Everything About Finance

As far as the bailout is concerned, I feel that it has done everything that it is supposed to do except… Create new Jobs! It has been successful in keeping existing jobs in the public service sector, but what needs to happen is that these Federal projects need to stimulate the private sector to start hiring again.

Having said that lets see what it has done so far.

A Good sign: The political action committee of Goldman Sachs Group Inc. stepped up its donations in the third quarter of this year after the New York-based investment bank paid back its U.S. taxpayer rescue funds.

Another one: $62 million worth of bailout money shoveled into  Chrysler and GM is that taxpayers can expect to see some of that money paid back.

In early September, the government placed mortgage guarantors Fannie Mae and Freddie Mac into conservatorship, saying the move would lower mortgage rates, stem foreclosures and help relieve the financial crisis.

Taking over Fannie and Freddie did protect two institutions that are vital to the nation’s mortgage market. But it has explicitly exposed the government to trillions in losses. Fannie and Freddie insure about half the $11 trillion mortgage market.

In late September, Treasury Secretary Henry Paulson asked Congress for $700 billion to save the nation’s financial system.

The good news is that there hasn’t been a single major bank failure since TARP was launched. But the sudden changes in the plan have added volatility to the nation’s financial markets and hurt the Treasury Secretary’s credibility.

How have we fixed the broken incentives at banks?

Thank goodness we’re getting tough on the banks that were reckless! And then, it turns out Mr. Feinberg did the banks the favor of removing the risk from a large portion of their compensation: he boosted base salaries at these firms, fearing top employees might leave. For those unfamiliar with how Wall St. compensation works, the variable portion that can be cut on a whim without recourse is the bonus–by increasing the salaries, he increased the money that is guaranteed. Regardless of the aforementioned actions, we still don’t have a good answer on how firms will tie their own fortunes, in the long term, to that of their employees.

After a well-known fund lost money in mid-September, assets in money-market funds dropped by $400 billion in two weeks. Money funds help provide loans for the day-to-day operations of large companies. So with investors fleeing these funds, many companies would have had to pay more for short-term loans or not gotten them at all.

The move quickly reversed the run on money funds. What’s more, it hasn’t cost the government a penny. In fact, it has actually made money for the government. Nearly every money-market-fund provider signed up for the insurance, which has generated some $750 million in premiums paid to the government since the program started.

What have we done about “Too Big To Fail?”
History will dictate that, once a firm is large enough, it has to be saved–by continuing to pay millions and keep management, you’re giving no disincentive for future firms. The government needs to put stiff rules in place that will prevent institutions from getting too big, and breakup the ones that exist now.

President Obama has offered community banks a deal:  If they’ll increase their lending to small businesses, he’ll give them cheap capital to do it.

Under the president’s plan, banks with less than $1 billion in assets will be able to get new capital from the U.S. Treasury Department’s Troubled Asset Relief Program at a 3 percent dividend rate. That’s a significant savings compared with the 5 percent rate now available to banks that tap TARP.

To encourage banks to repay the loans in a timely fashion, the dividend rate will increase to 9 percent after five years.

To access this capital, community banks must submit a plan explaining how they will use the money to increase lending to small businesses. They also will have to file quarterly reports on their small business loans.

Lets hope that this encourages banks to convince businesses to take loans and start hiring again.