SPIN METER: Future bailouts are part of the plan

WASHINGTON (AP) - Speaking on the anniversary of the start of the financial meltdown, President Barack Obama warned bankers not to "expect that next time, American taxpayers will be there to break their fall."

Obama's plan for overhauling the financial system creates a new category for the largest banks, those whose failures would threaten the wider financial system. These "Tier I" companies will face stricter rules designed to limit how much risk they can take and how much damage they would do if they fail.

The banks have repaid about half of their share of TARP and the money lent to them will show a profit, in double digits. It was always money-good, and not supporting them would have cost the treasury hundreds of billions, since it is on the hook for deposit insurance already. The banks are not broke, they aren't going to go broke with huge positive cash flow as they let loans run off, while they borrow at 0-1% and lend at 5-6%.

Fannie and Freddie have only drawn $75 billion of the $400 billion TARP funds set aside for them, and are already cash flow profitable. All their losses stem from high reserving and from marking down mortgages directly owned. They will end up repaying the taxpayers in full, but it may take 3-5 years. There is no long run danger to the US treasury on them.

The autos were a populist boondoggle from the word go and roughly 80% of the money spent on them will be lost. It was mostly a straight gift to the UAW (hardly poor BTW), with subsidies in the single digit billions for Fiat and existing bondholders. If GM does very well the loss might be cut somewhat, but basically $50 billion was just thrown away on them as a sop to populists and Dems.

The other consumer oriented bits of TARP, added due to populist congressional pressure at the last minute, like mortgage refinancing funding and consumer receivables lending, will lose single digit billions. They were unsound as credits but still basically lending operations, not outright gift to bankrupts.

AIG is the only one left with significant remaining uncertainty. They might lose $50 billion in the end, or they might fully repay the treasury on asset sales at non-distressed prices and future earnings of their sound insurance lines.

If the auto boondoggle had not been added, the entire program would have broken even directly, or better. With it added, we will be lucky to get back to break even and might end up out about $100 billion.

We spend that much on middle class entitlements every month.

If some financial institutions are “too big” to fail, then why not just SHRINK them to a less dangerous size?

Such shrinking would not require any government meddling beyond charging the banks higher and higher FDIC fees as the liabilities of those banks grow. Eventually, those costs would drive even foolish board members to see that incremental “growth” does NOT produce incremental “profits”.

If there is a “phase-in” of those higher FDIC fees, there should be minimal disruption as banks decline to promote their less profitable products and banks sell off their less profitable business units.

IMHO, the still un-resolved problem of excessively leveraged “derivatives” could be minimized by requiring banks to place higher reserves against them. Given the degree of debt-driven speculation in our current derivatives markets, that change would also have to be phased-in.

President Barack Obama warned bankers not to “expect that next time, American taxpayers will be there to break their fall.”

If his purple lips were moving, he was lying.
When he’s with the Clintons, they both defer to his superior lying skills.
He lies in his sleep.
He lies when he doesn’t have to, just to stay in practice.
He’s such a liar, his dog won’t come when he calls.
When he proposed to “Wide-load”, she had the proposal put in writing and notarized.
When he goes upstairs and says, “Kids! It’s good to be home!” his children reply, “Are you lying again, Dad?”
He is the only man alive who has ever done anything better than Chuck Norris. (But Chuck Norris never lies.)
The Obama action figure and Raggedy Ann ...
out of time

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