Stress Surrounds Stress Tests
“The Federal Reserve and other regulators aim to release the results of stress tests on 19 of the biggest U.S. banks on May 4,” reports Bloomberg. “The tests are designed to mesh with the administration’s effort to remove distressed mortgage assets from banks’ balance sheets, which have hampered lending to consumers and businesses. Officials aim to have the first purchases of the toxic assets by private investors financed by the government within weeks of the conclusion of the capital-need assessments. ”
Calculated Risk: “May 4th is a Monday … I wonder if the results will be released pre-market (or even leaked Sunday night).”
For all the bailout money they’ve received, some of America’s biggest banks are still unwilling to sell many of the toxic assets clogging their balance sheets. The prices being offered, they say, are simply too low, and neither massive government subsidies for buyers nor encouragement from President Obama has thus far been sufficient to change their minds…
…This tension over pricing helps explain the leaked stories on Wednesday announcing that Treasury Secretary Timothy Geithner will make public the results of the banks’ “stress tests” next month. The tests started out in March as a gauge of banks’ ability to handle a worst-case economic downturn; now they’ve become a weapon for Obama and Geithner to force the banks to clean up their acts, officials say.
First, the stress tests could show that the banks will survive any further economic decline over the next few months. For this Panglossian approach to succeed, the administration would have to convince the markets that its tests were sufficiently stressful – a tall order should it produce a straight flush of 19 unlikely solvencies.
Second, the tests could reveal significant capital shortfalls. The Treasury would then give viable banks six months to raise the difference from the private markets. …. To declare a shortfall that the Treasury cannot instantly plug may be to risk another meltdown, triggering a crisis of confidence in Mr Obama’s whole approach to the credit crunch.
Third, Mr Obama could take insolvent banks into receivership and wipe out the stakeholders – senior creditors included … Mr Obama always has the option of saying he has changed his mind. The stress tests revealed a far worse picture than imagined, he might say, leaving a temporary takeover of the leading banks as the only viable option. Or he could spend some of his considerable political capital appealing to Congress to authorise more funds to recapitalise the banks.
The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz” tells Bloomberg.
AIG starts to work off debt. Fortune: “AIG made the first big dent Thursday in its mountain of IOUs to taxpayers [agreeing] to sell its U.S. car insurance business to a unit of Zurich Financial Services for $2 billion in cash, notes and debt assumption … The company is trying to sell assets to raise cash to whittle down its gigantic obligations to the Treasury and the Federal Reserve Bank of New York. But progress has been slow.”
Bloomberg reports on government involvement after shares are bought back: “The Treasury may retain a stake in many U.S. banks even after they buy back the shares the government currently holds. The government will continue to hold warrants, attached to every capital injection it has made, even after any share buybacks, Treasury officials said. Banks seeking to escape the government’s grip want to retire the warrants — which give the right to buy stock in the future at a preset price — at the same time they acquire the government-owned preferred shares. The officials said the U.S. would give up the warrants only after subsequent talks with appraisers and the banks to agree on a price. As long as the warrants remain, lenders would continue to face some federal constraints, including limits on hiring non-American citizens, the officials said. Lenders would be freed of restrictions on executive pay and dividends, they said.”
In its latest attempt to restart financial markets, the Federal Reserve is weighing a twist in one of its rescue programs that it hopes will encourage investors to buy long-term commercial-mortgage-backed securities … TALF, offers three-year loans to investors who use them to buy asset-backed securities. Fed officials are considering whether to offer investors in commercial real-estate securities loans of as long as five years to make the program more appealing. But the Fed loans would become less attractive the longer they run to encourage investors to seek other financing as the economy recovers.
Fed officials want to accommodate investors, but fear that if they go too far they could undermine the central bank’s longer-run objectives. Officials are worried that making too many long-term loans could interfere with their ability to withdraw credit and raise interest rates when the economy recovers … People familiar with the matter say Fed officials haven’t reached a decision on the matter. Fed officials already reluctantly extended the terms of TALF loans from one year to three years.
Baseline Scenario’s Simon Johnson lambastes AIG CEO for owning Goldman shares: “Have we completely lost of sense of what is and is not a conflict of interest? Have we really built a system in which greed fully overshadows responsibility? Is it not time for a complete rethink of what constitutes acceptable executive behavior? One of our country’s leading corporate attorneys made a telling point to me on Wednesday night, ‘the only way to control executive behavior is to criminalize it,’ i.e., civil penalties do not change behavior – the prospect of jail time has to be on the table.”
Pecora Commission Planning
W. Post reports possibility for “creating a House-Senate committee to conduct one investigation.”
The Hill questions Senate support: “One of House Speaker Nancy Pelosi’s (D-Calif.) top lieutenants could soon become the driving force behind legislation to create a bipartisan commission to investigate Wall Street’s collapse. Talks are already under way between Pelosi and Democratic Caucus Chairman John Larson’s office about using his legislation as a jumping-off point … Democratic leadership aides in the House said the details behind the proposals would be addressed in the coming weeks though additional negotiations … Whether the effort can win Senate support is an open question.”
Pelosi’s original comments open door for a House-only effort: “…we’re going to have a commission of sorts, even if it’s a commission just in the House of Representatives…”
Campaign for America’s Future’s Bob Borosage list criteria for commission to work: “The commission needs subpoena power. It needs to be able to expose what appears to be widespread fraudulent and illegal practices – that can only be done with the power to demand production of documents and witnesses. It needs a large, aggressive and competent staff able to sort through volumes of material. It needs time to lay out the case to the public. And it needs courageous commissioners and a fearless prosecutor, a modern day Pecora, committed to unearthing the truth.”
OurFuture.org’s Bernie Horn: “Speaker Pelosi deserves substantial praise for this important and controversial plan. It’s controversial, of course, because executives on Wall Street don’t want to be investigated! They don’t want their (legal and illegal) Ponzi-like schemes and financial game-playing to be exposed. They want to keep Congress—and American taxpayers—in the dark about why we’re spending monumental sums on corporate bailouts and where the money goes.”
High-Speed Rail Leaving Station
LA Times: “President Obama touted his plan for developing high-speed railways Thursday, detailing how $13 billion in federal money would act as a ‘down payment’ on creating speedier passenger train service … The administration has not announced the criteria on which it will award funding, but it aims to release money by the end of the summer … a long-discussed high-speed rail line from Las Vegas to Anaheim was not included on a White House map of those likely to receive funding…”
Transportation experts are hailing the proposal as a good step forward, but cautioning that building high-speed rail on the same scale as the interstate highway system is going to require a little more than $8 billion. Presumably, this is a down payment on more significant funding to come…
…Some will cry boondoggle; certainly GOP leaders attempted to do so in (falsely) claiming that the $8 billion was destined for Harry Reid’s Mag-Lev line. This is a little silly. Rail in the northeastern corridor demonstrates that transit can become a crucial, even indispensable, part of the the infrastructure powering a regional economy. And most of the initial investments will be more about building a basic, functional passenger system, as opposed to bullet trains. Upgrades will involve getting trains to speeds around 120 miles per hour, improving reliability, increasing frequency, and so on. In a country where intercity highway and air travel have become burdensome, expensive, and plagued by congestion and delays, and where reduced carbon emissions is a priority, these are the minimum acceptable steps for the rail system.
And as was the case with highway construction, improved rail service will create its own demand. Faster, more reliable trains will attract riders and drive investment. New investment will attract new riders, and so on. The result will be a more balanced, reliable, redundant transportation system, that also happens to be more convenient and greener.
The Transport Politics says good criteria are being established: “the report’s basic outlines of the kinds of projects the federal government wants to fund with rail money are demonstrative of the administration’s seriousness in undertaking this project. By arguing that high-speed rail is most applicable for corridors between 100 and 600 miles in areas of moderate to high density, we can be assured that the government won’t be funding just any project with the limited funds available for rail. It’s good to know, in other words, that a line between El Paso and Phoenix isn’t going to get money over the connection between San Francisco and Los Angeles.”
TNR’s Brad Plumer rebuts claim that more passenger rail hurts environment by pushing freight onto roads.
WH Strategy on Public Health Insurance Option
The Treatment’s Jonathan Cohn notes while there is momentum for a public plan, it may be for a weaker version:
In the last few months, the administration has been pushing the public insurance option pretty hard. At the White House health summit in March, Obama himself seized the opportunity to make a strong case for it–and to do so before people who, he knew, were sharply critical of the idea. But this statement from DeParle suggests that the administration is looking at two pretty different options for it.
One is what you might call the full, or strong, public plan option: Creating a new insurance program that the government would run directly, much as it does Medicare. The idea would be to take advantage of Medicare’s efficiencies as well as government’s ability to set lower reimbursement prices. Projections suggest that such a program would have the potential to offer substantially lower premiums … Of course, precisely because a strong public plan has the power to offer lower premiums, the idea is a non-starter with the insurance industry. Since it would achieve a lot of its savings by reducing reimbursement levels, it’s not exactly popular with the providers of medical care. And because it is, by definition, “government run,” it’s anathema to most conservatives.
That’s why a second version has emerged, which you might call the partial, or weaker, public plan option: Creating a plan, or set of plans, that realize some of the administrative savings you find in programs like Medicare but explicitly avoid using government bargaining power to set prices. These plans would have potential to achieve some savings, but not nearly as much; and it’s not clear whether they’d be as secure, or offer the same protection to the truly sick (who rightly worry whether private carriers will take care of them), as a strong public plan.
On the other hand, precisely because these plans would be less aggressive about underselling private insurers and driving down reimbursements–and since they wouldn’t be “government-run” in the way a strong plan would–they are more acceptable politically…
…DeParle’s statement both clarifies and qualifies what Obama has said in the past. The administration likes the strong option, clearly, but they’re open to the lesser version as well.
This is probably not what promoters of the strong plan were hoping the administration would say. But it’s important they hear it, because it reflects the emerging political reality. I’d like the strong plan, too. But it’s going to take a serious political effort to make that possible. The votes for such a plan aren’t there yet.
Change.org’s Tim Foley rebuts claim that public plan would “crowd out” private insurance: “Should a public plan be part of the comprehensive health care reform package, no one loses anything. The consumer – either the employer or the uninsured individual – makes a choice. If it’s structured right, and the situation arises where I’m a diehard private insurance guy but my small business boss buys into the public plan for employee coverage, I have the ability to say no and get my own affordable private insurance”
Banks Look To Limit Mortgage, Credit Card Reforms
The Hill checks in on the “fluid” negotiations in the Senate: “Senate Democrats are negotiating with a handful of the nation’s largest banks and some credit unions to limit a controversial bill allowing judges to write down the value of home mortgages … discussions concern whether to limit the bill to certain types of loans or to the date on which the loans were issue … A draft compromise proposal indicates that borrowers who have been offered modifications consistent with the president’s Homeowner Affordability and Stability Plan or with a congressional program on refinancings would not be able to turn to courts to modify their mortgage. Under the proposal, judges would be able to reduce mortgage principal to a “fair market rate” and limit interest payments to a conventional rate plus a “reasonable” risk premium. Only loans made before 2009 and less than $729,750 would be eligible.”
In early March, when the bill went through the House, California Democratic Reps. Ellen Tauscher, Zoe Lofgren and Dennis Cardoza added an amendment directing bankruptcy judges to consider whether a loan modification consistent with President Obama’s plan was offered prior to the consideration of a judicial modification. The Senate deal would take this guideline and turn it into a strict rule: if the lender makes an offer to refinance at a lower rate, the judge can not intervene to make changes to the terms of the mortgage. It gives lenders final control over how loans can be reworked, not the judges.
It would also mean that the mortgage lenders wouldn’t be forced into taking losses. More homeowners would end up with the interest reductions from Obama’s plan, which would come at a cost to the government, not to the banks. Obama’s plan includes a dollar-fordollar matching fund to help bring down interest rates for borrowers and a $1,000 upfront bonus for lenders each time they adjust the interest rates of a loan.
W. Post on unannounced WH mtg today with credit card CEOs: “The executives plan to talk about their efforts to increase transparency and help the economy, according to an industry official and a Capitol Hill aide … The credit card industry has been under intense scrutiny in the past year for practices such as arbitrarily raising interest rates, charging excessive fees and giving customers little time between billing them and requiring payment. In December, the Federal Reserve approved new rules that would ban such practices. But consumer groups and several members of Congress criticized the Fed’s efforts because the new regulations don’t take effect until July 1, 2010. Bills have been introduced in both the House and Senate to accelerate that time line.”
Consumer Action urges voters to press Senate to pass The Credit C.A.R.D. Act, and crack down on the credit card industry.
Unions Step Up Activity
“The AFL-CIO will release a memo today summarizing activities held during the congressional recess to support the Employee Free Choice Act,” reports Hotline On Call
WSJ on Wal-Mart organizing: “The United Food and Commercial Workers union is ramping up organizing at Wal-Mart Stores Inc. after a five-year lull, dovetailing with its efforts to win support in Congress for a bill to make union organizing easier … about 60 UFCW organizers have been dispatched to more than 100 Wal-Mart stores in 15 states to get workers to sign union-authorization cards … the UFCW plans to fly about 100 pro-union Wal-Mart workers to Washington this month to lobby members of Congress on [EFCA.]”
Gaps In Food Safety Regulation
W. Post on food safety report: “Local and state health officials trying to prevent food illness outbreaks are stymied by scarce resources, weak leadership from the federal government and bureaucratic barriers, according to a new study public health experts released yesterday … The study urges Congress to invest at least $350 million over five years to bolster underfunded state and local agencies and ensure a basic level of food safety in each state.”
NYT on food industry self-regulation: “With huge losses from food-poisoning recalls and little oversight from the federal Food and Drug Administration, some sectors of the food industry are cobbling together their own form of regulation in an attempt to reassure consumers. They are paying other government agencies to do what the F.D.A. rarely does: muck through fields and pore over records to make sure food is handled properly. These do-it-yourself programs may provide an enhanced safety level in segments of the industry that have embraced them. But with industry itself footing the bill, some safety advocates worry that the approach could introduce new problems and new conflicts of interest. And they contend that the programs lack the rigor of a well-run federal inspection system.”
Auto Rescue Update
“Surgical” Bankruptcy for Big Auto Looking Increasingly Dubious, says Naked Capitalism
New management expected at Chrysler. WSJ: ” Chrysler LLC will likely get a new chief executive and board of directors appointed by Italy’s Fiat SpA and the U. S. government, if Chrysler and Fiat follow through on their plans to form an alliance, Chrysler’s current CEO told employees in a letter. Chrysler Chief Executive Officer Bob Nardelli said a new board of directors will be appointed by the federal government and Fiat once a deal is completed. The majority of the directors will be independent … Chrysler has been surviving on $4 billion in loans from the federal government and is racing to secure new union cost-cutting deals, reduce its debt and ink a Fiat partnership before the federally mandated April 30 deadline.”
NYT on possible union deal: “Chrysler has agreed to give more than 20 percent of its stock to a U.A.W.-administered trust to pay for half of its $10.6 billion obligation for retiree health care … The agreement has not been formally accepted by the U.A.W., and the exact size of the trust’s equity stake may not be determined for several more days.”
Economic Populist’s Robert Oak: “Anyone else notice that most of these negotiations from the auto industry involve squeezing the workers? Nothing about modifying trade agreements or bad cars or their supply chain…..”
Wonk Room’s Brad Johnson smokes out conservative attempt to stoke division on climate legislation: “The ‘cap-and-trade dividend’ proposal, supported by Obama allies like Rep. Chris Van Hollen (D-MD), recommends distributing carbon market revenues to 100% of American households. Obama’s proposal — which [WSJ's Pierre] du Pont calls ‘the opposite’ — returns 80% of the revenues to 95% of American households. C’mon, Pierre. What definition of ‘opposite’ are you using?”
Reuters on timing of new coastal drilling policy: “No drilling policy is expected until after the comment period ends on September 21, but Salazar said an energy policy should be made public by the end of 2009.”
Smart grid grants announced. LA Times: “Vice President Joe Biden today unveiled details for distributing more than $3.3 billion in stimulus funding for grants to drive the rollout of a nationwide electrical smart grid … Next month, Energy Secretary Steven Chu plans to bring together key stakeholders to develop a road map for creating industrywide standards to unlock the potential of the smart grid. Without agreement on standards, energy experts say, the promise of a smart grid that can communicate in real time with customers at one end and energy companies at the other is a pipe dream.” Green Inc.:
Wind Power Drives Need For Grid Changes”
Obama direct student loan proposal needs simple majority Senate vote, even though private lenders can’t produce more savings. CQ: “A Senate Democratic aide said that without [budget reconciliation] instructions, it would be ‘extremely hard’ to muster 60 votes in the Senate to surmount a filibuster against Obama’s plan … The student loan industry is working on a variety of alternatives to Obama’s proposals, but the Senate aide said a credible alternative would have to demonstrate a cost savings similar to the $94 billion that CBO estimated Obama’s proposal would save … the Senate aide said congressional staff have yet to see a proposal that ‘gets close to what the president has put on the table’ as far as cost savings.”
Pension Privatization Fail. Boston Globe: ” A special pension fund for railroad workers that was given permission during the Bush administration to invest its assets in the stock market lost more than a third of its value during a recent 18-month period, a loss that could influence an ongoing debate about how to keep government-affiliated retirement programs solvent … Senator Chuck Grassley of Iowa … was quoted in 2005 as saying that Congress should consider putting part of the Social Security trust fund into stocks “based upon the success of the railroad retirement fund.” Many other members of Congress made similar comments … But since the end of 2007, the railroad fund’s returns have crashed.”
Terrance Heath contributed to the making of this Breakfast