NewGeography.com blogs

The Treasury this week disclosed details of their plan to pump $1 trillion into the financial system by removing “Legacy Assets” from the balance sheets of banks. Wading through the multitude of documents and documents, I’m reminded of a remark by Michael Milken in a conversation with Charlie Rose on October 27, 2008 “Complexity is not innovation.”

Since its inception, the plan has been sold to Congress and the media as one with potential positive payoffs for the public coffers. To support this idea, proponents point to the experience of the Resolution Trust Company (RTC) in resolving the Savings and Loan (S&L) Crisis. Back then, RTC took over failing S&Ls – some of which were bankrupted by bad real estate loans made worse when they were forced to sell off below-investment grade bond assets – the by-now-well-known Junk Bonds.

Selling off today’s junk bonds will, I agree, clean up the balance sheets of the banks and make them more attractive to investors and depositors. But the investment in junk bonds now is not going to turn out like the investment in junk bonds then. For starters, the value of the junk bonds then declined as a result of the forced sell-off – Congress prohibited S&Ls from holding junk bonds on their balance sheets. When this supply was dumped on the market, the prices naturally dropped. Selling assets at depressed prices damaged a lot of S&Ls. RTC stepped in near the bottom of those prices to take control of the assets. When credit markets returned to normal, the prices of the junk bonds rose and the investments had positive returns.

Then, junk bonds paid extraordinary rates of return – 10 percentage points above Treasuries at the peak. At that time, a 30-year U.S. Treasury bond could be paying more than 18% interest.

Now, we are talking about junk bonds that we all know are junk – no matter fancy labels like “Legacy.” What rate of return could there be on a mortgage bond – no matter how you “slice-and-dice” it – created when mortgage interest rates were 5-6%? Add to that http://www.newgeography.com/content/00679-story-financial-crisis-burnin%... >our knowledge of the problems underlying these assets and it is increasingly unlikely that there will be any positive payoff for taxpayers in this plan.

On March 25, 2009, Mirek Topolanek, President of the European Union, called the U.S. economic plan “the way to hell.” His concern is that we’ll have to finance these trillion dollar bailouts with borrowing and that will ultimately further undermine global financial markets. He’s right, of course. The public-private partnerships will finance the purchase of the “Legacy Assets” by issuing debt. That debt will be guaranteed by the Federal Deposit Insurance Corporation (FDIC), the same agency that guarantees our savings accounts at the local bank. Our guarantee is backed by the payment of insurance premiums to FDIC. The guarantee on the debt used to purchase Legacy Assets will be secured by the Legacy Assets – which will be rated by the same credit rating agencies that gave us triple-A rated subprime mortgage bonds in the first place. How can this possibly turn out well? I’m sure Treasury, Federal Reserve and FDIC have good intentions, but as EU President Topolanek says, they may all end up as pavement on “the way to hell.” As NYTimes columnist Paul Krugman said of the new plan, “What an awful mess.”

Treasury Secretary Tim Geithner is on the cover of the April 2009 issue of Bloomberg Markets magazine. In the lead article, “Man in the Middle,” the authors refer to his time at the New York Federal Reserve Bank (FRB) as “experience as a consensus builder.” This overlooks the fact that it was easy for him to get everyone to agree, to build group solidarity, when he simply gave the banks and broker-dealers everything they wanted.

The Primary Dealers, those broker-dealers and banks who have a special arrangement with the FRB for trading in treasury securities, agreed when Geithner let them fail to deliver $2.5 trillion of treasury securities for seven weeks in the fall; they agreed when he let them fail to deliver more than $1 trillion two years earlier; they agreed when he let them fail to deliver treasury securities even after Geithner’s own economists told him it was dangerous. By the way, last year the New York FRB’s public information department prevented those economists from speaking on the record about that research with a Bloomberg reporter.

Now, at a hearing on March 24, 2009 before the House Financial Services Committee, Secretary Geithner and Federal Reserve Chairman Ben Bernanke lectured us on the awesome responsibilities of Treasury and Federal Reserve in the current crisis – without admitting that they had those same responsibilities while the crisis was being created.

In a joint statement from the Department of the Treasury and the Federal Reserve they offer no explanation for their failure to fulfill their “central role … in preventing and managing financial crises.” Rather, they use the fact of that role to require that we accept whatever plan they put before us today as the best and wisest course. To convince us that their plan is the right one, they can all point to the fact that the stock markets rallied (gaining nearly 7% across the board) led by the shares of financial institutions (Goldman Sachs’ shares went from $97.48 on Friday night to $111.93 on Monday – a gain of about 15%).

I criticized the “Public Private Partnership” when it was announced in February 2009. Calling Wall Street’s bad investments “Legacy Assets” doesn’t change the fact that they are “junk.” They could call it “the hair of the dog” because they now want to invest taxpayer money into the same junk investments that started the financial snow ball rolling in the first place.

Just because the stock market rallied doesn’t make this “consensus building” – I call it being Wall Street’s lapdog.

While San Francisco Mayor Gavin Newsom was recently chided for his water bottle usage, the city of Los Angeles hasn’t been much better.

It was recently reported that the city of LA spent $184,736 on bottled water in 2008, “despite a mayoral directive that it should not be provided at the city’s expense.”

City officials are encouraged to use coolers or pitchers of tap water for special events, and those that wish to drink bottled water “can do so at their own expense,” said City Controller Laura Chick.

Despite a 2005 memo for Mayor Antonio Villaraigosa stating that city funds were not to be used on bottled water, certain city departments continued to spend funds on the plastic bottles.

The biggest spenders were found to be Public Works ($69,696), Los Angeles World Airports ($31,429), Los Angeles Police Department ($19,708), General Services ($19,508), Transportation ($14,595), and Harbor ($11,993).

The Department of Water and Power cut their spending down from $31,160 in 2004/05 to $3,419 in 2008, while the departments of Community Development, Commission on Children Youth and Families, Fire, Housing, Library, Neighborhood Empowerment, and Personnel ceased purchases altogether.

Although spending has been reduced, public employees continue to expect the city to foot the bill for their bottled water. Such blatant non-compliance is hard to swallow.

The next official Census isn’t till 2010, but Election Data Services is already predicting considerable impacts on Congressional representation.

Things will be getting bigger in Texas, with four added seats, as well as Arizona, with two. Six states—Florida, Georgia, Nevada, Oregon, South Carolina, and Utah—will increase their federal delegations by one district each.

On the opposite end, Illinois, Iowa, Louisiana, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, and Pennsylvania will all relinquish one seat, with Ohio appearing to lose two.

While the redistricting process is in the distant future, it should prove interesting to see how the 2010 Census will change the seating arrangement in Washington.

Bloomberg.com reporters Mark Pittman and Bob Ivry are reporting a running total of the money the U.S. government has pledged and spent for bailouts and economic stimulus payments. The total disbursed through February 24, 2009 stands at $3.8 trillion; the total commitment is $11.6 trillion. The Federal Reserve is providing the largest share at $7.6 billion, followed by the U.S. Treasury $2.2 trillion and FDIC $1.6 trillion. The Department of Housing and Urban Development (HUD) and support for Fannie Mae and Freddie Mac, combined with purchases of student loans – bailout money that comes closest to directly bailing out Main Street – total only $760 billion – less than 7 percent of the total.

The national debt currently stands at $10.8 trillion — versus an authorized limit of $12.1 trillion.

Last week, U.S. Treasury Secretary Timothy Geithner got into a tiff with the rest of the world (denied by President Obama) by telling them that they should spend at least 2 percent of their GDP on their own stimulus packages.

The U.S. commitment of $11.6 trillion equals 81 percent of U.S. 2008 gross domestic product (GDP). The $787 billion fiscal stimulus is 5.4 percent of GDP. Just the two-thirds of the stimulus that represents new spending (one-third is tax cuts) is 3.6 percent of GDP. Here’s what financial institutions in various countries got from U.S. taxpayers by way of the AIG bailout: