Category Archives: Finance

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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Filed under Corruption, Economy, Finance, Government

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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Filed under Economy, Finance, Government