Category Archives: Economy

Did Political Contributions Drive Federal Bailout?

Did Political Contributions Drive Federal Bailout?

According to OpenSecrets.Org:

Banking / Financial Firms

  • AIG donated $586,000 to the Democrats while donating $268,000 to the Republicans, with 69% of total donations going to the Democratic Party. Since 1990, AIG has donated more than $9.3 Million to political candidates.
  • Goldman Sachs has donated nearly $20 Million to the Democratic Party since 1990.
  • In the 2008 election, Citigroup donated 61% of their nearly $4.4 Million to the Democratic Party.
  • In the 2008 election, Bank of America donated $2.3 Million, with 56% of donations going to the Democratic Party.
  • Merrill Lynch donated 62% of their $14.2 Million in contributions to the Republican Party since 1990.
  • Lehman Brothers level of political contributions did not make it to the Top 100 Political Contributors.

In examining this list, one can conclude that the two firms allowed to collapse or fold were not heavy contributors to the Democratic Party while those getting bailouts were heavy contributors.

Automotives Related

  • The Teamsters Union has donated nearly $25 Million to the Democratic Party since 1990.
  • The AFL-CIO has donated nearly $17 Million to the Democratic Party since 1990.
  • Sheet Metal Workers Union has donated $16 Million to the Democratic Party since 1990.
  • United Auto Workers has donated over $25 Million to the Democratic Party since 1990.

Is it any wonder that, while President Bush was in office, his administration offered no aide to the automotives industry, but President-Elect Obama pushed for financial assistance even before he took office?

Further Evidence of Political Favoritism to Heavy Democratic Contributors

In the meantime, both Senate Banking committee Chairman Christopher Dodd (Dem.) and Treasury Secretary Timothy Geithner have been implicated in designed the bonus plans for both AIG executives and Merrill Lynch. Add to the conspiracy that Freddie Mac and Fannie May, the two key federally controlled mortgage giants, are planning millions in retention bonuses to top executives. Will we find that Democratic Rep. Barney Frank, who failed in properly overseeing the two federal organizations, had something to do with these outrageously planned bonuses?

Poor President Obama!

Is President Obama the only Democrat in Washington D.C. who is straightforward and willing to take responsibility? Will he be the next Teddy Roosevelt (Rep. Pres.) in cleaning out corruption in Washington D.C. or will he fall victim to the corruption all around him? Obama survived the fallout in corrupt Democratic politicians in Illinois, but eventually his luck will run out unless he directly confronts the clear and evident pattern of political corruption all around him and his political party.

These are dire days for the U.S. economy, and a cloud of doom is building from the continuous ongoing exposure of political corruption in the party that controls Washington D.C.

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What Does Stress Testing of Banking Mean?

What Does Stress Testing of Banking Mean?

In recent financial news, Ben S. Bernanke, the chairman of the Federal Reserve, was quoted as stating that a stress test of the top 20 banks would occur. What this entails has been briefly outlined in the recent NY Times (online) article Stress Test for Banks Exposes Rift on Wall St. – NYTimes.com.

Note: Any emphasis shown in italics has been added by John Doughtry.

“Until the financial system deteriorated last fall, investors focused on what is known as Tier 1 capital, which [sic] consists of common stock, preferred stock and hybrid debt-equity instruments.

Now, however, they are focusing on what is called tangible equity capital, which [sic] includes only common stock, saying it is a better way to measure the risk in bank shares.

The difference might sound like something only an accountant would worry about, but it lies at the heart of two questions confounding both Washington and Wall Street: Are the nation’s banks sound? And are bank shares a good barometer for the health of the financial system? […]

Details of the bank stress test are scant, but federal regulators are expected to examine the ability of banks to cope with a situation in which unemployment rose to 10 to 12 percent and home prices declined by an additional 20 percent, according to Treasury Department and Federal Reserve officials. While officials say they don’t expect such a severe downturn, some economists aren’t ruling one out.

In recent weeks, federal regulators were planning to continue to demand that banks maintain Tier 1 capital equivalent of at least 6 percent of total assets adjusted for risk. Regulators also want at least half of it in common stock, but have given banks some leeway. […]

But stock investors are homing in on tangible common equity. Whereas Tier 1 capital gives regulators comfort because it captures a bank’s ability to weather a financial storm, stock investors, who suffer the first losses, are worried about their own exposure. Tangible common equity, or T.C.E., they argue, is the best measure for them.

Until last fall, there was little difference between the two measures. But when the government made big investments of preferred stock to shore up banks, common shareholders became more vulnerable.”

The Difference between Tier 1 Capital and Tangible Common Equity (TCE)

According to economist Dr. James Kwak:

“One commonly used measure of capital is called Tier 1 Capital, which includes common shares, preferred shares, and deferred tax assets. A less commonly used measure is Tangible Common Equity (TCE), which includes only common shares. Obviously, TCE will yield a lower percentage than Tier 1.

[…] The initial government investments in Citigroup, back in October and November, were in the form of preferred shares. Between the two bailouts, the government put in $45 billion in cash and got $52 billion in preferred stock (the $7 billion difference was the fee for the guarantee on $300 billion of Citi assets). That preferred stock was designed to be much closer to debt than to equity: it pays a dividend (5% or 8%), it cannot be converted into common stock (so it cannot dilute the existing shareholders), it has no voting rights, and it carries a penalty if it isn’t bought back within five years. In fact, it is hard to distinguish from debt, except perhaps for the fact that, if Citi defaults on it (cannot buy the shares back) we don’t need to worry about systemic instability, because the government can absorb the loss. As preferred stock, these bailouts boosted Citi’s Tier 1 capital, but not its TCE.”

The last sentence in italics is the key to understanding why TCE is a better measure of a bank’s health for share holders. It removes significant risks in measuring the capital worth of a bank, thus investors prefer to view TCE rather than Tier 1 measurements.

The bad news for the general public (whose tax dollars were used to buy the preferred stock) is that there is higher risk involved. Note, however, that unlike common stock, preferred stock does not provide as much control over banks, although the federal government, due to its massive presence, could attempt to bully bank executives. Considering the amount of corruption uncovered and the level of executive greed in the face of financial crisis, perhaps a full-time government watchdog is not a bad idea.

For those that have fears that these preferred stock purchases equate to a nationalization of our banking system, this should alleviate at least some of their fears.

Blog author: John Doughtry

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Requirements for Economic Recovery

Requirements for Economic Recovery

To get a handle on where the economy currently stands, take a look at the graph below. It is one of the nicest comparison graphs I’ve run across that compares our current economic (European AEX) picture with the 1929 DJIA economy and the Japanese Nikkei meltdown of the 1990s.

See http://www.vanenschot.com/finance/stockmarketcrash.html. The image is linked below:

Comparison of three stock markets

Comparison of three stock markets


Compare the chart above with the DJIA chart below. Line up the two charts at 2003, and one can see that the AEX and the DJIA are very close in performance.

DJIA Since 2003

DJIA chart courtesy of MSN at http://moneycentral.msn.com/investor/charts/chartdl.aspx?D5=0&D4=1&ViewType=0&ShowChtBt=Refresh+Chart&DateRangeForm=1&ComparisonsForm=1&D3=0&CE=0&Symbol=%24INDU&C9=2&DisplayForm=1&CP=0&PT=10

What Does This Mean?

The translation is this: Expect the stock market’s bottom to hit within the next 45 days (by April 30, 2009), followed by a protracted 5-7 year recovery.

Comments on Presidential Economic Stimulus Package

While I appreciate President Obama’s focus on improving the education system and access to the Internet, those incentives do not create new jobs. One must have a Return on Investment (ROI) that will remain after the money is spent. Education, unfortunately, is an ongoing expense. The ROI time line of education is typically a decade or longer, and this country cannot afford to wait ten years for an economic turn-around.

Obama indicated heavy investment in science and technology, but there needs to be clearly defined areas of investment. Exact areas were not outlined, and in business, identifying exact areas is the first step towards improvement.

For this country’s economy to recover between 2009 and 2015, it will require the federal government to invest in rebuilding the transportation infrastructure that serves as the primary conduit in a healthy, thriving economy.

Simultaneously, the country’s dependence on foreign oil holds this country hostage to foreign governments. Many of those countries would rather squeeze the American economy out of every cent they can. Do we really want to wait until petroleum is selling at $150 per barrel to say the words, “I told you so”?

Recommendations for Economic Recovery

Here are the recommendations I have for economic recovery. Compare what I believe is needed to what President Obama stated is in the stimulus package. See http://www.whitehouse.gov/agenda/economy/ for stimulus details.

1. Fund Alternative green energy for electrical power generation (Wind, Solar, WTE)

Yes. Obama wants “doubling the production of alternative energy in the next three years.” I have no idea how he he plans to replace all the electrical power that will be lost as nuclear plants close, but at least he wants to do it cleanly, right? Hmm, then why did he mention “clean” coal power plants? Does he really think coal is renewable energy?

2.Enact minimum of 40 mpg for passenger vehicles. Stop rewarding automakers for producing gas guzzlers like the Hummer that get single digit mileage. Penalize automakers for anything less than 40 mpg. Make it a federal mandate for all cars sold in the USA. There is no excuse with today’s technology not to get a minimum of 40 mpg for automobiles. Trucks are a different class.

No. Obama has not established anything for setting car mileage requirements or in generating incentives to car companies like Tesla Motors who produce cars with zero emissions and over 200 miles per battery charge.

3. Build twenty new Nuclear power plants to replace aging ones.

No. Obama is against nuclear power. As many as a dozen of the aging nuclear plants will go out of production in the next ten years, with several currently operating beyond the intended life expectancy. The average nuclear power plant generates 1 to 2 gigawatts of electrical power per year. How are we going to replace the power produced by these plants? Through Wind and Solar? No, both of those technologies are too inefficient. A large wind generator can produce 1.5 megawatts. We would need 1000 wind generators to equal the output of a single nuclear power plant! WTE (waste-to-energy) power plant? We would need 4 to 5 WTE plants to equal a single nuclear plant.

4. Enact infrastructure replacement for highway bridges.

No. Obama has not indicated a federal program for this. Yet tens of thousands of highway bridges are in need of serious repair or total replacement. Waiting until the economy starts to recovery is not the time to slow down the highway traffic to perform repairs. Do the repairs and replacements now. Be proactive, damn it!

5. Fund and build a federally subsidized High Speed Rail between all major cities ASAP.

No. Obama has not indicated a federal program for this. Why are high-speed rails not being built along the same corridors as Interstate highways?

Why are we wasting so much time and energy getting on airplanes to take trips of less than 300 miles? While are we spending hundreds of dollars on gasoline for a round trip of 600 miles (10 hours) if we could spend half that amount and spend only 6 hours travelling?

The average traveler spends 2 hours coming and going to the airport, another 2 hours to meet security requirements, and another 2 hours to fly 300 miles by the time we deal with airplane take offs and landings. A total of 6 hours to travel 300 miles.

Compare that with a high-speed rail service capable of 200 mph, and even with the 2 hours to travel to and from the rail terminal, we reduce the travel time from the 6 hours down to 4 hours. No cancellation of travel due to snow. No cancellation of travel due to thunderstorms at other airports.

Every economic recovery of the past one hundred years required investment in mass transportation, whether in providing it or in increasing the speed or improving efficiency. Why is the federal government ignoring this fact this time?

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US Economic Forecast Through July 2009

1. HOUSING/MORTGAGE
Housing slide has not bottomed out in all regions. The NE, SE, most of California (SW) and scattered portions everywhere else have NOT bottomed out on the declining market value of homes. Charts indicate that in those regions, the housing prices are still 200% higher than actual worth. Expect the Feds and the State of California to get really creative real soon. Also expect to see public backlash as many who do not “deserve” rescuing get it, and those “deserving” rescue do not get it. (Use whatever definition you wish for the two terms).

Other than for Chicago, the Midwest region is now stable, and has been relatively so for the past 60 days. The past two months of casualties has primarily been due to overloaded budget due to increased energy costs and food price increases. Those that had been squeezing by with less than 20% cushion in their finances were overloaded by the estimated 60% increase in budget needed for energy and food.

We should start seeing a MAJOR collapse in California and Florida beginning in mid-November. Not a good time for the two states responsible for 50% of our economic power.

2. OIL/PETROLEUM
There is both a critical tipping point caused by “too high a price” and another tipping point caused by “too low a price”. Back in 2004, I had calculated that a per gallon price of greater than $3.50 would create a significant economic slowdown. Once prices this year got over $4.00/gal., I had no doubt of what was coming down the tunnel.

The lower price end is $70 per barrel. We’re seeing current pricing at less than $65, and this will create another crisis as well. Without enough profit from oil, there is no incentive for:
a. Alternative Energy efforts. These efforts costs run in the Billions. Without an incentive of high energy costs, expect to see a lot of these Green projects lose funding or stock market support.
b. New Drilling efforts. Again, to establish a new well can cost in the hundreds of millions. Without adequate profit, there is no incentive to drill new holes. And if there are no new wells, when the NEXT energy crunch comes, we’ll be right back where we were this summer.

If pricing remains below $70, we’re going to be setting ourselves up for a VERY nasty economic recovery.

3. WHERE TO INVEST?
First a disclaimer: I am NOT a financial adviser. Take any action at YOUR OWN RISK. The following is based on my personal research and my own strategy for surviving the economic storm.

If you’re like millions of mutual fund owners, you’ve seen your portfolio lose value anywhere from 10%-50% percentage in the past six months. For those of you who didn’t move fast enough, it’s time to consider shifting your investments to the following:
a. BioMed Industry. It is still a hot market, and will weather the storm better than other areas. The reason is due to equity and forecast. The value of biomed does not easily change when other areas of the economy bounce. In addition, the forecast is that people will continue to need medical care — there is no decline in illness during bad times.
b. Treasury Bonds. DO IT QUICK! You’ll want to do this BEFORE the Federal Reserve lowers interest rates in order to obtain maximum gains from Treasury Bonds. Hang on to them unless interest rates show signs of rising. Remember the general rule: Treasury Bond yields go UP as interests rates go DOWN.
c. Find the best rates on six-month and 2-year CDs and shift investments into those as well. Again, do it before the Feds take action on lowering interest rates.
d. If you REALLY want to play stocks, it may already be too late to jump into the best bets. Generally, tight economic times means people change where they spend for entertainment. Businesses like NetFlix will see an increase as folk begin staying in and watching more rental movies. If you have a Timeshare in a Condo in Florida, you might not do well for the next 9-18 months, as an example. Places like Walmart and Target will increase business as shoppers move away from higher priced stores.

4. JOBS/EMPLOYMENT
If you’re in realty, the automotive manufacturing sector, or housing sector, then times will be tough. If you’re in industries where there is a heavy reliance on discretionary spending, such as vacation resorts, then expect to see a significant squeeze in business unless your particular zone is family-oriented and on the conservative end of cost.

Expect to see an additional 30,000 jobs lost in the automotive industry, with an additional 250,000 unemployed in other sectors by Spring 2009. We’ve already crossed the magic tipping point of losing over 400,000 jobs this year. (That was the magic number I had estimated would be the clear evidence of economic peril).

As I predicted to my friends and family back in the Spring of this year, expect to see either GM or Chrysler go down the tubes. Don’t be surprised if the Japanese buy one of them. They will do so because of the rising difference between the Japanese yen and the US dollar. Japanese manufacturers NEED an immediately home base in the US. What better way than to take over an existing infrastructure that is poorly run? If the Japanese merely buy the ASSETS without the employees, then hiring will restart WITHOUT unions. Think about that.

Expect unemployment to hit 9% to 12% (depending on the US Region) by Spring 2009.

5. WHAT HAPPENS IN SUMMER OF 2009?
I’m pushing the envelope of my little crystal ball. I see a clear point of delineation at this time frame. If the cost of oil is stable and above $70 per barrel, and the pricing decline of housing has completed its worst in the remaining regions, then the economy will be ready for a gradual recovery.

On the other hand, we could see pricing continue to collapse in ALL sectors, creating what economists dread the most: DEFLATION. Also known as instant DEPRESSION. Here’s the bad news: a depression doesn’t merely reduce the costs of everything, it also reduces everyone’s income. It’s an ugly one-two punch that the Feds and the Treasury are trying to avoid. It’s very possible they will avoid the big D word, but it will require:
a. Stabilization in the housing sector.
b. Japanese buyout of either GM or Chrysler.
c. Chinese economy to maintain GDP growth above 6% or so (they are now at 9% which is the lowest in a number of years, indicating a rapid slow down of the economy).
d. A steady low level interest rate while avoiding inflation. This will be a neat trick to pull off, since any extended period of time where interest rates are lower than inflation will create an over-abundance of money. The Feds and the Treasury will need to continually rebalance their dealings with the banks and other institutions with great dexterity and flexibility.

CONCLUSION
The good news is that this is hitting the entire world, so it’s not merely an American phenomenon. The bad news is that this is hitting the entire world, because the US GDP is equal to the EU + Asia, combined. Thus, the collapse of the US economy has triggered a domino effect.

Watch for the signs as outlined above. We’ll all know by next summer which way things are going.

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