Unchecked government spending is driving good people to tea bags

Today, there will be tea (taxed enough already) parties across the country. Maybe, just maybe, the bailout and stimulus trillions, which will translate into future tax hikes, are rubbing a bunch of folks the wrong way.  A sleeping giant has been awoken.

The tea parties find their roots in the original tea party in Boston harbor in 1773 and are meant to attract people from across party lines to protest the over-the-top government spending in recent months.

Congressional Spending continues to rise

According to a new report from Citizens Against Government Waste (CAGW), Congressional pork spending is actually up again in total dollars. For 2009, spending is up $2 billion.  Americans who are attending the tea parties are saying, ‘we’re fed up and we’re not going to take it anymore.’

The government has spent trillions of taxpayer dollars between the bailouts, stimulus package and Omnibus spending package. Much of this has gone towards pork projects and squanders the hard-earned dollars that tax-payers entrust to the government.  When the economy needs a true stimulus to bring back lost jobs and stimulate bank lending, the government has instead wasted trillions on pet projects and special interest group payback.

This is democracy bubbling up.  It is indicative of the very roots in the term ‘grassroots.’  Average Americans are getting very concerned and annoyed about unchecked spending, and the Congress and the administration, have to reel it in.  The bailout and the omnibus spending bill and the stimulus package all translate to an enormous deficit that straddles future generations with more encumbrance and means higher taxes in the not-too-distant future.

Tea parties – a reaction to bailouts and more

Thousands turned out at approximately 700 Tea-Party events across the nation.  After TARP1 and TARP2, and the bailouts of the domestic automakers and Citibank and AIG and the Omnibus spending bill and Stimulus bill, it has simply become too much for taxpaying Americans.  Many attendees braved bad weather to hear the featured speakers.

According to the American Enterprise Institute, just to pay interest on the administrations’ 2010 budget, those who are currently twenty will have to pay over $ $114,280.72, if they work until 70.  That does not pay down principal.  If interest rates increase to just 8%, that debt to people under 30, will triple.

Was the AIG bailout a waste of taxpayer money?

The former CEO of AIG made a few interesting statements when he testified before a Congressional committee a few days ago. Hank Greenberg ran AIG for 35 years until he was forced out in 2005. Mr. Greenberg stated that AIG should have been left to declare chapter 11 bankruptcy.  He said that the governments’ attempts to liquidate various divisions of the company, in the current environment, have largely failed.

The aging former CEO also said that a bankruptcy would have saved the taxpayer $180 billion and would not have disrupted the U.S. economy.  The governments’ original contentions, and my own conclusion, were that the AIG failure would have a far-reaching effect on the U.S. and world economies.

Was AIG on the right course in the past?

Mr. Greenberg’s contention is that dismantling AIG and selling off the parts at a deep discount does a disservice to American taxpayers.  He put the blame for the company’s problems on the current management, not the company’s business model.

The American taxpayer owns 80% of AIG. Hank Greenberg asserts that if the company is properly managed, there is still a chance for the taxpayer to recoup their investment.  He said that the company has to separate itself from its financial products division. It has been the Achilles heel of the company.

Throw the baby out with the bathwater

Disgraced former New York Governor and Attorney General Eliot Spitzer waged a fraud investigation against Greenberg, which caused his downfall.  The former CEO made a good argument that if he remained at the helm of AIG, the company would have managed risk better.

Greenberg pointed out in testimony that the capitalization of AIG increased 40,000 percent under his watch between 1969 and 2004. Greenberg said that AIG management “wrote as many credit-default swaps on collateralized debt obligations (CDO’s) in the nine months after he left as it had in his last seven years as CEO.”  He suggested that this steep increase in risk put the company in its precarious position.

When I worked for a major division of AIG, they were the number one player in their market. That was in the nineties. Maybe the old CEO is right and I am wrong; the bailout was a waste of taxpayer money.

Enough already

The bailout was about the banks. We have discussed in this space, until we were blue in the face, that the frozen credit markets were, and are, at the heart of the problem. Why then, are we throwing more taxpayer dollars at the auto makers?  They should have declared Chapter 11 in the first place and reorganized, restructured contracts, sought concessions, improved workflows and developed a more profitable business with a better product.

Now, the Obama administration is giving GM and Chrysler more of our money. Specifically, GM wants another $16.6 billion and Chrysler is asking for another $5 billion. Where are the good old days when the government gave away millions?

The funds going to Chrysler would help with its merger with Fiat, a small car producer.  GM will receive enough funds, according to the administration, to finance them over the next 60 days while they continue to restructure. GM will seek to gain concessions from all stakeholders.  Failure to get all their ducks in a row over the next 60 days means that they will then have to consider Chapter 11. So the taxpayer gets to foot the bill for several billion more before the inevitable happens.

Auto companies must sacrifice

Some, in the know, say that there is little forward movement with the unions on concessions.  The very notion that so much spending, in the form of taxpayer dollars, is meant to grow jobs and GM has had to cut, or is cutting 47,000 jobs is an ironic joke. Chrysler reported in February that it would cut 3,000 jobs.  How does this help the economy? Lost jobs and more taxpayer debt.

Negotiations also must take place with bondholders, in order to buy concessions and cut debt by 2/3. Labor costs are also way above Japanese automakers with plants in the U.S.  The companies must bring labor costs down to these levels to be competitive. More misguided bailout, with little to show for our hard-earned money.

The market needed some details

I previously wrote on this blog that the stock market hates uncertainty.  Conversely, it loves assurance.  The Treasury Secretary’s announcement of the new bank rescue plan addresses the problem of toxic assets and how the government plans to relieve banks and financial service companies of up to $1 trillion of this liability. 

These toxic assets have acted like a figurative anchor locked around the figurative ankles of the banks. As has been discussed on this blog, the banks have reduced lending and sought to preserve capital as they wrestle with tarnished balance sheets.

As you will remember, the Treasury Secretary had the opportunity to make this very announcement weeks ago, but provided only sketchy details. The stock market reacted and we saw a continuous sell-off that has depleted the wealth of retirement accounts everywhere.

Now the government has articulated their plan to help the banks and free up the credit markets by using a combination of government and private intervention.  

Banks need to resume lending

The lingering question in recent months has been, how does the government price and dispose of billions in toxic assets?  With no answer to this question, the DOW fell to a twelve year low in early March.  The announced plan would have the government making use of $75 to $100 billion of TARP funds.  The government would partner with the private sector and hedge funds to buy up billions in toxic assets.

The private sector is the wild card in the equation.  How much participation can the government expect? Will investors go for the risk-reward equation as they see it?   According to a March 23^rd story by the AP, ‘Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan.’

The FDIC will also contribute to the new plan by purchasing up to $500 billion of residential and commercial loans. This was anticipated to help clean up banks balance sheets. Additional bank failures are still anticipated.

This bonus information is really disturbing. Yes, of course I’m talking about the bonuses going to Fannie Mae and Freddie Mac executives. What did you think I meant?

Senior and Executive Vice Presidents at the two organizations will get retention bonuses, most of which have nothing to do with performance.  Fannie Mae executives will receive bonuses between $470,000 and $611,000. Freddie Mac has not yet released the exact amounts, or even a range, for their anticipated bonuses.

The Freddie Mac plan pays bonuses in four installments with only the final payment having anything to do with performance.  The government has invested more taxpayer dollars into the two mortgage-backers than it has into AIG.  Last year, the two institutions lost about $108 billion.

Unlike AIG, where the CEO has asked bonus recipients to return at least half of their bonuses, there is no such compromise at Fannie Mae. (remember that Fannie Mae and Freddie Mac have made large political contributions in recent years, and even our president was one of the top three benefactors while in the Senate)

 The CEO of Fannie Mae, Herb Allison, said in a company-wide email today, that eliminating the bonuses ‘would jeopardize our ability to fulfill the mission the government  has given us to address the housing crisis.’

The AIG bailout – why?

The U.S. government has provided insurer AIG with more than $170 billion in bailout funds and has committed to an additional $30 billion.

Have you ever wondered why it is so important to bail out AIG?  There are two primary reasons. The first is that the financial products unit at AIG provides special insurance coverage to hundreds of financial firms which use it to cover their losses from risky securities investments.  This includes the banks and other financial institutions that have been burned by the loss in value of mortgage-based derivatives.

The second reason is that AIG has two million policyholders. Most of these policyholders depend on the company for their insurance and retirement savings needs.

The failure of AIG would severely hurt people in every state who have nearly all of their long-term savings with the company. Also, if the company failed, there would be no backstop for hundreds or thousands of banks and financial institutions that need the insurance proceeds to prevent their own failures. The effect of an AIG failure would be felt throughout the U.S. economy.

The Stimulus bill- full of surprises

The stimulus bill, which was authored in speaker Nancy Pelosi’s office, included the language approving the AIG bonuses. If the taxpayers in this country are going to be upset about the AIG bonuses, we need to get angry about the Fannie Mae and Freddie Mac bonuses as well.

Another recent revelation is that thirteen firms taking bailout money are behind on their federal taxes.  They owe $220 million in back taxes. Two firms each owe more than $100 million each.

In an AP story that was reported in recent days, FDIC Chairwoman Sheila Bair has admitted that the government needs a new model for their bailout approach.  Hmmm…do you think?

Taxpayer funds continue to flow

Then there was the Omnibus spending bill.  This bill includes another $14 billion in earmarks.  Government spending gone ballistic. The bailout takes on yet another face, but in the end, it’s all your money.

The Omnibus spending bill is a whopping $410 billion.  It contains nearly 8,000 earmarks.

I am considering creating an auto-complete function on this blog; whenever a ‘b’ or ‘t’ is entered, the word ‘billion’ or the word ‘trillion’ is automatically spelled out.  The Congress and the president apparently equate these numbers with ‘hundred’ or ‘thousand.’  Unfortunately, there is a significant difference between each of these descriptive terms that impacts generations of taxpayers to come.

In the meantime, more consensus has been voiced in recent days that the most important measures to repair the economy have to be refocused on the banking system.  This was at the heart of the original bailout.

The focus of bailout funds for banks includes freeing up capital to increase lending and stabilizing banks that have large pools of toxic assets on their books.

Take your TARP funds back- please

Ironically, many of the banks that took early bailout funds (TARP) are anxious to give it back. Many more never took the funds, although they were approved to receive it. This information is not largely known by the public.

Many otherwise healthy banks do not want the stigma attached to the bailout funds. Many of the leading recipients of the bailout have brands and reputations that have been tarnished because of their financial difficulties. Healthier banks don’t want to be grouped in with institutions that find bailout funds a necessity.

An LA Times article describes one example of a bank anxious to overnight a check back to the government. Northern Trust Corp. received negative publicity because it took $1.5 billion in TARP funds and later sponsored an annual golf tournament. The bank stated that it actually made a $795 million profit in 2008 and was not deserving of the negative press. The golf tournament has raised $50 million for charity and the bank feels it has been undeservingly maligned.

The backdoor method to more bailout funds

More bailout without calling it ‘bailout.’  New legislation introduced by Senate Banking Committee chair Chris Dodd would allow the FDIC to borrow $500 billion. There is that word spelled with a ‘B’ again. That, and the ‘T’ word are getting a lot of use; so much so that most people have no idea what a big number either is. It’s well worth understanding the reality of these numbers if you pay taxes.

The FDIC could quietly use this money, without much fanfare, to cover the anticipated bank failures in the coming months.  At the end of last year (2008), the FDIC insurance fund was down to $19 billion. There are $4.5 trillion in deposit accounts covered by the fund.  Currently, the fund insures deposits in participating institutions up to $250,000. This level of coverage will remain through the end of 2009, and then revert to $100,000. Congress could always extend the higher limit.

This is all part of the bailout without focusing more attention on the TARP funds. As I state above, in the end, it is all taxpayer money. We work and sacrifice to provide the government with this money; we would hope that they use it judiciously.

Taxpayer funds for as far as the eye can see…….

In the past 50 days, we have seen $5 trillion in new government spending approved.  The original bailout, which seemed like a gargantuan number, is beginning to look like a drop in the bucket.

Today, House Speaker Nancy Pelosi said that we need to “keep the door open” with regards to yet another stimulus bill. While we may be bailing EVERYONE out, we are the ones stuck with the bill for doing it.  The spending continues unabated.

We are getting sidetracked with the additional waves of spending and need to determine what the original bailout has achieved. Today’s stock market was a record day. Two of the reasons for its performance are credited to remarks made by the Chairman of the Federal Reserve and some information from Citibank. According to the CEO of Citi, the bank realized a profit during the first two months of the year. 

Taxpayer money; our money handed out by the dump truck load

Omnibus, on top of stimulus, on top of TARP1 and TARP2.  $1.7 million for pig odor elimination. Pork barrel projects are abundant.  Taxpayer money is up for grabs.

When I started writing about the original bailout this past Fall, it was all about taxpayer money. Today, when we consider the multiple bailouts, it remains all about taxpayer money.

“We are going to ban all earmarks,” is what the president said during the campaign. Yet, today, taxpayer money continues to go towards paying numerous bailout schemes and plentiful earmarks. When it comes to taxpayer money, people get testy, and rightfully so.

Throwing good money after bad

Don’t get me wrong, this is not meant to be political commentary; it’s always been about taxpayer money and there doesn’t seem to be any end in sight.  Two recipients of bailout money (taxpayer money) may still go under.  AIG and GM have balance sheets that still don’t look that good even after getting bailed out.

The government went ahead and took an ownership position in Citibank, and the future of Citibank is questionable. I sold my Citibank stock recently at a loss. Had I waited another week, it would have been at a severe loss. 

The government ownership of the bank diluted the existing stock value. In this case, taxpayers appear to be losers, but stockholders are losers also. Citibank has a lot of depositors all over the world, so the purpose of a bailout is really meant for those folks.

As reported on this blog previously, one of the problems created by the mortgage crisis has been the devaluing of mortgage derivatives. These security instruments are ‘derived’ from mortgages.  Because they are financial instruments that are an offshoot of another type of instrument, they can present a whole host of problems.  For instance, if you are in the business to change the terms of a mortgage to prevent foreclosure and the mortgage ended up as a derivative, who gives a green light to a change in mortgage terms?

With record high foreclosures, these modern day financial instruments have proven to be a dicey proposition for financial service firms left holding the bag.

We gave them bailout funds last fall, but……..

Could we characterize the bailout as now being on steroids or should we just say that it is shifting gears? Whatever way we are to frame it, the bailout is now stealing the headlines again. Oh yeah, and then there is that stimulus deal.

Citibank is asking the government to shift their preferred stock holdings to common stock and take about a 25% ownership stake in the bank. (although it could be much more) The government currently holds $45 billion in preferred stock.

Does this begin to sound like nationalization? It is being denied, but come on. When the government is taking an ownership position in a bank; what else can you call it?

AIG needs more money. We haven’t talked about that firm in a while.  According to a CNBC report, AIG is expected to report a $60 billion loss next week.  The government has already invested $150 billion in the beleaguered insurer. Some speculate that the company will make a plea for more in order to avoid bankruptcy.

AIG was just one of the dominos in the mortgage crisis. Their heavy reliance on CDO’s (collateralized debt obligations) is what nearly led to their complete collapse.  As we have discussed in earlier posts, the investments that were derived from mortgages have been the undoing of many financial companies.

A return to the bailout basics

The Capital Assistance Program is the newest component of the bailout and officially starts today. This is a return to the original bailout theme. I spoke of this a couple of posts back when I talked about the ‘stress test.’  Many banks are stressing out because of this new phase of TARP2.

This new program is a joint effort by the FDIC, Office of Treasury Supervision, Federal Reserve, Treasury Department and OCC.   The program seeks to provide a ‘capital buffer’ for institutions that cannot obtain the funds through the private sector. The statement from the joint agencies says this; ‘Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government.’

The stress test will begin with 19 large banks that are experiencing balance sheet problems.  Depending on the results of the stress test, the government would pressure those banks to exchange the preferred stock that the government already owns for shares of common stock. 

As I said earlier, the move towards nationalization of the banking system, or at least portions thereof, appears to be in the works.  The Fed Chairman refuted this notion when testifying the other day in front of the Senate Banking Committee.  He could not guarantee that current shareholders would be safe.

Treasury also plans on March 4 to provide more details about a mortgage mitigation program it announced last week

Let’s drive back to D.C. for some more bailout money

Just when we turned the focus correctly towards banks and the bailout, there is new reason to shift some attention to the auto makers again.  Yes, we all thought that they had taken their billions and gone away for a while, but we were all day-dreaming.  They are back requesting another $22 billion.

As some opponents of the domestic auto industry bailout correctly predicted, the auto makers are back again with their hands out.  Mr. Obama, get your pen out again.

An article out today on One News Now quotes a senior fellow at the Heritage Foundation, who believes that ‘the bailout parade is just getting started.’  James Gattuso stated that the carmakers were not only asking for a second round of subsidies, but ‘they indicated in their materials that there very likely will be rounds after that.’

The bailout of the Big 3 is akin to taking blood thinner and then getting a bad cut. We may have learned a valuable lesson, but it’s too late for a quick fix.

All parties in the auto bailout have to sacrifice

According to the One News Now article, Gattuso sees it this way; GM and Chrysler’s restructuring plans contain two major problems — the UAW is still resisting across the board pay cuts down to industry-standard levels; and bondholders and stockholders “still have not taken full haircuts yet.”

Despite the bailout funds, the auto industry has had to make massive lay-offs to meet the terms of the government plan.  With auto sales down across the board, and even the Japanese automakers experiencing rare profit losses and large lay-offs, the outlook for the Detroit auto companies is not good.

Gattuso, who specializes in regulatory policy at Heritage, believes that the only successful method of assuring needed change at the automakers is bankruptcy.  Without any forced reorganization, that involves all interested parties, the domestic automakers will likely be back to Washington on a recurring basis.