I've had a credit card from one of the “big five” banks for about 20 years, and usually pay the balance due monthly. Recently, I've been charging some unusually high business expenses and I let the balance accumulate for a couple of months. About two weeks ago, they sent me a letter congratulating me on the increase of my credit balance to something like $60,000. There was an “oh by the way” in the same letter. They are increasing my interest rate from 9.99% to 13.99%. This is a bank which is now almost 40% owned by our federal government. I guess their generosity is a result of their new found capital and market for credit card backed securities that they can now sell to the Treasury Department. Makes perfect sense, huh?
Today, the Treasury Department announced its plan for removing toxic assets from the balance sheets of banks. Here's a simplistic summary of how it works. A bank has some toxic assets it wants or needs to to sell. For the most part, these are loans and securities backed by low grade residential and commercial mortgages. The bank puts them up for auction. Private investment funds can bid on and buy the assets. If the private investment fund puts up ½ of the needed capital, the Treasury department will put up the other ½. And then FDIC will agree to guarantee loans, secured by these assets and provided by banks or other lenders, up to 6 times the aggregate capital of this public/private investment fund that is formed.
On March 2nd, the Chairman of FDIC announced that, unless FDIC insurance premiums charged to banks are materially increased, the FDIC insurance fund will become insolvent during 2009. FDIC is a division of the Treasury Department.
OK, let's get this straight. I put up $10mm and the Treasury Department puts up $10mm. That gives us $20mm and we go buy some toxic assets from a bank. We borrow another $120mm from a bank (6 times $20mm), and that loan is guaranteed by the FDIC. So we buy $140mm of assets. The FDIC, which guarantees the $120mm loan, is owned by the Treasury Department. The Treasury Department owns ½ of the fund to which the loan is made. The FDIC says it is going broke. But they'll be fine because they are going to raise the insurance assessments to the healthy banks. Not only do they guarantee the loan to the bank who makes the loan, they also insure the deposits of that bank. But they are part of the Treasury Department and there's no way the Treasury will let the FDIC The stock market rallies because it likes the plan. Or perhaps just likes the fact that there is a plan. Is this transparency? It's clear as mud to me – sorry.
Then there's Fannie Mae and Freddie Mac. The government just keeps buying securities issued by these two companies. These two companies keep issuing securities backed by their guarantees. But they are both broke – by their own admission. Their guarantees are only as good as the implied support and guarantee of the U.S. Treasury. In other words, the U.S. Treasury is the implied guarantor of several trillion dollars of mortgage backed securities issued by these agencies
There's also the federal deficit of $1 trillion, or whatever it is today. That means the government is spending more than it is taking in. And that does not count a lot of these loans and securities that they are guaranteeing either directly or through government owned or controlled entities. The government will issue debt to pay for all of that. And that's just for this year. The current administration estimates we will run deficits for another four years.
I am sure you have heard of the Lehman failure that occurred back in the fall of 2008. That's the one that the Treasury “let fail” because there were no buyers. Its failure was closely followed by the Bear Stearns purchase and ”save” by JP Morgan Chase, supported heavily by Treasury guarantees and loans. Lehman was put into bankruptcy. But Lehman still owns two banks whose deposits are insured by the FDIC. About a week ago, the bankruptcy court allowed the bankrupt Lehman to inject $430mm of new capital into these banks to “keep the regulators from seizing them.” First of all,where did a bankrupt company get $430 million? Secondly, is Lehman FSB – one of the banks - eligible for TARP funds, or will it be eligible? Lehman now says they are going to auction off these two banks as part of the bankruptcy liquidation. Lehman FSB has assets of about $6.5 billion and is the bank in which Lehman did most of its mortgage originations. Did Lehman fail? Yes, the holding company failed. But the bank subsidiaries did not fail. With all of the hoopla about this, does it not seem like these are relevant facts? There is just something that does not make sense about all of that.
My points are these:
> There is nothing remarkably transparent about all of this. It's a convoluted web.
> When the Treasury guarantees debt, that's just like borrowing money. The Treasury has guaranteed, and continues to guarantee, huge sums of loans and securities. In the eyes of lenders to our country, that counts against our government's credit limit. If all of those guarantees were counted, our government debt is at historical highs, and growing.
> Remember my credit card? When we need it the most, or the lenders think we do, they will raise the interest rate, cut back the limit they will loan us or both. Debt issued by our government is being purchased, at an increasing rate, by foreign investors. The American dream is not their dream. It's just a matter of time.
It's a time for positive attitude and optimism. I'm trying. The stock market is showing some life. Existing housing sales are up. Say what you want about it. But there's a plan in place. We've got a President that's out working hard and selling America. Maybe things are starting to loosen up a bit. At this stage of the race, I'm not saying we have much of a choice. We have to ride this horse. But when things start getting better, we must keep focus on these fundamental issues and resolve them. There is a natural tendency to ride the wave of optimism. Our credit card has reached its limit. We must maintain the discipline and goal to pay it off - or expand our knowledge of foreign languages. One in particular comes to mind.
Today, the Treasury Department announced its plan for removing toxic assets from the balance sheets of banks. Here's a simplistic summary of how it works. A bank has some toxic assets it wants or needs to to sell. For the most part, these are loans and securities backed by low grade residential and commercial mortgages. The bank puts them up for auction. Private investment funds can bid on and buy the assets. If the private investment fund puts up ½ of the needed capital, the Treasury department will put up the other ½. And then FDIC will agree to guarantee loans, secured by these assets and provided by banks or other lenders, up to 6 times the aggregate capital of this public/private investment fund that is formed.
On March 2nd, the Chairman of FDIC announced that, unless FDIC insurance premiums charged to banks are materially increased, the FDIC insurance fund will become insolvent during 2009. FDIC is a division of the Treasury Department.
OK, let's get this straight. I put up $10mm and the Treasury Department puts up $10mm. That gives us $20mm and we go buy some toxic assets from a bank. We borrow another $120mm from a bank (6 times $20mm), and that loan is guaranteed by the FDIC. So we buy $140mm of assets. The FDIC, which guarantees the $120mm loan, is owned by the Treasury Department. The Treasury Department owns ½ of the fund to which the loan is made. The FDIC says it is going broke. But they'll be fine because they are going to raise the insurance assessments to the healthy banks. Not only do they guarantee the loan to the bank who makes the loan, they also insure the deposits of that bank. But they are part of the Treasury Department and there's no way the Treasury will let the FDIC The stock market rallies because it likes the plan. Or perhaps just likes the fact that there is a plan. Is this transparency? It's clear as mud to me – sorry.
Then there's Fannie Mae and Freddie Mac. The government just keeps buying securities issued by these two companies. These two companies keep issuing securities backed by their guarantees. But they are both broke – by their own admission. Their guarantees are only as good as the implied support and guarantee of the U.S. Treasury. In other words, the U.S. Treasury is the implied guarantor of several trillion dollars of mortgage backed securities issued by these agencies
There's also the federal deficit of $1 trillion, or whatever it is today. That means the government is spending more than it is taking in. And that does not count a lot of these loans and securities that they are guaranteeing either directly or through government owned or controlled entities. The government will issue debt to pay for all of that. And that's just for this year. The current administration estimates we will run deficits for another four years.
I am sure you have heard of the Lehman failure that occurred back in the fall of 2008. That's the one that the Treasury “let fail” because there were no buyers. Its failure was closely followed by the Bear Stearns purchase and ”save” by JP Morgan Chase, supported heavily by Treasury guarantees and loans. Lehman was put into bankruptcy. But Lehman still owns two banks whose deposits are insured by the FDIC. About a week ago, the bankruptcy court allowed the bankrupt Lehman to inject $430mm of new capital into these banks to “keep the regulators from seizing them.” First of all,where did a bankrupt company get $430 million? Secondly, is Lehman FSB – one of the banks - eligible for TARP funds, or will it be eligible? Lehman now says they are going to auction off these two banks as part of the bankruptcy liquidation. Lehman FSB has assets of about $6.5 billion and is the bank in which Lehman did most of its mortgage originations. Did Lehman fail? Yes, the holding company failed. But the bank subsidiaries did not fail. With all of the hoopla about this, does it not seem like these are relevant facts? There is just something that does not make sense about all of that.
My points are these:
> There is nothing remarkably transparent about all of this. It's a convoluted web.
> When the Treasury guarantees debt, that's just like borrowing money. The Treasury has guaranteed, and continues to guarantee, huge sums of loans and securities. In the eyes of lenders to our country, that counts against our government's credit limit. If all of those guarantees were counted, our government debt is at historical highs, and growing.
> Remember my credit card? When we need it the most, or the lenders think we do, they will raise the interest rate, cut back the limit they will loan us or both. Debt issued by our government is being purchased, at an increasing rate, by foreign investors. The American dream is not their dream. It's just a matter of time.
It's a time for positive attitude and optimism. I'm trying. The stock market is showing some life. Existing housing sales are up. Say what you want about it. But there's a plan in place. We've got a President that's out working hard and selling America. Maybe things are starting to loosen up a bit. At this stage of the race, I'm not saying we have much of a choice. We have to ride this horse. But when things start getting better, we must keep focus on these fundamental issues and resolve them. There is a natural tendency to ride the wave of optimism. Our credit card has reached its limit. We must maintain the discipline and goal to pay it off - or expand our knowledge of foreign languages. One in particular comes to mind.
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