Fed Reserve Bank Comes to the Rescue and Piles on Liabilities

The "Real Time Economics" section in The Wall Street Journal has an overview showing how the assets (and liabilities) of the Fed Reserve Bank have grown since the start of this crisis. These assets no longer have to be marked to market values so there is no way to know what these are worth, but we do know how much cash the Fed let out. This ballooning letting out is what causes inflation.

I've broken out each additional burden the Fed Reserve has taken in separate charts below. Click to enlarge each chart.

Chart 1 - $0


Chart 2- add $48 billion for every day credit lines the Fed gives out


Chart 3 - add $508 billion to buy US treasuries; this is ongoing


Chart 4 - add $56 billion given to federal agencies


Chart 5 - add $237 billion to purchase mortgage-backed securities; new


Chart 6 - add $529 billion, direct lending starts (you notice how this has not happened before)


Chart 7 - repurchase agreements with companies looking for immediate liquidity


Chart 8 - $117 billion for AIG and Bear Stearns


Chart 9 - add $314 billion for central bank liquidity swaps with other central banks


Chart 10 - add $255 billion for more lending to banks


Chart 11 - add $5 billion to start TALF, Secretary Geithner's plan to buy up bad bank debt

U.S Govt Tries Again, This Time FDIC Gets Involved

W.C. Fields is supposed to have said: "If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it."

This quote came to mind today as I was reading the new plan announced by the U.S. Treasury of Secretary Tim Geithner to buy what has been dubbed "cash for trash", the trash being mortgage-backed securities.

The new plan now gets the FDIC involved - why jeopardize the stability of the FDIC? The only reasons I can think of are: 1) everyone else is already involved - U.S. Treasury, Fed Reserve, Fannie Mae, and Freddie Mac; and 2) it's a source of new cash, i.e., the FDIC's credit lines with the Treasury which ultimately means more sales of U.S. Treasuries.

But how much more borrowing can the U.S. do?

As President Obama said on "60 Minutes" last night: "The limit is our ability to finance these expenditures through borrowing. . . . If we don't get a handle on this, and also start looking at our long-term deficit projections, at a certain point people will stop buying those Treasury Bills."

Private investors are cheering, sending the U.S. stock indices skywards today. And according to a source quoted in "The New York Times":

"One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday."

Now, the investors bidding up the stock market aren't the same ones buying U.S. debt. The stock market investors are happy today because the new plan gives them terrific leverage to make more money. Here's the example the U.S. Treasury gave today:

A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. TheF.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, the private investor contributes the remaining $6.

So for just $6, private investors will leverage $100 with backing from the tax payers. The only thing they have to lose is $6 but if that $100 loan package goes up in value to say $110, they benefit from $10 in profit. Of course some will go down too. But let's say it's 1/2 down, 1/2 up so that's $4 profit in this exmaple between the two, won't the govt get some of the upside? Well, AIG, Bank of America and other s paid out big bonuses but did they repay any of it to U.S. taxpayers? No. So the likelihood of any of the upside being shared is pretty low.

Senator Grassley Offers Way Out for AIG Executives

U.S. Senator Grassley in an interview with an Iowa radio station Monday night said of the AIG executives that he'd:

"feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, 'I'm sorry,' and then either do one of two things: resign or go commit suicide." - Senator Grassley

Well, at least this is a start. Up to now all we've heard from our politicians in Washington is: it's a contractual thing, you wouldn't understand.

More on bonuses: Citi Chief takes $38.2 million in 2008

This just in from "The New York Times:

"Citigroup gave Vikram S. Pandit, its chief executive, a compensation package valued at more than $38.2 million for 2008, even as the bank posted five consecutive quarters of multibillion-dollar losses and turned to the government three times for help."

That's almost 1/4 of the amount AIG is paying to its discredited executives.

Are you in shock? Well, you should be. Let President Obama know how you feel: http://www.whitehouse.gov/contact

U.S. Treasury Lost Track of 33% of TARP Bailout

According to the chairwoman of the Congressional Oversight Panel created for TARP, Secretary Paulson gave away 1 out of every 3 dollars to Wall Street banks with no record and no plans of getting any of it back.

Listen to the full interview with panel chairwoman Elizabeth Warren; it might set your hair on fire, but it also just might get you worked up enough to demand accountability from Congress and the President.

AIG to pay $100 million bonuses

[Correction on 3/15/09 - the total amount of bonuses as reported in the media went up by $65 million.]


Just as I finished a post on Robert Rubin's comments at a conference this past week about bonuses I read this headline on "The New York Times" Web site:

AIG to Pay $100 Million in Bonuses After Huge Bailout

What's more, according to the article, the bonuses will be paid to executives in the same business unit that brought the company to the brink of collapse last year.

U.S. taxpayers have already given $180 billion to save AIG, I guess in comparison to that $100 million is small potatoes.

U.S. taxpayer’s bailout of AIG: $180 billion

Today the U.S. Treasury announced that it is giving another $30 billion to the world's largest insurance company AIG.

Today AIG also had an announcement: a quarterly net loss of $61.66 billion.

Total amount now given to AIG: $180 billion.

The AIG funding eclipses the $50 billion that Citigroup has received from the U.S. Treasury, and the $45 billion that Bank of America has received.

From "The Wall Street Journal":

"The new deal, the government's fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG's value over a longer period."

In other words, the U. S. government is very afraid of AIG collapsing.

Meanwhile in other news, AIG's ex-CEO sued the company today.

Citi Bank Complaint: U.S. Govt is Too Strict On Us

After running the bank into the ground (see chart at the right for losses incurred over the past 5 quarters), Citi bank executives are complaining that the U.S. government is being too strict on them under the terms of the tax payer funded bailout.

This is like the kid who burns down his parent's home (and the entire block) and then complains when they take the matches away.

Citi's CEO, Mr. Pandit, has apparently met with everyone from
President Obama's National Economic Adviser to U.S. Representative from Manhattan looking for some sympathy.

But there still seems to be some who are having fun at all of this carnage. The Wall Street Journal reports:

" The scrutiny has Citigroup executives second-guessing everything, right down to the fresh-baked cookies offered at a recent corporate retreat in Armonk, N.Y."

Some of these bank executives just don't understand what they've done and how their actions have impacted our lives..

Greenspan: Nationalize the Banks . . . US Auto Next?

“I understand that once in a hundred years this is what you do.” (Read more.)

- Alan Greenspan, former U.S. Federal Reserve Chairman

OK, read that one more time.

Folks, we have entered a new era. The problems US banks created are so big that no amount of throwing money at the problem is helping. And we're talking about a lot of money being thrown, $8.5 trillion and counting.

If we're going to nationalize the banks, then why not US car companies who are threatening to layoff 25,000 American workers? I think the French got it right in setting a zero layoff policy in return for government funds. When are American voters going to wise up?

“Renault and PSA have also committed not to close any production sites for the duration of their loan and to do whatever they can to avoid layoffs.”
- French President Nicolas Sarkozy

U.S. Treasury Says Banks Refuse to Increase Lending

Some of the largest recipients of aid from the government's $700 billion financial-rescue plan didn't increase lending to consumers and businesses in the last three months of 2008, the Treasury Department said.

Read more.

Treasury Department paid $254 billion for $176 billion of assets

Today Elizabeth Warren, chairwoman of the Congressional Oversight Panel examining the Troubled Asset Relief Program, or TARP, testified with some bad news for taxpayers: “Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value."

But that's good news for Wall Street firms. Now we know how they managed to pay out billions in bonuses.

“In the rush to do something, it isn’t always justified or wise simply to do anything."
- Elizabeth Warren commenting on the $76 billion gone missing.