Thursday, October 23, 2008
Thomas Jefferson had it right!
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson - Letter to the Secretary of the Treasury Albert Gallatin (1802), 3rd president of US (1743 - 1826)
On Fannie and Freddie:
Congressional Hearing about Fannie and Freddie
Here's Barney Frank's opinion of how we got there:
Barney Frank passes the blame
On Fannie and Freddie:
Congressional Hearing about Fannie and Freddie
Here's Barney Frank's opinion of how we got there:
Barney Frank passes the blame
The Federal Bailout Continues and Expands
U.S. Agriculture Secretary Ed Schafer said the federal government is considering outlays of as much as $25 million to help ethanol plants, which have been hit by volatile commodity prices:
http://www.bizjournals.com/phoenix/stories/2008/10/20/daily45.html?ana=from_rss
FDIC Chaiman Shiela Bair Senate Banking Chairman Christopher Dodd urges the Treasury to use its new authority to spur servicers to modify loans. "This slender provision alone can help countless deserving Americans escape the foreclosure trap set by predatory lenders," Sen. Dodd said in prepared remarks. FDIC Chairman Sheila Bair testified before the banking committe and stated "Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards.............by doing so, unaffordable loans could be converted into loans that are sustainable over the long term."
http://www.fdic.gov/news/news/speeches/chairman/spoct2308.html
http://www.bizjournals.com/phoenix/stories/2008/10/20/daily45.html?ana=from_rss
FDIC Chaiman Shiela Bair Senate Banking Chairman Christopher Dodd urges the Treasury to use its new authority to spur servicers to modify loans. "This slender provision alone can help countless deserving Americans escape the foreclosure trap set by predatory lenders," Sen. Dodd said in prepared remarks. FDIC Chairman Sheila Bair testified before the banking committe and stated "Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards.............by doing so, unaffordable loans could be converted into loans that are sustainable over the long term."
http://www.fdic.gov/news/news/speeches/chairman/spoct2308.html
Wednesday, October 22, 2008
Morgan Stanley's Bonuses Get Saved By You and Me
http://www.bloomberg.com/apps/news?pid=20601039&sid=azo7aySdpFHw&refer=home
This from Jonathan Weil on the Bloomberg website:
"You can imagine the devilish grins on the faces of Morgan Stanley employees last week, after the Treasury Department said it would pump $10 billion into the bank. Not only did we, the taxpayers, save their company, with the help of a Japanese bank named Mitsubishi UFJ Financial Group Inc. More importantly, we funded their 2008 bonus pool."
Mr. Weil goes on to say: "Here's all you really need to know to see who lost and who benefited most at the Five Families of Wall Street, otherwise known as Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. From the start of their 2004 fiscal years through yesterday, the big standalone investment banks lost about $83 billion of stock-market value. During the same period, they reported about $239 billion of employee-compensation expense........So, for every dollar of shareholder value destroyed, the employees got paid almost three. "
This from Jonathan Weil on the Bloomberg website:
"You can imagine the devilish grins on the faces of Morgan Stanley employees last week, after the Treasury Department said it would pump $10 billion into the bank. Not only did we, the taxpayers, save their company, with the help of a Japanese bank named Mitsubishi UFJ Financial Group Inc. More importantly, we funded their 2008 bonus pool."
Mr. Weil goes on to say: "Here's all you really need to know to see who lost and who benefited most at the Five Families of Wall Street, otherwise known as Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. From the start of their 2004 fiscal years through yesterday, the big standalone investment banks lost about $83 billion of stock-market value. During the same period, they reported about $239 billion of employee-compensation expense........So, for every dollar of shareholder value destroyed, the employees got paid almost three. "
Cramer and his "Too little too late" advice
On October 6, CNBC "stock market analyst" Jim Cramer was appearing on NBC's Today Show.
The Dow had been rapidly dropping, had passed 10,000 and was continuing downward. It was now about 33% off it's high of about 14,000 which had been set a year earlier.
Cramer, ever the stock guru, offered this investment advice to the viewers of the show: "Whatever you may need for the next five years, please take it out of the stock market. Right now. This week. I do not believe that you should risk those assets in the stock market." Cramer said that his advice was prompted by the concern that "We could have as much as a 20% decline in the stock market." He went on to say "If you can withstand this, just ride it out."
(Update October 23: The Dow is down 16.21% since October 6; it seems Jim Cramer may have been too optimistic!)
Here is the interview: http://www.youtube.com/watch?v=uoSLVCEGKko
That was good advice. However, it was already a bit too late to offer it. It is recommended by most financial consultants that one shoud NEVER put money that is needed within 5 years into the stock market. And, if one is nearing or in retirement, that money shouldn't be put at risk. Money invested in the market is at risk.
So here we are. Thanks Jim Cramer. Any retirees watching your show "Mad Money" and playing the game, day after day, could possible have lost 1/3 to 1/2 of their retirement assets, before pulling the plug on your advice and then contributing to the "panic".
I suppose I could be criticized for lambasting Cramer. But I think my anger toward him, and others like him, is justified. No, I don't follow his advice. I do watch his show occasionally while using the tread mill at the gym. It strikes me that his show could be called "Having Fun and the Lure of Making Money through Trading". However, there is risk in the stock market and many people who had been lulled into complacency by the likes of Cramer have suddenly re-awoken to that risk. And when they did, they yanked all of their money out of stock, bonds, even gold!
The truth is, the only people guaranteed to make money in the stock market are stock brokers, who make a commission on every sale, and media types such as Cramer, who get paid very well to entice the lemmings to the cliff. There are those who say all of this is for the good of the "service economy".
Those of us who are "invested" are taking risks. True, over the long term, there is ample evidence that it is possible to make money buying quality stocks. Cramer is now advocating just that. He said yesterday (October 21) on his program that "It's still possible to make money in stocks... It's always been possible. But you have to know what to look for, particularly in this market!... As much as this market has made us lose some of our faith in the ability of stocks to go higher... As much as this market has pummeled us beyond all recognition... it's also given us a new touchstone... it has given us... a new faith in dividends..."
The title of that program, as per his website, was:
"Stick with the Dividend Plays for Capital Preservation..."
http://www.madmoneyrecap.com/index.html
So now Cramer says, take what is left of your retirement portfolio and put it into dividend paying stocks! Of course, there are stocks out there that pay dividends, healthy dividends, but won't survive the economic downturn. Oh, and by the way, if you get a healthy 5% growth on your remaining investments, and assuming you lost 40% in the past year, it could take 10 years using this investing technique to get back to where you were in September 2007! If you do very well and can get 10% growth on your ravaged portfolio, it will only take 6 years to recover. Which is why having a stock market time horizon of less than 5 to 10 years is dangerous to your financial health. It is I suppose why Jim Cramer told people to pull their money. However, there is frequently a sharp upswing in the market at the conclusion of a bear market. For example, at the conclusion of the bear markets of 1974 and 1982, which were very severe bear markets, the stock market returned at least 60% in the next 9 months. I have read that this also happened after the 1932 stock market bottom which was the Great Depression.
See this website: Bear Market Recoveries Since 1950
In the above, you will note that it took 10 years for the S&P 500 to fully recover. This was considered a worst case scenario. The important thing is to realize that these long, anemic or sideways markets do and did happen. Can you wait 10 years?
In fairness to Cramer, there is money to be made in trading stocks, and a lot of people have fun doing some trading. I suppose it's a healthy pastime, as long as one doesn't jeopardize their retirement funds. That means, probably no more than about 5% of one's worth should ever be invested for trading on a show such as Cramer's. If you "win" fine, and if you lose it all, you haven't lost much. But it is easy to get cocky and it is easy to get caught up in the excitement. People do it each and every day in casinos all across the USA.
You are probably wondering if I am invested in the stock market. The answer is yes. I do have my reasons. If you want to know what they are, then go to this site: http://letmethinkaboutthis.blogspot.com/2008/10/check-in-in-20-years.html
The Dow had been rapidly dropping, had passed 10,000 and was continuing downward. It was now about 33% off it's high of about 14,000 which had been set a year earlier.
Cramer, ever the stock guru, offered this investment advice to the viewers of the show: "Whatever you may need for the next five years, please take it out of the stock market. Right now. This week. I do not believe that you should risk those assets in the stock market." Cramer said that his advice was prompted by the concern that "We could have as much as a 20% decline in the stock market." He went on to say "If you can withstand this, just ride it out."
(Update October 23: The Dow is down 16.21% since October 6; it seems Jim Cramer may have been too optimistic!)
Here is the interview: http://www.youtube.com/watch?v=uoSLVCEGKko
That was good advice. However, it was already a bit too late to offer it. It is recommended by most financial consultants that one shoud NEVER put money that is needed within 5 years into the stock market. And, if one is nearing or in retirement, that money shouldn't be put at risk. Money invested in the market is at risk.
So here we are. Thanks Jim Cramer. Any retirees watching your show "Mad Money" and playing the game, day after day, could possible have lost 1/3 to 1/2 of their retirement assets, before pulling the plug on your advice and then contributing to the "panic".
I suppose I could be criticized for lambasting Cramer. But I think my anger toward him, and others like him, is justified. No, I don't follow his advice. I do watch his show occasionally while using the tread mill at the gym. It strikes me that his show could be called "Having Fun and the Lure of Making Money through Trading". However, there is risk in the stock market and many people who had been lulled into complacency by the likes of Cramer have suddenly re-awoken to that risk. And when they did, they yanked all of their money out of stock, bonds, even gold!
The truth is, the only people guaranteed to make money in the stock market are stock brokers, who make a commission on every sale, and media types such as Cramer, who get paid very well to entice the lemmings to the cliff. There are those who say all of this is for the good of the "service economy".
Those of us who are "invested" are taking risks. True, over the long term, there is ample evidence that it is possible to make money buying quality stocks. Cramer is now advocating just that. He said yesterday (October 21) on his program that "It's still possible to make money in stocks... It's always been possible. But you have to know what to look for, particularly in this market!... As much as this market has made us lose some of our faith in the ability of stocks to go higher... As much as this market has pummeled us beyond all recognition... it's also given us a new touchstone... it has given us... a new faith in dividends..."
The title of that program, as per his website, was:
"Stick with the Dividend Plays for Capital Preservation..."
http://www.madmoneyrecap.com/index.html
So now Cramer says, take what is left of your retirement portfolio and put it into dividend paying stocks! Of course, there are stocks out there that pay dividends, healthy dividends, but won't survive the economic downturn. Oh, and by the way, if you get a healthy 5% growth on your remaining investments, and assuming you lost 40% in the past year, it could take 10 years using this investing technique to get back to where you were in September 2007! If you do very well and can get 10% growth on your ravaged portfolio, it will only take 6 years to recover. Which is why having a stock market time horizon of less than 5 to 10 years is dangerous to your financial health. It is I suppose why Jim Cramer told people to pull their money. However, there is frequently a sharp upswing in the market at the conclusion of a bear market. For example, at the conclusion of the bear markets of 1974 and 1982, which were very severe bear markets, the stock market returned at least 60% in the next 9 months. I have read that this also happened after the 1932 stock market bottom which was the Great Depression.
See this website: Bear Market Recoveries Since 1950
In the above, you will note that it took 10 years for the S&P 500 to fully recover. This was considered a worst case scenario. The important thing is to realize that these long, anemic or sideways markets do and did happen. Can you wait 10 years?
In fairness to Cramer, there is money to be made in trading stocks, and a lot of people have fun doing some trading. I suppose it's a healthy pastime, as long as one doesn't jeopardize their retirement funds. That means, probably no more than about 5% of one's worth should ever be invested for trading on a show such as Cramer's. If you "win" fine, and if you lose it all, you haven't lost much. But it is easy to get cocky and it is easy to get caught up in the excitement. People do it each and every day in casinos all across the USA.
You are probably wondering if I am invested in the stock market. The answer is yes. I do have my reasons. If you want to know what they are, then go to this site: http://letmethinkaboutthis.blogspot.com/2008/10/check-in-in-20-years.html
Tuesday, October 21, 2008
Warren Buffett Says "Buy American, I am!"
Warren Buffett wrote and Op-Ed piece in the New York Times last week. On first blush, it sounds good. See:
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?em
To Quote Mr Buffett:
"The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities...."
Mr. Buffett goes on to say:
"Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”"
This sounds good, and Mr. Buffett did purchase a stake in GE to the tune of $3 Billion, and before that in Goldman Sachs. Unfortunately, his investment is not in the same common stock I would be purchasing if I were to "Buy American". Mr. Buffett is getting the best equity investment possible via preferred stock, and in the case of GE, is also getting a 10% annual dividend. GE can buy the stock back after three years, but only at a 10% premium. Mr. Buffett also gets warrants to buy GE common stock at any time during the next five years at $22.25 a share. Keep in mind that one year ago, GE common stock was selling for $40 a share. If the stock recovers, Mr. Buffett could double his return on top of the dividends he is getting paid.
However, I will get no such deal if I "Buy American". Something to keep in mind when reading Mr. Buffett's piece.
In fairness to Mr. Buffett, he is stating that stocks at the moment are "cheap". Deal or no deal, the price is right! He also says that "If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."
Sounds good to me! In fact, when the market tanked, I stopped everything and made a list of stocks in various companies I want to own, and had not previously purchased as I felt the stock was overpriced. I have since used that list to purchase stock in one company; I do expect to purchase stock from the other companies on my list and perhaps for all of those on my list.
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?em
To Quote Mr Buffett:
"The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities...."
Mr. Buffett goes on to say:
"Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”"
This sounds good, and Mr. Buffett did purchase a stake in GE to the tune of $3 Billion, and before that in Goldman Sachs. Unfortunately, his investment is not in the same common stock I would be purchasing if I were to "Buy American". Mr. Buffett is getting the best equity investment possible via preferred stock, and in the case of GE, is also getting a 10% annual dividend. GE can buy the stock back after three years, but only at a 10% premium. Mr. Buffett also gets warrants to buy GE common stock at any time during the next five years at $22.25 a share. Keep in mind that one year ago, GE common stock was selling for $40 a share. If the stock recovers, Mr. Buffett could double his return on top of the dividends he is getting paid.
However, I will get no such deal if I "Buy American". Something to keep in mind when reading Mr. Buffett's piece.
In fairness to Mr. Buffett, he is stating that stocks at the moment are "cheap". Deal or no deal, the price is right! He also says that "If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."
Sounds good to me! In fact, when the market tanked, I stopped everything and made a list of stocks in various companies I want to own, and had not previously purchased as I felt the stock was overpriced. I have since used that list to purchase stock in one company; I do expect to purchase stock from the other companies on my list and perhaps for all of those on my list.
Mark Zandi on the Risky Loans Behind the Meltdown
"'Financial Shock': Mark Zandi on the Risky Loans Behind the Meltdown"
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2076
Mark Zandi is chief economist, and founder of Moody's Economy.com. Moody's is one of the rating agencies that has been reported as dropping the ball in the recent financial meltdown, rating sophisticated mortgaged backed securities as AAA, or as good as U.S. Treasury bills and bonds. Mr. Zandi is in the process of publishing a book "Financial Shock" which is about the entire mess. Here is a quote from the above article:
"Well, many things surprised me. But at the most fundamental level, it was just how egregious the lending had become at the peak of the housing boom. It wasn't just simply making loans to people with low credit scores. It was making loans to people with low credit scores with no down payment, or down payment assistance. With no proof of income and just an enormous amount of risk layering that was going on. You know, I had a sense that obviously underwriting standards in the mortgage industry had fallen. I had no concept to what degree they had declined. And that's a bit surprising to me, because many of my clients are in the industry. They're mortgage companies, mortgage insurance companies; the Fannie Maes and Freddie Macs of the world. And I thought I had a pretty good understanding. I thought it was bad, but I had no understanding of how bad it really was."
Mr. Zandi closed the interview with this comment: "We still don't know -- really don't know -- how many people are being foreclosed on. No one knows. And that's not the fodder of good policy-making."
For some idea of what the foreclosure rate will look like for the near term (2008 to 2012) go to this link, which shows the anticipated increases in mortgage interest rate resets, or increases. Foreclosures will rise as these mortgages reset. The chart isn't pretty:
http://www.goodevalue.com/wp-content/uploads/2008/04/imfresets.jpg
As for Mr. Zandi's comment about the numbers of people being foreclosed on, consider this. It is anticipated that many option-ARM borrowers will face significantly higher monthly payment increases in the near future. How many? The statistics I have seen indicate that loans totaling about $30 billion will reset in 2009 and as much at $70 billion will reset in 2010. These are not sub-prime loans.
As a result, defaults are expected to double again. I think that politicians or economists who expect the housing market crises will “bottom” in early 2009 are absolutely wrong, unless there is strong government intervention to prevent these automatic resets. This event is not a surprise. In March 2008, Goldman Sachs estimated that a 15% decline in housing values would occur and that 21% of the total number of people with a mortgage would owe more than their house was worth. However, it was also estimated that if a recession occurred then there would be a total decline in the value of housing of 30% and a whopping 39% of people owing mortgages would be under water. It is now a certainty that we are in or are entering a serious recession.
I am not certain if our government will intervene until it is too late. At present, congress is working on committees of lynching parties rather than averting this looming crisis. So batten down the hatches and be prepared for a potentially rough ride for the next two or three years. However, the pessimists say it will be 2020 before all of this gets straightened out!
For more on the mortgage resets, go to:
http://letmethinkaboutthis.blogspot.com/2008/10/is-it-greed-or-stupidity.html
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2076
Mark Zandi is chief economist, and founder of Moody's Economy.com. Moody's is one of the rating agencies that has been reported as dropping the ball in the recent financial meltdown, rating sophisticated mortgaged backed securities as AAA, or as good as U.S. Treasury bills and bonds. Mr. Zandi is in the process of publishing a book "Financial Shock" which is about the entire mess. Here is a quote from the above article:
"Well, many things surprised me. But at the most fundamental level, it was just how egregious the lending had become at the peak of the housing boom. It wasn't just simply making loans to people with low credit scores. It was making loans to people with low credit scores with no down payment, or down payment assistance. With no proof of income and just an enormous amount of risk layering that was going on. You know, I had a sense that obviously underwriting standards in the mortgage industry had fallen. I had no concept to what degree they had declined. And that's a bit surprising to me, because many of my clients are in the industry. They're mortgage companies, mortgage insurance companies; the Fannie Maes and Freddie Macs of the world. And I thought I had a pretty good understanding. I thought it was bad, but I had no understanding of how bad it really was."
Mr. Zandi closed the interview with this comment: "We still don't know -- really don't know -- how many people are being foreclosed on. No one knows. And that's not the fodder of good policy-making."
For some idea of what the foreclosure rate will look like for the near term (2008 to 2012) go to this link, which shows the anticipated increases in mortgage interest rate resets, or increases. Foreclosures will rise as these mortgages reset. The chart isn't pretty:
http://www.goodevalue.com/wp-content/uploads/2008/04/imfresets.jpg
As for Mr. Zandi's comment about the numbers of people being foreclosed on, consider this. It is anticipated that many option-ARM borrowers will face significantly higher monthly payment increases in the near future. How many? The statistics I have seen indicate that loans totaling about $30 billion will reset in 2009 and as much at $70 billion will reset in 2010. These are not sub-prime loans.
As a result, defaults are expected to double again. I think that politicians or economists who expect the housing market crises will “bottom” in early 2009 are absolutely wrong, unless there is strong government intervention to prevent these automatic resets. This event is not a surprise. In March 2008, Goldman Sachs estimated that a 15% decline in housing values would occur and that 21% of the total number of people with a mortgage would owe more than their house was worth. However, it was also estimated that if a recession occurred then there would be a total decline in the value of housing of 30% and a whopping 39% of people owing mortgages would be under water. It is now a certainty that we are in or are entering a serious recession.
I am not certain if our government will intervene until it is too late. At present, congress is working on committees of lynching parties rather than averting this looming crisis. So batten down the hatches and be prepared for a potentially rough ride for the next two or three years. However, the pessimists say it will be 2020 before all of this gets straightened out!
For more on the mortgage resets, go to:
http://letmethinkaboutthis.blogspot.com/2008/10/is-it-greed-or-stupidity.html
Wednesday, October 15, 2008
We're Not the Only One's Feeling the Pain
With the stock market tanked, a recession on the horizon and US government deficits heading toward 10% of GDP, it is important to note that the ordinary middle class citizen isn't the only one feeling pain. After reading this, you may possibly feel a bit better. For example:
James E. "Jimmy" Cayne, former CEO and Chairman of Bear Stearns. His stock in that company was once worth over $1 Billion, but after the company's forced sale to JPMorgan Chase in March 2008, he sold his entire stake in Bear Stearns for "only" $61 million. However, it has been reported that in February, 2008, Mr. Cayne closed on two 14th-floor condominium units overlooking Central Park in New York's Plaza Hotel for $27.4 million.
Former Washington Mutual CEO and Chairman Kerry K. Killinger "exited" WaMu in September 2008, he was given a golden parachute worth $22.3 million which included about 75% in cash, or $16.5 million with the balance in special restricted stock valued at about $5.7 million. Due to the banking crisis, his stock has plummeted and his total package is now worth "only" about $16.5 million. The severance was apparently in recognition of Mr. Killinger's long service to WaMu. In 2001 Mr. Killinger was named American Banker's "Banker of the Year." However, shortly after leaving WaMu, the bank was seized by the FDIC on September 25, 2008 and sold off to JPMorgan Chase in the biggest failure in U.S. banking history.
Former Merrill Lynch & Co., Inc. Chairman and CEO Ernest Stanley "Stan" O'Neal exited ML&C in October 2007 with a golden parachute worth about $161 million. His resignation came on the heel of losses of about $8 billion at ML&C. His severance included about 75% stock and options, retirement benefits of about $25 million, about $5.5 million in deferred compensation and an additional $10 million in performance awards. Due to the financial turmoil, the value of his package was reported as now being worth "only" about $66 million. Mr. O'Neal led ML&CO to a record profit of $4 billion in 2003 after presiding over the elimination of more than 20,000 jobs at that company.
Former CEO and Chairman Charles O. Prince III of Citigroup, who exited that company in November 2007 was given a golden parachute worth about $30 million. This was about 95% stock and options and retirement benefits of about $1.5 million. Due to the turmoil, the value of his package was reported as now being worth "only" about $15 million. It should be noted that at the time Mr. Prince left Citigroup, he had vested stock holdings worth about $94 million and had received about $53 million in salary over the four years he headed Citigroup.
Former President and CEO Martin J. Sullivan of American International Group, who exited that company in June 2008 and was given a golden parachute worth about $48 million. This was about 40% stock and options and cash benefits of about $19 million. Due to the turmoil, the value of his package was reported as now being worth "only" about $35 million. In 2007 Mr. Sullivan was awarded the American Ireland Fund Leadership Award. He is a recipient of The International Center, New York "Award of Excellence" and in 2007 was awarded as a member of the Order of the British Empire.
Former President, Chairman and CEO G. K. Thompson of Wachovia, who exited that company in June 2008 and was given a golden parachute worth about $9 million. This was about 80% stock and options and cash benefits of about $1.5 million. Due to the turmoil, the value of his package was reported as now being worth "only" about $3.5 million. In the most recent fiscal year, his compensation was reported as being about $22 million.
A Historical Perspective
In 2004, the New York Times had an article entitled "For Wall Street Chiefs, Big Paydays Continue". The following is a link and the article is free, although you may have to "log in" as a member of the NYT's online community.
http://query.nytimes.com/gst/fullpage.html?res=9407EED81630F930A15750C0A9629C8B63
James E. "Jimmy" Cayne, former CEO and Chairman of Bear Stearns. His stock in that company was once worth over $1 Billion, but after the company's forced sale to JPMorgan Chase in March 2008, he sold his entire stake in Bear Stearns for "only" $61 million. However, it has been reported that in February, 2008, Mr. Cayne closed on two 14th-floor condominium units overlooking Central Park in New York's Plaza Hotel for $27.4 million.
Former Washington Mutual CEO and Chairman Kerry K. Killinger "exited" WaMu in September 2008, he was given a golden parachute worth $22.3 million which included about 75% in cash, or $16.5 million with the balance in special restricted stock valued at about $5.7 million. Due to the banking crisis, his stock has plummeted and his total package is now worth "only" about $16.5 million. The severance was apparently in recognition of Mr. Killinger's long service to WaMu. In 2001 Mr. Killinger was named American Banker's "Banker of the Year." However, shortly after leaving WaMu, the bank was seized by the FDIC on September 25, 2008 and sold off to JPMorgan Chase in the biggest failure in U.S. banking history.
Former Merrill Lynch & Co., Inc. Chairman and CEO Ernest Stanley "Stan" O'Neal exited ML&C in October 2007 with a golden parachute worth about $161 million. His resignation came on the heel of losses of about $8 billion at ML&C. His severance included about 75% stock and options, retirement benefits of about $25 million, about $5.5 million in deferred compensation and an additional $10 million in performance awards. Due to the financial turmoil, the value of his package was reported as now being worth "only" about $66 million. Mr. O'Neal led ML&CO to a record profit of $4 billion in 2003 after presiding over the elimination of more than 20,000 jobs at that company.
Former CEO and Chairman Charles O. Prince III of Citigroup, who exited that company in November 2007 was given a golden parachute worth about $30 million. This was about 95% stock and options and retirement benefits of about $1.5 million. Due to the turmoil, the value of his package was reported as now being worth "only" about $15 million. It should be noted that at the time Mr. Prince left Citigroup, he had vested stock holdings worth about $94 million and had received about $53 million in salary over the four years he headed Citigroup.
Former President and CEO Martin J. Sullivan of American International Group, who exited that company in June 2008 and was given a golden parachute worth about $48 million. This was about 40% stock and options and cash benefits of about $19 million. Due to the turmoil, the value of his package was reported as now being worth "only" about $35 million. In 2007 Mr. Sullivan was awarded the American Ireland Fund Leadership Award. He is a recipient of The International Center, New York "Award of Excellence" and in 2007 was awarded as a member of the Order of the British Empire.
Former President, Chairman and CEO G. K. Thompson of Wachovia, who exited that company in June 2008 and was given a golden parachute worth about $9 million. This was about 80% stock and options and cash benefits of about $1.5 million. Due to the turmoil, the value of his package was reported as now being worth "only" about $3.5 million. In the most recent fiscal year, his compensation was reported as being about $22 million.
A Historical Perspective
In 2004, the New York Times had an article entitled "For Wall Street Chiefs, Big Paydays Continue". The following is a link and the article is free, although you may have to "log in" as a member of the NYT's online community.
http://query.nytimes.com/gst/fullpage.html?res=9407EED81630F930A15750C0A9629C8B63
Tuesday, October 7, 2008
Comments on the Senator's Letter to Constituents
Here are a few morsels:
To quote the Senator "my proposal, S.2133, which would have authorized the bankruptcy courts to restructure interest and scheduling of payments. The so-called variable rate mortgages have confronted many homeowners with the surprise that original payments, illustratively, of $1200 a month were soon raised to $2000 which resulted in defaults." and "Senator Durbin's proposed legislation, S.2136, which would have authorized the bankruptcy courts to reset the principal balance depending on the value of the home."
Comment: these two proposals would attempt to reward mortgage defaulters. Sen. Specter justifies the courts "restructuring" of variable rate mortgages to avoid the "surprise" confronting "many" homeowners. What is he talking about? The "surpise" that people didn't have sufficient financial knowledge, aka common sense, to make the purchase in the first place and always expected they would have sufficiently increasing earnings to cover their debts, or the surprise that the people who obtained adjustable rate mortgages couldn't flip their houses quickly enough to make money and then move on to their next quick buck scheme? What will that be? Making money through foreclosures? So now the Senators want the taxpayer to pay their defaulted mortgages, thereby keeping these people in their houses and maintaining their lifestyle?
Of course, the rest of us, who practiced LBYM; "living below your means", we haven't defaulted on our mortgages, we pay our creditors and bills on time, and we may have some cash saved "for emergencies". So we can now turn it over to the imbeciles and scafflaws. And why? Because we are responsible with our money, don't take greedy chances with that money. So the Senators' reward to us? We will not be given the opportunity to "restructure interest and the scheduling of payments".
To quote the Senator "my proposal, S.2133, which would have authorized the bankruptcy courts to restructure interest and scheduling of payments. The so-called variable rate mortgages have confronted many homeowners with the surprise that original payments, illustratively, of $1200 a month were soon raised to $2000 which resulted in defaults." and "Senator Durbin's proposed legislation, S.2136, which would have authorized the bankruptcy courts to reset the principal balance depending on the value of the home."
Comment: these two proposals would attempt to reward mortgage defaulters. Sen. Specter justifies the courts "restructuring" of variable rate mortgages to avoid the "surprise" confronting "many" homeowners. What is he talking about? The "surpise" that people didn't have sufficient financial knowledge, aka common sense, to make the purchase in the first place and always expected they would have sufficiently increasing earnings to cover their debts, or the surprise that the people who obtained adjustable rate mortgages couldn't flip their houses quickly enough to make money and then move on to their next quick buck scheme? What will that be? Making money through foreclosures? So now the Senators want the taxpayer to pay their defaulted mortgages, thereby keeping these people in their houses and maintaining their lifestyle?
Of course, the rest of us, who practiced LBYM; "living below your means", we haven't defaulted on our mortgages, we pay our creditors and bills on time, and we may have some cash saved "for emergencies". So we can now turn it over to the imbeciles and scafflaws. And why? Because we are responsible with our money, don't take greedy chances with that money. So the Senators' reward to us? We will not be given the opportunity to "restructure interest and the scheduling of payments".
One Senator's Note to Constituents re: $700B Bill
Thank you for contacting my office regarding the financial rescue legislation. I appreciate your views on this matter.
I reluctantly supported this package because the failure of Congress to act would run the risk of dire consequences, including an economic downturn which could cause more foreclosures, jeopardize retirement accounts, and further restrict credit which is necessary for small businesses to operate. I am philosophically opposed to bailouts. I think that when you have Wall Street entrepreneurs who take big risks to make big profits and they go sour, they ought to sustain the loss themselves and not look to the government for a bailout which ends up in the laps of the taxpayers. However, I supported the plan to avoid economic disaster that would extend well beyond Wall Street.
From the outset, I cautioned against Congress's rushing to judgment. When the initial proposal was made in mid-September, I wrote to Majority Leader Harry Reid and Republican Leader Mitch McConnell by letter dated September 21, 2008 urging we take the time necessary to get the legislation right. By letter dated September 23, 2008, I wrote to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asking a series of questions which have not yet been answered. Then by letter dated September 27, 2008, accompanied by a Senate floor statement, I made a series of suggestions to the executive and legislative negotiators. Again, there has been insufficient time for a reply. Copies of these letters are available on my website:
http://specter.senate.gov
Whenever we deviate from regular order which has been developed during more than 200 years of serving our country very well, we are on thin ice. On regular order, the legislative process customarily begins with a bill which members of Congress can study and analyze. After the legislation is in hand, there are hearings with proponents and opponents of the bill and an opportunity for members to examine, really cross examine, to get to the heart of the issues and alternatives. Regular order calls for a markup in the committee of jurisdiction going over the language line by line with an opportunity to make changes with votes on those proposed modifications. Then the committee files a report which is reviewed by members in advance of floor action where amendments can be offered and debate occurs. The action by each house is then subjected to further refinement by a conference committee which makes the presentment to the President for yet another line of review. The process used to finalize this legislation drastically shortcut regular order.
The legislation passed by the Senate is enormously improved over the first Paulson proposal. The $700 billion is not to be authorized immediately, but instead there are installments of $250 billion, $100 billion at the request of the president and $350 billion more subject to congressional objection, although the latter phase may be unconstitutional under INS v. Chadha, which requires following regular legislative process with passage by both houses and Presidential approval to overrule Presidential action and perhaps inferentially legislative conditions. For protection of the taxpayers, the proposal contains a provision that if the government does not regain its money after five years, the President would be required to submit a plan for compensating the Treasury "from entities benefiting from the programs." While that provision is a far way from a guarantee or even assurances that such recovery legislation would be enacted, it gives some important comfort to the taxpayers' position.
There are provisions for multiple layers of oversight including a Financial Stability Oversight Board that will meet monthly to oversee the program. The Treasury Secretary will be required to report to Congress on a regular basis on the actions taken, along with a detailed financial statement. These reports will include information on each of the agreements made, insurance contracts entered into, and the nature of the asset purchased and projected costs and liabilities. Additional oversight will be provided by the Comptroller General (reports to Congress), a new Inspector General (audits and quarterly reports), a congressionally-appointed oversight panel (market and regulatory review, and reports to Congress on the program and the effectiveness of foreclosure mitigation efforts), and by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) (cost estimates). A report will be required from the Secretary of the Treasury with an analysis of the current financial regulatory framework and recommendations for improvements.
There are substantial limitations on having benefits for entities which created the problem and limitations on executive pay. In cases where financial institutions sell troubled assets directly to the government with no competitive bidding and where the government receives a meaningful equity position, the legislation states that, until that equity stake is sold, executives would not get incentives "to take unnecessary and excessive risks" and would have to give up or repay bonuses or other incentives based on financial statements that "are later proven to be materially inaccurate." The bill also would prohibit "any golden parachute payment to senior executives."
The legislation is less stringent in provisions for financial institutions that sell their assets to the government through an auction. Such provisions would apply only to companies that sell more than $300 million in assets and would subject companies and employees to extra taxes. Corporations would not be able to deduct any salary or deferred compensation of more than $500,000, and top executives would face a 20% excise tax on golden parachute payments if they left for any reason other than retirement. In evaluating limitations on executive salaries, it is relevant to note that the Institute for Public Studies found that chief executives of large U.S. companies made an average of $10.5 million last year. That is more than 300 times the pay of the average worker.
The final proposal does provide for debt insurance, as advocated for by House Republicans, but leaves it to the Secretary of the Treasury to utilize that approach so it seems unlikely that it will be implemented in light of the fact that Secretary Paulson has bluntly stated his disagreement with it. Had there been floor amendments, Congress could have structured standards for utilization of debt insurance.
Had we followed regular order with an opportunity to propose amendments, consideration could have been given to my proposal, S.2133, which would have authorized the bankruptcy courts to restructure interest and scheduling of payments. The so-called variable rate mortgages have confronted many homeowners with the surprise that original payments, illustratively, of $1200 a month were soon raised to $2000 which resulted in defaults. Individualized examination by the bankruptcy courts might show misrepresentation or even fraud to justify revising the interest payments and rearranging the payment schedule. Or consideration could have been given to Senator Durbin's proposed legislation, S.2136, which would have authorized the bankruptcy courts to reset the principal balance depending on the value of the home. I opposed that bill because I thought it would discourage future lending, and in the long run raise the cost to homebuyers. But at least, following regular order, there would have been an opportunity to consider Senator Durbin's proposal as well as my suggested legislation.
The legislation contains authority for the Treasury Secretary to compensate foreign central banks under some conditions. It provides that troubled assets held by foreign financial authorities and banks are eligible for the Toxic Assets Recover Program (TARP) if the banks hold such assets as a result of having extended financing to financial institutions that have failed or defaulted. Had there been an opportunity for floor debate, that provision might have been sufficiently unpopular to be rejected or at least sharply circumscribed with conditions.
As a step to help keep borrowers in their homes, I proposed language found in Section 119 (b) of the bill to address the concern that some loan servicers have been reluctant to modify home mortgage loan terms because they fear litigation from investors who hold securities or other vehicles backed by the mortgage in question. The loan servicers have a legal duty to the investors to maximize the return on their investments. In testimony on December 6, 2007, before the House Committee on Financial Services, Mark Pearce, speaking on behalf of the conference of State Bank supervisors, discussed a meeting with the top 20 subprime servicers. He explained that "many of them brought up fear of investor lawsuits" as a hurdle to voluntary loan modification efforts. Because the rescue legislation encourages the government to seek voluntary loan modifications, it is important to remove any impediments to such modifications. To that end, the language provides a legal safe harbor for mortgage servicers making loan modifications, if the loan modifiers take reasonable mitigation steps, including accepting partial payments from homeowners.
On reforms to prevent a recurrence of this crisis, we need to question whether the rating agencies adequately analyzed mortgage-backed securities before issuing investment-grade ratings. These agencies appear to have failed. In July of 2007, when it became apparent that ratings issued by the big three rating agencies-Moody's, S&P and Fitch- could not be relied upon, I urged the relevant committees to look into the ratings that those agencies issued in recent years regarding mortgage-backed securities. Financial institutions that issue asset-backed securities obtain ratings for such securities. The failure to issue reliable ratings misrepresented the facts and fed the ability of financial institutions to tout the value of securities even though their value was declining. Congress and the regulators need to take up the rating agencies issue, and consider whether ratings agencies that have utterly failed to detect and reflect the risks associated with the securities they were rating should be accorded any reliance or role in our financial system. Some have suggested they should be regulated and we may need to consider that.
In addition, Congress and the regulators should review "off-balance sheet" transactions and leveraging. There should be a close examination on whether banks are sufficiently transparent and providing accurate accounting that truly reflects risk and leverage. Similarly there should be a review on Credit Default Swaps (CDS), which are privately traded derivatives contracts that have ballooned to make up what is a $2 trillion dollar market according to the Bank of International Settlements. They are a fast-growing major type of financial derivative. Many experts assert that they have played a critical role in this financial crisis as various financial players believed that they were safe because they thought CDS fully insured or protected them, but the CDS market is unregulated and no one really knows what exposure everyone else has from the CDS contracts. Consideration should be given to subjecting all over-the-counter derivatives onto a regulated exchange similar to that used by listed options in the equity markets.
Overleveraging has been a contributing factor in the turmoil that now threatens our financial institutions. We have seen a massive expansion of the practice of leveraged financial institutions (banks, investment banks, and hedge funds) making investments with borrowed money. In turn, they borrow more money by using the assets they just purchased as collateral. This sequence is continued again and again. The financial system, in its efforts to deleverage, is contracting credit. They must guard against future losses by holding more capital. Deleveraging is leading to difficulty on Main Street for individuals seeking to get a mortgage or buy a car. If a financial institution is able to unload its toxic assets onto the government, it will again be able to resume its lending activities that are crucial for economic growth in the United States. Unfortunately, much of the financial crisis has arisen from miscalculations of the risks involved with purchasing large amounts of securities backed by subprime mortgages and other toxic assets. We now see a situation where we are not just talking about a handful of firms. This is a widespread problem that should be addressed by this package and in future reforms of our financial regulatory structure.
In addition, the package crafted by Senate leaders includes two notable changes from the version that was rejected by the House on Monday. It includes a tax package that was previously passed in the Senate by a vote of 93-2 on September 23, 2008, but has since been rejected by the House in a dispute over revenue offsets. It includes tax incentives for wind, solar, biomass, and other alternative energy technologies. It also includes critically important relief from the Alternative Minimum Tax, which threatens to raise the tax liability of over 22 million unintended filers in 2008 if no action is taken. Finally, the package includes a host of provisions that either expired in 2007 or are set to expire in 2008, including the research and development tax credit, rail line improvement incentives, and quicker restaurant and retail depreciation schedules. I supported the Senate-passed tax extenders bill because it struck a responsible balance on the issue of revenue raising offsets.
The package also includes a provision to temporarily increase the Federal Deposit Insurance Corporation (FDIC) insurance limit to $250,000. Currently, the FDIC provides deposit insurance which guarantees the safety of checking and savings deposits in member banks, up to $100,000 per depositor per bank. Member banks pay a fee to participate. The current $100,000 limit has been unchanged since 1980 despite inflation. This approach is supported by both Senator McCain and Senator Obama, by House Republicans, and by the FDIC Chairman Sheila Bair. Raising the cap could stem a potential run on deposits by bank customers, particularly businesses, who fear losing their money. Such fears contributed to the collapse of Washington Mutual and Wachovia Bank.
Congress has been called upon to make the best of a very bad situation. Careful oversight of the authority given to the Treasury Department will need to be undertaken, and a review of our regulatory structure will be necessary as we move forward.
Again, thank you for writing. The concerns of my constituents are of great importance to me, and I rely on you and other Pennsylvanians to inform me of your views. If you require assistance with a federal agency, please contact my state office in your area. The contact information can be found on my website at specter.senate.gov.
Sincerely,
Arlen Specter
I reluctantly supported this package because the failure of Congress to act would run the risk of dire consequences, including an economic downturn which could cause more foreclosures, jeopardize retirement accounts, and further restrict credit which is necessary for small businesses to operate. I am philosophically opposed to bailouts. I think that when you have Wall Street entrepreneurs who take big risks to make big profits and they go sour, they ought to sustain the loss themselves and not look to the government for a bailout which ends up in the laps of the taxpayers. However, I supported the plan to avoid economic disaster that would extend well beyond Wall Street.
From the outset, I cautioned against Congress's rushing to judgment. When the initial proposal was made in mid-September, I wrote to Majority Leader Harry Reid and Republican Leader Mitch McConnell by letter dated September 21, 2008 urging we take the time necessary to get the legislation right. By letter dated September 23, 2008, I wrote to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asking a series of questions which have not yet been answered. Then by letter dated September 27, 2008, accompanied by a Senate floor statement, I made a series of suggestions to the executive and legislative negotiators. Again, there has been insufficient time for a reply. Copies of these letters are available on my website:
http://specter.senate.gov
Whenever we deviate from regular order which has been developed during more than 200 years of serving our country very well, we are on thin ice. On regular order, the legislative process customarily begins with a bill which members of Congress can study and analyze. After the legislation is in hand, there are hearings with proponents and opponents of the bill and an opportunity for members to examine, really cross examine, to get to the heart of the issues and alternatives. Regular order calls for a markup in the committee of jurisdiction going over the language line by line with an opportunity to make changes with votes on those proposed modifications. Then the committee files a report which is reviewed by members in advance of floor action where amendments can be offered and debate occurs. The action by each house is then subjected to further refinement by a conference committee which makes the presentment to the President for yet another line of review. The process used to finalize this legislation drastically shortcut regular order.
The legislation passed by the Senate is enormously improved over the first Paulson proposal. The $700 billion is not to be authorized immediately, but instead there are installments of $250 billion, $100 billion at the request of the president and $350 billion more subject to congressional objection, although the latter phase may be unconstitutional under INS v. Chadha, which requires following regular legislative process with passage by both houses and Presidential approval to overrule Presidential action and perhaps inferentially legislative conditions. For protection of the taxpayers, the proposal contains a provision that if the government does not regain its money after five years, the President would be required to submit a plan for compensating the Treasury "from entities benefiting from the programs." While that provision is a far way from a guarantee or even assurances that such recovery legislation would be enacted, it gives some important comfort to the taxpayers' position.
There are provisions for multiple layers of oversight including a Financial Stability Oversight Board that will meet monthly to oversee the program. The Treasury Secretary will be required to report to Congress on a regular basis on the actions taken, along with a detailed financial statement. These reports will include information on each of the agreements made, insurance contracts entered into, and the nature of the asset purchased and projected costs and liabilities. Additional oversight will be provided by the Comptroller General (reports to Congress), a new Inspector General (audits and quarterly reports), a congressionally-appointed oversight panel (market and regulatory review, and reports to Congress on the program and the effectiveness of foreclosure mitigation efforts), and by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) (cost estimates). A report will be required from the Secretary of the Treasury with an analysis of the current financial regulatory framework and recommendations for improvements.
There are substantial limitations on having benefits for entities which created the problem and limitations on executive pay. In cases where financial institutions sell troubled assets directly to the government with no competitive bidding and where the government receives a meaningful equity position, the legislation states that, until that equity stake is sold, executives would not get incentives "to take unnecessary and excessive risks" and would have to give up or repay bonuses or other incentives based on financial statements that "are later proven to be materially inaccurate." The bill also would prohibit "any golden parachute payment to senior executives."
The legislation is less stringent in provisions for financial institutions that sell their assets to the government through an auction. Such provisions would apply only to companies that sell more than $300 million in assets and would subject companies and employees to extra taxes. Corporations would not be able to deduct any salary or deferred compensation of more than $500,000, and top executives would face a 20% excise tax on golden parachute payments if they left for any reason other than retirement. In evaluating limitations on executive salaries, it is relevant to note that the Institute for Public Studies found that chief executives of large U.S. companies made an average of $10.5 million last year. That is more than 300 times the pay of the average worker.
The final proposal does provide for debt insurance, as advocated for by House Republicans, but leaves it to the Secretary of the Treasury to utilize that approach so it seems unlikely that it will be implemented in light of the fact that Secretary Paulson has bluntly stated his disagreement with it. Had there been floor amendments, Congress could have structured standards for utilization of debt insurance.
Had we followed regular order with an opportunity to propose amendments, consideration could have been given to my proposal, S.2133, which would have authorized the bankruptcy courts to restructure interest and scheduling of payments. The so-called variable rate mortgages have confronted many homeowners with the surprise that original payments, illustratively, of $1200 a month were soon raised to $2000 which resulted in defaults. Individualized examination by the bankruptcy courts might show misrepresentation or even fraud to justify revising the interest payments and rearranging the payment schedule. Or consideration could have been given to Senator Durbin's proposed legislation, S.2136, which would have authorized the bankruptcy courts to reset the principal balance depending on the value of the home. I opposed that bill because I thought it would discourage future lending, and in the long run raise the cost to homebuyers. But at least, following regular order, there would have been an opportunity to consider Senator Durbin's proposal as well as my suggested legislation.
The legislation contains authority for the Treasury Secretary to compensate foreign central banks under some conditions. It provides that troubled assets held by foreign financial authorities and banks are eligible for the Toxic Assets Recover Program (TARP) if the banks hold such assets as a result of having extended financing to financial institutions that have failed or defaulted. Had there been an opportunity for floor debate, that provision might have been sufficiently unpopular to be rejected or at least sharply circumscribed with conditions.
As a step to help keep borrowers in their homes, I proposed language found in Section 119 (b) of the bill to address the concern that some loan servicers have been reluctant to modify home mortgage loan terms because they fear litigation from investors who hold securities or other vehicles backed by the mortgage in question. The loan servicers have a legal duty to the investors to maximize the return on their investments. In testimony on December 6, 2007, before the House Committee on Financial Services, Mark Pearce, speaking on behalf of the conference of State Bank supervisors, discussed a meeting with the top 20 subprime servicers. He explained that "many of them brought up fear of investor lawsuits" as a hurdle to voluntary loan modification efforts. Because the rescue legislation encourages the government to seek voluntary loan modifications, it is important to remove any impediments to such modifications. To that end, the language provides a legal safe harbor for mortgage servicers making loan modifications, if the loan modifiers take reasonable mitigation steps, including accepting partial payments from homeowners.
On reforms to prevent a recurrence of this crisis, we need to question whether the rating agencies adequately analyzed mortgage-backed securities before issuing investment-grade ratings. These agencies appear to have failed. In July of 2007, when it became apparent that ratings issued by the big three rating agencies-Moody's, S&P and Fitch- could not be relied upon, I urged the relevant committees to look into the ratings that those agencies issued in recent years regarding mortgage-backed securities. Financial institutions that issue asset-backed securities obtain ratings for such securities. The failure to issue reliable ratings misrepresented the facts and fed the ability of financial institutions to tout the value of securities even though their value was declining. Congress and the regulators need to take up the rating agencies issue, and consider whether ratings agencies that have utterly failed to detect and reflect the risks associated with the securities they were rating should be accorded any reliance or role in our financial system. Some have suggested they should be regulated and we may need to consider that.
In addition, Congress and the regulators should review "off-balance sheet" transactions and leveraging. There should be a close examination on whether banks are sufficiently transparent and providing accurate accounting that truly reflects risk and leverage. Similarly there should be a review on Credit Default Swaps (CDS), which are privately traded derivatives contracts that have ballooned to make up what is a $2 trillion dollar market according to the Bank of International Settlements. They are a fast-growing major type of financial derivative. Many experts assert that they have played a critical role in this financial crisis as various financial players believed that they were safe because they thought CDS fully insured or protected them, but the CDS market is unregulated and no one really knows what exposure everyone else has from the CDS contracts. Consideration should be given to subjecting all over-the-counter derivatives onto a regulated exchange similar to that used by listed options in the equity markets.
Overleveraging has been a contributing factor in the turmoil that now threatens our financial institutions. We have seen a massive expansion of the practice of leveraged financial institutions (banks, investment banks, and hedge funds) making investments with borrowed money. In turn, they borrow more money by using the assets they just purchased as collateral. This sequence is continued again and again. The financial system, in its efforts to deleverage, is contracting credit. They must guard against future losses by holding more capital. Deleveraging is leading to difficulty on Main Street for individuals seeking to get a mortgage or buy a car. If a financial institution is able to unload its toxic assets onto the government, it will again be able to resume its lending activities that are crucial for economic growth in the United States. Unfortunately, much of the financial crisis has arisen from miscalculations of the risks involved with purchasing large amounts of securities backed by subprime mortgages and other toxic assets. We now see a situation where we are not just talking about a handful of firms. This is a widespread problem that should be addressed by this package and in future reforms of our financial regulatory structure.
In addition, the package crafted by Senate leaders includes two notable changes from the version that was rejected by the House on Monday. It includes a tax package that was previously passed in the Senate by a vote of 93-2 on September 23, 2008, but has since been rejected by the House in a dispute over revenue offsets. It includes tax incentives for wind, solar, biomass, and other alternative energy technologies. It also includes critically important relief from the Alternative Minimum Tax, which threatens to raise the tax liability of over 22 million unintended filers in 2008 if no action is taken. Finally, the package includes a host of provisions that either expired in 2007 or are set to expire in 2008, including the research and development tax credit, rail line improvement incentives, and quicker restaurant and retail depreciation schedules. I supported the Senate-passed tax extenders bill because it struck a responsible balance on the issue of revenue raising offsets.
The package also includes a provision to temporarily increase the Federal Deposit Insurance Corporation (FDIC) insurance limit to $250,000. Currently, the FDIC provides deposit insurance which guarantees the safety of checking and savings deposits in member banks, up to $100,000 per depositor per bank. Member banks pay a fee to participate. The current $100,000 limit has been unchanged since 1980 despite inflation. This approach is supported by both Senator McCain and Senator Obama, by House Republicans, and by the FDIC Chairman Sheila Bair. Raising the cap could stem a potential run on deposits by bank customers, particularly businesses, who fear losing their money. Such fears contributed to the collapse of Washington Mutual and Wachovia Bank.
Congress has been called upon to make the best of a very bad situation. Careful oversight of the authority given to the Treasury Department will need to be undertaken, and a review of our regulatory structure will be necessary as we move forward.
Again, thank you for writing. The concerns of my constituents are of great importance to me, and I rely on you and other Pennsylvanians to inform me of your views. If you require assistance with a federal agency, please contact my state office in your area. The contact information can be found on my website at specter.senate.gov.
Sincerely,
Arlen Specter
Thursday, October 2, 2008
Costs Escalate for New York City’s “Hub to Somewhere”
The US taxpayer is currently on the hook for “only” about $2.2 Billion for New York City’s new transportation hub. However, it has been reported that while over $174 million has been spent for architects and engineers, no construction has yet begun. Nor does the report indicate where the funds will come from for the latest cost escalation. It would be reasonable to expect that additional funding will be requested from the taxpayer.
The latest details are contained in a 70 page report issued October 2, 2008 by the Port Authority of NY and NJ.
In 2004 the transportation hub project was unveiled with a projected cost of $2.2 Billion. In this, the latest round of re-estimates, the projected costs for the hub have now risen to $3.2 Billion. However, as no construction has yet begun and as construction is not scheduled for completion until the “probabilistic date” of the second quarter of 2014, it is also reasonable to assume that the costs will further increase. The report states that for the period 2004 to 2007, construction costs in NYC increased at the rate of 12% per year. The project is not even scheduled to go to market for the purchase of steel until “as early as” November 2008.
To put the cost of the hub into perspective, the cost of the “One World Trade Center, Freedom Tower” is currently projected to be less than the hub, at $3.1 Billion!
Cost projections include additional payments of $128 Million to the architects, for a total bill of about $302 Million for design. It is to be noted that the taxpayer’s money is administered through the Federal Transit Administration. A FTA spokesman has been quoted as saying that the design cost of "10% for design is consistent with best practices.” The report acknowledges however, that the FTA “has long called for greater project controls and a candid and on-going assessment of where this project stands.”
The report states that “If you consider how much value this money is buying, it begins to put the cost into perspective”.
The hub is intended to be a “Grand Central Station” for lower Manhattan and will be 800,000 square feet in size. However, according to the report, the hub will include “500,000 square feet of first class retail and restaurant space [which is] larger than the retail contained in the Time Warner Center” and is “a world-class retail venue serving all of lower Manhattan.”
As further stated in the report, this hub is to help “revitalize the Lower Manhattan Economy.”
I have to ask the question whether or not this is a good use of taxpayer money. While other communities all over the USA are struggling, the taxpayer is footing what could be argued to be most of the bill to construct a world-class shopping mall for Manhattan.
Note: After this was posted, a decision was made by the owners of the World Trade Center site in which they announced "scaled back designs for ...[the] transit hub....and delay...[of] other projects by several years...costs will still be more than $1 billion over budget".
The latest details are contained in a 70 page report issued October 2, 2008 by the Port Authority of NY and NJ.
In 2004 the transportation hub project was unveiled with a projected cost of $2.2 Billion. In this, the latest round of re-estimates, the projected costs for the hub have now risen to $3.2 Billion. However, as no construction has yet begun and as construction is not scheduled for completion until the “probabilistic date” of the second quarter of 2014, it is also reasonable to assume that the costs will further increase. The report states that for the period 2004 to 2007, construction costs in NYC increased at the rate of 12% per year. The project is not even scheduled to go to market for the purchase of steel until “as early as” November 2008.
To put the cost of the hub into perspective, the cost of the “One World Trade Center, Freedom Tower” is currently projected to be less than the hub, at $3.1 Billion!
Cost projections include additional payments of $128 Million to the architects, for a total bill of about $302 Million for design. It is to be noted that the taxpayer’s money is administered through the Federal Transit Administration. A FTA spokesman has been quoted as saying that the design cost of "10% for design is consistent with best practices.” The report acknowledges however, that the FTA “has long called for greater project controls and a candid and on-going assessment of where this project stands.”
The report states that “If you consider how much value this money is buying, it begins to put the cost into perspective”.
The hub is intended to be a “Grand Central Station” for lower Manhattan and will be 800,000 square feet in size. However, according to the report, the hub will include “500,000 square feet of first class retail and restaurant space [which is] larger than the retail contained in the Time Warner Center” and is “a world-class retail venue serving all of lower Manhattan.”
As further stated in the report, this hub is to help “revitalize the Lower Manhattan Economy.”
I have to ask the question whether or not this is a good use of taxpayer money. While other communities all over the USA are struggling, the taxpayer is footing what could be argued to be most of the bill to construct a world-class shopping mall for Manhattan.
Note: After this was posted, a decision was made by the owners of the World Trade Center site in which they announced "scaled back designs for ...[the] transit hub....and delay...[of] other projects by several years...costs will still be more than $1 billion over budget".
Wednesday, October 1, 2008
Secretary of the Treasury to be given broad powers to hire outside firms
It was reported today in the Washington Post that as a part of the HR3997 and possibly also the Senate version, Secretary of the Treasury Paulson will be give broad powers to hire contractors to administer the $700B he will be spreading to banks and investment banks, both foreign and domestic.
To quote Joe Davidson in the Washington Post: "Treasury Secretary Henry M. Paulson Jr. wants the ability to move quickly to smooth the very rocky road that is now Wall Street. He proposed granting his office essentially unlimited authority to hire outside firms to help manage the assets of companies the government basically nationalizes."
What a deal! Wall Street creates this mess and then gets bailed out and collects fees!
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/29/AR2008092903163.html
http://www.washingtontechnology.com/online/1_1/33599-1.html
To quote Joe Davidson in the Washington Post: "Treasury Secretary Henry M. Paulson Jr. wants the ability to move quickly to smooth the very rocky road that is now Wall Street. He proposed granting his office essentially unlimited authority to hire outside firms to help manage the assets of companies the government basically nationalizes."
What a deal! Wall Street creates this mess and then gets bailed out and collects fees!
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/29/AR2008092903163.html
http://www.washingtontechnology.com/online/1_1/33599-1.html
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