Obama administration officials and lawmakers lambasted plans by American International Group Inc., the insurer rescued by the government, to dole out $1 billion in bonuses and retention pay to employees.
Lawrence Summers, director of the White House National Economic Council, called the payments “outrageous” in an interview on ABC’s “This Week” program yesterday. AIG is “abusing the system,” Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, told “Fox News Sunday.”
AIG, which has received $170 billion in taxpayer money, succumbed to demands from the U.S. Treasury to scale back the payments. AIG agreed to reduce some retention payments in 2009 by 30 percent and tie bonuses to the company’s recovery. The New York-based insurer still plans to hand out about $165 million on March 15 because of legally binding contracts, according to a person briefed on the matter.
Public anger has been stoked by revelations of bonuses paid by firms at the center of the financial-market meltdown that has plunged the U.S. into what may become the deepest recession since World War II. New York Attorney General Andrew Cuomo is investigating $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired Jan. 1 by Bank of America Corp.
“There are a lot of terrible things that have happened in the last 18 months, but what’s happened at AIG is the most outrageous,” Summers said yesterday on CBS’s “Face the Nation.”
Summers said the Obama administration’s priority is safeguarding the U.S. taxpayer. “No one cares about the shareholders of AIG. No one feels the slightest obligation to people who led us into these difficulties.”
Even so, the administration can’t abrogate existing contractual obligations without shaking confidence in the legal system, Summers said.
“The easy thing would be to just say, you know, ‘Off with their heads,’ and violate the contracts,” he said. “But you have to think about the consequences of breaking contracts for the overall system of law.”
Frank said that starting when the Federal Reserve initiated the AIG rescue last September there should have been stricter rules on executive compensation and clearer guidelines for major financial institutions getting a government bailout.
“Clearly there was a mistake at the beginning,” Frank said on Fox. “These people who were receiving this should have been given much stricter rules at the beginning.”
AIG is “abusing the system,” said Frank. “Any bank that thinks we’re being too tough on compensation, or trying to get foreclosures reduced, or stopping some of the lavish entertaining, they can give the money back.”
“With AIG, I would just say we need to find out, one, are they legally recoverable,” Frank added. “But I do want to find out at what point these illegal obligations were incurred, who said, and at what point, we’re going to give these bonuses no matter what.”
Senate Minority Leader Mitch McConnell, speaking on ABC’s “This Week,” said the example of AIG might be followed by other companies lining up for government assistance.
“The message here, I’m afraid, to any business out there that’s thinking about taking government money, is let’s enter into a bunch of contracts real quick, and we’ll have the taxpayers pay bonuses to our employees,” the Kentucky Republican said. “This is an outrage.”
Treasury Secretary Timothy Geithner was “really upset” by AIG’s plan to distribute the $165 million, Austan Goolsbee, a top White House economist, said on Fox. “You worry about that backlash” from the public, “but you’re also angry,” he said.
“I don’t know why they would follow a policy that’s really not sensible, is obviously going to ignite the ire of millions of people,” Goolsbee said. “And we’ve done exactly what we can do to prevent this kind of thing from happening again.”
AIG Chief Executive Officer Edward Liddy, who was recruited by the U.S. to run the insurer after the bailout, has vowed that the company will repay “every penny” to the U.S. of its bailout package by selling subsidiaries, and said the retention pay for talented people helps taxpayers by making the units attractive to buyers.
By Timothy R. Homan and Margaret Chadbourn — March 16 (Bloomberg)
[comment: It was ironic watching the Bernanke interview on 60 minutes, and the AIG story above being featured during the commercial break for the late news. The system needs to crash, so it can be replaced by something more honest and transparent.
When will the banksters stop stealing? Not anytime soon it seems. Don't expect politicians to change as long as they serve the public last and the lobbyist Cartels first. They cannot serve two masters]
U.S. household wealth fell by a record $5.1 trillion from October to December, almost twice the decrease in the previous quarter, as home values and stock prices plunged, Federal Reserve figures showed.
Net worth for households and non-profit groups decreased to $51.5 trillion, the lowest level in four years, from $56.6 trillion in the third quarter, according to the Fed’s quarterly Flow of Funds report yesterday. Wealth dropped $11.2 trillion in 2008 from the year before, the biggest annual decline since the government began keeping quarterly records in 1952.
The erosion of Americans’ wealth is one reason that analysts project households will save more in coming months, restraining spending and economic growth. President Barack Obama’s administration aims to revive an economy in its second year of recession through the $787 billion stimulus package signed into law last month.
“I don’t think it’s any surprise that wealth has declined so much given the bad news out of markets and house prices,” said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc. in New York. “This decline in wealth is a headwind for spending and it’s a big reason to be cautious and to save.”
Household net worth has fallen in five consecutive quarters for a loss of $12.8 trillion during that period. The decline almost matches the total size of the U.S. economy, which was $14.2 trillion in the last three months of 2008.
The report underscores economists’ judgments that consumer spending isn’t in a sustained recovery after better-than- projected results in the first two months of the year.
A Commerce Department report yesterday showed sales at U.S. retailers in February fell 0.1 percent, less than the 0.5 percent decline anticipated by economists. The number of Americans receiving jobless benefits rose to a record 5.317 million in the week ended Feb. 28, according to data from the Labor Department.
Real-estate-related household assets declined by $937.1 billion, following a $681.2 billion third-quarter decrease. Net worth related to corporate equities dropped by $1.68 trillion.
Owners’ equity as a share of their total real-estate holdings dropped to 43 percent last quarter, from 44.8 percent in the third quarter, yesterday’s Fed report showed.
Households borrowed less as wealth evaporated. Debt dropped at a 2 percent annual pace, the first decrease on record. Mortgage borrowing fell at a 1.6 percent annual pace, after decreasing at a 2.3 percent rate in the previous quarter, the Fed said.
“Households are continuing to pay down debt,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. “Evaporating wealth and forced savings, coupled with rampant job losses, suggest consumers will continue to hibernate.”
Total borrowing by consumers, businesses and government agencies increased at an annual rate of 6.3 percent last quarter compared with an 8.1 percent rise the prior quarter. The gain was led by a 37 percent jump in borrowing by the federal government.
Business borrowing climbed at an annual pace of 1.7 percent after rising 4.1 percent the prior quarter, the Fed said. Borrowing by state and local governments rose at a 1.2 percent rate.
The U.S. economy shrank at a 6.2 percent annual pace in the last quarter of 2008, led by the fastest decline in consumer spending in almost three decades. Purchases dropped at a 4.3 percent annual rate October to December after falling 3.8 percent the previous three months, according to Commerce figures.
March 13 (Bloomberg) –
BEIJING (AP) — China’s premier didn’t say it in so many words, but the implied warning to Washington was blunt: Don’t devalue the dollar through reckless spending.
Premier Wen Jiabao’s message is unlikely to be misunderstood at the White House. It is counting on Beijing to help pay for its stimulus package by buying U.S. bonds. China already is Washington’s biggest foreign creditor, with an estimated $1 trillion in U.S. government debt. A weaker dollar would erode the value of those assets.
“Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a news conference Friday after the closing of China’s annual legislative session. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”
The appeal suggested the outlines of Chinese President Hu Jintao’s stance when he meets with President Barack Obama at an April 2 summit in London of the Group of 20 major economies on possible remedies for the global crisis.
Wen gave no indication whether Beijing wants changes in U.S. policy. But economists said his comments reflect fears that higher U.S. budget deficits from Washington’s $787 billion stimulus package could drive down the dollar and the value of China’s Treasury notes.
“China is telling the U.S. to be careful, not to overspend and keep an eye on the dollar,” said Kelvin Lau, regional economist at Standard Chartered in Hong Kong. “There are risks that China cannot control, so they’re depending on the U.S. to maintain fiscal prudence and keep the dollar reasonably stable.”
In Washington, White House press secretary Robert Gibbs responded to Wen’s concerns by saying the Chinese should rest assured because investments in the U.S. are the safest in the world.
Gibbs also said Congress can help by passing Obama’s budget for next year, which promises to halve the deficit by the end of his term.
Analysts estimate China keeps nearly half of its $2 trillion in foreign currency reserves in U.S. Treasuries and notes issued by other government-affiliated agencies.
“Inside China there has been a lot of debate about whether they should continue to buy Treasuries,” said Frank Gong, chief China economist for JP Morgan.
Beijing is trying to increase its leverage at the London G-20 meeting by reminding its partners of its role in financing U.S. spending, Gong said.
“Without China’s buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment,” he said. “By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting.”
Finance officials from the G-20 meet this weekend. U.S. Treasury Secretary Timothy Geithner is pressing for a new coordinated global stimulus. Japan is supportive but European governments are reluctant to make expensive commitments before they see how current plans are working.
Wen also offered an unqualified defense Friday of his government’s policies in Tibet, ignoring questions about a massive security buildup in the Himalayan region.
Tensions have spiked ahead of two key anniversaries this week — the 50th anniversary of a failed Tibetan uprising that sent the Dalai Lama into exile and Saturday’s one-year anniversary of violent anti-Chinese riots in Lhasa that sparked the largest protests in decades.
Asked whether the massive security presence pointed to failings in Beijing’s policies, Wen said: “The situation in Tibet is on the whole peaceful and stable. The Tibetan people hope to work in peace and stability.
“Tibet’s continuous progress (has) proven the policies we have adopted are right,” he said.
Wen expressed confidence the world’s third-largest economy can meet its official growth target of 8 percent this year and emerge from the crisis “at an early date.” But he said Beijing is ready to expand its 4 trillion yuan ($586 billion) stimulus if needed.
“We already have our plans ready to tackle even more difficult times, and to do that we have reserved adequate ammunition,” he said. “That means that at any time we can introduce new stimulus policies.”
Communist leaders worry about rising job losses and possible unrest amid a trade slump that saw Chinese exports fall 25.7 percent in February from a year earlier. They have promised to spend heavily to create jobs and boost exports.
Chinese bank lending and power demand have risen, suggesting the stimulus is taking effect. But growth in retail sales is weakening, indicating it has yet to spur private sector spending and investment, which analysts say will be key to its success.
Private sector economists expect growth as low as 5 percent this year. That would be the strongest of any major country but could lead to more waves of job cuts.
“I really believe we will be able to walk out of the shadow of the financial crisis at an early date,” Wen said. “After this trial, I believe the Chinese economy will show greater vitality.”
Wen also said Beijing wants the G-20 summit in April focus on helping the poorest countries.
The premier said Beijing has met its own commitments to help developing countries by erasing a total of $40 billion in debt owed by 46 countries and giving out 200 billion yuan ($29 billion) of aid to developing countries.”
“We must see to it that we show concern for developing countries,” he said.
By JOE McDONALD– AP.
Yes, the Fed’s balance sheet and the balance sheet of the federal government are expanding at record rates. But these reflationary efforts should be seen as a partial antidote, not a panacea, to the deflationary effects brought on from the unprecedented contraction in the largest balance sheet on the planet: The $55 trillion US household balance sheet.
Based on what house prices and equity valuation have been doing this quarter, we are likely in for a total loss of household net worth approximating $7 trillion this quarter alone, which would bring the cumulative decline in consumer wealth to $20 trillion. This wealth loss exceeds the combined expansion of the Fed’s and government balance sheet by a factor of ten. That should put the reflation-deflation debate into perspective.
When the reduction of credit is added to the equation, deflation is locked in for at least as long as the stock market is falling. No return to inflation until sometime after 2011-2016 according to one analyst that has made amazingly accurate calls long before others jumped on the obvious late trends.
To make matters worse, the problems in the East are beginning to look systemic. Credit Suisse has produced an interesting scorecard where they rank a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt. At the top of the tree (i.e. the worst credit score) you find Iceland – hardly surprising considering their current predicament. More importantly though, of the next 14 countries on the list, 8 are Eastern European – not what you want to hear if you are an already undercapitalised European bank with huge exposure to Eastern Europe.
While Washington has lauded the $787 spending bill as the medicine that will help bring the economy out of the recession that President Obama ‘inherited,’ the market is taking a different view. Consider this – since the spending bill was passed by Congress on February 13th, the S&P 500 has lost over $1.8 trillion in market cap, which is over twice the size of the plan signed into law! The question for economists now is whether or not the positive multiplier effect associated with the spending bill will be enough to offset the negative multiplier effect from the proportionately bigger decline in the value of US equities in the pension funds, IRAs, 401k’s, and investment accounts of Americans.
European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements. The BIS said European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets. “The build-up of large net US dollar positions exposed these banks to funding risk, or the risk that their funding positions could not be rolled over,” said the BIS.
The report, entitled “US dollar shortage in global banking”, helps explain why there has been such a frantic scramble for dollars each time the credit crisis takes a turn for the worse. Many investors have been wrong-footed by the powerful rally in the dollar against almost all currencies, except the yen.
British banks had accumulated a dollar “funding gap” of $300bn by mid 2007. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.
Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral.
The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse. The data is collected with a lag but it appears that there are still huge dollar liabilities to be covered.
Simon Derrick, currency chief at the Bank of New York Mellon, said the implications are obvious. “The global bullion of the last eight years was funded on dollar balance sheets, so the capital destruction we’re seeing leaves banks starved for dollars. Dollar is clearly going to appreciate a lot further,” he said.
Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to “temporarily borrow” as much as $500 billion from the Treasury Department.
[In other words, the public bank deposits require being insured by new borrowing from the public savings accounts.... does that seem like a recipe for a bank run when 2-3% of the people figure out this is a musical chairs scheme, and move their funds to safer (tax-free) banks offshore.]
The Connecticut Democrat’s effort — which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner — would give the FDIC access to more money to rebuild its fund that insures consumers’ deposits, which have been hard hit by a string of bank failures.
Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding. [my take - this means banks want us to pay their bill, pass it on to the taxpayer].
Mr. Dodd’s bill could also give the FDIC more firepower to help address “systemic risks” in the economy, potentially creating another source of bailout funds in addition to the $700 billion already appropriated by Congress.
Mr. Bernanke said in a Feb. 2 letter to Mr. Dodd that such a “mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system.”
The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted. The bill would allow it to borrow $100 billion absent that approval. Currently, its line of credit with the Treasury is $30 billion.
The FDIC’s deposit-insurance fund has fallen precipitously with 25 bank failures in 2008 and 16 so far in 2009. Some bank failures have a bigger impact on the fund than others, as IndyMac’s failure cost the fund more than $10 billion, while many others cost the fund less than $100 million.
A 1991 law generally caps the amount of money the FDIC can borrow from the Treasury at $30 billion, and the FDIC hasn’t borrowed money from the Treasury in more than a decade.
Ms. Bair said a change in the law would give the FDIC more options to determine the best way to rebuild its depleted fund. In an interview, she stressed that all insured deposits were already backed by the “full faith and credit of the United States government.”
A change in the law would ease “the mechanics of how seamlessly we can access our lines of” funding. “I’m the kind of person that likes to be prepared for all contingencies,” she said.
- Damian Paletta — wsj.com
Bernanke is protecting bank names that have taken 2.2 TRILLION in loans, and Senator Sanders has a hard time understanding who needs protecting - banks or the taxpayer? The last few seconds promises new legislation to force the Fed to provide full disclosure, it is about time.
Perhaps Bernie Maddoff should run the Fed Ponzi scheme, he can’t do much worse can he?
Poor retail sales, doubts about GM’s viability, and a clarification by the Chinese government that they would not add to its current $585 billion stimulus plan as some had hoped yesterday all helped push the market down 4% on the day.
As a result of today’s decline, the Dow closed at a new bear market low.
The Dow is currently down 53.4% since peaking in October 2007.
To put the magnitude of the current correction in perspective, today’s chart illustrates the 15 worst corrections of the Dow since its inception in 1896. The current Dow correction already ranks as the second worst on record, and it still likely has several years of weakness and lows ahead yet. Only the correction that began in 1929 was worse.
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