US FlagApril 1, 2009 Edition



WE'RE ALL IN THIS TOGETHER – President Obama met with the CEOs of JPMorgan Chase, Citigroup, Goldman Sachs, other banks, and security industry associations about the administration's proposals to increase regulation of the financial system. Said economic adviser Larry Summers, "This is a meeting about the broad approach to restoring our economy and our national economic strength."  Said Citigroup CEO Vikram Pandit of the meeting, "I'm of the feeling that we're all in this together."  Time will tell.

FINANCIAL RESCUE = GDP - Here's a Bloomberg article that just might take your breath away...Financial Rescue Approaches GDP as U.S. Pledges $12.8 Trillion.  That $12.8 trillion is getting uncomfortably close to the nation's $14.2 trillion gross domestic product in 2008.  Then we have Goldman Sachs CEO Lloyd Blankfein telling us, "The president and Treasury Secretary Geithner have said they will do what it takes.  If it is enough, that will be great.  If it is not enough, they will have to do more."  We'd be more comfortable if the second "they" in Mr. Blankfein's statement was a "we" since, presumably, we're all in this together.  

EXECUTIVE PAY - One of the sticking points in the White House/CEO meeting was reported to be the issue of executive pay.  The AIG bonuses, of course, brought this issue to the forefront and may make it more difficult to gain public support for additional government rescues.  From where we sit, there does seem to be a disconnect on the subject of "bonuses."  "Main Street" Americans consider a bonus as performance based, something paid to employees when a business is profitable.  On Wall Street, a bonus appears to be a contractually-guaranteed element of a compensation package, payable without any real connection to performance.  A couple of interesting articles:
 MORE HELP FOR BIG BANKS - The Public-Private Investment Program is designed to remove troubled assets from the banks. The plan will likely help larger banks more than smaller ones. The plan offers government support to private investors, including insurance companies and pension funds, interested in purchasing troubled securities and loans from financial institutions, with the goal of getting credit flowing again.  For more background, here's "Tim Geithner's Toxic-Asset Plan: 8 Things You Need to Know."  

SIFMA SUPPORTS PUBLIC-PRIVATE INVESTMENT PROGRAM - The government's new PPIP is designed to allow investors and the government to buy up substantial amounts of troubled assets from financial institutions. SIFMA President and CEO Timothy Ryan said, "Clearing toxic assets off of banks' balance sheets is an essential first step if we are to turn the corner on this recession. Selling these assets will improve the financial strength and the value of banks, which will free up the banks' ability to lend to consumers and small and large businesses at more normalized levels." The market seemed to agree.

BUYING TROUBLED ASSETS - BlackRock, Pimco and Legg Mason and others plan to create closed-end funds that would let "wealthy" individuals invest in troubled assets being sold under the Obama administration's plan. "If these assets are mostly good assets, the federal government and the investor will do fine."  No word on the definition of "wealthy" and/or the minimum investment required.

SHORT LEASH - In rejecting turnaround plans by GM and Chrysler, the Obama administration asserted unprecedented control over the U.S. auto industry.  In addition to backing new car warranties issued by the two automakers, the government required that GM CEO Rick Wagoner resign.  Apparently Chrysler has been deemed too small to survive and, as a result, has been given 30 days of funding in order to complete a partnership with Fiat or some other automaker.  Otherwise, it appears a Chrysler bankruptcy is in the future.  GM received assurances of 60 days of federal financing in order to try and revise its restructuring plans, including additional concessions from unions and bondholders.  Without those concessions, some form of a court-supervised restructuring/bankruptcy process may be in the cards for GM.  Here's a Forbes article on "Why Rick Wagoner Had to Go."  
AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

Also known as the stimulus package, this $787 billion spending bill was signed into law by President Obama on February 17.  Click here for a summary of the legislation's tax incentives, provided courtesy of The Virtual Assistant

GEITHNER ON THE MOVE - Treasury Secretary Timothy Geithner may have trouble using Turbo Tax, but is seeking changes in the way the government supervises risk-taking by large companies, as well as tougher controls on money-market mutual funds and hedge funds. Additionally, the dollar dropped against most major currencies after Geithner made comments about a Chinese proposal that raised concerns about the dollar's status. 

SEIZE POWER - The Administration and the Feds are proposing a plan that gives the government greater authority to take over financial institutions that "pose a systemic risk and are on the verge of collapse." President Obama believes the AIG situation could have been handled more effectively if the government had the authority to take over financial firms similar to the power it has to seize troubled banks.

SORRY - Christopher "Kit" Taylor, executive director of the Municipal Securities Rulemaking Board for nearly 30 years, confessed that the self-regulatory board enabled losses in municipalities across the nation because it failed to be tougher on regulations. He and his Rulemaking Board will ask Congress for greater oversight power. Sounds like they had the power, but just didn't use it.

RAPID TARP PAY BACKS - Goldman Sachs and a group of smaller banks plan a rapid repayment of TARP funds. Apparently, they feel some of the restrictions required by the government do not make for good business.

BLOWN ASSIGNMENTS - Frank Brosens, a hedge-fund manager considered to be the leading candidate to run the Troubled Asset Relief Program, withdrew for personal reasons. Treasury Secretary Geithner is looking at other possibilities, including Herb Allison of Fannie Mae. Two points here: What is it with all these botched appointments and why are we asking the very folks that caused the problems to help correct them?

THE REAL GREEN IN CAP AND TRADE - General Electric (with its MSNBC unit cheering every step of the way) and has been one of the prime movers behind the push for the cap-and-trade energy tax. The company spent upwards of $18 million on federal lobbying for cap-and-trade and other big businesses are backing the scheme. Reason? GE and others are positioned to make a fortune on cap-and-trade by rebooting their failed financial derivatives business for every aspect of carbon trading that the Wall Street can dream up. This is a "green" movement alright, just not the kind of "green" the public perceives. Who would have thought you create money out of thin (read, clean) air?

SPEAKING OF THIN AIR – After increasing the money supply 271% in just the last six months, the Fed is set to spend $1.2 trillion to purchase mortgage-related securities and government bonds. Hopes are that the money will reduce borrowing costs for loans, including mortgages, and spur the economy. The $1.2 trillion dwarfs previous efforts and indicates an acknowledgment that the economy has worsened. It will also not help the value of the dollar versus other currencies. 

TOUGH SALE - President Barack Obama has taken to the campaign trail to defend his proposed $3.6 trillion budget. In a recent news conference, he defended the budget against criticism from lawmakers, saying it is needed to help end the financial crisis and that earlier efforts to help the economy are working.

SHOW US THE MONEY! - While the new Administration is touting "a new era of accountability, transparency and conditions," Treasury officials are reluctant to disclose how much money is left in the TARP fund.  While no official accounting has been made public, Dow Jones estimates that less than $53 billion remains.

IMF WANTS SPECIFICS – The International Monetary Fund is concerned about the administration's plans to aid the banking system and the economy. "Critical details concerning the valuation of distressed assets remain unclear. The plan also does not address how severely undercapitalized or insolvent banks will be resolved...greater clarity on all these issues will be critical to ensure the plan's effectiveness."

CRAM-DOWN RESISTANCE - The Administration plan to allow bankruptcy judges to alter principle and interest rates on mortgages faces opposition in the Senate and does note have the 60 votes needed to get the legislation passed. Opponents say the plan would boost mortgage rates, clog bankruptcy courts and raise risks for lenders.

GE, MSNBC AND THE FORGOTTEN BAILOUT – AIG got $182.5 billion in bailout funds but, coming in at second place in the federal government bailout sweepstakes is General Electric, which got its own $139 billion in November. So with Congress and the media in a frenzy over AIG bonuses, where's the GE outrage? This might shed some light on the situation. Keith Olbermann of MSNBC has denounced Citigroup CEO Vikram Pandit's salary, AIG, Northern Trust, and other bailout recipients that he describes as "vast engorged gluttonous multinational corporations whose sneezes can be fatal to our jobs, whose mistakes can turn us into the homeless, whose accounting errors can be so panoramic that they can make our economy tremble and force us to hand them billions after billions in a blackmail scheme that has come to be known as 'bailout.'" GE bonuses only dropped 19% from 2007, even thought GE stock lost 53% of its value.  In November, with GE already in the depths of crisis and just two days before its $139 billion bailout deal was announced, Olbermann signed a new contract for a hefty raise from $4 million a year up to $7.5 million a year. MSNBC's other leading light, Chris Matthews, who's been bashing AIG bonuses nightly, just signed a new contract that pays him over $5 million per year. Did we mention that GE owns MSNBC?

SWEEPING REGULATORY CHANGES - Treasury Secretary Timothy Geithner's proposal for comprehensive changes to regulation of financial markets is meeting both opposition and resignation. The proposal focuses on four areas: risks to the overall economy, closing oversight gaps, enhanced protection for consumers and investors, and global coordination of initiatives. The trick will be to make the rules effective without needless intrusion and red tape.  Here are some interesting articles:
 BIGGER ROLE FOR THE SEC – SEC Chairwoman Mary Schapiro says additional legislation is needed to fill holes in regulatory oversight. Specifically, the SEC is pushing to gain oversight of market intermediaries that are unregulated, including financial and swap advisers.  Click here for more background from Investment News. 

SIFMA ON NEW SEC FEES - "Increased fees from the Securities and Exchange Commission on stock transactions are expected to impact trading volumes. The fees are jumping by four times so the SEC can avoid a funding shortfall. Smaller firms will be particularly hard hit by the increase, which goes into effect next month." Just like taxes, fees are ultimately paid by the consumer.

CONGRESS SHALL ENACT NO EX POST FACTO LAWS - No one was happy about taxpayer dollars being used to pay bonuses to AIG executives when the company had just fallen flat on its face, but the House legislation that would slap a 90% tax on executive bonuses at companies that received federal aid seems to be a bit after the fact.

PRAGMATIC APPROACH - Switzerland and other offshore tax havens have been under increasing pressure from the U.S. to disclose the names of their U.S. clients as part of a tax fraud probe.  Now we have a U.S. program "to offer non-punitive tax deals to people hiding money in foreign bank accounts."  Promising lower fines and no criminal charges to those who voluntarily come forward over the next six months holds the potential to bring billions of dollars of undeclared cash back to the U.S. at a time when the economy needs it most.

$240,000 HEALTH CARE TAB - That's how much researchers at Fidelity Investments estimate that a 65-year-old couple retiring this year will need to cover their health care expenses during retirement.  That's a 6.7% increase from 2008 and a 50% increase since 2002.

HEALTH INSURANCE MANDATE? - With business leaders urging Congress to act quickly on health care reform, we may see legislation before the end of the year.  The Business Roundtable, which represents the largest U.S. corporations, released a study showing that for every $1 the U.S. spends on health care, give leading economic competitors (Canada, Japan, German, the United Kingdom and France) spend about 63 cents.  While the U.S. spends more on health care than any other country, about 46 million Americans are uninsured.  

GEN Y - Deloitte Consulting advises financial services firms attempting to market to members of Generation Y (people born between 1977 and 1995) that they should know about some specific Gen Y consumer tendencies.  

STATE LEGISLATION - New York State has proposed a life settlement bill that would set licensing, registration and disclosure requirements for facilitators of life settlement transactions.  The legislation would also prohibit stranger-originated life insurance.  Florida legislators are considering proposed legislation, the Safeguard Our Seniors Act, that would make it easier to throw annuity salespeople in prison if "they make misleading representations about a policy or if they encourage a client to surrender or withdraw from a product in order to buy another annuity."  The bill would also give people over age 65 a 60-day "free look" period when they purchase an annuity.

S. 722 - Sen. Max Baucus, chairman of the Senate Finance Committee, has introduced S. 722 which, among other things, would make the 2009 estate tax level permanent and reunify the estate and gift taxes.

ELDER FINANCIAL ABUSE - Reporting that elder financial abuse costs older Americans more than $2.6 billion per year and is most often perpetrated by family members and caregivers, the MetLife Mature Market Institute has released "Broken Trust: Elders, Family and Finances."