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March 23, 2009

President Obama: Our Trillion Dollar Man

Obama  President Obama and his administration doesn’t want to nationalize our banks so they have unveiled a plan to remove toxic assets from banks’ books in hopes that the plan will breathe life into our financial system so that the government doesn’t have to take them over.

The plan is to finance up to $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The Public-Private Investment Program will also rely on Federal Reserve financing and FDIC debt guarantees. Doing this will allow banks to clean up their balance sheets and free up the money they were loaned under the TARP so that money can start flowing again and help resurrect our economy.

The government is taking a risk but we cannot solve a financial crisis of this magnitude without the government assuming some risk. It may take months for us to see if this is a successful approach since the government, private sector and banks have to collaborate to make this plan work.  Private asset managers have to be selected (in May), private investors have to participate and banks have to commit to sell their downgraded investments. The point of the program is to save the taxpayers’ money by attracting private capital. The private sector will invest alongside the American taxpayer on an equal basis, so both parties share the downside risk and upside potential. There is a great risk/reward potential here.

The second thing needed for this plan to work is strict oversight by Secretary Geithner. The Secretary has to keenly oversee what the banks are doing to ensure that bank executives continuously do the right things to get our economy back on track.  We have already seen that bank executives are confused, oblivious and disconnected from the reality of what they have done to our economy.  Geithner needs to keep them focused.

Fifty percent of the Treasury’s funds will go to a “Legacy Loans Program” that will be overseen by the FDIC. The Treasury will provide half of the capital going to purchase a pool of loans from banks, with private fund managers putting up the rest. The FDIC will then guarantee financing for the investors — up to a maximum of six times the capital or equity provided.

The FDIC — which has extensive experience disposing of devalued loans from taking over failed banks — will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC.

Geithner is expecting a wide range of investors to participate in the Legacy Loans Program, including insurance companies, pension funds and even individual investors.

The other fifty percent of the Treasury’s contribution will go to the “Legacy Securities Program.” The objective of this initiative is to generate prices for securities backed by mortgages that are no longer traded because investors have little confidence in the principal value of the home loans.

Under this program, the Fed will expand an existing feature that provides financing for investor purchases of asset-backed securities. The Term Asset-Backed Securities Loan Program will be broadened to take on assets such as residential mortgage-backed securities that were originally rated AAA and sold by private banks.

The Treasury will also approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” that will buy the securities.

The managers will be given time to raise private capital and receive matching funds from the Treasury.  Geithner is hoping that the private sector will compete to be partners with the government.

There is some fear by investors that if they do well by participating in this program the government will tax them at 90 percent or busloads of people might turn up at their doors. 

I don’t think that will happen, if this works and the market is on an upswing and everyone is making money  populist views will change and these private investors will be hailed as heroes.

A few weeks ago we were all in fear that banks would fail en masse.  If banks had failed en masse, then massive business failures would have followed and massive unemployment would have been the result and that would have led to more foreclosures, and more bank failures and more business failures and more foreclosures and this vicious cycle would not have ended until there was a complete collapse of our economic system.

President Obama stopped the economic free-fall and we have to recognize that and give him credit for it. 

There is more than one way to skin a cat so all of us will not agree 100 percent on this plan, but we have a plan and we must now give this trillion dollar plan the chance to work. 

As Warren Buffet said, we’re in an economic war and we have to start acting like it.  Democrats and Republicans alike have to put aside ideological differences and realize that our economy is under attack by our competitors and we have to band together since we are all in this together

If you are an American and you don’t want to see President Obama succeed then it’s time for you to give up your citizenship and move to another country — seriously.

We’re all Americans.

United we stand, divided we fall. 

Let’s pray for success!


October 5, 2008

Banking Brouhaha: Wachovia Now Wants To Self Itself To Wells Fargo – Not Citibank

 Last week we woke up to hear that Citibank “Citi” took over Wachovia’s banking/mortgage business.  Citi was to have paid Wachovia $2.1 billion in stock in exchange for Wachovia’s banking and mortgage assets (over $700 billion in deposits+assets). Citi was also going to assume about $53 billion in debt.

 Citi needed to cover losses up to $42 billion on mortgage related losses. Anything beyond that is guaranteed by the Federal government (FDIC). In exchange for that guarantee, the Feds would get $12 billion in preferred Citi stock, which pays 6% interest – so the Feds would most likely make money from the deal.

Wachovia owns a $300+ billion mortgage portfolio and has about $120 billion in option-ARM mortgages and expected losses on about 14% of those loans. The deal allowed Wachovia to keep its other businesses: Wachovia Securities, Evergreen Investments and Wachovia Insurance Services. The important question here is how much the remaining Wachovia businesses are worth – could Wachovia have sustained itself?

·       Wachovia Securities is the nation’s second largest investment firm

·       Wachovia Insurance Services is the 12th largest insurance brokerage firm

·       Evergreen Investments is America’s 29th largest asset management company

So now each Wachovia share is worth $1 – a penny stock.

In pre-market trading last week, even before any details were announced, Wachovia stock dropped 90% and trading was halted at the NYSE on Wachovia (WB) for the day. In spite of everything the S&P still maintains its hold rating on WB but will revise its price target.

Up until early Friday October 3 your deposits at both Citi and Wachovia are safe and the FDIC didn’t need to spend any money to help those 2 banks. The only difference was that your local Wachovia would become a Citibank and Citibank had plans to move its banking headquarters to Charlotte, NC while keeping its investment headquarters in Manhattan. Since Citi and Wachovia don’t have much of an overlap in branches, not much was expected to change for depositors.

Late Friday the banking industry was shaken by news that industry regulators were working to resolve rival acquisition proposals by Citigroup and Wells Fargo for Wachovia.

 Wells Fargo announced a surprise deal to buy Wachovia for about $15.1 billion in stock, four days after Citi agreed to acquire Wachovia’s banking operations in a government-backed deal valued at $2.1 billion.

So now we have a fight between Citi and Wells Fargo to see who will purchase Wachovia. Even though Wachovia said early Sunday that it is pressing ahead with its deal to sell itself to Wells Fargo for more money.

Wachovia responded to a judge’s order on Saturday to temporarily block the sale of the bank to Wells Fargo.  But Wachovia says that it does not believe the order by the judge “has any effect on the validity of the Wells Fargo agreement with Wachovia.”

Meanwhile, across the pond, hopes of a formidable European response to their financial crisis dimmed ahead of a hastily arranged weekend summit by France, Germany, Britain and Italy. Germany has already rejected a French proposal to create an emergency EU fund for struggling banks. European governments have had to step in and bail out several major banks, including Britain’s Bradford & Bingley, Belgian-Dutch Fortis and Belgium’s Dexia.

August 27, 2008

117 More Banks In Trouble. Are Your Deposits Insured?

The FDIC reported that the number of banks on the “problem bank” list grew to 117 during the second quarter. That’s the highest level since the middle of 2003.

 There were 90 banks on the problem list in the first quarter of this year. The FDIC chairman also said that list is going to grow. In fact, analysts say that there could be up to 150 bank failures on the horizon. Unfortunately the FDIC keeps the list private and will not share the information with the public.

Let’s put this in perspective – the FDIC insures more than 8,000 thrifts and banks. And this is nothing like what we saw during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis (which John McCain was a part of).

Generally small and mid-size banks are more at risk – that’s because they may not be able to raise enough money if they are in trouble. If you’re looking to put your money somewhere safe, go with larger, more familiar banks.

Since the FDIC doesn’t release the names of banks that are in trouble, but you can check the health of your own bank. Check out bankrate.com. This site will have a safe & sound rating system that can help you get a picture of your bank’s health.

If you want more detailed information about your bank’s financials, you can go to ambest.com.

Some signs to look for:

Pay attention to massive job layoffs or cutback in services at your bank.

1.    If your bank doesn’t accept new loan submissions that’s a HUGE red flag.

2.    If you start to see generous CD yields advertised – that could be a sign that the bank is in trouble. That’s because banks are trying to entice people to keep their money at the bank and get new deposits. 

If you are within the limits of FDIC-insurance coverage with an FDIC-insured bank, you shouldn’t panic. The worst move you could make is pulling your money out of a regulated institution and holding the cash yourself.

The FDIC is not required to reimburse you for anything above the covered amount. But there are some cases where you’ll be ok. For example, you may qualify for more than $100,000 if there are accounts in different “ownership categories.”

For example, your share of any joint account at a bank is insured up to $100,000 separately from accounts you hold in your name alone.

And the bank can also choose to pay for uninsured deposits if it raises enough money after selling off the banks assets. 

Are your deposits insured?  Find out by going to: http://www.fdic.gov/deposit/deposits/index.html


July 14, 2008

Economy — IndyMac Taken Over By FDIC 7/14/08

  Nervous customers of IndyMac Bank today lined up at branches in Pasadena and elsewhere, anxious to withdraw their money from the failed institution that was seized by federal regulators last Friday.

With some customers arriving as early as 4 a.m., fueled by coffee and packing lawn chairs and stools in anticipation of a lengthy stay, depositors waited for the bank to reopen at 9 a.m. It has been closed since Friday.

“I called in sick,” said Margie Harbottle, 62, a vocational counselor from Pasadena who arrived around 8:30 a.m. “This is going to take a couple hours.”

To calm customers’ fears, employees of the Federal Deposit Insurance Corp. — the bank’s new manager — made their way down the line, which wrapped twice in front of the building on Lake Avenue and stretched around the corner. They answered questions and explained the bank’s new policies.

“This right now is one of the strongest banks in the country,” said FDIC spokesman David Barr. But he acknowledged customers “just want to get their money — we understand that.”

Yet not all customers would be able to access all of their funds. Customers with $100,000 or less in deposits or with $250,000 or less in a retirement account would have full access to their funds, which are insured by the federal government.

There are, however, an estimated 10,000 IndyMac depositors who had a collective $1 billion over federal insurance limits. In an unusual move, the FDIC said it would give those customers access to 50% of their uninsured deposits. Any additional payments would be made only if the sale of IndyMac assets proved sufficient.

For all depositors, interest rates on most individual accounts would remain unchanged until the accounts mature, the FDIC said. That’s good news for many customers because IndyMac has been paying among the highest rates in the nation for certificates of deposit in recent months. As of last week, the bank was offering an annualized 4.3% on a six-month CD.



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