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June 10, 2009

Banks Allowed To Payback TARP Money – Government Predicts A Profit From The Investment

Ten big banks may be thinking that they may soon be able to sponsor golf tournaments, fly their corporate jets willy-nilly, hire foreign workers instead of American citizens and pay their executives preposterous salaries once again without interference from our government.

The real reason the banks are in such a hurry to repay the TARP loans is that they seem to actually believe that by repaying the funds the government will no longer intervene in their business practices – they’re wrong.

They’re wrong not because President Obama and his administration wants to be in the banking business but because Obama and his administration is going to continue to hold the banks accountable until President Obama believes that they have dug themselves out of the deep hole that they’re in and that the banks are on a solid foundation and that American depositors monies are safe and secure.

The banks are anxiousness to win back their independence but they might be acting prematurely.  Let them be warned, if they find themselves in another deep hole President Obama most likely will not save them a second time and what will they do then? They should really, really ponder that.  If I were a bank executive I would hold onto the monies until I was 200% sure that my bank was on a seriously solid foundation.

A concern of the Obama administration is that if big banks rush to return bailout money, it could prevent them from having enough capital to continue lending.  The Treasury Department, in conjunction with the Federal and other bank regulators conducted stress tests of the 19 largest banks this spring to see if they had enough capital to withstand worse-than-expected economic conditions.

Nine passed the test. But 10 others were required to raise a total of $75 billion as a cushion against potential future losses on bad mortgage loans and other investments if the recession worsened. The Federal Reserve said Monday that the 10 banks including Bank of America Corp and Wells Fargo & Co had submitted acceptable capital-raising plans.

Eight of the nine banks that were found to not need new capital following the government’s bank stress tests last month said they will pay back TARP funds.  They are:

JP Morgan Chase, Goldman Sachs, American Express, Bank of New York Mellon, State Street and regional banking giants Capital One, BB&T and U.S. Bancorp.

Investment bank Morgan Stanley which was the only financial firm that regulators did ask to raise money after the stress tests confirmed it also won approval from the Treasury Department to pay back $10 billion.

Chicago-based Northern Trust which received $1.576 billion in TARP funds was not part of the bank stress tests but said on Tuesday that it had also won government approval to exit the program.

All 10 financial firms indicated that they intended to pay back TARP funds by redeeming the preferred shares the government acquired in them last fall. Such a move would return approximately $68 billion to the government’s coffers.

So far, the Treasury Department has allowed nearly two dozen small, mostly community-based lenders to redeem the government’s preferred shares, representing nearly $1.9 billion in taxpayer money.

In a press conference Tuesday, President Obama said such repayments “a positive sign,” but warned that the financial crisis still presented challenges to both American businesses and consumers

“This is not a sign that our troubles are over, far from it,” he said.

Proceeds received from those 10 banks will be applied to the Treasury Department’s general account and some of the funds will used to promote financial stability should the economy take a turn for the worse. A portion of those funds will also be used to reduce Treasury’s borrowing and rein in the nation’s rapidly rising deficit.

Regulators are fearful that major financial institutions which are responsible for issuing a substantial amount of credit to the U.S. financial system may cut back on lending even further as a result of paying back TARP funds and could therefore endanger what may be a budding economic recovery.

Several bank chiefs downplayed these concerns in statements issued Tuesday stating that they will be there for consumers and businesses seeking loans.

“We fully expect to continue to vigorously offer lending opportunities to our credit-worthy consumer, small business, corporate and institutional customers, invest for future growth and support the U.S. government’s overall efforts to stimulate the economy,” Richard K. Davis, chairman and CEO of U.S. Bancorp, said in a statement.

Watch President Obama’s Press Conference about TARP money payback:

 

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!

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