On a lighter note....SNL's lone shining star is their political parody
Palin/Couric
First Debate
Palin/Hillary
First Debate
Palin/Hillary
posted by John Reagan at 7:03 AM
0 comments
Sunday, September 28, 2008
Saturday, September 20, 2008
All the gorry details from the last week of financial peril
A shocking series of events that forever changed the financial markets
Sunday - Trouble Brews
News that Lehman Brothers was on the brink of collapse and scrambling for a buyer first surfaced on Friday. But by Sunday, there were still no suitors for the 158-year-old investment bank, and bankruptcy seemed inevitable. Indeed, just after midnight, in Monday's early hours, the firm officially announced its intention to file for Chapter 11.
Equally as staggering, just hours after reports surfaced that Bank of America broke off talks to buy Lehman, BofA unleashed the news that it would pay $50 billion to scoop up Merrill Lynch, another iconic Wall Street name.
As if that weren't enough, American International Group, the nation's largest insurer, said that it planned to sell some of its troubled assets in order to raise cash and boost investor confidence.
Concerns about the credit crisis grew increasingly dire, even though the government had already pledged to backstop Fannie Mae and Freddie Mac up to $200 billion just one week ago, and months earlier engineered JP Morgan's purchase of Bear Stearns with a $29 billion guarantee.
But it looked like that wouldn't be enough, so Sunday afternoon the Federal Reserve, along with 10 banks, announced a $70 billion pool of funds to aid troubled financial firms. The U.S. central bank also loosened its lending restrictions.
Monday - The Collapse
As traders sold off stocks on the weekend's sour news, rumors began to circulate that AIG was struggling to raise enough capital to fend off a downgrade. As a result, New York Governor David Paterson bent intra-corporation lending rules, allowing the company to loan itself $20 billion from a subsidiary.
In the worst day on Wall Street in seven years, the Dow Jones Industrial Average tanked more than 500 points after Lehman Brothers' epic collapse and the buyout of Merrill Lynch.
By Monday night, AIG was in fact hit with a downgrade, as Fitch bumped the insurance group down a notch. With $1.1 trillion in assets and 74 million clients in 130 countries, investors feared AIG's collapse would severely hurt consumers and further tighten already strangled credit.
Also Monday, news cropped up that the nation's largest savings bank, Washington Mutual, was in search of a white knight.
Tuesday - The Fed Steps In
Stocks saw another sharp drop on Tuesday morning as worries mounted that the financial system was broken beyond repair. Investors poured money into bonds, and the yield on the benchmark 10-year Treasury note fell to a 5-year low.
Next, several rock-solid money market funds began to falter, dipping below the $1 per share benchmark.
Meanwhile the Fed was scheduled to meet on Tuesday afternoon. Wall Street analysts, who just a week ago expected the Fed to hold rates steady, began to anticipate a rate cut. But the central bank chose not to succumb to panic and unanimously decided to hold rates steady at 2%.
Markets cheered the decision, and the Dow jumped 140 points at the close.
After the bell, British bank Barclays agreed to buy up $2 billion worth of Lehman's brokerage assets and real estate holdings, and Morgan Stanley reported better-than-expected earnings.
But the big news came later that night when the government announced that it would stage a staggering $85 billion bailout of AIG, and take an 80% stake in the company.
Wednesday - Another Free Fall
Investors gave an enormous thumbs-down to the AIG news, sending stocks plummeting, while traders piled funds into safer havens. Gold rose $70, a new record. Oil rose $6, its second-largest jump ever. And the yield on the three-month Treasury sank to 0.02%, the lowest level since 1940.
The Dow dropped 450 points by the end of the day, dragged down by bank stocks in a tail-spin. Despite reporting better-than-expected results, Goldman Sachs shares dipped below $100 a share for the first time since 2005. Morgan Stanley took a tumble as well, as rumors circulated that it would merge with troubled bank Wachovia.
Many Wall Street analysts blamed the stock market's collapses on so-called "naked" short sellers, who short stocks without ever buying the security. Subsequently, the U.S. Securities and Exchange Commission stepped in and banned naked short selling.
Thursday - The Bailout
With a crisis on its hands, the Fed convinced five other central banks around the world to invest a total of $180 billion in global financial markets.
Meanwhile, AIG was tossed out of the Dow Jones Industrial Average and replaced with food giant Kraft.
The stock market soared towards the close of the session, with financial stocks rebounding. The Dow added more than 400 points on rumors that an even more extensive federal bailout of the banking industry was in the making. Investors cheered these early reports that the Treasury would create an independent federal agency to take bad loans off of bank balance sheets.
Late Thursday night, Treasury Secretary Henry Paulson met with Congressional leaders to hammer out the details of a large-scale bailout.
Friday - The Confidence Boost
As Wall Street eagerly awaited the details of Secretary Paulson's plan, the SEC took what it called "emergency action" Friday morning and temporarily banned investors from short-selling 799 financial companies.
The Treasury also said it would insure up to $50 billion in struggling money market fund investments at financial companies, guaranteeing that the funds' value will not fall below the standard $1 a share. The Fed also said it would make unlimited funds available to banks to finance purchases of asset-backed commercial paper from money market funds.
In a press conference, Treasury Secretary Paulson outlined the government's plan to put up hundreds of billions of dollars to help stem the crisis, saying "the financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Later, President Bush held a separate press conference, flanked by Paulson, SEC Commissioner Christopher Cox and Fed chief Ben Bernanke, saying it was "essential" that the government step in to save the economy.
Investors cheered the moves, sending stocks soaring throughout the day.
Although the U.S. government had set various bailouts in motion to the tune of roughly $1 trillion, investors finished the week with renewed confidence that Wall Street may be broken - but not beyond repair.
Sunday - Trouble Brews
News that Lehman Brothers was on the brink of collapse and scrambling for a buyer first surfaced on Friday. But by Sunday, there were still no suitors for the 158-year-old investment bank, and bankruptcy seemed inevitable. Indeed, just after midnight, in Monday's early hours, the firm officially announced its intention to file for Chapter 11.
Equally as staggering, just hours after reports surfaced that Bank of America broke off talks to buy Lehman, BofA unleashed the news that it would pay $50 billion to scoop up Merrill Lynch, another iconic Wall Street name.
As if that weren't enough, American International Group, the nation's largest insurer, said that it planned to sell some of its troubled assets in order to raise cash and boost investor confidence.
Concerns about the credit crisis grew increasingly dire, even though the government had already pledged to backstop Fannie Mae and Freddie Mac up to $200 billion just one week ago, and months earlier engineered JP Morgan's purchase of Bear Stearns with a $29 billion guarantee.
But it looked like that wouldn't be enough, so Sunday afternoon the Federal Reserve, along with 10 banks, announced a $70 billion pool of funds to aid troubled financial firms. The U.S. central bank also loosened its lending restrictions.
Monday - The Collapse
As traders sold off stocks on the weekend's sour news, rumors began to circulate that AIG was struggling to raise enough capital to fend off a downgrade. As a result, New York Governor David Paterson bent intra-corporation lending rules, allowing the company to loan itself $20 billion from a subsidiary.
In the worst day on Wall Street in seven years, the Dow Jones Industrial Average tanked more than 500 points after Lehman Brothers' epic collapse and the buyout of Merrill Lynch.
By Monday night, AIG was in fact hit with a downgrade, as Fitch bumped the insurance group down a notch. With $1.1 trillion in assets and 74 million clients in 130 countries, investors feared AIG's collapse would severely hurt consumers and further tighten already strangled credit.
Also Monday, news cropped up that the nation's largest savings bank, Washington Mutual, was in search of a white knight.
Tuesday - The Fed Steps In
Stocks saw another sharp drop on Tuesday morning as worries mounted that the financial system was broken beyond repair. Investors poured money into bonds, and the yield on the benchmark 10-year Treasury note fell to a 5-year low.
Next, several rock-solid money market funds began to falter, dipping below the $1 per share benchmark.
Meanwhile the Fed was scheduled to meet on Tuesday afternoon. Wall Street analysts, who just a week ago expected the Fed to hold rates steady, began to anticipate a rate cut. But the central bank chose not to succumb to panic and unanimously decided to hold rates steady at 2%.
Markets cheered the decision, and the Dow jumped 140 points at the close.
After the bell, British bank Barclays agreed to buy up $2 billion worth of Lehman's brokerage assets and real estate holdings, and Morgan Stanley reported better-than-expected earnings.
But the big news came later that night when the government announced that it would stage a staggering $85 billion bailout of AIG, and take an 80% stake in the company.
Wednesday - Another Free Fall
Investors gave an enormous thumbs-down to the AIG news, sending stocks plummeting, while traders piled funds into safer havens. Gold rose $70, a new record. Oil rose $6, its second-largest jump ever. And the yield on the three-month Treasury sank to 0.02%, the lowest level since 1940.
The Dow dropped 450 points by the end of the day, dragged down by bank stocks in a tail-spin. Despite reporting better-than-expected results, Goldman Sachs shares dipped below $100 a share for the first time since 2005. Morgan Stanley took a tumble as well, as rumors circulated that it would merge with troubled bank Wachovia.
Many Wall Street analysts blamed the stock market's collapses on so-called "naked" short sellers, who short stocks without ever buying the security. Subsequently, the U.S. Securities and Exchange Commission stepped in and banned naked short selling.
Thursday - The Bailout
With a crisis on its hands, the Fed convinced five other central banks around the world to invest a total of $180 billion in global financial markets.
Meanwhile, AIG was tossed out of the Dow Jones Industrial Average and replaced with food giant Kraft.
The stock market soared towards the close of the session, with financial stocks rebounding. The Dow added more than 400 points on rumors that an even more extensive federal bailout of the banking industry was in the making. Investors cheered these early reports that the Treasury would create an independent federal agency to take bad loans off of bank balance sheets.
Late Thursday night, Treasury Secretary Henry Paulson met with Congressional leaders to hammer out the details of a large-scale bailout.
Friday - The Confidence Boost
As Wall Street eagerly awaited the details of Secretary Paulson's plan, the SEC took what it called "emergency action" Friday morning and temporarily banned investors from short-selling 799 financial companies.
The Treasury also said it would insure up to $50 billion in struggling money market fund investments at financial companies, guaranteeing that the funds' value will not fall below the standard $1 a share. The Fed also said it would make unlimited funds available to banks to finance purchases of asset-backed commercial paper from money market funds.
In a press conference, Treasury Secretary Paulson outlined the government's plan to put up hundreds of billions of dollars to help stem the crisis, saying "the financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Later, President Bush held a separate press conference, flanked by Paulson, SEC Commissioner Christopher Cox and Fed chief Ben Bernanke, saying it was "essential" that the government step in to save the economy.
Investors cheered the moves, sending stocks soaring throughout the day.
Although the U.S. government had set various bailouts in motion to the tune of roughly $1 trillion, investors finished the week with renewed confidence that Wall Street may be broken - but not beyond repair.
posted by John Reagan at 11:35 PM
0 comments
Thursday, September 18, 2008
Demand Clean Energy! Ride the bus, it won't kill you, I swear
posted by John Reagan at 2:44 PM
0 comments
Wednesday, September 17, 2008
Light hearted perspective of Wall Street vs. Main Street
Dear Main Street: A Letter of Explanation From Wall Street
by Deal Journal
Thursday, September 18, 2008
provided by WSJ
Dear Main Street,
Are you trying to make sense of what's happening here on Wall Street?
Don't worry -- you aren't alone. A lot of people even here are trying to figure that out. It isn't that complicated, but Wall Street is so full of mumbo jumbo that it's easy to get confused -- or bored.
Say "collateralized mortgage obligation" a dozen times and see if you can stay awake.
Stick with me, though, Main Street and I'll explain what's going on here in New York.
Believe it or not, you've seen this movie before. And I don't mean, "It's A Wonderful Life," though that movie isn't far from the mark.
What's going on is a classic industry shakeout -- not all that different from the shake-out of the American steel or auto industries over the past half century. Just in a much shorter time frame.
In just nine months, we have gone from five big, independent Wall Street brokers to only two -- Morgan Stanley and Goldman Sachs.
The government took over Fannie Mae and Freddie Mac, the country's largest mortgage companies, a bit more than a week ago.
And just Tuesday, we nationalized AIG, the world's largest insurer.
Of course, consolidation inevitably produces winners and losers. Lehman Brothers, the fourth largest US broker, is a loser. It went bankrupt two days ago.
Bank of America is a winner. It bought brokerage Merrill Lynch three days ago and is now our nation's largest financial institution.
That's a lot of change in not a lot of time.
And when there's change, there's uncertainty. Today, for example, we still don't know whether Washington Mutual, the largest U.S. savings & loan, will stay independent.
Uncertainty isn't good for any business, as it destroys confidence. It is especially bad for our financial system, because the system runs entirely on confidence. I lend you money confident that you will pay me back. If I don't have confidence in you, I won't lend.
Which is just like Wall Street today. Our nation's financial institutions don't really trust each other. And for good reason.
In all, about $2 trillion dollars of lower quality mortgages are spread about our financial system. Many of these are now in default which threatens the banks that hold them.
And of course the lack of trust spirals. Less lending by banks to each other, less lending to Main Street's companies and less lending to you. In the end, the money's not there for you to get a mortgage or auto loan.
And you account for 70% of the economy. So when the money isn't there, that's bad for everybody. Without credit, you get a crisis -- a credit crisis.
Of course, we deserve heaps and heaps of blame. Wall Street took the mortgages, sliced and diced them a hundred ways, sold and traded them. We took a nice cut along the way, blissfully oblivious to the risks.
We do have a remarkable talent for cooking up crazy get-rich schemes. Remember the Internet bubble? That was less than a decade ago.
But Main Street, you're also to blame.
Recall the hundreds of billions in bad mortgages that are now killing Wall Street? That was money lent to you, Main Street, for homes and condos many of you could not afford.
And ironically, it is now your money that will be used to repay those dud mortgages because we on Wall Street are running out of money.
The government takeovers of AIG and Fannie and Freddie? That's your money. J.P. Morgan's buyout of broker Bear Stearns last March was also your money,
You might not like it. We on Wall Street may not like it. And even the politicians in Washington may not like it.
But nobody has a choice -- unless you happen to have an odd yearning to live in a barter economy.
So Main Street, our crisis is unfortunately your crisis. We made the mess together and now we pay for it together.
The mergers, government takeovers and bankruptcies that will continue to sweep our financial system are a good sign. It means that we are fixing ourselves. Albeit at gunpoint.
Isn't it strange the way our free market works? The government saves Wall Street -- and you Main Street foot the bill.
My advice? Save this letter and show it next time we all embark on another stupid misadventure.
Sincerely,
Wall Street
by Deal Journal
Thursday, September 18, 2008
provided by WSJ
Dear Main Street,
Are you trying to make sense of what's happening here on Wall Street?
Don't worry -- you aren't alone. A lot of people even here are trying to figure that out. It isn't that complicated, but Wall Street is so full of mumbo jumbo that it's easy to get confused -- or bored.
Say "collateralized mortgage obligation" a dozen times and see if you can stay awake.
Stick with me, though, Main Street and I'll explain what's going on here in New York.
Believe it or not, you've seen this movie before. And I don't mean, "It's A Wonderful Life," though that movie isn't far from the mark.
What's going on is a classic industry shakeout -- not all that different from the shake-out of the American steel or auto industries over the past half century. Just in a much shorter time frame.
In just nine months, we have gone from five big, independent Wall Street brokers to only two -- Morgan Stanley and Goldman Sachs.
The government took over Fannie Mae and Freddie Mac, the country's largest mortgage companies, a bit more than a week ago.
And just Tuesday, we nationalized AIG, the world's largest insurer.
Of course, consolidation inevitably produces winners and losers. Lehman Brothers, the fourth largest US broker, is a loser. It went bankrupt two days ago.
Bank of America is a winner. It bought brokerage Merrill Lynch three days ago and is now our nation's largest financial institution.
That's a lot of change in not a lot of time.
And when there's change, there's uncertainty. Today, for example, we still don't know whether Washington Mutual, the largest U.S. savings & loan, will stay independent.
Uncertainty isn't good for any business, as it destroys confidence. It is especially bad for our financial system, because the system runs entirely on confidence. I lend you money confident that you will pay me back. If I don't have confidence in you, I won't lend.
Which is just like Wall Street today. Our nation's financial institutions don't really trust each other. And for good reason.
In all, about $2 trillion dollars of lower quality mortgages are spread about our financial system. Many of these are now in default which threatens the banks that hold them.
And of course the lack of trust spirals. Less lending by banks to each other, less lending to Main Street's companies and less lending to you. In the end, the money's not there for you to get a mortgage or auto loan.
And you account for 70% of the economy. So when the money isn't there, that's bad for everybody. Without credit, you get a crisis -- a credit crisis.
Of course, we deserve heaps and heaps of blame. Wall Street took the mortgages, sliced and diced them a hundred ways, sold and traded them. We took a nice cut along the way, blissfully oblivious to the risks.
We do have a remarkable talent for cooking up crazy get-rich schemes. Remember the Internet bubble? That was less than a decade ago.
But Main Street, you're also to blame.
Recall the hundreds of billions in bad mortgages that are now killing Wall Street? That was money lent to you, Main Street, for homes and condos many of you could not afford.
And ironically, it is now your money that will be used to repay those dud mortgages because we on Wall Street are running out of money.
The government takeovers of AIG and Fannie and Freddie? That's your money. J.P. Morgan's buyout of broker Bear Stearns last March was also your money,
You might not like it. We on Wall Street may not like it. And even the politicians in Washington may not like it.
But nobody has a choice -- unless you happen to have an odd yearning to live in a barter economy.
So Main Street, our crisis is unfortunately your crisis. We made the mess together and now we pay for it together.
The mergers, government takeovers and bankruptcies that will continue to sweep our financial system are a good sign. It means that we are fixing ourselves. Albeit at gunpoint.
Isn't it strange the way our free market works? The government saves Wall Street -- and you Main Street foot the bill.
My advice? Save this letter and show it next time we all embark on another stupid misadventure.
Sincerely,
Wall Street
posted by John Reagan at 4:33 PM
0 comments
Give me a break!
Free market economy? Bull-oney. This might be my last rant about this topic since I think I've made my point. I just can't believe this Republican administration. Supposed free market advocates, no regulation. Well I call foul! You don't rescue companies from their idiocy after years of non-regulation, corporate greed, and enough tax breaks that might have otherwise paid for the other bullshit war half a world away. I don't care if it sends us into the Great Depression Part 2, I think these asses ought to suffer some consequences for a change and learn a lesson or two about ethical business. How many people in America could use a hand just like our wonderful corporations get in tough times? The American taxpayer needs to draw a line in the sand with their vote. Let your representatives know how you feel about them putting YOU on the hook for all this mess. Even if it works, even it is marginally successful, the government might only be prolonging the inevitable, and we all will have to suffer in the end due to their inept leadership. Where is the integrity? When will our leaders scream enough? I don't think they ever will, because their own personal interests cloud their judgment, and the rest of us are on the crap end of the chute.
---------------------------------------------------------------------
Will AIG plan cost taxpayers money, or just sleep?
By JEANNINE AVERSA, AP Business Writer
American taxpayers awoke Wednesday to learn they may end up owning one of the world's largest insurers. They might now lose some sleep wondering whether the government's $85 billion loan to American International Group was a wise investment.
If the gamble succeeds, the company nurses itself back to health, unhinged financial markets calm down and taxpayers turn a profit.
If it fails, the American public feels the hit — and possibly finds itself rescuing other major financial institutions, swelling the deficit and potentially driving up interest rates on mortgages, student loans and other debt.
Analysts said Wednesday the odds are pretty high that the rescue will be a good investment for taxpayers, with AIG paying off the loan at a relatively high interest rate and the government potentially making money off its nearly 80 percent equity stake in the company.
In 1979, the U.S. guaranteed $1.2 billion worth of loans to the struggling automaker Chrysler. When the company rebounded four years later, the government reaped more than $300 million in profits.
While relatively unknown on Main Street before Wednesday, AIG is a colossus on Wall Street and financial districts around the globe, with operations in more than 130 countries and $1 trillion in assets on its balance sheet.
Besides life, property and other insurance offerings, AIG provides asset-management services and airplane leases. Its myriad businesses are also linked to mutual funds, annuities and other retirement products held by millions of ordinary Americans.
But perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe — many of which were directly or indirectly linked to the value of U.S. mortgages.
"AIG is in this mess because they got leveraged up to their eye balls," said Professor John Coffee of Columbia University Law School.
AIG is required to post capital as collateral to back the securities and derivatives it issues, and those requirements increase if its credit rating is downgraded, as happened on Monday night.
AIG "essentially became the insurer of the financial industry," said Barry Ritholtz, chief executive of FusionIQ, a research firm. "As we've seen, that turned out to be not such a great trade."
The company's staggering reach, combined with the speed with which it faltered, is what forced the government to intervene after private rescue attempts fell apart and pushed the company to the edge of bankruptcy.
"A failure was seen as having catastrophic implications. It met the threshold of too big and too intertwined to fail," said former Federal Reserve economist Brian Sack now at Macroeconomic Advisers.
Over the weekend, the government refused to pony up taxpayer money to rescue troubled investment bank Lehman Brothers. That was seen as drawing a line in the sand after the Fed financially backed JPMorgan's takeover of Bear Stearns and then the Bush administration seized control of mortgage finance companies Fannie Mae and Freddie Mac.
But that turned out to be wrong.
The government agreed to loan up to $85 billion to AIG over two years in exchange for the right to buy 79.9 percent of the company. The hope is that the money will give the company enough time to reorganize and sell assets to repay the loan.
The interest rate the government is charging AIG for the loan is high — 11.5 percent. Because the government can borrow money right now at around 3.4 percent, taxpayers stand to make a handsome profit if all goes well.
The government is first in line to be paid back on the loan, which is backed by the assets of the entire company.
Key to the U.S. being repaid for its loan is whether AIG can sell its assets, how quickly and for what price.
For the company, that might mean putting some of its profitable, noncore assets, such as its aircraft leasing business, on the block. AIG's breakup value could top $150 billion, according to a preliminary estimate from FBR Capital Markets.
"The odds are pretty high that it will end up being a good investment for taxpayers," said Mark Klock, finance professor at George Washington University. "I think that AIG will be able to dispose of assets in an orderly fashion in the next year or so and the government will actually get back the money lent out — and more — in interest," he said.
It will be up to AIG to decide which assets to sell and the timing, which some analysts said should be done quickly because the publicized difficulties at the company could begin to turn customers away. The government does, however, have veto power.
One unit that analysts said will likely be sold is the International Lease Finance Corp., which leases out more than 900 aircraft with asset values topping $44 billion at the end of the second quarter. This division has been a moneymaker for AIG, tallying $873 million in operating income in 2007 and $555 million in the first half of this year, according to securities filings.
Another possibility for sale is AIG's foreign life insurance business, with profits of $1.5 billion in the first half of this year on top of earnings of $6.19 billion in 2007. Gary Ransom, an analyst with Fox-Pitt Kelton, pegged the value of that business at as much as $50 billion.
But Ransom also noted the foreign life insurance business is also probably the hardest to sell because it includes many different divisions operating across many countries.
"I would say everything is on the table," Ransom said. "At this point, the goal isn't to keep AIG as the owner of businesses."
If AIG is keeping some operations, the commercial lines and property and casualty operations are possibilities because they are among the divisions that are most closely associated with the company.
"They would love to sell off the bad stuff, but the only option they have is to sell off the good stuff," said Kent Smetters, an associate professor insurance and risk management at the Wharton School of Business.
The government is betting that two years will give AIG enough time to find buyers for its assets at good prices, avoiding a fire sale if it were forced to unload them quickly. But it is far from a sure thing.
"Two years may seem like a long time, but it doesn't give AIG all that long to resolve its problems. Some issues can't be put back into Pandora's box," said Kathleen Shanley, an analyst at the corporate bond research firm Gimme Credit.
---------------------------------------------------------------------
Will AIG plan cost taxpayers money, or just sleep?
By JEANNINE AVERSA, AP Business Writer
American taxpayers awoke Wednesday to learn they may end up owning one of the world's largest insurers. They might now lose some sleep wondering whether the government's $85 billion loan to American International Group was a wise investment.
If the gamble succeeds, the company nurses itself back to health, unhinged financial markets calm down and taxpayers turn a profit.
If it fails, the American public feels the hit — and possibly finds itself rescuing other major financial institutions, swelling the deficit and potentially driving up interest rates on mortgages, student loans and other debt.
Analysts said Wednesday the odds are pretty high that the rescue will be a good investment for taxpayers, with AIG paying off the loan at a relatively high interest rate and the government potentially making money off its nearly 80 percent equity stake in the company.
In 1979, the U.S. guaranteed $1.2 billion worth of loans to the struggling automaker Chrysler. When the company rebounded four years later, the government reaped more than $300 million in profits.
While relatively unknown on Main Street before Wednesday, AIG is a colossus on Wall Street and financial districts around the globe, with operations in more than 130 countries and $1 trillion in assets on its balance sheet.
Besides life, property and other insurance offerings, AIG provides asset-management services and airplane leases. Its myriad businesses are also linked to mutual funds, annuities and other retirement products held by millions of ordinary Americans.
But perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe — many of which were directly or indirectly linked to the value of U.S. mortgages.
"AIG is in this mess because they got leveraged up to their eye balls," said Professor John Coffee of Columbia University Law School.
AIG is required to post capital as collateral to back the securities and derivatives it issues, and those requirements increase if its credit rating is downgraded, as happened on Monday night.
AIG "essentially became the insurer of the financial industry," said Barry Ritholtz, chief executive of FusionIQ, a research firm. "As we've seen, that turned out to be not such a great trade."
The company's staggering reach, combined with the speed with which it faltered, is what forced the government to intervene after private rescue attempts fell apart and pushed the company to the edge of bankruptcy.
"A failure was seen as having catastrophic implications. It met the threshold of too big and too intertwined to fail," said former Federal Reserve economist Brian Sack now at Macroeconomic Advisers.
Over the weekend, the government refused to pony up taxpayer money to rescue troubled investment bank Lehman Brothers. That was seen as drawing a line in the sand after the Fed financially backed JPMorgan's takeover of Bear Stearns and then the Bush administration seized control of mortgage finance companies Fannie Mae and Freddie Mac.
But that turned out to be wrong.
The government agreed to loan up to $85 billion to AIG over two years in exchange for the right to buy 79.9 percent of the company. The hope is that the money will give the company enough time to reorganize and sell assets to repay the loan.
The interest rate the government is charging AIG for the loan is high — 11.5 percent. Because the government can borrow money right now at around 3.4 percent, taxpayers stand to make a handsome profit if all goes well.
The government is first in line to be paid back on the loan, which is backed by the assets of the entire company.
Key to the U.S. being repaid for its loan is whether AIG can sell its assets, how quickly and for what price.
For the company, that might mean putting some of its profitable, noncore assets, such as its aircraft leasing business, on the block. AIG's breakup value could top $150 billion, according to a preliminary estimate from FBR Capital Markets.
"The odds are pretty high that it will end up being a good investment for taxpayers," said Mark Klock, finance professor at George Washington University. "I think that AIG will be able to dispose of assets in an orderly fashion in the next year or so and the government will actually get back the money lent out — and more — in interest," he said.
It will be up to AIG to decide which assets to sell and the timing, which some analysts said should be done quickly because the publicized difficulties at the company could begin to turn customers away. The government does, however, have veto power.
One unit that analysts said will likely be sold is the International Lease Finance Corp., which leases out more than 900 aircraft with asset values topping $44 billion at the end of the second quarter. This division has been a moneymaker for AIG, tallying $873 million in operating income in 2007 and $555 million in the first half of this year, according to securities filings.
Another possibility for sale is AIG's foreign life insurance business, with profits of $1.5 billion in the first half of this year on top of earnings of $6.19 billion in 2007. Gary Ransom, an analyst with Fox-Pitt Kelton, pegged the value of that business at as much as $50 billion.
But Ransom also noted the foreign life insurance business is also probably the hardest to sell because it includes many different divisions operating across many countries.
"I would say everything is on the table," Ransom said. "At this point, the goal isn't to keep AIG as the owner of businesses."
If AIG is keeping some operations, the commercial lines and property and casualty operations are possibilities because they are among the divisions that are most closely associated with the company.
"They would love to sell off the bad stuff, but the only option they have is to sell off the good stuff," said Kent Smetters, an associate professor insurance and risk management at the Wharton School of Business.
The government is betting that two years will give AIG enough time to find buyers for its assets at good prices, avoiding a fire sale if it were forced to unload them quickly. But it is far from a sure thing.
"Two years may seem like a long time, but it doesn't give AIG all that long to resolve its problems. Some issues can't be put back into Pandora's box," said Kathleen Shanley, an analyst at the corporate bond research firm Gimme Credit.
posted by John Reagan at 4:33 PM
0 comments
Friday, September 12, 2008
I don't elect lying politicians and neither should you
And don't give me any of that "All politicians lie" bull crap. This is just despicable.
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Analysis: McCain's claims skirt facts, test voters
By CHARLES BABINGTON, Associated Press Writer
Fri Sep 12, 12:43 PM ET
The "Straight Talk Express" has detoured into doublespeak.
Republican presidential nominee John McCain, a self-proclaimed tell-it-like-it-is maverick, keeps saying his running mate, Sarah Palin, killed the federally funded Bridge to Nowhere when, in fact, she pulled her support only after the project became a political embarrassment. He said Friday that Palin never asked for money for lawmakers' pet projects as Alaska governor, even though she has sought nearly $200 million in earmarks this year. He says Obama would raise nearly everyone's taxes, when independent groups say 80 percent of families would get tax cuts instead.
Even in a political culture accustomed to truth-stretching, McCain's skirting of facts has stood out this week. It has infuriated and flustered Obama's campaign, and campaign pros are watching to see how much voters disregard news reports noting factual holes in the claims.
McCain's persistence in pushing dubious claims is all the more notable because many political insiders consider him one of the greatest living victims of underhanded campaigning. Locked in a tight race with George W. Bush for the Republican presidential nomination in 2000, McCain was rocked in South Carolina by a whisper campaign claiming he had fathered an illegitimate black child and was mentally unstable.
Shaken by the experience, McCain denounced less-than-truthful campaigning. Vowing to live up to his "straight talk" motto, he apologized for his reluctance to criticize the flying of the Confederate flag at South Carolina's state Capitol in a bid for votes. When the so-called Swift Boat Veterans for Truth attacked the military record of Democrat and fellow Navy officer John Kerry in 2004, McCain called the ads "dishonest and dishonorable."
Now, top aides to McCain include Steve Schmidt, who has close ties to Karl Rove, Bush's premier political adviser in 2000.
Politicians usually modify or drop claims when a string of newspaper and TV news accounts concludes they are untrue or greatly exaggerated. Sen. Hillary Rodham Clinton, for example, conceded she had not come under sniper fire in Bosnia after a batch of debunking articles subjected her to scorn during her primary contest against Obama.
But McCain and his running mate Palin, the Alaska governor, were defiant this week in the face of similar reports. Day after day she said she had told Congress "no thanks" to the so-called Bridge to Nowhere, a rural Alaska project that was abandoned when critics challenged its costs and usefulness. For nearly a week, major news outlets had documented that Palin supported the bridge when running for governor in 2006, noting that she turned against it only after it became an object of ridicule in Alaska and a symbol of Congress's out-of-control earmarking.
The McCain-Palin campaign made at least three other aggressive claims this week that omitted key details or made dubious assumptions to criticize Obama. It equated lawmakers' requests for money for special projects with corruption, even though Palin has sought millions of dollars in such "earmarks" this year.
It produced an Internet ad implying that Obama had called Palin a pig when he used a familiar phrase, which McCain also has used, about putting "lipstick on a pig" to try to make a bad situation look better. McCain supporters said Obama was slyly alluding to Palin's description of herself as a pit bull in lipstick, but there was nothing in his remarks to support the claim. Obama accused the GOP campaign of "lies and phony outrage."
The lipstick wars were fully engaged when the McCain campaign produced another ad saying Obama favored "comprehensive sex education" for kindergartners. The charge triggered the sort of headlines becoming increasingly common in major newspapers and wire services monitoring the factual content of political ads and speeches.
"Ad on Sex Education Distorts Obama Policy," was the headline on a New York Times article Thursday. "McCain's 'Education' Spot is Dishonest, Deceptive," The Washington Post's "Fact Checker" article said.
Major news outlets have written such fact-checking articles for years. "But in the last two election cycles, the very notion that the facts matter seems to be under assault," said Michael X. Delli Carpini, an authority on political ads at the University of Pennsylvania's Annenberg School for Communication. "Candidates and their consultants seem to have learned that as long as you don't back down from your charges or claims, they will stick in the minds of voters regardless of their accuracy or at a minimum, what the truth is will remain murky, a matter of opinion rather than fact."
With Palin giving McCain's campaign a boost in the polls, Obama supporters are nervously watching to see what impact the latest claims will have. Surveys already show that most people believe Obama would raise their taxes — a regular McCain claim — even though independent groups such as the Tax Policy Center concluded that four out of five U.S. households would receive tax cuts under his proposals.
McCain spokesman Tucker Bounds defended the campaign's statements. "We include factual backup in every one of our TV spots," he said Thursday.
Obama, of course, has made exaggerated or questionable assertions as well. Earlier this year, for instance, he repeated a claim that more black men are in prison than in college, after news accounts refuted it. He also used a McCain remark about having troops in Iraq for "100 years" to exaggerate McCain's proposals for being fully engaged militarily in that country.
In general, however, Obama has been quicker to react to news accounts challenging his accuracy. Faced with skeptical reports this year, for instance, he stopped saying he "worked his way" through college, and instead credited hard work and scholarships.
Dan Schnur, a former McCain aide who now teaches politics at the University of Southern California, said McCain and Obama learned they must stretch the truth "when staying on the high road didn't work out to their benefit."
McCain, he said, "tried it his way. He had a poverty tour and nobody covered it. He had a national service tour, and everybody made fun of it. He proposed these joint town halls" with Obama, "and nothing come of it. Through the spring and early summer, that approach didn't work. You can't blame him for taking a step back and reassessing."
--------------------------------------------------------------------
Analysis: McCain's claims skirt facts, test voters
By CHARLES BABINGTON, Associated Press Writer
Fri Sep 12, 12:43 PM ET
The "Straight Talk Express" has detoured into doublespeak.
Republican presidential nominee John McCain, a self-proclaimed tell-it-like-it-is maverick, keeps saying his running mate, Sarah Palin, killed the federally funded Bridge to Nowhere when, in fact, she pulled her support only after the project became a political embarrassment. He said Friday that Palin never asked for money for lawmakers' pet projects as Alaska governor, even though she has sought nearly $200 million in earmarks this year. He says Obama would raise nearly everyone's taxes, when independent groups say 80 percent of families would get tax cuts instead.
Even in a political culture accustomed to truth-stretching, McCain's skirting of facts has stood out this week. It has infuriated and flustered Obama's campaign, and campaign pros are watching to see how much voters disregard news reports noting factual holes in the claims.
McCain's persistence in pushing dubious claims is all the more notable because many political insiders consider him one of the greatest living victims of underhanded campaigning. Locked in a tight race with George W. Bush for the Republican presidential nomination in 2000, McCain was rocked in South Carolina by a whisper campaign claiming he had fathered an illegitimate black child and was mentally unstable.
Shaken by the experience, McCain denounced less-than-truthful campaigning. Vowing to live up to his "straight talk" motto, he apologized for his reluctance to criticize the flying of the Confederate flag at South Carolina's state Capitol in a bid for votes. When the so-called Swift Boat Veterans for Truth attacked the military record of Democrat and fellow Navy officer John Kerry in 2004, McCain called the ads "dishonest and dishonorable."
Now, top aides to McCain include Steve Schmidt, who has close ties to Karl Rove, Bush's premier political adviser in 2000.
Politicians usually modify or drop claims when a string of newspaper and TV news accounts concludes they are untrue or greatly exaggerated. Sen. Hillary Rodham Clinton, for example, conceded she had not come under sniper fire in Bosnia after a batch of debunking articles subjected her to scorn during her primary contest against Obama.
But McCain and his running mate Palin, the Alaska governor, were defiant this week in the face of similar reports. Day after day she said she had told Congress "no thanks" to the so-called Bridge to Nowhere, a rural Alaska project that was abandoned when critics challenged its costs and usefulness. For nearly a week, major news outlets had documented that Palin supported the bridge when running for governor in 2006, noting that she turned against it only after it became an object of ridicule in Alaska and a symbol of Congress's out-of-control earmarking.
The McCain-Palin campaign made at least three other aggressive claims this week that omitted key details or made dubious assumptions to criticize Obama. It equated lawmakers' requests for money for special projects with corruption, even though Palin has sought millions of dollars in such "earmarks" this year.
It produced an Internet ad implying that Obama had called Palin a pig when he used a familiar phrase, which McCain also has used, about putting "lipstick on a pig" to try to make a bad situation look better. McCain supporters said Obama was slyly alluding to Palin's description of herself as a pit bull in lipstick, but there was nothing in his remarks to support the claim. Obama accused the GOP campaign of "lies and phony outrage."
The lipstick wars were fully engaged when the McCain campaign produced another ad saying Obama favored "comprehensive sex education" for kindergartners. The charge triggered the sort of headlines becoming increasingly common in major newspapers and wire services monitoring the factual content of political ads and speeches.
"Ad on Sex Education Distorts Obama Policy," was the headline on a New York Times article Thursday. "McCain's 'Education' Spot is Dishonest, Deceptive," The Washington Post's "Fact Checker" article said.
Major news outlets have written such fact-checking articles for years. "But in the last two election cycles, the very notion that the facts matter seems to be under assault," said Michael X. Delli Carpini, an authority on political ads at the University of Pennsylvania's Annenberg School for Communication. "Candidates and their consultants seem to have learned that as long as you don't back down from your charges or claims, they will stick in the minds of voters regardless of their accuracy or at a minimum, what the truth is will remain murky, a matter of opinion rather than fact."
With Palin giving McCain's campaign a boost in the polls, Obama supporters are nervously watching to see what impact the latest claims will have. Surveys already show that most people believe Obama would raise their taxes — a regular McCain claim — even though independent groups such as the Tax Policy Center concluded that four out of five U.S. households would receive tax cuts under his proposals.
McCain spokesman Tucker Bounds defended the campaign's statements. "We include factual backup in every one of our TV spots," he said Thursday.
Obama, of course, has made exaggerated or questionable assertions as well. Earlier this year, for instance, he repeated a claim that more black men are in prison than in college, after news accounts refuted it. He also used a McCain remark about having troops in Iraq for "100 years" to exaggerate McCain's proposals for being fully engaged militarily in that country.
In general, however, Obama has been quicker to react to news accounts challenging his accuracy. Faced with skeptical reports this year, for instance, he stopped saying he "worked his way" through college, and instead credited hard work and scholarships.
Dan Schnur, a former McCain aide who now teaches politics at the University of Southern California, said McCain and Obama learned they must stretch the truth "when staying on the high road didn't work out to their benefit."
McCain, he said, "tried it his way. He had a poverty tour and nobody covered it. He had a national service tour, and everybody made fun of it. He proposed these joint town halls" with Obama, "and nothing come of it. Through the spring and early summer, that approach didn't work. You can't blame him for taking a step back and reassessing."
posted by John Reagan at 10:14 PM
0 comments
Monday, September 08, 2008
I guess free market economies don't work, unless you're a US taxpayer to shoulder the burden
Fannie and Freddie: why the takeover
By Mark Trumbull
Mon Sep 8, 4:00 AM ET
By taking control of Fannie Mae and Freddie Mac, the Bush administration has launched a high-stakes bid to bolster the housing market and the US economy – seeking to minimize costs to taxpayers even as it puts them on the hook.
Treasury Secretary Henry Paulson on Sunday announced a federal conservatorship for the two mortgage giants, which play a key role in the housing market, now rocked by falling home values and high rates of foreclosure.
The action begins a formal Treasury role that, just a few weeks ago, Secretary Paulson said he expected to avoid. Fannie and Freddie, as private companies created by government mandate, have long been seen as implicitly backed by the Treasury. Now that backstop is as explicit as it can be.
Why is it coming to this?
The short answer is that legislation Congress passed in July failed to reassure financial markets enough to position the two companies to raise needed capital on their own. That law gave the Treasury new authority to funnel credit or capital into Fannie and Freddie, if needed – at taxpayer expense.
Meanwhile, foreclosures continue to pummel the mortgage firms with big losses.
"It's going to get worse if they don't act," says Peter Morici, an economist at the University of Maryland. "We want this dealt with now."
The two companies will now operate, as they open their doors Monday, under the authority of the Federal Housing Finance Agency (FHFA), a new agency that Congress created this summer to regulate Fannie and Freddie.
Paulson announced the conservatorship along with James Lockhart, the FHFA's director. He outlined three key goals: ensuring market stability, continuing the availability of mortgages, and holding taxpayer costs to a minimum.
Those goals, he said, could not have been achieved by simply pumping federal money into the two companies in their present form.
An impetus for Sunday's move is what Paulson described as ambiguity in the identity of the two so-called government-sponsored enterprises (GSEs). For years they have operated with both a public mission – to foster broad and stable mortgage markets – and a private one of providing profits for shareholders.
The goal of maximizing shareholders' returns, Paulson said, has "encouraged risk-taking."
Given the plunge in share value at the GSEs during the past year, the worry was that their managers might have been tempted to take on more risk in an effort to recover.
"The shareholders have nothing to lose and everything to gain" if Fannie and Freddie's CEOs were to take new risks now, because the current share price is so low, says Morris Davis, a University of Wisconsin economist who focuses on real estate issues.
In the 1980s, he says, the savings and loan industry got into trouble because regulators and Congress allowed such a pattern to play out.
Fannie Mae and Freddie Mac have a central role in the housing market, with their odd names representing shorthand for longer titles including the words "federal" and "mortgage." The duo fuels home lending by purchasing loans from other lenders, or by providing guarantees to back the share of mortgage loans that meet their standards. The guarantees give investors confidence to buy packages of mortgage debt, known as mortgage-backed securities.
Those actions can keep loans flowing even when, as now, many traditional banks are reluctant or unable to make home loans and hold them on their own books. Currently, most mortgages in the US flow through Fannie or Freddie, and nearly half of all outstanding mortgage debt is linked to them in some way.
Their role in the housing market has long been controversial, but in the current weak economy their outright failure is unthinkable for most policymakers.
The conservatorship represents a temporary step, akin to a bankruptcy from which the GSEs will ultimately emerge. Next year, Paulson said, the next US president and Congress will have to determine the firms' longer-term structure and size. Ultimately, Paulson said, "government support needs to be either explicit or nonexistent."
For now, however, the focus is on improving the economic and credit climate.
Mr. Lockhart and Paulson detailed a multipronged plan for Fannie and Freddie in the near term:
•The firms will continue to make loans "without limits," at a time when mainstream banks have tightened lending standards or raised interest rates.
•They will stop paying shareholder dividends, conserving $2 billion a year.
•They will have access to a line of credit from the Treasury, if needed.
•The Treasury will become an investor in preferred shares and warrants of the GSEs, with a position senior to current investors. The size and timing of investments will be as needed to maintain a positive net worth for the enterprises.
•The Treasury will be a buyer of new GSE-issued mortgage-backed securities, a move designed to help keep mortgage rates low.
•The firms' chief executives, Daniel Mudd and Richard Syron, will be replaced, but will stay for a transition period. Herb Allison, a former Merrill Lynch executive, will head Fannie Mae, and former banker David Moffett will head Freddie Mac. The incoming CEOs, as public employees, will have much lower salaries.
•Political lobbying efforts, long a source of GSE clout on Capitol Hill, will cease. Charitable giving will be reviewed.
Paulson said he expects the purchase of GSE debt would come at no cost, and possibly at a profit, to taxpayers. But the overall taxpayer cost of the intervention would depend on business conditions going forward, he said Sunday.
"I have long said the housing correction poses the biggest risk to our economy," Paulson said.
By Mark Trumbull
Mon Sep 8, 4:00 AM ET
By taking control of Fannie Mae and Freddie Mac, the Bush administration has launched a high-stakes bid to bolster the housing market and the US economy – seeking to minimize costs to taxpayers even as it puts them on the hook.
Treasury Secretary Henry Paulson on Sunday announced a federal conservatorship for the two mortgage giants, which play a key role in the housing market, now rocked by falling home values and high rates of foreclosure.
The action begins a formal Treasury role that, just a few weeks ago, Secretary Paulson said he expected to avoid. Fannie and Freddie, as private companies created by government mandate, have long been seen as implicitly backed by the Treasury. Now that backstop is as explicit as it can be.
Why is it coming to this?
The short answer is that legislation Congress passed in July failed to reassure financial markets enough to position the two companies to raise needed capital on their own. That law gave the Treasury new authority to funnel credit or capital into Fannie and Freddie, if needed – at taxpayer expense.
Meanwhile, foreclosures continue to pummel the mortgage firms with big losses.
"It's going to get worse if they don't act," says Peter Morici, an economist at the University of Maryland. "We want this dealt with now."
The two companies will now operate, as they open their doors Monday, under the authority of the Federal Housing Finance Agency (FHFA), a new agency that Congress created this summer to regulate Fannie and Freddie.
Paulson announced the conservatorship along with James Lockhart, the FHFA's director. He outlined three key goals: ensuring market stability, continuing the availability of mortgages, and holding taxpayer costs to a minimum.
Those goals, he said, could not have been achieved by simply pumping federal money into the two companies in their present form.
An impetus for Sunday's move is what Paulson described as ambiguity in the identity of the two so-called government-sponsored enterprises (GSEs). For years they have operated with both a public mission – to foster broad and stable mortgage markets – and a private one of providing profits for shareholders.
The goal of maximizing shareholders' returns, Paulson said, has "encouraged risk-taking."
Given the plunge in share value at the GSEs during the past year, the worry was that their managers might have been tempted to take on more risk in an effort to recover.
"The shareholders have nothing to lose and everything to gain" if Fannie and Freddie's CEOs were to take new risks now, because the current share price is so low, says Morris Davis, a University of Wisconsin economist who focuses on real estate issues.
In the 1980s, he says, the savings and loan industry got into trouble because regulators and Congress allowed such a pattern to play out.
Fannie Mae and Freddie Mac have a central role in the housing market, with their odd names representing shorthand for longer titles including the words "federal" and "mortgage." The duo fuels home lending by purchasing loans from other lenders, or by providing guarantees to back the share of mortgage loans that meet their standards. The guarantees give investors confidence to buy packages of mortgage debt, known as mortgage-backed securities.
Those actions can keep loans flowing even when, as now, many traditional banks are reluctant or unable to make home loans and hold them on their own books. Currently, most mortgages in the US flow through Fannie or Freddie, and nearly half of all outstanding mortgage debt is linked to them in some way.
Their role in the housing market has long been controversial, but in the current weak economy their outright failure is unthinkable for most policymakers.
The conservatorship represents a temporary step, akin to a bankruptcy from which the GSEs will ultimately emerge. Next year, Paulson said, the next US president and Congress will have to determine the firms' longer-term structure and size. Ultimately, Paulson said, "government support needs to be either explicit or nonexistent."
For now, however, the focus is on improving the economic and credit climate.
Mr. Lockhart and Paulson detailed a multipronged plan for Fannie and Freddie in the near term:
•The firms will continue to make loans "without limits," at a time when mainstream banks have tightened lending standards or raised interest rates.
•They will stop paying shareholder dividends, conserving $2 billion a year.
•They will have access to a line of credit from the Treasury, if needed.
•The Treasury will become an investor in preferred shares and warrants of the GSEs, with a position senior to current investors. The size and timing of investments will be as needed to maintain a positive net worth for the enterprises.
•The Treasury will be a buyer of new GSE-issued mortgage-backed securities, a move designed to help keep mortgage rates low.
•The firms' chief executives, Daniel Mudd and Richard Syron, will be replaced, but will stay for a transition period. Herb Allison, a former Merrill Lynch executive, will head Fannie Mae, and former banker David Moffett will head Freddie Mac. The incoming CEOs, as public employees, will have much lower salaries.
•Political lobbying efforts, long a source of GSE clout on Capitol Hill, will cease. Charitable giving will be reviewed.
Paulson said he expects the purchase of GSE debt would come at no cost, and possibly at a profit, to taxpayers. But the overall taxpayer cost of the intervention would depend on business conditions going forward, he said Sunday.
"I have long said the housing correction poses the biggest risk to our economy," Paulson said.
posted by John Reagan at 11:46 AM
0 comments
Sunday, September 07, 2008
More bulljive about how crooked companies get bailed out while us peons pay for it
Fannie, Freddie blind to the bubble
Saturday September 6, 8:06 pm ET
By Alan Zibel, AP Business Writer
Mortgage finance companies Fannie Mae, Freddie Mac failed to anticipate scale of housing bust
WASHINGTON (AP) -- Mortgage giants Fannie Mae and Freddie Mac -- despite their robust cadre of economists and mortgage experts -- failed to heed warnings that the most dramatic housing bubble in U.S. history would burst.
The companies -- particularly Freddie Mac -- didn't raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices.
Federal regulators after scouring the companies' books with aid from investment bank Morgan Stanley -- believe the companies pushed accounting conventions when calculating their financial cushion against losses, a person briefed on the matter said Saturday. The person declined to be named because details of the government's actions were not yet public.
As their losses started rising at alarming rates over the past year, investors gradually lost confidence, forcing the government's historic takeover of the two companies, which could be announced as soon as Sunday and was expected to include the ouster of top executives.
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, said in an interview Saturday that the companies' financial picture was better than investors assumed, but "it just plainly became clear that elements of the market wouldn't accept that."
Investors have had reasons to feel jittery.
On Friday, the Mortgage Bankers Association said that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
Also on Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. In July, regulators seized IndyMac, which had $19 billion in deposits. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns Cos. by JPMorgan Chase & Co.
Treasury Secretary Henry Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.
Nevertheless, the Bank of China said in late August that it cut back its portfolio of the Fannie and Freddie's debt by about one quarter since the end of June.
Washington-based Fannie and McLean, Va.-based Freddie are the engines behind a complex process of buying, bundling and selling mortgages that remains a mystery to millions of Americans whose home loans pass through this system. Together Fannie and Freddie hold or guarantee about $5 trillion in mortgage debt -- about half of the nation's total.
They traditionally backed the safest loans, 30-year fixed rate mortgages that required a down payment of at least 20 percent. But in recent years, they lowered their standards dramatically, matching a decline fueled by Wall Street banks that backed the now-defunct subprime lending industry.
Armando Falcon, who clashed frequently with the companies during his six years as Fannie and Freddie's chief government regulator, said in an interview last month that the companies' woes are similar to the downfall of other major corporate titans like Enron and WorldCom earlier this decade. "It boils down to a whole lot of greed and arrogance," he said.
The companies, he said, took advantage of the perception on Wall Street that the government would stand behind them in a time of crisis, as is now the case.
With that implied government backing, the companies generated large profits for years, but ultimately took on too much risk, causing investors to lose faith in their ability to navigate the historic housing bust.
Economists who long warned the housing boom could not last are baffled that the companies were not better prepared for what they saw as an inevitable downturn.
"How could you look at an enormous rise in prices and not think there was a potential for them to fall?" said Christopher Thornberg, a principal with Beacon Economics in Los Angeles.
Another longtime proponent of the housing bubble concept is Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. He recalls several occasions when he debated top Fannie and Freddie economists, who dismissed the idea that U.S. home prices could decline.
"Even if they didn't want to listen to me, they should have at least thought this could be a possibility," he said.
Plummeting home prices are the key to Fannie and Freddie's troubles. As prices fall -- as much as 25 percent over the past 12 months in Las Vegas, Miami, Phoenix and Los Angeles -- the value of mortgages the companies hold on their books drops. That means Fannie and Freddie are recovering far less money through foreclosure sales.
While a government intervention had been expected for weeks, its timing came as a surprise.
The companies had been able to raise money through regular debt sales, but analysts say the Treasury Department likely grew concerned that foreign investors were pulling back.
"The main goal is to inject confidence into the foreign debt markets to ensure that the flow of capital to the mortgage market continues," said Howard Glaser, a Washington-based mortgage industry consultant who has worked for both Fannie and Freddie.
Freddie Mac in particular has had investors and analysts fearful for months. The company, led by CEO Richard Syron, promised to raise $5.5 billion earlier this year to shore up its finances, but failed to do so, and its sinking share price has since made it all but impossible for the company to raise that money from private investors.
Fannie Mae executives are likely to have resisted the proposed takeover because the company's financial condition isn't as dire as its sibling company, said Bert Ely, an Alexandria, Va.-based banking industry consultant.
But the government would still have to take over both companies, he said, to allow them to borrow money at the same rates.
"In order to level the playing field between the two companies, you've got to take over both of them," said Ely, a longtime critic of the two companies.
Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
While Fannie and Freddie generally had higher standards for lenders than the subprime mortgage companies that started going belly-up at the end of 2006, the duo lowered their standards during the housing boom and bought securities linked to riskier loans.
Even as the subprime mortgage market collapsed, Fannie and Freddie kept backing risky so-called Alt-A loans, which were made to borrowers with solid credit but little proof of their incomes, or small or no down payments.
For Fannie and Freddie, these Alt-A loans made up roughly 10 percent of their portfolios but accounted for more than half of their credit losses in the second quarter. The souring loans were concentrated in California, Florida, Nevada and Arizona, where speculation was rampant, prices soared and homeowners stretched to the financial limit to afford a home.
Saturday September 6, 8:06 pm ET
By Alan Zibel, AP Business Writer
Mortgage finance companies Fannie Mae, Freddie Mac failed to anticipate scale of housing bust
WASHINGTON (AP) -- Mortgage giants Fannie Mae and Freddie Mac -- despite their robust cadre of economists and mortgage experts -- failed to heed warnings that the most dramatic housing bubble in U.S. history would burst.
The companies -- particularly Freddie Mac -- didn't raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices.
Federal regulators after scouring the companies' books with aid from investment bank Morgan Stanley -- believe the companies pushed accounting conventions when calculating their financial cushion against losses, a person briefed on the matter said Saturday. The person declined to be named because details of the government's actions were not yet public.
As their losses started rising at alarming rates over the past year, investors gradually lost confidence, forcing the government's historic takeover of the two companies, which could be announced as soon as Sunday and was expected to include the ouster of top executives.
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, said in an interview Saturday that the companies' financial picture was better than investors assumed, but "it just plainly became clear that elements of the market wouldn't accept that."
Investors have had reasons to feel jittery.
On Friday, the Mortgage Bankers Association said that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
Also on Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. In July, regulators seized IndyMac, which had $19 billion in deposits. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns Cos. by JPMorgan Chase & Co.
Treasury Secretary Henry Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.
Nevertheless, the Bank of China said in late August that it cut back its portfolio of the Fannie and Freddie's debt by about one quarter since the end of June.
Washington-based Fannie and McLean, Va.-based Freddie are the engines behind a complex process of buying, bundling and selling mortgages that remains a mystery to millions of Americans whose home loans pass through this system. Together Fannie and Freddie hold or guarantee about $5 trillion in mortgage debt -- about half of the nation's total.
They traditionally backed the safest loans, 30-year fixed rate mortgages that required a down payment of at least 20 percent. But in recent years, they lowered their standards dramatically, matching a decline fueled by Wall Street banks that backed the now-defunct subprime lending industry.
Armando Falcon, who clashed frequently with the companies during his six years as Fannie and Freddie's chief government regulator, said in an interview last month that the companies' woes are similar to the downfall of other major corporate titans like Enron and WorldCom earlier this decade. "It boils down to a whole lot of greed and arrogance," he said.
The companies, he said, took advantage of the perception on Wall Street that the government would stand behind them in a time of crisis, as is now the case.
With that implied government backing, the companies generated large profits for years, but ultimately took on too much risk, causing investors to lose faith in their ability to navigate the historic housing bust.
Economists who long warned the housing boom could not last are baffled that the companies were not better prepared for what they saw as an inevitable downturn.
"How could you look at an enormous rise in prices and not think there was a potential for them to fall?" said Christopher Thornberg, a principal with Beacon Economics in Los Angeles.
Another longtime proponent of the housing bubble concept is Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. He recalls several occasions when he debated top Fannie and Freddie economists, who dismissed the idea that U.S. home prices could decline.
"Even if they didn't want to listen to me, they should have at least thought this could be a possibility," he said.
Plummeting home prices are the key to Fannie and Freddie's troubles. As prices fall -- as much as 25 percent over the past 12 months in Las Vegas, Miami, Phoenix and Los Angeles -- the value of mortgages the companies hold on their books drops. That means Fannie and Freddie are recovering far less money through foreclosure sales.
While a government intervention had been expected for weeks, its timing came as a surprise.
The companies had been able to raise money through regular debt sales, but analysts say the Treasury Department likely grew concerned that foreign investors were pulling back.
"The main goal is to inject confidence into the foreign debt markets to ensure that the flow of capital to the mortgage market continues," said Howard Glaser, a Washington-based mortgage industry consultant who has worked for both Fannie and Freddie.
Freddie Mac in particular has had investors and analysts fearful for months. The company, led by CEO Richard Syron, promised to raise $5.5 billion earlier this year to shore up its finances, but failed to do so, and its sinking share price has since made it all but impossible for the company to raise that money from private investors.
Fannie Mae executives are likely to have resisted the proposed takeover because the company's financial condition isn't as dire as its sibling company, said Bert Ely, an Alexandria, Va.-based banking industry consultant.
But the government would still have to take over both companies, he said, to allow them to borrow money at the same rates.
"In order to level the playing field between the two companies, you've got to take over both of them," said Ely, a longtime critic of the two companies.
Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
While Fannie and Freddie generally had higher standards for lenders than the subprime mortgage companies that started going belly-up at the end of 2006, the duo lowered their standards during the housing boom and bought securities linked to riskier loans.
Even as the subprime mortgage market collapsed, Fannie and Freddie kept backing risky so-called Alt-A loans, which were made to borrowers with solid credit but little proof of their incomes, or small or no down payments.
For Fannie and Freddie, these Alt-A loans made up roughly 10 percent of their portfolios but accounted for more than half of their credit losses in the second quarter. The souring loans were concentrated in California, Florida, Nevada and Arizona, where speculation was rampant, prices soared and homeowners stretched to the financial limit to afford a home.
posted by John Reagan at 1:50 PM
0 comments
Thursday, September 04, 2008
More of my Democrat-leaning political banter, probably why nobody reads the blog
Attacks, praise stretch truth at GOP convention
By JIM KUHNHENN, Associated Press Writer
Wed Sep 3, 11:48 PM ET
Alaska Gov. Sarah Palin and her Republican supporters held back little Wednesday as they issued dismissive attacks on Barack Obama and flattering praise on her credentials to be vice president. In some cases, the reproach and the praise stretched the truth.
Some examples:
PALIN: "I have protected the taxpayers by vetoing wasteful spending ... and championed reform to end the abuses of earmark spending by Congress. I told the Congress 'thanks but no thanks' for that Bridge to Nowhere."
THE FACTS: As mayor of Wasilla, Palin hired a lobbyist and traveled to Washington annually to support earmarks for the town totaling $27 million. In her two years as governor, Alaska has requested nearly $750 million in special federal spending, by far the largest per-capita request in the nation. While Palin notes she rejected plans to build a $398 million bridge from Ketchikan to an island with 50 residents and an airport, that opposition came only after the plan was ridiculed nationally as a "bridge to nowhere."
PALIN: "There is much to like and admire about our opponent. But listening to him speak, it's easy to forget that this is a man who has authored two memoirs but not a single major law or reform — not even in the state senate."
THE FACTS: Compared to McCain and his two decades in the Senate, Obama does have a more meager record. But he has worked with Republicans to pass legislation that expanded efforts to intercept illegal shipments of weapons of mass destruction and to help destroy conventional weapons stockpiles. The legislation became law last year. To demean that accomplishment would be to also demean the work of Republican Sen. Richard Lugar of Indiana, a respected foreign policy voice in the Senate. In Illinois, he was the leader on two big, contentious measures in Illinois: studying racial profiling by police and requiring recordings of interrogations in potential death penalty cases. He also successfully co-sponsored major ethics reform legislation.
PALIN: "The Democratic nominee for president supports plans to raise income taxes, raise payroll taxes, raise investment income taxes, raise the death tax, raise business taxes, and increase the tax burden on the American people by hundreds of billions of dollars."
THE FACTS: The Tax Policy Center, a think tank run jointly by the Brookings Institution and the Urban Institute, concluded that Obama's plan would increase after-tax income for middle-income taxpayers by about 5 percent by 2012, or nearly $2,200 annually. McCain's plan, which cuts taxes across all income levels, would raise after tax-income for middle-income taxpayers by 3 percent, the center concluded.
Obama would provide $80 billion in tax breaks, mainly for poor workers and the elderly, including tripling the Earned Income Tax Credit for minimum-wage workers and higher credits for larger families.
He also would raise income taxes, capital gains and dividend taxes on the wealthiest. He would raise payroll taxes on taxpayers with incomes above $250,000, and he would raise corporate taxes. Small businesses that make more than $250,000 a year would see taxes rise.
MCCAIN: "She's been governor of our largest state, in charge of 20 percent of America's energy supply ... She's responsible for 20 percent of the nation's energy supply. I'm entertained by the comparison and I hope we can keep making that comparison that running a political campaign is somehow comparable to being the executive of the largest state in America," he said in an interview with ABC News' Charles Gibson.
THE FACTS: McCain's phrasing exaggerates both claims. Palin is governor of a state that ranks second nationally in crude oil production, but she's no more "responsible" for that resource than President Bush was when he was governor of Texas, another oil-producing state. In fact, her primary power is the ability to tax oil, which she did in concert with the Alaska Legislature. And where Alaska is the largest state in America, McCain could as easily have called it the 47th largest state — by population.
MCCAIN: "She's the commander of the Alaska National Guard. ... She has been in charge, and she has had national security as one of her primary responsibilities," he said on ABC.
THE FACTS: While governors are in charge of their state guard units, that authority ends whenever those units are called to actual military service. When guard units are deployed to Iraq or Afghanistan, for example, they assume those duties under "federal status," which means they report to the Defense Department, not their governors. Alaska's national guard units have a total of about 4,200 personnel, among the smallest of state guard organizations.
FORMER ARKANSAS GOV. MIKE HUCKABEE: Palin "got more votes running for mayor of Wasilla, Alaska than Joe Biden got running for president of the United States."
THE FACTS: A whopper. Palin got 616 votes in the 1996 mayor's election, and got 909 in her 1999 re-election race, for a total of 1,525. Biden dropped out of the race after the Iowa caucuses, but he still got 76,165 votes in 23 states and the District of Columbia where he was on the ballot during the 2008 presidential primaries.
FORMER MASSACHUSETTS GOV. MITT ROMNEY: "We need change, all right — change from a liberal Washington to a conservative Washington! We have a prescription for every American who wants change in Washington — throw out the big-government liberals, and elect John McCain and Sarah Palin."
THE FACTS: A Back-to-the-Future moment. George W. Bush, a conservative Republican, has been president for nearly eight years. And until last year, Republicans controlled Congress. Only since January 2007 have Democrats have been in charge of the House and Senate.
By JIM KUHNHENN, Associated Press Writer
Wed Sep 3, 11:48 PM ET
Alaska Gov. Sarah Palin and her Republican supporters held back little Wednesday as they issued dismissive attacks on Barack Obama and flattering praise on her credentials to be vice president. In some cases, the reproach and the praise stretched the truth.
Some examples:
PALIN: "I have protected the taxpayers by vetoing wasteful spending ... and championed reform to end the abuses of earmark spending by Congress. I told the Congress 'thanks but no thanks' for that Bridge to Nowhere."
THE FACTS: As mayor of Wasilla, Palin hired a lobbyist and traveled to Washington annually to support earmarks for the town totaling $27 million. In her two years as governor, Alaska has requested nearly $750 million in special federal spending, by far the largest per-capita request in the nation. While Palin notes she rejected plans to build a $398 million bridge from Ketchikan to an island with 50 residents and an airport, that opposition came only after the plan was ridiculed nationally as a "bridge to nowhere."
PALIN: "There is much to like and admire about our opponent. But listening to him speak, it's easy to forget that this is a man who has authored two memoirs but not a single major law or reform — not even in the state senate."
THE FACTS: Compared to McCain and his two decades in the Senate, Obama does have a more meager record. But he has worked with Republicans to pass legislation that expanded efforts to intercept illegal shipments of weapons of mass destruction and to help destroy conventional weapons stockpiles. The legislation became law last year. To demean that accomplishment would be to also demean the work of Republican Sen. Richard Lugar of Indiana, a respected foreign policy voice in the Senate. In Illinois, he was the leader on two big, contentious measures in Illinois: studying racial profiling by police and requiring recordings of interrogations in potential death penalty cases. He also successfully co-sponsored major ethics reform legislation.
PALIN: "The Democratic nominee for president supports plans to raise income taxes, raise payroll taxes, raise investment income taxes, raise the death tax, raise business taxes, and increase the tax burden on the American people by hundreds of billions of dollars."
THE FACTS: The Tax Policy Center, a think tank run jointly by the Brookings Institution and the Urban Institute, concluded that Obama's plan would increase after-tax income for middle-income taxpayers by about 5 percent by 2012, or nearly $2,200 annually. McCain's plan, which cuts taxes across all income levels, would raise after tax-income for middle-income taxpayers by 3 percent, the center concluded.
Obama would provide $80 billion in tax breaks, mainly for poor workers and the elderly, including tripling the Earned Income Tax Credit for minimum-wage workers and higher credits for larger families.
He also would raise income taxes, capital gains and dividend taxes on the wealthiest. He would raise payroll taxes on taxpayers with incomes above $250,000, and he would raise corporate taxes. Small businesses that make more than $250,000 a year would see taxes rise.
MCCAIN: "She's been governor of our largest state, in charge of 20 percent of America's energy supply ... She's responsible for 20 percent of the nation's energy supply. I'm entertained by the comparison and I hope we can keep making that comparison that running a political campaign is somehow comparable to being the executive of the largest state in America," he said in an interview with ABC News' Charles Gibson.
THE FACTS: McCain's phrasing exaggerates both claims. Palin is governor of a state that ranks second nationally in crude oil production, but she's no more "responsible" for that resource than President Bush was when he was governor of Texas, another oil-producing state. In fact, her primary power is the ability to tax oil, which she did in concert with the Alaska Legislature. And where Alaska is the largest state in America, McCain could as easily have called it the 47th largest state — by population.
MCCAIN: "She's the commander of the Alaska National Guard. ... She has been in charge, and she has had national security as one of her primary responsibilities," he said on ABC.
THE FACTS: While governors are in charge of their state guard units, that authority ends whenever those units are called to actual military service. When guard units are deployed to Iraq or Afghanistan, for example, they assume those duties under "federal status," which means they report to the Defense Department, not their governors. Alaska's national guard units have a total of about 4,200 personnel, among the smallest of state guard organizations.
FORMER ARKANSAS GOV. MIKE HUCKABEE: Palin "got more votes running for mayor of Wasilla, Alaska than Joe Biden got running for president of the United States."
THE FACTS: A whopper. Palin got 616 votes in the 1996 mayor's election, and got 909 in her 1999 re-election race, for a total of 1,525. Biden dropped out of the race after the Iowa caucuses, but he still got 76,165 votes in 23 states and the District of Columbia where he was on the ballot during the 2008 presidential primaries.
FORMER MASSACHUSETTS GOV. MITT ROMNEY: "We need change, all right — change from a liberal Washington to a conservative Washington! We have a prescription for every American who wants change in Washington — throw out the big-government liberals, and elect John McCain and Sarah Palin."
THE FACTS: A Back-to-the-Future moment. George W. Bush, a conservative Republican, has been president for nearly eight years. And until last year, Republicans controlled Congress. Only since January 2007 have Democrats have been in charge of the House and Senate.
posted by John Reagan at 9:35 AM
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