The Econompic Data Blog does a great job graphing and explaining America’s bailouts and their effect on US’s finances.

Econompic explains how taxpayers paid too much for TARP purchases.

(emphasis mine) [my comment]

Monday, February 9, 2009
TARP Review: Taxpayers Paid too Much

The Congressional Oversight Panel (hat tip Felix) reports the Treasury "overpaid" for assets from troubled banks in the first round of TARP; especially when compared to investments made from private investors:

The Panel’s review of the ten largest TARP investments the Treasury made during 2008 raises substantial doubts about whether the government received assets comparable to its expenditures.



It doesn't surprise me that TARP paid above market value for assets (intentionally overpaying made it a form of equity injection - I thought this wasn't a bad thing at the time, though what banks have done with that equity has made me rethink that view). As Yves at Naked Capitalism stated back in September:

The intent is to overpay relative to current market prices, and with real estate and the economy headed south, these assets are certain to trade at even lower prices for a very long time. Plus banks will sell the stuff where they think Treasury is overpaying the most, and hang on to those assets that they think have the most upside.

That being said, I completely agree with Felix on his comment that:

If Treasury wants to overpay for bad assets, in order to recapitalize the banking system, then it should do so transparently. What's unforgivable is lying, and saying that you're paying a fair price when you're not.

Econompic graphs the breakdown of Merrill’s Bonus Pool.

Friday, February 13, 2009
Merrill $3.6 Billion Bonus Breakdown

Andrew Cuomo writes Barney Frank (hat tip Paul):

Merrill Lynch's decision to secretly and prematurely award approximately $3.6 billion in bonuses, and Bank of America's apparent complicity in it, raise serious and disturbing questions.

In the letter there are details regarding the breakdown of that $3.6 billion, which I've attempted to breakout further (there is some rounding and assumptions involved, but in general it is what it is).

[To understand the where this bonus money is coming from, compare the size of Merrill’s (which was bailed out by taxpayer) 2008 bonus pool ($3.6 billion) to the size of Lehman’s (which went bankrupt without a bailout) 2008 bonus pool (0 billions)]

Total Breakdown



Average by Tier (not sure how clear this is... I couldn't think of a better way to show it)



Source: NY State

Econompic explains how a bailout of securitization market equals a bailout of banks.

Thursday, February 12, 2009
Bailout of Securitization Market = Bailout of Banks

Eight top financial executives from various firms appeared yesterday before Congress. CNN reports:

Many of the CEOs at Wednesday's hearing defended their actions, noting that while credit standards have tightened, they were continuing to issue loans. Several of the CEOs added that without government assistance, credit would be even harder to obtain.

"We are still lending, and we are lending far more because of the TARP program," Bank of America Chairman and CEO Ken Lewis said in a copy of his prepared remarks.

Looking at the data, it looks like they may have a point (though they play a big part in this story later on). Since 1948, the commercial banking sector's share of consumer loan holdings dwindled from a peak of more than half the entire market (in the late 1970's), to less than 30% at the beginning of this decade.




The issue thus isn't only whether commercial banks are lending, but how to bring the securitization market back to life. Securitization holdings of consumer loans grew larger than that of commercial banks, all from nothing just 20 years ago.



And now the securitization market has all but ceased. WSJ's Marketbeat reports:

Securitization issuance is down 91% from this point last year, according to Dealogic, with asset-backed issuance declining to $2.6 billion from $32.1 billion at this point a year ago. Most consumer loans, such as credit cards, auto loans, student loans and others, are relatively easy to bundle and sell as securitized assets, but not now, when buyers of such product do not exist.

To summarize the problems in the securitization market (very high-level):

A) Nobody will buy securitized loans (which would restart the market) unless the yields are higher than that reported on bank balance sheets (although they do actually trade at these higher yields)
B) If these high yields were accepted as actual market prices (and not "forced selling" prices), it would force banks to write-down the value of their assets to the point where they could no longer pretend to be solvent

So.... solving problem A means banks are bankrupt (I am not opposed to nationalization, but "the forces" of corrupt politicians and their rich cronies sure are), while solving problem B means we are stuck in the present situation. Thus, without government intervention there appears to be no solution that solve BOTH A and B. This is where the TALF comes in. For details lets go to Morningstar:

Under the TALF, the Federal Reserve Bank of New York will lend to each borrower an amount equal to the value of the pledged ABS minus a haircut. The Fed posted a haircut schedule Friday.

Borrowers will be able to choose either a fixed or floating interest rate on TALF loans. The fixed interest rate will be 100 basis points over the three-year Libor swap rate, and the floating interest rate will be 100 basis points over one-month Libor.

In other words, the TALF will provide cheap, long-term financing, with no recourse [no recourse loans = loans for which an undersigners (banks/ institutional investors) is not liable for payment if the borrowers (consumers whose loans were securitized) defaults] to institutional investors, who can use this cheap financing to lever up the below market yields to an attractive level, all the while banks can continue to pretend they are solvent... what a beautiful plan. For everyone except taxpayers that is (who do you think is actually financing this leverage?)

Source: Federal Reserve

Econompic graphs the Mortage "Moral Hazard" Plan.

Wednesday, February 18, 2009
The Mortage "Moral Hazard" Plan

Click for larger table



Source: Homeowner Afford Ability and Stability Plan Fact Sheet

Econompic graphs the soaring budget deficit.

Xinhuanet reports:

The U.S. federal budget deficit soared to 569 billion dollars in the first four months of the current fiscal year, the highest on record for this period, the Treasury Department reported on Wednesday.

Rolling back that same fourth month time frame back to the mid-1980's we see just how unprecedented this truly is.



Not a surprising result in an economy in which production / employment (thus taxes) are sharply down, while stimulus / bailouts are sharply up. Looking at the 12 month change in the level of receipts and outlays over that same period, we get the following chart which must make all Keynesian's proud [Keynesian are those who believe “you can spend yourself to prosperity”] and conservatives shudder.



Source: Treasury

Econompic graphs our growing federal obligations.

More frightening, the article details the growing federal obligations as calculated by John Williams at Shadowstats:

Calculations from the "2008 Financial Report of the United States Government" also show that the GAAP negative net worth of the federal government has increased to $59.3 trillion while the total federal obligations under GAAP accounting now total $65.5 trillion.



How large a figure is this? More than the size of the global economy, estimated at $54 Trillion for 2007.

Econompic reports that Moody's has broken up their AAA rating into three tiers and the United States is not in the top tier.

Felix at Portfolio.com asks the worrisome question:

Can the yield on US Treasuries be considered the "risk free rate of return" if there are other securities which are lower-risk than US Treasuries?

Apparently Moody's has broken up their AAA rating into three tiers and the United States is not in the top tier (though I am left wondering who trusts / listens to / respects / cares about Moody's these days). Reuters reports:

The "Resistant" category included Germany, France, Canada and the four Scandinavian countries, whose ratings have so far been untested. These countries have either entered the financial crisis from a very strong position or have economic models that remain robust, it said.

The "Resilient" group comprises the United States and the UK, whose ratings are being tested due to a shock to their growth model and large contingent liabilities. But it added: "These countries display an adequate reaction capacity to rise to the challenge."

The size of the U.S. and UK economies, financial markets and capital flows and relative debt levels to growth mean policymakers have more scope to loosen fiscal policy without endangering the public finances too much.

Ireland and Spain fell into the third, "Vulnerable" group, which refers to nations which are forced to take risks with their public finances.

[Apparently, there is now three different types of AAA ratings

1) "Resistant" (best AAA rating) = Germany, France, Austria, Switzerland, Austria, Australia, Canada, Denmark, Finland, Luxembourg, Netherlands, Norway, Sweden, Singapore, and New Zealand
2) "Resilient" (not so good AAA rating) = United States and the UK
3) "Vulnerable" (junk AAA rating) = Ireland and Spain

Is it just me, or doesn't this make AAA ratings into a horrible joke?
]

Click for Larger Table

My reaction: Econompic does a great job highlighting the insane size of the US’s bailouts, the repulsiveness of these government handouts, and the horrid condition of America’s finances. Here is a quick summery of points to note:

1) In the first round of TARP, the Treasury "overpaid" for assets from troubled banks, especially when compared to investments by private investors.

2) If Treasury wants to overpay for bad assets to recapitalize the banking system, it should do so transparently.

3) About 50% of Merrill’s $3.6 billion 2008 bonus went to 2% of its employees

4) Since the late 1970s, the commercial banking sector's share of consumer loan holdings dwindled from over half the market, to around 30% today.

5) During last twenty years, securitization holdings of consumer loans grew larger than those of commercial banks.

6) Securitization issuance is down 91% from this point last year.

7) Nobody will buy securitized loans (credit cards, auto loans, student loans, etc) unless the yields are higher than that reported on bank balance sheets.

8) If these high yields were accepted as actual market prices (and not "forced selling" prices), it would force banks to write-down the value of their assets to the point where they could no longer pretend to be solvent

9) To solve this problem and bring the securitization market back to life, TALF will provide cheap, long-term financing, with no recourse to institutional investors so they can lever up the below market yields to an attractive level, while banks continue to pretend they are solvent. (no recourse loan = a loan for which an undersigner (banks) is not liable for payment if the borrower (consumer) defaults)

10) The US federal budget deficit soared to 569 billion dollars in the first four months of the current fiscal year, the highest on record for this period.

11) The GAAP negative net worth of the federal government has increased to $59.3 trillion (with the total federal obligations totaling $65.5 trillion).

(GAAP = Generally Accepted Accounting Principles. GAAP refers to the set of rules used by most US business to do their financial statement accounting.)

12) Under GAAP accounting, the US’s negative net worth is greater than the size of the global economy, estimated at $54 Trillion for 2007.

13) Moody's has broken up their AAA rating into three tiers and the United States is not in the top tier.

14) Moody's three different types of AAA ratings are:

A) "Resistant" (best AAA rating) = Germany, France, Austria, Switzerland, Austria, Australia, Canada, Denmark, Finland, Luxembourg, Netherlands, Norway, Sweden, Singapore, and New Zealand
B) "Resilient" (not so good AAA rating) = United States and the UK
C) "Vulnerable" (junk AAA rating) = Ireland and Spain


Conclusion: Buy physical gold, gold mining shares, or agriculture stocks.