Posts Tagged ‘credit markets’

TARP: Money Well Spent

Wednesday, March 23rd, 2011

A top Treasury official defended the federal government’s $700 billion bank bailout financial crisis-response program at a hearing where the effort was criticized by members of a watchdog panel insisting that it did more for Wall Street than Main Street. “The cost of TARP is likely to be no greater than the amount spent on the program’s housing initiatives,” said Timothy Massad, acting assistant secretary of the Treasury for the Office of Financial Stability, to the Congressional Oversight Panel that oversees the Troubled Asset Relief Program (TARP).  “The remainder of the programs under TARP — the investments in banks, credit markets and the auto industry — likely will result in very little or no cost,” he said.

Panel member J. Mark McWatters, a Dallas-based CPA ad tax attorney, argued that it is difficult to call TARP a success when the unemployment rate is still approximately nine percent and millions of Americans are fighting foreclosure.  Panel Chairman Ted Kaufman – who was Vice President Joe Biden’s chief of staff of 19 years and temporarily replaced him in the Senate – said that Wall Street bankers ended up in better shape than Main Street.  “It’s not a tough economy on Wall Street, it’s a tough economy everywhere else,” Kaufman said.

According to Massad, TARP will end up spending no more than $475 billion; 86 percent of which has been disbursed.  To date, Treasury has received $277 billion back, including $241 billion in repayments and $36 billion in additional income. The Treasury expects to receive an additional $9 billion, which will leave $150 billion outstanding through various investments.  The department hopes to recover those funds over the next several years.  “TARP helped bring our financial system back from the brink and paved the way for an economic recovery,” Massad said.  “Banks are better capitalized, and the weakest parts of the financial system no longer exist.  The credit markets on which small businesses and consumers depend — for auto loans, for credit cards and other financing — have reopened.  Businesses can raise capital, and mortgage rates are at historic lows.  We have helped bring stability to the financial system and the economy at a fraction of the expected costs.”

William Nelson, deputy director of the Federal Reserve’s division of monetary affairs, agrees with Massad. In testimony about the Fed’s program to restart the asset-backed securities markets with backing from the Treasury’s TARP program, Nelson said even that program is unlikely to experience any losses.  “The Term Asset-Backed Securities Loan Facility (TALF) program helped restart the ABS markets at a crucial time, supporting the availability of credit to millions of American households and businesses,” Nelson said, adding that of the more than 2,000 loans worth $70 billion that were extended through the Fed’s facility, 1,400 totaling $49 billion were repaid early.  Remaining loans are current, and the collateral backing the loans is retaining its value, “significantly reducing the likelihood of borrower default.”

“As a result, we see it as highly likely that the accumulated interest will be sufficient to cover any loan losses that may occur without recourse to the dedicated TARP funds,” Nelson said.  Europe, by contrast, did not act as aggressively to apply stimulus with the result that financial crises occurred in countries like Ireland and Greece.

Bernanke Sees Some Light at the End of a Long Tunnel

Friday, May 8th, 2009

Encouraging data on home and auto sales, homebuilding and consumer spending is seen by Federal Reserve Chairman Ben Bernanke as “tentative signs” that the recession may be moderating.  Still, he cautions that lasting recovery depends on the government’s success in stabilizing the reeling financial markets and unfreezing credit.captphoto_1241771944325-6-02

In remarks to faculty and students at Morehouse College in Atlanta, Bernanke said “Recently, we have seen tentative signs that the sharp decline in economic activity may be slowing.  A leveling out of economic activity is the first step toward recovery.  To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

Analysts expect the economy to shrink between two and 2 ½ percent during the second quarter of 2009, a better showing than the 6.3 percent contraction reported for the fourth quarter of 2008.  Although numbers for the first three months of 2009 will not be available until the end of April, some economists believe it will be in the four or five percent range – or perhaps higher.

“The current crisis has been one of the most difficult financial and economic episodes in modern history,” according to Bernanke.

Deep Freeze of an Unregulated Economy

Thursday, March 5th, 2009

Iceland’s economic collapse, the result of a reckless government and a lack of financial regulation, is an object lesson to Americans who fear increased — but necessary – markets oversight.

Icelandic debt is 10 times the country’s GDP!  In the United States, our debt would have to be close to $100 trillion to put us in the same position.  Icelandic banks were deregulated during the mid-1990s, after which the economy was run like a giant hedge fund; following the economic collapse, citizens lost most of their savings and are saddled with debt and mortgages they can’t afford.  Inflation and unemployment are skyrocketing.  Is it any surprise that the neo-liberal government whose policies put Iceland into a financial vise fell following protests by infuriated citizens?deep-freeze1

So vast is their debt, Iceland’s insolvent banks may be forced to declare bankruptcy a second time.  When their own economic crises left the United States, Britain and the European Central Bank unable to bail out Iceland, the country turned to Russia and the International Monetary Fund in hopes of a financial rescue…maybe a miracle.

The interim government, a coalition of the Left-Green Party and Social Democrats, wants to rewrite Iceland’s constitution.  The goal is to “enshrine national ownership of the country’s natural resources” and to “open a new chapter in public participation in shaping the structure of the government”.  This marks a 180-degree change from the free-wheeling policies of the past where market regulation was non-existent.

Ever since American credit markets froze last fall, it’s become clear that a well-regulated economy equals a healthier one.

Fannie, Freddie and the American Taxpayer

Thursday, September 11th, 2008

As the United States government commits a bare minimum of $100 billion of taxpayer money to bail out Fannie Mae and Freddie Mac, the final reckoning depends on how effectively Washington runs the mortgage powerhouses.

According to the Christian Science Monitor, with the sheer magnitude of Fannie and Freddie – with $5 trillion in home loans on their combined books – the taxpayers’ burden is likely to add up to billions of dollars very quickly. 00037darling-let-s-get-deeply-into-debt-postersThe worst-case scenario could see the tab rise as high as the $125 billion it cost the taxpayers in the early 1990s to bail out failed savings-and-loan institutions. The rosiest scenarios hypothesize that the short-term cash infusion might be recouped with little or no net cost to the taxpayers.

Part of the reason that Fannie and Freddie are under conservatorship is that foreign central banks and investors have been divesting themselves of American mortgage debt, because they are nervous about falling prices, weak credit and the weak dollar. Since foreign ownership represents $1.4 trillion, it is a sizable piece of the puzzle.

The bottom line is that every U.S. taxpayer is now tied directly to the troubled housing market. And the stakes here are significantly higher than the government’s $30 billion bailout of Bear Stearns. The ultimate cost to taxpayers is tied directly to the depth of the housing slump. If housing prices continue to fall and foreclosures rise, the losses to Fannie and Freddie will increase. The opposite scenario would be far better news for taxpayers.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), because Congress chartered them to create a stable mortgage market. They have functioned well by guaranteeing home loans or buying them outright. Even with steep declines in the number of sales and prices, investors have continued to fund home loans with a Fannie or Freddie seal of approval; this has kept mortgages relatively available and affordable.

The Treasury Department had no alternative but to intervene, become an equity investor in Fannie and Freddie, and a buyer of their mortgage-backed bonds. Their objective is to restore consumer confidence in the credit markets, reduce the cost of mortgages, and help the housing market recover.