Northern Country

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Posts Tagged ‘bailout

Bernanke in a town-hall meeting, shopping for popularity

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bernankeintownhallmeeting

Last Sunday Ben Bernanke, chairman of the Federal Reserve responded to questions from the public in a town-hall style meeting. For the first time in history an acting Federal Reserve chair stepped into the arena that is usually the prerogative of obligations among elected officials. We truly live in interesting times.

What could have provoked this extraordinary move by the chairman given the daunting unpopularity of cumulative actions taken by the Fed in the last twenty four months? The answer is already given in the question. Ben Bernanke is shopping for popularity in order to better his approval ratings. His term as chairman ends in January 31, 2010, when he is up for reappointment by president Obama.

I can only imagine it must have been scary and embarrassing for the chief to step in front of the very same audience he led down over the course of the last ten years. He certainly did not mean to inflict any harm upon his fellow countrymen, but together with his predecessor Greenspan he helped lay the foundations of a shaky economy based on bubble economics.

Sure he gave birth to many millionaires and even some billionaires, but for most people Greenspan’s and Bernanke’s policies were rather harmful. Certainly one cannot expect any sensational outcome of such meetings with both a preselected audience and preselected questions. Organizers won’t let that happen though the chairman won’t suffer any lasting damages. It would have been nice though to read Bernanke’s mind.

To his defense the chairman admitted that he was disgusted from bailing out giant Wall Street firms like AIG, Bear Stearns or Merrill Lynch and rescuing them from going bankrupt. Though we certainly respect his wish not to reside over a second Great Depression, of course we have to believe him that there were no other options at the time. I might also add we are not yet with absolute certainty out of the woods with regard to another Great one.

Asked about his too-big-to-fail policy he seemed to indicate sympathy for the public’s frustration and promised to make it better in the future. Though his credibility was called into question by reiterating his opposition to an independent outside audit of the Fed. Why no audit if he has nothing to hide? Yes there is the issue of independence of the Fed, but just how much independence was there say in the last ten years?!

The Federal bank closest to Wall Street, and therefore in a special position with regard to the nation’s largest financial institutions, is the Federal Reserve Bank of New York. During the financial crisis Federal Reserve and Treasury Department officials made all major decisions, but the New York Fed executed them.

In the meantime the New York Fed has been criticized as too close to Wall Street. William Poole, a former Fed president, missed a longer-run perspective among the Fed’s staff. They adopted a trader mentality instead and did not pay enough attention to a system skewed towards too much risk taking by numerous bailouts of large Wall Street firms.

The Fed’s board of directors is composed of powerful bankers and corporate titans like Jamie Dimon, the head of JPMorgan Chase, and Jeffrey Immelt, General Electric’s chief. Richard Fuld had to resign after Lehman’s bankruptcy and Stephen Friedman called it quits over a conflict of interest with the other board he served, of investment power house Goldman Sachs. The corporate-federal officials network seems too tight to ever disintegrate.

It is not only the Federal Reserve that has to fear for its independence. The lobbying departments of large financial institutions have expelled their tentacles even into the Financial accounting Standards Board (FASB) of the United States and the International Accounting Standards Board (IASB) of Europe.

According to a recent report by an international team of former regulators and corporate officials, the Financial crisis Advisory Group deplored efforts by politicians to prescribe changes on accounting standards. The integrity of valued assets on the books of financial institutions should not be called into question in an effort to save those institutions from potentially harmful bets gone awry. In April, 2009, FASB already caved in to heavy financial lobbying and paused fair-value accounting rules for illiquid assets.

Beside all the regulatory and statutory powers bestowed on elected or appointed officials their most potent tool still remains the integrity of the person and organization in question. It is by no means sufficient for Fed chair Bernanke to communicate his objection to the bailouts on Wall Street even if it is within such an elaborate setting of a town-hall meeting. There is not enough meet on the bone to undo what has already happened.

A Gallop poll, conducted in mid-July, found that only 30% rated the Fed as doing an excellent/good job. The bank had the lowest score out of nine government agencies and it was down sharply from the 53% who still approved of the Fed’s job in 2003. This time even the CIA and the Internal Revenue Service scored better than the Fed. Bernanke will have to do better. It will most certainly be like walking a tightrope.

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Wall Street – Washington Connection, Part II

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The Troubled Asset Relief Program (TARP) was enacted by Congress and signed into law by the president of the U.S. in October 2008. The Obama administration had asked the American people to commit a staggering $700 billion of taxpayer money to bailout Wall Street.

In order to insure appropriate oversight the president appointed and the senate confirmed a Special Inspector General (SIG) shortly after the establishment of the TARP. Neil Barofsky, head of SIGTARP, endowed with special powers is not required to report and to be supervised by the secretary of the Treasury. Moreover only the president can remove the SIG, which would be somewhat embarrassing since he appointed him in the first place.

The Inspector General’s special rights make sure that he remains independent in his oversight from the secretary of the Treasury, who is ultimately responsible for the TARP. It was therefore surprising to learn that the Treasury department refused to provide Barofsky with documents about a financial institution receiving tens of billions in bailout dollars. Barofsky received support from lawmakers on that issue who are sympathetic to SIGTARP’s work and also complained about the lack of transparency in major recipients of TARP funds.

In its most recent audit SIG surveyed 360 banks participating in the TARP and found that they misused the funds. 110 banks had invested some of the funds, 52 banks had used the money to repay existing debt and 15 used it to buy other banks. About 83percent used at least some funds to support new lending.

SIG goes on to encourage the Treasury to require regular, more detailed information about the use of TARP money by participating banks. This would help to achieve the goal of transparency and satisfy the taxpayer. Treasury responded by saying it is impossible to track the money because it’s fungible, much like water running through fingers: "…paying an expense from one source frees up cash to be used for other purposes”.

Barofsky did not buy it and argued Treasury was ignoring the common sense view. His latest audit found that banks could give at least a general indication of how they were using the money. It is not feasible why financial institutions using billions of dollars of taxpayer money to fund their operations are not required by the Treasury to maintain at least a documentation of the original disbursement of these funds. Treasury even admits that most banks don’t manage their TARP money separately from other funds.

A paper trail would help to hold banks accountable but the Treasury seems to think that it is best not to interfere with the financial industry’s business at all in order to achieve results. Why government officials would think that, is not clear under circumstances that rendered proponents of financial deregulation to be dead wrong. This epochal mistake grudgingly coerced taxpayers to fund bailouts in the form of TARP in the first place.

Back in March a Government Accountability Office (GAO) review found that regulators blatantly failed to do their job by ignoring the risks that had piled up in the financial industry. According to GAO, regulators like the Federal Reserve and the SEC relied too much on promises given to them by Wall Street’s representatives. They assumed according to SEC chairwoman Schapiro the industry would not take foolish risks and jeopardize their business model. Given the current dispute is it possible that we are going to make the same mistake again?

Treasury has only one problem with their laissez-faire approach, it is not showing results. Even after injecting massive amounts of liquidity lending to businesses and consumers has not resumed to pre-crisis levels. Some see this as a necessary adjustment, but others are calling for more forceful actions from the government.

Under pressure to revive lending the U.S. Treasury began to demand monthly reports on lending activities from banks participating in TARP. It took them until January to implement most basic reporting, when this should have been mandated immediately with the commencement of the funds. I strongly feel this shortcoming is indicative of a culture that has pervaded Washington to dismiss common sense when it comes to Wall Street. The perpetual lobbying of Wall Street’s executives in Washington is certainly not helpful in this regard (see WW Part I).

Results from Treasury’s latest monthly bank lending survey showed that total outstanding consumer loans, including first lien mortgages, home equity lines of credit, credit card loans, and other consumer loans, were flat in May, 2009. Commercial and Industrial loans (C&I) were also flat with demand well below normal. Commercial real estate loans (CRE) even fell with demand again lower than normal in May, 2009. Small business lending showed some growth but outstanding loan balance grew only by a meager one percent.

These results were based only on data from the top 21 recipients of TARP funds. SIGTARP’s audit on the other hand was based on results from 360 participating institutions. There is really no feasible reason why oversight should be limited to 21 when according to the Treasury 651 banks have received government funds so far.

The argument that banks don’t have enough capital to lend does not ring through. The Capital Assistance Program (CAP) was designed to make sure that financial institutions are sound and have sufficient capital to support businesses and consumers. The results of a financial stress test on banks published in May, 2009, speak for themselves and even sparked a stock market rally on Wall Street that nobody thought would be possible just a couple of months ago. Treasury secretary Geithner also confirmed that the vast majority of U.S. banks have more capital than needed.

Yet the evidence is indisputable. Lending to consumers and business while not at a halt remains strongly subdued and remarkably insufficient to support potential economic growth. Every day that passes makes it harder for the Obama administration to explain to the public why consumers and small businesses are being asked to be frugal and patient all the while Wall Street is celebrating. The mice are not dancing because the cat has left the house, they are celebrating because all cats have been stymied once and for all to never hurt them again ever. The public wants to know when Washington will stop working for Wall Street and start to work for the people again.

Treasurylendingloanoriginations TARP loan originations from BofA, C, JPM, and WF

TreasuryMay09growthinloanoriginations growth of TARP loan originations in 21 largest recipients

fredgraphCIloansweeklyJuly09 C&I loans weekly reporting by large commercial banks