Posted tagged ‘Treasury’

White House Goes After AIG Bonus Payments

March 16, 2009

President Barack Obama is going after the bonuses paid to employees of insurer AIG, expressing outrage that taxpayer money was used to reward executives at the bailed-out firm.

From the Washington Post:

“It’s a mob effect,” one senior executive said. “It’s putting people’s lives in danger.”

Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products’ complex trades and who are trying to dismantle the division before it further endangers the world’s economy.

“It’s going to blow up,” said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. “I have a horrible, horrible, horrible feeling that this is going to end badly.”

President Obama yesterday vowed to “pursue every legal avenue to block these bonuses.” But that pledge might have come too late. About $165 million in retention payments started to go out Friday to employees at Financial Products, after numerous discussions with the Treasury Department and the Federal Reserve.

From Reuters:

Though the insurance giant is being kept alive on a government bailout of up to $180 billion, it is now paying out $165 million in bonuses.

“This is a corporation that finds itself in financial distress due to recklessness and greed,” Obama said.

“Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” he said at the White House.

“How do they justify this outrage to the taxpayers who are keeping the company afloat?”

Obama said he had ordered Treasury Secretary Timothy Geithner to pursue “every single legal avenue” to cancel the bonuses and a Treasury official said later it would modify a planned $30 billion capital infusion for American International Group to try to recoup the bonuses.

White House spokesman Robert Gibbs said the Treasury could impose rules on the $30 billion loan facility for AIG but declined to go into specifics or spell out ways the legal avenues available to the administration to block the payments.

Obama said Geithner was working on the problem.

“I want everybody to be clear that Secretary Geithner’s been on the case. He’s working to resolve this matter with the new CEO, Edward Liddy, who, by the way, everybody needs to understand, came on board after the contracts that led to these bonuses were agreed to last year,” Obama said.

Liddy told Geithner in a letter the insurer was legally obliged to fulfill 2008 employee retention payments but had agreed to revamp its system for future bonuses.

Obama said overall financial regulatory reform was vital to ensure this did not occur again.

He said the government needed “some form of resolution mechanism in dealing with troubled financial institutions, so that we’ve got greater authority to protect American taxpayers and our financial system in cases such as this.”

Pausing to cough, Obama said he was “choked up with anger.”

“We don’t have all the … regulatory power that we need. And this is something that I expect to work with Congress to deal with in the weeks and months to come.”

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Dow Plunges To 12-Year Low

February 23, 2009

Investors unable to extinguish their worries about a recession that has no end in sight lowered stocks again today.

The Dow  tumbled 251 points to its lowest close since Oct. 28, 1997.

From the Associated Press:

All the major indexes slid more than 3 percent. The Dow is just over 100 points from 7,000.

“People left and right are throwing in the towel,” said Keith Springer, president of Capital Financial Advisory Services.

Investors pounded most financial stocks even as government agencies led by the Treasury Department said they would launch a revamped bank rescue program this week. The plan includes the option of increasing government ownership in financial institutions without having to pour more taxpayer money into them.

Although the government has said it doesn’t want to nationalize banks, many investors are clearly still concerned that this could be a possibility as banks continue to suffer severe losses because of the recession. They’re also worried that banks’ losses will keep escalating as the recession sends more borrowers into default.

“The biggest thing I see here is the incredible pessimism,” Springer said. “The government is doing a lousy job of alleviating fears.”

The Treasury and other agencies issued a statement after The Wall Street Journal reported that Citigroup is in talks for the government to boost its stake in the bank to as much as 40 percent. Analysts said the market, which initially rose on the statement, wanted more details of the government’s plans.

“It’s only a very partial picture of what we may get,” said Quincy Krosby, chief investment strategist at The Hartford. “This proverbial lack of clarity is damaging market psychology.”

Meanwhile, technology stocks fell after The Journal reported that Yahoo Inc.’s new chief executive plans to reorganize the company. But the selling came across the market as pessimism about the recession and its toll on companies deepened.

“There’s no where to hide anymore,” said Jim Herrick, director of equity trading at Baird & Co.

Why Americans Aren’t Buying the Economic Bailout

October 1, 2008

According to Time Magazine, the $700 billion financial bailout package failed because most Americans wanted it to fail. Before the vote, members of Congress were getting calls 100 to 1 against the bill.

From the article:

The question is: why? It’s easy to see why bailing out rich bankers doesn’t feel super, but why, despite all the efforts of all of the country’s leaders to fill them with fear of an economic apocalypse, did Americans not see a failure to act as a serious threat to their livelihoods?

Traditionally, human beings are not great at assessing this kind of risk — a peril that has not yet arrived and that is, in any case, hard to viscerally imagine. Witness people’s reluctance to evacuate before hurricanes, and weather forecasts portend a danger far easier to comprehend than failing investment banks.

But there are methods of communicating risk in a way that stills the heart, with words that inject dread into the populace. And Treasury Secretary Henry Paulson Jr., Fed Chairman Ben Bernanke and President George W. Bush used none of them. “

The case wasn’t made as to why the little guy needs this,” says Paul Slovic, author of The Perception of Risk and a psychology professor at the University of Oregon. “The numbers and vague warnings are too abstract.”

The most effective warnings are like the most effective TV ads: easily understood, specific, frequently repeated, personal, accurate, and targeted. Paulson and his grim reapers managed only to repeat themselves frequently. They were not easily understood, partly because the problem is so complex. They did not personalize or target their warnings.

And, as they themselves admitted, they did not know if their warnings were necessarily accurate, due to the novelty and unpredictability of the crisis.

But their biggest mistake was a lack of specificity. They never clearly told the American people what might happen if Congress did not act. “If you want people to support an action,” says Dennis Mileti, an expert on risk communications who has studied hundreds of disasters of the more conventional kind at the University of Colorado, Boulder, “you need to link the action to cutting people’s losses. And that link isn’t in place.”

Citigroup Acquires Wachovia

September 29, 2008

Citigroup has agreed to acquire Wachovia‘s banking operations for approximately $2.1 billion in stock and will assume another $53 billion in Wachovia’s debt. The transaction is expected to close before year-end. It has been approved by the directors of both companies and is subject to Wachovia shareholder and regulatory approval.

From the Wall Street Journal:

Citi’s purchase of the fabled Charlotte bank marks another deal orchestrated by the federal government, this time by the Federal Deposit Insurance Corporation, and one in which the agency could be on the hook for loan losses.

“The FDIC has agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets,” Citigroup said in a statement.

The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.

Wachovia shares fell more than 90% in premarket trading, and the New York Stock Exchange did not open the shares for trading. Citigroup was off 1% at $19.95 shortly after the market opened.

The FDIC said the deal was reached in concurrence with it, the Federal Reserve Board and the U.S. Treasury Department. “There will be no interruption in services, and bank customers should expect business as usual,” FDIC Chairwoman Sheila Bair said.

In a separate statement, Fed Chairman Ben Bernanke said he welcomes the Wachovia bailout deal and supports the timely actions taken by the FDIC. He added that the FDIC action shows the government is committed to U.S. financial stability.

The FDIC sought to calm any concerns the Citigroup and Wachovia deal might have on financial markets.

From the Washington Post:

The purchase of Wachovia boosts Citigroup as a rival for Bank of America and J.P. Morgan Chase in the new coterie of financial behemoths that is emerging from the current financial crisis. Those three banks will now control almost a third of the nation’s deposits.

Citigroup, based in New York, also will become the largest bank in the Washington area. The company said it would raise $10 million in new capital to help it absorb Wachovia’s troubled loan portfolio. Citigroup also plans to cut the dividend on its shares, among the most widely held stocks in America.

Dow Plummets Again; People “Scared to Death” of the State of the Economy

September 18, 2008

The Dow plunged once again today, finishing the trading day down about 450 points. Traders are very nervous about the financial system still ran high after the government’s bailout of insurer AIG.

From the Associated Press:

While stocks plummeted, investors sought the safety of hard assets and government debt sent gold, oil and short-term Treasurys soaring.

The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company after it lost billions in the risky business of insuring against bond defaults. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy. The ramifications of the world’s largest insurer going under likely would have far surpassed the demise of Lehman.

“People are scared to death,” said Bill Stone, chief investment strategist for PNC Wealth Management. “Who would have imagined that AIG would have gotten into this position?”

He said the fear gripping the markets reflects investors’ concerns that AIG wasn’t able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter. Over the past year, companies including Lehman and AIG have sought to reassure investors that they weren’t in trouble, and now the market isn’t sure who can and can’t be trusted.

“No one’s going to be believing anybody now because AIG said they were OK along with everybody else,” Stone said.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country’s largest thrift bank. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit. It insisted that it is surviving the credit crisis that has ravaged many of its peers.

Government Bails Out AIG

September 17, 2008

Glad to see that my money is going to a good cause. Hey, can you bail me out of debt too! In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money.

From the Associated Press:

Under the deal, the government will get a 79.9 percent stake in one of the world’s largest insurers and the right to remove senior management.

AIG’s chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.

A call to AIG to confirm the executive change was not immediately returned.

It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.

AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.

Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan at an interest rate of about 11.5 percent to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

AIG shares sank $1.34, or 36 percent, to $2.41 in morning trading Wednesday. They traded as high as $70.13 in the past year.

The government’s move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.

From CNN:

In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.

The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.

Officials decided they had to act lest the nation’s largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.

An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won’t have to go through a tumultuous fire sale.

“[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Fed said in a statement.

The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry.

US Government to Seize Fannie Mae and Freddie Mac

September 6, 2008

Senior officials within the Bush administration and the Federal Reserve have called in top executives of Fannie Mae and Freddie Mac, and told them that the government is preparing to place the two companies under federal control.

From the New York Times:

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind-the-scenes debate among policy makers has been waged over whether to seize the companies or let them work out their problems. It will be interesting to see what happens after the government steps in. Thoughts?