The information that accumulated helped make it possible for the board to eventually impose the rule it had wanted to pass in the first place.

TO BE NOTED: From the NY Times:

"“Integrity” and Standard Setting

The Financial Accounting Standards Board changed the rules today, as expected, to give banks more leeway in determining what their assets are worth. The board says it is also requiring better disclosures, but it will be a week before we get details on that, and longer than that to see how the banks interpret that rule.

As readers of this blog know, the change came after a subcommittee of the House Financial Services Committee made clear that FASB could be destroyed if it did not knuckle under to the banking lobby.

Arthur Levitt and Bill Donaldson, two former chairmen of the S.E.C., bemoaned the politicization of the board, but the current chairman of the commission, Mary Schapiro, does not appear to have resisted the political pressure. That is understandable, but not necessarily admirable.

Mr. Levitt knows what it is like to cave in to such pressures. He still feels guilty about the last time politicians forced the board to back down on a rule, on stock option accounting. As chairman, he advised the board to retreat, and then issued a strange statement praising the board’s “great courage.”

The most notable reaction I’ve seen tonight came from Barney Frank, the chairman of the Financial Services Committee (and a man who is proud that, on stock option accounting, he did not join in the fight against the rulemakers). His office released the following statement from him:

“I applaud the very important actions taken by FASB today, which has made significant progress toward addressing inaccurate asset valuations in the markets. The FASB believes the rule can be applied more fairly and take into account the currently dysfunctional state of some markets. The integrity of the standard-setting process is preserved, while avoiding the pro-cyclical effects of improper valuation practices.”

Just how was the “integrity of the standard-setting process” preserved by using political pressure to force the board to do something it did not want to do? And how does Mr. Frank know that markets are now producing “inaccurate asset valuations,” but that the banks that created and bought these assets know what they are really worth?

If the disclosures the FASB will now require really provide useful information, this could be a pyrrhic victory for the banks, much as the win on stock option accounting might have been.

Then, as now, those putting pressure on the banks wanted to keep reported profits from being changed by something they deemed unreasonable. But the FASB, in backing down, forced disclosure of what the impact would have been if options were expensed. The information that accumulated helped make it possible for the board to eventually impose the rule it had wanted to pass in the first place.

Could it be that these disclosures will work in the same way, by making it clear to those who read the footnotes just how much profits are being pumped up by the banks assuming that they know the real values of assets, even though nobody will pay that price for them right now?

In the long run, such disclosures might make it possible for us to track just how right (or wrong) the banks were in their confidence that they knew better than the market.

Or maybe my innate optimism is showing, and the new disclosures will not provide much useful information at all."

Once begun, a financial crisis can spread unpredictably

TO BE NOTED: From Real Time Economics:

"Bernanke’s Congressional Testimony on AIG

The prepared remarks of Fed Chairman Ben Bernanke about American International Group before the House Committee on Financial Services.

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I appreciate having this opportunity to discuss the Federal Reserve’s involvement with American International Group, Inc. (AIG). In my testimony, I will describe why supporting AIG was a difficult but necessary step to protect our economy and stabilize our financial system. I will also discuss issues related to compensation and note two matters raised by this experience that merit congressional attention.

Reasons for Our Original Lending Decision

We at the Federal Reserve, working closely with the Treasury, made our decision to lend to AIG on September 16 of last year. It was an extraordinary time. Global financial markets were experiencing unprecedented strains and a worldwide loss of confidence. Fannie Mae and Freddie Mac had been placed into conservatorship only two weeks earlier, and Lehman Brothers had filed for bankruptcy the day before. We were very concerned about a number of other major firms that were under intense stress.

AIG’s financial condition had been deteriorating for some time, caused by actual and expected losses on subprime mortgage-backed securities and on credit default swaps that AIG’s Financial Products unit, AIG-FP, had written on mortgage-related securities. As confidence in the firm declined, and with efforts to find a private-sector solution unsuccessful, AIG faced severe liquidity pressures that threatened to force it imminently into bankruptcy. ( NB DON )

The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. State and local government entities that had lent more than $10 billion to AIG would have suffered losses. Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear. Global banks and investment banks would have suffered losses on loans and lines of credit to AIG, and on derivatives with AIG-FP. The banks’ combined exposures exceeded $50 billion.1 Money market mutual funds and others that held AIG’s roughly $20 billion of commercial paper would also have taken losses. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.

Moreover, as the Lehman case clearly demonstrates, focusing on the direct effects of a default on AIG’s counterparties understates the risks to the financial system as a whole. Once begun, a financial crisis can spread unpredictably( NB A CALLING RUN DON ). For example, Lehman’s default on its commercial paper caused a prominent money market mutual fund to “break the buck” and suspend withdrawals, which in turn ignited a general run on prime money market mutual funds, with resulting severe stresses in the commercial paper market. As I mentioned, AIG had about $20 billion in commercial paper outstanding, so its failure would have exacerbated the problems of the money market mutual funds. Another worrisome possibility was that uncertainties about the safety of insurance products could have led to a run( NB DON ) on the broader insurance industry by policyholders and creditors. Moreover, it was well known in the market that many major financial institutions had large exposures to AIG. Its failure would likely have led financial market participants to pull back even more from commercial and investment banks, and those institutions perceived as weaker would have faced escalating pressure. Recall that these events took place before the passage of the Emergency Economic Stabilization Act, which provided funds that the Treasury used to help stem a global banking panic in October. Consequently, it is unlikely( NB DON ) that the failure of additional major firms could have been prevented in the wake of the failure of AIG. At best, the consequences of AIG’s failure would have been a significant intensification of an already severe financial crisis and a further worsening of global economic conditions. Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs. ( I AGREE COMPLETELY )

The decision by the Federal Reserve on September 16, 2008, with the full support of the Treasury, to lend up to $85 billion to AIG should be viewed with this background in mind. At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG. Unfortunately, federal bankruptcy laws do not sufficiently protect the public’s strong interest in ensuring the orderly resolution( NB DON ) of nondepository financial institutions when a failure would pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures. However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as central bank to maintain financial stability. We took as collateral for our loan AIG’s pledge of a substantial portion of its assets, including its ownership interests in its domestic and foreign insurance subsidiaries. This decision bought time for subsequent actions by the Congress, the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.

The Federal Reserve’s Ongoing Involvement with AIG

Having lent AIG money to avert the risk of a global financial meltdown, we found ourselves in the uncomfortable situation of overseeing both the preservation of its value and its dismantling, a role quite different from our usual activities. We have devoted considerable resources to this effort and have engaged outside advisers. Using our rights as creditor, we have worked with AIG’s new management team to begin the difficult process of winding down AIG-FP and to oversee the company’s restructuring and divestiture strategy. Progress is being made on both fronts. However, financial turmoil and a worsening economy since September have contributed to large losses ( NB DON ) at the company, and the Federal Reserve has found it necessary to restructure and extend our support. In addition, under its Troubled Asset Relief Program (TARP), the Treasury injected capital into AIG in both November and March. Throughout this difficult period, our goals have remained unchanged: to protect our economy and preserve financial stability, and to position AIG to repay the Federal Reserve and return the Treasury’s investment as quickly as possible.

In our role as creditor, we have made clear to AIG’s management, beginning last fall, our deep concern surrounding compensation issues at AIG. We believe it is in the taxpayers’ interest for AIG to retain qualified staff to maintain the value of the businesses that must be sold to repay the government’s assistance. But, at the same time, the company must scrupulously avoid any excessive and unwarranted compensation. We have pressed AIG to ensure that all compensation decisions are covered by robust corporate governance, including internal review, review by the Compensation Committee of the Board of Directors, and consultations with outside experts. Operating under this framework, AIG has voluntarily limited the salary, bonuses, and other types of compensation for 2008 and 2009 of the CEO and other senior managers. Moreover, executive compensation must comply with the most stringent set of rules promulgated by the Treasury for TARP fund recipients. The New York Attorney General has also imposed restrictions on compensation at AIG.

Many of you have raised specific issues with regard to the payout of retention bonuses to employees at AIG-FP. My reaction upon becoming aware of these specific payments was that, notwithstanding the business purposes that might be served by this action, it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG’s collapse. I asked that the AIG-FP payments be stopped but was informed that they were mandated by contracts agreed to before the government’s intervention. I then asked that suit be filed to prevent the payments. Legal staff counseled against this action, on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail; legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees. I was also informed that the company had been instructed to pursue all available alternatives and that the Reserve Bank had conveyed the strong displeasure of the Federal Reserve with the retention payment arrangement. I strongly supported President Dudley’s conveying that concern and directing the company to redouble its efforts to renegotiate all plans that could result in excessive bonus payments. I have also directed staff to work with the Treasury and the Administration in their review of whether the FP bonus and retention payments can be reclaimed. Moreover, the Federal Reserve and the Treasury will work closely together to monitor and address similar situations in the future.

Lessons Learned from AIG

To conclude, I would note that AIG offers two clear lessons for the upcoming discussion in the Congress and elsewhere on regulatory reform. First, ( 1 )AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now. Second,( 2 ) the AIG situation highlights the need for strong, effective consolidated supervision of all systemically important financial firms. AIG built up its concentrated exposure to the subprime mortgage market largely out of the sight of its functional regulators. More-effective supervision might have identified and blocked the extraordinarily reckless risk-taking at AIG-FP. These two changes could measurably reduce the likelihood of future episodes of systemic risk like the one we faced at AIG.

Footnotes

1. In addition, many of these same banks had borrowed securities from AIG’s securities lending program for which they had given AIG cash as collateral. Upon an AIG bankruptcy, the banks would have taken possession of the securities instead of receiving back their cash, exposing them to possible losses on those securities."

And:

"Geithner’s Congressional Testimony on AIG

The prepared testimony of Treasury Secretary Tim Geithner on American International Group at a hearing of the House Financial Services Committee.

Good morning, Chairman Frank, Ranking Member Bachus, and other members of the Committee. Thank you for the opportunity to testify about the federal government’s dealings with the American International Group, Inc. (AIG). I am pleased to be here with Chairman Bernanke and President Dudley.

AIG highlights broad failures of our financial system. Our regulatory system was not equipped to prevent the build up of dangerous levels of risk. Compensation practices encouraged risk-taking and rewarded short-term profits over long-term financial stability, overwhelming the checks and balances in the system. The U.S. government does not have the legal means today to manage the orderly restructuring of a large, complex, non-bank financial institution that poses a threat to the stability of our financial system.( NB DON )

I share the anger and frustration of the American people, not just about the compensation practices at AIG and in other parts of our financial system, but that our system permitted a scale of risk-taking that has caused grave damage to the fortunes of all Americans.

We must ensure that our country never faces this situation again. To achieve that goal, the Administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision. All institutions and markets that could pose systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking. Regulators must apply standards, not just to protect the soundness of individual institutions, but to protect the stability of the system as a whole. Finally, we must create a new resolution authority so that the federal government has the tools it needs to unwind an institution of the size and complexity of AIG.

Before the financial crisis, AIG was one of the largest insurance companies in the world with operations in 130 countries and a trillion dollar balance sheet. AIG’s businesses provide insurance and retirement services for millions of individuals and businesses. AIG directly guarantees over $30 billion of 401(k) and pension plan investments and is a leading provider of retirement services for teachers and educational institutions.

AIG’s Financial Products division (AIGFP) was a counterparty on thousands of over-the-counter derivatives contracts to major financial institutions and other entities across the globe. This division was an unregulated entity operating in unregulated markets.

In September, at a time of unprecedented financial market stress, losses on derivatives contracts entered into by AIG’s Financial Products group forced the entire company to the brink of failure.

The U.S. Department of the Treasury (Treasury), the Federal Reserve Board, and the Federal Reserve Bank of New York agreed that the collapse of AIG could cause large and unpredictable global losses with systemic consequences — destabilizing already weakened financial markets, further undermining confidence in the economy, and constricting the flow of credit. A disorderly failure of AIG risked deepening and prolonging the current recession.

There is no effective legal mechanism to unwind a non-bank financial institution like AIG. Therefore, on September 16th, the Federal Reserve Board authorized an $85 billion revolving credit facility to provide liquidity and avoid default. As a condition of government assistance, the government installed new management at AIG and began the process of restructuring the board. We initiated a strategy to return AIG to its core insurance business by winding-down its derivatives trading operation and selling non-core businesses. This loan was the beginning of a sustained effort to stabilize the company, which required additional commitments of capital in November and March.

In November, as part of the government’s infusion of capital, Treasury imposed the strictest level of executive compensation standards required under the Emergency Economic Stabilization Act. When we were forced to take additional action in March, we required AIG to also apply the Treasury rules that will be promulgated based on the executive compensation provisions in the American Reinvestment and Recovery Act.

On March 10th, I received a full briefing on the details of AIGFP’s pending retention payments, including information on the payments to individual executives.

I found these payments deeply troubling. After consulting with colleagues at the Fed and exploring our legal options, I called Ed Liddy and asked him to renegotiate these payments. He explained that the contracts for the retention payments were legally binding and pointed out the risk that, by breaching the contracts, some employees might have a claim under Connecticut law to double payment of the contracted amounts.

I demanded that Liddy reduce future payments by hundreds of millions of dollars. He committed to renegotiate the remaining retention awards on terms consistent with the American Recovery and Reinvestment Act, and the Administration’s compensation guidelines.

Additionally, Treasury is now working with the Department of Justice to determine what legal avenues may be available to recoup retention bonuses that have already been paid. Treasury will also impose on AIG a contractual commitment to pay the Treasury, from the operations of the company, the amount of the retention awards just paid. Finally, Treasury will deduct from the $30 billion in recently committed capital assistance an amount equal to the amount of those payments.

The issue of excessive compensation extends beyond AIG and requires reform of the system of incentives and compensation in the financial sector.

On February 4th, the President and Treasury announced new restrictions on executive compensation for financial institutions that are receiving government assistance as part of the Financial Stability Plan. These measures are designed to ensure that public funds are focused on the public interest and that the compensation of top executives in the financial community is aligned not only with the interests of shareholders and financial institutions, but with the interests of taxpayers providing assistance to those companies.

On February 17th, the President signed additional limits on executive compensation into law as part of the American Reinvestment and Recovery Act. These limits included a requirement to recoup bonuses already paid in cases of misrepresentation or malfeasance. Treasury is currently working to promulgate rules to implement these provisions and to develop a program under the original TARP legislation to review certain bonus awards already paid. We will work with Congress on any new legislation proposed in this area.

We need to strike the right balance between encouraging investment and prudent risk-taking to get our financial system moving again, and, on the other hand, placing limits on executive compensation to avoid taxpayer funded rewards for failure. The objective is to promote long-term value and growth for shareholders, companies, workers and the economy at large, and to reduce the risk of financial crises like the current one from occurring again.

In addition to problems with executive compensation, the financial crisis has revealed systemic gaps in the regulatory structure governing our financial markets. The lack of an appropriate regulatory regime and resolution authority for large non-bank financial institutions contributed to this crisis and will continue to constrain our capacity to address future crises. I will testify before this committee on Thursday to discuss our regulatory reform proposals – particularly those relating to mitigating systemic risk – in more detail.

As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can. The Administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context.

The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, purchase its obligations or assets, assume or guarantee its liabilities, and purchase an equity interest.

The U.S. government as a conservator or receiver would have additional powers to sell or transfer the assets or liabilities of the institution in question, renegotiate or repudiate the institution’s contracts (including with its employees), and prevent certain financial contracts with the institution from being terminated on account of the conservatorship or receivership.

This proposed legislation would fill a significant void in the current financial services regulatory structure with respect to non-bank financial institutions. Implementation would be modeled on the resolution authority that the FDIC has under current law with respect to banks.

Before taking any emergency action, the Treasury Secretary would need to determine that resolution authority is necessary upon the positive recommendations of the Federal Reserve Board and the appropriate federal regulatory agency.

This is an extraordinary time and the government has been forced to take extraordinary measures. We will do what is necessary to stabilize the financial system, and with the help of Congress, develop the tools that we need to make our economy more resilient and our system more just. Financial crises contain a basic and tragic unfairness – that those who were prudent and responsible in their personal and professional judgments are harmed by the actions of those were less careful and less prudent.

The actions that we take will help restore confidence in our markets and revive the flow of credit to households and businesses. They will create an environment where it is safe to save and invest and where all Americans can trust the rules governing their financial decisions. The process of repair will take time, but our actions will succeed. For all the challenges that we face, we still have a diverse and resilient financial system. Together we will help prevent future crises and the costs they would impose."

Dean Baker supports what I was sensing which was that the Fannie/Freddie infusion won't do much good, because there won't be a great pool of applicants to be added unless the rate goes way down, which I am against:

"The NYT reported that Barney Frank, the chair of the House Financial Services Committee, complained about the conduct of the bank bailout that “the anecdotal evidence is still overwhelming that there are people who think they are good borrowers who can’t get loans.”

It would have been appropriate to note that the data appears to contradict Mr. Frank's anecdotal evidence. There has been no surge in the number of mortgages applications over last few months. (They did jump last week in response to lower interest rates.) If people felt that they were creditworthy, but were being turned down anyhow, then they should be a sharp rise in the number of mortgage applications relative to house sales. Since this has not taken place, it seems that Mr. Frank is wrong in his assertion.

The NYT could have better informed its readers by calling attention to this fact.

--Dean Baker

I just don't see any evidence that there will be that many additional buyers. Free Exchange made the argument that it might unfreeze these markets, but Baker's evidence puts this in doubt. Of course, nothing is written, so it could turn out that a small drop in the interest rate on mortgages will have a major impact. I was simply saying that a further 5 % drop in housing prices might be a better deal and have similar consequences if rates remained the same or went slightly lower. I'm also not sure how much of this infusion will be spent. If you want to encourage refinances of mortgages, then it does seem that you will need a decent drop in the rate given the recent history of mortgage rates.

I feel that Baker's post supports my position.

"The Return Of The Detroit Three"

Here's a post for other John Sayles fans besides me. Justin Fox on Curious Capitalist again:

"I'm watching the House Financial Services Committee hearing on the auto bailout, but I'm not going to give it the extensive treatment that I gave to yesterday's Senate hearing. The House hearings are almost never as good as the Senate ones anyway, and I've got other stuff to do. I will

write something later about the drama in general.

Update: Here's my article."

Here's my comment:

donthelibertariandemocrat Says:

1. Friday, December 5, 2008 at 2:56 pm

   Too bad they didn't get stuck in Secaucus.

“The time has come that we consider what sort of limitations we should be placing on the Fed"

Here's a Bloomberg article I like, so I'm going to scan a fair bit of it even though it moves around quite a bit ( Kind of like TARP ):

"The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis."

I'm not sure what to say about this. In a way, I understand it. At some point, you just bet the whole ball of wax, and feel the wind in your hair, and the trade winds behind you. Do any of those work for you?

Pledging half of what we produced last year seems to validate the enormity of the undertaking. We're not fooling around here. We like our messes to be enormous. Given the situation, I have to admit to agreeing with this Bagehot on steroids approach. It somehow makes him more modern, more relevant to me.

"When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in."

There's a need, but not the means or will to fulfill it. But we acknowledge the need.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

It's good to know that you're on the case Congressman " A day late and a dollar short".

"Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort. "

Peculiarly, because no one else would.

"The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14. "

Don't worry about this.

"William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said. "

How reassuring. I love the use of "perceived", implying an illusion of some sort. Apparently, Mr.Poole, if that is his real name, doesn't believe that they are. Otherwise, there was no need to qualify the expression "rescuing companies too big to fail".

"The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.

Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.

“No question there is some credit risk there,” Poole said."

Poole again. First he's very forceful, using "No question". Then he's back to qualifying himself again with "some risk", meaning, what? There's a hell of a lot, but I don't want to say so, and freak everybody out? There's a little, but not enough to worry about? What does Mr. Poole do for a living exactly, that his speech is so terribly careful.

"Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.'

Can risk "lurk"? The only meaning that I could find that didn't imply agency, and work, is the following:to exist unperceived or unsuspected. But if you know it's there, it's not lurking. It's of unknown quantity, but you know it's there.

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”

Okay. It's not how likely, but what if it does? If I knew what is was, why couldn't I know what happen if it does, or at least have an idea. After all, I even have an idea about Heaven. There's no transparency. Meaning you can't see it. So who's to say they're right? Them, obviously. What's the problem, unless you don't trust them? If that's the case, just come out and say so.

"The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms. "

I'm sorry, but every time I hear generations I begin singing "L'dor vador".

"Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy. "

At least they're using organic terms, and not engineering terms.

"The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages."

It's a little more that than the $24,000, because I refuse to take responsibility for this. When you start thinking about what it could buy, your brain has an aneurysm. If I were Bloomberg, I'd be worried about lawsuits.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”

That's why they're supposedly smart.

“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”

This is why, if you're for smaller government, you have to have a real world plan to avert these crises. Otherwise, you might as well believe in Zeus.

"Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral."

Thanks.

"Collateral is an asset pledged to a lender in the event a loan payment isn’t made."

I like this definition.

“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”

Huh.

"The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said."

Does "counterproductive" here mean "it would piss people off "?

"In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion. "

I can't even compute that increase.

“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”

I find this obvious, but some remain unconvinced. Go figure.

"Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit."

They've guaranteed a hell of a lot more than that.

"Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said."

"Extraordinarily unusual" means " so unusual that you can't blame me if it happens".

"In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said."

Oddly, he and Paulson are bald like me.

"A haircut refers to the practice of lending less money than the collateral’s current market value."

A nice definition.

"Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.'

Earth to David Tobin, "We're in one".

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

You don't mark it. That was easy.

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices."

Another good definition.

"Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza."

This was the Paulson move that many just discovered. It was intended to facilitate mergers.

"House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.

“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money."

Strictly speaking, Rep. Frank is correct, although the tax breaks were obviously intended to facilitate private mergers to keep the government from having to recapitalize them. Remember, originally, TARP was not going to give money to the banks, but to buy toxic assets. These tax subsidies were meant to deal with the problem of recapitalization of banks through mergers, such as the failed Citi/Wachovia deal, and the successful Wells/Wachovia deal.

"Lawmakers unhappy with the plan are finding they can do little else but jawbone banks to lend"

Barney Frank agrees with me. From the WSJ:

"Frank Says Banks Should Just Use Government Funds for Lending

House Financial Services Committee Chairman Barney Frank asserted that a number of financial firms were “distorting” the financial rescue legislation by not using government capital exclusively to boost lending.

Frank

“Any use of these funds for any purpose other than lending — for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. — is a violation of the terms of the Act,” Frank (D., Mass.) said in a statement Friday.





But this:

“Maybe if we’d have 13 weeks instead of 13 days we would’ve written that bill with even more detail,” Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said Thursday."

Come on. I saw this problem from the very beginning on my blog.

"However, they aren’t required to shut off dividends to shareholders. And there are no requirements that banks use the funds to lend, rather than bolster their balance sheets or make acquisitions. Indeed, Treasury supports banks using the funds to buy weaker rivals.

Lawmakers unhappy with the plan are finding they can do little else but jawbone banks to lend. The financial rescue legislation that granted Treasury authority for the bank capital program says little about the use of any government funds, other than placing some curbs on executive pay.

The House Financial Services Committee will hold oversight hearings on Nov. 12 and Nov. 18 on TARP. Frank warned, “It is very important if congressional and public support for this program is to continue that we receive assurances at those hearings that the money being advanced will be used only for relending and for no other purpose.” –Jessica Holzer"

Good work Jessica. How well does jawboning work? Why pass laws when we can jawbone? Holy mackerel.