Posts Tagged ‘Chrysler’

Treasury Makes $25 Billion in Successful MBS Sale

Wednesday, April 4th, 2012

The Treasury Department just raked in a cool $25 billion for the American taxpayer. It sold the agency-backed mortgage-backed securities (MBS) that it bought during the financial crisis.  “The successful sale of these securities marks another important milestone in the wind-down of the government’s emergency financial crisis response efforts,” said Mary Miller, Treasury assistant secretary for financial markets.  The Treasury’s mortgage purchases were one part of the government’s support for banks and the financial markets.  The associated takeover of Fannie Mae and Freddie Mac cost another $151 billion.

Treasury bought the mortgage debt in an attempt to stabilize the housing industry, with funds approved by the Housing and Recovery Act of 2008.  Critics claim that it did more to prop up Wall Street than Main Street.  Anti-bailout anger fueled both the conservative Tea Party movement and Occupy Wall Street on the left.  Treasury Secretary Timothy Geithner argues that the government’s action helped prevent a deeper economic downturn.  TARP funds enabled the government to purchase preferred stock in banks, other financial firms and some automakers in return for the public investment.  Some of the preferred stock ultimately was converted to common stock.  According to a Treasury official, to date $331 billion has been repaid, including dividends and interest earned on the preferred shares.  While TARP currently is $83 billion in debt, Treasury projects losses will eventually number about $68 billion.  The nonpartisan Congressional Budget Office forecasts a lower loss of just $34 billion.

The Obama administration has stressed the TARP bank program’s performance, which has returned about $259 billion, more than the $245 billion lenders received.  At present. there are 361 banks remaining in TARP.

In all, Treasury bought $225 billion worth of mortgage-backed securities during the depths of the financial crisis between October of 2008 and December of 2009.  Some of those securities were backing loans believed to be worthless, according to some financial analysts at the time.  Treasury’s portfolio, however, was comprised mostly of 30-year fixed-rate mortgage-backed securities and were guaranteed by Fannie Mae or Freddie Mac, enhancing their value.  Congress authorized $700 billion for TARP, but Treasury only paid out $414 billion.  Of that, $331 billion has been paid back, including profits, interest and dividends made from investments.

Writing for The Hill, Peter Schroeder notes that “Now, with markets surging and the financial crisis in the rearview mirror — and with the presidential campaign rapidly approaching — the government is backing away from its outsized presence in the markets.  The move marks the latest in a series of steps by the government to exit its crisis-driven investments.  In July, the Treasury announced it was no longer invested in Chrysler, ending with a roughly $1.3 billion loss.  However, the government has fared better with investments in the banking sector.  The Treasury announced roughly one year ago that it had officially turned a profit on that portion of the bailout, and ultimately estimates it will turn a $20 billion profit on the $245 billion that was pumped into banks.”

All industry analysts are not as optimistic. Economist Douglas Lee, of the advisory firm Economics from Washington, said it is inevitable that the government will end up with “substantial losses” on the bailout, but that it was appropriate to try to reap gains where possible.  “A lot of these assets that were acquired were distressed at the time that they were bought so the chance of coming out ahead in selected areas is quite good,” Lee said.  For the long term, however, the effort to rebuild a reliable housing finance system means that costs for subsidizing operations of firms like Fannie Mae and Freddie Mac will continue to be expensive.  Investments in insurer AIG and in automakers might prove hard to recoup 100 percent.  Recently, Treasury said it was selling 206.9 million shares of AIG, which would reduce the government’s stake in the company to 70 percent from 77 percent.  “You have to say that these programs have worked in the sense that it’s restored a sense of stability that we sought,” Lee said, “but now it is right to have the government back out and let the private sector get on with their job.”

Fannie Mae Asks Uncle Sam For More Money

Wednesday, March 21st, 2012

In an attempt to dig itself out of a deepening hole, Fannie Mae has requested $4.6 billion in additional federal aid. “We think that we have reserved for and recognized substantially all of the credit losses associated with the legacy book,” Chief Financial Officer Susan McFarland said.  “We’re very focused on returning to profitability so we don’t have to draw (from Treasury) to cover operating losses.”

Although the nation’s banks seem to be recovering nicely, the same cannot be said for mortgage giants Fannie Mae and Freddie Mac.  Writing in Forbes, Steve Schaefer notes that “The mortgage finance giants have taken on a greater share of supporting the U.S. housing market as private players pared back their exposure in recent years, and the result has been billions of losses on the taxpayer dime.  Fannie Mae reported booking a $16.9 billion 2011 loss capped off by the loss of $2.4 billion in the 4th quarter.  Fannie Mae’s losses are still coming largely from its legacy book of business (from before 2009), which led to $5.5 billion in credit-related expenses tied to declining home prices.

“The black holes of Fannie and Freddie – Fannie’s Q4 report shows it has requested to draw $116.2 billion since being placed under conservatorship Sept. 6, 2008 while paying back $19.9 billion in preferred stock dividends – are the biggest black eyes of the 2008 bailouts.  Plenty of critics of the Troubled Asset Relief Program (TARP) have made their voices heard over the years, but at least most of the banks that received TARP injections – the biggest of which went to Bank of America and Citigroup – have paid back the government’s loans and are back to making profits, if modest ones. Even American Intl Group and the automakers  that received bailouts – General Motors and Chrysler – have moved beyond needing additional government dollars.  Fannie and Freddie, on the other hand, show few signs of becoming anything resembling productive companies until the housing market turns around or the pre-2009 assets are completely wiped off the books or new policies are necessary to encourage new refinancing beyond those currently in place that have had limited impact.”

“While economic factors such as falling home prices and high unemployment produced strong headwinds for our business again in 2011, we continued to grow a very strong new book of business as we have since 2009, “said CEO Michael Williams, who handed in his resignation in January but is still on board while the government-sponsored enterprise (GSE) looks for his replacement.

Bank of America last week announced that it had stopped selling some mortgages to Fannie Mae because of a dispute over requests from the government-run company to buy back defective loans.  “If Fannie Mae collects less than the amount it expects from Bank of America, Fannie Mae may be required to seek additional funds from Treasury,” the company said.

Fannie Mae blamed its loss primarily on pre-2009 loans and falling home prices, which pushed up the company’s credit-related expenses.  In the 4th quarter of 2010, Fannie Mae posted a slight profit to end a streak of 13 consecutive quarterly losses, though the company was back in the red in the following quarter and each since.  The net cost to taxpayers for bailing out Fannie and Freddie stands at more than $152 billion.

During the 4th quarter, Fannie Mae acquired 47,256 single family homes through foreclosure compared with 45,194 in the 3rd quarter.  The company disposed of 51,344 REO properties in the quarter, down from 58,297 in the 3rd quarter.  As of the end of 2011, Fannie Mae was holding 118,528 REO properties, a reduction from the 122,616 at the end of September and 162,489 on December 31, 2010.  The value of the single-family REO was $9.7 billion compared with $11.0 billion at the end of the 3rd quarter and $15.0 billion at the end of 2010.  The single family foreclosure rate in the 3rd quarter was 1.13 percent annualized compared with 1.15 for the first three quarters of the year and 1.46 percent for 2010.

Meanwhile, the federal government wants to sell approximately 2,500 distressed properties in eight locations to investors who buy them in bulk and rent them out for a predetermined period.  The properties, located in Atlanta, Phoenix, Las Vegas, Los Angeles/Riverside, and three Florida regions, include single-family homes and co-op apartment buildings.  “This is another important milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace,” said Edward J. DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae.

AIG Repays Another $2 Billion in TARP Money

Thursday, September 8th, 2011

The Treasury Department is laughing all the way to the bank. Insurance Giant AIG repaid $2.15 billion that it had borrowed through the Troubled Asset Relief Program (TARP).  In 2008, the government helped the giant get back on its feet with a $180 billion loan.  AIG has been gradually repaying the money.  The most recent repayment is the result of the sale of AIG’s Taiwan-based subsidiary Nan Shan Life Insurance Company. One of AIG’s strategies for cutting its debt has been to raise funds by selling assets.  “We continue to make progress in helping the Treasury and taxpayers recoup their investment in AIG,” according to AIG CEO Robert Benmosche.

Not surprisingly, the Treasury Department is pleased with the transaction.  “This is another important milestone in AIG’s remarkable turnaround,” Tim Massad, the assistant secretary for financial stability, said in a statement. “We continue to make progress in recovering the taxpayers’ investments in AIG.”  AIG still owes Treasury $51 billion.  TARP legislation was passed by Congress in late 2008 to rescue the financial sector, which was on the verge of collapse.

Benmosche is still weighing whether to retain a stake in AIA Group Ltd. while repaying TARP funds. AIG sold 67 percent of Hong Kong-based AIA last year in an IPO that raised $20.5 billion. The remaining interest added $1.52 billion to AIG’s second-quarter profit as the Asian insurer’s stock price surged. AIA has soared 19 percent this year and is the number one gainer in the 73-company Bloomberg World Insurance Index. “It’s been a great investment, so they may want to hold onto it,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP.

Now that the Nan Shan deal has closed, AIG’s final significant disposal will be International Lease Finance Corporation, or ILFC, which purchases airplanes to lease them to airlines.  The company is considering an initial public offering (IPO) for ILFC later this year.  Using Nan Shan proceeds to repay the special purpose vehicle gives AIG “more flexibility as to what to do with ILFC and other assets, too.  It adds in general to their cash-flow flexibility.”  He is telling his clients to buy AIG stock.  Treasury holds a $9.3 billion preferred interest in the special-purpose vehicle after accepting proceeds from the Nan Shan sale, according to AIG.  Benmosche may delay or forego selling AIA shares.  AIG’s agreement with underwriters lets Benmosche reduce or hedged the stake in October.  “We’re looking potentially at monetizing other assets that we have so that AIA might be sold much later on, if at all,” he said.

Writing in The Hill, Peter Schroeder says that “In many ways, AIG came to serve as a symbol of much of the public’s anger over the bailout, as it found itself at the center of the historic financial crisis and reliant on substantial government support.  That dissatisfaction came to a head in 2009, when executives at the company planned to distribute hundreds of millions of dollars in bonuses after billions in losses during the financial crisis.  In January, AIG completely repaid the Federal Reserve Bank of New York with a $47 billion payment, and the Treasury in May agreed to sell 200 million shares of AIG stock, raising nearly $9 billion in that offering.  The latest payback from AIG means the Treasury has recovered $313 billion of the investments it made under the Troubled Asset Relief Program (TARP) — roughly three-quarters of the $412 billion it originally dished out to keep the financial system afloat.  The Treasury announced in March that it had officially turned a profit on the bank portion of TARP.  It followed that up with a July announcement that it had exited its investment in Chrysler, ahead of schedule but losing about $1.3 billion in the process.”

On the Huffington Post, Jason Linkins has a cynical take on AIG’s recent repayment of TARP money. “Okay, I’m just going to stop it right there, because when it comes to ‘AIG’s remarkable turnaround,’ the devil is in the details.  Time and time again we’re asked to celebrate the success of TARP.  Back in March, the good news was that, ‘The Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers.’  But this profit that the government has turned on the bailout of AIG rings pretty hollow in light of the four different restructurings of the original agreement that the government has acquiesced to since the fall of 2008.

“When the Fed first stepped in to prevent AIG from collapse in September 2008, the deal was actually pretty good — it carried a punitively-high interest rate appropriate for a bailout, the CEO was dismissed and the company was going to sell itself off in parts, ending its too-big-to-fail status.  If the government were turning a profit on a deal like this, it would indeed be good news.  The trouble is, AIG’s new management didn’t break up the company very quickly.  And even as it paid out lavish bonuses to its top-performing traders and executives, it couldn’t make good on its interest payments to the government.  So the feds stepped in again — and again, and again — throwing more money at the company, reducing the interest that it would pay taxpayers and eventually converting the government’s loans to common stock, abandoning concrete repayment obligations in favor of whatever the stock might someday be worth.”

President Obama Proposes Significant Increase in CAFE Standards

Tuesday, August 16th, 2011

President Barack Obama and the nation’s predominant automakers have agreed to increase new vehicles’ fuel mileage.  The major way to accomplish this is to reduce the size of vehicles.  By 2025, the Corporate Average Fuel Economy (CAFE) must be 55.4 mpg for cars.  That’s up from the 2009 Obama mandate of 35.5 mpg by 2016.  The CAFE standard for 2011 is 30.2 mpg, with light trucks having slightly less burdensome standards.

The Obama administration says the new standards will save drivers $8,200 in fuel over the life of a car.  Between now and 2015, Americans will save $1.7 trillion on fuel costs, eliminate six billion metric tons of carbon dioxide pollution and use 12 billion fewer barrels of oil.  Environmentalists applauded the new standards.  According to President Obama, “This agreement on fuel standards represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil.”  Joining the president at the announcement were executives of Detroit’s Big Three automakers: GM, Chrysler and Ford.  GM and Chrysler were bailed out of insolvency by the Obama administration with taxpayer money.  The government still owns 27 percent of GM; the United Auto Workers, an ally of the Obama administration and which supports the revised CAFE standards, owns 46.5 percent of Chrysler.

The tiered standards are expected to yield approximately $50 billion in net benefits over the life of model year 2014 to 2018 vehicles.  Additionally, it will result in significant long-terms savings for vehicle owners and operators.  President Obama, the U.S. Department of Transportation (DOT) and the Environmental Protection Agency (EPA) worked closely with truck and engine manufacturers, fleet owners, the State of California, and environmental groups – among them, Navistar, Volvo, Chrysler, and Con-way – to garner support for the new standards.  “While we were working to improve the efficiency of cars and light-duty trucks, something interesting happened,” said President Obama.  “We started getting letters asking that we do the same for medium and heavy-duty trucks.  They were from the people who build, buy, and drive these trucks.  And today, I’m proud to have the support of these companies as we announce the first-ever national policy to increase fuel efficiency and decrease greenhouse gas pollution from medium-and heavy-duty trucks.”

Waste Management CEO David Steiner said the rules will help his company meet a  goal of reducing emissions 15 percent by 2020.  The company will save 350 million gallons of fuel over the life of their vehicles.  FedEx CEO Fred Smith said that commercial vehicles account for 20 percent of all transportation emissions.  “Today’s progress is a win for the transportation industry, for the environment and for all Americans as we seek to decrease U.S. dependency on oil,” Smith said.

According to the White House,  the revised heavy-truck rules will cost owners as much as $8 billion in additional technology, but “will save American businesses that operate and own commercial vehicles approximately $50 billion in fuel costs over the life of the program.”  The majority of fleet operators, according to the EPA, are likely to recover their up-front costs within a year or two.  Under the new program, heavy-duty vehicles are divided into three major categories: combination tractors (semi-trucks), heavy-duty pickup trucks and vans, and what is referred to as “vocational” or special-purpose vehicles such as transit buses and garbage trucks.  More specific targets within each of these categories are based on each vehicle’s design and purpose.

American Trucking Association (ATA) president & CEO Bill Graves said the new regulations are “welcome news to us in the trucking industry.  Our members have been pushing for the setting of fuel efficiency standards for some time and today marks the culmination of those efforts.”  He said that in 2007, the ATA endorsed a six-point sustainability program that included a proposal to set “technologically feasible” efficiency standards.

The new rules do not mean that President Obama has given up on his backing of electric vehicles.  Writing on the Climate Spectator website, Jessie Giles says that “While there has been some suggestion that Barack Obama’s new measure to double fuel economy targets for cars in the U.S. might be bad news for electric cars, at Better Place our assessment is that this will in fact be important for increasing the adoption of zero-emission vehicles.  The agreement to increase the CAFE standards is good news, not just in terms of taking steps to stretch our limited oil resources further and helping to reduce our carbon emissions.  Critically, it will also help to increase the adoption of zero-emissions vehicles such as electric cars.  Now, the twist: manufacturers must meet the CAFE standards on a sales-weighted basis – that is, the average fuel economy of all the cars sold by that particular car company.  What’s the easiest way of achieving the new standards on a sales-weighted basis?  It’s by increasing the proportion of electric cars in the manufacturer’s sales mix. It’s far easier to increase this proportion of electric cars than it is to make improvements in the current fuel consumption of every single car in the rest of the portfolio, where years of product development have produced incremental, but relatively minor improvements.”

Treasury: TARP Repayments Now Surpass Debt

Tuesday, June 29th, 2010

TARP repayments total $194 billion; $190 billion is still outstanding.  The $700 billion Troubled Asset Relief Program (TARP) is turning out to be a better bet than many thought at first. According to the Treasury Department, the amount of money repaid by banks and other recipients now exceeds TARP’s outstanding balance.  In a monthly report to Congress on the program, TARP repayments total $194 billion; $190 billion is still outstanding.  A large chunk of that came when Treasury sold 1.5 billion Citigroup shares it had acquired when bailing out the bank, netting $6.18 billion.

“TARP repayments have continued to exceed expectations, substantially reducing the projected cost of this program to taxpayers,” said Herbert M. Allison, the Department of the Treasury’s assistant secretary for financial stability.  “This milestone is further evidence that TARP is achieving its intended objectives:  stabilizing our financial system and laying the groundwork for economic recovery.”

Created during the darkest months of the financial meltdown in the fall of 2008, TARP originally was intended to purchase toxic subprime mortgage securities from banks.  Henry M. Paulson, who was Treasury Secretary at the time, later altered TARP to channel money into banks to stabilize them and provide capital to encourage them to make loans at a time when the capital markets were frozen.  TARP funds bailed out 707 American banks – including Citicorp and Bank of America — to the tune of $205 billion.  Another $331 billion was used to bail out companies such as General Motors and Chrysler.

Banks are making a concerted effort to repay the money to avoid strict executive compensation limits.  By May 31, 71 banks had repaid 100 percent – or $137 billion — of their TARP money.  President Barack Obama hopes to recoup some TARP losses with his proposal to tax the 50 largest financial institutions.  This would net approximately $9 billion annually over 10 years.  Congress is considering the legislation, which faces stiff opposition from the big banks.

Kenneth Feinberg Widens Review of Rescued Bank Compensation

Thursday, April 1st, 2010

The nation’s pay czar is widening his review of how much money hundreds of banks paid their top executives during Pay czar is asking for details on compensation at U.S. banks that took TARP money.  the 2008 financial crisis. Kenneth R. Feinberg, officially the Special Master for Executive Compensation, is asking for details on compensation at 419 banks that were bailed out by the Treasury Department’s Troubled Asset Relief Program (TARP).  Because Feinberg’s authority over compensation only started on February 17, 2009 – when President Barack Obama signed the $787 billion stimulus bill into law and gave Treasury the ability to shape compensation at bailed-out companies – he can do nothing about bonuses paid at the end of 2008.

The standards for deciding that compensation is excessive must be “contrary to the public interest.”  Feinberg’s “look back letter” gives the firms 30 days to provide the information requested.  The compensation review applies only to managers who earned upwards of $500,000 during the four-month period that is under assessment.  Scott Talbott, senior vice president of the Financial Services Roundtable, said the big banks “will work with Mr. Feinberg to demonstrate that the industry has eliminated pay practices that encouraged excessive risk-taking.”

Last fall, Feinberg cut executive paychecks by approximately 50 percent for the seven biggest bailout recipients.  Of those, Citigroup and Bank of America have since repaid the government.  Feinberg was able to pressure AIG employees to return a percentage of their compensation.  James Angel, a finance professor at Georgetown University’s McDonough School of Business, said, “On one hand, some of these banks were effectively forced to take TARP money.  But you could also argue that the executives of surviving banks should not be compensated highly because it wasn’t really their particular skill, it was their luck that they were in an institution that survived when the government bailed out the financial system.”

TARP’s Price Tag: $109 Billion

Monday, March 29th, 2010

CBO predicts that TARP’s ultimate price tag will not be as high as expected.  The Congressional Budget Office has determined that the Troubled Asset Relief Program (TARP) will cost the government $109 billion – just 16 percent of the $700 billion set aside to rescue the nation from the great recession.  Insurance giant AIG and the auto industry are TARP’s largest beneficiaries.

The federal government bought $40 billion in AIG preferred stock and created a $30 billion line of credit for the firm.  Earlier CBO estimates that AIG would cost the government $9 billion; since AIG hasn’t paid the Treasury Department the quarterly dividend it owes, the CBO increased its projected loss to $36 billion or more than half of the bailout cost.  The CBO estimates that TARP will lose $34 billion from its bailout of Chrysler and General Motors.

TARP’s mortgage modification program is estimated to use less than $20 billion, less than half of the $50 billion set aside to help people stay in their homes.  The CBO says that fewer people will participate in the program than anticipated.  When President Barack Obama announced the program in February of 2009, he said that as many as four million homeowners could reduce their monthly payments to no more than 31 percent of their pre-tax incomes.  At the end of February, only 170,000 distressed homeowners had taken advantage of the mortgage modification program.

Czar Kenneth Feinberg Wants Across-the-Board Executive Pay Cuts

Thursday, January 14th, 2010

Pay czar Ken Feinberg thinks Wall Street executives make too much money.  Compensation czar Kenneth Feinberg – officially, the Obama administration’s special master for executive compensation – believes that the pay reductions he mandated at seven taxpayer-rescued firms should become the model  for Wall Street and corporate America.

“There is entirely too much reliance on cash and there’s got to be a better way to tie corporate performance to long-term growth,” Feinberg said.  “I’m hoping that the methodology we developed to determine compensation for these individuals might be voluntarily adopted elsewhere.”  The Obama administration is holding unregulated risk-taking fueled by excessive pay partially responsible for the financial crisis, which has caused $1.6 trillion in losses and write-downs globally, as well as 7,200,000 jobs in the United States.  Between Feinberg’s ruling and Federal Reserve guidelines for banker compensation, the government has inserted itself directly into decisions normally made by corporate boards.

Feinberg has restructured cash “guarantees” into stock that the recipients must hold over the “long term”, according to a statement from the Treasury Department.  “Guaranteed minimum amounts give employees little downside risk in the event of poor performance – but upside when times are good.”

Meanwhile, the Federal Reserve has proposed new guidelines on pay practices at that nation’s banks and plans to review the 28 biggest firms to assure that compensation packages don’t create incentives that lead to the risky investments that caused the worst financial crisis in 70 years.

Manufacturing Showing a Glimmer of Hope

Monday, May 11th, 2009

A significant measure of manufacturing activity rose for the fourth straight month in April. This could mean that the sector is starting to stabilize, even though the index has been at contraction level for 15 consecutive months.gm1

According to the Tempe, AZ-based Institute for Supply Management (ISM), its manufacturing index climbed to 40.1 in April, a welcome increase over the 36.3 reported during March.  While it should be noted that a reading below 50 is a sign that manufacturing activity is down.  Economists had predicted a reading of 38.4 – so the manufacturing marker is performing slightly better than expected.  According to Norbert Ore, chair of the ISM’s survey committee, “The decline in the manufacturing sector continues to moderate.  This is definitely a good start for the second quarter.”

Although the index fell to a record low in December, it has risen every month in 2009.  It is gradually approaching 41.

“The index suggests we have come off the bottom but are still in recession,” according to John Silvia, chief economist at the Wachovia Economics Group.

One of the issues that may affect the index is the fallout of the Chapter 11 bankruptcy of Chrysler, which has closed all of its 22 U.S. plans for at least 60 days.  The fate of the company will affect a huge swath of suppliers since Chrysler buys 78 percent of its parts and services domestically.  General Motors will also idle 13 assembly plants in North America for at least nine weeks.