For historical purposes...November 2008 report by the National Intelligence Council on "Global Trends"

Post November 4, 2008:
OFFICIAL WHITE HOUSE PAGE LINK...Click here for interesting paper on tax rate history.  Plastic...bigger payoffs here.  New Middle East alignment, 2009. 

MAKING CHANGE:  Redistributing the wealth (and the health) part one...part two?  Globally?  Rhetorically?  Where's the audacity? Here?
Getting the ball rolling...economy comes first? "...Now, the very fact that this crisis is largely of our own making means that it's not beyond our ability to solve. Our problems are rooted in past mistakes, not our capacity for future greatness. It will take time, perhaps many years, but we can rebuild that lost trust and confidence. We can restore opportunity and prosperity..."


Mortgage rates poised to jump as Fed cuts funds
Carolyn Said, San Francisco Chronicle Staff Writer
Monday, February 15, 2010

The Federal Reserve is poised to turn off a major money spigot that has helped sustain the ailing real estate sector, as an extraordinary program under which the Fed has pumped $1.25 trillion into the mortgage market is slated to end March 31.

"Housing has been on government life support, and without it the crash would have been much more severe," said Mark Zandi, chief economist with Moody's Economy.com in Pennsylvania. "This spring and summer as those policy efforts unwind, we most likely will see mortgage rates move higher and more house-price declines."

Rather than being held by banks, today's mortgages are sliced, diced and resold on Wall Street to create liquidity - money that then can be lent in more mortgages. After the credit crunch beginning in the fall of 2008, investors lost their appetite for these mortgage-backed securities, so the Federal Reserve stepped in to purchase them to ensure that money would keep flowing to home purchasers.

The Fed started buying securities backed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009 and originally planned to conclude the program by year's end. It extended it for three months to ease the impact on mortgage markets, although it didn't allocate more money. The program's ultimate cost won't be known until the Fed sells off the securities, something that officials said it will do gradually starting this year. It's conceivable that the program could end up generating a modest profit, breaking even or losing money, depending on what prices the securities go for.

While experts agree that the Fed's exit will cause mortgage rates to rise, the big unknown is how severe the effect will be.

"There is no question rates have been kept artificially low by the Fed's heavy buying," said Guy Cecala, publisher of Inside Mortgage Finance. "My opinion is that rates will go up a full percentage point initially," meaning that 30-year fixed conforming loans, now hovering around 5 percent, would hit 6 percent.

Keith Gumbinger, vice president of HSH Associates, which compiles mortgage loan data, thinks that rates will slowly rise to about 5.75 percent after the Fed withdraws.

"Right now the Fed is acting as a sponge, absorbing about $12 billion a week of what you might consider excess supply," he said. "When they stop, the market will have to pick up some chunk of change."

Julian Hebron, branch manager at RPM Mortgage's San Francisco office, anticipates a bump up to around 5.5 percent by summer with rate volatility all year.

"The Fed isn't going to start dumping mortgage bonds on April 1, they're just going to stop buying," he said. "By that time, improving economic data is likely to push the Fed toward a rate hike bias. This will contribute to higher mortgage rates, slowing refi activity, and less mortgage bond supply. So while the Fed won't be buying anymore, rates shouldn't spike immediately because there will be less supply for markets to absorb."

Christopher Thornberg, principal at Beacon Economics in Los Angeles, thinks the Fed's withdrawal will have a radical impact.

"Clearly, when they stop printing all that money, it's going to be a shock to the system. I have to assume that when they pull back on it, it will cause a 100- to 200-basis-points rise" to rates of 6 percent or 7 percent, he said. "When they start selling off the stuff they purchased, which by my guess would come early next year, that would cause another 100- to 150-basis-points rise."

The Fed has indicated that it might resume buying mortgage-backed securities if mortgage rates spike.

In written Congressional testimony released last week, Fed Chairman Ben Bernanke said the Fed eventually will take steps to forestall inflation that also are likely to result in higher interest rates for all loans.

Several other government programs designed to prop up the housing market also are in play:

-- The home buyers tax credit of $8,000 for first-time buyers and $6,500 for repeat buyers expires April 30. Although many experts think the program simply caused people to buy houses earlier than they had planned, its end is likely to cause a dip in home sales.

"Higher interest rates without a tax credit means the cost of buying a home will rise significantly," Zandi said. "We should expect much weaker home sales in May, June and July."

Cecala thinks that if home sales are anemic, Congress may extend the tax credit an additional six months, as it's already done once before.

-- Federal Housing Administration loans, an increasingly important source of financing for many borrowers, especially those with low and moderate incomes, imposed more stringent lending criteria in January. As FHA delinquencies rise, the rules could tighten still more, eliminating some potential buyers.

"The FHA portfolio has all sorts of bad debt in it," Thornberg said. "Eventually they'll have to pull back" on lending.

-- Home Affordable Modification Program, the government-backed plan to get banks to help troubled homeowners, has kept the market from being flooded with foreclosures, as hundreds of thousands of borrowers are negotiating with their lenders for lower payments. Eventually, observers say, much of that backlog will wind up in foreclosure because homeowners simply don't have the income or ability to make modified payments. A new surge of bargain-basement foreclosures would undermine home prices.

"We have a boatload of homes that ultimately will find their way to a foreclosure sale, and that will put pressure on house prices," Zandi said. "The more that distressed home sales rise, the more home prices get pushed down."


Dodd to Unveil a Broad Financial Overhaul Bill
NYTIMES
By SEWELL CHAN
March 14, 2010

WASHINGTON — The chairman of the Senate Banking Committee will unveil on Monday a proposal to revamp the nation’s financial regulations that would empower shareholders to have advisory votes on executive pay and to nominate directors for the boards of public companies through company proxy ballots, several people briefed on the draft legislation said Saturday.

The shareholder provisions, which have been vigorously opposed by many corporations and by Republicans, will be part of a bill that would amount to the most sweeping overhaul of financial regulations since the Depression. In one of the most fiercely debated provisions, the bill would create a consumer financial protection agency under the umbrella of the Federal Reserve, a move certain to disappoint liberal Democrats who believe the Fed failed to safeguard consumers in the years leading up to the banking meltdown.

With no Republican support yet for the proposal, Democratic lawmakers and the White House have been gearing up for a potentially bitter partisan fight.

The impending proposal by the chairman, Christopher J. Dodd of Connecticut, hews in many ways to a proposal advanced last summer by the White House, the people briefed on the legislation said.

Mr. Dodd said Thursday that Democrats would proceed on their own after months of stop-and-start negotiations with Republicans over a bipartisan compromise yielded little progress.

As Senate aides worked through the weekend on drafting the legislation, key elements became clear, according to the people briefed on the negotiations, who spoke on the condition of anonymity because the situation was still fluid.

The consumer financial protection agency would have a director appointed by the president and the ability to write rules governing mortgages, credit cards, payday loans and a wide range of other financial products.

It would have some ability to ensure that the rules are followed; how the rules would be enforced has been a major source of partisan division. As in a House version of regulatory overhaul adopted in December, the bill would, in some circumstances, restrict states from writing their own, stronger consumer protection rules.

The Federal Reserve would see its bank supervision powers significantly diminished. It would continue to oversee bank holding companies with $50 billion or more in assets, and would be entrusted to regulate systemically important nonbank financial institutions. Mr. Dodd had considered setting the threshold at $100 billion, which would have been even worse for the Fed.

Smaller bank holding companies, if they have a federal charter, would be overseen by a new regulator formed out of the Office of the Comptroller of the Currency, which already oversees national banks. The Federal Deposit Insurance Corporation, which already oversees state-chartered banks that are not members of the Fed system, would gain oversight over those that are.

The provision for shareholder input on executive pay would represent a significant shift in corporate governance, handing a victory to shareholder activists and investors, large and small. While “say on pay,” as the provision is called, would be advisory and not binding, compensation consultants and the companies that use them fear that the provision would allow populist sentiment to boil over from annual meetings into boardrooms.

Giving shareholders a way to nominate their own slates of directors using the proxy ballots that companies mail to shareholders would be similarly unnerving for boards that customarily designate their own successors, with little input or opposition from stockholders.

The proposal would substantially alter the role of the Federal Reserve in protecting the economy, but the net effect would be a mixed outcome for the central bank.

On one hand, the Fed would be entrusted with oversight over all systemically important financial institutions, even if they are not banks. American International Group, the insurance giant that nearly brought down the financial system, was the most notorious example of such a company in the recent financial crisis. The Fed would also continue to oversee the nation’s largest bank holding companies — those with assets of $50 billion or more, or about 35 companies.

In addition, investment banks like Goldman Sachs and Morgan Stanley, which converted to bank holding companies in 2008 to take advantage of the Fed’s liquidity programs, would not be able to go back to their earlier status to avoid Fed oversight.

On the other hand, the Fed would lose oversight over more than 4,900 bank holding companies with roughly $3 trillion in assets, and about 870 state-chartered banks that are members of the Fed system and have a total of $1.7 trillion in assets.

The Fed’s chairman, Ben S. Bernanke, and leaders of the Fed’s 12 district banks have pressed Congress to let the Fed retain its say over smaller banks, and the fact that senators appear to be unwilling to go along is a reflection of the central bank’s diminished prestige in the wake of the financial crisis.

The bill would also create a council to detect systemic risks to the financial system, and trigger, if necessary, a process to seize and dismantle a large financial firm on the verge of failure; the goal would be to limit the possibility of a broader meltdown and the need for a government bailout.

The risk council would be headed by the treasury secretary and include representatives of the Fed, the new consumer agency, the F.D.I.C., the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Housing Finance Agency — along with an official appointed to monitor the insurance industry, which is largely regulated by the states.

The bill would also impose comprehensive regulation of the sprawling market in over-the-counter derivatives. Standardized swaps and derivatives would have to be traded on exchanges or clearinghouses.

But companies that do not primarily deal in derivatives and are not major participants in the swaps market would be exempt from the new requirements. The size and extent of that exemption has been a key focus of behind-the-scenes negotiations over the past several months.

A key Republican objection to the consumer agency is that a new body of regulators empowered to write and enforce consumer protection rules could interfere with existing regulators tasked with ensuring the “safety and soundness” of banks.

To address that objection, Mr. Dodd would allow the consumer agency’s rules to be overturned by a two-thirds vote of the new systemic risk council, or 6 of the 8 members, the people briefed on the matter said. In addition, the consumer agency would have enforcement powers over only those banks with more than $10 billion in assets. It would potentially have the ability to issue sanctions against nonbank financial companies, like payday lenders, debt collectors and mortgage originators and servicers, but which sectors and industries would be covered was not clear.

While the bill addresses many of the priorities the Obama administration outlined last July, and which the House acted on in a financial regulatory overhaul adopted in December, the bill does not go as far as the White House would like in reining in the size and scope of banks.

In January, Mr. Obama put forward a proposal he called the Volcker Rule, named for Paul A. Volcker, the former Federal Reserve chairman, which would prohibit deposit-taking banks from investing in or owning hedge funds or private equity funds, and from making market bets with their own money, as opposed to their customers’ money, a practice known as proprietary trading. Senators from both parties have said that the Volcker Rule arrived late, and have been wary of adding to a bill that is already of immense length and complexity. Like the House bill, the Dodd proposal would empower regulators to crack down on excessively risky practices, but not ban proprietary trading outright.

It appeared that Mr. Dodd was focused on advancing a proposal that could advance through the Banking Committee with united support among its Democratic members, and hoped to have a committee vote on the bill before Congress recesses on March 26.

He appeared to be taking steps to satisfy concerns by several Democrats on the committee, including Jack Reed of Rhode Island, who has advocated for an autonomous consumer agency, and Charles E. Schumer of New York Democrat, who has advocated for shareholder rights.
Obama to break up banks
I-BBC
Robert Peston | 17:38 UK time, Thursday, 21 January 2010

Banking reforms do not come bigger than those proposed today by President Obama.

In an echo of the break up of banks that was imposed in the United States after the Great Depression, he wants a limit on their overall size and he also wants them banned from three activities that in recent years have been central to many of them.

He is pushing for them to be prohibited from involvment in hedge funds, from buying and selling whole companies in what's known as private equity and from buying and selling securities for their own benefit on so-called proprietary trading desks.

In simple terms, he wants to prevent banks from taking speculative risks to generate colossal profits, while knowing that if their bets go wrong taxpayers will pick up the bill.

It means that some of the biggest banks in the US - from Bank of America, to JP Morgan and even Goldman Sachs - may have to be broken up.

Of course its possible (perhaps even likely) that pure investment banks, such as Goldman Sachs, will be largely exempt.

But President Obama did not say that the reform would only apply to those banks with a retail presence, such as JP Morgan and Citigroup (although perhaps it is what he meant to say). He said it would apply to "banks" as defined in US law - and Goldman became one of those in the autumn of 2008.

The big banks will hate his proposals - and will doubtless use their formidable lobbying power and financial resources to persuade Congress to water down the reform plans.

But Obama is up for the scrap. "If these folks want a fight, it is a fight I am ready to have".

The US President believes that banks are back to their bad old ways too soon after their woes led to the biggest bank global bail out in history.

Goldman Sachs would deny this, but its near record revenues of $45bn for 2009 and 50% rise in staff pay to $16bn - or $500,000 per head - shows that the banking crisis, for it at least, is a dim and distant memory.

UPDATE: 18:09

George Osborne, the shadow chancellor, has just told me that Obama's plan to break up the banks is consistent with the views he expressed in his recent bank reform paper.

His condition for implementing such a radical plan was that it needed international agreement.

Well, he has got that now. So he has told me - explicitly - that a Tory government would impose an identical dismantling of British banks to those suggested by President Obama.

Which will generate profound fear in the boardrooms of Royal Bank of Scotland and - more especially - Barclays.

Taxpayers to pay for Fannie, Freddie aid
Washington Times
Patrice Hill
Wednesday, January 13, 2010

A recent move by the Treasury Department to remove $200 billion caps on assistance to Fannie Mae and Freddie Mac eliminates any doubt that taxpayers will pay for all their losses for the next three years and appears to be a major step toward formally nationalizing the housing enterprises, analysts say.

The government took control of the companies, and effectively much of the U.S. mortgage market, in September 2008 and started purchasing all their mortgage-backed securities. But the Treasury previously used the $200 billion caps on aiding each company to try to limit taxpayer exposure to their mounting losses.

Republicans charge that Treasury has given the Depression-era companies a "blank check" to pay for burgeoning losses on defaulting loans.

The two housing enterprises last year guaranteed and secured nearly 70 percent of new mortgages, primarily made to "prime" borrowers with the best credit ratings, while the Federal Housing Administration insured most loans to subprime borrowers, leaving only a tiny share of the mortgage market in private hands.

In its Christmas Eve statement announcing the little-noticed changes, the Treasury insisted that it wants to preserve "an environment where the private market is able to provide a larger source of mortgage finance."

But analysts say Treasury's move may push off any return to a normal mortgage market for years — possibly forever. Treasury removed the liability caps for three years and loosened restrictions on Fannie's and Freddie's purchases of their own mortgage securities — enabling them to maintain their dominant share of the mortgage market.

"These actions would preserve and strengthen the governments involvement and control over the countrys housing finance system and make it harder to reintroduce substantial private-sector involvement later on," said Edward Pinto, a housing consultant and former chief credit officer at Fannie Mae.

When combined with a separate move by regulators not to provide common stock as part of executive compensation at Fannie and Freddie, the administration's recent actions suggest that it is moving to nationalize the companies, Mr. Pinto said.

Nationalization, or total government control and ownership of the companies, would wipe out the value of Fannie and Freddie stock, making it worthless as a way to pay executives. The value of the stock has plummeted to between $1 and $2 a share in the wake of the government's takeover.

Treasury spokesman Andrew Williams declined to elaborate on the Treasury's actions, but denied that nationalization was the goal.

The administration is preparing to present its proposals for governing Fannie and Freddie in the future — a major question not addressed in financial reform legislation pending in Congress — when it presents its budget in February. Options range from fully nationalizing the enterprises to reprivatizing them or turning them into public "utilities" like the closely regulated gas and electric companies.

Sen. Bob Corker, Tennessee Republican, questioned whether the administration was moving toward nationalization in a letter to Treasury Secretary Timothy F. Geithner this week, urging the Treasury to incorporate fully in its February budget the cost of any additional Fannie and Freddie liabilities the government is acquiring.

"Due to the level of support that this administration and the previous one have created for Fannie Mae and Freddie Mac, would you not consider your latest move an effective nationalization?" asked Mr. Corker, a member of the Senate Banking, Housing and Urban Affairs Committee. "If so, then the liabilities of these two firms should absolutely be reflected on the balance sheet of the U.S. Treasury."

Fully nationalizing the enterprises would permanently increase costs for taxpayers and would bloat the government's balance sheets. Fannie and Freddie currently guarantee about $5.5 trillion of outstanding mortgages and debts — nearly as much as the Treasury's own public debt. If the companies were fully nationalized, the government's books would have to reflect both the revenues and losses from those obligations.

But even if the administration and Congress stop short of formally incorporating the enterprises into the federal government, the removal of the caps at least for now has eliminated any doubt that the government stands behind all Fannie and Freddie obligations and will cover their losses for the next three years.

Treasury reportedly told Mr. Corker that the move was needed to calm markets.

Apparently, it deemed the certainty of government backing to be critical at a time when the Federal Reserve has announced that it will end its program of purchasing $1.25 trillion in Fannie and Freddie mortgage bonds in March. The Fed's program — another unprecedented federal intervention in the mortgage market — provided most of the funding to finance prime mortgages in the past year.

Many housing analysts and economists worry that the Fed's withdrawal from the mortgage market will cause a sharp rise in 30-year mortgage rates of as much as one percentage point from 5 percent to 6 percent as private investors demand higher yields to compensate for the increased likelihood of defaults on mortgages.

Nearly one in eight mortgages is in default, with prime mortgages guaranteed by Fannie and Freddie having taken over subprime last year as the principal source of delinquencies.

Rapidly rising delinquencies have prompted some analysts to predict a collapse in the mortgage market once the Fed stops buying most of Fannie and Freddie's debt. The Treasury's move appears designed to reassure investors and prevent that from happening.

"When you have someone as big as the Fed was in 2009 walking away cold turkey, there have to be bumps along the road," said Ajay Rahadyaksha, managing director at Barclays Capital. But he expects investors to be enticed back into the mortgage market because they have "massive amounts of cash" to invest.

While full nationalization of the enterprises would be controversial, and likely provoke overwhelming Republican opposition, most parties agree that after the massive efforts to prop up the mortgage market in the past two years it would be difficult for the government to entirely extricate itself in the future.

Former Treasury Secretary Henry M. Paulson Jr. said he intended to keep the government's options open when he designed the plan to take 79.9 percent control of Fannie and Freddie and put them under government conservatorship.

But he said they should not be returned to their previous ambiguous structure, where they were owned by private stockholders even as they carried out a government mission. He said the best structure in the future might be to turn them into public utilities that funnel the government's guarantee on mortgage-backed securities for a fee.

The Mortgage Bankers Association and other private groups have endorsed a permanent federal role in guaranteeing pools of prime mortgages, perhaps through a revamped Fannie and Freddie.

One reason heavy government involvement is likely to continue is that Fannie and Freddie — unlike many banks that received bailouts from the Treasury — likely will never be able to fully repay the nearly $100 billion in assistance they have received so far from taxpayers, analysts say.

Their losses are growing by the day, and many of them now are incurred as a result of new mandates from the Treasury and Congress to spearhead the government's efforts to alleviate the home foreclosure crisis and make credit available as widely as possible.

For example, Fannie recently said it may liberalize its rules for mortgages used to buy condominiums in Florida — an area that has been plagued with high rates of default and foreclosure, while it is giving preference to homeowners over investors when it sells foreclosed properties, even if investors offer a better deal.

Many analysts expect the administration to soon increase the subsidies the enterprises are providing to homeowners and banks that renegotiate mortgages to try to avoid foreclosure, and some suspect it already is using Fannie and Freddie to make loans available to riskier borrowers.

Mr. Corker said the proliferation of government mandates for the enterprises has essentially turned them into "a direct extension of the Treasury Department."


Part one of a "plot" or "plan" by some?

A Tougher Cap on Size
NYTIMES
Simon Johnson
April 20, 2010

Simon Johnson, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics, is the co-author of “13 Bankers: The Wall Street Takeover and The Next Financial Meltdown.”

Senator Dodd’s financial reform bill is missing a huge piece of the puzzle. The Obama administration proposed in January to cap the size of our biggest banks going forward, so they cannot pose an even larger threat to the economy than that which we faced in September 2008.

This was a good idea, but it should have gone further. Why would anyone think that today’s size of banks is the right place to stop? After all, it is the banks at their current size who brought us such disaster. And the largest six banks have only become bigger since the crisis — actually, as a direct result of the way the Bush and Obama administrations handled the bailout.
six big banks

But the most striking fact is that this part of the Volcker Rules has completely failed to make it into the Dodd bill. There is a provision in the bill that regulators can break up large banks but only “as a last resort.” This is very weak and essentially meaningless in today’s context where big banks have great political power.

The amendment proposed by Representative Paul Kanjorski to the House bill was a definite improvement — putting more power in the hands of regulators and also more pressure on them to act preemptively on megabanks that pose risks to the system. But events have moved on considerably since that time — as seen most dramatically by the Securities and Exchange Commission charges against Goldman Sachs last week.

Two months ago, Senator Ted Kaufman was pushing the frontier with tough rhetoric about fraud at the heart of Wall Street. Now his views are completely mainstream. And Senator Kaufman insists, for example, in a speech on Monday that (among many other things) our biggest banks need to be broken up — there is simply no other way to make the financial system significantly safer.

Senator Sherrod Brown will almost certainly have an opportunity to introduce an amendment that would implement a hard size cap on big banks. For all our futures, it is of the highest importance that this amendment succeeds
How Big Is Too Big?
NYTIMES
By PETER BOONE AND SIMON JOHNSON
November 26, 2009, 7:18 am

Peter Boone is chairman of the charity Effective Intervention, a research associate at the London School of Economics’ Center for Economic Performance, and a principal in Salute Capital Management Ltd. Simon Johnson, a senior fellow at the Peterson Institute for International Economic, is the former chief economist at the International Monetary Fund.

As legislation on restructuring the banking industry moves forward, attention on Capitol Hill is increasingly drawn to the issue of bank size. Should our biggest banks be made smaller?

Senator Bernard Sanders, an independent from Vermont, introduced the “Too Big To Fail Is Too Big to Exist” bill in early November; this helped focus attention. Since then, in the legislative trenches where the detailed crafting takes place, Representative Paul E. Kanjorski — the Pennsylvania Democrat who is chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises — proposed an amendment to the Financial Stability Improvement Act (currently before the House Financial Services Committee) that would empower federal regulators to rein in and dismantle financial firms that are so large, inter-connected, or risky that their collapse would put at risk the entire American economic system, even if those firms currently appear to be well-capitalized and healthy.

In a major step forward, this passed the committee on Nov. 18.

The Kanjorski amendment recognizes that the systemic and societal danger posed by banks can be hard to recognize, and it proposes a number of potential objective criteria that could be used by the Financial Services Oversight Council (to be created by legislation in progress) to determine when banks need to be broken up, including the “scope, scale, exposure, leverage, interconnectedness of financial activities, as well as size of the financial company.”

The Kanjorski amendment does not impose a hard size cap on banks, but lawmakers in the House are discussing amendments that would do so.

There is, of course, a strong precedent for capping the size of an individual bank: The United States already has a long-standing rule that no bank can have more than 10 percent of total national retail deposits.

This limitation is not for antitrust reasons, as 10 percent is too low to have pricing power. Rather, its origins lie in early worries about what is now called “macroprudential regulation” or, more bluntly, “don’t put too many eggs in one basket.”

This cap was set at an arbitrary level — as part of the deal that relaxed most of the rules on interstate banking — and it worked well (until Bank of America received a waiver).

Probably the best way forward is to set a hard cap on bank liabilities as a percent of gross domestic product; this is the appropriate scale for thinking about potential bank failures and the cost they can impose on the economy.

Of course, there are technical details to work out — including how the new risk-adjustment rules will be enacted and the precise way that derivatives positions will be regarded in terms of affecting size. But such a hard cap would the benchmark around which all the specifics can be worked out.

What is the right number: 1 percent, 2 percent, or 5 percent of G.D.P.? No one can say for sure, but it needs to be a number so small that we all agree any politician who cares about our future would have no qualm letting it fail, and when doing so have confidence that our entire financial system is not at risk as it fails.

So to us, 2 percent of G.D.P. seems about right. This would mean every bank in our country would have no more than about $300 billion of liabilities.

A large American corporation would still be able to do all its transactions using several banks. They would even be better off — competition would ensure that margins are low and the banks give the corporates a good deal. This would help end the situation where banks take an ever-increasing share of profits from our successful nonfinancial corporations (as seen in the rising share of bank value added in G.D.P. in recent decades).

Indeed, the whole world would soon realize that our banks are more competitive and offer better pricing than others.

If, as might occur, the Europeans subsidized their big banks with cheap finance and implicit subsidies, we should let our nonfinancial corporates benefit and understand that our banks may become ever smaller. We can let Europeans subsidize banking because we all get better deals through their taxpayer subsidies, and then our corporates will have more profits to bring back to America.

Today our politicians and regulators lack credibility. They have bailed out too many banks and need to show they have truly regained the upper hand — by showing that they are installing such a hard size cap rule without exception.

The litmus test is simple.

Does Goldman Sachs continue to grow, and continue to be regarded as almost as good a risk as the United States government (Goldman’s Credit Default Swap spread is only 70 basis points above that of the United States today), because it has demonstrated it is too big to fail? Or, will the government impose a cap on the size of such institutions and require Goldman Sachs to find sensible ways to break itself into pieces – becoming small enough so that it will not be bailed out again next time?

We’ll see. Indeed, by midterm elections, we will have an opportunity to decide. Is the Obama administration in favor of the status quo or, by November 2010 will they have sent a message that “too big to fail” has become “fail if you remain too big”?


Editorial: That Promised Financial Reform

October 14, 2009

Pretty much everyone agrees on the causes for the country’s desperate financial mess: predatory lenders, weak regulations, even weaker regulators, and risky nigh unto incomprehensible financial instruments.

Congress’s willingness to address those problems will have its first real test on Wednesday when the House Financial Services Committee puts finishing touches on what could be essential reform legislation — or a major disappointment, depending on what they do.

At the top of the committee’s agenda is regulation of the largely unregulated and dangerously opaque multitrillion-dollar derivatives’ market. Next on the agenda is the creation of a new Consumer Financial Protection Agency to oversee the consumer-credit offerings of banks and other financial firms — including mortgages, credit cards, overdraft “protection” and payday loans.

Both reforms are crucial, and we fear both are in danger of being irreparably weakened.

Derivatives are supposed to help investors and businesses manage risk, but their unchecked and unregulated use led — directly and indirectly — to the financial crash and subsequent trillions of dollars in taxpayer interventions.

Congress should require that all derivatives’ dealers and users — including banks, hedge funds and corporations — conduct their trades on exchanges where they would be subject to considerable regulation and public scrutiny. Regulators could create exceptions for customized contracts that are negotiated one on one for truly complex and unique circumstances. But most derivatives contracts are highly standardized and can be, and should be, exchange-traded.

Unfortunately, the proposed legislation has too many loopholes and exemptions. For example, many corporations and hedge funds would still be able to trade standardized derivatives privately. That may protect bank profits — without transparency, there is no chance for comparison shopping — but it would put taxpayers at risk of a repeat calamity.

Like the banks, some corporate investors in derivatives resist exchange trading. They argue that more regulation would raise their transaction costs to hedge any given risk. That’s debatable because greater transparency is likely to reduce costs. But even if true, somewhat higher costs would be a small price to pay for systemwide stability.

The threats to the consumer protection agency are even more blatant. To curry favor with the banks, several lawmakers are intent on amending the proposed legislation so that no state could impose its own — tougher — consumer protection laws on banks.

That would be a mistake because in the past, many states have demonstrated the will and the expertise to protect consumers. But federal rules were issued in 2004 that basically barred states from enforcing their laws over national banks and their subsidiaries. That short-circuited state efforts to control, among other things, the subprime lending that sparked the financial crisis.

Some lawmakers are also intent on weakening the proposed power of the new agency to examine the books of the banks and firms that it would regulate. Current bank regulators have that power, but they have not used it with a sole focus on protecting the best interests of consumers. Routine inspection of an institution’s books is essential to understanding the institution’s products and practices. Without such knowledge, consumer protection would be compromised.

Time and again over the last year we have heard lawmakers vow to protect the American public. We suspect most of them even meant it. But the lobbying power — and contributions — of the banks and the rest of the financial industry can be hard to resist.

The House Financial Services Committee and all of Congress must resist and deliver robust reform. That is the only way to protect consumers and taxpayers, and the entire financial system, from another disaster.

Subprime and the Banks: Guilty as Charged
NYTIMES
By Joe Nocera
October 14, 2009, 7:00 am

“There has not been a case made that there is an enforcement problem with banks,” Edward Yingling, the head of the American Bankers Association, said last week. “There is a problem with enforcement on nonbanks.”

As I wrote in my column last week,* this has become something of a mantra for the banking industry. We aren’t the ones who brought the world to the brink of financial disaster, they proclaim. It was those awful nonbanks, the mortgage brokers and originators, who peddled those terrible subprime loans to unsuspecting or unsophisticated consumers. They’re the ones who need to be regulated!

Apparently, when you say something long enough and loud enough, people start to believe it, even when it defies reality. Here, for instance, is the normally skeptical Barney Frank on the subject: “What happened was an explosion of loans being made outside of the regular banking system. It was largely the unregulated sector of the lending industry and the underregulated and the lightly regulated that did that.”

To which I can now triumphantly reply: Oh, really???

Last weekend, after the column was published, an angry mortgage broker — someone who felt she and her ilk were being unfairly scapegoated by the banking industry — sent me a series of rather eye-opening documents. They were a series of fliers and advertisements that had been sent to her office (and mortgage brokers all over the country) from JPMorgan Chase, advertising their latest wares. They were dated 2005, which was before the subprime mortgage boom got completely out of control. They’re still pretty sobering.

“The Top 10 Reasons to Choose Chase for All Your Subprime Needs,” screams the headline on the first one. Another was titled, “Chase No Doc,” and described the criteria for a borrower to receive a so-called no-document loan. “Got Bank Statements?” asked a third flier. “Get Approved!” In a number of the fliers, Chase makes it clear to the mortgage brokers that the bank doesn’t need income or job verification — it just needs to look at a handful of old bank statements.

“There were mortgage brokers who acted unethically, absolutely,” my source told me when I called her on Monday. (She asked to remain anonymous because she still has to work with JPMorgan Chase and the other big banks.) “But where do you think mortgage brokers were getting the subprime mortgages they were selling to customers? From the big banks, that’s where. Chase, Wells Fargo, Bank of America — they were all doing it.”

So enough already about how the banks weren’t the problem. Of course they were. Here’s the evidence, right here. Read ’em and weep.

---------------------

*...There are those who believe that Mr. Frank’s changes have essentially gutted the bill. John Taylor, the chief executive of the National Community Reinvestment Coalition, told me that he now opposed the bill because it had been so watered down.

But most others still think it is a strong bill. Michael Calhoun, the president of the Center for Responsible Lending, called it “a reasonably strong bill,” despite the changes. And although I was worried at first when I saw provisions like plain vanilla and the reasonableness standard falling by the wayside, I’m now convinced that the new agency, as currently conceived, can still do a lot of good. It will have the authority to outlaw unfair products, and to force financial institutions treat their customers like, well, customers — and not lambs to be slaughtered.

Who could possibly be against that? Oh, right. The bankers are against it. And just a few days ago, The Wall Street Journal editorial page, that knee-jerk defender of corporate interests, came out against it as well.

That clinches it for me. The sooner we can pass the thing, the better.

Job losses, early retirements hurt Social Security
YAHOO
By STEPHEN OHLEMACHER, Associated Press Writer
September 27, 2009

WASHINGTON – Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s.

The deficits — $10 billion in 2010 and $9 billion in 2011 — won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.

Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large.

What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security.

"A lot of people who in better times would have continued working are opting to retire," said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. "If they were younger, we would call them unemployed."

Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs.

Some have no choice.

Marylyn Kish turns 62 in December, making her eligible for early benefits. She wants to put off applying for Social Security until she is at least 67 because the longer you wait, the larger your monthly check.

But she first needs to find a job.

Kish lives in tiny Concord Township in Lake County, Ohio, northeast of Cleveland. The region, like many others, has been hit hard by the recession.

She was laid off about a year ago from her job as an office manager at an employment agency and now spends hours each morning scouring job sites on the Internet. Neither she nor her husband, Raymond, has health insurance.

"I want to work," she said. "I have a brain and I want to use it."

Kish is far from alone. The share of U.S. residents in their 60s either working or looking for work has climbed steadily since the mid-1990s, according to data from the Bureau of Labor Statistics. This year, more than 55 percent of people age 60 to 64 are still in the labor force, compared with about 46 percent a decade ago.

Kish said her husband already gets early benefits. She will have to apply, too, if she doesn't soon find a job.

"We won't starve," she said. "But I want more than that. I want to be able to do more than just pay my bills."

Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.

The increase in early retirements is hurting Social Security's short-term finances, already strained from the loss of 6.9 million U.S. jobs. Social Security is funded through payroll taxes, which are down because of so many lost jobs.

The Congressional Budget Office is projecting that Social Security will pay out more in benefits than it collects in taxes next year and in 2011, a first since the early 1980s, when Congress last overhauled Social Security.

Social Security is projected to start generating surpluses again in 2012 before permanently returning to deficits in 2016 unless Congress acts again to shore up the program. Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund.

President Barack Obama has said he would like to tackle Social Security next year.

"The thing to keep in mind is that it's unlikely we are going to pull out (of the recession) with a strong recovery," said Kent Smetters, an associate professor at the University of Pennsylvania's Wharton School. "These deficits may last longer than a year or two."

About 43 million retirees and their dependents receive Social Security benefits. An additional 9.5 million receive disability benefits. The average monthly benefit for retirees is $1,100 while the average disability benefit is about $920.

The recession is also fueling applications for disability benefits, said Stephen C. Goss, the Social Security Administration's chief actuary. In a typical year, about 2.5 million people apply for disability benefits, including Supplemental Security Income. Applications are on pace to reach 3 million in the budget year that ends this month and even more are expected next year, Goss said.

A lot of people who had been working despite their disabilities are applying for benefits after losing their jobs. "When there's a bad recession and we lose 6 million jobs, people of all types are going to be part of that," Goss said.

Nancy Rhoades said she dreads applying for disability benefits because of her multiple sclerosis. Rhoades, who lives in Orange, Va., about 75 miles northwest of Richmond, said her illness is physically draining, but she takes pride in working and caring for herself.

In June, however, her hours were cut in half — to just 10 a week — at a community services organization. She lost her health benefits, though she is able to buy insurance through work, for about $530 a month.

"I've had to go into my retirement annuity for medical costs," she said.

Her husband, Wayne, turned 62 on Sunday, and has applied for early Social Security benefits. He still works part time.

Nancy Rhoades is just 56, so she won't be eligible for retirement benefits for six more years. She's pretty confident she would qualify for disability benefits, but would rather work.

"You don't think of things like this happening to you," she said. "You want to be in a position to work until retirement, and even after retirement."


F O R   E V E R Y T H I N G   E L S E ,    T H E R E    I S    G O V E R N M E N T ' S    L A R G E S S E

NEW CREDIT CARD RULES LIKE CALORIES/NUTRITION SUPERMARKET ITEMS (EXAMPLE ABOVE):  Not picking up this lunch tab - at the American Bankers Association  "Sorry, got to run" says Treasury Sec'y..."Gotta run and see Chris and Barney about your request!"  Larchmont

Geithner's lifelong love of bailouts
NYPOST
By MARK A. CALABRIA, CATO INSTITUTE
Last Updated: 5:28 AM, January 20, 2010
Posted: 1:30 AM, January 20, 2010

Treasury Secretary Timothy Geithner faces tough hearings next week before the House Oversight and Government Reform Committee. But will any of the Congress members take him to task for his own role in creating last year's financial crisis?

Geithner refuses to take responsibility for "the legacy of crises you've [that is, the Republicans] bequeathed this country," as he told Rep. Kevin Brady (R-Texas) before the Joint Economic Committee in November. He apparently believes that the long string of Wall Street bailouts with which he's been associated -- starting with the Mexican "peso crisis" in 1994 -- had nothing to do with our financial institutions' widespread expectation that Washington would bail them out when they screwed up big-time.

Indeed, Geithner's consistent support for big-bank rescues dooms any real efforts to end "too big to fail." That's why, for the nation to truly move past the crisis, Geithner needs to go.

Although Geithner first came to Treasury in 1988, he didn't hold any leadership positions until 1995. But it was during those early years that he developed his apparent contempt for Congress and representative government.

In 1994, Mexico found itself unable to repay loans to a host of Wall Street investment banks. The Clinton administration pushed legislation to lend Mexico the cash -- but the new Congress voted it down. Geithner, then deputy assistant secretary for international monetary and financial policy, orchestrated back-door assistance to Mexico via Treasury's Exchange Stabilization Fund.

There was a national-interest case for helping out our southern neighbor. But it remains true that Wall Street was a huge beneficiary of that rescue -- it escaped paying a price for tens of billions in foolish lending.

Geithner, meanwhile, soon found himself in the middle of another round of bailouts -- as Treasury Secretary Robert Rubin's point man with the International Monetary Fund on the Asian financial crisis. The claim was that IMF "rescue packages" were needed to stabilize Asian economies -- but US banks again saw their losses reduced as a result.

On leaving Treasury, Geithner soon ended up at the IMF, an organization whose primary purpose seems to be to bail out US and European banks when they suffer losses on their developing-world investments -- a mission Geithner evidently shares.

From 2003 until his 2009 appointment as Treasury secretary, Geithner served as president of the Federal Reserve Bank of New York. The New York Fed's role as the top Wall Street watchdog can't be overstated -- so if regulatory failure contributed to the recent financial crisis, then few regulators contributed more than the New York Fed and its chief, Tim Geithner.

Plus, the New York Fed chief is a permanent member of the Federal Open Market Committee -- the Fed body that determines monetary policy. And Geithner strongly supported the Fed policies of that era -- particularly the overly expansionary monetary policy that directly contributed to the housing bubble.

Yes, the chief blame falls on former Fed Chairman Alan Greenspan (and to a lesser degree with then-Fed governor Ben Bernanke), but Geithner had plenty of chances to voice concerns about the growing housing bubble. He didn't.

Thankfully, Secretary Geithner's efforts to move his financial-regulatory "reforms" through Congress have so far failed. The core of his plan involves giving the Fed permanent bailout authority, which would be an unmitigated disaster: We need to end the cycle of bailouts, not double down on it.

If there's a common thread to almost every bank bailout over the last 15 years, it's that Timothy Geithner was always somewhere in the room. Each of these "rescues" brought short-term stability to our financial markets -- but only at the cost of long-term instability.

Only a handful of individuals could truly be called architects of our financial-regulatory system. Geithner, without a doubt, is one. To pretend he just now arrived on the scene is not only dishonest, it's dangerous. Without an honest assessment of how the long string of bailouts contributed to the current crisis -- an assessment that involves admitting Geithner's role -- we have little hope of avoiding future crises.




Banks make hay again;  investments boom overseas in refinancing, fueled by American banks, working with Macquarie, and Fraunces Tavern, perhaps the most historic building in lower Manhattan.

Risk-taking is back for banks 1 year after crisis
YAHOO
By STEVENSON JACOBS, AP Business Writer Stevenson Jacobs, Ap Business Writer
September 13, 200i9

NEW YORK – A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for risk.  Goldman Sachs, JPMorgan Chase and others — which have received tens of billions of dollars in federal aid — are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis.

That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say.

• There have been no significant changes to the federal rules governing their behavior. Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators.

• Through mergers and the failure of Lehman Brothers, the mammoth banks whose near-collapse prompted government rescues have gotten even bigger, increasing the risk they pose to the financial system. And they still make bets that, in the aggregate, are worth far more than the capital they have on hand to cover against potential losses.

• The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse — a precedent that could encourage even greater risk-taking from the private sector.

Lawrence Summers, director of the White House National Economic Council, says an overhaul of financial regulations is needed as soon as possible to keep the financial system safe over the long haul.

"You cannot rely on the scars of past crises to ensure against practices that will lead to future crises," Summers says.

No one is predicting another meltdown from risky trading in the near term. Rather, the concern is what happens over time as banks' confidence grows and the memory of the financial crisis of 2008 fades.  Will they pile on bets to the point that a new asset bubble forms and — as happened with mortgage-backed securities — its undoing endangers banks and the broader economy?

"We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund.

Some risk-taking is good. When banks are willing to invest in companies or lend to home-buyers, that nurtures economic growth by generating employment and consumer spending, feeding a cycle of expansion. The problem is when banks' quest for profits leads them to take on too much risk. In the case of the housing bubble, which burst last year, banks lent too freely to consumers with weak credit and wagered too much on complex financial instruments tied to mortgages. As real-estate prices turned south, so did the financial industry's health.

Because the largest banks' trading divisions make their bets with each other, their fortunes are intertwined. The collapse of one can threaten another — and another — if it is unable to pay off its debts.

This so-called counterparty risk is a major reason the Obama administration's regulatory overhaul plan calls for the creation of a "systemic risk regulator."

The administration is also seeking tougher capital requirements for banks, arguing that banks' buying of exotic financial products without keeping enough cash on reserve was a key cause of the crisis. Treasury Secretary Timothy Geithner has urged the Group of 20 nations — which meets this month in Pittsburgh — to agree on new capital levels by the end of 2010 and put them in place two years later. Geithner hasn't said how much extra capital banks should be required to keep on hand.

Data from the April-June quarter show that the banks are leaning heavily again on their trading desks for revenue.

• During the fourth quarter of 2008, when the financial crisis made even the shrewdest bankers risk-averse, Goldman's trading of risky assets nearly stopped. But in the second quarter of 2009, trading revenue had climbed to nearly 50 percent of total revenue, closer to where it was two years ago before the recession began. JP Morgan's reliance on trading revenue has exhibited a similar pattern.

• Also in the second quarter, the five biggest banks' average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago, according to regulatory filings.

The government hasn't just watched banks resume their freewheeling ways and prosper. It has been an enabler in the process. The Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp. — during both the Bush and Obama administrations — have made trillions of dollars available to the biggest banks through bailouts, low-cost loans and loss guarantees designed to stabilize the financial system.

The failure of Lehman Brothers — the biggest bankruptcy in U.S. history — and the panicky sales of Bear Stearns to JPMorgan and Merrill Lynch to Bank of America, also have transformed Wall Street. The surviving investment banks have fewer competitors and more market share.

Five of the biggest banks — Goldman, JPMorgan, Wells Fargo, Citigroup and Bank of America — posted second-quarter profits totaling $13 billion. That's more than double what they made in the second quarter of 2008 and nearly two-thirds as much as the $20.7 billion they earned in the second quarter of 2007 — when the economy was strong.

Meanwhile, Bank of America and Wells Fargo today originate 41 percent of all home loans that are backed by Fannie Mae and Freddie Mac, according to Inside Mortgage Finance. The banks made $284 billion in such loans in the first half of this year, up from $124 billion during the same period last year.

"The big banks now are more powerful than before," said Johnson, now a professor at the Massachusetts Institute of Technology's Sloan School of Management. "Their market share has grown and they have a lot of clout in Washington."

Wall Street's recovery is also being aided by a stock-market rally that has driven the S&P 500 index up nearly 54 percent since March 9, when it hit a 12-year low.

Despite the return to profitability, these aren't the high-octane days from before the crisis. To qualify for government backing, the biggest Wall Street firms are no longer allowed to supercharge their returns by borrowing up to 30 times the value of their assets to place bets on stocks, bonds and other investments.

Businesses supported by Wall Street bankers and traders say they've also noticed changes. Namely, their customers aren't spending as much on food, drinks and entertainment as they did during the boom years.

At Fraunces Tavern, a high-end bar just around the corner from the New York Stock Exchange, the Wall Street workers who used to drink $25 glasses of port are scarce these days.

"Now we're doing happy hours," says Damon Testaverde, one of the owners of Fraunces Tavern. "We never did that. There's just less bodies around."

But one thing fundamental to Wall Street hasn't changed: Big banks and their traders are still finding creative — some say speculative — ways to profit.  They're still packaging risky mortgages into securities and selling them to investors, who can earn higher returns by purchasing the securities tied to the riskiest mortgages. That was the practice that helped inflate the real estate bubble and eventually spread financial pain around the globe.

In a way, the government has emboldened banks to keep selling risky securities: Since the crisis erupted, federal emergency programs have helped keep the banks from failing. But now, as the financial system recovers, the government plans to phase out these backstops — leaving banks more vulnerable to big bets that go bad.

One investment gaining popularity is a direct descendant of the mortgage-backed securities that devastated many banks last year. To get some lesser performing assets off their books, banks are taking slices of bonds made up of high-risk mortgage securities and pooling them with slices of bonds comprised of low-risk mortgage securities. With the blessing of debt ratings agencies, banks are then selling this class of bonds as a low-risk investment. The market for these products has hit $30 billion, according to Morgan Stanley.

"It may be unpleasant to hear that the traders are riding high," said Walter Bailey, chief executive of boutique merchant banking firm EpiGroup. "But, hey, it's a pay-for-performance thing, and they're performing like mad."

And that means the return of another Wall Street mainstay: Lavish compensation.

After 10 of the largest banks received a $250 billion lifeline from the government last fall, some lawmakers were outraged that employees were being paid seven-figure salaries even though their companies nearly collapsed. A handful of top executives, including Citigroup CEO Vikram Pandit, have agreed to accept pay of just $1 this year. But the compensation of most high-performing traders hasn't changed.

Goldman spent $6.6 billion in the second quarter on pay and benefits, 34 percent more than two years ago. And Citigroup, now one-third owned by the government after taking $45 billion in federal money, owes a star energy trader $100 million.

The CEO of Goldman, Lloyd Blankfein, said at a banking conference in Germany last week that excessive banker pay works "against the public interest." He said bonuses are important to attract and retain top talent, but "misapplied, they can also encourage excess."

The Obama administration has proposed measures to diminish the risk posed by large banks. They include forcing banks to hold more capital to cover losses and trying to increase the transparency of markets in which banks trade the most complex — and potentially risky — financial products.  One major component of the Obama plan — creating an agency to oversee the marketing of financial products to consumers — will be difficult to pass in Congress. Industry lobbying against it and other proposed financial rules has been fierce.

Lobbyists for hedge funds, the large investment pools that cater to the rich, have been able to fend off proposals that would require them to register with the SEC and regularly disclose their holdings.  And they, too, are profitable again after a dismal 2008. The 1,000 largest hedge funds in Morningstar's database posted average returns of 11.9 percent through July. In 2008, those same funds lost 22 percent on average.

"Have there been changes around the edges?" says Timothy Brog, portfolio manager of New York-based hedge fund Locksmith Capital. "Absolutely. Have their been systematic changes? Absolutely not."

Geithner Says Bailout Programs Are Shrinking
NYTIMES
By EDMUND L. ANDREWS
September 11, 2009

WASHINGTON — One of President Obama’s top economic strategists said on Thursday that the government was now starting to shrink many parts of the gigantic financial bailout that followed the collapse of Lehman Brothers last September.

“We must begin winding down some of the extraordinary support we put in place for the financial system,” said the Treasury secretary, Timothy F. Geithner, in written testimony prepared for the Congressional Oversight Panel on the Treasury’s $700 billion rescue program.

Citing evidence of increased strength through much of the financial system, and signs that the recession is ending, Mr. Geithner said the government was already scaling back many of the government’s special loan and guarantee programs.  Treasury officials, in a separate briefing with reporters, said they expected banks and other financial institutions to repay an additional $50 billion to the government, on top of $70 billion that has already been repaid, over the next 12 to 18 months.

“The consensus among private forecasters is that our economy is now growing; the financial system is showing signs of repair; and the cost of credit has fallen dramatically,” Mr. Geithner said. “It is clear we have stepped back from the brink.”

The Treasury’s $700 billion Troubled Asset Relief Program, or TARP, is the most visible piece of a much broader array of emergency measures that the Obama administration and the Federal Reserve have used to prop up the economy after it fell into the deepest downturn since the Great Depression.

The Treasury has invested $239 billion in banks since the program was created one year ago. It has also invested about $80 billion in rescue efforts for General Motors, Chrysler and automobile suppliers and more than $80 billion in Fannie Mae and Freddie Mac, the mortgage-finance giants. The program has also contributed tens of billions of dollars to the Treasury and Federal Reserve’s joint bailout of the American International Group, the failed insurance conglomerate. The Treasury program is being used to subsidize loan modifications for troubled homeowners and it will soon start to subsidize the purchase of toxic assets held by banks.

Treasury officials acknowledged on Thursday that many of those efforts would be in place for a long time to come, but they said a host of special loan programs were either coming to an end or were turning out to be smaller than originally expected because private capital markets had improved so much since the start of the year.  Despite Mr. Geithner’s upbeat message, the Congressional Oversight Panel has issued a string of reports cautioning that many big problems remained.

In a report on Wednesday, the oversight panel predicted that the government would lose a substantial portion of its investment in General Motors and Chrysler. In a previous report, the panel warned that many banks have yet to sell off or write down hundreds of billions of dollars worth of troubled residential and commercial real estate mortgages.

THE INFINITE ARM OF O'S 'PAY CZAR'
New York Post
By MICHELLE MALKIN
August 19, 2009

'PAY Czar' Kenneth Feinberg's official government title is "special master for compensation." You'll be happy to know that he's really getting into the confiscatory spirit of his role. Asked by Reuters if his powers include reaching back and revoking bonuses awarded to financial-industry executives before his office was created this year, Feinberg asserted broad and binding authorities -- including the ability to "claw back" money already paid out.

Regulations governing his office explicitly limit his jurisdiction over contracts signed before Feb. 11, 2009. But the fine print is no obstacle to President Obama's czars. "The statute provides these guideposts, but the statute ultimately says I have discretion to decide what it is that these people should make and that my determination will be final," Feinberg claims. "Anything is possible under the law."

Yes, he said "anything." It's not just senior execs who fall under Feinberg's purview. "These people" also includes "the next 100 most highly paid employees" of all bank-bailout recipients, who must file compensation proposals with their pay overlord by Friday.

But why stop there? The Troubled Asset Relief Program has morphed from a toxic-asset buy-up to a capital-injection plan and back to a toxic-asset buy-up. The money has been doled out to auto-supply companies and life-insurance firms. Congress wants to siphon off more of it to bail out bankrupt California and create a "national housing trust fund" to bail out low-income renters. Grabby-handed politicians have used TARP as a crowbar to pry open new areas for command-and-control meddling under the guise of saving the economy.

How much longer until the pay czar is determining all corporate pay he wishes to deem "inappropriate, unsound or excessive"? House Financial Services Committee Chairman Barney Frank has yapped all year long about extending pay curbs to all financial institutions and perhaps to all US companies.

Let's remember that the Beltway hysteria over bonuses served as a convenient distraction from the responsibility of subprime meltdown-enabling lawmakers like Frank -- and of Obama's crony economic team.

Treasury Secretary Tim Geithner landed his previous job as head of the Federal Reserve Bank of New York thanks to heavy lobbying by his Wall Street mentors Robert Rubin and Larry Summers, both of whom sat on the New York Fed's selection committee. Their cronyism had multibillion-dollar consequences for taxpayers.

Rubin was also an executive at Citigroup, which Geithner was supposed to regulate. Instead, he helped foster Citi's spending binge and engineered the teetering company's $52 billion federal bailout. This makes the Obama administration's recent protestations about one Citi employee's $100 million compensation package look like the very kind of manufactured outrage of which it incessantly accuses its political opponents.

Geithner also had a hand in the $30 billion Bear Stearns bailout and the multilevel AIG bailouts. Massive sums of that taxpayer money went to major financial institutions that had employed Obama's moneymen and their closest confidants. Goldman Sachs, for example, raked in nearly $13 billion in December from AIG in federal TARP funds -- and reported record profits this quarter with a bonus pool of more than $11 billion.

The "solution" isn't to empower a czar to curb bonus payouts ex post facto. The solution is to stop dumping billions into failing firms in the first place.

As for private businesses, this is a teachable moment, to borrow one of Obama's favorite phrases. If a basket-case company is willing to take bailout money, it will pay an interminable price.

The long arm of regulators can and will reach back and open sealed deals and signed contracts on a whim. The Obama campaign chant is the czars' chant, too: "Yes, we can!"

"Multi-faceted commercial steps" is what he meant to say ...
Geithner Is Said to Lash Out at Regulators
NYTIMES "Dealbook"
August 4, 2009, 5:17 am

Treasury Secretary Timothy Geithner blasted top regulators in an expletive-laden tirade amid frustration over President Barack Obama’s faltering plan to overhaul financial regulation, Reuters reported, citing a Monday story in The Wall Street Journal.

A person familiar with the meeting said that Mr. Geithner told regulators “enough is enough,” the newspaper said. The meeting took place last Friday with Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairwoman Mary Schapiro and Federal Deposit Insurance Corporation Chairwoman Sheila Bair.

The Treasury secretary said regulators had been given a chance to air their concerns, but that it was time to stop, the newspaper said, citing the person.

A Treasury Department representative had no immediate comment. The Fed, the S.E.C. and the F.D.I.C. did not immediately return calls seeking comment.

Mr. Obama in June unveiled a financial regulatory overhaul, sometimes called the biggest since the 1930s. Among other things, the plan would give the Fed added powers, award the government more power to break up troubled companies and create a new agency to oversee consumer finance.

Many major banks and industry trade groups have criticized the plan, as have some regulators wary that any redistribution of power would reduce their own.

According to the newspaper, Friday’s roughly hour-long meeting was unusual because of Mr. Geithner’s repeated obscenities and his aggressive posture toward regulators generally deemed independent of the White House.

The newspaper said Mr. Geithner told attendees that the administration and Congress set policy. It also said the Treasury secretary, without singling out officials, raised concerns about regulators who have questioned the wisdom of giving the Fed more power.

Ms. Schapiro and Ms. Bair have argued that more authority should be shared among a council of regulators.

Do Obama's words reveal his Middle East sympathies?
A close examination of the speech underscores how Obama, four months into his presidency, is still introducing himself -- and what he stands for -- to Americans and the world.
Courant.com
By Peter Wallsten
June 5, 2009

Reporting from Washington

As a presidential candidate, Barack Obama left some fuzzy edges to his biography. He affirmed strong support for Israel but implied a strong empathy for Palestinians. His personal story played up his introduction to the black church, leaving his father's Islamic roots in the shadows.

It was a narrative designed to ease any voter concern about Obama's background and counter false Internet rumors that he was a Muslim.

But now, with Thursday's speech in Cairo, Obama is laying bare more of his sympathies and inclinations in the volatile area of Middle East politics.

Obama spoke, for example, of Palestinian "resistance" -- a word that can cast Israel as an illegitimate occupier. He drew parallels between Palestinians and the struggles of black Americans in slavery and of black South Africans during apartheid. Both references made some allies of Israel uneasy.

Moreover, in his defense of Israel's legitimacy, Obama cited the Holocaust and centuries of anti-Semitism, but not the belief of some Jews that their claim to the land is rooted in the Bible and reaches back thousands of years.

A close examination of the speech underscored how Obama, four months into his presidency and five years after stepping onto the national stage, is still introducing himself -- and what he stands for -- to Americans and the world.

The country has come to know Obama as someone willing to face a skeptical audience -- a Muslim world wary of U.S. power, abortion rights opponents at the University of Notre Dame and, during the presidential campaign, voters questioning his ties to the Rev. Jeremiah A. Wright Jr. -- and to ask that audiences move beyond old divisions.

Obama's style has been to cast himself as ready to lead the nation past the entrenched battles of the Clinton and Bush years and to ask Americans to look beyond old fault lines and accept a new politics of pragmatism and compromise.

Now, a key test of Obama's presidency is whether he can actually find new paths across old ideological battlefields.  In some cases, as in his speech last month at Notre Dame, there were few signs that either side in the decades-long fight over abortion rights felt obliged to give ground.

On Thursday, by contrast, the discomfort of some Jewish leaders stood as a sign that Obama may be willing to accept some level of criticism from political forces at home in the course of recasting the contours of an old dispute.  Nathan Diament, public policy director of the Union of Orthodox Jewish Congregations of America and an advisor to the White House during speech preparations, said he was struck by "some surprising word choices."

In particular, Diament was troubled that Obama shifted from his previous use of the term "Jewish state" and referred instead to a Jewish "homeland." It is a subtle distinction, but Israel advocates worry that it implies a downgrading in status.

Abraham H. Foxman, national director of the Anti- Defamation League and one of America's most ardent Israel supporters, said Obama's remark that Jewish aspirations for a homeland were "rooted in a tragic history that cannot be denied" was incorrect and "legitimizes the Arabs who say Israel has no place there."

Foxman said that Obama's views -- among them seeing lessons for Palestinians in the struggles of oppressed blacks and others with a moral high ground -- stem from his biography. "Every individual brings his own baggage," Foxman said. "He's an African American . . . and he has rediscovered his Islamic roots after two years. I don't like it, but I understand it."

Many Jewish leaders reacted with praise for much of Obama's speech, including his assurances that U.S.-Israel ties were "unbreakable" and his call for Muslims to reject violence. But there was also a concern because Obama does not have the long public record on Middle East politics that most other national leaders have developed by the time they run for the White House.

He built his early political career, on Chicago's South Side, by courting leaders from the large African American and Arab American communities. Then, as he sought statewide and national office, he also wooed Jewish leaders.

Supporters of both Israel and the Palestinian cause thought that when it came to the Middle East, Obama was sympathetic to their side -- even though his language always showed a stalwart support for Israel. A majority of American Jews supported Obama in last year's election.

"When he was a candidate he was more careful," said Ori Nir, a spokesman for the left-leaning Americans for Peace Now. In the Cairo speech, Nir said, Obama demonstrated his true feelings, free from the constraints of a campaign.

"Now he is showing great determination and courage, knowing what is needed to lead such a momentous effort," Nir said.

Several Jewish leaders described Obama's stance toward Iran's nuclear ambitions as too soft. Some also complained that he did not label Hamas a terrorist group, as he had in the campaign. Instead, he used more diplomatic terms, saying that to "play a role in fulfilling Palestinian aspirations . . . Hamas must put an end to violence, recognize past agreements, recognize Israel's right to exist."

Others said they were troubled by Obama's apparent desire to be evenhanded in his descriptions of the region's history. They objected to how the president, after invoking the bloody legacy of the Holocaust and criticizing Holocaust deniers, added: "On the other hand, it is also undeniable that the Palestinian people -- Muslims and Christians -- have suffered in pursuit of a homeland."

Said David Harris, executive director of the American Jewish Committee: "It's the search for the perfect balance that sometimes concerns me."

peter.wallsten@latimes.com

Copyright © 2009, The Los Angeles Times
An Overleveraged Presidency:  Barack Obama's risky initiatives.
THE WEEKLY STANDARD.
by Fred Barnes, executive editor
06/01/2009, Volume 014, Issue 35

Like a troubled bank, President Obama is overleveraged. When a bank makes risky loans and many of them default, the bank goes bankrupt (or gets bailed out). When a first-term president adopts risky policies and many of them fail, his prospects for sustained public approval and reelection diminish.

One of Obama's policies--the decision to close the Guantánamo prison within a year--has already gotten him in a jam. He has no plan for relocating most of the 241 detainees, and Congress refuses to fund the shutdown until he produces one. Both Congress and the public oppose transferring the prisoners to jails on American soil.

The president's distress was reflected last week in a speech in which he blamed the Bush administration for what he called the Guantánamo "mess." He said captured terrorists should never have been sent to Guantánamo, but he offered no alternative of what should have been done with them. Obama also denounced Bush officials for using tough interrogation tactics such as waterboarding to get information from terrorists. But a new poll by Whit Ayres for Resurgent Republic found a majority of Americans disagree with Obama and believe the tactics were justified.

So Obama, like a banker who made a bad loan, is confronted with a problem of his own making. The president said Bush acted too hastily in setting up Guantánamo. But Obama's announcement, two days after his inauguration, of a deadline for closing Guantánamo was a rash decision made in even greater haste.

Most presidents propose two or three risky policies in their first year--risky because there's a significant chance of failure to deliver what's promised. In 1981, President Reagan's policies of deep cuts in taxes and spending and aggressively confronting the Soviet Union were dicey. But the economy rebounded 18 months later and the Soviets buckled, though not until Reagan's second term.

Obama has outdone Reagan or any president since Lyndon Johnson, perhaps even since FDR, in risk-taking. He's adopted or proposed eight or nine risky policies (by my count). Re-election doesn't require all of them to succeed. If his policies bring about a briskly growing economy and nothing more, that may be sufficient for Obama to win a second White House term.

The president has been criticized for trying to do too much in his first year rather than focusing on a few important issues. But the size of Obama's agenda is less of a problem than the likelihood that much of it will be enacted, given the large Democratic majorities in the Senate and House.

The difficulty is that some of his policies are likely to hinder others. Tax hikes, increased energy costs, and new regulations work against the economic recovery that soaring spending and peacetime deficits at historic highs are supposed (by Obama at least) to spur. A more likely result: stagflation, a simultaneous surge in inflation and interest rates.

Obama is now trying to deleverage. The purpose of his speech last week was to take the risk--or at least the appearance of risk--out of his policy on Guantánamo and terrorists. He insisted the safety of Americans would never be put in jeopardy by the release of prisoners from Guantánamo or their transfer to prisons in this country.

In his appearance with Israeli prime minister Benjamin Netanyahu, Obama toughened his policy toward Iran. His position, a risky one, had been that friendly diplomacy is the best policy for persuading the Iranians to abandon their effort to build nuclear weapons. But Obama indicated he'd turn to stronger measures if the Iranians haven't responded favorably by the end of 2009.

Obama has set "energy independence" as a goal. But his policies make that goal harder to achieve. His administration has refused to open new areas in the United States and offshore for oil exploration and production. It favors lavish subsidies for renewable energy (wind, solar) that will do little in the foreseeble future to make up for the shortfall in domestic production of gasoline. As the demand for gasoline increases, as it almost certainly will, there will be only one place to turn: foreign oil.

His takeover of the Big 2 in Detroit, General Motors and Chrysler, poses another risk: downright failure. The auto companies are a money pit, requiring tens of billions in federal subsidies just to stay alive. The public opposes the continued bailout of the auto companies, but Obama is stuck with it. And the chance that either company will soon return to profitability is slim.

Taken together, Obama's policies on energy, health care, and financial institutions are risky for still another reason. They require more government control of the economy, which leads inevitably to a less dynamic and innovative economy and to less growth.

The raft of new regulations should have the same effect. Obama's crackdown on the credit card industry may be justified on ethical grounds. But there's a simple economic fact that applies here: The more you regulate something, the less you get of it. Though more credit is critical to reviving the economy, the new regulations mean we'll get less of it.

Obama is also a fan of labor unions. Through card check or whatever else it takes, Obama wants unionization of the workforce to grow. This, too, is risky. Unionization leads to higher wages for union workers but fewer jobs for everyone else. For Obama, the best outcome in 2009 is counterintuitive. The fewer of his risky initiatives that pass--in effect deleveraging his agenda--the better for the economy, and the better for him politically.  

Credit Card Industry Aims to Profit From Sterling Payers
NYTIMES
By ANDREW MARTIN
May 19, 2009

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.  Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

As they thin their ranks of risky cardholders to deal with an economic downturn, major banks including American Express, Citigroup, Bank of America and a long list of others have already begun to raise interest rates, and some have set their sights on consumers who pay their bills on time. The legislation scheduled for a Senate vote on Tuesday does not cap interest rates, so banks can continue to lift them, albeit at a slower pace and with greater disclosure.

“There will be one-size-fits-all pricing, and as a result, you’ll see the industry will be more egalitarian in terms of its revenue base,” said David Robertson, publisher of the Nilson Report, which tracks the credit card business.  People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks.

“Despite all the terrible things that have been said, you’re making out like a bandit,” he said. “That’s a third of credit card customers, 50 million people who have gotten a great deal.”

Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders — “deadbeats” in industry parlance, because they generate scant fee revenue.

“They aren’t charities. They have shareholders to report to,” he said, referring to banks and credit card companies. “Whatever is left in the model to work from, they will start to maneuver.”

Banks used to give credit cards only to the best consumers and charge them a flat interest rate of about 20 percent and an annual fee. But with the relaxing of usury laws in some states, and the ready availability of credit scores in the late 1980s, banks began offering cards with a variety of different interest rates and fees, tying the pricing to the credit risk of the cardholder.

That helped push interest rates down for many consumers, but they soared for riskier cardholders, who became a significant source of revenue for the industry. The recent economic downturn challenged that formula, and banks started dumping the riskiest customers and lowering their credit limits in earnest as the recession accelerated. Now, consumers who pay their bills off every month are issuing a rising chorus of complaints about shortened grace periods, new hidden fees and higher interest rates.

The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

Citigroup and Capital One referred comments to the A.B.A. Discover and American Express declined to comment. Bank of America intends to “provide credit to the largest number of creditworthy customers possible, while also remaining prudent in our lending practices,” said Betty Riess, a spokeswoman. Together with JPMorgan Chase, which has said the changes will force it to limit credit availability and raise fees, these banks account for 80 percent of the credit card industry.

Banks are not required to publicly reveal how much money they make from penalty interest rates and fees, though government officials and industry consultants estimate they constitute a growing portion of revenue.

For instance, Mr. Hammer said the amount of money generated by penalty fees like late charges and exceeding credit limits had increased by about $1 billion annually in recent years, and should top $20 billion this year.

Regulations passed by the Federal Reserve in December to curb unexpected interest charges would cost issuers about $12 billion a year in lost fees and income, according to industry calculations. The legislation before Congress would build on the Fed rules and would further squeeze banks’ revenue when they are being hit with a high rate of credit card charge-offs. The government’s stress tests showed that the nation’s 19 biggest banks will take on $82 billion in credit card losses in the next two years.

A 2005 report by the Government Accountability Office estimated that 70 percent of card issuers’ revenue came from interest charges, and the portion from penalty rates appeared to be growing. The remainder came from fees on cardholders as well as retailers for processing transactions. Many retailers are angry at the high fees and plan to pass them on to shoppers once the Congressional legislation takes effect.  Consumer advocates say they have little sympathy for credit card issuers, arguing that they have made billions in recent years with unfair and sometimes deceptive practices.

“The business model will change because the business model doesn’t work for the public,” said Gail Hillebrand, a senior lawyer at Consumers Union.

“In order to do business under the new rules, they’ll actually have to tell you how much it’s going to cost,” she said.

With many consumers mired in debt and angry at what they consider gouging by credit card companies, the issue of credit card reform has broad populist appeal. Members of Congress and the Obama administration have seized on the discontent to push reforms that the industry succeeded in tamping down when the economy was flying high.

Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to “a series of carjackings.”

“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.

Op-Ed Columnist
Fiscal Suicide Ahead
NYTIMES
By DAVID BROOKS
May 15, 2009

Barack Obama came to office with a theory. He believed that the country was in desperate need of new investments in education, energy and many other areas. He also saw that the nation faced a long-term fiscal crisis caused by rising health care and entitlement costs. His theory was that he could spend now and save later. He could fund his agenda with debt now and then solve the long-term fiscal crisis by controlling health care and entitlement costs later on.

In essence, health care became the bank out of which he could fund the bulk of his agenda. By squeezing inefficiencies out of the health care system, he could have his New New Deal and also restore the nation to long-term fiscal balance.

This theory justified the tremendous ramp-up of spending we’ve seen over the last several months. Obama inherited a $1.2 trillion deficit and has quickly pushed it up to $1.8 trillion, a whopping 13 percent of G.D.P. The new debt will continue to mount after the economy recovers. The national debt will nearly double over the next decade. Annual deficits will still hover around 5 percent or 6 percent of G.D.P. in 2019. By that year, interest payments alone on the debt are projected to be $806 billion annually, according to the Congressional Budget Office.

Obama believes these deficit levels are tolerable if he can fix the long-term fiscal situation, but he hasn’t been happy about them. He’s been prowling around the White House prodding his staff to find budget cuts. Some of the ideas they have produced have been significant (Medicare reforms), some have been purely political (asking cabinet secretaries to cut $100 million in waste, fraud and abuse), and many have been gutted on Capitol Hill (cap and trade, proposed changes in charitable deductions, proposed changes to the estate tax).

In any case, these stabs at fiscal discipline haven’t come close to keeping up with the explosion in spending. The government now borrows $1 for every $2 it spends. A Treasury bond auction earlier this month went poorly, suggesting the world’s hunger for U.S. debt is not limitless. President Obama has been thrown back on his original theory. If he is going to sustain his agenda, if he is going to prevent national insolvency, he has to control health care costs. Health care costs are now the crucial issue of his whole presidency.

Obama and his aides seem to understand this. They have gone out of their way to emphasize the importance of restraining costs. The president has held headline-grabbing summits with business and union leaders. Unlike just about every other Democrat on the planet, he emphasizes cost control as much as expanding health coverage.  o what exactly is the president proposing to help him realize hundreds of billions of dollars a year in savings?

Obama aides talk about “game-changers.” These include improving health information technology, expanding wellness programs, expanding preventive medicine, changing reimbursement policies so hospitals are penalized for poor outcomes and instituting comparative effectiveness measures.

Nearly everybody believes these are good ideas. The first problem is that most experts, with a notable exception of David Cutler of Harvard, don’t believe they will produce much in the way of cost savings over the next 10 years. They are expensive to set up and even if they work, it would take a long time for cumulative efficiencies to have much effect. That means that from today until the time President Obama is, say, 60, the U.S. will get no fiscal relief.

The second problem is that nobody is sure that they will ever produce significant savings. The Congressional Budget Office can’t really project savings because there’s no hard evidence they will produce any and no way to measure how much. Some experts believe they will work, but John Sheils of the Lewin Group, a health care policy research company, speaks for many others. He likes the ideas but adds, “There’s nothing that does much to control costs.”

If you read the C.B.O. testimony and talk to enough experts, you come away with a stark conclusion: There are deep structural forces, both in Medicare and the private insurance market, that have driven the explosion in health costs. It is nearly impossible to put together a majority coalition for a bill that challenges those essential structures. Therefore, the leading proposals on Capitol Hill do not directly address the structural problems. They are a collection of worthy but speculative ideas designed to possibly mitigate their effects.

The likely outcome of this year’s health care push is that we will get a medium-size bill that expands coverage to some groups but does relatively little to control costs. In normal conditions, that would be a legislative achievement.  But Obama needs those cuts for his whole strategy to work. Right now, his spending plans are concrete and certain. But his health care savings, which make those spending plans affordable, are distant, amorphous and uncertain. Without serious health cost cuts, this burst of activism will hasten fiscal suicide.

Judge Attacks Merrill Pre-Merger Bonuses
NYTIMES
By LOUISE STORY
August 11, 2009

Reigniting a major controversy over Wall Street pay, a federal judge on Monday sharply criticized the bonuses that Merrill Lynch hurriedly paid out before it was acquired by Bank of America last year and pointedly questioned a federal settlement that had seemed to put the issue to rest.

A week after the Securities and Exchange Commission announced that it had settled the matter, Judge Jed S. Rakoff questioned whether the $33 million agreement with Bank of America was adequate. He refused to approve the deal, saying too many questions remained unanswered, including who knew what and when about the controversial payouts.

His ruling prolongs what has become a major embarrassment for Bank of America and its chief executive, Kenneth D. Lewis, and also deals a stinging blow to the S.E.C., which needs Judge Rakoff’s approval of its deal with the bank.

Judge Rakoff ordered the bank and the commission to submit more information to him within two weeks.

During a hearing in New York that was heated at times, the judge was scathing about the settlement, in which the S.E.C. accused Bank of America of misleading its shareholders. Bank of America neither admitted nor denied wrongdoing.

Bank of America and Merrill Lynch, Judge Rakoff said, “effectively lied to their shareholders.” The $3.6 billion in bonuses paid by Merrill as the ailing brokerage giant was taken over by the bank was effectively “from Uncle Sam.”

The Merrill bonuses, which were the subject of a state investigation and prompted an outcry in Congress, were paid even though Merrill Lynch lost $27 billion last year. Its deepening red ink later forced Bank of America to seek a second taxpayer-financed bailout

“Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?” the judge asked.

Judge Rakoff, who took an active role in the S.E.C.’s case against WorldCom, is yet another voice in a growing chorus of critics of the Bank of America-Merrill deal, which was forged in the heat of the financial crisis last fall. Both the S.E.C. and Bank of America defended the settlement. The bank’s fine, however, represented a small fraction of the bonuses paid out by Merrill Lynch, a fact the judge and other critics seized on. In fact, at least one individual at Merrill Lynch collected a bonus totaling more than that amount.

The judge characterized the $33 million fine as “strangely askew” given the accusations made, the magnitude of Merrill’s losses and the subsequent bailout for Bank of America. The judge questioned the role of top executives at the companies, in particular Mr. Lewis and John A. Thain, the former chief executive of Merrill Lynch, both of whom signed off on a proxy statement to investors.

“Was there some sort of ghost that performed those actions?” Judge Rakoff said.

The S.E.C.’s complaint focused on a document that detailed the bonuses, but which was not included in the merger agreement or proxy statement that was sent to the companies’ shareholders, who voted to approve the merger on Dec. 5.

The S.E.C.’s lawyer, David Rosenfeld, said repeatedly during the hearing Monday that the agency had chosen not to make allegations against individuals in the case.

Mr. Rosenfeld spoke softly and was called up to the microphone after Judge Rakoff criticized the S.E.C. for the evidence it had presented — or failed to. The judge said the commission was remiss for not determining who at the companies decided not to disclose the bonus agreement. And he suggested that they should have interviewed the external lawyers for both companies.

“You filed a rather uninformative, bare-bones complaint,” Judge Rakoff said.

Lewis J. Liman, a lawyer representing Bank of America, told the judge, when prodded, that the bank believed it had not wronged its shareholders. Mr. Liman, son of Arthur L. Liman, the lawyer who led the Iran-contra investigation in the Senate, seemed at times dismissive, saying at one point: “My God! Bonuses on Wall Street? It is not a matter of surprise.”

Merrill had little choice but to pay many of the bonuses, Mr. Liman said. Of the $3.6 billion, Merrill had committed $850 million in the form of guaranteed bonuses. Mr. Liman said the rest of the money was shared among 39,000 workers who received average payments of $91,000 — though he did not mention that there were 696 people at Merrill who made more than $1 million in bonuses.

“I’m glad you think that $91,000 is not a lot of money,” the judge said. “I wish the average American was making $91,000.”

Mr. Liman agreed that $91,000 was quite a lot.

Judge Rakoff said he might hold another hearing to consider evidence of whether the bonuses were needed. He said he might want to know if Merrill’s management studied how many of the roughly 39,000 bonus recipients would have left had they not received their payouts.

Mr. Liman said the bank could prove in litigation that there were a number of companies that might have hired Merrill’s employees.

Mr. Rosenfeld of the S.E.C. said he had based the fine in part on a case the agency filed against Wachovia over disclosure issues in 2001. That case involved disclosure of a stock buyback program that cost $500 million.

The lawyer for Bank of America periodically whispered what appeared to be suggestions to Mr. Rosenfeld. One point that Mr. Liman emphasized was that the $3.6 billion was paid with funds other than the federal bailout money, and he said that if the bonuses were a problem simply because of the bank received aid, other banks that had received bailouts might face similar allegations.

The judge was unmoved. “Money is money, the last time I checked,” Judge Rakoff responded.
SEC Head Pledges Agency Will Get Tough
DAY
By Marcy Gordon
Published on 7/15/2009

The Securities and Exchange Commission has been revamping itself, buttressing enforcement efforts and taking a series of initiatives to protect investors in the wake of the financial crisis and massive Madoff fraud, the agency's chairman said Tuesday.

The agency has undergone fundamental changes “that will reinforce our focus on investor protection and market integrity,” SEC Chairman Mary Schapiro testified at a House hearing.

Appointed by President Barack Obama, Schapiro took the helm in January of an agency demoralized and widely assailed over its failure to detect Bernard Madoff's Ponzi scheme for many years despite red flags. The SEC also was criticized by lawmakers and investor advocates for its oversight of Wall Street investment banks in the period leading up to the financial crisis that erupted last year.

”In the wake of the Madoff fraud, I believe we owe it to investors to show them that we can and will adapt our ways and learn from our past errors so that we do not repeat them,” Schapiro said.

Schapiro has taken steps aimed to strengthen and speed the agency's enforcement efforts and installed a new enforcement director.

”We have to hold people accountable at all levels of the agency,” Schapiro said. “We've tried to pull all the lessons we can from those failings.”

The House panel seemed willing to increase funding for the SEC's budget, which Schapiro said was needed for the agency to have sufficient staff to police burgeoning and sophisticated markets.

The House is considering an increase of 8 percent in the SEC's proposed $1.03 billion budget for the fiscal year starting in October. But Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services subcommittee on capital markets, said Congress must seriously consider the SEC's request to boost its $1.2 billion budget for fiscal 2011 by an additional 20 percent.

A series of regulatory actions by the SEC commissioners in recent months have included restricting short-selling in down markets, strengthening oversight of mutual funds, tightening scrutiny of investment advisers and making it easier for shareholders to seat directors on company boards.

Schapiro said that restraining short-selling was the most widely and fiercely debated issue that has come before the agency during her tenure. The SEC has opened a public discussion on possible ways to restrict the practice of making trades that bet against a stock, which is legal and widely used on Wall Street.

Investors and lawmakers have clamored for limits on moves they say worsened the market's downturn. Short-selling involves borrowing a company's shares, selling them, then buying them back when the stock falls and returning them to the lender. The short seller pockets the difference.

The SEC also is working to identify emerging risks to investors, including so-called “dark pools,” or automated trading systems that don't publicly provide price quotes, Schapiro said.

Obama Proposes a First Overhaul of Finance Rules
NYTIMES
By STEPHEN LABATON and JACKIE CALMES
May 14, 2009

WASHINGTON — In its first detailed effort to overhaul financial regulations, the Obama administration on Wednesday sought new authority over the complex financial instruments, known as derivatives, that were a major cause of the financial crisis and have gone largely unregulated for decades.

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.

The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them.

“This financial crisis was caused in large part by significant gaps in the oversight of the markets,” Mr. Geithner said in a briefing. He said the proposal was intended to make the trading of derivatives more transparent and give regulators the ability to limit the amount of derivatives that any company can sell, or that any institution can hold.

The initiative was well received by senior Democrats in Congress with jurisdiction over the issue. The proposal had been expected, but some lawmakers, impatient with the pace of the new administration’s efforts, had begun moving ahead themselves.

Hinting at a lobbying campaign to come, Robert Pickel, the chief executive of the International Swaps and Derivatives Association, a trade group, said his organization “looked forward to working with policy makers to ensure these reforms help preserve the widespread availability of swaps and other important risk management tools.”

But some in the financial industry say that regulation is inevitable. “Nobody is in a ‘just say no’ mode,” said Steven A. Elmendorf, a former aide to the House Democratic leadership who represents several major financial institutions and groups. “Everybody understands that we’ve been through a financial crisis and that change has to happen. And the only question is how the change happens.”

The administration is seeking the repeal of major portions of the Commodity Futures Modernization Act, a law adopted in December 2000 that made sure that derivative instruments would remain largely unregulated.  The law came about after heavy lobbying from Wall Street and the financial industry, and was pushed hard by Democrats and Republicans alike. It was endorsed at the time by the Treasury secretary, Lawrence H. Summers, who is now President Obama’s top economic adviser.

At the time, the derivatives market was relatively small. But it soon exploded, and the face value of all derivatives contracts across the world — a measure that counts the value of a derivative’s underlying assets — outstanding at the end of last year totaled more than $680 trillion, according to the Bank for International Settlements in Switzerland. The market for credit-default swaps — a form of insurance that protects debtholders against default — stood around $38 trillion, according to the international swaps group. That represents the total amount of insurance that has been written on various kinds of debt, but the amount that would have to be paid out if the debt went into default is considerably less.

As the credit crisis has unfolded, trading in credit-default swaps has cooled, market participants said. The collapse of A.I.G. took a huge player out of the market and banks, hobbled by losses, have curbed their activities in the market. Still, derivatives trading desks have been profit centers at major banks recently.

The biggest banks and brokerage firms, including JPMorgan Chase, Citigroup and Goldman Sachs, as well as major insurers, are all major players in derivatives.

Derivatives are hard to value. They are virtually hidden from investors, analysts and regulators, even though they are one of Wall Street’s biggest profit engines. They do not trade openly on public exchanges, and financial services firms disclose few details about them. The new rules are meant to change most, but not all, of that opacity.

Used properly, they can reduce or transfer risk, limit the damage from market uncertainty and make global trade easier. Airlines, food companies, insurers, exporters and many other companies use derivatives to protect themselves from sudden and unpredictable changes in financial markets like interest rate or currency movements. Used poorly, derivatives can backfire and spread risk rather than contain it.

The administration plan would not require that custom-made derivative instruments — those with unique characteristics negotiated between companies — be traded on exchanges or through clearinghouses, though standardized ones would. The plan would require the development of timely reports of trades, similar to the system for corporate bonds.

The letter suggested that the Commodity Futures Trading Commission would play a leading role in the oversight of the market, although it would also leave important elements to the Securities and Exchange Commission. Over the years, the turf battle between those agencies contributed to the neglect of that market by government overseers.

Some lawmakers in the House and Senate have already introduced measures to regulate derivatives. But a number of members have pressed the administration to put out its own plan.

Representative Barney Frank of Massachusetts, the chairman of the House Financial Services Committee that oversees the S.E.C., and Representative Collin C. Peterson of Minnesota, chairman of the House Agriculture Committee with oversight of the commodities trading commission, released a joint statement saying, “we agree there must be strong, comprehensive and consistent regulation” of derivatives. “We will work closely together to achieve that goal,” they added.

While derivatives regulation will be a focus of some market players, of equal concern to many in the financial industry are what the Obama administration and Congress might do to regulate compensation for executives across the board, not just at institutions that have accepted federal bailout money.

The Treasury is acting on two paths. First, it plans as soon as next week to announce revised compensation rules for companies getting assistance, to make those rules conform with a law Congress passed in February that was more stringent than the Treasury’s own guidelines.

Separately, Treasury officials have just begun discussing with the Federal Reserve and the S.E.C. what the government can do industrywide — through incentives, restrictions or a mix of the two — to guard against eye-popping compensation that rewards excessive risk-taking of the sort that contributed to the current crisis.

The fear among many in the industry — and some in the administration — is that whatever limits Mr. Obama proposes, Congress will seek to add even more, in response to public anger.

In addition to the regulatory changes it is seeking, the administration is also continuing to expand its bailout programs for various industries. Mr. Geithner announced on Wednesday that the administration would provide a new round of capital assistance to smaller community banks, and would increase the amount that they can borrow from the program.

Beyond derivatives, he also said that the administration would be presenting a comprehensive proposal to overhaul the regulation of the financial system. He said a central goal would be to eliminate the ability of companies to pick the least onerous regulator.

“We need a much simpler financial oversight structure,” he said. “It’s not going to be comfortable for everybody but it’s important to do.”


Another side of the foreclosure lesson, or how big banks can't always have their way...how many times does this NOT happen?

As Big Banks Repay Bailout Money, U.S. Sees a Profit
NYTIMES
By ZACHERY KOUWE (and Eric Dash)
August 31, 2009

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.  These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.  But the mere hint of bailout profits for the nearly year-old Troubled Asset Relief Program has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business.

“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican and a member of the Congressional Oversight Panel examining the relief program, said in an interview.

Profits were hardly high on the list of government priorities last October, when a financial panic was in full swing and the Treasury Department started spending roughly $240 billion to buy preferred shares from hundreds of banks that were facing huge potential losses from troubled mortgages. Bank stocks began teetering after Lehman Brothers collapsed and the government rescued A.I.G., and fear gripped the financial industry around the world.

American taxpayers were told they would eventually make a modest return from these investments, including a 5 percent quarterly dividend on the banks’ preferred shares and warrants to buy stock in the banks at a set price over 10 years.  But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

The figure does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans. The government bought shares in these and many other financial companies last fall, when sinking confidence among investors pushed down many bank stocks to just a few dollars a share. As the banks strengthened and became profitable, the government authorized them to pay back the preferred stock, which had been paying quarterly dividends since October.  But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.

Despite the early proceeds from the bailout program, a debate remains over whether the government could have done even better with its bank investments.

If private investors had taken a stake in the banks last October on par with the government’s, they would have had profits three times as large — about $12 billion, or 44 percent if tallied on an annual basis, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who analyzed the data for The Times.  Why the discrepancy? Finance experts say the government overpaid for the bank assets it bought, because its chief priority was to stabilize the teetering financial system, not to maximize profit.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” said Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions.

A Congressional oversight panel concluded in February that the Treasury paid an average of 34 percent more than the estimated fair value of the assets it received.  Of course, many finance experts suggest that the comparison is academic at best, because there is no way to know what might have become of the banks or the financial system as a whole had the government not acted.

“Taxpayers should heave a sigh of relief that the investment in the banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the Stern School of Business at New York University.

A more direct comparison of profits can be made with the investment performance of other governments that poured money into ailing banks last fall.  The Swiss government, for example, said last week that it had pulled in a handsome profit for taxpayers on a $5.6 billion bailout it gave to UBS, the troubled Swiss bank, at the height of the financial crisis in October. The government netted $1 billion on its investment, a gain equal to a 32 percent annual return.

“They are substantially in the money,” Guy de Blonay, a fund manager at Henderson New Star in London, said after the announcement.

American taxpayers could still collect additional profits on their investments in two other big banks that have repaid their preferred stock but not their warrants: JPMorgan Chase and Capital One. They are expected to yield over $3.1 billion in gains for the Treasury in the next month or so, although the full tally will depend on how much they will pay to buy back their warrants.  And the government is owed about $6.2 billion in interest payments from banks that have not yet repaid their federal money.

But all the profits taxpayers have won could still be wiped out by two deeply troubled institutions. Both Citigroup and Bank of America are still holding mortgages and other loans that were once worth billions of dollars but whose revised values are uncertain. If they prove “toxic” because they cannot attract buyers, they could leave large holes in the banks’ balance sheets.  Neither bank is ready to repay its bailout money anytime soon, even though the banks’ stock prices have surged in the last month, leaving the government sitting on paper profits of about $18 billion between them.
Who benefits if the big banks can't relieve the "stress"?  How about these guys?
Three Big U.S. Banks to Sell Stock And Repay TARP
NYTIMES
By REUTERS
Filed at 8:07 a.m. ET
May 11, 2009

NEW YORK (Reuters) - Three big U.S. banks announced large common stock offerings on Monday and said they would use proceeds to repay funds received under the government's bank bailout program.

U.S. Bancorp <USB.N> said it plans to raise $2.5 billion, Capital One Financial Corp <COF.N> roughly $1.75 billion, and BB&T Corp <BBT.N> $1.5 billion. Capital One said its offering will total 56 million shares.

BB&T also said it will reduce its quarterly dividend 68 percent to 15 cents per share from 47 cents, saving $725 million a year, following 37 straight years of dividend increases. U.S. Bancorp also plans to sell medium-term notes.

In premarket trading, shares of U.S. Bancorp fell 3.7 percent, Capital One 8.7 percent and BB&T 6.6 percent.

The three banks were among the 19 lenders to undergo government "stress tests" of their ability to weather a long and deep economic downturn, and were among the nine found not to need more capital.

U.S. Bancorp took $6.6 billion from the government's Troubled Asset Relief Program, while Capital One took $3.55 billion and BB&T $3.1 billion.

Hundreds of lenders took money from TARP, which was designed to spur lending and improve the economy.

Yet many now view TARP as an albatross that imposes too many restrictions, including on executive pay, and suggests that recipients are desperate for capital.

"Rational, objective lending is one of the most important purposes of the banking system, and when you inject Congress and the administration into it, it effectively politicizes the process, which is not healthy," BB&T Chief Executive Kelly King said in an interview on Monday.

King also faulted the stress tests, saying they unnecessarily created "huge levels of anxiety and concern" among investors. "Regulators have always had the ability to assess the capital of institutions, and require more if they chose," he said.

On Friday, Wells Fargo &amp; Co <WFC.N> and Morgan Stanley <MS.N>, each found to need more capital under the stress test, sold $8.6 billion and $4 billion of stock, respectively. Morgan Stanley also sold $4 billion of debt.

Goldman Sachs & Co and Morgan Stanley are arranging the U.S. Bancorp stock offering. Barclays Capital is arranging the Capital One stock offering. Goldman Sachs, JPMorgan and Morgan Stanley are arranging the BB&T stock offering.

In Friday trading, U.S. Bancorp shares closed at $20.54, Capital One at $31.34 and BB&T at $26.33, Reuters data show.

 
Specter’s Plan to Rein In the Presidency
NYTIMES
By Robert Mackey
April 28, 2009, 1:26 pm

The current issue of the New York Review of Books includes an article by Senator Arlen Specter, Republican Democrat of Pennsylvania, called “The Need to Roll Back Presidential Power Grabs,” which suggests that Mr. Specter has not switched parties with the intention of simply rubber-stamping President Barack Obama’s legislative agenda.

Finding Mr. Specter’s byline in the left-leaning Review would seem to underscore that, as he said in his official statement on Tuesday, his “political philosophy” is now “more in line with Democrats than Republicans.” But the article itself makes clear that the newest Democrat hopes to use his position to rein in the power of the presidency.

In it, Mr. Specter makes the case that “since September 11, the United States has witnessed one of the greatest expansions of executive authority in its history, at the expense of the constitutionally mandated separation of powers.”

He then lays out an ambitious effort to roll back those powers, in words that indeed seem more natural coming from a senator of the majority party, rather than one in the minority:
I intend to take several concrete steps, which I hope the new president will support.

First, I intend to introduce legislation that will mandate Supreme Court review of lower court decisions in suits brought by the A.C.L.U. and others that challenge the constitutionality of the warrantless wiretapping program authorized by President Bush after September 11. While the Supreme Court generally exercises discretion on whether it will review a case, there are precedents for Congress to direct Supreme Court review on constitutional issues — including the statutes forbidding flag burning and requiring Congress to abide by federal employment laws — and I will follow those.

Second, I will reintroduce legislation to keep the courts open to suits filed against several major telephone companies that allegedly facilitated the Bush administration’s warrantless wiretapping program. Although Congress granted immunity to the telephone companies in July 2008, this issue may yet be successfully revisited since the courts have not yet ruled on the legality of the immunity provision. My legislation would substitute the government as defendant in place of the telephone companies. This would allow the cases to go forward, with the government footing the bill for any damages awarded.

Further, I will reintroduce my legislation from 2006 and 2007 (the “Presidential Signing Statements Act”) to prohibit courts from relying on, or deferring to, presidential signing statements when determining the meaning of any Act of Congress. These statements, sometimes issued when the president signs a bill into law, have too often been used to undermine congressional intent. Earlier versions of my legislation went nowhere because of the obvious impossibility of obtaining two-thirds majorities in each house to override an expected veto by President Bush. Nevertheless, in the new Congress, my legislation has a better chance of mustering a majority vote and being signed into law by President Obama.

In the rest of his article, Mr. Specter lays out in detail the “imbalance in our ‘checks and balances’ that has become increasingly evident in recent years.” He writes that he “witnessed firsthand, during many of the battles over administration policy since September 11, how difficult it can be for Congress and the courts to rally their members against an overzealous executive.”

Feeling Secure, Some Banks Want to Be Left Alone
NYTIMES
By GRAHAM BOWLEY and ERIC DASH
April 29, 2009

As Washington pushes banks to mend their finances, the banks are pushing back.

Emboldened by newfound profits and eager to shake off federal control, a growing number of banks are resisting the Obama administration’s proposals for fixing the financial system. Lenders that skirted disaster only months ago with the help of taxpayer dollars are now balking at government prescriptions.

Despite pressure from federal regulators, industry executives are taking issue with major elements of the president’s bank plan. Administration officials characterize each part of their three-pronged approach as crucial to bolstering banks and restarting the economy. But bankers are increasingly eager to extricate themselves from the government’s grasp, and worry that Washington will impose new restrictions on their businesses if the government’s already considerable role in the industry grows.

“The pushback has been pretty hard,” said Frederick Cannon, the chief equity strategist of Keefe, Bruyette & Woods and a specialist in banking stocks. “If we don’t address these issues, that could have a negative effect on economic growth, which in turn makes the banks’ problems worse.”

As the Obama administration marks its first 100 days, the banks’ resistance is complicating the government’s effort to solve some of the thorniest problems of the financial crisis. Opposition is building on several fronts.

Citigroup, Bank of America and other big banks are disputing so-called stress tests being conducted by federal examiners to determine how these institutions would withstand a deep, prolonged recession. The banks contend they are in better shape than the early findings suggest, although it is likely several will need to raise capital.

A Treasury plan to purge banks of their troublesome assets — a seemingly intractable problem — has received a lukewarm response in banking circles. Several big banks have declared they have no intention of participating in the program. Another major effort, one to revive credit for everything from car loans to equipment leases, has also gotten off to a slow start.

Administration officials said Tuesday that their efforts were going according to plan. They said that more than 100 private money managers had signed up for the program to buy troubled assets. “We are not flipping a switch here,” said one official, calling for patience. “These are intricate programs.”

But the disputes over the stress tests, which have been administered to 19 big banks, and a lackluster reception to the third effort, the Term Asset-Backed Securities Loan Facility, or TALF, are also potential worries.

Large banks are being put through a battery of tests to see whether they will hold up under pressure in the worst-case economic assumptions over the next two years. Big banks like Citigroup, Bank of America, PNC Financial and Wells Fargo are disputing some of the early findings, which suggest some banks may need to raise capital, according to people briefed on the exams. Because of the protracted negotiations with the banks and regulator infighting over how much information to disclose, officials now plan to announce the results on May 5 or 6, the third time the date has been postponed.

“There is concern among the banks that the stress test has led to uncertainty, the opposite of what is intended, and they would be diluting their shareholders based on a scenario that the regulators say themselves are unlikely to happen,” said Edward L. Yingling, the head of the American Bankers Association.

According to people briefed on the situation, the disputes center on several assumptions that regulators made in administering the tests. These include the severity of losses on assets like mortgages, credit card loans and commercial real estate loans, as well as the banks’ potential to generate earnings.

In a further challenge, the banks are also pushing regulators to relax the timetable for them to obtain new capital.

Some investors are prepared to buy problem assets from banks. What is less certain is whether banks will be willing to sell. Big money managers like BlackRock and Bank of New York Mellon said they had applied to raise money for the troubled-asset funds. While administration officials say they never expected every bank to participate, large banks whose involvement was regarded as vital to the plan’s success have said they will not be involved. Executives worry that whatever assurances the White House gives them, an angry Congress might impose new rules on banks that participate, particularly on pay.

Officials from Citigroup, Morgan Stanley, PNC Financial and a number of other big lenders that have received multibillion-dollar government bailouts are reluctant to participate or have refused so far to commit until more details are offered. Jamie Dimon, JPMorgan Chase’s chief executive, has said he believes that the Public-Private Investment Program — which depends on loans from the Federal Deposit Insurance Corporation — could be “good for the system” but that his bank has no intention of being either a seller or buyer. “We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that,” he said earlier this month in a conference about earnings.

Many banks are reluctant to sell their nonperforming loans because they could suffer big losses, forcing them to raise more capital. Others want to avoid the stigma of latching on to another federal program.

“Never mind the price,” James E. Rohr, PNC’s chief, said in a recent interview. “I wouldn’t want to be the first person and be perceived as a weak bank.”

D. Bryan Jordan, the chief executive of First Horizon, a big lender based in Tennessee, said the likelihood that his bank would participate was somewhat low. “We think we can get a lot more value out of them by working them out ourselves,” he said earlier this month in a conference call about first-quarter results.

Art Murton, an official at the F.D.I.C. who is helping to devise the troubled-loan program, said there had been “encouraging” levels of interest. To test the investor waters, the F.D.I.C. is planning a pilot auction in June.

The TALF program has also struck some as underwhelming. It was to ignite the market for securities backed by consumer and small-business loans, which dried up last year.

Policy makers said they planned to lend up to $1 trillion under the program. But investors took only $4.7 billion in loans in the first installment in March, and a further $1.7 billion in April, according to the Federal Reserve Bank of New York. Administration officials said, however, that the plan was restarting lending and would grow in coming months.

Citigroup, meanwhile, has been in discussions with the Treasury over overhauling its compensation system for traders and other employees, a person close to the talks said, as the bank awaits the government’s new compensation rules. Among the ideas discussed have been issuing warrants, permitting employees to buy stock rights at steep discounts and exempting traders from the new rules.
Editorial
The Stress Test Results
NYTIMES
April 26, 2009

The nation’s largest banks received the results of their government stress tests on Friday. The rest of us should get the news next week. For the Obama administration, the tests could be a major success, if they provide clear data on which to base a bank-rescue strategy. Or the tests could be one of its worst failures, especially if they are not seen as credible. That would feed already profound financial anxieties and make it even harder for President Obama to manage the economic crisis.

The tests are designed to gauge each bank’s capital, and its ability to withstand various stressful economic scenarios. Regulators have released information about how the tests were done, but it does not appear detailed enough for independent analysts to verify the results.

If they are credible, the stress tests will finally provide the information the government needs to deal forcefully with the banking mess — assuming the White House also has the will to do what is needed.

Banks that are shown to be well capitalized can basically fend for themselves. That does not mean they should be entirely freed from the government’s yoke. Bank health, where it exists, is due largely to hundreds of billions of dollars of taxpayer assistance and federal guarantees. The rules and monitoring that come with that — including curbs on executive pay and oversight from the bailout’s inspector general — should be loosened gradually as government support is withdrawn.

Banks that are ailing are a tougher problem. When the stress tests were announced in February, the plan called for giving weak banks six months to raise private capital. If they could not, the government would provide it, taking in exchange a potentially big ownership stake.

If the capital shortfalls are severe, however, it is all but certain that private capital will not be forthcoming. The government should act quickly to plug the holes. That will mean asking an angry Congress — and an angry public — for more money. The Obama administration is not eager to do that. But it will have a better chance if the results of the stress tests and their implications are fully disclosed and explained.

The administration should use the money to recapitalize the banks. And it should take temporary control if that infusion results in a majority stake.  The banks’ current executives would be fired, shareholders would be wiped out and bondholders would take a haircut. But that is the best way to ensure that the banks’ finances are quickly and efficiently restructured, and the taxpayers’ investment is protected.  The Obama administration has so far rejected that path. Instead it is proposing to provide government subsidies to private investors to get them to buy up the banks’ bad assets. At best, that would be an indirect path to recapitalization — at worst, another expensive and ultimately inadequate bailout attempt.

The administration needs to craft a rescue that is comprehensive rather than piecemeal, that favors taxpayers over investors, and that aims for a prompt, transparent solution. If the tests have been rigorous, the White House has the information it needs. Now the question is how it will use it.


Recession Drains Social Security and Medicare
NYTIMES
By ROBERT PEAR
May 13, 2009

WASHINGTON — Even as Congress hunted for ways to finance a major expansion of health insurance coverage, the Obama administration reported Tuesday that the financial condition of the two largest federal benefit programs, Medicare and Social Security, had deteriorated, in part because of the recession.

As a result, the administration said, the Medicare fund that pays hospital bills for older Americans is expected to run out of money in 2017, two years sooner than projected last year. The Social Security trust fund will be exhausted in 2037, four years earlier than predicted, it said.

Spending on Social Security and Medicare totaled more than $1 trillion last year, accounting for more than one-third of the federal budget.

The fragility of the two programs is a concern not just for current beneficiaries, but also for future retirees, taxpayers and politicians. Lawmakers say they would never allow Medicare’s trust fund to run out of money. But beneficiaries could be required to pay higher premiums, co-payments and deductibles to help cover the costs.

The projected date of insolvency, a widely used measure of the benefit programs’ financial health, shows the immense difficulties Mr. Obama and Congress will face in trying to shore them up while also extending health coverage to millions of Americans.

The labor secretary, Hilda L. Solis, noted that 5.7 million jobs had been lost since the recession began in December 2007. With fewer people working, the government collects less in payroll taxes, a major source of financing for Medicare and Social Security.

A resumption of economic growth is not expected to close the financing gap. The trustees’ bleak projections already assume that the economy will begin to recover late this year.

The Treasury secretary, Timothy F. Geithner, said the only way to keep Medicare solvent was to “control runaway growth in both public and private health care expenditures.” And he said Mr. Obama intended to do that as part of his plan to guarantee access to health insurance for all Americans.

But if cost controls do not produce the expected savings, Congress is likely to find it difficult to preserve benefits without increasing taxes.

Just hours before the trustees of Medicare and Social Security issued their annual report, suggesting that the nation could not afford the programs it had, the Senate Finance Committee finished a hearing on how to pay for the expansion of health insurance coverage that Mr. Obama seeks.

Mr. Obama has said he does not want to finance expanded health coverage with more deficit spending. Rather, he says, Congress must find ways to offset the costs, so they do not add to the deficit over the next decade.

Federal deficits and debt are soaring because of the recession and federal efforts to shore up banks and other industries while trying to revive the economy with a huge infusion of federal spending.

“The financial outlook for the hospital insurance trust fund is significantly less favorable than projected in last year’s annual report,” the Medicare trustees said. “Actual payroll tax income in 2008 and projected future amounts are significantly lower than previously projected, due to lower levels of average wages and fewer covered workers.”

In coming years, the trustees said, Medicare spending will increase faster than either workers’ earnings or the economy over all.

The trustees predicted that, for the first time in more than three decades, Social Security recipients would not receive any increase in their benefits next year or in 2011. In 2012, they predicted, the cost-of-living adjustment will be 1.4 percent.

The updates are calculated under a statutory formula and reflect changes in the Consumer Price Index, which was unusually high last year because of energy prices.

If there is no cost-of-living adjustment for Social Security, about three-fourths of Medicare beneficiaries will not see any change in their basic premiums for Part B, which covers doctors’ services. The monthly premium, now $96.40, is usually deducted from Social Security checks, the main source of income for more than half of older Americans.

The trustees said that one-fourth of Medicare beneficiaries would face sharply higher premiums: about $104 next year and $120 in 2011. This group includes new Medicare beneficiaries and those with higher incomes (over about $85,000 a year for individuals and $170,000 for couples).

Seventy-five percent of beneficiaries will not pay any increase, so the remaining 25 percent have to pay more to keep the trust fund at the same level, Medicare officials said.

The aging of baby boomers will strain both Medicare and Social Security, but Medicare’s financial problems are more urgent.

The trustees predict a 30 percent increase in the number of Medicare beneficiaries in the coming decade, to 58.8 million in 2018, from 45.2 million last year.

But the projected increase in health costs and the use of medical care is a more significant factor in the growth of Medicare. The trustees predict that average Medicare spending per beneficiary will increase more than 50 percent, to $17,000 in 2018, from $11,000 last year.

Representative Pete Stark, the California Democrat who is chairman of the Ways and Means Subcommittee on Health, said the Medicare report “underscores the urgent need for health reform.”
Social Security and Medicare Finances Worsen
NYTIMES
By THE ASSOCIATED PRESS
Filed at 2:38 p.m. ET
May 12, 2009

WASHINGTON (AP) -- The financial health of Social Security and Medicare, the government's two biggest benefit programs, worsened in the past year because of the severe recession.

Trustees of the two programs said Tuesday that Social Security will start paying out more in benefits than it collects in taxes in 2016, one year sooner than projected last year, and the giant trust fund will be depleted by 2037, four years sooner.

The trustees said Medicare was in even worse shape. They said that the trust fund for hospital expenses will pay out more in benefits than it collects this year and will be insolvent by 2017, two years earlier than the date projected in last year's report.

Bankruptcies Swell Deficit at Pension Agency to $33.5 Billion
NYTIMES
By ERIC LIPTON
May 21, 2009

WASHINGTON — The deficit at the federal agency that guarantees pensions for 44 million Americans more than doubled in the last six months to an historic high, reaching $33.5 billion, largely as a result of the surging number of bankruptcies among companies whose pensions it must now take over.

The Pension Benefit Guaranty Corporation, as of October, had faced a shortfall of $11 billion. But the combined effect of lower interest rates, losses on its investment portfolio and the increase in the number of companies filing for bankruptcy protection produced the jump in its estimated deficit, officials said Wednesday.

Because the agency has $56 billion in assets — most of which is invested in Treasury bonds — it is not facing any prospect of default in the short term, officials said.

“The P.B.G.C. has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums,” the agency’s acting director Vince Snowbarger said in a statementWednesday. “Nevertheless, over the long term, the deficit must be addressed.”

The agency, created by Congress in 1974, is paying to about 640,000 people actual benefits worth about $4.3 billion a year. Employers nationwide with so-called defined benefit pension programs pay insurance premiums to the agency in return for a promise that it will take over their pension plan if a company fails.

On Tuesday, for example, the agency announced that it had assumed the pension plan once run by the Lenox Group Inc., a bankrupt maker of tableware, giftware and collectibles based in Eden Prairie, Minn. Assuming control of pensions for this company’s 4,300 workers will cost the agency an estimated $128 million — the difference between what Lenox had in its pension fund and what the total estimated obligations are.

With the bankruptcy of Chrysler and a possible similar move by General Motors, the agency is facing a historic surge in demand, as the new deficit takes into account both pensions it has taken over in the last six months, as well as others it believes it will probably have to assume control of soon.

In the statement, the agency said that the $22.5 billion deficit increase was the result of about $11 billion in completed and probable plan terminations; about $7 billion from a decrease in the interest factor used to value liabilities; about $3 billion in investment losses; and about $2 billion in actuarial charges.

Options to close the deficit include a federal bailout by taxpayers, a change in insurance premiums it charges employers, or a successful strategy to increase its investment returns.

Last year, the agency’s board — made up of the secretaries of Labor, Treasury and Commerce — voted to allow it to shift its investment strategy to put more money into stocks, private equity and real estate, in an effort to reduce the deficit.

If that shift had taken place, the losses would most likely have been larger. But only a relatively small amount of the funds have already been shifted to stocks, so the losses on the investment portfolio were responsible for $3 billion of the jump in the deficit in the last six months.

The agency’s more aggressive and risky investment strategy, the rising deficit and questions about possible improprieties by its former director, Charles E. F. Millard, will all be addressed at a Senate hearing scheduled for Wednesday afternoon.

Mr. Millard, who resigned in January, has been accused by the agency’s inspector general of having inappropriate contact with companies including BlackRock, JPMorgan Chase and Goldman Sachs, as they competed last year for the right to manage $2.5 billion worth of the agency’s portfolio, contracts that may now be canceled.
Plight of Carmakers Could Upset All Pension Plans
NYTIMES
By MARY WILLIAMS WALSH
April 24, 2009

Decisions that the government will make soon on the future of General Motors and Chrysler could accelerate the decline of traditional pension plans, which have sheltered generations of workers from an impoverished old age.  Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.

For hundreds of thousands of retired auto workers, a federal pension takeover would mean sharply reduced benefits. For the federal agency that insures pensions, it would mean a logistical nightmare in the short term — and most likely a slow demise eventually as fewer and fewer small plans remain in the system and pay premiums.  So far, the prospect of a grueling grind through bankruptcy court has been a major deterrent to companies that might want to rid themselves of pension obligations. But retirement and labor specialists are watching closely to see whether the administration’s auto task force will give either of the auto companies an easier way to shed their huge pension funds, blazing a simplified trail for others to follow.

With or without a bankruptcy filing, the government is quietly making the preparations that would be needed to take over Chrysler’s pension plan, with its 255,000 participants, according to government officials.

Even if Chrysler manages to strike a deal to sell many of its assets to Fiat, perhaps in conjunction with a bankruptcy filing, experts doubt Fiat will agree to take on its pension plan without extraordinary assistance. One possibility being considered is a cash infusion of $1 billion from Daimler, which previously owned Chrysler and had agreed to backstop a pension failure for several years.  The future of General Motors’ pension plan is also unclear. G.M. has until June 1 to come up with an acceptable business plan. If it declares bankruptcy, it still may try to keep its pension plan afloat. G.M.’s plan for hourly workers, which covers 485,000 people, was in reasonably good shape until last fall’s market turmoil, and would not require cash contributions until 2013.

If one or both of these plans collapse, the federal agency that insures pension benefits, the Pension Benefit Guaranty Corporation, will lose a big source of the premium revenue it collects from companies with pension funds. But more important, the demise of the bellwether auto plans might set a template for other companies seeking to cut costs and stay competitive.

“If one of these companies solves its pension problem by shunting it off to the federal government, then for competitive reasons the others have to do the same thing,” said Zvi Bodie, a professor of finance at the Boston University School of Management and longtime observer of the government’s pension insurance system. “That is the death spiral.”

Though the automakers’ plans each have a gap between what they have on hand and what they owe their retirees over the years, if they failed, most of that shortfall would be made up by workers in the form of smaller benefits — not by the companies or the government.

The government estimated that Chrysler’s plan was $9.3 billion short as of last November — but said it would be responsible for only about $2 billion of that. Most of the shortfall would be sliced from workers’ benefits. At G.M., the estimated shortfall was $20 billion as of last November, but the government would assume $4 billion of obligations and G.M.’s workers would lose the rest.

When Daimler sold a majority stake in Chrysler in 2007 to a private equity firm, Cerberus, it promised to pay $1 billion into the government’s pension insurance program if the pension plan failed within five years. The Treasury could try to persuade Daimler to put some of that money into the plan to avoid a failure.

For years, traditional pensions — those that shield workers from market risk — have been in a slow decline, with troubled sectors like aviation and steel shedding their plans in bankruptcy court as new types of individually managed benefits like 401(k) plans have taken hold.

But big sectors, particularly manufacturing and financial services, have clung to the old plans. The Pension Rights Center, a consumer group in Washington, estimates that 18 million Americans are still building up such benefits every year, and millions more retirees are receiving guaranteed payments from their former employers.

“Those that are fortunate enough to have those plans are sleeping soundly,” said Karen Ferguson, director of the center.

The loss of the auto pensions would be devastating partly because Detroit sustains many other businesses and partly because of their history. It was the United Automobile Workers union, more than any other force, that pushed Congress to enact laws forcing companies to put money behind their pension promises and creating the federal guarantor. The failure of a major auto workers plan would be a blow to the whole system.

Not only would Ford have reason to opt out of the expense of maintaining a pension plan, but so would Toyota and Honda, which also have pension plans at their American plants, said Teresa Ghilarducci, a professor of economics at the New School for Social Research and former member of the P.B.G.C.’s advisory board.  Professor Ghilarducci said she believed the Obama White House had selected people for its auto task force who understood these stakes, and would strive to find some middle ground.

The pension insurance agency, currently operating with an $11 billion deficit, has long viewed the automakers’ plans with anxiety, though its officials declined to discuss the situation. G.M.’s plan alone is bigger than the guarantor. The agency has roughly $67 billion in assets to cover the benefits of nearly 4,000 failed pension plans; G.M. has $84 billion in trust just to cover promises to its own workers.  In a failure of that size, the agency’s immediate challenge would be logistical, not financial. Its insurance covers a simple benefit, not the much richer pensions negotiated over the years by the U.A.W. It would have to process applications from thousands and thousands of workers, most of whom would get the bad news that they were going to get less than promised.

The government’s maximum benefit is $42,660, but coverage falls off rapidly for workers who are younger when their plan fails. For a 55-year-old, the maximum is only $24,300.

Calculating which workers would bear how much of the losses would be fiendishly complex. The government’s rules favor older participants and contain tripwires and arbitrary cutoffs that can leave similar workers with sharply different benefits.  None of this can be sorted out in advance, because the calculations also depend on the amount of money in a pension fund on the day it terminates — something the pension benefits corporation does not yet know.

Some pension specialists, aware of these difficulties, are hoping the Obama administration’s auto task force will spare at least the G.M. pension fund. Not only would that let laid off workers keep receiving full benefits, but it could also break the death spiral among other plans.

For traditional pension plans, “maybe this is their last stand,” said Jeffrey B. Cohen, a partner with the law firm Ivins, Phillips & Barker in Washington who was chief counsel for the Pension Benefit Guaranty Corporation from 2005 to 2007. If the automakers’ plans fail, he added, “the biggest domino will have fallen for the P.B.G.C.”



Cracking Down, Antitrust Chief Hits Resistance
NYTIMES
By STEPHEN LABATON
July 26, 2009

WASHINGTON — President Obama’s top antitrust official and some senior Democratic lawmakers are preparing to rein in a host of major industries, including airline and railroad giants, moving so aggressively that they are finding some resistance from officials within the administration.

The official, Christine A. Varney, the antitrust chief at the Justice Department, has begun examining complaints by the phone companies Verizon and AT&T that their rivals — major cable operators like Cablevision and Cox Communications — improperly prevent them from buying sports shows and other programs that the cable companies produce, industry lawyers said.

At the request of some lawmakers, notably Senator Bernard Sanders, independent of Vermont, Ms. Varney is examining whether small agricultural operations are being hampered unfairly by large food processors, particularly in the milk industry, congressional aides said.

Ms. Varney has also challenged agreements that the Federal Trade Commission and consumer groups say discourage pharmaceutical companies from marketing more generic drugs. And she is examining a settlement between Google and book publishers and authors to make more books available online.

The more aggressive antitrust policy was described in interviews with officials at the White House, the Justice Department, other agencies and Congress. It is a major policy reversal from the Bush administration, which did not prosecute cases in which some dominant companies engaged in potentially anticompetitive behavior, often because those officials maintained such behavior was not harmful to consumers.

Democrats have spent years trying to gain the support of businesses, and the policy changes under way may have long-term political implications for their party. Some companies would like to see more aggressive antitrust enforcement against their rivals, while others could be hurt by it.

In some cases, though, the new approach is being opposed by administration officials. Some fear that the crackdown is coming at a bad time, as corporate America reels from the recession. Other officials embrace the Bush administration’s view that larger companies and industry alliances can provide consumer benefits by making their businesses more efficient.

One clash played out recently when the Transportation Department, rejecting many of Ms. Varney’s recommendations, approved an antitrust immunity request involving a global alliance of nine airlines; Continental Airlines wanted to join the alliance to share routes, marketing and revenue.

The antitrust division argued the immunity was unnecessary for approving the newly reconstituted alliance and that it could lead to rates rising from 6 to 15 percent for many routes, according to public filings. The Transportation Department rejected that analysis for most of the routes and instead endorsed a policy popular during the Bush administration that favored such industry agreements out of a desire for efficiency.

The disagreement became so heated that the president’s chief economic adviser, Lawrence H. Summers, was called in to mediate.

Administration officials said that Mr. Summers did not take sides in the dispute but urged the two agencies to reach an agreement as they sought to balance the interests of the industry against those of consumers.

In a second area, senior Democrats are proposing legislation to eliminate an exemption from antitrust law for commercial railroad companies. It would give the antitrust division the authority to scrutinize the railroads for anticompetitive practices.

The proposal, by Senator Herbert Kohl of Wisconsin, who heads the antitrust subcommittee, and Senator John D. Rockefeller IV of West Virginia, the chairman of the Senate Commerce Committee, has been sought by a coalition of railroad shippers. But so far the administration has not taken a position on the measure.

In a third area, a White House effort to overhaul financial regulation, officials weighed but rejected a significant antitrust role as a way to reduce the size of large companies considered too big to be allowed to fail.

“The struggles between the expert agencies and the Justice Department get to the heart and soul of exactly what the competition policy of the Obama administration will be,” said Mark Cooper, an antitrust expert and director of research at the Consumer Federation of America, an advocacy group.

He added: “Now you have an antitrust division that cares about competition, and it is running up against the expert agencies that haven’t changed their attitudes yet.”

Ms. Varney returned to government after working as a partner at Hogan and Hartson, a Washington law firm. During the Clinton administration she served in the White House as Cabinet secretary and a commissioner at the Federal Trade Commission.

The antitrust division under Ms. Varney scrapped the Bush administration’s monopoly guidelines, which had sharply limited the government’s ability to prosecute large corporations that used their market dominance to elbow out competitors.

Now the division has opened inquiries in the financial services and wireless phone industries. The division’s wireless inquiry is looking at, among other things, whether it is legal for phone makers to offer a particular model, like the iPhone or the Palm Pre, exclusively to one phone carrier. It is examining the sharp increase in text-messaging rates at several phone companies. And it is scrutinizing obstacles imposed by the phone companies on low-price rivals like Skype.

Though Ms. Varney has the backing and encouragement of senior Democratic lawmakers in the House and Senate, some agencies have been less open to the change in policy.

In the case of the airline alliance, the Justice Department and consumer groups had maintained that it was potentially harmful to customers to grant such immunity and that it would not promote the opening of new markets because the flights involved routes to countries that had already approved “open skies” agreements. But Transportation officials sided with the airlines for many of the routes and criticized the department’s antitrust analysis.

In its July 10 order, the Transportation Department criticized the approach of the Department of Justice: “Were we to suddenly change our antitrust immunity and public interest approach, as D.O.J. suggests, the credibility of the U.S. government with its international aviation partners would be significantly compromised and our ability not only to reach new Open-Skies agreements but also to maintain those agreements that we have already achieved would be undermined.”

Senior Democrats on the House Judiciary Committee, concerned that the order gave short shrift to rigorous antitrust analysis, are preparing to hold a hearing soon. A pending major expansion of a different airline alliance, involving American Airlines, British Airways and Iberia Lineas Aereas de Espana SA, is expected to provoke further disagreement between the agencies.

Justice Department officials have also been urged by major commercial shippers to examine the potentially anticompetitive practices of the highly concentrated commercial railroad industry. But the department’s authority to examine that industry is curtailed by a law that gives such authority to another agency affiliated with the Transportation Department. That agency, the Surface Transportation Board, has traditionally been sympathetic to industry concerns.
Op-Ed Columnist
Well, That Certainly Didn’t Take Long
By MAUREEN DOWD
February 4, 2009

WASHINGTON

On 9/11, President Bush learned of disaster while reading “The Pet Goat” to grade-school kids. On Tuesday, President Obama escaped from disaster by reading “The Moon Over Star” to grade-school kids.

“We were just tired of being in the White House,” the two-week-old president, with Michelle at his side, explained to students at a public charter school near the White House.

Even as he told the children his favorite superheroes were Batman and Spider-Man, his own dream of being the superhero who swoops in to swiftly save America was going SPLAT!

It just ain’t that easy.

Unlike W. and Dick Cheney, who heroically resisted acknowledging their historically boneheaded mistakes, President Obama summoned a conga line of Anderson, Katie, Brian, Chris and Charlie to the Oval Office to do penance, over and over.

“I think I messed up. I screwed up,” he confessed to Couric.

He told the anchors that the man who helped make him president, Tom Daschle, had made “a serious mistake” by not paying taxes on a car and driver. (It should have been a harbinger of doom when Daschle began sporting those determined-to-be-hip round red glasses.)

Mr. Obama admitted that “ultimately it’s important for this administration to send a message that there aren’t two sets of rules. You know, one for prominent people and one for ordinary folks who have to pay their taxes.”

It took Daschle’s resignation to shake the president out of his arrogant attitude that his charmed circle doesn’t have to abide by the lofty standards he lectured the rest of us about for two years.

Before he recanted, his hand forced by a cascade of appointees who “forgot” to pay taxes, his reasoning was creeping perilously close to that of the outgoing leaders he denounced in his Inaugural Address: that elitist mentality of “we know best,” we know we’re doing the “right” thing for the country, so we can twist the rules.

Mr. Obama’s errors on the helter-skelter stimulus package were also self-induced. He should put down those Lincoln books and order “Dave” from Netflix.

When Kevin Kline becomes an accidental president, he summons his personal accountant, Murray Blum, to the White House to cut millions in silly programs out of the federal budget so he can give money to the homeless.

“Who does these books?” Blum says with disgust, red-penciling an ad campaign to boost consumers’ confidence in cars they’d already bought. “If I ran my office this way, I’d be out of business.”

Mr. Obama should have taken a red pencil to the $819 billion stimulus bill and slashed all the provisions that looked like caricatures of Democratic drunken-sailor spending.

As Senator Kit Bond, a Republican, put it, there were so many good targets that he felt “like a mosquito in a nudist colony.” He was especially worried about the provision requiring the steel and iron for infrastructure construction to be American-made, and by the time the chastened president talked to Chris Wallace on Fox Tuesday, he agreed that “we can’t send a protectionist message.”

Mr. Obama protested to Brian Williams that the programs denounced as “wasteful” by Republicans “amount to less than 1 percent of the entire package.” All the more reason to cut them and create a lean, clean bill tailored to creating jobs.

The Democratic president has been spending so much time trying — and failing — to win over Republicans that he may not have noticed the disillusionment in his own ranks.

Betrayed by their bankers and leaders, Americans were desperate to trust someone when they made Barack Obama president. His debut has left them skeptical about his willingness to smack down those who would flout his high standards or waste our money.

Companies that have gotten bailouts continue to make a mockery of taxpayers.

Until it came to light Tuesday, Wells Fargo, which received $25 billion in federal funds, was blithely planning a series of “employee recognition outings” to Las Vegas luxury hotels this month.

As ABC reported, Bank of America took its $45 billion in bailout funds and sponsored a five-day carnival outside the Super Bowl stadium, and Morgan Stanley took its $10 billion in bailout money and held a three-day conference at the Breakers in Palm Beach. (Morgan Stanley had also still planned to send top employees to Monte Carlo and the Bahamas, events just canceled.)

The New York Post revealed that Sandy Weill, former chief executive of Citigroup, took a company jet to fly his family for a Christmas holiday to a $12,000-a-night luxury resort in San José del Cabo, Mexico. No matter that the company just got a $50 billion federal bailout and laid off 53,000 worldwide.

The interior of the 18-seat jet, as described by The Post, is posh, with a full bar, fine-wine selection, $13,000 carpets, Baccarat crystal glasses, Cristofle sterling silver flatware and — my personal favorite — pillows made from Hermès scarves.

Aux barricades!

Looks like the Yankee lineup - the one that didn't get into the playoffs!
And Now Let the Jockeying Begin
NYTIMES
By PETER BAKER
February 1, 2009

WASHINGTON — In her first days as America’s top diplomat, Secretary of State Hillary Rodham Clinton found the Middle East portfolio handed off to a special envoy. Afghanistan and Pakistan were assigned to a special representative. And administration officials expect another special envoy to be tapped soon to deal with Iran.

So with much of her turf already parceled off, Mrs. Clinton made a bid to take over the China file, which in recent years has been primarily the responsibility of the Treasury Department since the major issues with Beijing tend to be economic. Mrs. Clinton said the administration needed “a more comprehensive approach.” The only trick is Treasury Secretary Timothy F. Geithner has no intention of giving that up.

The opening phase of any administration involves a certain amount of jockeying as new players struggle to define their territory and establish boundaries with colleagues. The lines and boxes in organization charts are only the starting point. Force of personality, political heft and relationships among the power elite can be just as important in determining who really takes the lead in various priority areas under a new president.

Under Mr. Obama, that may prove even more complicated. More than any president in years, Mr. Obama came into office creating new White House czars and special envoys to supervise various hot-button issues at home and abroad, overlaying an additional set of actors upon a bureaucracy already scratchy about who’s in charge. Mr. Obama concluded that new high-powered figures were needed to force change but they pose a delicate management challenge for a president with no real management experience beyond his presidential campaign.

“I think it’s actually quite a workable model,” said John D. Podesta, who helped design it as Mr. Obama’s transition co-chairman. “It doesn’t subjugate the cabinet officers.” While there will be multiple players in every key arena, Mr. Podesta said the new White House chief of staff, Rahm Emanuel, would be a firm umpire. “It puts a burden on Rahm to discipline the intramural sports,” Mr. Podesta said, “but he’s a strong chief of staff and I don’t think it’s going to be a problem.”

In addition to naming special envoys for critical regions, Mr. Obama also created a new White House office to oversee health care, a new White House office to oversee climate change and energy, a new White House office to oversee urban policy and a new White House office to oversee technology. He also created a new group of economic advisers to go along with the two economic councils the president already has. He plans to name a czar to oversee the economic rescue of the auto industry. And on top of all that, he formed a task force to focus on economics specifically for the middle class, this one headed by Vice President Joseph R. Biden Jr.

Moreover, many of the players bring long, interwoven histories to the table. Mrs. Clinton, for example, reportedly once got Mr. Emanuel demoted when he worked in Bill Clinton’s White House, though they later grew closer. And when Mr. Clinton considered making former Senator George J. Mitchell secretary of state, Mrs. Clinton was believed to have favored Madeleine K. Albright. Now Mr. Mitchell is the special envoy to the Middle East.

The economic arena had the most potential for overlap overload, particularly because Mr. Obama appointed Mr. Geithner to be Treasury secretary but recruited Lawrence H. Summers, a former Treasury secretary himself, to head the National Economic Council in the White House.

In theory, Mr. Geithner has the more prominent position — a cabinet post, his name on the money, fifth in the line of succession. Mr. Summers, who once had all that, now officially has a staff job charged with coordinating policy across agencies. But anyone who knows Mr. Summers understands the outsize role he will play.

With Mr. Geithner delayed in taking office because of confirmation problems, Mr. Summers asserted himself as the architect of the economic recovery package now working its way through Congress. It did not go unnoticed in Mr. Geithner’s circle when Time magazine reported last week that Mr. Summers “has expanded his turf so that it touches on nearly every area of domestic and international policy.”

But Mr. Geithner is no pushover. Taking his cue from Robert E. Rubin when he was Treasury secretary under President Clinton — and from Mr. Summers himself after he succeeded Mr. Rubin — Mr. Geithner has made a point of attending White House senior staff meetings each morning, something other cabinet secretaries do not do. He also has taken the lead in determining the next stage in the financial bailout and formulating new regulations for the markets.

Mr. Obama’s new czars for health care, climate change, urban policy and technology also will have to figure out relationships with their cabinet counterparts. Like Mr. Summers, Carol Browner served as an agency head under Mr. Clinton, in her case the Environmental Protection Agency. Now she serves as Mr. Obama’s climate change director in the White House, coordinating not only the E.P.A. but also the departments of energy, interior and others.

Her brief ranges over so much territory that it could be one of the most expansive positions in the new administration, which is what the Obama team said was necessary to tackle such a complicated issue crossing bureaucratic lines. Like Mr. Geithner, who once worked for Mr. Summers at Treasury, the new E.P.A. director, Lisa P. Jackson, once worked for Ms. Browner.

Former Senator Tom Daschle may have proved the wiliest player in the organizational structure. When Mr. Obama approached him about becoming secretary of health and human services, Mr. Daschle insisted on having a second hat as the head of a new White House health care office. Like Mr. Geithner, he understood that he had to be in the White House to make policy changes — although, like Mr. Geithner, his cabinet nomination is threatened by his failure to pay all of his taxes.

Just as the attendance at senior staff meetings helps determine pecking order, so does the map of the West Wing. Mr. Daschle is slated to have an office in the West Wing, as does Mr. Summers. Ms. Browner, on the other hand, is working out of the Eisenhower Executive Office Building next door, where most White House aides work.

With so many czars and senior advisers, the Obama team is trying to stuff more people into the West Wing proper than its predecessor did. That prompted Karl Rove, who was President George W. Bush’s deputy chief of staff, to needle the Obama team in the Wall Street Journal last week, writing that there would be four people in the modest-size office he once occupied. Mr. Obama, Mr. Rove wrote, is likely to “create a more centralized and possibly incoherent policy process.”

Mr. Obama’s advisers scoffed at that, saying they do not want the results produced by Mr. Bush’s policy process. And they expressed faith that the no-drama edict of the Obama campaign would overcome any friction. Many of those unpacking boxes in the White House complex and the various departments across town worked together in the past, either in the Clinton administration, on Capitol Hill or at Mr. Podesta’s research organization, the Center for American Progress.

“There are things that cut across agency lines that needed real powerful White House cohesion, direction and leadership,” Mr. Podesta said. “The structure that was built was done with due regard for the fact that there could be conflict. But the team we built was done with the idea that these people could work together.”

House passes Obama's economic plan without a single GOP vote 
DAY
By DAVID M. HERSZENHORN    
Published on 1/29/2009

Washington - At first, it will trickle into paychecks in small, barely perceptible amounts: perhaps $12 or $13 a week for many American workers, in the form of lower tax withholding.  For the growing ranks of the unemployed, it will be more noticeable: benefit checks due to stop will keep coming, along with an extra $25 a week.

At the grocery store, a family of four on food stamps could find up to $79 more a month on their government-issued debit card.  And far bigger sums will appear, courtesy of Washington, on budget ledgers in state capitals nationwide: billions of dollars for health care, schools and public works.

There is no doubt that the impact of the $819 billion economic stimulus package advanced by President Barack Obama and approved by the House on Wednesday will start to be felt within weeks once the final version becomes law.  But estimating how effective the huge program of tax cuts and spending will be in getting America's economic engines humming again is a far more complex calculation requiring almost line-by-line scrutiny of the 647-page bill, lawmakers, economists and policy analysts say.

Without a single Republican vote, Obama won House approval on Wednesday for the plan as congressional Democrats sought to temper their own differences over the enormous package of tax cuts and spending.

As a piece of legislation, the two-year package is among the biggest in history, reflecting a broad view in Congress that urgent fiscal help is needed for an economy in crisis, at a time when the Federal Reserve has already cut interest rates almost to zero.  But the size and substance of the stimulus package remain in dispute, as House Republicans complained that it tilted heavily toward new spending instead of tax cuts.

All but 11 Democrats voted for the plan and 177 Republicans voted against it. The 244-188 vote came a day after Obama traveled to Capitol Hill to seek Republican backing, if not for the package then on coming issues.  While it may be difficult to predict how well the overall plan will work, it is easier to draw conclusions about its individual components, gauging them against the basic goal of any stimulus: to promote economic activity and create jobs as quickly and efficiently as possible.

Devising any economic stimulus plan is tricky: initiatives that can be carried out relatively fast, like tax cuts, tend to provide less bang for the buck in terms of generating jobs and economic growth, while initiatives likely to spur more robust activity, like public works projects, can take so long to get under way that they arrive too late.

Tax cuts

The provisions intended to have the swiftest impact are the tax cuts, totaling $275 billion, roughly a third of the package.

Republicans say the cuts are too small, some Democrats say they were ill designed in a vain effort to appease House Republicans, and some economists say both sides are right: that the plan should include more effective tax cuts and more of them, and also address specific problems like the weak housing market.

Obama's signature tax cut would provide a credit of up to $500 for individuals and $1,000 for couples. It won praise in an analysis by the Tax Policy Center, a nonpartisan research group, because it could be carried out quickly, by reducing the amount of money withheld from paychecks.

But the same group also criticized it because it would help families earning as much as $150,000 a year, who are more likely to save than spend. (Saving, or paying off debt, might make sense for individual households, but what the economy needs most is for people to spend money, helping stores to sell more, factories to produce more and employers to avoid cutting additional jobs.)

Some experts say adjusting withholding rates could prove complicated, delaying the money. But the White House says the plan would work even better than a lump-sum rebate; some research suggests that rebate checks are more likely to be saved than tax reductions spread out over a length of time.

Even some economists who generally support the stimulus think that the main tax proposal would provide limited economic lift.

”People are going to spend 30, 40 cents on the dollar, so the multiplier is going to be low,” said Adam S. Posen, deputy director of the Peterson Institute of International Economics.

Aid to states

One area where analysts say the bill would be relatively effective is in providing assistance to states, many of which, to comply with balanced-budget requirements, are facing the prospect of steep cuts in jobs and services. Aid to states does not expand economic activity, but it helps prevent cuts that would make the downturn even worse.

An $87 billion provision increasing the federal contribution for Medicaid costs is expected to go a long way toward helping states close their budget gaps.

But there has been little discussion so far on a proposal by the Senate Republican leader, Mitch McConnell of Kentucky, that aid to states be provided in the form of loans, encouraging them to spend the money wisely and, once the economy rebounds, obligating them to help reduce the national debt.

The bill would also create a $79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010. The Congressional Budget Office has estimated that little of that money would be spent this year.

Infrastructure

The greatest prospect of delay in spending is on infrastructure. The bill provides $30 billion for highway construction and tens of billions more for other transportation projects, water projects, park renovation, military construction; local housing projects and more.

A Congressional Budget Office analysis found that only 64 percent of the bill's spending would be completed within 19 months, and spending on construction projects was among the slowest.

If the economic recovery is slow, that timing could work out perfectly, giving the economy a jolt just when faster-acting components are wearing off. But if there is a quicker-than-expected rebound, many of those projects could start just in time to compete with renewed private spending.

Then there is the risk that the projects themselves have little or no long-term economic value and simply drive up the budget deficit. Democrats bowed to Republican pressure on Tuesday and stripped from the bill a $200 million provision for National Mall restorations.

Education, health care and alternative energy

A look at more than $140 billion in the bill's spending on education finds some that can move quickly - for instance, $13 billion each over two years for Title I schools, which serve impoverished students, and for special education under the Individuals With Disabilities Education Act.

But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide little near-term help for the economy.

Similar scrutiny could be trained on health care and especially on alternative energy programs. Like some of the education spending, a large chunk of health care spending would not start until 2012 or later, when, most experts think, the recession will be over.

Automatic stabilizers

Unemployment benefits and food stamps are such useful stimulus tools that budget analysts refer to them as “automatic stabilizers.”

They are built into the system, allowing money to flow quickly to people who need it and likely to spend it.

The House bill would spend $20 billion over five years on added food stamps. If the recovery legislation is adopted by mid-February, officials say, the first added food stamps will be delivered in April and nearly all of that aid used that month.

The legislation would also devote roughly $43 billion over two years to extend and increase unemployment benefits. The provision would add as much as 33 weeks of benefits, for states with the highest unemployment rates.  

Recession, Taxes and Mr. Obama
NYTIMES Editorial
January 4, 2009

A year into the recession, millions of Americans have already lost their jobs, their incomes and their homes. Millions more are having their peace of mind tested daily by the certainty of harder times to come. Yet as the recession deepens, one small group could actually catch a break: the richest Americans, who are likely to see a proposed tax increase postponed.

During the campaign, President-elect Barack Obama pledged to raise taxes, starting in 2009, on roughly the top 5 percent of American households, generally defined as those making more than $250,000 a year. The objective was to restore fairness and raise revenue by undoing Bush-era tax cuts that overwhelmingly benefited the rich while worsening the budget deficit.

The Obama team has not officially ditched that plan. But it is sounding increasingly reluctant to move soon. A delay is supported by the conventional wisdom that raising any taxes during a downturn is wrong.

That argument starts with the correct premise that a stalled economy needs all the juice it can get, hence the need for the roughly $800 billion recovery package to spur consumption and create jobs, taking shape in Congress and championed by Mr. Obama. But not all tax increases are damaging in a recession. An increase could help if it raised more in revenue than it subtracted in consumption and if that revenue was used for stimulus.

That sounds like the very definition of a tax increase for the richest Americans. The wealthy are unlikely to slow their consumption much if their income tax rates return — as Mr. Obama has proposed — to their pre-Bush levels (an increase from rates of 33 and 35 percent to 36 and 39.6 percent).

We know that higher taxes are never an easy sell politically — and would be especially difficult now, when Mr. Obama needs support from Republicans in Congress to quickly pass his recovery package.

We also acknowledge that a tax increase on the rich, though feasible, could backfire in these tense times. Because it is hard to explain and easy to demagogue, it could foster a confusing debate that might impair confidence just when confidence needs to be revived.

But even if he skips the income tax increase this year, Mr. Obama must press for increases in coming years. The fight for tax fairness — and for the practice of paying for government services rather than borrowing or printing money — must be a goal in itself, rather than becoming a perennial bargaining chip.

To that end, Mr. Obama should move forward in 2009 to close loopholes and make other long overdue changes in tax law. As promised during the campaign, he should push to alter the outmoded provision that has allowed private equity partners to pay about the lowest rate in the tax code on most of their multimillion-dollar earnings. He should also push for freezing the tax on multimillion-dollar estates at current levels, rather than letting the tax expire as scheduled in 2010.

Stimulus spending is front and center now, but over all, the nation needs far more tax revenue, generated more progressively. Mr. Obama needs to establish himself from the start as a proponent of fair and adequate taxation — just as he promised during the campaign.


In Obama’s Team, 2 Camps on Climate
NYTIMES
By JOHN M. BRODER
January 3, 2009

WASHINGTON — In the fall of 1997, when the Clinton administration was forming its position for the Kyoto climate treaty talks, Lawrence H. Summers argued that the United States would risk damaging the domestic economy if it set overly ambitious goals for reducing carbon emissions.

Mr. Summers, then the deputy Treasury secretary, said at the time that there was a compelling scientific case for action on global warming but that a too-rapid move against emissions of greenhouse gases risked dire and unknowable economic consequences.

His view prevailed over those of officials arguing for tougher standards, among them Carol M. Browner, then the administrator of the Environmental Protection Agency, and her mentor, Al Gore, then the vice president.

Today, as the climate-change debate once again heats up, Mr. Summers leads the economic team of the incoming administration, and Ms. Browner has been designated its White House coordinator of energy and climate policy. And Mr. Gore is hovering as an informal adviser to President-elect Barack Obama.

As Mr. Obama seeks to find the right balance between his environmental goals and his plans to revive the economy, he may have to resolve conflicting views among some of his top advisers.

While Mr. Summers’s thinking on climate change has evolved over the last decade, his views on the potential risks to the economy of an aggressive effort to limit carbon emissions have not. But he now works for a president-elect who has set ambitious goals for addressing global warming through a government-run cap-and-trade system.

It may once again prove to be Mr. Summers’s role to inject a rigorous economist’s reality check into the debate over the scope and speed of an attack on global warming.

According to a transition official familiar with Mr. Summers’s thinking, he is wary of moving very quickly on a carbon cap, because doing so could raise energy costs, kill jobs and deepen the current recession. He foresees a phase-in of several years for any carbon restraint regime, particularly if the economy continues to be sluggish, a slower timetable than many lawmakers and environmentalists are pressing.

Mr. Summers and Peter R. Orszag, the economist whom Mr. Obama has designated director of the White House budget office, have both argued that a tax on carbon emissions from burning gasoline, coal and other fuels might be a more economically efficient means of regulating pollutants than a cap-and-trade system, under which an absolute ceiling on emissions is set and polluters are allowed to buy and sell permits to meet it.

But Mr. Obama and Ms. Browner have ruled out a straight carbon tax, perhaps mindful of the stinging political defeat the Clinton administration suffered in 1993 when, prodded by Mr. Gore, it proposed one.

Mr. Obama was asked in a television interview last month whether he would consider imposing a stiff tax on gasoline, whose price has now fallen to below $2 a gallon after cresting above $4 a gallon last summer.

He replied that while American families were getting some relief at the pump, they were hurting in other ways, through rising unemployment and falling home values. “So putting additional burdens on American families right now, I think, is a mistake,” he said.

At least for the present, then, the idea of a carbon tax has been shelved, and Mr. Obama’s economic and environmental advisers are working, along with Congress, to devise a cap-and-trade system.

But difficult debates lie ahead within the White House, between the White House and Congress, and within the Democratic Party, whose deep divisions on climate change break down along ideological and geographical lines.

The fight in November between two Democrats, Representatives John D. Dingell of Michigan and Henry A. Waxman of California, for the chairmanship of the House Energy and Commerce Committee was a preview. It pitted lawmakers from auto- and coal-producing states against liberal lawmakers from California and the East Coast, Blue Dog fiscal conservatives against environmentalists, pro-business moderates against regulatory activists. Mr. Waxman, with the tacit support of the Obama camp and Speaker Nancy Pelosi, won, but narrowly.

That was just a taste of the broader and potentially more bitter fight over global warming and energy legislation, which will have profound implications for the American economy, the environment and foreign policy.

Both sides — those seeking strict enforcement of emissions limits and those concerned about higher energy costs and potential job losses — will find receptive ears in the new White House, Obama aides and outside analysts said.

“There is a diversity of opinion among Democrats over the best way to contain costs associated with a climate change plan,” said Scott Segal, a utility lobbyist in Washington, who cited rival approaches pushed by Senator Barbara Boxer of California, chairwoman of the Environment and Public Works Committee, and Senator Jeff Bingaman of New Mexico, chairman of the Energy and Natural Resources Committee.

“I think there is room within the current range of administration advisers to accommodate all those points of view,” Mr. Segal said.

The Obama transition did not make Ms. Browner or Mr. Summers available for on-the-record interviews. A spokesman, Nick Shapiro, said that Mr. Obama had appointed advisers with differing views but that ultimately he would set policy.

“At the end of the day,” Mr. Shapiro said in an e-mail statement, “the advisers will be charged with implementing President-elect Obama’s strong targets that set us on a course to reduce emissions to their 1990 levels by 2020 and reduce them an additional 80 percent by 2050. However, the president-elect appointed a cabinet with diverse views and looks forward to strong debate within the cabinet on how best to achieve those outcomes.”

Emissions of carbon dioxide and other greenhouse gases by the United States in 2007 were about 15 percent above 1990’s level, according to the Department of Energy.

In past public statements and writings, Ms. Browner and Mr. Summers have wrestled with the difficult choices posed by global warming and at times have come to different conclusions on how to minimize the impact on the economy.

Ms. Browner has been a forceful advocate for strict carbon limits for years and has said that a comprehensive cap-and-trade system is the best way to achieve swift and certain reductions in emissions. She has said that the plan could include flexibility for carbon-emitting businesses by allowing them to bank and borrow permits, but she has not supported setting a maximum price or “safety valve” cost in case permits become prohibitively expensive, as Mr. Summers and Mr. Orszag have.

She has urged Congress to take up the issue quickly in the new year. In September, in testimony before the House Ways and Means Committee, Ms. Browner pointedly noted that the Supreme Court had given the E.P.A. authority to regulate greenhouse gases under the Clean Air Act. She implied that if Mr. Obama was elected, the new administration might unilaterally seek to curb carbon emissions should Congress not act.

“Given the magnitude of the problem, and the scale of the solution required,” she said, “I believe it is important that Congress provide national leadership on this issue.”

Mr. Summers believes a cap-and-trade program can be a workable solution, provided it includes some sort of escape clause if prices rise too quickly, according to several articles he has written in the past two years. He has also expressed a belief that developing nations must also adhere to carbon limits, or manufacturing jobs will migrate to countries without them.

In a forum at the Brookings Institution a year ago, Mr. Summers said the current moment on climate change was analogous to that on health care in 1992: Everyone agreed that the current system was unsustainable, but there was less agreement on how to address the complexities and costs. There was a general expectation that with the inauguration of a new Democratic president, something would be done.

“In the end,” Mr. Summers said, “what everyone agreed needed to happen didn’t happen in 1993.”

Obama to Iran's leaders: Stop 'unjust' actions 
DAY
By BEN FELLER, Associated Press Writer 
Posted on Jun 20, 3:09 PM EDT

WASHINGTON (AP) -- President Barack Obama on Saturday challenged Iran's government to halt a "violent and unjust" crackdown on dissenters, using his bluntest language yet to condemn Tehran's postelection response.

Obama has sought a measured reaction to avoid being drawn in as a meddler in Iranian affairs. His comments have grown more pointed as the clashes intensified, and his latest remarks took direct aim at Iranian leaders.

"We call on the Iranian government to stop all violent and unjust actions against its own people," Obama said in a written statement. "The universal rights to assembly and free speech must be respected, and the United States stands with all who seek to exercise those rights."

Obama met with advisers at the White House as developments in Iran grew more ominous.

"Suppressing ideas never succeeds in making them go away," the president said, recalling a theme from the speech he gave in Cairo, Egypt, this month.

"The Iranian people will ultimately judge the actions of their own government," Obama said. "If the Iranian government seeks the respect of the international community, it must respect the dignity of its own people and govern through consent, not coercion."

Obama also cited Martin Luther King's statement that "the arc of the moral universe is long, but it bends toward justice."

"I believe that," the president said. "The international community believes that. And right now, we are bearing witness to the Iranian peoples belief in that truth, and we will continue to bear witness."

3 January 2009
Will Obama shift policy on Cuba?

By Kim Ghattas
BBC News, Washington

The election of Barack Obama has energised those seeking a change in relations between the US and Cuba.

Barack Obama
Mr Obama promised change during the election campaign
And with so many thorny, complex issues awaiting the incoming president, analysts say Cuba might provide Mr Obama with an easy opportunity to bring about the kind of change to America's foreign policy that the world and Latin America in particular are waiting for.

From Russia to Iran, Iraq and Pakistan, "none of these crises will allow President Obama to signal swiftly to the world the kind of changes he proposes in American foreign policy," write Lawrence Wilkerson, former chief-of-staff to Colin Powell, and Patrick Doherty, from the New American Foundation.

"In contrast, US-Cuba policy is low-hanging fruit: though of marginal importance domestically, it could be changed immediately at little cost."

Younger generation

Hopes have been raised by statements made by Barack Obama himself and policies spelled out on his campaign website.

A Cuban man sits in front of a large Cuban flag
Cuban-Americans are eager to help their families in Cuba
A big factor driving the calls for change is the growing number of Cuban-Americans who are eager for more contact with the homeland, want to help their families there improve their living standards and believe this will help bring about change inside Cuba.

Attitudes are especially changing amongst the younger generation, which does not bear the scars of life under Fidel Castro - but some older Cuban-American have also had a change of heart.

Carlos Saladrigas is a 60-year-old Cuban-American from Miami. He is a life-long Republican, but voted for Mr Obama this time round.

Speaking to the BBC earlier this year, he said: "You don't have to be very smart to figure out that after 50 years of trying something that hasn't worked, maybe it's time to try something new."

He said the best way to bring about change inside Cuba was to allow Cuban-Americans to become the agents of change by letting them visit the island.

As the Americas have changed, we have sat on the sideline, offering no compelling vision and creating a vacuum for demagogues to advance an anti-American agenda
Barack Obama
On Mr Obama's campaign website, the section on Cuba states that he will "empower our best ambassadors of freedom by allowing unlimited Cuban-American family travel and remittances to the island".

A quick way to send a signal of change would indeed be for Barack Obama to lift some of the restrictions imposed by President George W Bush in 2004.

Mr Bush limited the number of visits Cuban-Americans were permitted to make to the communist island from one a year down to one every three years.

He also reduced the amount of remittances they could take with them to Cuba from $3,000 to $300.

Embargo

A new report published by the Brookings Institution in Washington makes even further recommendations on Cuba, advising almost total reversal of US policy.

The report, written by prominent policy-makers from the US and Latin America, advocates lifting all restrictions on travel to Cuba by Americans and recommends removing Cuba from the State Department's list of countries sponsoring terrorism.

People sit in front of their house in Santiago, Cuba
Rarely before has the potential for change been so tangible
While Mr Obama may not go this far initially, there is little doubt that he will make changes to a policy that has put the US at odds with most of the world.

In October, the UN General Assembly adopted a resolution urging the US to lift its trade embargo against Havana, for the 17th year in a row.

Only Israel and Palau joined the US in supporting the embargo, with 185 countries voting against it.

A rapprochement with Cuba would also help improve ties with Latin America.

On his website, Mr Obama states that "George Bush's policy in the Americas has been negligent toward our friends, ineffective with our adversaries, disinterested in the challenges that matter in people's lives, and incapable of advancing our interests in the region".

Fidel (L) and Raul Castro
Economic conditions could force the Castro brothers to adopt reforms
"As the Americas have changed, we have sat on the sideline, offering no compelling vision and creating a vacuum for demagogues to advance an anti-American agenda."

The Bush administration rejects the charge that it has neglected Latin America, pointing out that the president has travelled nine times to the region.

But there is clearly room for improvement, according to Mr Wilkerson and Mr Doherty.

"Our Cuba policy is also an obstacle to striking a new relationship with the nations of Latin America," they write.

"But until Washington ends the extraordinary sanctions that comprise the Cuba embargo, Latin America will remain at arms-length, and the problems in our backyard - Hugo Chavez, drugs, immigration, energy insecurity - will simply fester."

Economic challenge

Supporters of the embargo and the tough policies on Cuba say any rapprochement with Cuba would be a sign of weakness, unilateral concessions to an oppressive regime with nothing in return.

Cuba has welcomed some of Mr Obama's proposals and Raul Castro has offered to free political dissidents in exchange for the release of five convicted Cuban spies in US prisons as a gesture to pave the way for a meeting with the incoming president.

Tourists pass in front of a painting of Fidel Castro and guerrilla leader Camilo Cienfuegos in Havana
Fifty years on, the revolution's legacy is mixed, correspondents say
Mr Obama is unlikely to make such a deal, but Marifeli Perez-Stable, writing in the Miami Herald in December, suggested that it may be possible to exchange the "Five Heroes" (as they are known in Cuba) for US fugitives living in Cuba.

Rarely before has the potential for change been so tangible, in US policy towards Cuba but also in the attitudes inside the island itself.

After a devastating hurricane season, a worldwide economic downturn and a drop in oil prices, which impacts how much support Cuba can get from its oil-rich ally Venezuela, the Castro brothers, both of whom are old, may be more malleable.

Mr Obama is expected to travel to Trinidad and Tobago in April to attend the Summits of the Americas.

There have been calls for him to announce the policy shift towards Cuba ahead of the gathering so that the meeting can be the start of a new era in Washington's ties with Latin America.






RATIONING
As the Congress moves towards universal health care, perhaps funded by surtax on "wealth"

...Massachusetts Takes a Step Back From Health Care for All
NYTIMES
By ABBY GOODNOUGH
July 15, 2009

BOSTON — The new state budget in Massachusetts eliminates health care coverage for some 30,000 legal immigrants to help close a growing deficit, reversing progress toward universal coverage just as Congress looks to the state as a model for overhauling the nation’s health care system.

The affected immigrants, permanent residents who have had green cards for less than five years, are now covered under Commonwealth Care, a subsidized insurance program for low-income residents that is central to the groundbreaking health care law enacted here in 2006.

Critics of the cut, which would save an estimated $130 million, say it unfairly targets taxpaying residents and threatens the state’s health care experiment at a critical time.

“It either sends the message that health care reform cannot be done, period,” said Eva Millona, executive director of the Massachusetts Immigrant and Refugee Advocacy Coalition, “or it opens the door to doing it halfway and excluding immigrants from the process.”

Gov. Deval Patrick has proposed restoring $70 million to the program, which would partly restore the immigrants’ coverage. But legislative leaders have balked, saying vital programs for other groups would have to be cut as a result. The cut, which would affect only nondisabled adults from 18 to 65 years old, would take effect in August unless the legislature approves Mr. Patrick’s proposal.

“The governor has made a very good and compelling case relative to providing for legal immigrants,” Robert A. DeLeo, the speaker of the State House of Representatives, said Monday. “On the other hand, there is only so much money that we have.”

With tax collections down by $2.7 billion in the fiscal year that ended June 30 and still dropping, lawmakers may have no choice but to make further cuts in the $27 billion budget approved this month. That makes Mr. Patrick’s proposal all the more problematic, according to the Massachusetts Taxpayers Foundation, a nonpartisan watchdog group.

“It’s bad timing,” said Michael J. Widmer, the group’s president. “This budget casualty may be more under the national microscope than others, but there is no shortage of casualties across the board.”

Because of its three-year-old law, Massachusetts has the country’s lowest percentage of uninsured residents: 2.6 percent, compared with a national average of 15 percent. The law requires that almost every resident have insurance, and to meet that goal, the state subsidizes coverage for those earning up to three times the federal poverty level, or $66,150 for a family of four.

But the recession has made an already difficult experiment far more challenging. Enrollment in Commonwealth Care has risen sharply in recent months, to 181,000, as more people have lost jobs. That increase, combined with plummeting state revenues, made it impossible to maintain last year’s level of service, said Cyndi Roy, a spokeswoman for the state’s Executive Office for Administration and Finance.

In addition to dropping the immigrant insurance program, Commonwealth Care will save an estimated $63 million by no longer automatically enrolling low-income residents who fail to enroll themselves.

Under the 1996 federal law that overhauled the nation’s welfare system, the 30,000 immigrants affected by the loss of coverage also do not qualify for Medicaid or other federal aid. Massachusetts is one of the states, including California, New York and Pennsylvania, that nonetheless provide at least some health coverage for such immigrants.

Laura Porto, who moved here from Venezuela and has had permanent residency for three years, said losing her state-subsidized coverage would end her treatment for bipolar disorder, including weekly therapy, monthly consultations with a psychiatrist and medication.

“I am so afraid — if I lose it, I don’t know what my life is going to be,” said Ms. Porto, 58, who said she lost employer-sponsored coverage when she was fired because of her illness. “If I don’t have it, I am going to be in danger, and I don’t have any other way to have insurance unless I find a job, which is very difficult right now because no one is hiring.”

Mr. Patrick, a Democrat who is up for re-election next year, said Tuesday in an interview that dropping insurance for legal immigrants would send the wrong message about the state’s commitment to universal health care.

“I know we don’t have very much money, but we made a commitment in this commonwealth to embark down this health care reform path,” he said. “We ought to do what we can to keep it intact, and rather than just drop these folks who are good, hard-working, contributing members of our community, I’m just looking for some way to find a compromise here.”

Mr. Patrick said it was too early to elaborate on what form the curtailed coverage would take.

Lindsey M. Tucker, health reform policy manager at Health Care for All, an advocacy group in Boston, said that restoring $70 million to the program might provide some preventive and emergency care.

“It’s in no way the best solution,” she said, “but it looks like we are going to need a compromise given the difficult climate.”

If the full $130 million cut survives, hospitals that provide free care to the poor will need to spend an additional $87 million this year treating immigrants who lose their coverage, according to the Massachusetts Hospital Association. That would come on top of a $40 million cut in the state’s Health Safety Net, which reimburses such hospitals, said Tim Gens, the association’s executive vice president.

What the state needs, said Philip W. Johnston, chairman of the Blue Cross Blue Shield of Massachusetts Foundation and a former state secretary of health and human services, is a dedicated revenue stream to protect its pioneering system from cyclical downturns in the economy.

The revenue, Mr. Johnston said, should come from an income tax surcharge on the wealthiest, as House leaders in Washington have proposed for a federal health plan. “Otherwise,” he said, “the program is going to be subject to the ups and downs of the economy forever.”


Fishing for just the right bill - oops, wrong animal!

Congress Weighs Far-Reaching Global Warming Bill
NYTIMES
By THE ASSOCIATED PRESS
Filed at 11:08 a.m. ET
April 18, 2009

WASHINGTON (AP) -- The last time Congress passed major environmental laws, acid rain was destroying lakes and forests, polluted rivers were on fire and smog was choking people in some cities.

The fallout from global warming, while subtle now, could eventually be even more dire. That prospect has Democrats pushing legislation that rivals in scope the nation's landmark anti-pollution laws.

Lawmakers this coming week begin hearings on an energy and global warming bill that could revolutionize how the country produces and uses energy. It also could reduce, for the first time, the pollution responsible for heating up the planet.

If Congress balks, the Obama administration has signaled a willingness to use decades-old clean air laws to impose tough new regulations for motor vehicles and many industrial plants to limit their release of climate-changing pollution.

The Environmental Protection Agency on Friday said rising sea levels, increased flooding and more intense heat waves and storms that come with climate change are a threat to public health and safety. The agency predicted that warming will worsen other pollution problems such as smog.

''The EPA concluded that our health and our planet are in danger. Now it is time for Congress to create a clean energy cure,'' said Rep. Ed Markey, D-Mass., one of the sponsors of the American Clean Energy and Security Act.

If passed, it would be the first major environmental protection law in almost two decades. In addition to attempting to solve a complex environmental problem associated with global warming, the bill also seeks to wean the nation off foreign oil imports and to create a new clean-energy economy.

''It's a big undertaking,'' said the chairman of the House Energy and Commerce Committee, Rep. Henry Waxman, D-Calif. Waxman and Markey presented their 648-page bill last month.

From 1969 to 1980, Congress passed more than a dozen environmental bills tackling everything from air and water pollution and garbage, as well as protections for fisheries, marine mammals and endangered species. In 1990, the Clean Air Act was overhauled to address the problem of acid rain created by the sulfur dioxide released from coal-burning power plants.

''We had two decades of extraordinary legislation and almost two decades of nothing,'' said Richard Lazarus, a Georgetown University law professor and author of ''The Making of Environmental Law.'' ''If this one passes, it will certainly be an outburst.''

There are many reasons why Congress' chances to succeed in passing global warming legislation are improved this year, but by no means assured.

After President George W. Bush did little about global warming in his two terms, there is ''a lot pent up demand'' for action on climate, said William Ruckelshaus, the first administrator of the Environmental Protection Agency.

Both the Democratic-controlled Congress and President Barack Obama agree that legislation is needed to limit emissions of greenhouse gases and radically alter the nation's energy sources. They want to pass a bill by the end of the year.

''For the first time ever, we have got the political actors all aligned,'' said Lazarus. ''That is not enough to get a law passed, but that is a huge start. We haven't been close to that before.''

Unlike the 1970s, when the first environmental laws passed nearly unanimously, Republicans are opposed. They question whether industry and taxpayers can afford to take on global warming during an economic recession.

Then there is the question whether the public will have the appetite to accept higher energy prices for a benefit that will not be seen for many years. Climate change ranks low on many voters' priority lists.

Every year since 2001 has been among the 10 warmest years on record. Sea ice in the Arctic and glaciers worldwide are melting.

But the problems are not as apparent as they were in the 1970s, or even the early 1990s, when Congress addressed acid rain and depletion of the ozone layer.

''If carbon dioxide were brown, we wouldn't have the same problem,'' said Gus Speth, who organized the Natural Resources Defense Council in 1970. ''But it's a subtle issue. ... The problems are chronic not acute, and it is largely invisible to people unless they're reading the newspaper or checking the glaciers or going to the South Pole.''

In 1969, oil and debris in the Cuyahoga River in Cleveland burst into flames, an incident that led to the passage of the Clean Water Act. That same year, a blowout at an offshore oil platform off Santa Barbara, Calif., spilled millions of gallons of oil onto beaches. And long before that, a smog episode in Donora, Pa., in 1948 killed 20, sparking a crusade against air pollution.

''There was so much evidence -- sort of smell, touch and feel kind of evidence -- that the environment was really in trouble,'' said Ruckelshaus. ''We had real problems, real pollution problems that people could see on the way to work. And there were rivers catching on fire and terrible smog events.''

With climate, ''you are asking people to worry about their grandchildren or their children,'' he said. ''That is why it will be so tough to get something like this through.''

------

On the Net:

House Energy and Commerce Committee: http://tinyurl.com/c68ukd

Environmental Protection Agency: http://www.epa.gov/

Natural Resources Defense Council: http://www.nrdc.org/

In a line from "Die Hard #1" a character who does not live very much longer notes "...what's the difference - you use a gun, I use a fountain pen?"
AS AMERICAN AS APPLE PIE - THE STICK'M UP BANK HEIST - U.S.A.'S  FUTURE? 



3 Fla. banks, 1 each in Nev., Calif. shut down
YAHOO
By MARCY GORDON, AP Business Writer
Fri May 28, 9:56 pm ET

WASHINGTON – Regulators on Friday shut down three banks in Florida and one each in Nevada and California, bringing the number of U.S. bank failures this year to 78.

The Federal Deposit Insurance Corp. took over the Florida banks, all owned by holding company Bank of Florida Corp. They are Bank of Florida-Southeast, based in Fort Lauderdale, with $595.3 million in assets; Bank of Florida-Southwest, based in Naples, with $640.9 million in assets; and Bank of Florida-Tampa Bay, based in Tampa, with $245.2 million in assets.

The FDIC also seized Las Vegas-based Sun West Bank, with $360.7 million in assets, and Granite Community Bank, located in Granite Bay, Calif., with $102.9 million in assets.

EverBank, based in Jacksonville, Fla., agreed to acquire the assets and deposits of the failed Florida banks. Los Angeles-based City National Bank is assuming all the assets and deposits of Sun West Bank, and Tri Counties Bank, based in Chico, Calif., is assuming those of Granite Community Bank.

In addition, the FDIC and EverBank agreed to share losses on the three Florida banks' loans and other assets. Losses will be shared on $437.3 million of Bank of Florida-Southeast's assets, $568.1 million of Bank of Florida-Southwest's assets and $210.8 million of Bank of Florida-Tampa Bay's assets. The federal agency and City National Bank agreed to share losses on $280 million of Sun West Bank's assets. The FDIC is sharing with Tri Counties Bank losses on $89.3 million of Granite Community Bank's assets.

The failures of the three Florida banks are expected to cost the deposit insurance fund a total of about $203 million. The failures of Sun West Bank are expected to cost around $96.7 million, while losses at Granite Community Bank are expected to cost $17.3 million.

The three Florida closures brought to 13 the number of bank failures this year in Florida, a state with one of the highest concentrations of bank collapses and where the meltdown in the real estate market brought an avalanche of soured mortgage loans. Fourteen banks in the state failed last year.

California is another state with a heavy concentration of bank failures, and Granite Community Bank was the sixth bank to fall in the state this year, following the shutdown of several big California banks in the last months of 2009. Seventeen banks failed in California last year.

Georgia and Illinois also are high on the list of states with concentrated bank failures.

With 78 closures nationwide so far this year, the pace of bank failures is more than double that of 2009, which was already a brisk year for shutdowns. By this time last year, regulators had closed 36 banks. The pace has accelerated as banks' losses mount on loans made for commercial property and development.

The number of bank failures is expected to peak this year and to be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of March 31.

The number of banks on the FDIC's confidential "problem" list jumped to 775 in the first quarter from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

A majority of institutions posted profit gains in the January-March quarter. But many small and mid-sized banks are likely to continue to suffer distress in the coming months and years, especially from soured loans for office buildings and development projects.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government.

Banks report small profit but 'problem' list jumps
YAHOO
By MARCY GORDON, AP Business Writer
Feb. 23, 2010

WASHINGTON – The number of U.S. banks considered troubled jumped to more than 700 last quarter even as the industry squeezed out a small profit in a recovering economy.

Loan losses and bank failures are likely to continue to haunt the industry as regional banks succumb to soured commercial real estate loans.

The snapshot for October-December 2009 issued Tuesday by the Federal Deposit Insurance Corp. offered a tale of two banking sectors. On the one hand, big banks have been gradually recovering, many of them with help from federal bailout money. On the other, small and mid-sized institutions continue to suffer distress that will likely persist in the coming years.

Regional banks are especially vulnerable to losses on loans for commercial real estate, like stores and office complexes. These loans make up a disproportionate share of their business. Losses are growing as buildings sit vacant and builders default on their loans.

Such defaults could escalate the wave of bank failures that numbered 45 in the fourth quarter and totaled 140 last year. That was the highest annual total since 1992, at the peak of the savings-and-loan crisis. So far this year, 20 banks have failed. FDIC Chairman Sheila Bair said that pace likely will pick up this year.

Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report by the Congressional Oversight Panel, which monitors the government's efforts to stabilize the financial system.

The report also said that on nearly half of all commercial real estate loans, the borrowers owe more than the property is worth, and the biggest loan losses are expected for 2011 and beyond.

The FDIC said banks essentially broke even in the fourth quarter. They earned $914 million, compared with a $37.8 billion loss in the fourth quarter of 2008, at the height of the financial crisis. Still, nearly one in every three banks reported a net loss for the latest quarter.

Most of the improvement in earnings was due to the largest banks. Yet for the first time in three years, more than half the 8,000 or so federally insured banks and thrifts reported higher income compared with the year-earlier quarter.

"Consistent with a recovering economy, we saw signs of improvement in industry performance" in the fourth quarter, FDIC Chairman Sheila Bair said at a news conference. She noted, though, that a recovery in the banking industry usually lags behind an economic rebound.

"It's not that this was a strong quarter," Bair said. "It's simply that everything was so bad a year ago."

The increase in the number of banks on the FDIC's confidential "problem" list — from 552 in the third quarter to 702 last quarter — "points to a likely rise in the number of failures," Bair said. The combined assets of the 702 banks were $402.8 billion, up from $345.9 billion for problem banks in the third quarter.

Troubled loans continued to increase. Loan charge-offs — the debt that banks don't expect to be repaid — vaulted to $53 billion from $38.6 billion in the fourth quarter of 2008.

Consumers and businesses have cut spending in the weak economy. And banks have tightened their lending standards.

"Banks are increasing their capital levels, and the industry continues to set aside strong reserves to cover problem loans created by the high levels of unemployment and business failures," James Chessen, chief economist of the American Bankers Association, said in a statement.

He said U.S. banks overall have set aside reserves against potential losses of about $1.7 trillion. Chessen, like FDIC officials, stressed that 95 percent of banks are considered by regulators to be well-capitalized.

Bank failures pushed the FDIC's deposit insurance fund into the red last year. It was $20.9 billion in deficit as of Dec. 31, the agency reported — $12.6 billion deeper than the deficit three months earlier.

Bair said the fund is expected to bottom out this year. The FDIC expects further bank failures to cost the fund around $100 billion through 2013.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to help replenish the insurance fund.

The FDIC's reserves of cash and securities set aside to cover losses from failures jumped to $66 billion as of Dec. 31 from $23 billion at the end of September. Depositors' money — insured up to $250,000 per account — isn't at risk. The FDIC is backed by the government.

For all of 2009, banks earned $12.5 billion, up from $4.5 billion in 2008. Last year's earnings represented a return on assets of 0.09 percent, up from 0.03 percent in 2008.

Obama Tries to Rally Smaller Lenders
NYTIMES
By THE ASSOCIATED PRESS
December 23, 2009

WASHINGTON (AP) — Sounding a friendly tone to community bankers, President Obama said on Tuesday that the White House would seek to cut restrictions so that local lenders could help businesses seize on opportunities for growth.

“We feel very optimistic that the worst is behind us,” the president declared after meeting with heads of a dozen small and community banks.

The event, among the final acts of business for President Obama before he leaves for a Christmas vacation in Hawaii, follows a similar meeting with some of the nation’s top bankers. But the tone was different this time.

Mr. Obama had implored those bankers to help keep the fragile recovery from faltering by increasing lending to small businesses and supporting a rewrite of financial regulations. With the smaller lenders, he rallied behind them.

The president said his administration did not have direct influence over independent regulators but would still seek to spotlight cases in which restrictions may have become too tight on community banks, causing the pendulum to swing too far in the direction of not lending.

“There remains enormous opportunities as we come out of this recession for businesses to start growing again and to start hiring again,” Mr. Obama said. He pledged that the White House would keep working in the months ahead to spur the lending needed to help businesses hire.

He made a point to say the community lenders were largely not responsible for the risky behavior that helped imperil the financial system.

There are about 8,000 small and community banks with assets of less than $5 billion, most of them with assets of no more than $1 billion. They are important to the administration because they make more than 50 percent of small-business loans under $100,000.

Smaller bankers have generally backed the administration’s financial regulatory package and have received kinder treatment in the House version of the legislation. For example, banks with assets of less than $10 billion will not have to undergo a separate bank examination by a proposed consumer protection agency. Large banks would have to submit to such a review.


Example:  former J.P.Morgan CEO

Former bankers look to buy failing banks: report
YAHOO
Fri Nov 13, 12:41 am ET

(Reuters) – Some former bankers are planning to bid for failing banks in the Federal Insurance Deposit Corp auction process, and getting financial backing from Wall Street firms like Goldman Sachs Group Inc (GS.N) and Deutsche Bank AG (DBKGn.DE), the Wall Street Journal reported citing sources.

JPMorgan Chase & Co's (JPM.N) former Chief Executive William Harrison, former Wachovia Corp CEO Robert Steele and Herb Boydstun, former CEO of Hibernia Corp were among the banking veterans considering such plans, the paper said citing people familiar with the situation.

Last month, former executives at Citizens Financial Group Inc, a unit of Royal Bank of Scotland Group PLC (RBS.L), raised $1.15 billion in a private placement and formed NBH Holdings Corp in an effort to buy battered banks, the Journal said.

Other bankers who are looking for investors to enter the auction include Charles Rinehart, former chairman and CEO of H F Ahmanson & Co and Daniel Healy, former finance chief of North Fork Bancorp, the Journal said citing sources.


Frank: Big banks must pay systemic fee in advance
Systemically risky institutions will be publicly named
YAHOO
By Ronald D. Orol, MarketWatch
Nov. 3, 2009, 5:49 p.m. EST

WASHINGTON (MarketWatch) -- Large banks should be required to pay fees in advance into a special insurance fund that would cover the cost of safely dismantling an insolvent too-big-to-fail bank, said Rep. Barney Frank, D-Mass., who is the chairman of the House Financial Services Committee.

Frank said he expects the committee to adopt an amendment later this week to require financial institutions with more than $10 billion in assets to pay in advance into the fund, as part of larger bank regulatory reform legislation under consideration. The full House could vote on the legislation in early December.

The Massachusetts Democrat had originally sought to have taxpayers first pay to cover costs of unwinding a large financial institution so that the failure would not negatively impact the markets, and those funds would later be recouped from large banks. That after-the-fact payment was the approach sought by the White House and Treasury.

But Frank said Tuesday that he will support the legislation, arguing that many lawmakers were concerned that the funds would never be collected from the banking industry. The provision, however, will likely delay the initial outlay by financial institutions within six months to a year of the passage of the legislation.

"I agree that we don't want to hamper the banks as they try to recover," Frank said in a press conference with reporters. "But for those that complain that they are paying for something they won't benefit from, consider that a financial crisis rains on everybody and every financial institution has an interest to prevent these kinds of collapses."

The goal is to provide funds to the creditors, debt holders and counterparties of the failed super-bank so that they don't collapse as well. "I hope that eventually, the fund gets enormous," Frank said, adding that he was opposed to capping it.

Taxpayers and the Fed will help too

Frank added if the fund did not have sufficient capital to cover the costs of dismantling a financial institution, the measure would allow Treasury to lend some taxpayer money to cover the costs, with an assumption that the costs would be recouped from big banks after the fact.

However, the ability of Treasury to provide those funds would require some "congressional involvement," Frank said, but he didn't provide further details.

"We are still working on the mechanism," he said. "We did not want there to be an unfettered executive decision."

Frank also said that the Federal Reserve would continue to have an ability to provide liquidity to solvent financial institutions to prop them up in the event of a financial crisis. However, instead of individual injections, solvent institutions that are "adequately collateralized" could borrow from a Fed liquidity facility.

"You will see a prohibition on the Federal Reserve lending money...so we won't see funds going to an individual entity such as AIG," Frank said. "No entity would be able to borrow from that facility in times of crisis unless they are adequately collateralized."

An administration official said lawmakers could go too far in constraining the Federal Reserve's intervension powers in the case of a financial crisis, according to a Reuters report.
Glass Steagal on a company-by-company basis

Frank said he did not believe that Congress should go so far as reinstating the Glass Steagal Act of 1933, which would prohibit commercial banks from investment banking activities such as owning full service brokerage firms. Some large institutions, such as J.P. Morgan Chase, would have had to split up had Congress sought to reintroduce Glass Steagal.

"It would have had a destabilizing effect," Frank said.

However, Frank said he supported legislation expected to be introduced later this week that would allow the council of regulators to reduce the size of financial institutions they deem is a risk to the markets, including giving the council the authority to reinstate Glass-Steagal on a company-by-company basis.

Frank added that he expected to support a measure that would be included in the broader financial regulation legislation that would give the systemic risk council the authority to break up large financial institutions if it deems that their size is dangerous to the financial markets.

"Had Glass Steagal been in effect it would not have prevented the kind of failure we saw with AIG and Lehman Brothers," said Frank.
Systemically risky institutions to be publicly named

The names of large systemically significant financial institutions will be made public once a newly set up council of regulators designates an institution within the category, Frank added.

"The way an institution will be publicly identified as systemically important is the day it is hit with severe stricter constraints," Frank said. "When they are designated systemic institutions they will have new capital and leverage restrictions."

It was unclear previously whether regulators would make this information public or kept confidential. "It will be made public," Frank said. "Any time an institution is considered a threat to systemic stability it will be hit with restraints that will include increased capital and restriction on certain activities and maybe a case-by-case Glass Steagal."
Consolidated regulator?

Frank reiterated that he did not believe that legislators would create a consolidated super bank regulator. He reiterated his support for combining the Office of Thrift Supervision and the Office of the Comptroller of the Currency, but he opposed a proposal introduced by Senate Banking Committee Chairman Christopher Dodd, D-Conn., which would create a consolidated regulator made up of all bank regulators.

However, an administration official said that there are "workable ways" to consolidate federal bank regulators beyond combining the OCC and the OTS, Reuters reported.

9 banks fail in 1 day; $2.5 billion hit to FDIC insurance fund
YAHOO
By Matt Andrejczak, MarketWatch
Oct. 31, 2009, 1:30 p.m. EDT

SAN FRANCISCO (MarketWatch) -- Federal regulators have shut the doors on part of a small banking empire built by through a string of 28 acquisitions over the past two decades.

Nine banks, all owned by the same troubled Illinois holding company, were closed Friday by regulators, and the Federal Deposit Insurance Corp. said U.S. Bank of Minneapolis would assume their deposits.  The nine banks as of Sept. 30 had combined assets of $19.4 billion and deposits of $15.4 billion, the FDIC said. Combined, US Bank took over 153 branches.  The deposit insurance fund will take an estimated $2.5 billion hit, the FDIC said.

All nine banks were subsidiaries of FBOP Corp., a holding company based in the Chicago suburb of Oak Park, Ill., according to the FDIC.

The closings brought the 2009 total to 115 in 2009 -- the first year since 1992 that more than 100 banks have gone under.  By number, banks in Georgia account for one-fifth of all U.S. banks closing this year, with 20 failures, followed by Illinois with 19, California with 13, and Florida with nine.

Privately held FBOP, which originated as the parent company of First Bank of Oak Park, wasn't involved in Friday's closures, the FDIC said.  FBOP is run by Michael Kelly, who from his base in the Chicago suburbs snapped up banks in San Diego, Los Angeles, Houston, and San Francisco. He started in 1990 with First Bank of Oak Park, which had $125 million in assets.

The FBOP subsidiaries that were closed Friday were identified as Bank USA, Phoenix; California National Bank, Los Angeles; San Diego National Bank, San Diego; Pacific National Bank, San Francisco; Park National Bank, Chicago; Community Bank of Lemont, Lemont, Ill.; North Houston Bank, Houston; Madisonville State Bank, Madisonville, Texas; and Citizens National Bank, Teague, Texas.

Things were looking grim for Kelly late this summer.  On Aug. 28, he had signed an agreement with the Federal Reserve to present a plan to shore up his commercial real-estate loans.

US Bank reportedly began doing due diligence on FBOP's banks a month ago.

Since the 1990s, US Bank itself has expanded from its Minnesota-base, acquiring small banks in California and other western states.
Nine U.S. banks seized in largest one-day haul
YAHOO
By Sam Mircovich and Edwin Chan
Oct 31, 2009 12:11 am ET

LOS ANGELES (Reuters) – U.S. authorities seized nine failed banks on Friday, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation's banking industry are being crippled by bad loans.

The move brought the total number of failed banks in 2009 to 115 -- their highest annual level since 1992 -- with analysts expecting more to come. Among the lenders seized Friday was Los Angeles-based California National Bank, in what was the fourth-largest U.S. bank failure this year.

The largest institution to fail in the current financial crisis was Washington Mutual, which boasted $307 billion in assets when it was shuttered in September 2008.

U.S. Bancorp on Friday acquired the nine banks that had been held by FBOP Corp, picking up $18.4 billion in assets and $15.4 billion of deposits.

Visibly worried employees lined up to file into Cal National's head offices in the heart of a deserted downtown Los Angeles on a chilly Friday evening, where they had their employers' fate explained to them, regulators said.

"We're getting ready to turn everything over to U.S. Bank," said Roberta Valdez, a spokeswoman for the Federal Deposit Insurance Corp, which helped supervise the transfer of FBOP's assets. "They will continue to operate as normal in the interim," she added, referring to lenders acquired from FBOP.

U.S. Bancorp -- which has been buying up distressed assets this year -- is picking up the lenders once owned by FBOP, a private Illinois group with over $18 billion in assets that owned banks in Texas, Illinois, Arizona and California.

Cal National is FBOP's largest bank by branches. Others that will now go under the U.S. Bancorp umbrella included BankUSA, Citizens National Bank, Madisonville State Bank, North Houston Bank, Pacific National Bank, Park National Bank, San Diego National Bank, and the Community Bank of Lemont.

"This transaction is consistent with the growth strategy that we have outlined many times in the past, which includes enhancing our existing franchise through low-risk, in-market acquisitions," said Rick Hartnack, vice chairman of consumer banking for U.S. Bancorp.

"This transaction adds scale to our current California, Illinois and Arizona footprints."

NEXT BIG HEADACHE

In the "near future," all nine lenders' branches will be re-branded U.S. Bank, which is the California-focused unit of U.S. Bancorp's that operates a network of more than 770 branches across Illinois, Arizona and California.

U.S. Bancorp did not specify what would happen to the new employees it inherits.

Cal National operates 68 branches across Southern California with more than $7 billion in assets. As of June 30, the lender maintained five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier, according to the Los Angeles Times, which first reported news of its evening takeover on Friday.

Cal National lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, the newspaper added, referring to securities rendered nearly worthless by the government takeover of the mortgage firms last year.

According to FDIC data, Cal National was the fourth biggest bank failure this year in terms of assets, just edging out Corus Bank, seized Sept 11 with a flat $7 billion of assets.

A bank official who answered the main number at Cal National's headquarters said they could not talk at the time.

Banks are still cleaning up their balance sheets from the recent credit boom that fueled banks' appetite to extend loans, many with poor underwriting and triggers that caused borrowers' payments to spike to unaffordable levels.

More lenders are expected to go under this year as the industry tries to get a handle on commercial real estate loans that will continue to worsen, as more strip malls go vacant and residential developments stall.

Banks held about $1.7 trillion in commercial real estate loans at the end of September, according to Federal Reserve data, or about 15 percent of their total assets. But to the extent these loans weaken, small banks are likely to be hit the hardest because larger banks were better diversified.

Banks that analysts say could risk big losses include Salt Lake City's Zions Bancorp, Columbus, Georgia's Synovus Financial Corp and Dallas-based Comerica Inc.

Before FBOP, U.S. Bancorp bought Downey Savings of Newport Beach and PFF Bank & Trust of Pomona when those thrifts failed last November, the newspaper said. Just this month, U.S. Bancorp bought 20 Nevada branches from BB&T Corp, which had acquired them as part of its deal to buy Colonial BancGroup Inc, it added.

Bank failures drain FDIC insurance
Washington Times
David M. Dickson
Sunday, October 18, 2009

Nearly 100 banks have failed so far this year, pushing the Federal Deposit Insurance Corp.'s insurance fund into the red for only the second time since its founding in 1933.

As the worsening commercial real estate debacle continues to ravage the balance sheets of thousands of mostly small and medium-sized banks, analysts expect hundreds more could fail before the problem abates.

"While banks and thrifts are now well along in the process of loss-recognition and balance-sheet repair, the process will continue well into next year, especially for commercial real estate," FDIC Chairman Sheila C. Bair told the Senate Banking, Housing and Urban Affairs financial institutions subcommittee last week.

"We expect the numbers of problem banks and failures will remain elevated, even as the economy begins to recover," Mrs. Bair said when she revealed in late September that the insurance fund's net worth turned negative. Problem banks and bank failures "tend to be lagging economic indicators," she said.

Mrs. Bair put those failures in perspective on Friday by noting that more than 500 financial institutions collapsed in 1989.

This year's 99 bank failures have already cost the FDIC more than $25 billion. That's on top of the nearly $20 billion in costs absorbed by the federal agency from the 25 banks that failed last year.

The recession has so devastated the FDIC's deposit insurance fund that the agency has had to take the unprecedented step of requiring banks to prepay $45 billion of insurance premiums by the end of this year in order to replenish the FDIC's coffers. The premiums would cover the fourth quarter of this year and all of 2010, 2011 and 2012.

As recently as May, the FDIC estimated that bank failures from 2009 through 2013 would cost the agency $70 billion. In late September, the FDIC increased that estimate by more than 40 percent to $100 billion.

The $100 billion projection is "about right, unfortunately," said Scott Talbott at the Financial Services Roundtable, a banking trade group that supports the FDIC's prepayment plan.

The deposit insurance fund's balance at the end of June was $10.4 billion, down from more than $45 billion a year ago. It is this balance that turned negative at the end of the third quarter; final figures are not yet available.

Noting that the negative net worth of the insurance fund was "a bad situation," Mr. Talbott called the FDIC's prepayment plan "a creative and elegant solution."

Rob Strand, a senior economist at the American Bankers Association, which also supports the prepayment plan, said the FDIC has devised "an aggressive plan" to generate the needed cash. "We think that will handle the problem," said Mr. Strand, who doesn't expect the FDIC will need to tap the U.S. Treasury for a bailout.

Even though the agency's insurance fund is in the red, the FDIC still has money to absorb losses. That's because the insurance fund balance is just one part of the FDIC's total reserves that are available to cover losses. The second part is the agency's contingent loss reserve, which totaled $32 billion as of June 30.

Just as banks set aside reserves for loan losses, the FDIC sets aside reserves for bank failures. The $32 billion in its contingent loss reserve reflects its estimate of the cost of failures expected over the next year. As of June 30, these funds were available to absorb future losses. It is this $32 billion contingent loss reserve that is expected to be depleted early next year unless the prepayment assessments begin rolling in.

The FDIC has the power to exempt institutions from the prepayment requirement if it would adversely affect the safety of the institution.

In addition to requiring the prepayment of insurance fees, the FDIC, beginning in 2011, will increase the insurance premium that banks pay. Banks pay the FDIC their insurance assessments based on the amount of deposits they hold. Currently, the healthiest banks pay between 12 cents and 16 cents for each $100 on deposit. Beginning in 2011, that annual assessment will rise by 3 cents.

If regulators declare a bank has been pursuing risky practices or is in danger of failing, its assessment is higher.

If the cost of bank failures significantly exceeds the FDIC's projections, the agency has the option to raise premiums again, Mrs. Bair recently noted. But that decision would irritate many banks.

Earlier this year, the FDIC assessed banks an emergency charge in addition to their regular premiums. The emergency charge brought in $5.6 billion but hit the banks in their profit-and-loss columns.

The FDIC considered - but rejected - another emergency charge to replenish its insurance fund in the fourth quarter. To pay the charge, banks would have had to record the expense on their income statements, reducing their profits or increasing their losses.

Some banks likely would have had to dip into their capital reserves, which regulators have been encouraging banks to build up. Reducing a bank's capital limits the amount of loans it can extend, something policymakers do not want to do as the economy slowly emerges from its deep recession.

Compared to an emergency charge, requiring banks to prepay $45 billion in assessments has several accounting benefits for the banks' balance sheets.

"Cash goes out but doesn't hit earnings, which is crucial," said Mr. Talbott.

While banks are relatively flush with cash, and thus able to prepay the assessment, the banking industry's overall profit performance has been abysmal in recent quarters. After posting net losses of more than $37 billion during last year's fourth quarter, the banking industry eked out a net profit of just $1.8 billion during the first half of 2009, according to FDIC data.

In this environment, huge expenses from emergency charges would not be welcome.

The FDIC had a third option to rebuild its insurance fund - borrowing directly from the U.S. Treasury. The FDIC has authorization to tap the Treasury for up to $100 billion and has access to an additional $400 billion from the Treasury with the approval of the Federal Reserve and the Treasury secretary.

Independent banking analyst Bert Ely said tapping the Treasury would have been a better option than the prepayment plan. The FDIC could have repaid the Treasury loan from the bank fees it collects. By publicly signaling she was loath to tap the Treasury, "Sheila Bair unwisely stigmatized borrowing from the Treasury," Mr. Ely said.

FDIC officials acknowledged they did not want to incur the stigma of yet another taxpayer-funded bailout in the wake of the bailout fatigue that has pervaded the nation.

"It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem," Mrs. Bair said Sept. 29when she announced that the insurance fund's net worth had turned negative. "In choosing this [prepayment] path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer."

In its background paper on prepaid assessments, the FDIC pointedly answered "no" to a question asking whether the plan would "constrict lending." Some bankers disagree.

"Certainly, it's going to limit lending," said Mr. Strand of the ABA. Prepaid expenses "will be a non-earning asset and will not be used to build capital," which is the foundation for loans, Mr. Strand explained.

Mr. Talbott expected the prepayment plan would have a "negligible" impact on lending. In an interview Friday on MSNBC, Mrs. Bair acknowledged that "premiums impact banks' ability to lend."

Even as the economy recovers, the FDIC's finances could remain precarious for years.

By the end of June, losses had whittled the insurance fund to 0.22 percent of the $4.8 trillion in deposits that the FDIC insures. By the end of September, that percentage turned negative. Congress has mandated a minimum level of 1.15 percent, which the FDIC does not expect to reach until 2017.

Meanwhile, the FDIC's list of "problem" banks increased to 416 at the end of the second quarter, rising from 305 at the end of March and reaching a 15-year high. Analysts expect that the list almost certainly increased during the third quarter.

Mrs. Bair put that problem in perspective in testimony before the Senate banking panel on Wednesday.

"The number of problem institutions is still well below the more than 1,400 identified in 1991, during the last banking crisis, on both a nominal and percentage basis," she said, adding that "most [problem banks] do not fail."

Mr. Ely is confident that banks will be able to cover all of the FDIC's losses, but it may take seven years to rebuild the FDIC's insurance fund. Mr. Strand of the ABA agreed.

Mrs. Bair also agrees, but she has not closed the door on tapping the Treasury.

"While we're optimistic on the economy, if conditions unexpectedly worsen, we could reach a point when we would have to tap our Treasury line" of credit, she said late last month. "But today is not that day."


Pay czar fingerprints on Citi move to sell Phibro
YAHO)O
By Steve Eder and Karey Wutkowski
Fri Oct 9, 2:57 pm ET

NEW YORK/WASHINGTON (Reuters) – The U.S. government's "pay czar" played a critical role in Citigroup's(C.N) decision to sell off its lucrative commodities trading business, Phibro, a source familiar with the matter said Friday.

The sale of the unit to Occidental Petroleum Corp (OXY.N) relieves beleaguered Citigroup of a massive political headache-- what to do with Phibro trader Andrew Hall and his paycheck of up to $100 million.

Hall has become the poster child of Wall Street's top earners; and while pay czar Kenneth Feinberg would have limited power over his pay this year, he would undoubtedly have dramatically restructured Hall's pay in future years.

Feinberg made it clear to Citigroup that Hall would not be able to keep earning his eye-popping paychecks, leaving Citigroup with the decision of selling off Phibro and parting with Hall or keeping Phibro but losing the unit's moneymaker, according to the source.

The source spoke anonymously because the negotiations between Citigroup and the pay czar have not been made public.

Citigroup's decision to offload both Phibro, and so Hall, demonstrates the extent of Feinberg's power over the seven firms that have received "exceptional assistance" from the government.

The other firms are Bank of America Corp (BAC.N), American International Group Inc (AIG.N), Chrysler Group LLC, General Motors Co (GM.UL), Chrysler Financial and GMAC.

Alan Johnson, a Wall Street compensation consultant, said the deal helped Citigroup unload what was becoming "an embarrassment."

Occidental did not disclose the terms of the deal but said that its net investment would be about $250 million and that it was paying roughly the net asset value of the business.

Citigroup has received multiple bailouts from the government, including $45 billion from the U.S. Treasury's Troubled Asset Relief Program.

POWER PLAY

Feinberg is in the thick of a 60-day intensive review of the pay contracts for the top 25 earners at the seven firms, in which he has the power to approve or renegotiate their compensation packages.

Citigroup's announcement that it is shedding Phibro comes just three weeks before Feinberg's rulings are due.

Feinberg did not have explicit authority to approve or reject Hall's pay for this year because the contract was signed before a cut-off date of February 11, 2009.

But in a demonstration of the reach of Feinberg's powers, he would still have a say over Hall's future pay. He would have likely forced much more of it to be in equity that vested over a longer time horizon, crimping Hall's ability to take home cash.

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said it is not clear that influencing Citigroup to shed a profitable unit is in the shareholders' best interests.

Wall Street firms and the government should be concerned not with "high pay," but with "undeserved pay" -- and by all accounts Hall had earned what was coming to him, Elson said.

"That demonstrates, in my view, the absurdity of this whole exercise," Elson said.

But even Citigroup Chief Executive Vikram Pandit has admitted that nine-figure paychecks are hard to justify, saying publicly last month that $100 million was too much for an employee to earn, given the bank's circumstances.



Debt-Market Paralysis Deepens Credit Drought
NYTIMES
By JENNY ANDERSON
October 7, 2009

A year after Washington rescued the big names of American finance, it’s still hard to get a loan. But the problem isn’t just tight-fisted banks.

The continued disarray in debt-securitization markets, which in recent years were the source of roughly 60 percent of all credit in the United States, is making loans scarce and threatening to slow the economic recovery. Many of these markets are operating only because the government is propping them up.

But now the Federal Reserve has put these markets on notice that it plans to withdraw its support for them. Policy makers hope private investors will return to the markets, which imploded during the financial crisis.

The exit will require a delicate balancing act, government officials said.

“You do it incrementally, where and when you think you can, and not sooner,” said Lee Sachs, a counselor to the Treasury secretary, Timothy F. Geithner.

The debt-securitization markets finance corporate loans, home mortgages, student loans and more. In good times, they enabled banks to package their loans into securities and resell them to investors. That process, known as securitization, freed banks to lend even more money.

Many investors have lost trust in securitization after losing huge sums on packages of subprime mortgages that had high default rates. The government has since spent more than $1 trillion trying to restore the markets, with mixed success.

Until more of the securitization market revives, or some new form of financing takes its place, a wide range of loans needed to secure a lasting economic recovery will remain elusive, experts said.

“Given the imperative for securitization markets to fuel bank lending, we won’t have meaningful economic growth until securitization markets are re-established,” said Joseph R. Mason, a professor of banking at Louisiana State University. Mr. Sachs agrees: “It’s very important these markets come back to get credit to businesses and families who need it, and also as a sign of confidence.”

Enormous swaths of this so-called shadow banking system remain paralyzed. Depending on the type of loan, certain securitization markets have fallen 40 to 100 percent.

A once-thriving private market in securities backed by home mortgages has collapsed, from $744 billion in 2005, at the peak of the housing boom, to $8 billion during the first half of this year.

The market for securities backed by commercial real estate loans is in worse shape. No new securities of this type have been issued in two years.

“The securitization markets are dead,” said Robert J. Shiller, the Yale University economist and housing expert who predicted the subprime collapse. The government is supporting them, he said, but it’s unclear what will happen when it extricates itself. “We’re stuck,” he said.

Despite the running problems, federal officials hope to start weaning the securitization markets off government support next spring. The Federal Reserve has spent about $905 billion buying government-guaranteed mortgages in an effort to keep mortgage rates low. It will continue buying until it reaches its target of $1.25 trillion.

Complicating the Fed’s plan, banks — the other source of credit next to the securitization markets — continue to rein in lending, according to data from the Federal Reserve. And next year, banks face accounting rule changes and capital requirements that could further restrict their ability to make loans.

To be sure, certain corners of the securitization market are percolating again, thanks to the government’s Term Asset-Backed Securities Loan Facility, or TALF, which provides attractive financing for investors who buy the securities.

Bonds backed by consumer debt — credit card debt, auto loans and some student loans — are being issued at costs close to those before the financial crisis, an indication that the market is functioning again.

But the program applies only to borrowers with stellar credit. It does not cover credit card debt or auto loans for people with blemished credit histories.

“The market is coming back, but a lot of it is because of TALF,” said Hyun Song Shin, a Princeton economist who studies securitization. “The big question is, Will the private issuance market stand on its own two feet without TALF, or has there been a fundamental change in the market that it is somehow hobbled permanently?”

That question is hard to answer as long as the government is dominating certain securitization markets. So far, the Fed has been most aggressive in supporting the market for mortgage-backed securities, which plays a crucial role in housing finance. The Fed is virtually the only buyer for these instruments, purchasing about $905 billion worth of government-guaranteed mortgage-backed securities through mid-September. Industry analysts estimate that is about 80 to 85 percent of the market.

“This is public support,” said George Miller, executive director for the American Securitization Forum, which represents the industry. “At the end of the day, the mortgage risk is held by the taxpayer.”

Investors are particularly concerned about the commercial real estate market. A big worry is that $50 billion of securitized commercial property loans are due to be refinanced in the next year. If that can’t be done, a toxic mix of declining property prices and maturing loans could lead to fresh losses at many banks.

“If there’s no mechanism, those properties will default,” said Arnold Phillips, who oversees mortgages and structured securities for the $50 billion in fixed-income investments managed by the California Public Employees’ Retirement System.

As long as the market remains closed, banks will be reluctant to make loans for commercial real estate, since they would have to hold on to them, rather than package them into securities.

Meanwhile, the programs the government has started have not changed securitization practices that many investors say were a cause of the financial crisis. Lawmakers remain concerned that when securitization comes back, it does so in a way that doesn’t put the financial system at risk.

“Our challenge is to have a robust securitization process that adds value to the economy and doesn’t undermine it,” said Senator Jack Reed, Democrat of Rhode Island and chairman of the Banking Subcommittee on Securities, Insurance and Investment. He plans to hold a hearing on securitization next month to find out why consumers and businesses are still having so much trouble getting loans.

"Too big to fail" must end for all: FDIC chief
YAHOO
October 4, 2009

ISTANBUL (Reuters) – The head of the U.S. Federal Deposit Insurance Corp. said on Sunday that she wanted to end the "too big to fail" doctrine and shrink the shadow banking system that operates outside the reach of regulators.

FDIC Chairman Sheila Bair, speaking to the Institute of International Finance meeting here, said a proposal to create authority to shut down failing systemically important financial firms may need to be extended to insurers and hedge funds.

"We need to end 'too big to fail' and this needs to be an overarching policy that applies to everyone," Bair said.


And an earlier opinion here...
U.S. "option" mortgages to explode, officials warn
YAHOO
By Lisa Lambert Lisa Lambert Thu Sep 17, 3:15 pm ET

WASHINGTON (Reuters) – The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

"That's the next round of potential foreclosures in our country," he said.

Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These "underwater" mortgages have been a driving force behind rising defaults and mounting foreclosures.

In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

"It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."

The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan's principal.

When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy borrowers that fed the first wave of the financial crisis.

Miller said option-ARMs were discussed at Tuesday's meeting on mortgage scams, which brought state attorneys general from across the country together with U.S. Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, and Federal Trade Commission Chairman Jon Leibowitz.

The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

Goddard said his office is investigating hundreds of cases where companies have made fraudulent promises, and charged large fees, to mortgage defaulters.

The U.S. housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy.

Some signs of stabilization emerged recently, with sales rising and home price declines moderating in many regions of the country. Home prices in some regions have risen.

However, many economists say there is still a huge supply of unsold homes lingering on the market and that, coupled with a frenzy of more foreclosures ahead, should depress home prices for the rest of 2009.

Real estate data firm RealtyTrac, in its August 2009 U.S. Foreclosure Market Report, said foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month, but an increase of nearly 18 percent from the same month a year ago.

The report said one in every 357 U.S. housing units received a foreclosure filing last month.

The Meltdown Next Time
The financial danger nobody knows about.
The Weekly Standard
by Eli Lehrer
09/21/2009, Volume 015, Issue 01

When the insurance giant American International Group was threatened with collapse in late 2008, its credit default swap business and other international operations were cited as the heart of its troubles. But the largest consequence of AIG's uncontrolled failure on consumers' pocketbooks could have come from the domino-like collapse of its businesses writing insurance on boats, cars, homes, lives, and just about everything else. If these businesses fell apart as a result of AIG's overall collapse, the argument went, the contagion could have brought a collapse of everything from retirement savings plans to auto insurance claims payments from companies unconnected to AIG. (In theory, the operations were firewalled from AIG's other operations, but the extremely slow rate at which they've found buyers indicates that many had significant exposure to the company's other woes.)

The source of the spreading trouble would have been an obscure, dated, and potentially dangerous system intended to make sure that insurance claims are paid even if an insurer becomes insolvent. This system, called state guarantee funds, has almost miraculously remained untested by the present financial crisis, but it poses a major worry for anyone looking to prevent future financial crises, or even a continuation of the current one.

Each of the 50 states runs its own guarantee fund. Any insurance company wanting to write insurance policies in a state must join its guarantee fund. The fund, usually operated by an industry-selected board technically independent of the government, serves as a receiver for insurers that become unable to pay their likely claims. The money to bail out these insolvent insurers comes from forced asset sales but mostly from assessments on the still-solvent insurers in a state. When there are no insolvencies, participation in guarantee associations costs next to nothing. When assessments come due, companies must immediately pay in proportion to their market share. In most states, they can pass on the assessments to policyholders but actually getting the money can take months or years. Although the amounts of individual claims covered by the guarantee funds differ (most are limited to either $300,000 or $500,000), there's no national cap on any insurers' total liability. (Since annuities-private, self-funded pensions-are generally sold as part of life insurance policies, the system also secures vehicles that look a lot more like investments than insurance.) Guarantee funds are obscure even to industry insiders: Most large insurers have policies against even mentioning them in their sales pitches, and several states forbid insurance agents from talking about them unless asked specifically.

The guarantee fund system has two important differences from the similar ones that back bank deposits (the Federal Deposit Insurance Corporation) and investments (the Securities Investor Protection Corporation). First, guarantee funds charge no annual premiums, and thus every penny they spend has to be rapidly raised. Second, unlike the FDIC, guarantee funds have no enforcement authority. Any effort to prevent insolvencies is carried out by state regulators who turn things over to guarantee funds only if they fail to prevent the collapse of a company.

As a result, the system carries an intrinsic danger: Medium-sized insurers-like Vermont Mutual or the Farm Bureau-affiliated insurers in most states-may have large market shares in one state but small or nonexistent operations elsewhere. Paying market-share based assessments for the collapse of a national rival could put them out of business almost immediately. Thus, a large assessment, due immediately, could cause further collapses and start a vicious cycle and bring down even more companies. Even if a regulator, aware of the risk, lets a company "fake it until it makes it" or extends government-backed credit, the private insurance-rating firms like Standard and Poor's and A.M. Best have no incentive to play along, and lenders would likely pull the credit lines that insurers need. The risk that this could happen is not negligible. Currently, one large insurer, the Hartford, has accepted TARP funds to stay afloat.

So far, however, the system has survived. In the past two decades, only two companies ranking in the nation's 100 largest-Florida's Poe National (which collapsed in 2006) and California's Executive Life (which went under in 1991)-have tested the system. Both states saw small and medium-sized insurers flee in the wake of these assessments. In Virginia, likewise, the unexpected collapse of Shenandoah Life Insurance (well-rated by private rating agencies) earlier this year put several small carriers on the ropes.

Two options for reducing the risk of the guarantee fund system have presented themselves.

First, guarantee associations could be pre-funded in a manner similar to the FDIC. New York State has, since the mid-1980s, pre-funded its guarantee associations. The existence of an already-in-place fund greatly decreases the possibility of cascading insolvencies by reducing the need for, and amounts of, sudden assessments. Pre-funding, though, has drawbacks. First, states might raid the funds. In 2006-as several times before-the New York state legislature tried to use the guarantee funds to bail out an ailing workers' compensation fund. Second, the greater costs of pre-funding will almost certainly end up in consumers' insurance bills. And consumers don't want to pay higher rates.

A national guarantee fund with essentially the same structure as the existing state funds is another option. Legislation now pending before Congress proposes one as part of the creation of a federal insurance regulator. The current version of this legislation, the National Insurance Consumer Protection Act, would start a national guarantee fund while still requiring national insurance companies to continue to participate in every state's guarantee fund. Although this would reduce the ability of one company's collapse to have a massive negative impact on large companies or the overall economy, a system of dual guarantee funds could well prove even more destabilizing to small and medium-sized companies than the current system in that it would essentially double their exposure to other companies' insolvencies.

Although no perfect solution exists, the best way to reduce the risks of the guarantee fund system probably lies with trying both ideas: a pre-funded agency for annuity insurance as part of a broader reform of retirement savings and a national fund for everything else.

Pre-funded annuity insurance will almost certainly become a political necessity if the country becomes serious about replacing Social Security. Given the amount of money involved in the collapse of any sizeable annuity provider, the assessments would prove just too much a shock to the insurance system. Such a system would probably have to figure out a way to distinguish between the "insurance" and "investment" components of these annuities and work to provide a partial safety net rather than an absolute "your money is safe" guarantee.

For the automobile, homeowners, and other insurance policies, the national guarantee fund option before Congress would significantly reduce risk. Although the collapse of any enormous insurer would still rattle the system, cascading insolvencies would be very unlikely. The system wouldn't be totally safe, particularly if insurers still had to participate in state guarantee funds, but its enormous assessment base would make it more stable and mitigate a lurking threat to the health of the economy.

Treasury Says Millions More Foreclosures Coming
NYTIMES
By REUTERS
September 9, 2009
Filed at 11:02 a.m. ET

WASHINGTON (Reuters) - Only 12 percent of U.S. homeowners eligible for loan modifications under the Obama administration's housing rescue plan have had their mortgages reworked, and millions more foreclosures are coming, the Treasury Department said on Wednesday.

A Treasury report showed 360,165 people had their monthly payments reduced through August, up from 235,247 through July, but a senior Treasury official conceded much more must be done to soften the impact of a severe and prolonged housing crisis.  Treasury has begun releasing monthly reports on the loan modification program, called the Home Affordable Modification Program or HAMP.

In July, it said that just 9 percent of the estimated number of homeowners eligible had had their loans modified, so Treasury's assistant secretary for financial institutions, Michael Barr, was able to claim modest progress in August.  He told a House Financial Services subcommittee that the program launched in February, which brings banks and loan servicers together with at-risk homeowners, was on target to help a half million Americans homeowners by November 1.  But that is a small start on a huge problem at the heart of U.S. economic woes.

Barr said that "even if HAMP is a total success, we should still expect millions of foreclosures" as administration and industry efforts continue to stabilize a crisis-stricken housing sector.

Barr said a strong housing market was "crucial" to a sustained U.S. economic recovery and described the slump in prices and demand in the housing sector as being "at the center of our financial crisis and economic downturn."

He noted that analysts anticipate more than six million Americans could lose their homes in the next three years.

"Much more remains to be done and we will continue to work with other agencies, regulators and the private sector to reach as many families as possible," Barr said.

The Treasury report showed that some lenders had not helped any of their borrowers who were eligible for loan modifications. Others had helped varying numbers of those who were 60 or more days delinquent on their mortgages, ranging up to 100 percent for one bank that only had one eligible borrower.

Administration Unveils Bank Capital Proposal
NYTIMES
By THE ASSOCIATED PRESS
September 3, 2009
Filed at 4:31 p.m. ET

WASHINGTON (AP) -- The Obama administration is proposing stronger international standards for the capital reserves banks are required to hold. The goal is to avoid a repeat of last year's severe financial crisis.

The administration released a 14-page outline that would require higher capital cushions for financial firms deemed to pose a threat to the overall stability of the financial system.

Treasury Secretary Timothy Geithner is slated to discuss the U.S. proposals during two days of meetings in London among the Group of 20 nations that begin Friday.

Geithner's proposal says a comprehensive international agreement should be reached by the end of 2010 with countries agreeing to implement the measure by the end of 2012.

FDIC fund falls into red, Bair urges lending
YAHOO
By Karey Wutkowski
November 24, 2009

WASHINGTON (Reuters) – The fund used to safeguard U.S. bank deposits dropped to a negative balance of $8.2 billion in the third quarter, the first shortfall since 1992, the Federal Deposit Insurance Corp said on Tuesday.

Although the FDIC still has $23.3 billion in cash resources to handle bank failures, its fund balance veered into the red due to an additional $21.7 billion the FDIC set aside in the quarter for future bank failures.  At the end of the second quarter, the FDIC's insurance fund had stood at $10.4 billion.

The number of banks on the FDIC's "problem list" rose 33 percent during the third quarter to 552, the highest level since 1993.

The FDIC will soon get an infusion of $45 billion through a plan to have the banking industry prepay three years of assessments.  While those additional funds will boost the cash on hand, accounting rules will stop the FDIC from including all the money immediately in the fund balance.  The depleted insurance fund and the sharp rise in troubled institutions reflects the continued weight of bad loans on banks' balance sheets.

"Today's report shows that, while bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance," FDIC Chairman Sheila Bair told reporters in a briefing.

The industry as a whole managed to post a profit for the quarter of $2.8 billion due to growth in operating revenues and a rebound in securities values after a $4.3 billion loss last quarter.  But she said the earnings improvement was counterbalanced by the largest decline in loan balances on record, indicating that banks are still being tight-fisted with credit.

"We need to see banks making more loans to their business customers," Bair said.

Loan balances dropped by 2.8 percent or $210.4 billion -- the largest percentage drop since 1984. The tight credit comes as the Obama administration is launching programs to encourage community banks to increase lending to small businesses.

LOANS CONTINUING TO SOUR

High loan loss provisions continued to drag on bank earnings, but banks set aside less money in the third quarter, the FDIC said. Industrywide, banks set aside $62.5 billion to cover deteriorating loans, a 7.1 percent decrease from the prior quarter.

"The credit adversity we have been discussing for some time remains with us, and we expect that it will be at least a couple more quarters before we see a meaningful improvement in that trend," Bair said.

The third-quarter data revealed that loans are continuing to deteriorate at a rapid pace. The percentage of loans that were 90 days or more past due rose to 4.94 percent of total loans, the highest level in the 26 years that banks have reported the data.  Jeff Davis, an analyst at FTN Equity Capital Markets, said the banking industry is largely off the bottom, but credit problems are going to continue to dominate the sector for a while. "There's a lot of wood to chop right now," he said about credit issues.

Bair said she was optimistic that if the banking industry addressed its problems head-on, it would see signs of improvement in earnings and lending in 2010.  So far this year, 124 U.S. banks have failed, the highest annual level since 1992.

FDIC officials said on Tuesday they are standing by their projection that the cost of bank failures will total $100 billion from 2009 through 2013.  The FDIC posted its quarterly report at: http://www2.fdic.gov/qbp/2009sep/qbp.pdf.

SLOW THRIFT RECOVERY

The Office of Thrift Supervision also reported on Tuesday the results for savings and loans, which are a subset of the larger FDIC data.

The industry, dominated by mortgage lenders, reported a profit of $1.3 billion -- but $1.1 billion of that amount was due to one thrift's large non-operating gain.  Absent that gain, thrifts earned $200 million in the quarter, a slight improvement from the prior quarter, which was downwardly revised to a $94 million loss from a $4 million profit.

The OTS said the small profit in the third quarter was primarily due to higher net interest margins and, like banks in general, those gains were mostly offset by high amounts of money put aside to cover losses from souring loans.

"We see some encouraging signs, but we also see signs that give us pause," OTS Acting Director John Bowman said.

The number of problem thrifts rose to 43 during the third quarter, from 40 the quarter before.


Op-Ed Contributor
The Case Against a Super-Regulator
By SHEILA C. BAIR
September 1, 2009

Washington

THE Obama administration has proposed sweeping changes to our financial regulatory system. I am an active supporter of the key pillars of reform, including the creation of a consumer financial protection agency and the administration’s plan to consolidate the supervision of federally chartered financial institutions in a new national bank supervisor. This consolidation would improve the efficiency of federally chartered institutions while not undercutting our dual system of state and federally chartered banks.

But some are advocating even more drastic changes, like the creation of a single regulator for all banks (and bank holding companies). We clearly need to streamline the system, but a single regulator is not the solution. Calls for consolidation beyond the administration’s plan fail to identify the real roots of last year’s financial meltdown. The truth is, no regulatory structure — be it a single regulator as in Britain or the multiregulator system we have in the United States — performed well in the crisis.

The principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the nonbank shadow financial system, and by using unregulated over-the-counter derivative contracts to develop volatile and potentially dangerous products. Consumers continue to face huge gaps in personal financial protections. We also lack a credible method for closing large financial institutions without inflicting severe collateral damage on the economy.

The creation of a single regulator for all federal- and state-chartered banks would not address these problems. Rather, it would endanger a thriving, 150-year-old banking system that has separate charters for federal and state banks. Within this system, state-chartered institutions tend to be community-oriented and very close to the small businesses and consumers they serve. They provide loans that support economic growth and job creation, especially in rural areas. Main Street banks also are sensitive to market discipline because they know that they’re not too big to fail and that they’ll be closed if they become insolvent.

Concentrating power in a single regulator would inevitably benefit the largest banks and punish community ones. A single regulator’s resources and attention would be focused on the largest banks. This would generate more consolidation in the banking industry at a time when we need to reduce our reliance on large financial institutions and put an end to the idea that certain banks are too big to fail. We need to shift the balance back toward community banking, not toward a system that encourages even more consolidation.

A single-regulator system could also hurt the deposit-insurance system. The Federal Deposit Insurance Corporation currently supervises state banks. The loss of a significant regulatory role would limit its ability to protect depositors by identifying and assessing risks in the financial system.

We can’t put all our eggs in one basket. The risk of weak or misdirected regulation would be increased if power was consolidated in a single federal regulator. We need new mechanisms to achieve consensus positions and rapid responses to financial crises as they develop.

I have advocated the creation of a strong council of federal financial regulators. This council would monitor the financial system to help prevent the accumulation of systemic risks and would also have the authority to close even the largest institutions. But we don’t need — and can’t afford — to depend on one supreme regulator to have sole decision-making authority in times when our entire financial system is in flux.

One advantage of our multiple-regulator system is that it permits diverse viewpoints. The Federal Deposit Insurance Corporation voiced strong concerns about the Basel Committee on Banking Supervision’s relatively relaxed rules for determining how much capital banks should have on hand. In a single-regulator system, it’s very likely that these rules would have been put into effect much more quickly and with fewer safeguards, and our largest banks would have faced the current crisis with much smaller buffers of capital. This is not about protecting turf. This is about protecting consumers and the safety of our financial system.

Working with Congress, we need to draw on the best ideas available to plug regulatory gaps as outlined in the administration’s proposal. We may never have a better opportunity to address the root causes of this crisis — and prevent it from ever happening again.

Sheila C. Bair is the chairman of the Federal Deposit Insurance Corporation.

Bank Losses Drain Deposit Fund, F.D.I.C. Reports
NYTIMES
By ERIC DASH
August 28, 2009

Even as financial stocks have rallied nearly 60 percent since the end of March, the Federal Deposit Insurance Corporation issued another grim report card Thursday on the health of the nation’s banks.

The agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers, and small and midsize businesses.  Its deposit insurance fund dropped 20 percent, to $10.4 billion, in the second quarter, its lowest level in nearly 16 years.  And the number of “problem banks” increased to 416, from 305 in the first quarter, and is expected to remain high, the F.D.I.C. said.

Indeed, federal officials warned that a rebound in the banking sector could lag an economic recovery by a year or more. “In many important respects, financial markets are returning to normal,” the F.D.I.C. chairwoman, Sheila C. Bair, said. “Cleaning up balance sheets is a painful process that does take time, but it is absolutely necessary to the industry’s sustained profitability.”

The banking industry’s dismal report card shows how the troubles have spread. Although a handful of the nation’s biggest banks posted strong profits from trading, most of the country’s 8,195 banks make old-fashioned loans to consumers and businesses. Analysts say they are unlikely to see a rebound until well after the economy has stabilized.  So far, 81 banks have failed this year, including 45 in the second quarter. That, in turn, has put enormous stress on the deposit insurance fund as administered by the F.D.I.C. It has been drained to $10.4 billion in the second quarter, compared with $45.2 billion a year earlier.

Still, the bulk of that decrease comes from additional money that the agency has set aside to cover the cost of bank failures. F.D.I.C. officials will consider a second special assessment, on top of elevated insurance fees, toward the end of the third quarter to help replenish the fund.  It added $9.1 billion to the insurance fund in the second quarter from higher deposit fees on banks, and it may be able to recover more money by selling assets from seized banks.

Ms. Bair said that she did not anticipate having to tap an emergency credit line run by the Treasury Department, although she did not rule it out. “I never say never,” she said. The F.D.I.C. quarterly report card followed a similar release by the Office of Thrift Supervision on Wednesday that showed savings and loan associations eked out a $4 million profit, the first time the sector posted positive results since the fall of 2007. Still, the number of “problem thrifts” rose to 40, up from 17 a year earlier.

The savings and loan industry “is not out of the woods yet,” John E. Bowman, the acting director of the Office of Thrift Supervision. “Despite some encouraging signs, the industry’s performance remained uneven.”

Federal banking regulators are bracing for hundreds of small and medium-size banks to collapse in the coming months even though the economy has shown early signs of rebounding. Banks are being saddled with billions of dollars of bad loans made over the last few years and are continuing to set aside more money to cover losses. Until the unemployment rate stabilizes, analysts do not see the pressure on the industry abating

Despite some improvement in the financial markets and broader economy, credit loss rates reached a record high in the second quarter. Over all, banks charged off $48.9 billion, or 2.55 percent of assets, or nearly twice the levels the industry reported last year. The bulk of that increase was tied to rising corporate and commercial real estate losses, as big write-offs on short-term debt and a surge in troubled credit card loans. Bank profits were also strained by sharp increases in their deposit insurance fees as the F.D.I.C. moved to shore up its fund.

Even so, federal officials said there were some glimmers of good news.  The agency said lending margins had improved because of the government’s ultra-low interest rates. And the quarterly increase in loan losses showed signs of slowing.

“We will need another quarter to confirm that trend,” Ms. Bair said.

US Thrifts Earn $4M in 2Q; 40 on 'Problem' List
NYTIMES
By THE ASSOCIATED PRESS
August 26, 2009
Filed at 10:01 a.m. ET

WASHINGTON (AP) -- U.S. thrifts eked out a $4 million profit in the second quarter, but the number of troubled institutions continued to rise.

The Office of Thrift Supervision says the small profit in the April-June period, marked the industry's first positive earnings since the third quarter of 2007. It compared with a loss of $5.4 billion in the year-ago period, and $1.62 billion in the first quarter of this year.

The agency also says the number of ''problem thrifts'' increased to 40, from 31 in the January-March period.

Thrifts differ from banks in that, by law, they must have at least 65 percent of their lending in mortgages and other consumer loans -- making them particularly vulnerable to the housing downturn.

Solution or just deja vu? Wall Street has new way to turn mortgage debt into AAA bonds
Associated Press Writer (by way of LWVCT)
MATT APUZZO
1:38 PM EDT, August 24, 2009

WASHINGTON (AP) — Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place.  In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.

"There is a little bit of deja vu in this," said Arizona State University economics professor Herbert Kaufman.

But Kaufman said the strategy could help solve one of the lingering problems of the financial meltdown: What to do about hundreds of billions of dollars in mortgages that are still choking the system and making bankers reluctant to make new loans.  These are holdovers from the housing bubble, when home prices soared, banks bought risky mortgages, bundled them with solid mortgages and sold them all as top-rated bonds. With investors eager to buy these bonds, lenders came up with increasingly risky mortgages, sometimes for people who could not afford them. It didn't matter because, in the end, the bonds would all get AAA ratings.

When the housing market tanked, figuring out how much those bonds were worth became nearly impossible. The banks and insurance companies that owned them knew there were still some good mortgages, so they didn't want to sell everything at fire-sale prices. But buyers knew there were many worthless loans, too, so they didn't want to pay full price for the remnants of a real estate bubble.

In recent months, banks have tiptoed toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

"You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.

As for the bottom-of-the-barrel bonds that are left over, those are getting sold off for pennies on the dollar to investors and hedge funds willing to take big risk for the chance of a big reward.  Kaufman said he's optimistic about the recent string of deals because, unlike during the real estate boom, investors in these new bonds know what they're buying.

"We're back to financial engineering, absolutely," he said. "But I think it's being done at least differently than it was before the meltdown."

The sweetener at the heart of the deal is a guarantee: Investors who buy into the really risky pool agree to also take some of the risk away from those who buy into the safer pool. The safe investors get paid first. The risk-taking investors lose money first.  That's how the safe stack of bonds gets it AAA rating, which is crucial to the deal. That rating lets banks sell to pension funds, insurance companies and other investors that are required to hold only top-rated investments.

"There's no voodoo going on here. It's just math," said Sue Allon, chief executive of Allonhill, which helps investors analyze such hard-to-price investments.

Financial gurus call it a "resecuritization of real estate mortgage investment conduits." On Wall Street, it goes by the acronym Re-Remic (it rhymes with epidemic).

"It actually makes a lot of fundamental sense," said Brian Bowes, the head of mortgage trading at Hexagon Securities in New York. "It's taking a bond that doesn't necessarily have a natural buyer and creating two bonds that might have a natural buyer for each."

The risk is, if the housing market slips even more, even the AAA-rated investments may not prove safe. The deal also relies on the rating agencies, which misread the risk at the heart of the subprime mortgage crisis, to get it right.  And then there's the uncertainty about the value of the underlying investments, which FBR Capital Markets analyst Gabe Poggi called "totally combustible." Poggi likes the deals because they appear to have breathed some life into the market, but he said it only works if everyone knows exactly what they're buying.

The Obama administration is also working on a plan to get banks buying and selling risky bonds. But the public-private partnership announced this spring is still in the works and has yet to help investors figure out what those bonds are worth. By creating Re-Remics, banks can help start the process themselves.  The concept has been around for years, but it has become increasingly popular lately as a way for banks to sell off bonds backed by commercial properties such as malls and office buildings. Analysts say they've seen a few dozen deals aimed at repackaging debt held over from the mortgage boom. Investment banks have also dabbled in turning collateralized debt obligations, or CDOs, into Re-Remics.

That's where Allon gets nervous.

"I think that's trouble," she said.

CDOs are already complicated. Repackaging them makes it harder to figure out what the investment is worth. The more obscure the concept, she said, the more likely the deal has gotten too creative.  Wall Street has a tendency to push the boundaries of good ideas, Bowes said. But he said banks are still smarting from the market implosion and are unlikely to rush into new, risky ventures.

"A lot of the market innovations, they all started out with this fundamentally good concept and they often tend to deteriorate over time, or just evolve into more and more risky versions of the same concept," Bowes said. "This time around, the likelihood is, it will take a lot longer for that to happen."

Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Geithner Defends Plan for Financial Oversight
NYTIMES
By STEPHEN LABATON
July 25, 2009

WASHINGTON — The Obama administration on Friday scrambled to salvage major elements of its plan to overhaul the nation’s financial regulatory system in the face of significant criticism from the financial services industry and its allies in Congress.

Earlier this week, senior Democrats in the House conceded that they would not be able to complete work on the proposal to create a new consumer protection agency for financial products like credit cards and mortgages before the lawmakers left for their August recess at the end of next week.

The Democrats had hoped to complete action on the legislation this month. But because of opposition to the proposal, Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, said on Friday that the committee would work on the proposal in September.

A second major component of the Obama plan, to give the Federal Reserve more authority to supervise large companies for risks they may pose to the financial system, came under attack by senior Senate Republicans earlier this week. That proposal has also been questioned by Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate Banking Committee.

Appearing this morning before the House Financial Services Committee, the Treasury secretary, Timothy F. Geithner, tacitly acknowledged the criticism. He urged the lawmakers not to delay or bow to industry pressure, but to move swiftly.

“Over the past five weeks, in Congress and in the press, among legislators and business leaders, academics and advocates, the administration’s proposals have spurred an important and sometimes heated debate about how best to reform the financial regulatory system,” Mr. Geithner said in his prepared testimony. “We understand that on any issue this complex and this important there will be areas where parties genuinely disagree, and we look forward to refining our recommendations through the legislative process. But there should be no disagreement on the need to act.”

Mr. Geithner added in his written testimony: “As a country, we now know that our financial system failed in its most basic responsibility to be stable and resilient enough to provide credit while protecting consumers and investors.”

“We now know that millions of Americans were left without adequate protection against financial predation, especially in the mortgage and consumer finance areas; and that many were unable to evaluate the risks associated with borrowing to support the purchase of a home, a car, or an education.”

Mr. Geithner methodically tried to make the case for a new Consumer Financial Protection Agency. He noted that mortgage brokers and large mortgage companies, which played a central role in the financial crisis, are now virtually unregulated by the federal government. He said that even though financial oversight exists in other areas involving consumer protection, companies have been able to select their regulators, a practice that had led to “the least restrictive oversight of consumer protection.”

And he noted that the banking agencies responsible for enforcing consumer protection have typically had higher priorities.

Large and small banks and their trade associations in Washington have waged a major lobbying effort to kill the proposal or least substantially water it down so that the new agency would not be able to write new regulations and also enforce them. The banks have maintained that the creation of a new agency would lead to burdensome and duplicative regulation of the banks.

The lawmakers will hear testimony this afternoon from Ben S. Bernanke, the chairman of the Federal Reserve, and from senior regulators, who have disagreed among themselves about several aspects of the plan. The new consumer financial product commission, for instance, would take over many of the functions that are now done by the Federal Reserve, a prospect that Mr. Bernanke has opposed.

And Sheila C. Bair, the head of the Federal Deposit Insurance Corporation, who will also be testifying this afternoon, has suggested a lesser role for the Federal Reserve as the systemic risk regulator and a greater role for an advisory council that includes the head of the F.D.I.C.



CIT amends restructuring plan with bondholders
YAHOO
October 17, 2009

CHICAGO (Reuters) – Commercial finance company CIT Group Inc (CIT.N) and a group representing its bondholders have agreed on changes to the company's proposed restructuring plan as it looks shore up its finances.

The changes, announced by CIT late Friday, include a mechanism to accelerate the repayment of new notes; the shortening of maturities by six months for all new notes and junior credit facilities; and offering more equity to subordinated debt holders.

The changes would include notes maturing after 2018 in the company's exchange offer and increase the interest paid on Series B notes being offered by CIT Delaware Funding to 9 percent from 7 percent. They would also provide preferred stockholders contingent value rights in the reorganization and modify the allocation of common stock in the company's recapitalization after the exchange offers, as part of an agreement with the Treasury Department.

On October 1, CIT, founded more than a century ago, launched a debt-exchange plan as it looks to cut its debt by at least $5.7 billion.

The company, which is one of the largest lenders to small and mid-sized companies, also asked bondholders to approve a prepackaged plan of reorganization that would allow it to initiate a voluntary filing under Chapter 11 if the debt exchange failed.

CIT said on Friday that completion of either the debt exchange or a bankruptcy filing would generate significant capital and improve the company's liquidity.

The exchange offer expires at 11:59 p.m. EST on October 29.
CIT debt swap struggles, bankruptcy looms
YAHOO
By Dan Wilchins and Paritosh Bansal
October 12, 2009

NEW YORK (Reuters) – CIT Group Inc (CIT.N) is seeing little interest from bondholders in a debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely, sources familiar with the matter said.  The lender to small and medium-sized businesses said earlier this month it was looking for investors to approve a large debt exchange that would reduce its borrowings, or to approve a prepackaged bankruptcy.  CIT is now more likely to try a prepackaged bankruptcy, two people familiar with the matter said. They declined to be identified because the exchange offer is ongoing and information about its progress is private.

But separately, investors in CIT securities said it is possible the company will not find enough debtholder approval for a prepackaged bankruptcy, which requires sufficient support before the company files for protection from creditors. Instead, CIT might have to aim for a prenegotiated bankruptcy, which typically has less support before the actual filing.  CIT spokesman Curt Ritter declined to comment.

CIT has limited time to work out its debt difficulties. It has about $3 billion of debt to repay in the fourth quarter, including both secured and unsecured obligations, according to a CIT quarterly filing with regulators.

CIT has lost access to unsecured debt markets, but has billions to refinance in coming years. In three of the next four years, it will have more debt to repay than cash to pay it back. CIT has roughly 1 million customers and more than $70 billion of assets, but many of its borrowers are struggling amid the worst recession since the Great Depression.

The company's debt exchange aims to reduce CIT's borrowings by at least $5.7 billion, with specific targets for lowering the company's liabilities through 2012. The exchange offer expires on October 29.

AT LEAST TWO WANT MORE

At least two groups of investors are pushing for better terms in a bankruptcy than those suggested by the company earlier this month, one of the sources and investors said.

A subordinated debt holder said last week he was hoping to press for either more equity, or for a promise from the company to pay extra money to current subordinated debt holders if the company's assets perform well enough.

Separately, investors holding debt that funded CIT business in Canada are pushing for greater consideration in any bankruptcy plan, too. These investors are entitled to recover money from Canadian assets and the parent company in the United States and could therefore get close to 100 cents on the dollar in any bankruptcy.

One investor that would take a hit in a CIT bankruptcy is the U.S. government. The United States' Troubled Asset Relief Program invested $2.3 billion in CIT in December and much or all of that could be lost if the company files for bankruptcy, analysts said.

But many debt investors are likely to end up with much more than zero if CIT files for bankruptcy. One group of bondholders lent $3 billion to the company in July. That loan is collateralized by an estimated $30 billion of assets, which would ensure that the July loan could likely be paid back in full.
Editorial
CIT on the Verge
NYTIMES
July 23, 2009

A funny thing happened last week. After the government refused a second bailout for the CIT Group — the ailing lender to small and midsize businesses — CIT’s bondholders realized how much they could lose if the firm filed for bankruptcy and agreed to provide $3 billion in emergency financing. The agreement, finalized Monday night, averted what would have been the fifth-largest bankruptcy filing in the history of corporate America.

The reprieve is likely only temporary. CIT needs $7 billion just to pay debt that is coming due over the next year. Even if it comes up with the money, the firm’s longer-term viability is still in doubt. That’s because the bondholders currently propping up CIT are apparently counting on regulators to provide more government support in the future. That’s far from assured.

The government’s decision not to offer a second bailout to CIT is defensible. The lender had not satisfactorily restructured its operations since receiving a $2.3 billion bailout late last year. Since then, financial markets have calmed down, building confidence among regulators that the system is strong enough to withstand at least CIT-sized problems.

While CIT may be too small to rescue, its problems hold big lessons for the Obama administration on how to manage through the ongoing recession and how to judge the system that is emerging from the wreckage.

For starters, forcing CIT to fend for itself does not mean that its business customers should be cut adrift. In today’s tight credit markets, many small businesses cannot simply switch lenders at will. In a CIT bankruptcy filing, retailers could be especially clobbered, since the firm provides short-term financing to some 2,000 vendors that supply hundreds of thousands of stores. And yet, last week, when the government refused to rescue CIT, it had no apparent plan to make sure those businesses would continue to have access to the financing needed to stay in business.

Clearly, the administration must do more to ensure that lender difficulties do not undermine small businesses. The Treasury Department must ramp up a stalled $15 billion initiative to buy up small business loans so that lenders have more money to re-lend. The program was announced in March but is not expected to be up and running until the end of this month. A separate $730 million program that allows the Small Business Administration to guarantee most small-business bank loans should be reassessed to see if it is big enough.

The Obama administration must also pay close attention to how the broader financial system responds to CIT’s difficulties. As CIT restructures, whole swaths of its operations could be sold to competitors. The knee-jerk reaction would be to hail that outcome as evidence that the markets are working to efficiently deploy resources.

But if much or most of the business ends up at the few big banks that are still standing (thanks in no small part to federal efforts to rescue the financial system), the result would be that too-big-to-fail institutions get even bigger. That implies, in turn diminished competition, higher banking costs for businesses and increased systemwide risk. That would be the opposite of what’s needed to rebuild a healthy economy.
CIT Is Said to Obtain Urgent Loan to Prevent Bankruptcy
NYTIMES
By MICHAEL J. de la MERCED
July 20, 2009

Directors of the CIT Group, one of the nation’s leading lenders to small and midsize businesses, approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan, according to people briefed on the matter.

The deal will buy CIT some time to restructure its business model and reduce its voluminous debt load, after the company failed to win crucial concessions from Washington regulators. The company had planned to file for bankruptcy protection as soon as Monday afternoon if it could not attract enough capital from private investors, including big bondholders and its banks.

Under the terms of the deal, CIT would receive $3 billion from some of its main bondholders, though at an initial rate of about 10.5 percent. The money, arranged by Barclays Capital, is meant to give the company several weeks to set up an exchange of bondholders’ debt for equity, alleviating some of the pressure from billions of dollars in obligations.

CIT’s board approved the deal around 10:30 p.m. Sunday, these people said.

For more than a week, CIT, which is 101 years old, posed a difficult question for regulators: Should they step in to save yet another foundered financial institution?  Regulators felt some political pressure to intervene, because of CIT’s big presence in lending to small businesses across the country and because the government had already invested $2.33 billion in the company.  But officials eventually concluded that CIT, unlike the banks that were bailed out last year, posed no risk to the global financial system, leaving its fate in the hands of the private market.

The plan was formed after days of round-the-clock negotiations between CIT and its financial and legal advisers, and a group of large bondholders represented by the investment bank Houlihan Lokey Howard & Zukin and the law firm Paul, Weiss, Rifkind, Wharton & Garrison. The two firms previously represented the biggest group of large bondholders in General Motors.

Jeffrey M. Peek, CIT’s chief executive and the architect of the lender’s ill-timed aggressive push into subprime mortgages and student loans, was active in the financing talks, according to people briefed on the matter. Mr. Peek, a longtime banker who lost a race to become Merrill Lynch’s chief executive, called upon many of his acquaintances on Wall Street to provide some form of aid.

Even as CIT negotiated with its bondholders, it also had teams from the investment bank Evercore Partners and the law firm Skadden, Arps, Slate, Meagher & Flom prepare for a potential Chapter 11 filing. Several advisers, including JPMorgan Chase and Morgan Stanley, had begun preliminary discussions about raising $2 billion to $3 billion in debtor-in-possession financing, money needed to get a company through bankruptcy.

It remains unclear whether CIT’s long-sought lifeline will be enough to give it the room to make crucial changes to its business at a time when it is unable to obtain financing from the capital markets. While it maintains a bank subsidiary in Utah, the company has traditionally relied on money that it borrows in the capital markets to make loans to its customers.

Once the credit markets froze and investors became leery of CIT’s loan portfolio, the company was in peril.

Were CIT to fail, the company — with $75 billion in assets — would become the largest casualty in the finance sector since Lehman Brothers collapsed last fall. Since then, federal regulators have been pumping billions of dollars into numerous banks across the country to prop them up and create some stability in the financial system.

A failure of CIT could have sent ripple effects through the nation’s small and midsize businesses. While most of its portfolio consisted of term loans, the company dominated the market for factoring, a type of lending common within the manufacturing and retail sectors.  Many analysts and federal regulators have questioned why CIT did not try to change its risky business model sooner. Last December, amid the market turmoil, the Bush administration rushed through the company’s application to become a bank holding company and gave it $2.33 billion through the Troubled Asset Relief Program.

Yet the company made no move to build a sturdier business model. Instead, it applied for access to a program through the Federal Deposit Insurance Corporation that has allowed Goldman Sachs and other banks to issue their debt cheaply with the backing of the agency.

Sheila C. Bair, the chairwoman of the F.D.I.C., does not view the program as a bailout solution for banks and financial institutions, a government official briefed on the situation said.

When that door closed last week, CIT executives still held out hope that they would receive approval from regulators to transfer $10 billion in assets to the company’s Utah bank, a move that would have given it access to loans from the Federal Reserve. But regulators demanded that such a move be accompanied by CIT’s raising a significant amount of private capital, which at the time seemed nearly impossible.

A third front of the debate was whether, after throwing large sums of money to some of the nation’s largest banks, the Obama administration was doing enough to brace up institutions that lend money to smaller businesses. Many of those large banks, including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America, reported either record or substantially improved results last week.
When to Let a Bank Fail
NYTIMES
By The Editors
July 16, 2009, 6:48 pm

The CIT Group, one of the nation’s largest commercial lenders serving a million small and midsized companies, is on the verge of collapse now that federal officials have rebuffed pleas to rescue it with more taxpayer money. It had received $2.33 billion bailout from the feds in December.

The company’s failure would create a stark line between banks that the government deems too big to fail and those regarded as expendable. Some observers have pointed out that if Lehman Brothers had acquired CIT in 2002, when it was considering a deal, the two banks together would now be considered “too big to fail.”

Where should such a line be drawn? Does it send the wrong message to the banking sector when big banks are rescued when they engage in behavior that would otherwise be fatal for smaller institutions?
CIT’s Shares Sink After Geithner’s Comments
NYTIMES
By THE ASSOCIATED PRESS
July 14, 2009

Shares of the diversified lender CIT Group fell sharply on Monday even as Treasury Secretary Timothy F. Geithner indicated there could be help for the ailing company.  CIT’s shares fell about 20 percent by midday after dropping 18 percent in heavy trading Friday amid uncertainty over federal aid.  Mr. Geithner, while in London, said Monday that he was confident the government had the authority and the ability to address the problems at CIT.

“I am actually pretty confident in that context that we have the authority and the ability to make sensible choices,” Mr. Geithner was quoted in response to a question about how the United States government might deal with CIT. The Treasury confirmed the comment.

CIT said it was still in talks with regulators about ways to improve its near-term liquidity as recent losses might jeopardize its compliance with capital requirements.

The company, which posted a wider-than-expected first-quarter loss in April, said late Sunday that it would talk with regulators about the possibility of participating in the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.  The program would allow CIT, a lender to small and midsize businesses, to issue government-backed bonds to raise capital at a lower cost. As of June 8, the program has backed $335.4 billion of debt.

CIT already received $2.3 billion in government bailout money in December, as part of the $700 billion rescue fund created by Congress last October. It had to convert to a bank holding company to gain access to the money.

CIT, like many other financial firms, has been hit hard by the continuing credit squeeze as investors have shied away from purchasing all but the safest forms of debt, leading to a near disappearance of financing options.  If CIT is unable to receive access to the Temporary Liquidity Guarantee Program, it would have to find alternative financing that would probably need to be secured by its assets.

The lender faces maturing debt of $7.4 billion in the first quarter of 2010, plus other obligations. CIT could issue debt without government backing to help it in the near term, but it has to carry a high yield to attract investors.  CIT has said it is also considering the possible transfer of assets into CIT Bank as well as the transfer of its vendor finance and trade finance businesses into the bank.  The company, which has faced a recent series of downgrades by credit ratings agencies, said there was no guarantee that its discussions with regulators would result in any action.

Government officials have said that CIT does not pose a systemic risk to the financial system, as other lenders could step in to provide loans and services to CIT’s client base.

For Banks, Wads of Cash and Loads of Trouble
NYTIMES
By ERIC LIPTON and ANDREW MARTIN
July 4, 2009

MACON, Ga. — H. Averett Walker used hot money to turn Security Bank from a sleepy Southern lender into a regional powerhouse. Darrell D. Pittard used hot money to jump-start his brand-new MagnetBank, allowing it to lend hundreds of millions of dollars even though it did not have a single drive-up window or even a customer with a checking account.

It is a formula being replicated at banks across the United States.

Rather than simply wooing local customers, they have turned to out-of-state brokers who deliver billions of dollars in bulk deposits, widely known as “hot money,” from investors nationwide. In fast-growing regions like this one in central Georgia, the money produced record bank profits and financed whole new communities, built at a phenomenal rate.

But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on.

Though few people have heard of it, hot money — or brokered deposits, as it is also known in the industry — is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing.

Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing.

So far the banks are winning, and the hot money continues to fuel bank growth. The industry has even invented variants to get around the few rules that have been put in place by regulators.

Banks defend the use of brokered deposits as an important tool to bring in money to help communities grow. But even some industry executives acknowledge that certain banks became too dependent on the deposits, and that this abuse caused banks to fail. The consequences can be seen across the country.

The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks.

The data also shows that the problem isn’t likely to go away. The 371 still-operating banks on Foresight’s “watch list” as of March held brokered deposits that, on average, were twice the norm. Even this year, in the depth of the recession, a number of struggling banks have been piling up hot money in a desperate effort to survive.

It is the same mix — rapid increases in hot money and heavy lending for risky real estate development — that brought down many of the savings and loans in the late 1980s.

Warnings and Resistance

Regulators now acknowledge that they saw the warning signs during the most recent boom, but failed to take aggressive action. “We went through this golden age of banking and I just think that everybody lost their compass,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation.

Their indifference has been costly. Even brokered deposits are insured, up to $250,000 for each customer account. But once a bank fails, these deposits become an albatross to the F.D.I.C., which often looks for a healthy bank to take over the failed bank. Most new owners refuse to accept the brokered money — it doesn’t bring branches or real customers — forcing the F.D.I.C. to repay it. The fight over brokered deposits, though far less public than other struggles over the nation’s regulatory system, is one of many in Washington that will help determine the shape of industries ravaged by the economic crisis.

To make their case, a delegation of nearly 50 Georgia bankers assembled at the F.D.I.C.’s headquarters in May to plead with regulators to ease restrictions on brokered deposits.

“It is a bullet to their head,” Joe Brannen, president of the Georgia Bankers Association, recalled members of the group telling senior agency officials. “This is insanity.”

Brokered deposits, industry players and regulators agree, are not inherently a bad thing. Many institutions have relied on brokered deposits for years without troubles. Without brokered deposits, small regional banks in fast-growing parts of the country would not have been able to keep up with the demand for construction loans.

The brokers receive much of the money from investment firms like Merrill Lynch, which are looking to park high-interest certificates of deposits they have sold to clients. Merrill customers get two things out of the arrangement: high returns on their investments and a haven because the money is placed in a bank insured by the F.D.I.C. One brokerage firm, Finance 500, in Irvine, Calif., started a hot money program in 1997 with seven bank customers. A decade later, it delivered $14 billion to more than 1,500 banks.

But the money is volatile. It can be easily shifted from one bank to another as brokers seek the highest interest rates. Thus the term hot money.

Some banks prosper by supplementing their accounts with these deposits, but try not to rely too much on them because the interest payments are high and the brokers can be fickle. “It’s simple, really,” Michael Hobbs, the chief executive of First Commercial Bank in Missouri wrote to the F.D.I.C. late last year, in defending the industry’s practices. “If brokered deposits are managed accordingly, they provide a safe alternative funding source.”

But William M. Isaac, chairman of the F.D.I.C. from 1981 to 1985, said he became wary nearly three decades ago after watching the spectacular fall of Penn Square Bank of Oklahoma City, which had grown astronomically by gorging on brokered deposits. Alarmed by the practice, Mr. Isaac moved to eliminate F.D.I.C. insurance for most brokered deposits — a rule that provoked an industry revolt and was ultimately overturned. Congress later made a similar attempt, but it too was defeated.

“I have a lot of scars on my back,” Mr. Isaac said in an interview, recalling the fight over the rules. “I don’t have any doubt that tens of billions were lost in the S.& L. crisis because of brokered deposits. And we were on our way to shutting that practice down.”

By 1991, Congress prohibited weak banks from obtaining brokered deposits unless they were adequately capitalized. But because approximately 97 percent of the banks in the United States are considered “well capitalized,” the limit has little impact. Three years later, the F.D.I.C. watered down that rule by repealing the requirement that banks looking to grow rapidly with brokered deposits seek special permission from the agency.

The Frenzy in Georgia

The risks and rewards of brokered deposits played out visibly here in Georgia, where a red-hot real estate market in metropolitan Atlanta drove a lending frenzy that was heavily financed by hot money.

Mr. Pittard built MagnetBank solely on brokered deposits, eschewing even traditional branches. “It was very simple,” he said. “It was clean.” And the F.D.I.C. approved it.

The bank was chartered in Utah, but did much of its lending in Georgia. When the real estate market here turned in 2007, many borrowers fell behind and Magnet began to crumble. Its failure in January 2009 cost the F.D.I.C. an estimated $129 million.

Magnet is the extreme example: 100 percent of its deposits were brokered. The story of Security Bank is more typical of the risks.

For years it stayed out of the brokered deposit trade. Mr. Walker, its president and chief, who was known to everyone here in Macon as Rett, bragged to the newspaper about how much he valued local customers.

“The more accounts they have with you — from a child’s savings account to a safety deposit box — the more loyal the customer is and less likely to leave,” Mr. Walker said in 2001, the same year he dressed up in a tuxedo shirt and jacket, jeans and boots to cook up a quail dinner for employees at a branch that had met a sales goal.

But even as he spoke, suburban Atlanta was booming, and Security wanted to take advantage.

It bought small banks to ramp up its lending. But that did not satisfy its ambitions, government records show. So, despite Mr. Walker’s faith in small depositors, Security called the brokers.

At the start of the decade, Security held just $693,000 in brokered deposits. By last year it had $798 million, or 33 percent of its overall deposit base.

It transformed the bank.

To attract the wholesalers, Security had to offer interest rates that, as of 2007, averaged 5.28 percent, or 20 percent higher than what local banking customers got.

To generate the profits to pay such rates, Security began concentrating its lending in the riskiest corners of the market: acquisition of raw land and construction of housing developments. These loans can bring higher profits from fees and higher interest rates. In 1999, construction lending was 8 percent of Security’s loan portfolio. By 2007, it peaked at 53 percent, including prominent projects like converting 230 acres of a former plantation into an upscale new neighborhood called the Highlands.

For a while, the hot money strategy seemed to be working; Security’s profits soared, as did its stock price. Then the economy went sour. Now Mr. Walker has been forced out of his job, and the bank acknowledges it is struggling to survive. It built itself a sprawling new headquarters here in Macon, but it is no longer putting its name atop the tower. Instead, it is trying to find someone to lease the empty space. The Highlands project, like many others it financed, sits unfinished.

Thomas D. Woodbery, the bank’s senior vice president, defended the strategy as a “proven and reliable” way to get more money for loans. But he said the bank was now reducing its allowance on brokered deposits — under orders from the F.D.I.C., which only in April placed heavy restrictions on Security by issuing a cease-and-desist order.

Through this hot-money explosion, the regulators largely watched from the sidelines, offering warnings at times, but declining to intervene forcefully, officials in Washington now acknowledge. The F.D.I.C. allowed many banks that lost their “well capitalized” status to keep taking brokered deposits, approving waivers for about 65 percent of the applicants over the last five years.

“Don’t get in the way, don’t take away the punch bowl,” Ms. Bair said, describing the approach taken by regulators, including her own agency.

Regulation Battles

At the Office of the Comptroller of the Currency, part of the Treasury Department, bank examiners in 2005 found that ANB Financial of Arkansas relied heavily on brokered deposits to fuel rapid growth, an audit shows. Yet the regulators did not take “forceful action” for two more years, the audit says, just before ANB was shut down.

At the Office of Thrift Supervision — a Treasury agency that President Obama wants to eliminate — regulators advised BankUnited of Coral Gables, Fla., to backdate financial records, allowing it to continue to lure brokered deposits, the department’s inspector general reported in May 2009.

In recent years, even some brokers became concerned about the dependence on hot money that certain banks had developed, said Paul T. Clark, an industry lawyer in Washington. They shared those concerns with regulators at the F.D.I.C. last year, hoping to head off a crackdown. “We looked at this and we were very nervous,” he said. “We are going to get blamed because these banks failed. It is not our fault. Where were the regulators?”

Looking back on the reluctance to slow the growth, Timothy W. Long, chief national bank examiner in the comptroller’s office, asked: “When do you tap on the brakes versus slamming on the brakes? It is a hard thing to do sometimes, particularly when management is pushing back hard.”

Late last year, the F.D.I.C. proposed a new rule. Banks that rely too heavily on brokered deposits to accelerate their growth will have to pay a higher insurance premium to help cover losses if they fail. The proposed limit was 10 percent brokered deposits and a growth rate of 20 percent over four years.

Just as it did in the early 1980s, industry opposition emerged almost overnight.

“Brokered’ is not a 4-letter word!” Dennis M. King, chief credit officer of North County Bank in Washington State, wrote in one of hundreds of letters the agency received condemning Ms. Bair’s plan. “They are especially important to community banks in our present economic environment.”

The banks won important concessions. The regulator relaxed the part of the rule that required higher premiums if banks grew too fast with brokered deposits, allowing a growth rate of up to 40 percent over four years. And it left open a loophole that lets banks — even those considered unsound — turn to a “listing service,” a source of hot money by another name. Instead of paying a broker, banks pay to subscribe to an electronic bulletin board of credit unions with money to park.

One listing service, QwickRate, based in Marietta, Ga., has just 18 employees crammed into a tiny second-floor office. But it delivered $1.6 billion in hot money to banks in May, up from $450 million last May. The growth is coming partly because banks on the edge of failure are coming to the service for a lifeline.

Bank regulators are just learning how popular these unregulated services have suddenly become — and are already worried that they will be the next source of hot money abuses.

Ms. Bair said she planned to ask Congress for greater powers to limit the role of hot money in banking — be it brokered deposits, listing services or simply Internet sales by banks offering unusually high interest rates.

“We have seen the error of our ways,” she said.
FDIC Seeks Stronger Rules for Sale of Failed Banks
NYTIMES
By THE ASSOCIATED PRESS
Filed at 5:43 p.m. ET
July 2, 2009

WASHINGTON (AP) -- Private equity firms seeking to buy failed banks would face strict capitalization and disclosure requirements under government rules proposed Thursday that some regulators already warn may go too far.

The Federal Deposit Insurance Corp. is seeking to expand the number of potential buyers for the growing number of banks it has closed during the financial crisis. With mounting interest from private equity firms, whose methods and motives aren't always clear, the FDIC is trying to set requirements to ensure the banks won't fail again.

While the issues is being discussed, yet another bank failure was announced Thursday.

Regulators shut down John Warner Bank in Clinton, Ill., boosting to 46 the number of failures this year.

The FDIC was appointed receiver.

Deposits were acquired by Lincoln, Ill.-based State Bank of Lincoln.

Three branches of The John Warner Bank will reopen on Friday as branches of State Bank of Lincoln, the FDIC said in a statement.

As of April 30, The John Warner Bank had total assets of $70 million and total deposits of approximately $64 million. In addition to assuming all the deposits of the failed bank, State Bank of Lincoln agreed to buy about $63 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimated that the cost to the Deposit Insurance Fund will be $10 million.

The John Warner Bank was the seventh bank in Illinois to fail this year.

In its bid to avoid further bank failures, the FDIC is proposing to require that investors maintain a healthy amount of cash in the banks they acquire, keeping them at about a 15-percent leverage ratio for three years. Most banks have lower leverage ratios, which measure capital divided by assets.

Investors also would have to own the banks for at least three years and face limits on their ability to lend to any of the owners' affiliates.

Regulators said their intent was to tap into the potentially deep source of private equity, while ensuring that banks remain well capitalized once they are sold.

''We want nontraditional investors,'' FDIC Chairman Sheila Bair said at the board meeting. ''There is a significant need for capital and there is capital out there.''

Still, some regulators worried that the rules could stifle a potentially valuable new source of investment. Bair said the proposal was ''solid,'' but acknowledged that some details, including the high capital requirements, could be controversial.

Comptroller of the Currency John Dugan said that the rules, which will now be subject to public comment, may be too restrictive.

The FDIC monitors the health of banks to ensure that they have enough capital to stay afloat and cover their deposits. When banks get in trouble, the FDIC can seize and sell them. Prior to Thursday, the FDIC already had closed 45 banks this year, many of them community or regional institutions. That compares with 25 failures last year and three in 2007.

The FDIC already has brokered two sales this year to entities controlled by private equity firms. In March, the government sold IndyMac Federal Bank for $13.9 billion to a bank formed by investors that included billionaire George Soros and Dell Inc. founder Michael Dell.

But the business practices and ownership of the lightly regulated pools of investor funds often can be difficult to penetrate. The FDIC proposals include requirements meant to pry some information out of the investors, including disclosing the owners of private equity groups. The FDIC rules also would prevent the groups from using overseas secrecy laws to shield details of their operations.

Under the regulations, banks also would not be sold to investors with so-called ''silo'' structures that make it hard to determine who is behind a private equity group.

The FDIC had 305 banks with $220 billion of assets on its list of problem institutions at the end of the first quarter, the highest number since the 1994 savings and loan crisis.

Banks shuttered in Fla., Ill., Md., Utah
YAHOO
By IEVA M. AUGSTUMS and MARCY GORDON, AP Business Writers
Sat Mar 6, 5:47 am ET

CHARLOTTE, N.C. – Regulators on Friday shuttered banks in Florida, Illinois, Maryland and Utah, boosting to 26 the number of bank failures in the U.S. so far this year following the 140 brought down in 2009 by mounting loan defaults and the recession.

The Federal Deposit Insurance Corp. took over Sun American Bank, based in Boca Raton, Fla., with $535.7 million in assets and $443.5 million in deposits. Also seized were Bank of Illinois of Normal, Ill., with $211.7 million in assets and $198.5 million in deposits; Waterfield Bank in Germantown, Md., with $155.6 million in assets and $156.4 million in deposits; and Centennial Bank in Ogden, Utah, with $215.2 million in assets and $205.1 million in deposits.

First-Citizens Bank & Trust Co., based in Raleigh, N.C., agreed to assume the assets and deposits of Sun American Bank and to share losses with the FDIC on $433 million of the failed bank's loans and other assets. It was First-Citizens' fourth acquisition of assets of a failed bank since last July; the others were First Regional Bank of Los Angeles, Venture Bank of Lacey, Wash., and Temecula Valley Bank of Temecula, Calif.

Heartland Bank and Trust Co., based in Bloomington, Ill., is buying the assets and deposits of Bank of Illinois, and is sharing losses with the FDIC on $166.6 million in loans and other assets.

For Waterfield Bank, because no buyer was found, the FDIC set up a new savings institution that will operate until April 5 to allow customers access to their deposits and give them time to open accounts at other banks.

The FDIC was also unable to find a buyer for Centennial Bank, and it approved the payout of the institution's insured deposits. As a result, checks to the retail depositors for their insured funds will be mailed on Monday. Zions First National Bank in Salt Lake City agreed to accept the failed bank's direct deposits from the federal government, including Social Security and Veterans' payments.

The failure of Sun American Bank is expected to cost the federal deposit insurance fund $103.8 million. The cost of resolving Bank of Illinois is estimated at $53.7 million; that of Waterfield Bank is $51 million; and Centennial Bank is $96.3 million.

The pace of bank seizures this year is likely to accelerate in coming months, FDIC officials have said.

As the economy has weakened, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have mounted, sapping billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31.

Banks, meanwhile, have tightened their lending standards. U.S. bank lending last year posted its steepest drop since World War II, as the volume of loans fell $587.3 billion, or 7.5 percent, from 2008, the FDIC reported recently.

President Barack Obama recently promoted a $30 billion plan to provide money to community banks if they boost lending to small businesses. The program, which must be approved by Congress, would use money repaid by banks to the $700 billion federal bailout fund.

But many lawmakers want the $30 billion sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

The number of banks on the FDIC's confidential "problem" list jumped to 702 in the fourth quarter from 552 three months earlier, even as the industry squeezed out a small profit. Banks earned $914 million, compared with a $37.8 billion loss in the fourth quarter of 2008, at the height of the financial crisis. Still, nearly one in every three banks reported a net loss for the latest quarter.

The 140 bank failures last year were the highest annual tally since 1992, at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion. There were 25 bank failures in 2008 and just three in 2007.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government. Apart from the fund, the FDIC has about $66 billion in cash and securities available in reserve to cover losses at failed banks.
Four banks fail, bringing 2009 tally to 44
By John Letzing, MarketWatch*
Jun 26, 2009, 8:05 p.m. EST

SAN FRANCISCO (MarketWatch) -- Four banks in Georgia, Minnesota and California were closed by regulators Friday, as the ongoing credit crisis continued to claim victims.

Villa Rica, Ga.-based Community Bank of West Georgia and Newman, Ga.-based Neighborhood Community Bank were closed, as were Irvine, Calif.-based MetroPacific Bank and Pine City, Minn.-based Horizon Bank. The closures brought the national tally this year to 44, and marked the ninth so far in Georgia.

The Federal Deposit Insurance Corporation said in a statement that it will mail checks to insured depositors at Community Bank of West Georgia on Monday. An institution able to assume the failed bank's deposits could not be found, the FDIC added.

Community Bank of West Georgia had $199.4 million in assets and $182.5 million in deposits as of May 15, according to the regulator, which said that at the time of the closing the bank had roughly $1.1 million in deposits that exceeded the $250,000 limit for insurance.

The FDIC estimated that the failure of Community Bank of West Georgia will cost its deposit insurance fund roughly $85 million.

Neighborhood Community Bank had $221.6 million in assets and $191.3 million in deposits as of March 31, the FDIC said.

The regulator said that West Point, Ga.-based CharterBank will assume National Community Bank's deposits, and that offices of National Community will reopen as branches of CharterBank.

CharterBank also agreed to buy $209.6 million worth of the failed bank's assets.

The failure of National Community will cost the deposit insurance fund $66.7 million, the FDIC added.

Minnesota-based Horizon Bank had $87.6 million in assets and $69.4 million in deposits as of March 31, the FDIC said. The failed bank's deposits will be assumed by St. Cloud, Minn.-based Stearns Bank, National Association.

The cost of Horizon Bank's failure to the deposit insurance fund will be $33.5 million, the FDIC added.

California-based MetroPacific Bank had $80 million in assets and $73 million in deposits, according to the regulator. The failed bank's deposits have been assumed by Tustin, Calif.-based Sunwest Bank.

The cost of MetroPacific Bank's failure to the deposit insurance fund will be $29 million, the FDIC said.
---------------
*
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Regulators Feud as Banking System Overhauled
NYTIMES
By STEPHEN LABATON and EDMUND L. ANDREWS
June 14, 2009

WASHINGTON — Two of the nation’s most powerful bank regulators were once again at each other’s throats.

At a public meeting three weeks ago, John C. Dugan, the comptroller of the currency, blasted a proposal to impose stiff new insurance fees on banks as unfair to the largest banks, which he regulates. The financial crisis stemmed in part from problems at small banks, he insisted.

Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation and the regulator for many smaller, community banks, could barely hide her contempt. The large banks, she said, had wreaked havoc on the system, only to be bailed out by “hundreds of billions, if not trillions, in government assistance.” She added, “Fairness is always an issue.”

Behind the scenes, the two regulators have been clashing over a host of issues, officials said, be it the administration’s coming regulatory overhaul or Ms. Bair’s campaign to shake up the top management at Citigroup.

The long-running and deeply personal feud between Mr. Dugan and Ms. Bair, two Republican holdovers with similar career paths in Washington, is now helping to shape President Obama’s attempt to revamp financial regulation aimed at preventing the regulatory lapses that contributed to the economic crisis.

Some of Mr. Obama’s advisers and some senior Democratic lawmakers have suggested creating a single bank regulator. But the administration’s current version, which could be announced as early as this week, would not combine the regulatory agencies. Instead, it would give Mr. Dugan and Ms. Bair significant new powers — and could intensify their turf battles.

Ms. Bair and Mr. Dugan declined to comment for this article.

The Treasury secretary, Timothy F. Geithner, the main author of the administration’s plan, in recent weeks has refereed among the competing views of Ms. Bair, Mr. Dugan and Ben S. Bernanke, the Federal Reserve chairman. The four generally agree that, if starting from scratch, they would not create the cumbersome system that has evolved piecemeal over the last 150 years.

But with the administration and crucial lawmakers rejecting a single agency, the four officials have often disagreed on just how to streamline and strengthen regulation. Some points of contention include views on which agencies should play central roles in overseeing financial companies whose troubles could pose problems for the overall system, and whether to create a new agency to protect consumers from abusive mortgages or credit cards.

Officials say the latest version of the plan, in large part, is a compromise of various viewpoints.

“On an issue like regulatory reform, with so many differing opinions, the expectation is not that all sides will agree on the final product,” said Andrew Williams, a Treasury spokesman. “But the administration worked hard to gather information from all parties to prevent a crisis like this from ever happening again.”

Mr. Obama’s economic team has often had internecine battles over policy, but the president’s advisers generally fall in line once he makes the final decision. But Mr. Dugan and Ms. Bair are semi-independent regulators whose feuds have multiplied — and at times erupted in public.

Most of the banking industry couldn’t be happier with the current system. Bank executives and lobbyists say that the system, while flawed, enables regulators to tailor rules for a variety of financial institutions. They maintain that the policy issues for small banks differ markedly from, and often conflict with, those involving the large banks.

“It’s healthy that the regulators disagree,” said Camden R. Fine, head of the Independent Community Bankers of America. “Out of their tension comes good, balanced policy.”

But the fractured nature of regulation also makes it easier for financial institutions to shop for the friendliest regulator or pit agencies against one another, lawmakers say. To reduce that risk, the administration is expected to propose eliminating one of the weakest agencies, the Office of Thrift Supervision. The agency was faulted for missing problems at some of the largest savings associations, like Washington Mutual and IndyMac, as well as at the American International Group, which it regulated because the company owns a thrift.

Two Democratic senators, Christopher J. Dodd of Connecticut and Charles E. Schumer of New York, have urged Mr. Geithner to combine the four federal bank regulators into one.

“With multiple bank regulators, you get the worst of both worlds,” Mr. Schumer said. “Some banks get conflicting signals. Other banks get no signals at all.”

Mr. Dodd said that, despite his support for a single regulator, he favored the F.D.I.C.’s continued role as the manager of the bank insurance fund. He said the plan was intended to reduce regulatory gaps but not discourage healthy debate among officials.

“Despite the fact that I’m an advocate of a single regulator, I like the idea of some tension,” Mr. Dodd said.

Other Democrats, notably Representative Barney Frank of Massachusetts, have so far succeeded in convincing the administration that such a proposal is more political trouble than it is worth. And some banking experts say that the number of regulators is not the crucial factor.

“What’s most important is who the leaders are,” said William K. Black, a former senior lawyer for the agency that became the Office of Thrift Supervision, and who brought cases against many savings and loans in the 1990s.

The Obama plan, still being drafted by Mr. Geithner, is likely to give the F.D.I.C. new authority to seize and shut down financial companies in serious trouble.

The administration is also expected to propose an agency to oversee financial products sold to consumers, like mortgages and credit cards. Both those ideas were supported by Ms. Bair and challenged by Mr. Dugan.

The regulatory plan would also establish the Federal Reserve as a super-regulator to police risk across the financial system, a proposal supported by Mr. Dugan and criticized by Ms. Bair.

The fighting between Mr. Dugan and Ms. Bair reflects the institutional interests of their respective agencies, as well as the differences between big banks and small banks.

“The F.D.I.C.’s primary role is as the deposit insurer, so it is inclined to be risk averse,” said Brian C. McCormally, a former regulator in the comptroller’s office who is a partner at the Washington law firm Arnold & Porter.

Ms. Bair and Mr. Dugan have fought over many other issues. In recent weeks, Ms. Bair has sought management changes at the large troubled banks, including Citigroup. Mr. Dugan, on the other hand, has advocated giving Citigroup managers more time to put their house in order.

The résumés of the two regulators might make it seem as if they would get along. Both began their political careers as aides to Republican senators and both served as assistant Treasury secretaries under Republican presidents, at different times.

Ms. Bair’s approach to policy has evolved significantly from a conservative Republican aide to Senator Bob Dole of Kansas to a top regulator who now derives much of her political clout from her close ties to senior Democrats, notably Mr. Frank and Mr. Dodd. Both lawmakers urged the White House to retain Ms. Bair.

“She’s been brilliant,” Mr. Frank said in an interview. Mr. Frank said she recognized long before officials in the Bush administration that it was vital for the government to more aggressively support the housing market and reduce foreclosures. He also lauded her for a series of decisions that have helped community banks.

But at the Treasury and the Federal Reserve, Ms. Bair is viewed as someone who pushes her and her agency’s interests rather than someone who finds common ground with other policy makers. Besides Mr. Dugan, she has antagonized many other leaders in Washington.

Officials at the Federal Reserve and the comptroller’s office said she exasperated them last fall when she balked at allowing Citigroup to take over Wachovia, a major bank that was about to collapse.

In bruising negotiations that lasted until 4 a.m., Ms. Bair squared off against Mr. Bernanke, Mr. Dugan and the Treasury secretary at the time, Henry M. Paulson Jr. The stand-off left many officials, who thought the broader financial crisis had given them no alternative but to finance the deal, fuming.

When Wells Fargo a few weeks later made a more generous offer for Wachovia that required no government aid, Ms. Bair enraged Citigroup executives, some bank officials said, when she backed Wells Fargo and helped scuttle Citi’s deal.

Her supporters said she believed that she had a duty to take an active role and could not afford to sit on the sidelines, hoping that the plans of the Fed and Treasury turned out well.

Mr. Dugan, a more low-key regulator, has also worked as a lawyer representing some of the largest banks.

He derives much of his influence from his close relationship with Mr. Geithner, reinforced when they worked on the banking crisis last year under the Bush administration.

The proposal to overhaul financial regulation must be approved by Congress, where it could be reshaped drastically.

“This is the kind of thing that reminds me of the anecdote about the old man and the sea,” said Mr. Dodd, the Senate Banking Committee chairman. “It’s going to take so long to drag it in that by the time it gets to the boat, it could come in as a set of bones.”
“The banks run the place.”   So says Congressman Peterson
Editorial: Congress, the Banks and Derivatives
NYTIMES
June 7, 2009

The Obama administration has made a serious proposal to regulate derivatives — the multitrillion-dollar market in financial contracts that malfunctioned so disastrously last year. The plan goes further than many thought politically possible, especially in its call for federal oversight of all large derivatives dealers. But it does not go far enough.

Those dealers — including big banks like JPMorgan Chase, Goldman Sachs and Morgan Stanley — trade derivatives mainly as one-to-one private contracts, largely without any regulation. The plan would allow regulators to impose rules on dealers and track their activities and presumably put a timely halt to abuses. But it does not demand the full transparency that would come from trading all derivatives on exchanges, like stocks.

Exchange trading allows the market as a whole — investors, economists, researchers — to see how derivatives are structured, priced and traded. Such knowledge is the best defense against speculative excesses.

The plan would require that derivatives that are deemed “standardized” — off-the-shelf contracts with mostly boilerplate language — be traded through a central clearinghouse or on an exchange. But the plan would also allow for “customized” derivatives — no one knows yet with certainty what the difference would be — to continue to be traded privately.

The danger of perpetuating a freewheeling market in customized derivatives is real. The decision to rope them off looks like a sop to the banks, which have fought against disclosure and transparency. They know that customers who rely on derivatives — including investment funds, major corporations and wealthy individuals — would likely pay less if they could compare prices.

The question now is whether Congress will try to improve the plan. Gretchen Morgenson and Don Van Natta Jr. reported in The Times last week on the banks’ post-meltdown lobbying efforts. Lawmakers are being pressed, and plied with contributions, to favor the lightest regulations and the largest loopholes.

Senator Tom Harkin has introduced legislation that would require exchange trading for derivatives. Representative Collin Peterson has introduced a bill that would tighten the regulation of derivatives’ clearinghouses. He acknowledges that his bill is not as strong as he would like but that Congressional politics left him no choice, telling The Times, “The banks run the place.”
Back to Business:  Even in Crisis, Banks Dig In for Fight Against Rules
NYTIMES
By GRETCHEN MORGENSON and DON VAN NATTA Jr.
June 1, 2009

As the financial crisis entered one of its darkest phases in October, a handful of the nation’s largest banks began holding daily telephone sessions. Murmurs were already emanating from Washington about the need for a wide-ranging regulatory overhaul, and Wall Street executives girded for a fight.

Atop the agenda during their calls: how to counter an expected attempt to rein in credit-default swaps and other derivatives — the sophisticated and profitable financial instruments that were intended to limit risk but instead had helped take the economy to the brink of disaster.

The nine biggest participants in the derivatives market — including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America — created a lobbying organization, the CDS Dealers Consortium, on Nov. 13, a month after five of its members accepted federal bailout money.

To oversee the consortium’s push, lobbying records show, the banks hired a longtime Washington power broker who previously helped fend off derivatives regulation: Edward J. Rosen, a partner at the law firm Cleary Gottlieb Steen & Hamilton. A confidential memo Mr. Rosen drafted and shared with the Treasury Department and leaders on Capitol Hill has, politicians and market participants say, played a pivotal role in shaping the debate over derivatives regulation.

Today, just as the bankers anticipated, a battle over derivatives has been joined, in what promises to be a replay of a confrontation in Washington that Wall Street won a decade ago. Since then, derivatives trading has become one of the most profitable businesses for the nation’s big banks.

The looming fight over regulation is the beginning of a broader debate over the future of the financial industry. At the center of the argument: What is the right amount of regulation?

Those who favor more regulation say it would offer early warning signals when companies take on too much risk and would help avert catastrophic surprises like the huge derivatives losses at the giant insurer the American International Group, which has so far received more than $170 billion in taxpayer commitments. The banks say too much regulation will stifle financial innovation and economic growth.

The debate about where derivatives will trade speaks to core concerns about the products: transparency and disclosure.

There are two distinct camps in this argument. One camp, which includes legislative leaders, is pushing for trading on an open exchange — much like stocks — where value and structure are visible and easily determined. Another camp, led by the banks, prefers that some of the products be traded in privately managed clearinghouses, with less disclosure.

The Obama administration agrees that more regulation is needed. A proposal unveiled recently by Treasury Secretary Timothy F. Geithner won plaudits for trying to make derivatives trading less freewheeling and more accountable — a plan that hinges in part on using clearinghouses for the trades.

Critics in both the financial world and Congress say relying on clearinghouses would be problematic. They also say Mr. Geithner’s plan contains a major loophole, because little disclosure would be required for more complicated derivatives, like the type of customized, credit-default swaps that helped bring down A.I.G. A.I.G. sold insurance related to mortgage securities, essentially making a big bet that those mortgages would not default.

Mr. Rosen and other bank lobbyists have pushed on Capitol Hill to keep so-called customized swaps from being traded more openly. These are contracts written for the specific needs of a customer, whose one-of-a-kind nature makes them very hard to value or trade. Mr. Rosen has also argued that dealers should be able to trade through venues closely affiliated with banks rather than through more independent platforms like exchanges.

Mr. Rosen’s confidential memo, dated Feb. 10 and obtained by The New York Times, recommended that the biggest participants in the derivatives market should continue to be overseen by the Federal Reserve Board. Critics say the Fed has been an overly friendly regulator, which is why big banks favor it.

Mr. Rosen’s proposal for change was similar to the Treasury Department’s recently announced plan to increase oversight. Treasury officials say that their proposal was arrived at independently and that they sought input from dozens of sources.

Even so, market participants, analysts and members of Congress who have proposed stricter reforms worry that the Treasury proposal does not go far enough to close several important regulatory gaps that allowed derivatives to play such a destructive role in the current financial crisis.

But increased transparency of derivatives trades would cut into banks’ profits — hence the banks’ opposition. Customers who trade derivatives would pay less if they knew what the prevailing market prices were.

“The banks want to go back to business as usual — and then some. And they have a lot of audacity now that everyone has bailed them out,” said Yra Harris, an independent commodities trader who was involved in an effort to regulate derivatives nine years ago. “But we have to begin with the premise that Wall Street doesn’t want transparency, because more transparency means less immediate profits.”

Legislators in the Senate and the House of Representatives have introduced bills offering stricter controls than those pushed a decade ago. The pending legislation goes even further than Mr. Geithner’s proposals.

“These mathematical geniuses who create these things can find a way to turn anything into a customized swap,” said Senator Tom Harkin, an Iowa Democrat, who has introduced legislation that would require all derivatives to be traded on an exchange. “You’d get a loophole big enough to drive a truck through. It could be worth trillions and trillions of swaps.”

Lessons From History

Hotly contested legislative wars are traditional fare in Washington, of course, and bills are often shaped by the push and pull of lobbyists — representing a cornucopia of special interests — working with politicians and government agencies.

What makes this fight different, say Wall Street critics and legislative leaders, is that financiers are aggressively seeking to fend off regulation of the very products and practices that directly contributed to the worst economic crisis since the Great Depression. In contrast, after the savings-and-loan debacle of the 1980s, the clout of the financial lobby diminished significantly.

The current battle mirrors a tug-of-war a decade ago. Arguing that regulation would hamper financial innovation and send American jobs overseas, Congress passed legislation in December 2000 exempting derivatives from most oversight. It was signed by President Bill Clinton.

The law passed despite the strenuous objections of Brooksley Born, a former head of the Commodity Futures Trading Commission, who left the government after her unsuccessful effort to impose more regulation. In a recent speech, Ms. Born said big banks are again trying to water down oversight efforts.

“Special interests in the financial-services industry are beginning to advocate a return to business as usual and to argue against any need for serious reform,” Ms. Born, now a lawyer in private practice, said at the John F. Kennedy Library in Boston, where she received a Profile in Courage Award.

After the 2000 legislation was passed, derivatives trading exploded, helping the biggest traders earn immense profits.

The market now represents transactions with a face value of $600 trillion, up from $88 trillion a decade ago. JPMorgan, the largest dealer of over-the-counter derivatives, earned $5 billion trading them in 2008, according to Reuters, making them one of its most profitable businesses.

Among the companies that expanded rapidly was A.I.G. Straying from its main business of providing property and life insurance, A.I.G. wrote a type of contract known as credit-default swaps that protected holders of mortgage securities against defaults. When millions of subprime borrowers stopped paying their mortgages, A.I.G. had to provide cash collateral that it did not have to clients that had bought its insurance.

Before the crisis, few market participants knew the size of A.I.G.’s exposure. Some derivatives transactions occur on exchanges, where the value and nature of the contracts are disclosed, but many do not. Credit-default swaps trade privately. This kept risk in these trades under wraps, leaving regulators unaware of how dangerously stretched and poorly managed the market was.

Where to Trade

On Capitol Hill, banking lobbyists have argued that derivatives should be traded on clearinghouses rather than exchanges, legislative leaders and their staffs say. The Geithner plan favors clearinghouses, where an intermediary would guarantee trades between participants, instead of participants dealing directly with one another as in an exchange.

A major New York clearinghouse is ICE U.S. Trust, an entity closely affiliated with banks that are also members of Mr. Rosen’s group, the CDS Consortium.

Although the Chicago Mercantile Exchange is a more established place for derivatives trading and is independent from the big New York banks, ICE seems to be the clearinghouse of choice, especially among policy makers in Washington, said Brad Hintz, a brokerage firm analyst at Bernstein Research. That is because under the Treasury proposal, the Federal Reserve Bank of New York would oversee ICE, while the Commodity Futures Trading Commission would oversee the Chicago Mercantile Exchange. Critics say the Fed has been too easy on those it oversees.

Theo Lubke, a senior New York Fed official, countered Mr. Hintz’s view, saying the Fed wants a market where a variety of clearinghouses can succeed.

Analysts say that because major banks that deal derivatives are so closely affiliated with ICE, they could seek to have many of the products classified as “customized” — the only category that would keep them off regulators’ radar screens under Mr. Geithner’s proposal.

This worries Mr. Harkin, the Iowa Democrat, whose constituents include agricultural concerns that want better oversight of trading.

This is needed, he said, to “add openness, transparency and integrity in futures trading to rebuild the financial system.”

Letting “customized” derivatives — like many credit-default swaps — trade without detailed disclosure is a way to keep regulators in the dark, he said.

Mr. Harkin said Mr. Geithner visited the Democratic caucus on Capitol Hill three weeks ago. At that meeting, Mr. Harkin said, he challenged Mr. Geithner to “define customized swaps.” Mr. Harkin said the Treasury secretary told him he would have to get back to him.

The big dealers, including major banks, say exchange trading would impose overly strict rules. But requiring exchange trading would have another effect: it would reduce the profits dealers make on derivatives.

Members of Congress say the lobbying efforts by big banks promise to produce one of the most intense political face-offs in Washington in years.

“The swaps and derivatives people are all over the place up here,” Mr. Harkin said. “They sure are trying hard to win. A lot of money is on the line.”

Lobbyists for the banks plan to make a renewed push on Capitol Hill this week.

The Financial Lobby

Through political action committees and their own employees, securities and investment firms gave $152 million in political contributions from 2007 to 2008, according to the most recent Federal Election Commission data.

The top five companies — Goldman Sachs, Citigroup, JP Morgan Chase, Bank of America and Credit Suisse — gave $22.7 million and spent more than $25 million combined on lobbying activities in that period, according to election data compiled by the Center for Responsive Politics.

All five companies are members of the CDS Dealers Consortium, the lobbying group formed in November. Lobbying records show that the group has paid Mr. Rosen, the Cleary Gottlieb partner, $430,000 for four months’ work. Mr. Rosen declined to comment, a spokeswoman said, citing “client sensitivities.”

Mr. Rosen, co-author of a treatise on derivatives regulation, frequently counsels the industry on these complex contracts. In late January, according to e-mail messages, he asked the members of the CDS dealer group if they would support his testifying before Congress on behalf of the Securities Industry and Financial Markets Association, a trade group. The CDS dealers are a much smaller group with a far larger interest in derivatives than Sifma as a whole.

Mr. Rosen received an e-mail response from Mary Whalen, managing director for public policy at Credit Suisse, the Swiss bank, which is active in the derivatives market:. “It is a good idea for Ed to write the testimony and if necessary testify. That way we can be sure that the banks’ point of view is expressed, rather than taking a chance on testimony that Sifma might craft.”

Sifma’s members include 650 firms of varying size and interests, many of which do not trade complex derivatives. By taking the lead, Mr. Rosen was able to position himself as the main advocate on derivatives for the securities industry and to make sure that the group of nine banks in the CDS Dealers Consortium had a loud voice within Sifma.

A spokeswoman for Ms. Whalen declined to comment.

Testimony to Congress

At a House Agriculture Committee hearing on derivatives in February, Mr. Rosen testified on behalf of Sifma. He did not mention that he was also a paid lobbyist for the CDS Dealers Consortium, whose interests might be different from Sifma’s.

Those testifying at such hearings are not required to disclose all of their affiliations. But when asked, Representative Collin C. Peterson, a Minnesota Democrat and the chairman of the House Agriculture Committee, said he had not known of Mr. Rosen’s relationship to the consortium. He said he would have liked to have known because it would have guided his questioning and interpretation of Mr. Rosen’s testimony, given that his clients in the smaller CDS group represented a narrower interest group with a more specific agenda.

Mr. Peterson, whose constituents include farmers, who are historically suspicious of Wall Street and whose livelihoods depend on efficient markets, is a longstanding critic of loose regulation. And since his committee oversees the Commodity Futures Trading Commission, he would retain more of his prerogatives overseeing the market if the C.F.T.C. were the main regulator.

Mr. Peterson’s bill specifically bars derivatives trading in a clearinghouse regulated by the New York Federal Reserve, which he said in an interview “is a tool of the big banks” that “wouldn’t do much” to regulate the contracts.

Because the banks’ lobbyists persuaded some of his Republican colleagues to resist more sweeping changes, Mr. Peterson said, he has had to modify a bill he introduced that is similar to Mr. Harkin’s in calling for wide-ranging limits on derivatives.

“The banks run the place,” Mr. Peterson said. “I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.”

As a result of the lobbying efforts, champions of broad-based regulation are concerned that proposals will be significantly limited by banking interests.

“The outrage among the public means that things have a chance to change, if things move quickly,” said Michael Greenberger, a professor at the University of Maryland Law School and a former director of trading and markets at the C.F.T.C. “We’re in this brief moment of time when the average citizen is on a level playing field with the lobbyist.”

Is this what Flowers has been waiting for?
Six Insurers Named to Get U.S. Taxpayer Aid
NYTIMES
By ERIC DASH and DIANA B. HENRIQUES
May 15, 2009

Six major insurance companies have received preliminary approval to get billions of dollars in fresh capital as part of the government’s financial rescue program, a Treasury Department spokesman confirmed on Thursday.  The department said the Hartford Financial Services Group, Prudential Financial, Lincoln National, Allstate, Ameriprise and Principal Financial Group have all received approval for capital infusions, subject to terms still to be negotiated.

The Hartford, in a statement released late Thursday, said it was told it could receive $3.4 billion under the program.  Applying for the additional capital “was a prudent step for the Hartford, particularly given the continued economic uncertainty,” said Ramani Ayer, the company’s chairman and chief executive.

“These funds would further fortify our capital resources and provide us with additional financial flexibility during one of the most volatile market climates in our nation’s history,” Mr. Ayer continued. The other companies did not immediately provide details about the status of their application.

Under the program, each company is eligible to receive investments worth up to 3 percent of its total assets. Based on the Treasury formula, the amount of capital available to the other companies would be at least several billion dollars each.

While the extension of additional capital to insurers had been widely expected, these are the first companies that have been identified to receive aid after the near-collapse of American International Group. According to the Treasury spokesman, Andrew Williams, these insurers qualified for capital infusions under the department’s Capital Purchase Program because each had restructured itself as a bank holding company and met the November deadline for the program.

Hundreds of other financial institutions are still in the pipeline for review and will be approved on a rolling basis, the Treasury Department said.  As the financial crisis erupted last fall, A.I.G. became the first insurer to receive substantial government aid before a broad-based program to help financial firms was established. Its problems stemmed from complex derivatives that greatly increased its obligations to its trading partners.

This recent group of insurers is far less troubled than A.I.G., but they still have been hurt by the collapse in real estate prices. Amid the housing boom, many insurers invested in complex mortgage-related securities that have since turned sour, weakening their balance sheets.  Indeed, several insurance companies took extraordinary steps to qualify for taxpayer money, which has become even more attractive as the economic environment has worsened.

For example, Lincoln National and the Hartford both bought up smaller banks to qualify as savings banks, which made them eligible for government support.  The insurers followed investment banks Goldman Sachs and Morgan Stanley, which received emergency waivers from the Federal Reserve to become bank holding companies last fall.  GMAC, the auto lender, and American Express, the credit card company, also have transformed themselves into banks to qualify for government support.

“You want the regulatory program to be as broad as possible,” said Scott E. Talbott, a lobbyist for the Financial Roundtable, a group of the nation’s biggest financial services companies. “If all it took was regulatory gymnastics, that expands the program.”

The Capital Purchase Program is part of the sweeping bailout of financial institutions that grew out of the panic that hit in mid-September.

At that time, the Treasury Department, with the backing of the Federal Reserve chairman, Ben S. Bernanke, asked Congress for $700 billion to buy up mortgage-backed securities whose value had dropped sharply or had become impossible to sell, in what he called the Troubled Asset Rescue Plan, or TARP.

As the financial crisis worsened, the TARP plan was modified and expanded to include various support programs set up by the Treasury and the Federal Reserve, ranging from an ad hoc temporary guarantee program for money market funds to the purchase of preferred shares in various financial institutions.

Op-Ed Contributor
How We Tested the Big Banks
NYTIMES
By TIMOTHY GEITHNER
May 7, 2009

Washington

THIS afternoon, Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve will announce the results of an unprecedented review of the capital position of the nation’s largest banks. This will be an important step forward in President Obama’s program to help repair the financial system, restore the flow of credit and put our nation on the path to economic recovery.

The president came into office facing a deep recession and a damaged financial system. Credit had dried up, forcing businesses to lay off workers and defer investment. Families were finding it difficult to borrow to finance a new house, buy a car or pay college tuition. Without action to restore lending, we faced the prospect of a much deeper and longer recession.

President Obama confronted these problems with dramatic action to address the housing crisis and to restart credit markets that are responsible for roughly half of all business and consumer lending. The administration also initiated a program to provide a market for legacy loans and securities to help cleanse bank balance sheets. These programs are helping to repair lending channels that do not rely on banks, and will contribute to fixing the banking system itself.

However, the banking system has also needed a more direct and forceful response. Actions by Congress and the Bush administration last fall helped bring tentative stability. But when President Obama was sworn into office in January, confidence in America’s banking system remained low.

Because of concern about future losses, and the limited transparency of bank balance sheets, banks were unable to raise equity and found it difficult to borrow without government guarantees. And they were pulling back on lending to protect themselves against the possibility of a worsening recession. As a result, the economy was deprived of credit, and this caused severe damage to confidence and slowed economic activity.

We could have left this problem as we found it and hoped that, over time, banks would earn their way out of the mistakes they had made. Instead, we chose a strategy to lift the fog of uncertainty over bank balance sheets and to help ensure that the major banks, individually and collectively, had the capital to continue lending even in a worse than expected recession.

We brought together bank supervisors to undertake an exceptional assessment of the strength of our nation’s 19 largest banks. The object was to estimate potential future losses, and ensure that banks had enough capital to keep lending even in the face of a deeper recession.

Some might argue that this testing was overly punitive, while others might claim it could understate the potential need for additional capital. The test designed by the Federal Reserve and the supervisors sought to strike the right balance.

The Federal Reserve marshaled hundreds of supervisors to spend 45 days rigorously reviewing the banks’ detailed loan data. They applied exacting estimates of potential losses over two years, along with conservative estimates of potential earnings over the same period, and compared them with existing reserves and capital. The results were then evaluated against strict minimum capital standards, in terms of both overall capital and tangible common equity.

The effect of this capital assessment will be to help replace uncertainty with transparency. It will provide greater clarity about the resources major banks have to absorb future losses. It will also bring more private capital into the financial system, increasing the capacity for future lending; allow investors to differentiate more clearly among banks; and ultimately make it easier for banks to raise enough private capital to repay the money they have already received from the government.

The test results will indicate that some banks need to raise additional capital to provide a stronger foundation of resources over and above their current capital ratios. These banks have a range of options to raise capital over six months, including new common equity offerings and the conversion of other forms of capital into common equity. As part of this process, banks will continue to restructure, selling non-core businesses to raise capital. Indeed, we have already seen banks, spurred on by the stress test, take significant steps in the first quarter to raise capital, sell assets and strengthen their capital positions. Over time, our financial system should emerge stronger and less prone to excess.

Banks will also have the opportunity to request additional capital from the government through Treasury’s Capital Assistance Program. Treasury is providing this backstop so that markets can have confidence that we will maintain sufficient capital in the financial system. For institutions in which the federal government becomes a common shareholder, we will seek to maximize value for taxpayers and enable these companies to attract private capital, thereby reducing government ownership as quickly as possible.

Some banks will be able to begin returning capital to the government, provided they demonstrate that they can finance themselves without F.D.I.C. guarantees. In fact, we expect banks to repay more than the $25 billion initially estimated. This will free up resources to help support community banks, encourage small-business lending and help repair and restart the securities markets.

This crisis built up over years, and the financial system needs more time to adjust. But the president’s program, alongside actions by the Federal Reserve and the F.D.I.C., is already helping to bring down credit risk premiums. Mortgage interest rates are at historic lows, putting more money in the hands of homeowners and helping slow the decline in housing prices. Companies are finding it easier to issue new debt to finance investment. The cost of borrowing for municipal governments has fallen significantly. Issuance of securities backed by consumer and auto loans is increasing, and the interest rates on these securities are falling. The Federal Reserve reports that credit terms are now starting to ease a bit.

This is just a beginning, however. Our work is far from over. The cost of credit remains exceptionally high, and businesses and families across the country are still finding it too hard to borrow to meet their needs. We are continuing to execute our programs to relieve the burden of legacy assets, help small businesses and community banks, and tackle the mortgage and foreclosure crisis. The ultimate purpose of these programs is to ensure that the financial system supports rather than impedes economic recovery.

We have not reached the end of the recession or the financial crisis, but the bank stress tests should advance the process of repairing our financial system and provide a better foundation for recovery.

Small Banks Failure Rate Grows, Straining F.D.I.C.
NYTIMES
By ERIC DASH
October 11, 2009

A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009.

In what has become a ritual, the Federal Deposit Insurance Corporation has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank.

While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves.

Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy.

Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red.

The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses.

The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners.

In some cases, they tighten lending and make it harder for longtime customers to obtain loans or favorable terms. In other cases, managers of the new bank make other changes, like ending offers for high-interest certificates of deposit and calling in certain lines of credit. In the longer term, some new owners are likely to close branches of the bank they have acquired in order to cut costs.

“In the near term, bank failures can be painful,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. But a bank that is teetering on collapse is not going to lend, she said, and “that’s not good for the economy.”

Regulators expect closures to ripple through hundreds of small banks over the next couple of years, especially in the Midwest and Southeast, where lenders have been hard hit by the recession.

These banks loaded their balance sheets with loans to home builders and other property developers to make up for lost business in credit card and mortgage lending that bigger competitors wrested away. They eased their lending standards during the boom years and made big bets on new housing developments, strip malls and office projects. Now, many of those deals are falling apart, and the lenders are scrambling to raise capital to cushion the losses.

“These banks were big enough that they could do loans that were fairly sizable,” said John R. Chrin, a former investment banker who is now an executive in residence at Lehigh University. “If they go bad, they are toast.”

The pace of bank failures is expected to accelerate in the coming months. There were just 25 bank failures in 2008 and just 10 in the five previous years. But in September alone, regulators took over 11 banks in nine states that were saddled with soured commercial real estate loans, from Corus Bank, a $7 billion construction lender based in Chicago that financed projects across the country, to Brickwell Community Bank in Woodbury, Minn., which had just a single branch and $72.6 million in assets.

Three others were taken over this month, including Warren Bank, a small lender just outside Detroit. Regulators swept into the offices on a recent Friday night after brokering a sale to Huntington Bancshares of Ohio, a regional bank with a big presence in Michigan.

By Saturday morning, Huntington had taken control of the bank’s computer systems, started reassuring depositors and placed vinyl signs with its name outside some of the Warren Bank branches.

Even though the process went smoothly, customers still found it unnerving.

“People expect companies to go out of business, not banks,” said James R. Fouts, the mayor of Warren, Mich., whose working class city of 140,000 has had a front row seat to the collapses of General Motors and Chrysler. “That is something that you expect to hear about in the Great Depression, and it further exacerbates the feeling that financially, the country is not yet in stable shape.”

The banking system may also be facing a long recovery. About $870 billion, or roughly half of the industry’s $1.8 trillion of commercial real estate loans, now sit on the balance sheets of small and medium-size banks like these, according to an analysis by Foresight Analytics, a research firm. For most of the banks, this represents the biggest and riskiest part of their loan portfolio, since they lack the trading streams and fee businesses of their larger rivals. And as a group, small banks have written off only a tiny percentage of the losses that analysts expect them to incur.

In fact, applying only the commercial real estate loss assumptions that federal regulators used during the stress tests for the big banks last spring, Foresight analysts estimated that as many as 581 small banks were at risk of collapse by 2011.

By contrast, commercial real estate losses put none of the nation’s 19 biggest banks, and only about 5 of the next 100 largest lenders, in jeopardy.

Even Citigroup, the biggest and most troubled of the banks, has a relatively small portion of its loans tied to commercial real estate and may begin to recover faster than other rivals.

Gerard Cassidy, a veteran banking analyst, said the problems call to mind the wave of small bank failures in Texas and New England two decades ago during the savings and loan crisis — only on a national scale.

Back then, regulators closed more than 700 lenders in those regions. Today, Mr. Cassidy projects that as many as 1,000 small banks will close over the next few years and that their losses will be more severe. “It’s a repeat on steroids,” he said.

But Ms. Bair said the savings-and-loan crisis far surpassed the current situation. “We aren’t anywhere close to that today, and based on current projections, I don’t think we will get near that pace,” she said.

Even if hundreds of banks collapsed, they would not threaten to bring the financial system to its knees.

Together, the 8,176 smallest banks control just 15 percent of the industry’s $13.3 trillion in assets. And thanks to the expansion of the government’s deposit insurance program, regulators also appear to have squelched the threat of bank runs that brought down IndyMac Bank and Washington Mutual last year.

Consumer deposits are now insured up to $250,000 per account, and the F.D.I.C. offers unlimited coverage on noninterest payroll accounts used by businesses.

“We’ve passed the panic stage,” said Frederick Cannon, the chief equity analyst at Keefe, Bruyette & Woods in New York.

What is more, community bank supporters say the bulk of their institutions will emerge from the crisis stronger. “The community banks are picking up market share,” said Camden R. Fine, the head of the Independent Community Bankers of America.

“People are angry with all the shenanigans on Wall Street,” he said. “They believe their money stays local when they put it in a community bank, rather than sent off to Never-Never land.”

Just you wait! 
We’re Dull, Small Banks Say, but Have Profits
NYTIMES
By DAVID SEGAL
May 12, 2009

INDIANAPOLIS — It’s unlikely that any group of professionals is happier to highlight the dullness of their work than small-town bankers.  At a recent conference held here by the Indiana Bankers Association, attendees said it over and over: our business is plodding and boring and we would not have it any other way.

“Banking should not be exciting,” said Clay W. Ewing, president of retail financial services at German American Bancorp, a community bank in Jasper. “If banking gets exciting, there is something wrong with it.”

It is an ethos squarely at odds with the risk-addicted style of megabanks, like Citigroup and Bank of America, that trafficked in the subprime mortgages and complex financial products that helped drive the country into the grimmest recession in decades.  But to the deep chagrin of Mr. Ewing and others at the conference, the public, politicians and the media have made little distinction between the stress-tested behemoths and the 7,630 community banks across the country — the vast majority of which have watched the crisis like bystanders at a 10-car pileup.

As a result, community bankers have felt compelled in recent months to mount public relations campaigns to emphasize their fiscal health and in some cases to announce they rejected Troubled Asset Relief Program, or TARP, funds. Some have held cookouts, others have held “reassurance” meetings in their lobbies, hoping to educate customers and prevent panics. All are dealing with banker jokes and the occasional wisecrack.

“I was on vacation in California and this guy I had just met said, ‘So, traveling on that bailout money, huh?’ ” said Blake Heid, of First Option Bank in Paola, Kan., which didn’t take any bailout money. “I didn’t find that very amusing.”

Though they greatly outnumber the national and regional banks, community banks have barely registered in any of the fallout from the credit crisis, in part because they hold less than 10 percent of the $13.8 trillion in bank assets nationwide.  The 50 or so bank failures have been largely clustered in a few states, like Florida, Arizona and California, where the bursting housing bubble had the greatest impact.

In states like Indiana, where property values never soared, community banks have been rock solid. The last failure in the state was in 1992.  To spend time with these Indiana community bankers is to step into an alternate universe, where everything sounds a little strange because it makes perfect sense. You hear things like, “If you don’t understand the risk you’re taking, don’t take it.” And, “We want to be around for decades, so we’re not focused on the next quarter.”

Forget “too big to fail.” These banks consider themselves too small to risk embarrassment. They are run by people who grew up in the towns where they work, and their main fear is getting into a financial jam that will shame them in the eyes of their neighbors.  The steep profits earned by national banks didn’t turn their heads in the last decade because they were inherently skeptical of double-digit growth rates.

“We like a nice, gentle, upward slope,” said Donald E. Goetz, the president of DeMotte State Bank, an 11-branch operation in the northwest part of Indiana.

“This kind of growth, like you see in the stock market” — Mr. Goetz ran his hand through the air, tracing the shape of a mountain range — “that doesn’t interest us.”

One recent morning Mr. Goetz gave a tour of his bank, which included a bulletin board with fliers for a fire department fish fry and the Kankakee Valley Women’s Club flower sale.  There is a lot of bric-a-brac in his wood-paneled office and a Thomas Kinkade painting of a green-gabled stone house after a snow fall, titled the “Olde Porterfield Gift Shoppe.”

“There is one set of footprints, going in,” he said, pointing to the painting. “That’s how we feel as a business sometime. We’re walking alone.”

Mr. Goetz, who was wearing a tie and a short-sleeve shirt, started as a teller at DeMotte right after he graduated from college in 1976, and he’s been president since 1988. He is a stolid guy who, when asked what he does for fun, offered two words: “Yard work.”

He sounds somewhat aggrieved. His bank, which opened in 1917, didn’t make any subprime loans, nor did it take any bailout money. Even when bank stocks were soaring, not one of his 246 shareholders needled him to earn more than the 3 to 4 percent dividend that DeMotte has generated for years.  Still, he’s had to train employees in the art of assuaging the fears of jittery customers. He programmed the blinking signs outside his branches to read “Safe, Strong, Secure.”

Despite these efforts, he’s fielded some customer calls at night, to his home. In rare cases, people withdrew their savings.

“We had three or four people panic,” he said. “A couple of them said, ‘It’s not the bank. We just don’t trust the government.’ And I told them, ‘If the government fails, the money you’re taking out of this bank won’t be worth anything.’  ”

Mr. Goetz, like a lot of his competitors, is livid about the mortgage shenanigans born of the securitization craze. But he thinks his public relations problem had many authors.

“The media, Congress, the president, everyone just keeps saying ‘the banks, the banks, the banks,’ like we’re all the same thing,” he said. “Well, we’re not all the same thing.”

Explaining that distinction has been especially challenging for community banks that signed up for TARP funds, which initially were pitched by the government as a way to shore up healthy banks. Only later, after the American International Group bonus fiasco, community bankers say, did the TARP acquire a stigma.

“We heard a lot of smart-alecky comments,” said James C. Latta, president of the Idaho Banking Company in Boise, Idaho, which took $6.9 million in TARP funds. “A lot of ‘Wish I had a bailout.’ ”

At DeMotte, Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.  Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.

“Isn’t that the American way?” he says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”

PART ONE...
Back to Business: As Investors Circle Ailing Banks, Fed Sets Limits
NYTIMES
By ERIC LIPTON
May 6, 2009

CAINSVILLE, Mo. — No one seems to want to own a business in this dusty, windswept corner of rural America, population 370, with its crumbling sidewalks and boarded-up storefronts.

Except, that is, for J. Christopher Flowers, a media-shy New York billionaire who last year bought the First National Bank of Cainesville, one of the United States’ smallest national banks.

Mr. Flowers, a private equity manager, has no particular love for rural Missouri; in fact, he has never set foot in Cainsville. Rather, he wants to use the national bank charter he picked up in this farm town to go on a nationwide buying spree.

With that charter in hand, Mr. Flowers plans to take over a handful of large struggling banks, casualties of the economic crisis. In some cases, he hopes, the federal government will help.

But Mr. Flowers, whose investments in banks overseas have made him one of the richest men in America, has run into a major obstacle in the United States: the Federal Reserve, and its very notion of what a bank should be.

The Fed does not mind if private equity firms have a minority interest in banks — the Obama administration even wants them to invest. But the Fed will not let them take control, a stance the firms are lobbying regulators mightily to change, especially given that stress test results to be released Thursday are expected to show a glaring need for capital in the banking system.

It’s not personal, Fed officials say. It’s just that as the nation recovers from one of the worst banking crises in history, the Federal Reserve wants to make sure that it does not set the stage for the next financial implosion by turning banks over to private equity firms, some of the riskiest players in the business world.

So while Mr. Flowers was able to buy the bank here with his own money, he cannot tap into the billions his firm, J. C. Flowers & Company, has raised.

How this battle — and others being fought in the aftermath of the economic crisis — plays out will help determine the future shape of the financial industry.

For all the talk of the banking crisis, Mr. Flowers and other giant private equity players are circling distressed banks around the country, competing to buy into the industry. Bidding wars are now breaking out among private equity firms, including the Carlyle Group, which is going up against Mr. Flowers’s firm for a stake in BankUnited of Florida.

They and other investors see banks as the recession’s biggest prize: potential money machines that could one day generate fabulous returns, particularly after the federal government eats the losses of failed banks, then heavily subsidizes their sale. But like Mr. Flowers, some of them would prefer to take over the banks completely, replace their managements and take all the profit.

“I don’t think the Republic is going to be brought to its knees if private equity owns banks, personally,” Mr. Flowers said from his Midtown Manhattan office with its expansive views of Central Park. “We invest around the world — Japan, Germany, England, no problem.”

The Fed is resisting this pitch, for several reasons. Current law prohibits mixing banking and commerce, based on a fear that if industrialists own banks, they will dominate — and try to manipulate — the economy, as they did during the early-20th-century heyday of John Pierpont Morgan.

The government also wants the ability to stabilize a teetering bank by drawing on the funds of its parent company. That is hard to do with private equity firms, which have numerous businesses owned by funds, each of which is walled off to protect investors.

For these reasons, banks generally cannot be owned by nonfinancial companies like the Carlyle Group, whose assets are as varied as an interest in Dunkin’ Donuts and United Defense Industries, a maker of combat vehicles and missile launchers.

The equity firms counter that banking desperately needs cash if the economy is going to recover, and that they are the only big sources of money around. An executive at the Carlyle Group said the industry had an estimated $400 billion in “dry powder,” or ready-to-invest reserves.

To push their case at the White House, the Treasury and the Fed, Mr. Flowers and others in his industry have enlisted an all-star cast of advisers, lobbyists and lawyers. They include H. Rodgin Cohen, chairman of the Sullivan & Cromwell law firm and Wall Street éminence grise, and Randal K. Quarles, a managing director of the Carlyle Group and a Treasury under secretary in the administration of President George W. Bush. Part of their strategy, Mr. Flowers said, is to persuade the Treasury secretary, Timothy F. Geithner, to pressure the Fed to back down.

“Chris is obviously a get-it-done type of person — and he wants to get this done,” said Mr. Cohen, who represents Mr. Flowers. “He believes, as I do, that it is unfortunate to deprive the banking system in the United States of this key source of capital.”

While they press their case, the firms have found some ways around the rules.

They have formed so-called club deals, in which teams of private equity firms and other investors each buy up to the legal limit of a bank — about a quarter or a third, depending on the type of bank — with their individual pieces adding up to 100 percent control. IndyMac, the failed California bank, was sold by the Federal Deposit Insurance Corporation last fall to one such club, which includes funds controlled by Mr. Flowers; the hedge fund billionaires George Soros and John Paulson; and Michael S. Dell, founder of the Dell computer company. The investors are barred from acting in concert to, in effect, take control of the bank — an unwieldy arrangement but one that regulators insist they can enforce.

As part of the IndyMac deal, the F.D.I.C. agreed to take most of the risk from future losses on loans acquired by the partnership — leading Mr. Flowers to quip at one investor forum in New York in January that “the government has all the downside and we have all the upside.”

Mr. Flowers has come up with another way around the restrictions. There is no limit on an individual’s taking over a bank, so he purchased all of the First National Bank of Cainesville in his own name and with his own funds. But that deprives him of the billions his equity firm has set aside to buy banks, so his new bank sits in this tiny town, waiting for a change in the rules.

First National — whose second story is boarded up and whose $17 million in assets are worth about a third of what Mr. Flowers paid for an Upper East Side town house in 2006 — seems an unlikely launching pad for a new American banking empire.

It is so tradition-minded that it refused to change the spelling of its name, even after the town did so back in 1925 to honor its founder, Peter Cain.

Suddenly, in February, the First National Bank name was dropped and “Flowers Bank” was painted on the window. New bank executives showed up, passing out packs of promotional sunflower seeds with the bank’s new logo, urging the mostly elderly town residents to get ready to “Grow with Us.”

“Everyone wonders, who is this Flowers guy?” said Lefty McLain, as he finished up the ham, mashed potatoes and butter beans lunch special at the Little Store, an all-in-one restaurant, deli, pool hall and gossip post here in the one-block downtown.

Mr. Flowers, while still in his 20s, founded Goldman Sachs’s financial services merger business, helping line up the $62 billion merger of NationsBank and BankAmerica (now Bank of America) and the $34 billion takeover of Wells Fargo by Norwest.

By 1998, he had left Goldman to start his own business, focusing at first overseas, with the 2000 purchase from the Japanese government of the failed Long-Term Credit Bank of Japan, which was renamed Shinsei Bank, its name meaning “new life.”

Mr. Flowers, now 51, made a sizable chunk of his fortune when he and his partners took the bank public four years later. But the deal left some in Japan steaming, as they wondered how an American businessman could make such an enormous profit when the government was never repaid most of the trillions of yen it had spent bailing out the failed bank. The bank is now in trouble again, from investments in subprime mortgages that went sour and exposure to Lehman Brothers, which went bankrupt.

His holding in Hypo Real Estate in Germany is also suffering because of bad real estate investments, even after Mr. Flowers and Shinsei poured money into it. German regulators are threatening to take over Hypo and force Mr. Flowers out.

These kinds of high-risk investments make United States banking officials nervous, though Mr. Flowers points out, accurately, that many Japanese banks are struggling, not just Shinsei.

The private equity firms are pitching to regulators a way to let them take control of banks while respecting banking traditions. Essentially, they would separate the entities — they call them silos — that buy the banks, walling off their other private equity investments from any newly created bank holding company.

Fed officials will not speak about banks for the record, but they have told the firms that they view the silo concept as little more than a subterfuge.

Mr. Flowers and other executives have lobbied hard; their efforts have included a recent meeting with William C. Dudley, chairman of the New York Fed. At the meeting, Mr. Flowers and his colleagues bragged about how they could raise as much as $10 billion in 48 hours to help with a bank takeover if they were given the chance, according to one executive in attendance.

Mr. Flowers, in an interview, said he was confident he would prevail. Even if he cannot make the Fed reverse its policy, he will consider it a victory if the Fed approves an individual deal.

He has estimated his banking empire will one day earn at least a 35 percent return on banks it has bought in the United States. “I find it to be an extraordinary time to invest,” he said.

He was even more blunt when he spoke to an industry group in New York earlier this year. “Lowlife grave dancers like me will make a fortune,” he predicted.



China Grows More Picky About Debt
NYTIMES
By KEITH BRADSHER
May 21, 2009

HONG KONG — Leaders in both Washington and Beijing have been fretting openly about the mutual dependence — some would say codependence — created by China’s vast holdings of United States bonds. But beyond the talk, the relationship is already changing with surprising speed.

China is growing more picky about which American debt it is willing to finance, and is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America. For its part, the United States is becoming relatively less dependent on Chinese financing.

China has actually bought Treasury bonds at an accelerating pace over the last year — notwithstanding Chinese officials’ complaints about American profligacy. But the borrowing needs of the United States government have grown even faster. So China represents a rapidly shrinking share of overall purchases of Treasury securities. “China’s demand for Treasuries has increased over the past year, but it hasn’t increased at anything like the pace of the Treasury’s sale of new Treasury bonds,” said Brad W. Setser, a specialist in Chinese financial flows at the Council on Foreign Relations.

Americans and investors elsewhere are buying Treasuries instead. They are saving more and have been shifting out of other investments — including equities until the past two months — and into Treasuries.

China bought less than a sixth of the Treasuries issued in the 12 months through March. Less than two years ago, by contrast, Chinese purchases of Treasuries, which included purchases in the secondary market as well as newly issued securities, briefly exceeded the entire borrowing needs of the United States.

Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars.

This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. While this has been clear for months, new data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt.

So China’s rising purchases of Treasuries do not represent the confident bet on America’s future that they might seem to be on the surface. For instance, China does not appear to be dumping euros or yen to buy Treasuries, economists said.

That said, recent Chinese and American data suggest that an astounding 82 percent of China’s $2 trillion in foreign reserves is in dollars, according to calculations by Standard Chartered.

The development has caught the attention of the leaders of both countries.

“The long-term deficit and debt that we have accumulated is unsustainable — we can’t keep on just borrowing from China,” President Obama said last Thursday.

Wen Jiabao, prime minister of China, also has expressed concern.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried,” Mr. Wen said earlier this year.

China now earns more than $50 billion a year in interest from the United States, Mr. Setser at the Council on Foreign Relations calculated.

China’s leaders were able to buy more Treasuries in recent months without buying more dollars because they have abruptly turned their back on the market for securities issued by government-sponsored enterprises.

China was the world’s biggest buyer of these securities a year ago, splashing out more than $10 billion a month.

But in the 12 months through March, it actually had net sales of $7 billion, and ramped up purchases of Treasuries instead.

China has also changed which Treasuries it buys. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States. As recently as a year ago, China actively bought long-dated bonds, seeking the extra yield they could bring compared to Treasury securities with short maturities, of which China bought virtually none.

But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. This gives China the option of cashing out its positions in a hurry, by not rolling over its investments into new Treasury bills as they come due should inflation in the United States start rising and make Treasury securities less attractive.

The big question now for policy makers and economists alike lies in whether the Chinese government’s purchases of American securities will rise or fall in the coming months.

Two big forces are at work — but they are pushing Chinese investments in opposite directions and might cancel each other out.

The first big shift is that Chinese foreign exchange reserves might start growing again, after shrinking early this year.

A senior Chinese economic policy maker, Xu Lin, expressed concern here on Monday that the reserves might grow faster if speculators started pushing more foreign exchange into China in the months ahead.

China is strongly opposed to any significant appreciation or depreciation of its currency, Mr. Xu said at a press conference. But if international investors conclude that the Chinese economy has stabilized ahead of economies elsewhere, they may start pumping more money into the Chinese economy, he said.

To keep its currency at the same level, the Chinese government buys foreign currency flowing into the country in excess of China’s needs. If overseas demand for Chinese exports recovers, then China’s trade surplus could start widening again as well. This would also tend to fatten Chinese reserves.

But the countervailing trend is that the Chinese government is trying to foster channels for foreign currency to be pumped out of the country without the involvement of the central bank. The government has been buying a wider range of assets and encouraging the private sector to invest more money overseas.

“That’s part of a strategic move by the authorities to diversify,” said Wensheng Peng, the head of China research at Barclays Capital. “The reserves growth should accelerate because of inflows, but it will not be as large as what we observed in 2007 and the first half of 2008.”

The State Administration of Foreign Exchange, which is part of the central bank, issued draft regulations on Monday that would make it considerably easier for private companies to raise dollars in China to spend on overseas investments — a step that would lessen the need for the Chinese government to buy up those dollars.

This spring China has also been stepping up its purchases of commodities, which are usually bought in dollars. Iron ore has been piling up on Chinese docks, government stockpiles of crude oil and grain are being expanded and stockpiles are being started for products like gasoline, diesel and sugar.

After six years of silence, China unexpectedly disclosed last month that it had been gradually buying gold from domestic producers. The country’s reserves had climbed from 600 tons in 2003 to 1,054 tons, worth $31.8 billion at prices late Wednesday.

The disclosure, which produced a frisson of excitement in gold markets, may have been aimed at reassuring a domestic audience that the Chinese government was not putting all the na