FedUpUSA

Bailout “Star” Joe Donnelly (D-IN) says bank bailouts are “good for America.”

Political Toxic Asset Test — How did your representatives vote on TARP?

• House TARP vote list

• Senate TARP vote list

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By Dr. Pitchfork

In 2008, few of the Congressional incumbents who ran for re-election were held accountable for voting “yes” on TARP.  Fast forward two years and that TARP vote is the most toxic asset they own.

In 2008, there was only a month between the passage of the TARP legislation and Election Day.  Unless they were accustomed to following the financial markets, most voters were still trying to figure out what the financial crisis was all about and why Congress appropriated $700B to “fix” the problem.  Two years later, with unemployment hovering around 10%, the national debt out of control and the Wall St. bonus train back in high gear, voters are rightly ticked off.  And incumbents who panicked and voted for the bank bailout are about to pay the price.

One of those incumbents is Joe Donnelly (D) of Indiana’s 2nd district.  Like most of those in Congress who voted for the bailout, he remains adamant that TARP helped prevent an “economic depression,” and that by standing up to his own constituents and voting against their wishes, he did the right thing.

Donnelly says that Jackie Walorski (R), his Tea Party-backed oppenent:

• “obviously does not understand that, without these steps [i.e. TARP], credit would have completely frozen up, there would have been no loans available, there would have been bank collapses across the cocuntry and there would have been a global economic collapse.”

Readers of The Daily Bail know the deal, but just for kicks let’s unpack this statement of Donnelly’s.  Some members of Congress probably voted for TARP for purely cynical reasons, but Donnelly could be the poster boy for dumb bailout votes – he’s clearly swallowed the Bernanke-Paulson story, hook, line and sinker.  Let’s help him out a little, with some cold, hard bailout facts.

• First, interbank lending DID NOT “freeze,” nor did TARP prevent it from “freezing.”  As researchers from FRBNY and MIT have shown, right through the entire crisis period, hundreds of billions of dollars were loaned in the interbank market – and paid back –  EVERY SINGLE DAY.  Both before and after Lehman, both before and after TARP.

• Second, there was never a choice between A) passing TARP and B) doing absolutely nothing while the world burned.  Donnelly seems to actually believe that’s the choice he had.  What a rube.

• Third, other means of stabilizing the financial system, besides TARP, could have been used.  How do we know?  Because they were being used AT THE VERY SAME TIME that TARP was being debated and then implimented.  The Treasury, for example, stopped Paul Kanjorski’s fabled “electronic run” on the money market funds by issuing a blanket guarantee of all money market funds on September 19 – before TARP was even passed!  The Fed intervened in the commercial paper market and nipped that problem in the bud lickety split – no need for TARP there.   Though TARP raised the FDIC limit to $250K, new legislation wasn’t needed for the FDIC to guarantee all bank deposits under a systemic risk exception – which Bair, Paulson, et al. declared almost immediately after the bailout bill was passed. Further, the FDIC also initiated the TLGP to protect bank creditors, but it could have covered bank creditors in any case under the same systemic risk exception under which it protected depositors – and not in any way, shape or form did TARP have anything to do with it.

• Fourth, the TARP funds were originally intended for the purchase of “toxic assets” from the banks.  That’s how the bill was sold, and that’s what Congress (including Joe Donnelly) voted for.  But this plan could only “work” if taxpayers over-paid for the assets.  If taxpayers paid less than they were worth, the banks would have had no reason to sell them.  Even a panic-stricken Congressman should have known that TARP was a dumb idea just from a basic accounting perspective.  But even if you agree with Paulson’s decision to take equity stakes in the banks instead, why take that step when regulatory forbearance or a change in FAS 157 would have had the same effect WITHOUT spending taxpayer dollars?  Of course, FAS 157 was eventually changed, and with the help of Bernanke’s gift of zero interest rates, most banks paid back TARP.  What a convoluted waste.

At this point, can someone please explain to me how “global economic collapse” comes into the picture?  Everything that TARP is credited with having done, was actually achieved through actions requiring no legislation and had nothing to do with an ass-backwards capital purchase program.  Anyone?

The funniest thing about Joe Donnelly’s bailout vote is that in the fall of 2008 he was telling everyone (all tough like) that “We’re going to get the Wall St. people who did this.”  Oh yes, folks, heads were going to roll.  People were going to pay the price.  Joe Donnelly was going to…   Joe Donnelly hopes you forget he said all that.  Most of the TARP bank executives are still running the firms they nearly ran into the ground, picking up multi-billion-dollar bonuses last year with the help of taxpayer subsidies, while the rest (like Ken Lewis) left with their golden parachutes.

Further, Donnelly claimed that taxpayers would get every single penny of TARP money paid back, even from AIG.  Really?  Even Tim Geithner doesn’t make that claim, anymore.  And what about the fact that much of the banks’ risk has the potential to be foisted right back onto the taxpayer by way of Fannie and Freddie – whose taxpayer credit card limit was upped to INFINITY on Christmas Eve last year?  I suspect Donnelly doesn’t even know half of what’s gone on since he voted for a bailout bill he obviously didn’t understand.  (Here he is simpering about naked credit default swaps in March of 2009, but talk is cheap — ask Obama.)  Jackie Walorski, or any candidate who makes bank bailouts a campaign issue, should beat Donnelly handily.  May he be the first of many!

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Tea Party candidate Jackie Walorski (R-IN) sits down with the locals for a cup of Joe.  Donnelly is most likely right — she probably doesn’t understand bank bailouts any more than he does.  But she’s right to oppose them, and doing so is going to get her elected.

The DailyBail

There are growing signs of unease bordering on desperation inside the Obama White House. Most of the O Team now understands that the real, private economy never got out of Dip Number One. The prospect of a permanent downward shift in “trend growth” to a lower track, and continued double digit unemployment, are driving a search for alternative measures that has even touched conservatives in the worlds of finance and economics.

The Obama Administration and the Fed have taken the position that the crisis affecting the U.S. economy and the financial sector is slowly ending. In fact, the largest banks remain profoundly troubled by bad assets on their books as well as claims against these same banks for assets sold to investors. By allowing banks to “muddle along” and heal these wounds using low interest rates provided by the Fed, the Obama Administration is embracing a policy of deflation that has horrible consequences for U.S. workers and households.

In a post over the weekend on ZeroHedge –  “Bernanke Fed Drives Deflation With Zero Rate Policy” — I described the negative effects of the Fed’s low interest rate policy on bank earnings, as well as consumer and corporate spending and saving. When interest rates are low, savers move their preference for liquidity to infinity, especially after the past several years of market breakdown. Retirees spend less because the interest earned on bonds and savings has plummeted.  Here’s an excerpt:

When the Fed buys securities through QE, it is removing duration from the markets, pushing down yields and volatility. For a while this boosts the net interest margin (NIM) of leveraged investors such as banks, who are able to borrow at lower rates to fund current assets. As assets re-price to the low rates maintained by the Fed, however, NIM begins to disappear. Over the medium to longer term, think of duration and NIM as being linked, so obviously a sustained period of QE is bad for NIM. This is why NIM in the U.S. banking sector is starting to fall.

Just as the earnings of leveraged investors like banks are starting to suffer due to zero rate policy, so too the spending by all manner of savers, from retirees to companies and not-for-profits to municipalities, is falling too. Fed Chairman Bernanke and the other members of the FOMC are killing the real economy to save the banks — but none of the benefit flowing to the banks is reaching U.S. households. In fact, the Obama Administration has been providing political cover for the Fed to conduct a massive, reverse Robin Hood scheme, moving trillions of dollars in resources from savers and consumers to the big banks and their share and bond holders.

The first priority is to make clear to the largest banks, especially the top four institutions — JPMorganChase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C), that the party is over when it comes to providing credit to the real economy. Until President Obama and Fed Chairman Bernanke recognize that six institutions — FNM, FRE, BAC, C, JPM and Wells Fargo — have broken the mechanism which makes interest rate easing work, we will make little progress fixing the economy.

“In every Fed easing event during my career in finance (1986, 1992, 1998, 2002), it was the wave of refinancing of debt after the Fed eased interest rates that put permanent disposable income into the hands of households,” notes a former Fed official who worked in the banking industry for decades. “In this last easing, however, FNM, FRE and the TBTF banks have conspired to break the transmission mechanism for monetary policy and are now strangling the U.S. economy to save themselves from past errors.”

Rules changes made by FNM and FRE since the Treasury’s conservatorship began in 2008 have prevented millions of American consumers and business from refinancing their mortgage debts. The Bernanke Fed will attempt to compensate for this de facto freeze on refinancing with QE II, but this will fail.

So what should President Obama do?

First, the Obama Administration should use the power provided in the Dodd-Frank legislation to force an accelerated cleanup of bad assets and to mandate refinancing and principal reductions for performing loans with viable borrowers. If any banks resist, the Treasury should use the power under current federal law to remove recalcitrant officers and directors of these same banks.

Second, President Obama also needs to focus on the growing competitive problem in the U.S. mortgage sector. The mortgage banking industry suffered significant consolidation since 2007. In particular, the competitive, third part origination players went out of business via bankruptcy or by being taken over. The industry is now dominated by a cozy oligopoly of Too Big To Fail banks (TBTF).

The top three banks control 55% of all mortgage originations. The top 10 banks control 95%. The top five run the only surviving channels to sell loans to Fannie Mae (FNM) and Freddie Mac (FRE), and force their pricing upon the entire banking industry. Small banks give up half the economics of a typical loan to sell a loan to FNM or FRE indirectly, through WFC or JPM. Why is there no antitrust investigation of the top banks by the Department of Justice?

The Obama Administration should move to restructure FNM and FRE now, not in 2011. The Treasury should use its existing authority under the conservatorship to force FNM and FRE to make rules changes to allow for the refinancing of all existing residential mortgages, if only to reduce the current cost of the debt and increase disposable income for households.

By moving on reforming FNM and FRE, the Obama Administration can provide relief to home owners and also send a strong message to Wall Street and global investors that the practice of “too big to fail” is at an end. We should always remember that the model of the government sponsored enterprises (GSEs) goes back to fascist Italy and Germany of the 1920s. The very public demise of these GSEs is an important part of ending TBTF for the large banks — but only part of the story.

President Obama should make some political hay over the fact that loan origination margins for the top four banks have gone from ½ point to over 4 points in the last two years. This is the subsidy for Wall Street above and beyond the zero interest rate policy of the Fed. The Obama Administrations needs to require changes in the way in which FNM and FRE do business with the banking sector and with mortgage holders, and use these changes to reform the mortgage market in preparation for legislation from the Congress.

By reducing barriers to refinancing by FNM and FRE, and aggressively forcing private banks to mark mortgages to market and accept principal write-downs or short sales to clear the backlog of bad debt, the Obama Administration can restore balance to the economy and create a healthy basis for new growth.

“Christopher Whalen is the co-founder of Institutional Risk Analytics, the Torrance, CA, provider of bank and company ratings, custom analytics and consulting services for auditors, regulators and financial professionals. He edits The Institutional Risk Analyst, a weekly commentary on the personalities, institutions and markets which populate the global political economy.”

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