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Fannie Mae and Freddie Mac limping back to profit

Peter Stone — Wed, 02 Mar 2011 23:41:33 +0000

Fannie Mae and Freddie Mac are starting to limp back to health, but Treasury Secretary Timothy Geithner is still serious about reducing their role in the market. Image from Wikimedia Commons.

Troubled mortgage insurers Fannie Mae and Freddie Mac are starting to creep back toward solvency. The federal government has lent both houses more than $130 billion since Fannie and Freddie were placed under conservatorship in 2008. However, a new round of foreclosures is on the horizon, and that may undo any progress that has been made.

Losses slow as Freddie and Fannie get houses in order

Freddie Mac and Fannie Mae were one of the largest recipients of emergency loans during the federal bailouts of the past several years. Both mortgage houses received a combined sum of more than $130 billion to keep the real estate market afloat. However, the two toxic companies are starting to hemorrhage less money, according to ABC. During the last quarter of 2010, the period from October to December, Fannie Mae posted a loss of only $2.1 billion and Freddie Mac posted a loss of only $1.7 billion. In the same period of 2009, Fannie posted a $16.3 billion loss and Freddie posted a $7.8 billion loss. However, Fannie and Freddie have both requested additional loans, with Fannie asking for a further $2.6 billion and Freddie seeking another $500 million.

Plans to wind down the mortgage giants

For decades, Fannie Mae and Freddie Mac have played a crucial role in the real estate industry. The two companies purchase mortgages and resell them as investments in order to free up capital for loan lenders to lend more mortgages. However, the government is serious about drastically reducing Fannie and Freddie’s involvement in the mortgage market, including possibly phasing them out altogether. Treasury Secretary Timothy Geithner has admonished Congress to have a serious plan ready before trying to vote on anything, according to USA Today. Geithner cautioned House Republicans eager to cut the programs that doing so could have an adverse effect on the real estate market, including possibly destabilizing the housing finance industry entirely. Geithner has recommended a gradual program as the best course.

Darkest before dawn

Fannie and Freddie are both expected to endure further damage in coming months. Though Fannie and Freddie own roughly 50 percent of all mortgages in the United States, and 90 percent of all mortgages originated in the past few years, there is a growing backlog of foreclosures that cannot be completed until foreclosure reforms related to the “robo-signing” scandal are resolved. Whatever reforms take place regarding Fannie and Freddie, Treasury Secretary Geithner expects housing prices to rise a little bit over the next few years, according to Reuters. He also recommended that given housing conditions over the past few years, home buyers put larger amounts of cash down to ensure greater stability.

Sources

ABC

Reuters

Mortgage modification programs under fire from Republicans

Peter Stone — Fri, 25 Feb 2011 22:04:22 +0000

Congressional Republicans are looking to cut mortgage modification programs that don't work. Photo Credit: respres/Flickr.com/CC-BY

The federal mortgage modification program is fast becoming a target for criticism as a failed program. Congressional Republicans have announced intentions on scrapping federal mortgage relief programs, which have been dismal failures. Foreclosures on failing mortgages have slowed, but procedural issues are hampering the foreclosure processes nationwide.

Failed mortgage relief programs prime target for spending cuts

Congressional Republicans are taking aim at failing programs that throw money down the drain, and mortgage modification programs are prime targets, according to CNN. Republican members of the House of Representatives have announced intentions to put federal programs aimed at saving failing mortgages on the chopping block in order to cut about $38 billion in instant cash from the budget. The Home Affordable Modification Program is a prime target, as Inspector General for the Troubled Asset Relief Program Neil Barofsky described the program as a failure.

On the chopping block

Other programs slated for demolition include the Neighborhood Stabilization Program, refinance programs under the Federal Housing Administration and the Emergency Homeowner Relief Fund, all of which lend emergency loans to aid troubled mortgages. However, these programs haven’t been smashing successes, either. Spencer Bacchus, a Representative from Mississippi and chair of the House Financial Services Committee, said that “it’s time to pull the plug” and end programs that don’t work. Only about 500,000 permanent mortgage modifications have been performed on troubled mortgages through these programs, which is a success rate of less than 50 percent. Foreclosures are also taking far longer to process.

Foreclosures take longer

Because of new procedural rules for foreclosure and increased scrutiny of foreclosure practices, loan lenders are taking far longer to foreclose on a home, according to USA Today. A distressed homeowner will spend about 19 to 20 months living in a foreclosed home at current rates, which may increase to 22 to 23 months. The average person in a foreclosed home would normally have gone 250 days without making a payment prior to the mortgage crisis, but that stretched from 410 days in January 2010 to 507 days in December 2010. Increased scrutiny due to the “robo-signing” controversy has led to foreclosures taking far longer, which causes loan lenders to lose considerable amounts of money.

Sources

Possible end in sight for mortgage giants Fannie and Freddie

Peter Stone — Wed, 09 Feb 2011 17:23:32 +0000

Treasury Secretary Timothy Geithner is due to unveil some proposals concerning Freddie Mac and Fannie Mae soon. Image from Wikimedia Commons.

Mortgage backing companies Freddie Mac and Fannie Mae could become a thing of the past. An upcoming Treasury report will make proposals about what should be done with the two government sponsored enterprises. One proposal is to let them both go under.

Proposed cut of Freddie and Fannie would take years

The Department of the Treasury has several proposals about what to do with government sponsored mortgage insurance companies Fannie Mae and Freddie Mac, according to CNN. The mortgage backing companies were placed in conservatorship when the real estate market crashed. Since then, more than $150 billion in emergency loans was lent to Freddie and Fannie to keep the housing market afloat. The government has been trying to figure out what should be done with Freddie and Fannie. One proposal is to withdraw the government from the mortgage market altogether. However, that would mean that low cost loans for homes would likely become a thing of the past.

Other possibilities

Freddie and Fannie own or insure half of all mortgages in the United States, from Birmingham, Alabama, to Anchorage, Alaska. Phasing the mortgage houses out, according to Bloomberg, or other proposals will take time to implement. It is also rumored that the size of loans that the companies can insure will be reduced. Currently, only loans less than $729,500 can be backed by either company. It is also thought that Freddie and Fannie could be reduced to being mortgage backers of last resort.

Vital role in keeping mortgage costs low

Freddie Mac and Fannie Mae play a role in keeping risks and costs in the mortgage market low. The companies repackage mortgages as securities that are sold to investors and guarantee lenders and investors compensation if borrowers default. The goal is to make sure loan lenders are willing to lend by creating more lending capital and decreasing risks that lenders will lose money if borrowers default. If Freddie and Fannie are axed, the cost of mortgages could increase and make it difficult for anyone other than the wealthy to get a loan for purchasing a home.

Sources

Interest rates on credit cards hit highest point in 13 years

Peter Stone — Thu, 03 Feb 2011 18:31:22 +0000

Interest rates on credit cards have hit a 13-year high. Image: MoneyBlogNewz/Flickr.com/CC-BY

The interest rates charged on credit cards have recently reached a 13-year high. Since legislation has changed the rules about how interest can be charged, card companies are raising the base rates to make up lost ground. It is working, as credit card companies are also posting high revenues.

Legislation leads to higher rates on credit cards

The interest rates on credit cards is reaching a 13-year high, according to CNN. The current average interest rate for credit cards is 14.72 percent. However, the interest rate charged to a customer varies between card issuers and also can depend on credit scores. People with poor credit ratings can be charged interest rates in excess of 50 percent. The average APR on credit cards has been rising over the past two years, as the recession ate into card company and bank profits. On top of consumers being less willing to add to their debt, Congress passed the CARD Act, which prevents credit card companies from raising interest rates after a customer signs an agreement or without due notice. However, the major card issuers won’t be running for emergency loans anytime soon.

Card companies post huge earnings

Despite rising rates giving the impression that it is harder for credit card companies to earn a living, recent earnings statements show that is certainly not the case. Visa, according to the New York Times, recently posted an earnings report stating the company had increased profits by 16 percent, a profit of $2.24 billion, in the most recent quarter. MasterCard, according to the Wall Street Journal, managed to post a 41 percent increase in profits by the end of the most recent quarter.

Harder to get a credit card

Though card issuers certainly want more people to get credit cards, the interest rates may make it prohibitive to people who have less than stellar credit. Having to take out installment loans to pay for a weekend trip from Jackson to Birmingham is not a thrilling prospect for many people.

Sources

New York Times

Wall Street Journal

Estimates project Social Security will run out of cash by 2037

Peter Stone — Fri, 28 Jan 2011 22:51:48 +0000

New estimates for Social Security indicate the program will run deficits until 2037, when the trust fund will run as dry as the Bonneville Salt Flats. Image from Wikimedia Commons.

New estimates project that Social Security will run out of cash by 2037. The estimates, from the Congressional Budget Office purport that Social Security will run a deficit until 2037, when the trust fund will be completely depleted. Recent tax cuts already have given advance cash out of Social Security revenue.

Constant deficits projected for Social Security

A new series of projections for the Social Security program by the Congressional Budget Office estimates that Social Security will run a deficit from now until 2037, according to MSNBC. The new projections are a reversal from last year, when the CBO had a far rosier estimation of the health of the Social Security Administration. In 2010, the SSA ran a deficit for the first time since the Reagan administration, but the CBO estimated Social Security would recover from any shortfalls by 2012. Previous estimates had projected a $45 billion shortfall for 2011, but it is now estimated that the shortfall will increase to $130 billion. The CBO also contends that Social Security will continue to post deficits until 2037, when the Social Security Trust Fund is expected to run out, leaving retirees from Alabama to Arizona high and dry.

Rare losses

The Social Security Administration had not run at a loss since the 1980s, though it is the single largest expenditure in the national budget. Budget surpluses of Social Security, which have been constant until recently, were put into the Social Security Trust Fund but have been a frequent source of emergency loans for the U.S. government. This year, the government is expected to run a $1.5 trillion deficit, which is more than a government can take out some personal loans to cover.

Tax cuts a partial culprit

Part of the problem, if the CBO’s estimates prove correct, is that the Bush era tax cuts that were re-extended included a reduction of Social Security payroll taxes. The loss of revenue will only exacerbate the loss, though Congress has pledged to put up the necessary funding to cover the loss.

Source

MSNBC

Bailout official labels mortgage modification program a failure

Peter Stone — Thu, 27 Jan 2011 20:52:24 +0000

At a recent congressional hearing, the government mortgage modification program was blasted as being a "failure." Image from Wikimedia Commons.

The Inspector General of government bailout programs has labeled the mortgage modification program a failure. Neal Barofsky, appointed to oversee the bailout programs including the Home Affordable Modification Program, blasted the program in a Congressional hearing for being ineffective. More than half a million applicants have gotten their mortgages modified.

Mortgage modification program blasted in hearing

Recently, there was a joint Congressional hearing about whether certain programs in government bailouts had been effective, including the mortgage modification program. The program, which was nicknamed Make Home Affordable, but titled the Home Affordable Modification Program or HAMP, was blasted in the hearing as “a failure,” according to USA Today. Neil Barofsky was appointed as a special Inspector General in charge of bailout programs and funding and told the Congressional oversight committee that the mortgage modification program was not working. He went on to say that an increasing number of people will continue to want the program canceled, “and understandably so.” However, some have pointed to slow moving loan lenders as being part of the cause of the program’s problems.

Call to repeal HAMP

An increasing number of people are calling for the HAMP program to be cut. On the same day that the oversight committee met, three House Republicans submitted a bill that would end the HAMP program. Doing so would cut $30 billion from unused funding for bailout emergency loans. HAMP was intended to help 3 million to 4 million people avoid foreclosure by modifying existing loans with loan companies, but only 549,620 mortgages have been successfully modified. However, the cash advances lent to banks, more than $341 billion, have been viewed as very successful.

Foreclosures still epidemic

The rate of foreclosure has started to fall in the worst hit areas, especially states like Arizona with higher than normal real estate values, according to CNN. Las Vegas, the worst hit city in the United States, has seen the rate of foreclosure fall by 7 percent over the last year, but one in nine homes there has been in some form of foreclosure activity. However, in a survey of more than 200 metro areas by RealtyTrac, the overall foreclosure rate rose by 72 percent in 2010.

Sources

Simba Information
Finding Dulcinea
Becker-Posner

Debt settlement plans more likely than state bankruptcy

Peter Stone — Wed, 26 Jan 2011 23:55:17 +0000

Congressional leaders such as Eric Cantor have insisted on debt settlement options before state bankruptcies can even be contemplated. Image from Wikimedia Commons.

There has been speculation that some U.S. states will declare bankruptcy due to budget issues, but debt settlement plans are more likely. Senior members of Congress have discussed it, but key Republicans have dismissed the idea. However, further loans from the government are not likely either.

State bankruptcy less likely than debt settlement measures

Most U.S. states, if not all, have encountered some sort of budget shortfall since the recession began in 2008. Fewer people employed — and therefore purchasing goods and services — combined with a sluggish housing market has exacerbated state budgetary woes. The idea of state bankruptcy has been discussed, but top Republican lawmakers are not entirely receptive to the idea, according to Reuters. House Majority Leader Eric Cantor expressed that debt settlement options exist outside of passing legislation to allow states to declare bankruptcy, including drastic spending cuts. The possible outcomes from allowing state bankruptcies could include the growing municipal bond market collapsing. However, it has also been made clear that emergency loans, like those included in the bailout packages, were not likely to be lent.

States insist bankruptcy not on agenda

Some state governors of states with budget woes have insisted that their respective states would not consider bankruptcy. Governors Christine Gregoire (Wash.) and Dave Heineman (Neb.) issued a joint statement to the effect that neither state would file for bankruptcy even if it were made an option legally. There are 44 states looking at a budget shortfall in the next year, according to the Center on Budget and Policy Priorities. Only six states — Alabama, Arkansas, Alaska, Delaware, North Dakota and Wyoming — are not expecting to be short instant cash at some point.

Toughest years possibly behind

Most economic forecasts have been for a slow but steady growth out of recession conditions. The possible ramifications for a state government to declare bankruptcy could be catastrophic, and thus the idea is too dangerous for lawmakers to contemplate. Federal bankruptcy courts would be tied up for years were that to happen.

Sources

Reuters

CBPP

Can bookstores survive financial challenges?

Mary Rice — Tue, 18 Jan 2011 15:53:45 +0000

Local bookstores face serious financial challenges in a struggle to survive. Image: Flickr / yosoynuts / CC-BY-ND

With over $431 million in sales and over 22 million units shipped in 2009, the e-reader market is exploding. This is leaving many wondering — can bookstores survive? The short answer is, with creative marketing and short-term loans, some bookstores might survive, but it won’t be easy.

Can bookstores survive major changes?

There are dozens of major challenges facing brick-and-mortar bookstores. E-readers are often called out as the biggest challenger to a traditional brick and mortar store. Estimates are that about 30 percent of books are currently sold online either in paper or e-book format. However, bookstores are already feeling the crunch — Borders, the original big chain bookstore, is restructuring in an effort to survive. Asking can bookstores survive is really asking if bookstores can find a way to capture a changing market of readers.

Financial challenges facing bookstores

Books, like many other retail products, are a high-cost product to keep on the shelves. Many independent bookstores end up taking out short-term loans just to meet overhead and inventory costs when sales aren’t making ends meet. From Baltimore, Maryland to Reno, Nevada, bookstores are having to find new ways to bring people in — most of which require longer hours and more employees, which in and of themselves cost money. Authors present another unique financial challenge, as they are often coming out of e-book deals with only pennies per copy for their life’s work.

Are e-books the solution for independent bookstores?

As the e-book market grows, some say that bookstores can survive by selling e-books. The Google e-bookstore offers an affiliate-style program that allows bookstores to get a portion of the sales of an e-book. Google puts these bookstores in a unique position of both competing against and making use of the Google system. Bookstores will not get nearly the margin they usually do on a product, but because the e-book does not require physical inventory, it may have lower overhead. The challenge is convincing customers to spend money through the online home of a local bookstore, rather than an internet juggernaut bookstore.

Soures:

Louisiana ethanol production plant waiting on short-term loans

Mary Rice — Wed, 12 Jan 2011 17:50:06 +0000

Sugarcane grown in the Southern United States could become ethanol, if funding is secured. Image: Flickr / arriabelli / CC-BY-SA

A company that has been trying since 2006 to make Louisiana ethanol is still waiting on funding. Louisiana Green Fuels is hoping to purchase a syrup mill from the state. Until short term loans or funding solutions are secured, several plants will sit idle.

Louisiana Green Fuels, LLC

Founded in 2006, Louisiana Green Fuels, LLC, has the goal of creating ethanol from sugarcane and other Louisiana agricultural crops. Louisiana Green Fuels started the process to purchase a sugarcane syrup plant originally built by the state. The last of four $100,000 payments to the state is due by Louisiana Green Fuels in December of this year, at which point the company is required to start making $2 million payments on the $60 million principal.

Creating sugarcane ethanol

The cost of starting up the plant for production of sugarcane ethanol is estimated to run between $60 million and $200 million, depending on agricultural product prices and other costs. Briefly in 2009, the syrup mill and connected ethanol plant ran just long enough to create sorghum syrup and sugarcane syrup test runs. When an investor pulled out, however, production had to be stopped. Once the production is up and running, Louisiana Green Fuels has already brokered agreements to sell the byproducts of the ethanol production.

The problem with Louisiana ethanol

Louisiana Green Fuels hopes to create ethanol biofuels from agricultural products grown in the state. Farmers in Louisiana, however, are facing very difficult times. A hard freeze ruined several sugarcane crops, and many agricultural products are being sold at a loss or at cost. Several farmers are applying for emergency loans through the U.S. Department of Agriculture. The U.S. Department of Agriculture is also offering short term loan guarantees for Louisiana Biofuels. In short, Louisiana Green Fuels may soon be producing biofuels, but only if long- and short-term funding, agricultural products and governmental support can be secured.

Source

Ethanol Producer Magazine

Relief and emergency loans may be needed in frozen South

Peter Stone — Tue, 11 Jan 2011 00:55:23 +0000

Blizzard conditions are hitting the Southern U.S., and states without cold weather infrastructures may need emergency loans before long. Image from Wikimedia Commons.

The American Southwest has been paralyzed by freezing cold, and emergency loans may be needed before long. Several major southern cities have been brought almost to a halt by snow and ice in one of the worst winters on record. Some states have declared states of emergency.

Southern states may need emergency loans before long

The winter storms that have been wracking the east coast with record snow and ice are wreaking havoc in the South, and emergency loans may be needed for relief efforts before long. Up to a foot of snow has fallen from Louisiana through Alabama and all the way up to the Carolinas, according to MSNBC. The amount of precipitation has varied, but Tennessee received 13 inches of snow. Freezing rain across the Gulf Coast has not helped matters; it has turned roads into skating rinks and bridges into dangerous crossings. The states of Alabama, Georgia, Louisiana, North Carolina, South Carolina and Tennessee have all declared states of emergency, including school and university closures.

Alabama terrified of missing game

Alabama is said to be the most obsessed states in the union regarding college football, and the Auburn Tigers are playing the Oregon Ducks in the BCS Championship today. However, icy roads and snowy conditions may prevent people from being able to attend. The city of Birmingham has been hard hit by the weather, and flights are being canceled. Governor Bob Riley had to opt out of a trip to Arizona for the game because of the rotten weather. More snow is due in the region, and the conditions are expected to stay rotten for days.

Silver lining for some

Some have found a way to make a little extra cash during the snowstorm in a region known for humidity, heat and more humidity. Enterprising individuals and contractors with the equipment are able to plow snow covered roads and lay down de-icer and sand in cities lacking the equipment.

Sources

MSNBC

Economic growth in Louisiana dependent on government loans

Mary Rice — Tue, 28 Dec 2010 16:58:13 +0000

Nucor steel is taking advantage of new-business incentives and loans from Louisiana. Image: Flickr / chasbot / CC-BY-SA

In Louisiana, 2010 has been an up-and-down economic year. Economic development in the state suffered several major setbacks. By using a combination of tax incentives and short-term loans, though, the state is likely to see slow growth in 2011.

Effect of closures on Louisiana

The biggest hit to Louisiana’s economic development this year was the BP oil spill. When the federal government shut down offshore oil drilling in the Gulf, many workers in Louisiana found themselves unemployed. Employees and businesses have been reliant on emergency loans or remuneration from BP and the federal government to stay afloat. Beyond just the oil spill, NASA, Northrop Grumman Corp. and General Motors have announced shutdowns that will cut 7,500 jobs from the state.

New businesses opening in Louisiana

In some mid-size Louisiana cities such as St. James Parish, Michoud and Alexandria, Louisiana, the economic outlook is not entirely negative. By using a combination of tax incentives and short term loans, the state has attracted some big new businesses. A Nucor Corp. steel plant is expected to open in St. James Parish and employ 1,250 people and spend $3.4 billion in the state. A high-tech wind turbine company is also using Louisiana’s offer of short term loans to help open a wind turbine plant that will employ 600.

New proposed taxes on drilling

The federal government is currently considering $36 billion in proposed taxes on the oil drilling industry. The government has also ordered the industry to spend $4 billion on cleaning up abandoned oil rigs. The relationship of oil companies to the state of Louisiana is a tumultuous one. The industry has spent billions of dollars in the state. At the same time, oil drilling is moving to other countries and not quickly paying up on promises of emergency loans to residents.

Source

Installment loans from bailouts may not be that expensive

Peter Stone — Mon, 20 Dec 2010 23:49:35 +0000

Some people think the installment loans lent in the bailouts weren't worth it, but Treasury Secretary Tim Geithner disagrees. Image from Wikimedia Commons.

In the financial crisis of the last few years, billions of dollars in installment loans to huge firms were lent in bailouts. Many have preached loudly about the waste involved and corporate favoritism. However, it may not cost as much as some think.

Rage at installment loans to big business

In 2008, the financial world was in turmoil, and the government moved to get some installment loans out to head off a collapse. Billions were lent to banks and investment houses from New York, New York, to Kansas City, Missouri, and the largest domestic auto manufacturers were given some enormous advance cash bundles to keep them afloat. Conservatives and liberals alike have raged about the bailout loans, but Treasury Secretary Timothy Geithner thinks the outrage is unfairly directed his way, according to the New York Times. Though officials, of course, don’t go out of their way to agree with their critics, he has a point.

Emergency loans could turn a profit

The emergency loans made to huge businesses could be justified. Geithner has maintained that the $25 billion estimated as losses by the Congressional Budget Office are estimates. He also has maintained losses will only come from bank loans and mortgages gone bad, but everything else will turn out. For instance, if the Treasury holds onto shares in GM and sells them over time, the loans GM received could eventually turn a profit on the long term. Citigroup, which received more than $45 billion in aid, turned a profit of more than $10 billion for the taxpayers already.

Proof will be in the pudding

Though it certainly seems ridiculous to only aid to the parties that created the economic problems in the first place when the people that have been hurt could use the help more, there may be an upside after the fact. If the profits realized from bailing out huge firms are more than the losses of bailing out Fannie and Freddie, then a rational basis for bailouts in dire straits will have appeared.

Sources

New York Times

Foreclosures halted by loan lenders for holidays

Peter Stone — Sat, 11 Dec 2010 13:44:12 +0000

Loan lenders are going to freeze foreclosure activity for the holidays, as is customary. Image: Brendel/WikiMedia Commons/CC-BY

Every year, most home loan lenders halt foreclosures through the holidays. This year, most mortgage lenders are halting foreclosure activity for Christmas, as it is customary to do so. It isn’t unusual, but a foreclosure freeze was already in effect for some lenders anyway.

Loan lenders customarily halt foreclosures

Typically, mortgage loan lenders halt all foreclosure activity from late December until after New Year’s Day, according to CNN. This year will be no exception. Freddie Mac and Fannie Mae have a freeze on foreclosing on any outstanding installment loans that either company lent or backed. Freddie and Fannie are still a long way from emerging from conservatorship, as both companies are still under the direct control of the Treasury, but auctioning a few homes would not help the troubled mortgage houses. Both are still suffering from the weight of toxic mortgages, regardless of how many emergency loans either company has received from the government.

Large lenders freezing foreclosures as well

The nation’s largest loan companies are freezing foreclosures for the holiday as well, as is the custom. JPMorgan Chase, Bank of America and Wells Fargo are all halting evictions from foreclosed properties where the people who were borrowing money lapsed on payments. However, Bank of America and JPMorgan Chase are both embroiled in the “robo-signing” controversy and cannot necessarily evict anyone to begin with. Both companies are accused of automatically signing off on foreclosures without having done the due diligence as to whether the action was legal.

Much needed reprieve

Currently, about 100,000 people lose their homes to foreclosure per month. Foreclosures have been a scourge of the real estate industry, but the bright side, if there is one, is that the rate hasn’t been accelerating lately. However, the key to fixing the real estate market is for unemployment to further decrease.

Sources

Citigroup turns emergency loans into profit for taxpayers

Peter Stone — Wed, 08 Dec 2010 23:16:06 +0000

Taxpayers should realize a profit when the government sells its remaining shares in Citigroup. Image from Wikimedia Commons.

After being lent billions in emergency loans, Citigroup may be the model that firms receiving bailouts should follow. Citigroup will end up turning a profit for taxpayers when the Treasury sells its shares. The company stands to have produced a net gain of $12 billion or more for the government.

Emergency loans to Citigroup pay off

More than two years ago, Citigroup asked the U.S. Treasury for some hefty emergency loans, saying it direly needed some instant cash or the firm would perish. The bailouts, and the Troubled Asset Relief Program or TARP, have been the subject of a lot of controversy. However, a recent announcement ought to please even the most ardent fiscal conservative. The Treasury will be selling the rest of its shares in Citigroup; it holds more than 2 billion common shares in the company, according to USA Today. The shares were given to the Treasury as a condition of receiving secured loans. If everything goes according to plan, taxpayers stand to profit about $12 billion from the loans to Citigroup.

Citigroup would net Treasury a 27 percent profit

The government held about 7.7 billion shares in Citigroup as a result of the bailout. The Treasury had sold 5.3 billion of those shares as of Monday. The remaining 2.4 billion shares are worth about $4.35 a piece as of Monday, and the sale of those remaining shares should net a quick payday of about $31.8 billion, plus another $2.9 billion in interest and dividends. Combined with the payments Citigroup has already made, more than $20 billion, the Treasury should take in an estimated $57 billion for the $45 billion in loan cash and guarantees to Citigroup. That’s a simple profit of about 26.7 percent.

Model bailout

If the sale of Citigroup shares by the Treasury does result in a profit of that much, or even close, that would make Citigroup a model bailout company. Ideally, the shares of other bailed out firms, such as GM, will have a similar outcome.

Sources

Stimulus cash advances did little to dent unemployment rate

Peter Stone — Tue, 21 Sep 2010 18:51:12 +0000

The job market is still in ruins. Image from Wikimedia Commons.

A lot of people lost their jobs during the worst parts of the recession. The idea was that if the government doled out a huge cash advance, the unemployment rate would decrease. Instead, the number of unemployed has only increased. In the month of August, there were 27 states that recorded an increase in unemployment. There were only 13 states that marked an improvement, and 10 that did not change. The recession is supposedly over, yet the economy as a whole does not seem to be improving fast enough.

Spike in unemployment rate

The unemployment rate has shot through the roof over the last month. According to CNN, there were 27 states that recorded an increase in the unemployment rate. Nevada still has the highest unemployment rate in the nation at 14.4 percent. Michigan and California have unemployment rates of 13.1 and 12.4 percent, respectively. These have been the hardest-hit states throughout the recession. It appears emergency loans that went to these states to stimulate job growth, such as the auto bailout for Detroit, have not helped as much as was hoped.

Census accounted for losses

The end of the 2010 Census had a heavy hand in the increase in unemployment, according to USA Today. The Census employed about 114,000 people nationwide. That said, private employers are slowly starting to add jobs. About 67,000 private sector jobs were added, which has to be a relief for people looking for a pay day again. The end of the Census was anticipated to have a negative impact on the unemployment rate and jobless claims, as there isn’t enough instant cash floating around to hire all of them back into the private sector.

Slow but steady wins the race

Recent data was released indicating that the recession was supposedly over. However, it is difficult to reconcile that idea with the levels of unemployment and decreased spending and credit activity.

Sources

AIG makes more progress in paying off taxpayer installment loans

Peter Stone — Tue, 14 Sep 2010 21:56:34 +0000

AIG is fund raising with more than just baked goods to pay taxpayers back. Image from Wikimedia Commons.

American International Group had to borrow money in the bailout, and a lot of it. The insurance giant took out more than $130 billion in installment loans from the taxpayers to keep from collapse, and controversy surrounded it. However, AIG is making significant progress. The company has already paid back several billion to the government, and recently had a meeting with the Treasury to figure out how to complete the debt settlement. The company is set to convert the 80 percent in preferred shares the government holds to common shares, which would be sold for fast cash.

AIG and Treasury discuss payment plan

There isn’t a company that got emergency loans from the government that doesn’t want those balances reduced to zero. AIG received about $132 billion in loans from the taxpayers, and for that generous offer of help, the government got an 80 percent stake in the preferred shares of the company. Since then, AIG has been selling sub-companies and creating capital to pay off the government. According to USA Today, AIG recently met with Treasury officials to discuss paying the loans off. The deal is reportedly for the company to be completely paid up in two years or less.

Stock sale

The bulk of the fund raising would be done via sale of stock. Currently, the government holds about 80 percent of preferred shares in AIG. Preferred shares are different from common shares, in that there are more in dividends, but are less of a security than bonds. The preferred shares the government holds would be converted to almost a 90 percent share of common stock, which would be offered by the government to investors. Should the stock price rise accordingly, the government will actually turn a profit.

Miles to go before AIG sleeps

Currently, AIG still owes the government more than $100 billion. That is a lot of money to raise in two years, for any corporation. The company has been doing well in settling accounts, as non-essential divisions have been sold off to other companies.

Sources

Two Federal Reserve banks want higher rates on emergency loans

Peter Stone — Thu, 09 Sep 2010 21:07:45 +0000

The Federal Reserve won't send interest rates on emergency loans skyrocketing anytime soon. Image from Wikimedia Commons.

Throughout the recession, the Federal Reserve has kept overall interest rates hovering near zero, in order to keep deflation or further inflation from taking place. The 12 regional Federal Reserve Bank directors recently met, and one of the items for discussion was concerning the discount rate on emergency loans. A discount rate is basically the interest rate the Federal Reserve charges on loans to banks, and lately loans lent to banks have been low interest loans. Two Federal Reserve branches wanted rates raised, as recovery is too slow to justify the low rate.

Federal Reserve is keeping rates low

Part of the monetary policy that the Federal Reserve has been pursuing is keeping interest rates low, even on bank loans. Essentially, the bet is that if banks need to borrow money, the access to liquid capital is there and breathing room for a strained banking and finance industry is assured. However, signs of recovery are beginning to show, even though there is every indication that growth in the economy is going to be more modest than hoped, but that a return to more normal conditions seems to be under way.

Two Fed banks want higher rates

According to Bloomberg, directors of two of the 12 regional Federal Reserve banks asked for a slight raise of the discount rate for emergency loans to banks, but by less than one percentage point. The rationale is that recovery is slow, but is occurring, and therefore it is best to raise the rates sooner rather than later. Currently, a fast cash loan from the Fed comes with an interest rate of 0.75 percent. Not only that, but fewer banks are actually borrowing these days.

It won’t happen

It is only the Federal Reserve banks of Kansas City and Dallas that want higher rates, and the raise in mind was slight. It also wasn’t adopted. Bank rates will probably hold low for some time.

Sources