Re-Default: Up To 46% Of Bailed Out Homeowners Can’t Pay Their Mortgage (Again)

The Treasury Department and managers of the Home Affordable Modification Program (HAMP) are scrambling to figure out why homeowners who used the government’s bailout mechanism to save their homes are re-defaulting on their payments.

The program, originally designed to assist homeowners who were facing foreclosure following the 2007 sub-prime crisis, has reportedly saved 1.2 million people from losing their homes, but a report from the Special Inspector General who oversees the government’s Troubled Asset Relief Program (TARP) says that the loan modifications that were supposed to get American families back on their feet aren’t working as well as expected.


If your mortgage payment is $1500 monthly, and you just lost your job and are collecting $800 in unemployment insurance monthly, then it is impossible for you to make good on your loan. Even if the government helps to reduce your mortgage payment to $850 monthly and provides you with emergency funds to cover all of your other expenses like food, health insurance and utilities, you still can’t service your debt.

It’s that simple. Read more >>

GM bailout: Taxpayers still $18.1 billion in the hole

General Motors stock would have to sell for $95.51 per share for taxpayers to break even on bailing out the company, according to a government watchdog's report released Wednesday. That price is about three times what GM shares are selling for now, even after a 25 percent increase in the price so far this year.

"There's no question that Treasury, the taxpayers, are going to lose money on the GM investment," Special Inspector General Christy Romero, author of the July quarterly report to Congress, said in an interview.

GM needed the $49.5 billion bailout to survive its trip through bankruptcy restructuring in 2009. Since emerging from bankruptcy, the restructured company has piled up $17.2 billion in profits. In exchange for the bailout, the government got 61 percent of GM's stock. It cut that to 33 percent in GM's November 2010 initial public offering.

The government has gradually been selling off the rest of the stock, with the goal of exiting the investment by April of next year. As of June 6, it still owned 189 million shares, or about 14 percent of the company, according to the report. Taxpayers are still $18.1 billion in the hole on the $49.5 billion bailout, including interest and dividends, according to the report.

If the government sells its remaining shares of GM for the current stock price of $36.61, it would get just over $6.9 billion, meaning taxpayers would lose about $11.2 billion on the bailout. Read more >>

What Sept-Oct 2008 taught us: the bottom 90% really does not matter

Image by publik16 via FlickrComment of the day by Keri at Bankste...

Like today, it was true 100 years ago that most people had very little skin in the stock market game; in fact, the average man's involvement in the stock market was even less at that time. However, the people who did---as is still true today---not only had/have skin in the game, but also happened/happen to be the most politically powerful. Thus, what hurts the politically powerful will be "fixed" by the politically powerful. Enter the Federal Reserve Act.

What Sept-Oct 2008 taught us if nothing else is that the bottom 90% really does not matter; very cynical, I know, but that's what I learned, anyway. Remember the first TARP vote? Paulson's three-page blank check authorization bill, aka TARP, was overwhelmingly unpopular with 90%+ of the voting public. And when it was voted down in the House at the end of September, the DJIA crashed 777 points the same day. Many of our elected representatives are themselves members of that top 10%, thus all the sudden their votes were hurting their own pocket books. Within a few days, TARP came up again for a vote, and those same reps had two choices: 1.) help themselves on the backs of the taxpayer (aka, the other 90%), or 2.) release the taxpayer from the cluthes of the zombie banks. They chose the former---and then, many of them were re-elected by their own "90%" back home two years later. Go figure.

"We" are getting what "we" deserve to a great decree---but only if "we" means "the collective majority." The collective majority still falls for the manufactured left-right paradigm, and fails to see that the different puppets are manipulated by the same hands, year after year. The average person on the street, and probably the average rep or senator, has no clue that the US is backstopping the EU banks as we speak, and no clue that the US is bailing out Greece (and Ireland, and Italy, and...) through the US-run IMF. The biggest danger of a stock market crash, as inevitable as it is, is not the danger that pension plans will lose money, or even that the top 10% will get hurt. The real danger is that it will repeat the "Rich Man's Panic" of 1907 that prompted the FRS, and this time on a global scale. We call the VIX the "fear index," but the SP500 or DJIA are truly the fear scales of the elite and the wanna-be elite politicos, and if/when we get another market crash, the fear level will very likely prompt the test-tubing of creature worse even than the one from Jekyll Island.

U.S. lost $14B on auto bailout

Image via WikipediaIncluding the $1.3 billion loss on its Chrysler investment, announced Thursday, the United States government has lost about $14 billion on the auto industry bail-out. GM is now mostly owned by the U.S. Treasury. Chrysler is mostly owned by the United Auto Workers union and Italian automaker Fiat SpA, which controls the Auburn Hills, Mich., automaker. Read more...

Tarp Repayments a Farce - Banks Pay Back TARP Funds by Borrowing from Treasury

Image via WikipediaMost of the big banks have repaid the government funds they received under the Capital Purchase Program (CPP), the pillar of TARP under which Treasury bought preferred shares in the nation's banks. Enough so that, combined with dividends and sales of warrants, Treasury has declared that taxpayers have earned a profit on the CPP. Thus far, $245 billion has gone out, and $255 billion in repayments, interest and warrants has come back, yielding a profit to taxpayers of $10 billion. And there's several billion more where that came from.

Many of the small banks that took relatively small chunks of capital have been slower to exit. Last week, however, there was a mini stampede. The transactions are reported here. Eight banks paid back their funds on July 14. They were:

Eagle Bancorp of Bethesda, MD: $23.235 million
First California Financial, Westlake Village, CA: $25 million
Cache Valley Bank, Logan, UT: $4.77 million, plus $263,000 to buy back preferred shares granted to Treasury in lieu of warrants
Security Business Bancorp, San Diego, CA: $5.8 million, plus $290,000 to buy back preferred shares granted to Treasury in lieu of warrants
BOH Holdings of Houston, Houston, TX: $10 million, plus $500,000 to buy back preferred shares granted to Treasury in lieu of warrants
BancIndependent, Sheffield, AL: $21.1 million, plus $1.055 million to buy back preferred shares granted to Treasury in lieu of warrants
York Traditions Bank, York, PA: $4.871 million, plus $244,000 to buy back preferred shares granted to Treasury in lieu of warrants
Centric Financial, Harrisburg, PA: $6.056 million, plus $182,000 to buy back preferred shares granted to Treasury in lieu of warrants

That adds up to a total of $103.3 million.

But sometimes there's less than meets the eye. Generally, banks that repaid CPP funds did so with cash raised from earnings, or by raising new outside capital. In finance and banking you always have to read the fine print. And if you go back to the report, you'll notice that the fine print accompanying the entries for each of the above exits makes reference either to Footnote 49 or Footnote 50. Footnote 49 reads: "Repayment pursuant to Title VII, Section 7001(g) of the American Recovery and Reinvestment Act of 2009 using proceeds received in connection with the institution's participation in the Small Business Lending Fund." Footnote 50 reads: "Repayment pursuant to Title VII, Section 7001(g) of the American Recovery and Reinvestment Act of 2009 — part of the repayment amount obtained from proceeds received in connection with the institution's participation in the Small Business Lending Fund."

All of which is to say that these banks repaid cash owed to a program run by the Treasury Department by. . . borrowing from another program run by the Treasury Department. More...

U.S. financial bailout hits $3.7 trillion

(Reuters) - Increased housing commitments swelled U.S. taxpayer infusions into the nation's financial system by $700 billion in the past year to around $3.7 trillion, a government watchdog said Wednesday.

The Special Inspector General for the Troubled Asset Relief Program said the increase was due largely to the government's pledges to supply capital to Fannie Mae and Freddie Mac and to guarantee more mortgages to the support the housing market.

Increased guarantees for loans backed by the Federal Housing Administration, the Government National Mortgage Association and the Veterans administration increased the government's commitments by $512.4 billion alone in the year to June 30, according to the report.

"Indeed, the current outstanding balance of overall federal support for the nation's financial system…has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases," the TARP inspector general, Neil Barofsky, wrote in the report.

The total includes Federal Reserve programs and a myriad of asset guarantees, including Federal Deposit Insurance Corp. protection for bank deposits.

The increased government commitments more than offset about a $300 billion decline in the U.S. Treasury's TARP commitments in the past year as programs have closed and banks have repaid taxpayer funds. More...

Five Lies About the American Economy

The Obama team’s favorite slices of fiscal baloney
Tim Cavanaugh from the April 2010 issue

The ongoing recession has raised a troubling question for otherwise resurgent Keynesian economists: How can the American economy keep getting worse under the intensive care of an interventionist economic team almost universally praised for its brilliance? The answer may be that the Obama administration is dealing with a fictional economy, one that bears little resemblance to the economy the rest of us inhabit. And when the difference between fact and fiction becomes too apparent, they just make stuff up. Herewith, five big lies the administration loves to tell and the mainstream media (with some notable exceptions) love to repeat:

1. Bold government action staved off a Depression, saving or creating 1.5 million jobs.

“Just remember,” Treasury Secretary Tim Geithner said on November 1, 2009, “a year ago today, last year, you had markets around the world come to a stop. Economic activity just stopped, came to a standstill, like flipping a switch.”

Geithner implies that the American business climate improved substantially in the first year of the Obama administration. In fact, nearly every indicator, from employment to freight transport to rents to retail sales to real estate, has headed steadily south. In some cases, such as unemployment, the numbers have been far worse than the Obama economic team’s worst-case projections. In others, such as real estate, the weakness of the market is masked by expensive government support, including but not limited to the unkillable First-Time Homebuyer Credit, an assault on loan underwriting standards (see Lie No. 2) by the Federal Housing Authority and the government-run mortgage giants Fannie Mae and Freddie Mac, and the completely opaque $75 billion Home Affordable Modification Program (HAMP).

The $787 billion in stimulus spending authorized by the American Recovery and Reinvestment Act of 2009 is now best known for its inflated and unsupportable job creation numbers. At press time, Council of Economic Advisers Chairwoman Christina D. Romer (who, confusingly, made her academic reputation proving that fiscal stimulus did not help the U.S. economy during the Great Depression and World War II) was giving the stimulus credit for 1.5 million American jobs in 2009. All efforts at checking her claims, however, have turned up very different numbers. The Associated Press, the Boston Globe, the L.A. Weekly, and local papers around the country have failed to find actual jobs to match up with those being reported at Recovery.gov. The administration’s only concession to this reality has been rhetorical: After claiming that hundreds of thousands of jobs had been “created” early in 2009, the Council of Economic Advisers turned to the phrase “saved or created” by mid-year. In December the Obama administration again changed its measure to jobs “funded” by the stimulus.

Of all the government interventions since the start of the real estate decline, only one—the rescue effort for too-big-to-fail Wall Street players, which predates Obama—has had a measurable effect. The Troubled Asset Relief Program, the Federal Reserve’s promiscuous use of discount windows and dollar-destroying low interest rates, and the Treasury Department’s open wallet for incompetent financial institutions have cumulatively ensured the survival of the biggest, failiest financial institutions, including such devourers of the commonweal as Citigroup, which managed to lose $7.6 billion in the fourth quarter of 2009 despite an infusion of tens of billions of taxpayer dollars over the year.

2. “No one wants banks making the kinds of risky loans that got us into this situation in the first place.”

President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take “third and fourth” looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place.

Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama’s guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.

Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.

3. The economic crisis is a “subprime crisis.”

“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited,” Federal Reserve Chairman Ben Bernanke said in May 2007, “and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

To understand how Bernanke could be so wrong on something so important (see Lie No. 4), note that the real estate bust was not a problem with self-identified “subprime” loans (mortgages that are made to borrowers with bad credit and not backed by Fannie Mae and Freddie Mac). In fact, the rapid expansion in subprime lending was a late phenomenon that occurred in the last 18 months of a decade-long real estate bubble. Subprime defaults are actually slightly below their worst-ever historic records, and the explosion of subprime defaults that began in 2005 was accompanied or slightly preceded by a statistically equal explosion in prime defaults.

How is this possible? The period going back to the mid-1990s has seen a massive increase in mortgages that look prime (and are backed by Fannie and Freddie) but in fact feature dangerously low down payments, tricky interest-only and adjustable rate mechanisms, and other inadvisable debt schemes. Late in 2008, Fannie Mae admitted in a footnote that its portfolio had for years been stuffed with alt-A, negative amortization loans, and other junk debt.

Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. Fannie, Freddie, the Department of Housing and Urban Development, the Federal Housing Administration, and all other federal real estate concerns have been working since the 1990s to increase the loan-to-value ratio of mortgages. They have succeeded: Americans now own a smaller percentage of their homes than at any other time in history.

4. Ben Bernanke is a heroic leader.

“The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and the world has ever faced,” Obama said when nominating Bernanke for a second term as Fed chairman. “As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

Seconding that emotion, Time anointed Bernanke its 2009 Person of the Year, swooning over the Fed chairman’s cranial power, his “tired eyes,” and such bold action as lowering interest rates to zero and paying banks to keep deposits in the Fed’s vaults—none of which has translated into noticeable economic health during the last two years. (See Lie No. 5.) “He wishes Americans understood that he helped save the irresponsible giants of Wall Street only to protect ordinary folks on Main Street,” Time wrote.

Alas, no sooner had the year turned than Bernanke’s reality distortion field began to fail. His reappointment, though inevitable, turned out to be a bigger challenge than expected, with a left-right Senate coalition rising up to make hay out of Bernanke’s abundantly documented record of wrong bets and absurd predictions. Had Bernanke limited himself to defending fictions about his own career, he might have stayed out of trouble. Yet he continues to maintain, in one of many examples, that former Fed Chairman Alan Greenspan’s artificially low interest rates in the early part of Decade Zero did not contribute to the real estate bubble. The hapless banking chief’s performance may have been summed up best by the financial blogger Mish Shedlock: “Bernanke did not get a single thing right.”

5. The worst is behind us.

“Here is what I know,” Larry Summers, Obama’s top economic adviser, told ABC in December. “We were talking about Depression; we were talking about the financial system collapsing. Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be.”

Shortly after Summers made that comment, third-quarter GDP numbers were revised downward substantially. (They have traveled from 3.5 percent to 2.8 percent to 2.2 percent so far.) Former Fed Chairman Paul Volcker told Der Spiegel in December 2009, “You know, people get very technical about these things. We had a quarter of increased growth, but I don’t think we are out of the woods.” In January regional unemployment rates, which had shown some signs of improvement, began moving up again. The unwinding of consumer and homeowner credit continues. Christmas spending turned out to be only slightly higher (around 1 percent, according to MasterCard’s Spending-Pulse unit) in 2009 than in 2008—when, according to Summers and others, the United States was flirting with depression and financial collapse. The only good news: a return to GDP growth in the second half of 2009, based largely on inventory investment and nonresidential fixed investment, not a return to demand or underlying growth.

But the truly dire evidence is in real estate, the market that drove both the bubble and the bust. A record 7.6 percent of U.S. homeowners are at least 30 days late on payments, according to Equifax, and delinquencies continue to rise at an increasing pace. About 1.2 million loans out there are in limbo: The borrower is in serious default, but the bank has not started the foreclosure process. Another 1.5 million are in the early stages of the foreclosure process, but the banks haven’t yet taken possession of the homes. By a conservative estimate, there may be 3 million to 4 million foreclosed homes coming onto the market in the next few years. This is the inevitable, and salubrious, reaction to many years of real estate inflation, and it will continue to happen no matter how hard the government pretends it can control economic outcomes. See Lie No. 1.

S&P cuts BofA, Citi outlook to negative

bizjournals.com
Standard & Poor’s Ratings Service said Tuesday that it downgraded its outlook on Bank of America and Citigroup to negative from stable.

The move underscored that the global financial crisis is far from over despite BofA, California’s largest bank, repaying the government’s investment of $45 billion in the bank under the federal Troubled Asset Relief Program in December. The revised outlook signals possible downgrades to their credit ratings.

S&P assigns counterparty and debt ratings on Bank of America and Citigroup of “A” and “A-1”

The ratings agency’s change in its outlook for the two big banks reflects the more onerous terms BofA or Citi would face if another government bailout is needed.

“We believe there is increased uncertainty about the U.S. government’s willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders,” S&P analyst John Bartko said in lowering the outlook on the banks.

“We previously stated our belief that the extraordinary support was temporary. We believe markets are beginning to stabilize and the U.S. government is seeking ways to reduce the potential for moral hazard and systemic risk associated with large financial institutions,” Bartko added.

S&P pointed to proposals to tax the big banks to help recoup the cost of the bailout and a bill introduced in December to prohibit company-specific bailouts as raising concerns about the terms of another big bank bailout, if needed.

S&P’s rating on BofA gets a lift of three credit notches based on expectations that the government would step in to help BofA (NYSE: BAC) and Citigroup, (NYSE: C) given their status as systemically important financial institutions.

“We are uncertain whether BofA will be able to show sufficient additional improvement over the next two years in its operating performance and profitability to benefit its stand-alone credit profile,” Bartko said.

Obama's Dog and Pony Show with Bankers

Image by Getty Images via Daylife

Tom Eley
Obama holds stage-managed meeting with Wall Street bankers
The stated aim of the gathering of Wall Street bankers at a private White House meeting with President Barack Obama on Monday was to cajole the nation's largest financial institutions into offering loans to cash-starved businesses and consumers.

In reality, the event was a media exercise designed to placate growing popular anger toward the Obama administration. The true nature of the event was not lost on its attendees. “It's a PR [public relations] stunt,” an unnamed CEO flatly told Time magazine prior to the meeting.

Attending were Jamie Dimon of JPMorgan Chase, Ken Lewis of Bank of America, Richard Fairbank of Capital One, Bob Kelly of Bank of New York Mellon, Ken Chenault of American Express, and Ron Logue of State Street Bank. Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, and Dick Parsons of Citigroup joined the meeting via video conference.

The nation's biggest banks will soon hand out year-end executive bonuses totalling in the tens of billions. This conspicuous display of bank prosperity comes just over one year after the US Treasury and Federal Reserve began to funnel trillions of dollars to the finance industry. This ensured that the banks would profit from the economic crisis that they precipitated through rampant financial speculation.

The vast majority of the population continues to suffer through the nation's worst social crisis since the Great Depression. One in six workers is without a job or underemployed. For those who have work, speed-up and pay and benefit cuts are the rule. The foreclosure crisis continues. Hunger is at a record high. The destruction of the social safety system by cash-strapped states is accelerating, and the Obama administration is readying years of budget austerity to right the US fiscal crisis at the expense of the working class.

Appearing on the CBS news program “60 Minutes” on Sunday evening, Obama acknowledged the anger. Referring to the Wall Street financiers as “fat cat bankers,” Obama noted, “They're still puzzled why is it that people are mad at the banks.”

“Well, let's see,” Obama continued, “you guys are drawing down 10, 20 million dollar bonuses after America went through the worst economic year that it's gone through in decades, and you guys caused the problem. And we've got 10 percent unemployment.”

Obama did not mention that this is an outcome of the policies of his own administration, which has overseen the Wall Street baillout and has explicitly campaigned to oppose any measure that would curb executive pay. Meanwhile, it has spearheaded the attack on workers' pay, including through the forced bankrupcy of General Motors and Chrysler.

Monday's meeting comes nine months after a similar meeting at the White House in March. Then, Obama pledged not to take any measures that would impinge on the interests of the financial oligarchy. Bank of America's Lewis said at the time that he was confident that no “punitive” actions would be taken after the “pleasant” meeting. (See “Obama holds ‘very pleasant’ meeting with top US bankers”)

While the media had predicted that Obama's criticisms on “60 Minutes” meant he would shame the executives or give them a “dressing down” on Monday, by all accounts the meeting was likewise as pleasant as it was unsubstantial. No transcripts of the discussion have been released.

Richard Davis, CEO of US Bancorp, told the media “there wasn't a lot of disagreement.” “He didn't call us any names,” Davis said, referring to Obama's “fat cat” reference on “60 Minutes.”

Obama pleaded with the bank executives to “explore every responsible way” to increase lending “to help creditworthy small and medium-sized businesses.” Over the past year, a general lack of cash liquidity has forced many businesses to fold, scale back operations, and lay off workers.

Last fall, Obama, President George W. Bush, and Democratic House Speaker Nancy Pelosi, among others, justified the Troubled Asset Relief Program (TARP) as critically necessary in order to “jump start” or “open the spigot” of lending. Since then every facet of the Wall Street bailout, including the unaccounted trillions extended to the banks from the Federal Reserve, has relied on the same rationale.

But all evidence shows that the banks have hoarded the cash or used it to engage in new forms of speculation. Overall loan volume continued to fall from the second to third quarters this year, according to recent data.

What the banks have made liquid has not been invested in production. Instead much of it has been been shifted into new asset bubbles, primarily in Asia. From this and other speculative practices the banks have made windfall profits only one year after they teetered on the brink of collapse.

The banks have used some of these profits to pay back TARP funds in order to escape modest limitations on executive pay. Citigroup and Wells Fargo became the latest Wall Street firms to do so, announcing Monday they would pay back $20 billion and $25 billion, respectively. They join Bank of America, Goldman Sachs, JPMorgan Chase, and Morgan Stanley.

Obama also implored the bankers to “close the gap” between their declared support for finance reform and their vocal opposition to the regulatory bill passed by the US House of Representatives last week, even though the proposed law would, if anything, expand possibilities for financial speculation.

Such hypocritical entreaties from the president characterized the meeting. There was no mention of any penalties or consequences to banks that fail to increase their lending. Unsurprisingly, results were slim, with only Bank of America announcing it intends to make $5 billion more available to small and medium-sized businesses, a drop in the bucket compared to the enormous need for capital and liquidity.

Wall Street executives' determination to not lend to the productive sectors of the economy―while rewarding themselves billions in compensation―is not a question of morality, nor is it an aberration. It arises from the historical decay of capitalism and its turn to evermore parasitic forms of financial speculation.

While media accounts attempted to present the gathering as an example of Obama “taking on” the bankers, they could not conceal the real relationship of forces. The Obama administration's efforts to put on the show of getting tough produced the opposite image, that of the president as willing supplicant before the masters of Wall Street.

It is significant that Blankfein of Goldman Sachs, Mack of Morgan Stanley, and Parsons of Citigroup did not attend in person. While their last-minute cancellations were chalked up to weather―fog in the Washington DC area delayed some flights on Monday morning―they more likely aimed a rebuke at Obama over his “fat cats” comments. Parsons was already a substitute for Citi CEO Vikram Pandit, whose decision to skip the event was attributed to his bank's negotiations with the Treasury to pay back TARP.

“The President has real problems only the banks can help him solve,” according to Time magazine. “On jobs, housing and the strength of the economy, he needs bankers to change their behavior, and there's only so much he can do to force them. So when he sits down with the financial industry elite on Monday, he may talk tough, but he'll also be asking for their help.”

The admission that a democratically elected president has no power over a handful of financiers is an acknowledgement of the oligarchic character of US society. The financial aristocracy in fact controls every lever of state power and dictates economic and social policy. Obama is their representative.

Bob Chapman: This may be the most important info we have ever published

Image via Wikipedia

Bob Chapman
The following information may be the most important we have ever published. One of our Intel sources, highly placed in banking circles, tells us that on 1/1/10 all banks that have received TARP funds have been informed by the Federal Reserve that they must further restrict any commercial lending. Loans have to be 75% collateralized, 50% of which has to be in cash, which is a compensating balance.

The Fed has to do one of two things: They either have to pull $1.5 trillion out of the system by June, which would collapse the economy, or face hyperinflation. This is why the Fed has instructed banks to inform them when and how much of the TARP funds they can return. At best they can expect $300 to $400 billion plus the $200 billion the Fed already has in hand.

We believe the Fed will opt for letting the system run into hyperinflation. All signs tell us they cannot risk allowing the undertow of deflation to take over the economy. The system cannot stand such a withdrawal of funds. They also must depend on assistance from Congress in supplying a second stimulus plan. That would probably be $400 to $800 billion. A lack of such funding would send the economy and the stock market into a tailspin. Even with such funding the economy cannot expect any growth to speak of and at best a sideways movement for perhaps a year.

We have been told that the FDIC not only is $8.2 billion in the hole, but they have secretly borrowed an additional $80 billion from the Treasury. We have also been told that the FDIC is lying about the banks in trouble. The number in eminent danger are not 552, but a massive 2,035. The cost of bailing these banks out would be $800 billion to $1 trillion. That means 2,500 could be closed in 2010. Now get this, the FDIC is going to be collapsed before the end of 2010, which means no more deposit insurance. This follows the 9/18/09 end of government guarantees on money market funds. Both will force deposits into US government bonds and agency bonds in an attempt to save the system.

This will strip small and medium-sized banks and force them into shutting down or being absorbed. This means you have to get your money out of banks, especially CDs. We repeat get your cash values out of life insurance policies and annuities. They are invested 80% in stocks and 20% in bonds. Keep only enough money in banks for three months of operating expenses, six months for businesses.

Major and semi-major banks are being told to obtain secure storage for new currency-dollars. They expect official devaluation by the end of the year.

We do not know what the exchange rate will be, but as we have stated previously we expect three old dollars to be traded for one new dollar. The alternative is gold and silver coins and shares. For those with substantial sums that do not want to be in gold and silver related assets completely you can use Canadian and Swiss Treasuries. If you need brokers for these investments we can supply them.

The Fed also expects a meltdown in the bond market, especially in municipals. Public services will be cut drastically leading to increased crime and social problems, not to mention the psychological trauma that our country will experience. Already 50% of homes in hard hit urban areas are under water, nationwide more than 25%. That means you have to be out of bonds as well, especially municipals. More...

22 banks that got the most in bailouts cut $10.5 billion in business loans

money.cnn.com
Eight months after President Obama began prodding the nation's banks to increase their small business lending, the loan numbers continue to move in the opposite direction.

The 22 banks that got the most help from the Treasury's bailout programs cut their small business loan balances by a collective $10.5 billion over the past six months, according to a government report released Monday.

Three of the 22 banks make no small business loans at all. Of the remaining 19 banks, 15 have reduced their small business loan balance since April, when the Treasury department began requiring the biggest banks receiving Troubled Asset Relief Program (TARP) funding to report monthly on their small business lending.

Over the six months that the reporting requirement has been in effect, the banks have cut their collective small business lending by 4%. Their cumulative balance stood at $258.7 billion as of Sept. 30, according to a Treasury Department report.

The bank with the biggest lending drop was Wells Fargo, which cut its loan balances by $3 billion. However, Wells Fargo also remains by far the biggest small business lender, with $73.8 billion lent out to small companies. No other bank comes close to that tally.

Some banks are unapologetic about their cutbacks. Small business defaults are soaring, and banks are under pressure to shore up their balance sheets and reduce their exposure to risky loans. Two key small business lenders, CIT Group and Advanta, filed for bankruptcy this month.

But other banks downplay their dwindling loan numbers.

JPMorgan Chase made headlines last week by announcing that it would increase its small business lending by $4 billion this year. But there's no sign of an increase so far in the reports the bank has been filing to the Treasury. JPMorgan's small business lending total has declined every month since April, falling 2.5% over the period. As of Sept. 30, the balance stood at $25.4 billion, down $664 million from six months ago.

JPMorgan spokesman Tom Kelly said the bank will ramp up its lending as the economy improves. The bank is already starting to see healthier, better-qualified applicants, he said: "Some of the businesses are better than they were six months ago."

He also pointed to JPMorgan's recent move to hire additional small business specialists. "We are going to have 325 more bankers talking to customers, so that means there is going to be more applicants for loans," Kelly said. "We have 325 more people knocking on doors."

Credit crunch: Obama administration officials, including Treasury Secretary Tim Geithner and Small Business Administration head Karen Mills, will host a forum Wednesday in Washington to discuss the lending challenges small businesses face. Bankers, members of Congress, and a selection of small business owners will participate.

While credit conditions have improved in some parts of the financial system, lending remains very tight for businesses that rely on banks for their financing, Federal Reserve Chairman Ben Bernanke acknowledged on Monday.

"Many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms," Bernanke said in a speech at the Economic Club of New York. "The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further."

Those in the field back that view. Susan Carlson is president of The International Center for Assistance, a nonprofit organization in Richmond, Va., that assists small businesses seeking capital. Lenders remain very skittish, she said.

"They will look at me and say, 'Susan, we would love to help you, but right now we can't take the risk,'" she said.

Jobs on the line: Frank and Ingrid Brown are a prime example of what happens when entrepreneurs can't get financing. The couple would like to expand their businesses in Auburn, Ala., which currently employ 20 people, but can't land the loan they'd need to do it.

The Browns own two retail art and gift shops, The Villager and AuburnArt.com, as well as a collection of online stores. First they applied at the bank for a loan targeting businesses in underutilized urban areas, but were denied because their sales exceeded the cap for the loan. So they applied with the bank for a Small Business Administration-backed 7(a) loan, but were again rejected.

Next the Browns turned to the America's Recovery Capital (ARC) loan program, a stimulus measure launched this year to get government-backed bridge loans to struggling but viable businesses. After filling out mountains of paperwork, the couple got a bank loan for $14,000 -- less than half the $35,000 they applied for.

"We couldn't get any answers for why we didn't get the full amount, but that is what they came up with. It was kind of like 'take it or leave it,'" Frank said. "By the time you get through everything, it is not even worth it."

The Browns also applied at their local bank, BBVA Compass in Birmingham, for a $50,000 credit line. They were approved for $10,000.

The frustration is taking its toll. "People like us go out and hire people," Frank said. But without the capital it needs to grow, The Villager isn't bringing on new staffers.

That's the nightmare scenario for policymakers as they try to fan the flames of the nation's fragile economic recovery. As long as bank vaults stay slammed shut, fewer startups will launch, successful businesses will have trouble expanding, and struggling businesses are more likely to fail.

"Difficulties in obtaining credit could hinder the expansion of small and medium-sized businesses and prevent the formation of new businesses," Bernanke said on Monday. "Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth."

CIT Bankruptcy Sticks Taxpayers With $2.3 Billion Loss

John Carney
The lifeline extended by Carl Icahn to CIT on Friday may as well be a noose around the neck of taxpayers.

The company said Friday that Icahn to support its prepackaged bankruptcy plan. Icahn, who wanted to push CIT into liquidatio had attempted to persuade other bondholders to derail CIT's restructuring plan. When that attempt failed, Icahn agreed to support the prepack.

The company received $2.3 billion in taxpayer support under TARP. In exchange, the government got preferred securities and warrants for common stock.

Under the bankruptcy plan, which may be filed as early as this weekend, senior bondholders would take a 30 cent haircut on their debt, which will also have its maturity pushed out into the future. The senior bond holders will also get 92.5% of the equity in the company. Junior bondholders will get seriously crunched down the capital structure: the debt will be converted to the remaining 7.5% of the equity.

Current equity holders, including the US taxpayer will be wiped out.

Why did the US taxpayers wind up in a riskier part of the capital structure than billionaire investors like Icahn? Because the US Treasury insisted on "rescuing" financial firms without forcing the existing creditors to accept equity for debt swaps, which would have recapitalized the companies while keeping the taxpayer money in a safer senior position.

CIT was repeated turned down this summer when it sought additional bailout money. This is to the credit of Tim Geithner and the Obama administration, which must have been at least tempted to extend government aid to a company that lends to so many small and medium sized businesses. But this is a cold comfort to taxpayers looking at a $2.3 billion loss: it could have been worse.

With $71 billion in assets, CIT will be the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers, Washington Mutual, Worldcom and General Motors. But apparently the Treasury has decided financial system can survive the CIT bankruptcy. Which raises the question: why did they get any bailout at all?

TARP Tracker Barofsky Sees Danger Ahead

Neil Barofsky is the man who tracks the historic bailout known as the Troubled Asset Relief Program or TARP. Named in December, the 39-year-old special inspector general monitors a dozen separate bailout-related programs, which now account for nearly $3 trillion in financial commitments.

Barofsky has subpoena power and, as a former federal prosecutor who successfully pursued white-collar crime, he has wasted no time in demanding details from institutions rescued by TARP. From a floor of office on L Street, the man known as SIGTARP has launched about two dozen investigations.

In an audit released in July, Barofsky made clear that he was intent on demanding transparency from all quarters - including the U.S. Treasury. His next audit is due in October. In a half-hour interview with the Investigative Fund, Barofsky lays out the breadth of his work and is blunt in his assessment about whether the financial system, now with fewer and bigger banks, is yet safe. "I think we may be in a far more dangerous place today than we were a year ago," he said.

Still wonder if the market's rigged?

After a former Goldman Sachs employee was arrested by the FBI on federal charges for stealing software codes from Goldman's automated stock and commodities trading business, a story in Bloomberg indicated Goldman was concerned that there was a danger somebody who knew how to use their stolen program could use it to "manipulate markets in unfair ways". So how was Goldman using it?

Now read John Crudele's take:

According to the New York Stock Exchange figures for the week of April 13 that I quoted, Goldman executed twice as many big trades -- called "program" trades by the industry -- as any other firm. And, the bulk of the 1.234 billion shares bought by Goldman that week were paid for with the firm's own money.

Of course, Goldman would have to be mighty confident that stock prices were going up to risk so much of its own capital. Or, perhaps, it knew stocks would be rising. This was the time, remember, when banks were trying to recapitalize by selling shares to the public. Goldman, you'll also recall, had turned itself into a bank holding company so it could take $10 billion in government money under the Troubled Asset Relief Program.

Goldman also sold billions worth of new stock to the public while all this was happening. How much harder would it have been for banks to sell stock to nervous investors if the market was swooning rather than booming? Goldman's sudden and inexplicable optimism about stocks was incredibly opportune for the banking industry in general, for Goldman in particular and -- here's where the conspiracy starts to unfold -- for the government.

It's tough, however, to do what needs to be done to rescue the market when pesky journalists and annoying bloggers are looking over your shoulder. So a couple weeks ago the NYSE suddenly announced that brokerage firms would no longer have to report their program trades. The new rule takes effect next week. Convenient!