KeNo's Housing and Economic Portal: Tuesday July 28 Housing and Economic stories

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Does Goldman Owe the Taxpayers?‎ - (www.nytimes.com) Goldman Sachs Group Inc. announced record earnings Tuesday of $3.44 billion for the second quarter of 2009. Goldman's stock price leapt 77 percent for the first half of 2009, and closed Tuesday at $149.66 a share. Without an ongoing series of front- and backdoor bailouts financed by U.S. taxpayers, most of Goldman's record profits would not have been possible. In April 2009, Goldman Sachs' CEO, Lloyd Blankfein, who received record salary and bonus compensation of $68.5 million in 2007, said that bonus decisions made before the credit crisis looked "self-serving and greedy in hindsight." Now, they look self-serving and greedy with foresight. Goldman set aside $11.4 billion for employee compensation and benefits, up 33 percent from last year. That's enough to pay each employee more than $390,000, just for the first six months of this year. In June, Goldman bought back its preferred shares, repaying $10 billion it received from the government's Troubled Asset Relief Program, or TARP, and setting it free of limits on executive compensation and dividends. But pay is not the key issue. U.S. taxpayers deserve a large cut of the profits, not the chump change -- less than a half-billion dollars -- they got from preferred shares in the company and the relatively small amount they could get from warrants in its stock. U.S. taxpayers should insist that a large part of Goldman's revenues and profits belong to the American public. TARP money was just part of a series of bailouts and concessions that allowed Goldman to prosper at the expense of a flawed regulatory system. In March 2008, Goldman, a primary dealer in Treasury securities, was among the beneficiaries of a massive backdoor bailout by the Federal Reserve Bank. At the time, Henry Paulson, former CEO of Goldman Sachs, was treasury secretary. In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed. The bailout of American International Group, or AIG, ballooned from $85 billion in September 2008 to $182.5 billion. Of that money, $90 billion was funneled as collateral payments to banks that traded with AIG. American taxpayers may never see a dime of their bailout money again, but Goldman saw plenty. Goldman may be the largest indirect beneficiary of AIG's bailout, receiving $12.9 billion in collateral, including securities lending transactions, from AIG after the government bailed out the insurance company. The key question is whether Goldman asked AIG to insure products that were as dodgy as the doomed deal from Goldman Sachs Alternative Mortgage Products exposed by Fortune's Allan Sloan in his October 16, 2007, Loeb Award-winning article: "Junk Mortgages Under the Microscope." If the federal government had not intervened and if AIG had gone into bankruptcy, Goldman probably would not have received its $12.9 billion from AIG. U.S. taxpayers and the American economy are owed some of the bailout money passed directly through AIG to Goldman. Wall Street firms also reaped trading windfalls when AIG needed to close out its derivative transactions. This was the most lucrative windfall business in the history of the derivatives markets. When AIG left money on the table, it was U.S. taxpayer money. Goldman Sachs was granted bank holding company status in the fall of 2008. It already had the temporary ability to borrow from the Fed through the TSLF, which would have expired in January 2009. Now it has permanent access to lending from the Fed. Goldman can now compete with the largest U.S. banks and borrow money at interest rates pushed as close to zero as possible by the Fed. Goldman gets a further benefit: favorable accounting rule changes. In addition, Goldman issued $30 billion of debt with a valuable government guarantee that remains outstanding. Meanwhile, the American public faces a rising unemployment rate, falling housing prices, rising unemployment, higher local taxes and a dismal economic outlook. Interested men with reputations and fortunes at stake rode roughshod over public interest. The American public is owed part of the profits Goldman was able to make because of the largesse of our Congress. Wall Street's "financial meth labs," including Goldman's, massively pumped out bad bonds and credit derivatives that have melted down savings accounts, pension funds, the municipal bond market and the American economy. Risky assets, leverage and fraud led to acute distress in the global financial markets.

California IOUs set for trade - (www.ft.com) A market is set to emerge this week in Californian IOUs as the persistence of the state’s budget crisis is making it increasingly difficult to exchange these emergency instruments for cash. California is printing $3bn of IOUs for businesses, individual taxpayers and local counties in lieu of cash. It has sent more than $450m of them to court-appointed attorneys, county-run health schemes and taxpayers awaiting rebates, among others. IOUs will continue to be issued until Arnold Schwarzenegger, California governor, and the state legislature agree a deal to close a $26bn budget deficit. The state began issuing the IOUs early this month. SecondMarket, a New York firm that trades illiquid assets, launched a platform for trading the IOUs on Wednesday. A decision last week by large banks, such as Wells Fargo and Bank of America, to stop accepting the IOUs has paved the way for some initial trading, although volumes are expected to be very thin. Citigroup, Bank of the West, credit unions and some community banks still are accepting the IOUs for their customers. “With several major banks no longer redeeming Californian IOUs, and with some citizens, businesses and municipalities needing liquidity, we felt it was important to launch this market promptly,” said Barry Silbert, SecondMarket chief executive. Buyers and sellers can list their interest, and SecondMarket expects bids to emerge later in the week. It first needs to verify the listed IOUs with the state. Hedge funds and municipal bond investors are among the interested buyers. Trading in the IOUs is controversial and drew the eye of regulators after offers from opportunistic individuals popped up on websites such as Craigslist. “The [California] Treasury is concerned about the potential for IOU holders in a vulnerable position being victimised by con artists,” said a spokesman for the state treasurer. The Securities and Exchange Commission last week ruled the notes were tradeable securities, but only by banks or broker-dealers that comply with recommendations by the Municipal Securities Rulemaking Board. Individuals involved in more than single, one-off private transactions risk violating securities law. Assuming California can repay the IOUs as promised on or before October 2, their 3.75 per cent annual rate is attractive for a short-term obligation.

CIT Presses U.S. Regulators for Aid to Forestall Cash Crunch - (www.bloomberg.com) CIT Group Inc., the small-business lender with $1 billion in bonds maturing next month, pressed for more aid from regulators who are reluctant to use taxpayer funds for a company that may not be a risk to the financial system, people familiar with the matter said. Treasury officials have indicated in talks that they are reluctant to deploy funds from the $700 billion bank-rescue program, and the Federal Deposit Insurance Corp. continues to balk at debt guarantees, the people said. As of late yesterday, the Federal Reserve was considering granting permission to shift some CIT parent assets to its bank, two people said. That could boost the amount New York-based CIT could borrow from the Fed’s discount window, affording more time to restructure its debt. The course of the talks may still change, and analysts have pointed to the potential political implications of letting a lender to thousands of borrowers at smaller businesses go bust after bailouts for some of the biggest Wall Street firms. CIT’s case underscores calls for new federal powers to allow an orderly wind-down of a bank holding company. “CIT represents a difficult policy issue for Washington as there is sentiment to punish the fat cats and greed matched by what potential damage could be done against an economy struggling to regain momentum with all of its possible political fallout,” said Scott MacDonald, head of research at Stamford, Connecticut-based Aladdin Capital Management LLC. Fed spokeswoman Michelle Smith declined to comment. Meg Reilly, a Treasury spokeswoman in Washington, also declined to comment. Stock Advances: CIT advanced 26 cents, or 19 percent, to $1.61 at 4:03 p.m. yesterday in New York Stock Exchange composite trading as the company pushed for aid. The lender counts 1 million firms among its customers, including the parent of Dunkin’ Donuts and 300,000 retailers. Standard & Poor’s said this week the company, once the biggest independent commercial lender in the U.S., may face bankruptcy without federal aid. Todd McCracken, chief executive officer of the National Small Business Association, said in an interview regulators shouldn’t underestimate the importance of CIT to smaller businesses, which account for about half the private sector U.S. workforce. The U.S. jobless rate rose to 9.5 percent in June, the highest in almost 26 years.

SEC Upsets Some as It Tries to Sharpen Teeth - (www.washingtonpost.com) The Securities and Exchange Commission has begun moving far faster to stop financial scams and open investigations into potential wrongdoing than in the past, according to agency data, adopting an aggressive posture after it was sharply criticized about its oversight of Wall Street and failure to uncover Bernard Madoff's massive fraud. Since Mary Schapiro became chairman in January, for instance, the SEC has launched nearly as many formal investigations as it did in any of the past five years. At the same time, Schapiro and her enforcement director, Robert Khuzami, have undertaken a series of personnel changes that employees say are causing turmoil within the enforcement division and posing a distraction from its work investigating financial crime. Khuzami has two meetings scheduled today with employees to discuss these moves. The enforcement division -- the largest at the SEC -- is at center stage as the agency prepares to gain new responsibilities under the Obama administration's proposed reworking of financial regulations. In testimony before Congress yesterday, Schapiro said the agency was keenly aware of its obligations. "There is an invigorating sense of urgency among the staff of the agency to demonstrate that we are up to the job," she said. "Khuzami is reducing bureaucracy by streamlining management within the enforcement division, putting many more talented investigators directly to work on cases."

How much health care for $1 trillion? - (www.usatoday.com) The White House and Democratic congressional leaders, scrambling to pass health care bills within the next few weeks, are trying to keep the cost of legislation that expands coverage and controls costs to about $1 trillion over 10 years — a benchmark for moderates in both parties. So what can you buy for $1 trillion? Although the eye-popping price tag would help boost insurance coverage to 95% or more of the public, it's not enough to do everything advocates initially want. The proposals being shaped in Congress — including the $1.042 trillion bill unveiled by House Democratic leaders Tuesday — offer subsidies to fewer moderate-income families than originally intended, bar most workers from choosing to leave their employer-provided plans and likely drive up Medicaid costs for states. THE PLAN: House Dems' health bill would tax rich. At the end of a decade, 15 million to 20 million would remain uninsured, according to assessments by the non-partisan Congressional Budget Office— a sticking point for critics who argue the whole enterprise doesn't get enough bang for the buck. Nearly 50 million now lack coverage. "One of the major concerns that Americans have about health care reform is the price tag," Senate GOP leader Mitch McConnell said Monday on the Senate floor. "Every proposal we've seen would cost a fortune by any standard." President Obama defends the overhaul as a critical investment to fix a dysfunctional system he says is hobbling many families and threatening the nation's fiscal future. "This is no longer a problem we can wait to fix," he said Monday at the White House. "Inaction is not an option." Here's the squeeze for policymakers: Allow the price tag to grow much past $1 trillion and you risk losing the support of fiscal hawks in Congress and voters alarmed by the costs of stimulus spending and corporate bailouts. Because the president has promised the health care plan won't increase the deficit, a bigger bottom line means more taxes would have to be raised, or spending cut, to offset it. On the other hand, cut back too far and you imperil the legislation's fundamental goal of giving everyone access to health insurance they can afford. That could undermine support from the strongest advocates for change. The battles roiling the negotiations — and threatening Obama's call for votes in the House and Senate before their August recess — center on which taxes should be raised to finance the bill and whether the plan should include a public, government-run option to compete with private insurers.

Coalition to attack plan for Fed powers - (www.ft.com) Barack Obama’s plan to give the Federal Reserve extensive powers over all large US financial groups will be attacked on Wednesday by a coalition of investors, analysts and ex-regulators who say the Fed’s credibility has been “tarnished” by its role in contributing to the crisis. The strong stance by the investor community will fuel the heated debate over financial regulation and strengthen Congressional opposition to the administration’s push for the Fed to monitor any company whose failure would endanger the banking system. Wednesday’s report, by an alliance including two former heads of the Securities and Exchange Commission, a group of investors with a total $3,000bn in assets and the investment analysts’ trade body, will break the investment industry’s silence on regulatory reform. The 39-page document, seen by the Financial Times, calls for the creation of an independent body to police risks across the financial sector. In contrast, last month’s government proposals envisage turning the Fed into a “systemic regulator” with powers to oversee large banks and insurers, such companies as General Electric, and possibly hedge funds and private equity firms. A body proposed by the investors – the Systemic Risk Oversight Regulator – would have a full-time staff led by a chairman and four members appointed by the president and confirmed by the Senate, and would be accountable to Congress. William Donaldson, a co-chair with fellow former SEC head Arthur Levitt of the Investors’ Working Group, told the FT the new agency should have “carte blanche to go everywhere it wants . . . to find systemically weak areas within the system”. Letting the Fed regulate all large financial groups would detract from its focus on monetary policy and could have “serious drawbacks” given its poor record in the run-up to the crisis, the report says. It criticised the central bank for lax bank supervision and the role its low interest rate policy played in inflating the housing bubble earlier this decade.