EconNotePad.com
What Happened to the American Economy? Why all the debt?
 
Answers...

What about the GDP?
 
View...

Is the economic contraction over?
  You decide...

 THE FUTURE 
The U.S. Economy is Unsustainable? more...

 THE PAST 

Fannie Mae Investigation in 2004.

Fannie Mae executive explains how it all went wrong.


Who knew?


Why all the U.S. debt?
Watch this... Video 1, 2, 3, 4, 5, 6, 7, 8, 9
see... Money As Debt, II, III, IV

After 2008
Low Employment...

Percentage of U.S. Population Employed

Low Construction & Manufacturing...

U.S. Housing Starts  /  All Employees: U.S. Manufacturing

Rise in Dollars and Government Dependence...

U.S. Dollar Base (Monetary Base)

Click on above charts to enlarge


"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills." -- Senator Obama on the U.S. Senate floor on March 16, 2006

Why Americans Hate Economics

 Notepad: The Second Great Contraction (2008 - ?)   Links: News & Commentary 
Real Unemployment is Uglier
March 2015
 
Here’s what the unemployment rate would look like if the labor force participation rate — basically the number of people in the economy working or looking for work — had remained constant since June of 2009...


[source]

Why June of 2009 and not some other random month? That is when the National Bureau of Economic Research’s Business Cycle Dating Committee — a group of economists who determine when recessions end and begin — believe the most recent recession finally ended.

What does this all mean? Rather than being the sign of a vibrant economy, the falling unemployment rate is actually an arithmetic artifact of the BLS head-counting process. If the labor force participation rate had held steady since 2009, the number of people in the labor force today would total nearly 162 million people. Instead, BLS reports the official number to be just shy of 155 million.

And thanks to how BLS calculates and reports the official unemployment rate, those 7 million people are not included among the ranks of the unemployed. Add them back in and you have an unemployment rate that averages a very stubborn 10.8 percent since the end of the recession. more...


THE LINE IS CROSSED — no more debt limit! AGAIN!!
October 2013
 
By Act of October 17, 2013...


[source]


A "Lost" Generation: Five years after the 2008 crisis, younger adults still struggle to find work
Sept 2013   WSJ


[source]

This generation's struggles have few historical precedents, at least in the U.S. The recession of the early 1980s was comparable but was followed by a rapid recovery. The economic legacy of the Great Depression was erased to a large degree by World War II and the boom that followed. No similar rebound looks likely this time around. What evidence does exist suggests today's young people will suffer long-term consequences.


Fallen US wages after "end of recession"
July 2013 


[source]

Wages have fallen the most in low-paying jobs, study says

Home a Loan — Risky Business

GOVERNMENT RISK:
US government backing almost all mortgages originated during the great housing bust (2008 - ?)
July 2013 

Federal government share of new mortgage originations

[source]

FEDERAL RESERVE RISK: US central bank buying "toxic" mortgages (2009 - ?)

Mortgage-backed securities held by the Federal Reserve

[source]

Why the Fed can buy mortgage-backed securities

U.S. Fed buys $13.3 bln of mortgage bonds, sells none

Americans Gambling on Rates with Most ARMs Since '08


Detroit files largest municipal bankruptcy case in U.S. history
July 18, 2013 
The bankruptcy case was filed at 4:06 p.m.  more...

Detroit's bankruptcy to set off pitched battles with creditors, pensions, unions

Detroit's Beautiful, Horrible Decline

GM bailout: Taxpayers still $18.1 billion in the hole


THE LINE IS CROSSED — no more debt limit! (for a while)
February 2013 
On February 4, 2013, the President signed legislation suspending the debt limit until May 18, 2013. As a result, the debt limit does not apply after February 4, 2013.


[source]

Treasury Surpasses Debt Limit on First Day of Ceiling’s Suspension

“It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies. Over the past five years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is ‘‘trillion’’ with a ‘‘T.’’ That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers.”
-- Obama in 2006 speech on the debt limit

U.S. Postal Service to end Saturday home delivery of mail


MAX DEBT
December 31, 2012 
The US federal debt limit is reached again!


[source]

Scrap the debt limit, some lawmakers and economists say


The New Invisible Great Depression

THEN... 
  


NOW... According to Al Lewis on The News Hub, we're actually in a depression right now, but most people don't see it. One out of seven Americans are on food stamps - if they weren't getting cards in the mail every month, you'd see them in soup lines. more...

Effective October 1, 2008 the federal Food Stamp Program was renamed the Supplemental Nutrition Assistance Program (SNAP). SNAP recipients use EBT cards, which are similar to debit cards, to purchase food in authorized retail stores.

EBT Cards
help make
depression
invisible

According to Keynesian economic theory (developed and used during the first Great Depression), like other forms of government spending, SNAP, by putting money into people's hands, increases aggregate demand and stimulates the economy.

Another sign of economic depression... Social Security Disability Insurance benefit payouts are growing at an alarming rate. As people see their unemployment insurance benefit payments run out, many apply for and receive SS disability payments. more...


[source]

The Rise Of Government Dependence

[source]


[source]

Welfare spending jumps 32% in four years

US government spent over $1 trillion on welfare programs in fiscal year 2011 

Why the U.S. Is in an Invisible Depression

 

Disability Ranks Outpace New Jobs In Obama Recovery

Americans Joining Disability Now Outpacing Americans Finding Jobs

Post office nears historic default on $5B payment

18 Charts Showing The Rise Of Government Dependence


US MONETIZING DEBT, AGAIN:

LOST FED QE3
September 13, 2012  New York Times
The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially. more...

Fed Plans to Buy $40 Billion in Mortgage Securities a Month

Fed Undertakes QE3 With $40 Billion Monthly MBS Purchases

Fed's Lacker: More Bond Buying Makes it Riskier For Fed to Unwind Portfolio


LOST INCOME last seen in 1995
September 13, 2012  WSJ
The income of the typical U.S. family has fallen to levels last seen in 1995, a long and pernicious slide that likely means it will be a generation before Americans regain the peak income levels reached at the close of the '90s. A report from the Census Bureau Wednesday said annual household income fell in 2011 for the fourth straight year to an inflation-adjusted $50,054.


[source]

Real Median Household Income: 1967 to 2011

LOST JOBS a 30-year low.
September 7, 2012  WSJ

 
[source]

The Jobs Deficit - Labor force participation goes backward to 1981

MORE DEBT Postal service posts big loss as cash runs low.
August 9, 2012  WSJ
The U.S. Postal Service on Thursday reported a $5.2 billion quarterly loss and said it was nearly out of cash and likely to exhaust its government credit line in coming months. The Postal Service's loss for its third quarter ended June 30 compared with a $3.1 billion loss for the like period a year earlier.  more...


[source]


GM gambles in 2012 ramps up risky subprime auto loans to drive sales.
Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM's growth. GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.  more...


[source]

GM gambles on money-back guarantee

Recovery this time is different...


[source]

Why This Slow Recovery Is Like No Recovery

To most Americans, it doesn't feel like an economic recovery


Chief Justice John Roberts allows the Obama-signed, far-reaching health care laws to go forward with mandated personal penalties taxes.
June 28, 2012

Supreme Court ruling allows a new federal "tax" to eventually be imposed on every not-exempt U.S. citizen who has not acquired health insurance.

Supreme Court's decision with full text (PDF file): http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf


The tax man cometh to police you on health care

Government actions result in small banks being sold reducing banking choices.
June 18, 2012
  WSJ
A growing number of tiny community banks are deciding it's time to put out the "for sale" sign. Many executives of these small lenders are frustrated by costly, new regulations. Other bankers are throwing in the towel because their companies have limited growth prospects in a period of weak loan demand, low interest rates and thinning profit margins.

With more than 90 deals announced so far this year, 2012 is shaping up to be the biggest year—as measured by number of deals—for bank mergers since 2007, when there were 286 transactions.  more...

Regulators Shut Banks in Three States

Stocks near record levels versus Treasurys.
June 1, 2012
  smartmoney.com
The 10-year Treasury yield, which moves opposite the bond’s price, plunged to 1.47% by midday Friday–the latest in a string of record lows. Investors have rushed to Treasury bonds for safety from a mounting fiscal crisis in Europe.

Meanwhile, the S&P 500 index was trading around 1286 at midday, down 1.9% from Thursday’s close. At that level, its dividend yield, based on the past four quarters of company payments, is 2.13%.

The ratio of the dividend yield to the Treasury yield is 1.45. That’s close to the high of 1.51, reached near the end of 2008, following the collapse of Lehman Brothers. more...

 

PRESS RELEASE: SEC Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader Stock Market

China to start direct currency trading with Japan.
May 29, 2012
  washingtonpost.com
China and Japan have agreed to start direct trading of their currencies from Friday as Beijing moves toward making the yuan more of a global currency. Until now, China has only allowed direct trading between the yuan and the U.S. dollar, under tight limits that have been loosened only gradually.

The People’s Bank of China said Tuesday that it had authorized the move to help improve the foreign exchange market, promote Sino-Japanese cooperation and develop China’s capital markets.

China, Japan question dollar dominance, shake global currency tree

Reserve Currency: China Sun Rises, U.S. Sun Sets

China-Japan Currency Deal Points Way to New Monetary Order

The Dollar's Future as a Reserve Currency


Half of U.S. in a household getting government benefits.
May 26, 2012
  WSJ
49.1%: Percent of the population that lives in a household where at least one member received some type of government benefit in the first quarter of 2011, up from 30% in the early 1980s and 44.4% as recently as the third quarter of 2008.


[source]

Half of US tax filers pay little or no federal income tax.

Tax money funneled to targeted groups.


China now has direct access to U.S. Treasury.
May 21, 2012
  Reuters
China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

The relationship means the People's Bank of China buys U.S. debt using a different method than any other central bank in the world.

The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.

China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn't been necessary. more...

“What’s Geithner Thinking?” Treasury Grants China Direct Access to Buy U.S. Bonds

China Can Now Monetize US Debt Directly


Q. Since 2010, U.S. unemployment is down (seems good), but % of population employed is not up (seems bad). Why?

A. Select...
1. Numbers are calculated using different factors.
2. U.S. economy has contracted and many people have stopped looking for a job.
3. 2012 is an election year.
4. All of the above.

% Unemployed - Civilian Unemployment Rate

% Employed - Civilian Employment-Population Ratio

U.S. Employers Pull Back Sharply On Hiring As Fewer People Search For Jobs

People who are out of work but not looking for jobs aren't counted among the unemployed


Food Stamp spending explodes, and then remains high for years.
April 19, 2012  WSJ

The Congressional Budget Office said Thursday that 45 million people in 2011 received Supplemental Nutrition Assistance Program benefits, a 70% increase from 2007. It said the number of people receiving the benefits, commonly known as food stamps, would continue growing until 2014. more...


[source]

House panel okays $33 billion in food stamp cuts

Fannie Mae to ask Treasury for $4.6 billion more.
February 29, 2012  ft.com

Fannie Mae, the US government-controlled mortgage financier, will ask taxpayers for another $4.6bn after recording a $2.4bn loss last quarter, the company has said.

The latest appeal brings its total request from the US Treasury to $116bn, of which $20bn is due back to taxpayers in the form of a dividend as part of its government rescue.

The company, which together with its corporate cousin Freddie Mac backs nearly half of all outstanding US home loans, lost $16.9bn last year, a 20 per cent rise from 2010. source


February 29, 2012  Fannie Mae News Release
Fannie Mae Reports Fourth-Quarter and Full-Year 2011 Results


FED writes sweeping rules from behind closed doors.


[source]

The Federal Reserve has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system

US debt limit increased, again.
January 30, 2012



[source]

U.S. Debt Nears $15.194 Trillion Ceiling

Senate Vote Approves 1.2 Trillion Dollar Rise in Debt Limit

The U.S. Postal Service's losses shot up to $3.3 billion in the last three months of 2011, a tenfold jump from the same period a year before

Barack Obama calls for the U.S. Postal Service to end Saturday mail delivery and raise rates


1,000th day since the U.S. Senate has passed a budget.
January 24, 2012
Tuesday, January 24, will mark the 1,000th day since the U.S. Senate has passed a budget—an egregious dereliction of duty on Senate Majority Leader Harry Reid’s (D–NV) watch. By enacting continuing resolution upon continuing resolution (short-term measures to keep the government running, spending money at the current rate), the Senate has taken a pass on leading, all to the detriment of the poor and middle class.

The budget process forces Congress to set priorities to protect the people’s money and put it to its appropriate use. Instead, the Democrat-controlled Senate has abdicated its responsibility. The result? The deficit is soaring, causing a looming tax burden and injecting uncertainty into the economy, leaving jobs and economic growth on the table. It’s no wonder the U.S. economy’s growth is so tepid.  source

White House to miss budget deadline for third year

Under Obama, Price of Gas Has Jumped 83 Percent, Ground Beef 24 Percent, Bacon 22 Percent


Social Security "burns" billions of dollars in 2009, 2010, 2011...
December 2011    
The following chart shows adjusted Payroll Tax revenues minus Benefit Payments:

Looking at the data on this basis, you'll see the actual deterioration that took place in 2011. 2012 will be worse than 2011. Benefits are going to jump by $50B+ next year. 10,000 new people are signing up for checks every day of the week. Add the fact that every one of the 55 million beneficiaries will be getting 3.6% more in their checks (COLA adjustment). The revenue side is a wild card. What will GDP be? If it's around the 2% that is currently anticipated, revenues at SSA will fall well below plan. A flat economy (+2%) would translate into a $100B 2012 primary deficit (payroll receipts minus benefits). A number like that is not on anyone’s radar today.

The following is a chart used by the House Finance Committee. It plots the expectations for net cash drains at SSA. While there is plenty of red ink in the chart, there is not nearly enough to describe what is going to happen. Note that the expectation is for some improvement in 2011 and relative stability until 2018 when the red ink explodes. On the chart, I think today we are really at the 2017 level. 2012 will bring us the results depicted in the chart for 2018. more...

The 2011 numbers for SSA indicate that we are at least five years ahead of existing thinking on the SSA deficits! The cumulative SS cash shortfall over the next decade will add another $1.5 trillion onto public sector borrowing.

Social Security will effectively run a $45-billion deficit in 2011 and continue to run deficits totaling $547 billion over the coming decade.

How Social Security went ‘cash negative’ earlier than expected

The Social Security Deficit

Social Security deficits now ‘permanent’


FED backstops Europe, again.
The Federal Reserve's covert bailout of Europe.
December 28, 2011  WSJ
America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

The ECB is entangled in an even bigger legal and political mess.  more...

The Ever-Expanding Federal Reserve

Fed Loads Up Balance Sheets, Begins Europe Bailout On Same Week It Promises Not To


Jobless tap Social Security Disability Fund.
December 28, 2011  WSJ
The prolonged economic slump has fueled a surge in applications for Social Security disability benefits, with many desperate Americans seeking refuge in the program as a last resort after their unemployment insurance and savings run out.

Two new studies, one of them co-authored by the White House's top economist, show a correlation between when people seek Social Security disability payments and when their unemployment benefits are exhausted. Some economists say that connection shows many people now view the system as an extended unemployment program. more...
Lawyers Strike Gold In U.S. Disability System


A sign of lower U.S. industrial activity: Top U.S. Export is Fuel.
December 2011
Measured in dollars, the nation is on pace this year to ship more gasoline, diesel, and jet fuel than any other single export, according to U.S. Census data going back to 1990. It will also be the first year in more than 60 that America has been a net exporter of these fuels. more...

US exports record amount of refined fuels

U.S. natural gas exports could surge if DOE approves applications

Sunoco and ConocoPhillips closing some US refineries.


A big pile of... DEBT.


[source]

Bank-Run Risk in the Shadows

Hot Money Could Make Banks Sweat


Fed Now Largest Owner of U.S. Government Debt — Surpassing China. 
November 16, 2011   

At the close of business on Tuesday, the debt of the federal government exceeded $15 trillion for the first time--with the largest single owner of the publicly held portion of that debt being the Federal Reserve.

Over the past year, as the Federal Reserve massively increased its holdings of U.S. Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held U.S. government debt.

In its latest monthly report, the Federal Reserve said that as of Sept. 28, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of Sept. 29, 2010.  more...


White House eliminates insurance program for long-term care. 
October 15, 2011   
Known as the Community Living Assistance Services (CLASS) Act, the program was intended to be purely voluntary and open to all working Americans. It would have provided a basic lifetime benefit of a least $50 a day in the event of illness or disability, to be used to pay for even nonmedical needs, such as making a house wheelchair-accessible or hiring a home caregiver to assist with basic tasks. 

The program was to be entirely self-financed with the premiums participants paid. Obama officials said that presented them with a problem: If they designed a benefits package generous enough to meet the law’s requirements, they would have had to set premiums so high that few healthy people would enroll. And without a large share of healthy people in the pool, the CLASS plan would have become even more expensive, forcing the government to raise premiums even higher, to the point of the program’s collapse.

“I feel justified and vindicated,” Gingrey said. Like other Republicans, he predicted that this would be the first thread in the health-care law to unravel. “The bottom line is: As people start to understand this bill, you are going to see more and more of a domino effect,” he said.  more...

Obama pulls plug on part of health overhaul law

Why the Jump in Health Insurance Premiums?


US debt limit increased, again.
September 22, 2011 


[source]


FDIC's bank closings in 2011.
About 1,000 U.S. banks and savings institutions have disappeared since the end of 2007, leaving 7,513 FDIC-insured institutions as of June 30. During that period, 396 banks failed and about 600 disappeared through mergers or acquisitions.

Camden Fine, president of the Independent Community Bankers of America, a trade group, predicted another 1,000 to 1,500 banks will vanish between now and the end of 2015. more...

[source]

The Banking Mess: It’s Not Over Until It’s Over

Food stamp use rises to record 45.8 million in 2011.
Nearly 15% of the U.S. population relied on food stamps in May, according to the United States Department of Agriculture. The number of Americans using the government's Supplemental Nutrition Assistance Program (SNAP) -- more commonly referred to as food stamps -- shot to an all-time high of 45.8 million in May, the USDA reported. That's up 12% from a year ago, and 34% higher than two years ago. more...


US loses AAA credit rating.
August 5, 2011   Bloomberg
Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.


Foreclosure woes fuel wider loss at Fannie Mae
Red ink continues to flow at Fannie Mae as the mortgage finance company struggles to digest a glut of defaulted mortgages and foreclosed properties. Fannie posted a net loss of $2.9 billion for the second quarter, up from a year-ago loss of $1.2 billion. The company has now reported losses in 15 of the last 16 quarters and must ask the U.S. for another $2.8 billion in bailout funds after it makes quarterly dividend payments to the Treasury. more...


Post Office losses mount to $3.1B for quarter.
The Postal Service said Friday it lost $3.1 billion in the April through June period and could be forced to default on payments due to the federal government when the fiscal year ends in September. Losses for the year come to $5.7 billion. more...

S&P: 'Get serious about your debt.'

Australia's Swan Says US Faces Long, Painful Adjustment

U.S. Stocks Sink in Biggest Drop Since 2008

Unemployment 9.1% for July 2011

Postmaster General: Need to cut Saturday mail delivery

U.S. 10-Year TIPS Yields Go Negative for First Time After Fed Rate Promise


US debt limit increased, followed by rapid debt rise.
August 2, 2011 


[source]

"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies." -- Senator Obama on the U.S. Senate floor on March 16, 2006

President Obama signs debt-limit bill into law

U.S. eats up most of debt limit in one day

U.S. Debt Reaches 100 Percent of Country's GDP

$2.4 Trillion Would Be Largest Debt-Limit Increase in U.S. History

The real U.S. debt crisis is still to come


July 22, 2011   WSJ
Fiat acquires majority share of Chrysler. more...

Job search stretches past a year for millions. more...

Government weighs landlord role to ease housing slump. more...


Government to lose $14 billion of auto bailout funds.
June 1, 2011  AP

The Obama administration said Wednesday that the government will lose about $14 billion in taxpayer funds from the bailout of the U.S. auto industry.

Obama admin knew GM lied about paying back taxpayers

Chrysler restructures debt deal.
May 17, 2011  ft.com

Chrysler, the US carmaker run by Fiat, has restructured a landmark debt refinancing meant to distance itself further from its bankrupt past and pave the way for the Italian company to solidify its control.

The refinancing includes institutional loans, which are arranged by banks and syndicated to investors, and junk bonds to replace high-interest government loans associated with its restructuring two years ago.

The market for risky corporate debt has rallied for months as investors look for better returns and safeguards against rising rates. Institutional loans pay interest that floats over three-month Libor.

Car Bailouts Left Behind Crash Victims

Chrysler repays $7.5B to U.S., Canadian and Ontario governments

The truth behind Chrysler’s fake auto bailout pay back


US Postal Service posts $2.6 billion loss for first half of fiscal 2011.
May 10, 2011  govexec.com

The U.S. Postal Service has lost $2.6 billion so far this year and will require significant help from Congress to get back on track, officials said on Tuesday. During a board meeting, Postal Service leaders reported large losses through the second quarter of 2011. USPS lost $1.9 billion in that same period in fiscal 2010. The agency continues to face long-term financial challenges and despite significant cost reductions will reach its statutory borrowing limit by the end of the fiscal year and default on a number of obligations to the federal government, officials said.

Chief Financial Officer Joseph Corbett said the Postal Service does not expect to meet its cash obligations this year, including a $5.5 billion prepayment to its retiree health benefits fund, due Sept. 30. A $2.8 billion prefunding requirement for these benefits, along with a $700 million workers' compensation liability, contributed to the $2.6 billion fiscal 2011 loss.

Congress looking at new bill to bail out postal workers

Fannie Mae to ask $8.5 billion of Treasury.
May 7, 2011  FT.com

Fannie Mae, the troubled mortgage finance company, on Friday reported a return to losses for the first quarter as it announced it would seek an additional $8.5 billion from the US Treasury.

The Washington DC company, which finances almost half of all US mortgages, reported the net worth of its assets as minus $131.1 billion at the end of March, and indicated that it was unlikely ever to earn more than the dividends owed to the Treasury on preferred stock issued as part of its bail-out.  

Are we facing the end of the 30-year fixed-rate mortgage?


Federal Reserve's balance sheet is rising again in early 2011.

 FED Balance Sheet


A look back at overnight loans to big banks.

Foreign Firms Received Funds: Data From Fed Show Lenders Got Emergency Cash

Bailout Nation: Banks Got the Goldmine


US government comfortable with GM IPO pricing, and the resulting large taxpayer loss.
November 18, 2010  Reuters

US Treasury is reducing its stake in GM through the initial share sale from 61 percent to 37 percent at minimum. It could sell more shares initially to bring down taxpayer exposure to 33 percent, depending on whether an overallotment option is exercised. Ron Bloom, the administration's point man on auto restructuring, said GM has done the right thing and pricing of $33 per share is a "fair deal" even though the partial sale represents a loss of roughly $9 billion on taxpayers' original investment.

UAW Cashes In on GM IPO

China acquired 1% stake in General Motors


Fed orders 2nd round of stress tests for top 19 banks.
November 18, 2010  WSJ

The Federal Reserve plans to scrutinize the nation's top 19 banks for a second time, the latest indication federal regulators are seeking to toughen oversight of the nation's biggest financial institutions. The Fed said the 19 largest bank-holding companies must submit capital plans by early next year showing their ability to withstand losses under a set of conditions to be determined by the central bank, including "adverse" economic conditions and continuing real-estate-related woes. The banks are the same that underwent highly publicized "stress tests" at the height of the financial crisis in early 2009.

What's Really Behind Bernanke's Easing?

1.2 million people want a job but aren't looking


Fannie Mae needs an extra $2.5 billion from the U.S. Treasury after a third quarter loss on foreclosure and other credit expenses.
November 5, 2010  Reuters
Fannie Mae said credit-related expenses, which include provisions for losses and foreclosed property expense, rose to $5.6 billion in the quarter from $4.9 billion in the previous period. Among factors, it lowered the value of repossessed homes it owns, it said. The company also said it expected credit losses would rise due to the pause in foreclosures after some loan servicers found "deficiencies" as they processed delinquent borrowers.

Fannie Mae, Freddie Mac bailout cost is likely to rise to $154 billion, agency projects

US MONETIZING DEBT, AGAIN: Federal Reserve will buy $600 billion of U.S. government bonds.
November 4, 2010  WSJ

The Federal Reserve, in a dramatic effort to rev up a "disappointingly slow" economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth.

In essence, the Fed now will print money to buy as much as $900 billion in U.S. government bonds through June—an amount roughly equal to the government's total projected borrowing needs over that period.

This is the Fed's second experiment with a big bond-buying program. Between January 2009 and March of this year, the central bank purchased roughly $1.7 trillion worth of government and mortgage bonds. That move also sparked worries about inflation, which so far hasn't materialized. The bond-buying program is known in some corners as quantitative easing.

G-20 Nations Aim to Grill Fed on Purchases

$600,000,000,000 for what? (video)


GM could be free of taxes for years!
November 3, 2010  WSJ

General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.

GM, which plans to begin promoting its relisting on the stock exchange to investors this week, wiped out billions of dollars in debt, laid off thousands of employees and jettisoned money-losing brands during its U.S.-funded reorganization last year.

Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.

GM Could Get $45 Billion Tax Break, Thanks to Bailout

Detroit offers GM tax breaks to stay in city


Past-due home loans stay sky-high. Payrolls stay lower.

  

Mortgage Damage Spreads

Experts Say Recession Over, Unemployment Rate Still High


US annual deficit stays sky-high.

Treasury reported a nearly $1.3 trillion deficit for 2010

Banks keep failing, no end in sight.

The largest number of bank failures in nearly 20 years has eliminated jobs, accelerated a drought in lending and left the industry's survivors with more power to squeeze customers. Some 279 banks have collapsed since Sept. 25, 2008, when Washington Mutual Inc. became the biggest bank failure on record. [source]

The government's $700 billion financial bailout officially ends Monday, but some banks are having a hard time letting go with more than 600 banks sitting on about $65 billion in government bailout funds. In some ways, the end is largely symbolic and based on the resistance of some banks to repay, doesn't actually mean the end of TARP. The expiration means the Treasury can't fund any new programs but is allowed to continue overseeing existing investments. [source]

Florida Bank Becomes 126th Failure This Year

A Bank Bailout Some Won't Exit


Record low Treasury two-year note yield of 0.441%.
September 27, 2010
  WSJ
The U.S. sold $36 billion in two-year notes at a record low yield of 0.441% Monday. The successful auction served as evidence of the continuing solid demand for low-risk U.S. government debt, as investors, still concerned about the recovery in the U.S. and abroad, continue to pour money into Treasurys. Demand for Treasurys intensified last week after the Federal Reserve highlighted the risk of deflation and signaled it is ready to provide more help to the economy if needed. Many investors are even more persuaded the Fed will launch another large-scale bond-buying program this year, purchasing Treasurys, which has left the government bond market well bid.

Daily Treasury Yield Curve Rates:
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
09/16/10 0.12 0.16 0.20 0.25 0.48 0.77 1.48 2.17 2.77 3.61 3.92
09/17/10 0.12 0.16 0.20 0.26 0.48 0.75 1.46 2.14 2.75 3.60 3.90
09/20/10 0.12 0.17 0.20 0.26 0.47 0.73 1.43 2.10 2.72 3.57 3.87
09/21/10 0.12 0.17 0.20 0.26 0.43 0.68 1.34 1.99 2.61 3.49 3.79
09/22/10 0.12 0.16 0.19 0.25 0.44 0.68 1.33 1.96 2.56 3.43 3.74
09/23/10 0.13 0.16 0.20 0.25 0.45 0.67 1.34 1.96 2.56 3.43 3.73
09/24/10 0.09 0.15 0.19 0.25 0.45 0.69 1.37 2.01 2.62 3.50 3.79
09/27/10 0.08 0.16 0.19 0.26 0.44 0.66 1.31 1.92 2.54 3.40 3.70
09/28/10 0.08 0.16 0.20 0.26 0.37 0.64 1.25 1.85 2.48 3.35 3.66

$29 Billion 7-Year Notes Sold At Record Low Yield

Auction of T-notes sees record low yield


US federal government swooped in to stabilize credit-union sector.
September 25, 2010
  WSJ
Two years after the peak of the financial crisis, the federal government swooped in to stabilize a crucial part of the credit-union sector battered by losses on subprime mortgages.

Regulators announced Friday a rescue and revamping of the nation's wholesale credit union system, underpinned by a federal guarantee valued at $30 billion or more. Wholesale credit unions don't deal with the general public but provide essential back-office services to thousands of other credit unions across the U.S. The majority of retail credit unions are sound, but they will have to shoulder the losses through special assessments over the next decade.

Friday's moves include the seizure of three wholesale credit unions, plus an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.

Credit Unions Receive TARP Bailout Funds

Commercial real estate woes increasing.

Outstanding construction loans backing office buildings, shopping malls and other kinds of commercial real estate fell to a total of $221 billion in the second quarter of 2010, down from a peak of $298 billion in early 2009, according to data firm Foresight Analytics. The portion of those loans 30 days or more past due is up to 15.6%, nearly four times the rate two years ago. [source]

Commercial Property Woes Are Likely to Resume

Mayflower Hotel's loan woes could be echoed by commercial properties nationwide


Almost all new mortgages "guaranteed" by US government since 2008.

About 95% of mortgages today are backed by Fannie Mae, Freddie Mac, or other government agencies. Many investors believe mortgage markets won't ever again function without some form of government backstop.

Mortgage Investors Need to Step Up

Rethink signalled on home loan pledge

How to Get a Government-Backed, Zero-Down-Payment Mortgage


Bank repossessions of homes set record in August of 2010.

Bank Repossessions of Homes Reach New High in August

Foreclosures Rise; Repossessions Set Record


California's private jobs have taken a dive, but not public jobs.

Public Pensions and Our Fiscal Future

California May Resort To Making Payments With IOU’s – Again


FDIC finds 829 U.S. banks at risk.
September 1, 2010
  WSJ
The Federal Deposit Insurance Corp. said Tuesday that 829 of the nation's roughly 7,800 banks were on its "problem list" at the end of June, up from 775 at the end of the first three months of the year. Already 118 banks have failed this year, well ahead of the pace set last year when 140 were seized by regulators.

Broken banks, durable delusions

US government to go further into debt to help keep some states solvent — Obama signs $26 billion aid package.
August 10, 2010
  WSJ
President Barack Obama signed into law a package of $26 billion in aid for state and local governments, following House approval of the package Tuesday.

The new law includes limits on foreign tax credits that will cost U.S. multinational firms nearly $1 billion a year in additional taxes, according to the official estimate from Congress's Joint Committee on Taxation.

House Speaker Nancy Pelosi (D., Calif.) called back into session lawmakers who had just begun their six-week-long summer recess in order to cast the vote. Democrats see the legislation as politically important for them, as it benefits key constituencies, including public-sector workers and labor unions. But to pay for it, they handed a hefty tax bill to U.S. companies with units overseas that have been able to pay a lower corporate income-tax rate on profits derived from their foreign businesses.

The House voted 247-161 to approve the legislation, in a vote that was almost exclusively along party lines, with just two Republicans joining all but three Democrats in favor of the measure.

The legislation will provide $16 billion in aid to help states pay rising Medicaid costs.

Current federal funding for the expansion of the program, which provides health care for the poor, expires at the end of the year. The law will continue the funding through the first six months of 2011.

The bill will steer a further $10 billion to local governments to help them avert layoffs of teachers and other public-sector workers such as firemen and police officers.

The legislation's full $26 billion cost is offset by tax increases or spending cuts elsewhere in the federal budget. The foreign-tax credit limits will increase government revenues by $9.6 billion over the next 10 years. The bill also ends early an increase in food-stamp payments that was part of economic-stimulus legislation.

House Votes to Raise Taxes on Jobs Creators, 247-161

Obama Signs $26 Billion State Aid Package Into Law


Postal Service Reports $3.5 Billion Loss
August 5, 2010
  WSJ
The U.S. Postal Service's fiscal-third-quarter loss widened to $3.5 billion as mail volume fell 1.7% and operating expenses increased, and a potential cash crunch looms.

The Postal Service has lost money each year since 2007, while mail volume has declined 20% since then, hit by the economy's downturn and the growing use of email and online bill payment. The problem is compounded by high fixed costs for the Postal Service.

Postal Service Chief Financial Officer Joseph R. Corbett said Thursday that liquidity remains a concern because it is uncertain whether it can both meet a $5.5 billion payment to its retiree health fund at the end of September and "retain sufficient liquidity" into the next fiscal year.

Despite cost cuts of more than $10 billion in the past three years, the Postal Service last month proposed raising the price of a first-class stamp in what would be the seventh increase in a decade.

The Postal Service's $3.5 billion loss for the quarter ended June 30 compares with a $2.4 million loss a year earlier. Its year-to-date loss widened to $5.4 billion from $4.7 billion.

U.S. Postal Service Can't Stop the Bleeding

U.S. Postal Service reports $3.5-billion loss, sees more red ink in future


Treasurys Rally; Two-Year Yield Hits Record Low
August 4, 2010
  WSJ
Treasurys and mortgage-backed securities gained Tuesday as weak economic data further fanned expectations that the Federal Reserve may need to restart its asset purchases to support the economy. The two-year yield was pushed down to a record low of 0.515% at one point during the day, as the price rose, after surprisingly weak reports on consumer spending, pending home sales and factory orders.

The Fed has already pledged to keep rates ultra-low for an extended period which has helped keep Treasurys yields low and borrowing costs down for consumers and corporations.

US Treasury yields fall to record low on Fed's 'QE lite' plan

July 2010
Obama Declares Auto Bailout a Success

President Barack Obama on Friday declared the controversial bailout of the U.S. auto industry a success in visits to Detroit auto plants that came weeks before General Motors Co. is expected to take a critical step toward an IPO.

Public and investor support of the U.S. government's $60 billion rescue of GM and Chrysler LLC is important to Detroit auto makers as they prepare to make a return to public markets that will rely on solid sales and Wall Street support.

Also, public support for the bailout is key for the Obama administration, worried that Democrats who supported the unpopular bailout could be ousted in November elections.  [source]


At 'Old GM,' Bad Assets Linger On

A year into the process of shedding GM's "bad assets," only one former factory and a few other properties have found a second life.

The vast majority of the auto maker's closed offices, decrepit plants and parts depots that were left behind in bankruptcy court remain on the market or are slated for demolition. Some of the properties are contaminated with toxic waste; others are cavernous structures way too big for alternative uses. Few sport good locations.

It could take years to dispose of the 200 remaining properties, the detritus of one of the country's biggest-ever bankruptcies.

Washington last year pumped $50 billion into General Motors to prevent the car maker's collapse and decreed that its "good" assets should be split from the "bad" assets. The U.S. steered GM through a quick bankruptcy sale that sent its best assets to a new, leaner company, now 61% owned by U.S. taxpayers.

The rest of the assets were left in bankruptcy court with "Old GM," a shell of the once-dominant auto maker, renamed Motors Liquidation Co.  [source]

Remnants of 'Old GM' to Linger

Motors Liquidation Company

Windsor's 90-year-old GM plant closes


Recovery Loses Momentum

Chicago Bank Fails, 2010 Tally Hits 109


Deflation Worries Stir as Consumer Confidence Slips
July 2010
Consumer prices fell in June for the third straight month, underscoring the continuing risk of deflation as high unemployment and weak consumer demand keep prices under pressure.

Fears about the economy slowing in the second half of this year, with little sign of employment picking up rapidly, add to the risk of continued downward pressure on prices.  [source]

Banks Generate Profits, but Struggle to Lend

Collateral Damage in Lending


Historic financial overhaul signed to law by Obama
July 21, 2010  AP
Reveling over a new milestone in his presidency, a triumphant Barack Obama on Wednesday signed into law the most sweeping overhaul of lending and high-finance rules since the Great Depression.
Firms have been poring over the massive bill, anxious to assess its most immediate impact. Credit rating firms, for instance, say they will no longer allow the issuers of debt-backed securities to put their ratings for them in public sale documents, wary of a provision in the law that makes it easier to sue ratings agencies.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Dodd-Frank Wall Street Reform and Consumer Protection Act

Timeline: Long road to implement financial reform bill

Financial “Reform”: Wolves Guarding Sheep Pastures

The Dodd-Frank Mistake video

Is Dodd-Frank a Quota Bill? video


CBO’s Long Term Budget Outlook - July 1, 2010
July 1, 2010  CBO Release
As part of the Long-Term Outlook, CBO (Congressional Budget Office) has updated its health care spending projections to reflect the recently-passed health care reform legislation. The legislation makes a number of changes with major budgetary consequences, including expanding Medicaid, providing insurance subsidies, enacting changes to cut the level of Medicare spending, making changes to reduce the growth of Medicare, and raising new revenues in a variety of ways.

Regardless of what effect health reform actually has, the long-term budget remains on an unsustainable path. If we simply continued on our current policy path through 2020, our debt will grow to 87 percent of GDP in that year, and to unprecedented levels soon after. Under any scenario, Social Security will grow by 1 to 1.5 percent of GDP and federal health spending will grow many times more.

Our coming fiscal trainwreck

CBO: Obamacare Unlikely to Reduce Spending on Health Care


2010 car sales stay in low gear.

Car Sales Are Stuck in Slow Lane

Automobile Sales May Stall in ‘Tortoise-Like’ U.S. Recovery

CarMax CEO expects slow auto market recovery


Obama launches 10,000th recovery project in Ohio.
June 18, 2010  The White House Blog

President Barack Obama launched Friday a road improvement project in Ohio he said was the 10,000th recovery initiative since the US economic stimulus plan kicked in early last year.

"Today, I return to Columbus to mark a milestone on the road to recovery: the 10,000th project launched under the Recovery Act," Obama said, referring to the 787-billion-dollar stimulus program he launched on February 17, 2009.  [source]

Obama touts 10,000th stimulus project

FHFA Directs Delisting of Fannie Mae and Freddie Mac Stock from New York Stock Exchange
June 16, 2010  FHFA NEWS RELEASE

The Federal Housing Finance Agency has directed Fannie Mae and Freddie Mac (the Enterprises), operating in conservatorship, to delist their common and preferred stock from the New York Stock Exchange and any other national securities exchange. Once the delisting is completed, each Enterprise’s common and preferred stock is expected to be quoted on the Over–the-Counter Bulletin Board.

Fannie's and Freddie's House of Horror

Delisted but Not Gone: What to Do About Fannie and Freddie?


Lost decade for US economic growth?
June 14, 2010  WSJ

If 2008 was the year of sheer panic, 2010 is shaping up into one of stubborn, slow-burning angst. There is a feeling that a lot remains unfixed in the economy, even though governments have spent heavily and central banks have flooded their economies with easy money. If the forces of deflation and deleveraging still aren't neutralized, what can be done to stop them? Indeed, might the only workable economic approach be to let these forces play themselves out? The case for doing this can arguably be seen in the banking system, where credit is contracting, despite government help. Bank loans and leases have fallen a brutal 10.5% since the end of 2008, adjusted for loans brought onto banks' balance sheets because of an accounting-rule change. They are even down 3.25% since the end of 2009.

Aughts were a lost decade for U.S. economy, workers

Bad news for Social Security at mid-year 2010.
There is enough published information from the SSTF to make some observations for the first six months of 2010. The numbers are going in the wrong direction. Receipts are down across the board while expenses keep rising. This chart looks at the Jan.-June results for 2008-2010. These lines were not expected to cross for at least another five years. This is the cost of the protracted recession and the failure of the economy to generate new jobs. 
[source]

 

Social Security: Bankrupt System Will Impact Markets Sooner than Expected

Bank Contagion Spreads to Northwest

U.S. April budget deficit $83 billion.
May 12, 2010 

The U.S. government ran a budget deficit in April of $83 billion, the Treasury Department reported Wednesday, as individual income tax receipts declined sharply. April marked a record 19th consecutive monthly budget deficit. A year ago in April, the deficit was $20.9 billion.

April is usually a surplus month as federal taxes are due but the recession has hit tax receipts for the past two years. The Obama administration projects a deficit of $1.6 trillion in the current fiscal year, compared with $1.4 trillion in the prior year.  [source]


Fannie Mae needs $8.4 billion more.
May 11, 2010  WSJ

Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing-market bust.

The company has now racked up losses of nearly $145 billion, or nearly double its profits for the previous 35 years.

The government's tab for Fannie will climb to $84 billion, while Freddie's stands at $61 billion. The government took control of both companies in 2008 through a legal process known as conservatorship as rising losses threatened to wipe out their thin capital reserves.

Fannie's losses have surpassed Freddie's because its $3 trillion book of loan guarantees is nearly one-third larger than Freddie's. Delinquencies are higher at Fannie because the firm more aggressively dialed up its appetite for riskier loans at the peak of the housing boom.

Fannie, Freddie and the Federal Housing Administration provided guarantees or insurance for 96.5% of the home mortgages that originated in the first quarter, according to Inside Mortgage Finance, a trade publication. The companies also play a central role in the Obama administration's loan-modification effort designed to avert foreclosures.

Losses at Fannie and Freddie continue to grow because the firms must set aside more capital to cover anticipated losses as mortgage delinquencies rise. The Treasury kicks in more capital every quarter if revenues can't meet those financial needs. Unlike many financial companies, the firms are exposed to a single asset class, holding nearly $5.5 trillion in mortgages and loan guarantees.

Fannie's capital hole would have risen by $3.3 billion without new accounting rules that took effect Jan. 1. The firm's losses were driven by deterioration in its $3 trillion book of loan guarantees, which accounted for a $12.5 billion loss.

But the terms of the government conservatorship, which require Fannie and Freddie to pay an annual 10% dividend on their Treasury draw, could create an incentive to reserve more conservatively. Fannie had to pay the government $1.5 billion in dividends last quarter. "They don't want to raise the reserve levels because in a sense it doesn't matter and it could be perversely damaging to them," says Mr. Sanders.

In its filings Monday, in the coming months Fannie said it wasn't likely to repay its debt to the Treasury for the "indefinite future."

Senate rejects GOP's Fannie, Freddie plan

Bernanke Sees Privatizing Fannie, Freddie As Overhaul Option


New-home sales down as a percentage of total home sales, as massive foreclosures occur.
April 23, 2010  WSJ
New homes tend to be more expensive in a market with plenty of inventory. To stay competitive, home builders have been cutting the size and cost of properties - accounting for more than half of the builder's sales in its quarter ended in February.

The typical new home sold for $220,500 in February, compared with $165,000 for a pre-owned one. The inventory of cheaper homes looks set only to grow. Foreclosure filings in March hit a record of about 367,000, according to RealtyTrac. And there are about 5.5 million additional properties in the foreclosure pipeline, according to Barclays Capital. Government programs to keep people in their homes and current on mortgages have had only mixed success.


States skip pension payments, delay day of reckoning.
April 9, 2010  WSJ
State governments from New Jersey to California that are struggling to close budget deficits are skipping or deferring payments to already underfunded public-employee pension plans. The moves could help ease today's budget pressures, but will make tomorrow's worse.

New Jersey's governor, a fiscal conservative, has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit. Virginia has proposed paying only $1.5 billion of the $2.2 billion required pension contribution. Connecticut Republican Gov. M. Jodi Rell is deferring $100 million in payments this year to the pension fund for state employees to help close a $518 million budget gap

"Yes it's wrong," said New Jersey Republican State Sen. Robert Singer. "But the governor "has no other choice."


With unemployment still at a severe high, a majority of states have drained their jobless benefit funds, forcing them to borrow billions from the federal government to help out-of-work Americans.

State Borrowed
California $8.40 billion
Michigan $3.78 billion
New York $3.00 billion
Pennsylvania $2.81 billion
Ohio $2.23 billion
North Carolina $2.14 billion
Illinois $2.06 billion
Texas $2.03 billion
Indiana $1.81 billion
New Jersey $1.55 billion
Florida $1.50 billion
Wisconsin $1.34 billion
 [source]
33 states out of money to fund jobless benefits

Food stamp rolls break record again.

About 39.4 million Americans, the most ever, received food stamps in January, the government said. The number of recipients was up 22% from a year earlier, according to the U.S. Department of Agriculture. The total of Americans getting the subsidy has hit records for 14 consecutive months.

Beginning Oct. 1, an average of 40.5 million people are expected to get food stamps each month this year, rising to 43.3 million in 2011, according to White House estimates.  [source]


Massive US government involvement in another key sector of the economy.
April, 2010  WSJ

Treasury Secretary Timothy Geithner recently noted in congressional testimony, the government is backing 95% of the housing-finance market, between Fannie Mae, Freddie Mac and other federal agencies.

Fannie and Freddie alone account for 70% of new single-family mortgages, up from 40% in 2006.


With stroke of a pen, Obama signs health reform into law — projected cost of $940 billion.
March 23, 2010
Cuban revolutionary leader Fidel Castro declared passage of American health care reform "a miracle" and a major victory for Obama's presidency, but couldn't help chide the United States for taking so long to enact what communist Cuba achieved decades ago.
         
Democrats Prepare for Another Healthcare Blitz

Companies take big health-care charges for anticipated costs


US housing starts remain very low.
Sales of new homes in the US fell to their lowest level on record in February. The seasonally adjusted annual rate of 308,000 units in February was the lowest since the Commerce Department began keeping statistics in 1963.
        
U.S. Housing Starts Remain Near Record Low Levels

New-home sales hit a new low


Four more banks fail, depositors suffer.
March 5, 2010
Regulators shuttered four U.S. banks on Friday, bringing the nation's tally of bank and thrift failures to 26. The Federal Deposit Insurance Corp. was unable to find buyers for two of the failed institutions, leading to losses for depositors who had balances exceeding the agency's insurance limits.  [source]

Bank Name

City

State

Closing Date

Centennial Bank Ogden UT March 5, 2010
Waterfield Bank Germantown MD March 5, 2010
Bank of Illinois Normal IL March 5, 2010
Sun American Bank Boca Raton FL March 5, 2010

FDIC's Failed Bank List

Four More Bank Closures – Many More to Come

Fannie Mae needs another $15.3 billion from US government.
February 26, 2010  WSJ
On Friday, Fannie Mae said the fourth-quarter loss resulted in a net worth deficit of $15.3 billion as of Dec. 31. As a result, the company said the Federal Housing Finance Agency on Thursday submitted a request for that amount from the Treasury on the company's behalf. It is seeking the funds prior to March 31, and the request would put the total received by the government to $76.2 billion.

Fannie and Freddie Mac were placed under conservatorship in 2008 to prevent potential implosions at the height of the credit crisis.

Fannie, Freddie Need to Issue More Short-Term Debt

Fannie and Freddie are at it again

Geithner: No change to Fannie, Freddie until 2011


Q. Unstable US banks need more dollars — does FED borrow or print?

A. Both.  After massive US debt limit increase, Treasury to give FED $200 billion of borrowed money to slow down the printing of money — needed for buying mortgage-backed securities which destabilized the US banking system.
February 24, 2010  WSJ
The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.

The Treasury borrowing is part of an unusual dance the Fed has undertaken to manage a balance sheet that has grown large and complex.

The Treasury initiated the program—the Supplemental Financing Program—during the peak of the financial crisis in 2008 to get cash to the Fed to fund programs that pumped credit into the financial system. The Treasury reduced the program last year as its own borrowing authority approached legal limits. Now that Congress has raised the government debt limit, Treasury was able to revive it.

In 2008, as it reduced short-term interest rates nearly to zero, the Fed used the Treasury deposits to fund interventions without printing money. As the economic outlook worsened and the size of Fed interventions grew, the Fed began printing money, or, technically, crediting the electronic accounts of banks with funds when it made loans or bought securities from them.

Revival of the Treasury program makes it possible for the Fed to avoid printing more money, a step that could lead to inflation, at it develops exit strategies from its interventions.

As of Feb. 10, the Fed had pumped more than $1 trillion into the financial system. That sum had the potential to grow in coming weeks as the Fed completed plans to buy $1.25 trillion of mortgage-backed securities. As of mid-February, the Fed's holdings of mortgage-backed securities stood at $1.025 trillion.

Fed to Get $200 Billion Boost

How Currency Gets into Circulation


$400 million for food financing in US.
February 19, 2010  Treasury Press Release
The Obama Administration today released details of an over $400 million Healthy Food Financing Initiative, which will bring grocery stores and other healthy food retailers to underserved urban and rural communities across America. The initiative was announced today in Philadelphia by Treasury Secretary Tim Geithner and Agriculture Secretary Tom Vilsack.

The Healthy Food Financing Initiative will promote a range of interventions that expand access to nutritious foods, including developing and equipping grocery stores and other small businesses and retailers selling healthy food in communities that currently lack these options.


Record high long-term unemployment in US.
February 2010
The position of the already unemployed is looking more and more desperate. The average length of time jobless people have been out of work is at a record high of 30.2 weeks, and that doesn’t even include people who want jobs but have given up looking for them.  [source]

How a New Jobless Era Will Transform America

A New Norm for Unemployment?

Number of long-term unemployed hits highest rate since 1948

Millions of Unemployed Face Years Without Jobs


US debt limit increase needed after massive federal spending increase.

It's the Spending, America

US debt limit increased again.
President Obama signs $1.9 trillion debt limit increase.
February 12, 2010

President Obama signed into law February 12 a bill that would increase the federal debt limit by $1.9 trillion to a total of $14.3 trillion. The legislation also included a restoration of the “pay-as-you-go” provision of congressional budgeting that requires new spending proposals in Congress to be matched by cuts or tax increases in order to prevent accelerating the already out-of-control federal budget deficit.

The legislation — which amounts to increased borrowing of more than $15,000 for every household in America — will only account for scheduled borrowing for a little more than a year. The current annual deficit for fiscal 2010 is expected to be nearly $1.6 trillion, and Obama introduced a budget calling for an additional $1.3 trillion deficit in fiscal 2011.  [source]


US Debt Limit was increased from $12.394 trillion to $14.294 trillion
effective February 12, 2010. 
[source]

President Obama increases US debt limit

All 60 Senate Democrats and no Republicans voted for the debt limit increase


The real 2010 jobs boom is in the US federal agencies.

Uncle Sam Wants You

Government union members now outnumber private for the first time

Most U.S. Union Members Are Working for the Government


Senate proposes increasing U.S. debt limit by $1.9 trillion.
January 21, 2010   Bloomberg

The U.S. debt limit would be raised by $1.9 trillion to $14.29 trillion under an amendment proposed in the Senate. The chamber began debate yesterday on raising the debt ceiling for the fifth time in two years after lower tax revenue from the recession and higher stimulus spending boosted the calendar-year budget deficit to an all-time high last year. The proposed ceiling would probably allow the Treasury to continue its borrowing until next year, said Michael Feroli, an economist at JPMorgan Chase & Co. in New York.

Congress passed a short-term increase in the debt limit to $12.39 trillion last month after a group of senators, led by Budget Committee Chairman Kent Conrad of North Dakota, refused to vote on a longer-term extension unless Congress created a commission to study deficit reduction. The Obama administration reached a tentative accord with congressional Democrats to create a version of the panel by executive order, House aides said.


Growing number of commercial real estate loans past due in 2009.

US commercial property loan defaults soar

Commercial Real Estate Loans A Growing Problem For Banks


Joblessness set record high in 2009.

A record 20 million-plus people collected unemployment benefits at some point in 2009, a year that ended with the jobless rate at 10 percent.

Budget-strapped state governments will struggle with higher spending on unemployment insurance in 2010. States are required to set aside money in a trust fund to pay jobless benefits, but 25 have already run through their funds and have borrowed $26 billion from the federal government.

The Labor Department has projected that 40 states may need to borrow as much as $90 billion by 2012.

Thirty-five states have already increased the unemployment insurance taxes they levy on employers for 2010, according to the National Association of State Workforce Agencies. Some are also cutting benefits as they try to reduce the size of budget shortfalls that are expected to reach $180 billion in the coming fiscal year.  [source]

- - - - - - - - - -

American Recovery and Reinvestment Act of 2009
The Recovery Act was signed into law by President Obama on February 17th, 2009. It was an unprecedented effort to jumpstart the economy and create or save millions of jobs.

Employed 2009 - USA

Percent Job Losses
 

US debt limit increased again.
December 28, 2009

US Debt Limit 2009
US Debt Limit was increased from $12.104 trillion to $12.394 trillion
effective December 28, 2009. 
[source]

 

Obama signs U.S. debt limit increase into law

Why Our Massive Debt Will Kill Us in the End


US Treasury debt sales top $2.1 trillion in 2009. 

The Treasury sold more than $2.1 trillion in notes and bonds this year, more than in the previous two years combined, to fund a widening budget shortfall and finance programs to rescue the banking system and support the economy.

Next year, the Treasury is expected to sell about $2.45 trillion in notes and bonds, setting another record. But yields may need to rise to entice buyers, particularly as the economic recovery gathers pace.  [source]

US Treasury Debt Sales 2009

 

 


US Treasury will supply "unlimited" funds
to cover cumulative Fannie Mae and Freddie Mac losses.
December 24, 2009  FED Press Release

At the time the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship in September 2008, Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth. Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years.

Treasury is making two additional changes to the PSPAs. Treasury will delay setting the Periodic Commitment Fee by one year to December 31, 2010. Treasury will also make technical changes to the definitions of mortgage assets and indebtedness to make compliance with the covenants of the PSPAs less burdensome and more transparent in light of impending accounting changes.

 

 

Shares of Fannie, Freddie Rally as Treasury Removes Caps Shares of Fannie, Freddie Rally as Treasury Removes Caps

Delinquencies Rise Further In Fannie Mae's Portfolio In October

Fannie and Freddie shares soar, but for no good reason

 


Food Stamp Growth
Midnight in the food-stamp economy

U.S. food stamp chief wants California to boost use

Food stamp enrollment is soaring in the city — to the point where one New Yorker out of five takes part in the federal nutrition program.


US Automakers Continue to Shrink: Ford offers buyouts to 41,000 UAW workers.
December 21, 2009  Reuters

Ford Motor Co said it is offering its 41,000 U.S. factory workers buyouts and early retirement offers in a bid to reduce its payroll costs as it aims to return to profit by 2011. Ford workers have until late January to accept the offer, which include payouts of up to $70,000 cash for newer hires to $60,000 cash for veterans already eligible for retirement.

"Despite a strengthening in our business, we still have a surplus in employees," said Ford spokesman Mark Truby. Ford did not provide a target for how many workers it expected would take the offers.

While Ford was the only U.S. automaker to have avoided bankruptcy in the past year, its relative success has complicated efforts to win concessions from its major union. Last month, UAW workers overwhelmingly rejected a proposed cost-cutting deal for Ford that would have changed the terms of a labor contract which runs until 2011.

Under the terms of the new buyouts, Ford workers with at least a year of experience will be eligible for a payout of $50,000 plus a new car voucher worth $25,000 or an additional cash payment of $20,000. Workers eligible for retirement will be able to draw pension payments and take either the $25,000 voucher toward a new Ford vehicle or the $20,000 payment. In addition, retirement eligible workers with a skilled trade can receive $40,000 cash. Other workers would be paid $20,000 as an incentive to retire. Workers who accept the offer would leave the company between February 1 and March 1, Truby said.

Michigan, where the unemployment rate was 14.7 percent in November, has the highest jobless rate in the United States.

Over the past decade, the U.S. auto sector has seen employment drop by over half to 547,500 workers as of June, according to government data.

By reducing the number of older workers on their payroll, all three U.S. automakers aim to create room to hire new workers at sharply reduced wages when they need to increase production. New UAW hires at the Detroit automakers will make $14 per hour compared with an average about $28 per hour for older workers under a round of concessions granted by the union.

Ford offers incentive packages to cut US staff

FDIC expanding to handle more bank failures in 2010.
December 15, 2009  FDIC Press Release

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved a $4.0 billion Corporate Operating Budget for 2010. The Board also revised the current 2009 budget to $2.6 billion.

"The 2010 budget is a prudent and measured response to current conditions in the banking industry," said FDIC Chairman Sheila Bair. "It will ensure that we are prepared to handle an even-larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions."

The 2010 operating budget will increase more than $1.4 billion (55%) from 2009, primarily due to the cyclical nature of bank failures. The receivership funding component of the 2010 budget, the vast majority of which is funded by receiverships, will be $2.5 billion, up from $1.3 billion in 2009. This includes funding for the continuing work associated with bank failures that have occurred over the past two years. The budget also contains contingency funding for the possible continuation of an elevated number of bank failures in 2010.

In conjunction with its approval of the 2010 operating budget, the Board also approved an authorized 2010 staffing level of 8,653 employees, up from 7,010 in 2009.

Bank Agency Boosts Budget 35%

Is it Possible 1,000 Banks Could Fail?


US Treasury extends TARP until October 2010.
December 9, 2009  Treasury Press Release

The U.S. Department of the Treasury released the text of identical letters sent today from Secretary Tim Geithner to Speaker Nancy Pelosi and Senator Harry Reid outlining the Administration's exit strategy for the Troubled Asset Relief Program (TARP) established by the Emergency Economic Stabilization Act of 2008 (EESA).

...pursuant to Section 120(b) of EESA, I certify that I am hereby extending the authority provided under the Act to October 3, 2010. This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats, as described above.

While we are extending the $700 billion program, we do not expect to deploy more than $550 billion. We also expect up to $175 billion in repayments by the end of next year, and substantial additional repayments thereafter. The combination of the reduced scale of TARP commitments and substantial repayments should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate.

TARP critic steps down from oversight panel

Six more U.S. banks fail — yearly total now 130 failures.
December 4, 2009  FDIC Press Release | Failed Bank List

AmTrust Bank, Cleveland, Ohio, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with New York Community Bank, Westbury, New York, to assume all of the deposits of AmTrust Bank.

As of October 27, 2009, AmTrust Bank had total assets of approximately $12.0 billion and total deposits of approximately $8.0 billion. New York Community Bank did not pay a premium to assume all of the deposits of AmTrust Bank. In addition to assuming all of the deposits of the failed bank, New York Community Bank agreed to purchase approximately $9.0 billion in assets of AmTrust Bank. The FDIC will retain the remaining assets for later disposition.

“The commercial real estate market is the big problem,” said James Barth, a former chief economist at the Office of Thrift Supervision.

AmTrust, Five Other U.S. Lenders Shut as 2009 Toll Reaches 130
Closely held AmTrust collapsed alongside three banks in Georgia and one each in Virginia and Illinois, according to statements issued yesterday by the Federal Deposit Insurance Corp., which was named receiver. The failures will cost the FDIC’s deposit fund $2.38 billion, the agency said.

FED balance sheet explodes with mortgage-backed "securities".

FED Balance Sheet

Wave of Debt Payments Facing U.S. Government

House Attacks Fed, Treasury

Homebuyer Tax Credits Threaten the FHA

Banks Scramble as Debt Comes Due


US government-controlled Fannie Mae to obtain deeds of private homes through "Deed for Lease" program.
Home loans past due 2009 Fannie to Rent to Owners in Foreclosure

Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government's latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.

The "Deed for Lease" Program lets borrowers who don't qualify for loan modifications transfer their property to Fannie Mae in exchange for a lease. Borrowers-turned-tenants will pay market rents, which in most cases are lower than the cost of mortgage payments, and might be offered extensions when their leases expire.  [source]

Fannie Mae to rent out homes instead foreclosing

Fannie Mae’s Sale of Tax Credits Is A Bad Deal, Treasury Says

The Fannie Mae Dice Roll Continues: Losses of $400 billion are increasingly possible


CIT Group files bankruptcy.
November 1, 2009  CIT Press Release

CIT Board of Directors Approves Proceeding with Prepackaged Plan of Reorganization with Overwhelming Support of Debtholders

CIT Group Inc., a leading provider of financing to small businesses and middle market companies, today announced that, with the overwhelming support of its debtholders, the Board of Directors voted to proceed with the prepackaged plan of reorganization for CIT Group Inc. and a subsidiary that will restructure the Company’s debt and streamline its capital structure.

CIT Group Files Bankruptcy, Seeks to Reduce Debt

$2.3 billion in taxpayer money spent to save CIT Group Inc. is likely to be wiped out


Deficit Dilemma: How to Dig Out?

2009 deficit of $1.4 Trillion is about 10% of GDP

US Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) Issues Top $90 Billion


US jobless rate surges to 10.2 percent.
October, 2009
US Jobless Rate 10.2% GMAC Offers $2.9 Billion in Debt

GMAC is the only financial company with a junk credit rating to receive support under the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program. Moody's Investors Service has the company rated at Ca, two notches above default. The FDIC backing, however, means these bonds will be rated triple-A.

The offering came as GMAC was in discussions to take another $2.8 billion to $5.6 billion of fresh capital in the form of preferred stock from the government. The Treasury already has pumped $12.5 billion into the company, which lost $3.9 billion last quarter and will post its third-quarter results next week.

GMAC converted to a bank-holding company last year and is seen as crucial to the survival of Chrysler LLC and General Motors Co., both of which were shepherded into bankruptcy by the government earlier this year.  [source]

 

Washington and the Jobs Market

10.2 Percent Unemployment 'A Sobering Number'

New round of bank closures to cost FDIC $1.5 billion

Credit Ratings Now Optional, Firms Find


Treasury sales smash record.
October 30, 2009  WSJ

For all the concern over Washington's ballooning deficits and its $12 trillion debt load, the U.S. government demonstrated this week that it retains the capacity to easily raise the funds it needs.

The government sold a record $123 billion in notes this week in four auctions. Each was heavily oversubscribed, drawing in a total of $372.4 billion in bids, more than three times the offered amount.

This is comforting news for those worried that the U.S. biggest lenders, especially the Chinese central bank, could start paring back on purchases for fear that record U.S. fiscal deficits and excessively easy monetary policy could undermine confidence in the dollar.

The four giant U.S. government debt sales -- comprising $116 billion in two-, five-, and seven-year notes and $7 billion in five-year inflation-protected securities -- speak in part to the continued dominance of the dollar as a reserve currency.

And the U.S. will need that demand going forward. Lou Crandall, chief economist at Wrightson ICAP, expects the Treasury to issue $1.325 trillion in new debt in the year through September 2010, based on the government's guidance for a budget deficit of $1.3 trillion.

"When you look at the largest capital flows that are going around the world, they are still coming out of Asia," said Dominic Konstam, interest-rate strategist at Credit Suisse in New York. "And although there has been some diversification ... at the end of the day they are still beholden to U.S. markets."

Crisis Compels Economists To Reach for New Paradigm


FDIC in trouble as banks continue to fail.
September 29, 2009
  FDIC Press Release

Banks Tapped to Bolster FDIC Resources

The Board of Directors of the Federal Deposit Insurance Corporation today adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately
$45 billion. The FDIC Board also voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years.

Prepayment of assessments will allow the industry to strengthen the cash position of the Deposit Insurance Fund (DIF) immediately, while allowing the capital impact of deposit insurance assessments to be felt gradually over time as the industry improves its own financial position. The banking industry has substantial liquidity to prepay assessments. As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances, or 22 percent more than they did a year ago. Prepaying assessments will put the industry's liquid balances to good use in conserving capital and helping to maintain the capacity of banks to lend while they rebuild the DIF. FDIC analysis indicates that this arrangement is much less likely to impair bank lending than a one-time special assessment.

FDIC Fund to Be in Red for Years as Bank Failures Jolt System

FDIC insurance plan is no long-term solution


FHA Capital Reserve Ratio to drop below federal mandate.
September 20, 2009
  American Banking News
The Federal Housing Authority announced last week that its capital reserve ratio would drop below mandatory levels for the first time in its 75-year history. The news comes just weeks after the Obama Administration launched a program to assist FHA borrowers that are behind on payments, a program that is set to only help a small percentage of those eligible.

The capital reserve ratio mandated by Congress for the FHA is 2 percent and with the agency now insuring about a quarter of all new loans generated this year some concern exists that a bailout may be needed if delinquencies continue to rise. Roughly 17 percent of the 5.3 million mortgages the FHA insures are behind by at least one payment.

With perceived risk increasing for the FHA, Commissioner Stevens also announced intentions to hire a Chief Risk Officer, a new position that has not existed in the agency’s 75-year history.

The FHA has been key component in recovery of the home loan market the past year as borrowers who attain FHA insurance are only required to make a down payment of 3.5 percent. About 80 percent of new loans insured by the FHA have been for new homebuyers who might not have been able to purchase a home with larger down payment requirements.

FHA Will Tighten Credit Standards


States shut down to save cash.
September 4, 2009  WSJ
Across the country, cash-strapped state governments are shutting down business for a day at a time to save money. State offices are shuttered Friday in California, Maine, Maryland and Michigan. Some state agencies are closed in Georgia and Wisconsin, and most Colorado state offices will be shuttered on Tuesday. Other states, such as Arizona, have been trying to keep their operations open while furloughing thousands of workers.


Fannie Mae reports second-quarter loss of $14.8 Billion, and then requests $10.7 Billion more from U.S. Treasury.
August 6, 2009  Fannie Mae News Release
Fannie Mae reported a loss of $14.8 billion in the second quarter of 2009, compared with a loss of $23.2 billion in the first quarter of 2009. Second-quarter results were driven primarily by $18.8 billion of credit-related expenses, reflecting the ongoing impact of adverse conditions in the housing market, as well as the economic recession and rising unemployment.

Taking into account unrealized gains on available-for-sale securities during the second quarter and an adjustment to our deferred tax assets due to the new accounting guidance, the loss resulted in a net worth deficit of $10.6 billion as of June 30, 2009. 

As a result, on August 6, 2009, the Director of the Federal Housing Finance Agency (FHFA), which has been acting as our conservator since September 6, 2008, submitted a request for $10.7 billion from the U.S. Department of the Treasury on our behalf under the terms of the senior preferred stock purchase agreement between Fannie Mae and the Treasury in order to eliminate our net worth deficit. FHFA has requested that Treasury provide the funds on or prior to September 30, 2009.

Fannie Mae is continuing its efforts to support the housing market by working with lenders, loan servicers and the government to help homeowners avoid foreclosure and provide liquidity to the mortgage market. We have focused our foreclosure-prevention efforts on the implementation of the Making Home Affordable Program, which is designed to significantly expand the number of borrowers who can refinance or modify their mortgages.

Fannie Mae posts bigger loss, requests $10.7B more in aid

The Next Fannie Mae: Ginnie Mae’s mortgage exposure


Souring Prime Loans Compound Mortgage Woes


Massive bank failures in 2009.

Major Bank Fails in South: sixth-largest bank failure in U.S. history

Banks on Sick List Top 400


Massive distressed mergers in 2009.
The brutal recession is opening up the landscape to vulture investors as never before. New data show that distressed-debt deals -- in which creditors use their debt positions to seize ownership of troubled companies -- are running close to double the pace of 2008. Some 140 of the deals have been struck during 2009, compared with 102 transactions for all of last year, according to data provider Dealogic. Those figures also include corporate takeovers, encompassing a wide array of transactions related to bankruptcies, restructurings, recapitalizations or liquidations.

The deals are valued at $84.4 billion altogether, dwarfing the $20 billion figure from 2008. And they involve companies from virtually every nook of the U.S. economy, from auto-parts maker Delphi Corp., to retailer Eddie Bauer and hotel chain Extended Stay America.  [source]

Distressed Mergers in 2009

Distressed Takeovers Soar


U.S. tax revenue takes a dive.
Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever. The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.  [source]

Federal tax revenues plummeting


U.S. companies borrowing to the max.
July 31, 2009
Companies sold more than $64 billion in debt in July, the most ever for a summer month. Part of that flood is simply because the yields that companies have to pay above Treasurys has been cut in half, to the lowest in more than a year. The spread between corporate bonds and Treasurys has fallen to 2.78 percentage points, from as high as 6.56 points in December, according to Merrill Lynch. Even as Treasury yields have risen this year, as investors reverse the extreme flight to safety move from the depth of the economic and financial meltdown, the rates that companies have to pay have actually come down because of that narrowing spread.  [source]

Corporate Bond Yield Gap

Companies' debt-sale spree in July to continue, analysts say


U.S. government borrowing to the max.
Treasury Net Borrowing "We believe by maintaining the deepest, most liquid market in the world, we will continue to attract capital from a broad array of investors," said Andrew Williams, a spokesman for the Treasury Department.

 

Fed said once again that its key interest rate will remain near zero "for an extended period."

Bond Worry: Will China Keep Buying?

Big Government, Big Recession


Federal minimum wage increased to $7.25 per hour.
July 24, 2009   Department of Labor

Kiss Jobs Goodbye With Minimum Wage Increase

Minimum-Wage Increase Comes at a Bad Time for Weakened Job Market


Federal corporation bails out pension plan of largest US producer of automotive parts. 
July 22, 2009  Pension Benefit Guaranty Corp. Press Release

PBGC To Assume Delphi Pension Plans
The Pension Benefit Guaranty Corporation today announced it will assume responsibility for the pension plans of 70,000 workers and retirees of Delphi Corp., the nation’s largest producer of automotive parts. The PBGC will initiate action to become trustee of the plans, a process that could last up to several months.

The PBGC is stepping in to protect the Delphi pensions because the restructuring Delphi cannot afford to maintain its pension plans and General Motors has stated it will not assume them. Delphi was spun off from GM in 1999.

Since Delphi entered bankruptcy protection in 2005, the PBGC has worked intensively with Delphi, GM and other stakeholders to keep the pension plans ongoing. In September 2008 GM took on approximately $2.5 billion in liabilities of the Delphi Hourly Plan, and until its recent restructuring in bankruptcy, GM had been expected to assume the entire obligation for the hourly plan.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

Delphi Gets $6.2 Billion Bailout of Pensions

 


California to issue IOUs again.
July 2, 2009
  FED Press Release
The California State Controller's Office has announced that it may issue registered warrants, or IOUs, for some payments as early as today. These registered warrants would not be payable immediately, but rather on a future date. These warrants will be identified with the word "REGISTERED" on the front.

Customers are advised to consult with their banks before depositing a registered warrant and should ask the following:

  • Will the bank accept the registered warrant for deposit? Some banks may have arrangements to advance funds to depositors prior to the warrant's payment date.
  • When will the funds be made available for withdrawal? These warrants will not be subject to the normal, federal check-hold limits and therefore could be subject to extended holds.
  • Is there a potential to incur fees? The State of California will likely return unpaid any registered warrants that it receives before the payment date. Therefore, depositors of these warrants may be subject to returned-deposit fees if their banks attempt to collect these warrants before they are payable. In addition, if customers rely on these funds to make other payments, they may be subject to overdraft or bounced-check fees if the warrants are returned.


 
Why is the State issuing registered warrants? Without action by the Governor and Legislature to stave off a severe cash deficit of almost $3 billion at the end of July, and more than $3.5 billion in August, the Controller will be forced to issue individual registered warrants, also called IOUs, for many payments. [source]

California Sets 3.75% Rate For July IOUs, Oct 2 Maturity (2009)

Interest-Rate Payoff of 5% on California I.O.U.'s (1992)


GM bankruptcy announced.
June 1, 2009  Treasury Press Release
Details on the Creation of New GM:
The newly organized GM will purchase substantially all of the assets of the old GM needed to implement its business plan out of a chapter 11 in exchange for the U.S. Government relinquishing the majority of its loans to GM.

*   This new GM will establish an independent trust (VEBA) that will provide health care benefits for GM’s retirees. The VEBA will be funded by a note of $2.5 billion payable in three installments ending in 2017 and $6.5 billion in 9% perpetual preferred stock. The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company. The VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights. 
*   The GM qualified pension plans for both hourly and salaried employees will be transferred to the New GM as part of the purchase process. 
*   The U.S. Treasury is prepared to provide approximately $30.1 billion of financing to support GM through an expedited chapter 11 proceeding and transition the new GM through its restructuring plan. The U.S. Treasury does not anticipate providing any additional assistance to GM beyond this commitment. In exchange for funds already committed by the U.S. Treasury and the new injection of $30.1 billion, the U.S. government will receive approximately $8.8 billion in debt and preferred stock in the new GM and approximately 60% of the equity of the new GM. The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by the VEBA and the Canadian government. 
*   The Governments of Canada and Ontario will participate alongside the U.S. Treasury by lending $9.5 billion to GM and New GM. The Canadian and Ontario governments will receive approximately $1.7 billion in debt and preferred stock, and approximately 12% of the equity of the new GM. Based on its substantial financial contribution, the Canadian government will also have the right to select one initial director
*   Based on these steps, the new GM will have far less debt and a world class balance sheet. This will allow the company the financial stability to weather future market downturns and generate significant excess free cash flow to invest in the business. 
*   The new GM will also pursue a commitment to build a new small car in an idled UAW factory, which when in place will increase the share of U.S. production for U.S. sale from its current level of about 66% to over 70%.

Warrantees:
GM will continue to honor consumer warranties. This past week, the U.S. Treasury made available the Warranty Support Program to GM and $361 million was funded to a special vehicle available to provide a backstop on the orderly payment of warranties for cars sold during this restructuring period.

The Bankruptcy Process
During this process, GM will continue operating in the ordinary course. From an operating perspective, the day after the filing will not be materially different from the day before the filing. The following parties will be treated as described below:

*   Employees: Employees will get paid in the ordinary course, including salary, wages and ordinary benefits. Assuming the sale moves forward as expected, Pension Plan and VEBA funding will be transferred to New GM. 
*   Suppliers: GM will seek authority at its “first day” hearing to continue to pay suppliers in the ordinary course. In addition, the U.S. Treasury’s Supplier Support Program will continue to operate, and GM suppliers benefiting from the program will continue to receive that support. 
*   Dealers: GM will seek authority at its “first day” hearing to honor its customer warranties in the ordinary course. Moreover, GM will seek to continue to honor its dealer incentives for those dealers who are expected to continue to be part of GM’s distribution network going forward. There are some dealers that GM has identified that will not continue with GM. It is expected that the terminated dealers will be offered an agreement to orderly wind down their operations over the next 18 months 
*   UAW: The modified labor agreement reached between the UAW and GM will be operative and will be assumed by the New GM.

GM BANKRUPTCY: After months of speculation, it's Chapter 11

General Motors to close or idle 12 more plants

GM Shareholders Likely End Up Empty Handed


May 22, 2009  General Motors, facing the likelihood of a bankruptcy filing, said Friday it drew another $4 billion from the Treasury Department, raising the total it has received from the government to $19.4 billion.  [source]

Who Owns GM?

GM Gets $4 Billion in New U.S. Funds

Government to lend Ford, Nissan, Tesla $8 billion


The coming massive U.S. federal debt...

US Outlays and Revenues
Congressional Budget Office -
Budget Projections

Simply stated, America is on a path toward an explosion of debt. And that indebtedness threatens our country's, our children's, and our grandchildren's futures. With the looming retirement of the baby boomers, spiraling health care costs, plummeting savings rates, and increasing reliance on foreign lenders, we face unprecedented fiscal risks.
-- David Walker, comptroller general of the United States 
[source]

U.S. posts first April budget deficit since 1983

Medicare, Social Security drying up faster than expected

U.S. credit card defaults rise to new highs


Congress Extends $250,000 Insurance Coverage Through 2013.
May 19, 2009  FDIC Consumer News
Last October, to help reassure depositors about the safety of their money during the economic crisis, Congress temporarily increased the basic limit on federal insurance coverage from $100,000 to $250,000 per depositor through December 31, 2009. Now here’s important news, especially for people who have or plan to place long-term deposits. On May 19, 2009, Congress extended the temporary $250,000 coverage through December 31, 2013.

FDIC

FDIC Insurance increase extended

Emergency money made available for the commercial property sector.
May 1, 2009  FED Press Release
The Federal Reserve Board announced that, starting in June, commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans will be eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF).

The CMBS market came to a standstill in mid-2008. The inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties. CMBS accounted for almost half of new commercial mortgage originations in 2007.

More than 1.5 million insurance premium finance loans are extended to small businesses each year so they can obtain property and casualty insurance. The loans are often funded through the asset-backed securities (ABS) market and have become more expensive and more difficult to obtain since the shutdown of that market last fall. The inclusion of insurance premium ABS as TALF-eligible collateral will facilitate the flow of credit to small businesses. Commercial Property Price Index
Commercial Real Estate Crisis

Fed throws TALF lifeline to commercial real estate


- Chrysler dealers slated to close -
Chrysler dealers slated to close

Chrysler bankruptcy announced.
April 30, 2009  Treasury Press Release
On March 30, 2009, President Obama laid out a framework for Chrysler to achieve viability by partnering with the international car company Fiat. After a month of close engagement with the President's Auto Task Force, Chrysler, Fiat and their key stakeholders have made unprecedented sacrifices and executed an agreement that positions Chrysler for a viable future. To execute this agreement, Chrysler will use Section 363 of the bankruptcy code to clear away the remaining impediments.

The Chrysler Fiat Alliance:
*   The alliance will retain Chrysler's existing factory footprint and continue producing Chrysler cars in U.S. factories. 
*   Fiat is contributing billions of dollars in advanced technology and intellectual property, and offering Chrysler access to a global distribution network. 
*   The UAW has made important concessions on wages, benefits, and retiree health care.
*   Chrysler's largest secured creditors have agreed to exchange their portion of the Company's $6.9 billion secured claim for their pro-rata share of $2 billion in cash at closing. The Bankruptcy Court process will be used to confirm this treatment on those lenders that failed to accept the offer that was accepted by a majority of the lenders. 
*   Daimler, Chrysler's current minority shareholder, has agreed to waive its share of Chrysler's $2 billion of second lien debt, give up its 19% equity interest in Chrysler's ultimate parent, and settle its guaranty obligation to the PBGC by agreeing to pay $600 million to Chrysler's pension funds. 
*   Cerberus has agreed to waive its share of Chrysler's $2 billion of second lien debt and forfeit its entire equity stake in Chrysler.

Details on the Chrysler Fiat Alliance:
*   Fiat will contribute a free license to use all of its intellectual property and "know how" to capitalize Chrysler in exchange for 20% of the equity of the reorganized Chrysler. Fiat will have the right to select three directors of Chrysler once reorganized. In addition, Fiat will have the right to earn up to 15% in additional equity in three tranches of 5% – each in exchange for meeting performance metrics, including introducing a vehicle produced at a Chrysler factory in the U.S. that performs at 40 mpg; providing Chrysler with a distribution network in numerous foreign jurisdictions; and manufacturing state-of-the art, next generation engines at a U.S Chrysler facility. 
*   The newly reorganized Chrysler will purchase substantially all of the assets of the old Chrysler out of a chapter 11 bankruptcy case in exchange for a $2 billion payment to its secured lenders. 
*   This new Chrysler will establish an independent trust (VEBA) that will provide health care benefits for Chrysler's retirees. The VEBA will be funded by a note of $4.6 billion payable over approximately 13 years with a 9% rate of interest and will receive 55% of the equity of New Chrysler. The VEBA will have the right to select one independent director and will have no other governance rights. 
*   The Chrysler Pension Plans will be preserved, and their stability will be strengthened from the Daimler contribution of $600 million
*   The U.S. Treasury will receive 8% of the equity of the new Chrysler. U.S. Treasury also has the right to select the initial group of four independent directors, but thereafter will not play a role in the governance or management of the Company. 
*   The Governments of Canada and Ontario will together receive 2% of the equity of the new Chrysler. Based on its substantial financial contribution, Canada will also have the right to select one independent director, on the same basis as the four independent directors initially chosen by the U.S.

Details on U.S. Government Support:
*   Consistent with the President's commitment to provide adequate working capital to help Chrysler through this restructuring period and loan up to $6 billion to the Chrysler-Fiat Alliance, the U.S. government has committed to provide assistance sufficient to help give Chrysler a chance to achieve financial viability.
*   Working capital: The U.S. government is prepared to provide approximately $3.3 billion in debtor in possession financing to support Chrysler through an expedited chapter 11 proceeding
*   Loan to the New Chrysler: Upon closing, the U.S. government is prepared to loan approximately $4.7 billion to New Chrysler. There is also an additional note of $288 million which is a fee for making these loans. The loans will be secured by a first priority lien on all of Chrysler's assets.

Canadian Government Participation:
*   The governments of Canada and Ontario will participate alongside the U.S. Treasury in lending money to Chrysler and New Chrysler based on a 3:1 formula using Canadian currency.

Viable Financing Solution:
*   Chrysler will enter into an agreement with GMAC to provide dealer and customer financing. The U.S. Government is supporting the automotive restructuring initiative by promoting the availability of credit financing for dealers and customers, including liquidity and capitalization that would be available to GMAC, and by providing the capitalization that GMAC requires to support the Chrysler business.

Warranties:
*   Chrysler will continue to honor consumer warranties. Yesterday, the U.S. Treasury made available the Warranty Support Program to Chrysler and $280 million was funded to a special vehicle available to provide a backstop on the orderly payment of warranties for cars sold during this restructuring period.

Executing the Chrysler-Fiat Alliance
*   While many stakeholders made sacrifices and worked constructively in this process, some did not. In particular, a group of investment firms and hedge funds failed to accept reasonable offers to settle on their debt. In order to effectuate this alliance without rewarding those who refused to sacrifice, the U.S. government will use our bankruptcy code to clear away remaining obligations.

Chrysler's U.S. sales tumble 48% in April from a year ago

Chrysler to close five more plants by the end of 2010

Chrysler to Receive $10.5 Billion From Canada, U.S.

Cerberus’s Chrysler Bankruptcy Sets Record in U.S. LBO Industry

Fuel-Efficiency Technology Gives Fiat a Boost in Bargaining to Acquire Chrysler Stake

Bankruptcy reality sets in for Chrysler, workers

UAW wins big Chrysler stake but can't run company

Treasury will administer VEBA's Chrysler stake

Chrysler's lenders include Gates Foundation, Yale University

Keep government out of auto business

Mean Street: Obama’s Fuzzy Detroit Math

These 789 Chrysler Dealers Are To Be Closed By June 9th


More Mortgage Troubles: FHA likely to need taxpayer bailout.
April 2, 2009  DOW JONES NEWSWIRES
The Obama administration will soon decide whether the Federal Housing Administration will remain self-financing or need taxpayer money to continue propping up the mortgage market, Housing Secretary Shaun Donovan told a Senate panel. The FHA, which is located within HUD, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. In the aftermath of the housing bust, borrowers have flocked to FHA loans as other sources of mortgage credit have dried up.

The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in the fourth quarter of 2008, from about 2% in 2006. Rising defaults are now eating through the FHA's cushion of reserves, raising the risk the program will face a financial crunch. There is concern that the program is becoming a magnet for fraudsters or the former subprime lenders who helped to cause the housing crisis. The FHA program has never needed taxpayer funds to cover insurance claims since its creation in 1934.

In his testimony, Donovan made a strong pitch for increased funding at FHA so the agency could cope with the surge in business. He said the agency is short of staff, too reliant on manual processes for its underwriting and risk management and in need of better fraud-detection tools. The list of approved FHA lenders has soared 525% from 2006 through 2008. "The integrity and reliability of this crop of program loan originators is, in our view, unproven, and, in light of the aggressive recent history of this industry, may pose a risk to the program."

- - - - - - - - - -

The Next Housing Bust

Will the FHA Be the Next Government Bailout?

The Next Fannie Mae: Ginnie Mae’s mortgage exposure


GM Bankruptcy: General Motors enters government-initiated virtual bankruptcy, and faces potential full bankruptcy.
March 30, 2009  THE WHITE HOUSE - Office of the Press Secretary
...the federal government provided General Motors and Chrysler with emergency loans to prevent their sudden collapse at the end of last year -- only on the condition that they would develop plans to restructure. In keeping with that agreement, each company has submitted a plan to restructure. But after careful analysis, we've determined that neither goes far enough to warrant the substantial new investments that these companies are requesting.

And so today I'm announcing that my administration will offer GM and Chrysler a limited additional period of time to work with creditors, unions, and other stakeholders to fundamentally restructure in a way that would justify an investment of additional taxpayer dollars. During this period they must produce plans that would give the American people confidence in their long-term prospects for success.

Now, what we're asking for is difficult. It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It'll require creditors to recognize that they can't hold out for the prospect of endless government bailouts... As an initial step, GM is announcing today that Rick Wagoner is stepping aside as Chairman and CEO... my administration will offer General Motors adequate working capital over the next 60 days.  And during this time, my team will be working closely with GM to produce a better business plan....

If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warranty will be safe. In fact, it will be safer than it's ever been, because starting today, the United States government will stand behind your warranty... the IRS is launching a campaign to alert consumers of a new tax benefit for auto purchases made between February 16th and the end of this year... several members of Congress have proposed an even more ambitious incentive program to increase car sales while modernizing our auto fleet... The Canadian government has indicated its support for our approach and will be announcing their specific commitments later today.

Obama forces Wagoner out as GM chairman; end of a 31-year career

Obama Seeks Concessions From UAW Retirees

U.S. to guarantee GM, Chrysler vehicles

GM More Open to Bankruptcy

U.S. Threatens Bankruptcy for GM, Chrysler

GM, Segway to Make Vehicle


More Government Control of Financial System: US Treasury outlines framework for regulatory reform.
March 26, 2009  Treasury Press Release 
New Rules of the Road, focusing on containing systemic risk
1.  A Single Independent Regulator With Responsibility Over Systemically Important Firms and Critical Payment and Settlement Systems 
2.  Higher Standards on Capital and Risk Management for Systemically Important Firms 
3.  Registration of All Hedge Fund Advisers With Assets Under Management Above a Moderate Threshold 
4.  A Comprehensive Framework of Oversight, Protections and Disclosure for the OTC Derivatives Market 
5.  New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals

7 bailed-out banks seek monopoly over derivatives market

The Size of Derivatives Bubble = $190K Per Person on Planet

Credit Derivatives' Role in Crash

Credit Derivatives: An Overview (PDF)

Computerized financial model helped create huge market for credit derivatives (did it work?)


Independent Federal Agency needs help from Federal Government: U.S. Postal Service cannot overcome the economic forces without help from Congress.
March 25, 2009  USPS Press Release 
Postmaster General John E. Potter outlined ongoing elements of the Postal Service’s strategy to help close the budget gap – a “chasm, widening each day,” he said – created by the agency’s revenue shortfall. These include:

* A new process for evaluating and adjusting city delivery routes 
* Reduction of employee work hours and overtime by pursuing even greater efficiencies throughout the organization 
* Halting construction of new postal facilities and directing funds to the sites with the most critical needs (i.e., buildings badly damaged or destroyed by natural disasters) 
* Improved fleet management and delivery routing to reduce fuel usage 
* Expanded energy efficiency to reduce energy use throughout Postal Service facilities 
* Reductions in employee travel budgets through the use of web and video technology to conduct meetings and conferences 
* Renegotiations of supplier contracts to reflect reduced needs

To strengthen the Postal Service’s efforts, Potter asked Congress to pass H.R. 22 and modify the method by which it is required to fund retirement health care benefits. This legislative change would reverse a policy that was instituted when the Postal Service experienced large surpluses – and result in at least $2 billion in annual savings over an eight year period. There would be no costs to the taxpayer were H.R. 22 to be enacted.

“Even with our aggressive cost-cutting measures, our situation is critical,” Potter said. “We cannot overcome the economic forces without help from Congress.”

US Post Service looks for new ways to cut losses

USPS Survives Rain, Snow, Sleet - But Not Recession?

USPS facing major financial woes despite growth in package services offerings


Bad Asset Shifting: US government to supervise asset shifting when toxic assets become legacy assets under new Public-Private Investment Program planned by the US Treasury, the Federal Deposit Insurance Corporation and the Federal Reserve.
March 23, 2009  Treasury Press Release 
Using $75 to $100 billion in Troubled Asset Relief Program (TARP) capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

1.  Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
2.  Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
3.  Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The U.S Treasury Bubble: The worst kept secret on Wall Street

China challenges US global financial leadership


US MONETIZING DEBT: Federal Reserve puts billions of newly-printed dollars in circulation with purchases of up to $1.15 trillion.
March 18, 2009  FOMC Press Release 

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. The Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. 


Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to
$300 billion of longer-term Treasury securities over the next six months. 

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent.

 

Central Banks Unleash the "Nuclear Option"

What is Debt Monetization?  (see FED's explanation in PDF or HTML)


Congress passed the $787,000,000,000 American Recovery and Reinvestment Act of 2009 at the urging of President Obama.
February 13, 2009  Recovery.gov 

On Feb. 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 at the urging of President Obama, who signed it into law four days later. A direct response to the economic crisis, the Recovery Act has three immediate goals:

* Create new jobs and save existing ones 
* Spur economic activity and invest in long-term growth 
* Foster unprecedented levels of accountability and transparency in government spending

The Recovery Act intends to achieve those goals by:

* Providing $288 billion in tax cuts and benefits for millions of working families and businesses 
* Increasing federal funds for education and health care as well as entitlement programs (such as extending unemployment benefits) by $224 billion 
* Making $275 billion available for federal contracts, grants and loans 
* Requiring recipients of Recovery funds to report quarterly on how they are using the money. All the data is posted on Recovery.gov so the public can track the Recovery funds.

In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting a process to computerize health records to reduce medical errors and save on health care costs, the Recovery Act is targeted at infrastructure development and enhancement. For instance, the Act plans investment in the domestic renewable energy industry and the weatherizing of 75 percent of federal buildings as well as more than one million private homes around the country.

Construction and repair of roads and bridges as well as scientific research and the expansion of broadband and wireless service are also included among the many projects that the Recovery Act will fund.

While many of Recovery Act projects are focused more immediately on jumpstarting the economy, others, especially those involving infrastructure improvements, are expected to contribute to economic growth for many years.


H.R. 1: American Recovery and Reinvestment Act of 2009
Introduced	Jan 26, 2009
Amendments (485 proposed)
Passed House	Jan 28, 2009
Passed Senate	Feb 10, 2009
Differences Resolved	Feb 13, 2009
Signed by President	Feb 17, 2009


Almost-Free Money for Banks: Federal Reserve reduces selected interest rates to nearly zero.
December 16, 2008  FOMC Press Release 

Since the Federal Open Market Committee's last meeting, labor market conditions have deteriorated, and the outlook for economic activity has weakened further. The Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. The Board also established interest rates on required and excess reserve balances of 1/4 percent.


Creation of Term Asset-Backed Securities Loan Facility (TALF).
November 25, 2008  FED Press Release 
The Federal Reserve Board announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department--under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008--will provide $20 billion of credit protection to the FRBNY in connection with the TALF.

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.


Federal Reserve deals with Fannie Mae and Freddie Mac unsoundness.
November 25, 2008  FED Press Release 
The Federal Reserve announced that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters.


US Treasury Announces TARP (Troubled Asset Relief Program) Capital Purchase Plan.
October 14, 2008
  Treasury Press Release
Treasury announced a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.

Under the program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms as described in the program's term sheet. The program will be available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities.

Companies participating in the program must adopt the Treasury Department's standards for executive compensation and corporate governance, for the period during which Treasury holds equity issued under this program.

Emergency Economic Stabilization Act

US Congress - H. R. 1424
One Hundred Tenth Congress of the United States of America

An Act To provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes...

SEC. 115. GRADUATED AUTHORIZATION TO PURCHASE. (a) AUTHORITY.—The authority of the Secretary to purchase troubled assets under this Act shall be limited as follows: 
(1) Effective upon the date of enactment of this Act, such authority shall be limited to $250,000,000,000 outstanding at any one time. 
(2) If at any time, the President submits to the Congress a written certification that the Secretary needs to exercise the authority under this paragraph, effective upon such submission, such authority shall be limited to $350,000,000,000 outstanding at any one time. 
(3) If, at any time after the certification in paragraph (2) has been made, the President transmits to the Congress a written report detailing the plan of the Secretary to exercise the authority under this paragraph, unless there is enacted, within 15 calendar days of such transmission, a joint resolution described in subsection (c), effective upon the expiration of such 15-day period, such authority shall be limited to $700,000,000,000 outstanding at any one time.
  more...

Treasury Announces TARP Investment in GMAC

Treasury Announces TARP Investments in Chrysler Financial


FED Helps Banks with Interest: Federal Reserve announces that it will pay interest on banks' reserve balances.
October 6, 2008  FED Press Release
The Federal Reserve Board announced that it will begin to pay interest on depository institutions' required and excess reserve balances.

The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.

Employing the accelerated authority, the Board has approved a rule to amend its Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on required reserve balances (that is, balances held to satisfy depository institutions' reserve requirements) and on excess balances (balances held in excess of required reserve balances and clearing balances).

The interest rate paid on required reserve balances will be the average targeted federal funds rate established by the Federal Open Market Committee over each reserve maintenance period less 10 basis points. Paying interest on required reserve balances should essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector.

The rate paid on excess balances will be set initially as the lowest targeted federal funds rate for each reserve maintenance period less 75 basis points. Paying interest on excess balances should help to establish a lower bound on the federal funds rate. The formula for the interest rate on excess balances may be adjusted subsequently in light of experience and evolving market conditions.

Excess Reserves Go Berserk As Lending Flatlines

FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor.
October 3, 2008  FDIC Financial Institution Letters
On October 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008, which temporarily raises the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective immediately upon the President's signature. The legislation provides that the basic deposit insurance limit will return to $100,000 after December 31, 2009.

FDIC

FDIC Asks Congress to Increase Bank Deposit Insurance

Call for FDIC Increase Aimed at Reassuring Bank Customers


Run ends on money market funds.
September 29, 2008
Investors have stopped fleeing money-market funds, a week after the federal government said it would insure fund shares don't lose their value.

Under the program, which began Monday, the Treasury Department will guarantee that the value of participating money funds will not fall below the standard $1 a share. Fund companies must pay for the insurance and only shares held on or before Sept. 19 will be covered.

The rapid exodus from money funds began after The Reserve Fund announced on Sept. 16 that shares in its primary fund fell to 97 cents due to losses incurred when Lehman Brothers declared bankruptcy.

The total held in money funds, which had hit a record high of $3.535 trillion on Sept. 9, plummeted to $3.288 trillion 10 days later, when the government plan was unveiled.  [source]

Treasury’s Temporary Guarantee Program for Money Market Funds

After massive oversight failure, SEC announces end of CSE program.
September 26, 2008  SEC Press Release
Securities and Exchange Commission Chairman Christopher Cox today announced a decision by the Division of Trading and Markets to end the Consolidated Supervised Entities (CSE) program, created in 2004 as a way for global investment bank conglomerates that lack a supervisor under law to voluntarily submit to regulation. Chairman Cox also described the agency's plans for enhancing SEC oversight of the broker-dealer subsidiaries of bank holding companies regulated by the Federal Reserve, based on the recent Memorandum of Understanding (MOU) between the SEC and the Fed.

Chairman Cox made the following statement:

The last six months have made it abundantly clear that voluntary regulation does not work. When Congress passed the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to the SEC or any agency the authority to regulate large investment bank holding companies, like Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns.

Because of the lack of explicit statutory authority for the Commission to require these investment bank holding companies to report their capital, maintain liquidity, or submit to leverage requirements, the Commission in 2004 created a voluntary program, the Consolidated Supervised Entities program, in an effort to fill this regulatory gap.

As I have reported to the Congress multiple times in recent months, the CSE program was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.

The Inspector General of the SEC today released a report on the CSE program's supervision of Bear Stearns, and that report validates and echoes the concerns I have expressed to Congress. The report's major findings are ultimately derivative of the lack of specific legal authority for the SEC or any other agency to act as the regulator of these large investment bank holding companies.

With each of the major investment banks that had been part of the CSE program being reconstituted within a bank holding company, they will all be subject to statutory supervision by the Federal Reserve. Under the Bank Holding Company Act, the Federal Reserve has robust statutory authority to impose and enforce supervisory requirements on those entities. Thus, there is not currently a regulatory gap in this area.

The CSE program within the Division of Trading and Markets will now be ending.

Under the Memorandum of Understanding between the SEC and the Federal Reserve that was executed in July of this year, we will continue to work closely with the Fed, but focused even more clearly on our statutory obligation to regulate the broker-dealer subsidiaries of the banking conglomerates. The information from the bank holding company level that the SEC will continue to receive under the MOU will strengthen our ability to protect the customers of the broker-dealers and the integrity of the broker-dealer firms.

The Inspector General's office also made 26 specific recommendations to improve the CSE program, which are comprehensive and worthy of support. Although the CSE program is ending, we will look closely at the applicability of those recommendations to other areas of the Commission's work and move to aggressively implement them.

As we learned from the CSE experience, it is critical that Congress ensure there are no similar major gaps in our regulatory framework. Unfortunately, as I reported to Congress this week, a massive hole remains: the approximately $60 trillion credit default swap (CDS) market, which is regulated by no agency of government. Neither the SEC nor any regulator has authority even to require minimum disclosure. I urge Congress to take swift action to address this.

Finally, I would like to commend the extraordinary efforts of the SEC's diligent staff, who for so many months have been working around the clock in the current market turmoil. Their dedication and commitment in behalf of investors and the American people are unequaled.


Treasury Announces Guaranty Program for Money Market Funds.
September 19, 2008   Treasury Press Release | FED Press Release
The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below.

Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets. In turn, these pressures have caused a spike in some short term interest and funding rates, and significantly heightened volatility in exchange markets. Absent the provision of such financing, there is a substantial risk of further heightened global instability.

Maintenance of the standard $1 net asset value for money market mutual funds is important to investors. If the net asset value for a fund falls below $1, this undermines investor confidence. The program provides support to investors in funds that participate in the program and those funds will not "break the buck".

This action should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss. Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program.

- - - - - - - - - -

The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.

Rushing to save money-market funds

Money market "bank run" of billions of dollars.
September 18, 2008  
"The Treasury opened its window to help. They pumped a hundred and five billion dollars into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened. If they had not done that their estimation was that by two o'clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed." -- Capital Markets Subcommittee Chair, Rep. Paul Kanjorski of Pennsylvania

Run On Money Market Fund: Reserve Primary Fund Lost 60% Of Its Assets To Redemptions

Putnam closes a money market fund

The Government Panic of September 2008

Inside the Meltdown: Who Was Withdrawing From Money Market Funds On September 16-18, 2008 and Why?

Treasury to Guarantee Money Market Funds


$85 billion to save AIG, and U.S. government will receive a 79.9 percent equity interest.
September 16, 2008  FED Press Release
The Federal Reserve Board, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.

This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

Money market fund 'breaks the buck' on Lehman IOUs

'Empty Creditors' and the Crisis


LEHMAN BROTHERS HOLDINGS INC. FILED CHAPTER 11
September 15, 2008  Lehman Press Release
Lehman Brothers Holdings Inc. (“LBHI”) stated that it has filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. None of the broker-dealer subsidiaries or other subsidiaries of LBHI was included in the Chapter 11 filing and all of the U.S. registered broker-dealers will continue to operate.

There is likely to be a domino effect.
Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.

Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Chief Executive Officer Richard Fuld, who turned the New York-based firm into the biggest underwriter of mortgage-backed securities at the top of the U.S. real estate market, joins his counterparts at Bear Stearns Cos., Merrill Lynch & Co. and more than 10 banks that couldn't survive this year's credit crunch.

``There is likely to be a domino effect as other firms and individuals who relied on Lehman for financing feel the effects of its meltdown,'' said Charles ``Chuck'' Tatelbaum, a bankruptcy lawyer with Adorno & Yoss in Florida and former editor of the American Bankruptcy Institute Journal. ``The whole thing is frankly frightening for the U.S. economy.''  [source]

Lehman Brothers Files for Bankruptcy - CNBC

Lehman folds with record $613 billion debt

BofA Buys Merrill; Lehman Files for Bankruptcy; AIG, WaMu Teeter

Case Study: The Collapse of Lehman Brothers


Unstable and about to fail, Fannie Mae and Freddie Mac enter into conservatorship.
September 7, 2008  FHFA Statement  |  Treasury Press Release
In order to restore the balance between safety and soundness and mission, Federal Housing Finance Agency has placed Fannie Mae and Freddie Mac into conservatorship. That is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate the Enterprises until they are stabilized.
Fannie, Freddie Are Pressured as Homeowners Fall Behind

Risky Business: OFHEO, Fannie Mae and Freddie Mac announce initiative to increase liquidity in the U.S. mortgage market -- capital requirement reduced by 33%.
March 19, 2008  OFHEO News Release 
The initiative is expected to provide up to $200 billion of immediate liquidity to the mortgage-backed securities market. The Office of Federal Housing Enterprise Oversight estimates that Fannie Mae’s and Freddie Mac’s existing capabilities, combined with this new initiative and the release of the portfolio caps announced in February, should allow government-sponsored enterprises (like Fannie Mae and Freddie Mac which are privately held corporations with public purposes created by the U.S. Congress to reduce the cost of borrowing in certain sectors) to purchase or guarantee about $2 trillion in mortgages this year. This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas.

OFHEO concludes that it is appropriate to reduce immediately the existing 30 percent OFHEO-directed capital requirement to a 20 percent level, and will consider further reductions in the future.

Fannie, Freddie Surplus Capital Requirement Is Eased

Federal Reserve Bank of New York funds Maiden Lane LLC to deal with Bear Stearns collapse and forced merger.
March 2008  FED News 
In March 2008, the Federal Reserve Bank of New York (New York Fed) and JPMorgan Chase & Co. (JPMC) entered into an arrangement related to the financing provided by the New York Fed to facilitate the merger of JPMC and the Bear Stearns Companies Inc. (Bear Stearns). In connection with the transaction, the Federal Reserve Board authorized the New York Fed under section 13(3) of the Federal Reserve Act, to extend credit to a Delaware limited liability company, Maiden Lane LLC (ML LLC), to fund the purchase of a portfolio of mortgage related securities, residential and commercial mortgage loans and associated hedges (Asset Portfolio) from Bear Stearns.

ML LLC was formed in the second quarter of 2008. ML LLC borrowed approximately $28.8 billion from the New York Fed in the form of a senior loan (Senior Loan), which, together with funding from JPMC of approximately $1.15 billion in the form of a subordinate loan (Subordinate Loan, and together with the Senior Loan, the Loans) was used to purchase the Asset Portfolio from Bear Stearns. The Asset Portfolio had an estimated fair value as of March 14, 2008, of approximately $30 billion.

The New York Fed has all material control rights over the Asset Portfolio and is the sole and managing member of ML LLC.

The Loans are secured by the Asset Portfolio. The Senior Loan was issued with a stated term of ten years, and may be extended at the New York Fed’s discretion.


FED lending up to $200 billion under new Term Securities Lending Facility (TSLF).
March 11, 2008  FED Press Release 
The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.

FED lending billions of dollars under new Term Auction Facility (TAF) program.
December 12, 2007  FED Press Release 
Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee).

Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008. The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008. The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays. The amounts of those auctions will be determined in January. The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions.


Bear Stearns High-Grade Structured Credit Funds collapse.
July 17, 2007   Investopedia
In a letter sent to investors, Bear Stearns Asset Management reported that its Bear Stearns High-Grade Structured Credit Fund had lost more than 90% of its value, while the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund had lost virtually all of its investor capital. The larger Structured Credit Fund had around $1 billion, while the Enhanced Leveraged Fund, which was less than a year old, had nearly $600 million in investor capital.

Then on July 31, 2007 the two funds filed for Chapter 15 bankruptcy. Bear Stearns effectively wound down the funds and liquidated all of its holdings.

Bear Stearns' Subprime Bath

Bear Stearns Fund Collapse Sends Shock Through CDOs

Bear Stearns High-Grade Structured Credit Funds - A tale of two funds

Dissecting The Bear Stearns Hedge Fund Collapse


Fannie Mae and Freddie Mac Discussion  C-SPAN 2 [video]
October 2004

Government Sponsored Enterprises (GSEs) are a group of financial services corporations created by the United States Congress. The two largest housing GSEs, Fannie Mae and Freddie Mac, own and/or securitize the majority of the residential mortgage loans in the United States.  A GSE bond is generally perceived to have the same risk as a government bond, such that while GSEs clearly state their securities are not directly backed by the U.S. government, the market largely perceives them to have an implicit government guarantee. GSEs are a hybrid form of a corporation designed to use privately provided capital in pursuit of publicly developed missions.

SEC: Office of the Chief Accountant Issues Statement on Fannie Mae Accounting (Dec. 2004)

THE OFHEO REPORT: ALLEGATIONS OF ACCOUNTING AND MANAGEMENT FAILURE AT FANNIE MAE

Wednesday, October 6, 2004 U.S. House of Representatives, Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Committee on Financial Services, Washington, D.C. (transcript)


Large growth in index trading based on credit-default swaps (CDS). 
June, 4 2004  wallstreetandtech.com
In the booming business of credit derivatives, hedge funds, insurance companies, asset managers and pension funds have been fueling growth in index trading based on credit-default swaps (CDS).

The surge in buy-side interest - particularly from hedge funds - has led to tighter spreads, more liquidity and growth in CDS index-trading volumes. This, in turn, is causing dealers to seek more automation in terms of electronically trading, booking and confirming the index transactions to scale their operations.

"You've seen an exponential rise in the amount of index trading," comments Samik Chandarana, a vice president at JPMorgan Chase in London who trades the TRAC-X European indices via Creditex, an electronic platform. Comparing the TRAC-X indices to the futures contract on the Standard & Poor's 500 index, Chandarana says, "It's an easy way to take exposure to a well-diversified portfolio from the long or short side."

Index trading has become the hot trend in credit derivatives because it lets investors take a position, such as a negative view of credit, more easily than if they had to short a bond, for instance. "It is one of the driving forces of the industry right now," says Adam Josephson, an analyst at Boston-based Celent Communications who authored a report on credit derivatives in January.

About a year ago, JPMorgan and Morgan Stanley created the TRAC-X index, Josephson writes, "in an effort to build greater transparency, liquidity and acceptance of credit-default swaps." After bickering over the way the index was being administered, the dealers brought in Dow Jones to calculate and publish the index, now known as the Dow Jones TRAC-X. Meanwhile, a separate group of dealers, led by Deutsche Bank, ABN Amro and Citigroup, created the iBoxx index suite.

"These index products were essentially designed to give the buy side broad market exposure to credit risk as an asset class," says Michael Fuhrman, product market specialist at GFI, an inter-dealer broker in credit derivatives.

With TRAC-X, an investor can obtain exposure to the 100 most liquid credit-default swaps in North America, Europe, Asia, Japan and Australia, while iBoxx offers the top 125 names in North America and Europe. Each one breaks down into sub-sectors, such as financials, consumer products, transportation, technology media and telecom, energy, and industrial, so investors can trade different sectors as opposed to the entire index.

Now, the two rival credit-derivatives index products have agreed to merge. According to published reports, the banks have signed a letter of intent to develop a set of indices and create two separate companies covering the U.S. markets, Europe and Asia. Dow Jones reportedly will take over the marketing and licensing of the indices.  more...


Following Europe, SEC sets new net-capital rules for brokerages.
April 28, 2004  stanford.edu
U.S. market regulators on Wednesday approved new rules that would let some major Wall Street brokerages reduce the amount of money they set aside as net capital, in some cases by as much as 30 percent. In a move in line with bank regulatory changes in Europe, the U.S. Securities and Exchange Commission voted unanimously in an open meeting to approve two optional sets of rules. Under one of them, five big U.S. brokerages are expected to apply soon to be designated as "consolidated supervised entities," or CSEs. Each application for CSE status will have to be reviewed by the SEC, likely several months from now. 

Goldman Sachs , Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have expressed keen interest in CSE status, SEC Market Regulation Director Annette Nazareth told reporters after the meeting. "They are all very well-capitalized firms," Nazareth said. In line with new capital adequacy standards coming into force soon under Europe's Basel accords, brokerages granted CSE status would be able to use in-house, risk-measuring computer models to figure how much net capital they need to set aside. Under Basel standards, some institutions could soon be cutting their net capital by as much as 50 percent. But the SEC's new CSE rule added a $5-billion floor to the Basel model, reducing the likely level of reductions to 20 to 30 percent. 

The SEC approved a second set of net-capital rules, also voluntary, that would designate an institution as a "supervised investment bank holding company." But Nazareth said there has been little industry interest expressed in it. 

SEC Commissioner Paul Atkins said monitoring the sophisticated models used by the brokerages under the CSE rules -- and stepping in where net capital falls too low -- "is going to present a real management challenge" for the SEC. Since the new CSE rules will apply to the largest brokerages without bank affiliates, SEC Commissioner Harvey Goldschmid said, "If anything goes wrong, it's going to be an awfully big mess."

The SEC Killed Wall Street On April 28, 2004

SEC Open Meeting Agenda Wednesday, April 28, 2004

Speech by SEC Chairman: Opening Statement at April 28, 2004 Open Meeting


New agency proposed to oversee Freddie Mac and Fannie Mae.
September 11, 2003   The New York Times
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.

''These irregularities, which have been going on for several years, should have been detected earlier by the regulator,'' he added.

The Office of Federal Housing Enterprise Oversight, which is part of the Department of Housing and Urban Development, was created by Congress in 1992 after the bailout of the savings and loan industry and concerns about regulation of Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them as securities or hold them in their own portfolios.

At the time, the companies and their allies beat back efforts for tougher oversight by the Treasury Department, the Federal Deposit Insurance Corporation or the Federal Reserve. Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. This year, however, the chances of passing legislation to tighten the oversight are better than in the past.

Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

What They Said About Fan and Fred
"I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing."

-- Rep. Barney Frank,
House Financial Services Committee hearing, Sept. 25, 2003

 


Freddie Mac gives U.S. a case of nerves.
June 13, 2003   LA Times
Even as mortgage interest rates glided effortlessly to new lows Thursday, the nation's economic policymakers watched nervously for signs of additional trouble at mortgage finance giant Freddie Mac. And with good reason.

If things were to go terribly wrong for the federally chartered behemoth, the results could dwarf what until now has been the government's biggest bailout: the savings and loan collapse of the 1980s.

In the S&L case, Washington had to protect government-guaranteed deposits totaling about $1.9 trillion in 2003 dollars. If Freddie Mac and its mortgage industry sibling, Fannie Mae, were to run into deep trouble, it's conceivable that the government could get stuck guaranteeing nearly twice that much. That, or risk letting the firms' problems threaten the strongest pillar of today's shaky U.S. economy: housing.


Congress passes wide-ranging bill easing bank laws.
November 4, 1999   The New York Times
Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.

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Bill Clinton signs the repeal of the Glass-Steagall Act.
November 12, 1999
   Forbes
On Nov. 12 President Bill Clinton signed the 1933 Glass-Steagall Act out of existence. For the first time in 66 years, no legal wall stands between banks and insurance companies. Banks can now write and sell insurance policies. Insurers can make loans and do other bankerly things. Banks and insurers can merge into one-stop financial product combines--bancassurers, as they're known in Europe.

Ten years later...

10 Years Later, Looking at Repeal of Glass-Steagall

Bring Back Glass-Steagall
Banks that behave like hedge funds don't deserve guarantees.

Glass-Steagall Restoration Act (Introduced in House, Dec. 2009)

Bring back Glass-Steagall and let investment banks gamble and fail


An early credit default swap to avoid reserve capital requirement.
1994    
The Exxon Valdez ran aground in March of 1989, spilling 11 million gallons of oil into Prince William Sound. Lieff Cabraser served as one of the court-appointed Plaintiffs’ Class Counsel. The class consisted of 32,000 fishermen, Alaska natives, landowners, and others whose livelihoods were gravely affected by the disaster. In addition, Lieff served on the Class Trial Team in 1994. A class action jury trial was held in federal court in 1994. The jury returned an award of $5 billion in punitive damages.  more...

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Exxon needed to open a line of credit to cover potential damages of five billion dollars... J. P. Morgan was reluctant to turn down Exxon, which was an old client, but the deal would tie up a lot of reserve cash to provide for the risk of the loans going bad. The so-called Basel rules, named for the town in Switzerland where they were formulated, required that the banks hold eight per cent of their capital in reserve against the risk of outstanding loans. That limited the amount of lending bankers could do, the amount of risk they could take on, and therefore the amount of profit they could make. But, if the risk of the loans could be sold, it logically followed that the loans were now risk-free; and, if that were the case, what would have been the reserve cash could now be freely loaned out. No need to suck up useful capital.

In late 1994, Blythe Masters, a member of the J. P. Morgan swaps team, pitched the idea of selling the credit risk to the European Bank of Reconstruction and Development. So, if Exxon defaulted, the E.B.R.D. would be on the hook for it—and, in return for taking on the risk, would receive a fee from J. P. Morgan. Exxon would get its credit line, and J. P. Morgan would get to honor its client relationship but also to keep its credit lines intact for sexier activities. The deal was so new that it didn’t even have a name: eventually, the one settled on was “credit-default swap.”  more...

Outsmarted: High Finance vs. Human Nature

How the Last Big Oil Spill Helped Create the Credit Crisis


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