Are there any ulterior motives behind the Government so called “Stress Test” on 19 of the Nation’s Largest Banks? By Ofuoma Odje
On April 4th 2009, Treasury Secretary Tim Geithner testified before a congressional oversight committee headed by Elizabeth Warren and stated that "the vast majority" of banks could be considered well-capitalized.
If this is the case, why is the Government still talking about the stress test and the possible ramifications for the banks?
Why is there so much back and forth between the Banks and the Treasury over the stress test? And why are the results still being delayed?
The true motives behind this stress test are still unclear at this time, but certain conclusions can be drawn based on the chatter from the Treasury and other Government officials.
From an objective point of view, the stress test looks like a directed effort at State control of the banks deemed to need more capital by the Treasury.
In other words it appears the so called “Stress Test” is a backdoor to nationalization of the nation’s largest banks, to more TARP money from congress, and Government direction of the banking industry.
This means that key functions like control over executive compensation and ousting of CEOs that were formerly reserved for shareholders could now become exclusively reserved for the government.
Treasury Secretary Gaithner made it clear that none of the 19 banks will be allowed fail.
This surely reveals that if necessary, he intends to go back to congress for more TARP money in order to re-capitalize banks deemed as weak per his “Stress Test”.
If this is the case, the stress test is a political exercise that could expose nearly a Trillion Dollars hole in bad assets amongst these 19 banks.
Government remedies for under-capitalized banks
The Government has said that Banks needing more capital will be given 6 months to raise such capital privately, after which they must accept government funding.
The government is currently considering 2 options to address the under-capitalized banks.
Since the TARP funds are running low, the first and most likely action will be to follow the Citigroup model, where the government converts the Banks preferred shares it acquired via TARP funds into common equity.
But what good does this conversion really do? Let’s look at this scenario and its ramifications.
Currently, the Banks have to pay interest to the Treasury on the preferred shares it exchanged for TARP loans. While the government receives interest on those preferred shares, the shares themselves do not bestow any voting rights on the government.
If those preferred shares were converted into common equity, the banks would not have to pay anymore interest on the TARP funds. But there’s a catch.
By converting the preferred shares into common equity the Government does 2 things it clearly has said it does not intend to do. First, it takes a larger or the largest stake in the Banks which is tantamount to semi-nationalization at best along with voting rights to match. For example, if we look at the planned Citibank conversion we would see that the Government stake is increased to 36% making it the largest shareholder with matching voting rights.
Secondly, it dilutes the value of common equity and wipes out shareholders. The worst part of this exercise is that it doesn’t make significant improvements to the banks health. Shareholders are simply wiped out in favor of the Government without actually adding one cent of new money to banks.
Seeing the potential ineffectiveness or damage that can be caused by this conversion of preferred shares into common equity, the next option available to the Treasury will be to approach congress for more TARP money.
If indeed the Treasury follows this cause of action, then it could be well said that the stress test was nothing but a Trojan horse intended to approach congress for more TARP, which of course means more Government Direction of the economy, more Government control of Executive compensation and how Banks are run in the U.S.
The overheads of Government involvement
The TARP however, comes with its own problem. Neil Barofsky, the Special Inspector General overseeing TARP, has warned that the TARP program is 'inherently vulnerable to fraud, waste and abuse.' This risk he says grows as the plan becomes larger and more complex. Already federal investigators have opened about 20 criminal probes into possible securities fraud, tax violations, insider trading and other crimes.
In spite of these criminal underpinnings that could come with the TARP program, it is increasingly becoming clear that this is the path that Gaithner and the Treasury Department are likely to embark on.
So are we just adding to the numerous examples of government failure to provide effective and efficient services to the public?
We already see a slew of these Government wasteful spending and failures all around us.
Government has failed with Medicare and Medicaid to provide decent and efficient healthcare to the uninsured and even to war veterans who have put their lives at risk for the Country. Government has failed to provide high quality education to the public to enable America compete on a global scale and has even failed to provide a fair Justice system at the state and federal levels to protect its citizens.
These are just a few examples of why Government intervention in Private Enterprise could only mean bad news.
Knowing this, what then makes the Government the best choice to run the nation’s Banking Industry in the light of the financial collapse?
Any Bank that needs money to pay its bills simply put should not be a Bank. Something has to fail in order for Capitalism to succeed.
The Stress Test appears to be a mistake by an over-panicked Treasury Dept. who got themselves into a box when they announced that they were going to perform a stress test without thinking about what would come next after the results were announced.
We’ve seen this in the delays and steps taken by the Treasury in connection to releasing the results of the stress tests. First they released the parameters behind the tests, and then released the results to the banks only, and then they moved the public release date from May 4th to May 7th.
They even claimed that prior to the release of the results to the public, they would correct any faults raised by the Banks about the way the tests were conducted. In this case, how then will the stress test offer any transparency?
It is clear that all banks in the U.S. are insured. Why then do we need to know which ones are more equal than the others?
These stress test results could only be harmful to the banks and investors.
It is very hard to say that this is not going to lead to the nationalization of the U.S. banking industry.
If the government is going to have major stakes in banks, control bank lending policy and control employee pay and bonuses there is no question that the banks will be nationalized, at least for as long as they keep government money.
The government however continues to deny this by saying banks should remain private, and that it has no intention to nationalize them. Based on its actions however, an interpretation to what the government is actually saying could be that it desires to keep control over the banks, but does not want to be held accountable.
With government intention to nationalize healthcare, adding the banking sector results in government control of more than 20% of the economy. This does not look like free enterprise and capitalism; instead, it has the flavors of socialism.
Do the banks have alternatives?
The first question that comes to mind when opposing government involvement is that: - can the banks grow their way out of this crisis on their own?
There are other alternatives to the direct government intervention through TARP and Nationalization.
The first alternative will be to relax Mark-to-Market rules. Mark-to-market rules force banks to readjust the value of the assets they hold to reflect current market prices. For assets like mortgage-backed securities the market prices have declined well below the prices at which the banks would agree to sell them. Assets that have not defaulted however continue to generate income and that income makes them worth more to the banks than buyers on the market would be willing to pay.
Nevertheless, under the current Mark-to-Market rules it doesn’t matter that the assets generate income and have not defaulted. Their values must be adjusted to account for what the rules describe as a “hypothetical transaction at the measurement date.”
Mark-to-Market rules are harmful to banks in two ways. Firstly, the banks are forced to take losses on paper as though they were actual financial losses based on fire-sale valuations of securities that they may not intend to sell. Secondly and perhaps the most damaging is that mark-to-market rules are used in assessing banks’ capital requirements. This means that banks deemed by regulators to be undercapitalized are forced to sell forced to sell assets at diminished mark-to-market prices in order to raise enough capital to keep the regulators satisfied.
These forced sales cause banks to lock in losses and drives down prices of similar assets, thus creating a vicious cycle of wealth destruction.
Under pressure from lawmakers, The Financial Accounting Standards Board (FASB) recently relaxed mark-to-market rules.
The changes apply to the second quarter that began in April 2009. The changes will allow banks to value assets at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale. This change however is not enough to help banks earn their way out.
So long as banks are still forced to take losses on performing assets, they face tough choices like accepting TARP money and government control or lose customers and shrink their asset base. We’ve already seen some banks like Citibank and American Express offering customers cash incentive in exchange for either reducing their credit limits or closing their accounts as they move to get rid of customers, reduce their asset base and avoid more TARP money.
Another alternative is for the Treasury to change the Bank Capital rules, particularly on its focus on Tier 1 Capital and Tangible Common Equity requirements. In other words the government could change the parameters of the so called “stress test”. If this were done then the stress test results would not be as harmful to the banks, because it will not force them to require new capital.
Conclusion
The banking system has taken a hard hit. Banks are earning money on some of their products, but capital is being eaten away by the declining value of toxic assets governed by Mark-to-Market rules. The situation can be likened to fighting a cancer. This unfortunate situation is not helped by mark-to-market rules and government capital requirements for the banks.
The current low rates on borrowing can potentially help the banks grow their way out of this crisis if the FASB would do more about mark-to-market rules and if the government would change their capital rules for the banks.
If they did this, the banks will get help to quickly De-TARP and the injection of further taxpayer money in pursuit of a solution to a regulatory problem could be avoided.
The current government actions have done more to politicize a regulatory process more than anything else. This is underscored by the stress test which has been a show trial and political exercise.
The motivation behind the stress test remains a mystery, but it does appear that the Treasury and the Whitehouse intend to pursue the reinstitution of credit by staying on the banks long enough to change the way credit is issued.
Until the government gets out of the way, investing in banking stocks will be purely speculative. Purely speculative like investing in biotech companies who have drugs in clinical trials with the hope that the clinical trials will be successful. Perhaps the wise advice right now is not to invest in banks until the government gets out of the way.
Banks should be regulated by the Office of the Comptroller of the Currency, the FDIC and the Federal Reserve; not by the Treasury and the Whitehouse.
Ofuoma Odje
Sunday, May 3, 2009
Friday, May 1, 2009
One tip to keeping runners winning
Training for a 3k, 5k or longer run?
When preparing for a long distance race, we often put all our focus on training hard and improving our lap times, leg strength, endurance and general fitness.
While this is a disciplined thing to do it can hurt rather than help our chances of maximum performance on the day of the race.
In order to avoid that pitfall, here's a helpful tip.
Avoid all serious training in the final few days of the big race.
British researchers discovered that doing serious training 48 hours before the big race reduced by 7 percent the total distance covered by runners.
According to Samuele Marcora, Ph,D., the research showed that the excercises caused a high level of muscle damage which affected the runner's brain and caused him to exert more effort, even when he felt no sore in his muscles
Ofuoma Odje
When preparing for a long distance race, we often put all our focus on training hard and improving our lap times, leg strength, endurance and general fitness.
While this is a disciplined thing to do it can hurt rather than help our chances of maximum performance on the day of the race.
In order to avoid that pitfall, here's a helpful tip.
Avoid all serious training in the final few days of the big race.
British researchers discovered that doing serious training 48 hours before the big race reduced by 7 percent the total distance covered by runners.
According to Samuele Marcora, Ph,D., the research showed that the excercises caused a high level of muscle damage which affected the runner's brain and caused him to exert more effort, even when he felt no sore in his muscles
Ofuoma Odje
Monday, April 27, 2009
Government Role in Housing Collapse
Government Role in the Financial Collapse by Ofuoma Odje
There are at least 2 facets of Government responsibility in the current financial collapse.
The first is was the aggressive promotion of home ownership by the Bush and Clinton Administrations. The New York Times front-page story on Sunday, December 21, 2008 reported that former President Bush excessively promoted growth in home ownership without adequately enforcing oversight over banks and other mortgage lenders that made the bad loans. This is now what has resulted in a banking system flooded with bad mortgages whose losses continue to drag down the banks and the economy.
The second was government policy over the last 2 decades. The Community Reinvestment Act (CRA) and the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac are both Governmental vehicles that were used to distort the housing credit system, crash the housing market and ultimately the broader economy.
The New York Times edition of December 21, 2008 reported on home ownership in the United States since 1990. In 1993 home ownership was at 63 percent, and by the end of the Clinton administration it was 68 percent. Under the Bush administration, it grew by about1 percent to 69 percent.
The Times also reported that in 1999 the Clinton administration put pressure on Fannie Mae and Freddie Mac to increase lending to minorities and low-income home buyers.
This was of course a high risk policy that is partly responsible for today’s financial crisis because it opened the door to subprime predatory lending and other irresponsible borrowing and lending practices that abused the mortgage markets.
The Clinton and Bush administrations’ aggressive promotion of home ownership by reduced lending standards led to the housing bubble and burst.
The CRA was originally enacted in 1977 under President Carter. It mandated regulators to consider whether an insured bank was serving the needs of the entire community. The Act was set in place to encourage banks to halt the practice of lending discrimination.
The Clinton Treasury Department changed the Community Reinvestment Act in 1995. The change required banks that wanted outstanding CRA ratings to demonstrate statistically that they were lending in poor neighborhoods and to lower-income households.
Some economists say this amendment to the CRA raised the amount of home loans to unqualified low-income borrowers and also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages.
Throughout the early 90’s the Department of Housing and Urban Development pushed Fannie Mae and Freddie Mac to purchase loans based on criteria other than creditworthiness. And by 2005, these affordable housing goals mandated that Fannie Mac and Freddie Mae buy 45 percent of all loans from those of low and moderate income neighborhoods. A majority of these loans, especially the subprime ones, significantly account for today’s housing collapse.
The Federal Government housing initiatives are not the only “Government” causes of the current mortgage crisis. State Laws also gave homeowners free options that added substantially to the mortgage crisis.
As house prices increased between 2000 and 2006, State Laws allowed homeowners to refinance their mortgages at lower interest rates, and in addition cash-out equity based on increase in home prices without penalties.
The above practice was also supported by the deductibility of the interest paid on home equity loans from individual tax returns. This of course encouraged homeowners to go for a home equity loan, instead of credit cards or traditional loans when making major household purchases.
Instead of seeing their homes as a place to live, homeowners saw their abode as accounts to withdraw from or borrow against to make purchases. Unfortunately, this meant that when house prices collapsed homeowners found themselves in a negative equity situation with their homes. Simply put they owed more than their houses were worth.
This made it easy for homeowners to walk away from their mortgages. Further exacerbating this willingness to walk away from their bad mortgages was the leeway provided by State Laws in most States. Most States allowed the so called “without recourse mortgages” that allowed defaulting owners to escape the personal responsibility of paying the difference between their home’s value and the amount they originally borrowed from the Banks.
If we’ve learned anything from the Housing burst, it’s that Government policies were a catalyst that encouraged other players to run the system aground. Certainly predatory lenders, greedy brokers and irresponsible borrowers and lenders all played their parts in the housing collapse. However, government policies like the CRA and the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac, which buy loans from the banks in order to provide liquidity setup the fertile ground for this abuse.
What can the government do to prevent a reoccurrence of this kind of crisis in the future?
If there is anything for the government to learn from this;-- it should allow market mechanisms to operate rather than enacting regulatory mandates like the CRA that pose political risks to financial markets.
Tools for fair, antidiscrimination, and effective housing policy should do NO MORE than to ensure that borrowers are not turned away for non-financial reasons.
Government policies that distort mortgage lending should be terminated in order for the markets to function efficiently whilst measuring risks and maintaining profitability.
Continued government intervention in the financial system will do nothing but continue this subversion of capitalism.
Ofuoma Odje
There are at least 2 facets of Government responsibility in the current financial collapse.
The first is was the aggressive promotion of home ownership by the Bush and Clinton Administrations. The New York Times front-page story on Sunday, December 21, 2008 reported that former President Bush excessively promoted growth in home ownership without adequately enforcing oversight over banks and other mortgage lenders that made the bad loans. This is now what has resulted in a banking system flooded with bad mortgages whose losses continue to drag down the banks and the economy.
The second was government policy over the last 2 decades. The Community Reinvestment Act (CRA) and the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac are both Governmental vehicles that were used to distort the housing credit system, crash the housing market and ultimately the broader economy.
The New York Times edition of December 21, 2008 reported on home ownership in the United States since 1990. In 1993 home ownership was at 63 percent, and by the end of the Clinton administration it was 68 percent. Under the Bush administration, it grew by about1 percent to 69 percent.
The Times also reported that in 1999 the Clinton administration put pressure on Fannie Mae and Freddie Mac to increase lending to minorities and low-income home buyers.
This was of course a high risk policy that is partly responsible for today’s financial crisis because it opened the door to subprime predatory lending and other irresponsible borrowing and lending practices that abused the mortgage markets.
The Clinton and Bush administrations’ aggressive promotion of home ownership by reduced lending standards led to the housing bubble and burst.
The CRA was originally enacted in 1977 under President Carter. It mandated regulators to consider whether an insured bank was serving the needs of the entire community. The Act was set in place to encourage banks to halt the practice of lending discrimination.
The Clinton Treasury Department changed the Community Reinvestment Act in 1995. The change required banks that wanted outstanding CRA ratings to demonstrate statistically that they were lending in poor neighborhoods and to lower-income households.
Some economists say this amendment to the CRA raised the amount of home loans to unqualified low-income borrowers and also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages.
Throughout the early 90’s the Department of Housing and Urban Development pushed Fannie Mae and Freddie Mac to purchase loans based on criteria other than creditworthiness. And by 2005, these affordable housing goals mandated that Fannie Mac and Freddie Mae buy 45 percent of all loans from those of low and moderate income neighborhoods. A majority of these loans, especially the subprime ones, significantly account for today’s housing collapse.
The Federal Government housing initiatives are not the only “Government” causes of the current mortgage crisis. State Laws also gave homeowners free options that added substantially to the mortgage crisis.
As house prices increased between 2000 and 2006, State Laws allowed homeowners to refinance their mortgages at lower interest rates, and in addition cash-out equity based on increase in home prices without penalties.
The above practice was also supported by the deductibility of the interest paid on home equity loans from individual tax returns. This of course encouraged homeowners to go for a home equity loan, instead of credit cards or traditional loans when making major household purchases.
Instead of seeing their homes as a place to live, homeowners saw their abode as accounts to withdraw from or borrow against to make purchases. Unfortunately, this meant that when house prices collapsed homeowners found themselves in a negative equity situation with their homes. Simply put they owed more than their houses were worth.
This made it easy for homeowners to walk away from their mortgages. Further exacerbating this willingness to walk away from their bad mortgages was the leeway provided by State Laws in most States. Most States allowed the so called “without recourse mortgages” that allowed defaulting owners to escape the personal responsibility of paying the difference between their home’s value and the amount they originally borrowed from the Banks.
If we’ve learned anything from the Housing burst, it’s that Government policies were a catalyst that encouraged other players to run the system aground. Certainly predatory lenders, greedy brokers and irresponsible borrowers and lenders all played their parts in the housing collapse. However, government policies like the CRA and the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac, which buy loans from the banks in order to provide liquidity setup the fertile ground for this abuse.
What can the government do to prevent a reoccurrence of this kind of crisis in the future?
If there is anything for the government to learn from this;-- it should allow market mechanisms to operate rather than enacting regulatory mandates like the CRA that pose political risks to financial markets.
Tools for fair, antidiscrimination, and effective housing policy should do NO MORE than to ensure that borrowers are not turned away for non-financial reasons.
Government policies that distort mortgage lending should be terminated in order for the markets to function efficiently whilst measuring risks and maintaining profitability.
Continued government intervention in the financial system will do nothing but continue this subversion of capitalism.
Ofuoma Odje
Saturday, April 18, 2009
Ofuoma Odje blogs about recent earnings from the Financials
Should the Banks be believed?
Since the DOW and the S&P touched 12 year lows of 6763 and 666 respectively in early March 2009, the stock market has rallied by approximately 20%. The move has been fueled mainly by the Financials.
So what has changed since the massive shock of the September 2008 Financial Crisis?
A few Banks like Citibank, Bank of America and JP Morgan have all come out to say they made money in first 2 months of 2009. These claims of course spearheaded the current rally in the Financials and the broader market.
However, taking a closer look at these claims and insinuations, one could ask how Banks that were deemed insolvent only a few months ago have suddenly returned to profitability with overwhelming alacrity.
Recent earnings reports from Goldman Sachs, JP Morgan Chase, Citibank and a preview Wells Fargo’s numbers have all been better than expected and have resulted in the Financials rallying higher and higher.
So how could so many investors be so wrong a few months ago when they sold banks into multi year lows?
Or could they have been right anyway?
Let’s look at some key economic indicators between the months of September 2008 and March 2009, a climate where these Banks have claimed to make such remarkable profits.
First of all, nearly 2.6 million jobs were lost in 2008 alone, with another 1.9 million more lost in the first quarter of 2009. To be quite specific, let’s look some headlines of the Government’s Job Reports between the months of September 2008 and March 2009.
---159,000 Jobs Lost in September 2008, the Worst Month in Five Years
---240,000 jobs lost in the US in October 2008
---The nation’s employers cut 533,000 jobs in November worst in a generation
--- The U.S. economy lost 524,000 jobs in December, the 12th straight month of decline.
---Employers slashed 598,000 more jobs in January as unemployment rate climbed to 7.6%.
---651,000 US Jobs Lost in February; Unemployment Rate Now at 8.1%
---US jobs lost in March 2009 totaled 663,000; Unemployment Rate Now at 8.5%
Add to this the wave of foreclosures and bankruptcies filed by individuals, corporations and institutions, and you will get a clear picture of a depression at the least.
Examples are all around us. Household names like Linen and Things, Circuit City and Sharper Image are now history thanks to the financial crisis.
Only last week Mall Operator GEN GROWTH PROP INC (GGP) filed for bankruptcy protection sparking concerns about new wave of trouble in commercial real estate.
So how did these Banks manage to net outstanding profits in this same time period? No one can say for sure but we can speculate.
We know that these Banks received TARP Money from the Federal Reserve so that is not in question.
What’s in question however, is that the direct TARP money the banks received could not by itself have resulted in these earnings.
AIG might well be the answer to this mystery. Since the beginning of this financial crisis, the over-leveraged AIG has received more than $170 Billion in Taxpayer money to satisfy debts caused by the collateralized debt obligations, credit default swaps and other similar financial instruments it underwrote prior to the September 2008 financial crisis.
The Washington Post Disclosed some US and foreign Banks and entities that received some $85 Billion of this Bailout money.
You can read more by visiting the url below.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/15/AR2009031501909.html
It is quite clear that US Taxpayer money went to bailout U.S and other Foreign Banks and financial institutions hence we have seen healthy earnings from some of these institutions.
If this is indeed the case behind these profits, then we can say they were nothing more than a transfer of money from U.S taxpayers to banks, with AIG acting as the go-between.
AIG however, is potentially still on the hook for several hundred billions more, should certain defaults occur on financial instruments it has underwritten
This could mean that second quarter earnings for these banks would be anything but as rosy as these first quarter shows, unless Bailout Nation continues to expand and congress approves more bailout money after a well anticipated mighty political battle on Capitol hill.
With the TARP running low on funds and the Government refusing to say how much is left, could it be that the U.S Taxpayer is on the hook for a few hundred billion bucks more in bailout money?
Or could this really mean that we would see another decline in the financials as second quarter earnings paint a grim picture?
We surely will find out between now and the end of the 2nd quarter of 2009, at least as far as the Banks and financials are concerned.
Ofuoma Odje
Since the DOW and the S&P touched 12 year lows of 6763 and 666 respectively in early March 2009, the stock market has rallied by approximately 20%. The move has been fueled mainly by the Financials.
So what has changed since the massive shock of the September 2008 Financial Crisis?
A few Banks like Citibank, Bank of America and JP Morgan have all come out to say they made money in first 2 months of 2009. These claims of course spearheaded the current rally in the Financials and the broader market.
However, taking a closer look at these claims and insinuations, one could ask how Banks that were deemed insolvent only a few months ago have suddenly returned to profitability with overwhelming alacrity.
Recent earnings reports from Goldman Sachs, JP Morgan Chase, Citibank and a preview Wells Fargo’s numbers have all been better than expected and have resulted in the Financials rallying higher and higher.
So how could so many investors be so wrong a few months ago when they sold banks into multi year lows?
Or could they have been right anyway?
Let’s look at some key economic indicators between the months of September 2008 and March 2009, a climate where these Banks have claimed to make such remarkable profits.
First of all, nearly 2.6 million jobs were lost in 2008 alone, with another 1.9 million more lost in the first quarter of 2009. To be quite specific, let’s look some headlines of the Government’s Job Reports between the months of September 2008 and March 2009.
---159,000 Jobs Lost in September 2008, the Worst Month in Five Years
---240,000 jobs lost in the US in October 2008
---The nation’s employers cut 533,000 jobs in November worst in a generation
--- The U.S. economy lost 524,000 jobs in December, the 12th straight month of decline.
---Employers slashed 598,000 more jobs in January as unemployment rate climbed to 7.6%.
---651,000 US Jobs Lost in February; Unemployment Rate Now at 8.1%
---US jobs lost in March 2009 totaled 663,000; Unemployment Rate Now at 8.5%
Add to this the wave of foreclosures and bankruptcies filed by individuals, corporations and institutions, and you will get a clear picture of a depression at the least.
Examples are all around us. Household names like Linen and Things, Circuit City and Sharper Image are now history thanks to the financial crisis.
Only last week Mall Operator GEN GROWTH PROP INC (GGP) filed for bankruptcy protection sparking concerns about new wave of trouble in commercial real estate.
So how did these Banks manage to net outstanding profits in this same time period? No one can say for sure but we can speculate.
We know that these Banks received TARP Money from the Federal Reserve so that is not in question.
What’s in question however, is that the direct TARP money the banks received could not by itself have resulted in these earnings.
AIG might well be the answer to this mystery. Since the beginning of this financial crisis, the over-leveraged AIG has received more than $170 Billion in Taxpayer money to satisfy debts caused by the collateralized debt obligations, credit default swaps and other similar financial instruments it underwrote prior to the September 2008 financial crisis.
The Washington Post Disclosed some US and foreign Banks and entities that received some $85 Billion of this Bailout money.
You can read more by visiting the url below.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/15/AR2009031501909.html
It is quite clear that US Taxpayer money went to bailout U.S and other Foreign Banks and financial institutions hence we have seen healthy earnings from some of these institutions.
If this is indeed the case behind these profits, then we can say they were nothing more than a transfer of money from U.S taxpayers to banks, with AIG acting as the go-between.
AIG however, is potentially still on the hook for several hundred billions more, should certain defaults occur on financial instruments it has underwritten
This could mean that second quarter earnings for these banks would be anything but as rosy as these first quarter shows, unless Bailout Nation continues to expand and congress approves more bailout money after a well anticipated mighty political battle on Capitol hill.
With the TARP running low on funds and the Government refusing to say how much is left, could it be that the U.S Taxpayer is on the hook for a few hundred billion bucks more in bailout money?
Or could this really mean that we would see another decline in the financials as second quarter earnings paint a grim picture?
We surely will find out between now and the end of the 2nd quarter of 2009, at least as far as the Banks and financials are concerned.
Ofuoma Odje
Wednesday, April 15, 2009
Ofuoma Odje on Business Journalism
Is business journalism now a blend of political and business Reporting?
by Ofuoma Odje
Long ago Business journalism used to be about Walls Street, stocks, businesses, finance, entrepreneurs and so on.
Business journalism today however seems to be a blend of Washington, Capitol Hill, Politicians, Legislation and many other socio-political issues along with core business reporting.
It appears that September 2008 collapse of the Global Financial System along with the recent worldwide recession is redefining Systemic Financial Procedures, consumer sentiment/spending, Lending and Borrowing practices, as well as Business Journalism.
One example was the recent frenzy about bailout nation. Main Street has been furious about the Fed’s actions that was seen by many as mortgaging the future of all Americans to bailout major Financial Institutions that have been irresponsible in conducting their business.
Many argue that these institutions should have been allowed to fail even if it meant the collapse of Capitalism and that those institutions left standing after the collapse should have been allowed to benefit from the demise of these failed institutions.
There has also been the auto crisis. With GM and Chrysler on the verge of Bankruptcy and Ford struggling to stay healthy, many have questioned why the Government should throw good money after bad money.
Both the Bailout of the Financial Institutions and the Auto Crisis were hot button topics during the 2008 Presidential Elections.
Mainstream business media including the likes of CNBC and Bloomberg have been caught in the middle of business and political reporting. They often interview politicians on business shows/airtime who sometimes have no business background or full understanding of the subject matter in play but are influential in passing important legislation that would impact the business community.
They also report on the behavior of these politicians and how they sometimes base their vote on legislation that impact the economy on pure political and main street sentiment, even when those sentiments are not in the best interest of the economy.
Then there are the politicians who are lobbied by Walls Street with cash and gifts to influence how they vote on legislation.
Many argue that the 2008 collapse of the Global Financial System has permanently scarred Capitalism forever, and that trust would almost never be wholly restored.
As for Business Journalism, one could also argue that it would never be strictly about business, finance and the markets from this point on.
Ofuoma Odje
by Ofuoma Odje
Long ago Business journalism used to be about Walls Street, stocks, businesses, finance, entrepreneurs and so on.
Business journalism today however seems to be a blend of Washington, Capitol Hill, Politicians, Legislation and many other socio-political issues along with core business reporting.
It appears that September 2008 collapse of the Global Financial System along with the recent worldwide recession is redefining Systemic Financial Procedures, consumer sentiment/spending, Lending and Borrowing practices, as well as Business Journalism.
One example was the recent frenzy about bailout nation. Main Street has been furious about the Fed’s actions that was seen by many as mortgaging the future of all Americans to bailout major Financial Institutions that have been irresponsible in conducting their business.
Many argue that these institutions should have been allowed to fail even if it meant the collapse of Capitalism and that those institutions left standing after the collapse should have been allowed to benefit from the demise of these failed institutions.
There has also been the auto crisis. With GM and Chrysler on the verge of Bankruptcy and Ford struggling to stay healthy, many have questioned why the Government should throw good money after bad money.
Both the Bailout of the Financial Institutions and the Auto Crisis were hot button topics during the 2008 Presidential Elections.
Mainstream business media including the likes of CNBC and Bloomberg have been caught in the middle of business and political reporting. They often interview politicians on business shows/airtime who sometimes have no business background or full understanding of the subject matter in play but are influential in passing important legislation that would impact the business community.
They also report on the behavior of these politicians and how they sometimes base their vote on legislation that impact the economy on pure political and main street sentiment, even when those sentiments are not in the best interest of the economy.
Then there are the politicians who are lobbied by Walls Street with cash and gifts to influence how they vote on legislation.
Many argue that the 2008 collapse of the Global Financial System has permanently scarred Capitalism forever, and that trust would almost never be wholly restored.
As for Business Journalism, one could also argue that it would never be strictly about business, finance and the markets from this point on.
Ofuoma Odje
Monday, April 13, 2009
Ofuoma Odje on President Barack Obama's healthcare plan
Ofuoma Odje on Barack Obama’s Universal Healthcare Plan
Universal health care is a Government sponsored system for the healthcare of all its residents regardless of their medical condition or financial status. Is this feasible America? And is it the best for American Businesses?
As the push for the Barack Obama proposed Universal Healthcare heats up on Capitol Hill many argue about the merits and demerits of a Universal Healthcare system.
Experts estimate Americans without Healthcare insurance to be as many as 47 million. At the same time, Healthcare spending in the United States account for about 15% of its GDP, the highest in any industrialized nation.
Nationalized healthcare models are being used in Countries like Canada and Great Britain and residents of those countries are fully covered by the State. There are questions however, about the quality of healthcare services received under those models.
Perhaps we couldn’t make an argument as to whether the health insurance based model being used in the U.S today would have also proven successful in Canada and in the UK or other European Countries because they never adopted such a model in the first place.
Good or bad we must critique the whole idea of a nationalized healthcare system in the U.S. There are arguments ranging from the insinuation that the Government is no good at running anything and that the current U.S healthcare system is the best in the world and should not be tinkered with by the Government, to arguments that Healthcare coverage is a right to U.S citizens and residents rather than a privilege as it is today.
It would seem that a good place to start is to find out who stands to gain the most and who stands to loose the most from a nationalized healthcare system.
The increasing cost of employee Healthcare in U.S is a cause of a lot of concern in Corporate America and many Executives are speaking out about the impact on earnings and the ability of U.S businesses to remain competitive on a Global scale whilst carrying this burden. Employees have also expressed concerns about the rising cost of their share of health insurance premiums.
Major U.S Employers like Wal-Mart and General Mills have been some of the recent proponents of Universal Healthcare that have argued that the current Health Insurance Model is simply unsustainable going forward.
There is little doubt that the Barack Obama Universal Healthcare plan cannot take off without broad reforms and enactment of regulations to govern the provision of health coverage by large healthcare companies.
This raises the first question which is:- How can we include an estimated 40% of the population and reduce Healthcare costs by over 60% at the same time?
Even if there are efficiencies to be realized from restructuring the existing system, it is still somewhat baffling to imagine the credibility of this proposition without having the taxpayer on the hook for a very significant portion of the bill. One could even argue that Healthcare giants like Aetna and United Health Care could not remain profitable without huge taxpayer subsidies.
One key point to note is that companies like Aetna and United Health will effectively see the demise of their HMO business as those who currently have coverage would make changes to their plans in order to take advantage of Barack Obama Universal Healthcare plan.
Who are the winners and losers?
A good question though, is who actually benefits from Universal Healthcare? It is hard to be definite today, but one could argue that Generic Drug makers and Hospitals would be winners right off the wall.
Corporate America would be another big winner as the burden of Managed Employee Healthcare is lifted off its shoulders. In addition, the estimated uninsured 47 million Americans would also be winners under this scenario.
While big Pharma would take a hit because of Government pressure on drug pricing, those who do well with producing hard-to-make generic drugs should experience lower development risk.
However, Government pressure on drug pricing could hamper research and development of new drugs or result in U.S. Pharmaceutical Companies relocating abroad to countries with more favorable business environments; taking away U.S jobs in some cases.
Companies like Aetna and United Health would not be as fortunate because their HMO business will be completely wiped out by the Barack Obama Universal Healthcare plan, and if there are no taxpayer subsidies these companies will see a decline in earnings.
The Politics
The Barack Obama proposed Universal Healthcare Plan would be a success if there is no money to be made in the decision making process of enacting the Universal Healthcare Plan.
It is no news that big business is in bed with Lawmakers and Politicians. Therefore we must expect serious lobbying of Lawmakers and Politicians by large Healthcare institutions that stand to gain or loose from Universal Healthcare.
This kind of lobbying however, if allowed, will get in the way of getting the peoples business done. The result could mean that Universal Healthcare would be held up in both houses of congress and never get enacted in Barack Obama’s first term. Even worse we could see a compromised mediocre version of Universal Healthcare passed by the House and Senate after falling victim to lobbying by big business interests.
The Bottom-line
Universal Healthcare may well not be feasible in America for the sheer reason that it’s a socialist concept that goes against the very tenets of Capitalism on which the American society was established.
Simply put, it is un-American to propose the use of taxpayers’ money to pay for the Healthcare of those who do not contribute to the economy.
On the flip side, one could take a long shot and make an argument that Healthcare is a constitutional right of all Americans. In the face of this kind of argument, Universal Healthcare could stand a chance.
Ofuoma Odje
Universal health care is a Government sponsored system for the healthcare of all its residents regardless of their medical condition or financial status. Is this feasible America? And is it the best for American Businesses?
As the push for the Barack Obama proposed Universal Healthcare heats up on Capitol Hill many argue about the merits and demerits of a Universal Healthcare system.
Experts estimate Americans without Healthcare insurance to be as many as 47 million. At the same time, Healthcare spending in the United States account for about 15% of its GDP, the highest in any industrialized nation.
Nationalized healthcare models are being used in Countries like Canada and Great Britain and residents of those countries are fully covered by the State. There are questions however, about the quality of healthcare services received under those models.
Perhaps we couldn’t make an argument as to whether the health insurance based model being used in the U.S today would have also proven successful in Canada and in the UK or other European Countries because they never adopted such a model in the first place.
Good or bad we must critique the whole idea of a nationalized healthcare system in the U.S. There are arguments ranging from the insinuation that the Government is no good at running anything and that the current U.S healthcare system is the best in the world and should not be tinkered with by the Government, to arguments that Healthcare coverage is a right to U.S citizens and residents rather than a privilege as it is today.
It would seem that a good place to start is to find out who stands to gain the most and who stands to loose the most from a nationalized healthcare system.
The increasing cost of employee Healthcare in U.S is a cause of a lot of concern in Corporate America and many Executives are speaking out about the impact on earnings and the ability of U.S businesses to remain competitive on a Global scale whilst carrying this burden. Employees have also expressed concerns about the rising cost of their share of health insurance premiums.
Major U.S Employers like Wal-Mart and General Mills have been some of the recent proponents of Universal Healthcare that have argued that the current Health Insurance Model is simply unsustainable going forward.
There is little doubt that the Barack Obama Universal Healthcare plan cannot take off without broad reforms and enactment of regulations to govern the provision of health coverage by large healthcare companies.
This raises the first question which is:- How can we include an estimated 40% of the population and reduce Healthcare costs by over 60% at the same time?
Even if there are efficiencies to be realized from restructuring the existing system, it is still somewhat baffling to imagine the credibility of this proposition without having the taxpayer on the hook for a very significant portion of the bill. One could even argue that Healthcare giants like Aetna and United Health Care could not remain profitable without huge taxpayer subsidies.
One key point to note is that companies like Aetna and United Health will effectively see the demise of their HMO business as those who currently have coverage would make changes to their plans in order to take advantage of Barack Obama Universal Healthcare plan.
Who are the winners and losers?
A good question though, is who actually benefits from Universal Healthcare? It is hard to be definite today, but one could argue that Generic Drug makers and Hospitals would be winners right off the wall.
Corporate America would be another big winner as the burden of Managed Employee Healthcare is lifted off its shoulders. In addition, the estimated uninsured 47 million Americans would also be winners under this scenario.
While big Pharma would take a hit because of Government pressure on drug pricing, those who do well with producing hard-to-make generic drugs should experience lower development risk.
However, Government pressure on drug pricing could hamper research and development of new drugs or result in U.S. Pharmaceutical Companies relocating abroad to countries with more favorable business environments; taking away U.S jobs in some cases.
Companies like Aetna and United Health would not be as fortunate because their HMO business will be completely wiped out by the Barack Obama Universal Healthcare plan, and if there are no taxpayer subsidies these companies will see a decline in earnings.
The Politics
The Barack Obama proposed Universal Healthcare Plan would be a success if there is no money to be made in the decision making process of enacting the Universal Healthcare Plan.
It is no news that big business is in bed with Lawmakers and Politicians. Therefore we must expect serious lobbying of Lawmakers and Politicians by large Healthcare institutions that stand to gain or loose from Universal Healthcare.
This kind of lobbying however, if allowed, will get in the way of getting the peoples business done. The result could mean that Universal Healthcare would be held up in both houses of congress and never get enacted in Barack Obama’s first term. Even worse we could see a compromised mediocre version of Universal Healthcare passed by the House and Senate after falling victim to lobbying by big business interests.
The Bottom-line
Universal Healthcare may well not be feasible in America for the sheer reason that it’s a socialist concept that goes against the very tenets of Capitalism on which the American society was established.
Simply put, it is un-American to propose the use of taxpayers’ money to pay for the Healthcare of those who do not contribute to the economy.
On the flip side, one could take a long shot and make an argument that Healthcare is a constitutional right of all Americans. In the face of this kind of argument, Universal Healthcare could stand a chance.
Ofuoma Odje
Tuesday, March 31, 2009
Ofuoma Odje stock market comments
Ofuoma Odje on the recent market crash
The uptick rule established after the 1929 crash, may have contributed to the recent market declines.
Not acting quickly to restore this rule may still be costly to the markets.
It is clear that massive shorting of stocks of major financial institutions by big hedge funds and other big investors were a catalyst to the current financial crisis.
Even worse was the illegal naked shorting these stocks. Usually when shorting a stock the trader or investor borrows the stock on margin and sells in the market with the expectation that the stock price will go down in the future in which case he would buy and return the stocks but keep the difference as profit.
Naked shorting however is a practice of selling the stock without borrowing or owning them to ensure that the transaction can be completed within the required timeframe. This is pure speculation and can be used to manipulate the market.
Naked shorting sometimes leads to a result known as a "fail to deliver, which means the seller does not obtain the shares within the required time frame. However the damage to a stock price would have been complete at that stage.
One way to realize how damaging this practice can be to the financials is highlighted in this scenario.
Take a blue-chip company like Coca Cola or say Johnson and Johnson.
If the stocks of these 2 companies are shorted and go down to extremely low levels, people will still continue to buy and drink coke and use baby care products, Listerine mouthwash etc because these are essentials, therefore the companies will still continue to conduct business as usual even at low stock prices.
However, when stocks of banks are shorted and go to very low levels, people get concerned and begin a run on the banks because they are concerned about the safety of their deposits.
This in turn diminishes the banks’ financial posture in addition to market cap lost by the price drop in stock. It even goes on to hurt their credit rating with the rating agencies who could downgrade the bank's bonds(debt) to junk status and increases cost of credit to the bank who are often asked to put up more assets as collateral against its debt since a loss in market cap would hurt any debt secured by its stock.
Also small investors see their trading accounts and 401ks take a big hit. In extreme cases the bank gets seized by the FDIC and the deposits are sold to a healthier bank and the common equity holders are left holding the bag. The demise of Washington Mutual was one example of this. It was ultimately seized by the FDIC who sold its deposits and assets to JP Morgan Chase.
The uptick rule established after the 1929 crash was clearly intended to at least mitigate the kind of crash that recently occurred in the markets.
Before being eliminated by the SEC on July 6th, 2007 the uptick rule prevented sellers from adding to the downward pressure on the market by barring sellers from shorting stocks on a downtick. It mandated that after shorting a stock, the next order must be entered at a higher bid. This offered protection for honest investors as well as small and retail investors.
Eliminating the rule was at best unhelpful for the markets as it resulted in the rushed destruction of some of the most outstanding financial institutions which in turn destroyed confidence in the Global Financial System
The SEC has recently hinted that it will consider an even more stringent uptick rule that would not only prevent shorting stocks on a downtick, but would force the shorts to enter their orders at a price higher than the highest bid.
While betting against the market is a legitimate means of making money, unregulated shorting can destroy or decimate healthy institutions, destroy bullishness, and ultimately make the markets a place where growth can seldom be expected.
The SEC and/or Congress should at least ban short selling financial institutions until a new uptick rule is in place.
If a ban is not enacted pending a new uptick rule, we would at best see sideways movements in the financials or even worse, we could see another serious decline in the stock prices of major financial institutions catalyzed by these short sellers.
We also risk scaring away an entire generation of small and retail investors.
Ofuoma Odje
The uptick rule established after the 1929 crash, may have contributed to the recent market declines.
Not acting quickly to restore this rule may still be costly to the markets.
It is clear that massive shorting of stocks of major financial institutions by big hedge funds and other big investors were a catalyst to the current financial crisis.
Even worse was the illegal naked shorting these stocks. Usually when shorting a stock the trader or investor borrows the stock on margin and sells in the market with the expectation that the stock price will go down in the future in which case he would buy and return the stocks but keep the difference as profit.
Naked shorting however is a practice of selling the stock without borrowing or owning them to ensure that the transaction can be completed within the required timeframe. This is pure speculation and can be used to manipulate the market.
Naked shorting sometimes leads to a result known as a "fail to deliver, which means the seller does not obtain the shares within the required time frame. However the damage to a stock price would have been complete at that stage.
One way to realize how damaging this practice can be to the financials is highlighted in this scenario.
Take a blue-chip company like Coca Cola or say Johnson and Johnson.
If the stocks of these 2 companies are shorted and go down to extremely low levels, people will still continue to buy and drink coke and use baby care products, Listerine mouthwash etc because these are essentials, therefore the companies will still continue to conduct business as usual even at low stock prices.
However, when stocks of banks are shorted and go to very low levels, people get concerned and begin a run on the banks because they are concerned about the safety of their deposits.
This in turn diminishes the banks’ financial posture in addition to market cap lost by the price drop in stock. It even goes on to hurt their credit rating with the rating agencies who could downgrade the bank's bonds(debt) to junk status and increases cost of credit to the bank who are often asked to put up more assets as collateral against its debt since a loss in market cap would hurt any debt secured by its stock.
Also small investors see their trading accounts and 401ks take a big hit. In extreme cases the bank gets seized by the FDIC and the deposits are sold to a healthier bank and the common equity holders are left holding the bag. The demise of Washington Mutual was one example of this. It was ultimately seized by the FDIC who sold its deposits and assets to JP Morgan Chase.
The uptick rule established after the 1929 crash was clearly intended to at least mitigate the kind of crash that recently occurred in the markets.
Before being eliminated by the SEC on July 6th, 2007 the uptick rule prevented sellers from adding to the downward pressure on the market by barring sellers from shorting stocks on a downtick. It mandated that after shorting a stock, the next order must be entered at a higher bid. This offered protection for honest investors as well as small and retail investors.
Eliminating the rule was at best unhelpful for the markets as it resulted in the rushed destruction of some of the most outstanding financial institutions which in turn destroyed confidence in the Global Financial System
The SEC has recently hinted that it will consider an even more stringent uptick rule that would not only prevent shorting stocks on a downtick, but would force the shorts to enter their orders at a price higher than the highest bid.
While betting against the market is a legitimate means of making money, unregulated shorting can destroy or decimate healthy institutions, destroy bullishness, and ultimately make the markets a place where growth can seldom be expected.
The SEC and/or Congress should at least ban short selling financial institutions until a new uptick rule is in place.
If a ban is not enacted pending a new uptick rule, we would at best see sideways movements in the financials or even worse, we could see another serious decline in the stock prices of major financial institutions catalyzed by these short sellers.
We also risk scaring away an entire generation of small and retail investors.
Ofuoma Odje
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