Wall Street Bailout

Maintaining the Status Quo

That is what we are doing with this financial crisis. The Obama Administration, Fed and Congress are just fighting to get back to status quo. The same securitization model that got us into this mess is still there but with huge government subsidies. It looks like the financial oligarchy won.

“The system will look more like what preceded the current environment than many people seem to believe,” Cohen said yesterday at a panel discussion on the future of Wall Street sponsored by Bloomberg News in New York. “I am far from convinced there was something inherently wrong with the system.”

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IMF: Financial Bailout Will Cost U.S. Taxpayers $1.9 trillion

IMF released a report that attempts to quantify the U.S. bailout costs.

Efforts to stabilise the financial system could end up costing US taxpayers about 13.3 per cent of annual output, or $1,900bn over the next five years, according to analysis by the International Monetary Fund.

That is a nice chunk of change. Financial Times performed a nice little calculation for us.

The dollar estimate, calculated by the Financial Times, equates to about $6,200 (€4,650, £4,200) per head of the population.

I have not verified the correctness of Financial Times' calculation because I am writing this article and I dont' want my blood pressure to increase anymore then it is right now.

Check out this little piece of information.

Another Gift to Financial Conglomerates

Treasury floated (could be testing the waters) a new program that provides new incentives to second lienholders. During the mortgage lending boom "no-downpayment" loans and "piggyback" loans were aggressively pushed. Obviously, these second mortgage loans were to compensate for no-downpayment or low downpayment. At the time, mortgage lenders didn't care about adding a second mortgage lien on residential property because real estate prices "always" go up. Then reality set in.

But those loans, which are attached to about half of all troubled mortgages, have been an obstacle to efforts to alleviate the housing crisis. That's because borrowers who are trying to get their primary mortgage modified at a lower monthly payment need the permission of the company holding the second mortgage.

Is this a 'Moral Hazard' in the making?

Will Goldman Sachs be a case study in 'Moral Hazards'? Goldman is increasing its risk-taking at a time when taxpayer dollars are still in its coffers.

Goldman Sachs Group Inc., unbowed by the securities industry’s worst year since the Great Depression, increased its trading bets at the fastest rate on Wall Street.

Interesting time to increase your risk. Here is some perspective on the amount of risk.

Goldman Sachs’s so-called value-at-risk, the amount the New York-based bank estimates it could lose from trading in a day, jumped 22 percent to $240 million in the first quarter, twice what Morgan Stanley stands to lose, company reports show. VaR climbed 2.8 percent in the same period at JPMorgan Chase & Co. and dropped 14 percent at Credit Suisse Group AG.

Treasury and Fed "Heart" Financial Conglomerates?

The "cat is out of the bag" - the regulators performing the 'not too stressful stress tests' will take a harsher view of loans than other trouble assets. So, if a bank does more traditional banking such as loans the 'not too stressful stress tests' will scrutinized them more than a financial conglomerate who may have all kinds of securitized assets and "off-balance" exposure.

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

I don't buy that excuse. There are politics at play here. The financial oligarchy has great interest in preserving financial conglomerates. The Obama Administration apparently does not want to take on the financial oligarchy.

Treasury is OK With "Too Big" Part

I have been reviewing Treasury's Framework for Regulatory Reform and have reviewed several articles about the reforms. In my opinion, something is missing. Some of the proposals offered are good such as increased oversight of the OTC derivatives market or requiring hedge funds over a certain size to register. These proposals should help.

However, no where in the Framework does it say that financial conglomerates were too big and must be made smaller. The proposal for a systemic risk monitor/regulator is troubling because why add another regulatory body to the current web of regulators. What is needed is hard rules, better yet Federal laws, not another regulatory body.

TALF Failure Will Be Blamed on Protecting American Workers

The Fed's Term-Asset Backed Securities Loan Facility (TALF) has experienced a drop in popularity from the previous month: Fed Requests for TALF Loans Drop 64% to $1.7 billion. What is amazing about this one month decrease is the spin related to the drop? Consumers not spending and hence using less credit. Hell no that would be too logical.

The reason for the drop: protections for American workers:

The Federal Reserve’s requests from borrowers for loans to buy asset-backed securities fell 64 percent from last month as investors balked at visa limits and possible political efforts to tax earnings.

That is right. Let the scapegoating begin!

William Black on Bill Moyers Journal drops bailout bomb on Obama

This evening, Bill Moyers interviewed William K. Black, the former senior regulator during the savings and loan crisis of the 1980s, who blew the whistle on the Keating Five (the U.S. Senators implicated in taking “gifts” from S&L bankster Charles Keating was convicted of racketeering and fraud in both state and federal court after his Lincoln Savings & Loan). Black is now an Associate Professor of Economics and Law at the University of Missouri, and the author of the recently released book, The Best Way to Rob a Bank is to Own One.

Bailouts create disincentives.

We are now in the eighth month of extraordinary efforts to reverse the financial crisis. Tillions of dollars have been spent or guaranteed with the stated goal of getting the banks to lend again. Many acronymic plans like TARP, TALF, PPIP and countless others have been devised to accomplish the goal. Yet, it seems that for all the efforts of the Fed and Treasury, little has been accomplished, other than reward bad behavior in the Financial Markets. The more they direct their efforts only toward the largest institutions, the better the hedge becomes for bondholders everywhere. This has been the achilles heel of all the bailout plans, going back to Paulson/Bernanke and right up until today.

I think Joseph Stiglitz has been out of the country for an extended period or we would have heard more from him about the PPIP. He was recently interviewed by Der Spiegel in which he makes a suggestion that is the antithesis of the governments efforts to date.

FDIC Inviting Public Comment on Legacy Loan Program

FDIC is accepting public comments on its Legacy Loan Program. The program that provides even more leverage in our financial system in the form of subsidies to private investors so that private investors will purchase toxic loans from banks (especially zombie banks). Look at what the FDIC is considering:

The FDIC may allow the sellers of a loan to get an equity interest in the vehicle that buys it, meaning they would gain from any future increase in the asset’s value. The aim is to give healthier banks an incentive to sell loans at a cheaper price, encouraging more investors to make bids.

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