By green-lighting more shareholder dividends, the Fed has allowed banks to increase leverage, which could lead to needing another bailout. Image: CC Flickr/TheTruthAbout

Bank of America quarterly dividends will stay stuck at only 1 cent for the rest of the year on order from the Federal Reserve Wednesday. However, last week after the Fed conducted stress tests on the biggest U.S. lenders it allowed many major banks other than Bank of America to increase shareholder dividends. Many financial analysts are concerned that the Fed’s decision to allow any bank to increase shareholder dividends poses an undue risk to economic recovery.

Fed throttles Bank of America dividends

In January Bank of America told the Federal Reserve it wanted to initiate an increase in shareholder dividends in the second half of 2011. The bank was expected to raise its quarterly dividend by up to 8 cents, about 20 percent of its anticipated earnings this year. According to analysts, the Fed forbid B of A from doing so because of the bank’s exposure in the housing market after buying out Countrywide in 2008, a decision that cost it $2.24 billion last year. Investor groups have also been pressuring B of A to buy back billions in bad mortgage securities that the bank foisted on them before the meltdown. After the green light from the Fed, JPMorgan Chase, Wells Fargo and U.S. Bancorp quickly announced dividend hikes. Bank of America said it planned to submit a revised dividend proposal to the Fed by the end of June.

Why banks want to increase shareholder dividends

Wall Street banks say without increasing dividends they will have a hard time raising more equity in the future, which they say will hold back economic growth. By paying shareholder dividends, banks attract investors but lose equity. Bankers disdain equity and love leverage. While a company like Google is funded almost entirely by equity, the average bank lives on other people’s money, funding more than 95 percent of investments with debt. Banks avoid equity because their executives and shareholders make big money on leverage as long as the financial services sector is healthy. Banks also avoid equity because the more equity they hold, the more liable they are for the risks they take. If things go sour, they have to reduce the risk of default at their own expense, rather than count on taxpayers to bail them out.

Fed decision risks another bailout

During the financial crisis, highly leveraged banks caused alarm at the Fed. Some analysts believe the Fed needs to allow the economy to get stronger before allowing increases in shareholder dividends. Simon Johnson of the New York Times compared a highly leveraged bank to buying a house with a minuscule down payment on a mortgage for 98 percent of the purchase price. If home prices rise, the risk pays off. If they drop, the borrower is quickly underwater and creditors get the shaft. The difference, however, between highly leveraged banks and highly leveraged homebuyers is that the banks have learned they are too big to fail. When a highly leveraged bank fails, a government bailout rescues its executives, shareholders and creditors, and U.S. taxpayers get the shaft.

Sources

New York Times

Business Insider

CNNMoney.com

TARP ends Oct. 3 after getting results at a discount, but "bailout" has become the dirtiest word in politics. Image: CC Willamor Media/Flickr

The Troubled Asset Relief Program (TARP) ends Oct. 3 after accomplishing its specific objectives and costing less than originally predicted. But TARP became a symbol of big government and made “bailout” a dirty word wielded by Republicans to score political points. The fact that TARP saved Wall Street, automakers and insurance giants, yet failed to perceptibly help ordinary Americans has Democrats on the defensive over a policy enacted by the previous Republican administration.

The true cost of TARP

TARP will stop extending loans Sunday, but it will continue to collect dividends and repayments. Fortune at CNN reports that it’s been two years since Congress gave $700 billion to the Treasury Department to prevent an economic collapse. The economy is limping along, Wall Street has resumed pillaging, and TARP’s final bill is much less than originally thought. According to the Treasury, the government only lent $386 billion of the fund. That money is coming back to the government at a much higher rate than expected. This week Treasury secretary Tim Geithner said he expected the total cost of TARP to be less than $50 billion.

The toxic backlash of TARP

The Washington Post reports that the TARP money spent is a fraction of what the government allocated to save the financial system. The Treasury and the Federal Reserve have spent more than $1.5 trillion to keep the mortgage and housing markets from melting down entirely. The bailouts have also embedded the federal government deeply into the private sector. As a result, political extremists are painting economic rescue as a socialist takeover.

The twisted politics of TARP

TARP, despite meeting its intended results at a discount, has put Democrats on the spot for defending a program that was the product of the Bush administration. ABC News reports that Republicans are hoping to take advantage of TARP’s unpopularity by linking Democrats and President Obama to “bailout,” which has become the dirtiest word in politics. For example, at a press conference Aug. 10, House Republicans used the word at least seven times while badmouthing a $26 billion state fiscal aid package moving through Congress. The Republican “Pledge to America” vowed permanently to end the program, even though it has expired already on its own.

Pay Czar Kenneth Feinberg will once more slash and burn the salaries of TARP CEOs. (Photo: Wikipedia)

Obama “Pay Czar” Kenneth Feinberg wields a mighty money ax, and that ax is coming down once more on executive salaries at bailed out companies, says Reuters. The five firms under consideration – AIG, General Motors, GMAC, Chrysler and Chrysler Financial – are still depending upon government assistance to remain afloat. Since the Obama administration has found that previous crackdowns haven’t sent talented workers “fleeing for the exits” as the companies feared, the Pay Czar has the power to make another cut. Overall for 2010, the Treasury cut cash pay 33 percent.

Pay Czar’s office says 84 percent still with firms, despite pay cuts

In fact, Feinberg told the media that “There is a striking number of holdovers.” So far, that’s all the evidence the Treasury needs to justify striking this delicate balance and enable more money to come back to American taxpayers. The firms must be able to function, but taxpayers’ overnight loans must also be repaid. If a firm received “exception assistance” from the $700 billion in TARP funds, that firm must make sacrifices to repay America’s taxpayer base.

People don’t like to hear about AIG execs receiving multi-million-dollar bonuses

Yet that’s what happened, even after taxpayers had given up TARP monies to keep them afloat. Now that Pay Czar Feinberg is making wider cuts, the hope is that more Wall Street firms will follow the example. It could be the only way to begin restoring public confidence in a financial sector that openly played unnecessarily risky games with other people’s money. Reuters reports that Bank of America and Citigroup have repaid all or some of the TARP money they took, but too many offenders are still on the hook.

No cash bonuses, no long-term restricted stock, no golden parachutes

Those have all been eliminated in those companies under Pay Czar Feinberg’s watch. That frees up $45 million for AIG to repay their obligation to the American people. Salaries will also remain frozen at AIG with only “one exception” until they meet their obligation, says Feinberg. GMAC’s CEO has no cash salary now, only long-term stock. Chrysler’s CEO has a similar deal. Salaries there and at General Motors have been tightly monitored and kept down.

Let us reflect back on your greed

Companies that repay their TARP obligation would technically slip out of Pay Czar Feinberg’s regulation. Perhaps this is why he is looking to expand his legal authority. Reuters says he has contacted 419 TARP firms – including those who are technically off the hook – and asked them to “look back” at their past salary history. If pay was “excessive” between October 2008 (when TARP funds were first distributed) and February 2009 (when legislation affected pay levels at TARP firms), Pay Czar Feinberg wants there to be renegotiation. Specifically, pay above $500,000 for 2008 that is “not in the public interest” will apparently be routed back to American taxpayers in a yet to be determined percentage. Companies can either cooperate voluntarily or be forced by the Pay Czar to comply and give up news of their transgression to the public.

That’s quite an aggressive retroactive plan, isn’t it?

It will be interesting to see how many TARP companies fall in line. It is difficult to imagine the American public having any sympathy for them at this point. The recession has run too long and struck too deep in the country’s consciousness for more excuses. Taxpayers are not a personal loan company for these wasteful behemoths. Pay Czar Kenneth Feinberg may be the czar America needs; he may be the czar that Glenn Beck will regret weeping over.

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This year’s AIG bonuses are smaller than last year’s, but they are still a huge amount of money. American International Group will pay $100 million worth of bonuses to employees at the company’s Financial Products division.

Last year, AIG bonuses were $168 million. Individuals slated for bonuses agreed this year that they would accept 10 to 20 percent less for their AIG bonuses. Still, this might do little to curb the outrage many Americans and their leaders feel regarding handing out bonuses at a company that received guaranteed payday loans from the government to keep it from failing.

More AIG bonuses

The $100 million in AIG bonuses that will be given out this month aren’t the last of the bonuses. Only those who agreed to accept the smaller bonuses will get paid this month. Next month, those who prefer to wait longer for the full amount will get their bonuses, which will mean probably more than another $10 million in AIG bonuses.

The deadline to pay all AIG bonuses to employees at Financial Products is March 15. According to Henry Unger of AJC, Financial Products is “the unit whose risky derivatives deals brought the insurer to the brink of collapse in 2008.”

Trouble with AIG bonuses

Unger also reports that “Government and AIG officials have been eager to avoid a repeat of the public furor that erupted last March when an earlier round of payments — worth $168 million — went to the same set of employees.”

It seems to me that if AIG really wanted to avoid public furor, the company would not hand out the AIG bonuses. What do you think? If a company accepts government bailout money, should the government have a say in whether or how much that company pays for bonuses? Or do you think that the government shouldn’t have a say? Do you think the government should not have paid to bail out AIG in the first place?

The recent government bailout of the nation’s banks, begun under former president George W. Bush and continued under current president Barack Obama, has produced considerable outrage among many Americans, particularly those facing mounting job losses, declining home prices and income, rising variable-rate mortgages and a host of other economic and financial pressures. The $700 billion plus rescue was necessary, government and bank leaders say, to save the nation’s banking and investment system from imminent collapse and to help restore failing banks to financial liquidity and ability to offer credit to America’s businesses and consumers, both large and small.

But the disclosures of large salary bonuses conferred upon bank executives, lavish spending on entertainment and the continued tightening of credit became lightning rods for the public’s anger. When this combined with persistent complaints from consumers about credit card and banking account abuse by banks, Congress finally moved in 2009 to address at least some of the industry’s more aggressive practices.

The Credit Act of 2009 Promises Relief to Consumers

The Credit Card Accountability Responsibility and Disclosure Act, or CARD, enacted by Congress in May 2009, is being called a major step forward in reining in some of the banking industry’s excessive practices. While there are undoubtedly some specific curbs that consumers can be thankful for, there are also clear limitations to what the new law is empowered to regulate. Plus, the time gaps in implementing the various measures are allowing banks to find alternate ways to charge fees and raise interest rates, actions which have raised the ire of consumers in recent years.

What the Credit Act Will Regulate

The first phase of CARD took effect back in August 2009. Since August, card issuers must announce any interest-rate increase 45 days before it takes effect, and the notice must be in writing. Cardholders have the right to refuse the increase by closing the account and are also allowed to pay off the balance within five years under the old terms. Some banks are allowing their customers to keep an account open but no new purchases may be made on the card until the balance is paid. Another change since August requires card issuers to deliver account statements at least 21 days before the due date, up from 14 days.

A second phase takes effect in February 2010. Banks will then be prohibited from raising interest rates on current balances unless a customer is at least 60 days behind on a payment. This restriction will apply as well to the widely detested practice of raising interest rates on one balance simply because the bank learned a customer was behind on another account with a different card issuer. In addition, a customer whose rate is increased for being 60 days late must be allowed to earn back the earlier rate with successive on-time payments for six months. But these protections have several exceptions: banks can still charge increases on introductory rates, temporary hardship rates and established variable rates.

Highlights of other rules to take effect in 2010 include: for balances with different rates as a result of special transfer offers, payments above the minimum payment must be allocated to the balance carrying the highest rate; banks can only charge an over-the-limit fee for a purchase if the customer authorizes the bank to allow purchases that push him or her over their credit limit; and cardholders cannot be charged for payments made over the telephone, online or by other means unless the customer requests expedited service.

Will the Act Make a Genuine Difference?

CARD thwarts several egregious practices imposed upon consumers by many banks. What shines particularly are the limitations to how rates can be increased and the manner in which excessive payments are distributed to different balances on the same account. Of course, constricting over-the-limit fees and extending notice periods are helpful as well. But what can banks still do to generate revenue and not be overruled by CARD? As Bill Hardkopf, chief executive officer of LowCards.com, a Web site that tracks the industry, says: “There are so many things that issuers can do that the Card Act doesn’t touch.”

What issuers have been doing leading up to CARD’s full implementation is to arbitrarily raise interest rates, including on fixed-rate agreements, slash credit limits and, in some cases, close accounts, all in the name of “a challenging economy.” What they will be allowed to do after implementation is to close accounts, switch fixed-rate agreements to variable-rate ones and start charging annual fees on some cards, including new cards. For these actions, the Act offers no protection.

Where the Consumer Now Stands

Congress has acted to provide some real benefits and protections to credit-card users and it is to be praised for that. At the same time, it didn’t act on other, onerous bank practices. For instance, there is nothing in the Act that prohibits banks from charging exorbitant interest rates that have been as high as 30 percent and more, levels traditionally associated with usury. In addition, they can charge these rates retroactively after the 60-day period of being late. These actions have been taken by banks usually in response to customers missing a payment and being deemed in default of their account. Banks have shown some flexibility for one-time late customers, particularly if they have consistent payment histories. But they almost invariably impose a late charge for missing one payment. Thankfully, the Act now limits the late charge to a maximum of $39 per occurrence and at least offers the payer 60 days to mend his or her late status before major changes occur.

If and when a card user’s bank imposes severe changes on the account, the user should communicate with the bank and ask for modification of those changes. Specifically, the consumer should ask to have the credit limit raised again if drastically lowered, ask that rate increases be lowered if drastically raised and ask that a variable-rate status be returned to a fixed-rate agreement. If a large number of consumers undertook such action, the banks could be pressured if they started to see their customers leaving them for other banks offering better credit-card terms. Also, remember that being properly informed about one’s financial rights protected by law limits the opportunities to be taken advantage of. Consumers can learn more about CARD at: www.whitehouse.gov/the_press_office/Fact-Sheet-Reforms-to-Protect-American-Credit-Card-Holders .

Finally, consumers can always, and should, write or call their Congressperson asking him or her to work to expand the consumer protections in the Credit Card Accountability Responsibility and Disclosure Act of 2009.

The recession is beginning to slow down. Will short term loans be able to pick up the pieces?

Mortgage loans, home equity loans, short term loans and automobile loans are all on the rise now that the economy is on the upswing. The Bank Bailout of 2008 was created to help lenders regain their footing as solid business entities. In years leading up to the recession, lenders were lending so freely that they were not careful to qualify a borrower. A huge number of those borrowers defaulted on their loans and sent lenders into a downward spiral of disaster. The government created the bailout to help financial institutions regain their footing. Now that the bailout is over, the economic analysts are projecting that money will be flowing back into the U.S. Treasury. The total put out was $700 billion and the estimated return will be a huge sum, though less than the full amount. For example, Bank of America continued to repay their bailout portion of $45 billion last week.

TARP and What it Means to Taxpayers

TARP, or the Troubled Asset Relief Program, was set up by the Treasury to protect the Federal Reserve. The Fed realized late in the game that the banking system was at near crash-level and quickly tried to come up with solutions. It doubled its lending quickly and put more than $2 trillion into the economy. To mitigate damage, the Federal Reserve offered the TARP program. Though smaller lenders were slow to get on board, it was the larger lenders who set the stage for receiving help. Now that the economy is starting to recover, they are slowly paying the money back.

The price for taxpayers regarding the TARP program has yet to be calculated. In August, the Treasury predicted that of the total $700-billion bailout, approximately $341 billion would not be recouped. Fortunately, new studies are showing that an additional $200 billion will be coming back to the U.S. Treasury. The reason is because banks did better than anticipated and won’t need additional funding. Those funds are being diverted directly back.

What to Do With the Money

Both Congress and the White House have their own ideas on what needs to be done with the funds. Some of the ideas floating around the government are:

• Use the money to build up financial institutions more so they continue to extend home equity, mortgage and short term loans to the public.
• Spend the additional money on job creation.
• Fund new transportation and infrastructure projects around the country.
• Create additional tax credits for small business that start hiring.
• Fuel funds into local governments so they can stop layoffs of public workers.
• The President wants to use the recouped money to go to reducing the unemployment rate and towards the record $1.4 trillion budgetary deficit. Republicans vetoed the plan, however, citing that any TARP-related funds should be used for financial initiatives only.

A Hopeful Financial Future

Ben Bernanke, Federal Reserve Chairman, said, “If you look at the money that was put into financial institutions specifically, I think overall we are going to end up pretty close to break-even, maybe somewhat in the red, but not too much.” Admittedly, his estimates do not include the $20 billion spent on the automobile giants Chrysler and GM. Most believe that the money channeled to those two companies is lost for good.

The True Cost to Taxpayers

The true cost of TARP is unknown. Most analysts believe that is will bring a loss to taxpayers, but no one can predict how much. Some are speculating that once the money is brought back into the U.S. Treasury, it will be used to fund government programs and close up the deficit. Others are hoping that at least part of it is used to increase the number of mortgage loans, home equity and short term loans that consumers are able to receive.

Apply for Short Term Loans HERE!

Payday loans are predicted to remain popular funding options as the economy continues to lag. Last week President Obama announced that the administration has extended the $700 billion financial bailout program until October of 2010. That’s sad news for many Democrats, who were hoping the leftover funds would be put toward job creation, and Republicans, who think the money should be applied to the huge deficit.

The administration, however, believes that the bailout fund is still needed to save the financial industry. They say that studies are showing that the banking world is still in need of aid. Treasury Secretary Tim Geithner said that “extending the program will also help homeowners struggling to avoid losing homes to foreclosure and small businesses having trouble getting loans.”

Experts weigh in on the bailout’s results

The billion-dollar bailout was all over the news last year. It was expected to turn around key industries in the nation and save the financial system from crashing altogether. Recently, the Obama Administration acknowledged some issues the bailout brought. The American International Group, Inc. was the first failure and the automobile manufacturer’s bailout was the second. Together, these two programs cost the country more than $60 billion.

The administration believes that the losses from the bailout will end up totaling about $141 billion. That may sound like a huge number, but it’s more than $200 billion less than what was originally estimated. With an additional $200 billion to put toward other programs, many are seeing the money as good news. President Obama said the additional money can now be put toward the deficit and creating jobs “on Main Street rather than Wall Street.”

Life after the bailout

The president also announced the government’s intent to encourage job creation. The overall plan is to proactively fight the country’s 10 percent unemployment rate. With tax breaks for companies that hire new workers and create new jobs, the administration is hoping to fuel the economy. In addition, an increase in lending, from payday loans to small business loans, should breathe new life into the economy. Legislators are hoping that credit and underwriters once again start extending their services.

The new spending package- both sides

The new spending package in the wings is vague, at best. No one has  released what it is going to be, but democratic leaders are suggesting that it could cost between $75 and $150 billion. The details likely won’t be released until early next year. The Democrats’ focus is to target the job market and start getting people back into the workforce.

The Republican side is still vowing to stop the additional rescue program. Republican Jeb Hensarling said, “The Obama administration just can’t seem to let go of the $700 billion in ‘walking around money’ taxpayers were forced to put on the line to bailout Wall Street last year.” In addition, he criticized the Treasury for using the Troubled Asset Relief Program, or TARP, as a fund that supported programs that were not backed by Congress. That includes bailouts for car manufacturers and the fund for American International Group, Inc.

House Republican leader John Boehner said, “American taxpayers have had enough of open-ended bailouts that have left them stuck with trillions of dollars in new debt. TARP should be shut down by the end of the year. It’s time to get the government out of the bailout business.”

The future of the US economy

No one knows what the future of the U.S. economy will be. The bailout was supposed to turn everything around, but it has taken a lot longer than anyone anticipated to show visible results. In the mean time, Americans are left to fend for their own longer. They are most likely going to rely on strict budgeting, payday loans, and family help to make it through the next six months.

Apply for Payday Loans HERE

Of all the companies the United States government has bailed out during this recession, few have drawn as intense a degree of the public’s ire as American International Group, the company that is commonly known as AIG. Their indiscriminate use of the credit default swap seemingly didn’t include any hedging at all, and thus they were unprepared when values dropped due to delinquency. The insurance monster found itself in a deep grave. It would need more than $100 billion to get out.

As you may know, the government ponied up the money – which means you and I paid to rescue the irresponsible, greedy AIG. Would the government (forget about us, cowboy) ever get its personal loans and cash advances back?

Apparently so

AIG stock could be on the way up soon, as outgoing CEO Edward Liddy believes the company has “an excellent chance” to repay the government, reports Bloomberg. The insurer has plans to pay down its massive Federal Reserve credit line of $25 billion by selling off two of its foreign life insurance interests.

They have to do something. AIG has received four bailouts so far, making their take so far $182.5 billion. Their gambles in the housing market prompted them to turn over majority stake to the government. In addition to a $60 billion credit line (are they worth it, or should they be nationalized?), there’s also $52.5 billion to buy mortgage assets and another investment of $70 billion. It’s truly staggering.

Sell, sell, sell

“We believe there is an excellent chance that we can repay the government,” Liddy said. “The government is not prepared to make any adjustments to the arrangement that turned over majority control to the U.S. My hope would be that as we make progress in the overall restructuring, that maybe those conversations will bear fruit.”

So far, AIG has put its money where its mouth is when it comes to selling off its interests. They’ve raised $6.7 billion by making deals in a variety of industries, including those with an American auto insurance company, an equipment guarantor, the title-holder for its New York headquarters and the owners of a Japanese office building. AIG is also working to sell off its airline-leasing and consumer-finance businesses, said Liddy.

“We have determined the destinies of nine of our major businesses spanning everything from life insurance in Taiwan to global real estate, and have specific plans for each of those nine,” he said. “We expect this process to advance steadily in the next six months, and may involve public offerings.”

Replacing Liddy, moving forward

Former AIG CEO Liddy no longer holds that position with the company. He has said that he will also step down from his position of board chair. He had come out of retirement to run the company after it was taken over by the United States government. His annual salary was $1. An executive search firm is currently working to find a replace for each position. Liddy urged the company to keep the two positions separate in the future.

Liddy’s departure, as well as a number of high-ranking members of the AIG board, has given investors something this doesn’t exactly resemble new hope, but it is looking upward.

“Goodbye and good riddance,” said Kenneth Steiner, who holds 10,000 AIG shares. “I hope our new directors will do a better job.”

One concerned person in attendance at a recent shareholders’ meeting was retired AIG employee Kathleen Mylott. Her reaction to her once great company and its need for bailouts seems to accurately gauge the temperature of the water: “It’s like watching your house burn down, The emotional toll has been worse than the financial toll, if you can believe that. It’s an American tragedy.”

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