors until Friday to appeal the decision. How likely is it that anyone with a secret $100 million bank account and facing a life sentence would be concerned about forfeiting a half million bond by fleeing the US to escape justice?  This is no doubt a question that defrauded investors are asking.

Is This Man Smiling?

Is This Man Smiling?

Courtesy: Reuters

Other remarkable aspects of the Stanford Financial fraud are:

  • How long will it take for investors to be suspicious of firms offering guaranteed rates of return far in excess of what is available elsewhere?  No Ponzi scheme would work without the suspension of prudent judgment by investors blinded by ridiculous claims.  Has no one ever heard of “the higher the return the higher the risk”?
  • This is another case that should have caught the attention of the SEC long before Stanford could defraud thousands of people.  Just as with the Madoff fraud, Stanford blatantly and publicly advertised untenable returns, a classic sign of a Ponzi scheme.  The SEC blithely ignored or was oblivious to the obvious warning signs.
  • It took 4 months to arrest Mr Stanford and he is now on bail, free to enjoy his life.  At this rate of justice, Mr Stanford may get to spend the rest of his life immune from punishment and living a lavish life style courtesy of his secret bank accounts.   Defrauded investors, dolefully seeking for perspective on this matter may consider the remarks of William Gladstone who stated that “justice delayed is justice denied”.

Sanity Returns to Mortgage Lending – After Trillions In Losses

Liar Loans To Become Illegal

Case Closed on Liar Loans

Case Closed on Liar Loans

New legislation passed by the House will outlaw “stated income”  mortgage loans (commonly called liar loans).

WASHINGTON — The House voted Thursday to outlaw “liar loans,” ballooning mortgage payments and other bank practices that lawmakers say preyed on consumers who couldn’t afford their homes.

The proposal, by North Carolina Democratic Reps Brad Miller and Melvin Watt, is one of several that Democrats are pushing to tighten controls on an industry that critics say undermined the economy by underwriting risky loans, then passing them off to investors.

The bill passed 300-114, with many Republicans contending it would limit consumers’ options and restrict credit.

Democrats said it would ban only the most egregious lending practices and wouldn’t keep most people from getting a mortgage they can afford.

Under the bill, banks offering other than traditional fixed-rate mortgages would have to verify a person’s credit history and income and make a “reasonable and good faith determination” that a loan can be repaid. This provision is aimed at eliminating high-risk credit lines that became known as “liar loans” because they required little or no documentation.

Banks also would have to make sure the loan provides a “net tangible benefit” for the consumer.

What Congress is saying is that banks should not lend in a situation where the borrower cannot provide proof of income or has a poor credit history.  Inadequate income and poor credit have always been two factors that imply high risk of  loan default.  In other words, the banks need legislative action to outlaw practices that they should never have  engaged in to begin with.

Niche Lending Gone Astray

Lending to borrowers who cannot provide proof of income and have poor credit has been going on for decades, first by small private “hard equity” lenders and later by (the now defunct) sub prime mortgage lenders such as Countrywide (now part of Bank of America).  Typically, such loans were made at high rates and at low loan to values, reflecting the very high risk of loan default.   Lenders knew the risk and priced accordingly – borrowers knew that not paying back the loan would likely mean the loss of their home which was the collateral for the loan.

Various situations made this type of lending sensible on occasion for both borrowers and lenders.  For example, a homeowner facing a sudden financial emergency could borrow against his home and hope that his situation would improve.  Borrowers who for various legitimate reasons could not verify income, were allowed access to credit.  Small business owners wanting to expand or open a new business could access risk capital that would otherwise not be available.

Unfortunately, Wall Street and the Banking Industry combined forces to turn a small segment of the mortgage industry into a colossal part of their lending operations – greed overrode sound lending and the sowed the seeds for the biggest housing and banking bust in US history.   The legislation to outlaw liar loans should have happened  five years earlier if regulators had been doing their jobs properly.

Some Thoughts on the New Legislation

It is not clear if the legislation outlaws stated income loans only by lending institutions regulated by state or federal agencies.  If private lenders wish to risk their capital without regard to income or credit criteria they should be allowed to do so with informed borrowers.

Banking institutions whose deposits are protected by the FDIC and whose losses are ultimately paid for by the taxpayer should not be allowed to engage in unsound, high risk lending practices.  The very nature of lending without regard to credit or income implies a very high risk loan that should not be backed up by taxpayer funds.

The requirement that there be a “net tangible benefit” to the borrower when engaging in a mortgage transaction is also another sound rule meant to eliminate abuses.  In the past, there were situations in which a borrower could pay closing costs that far exceeded any benefit of cash out or payment reduction.  Does it really make sense to charge a borrower $15,000 in closing costs while the borrower walks away with maybe $5,000 cash and a higher monthly payment?   This type of law is not a restriction on free enterprise – it merely protects the foolish or desperate borrower and prevents some of the egregious lending abuses that have occurred in the past.

Had it not been for the outrageously reckless lending policies engaged in by the banking industry, this new law would not have been necessary.   Although I believe that less  government regulation is usually better, this is one case where it should be welcomed.  Since the lending industry could not properly institute sound lending policies, it is only appropriate that the government  establish guidelines.

A Law That Should Have Never Been Necessary

Consider the message that the House is sending to the banking industry –  loans should not be made to borrowers who cannot afford the loan payment!  The fact that Congress had to pass this type of legislation is an indictment of the banking industry’s judgment and conduct and a reminder of how ongoing absurd situations can be viewed as normal – until the house of cards collapses.

Frugality The New Lifestyle For Many

savingsHard Times Bring Back Thrift

Without the aid of easy credit, matching income with expenses has required cutbacks in consumer expenditures and forced price reductions and layoffs by businesses.  Frugality has become the new mantra for many as we can see from the following examples.

Dumped Pets Pay The Price Of Recession

From fancy cars to foreign holidays, Britons have had to relinquish all sorts of luxuries as the credit crunch takes hold. To this list we can now add pets: 57% more animals were abandoned last year than in 2007, according to figures from the Royal Society for the Prevention of Cruelty to Animals (RSPCA).

The number of abandoned cats rose by half; dogs by nearly a third. Horses, farm animals and exotic pets were also being left to fend for themselves.

Tim Wass, chief officer of the RSPCA inspectorate, said the cause was “everything to do with the economics about owning a pet”, from paying for food to veterinary bills.

In Glum Times, Repair Shops Hum

Economic fears are driving a resurgence for repairmen. When it comes to autos, computers and all kinds of appliances, consumers are more likely to repair what they have, rather than buying a new replacement.

Appliance-repair businesses, too, have seen an uptick in business in recent months, says Michael Donovan … even though the appliances he works on are not very expensive to buy new.

He and other business owners are surprised by the repair work people authorize these days. “Much to my amazement, people are spending $60 on repairing a vacuum that they bought for $100 new,” he said, adding that limiting new purchases is “definitely a factor on everyone’s mind.” Mr. Donovan has even seen a rise in repairs of small home items, such as electric razors.

Cars, however, are the most visible signs of the new frugality, with new-vehicle sales down sharply. Opting to keep cars running, consumers are extending the lives of their vehicles to nearly 10 years on average from eight just two years ago, says the Automotive Services Association, a trade group for repair businesses.

Starbucks Sales Down

Like many retailers in this difficult environment, Starbucks experienced further declines in comparable store sales in both its US and International stores during the quarter. Consolidated comparable store sales declined by 9% for the first quarter of fiscal 2009, with comparable store sales declines of 10% in the US and 3% in International for the period. Management believes that the negative comparable store sales are in large part a result of the ongoing global economic crisis and its effects on consumers’ discretionary spending…

Expect to see continued poor sales at Starbucks as consumers realize that one upscale beverage per work day can amount to over $800 per year.

Falling sales caused by frugality are  forcing businesses to cut costs and slash prices in an attempt to stimulate sales.

Yankees Slash Prices to Fill Costly Seats

Acknowledging their prices were too steep even by Yankees standards, the 26-time world champions announced a plan to fill thousands of empty high-priced seats by reducing prices and giving away much of the unsold inventory.

The Yankees cut season-ticket prices on some of their premium seats by as much as 50% — to $1,250 from $2,500 for some seats and to $650 from $1,000 on others. Customers who purchased such season tickets will receive their choice of a refund or a credit.

Mr. Steinbrenner said the team reviewed its pricing “in light of the economy,” and stated the changes were for the 2009 season only.

Whether or not Mr. Steinbrenner’s optimism is warranted remains to be seen.  I would expect further price cuts in the future as incomes remain weak and demand for premium priced services diminishes further.

Newcomers Challenge Office-Supply Stalwarts

In the grinding recession, companies are finding ways to save even on the cost of the lowly office pen. And that has created an opening for discounters to steal business from the office-supply industry’s big three.

The result: a wave of price-competition that is benefiting lower-cost vendors and encouraging companies to switch suppliers.

Count Me In for Women’s Economic Independence, a New York group that promotes women entrepreneurs, switched its business to Sam’s Club after a review of its Staples invoices. “It turns out we’ll be saving more than $7,000 on an annual basis,”said Nell Merlino, president and chief executive.

Franchise Sales Pull Back During the Recession

Annual applications from franchisers who want to do business in Maryland are down significantly so far this year, says Dale Cantone, an assistant attorney general for the state. First-quarter franchise-registration applications in Maryland fell 16% from a year earlier to 367.

Other states report similar falloffs. For instance, California’s filings from Jan. 1 through its April 20 deadline fell nearly 20% from a year earlier to 769. New York’s first-quarter registrations dropped 22% to 348 — the lowest number in five years.

The fall off in franchise sales is being blamed on a lack of financing.  Hopefully, the real reason is a more rational allocation of capital by lenders.  Does the average American city really need more fast food outlets, real estate firms or home decorators?

Forced Frugality

Have American consumers rejected the notion of  credit fueled economic prosperity or is something else at work?  The reason for the new found frugality correlates to the fundamental economics of adjusting spending to income levels.  Lower income levels, the threat of unemployment, lack of savings and the destruction of stock and real estate values have created a fundamental shift in consumer behavior that is not likely to change in the near future.

Salary Cuts: Ugly, But It Could Be Worse

A growing number of employers are resorting to salary cuts as the recession drags on. This month alone, A.H. Belo Corp., publisher of the Dallas Morning News, and the Atlanta Symphony Orchestra have announced pay reductions of as much as 15%.

At some companies, the cuts affect only executive and senior management levels, but many others are adopting an across-the-board approach or tiered salary reductions. Some companies are imposing permanent cuts, and some are promising to return employees to their full pay — eventually.

A January survey by global outplacement firm Challenger, Gray & Christmas found that of 100 human-resource professionals surveyed, 27.2% reported that their companies have imposed a salary freeze or cut.

Until the current recession, the practice of imposing pay cuts has been “very rare,” says John Challenger, chief executive officer of Challenger, Gray & Christmas, despite recent calls for capping executive salaries and bonuses.

Organizations in dire straits may have no choice but to slash salaries across the board. After being unable to make payroll in mid-March, South Carolina’s Charleston Symphony Orchestra cut the wages of all its staff and employees by 11.4%. Musicians in the orchestra also took a 11.4% hit in the form of unpaid time off.

Entrepreneurs Cut Own Pay To Stay Alive

A number of small-business owners have stopped paying themselves as they struggle to keep their companies afloat.

It’s impossible to know just how many owners are affected. But in a sign of the breadth of the trend, 30% of 727 small-business owners and managers surveyed by American Express Co.’s small-business services division said recently that they were no longer taking a salary. That’s a troubling sign for small businesses, which have created a significant share of the new U.S. jobs in recent years.

It’s not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession.

“The situation overall is more dire,” says Jerry Silberman, chief executive of Corporate Turnaround, a debt-restructuring company in Paramus, N.J. Historically, he says, nearly half of his clients weren’t taking a salary when they come through his door. Now, it’s close to two-thirds. And if they do take a salary, it’s often not enough to cover expenses.

The prevalence of pay cuts, something rarely seen before, tells us that this economic downturn is different.  The unanswered questions are how much worse does it get and how long will it last?  Those businesses carrying heavy debts have the lowest chances of surviving as the downside of leverage shows its destructive capacity.

Newly Thrifty Americans Are Slashing Spending More Than The Numbers Show

How much have Americans cut back?
On the face of it, not much. The official data from the Bureau of Economic Analysis say that in February personal spending was down 0.4%, or $40 billion, from the year before. Certainly any drop is bad news, since consumer spendingrarely decreases–but $40 billion out of total spending of $10 trillion doesn’t seem like enough to wreak economic havoc.

A closer look, however, shows that Americans have tightened their belts more sharply than the numbers report. The reason? Official figures for personal spending include a lot of categories, such as Medicare outlays, that are not under the control of households.

After removing these spending categories from the data, let’s call what’s left “pocketbook” spending–the money that consumers actually lay out at retailers and other businesses. By this measure, Americans have cut consumption by $200 billion, or 3.1%, over the past year. This explains why the downturn has hit Main Street hard.

For those American consumers concerned with their financial future, harsh realities are setting in.  The massive structural imbalances caused by decades of stagnant income growth and huge increases in debt levels will not be cured quickly.  Household balance sheets will eventually improve but it will be a slow and painful process for many.  The Age of Frugality is here for the foreseeable future.

Not All Are Suffering

After reviewing the gloomy news above, let’s end on a positive note.  Many Americans are financially secure, by dint of personal effort or privileged positions.  Here are two examples of those in the later category.

CCAGW Opposes Congressional Pay Raise

(Washington, D.C.) – The Council for Citizens Against Government Waste (CCAGW) today urged lawmakers to make their first order of business when they reconvene in the nation’s capitol in January to introduce legislation to freeze congressional salaries at current rates.  All Members of Congress are slated to get an automatic pay raise in January, 2009 unless they vote to block it.  Each rank and file member of Congress is poised to see another $4,700 in his or her paycheck over the next year, an increase of 2.8 percent over their current $169,300 annual salary.

“Members of Congress don’t deserve one additional dime of taxpayer money in 2009,” said CCAGW President Tom Schatz.  “While thousands of Americans are facing layoffs and downsizing, Congress should be mortified to accept a raise.  They failed to pass most of their appropriations bills, the deficit is on pace to reach an unprecedented $1 trillion, and the national debt stands at $10 trillion.  In addition, this Congress has been ethically challenged, plagued with corruption allegations, convictions, and sex scandals.”

The list of monetary benefits (beyond salary) that goes along with being a member of Congress is too long to list, but suffice it to say that most members of Congress will continue to live the “American Dream”.

Money For Nothing-Paul Krugman

On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, (C) who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.

All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

Few could argue with Mr. Krugman’s well penned article but will anything change?  With their high powered Washington connections, my bet is that the boys at Citigroup, AIG, Bank of America, et al will continue to do just fine.

More On This Topic

Recession Has Changed Lifestyles

A Reality Check For Economic Optimism


Financial interests in companies mentioned – None

AIG Says We Must Retain The Talented Staff That Lost $170 Billion

According to AIG, Good Work Must Be Rewarded

Record Loss

AIG, whose fourth-quarter loss was the worst in corporate history, earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave the crippled insurer.

The company’s fourth-quarter loss of $61.7 billion was the biggest ever recorded for any U.S. company, and AIG considered seeking court protection before accepting the U.S. rescue in September.

Bonuses paid by companies receiving public funds have sparked outrage among lawmakers. New York Attorney General Andrew Cuomo is probing $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired by Bank of America Corp. on Jan. 1.

AIG Faces Growing Wrath Over Payouts

Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks and used to pay employee bonuses at the business unit that almost sank the company.

After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.

The disclosures came as AIG was lambasted for about $450 million in bonus payments planned for employees at a business unit that lost $40.5 billion last year. The unit’s woes pushed the company to near-collapse, forcing the government bailout.


The government’s bailout of AIG has been a disaster.   The bailout been a public relations nightmare and the cost to taxpayers is open ended.   A controlled liquidation of AIG would have been a more complex but better option.

How does AIG, which is now 80% owned by the US taxpayers, get away with this outrageous conduct?  Had there been no bailout, AIG would not have had the cash to make these ridiculous bonus payments.
What has the $170 billion (and counting) bailout of AIG accomplished?  We still have an organization that is losing huge amounts of money and is now using taxpayers money to pay ridiculous bonuses to the people who ran the company into the ground to begin with.

Let the free market work here.  Stop the government bailout of a failed company and let AIG go bankrupt as they should have.   Executives who have “contractual rights” to huge bonuses can get in line with other creditors in the bankruptcy court.  The taxpayers supporting this atrocity have been screwed enough already.

Obama Approves 8,500 Earmarks While Vowing To Fight Them – What?

Obama Says: Hear What I Say, Don’t Watch What I Do

After campaigning on promises to reform Washington, it was easy to be confused by the Washington Post article – Obama Signs Spending Bill, Vowing To Battle Earmarks. The president vowed to fight earmarks and wasteful spending while simultaneously signing a spending bill that approves spending almost $8 billion dollars on 8,500 earmarks.  Was this a very poor attempt to please all sides or does it suggest something deeper about the president’s leadership abilities?

Logical minds understand that actions speak louder than words, and not the other way around.  This latest surrender to special interest groups, especially after signing a “stimulus” bill with hundreds of $billions of special interest spending certainly suggests that Mr Obama is saying one thing but doing another.

Trust Me, No More Special Interest Handouts

Washington Post – President Obama’s call to rein in the use of earmarks was met with derision yesterday even from some of his past reformer allies, dealing an early blow to his attempt to change how business is done in Washington.

Obama signed what he called an “imperfect” $410 billion measure to fund most government agencies through September. He used the occasion to criticize the more than 8,500 projects, costing more than $7.7 billion, that lawmakers inserted into the bill, and he declared that “this piece of legislation must mark an end to the old way of doing business and the beginning of a new era of responsibility and accountability that the American people have every right to expect and demand.”

But as he vowed to press Congress to shun earmarks in the future, a bipartisan collection of lawmakers said the proposals he offered yesterday would do little to curb the practice and would do nothing to address the appearance of a connection between campaign contributions and spending programs ordered up by lawmakers.

Earmark supporters and opponents alike said Obama’s words would carry little weight unless he also vowed to veto critical legislation that is full of spending projects.

“Absent a genuine veto threat, he’s just spittin’ in the wind,” said Rep. Jeff Flake (R-Ariz.), an earmark opponent who walked through the House chamber yesterday carrying almost 100 pages of approved spending requests from a lobbying firm that is under federal investigation.

The connection between earmark recipients and the lobbyists who made campaign donations to lawmakers to secure their passage was central to criminal investigations that landed former lobbyist Jack Abramoff and former congressman Randall “Duke” Cunningham (R-Calif.) in federal prison.

Rep. Henry A. Waxman (D-Calif.), who as commerce committee chairman is quarterbacking much of Obama’s agenda, said of the earmarks: “I think they’re completely out of hand, completely out of control. Most of them are driven by lobbyists.”

How Obama Missed The Opportunity To Inspire

Mr Obama, you campaigned on promises of hope, change, reform and the beginning a new era of responsibility and accountability.  This could have been your shining moment to seize the initiative and prove to the American public that you mean what you say.  Signing the bill as you criticized it is not change or a reason for hope; it is just the same old way of doing business in Washington.

Criticizing an action while legally approving it makes no sense.  Vowing to end earmarks while you are approving them is like a drunk who wants “just one more” drink before he quits.   This could have been your shining moment to inspire us.  The country cries out for a visionary leader who will stand up and fight the special interest groups that have plundered our country and collapsed our economy.

Actions Speak Louder Than Words

The Marines have a saying – “follow, lead  or get out of the way”.  From my perspective, I am not sure if you followed or got out of the way, but you certainly did not lead.

Economists Give Obama Grade Rating of F – An Ugly Ending

The First Test Results Are In

Obama, Geithner Get Low Grades From Economists

U.S. President Barack Obama and Treasury Secretary Timothy Geithner received failing grades for their efforts to revive the economy from participants in the latest Wall Street Journal forecasting survey.

The economists’ assessment stands in stark contrast with Mr. Obama’s popularity with the public, with a recent Wall Street Journal/NBC poll giving him a 60% approval rating. A majority of the 49 economists polled said they were dissatisfied with the administration’s economic policies.

However, economists’ main criticism of the Obama team centered on delays in enacting key parts of plans to rescue banks. “They overpromised and underdelivered,” said Stephen Stanley of RBS Greenwich Capital. “Secretary Geithner scheduled a big speech and came out with just a vague blueprint. The uncertainty is hanging over everyone’s head.”

Mr. Geithner unveiled the Obama administration’s plans Feb. 10, but he offered few details, and stocks sank on the news. The Dow Jones Industrial Average is down almost 20% since the announcement, as multiple issues have weighed on investors’ confidence.

Despite spending and borrowing trillions of taxpayer dollars in the past two months, Mr Obama has failed to inspire confidence in the business community.  Investors have expressed a resounding vote of no confidence as seen by the ugly 20% slide in stock prices since the new administration took over.   At the current pace of events, the country will be insolvent and the Dow at 800 by year end 2009.

Investment Adviser In Chief Fuels Despair

The Obama Administration finally seems to have noticed that all of their policy announcements so far have only fueled economic despair, not alleviated it. So President Barack Obama took the rare opportunity yesterday of offering some investment advice to the American people: “What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it.” In other words, Obama wants Americans to Buy! Buy! Buy!

But before you rush out and follow President Obama’s investment advice, consider this: last week Obama’s Treasury Department announced that the government would take a 36% stake in Citigroup by converting $25 billion of its preferred shares into common stock. The Treasury paid $3.25 a share for the stock last week, which after a weekend’s worth of government nationalization rumors fell to $1.20 by Monday. So to recap, President Obama managed to lose billions of taxpayer invested dollars in just a few days. But that’s not even the worst part. So far the government has poured $50 billion into Citigroup. Meanwhile, Citi’s market capitalization is only $6.54 billion. In other words, taxpayers could have bought Citi eight times over already for all the money they have thrown at it already.

What the Citi story does highlight though, are the perils and conflicts that make massive and intrusive government intervention in the economy a disaster for all involved. Congress has no idea how to run a bank, and that is why all the political posturing in the House and Senate is completely undermining the stabilization of the banking sector. Meanwhile, the private sector has no incentive to create jobs since they are facing a $1.3 trillion tax hike in the coming decade. Then there is the $646 billion tax hike every American will see in their energy bills from President Obama’s promised carbon capping plans. It is no wonder that nobody is taking Obama’s investment advice.

The only sector of the economy that is sure to grow under Obama is the public sector. Our own Center for Data Analysis estimates that President Obama’s budget will require over 250,000 new government employees. Other expert estimates put the number at 100,000. Another big winner under Obama’s big government: lobbyists. Democratic staffers are now commanding $350,000 to $450,000 salaries at prestigious K Street lobbying firms. At least somebody is benefiting from this Obama economy.

Investors don’t invest precious cash on hope – they invest money based on viable plans that will lead to future economic growth and prosperity.   So far, all that investors have seen are plans for massive spending related to “tax rebates” and increased social spending.

Logical minds have questioned why so much of the “stimulus” plan spending would be directed to social spending and wealth transfer expenditures, when critical sectors of the American economy (banking, insurance, manufacturing, etc.) are effectively insolvent and on the edge of collapse.  An interesting theory that makes sense comes from Michael Boskin, economic professor at Stanford University. (Courtesy of

“New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president’s budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.’

“Have Nots” The New Majority – courtesy

First off, let’s start with comments on the new Barack “Pinocchio” Ob@ma Administration and the public servants inside the beltway of WASHINGTON DC. Several words and comments come to mind: Morally and fiscally bankrupt and absolutely corrupt. Their betrayal of doing what is good for their constituents/country and creating the conditions for economic growth versus doing what is good for their political ambitions and power over the economy is on PLAIN display in their activities and proposals.

Contrary to their words, their actions can only lead to one conclusion: They are PURPOSELY driving the economy off a cliff to gather power in the UNFOLDING crisis by destroying every corner of what is still working at the public’s expense and MISERY. Please notice how they IMMEDIATELY jump on any public figure who murmurs anything contrary to the headline illusions.

The only reason they are reducing the deduction for charity for those earning over $250,000 dollars, at a time when we need charity more than in the last 70 years, is so the people relying on charity will have to rely on government.

As I mentioned in previous newsletters, the stage is set for the emergence of a new dictator, and my bet is that we shall see Ob@ma and the gang of 535 morph into it over the next two years. Two recent articles have caught my eye, both are about Narcissism; one is by Dr.Ali Sina entitled “Understanding Ob@ma: The Making of a Fuehrer at

Is it possible that the economic well being of the country is being sabotaged so that the ruling elite in Washington can maintain their seats of power?  When the “have nots” outnumber those able to sustain them, massive social upheaval will follow.   America’s failed experiment to create wealth through debt may be laying the groundwork for a future that few of us dare to contemplate.

Common Sense Banned In Washington

Words of Wisdom

None of the following quotes would make any sense to the ruling elite in Washington.

1.  “You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else.  When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation. You cannot multiply wealth by dividing it.”
Adrian Rogers, 1931

2. The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.  — Winston Churchill

3.  I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

Winston Churchill

4. Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.
Frederic Bastiat, French Economist (1801-1850)

5. Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Ronald Reagan (1986)

6. If you think health care is expensive now, wait until you see what it costs when it’s free!
— P.J. O’Rourke

7. In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other.
— Voltaire (1764)

    Here’s a quote from one of our founding fathers that Washington’s elite fully understands:

A government big enough to give you everything you want, is strong enough to take everything you have.

Thomas Jefferson