Category Archives: Government

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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The Frightening Rise of Federal Power and the Loss of American Liberty


Federal Powers at the Local Level

Lew Rockwell is a political commentator. At Lew Rockwell’s web site, he outlines how, since 1995, the Federal government has been pushing the militarization of local law enforcement through the Pentagon’s Law Enforcement Support Office (LESO), which is a part of the Defense Logistics Agency (DLA). The problem with this Federal assistance, Rockwell states, is that “Any police agency that receives so much as a particle of federal aid is no longer a local police force. It is, in principle, a federal army of occupation.” Rockwell states that this “principle [was] recognized in the Supreme Court’s 1942 Wickard v. Filburn decision.

With local law enforcement receiving additional Federal assistance after the 9/11 attacks, all local law enforcement became de facto members of a Pentagon-led army. Year after year since 1995, the White House has been expanding Federal powers, eliminating independent local law enforcement, and charging private citizens with the newly create laws – laws which violate civil rights and violates the Bill of Rights. To see the progression, a nice timetable has been listed at TinWiki.org.

In the past year, local law enforcement agencies were given a Federal order to report any suspected terrorists. An outline of how a “suspect” is determined, prior to any crime, was not given. Thus, your city police can now act as part of the Pentagon Gestapo. Under the Patriot Act, you have no rights to an attorney, and should you be whisked away in the dead of night, no one in your family has to be informed of your situation. The Patriot Act cancels Habeas Corpus which guarantees your right to an attorney. Ironically, the Supreme Court restored Habeas Corpus to Guantanamo detainees in June 2008, however the Supreme Court has yet to restore Habeas Corpus to American citizens cornered by the unpatriotic Patriot Act.

Is Hope of Change for Better Ethics Already Lost?

For those who hoped for political change in Barrack Obama might be interested to know how closely he worked with the Neocons (click here for details on the Neocon movement).

Coincidentally, Obama was endorsed by Jay Rockefeller, who is part of the Rockefeller family legacy. It is no secret that the Rockefeller family believes in manipulation of politics, economics, and even the law itself to obtain the true objective, that of centralized wealth and power.

David Rockefeller, the only surviving grandchild of the famous John D. Rockefeller, stated in his memoir:

“Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that is the charge, I stand guilty, and I am proud of it.”

What has become of America? Where are the leaders with conscience and ethics? Is this country doomed? Have we been hoodwinked into believing Obama represents a change in political agenda?

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Change of Government? Really?

Originally posted on another web site: November 05, 2008 2:14AM
(Small expansions/clarifications made in this posting)

Foreword: I am an Independent, neither Democrat nor Republican. I did not vote for either of those parties in this recent presidential election.

The Fear Factor
I know many Republicans who fear that our country will lean towards Socialism or Marxism because of a radical left wing of the Democratic party. Many fear that Obama’s “redistribution of wealth” is a disguise for Socialism. Many believe that Capitalism is the only way that works.

A response to cover all angles of fears is beyond my available time to devote. But I do wish to provide observations of what I perceive as erroneous by various groups who are fearful of the recent change in government.

Distribution of Wealth
First, some background:
No president has been able to pull back Federal spending. It is the nature of government to spend as much as they can. Alexander Hamilton and his group of supporters during the establishment of the US Constitution made sure that the Federal government has the ability to raise taxes as high as they wish.

Capitalism:
Adam Smith, a supporter of the capitalist economic model, had serious concerns about the dehumanization of people. The long history of business in this country proved that unless laws were created to protect the workers, business owners would not provide the essential necessities to their employees. This negative aspect of apathy and corporate greed has been the bane of capitalism, and eventually led to laws governing work safety, minimum wage, and more.

Business owners screamed bloody murder, claiming that they were being robbed of their profits. In essence, they were right. It was a redistribution of wealth because of their lack of concern for their workers. Workers today have matching 401K programs and insurance because of this “redistribution of wealth”. Business Owners, for the most part, only provide these types of benefits because of competition, and not because of their generosity.

Note: The ability to compete against corporations that do not provide similar benefits has forced US manufacturers to either tighten up their efficiencies or to move operations overseas to countries where employers are faced with lower employee benefit costs. This means countries such as China, Thailand, Philippines, South Africa, and India may seem more lucrative in profit than US based operations with US workers. Much more can be said about this issue, but it is sufficient to state that many 2nd and 3rd tier companies that moved operations to China regretted the move once energy prices tripled shipping costs. There is always a price to pay when taking an apparent easy way out rather than working on improving US-based operational efficiencies.

Taxation:
Taxation exists in many forms. There are taxes on gasoline, non-food items, toll roads, and various sales tax at the federal, state, and local levels. Then there are all of the taxes on income, including Medicare and social security. These taxes are not limited to the government providing security and common well fare. It also provides for “redistribution of wealth“. How? If the wealthy are taxed more severely, then the majority of the cost of new highways and new infrastructure to support communities are paid by the wealthy. Therefore, everyone that uses those infrastructures should thank the wealthy for covering the lion’s share of the cost.

However, many who are non-wealthy erroneously believe that the wealthy do not pay income tax. Rest assured that the Alternative Minimum Tax insures that everyone who makes above a certain income will pay taxes. Unfortunately, this system never considered inflation, therefore the AMT is now striking more and more middle class incomes. Every year a temporary fix has had to be passed through Congress. See http://www.cbpp.org/2-14-07tax.htm

Note: The sad truth is that all of the tax loop holes that existed at the time the AMT was initially created no longer exist. Therefore, the purpose of the AMT no longer exists. The obvious question is why is AMT still around if its purpose for existence is no longer there? The answer is that the US Government does not wish to stop collecting the additional $600 Billion in AMT taxes gathered each year. What I fear is that Obama has indicated that he will remove all tax breaks instilled by Bush. This would mean that the impact of the AMT will hit more Americans because there will no longer be any manual adjustments made.

  • Thus, we see from a brief examination of history that the harsher side of capitalism created the need to force adjustments, which, in essence, created a form of wealth redistribution.
  • The AMT also attempted to do the same, attempting to insure that the wealthy did not walk away without playing taxes.
  • The future shows that tax increases will hit households making over $150K per year, and if the manual temporary fixes to AMT are eliminated, the increase will hit households with incomes below $100K per year.
  • Obama stated in his first debate with McCain that he would bring tax relief to those making under $250K per year. However, later in his campaign, he changed that limit to $200K per year.

The point is this: Unless Obama eliminates the AMT and restructures existing IRS guidelines, taxes will significantly rise for any household with an income of $100K or higher. This would mean an increase in taxes for a majority of middle class workers, not a tax break.

What Does This Mean For The Future Obama Redistribution of Wealth?
If he is telling us the truth, he is wanting to balance the tax burden more fairly. However, the term “fairly” means different things to each income level.

The primary problem, however, has been out-of-control governmental taxation while simultaneously ignoring the severe impact on individuals making less income who are still required to pay taxes at a greater impact to their income that those who earn higher wages.

To provide an analogy: the price of gasoline has more than doubled in the past few years. For a person earning $30K per year and whose prior gasoline expenses were $1000 per year was, only recently before prices collapsed, suddenly facing $4000 per year in gas expenses. At the lower expense, fuel was 3.3% of yearly income. Suddenly, at the higher price, the fuel cost was 13.3% of yearly income — a jump of 10% in expenses. However, for someone earning $200K per year, the percentage would have moved from 0.5% to a mere 2.0% — a change of only 1.5% in expenses.

The same level of impact applies to fixed taxes (such as those hidden in gasoline and cigarettes). The smaller wage earner may pay a significantly smaller percentage, however, due to the many hidden taxes within our economy (gasoline, telephone, toll roads, purchases at stores, etc) the net impact of hidden, fixed taxes takes a higher percentage of the earner’s income. This is what Obama is suggesting will be changed by modifying tax scales, providing relief for lower and middle income workers while increasing the tax burden on the wealthy. We shall see if he truly understands the complexity of the tax system.

This action goes against the core of libertarian minds who do not view that government should manipulate taxation for any reason, and it does not suit hardcore capitalists who demand “a decent profit” for their hard work and risk taking. While I partially agree with the libertarian view and with the capitalist view, I belief there must be a balance as John Rawls indicated. However, it is imperative that a true balance exists. Rawls warned of over-burdening the higher earners to the point of punishing the wealthy for earning money. It would take far too much space to explain the details of Rawls’ philosophy, but it is a balance between capitalistic and socialistic economies.

If Obama does increase taxes, promising for redistribution, but turns around and spends heavily on federal programs creating more federal bureaucracy, then he will not have kept his promise of reducing government interference and creating redistribution of wealth. He will have merely increased the tax burden on the wealthy, potentially creating a situation of which Rawls warned.

Socialist Economics vs. Socialist Government
Socialist Economics has been in our system for almost a hundred years. It has helped to create a large middle class. Prior to the socialist economic mechanisms put into place gradually during the past 100 years, capitalism was creating the classic Marxist model of “class struggle”, just as Marx predicted. The wealthy controlled the poor, and there were very few middle class earners. Capitalists like John D. Rockefeller and Andrew Carnegie truly believed that their wealth was given to them by “God” and that they had no responsibility to share any profit to the workers. Since workers had no representation within corporations and the government traditionally sided with big business, the “class struggle” emerged, giving rise to unionization and the consequences.

Constitutional Objectives: It Includes General Well-Fare of the People
A part of our Constitution states that the government is responsible for the defense of this country against foreign powers. It also states that the government is responsible for the general well fare of its people. Government cannot ignore the economic blight of its people created by its economic model (capitalism) which does not possess a conscience.

Milton Friedman warned us that corporations do not possess ethics. It is the people who must possess them. He also warned us of the growing trend of companies selecting executives focused solely on the market without any consideration of social or societal responsibilities. When the leaders of businesses are without ethics, we see the aftermath, such as Enron, AIG, and more. The workers are the ones that suffer the most from unethical practices that are performed within capitalism.

Thus, no economic system is without problems, not even capitalism. An uncontrolled socialist economic model can lead to total government control. I fear that the recent bail-out to the financial industry is a step toward nationalization of the business sector — a heavy-handed symptom of socialist economics. Unless watched and controlled, this can lead us down the road to a Socialist Government and not merely a socialist economy.

John Doughtry

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