Beggar Nation

U.S. cities seek federal help to ease economic crisis

Excerpt:

Three major American cities buffeted by the global financial crisis are requesting at least $50 billion in federal funds to help pay for infrastructure improvements, pensions and short-term borrowing.

Philadelphia, Phoenix and Atlanta are asking U.S. Treasury Secretary Henry Paulson to release funds from the $700 billion financial bailout authorized by Congress last month.

Philadelphia Mayor Michael Nutter will hand-deliver the request to Paulson on Friday, spokesman Luke Butler said. Five or six other cities, including Chicago, may also sign on, Butler added.

Congress set up the so-called Troubled Asset Relief Program to help banks and other institutions that were ensnared in the global credit crisis. But since President George W. Bush signed the bill into law, numerous other entities, including the U.S. auto industry, have lined up for help.

In recent weeks, some cities have announced layoffs and service cuts as slumping tax receipts create budget shortfalls. Philadelphia, for example, will eliminate hundreds of jobs and shut libraries and swimming pools to close a $108 million gap in its current $4 billion budget.

"We who run some of America's larger cities are dealing with the economic damage wrought by the credit and housing crises," the mayors' letter to Paulson said.

"The economic contraction precipitated by these twin crises is forcing us, and mayors all over the country, to dramatically reduce programs and services for millions of residents."

Participating cities are asking Paulson to set up a $50 billion fund to rebuild infrastructure.

The fund would consist of $25 billion in grant money for cities that are unwilling or unable to take on debt, and another $25 billion for loans to cities at an interest rate of 50 basis points above that of 30-year Treasury bonds.

Comment: It's always easy to spend someone else's money. I'm surprised Washington DC isn't lined up for a handout. Image from http://deanhunt.com/a-marketing-lesson-from-two-beggars/

Handout Nation (now it's Detroit)

City Council: Detroit needs $10-billion bailout

Excerpt:

The Detroit City Council passed a resolution today calling for a $10-billion bailout for the city of Detroit.

Council President Pro Tem JoAnn Watson sponsored the resolution to use the money for public service employment, to fund mass transit plans and to place a moratorium on home foreclosures for two years.

The resolution specifically requests the council meet with Mayor Ken Cockrel Jr., Gov. Jennifer Granholm, the state’s congressional delegation, U.S. House Speaker Nancy Pelosi and officials from President George W. Bush’s office and President-Elect Barack Obama’s transition team.

Comment: Everyone seems to have their hand out!

"Zombie firms"

Comment: New term "zombie corporation"

Revised AIG Terms Begin Treasury Transfusions to 'Zombie' Firms

Excerpt:

Taxpayers are ``keeping the zombie alive,'' said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of research at the Atlanta Fed. ``We keep getting deeper and deeper into these holes.''

The shift is likely to vastly expand political demands for saving dying companies in the name of financial or economic stability. The administration of President-elect Barack Obama may soon have to consider credit or capital injections for other insurers, automakers, even retailers as the U.S. slides deeper into what could be the worst recession in a quarter-century.

``Are you going to do General Motors and Ford, and, if you do those, are going to go on and do retailers?'' said William Isaac, former chairman of the Federal Deposit Insurance Corp. and now chairman of the Secura Group LLC. `` Where does it stop? That is a very difficult decision we are going to face as a country.''

Comment: As long at they keep "eating blood" (receiving taxpayer money), they (the "zombie firms") will survive. Wonder why the government doesn't just buy the whole company for $ 1.68 billion (market capitalization)? (Instead of loaning them $ 25 billion). I've loaned and given people (hard luck cases including some relatives), but at some time one has to ask ... how does this money really help them? GM may be a case like that!

Credit crisis: the pain is unlikely to end soon!

Banks Are Likely to Hold Tight to Bailout Money

Excerpt:

Since mid-2007, when the credit crisis erupted, the country’s nine largest banks have written down the value of their troubled assets by a combined $323 billion. With a recession looming, the pain is unlikely to end there. The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans.

...
Every corner of the economy goes through cyclical ups and downs. But the banking downturn has acted with ferocious speed to erase past profits.

In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount.

More:

Millions owe more on their homes than homes are worth

Excerpt:

... an estimated 12 million American mortgage holders now owe the bank more than their homes are worth. And with housing prices still sliding and the credit crunch worsening, the number of so-called upside-down mortgages is expected to rise to record levels.

Within a year, Moody’s Analytics predicts, a whopping 30 percent of all U.S. mortgage holders will owe more on their homes than they are worth. In some California communities, according to real estate service firm Zillow.com, negative equity already is the norm.

The effects of this are many.

The risk of default rises — and it’s good to recall that it was people defaulting on their home loans last year that set much of the current economic crisis in motion. Home equity lines of credit — even for people who pay their mortgages faithfully — will be harder to come by. And woe to those who lose a job or get sick.

“If you have some kind of disruption to your income and you can’t make your mortgage payment, it’s going to be very hard for you to refinance or anything like that,” said Mark Zandi, chief economist for Moody’s. “This was the bedrock of most people’s savings, their home.”

Comment: I saw something on an investment TV show yesterday ... the commentator said something to this effect: "credit to the economy is like alcohol at a party". In essence, if you want to have a fun party you need booze (I dispute this but let's go with this analogy for a minute) ... in the same way the US economy has been pumped up (high if you will) on credit. The after effect of a drunken binge is a terrible hangover ... well the after effect of this credit binge is a recession. Our economy is "hung over". I just hope someone does not vomit on me!

Don't want it ... no you must take it!

Drama Behind a $250 Billion Banking Deal

Excerpt:

The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

...
“It was a take it or take it offer,” said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. “Everyone knew there was only one answer.”

Getting to that point, however, necessitated sometimes tense exchanges between Mr. Paulson, a onetime chairman of Goldman Sachs, and his former colleagues and competitors, who sat across a dark wood table from him, sipping coffee and Cokes under a soaring rose and sage green ceiling.

Comment: An offer they couldn't refuse! I guess that the Treasury is committed to "Coke" products! No "Pepsi" there!

Government bears a huge responsibility for the mess

Comment: Good editorial with perspective on how we got in this mess!

Commentary: Bankruptcy, not bailout, is the right answer

How we got here:

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

Solution:

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

...
So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

Bailout: a temporary euphoric reception?

Bailout won't put the brakes on downward slide

Excerpt:

But, at best, all a government program can do is keep things from getting dramatically worse, economists say. In the worst case, a government bailout program won't keep financial conditions for households and businesses from deteriorating much further.

The public detests the idea of bailing out lenders and investors complicit in the stupid decisions to offer mortgages to home buyers who couldn't afford them. But almost all financial market pros and the great majority of economists stress that failure to help financial institutions with bad loans would be a recipe for a deep recession or worse.

"Something does need to be done in short order," said Aaron Edlin, a professor of economics and law at UC Berkeley and one of 122 economists who signed a letter to Congress critical of the Treasury Department's original bailout plan.

...

In the short term, the financial markets emergency is a classic crisis of confidence. The catastrophe that nearly befell markets last week was driven by overwhelming and, in many cases, unjustified fear. After Wall Street's Lehman Bros. went bankrupt two weeks ago and insurance giant AIG needed government intervention to keep from going under, every company became suspect, even highly creditworthy borrowers far-removed from the housing market.

Quick, forceful action from Washington is essential to restore confidence and loosen loan markets, financial professionals and political leaders say.

"The markets need a message from us," House Speaker Nancy Pelosi, D-San Francisco, said at a news conference Friday.

Indeed, it's possible a bailout package could get a euphoric reception from both the stock and credit markets. But any psychological effect would be temporary, experts caution. In the medium and long term, it's by no means certain a bailout will succeed.

"I'd give the government a 50 percent chance of stabilizing the markets," Edlin said. "The reason for optimism is that there will be an enormous amount of money. The reason for pessimism is that nobody knows how the money will be spent."

The idea behind the bailout is to buy bad loans from financial institutions, freeing them to turn on the credit spigot again. But if those institutions have to take big losses on the assets they sell to the government, they could still be too strapped to lend freely again. In addition, they are likely to remain wary of extending credit in the midst of a recession. On top of that, a movement is under way throughout the economy to cut back on debt, a phenomenon known as deleveraging.

The danger of a downward spiral of credit lockdown

Credit Enters a Lockdown

Excerpt:

In many corporate offices, in company cafeterias and around dining room tables, however, the reality of tight credit already is limiting daily economic activity.

“Loans are basically frozen due to the credit crisis,” said Vicki Sanger, who is now leaning on personal credit cards bearing double-digit interest rates to finance the building of roads and sidewalks for her residential real estate development in Fruita, Colo. “The banks just are not lending.”

With the economy already suffering the strains of plunging housing prices, growing joblessness and the new-found austerity of debt-saturated consumers, many experts fear the fraying of the financial system could pin the nation in distress for years.

Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.

Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.

“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” said Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management. “It would be disastrous to have no plan.”

Comment: One may think that they are immune .... but you probably are not. If you have a 401K plan, are an investor, have a credit card, have a student loan, work for a company, etc. ... it impacts us all!

Update: The credit crunch: Loans out of reach

At larger institutions, such as the San Francisco-based Bank of the West, which has approximately 700 branches mostly west of the Mississippi River, consumers need a better credit score than they did before the credit crunch hit.

"We have seen a change in the landscape and responded to it," said Bruce Heysse, an executive vice president for Bank of the West's consumer lending business.

Consumers whose credit rating teeters between 'good' and 'not so great' are the ones getting squeezed the most, added Carole Merchant, a fellow Bank of the West executive vice president in the company's indirect lending business.

"Will loans be available for people who have some sort of credit blemish? That will probably remain more difficult," said Merchant.

Given the current state of the economy, banks such as the San Antonio, Texas-based Cullen/Frost (CFR), have been forced to withdraw lines of credit from some customers.

Still, the lending spigot hasn't been completely shut off. Instead, Dick Evans, chairman and CEO of Cullen/Frost, said that his bank is charging customers higher rates for loans than they did before.

"We have tightened from the standpoint that we get paid for the risk," said Evans, whose bank focuses primarily on business lending and had more than $13 billion in assets as of the end of last year.

Comment: The above seems like a good thing!

Another view of the Bailout

Issue Is Payback, Not Bailout

Excerpts:

Yet in just a few days’ time, members of Congress have to figure out how to improve the bare-bones $700 billion plan submitted by Henry Paulson, the Treasury secretary, and ultimately whether to vote for it.

Their best shot at success depends on keeping the debate tightly focused on the questions that matter most. There are really only two: What steps are most likely to solve the immediate crisis? And how can the long-term cost to taxpayers be minimized?

...
The first thing to understand is that a bailout plan doesn’t have to cost anywhere close to $700 billion, so long as it’s designed well. The $700 billion number that you see everywhere is an estimate of how much the government would spend to buy deteriorating assets now held by banks. Eventually, the government will turn around and sell these assets, for a price almost certain to be greater than zero. So this $700 billion is very different from $700 billion spent on a war or on Medicare.

“Much of the discussion of the cost of the bailouts is getting it wrong,” David Colander, an economist at Middlebury College, says. “What matters is what price they buy the assets for and the price they sell them for. That’s where the real action is.”

Figuring out how much to pay for the assets is the first problem. The drop in house prices and rise in foreclosures have made it clear that these securities are worth considerably less than banks expected. But there is enormous uncertainty about how much less.

Comment: Much I do not understand!