Contempo Magazine Blog

The mistake to not declare AIG bankrupt initially has resulted in billions of U.S. taxpayer dollars going hastily and unobstructed to foreign banks who were reimbursed dollar for dollar for their losses instead of a negotiated settlement to a reduced rate typically mandated by bankruptcy proceedings which could have saved billions. The decision not to use bankruptcy was not a universally shared opinion. Andrew Grossman of the Heritage Foundation,Wall Street impresario John Rodgers, and conservative House Republicans were among the significant number of dissenters to the government bailout plan.

AIG went through a bailout instead of bankruptcy because authorities hypothesized that the many financial institutions that were secondarily insured for losses with AIG would founder if the giant did as well. A significant portion of these so called “counter parties” exist in other countries under other governments. This in the eyes of those who favored bailout over bankruptcy would cause a calamitous world wide economic catastrophe. Therefore it was felt that bailing out AIG was in fact bailing out many other institutions.

Some have argued that the urgency of the situation did not allow a complete investigation of all the alternatives at the time the decision was made but regardless of whether bankruptcy or bailout was used there should have been more diligence on the government’s part. This potential scandal involves not millions as did the recent fray over bonuses but instead billions of dollars. In a column written this week by James Kwak of the Wall Street Journal on their website The Baseline Scenario he has examined several writers who are now saying that a controlled failure of AIG would have been possible if this study and evaluation of AIG creditors had been carried out.

The government needed to identify and determine the relative importance of those counter parties before a blank American taxpayer check was given to literally all of the world’s banks. Michael Mandel of Business Week reports that $44 billion of taxpayer bailout that went through AIG went to domestic U.S. institutions including state governments and Wall Street firms such as Goldman Sachs but a larger portion $56 billion went to foreign banks with German banks getting $17 billion and French $19 million.

What has happened is the United States bailed out the whole world at face value inappropriately. Payments were given mostly for “credit swaps” between banks which had invested in unsecured high risk financial instruments that the banks of the world made a poor choice to make. Unlike just about everyone else in the world these banks got full reimbursement for their loses not a negotiated settlement.

If the bankruptcy route had been chosen instead of the bailout several important functions would have been put in place that could have saved taxpayers potentially billions of dollars. First of all contracts with employees and all debts to creditors would have been rendered immediately renegotiable.

Today in Congressional hearings both Federal Reserve Chairman Bernanke and Treasury Secretary Geithner were asked why the government did not review not only the employee contracts but also the debts of AIG. They both answered they did not have the power to do so. If bankruptcy had been filed the payouts to the worlds banks could have been negotiated at a reduced percentage. By the way none of the other foreign governments volunteered to help this. Mr. Bernanke even admitted to Congress that if AIG had declared bankruptcy and been put into “receivership” none of these problems would have existed.

Now Mr. Geithner is asking Congress for special powers to change AIG contracts and to create an organization similar the Federal Deposit Insurance Corporation which currently is just for banks but this new “Resolution Authority” would have domain over non-banking financial entities. A new regulatory body for non-bank financial entities may seem reasonable but many seem to be missing the point that they really are asking for the power they would have had with bankruptcy.

Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Revew

In anticipation of the formal public exordium of the Obama-Geithner banking and credit program many are predicting continued skepticism on the President’s gripe on fiscal recovery and whether the Treasury Secretary’s gravitas is enough to hold the consequential billet where he finds himself now. Economic experts from the right, center, and left are harmonious like a chorus in sounding their disapproval.

The top 15 to 20 banks which have assets amounting to more than $100 billion are being “stress tested” to see if they can continue to be in operation. If large banks pass their stress test they will be allowed further injection of capital from the Federal Reserve but must accept certain conditions. There will be restrictions on bank operations, including limits on purchasing healthy institutions, salary caps, and caps on dividends. From most experts points of view this is the most accepted and least controversial part of the Obama-Geithner plan.

The controversy starts with the Obama-Geithner plan to form partnerships between private investment groups like banks and hedge funds with the government to buy “toxic assets”. The government will pay or at least guarantee hedge fund managers for their participation. Up to $700 billion in funds from the FDIC will be used to provide loans for these partnerships to buy up troubled assets from banks. Those assets that the bank wants to put up for sale will be auctioned to the highest bidder. The hedge funds will have to put some small percentage of investment but 80% of their risk will be guaranteed by the Federal government.

This brings up perhaps the quintessential issue of the plan according to David C. John and James L. Gattuso of the Heritage Foundation who recently analyzed the program. How will an appropriate price be paid? David Elliot at the Brookings Institute points out that banks are only going to sell the very worst of the assets which may create very little volume. Analysts were critical in the New York Times perhaps best summarized by the once Obama cheerleader now pundit, Paul Krugman, who calls the plan “a loser” which will create “zombie banks”. Almost every analyst says there is a potential that the government will be over subsidizing the private investors and cost too much money to execute.

Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) program will be increased from $200 billion to $1 trillion. Holders of derivative securities involved with commercial real estate loans,residential lending, student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration will will be lent more more from the fund to allow creating new securities.

Many are asking why is the government seeking to make new derivatives of low value assets when exactly the same process of making derivatives of then over priced assets created the process in the first place? Why is the government guaranteeing the private investors? Paul Krugman has said that President Obama has failed to realize that the problem is not a problem of just needing confidence in the system instead of recognizing the reality of their lost value.

The overwhelming interference in government to prop up the prices of these assets will only cost the taxpayers more money. America must come to realization that you cannot get something for nothing. Spending trillions of dollars to build a fancy store to sell horse manure will not improve the price of the manure. The tried and true method of dealing with business failure that has been a staple instrument in commerce, bankruptcy, has been dismissed for a financial Frankenstein.

Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Revew

The Congressional Budget Office (CB0) released a forecast for the Federal deficit that shows a significant worsening of the projected national debt. This comes while President Barack Obama is planning to pass the largest Federal budget in history of $3.55 trillion for 2010. The CBO report adds to growing uncertainty even among Democrats that President Obama’s ambitious spending plan is a perilous path to ruin rather than recovery.

Democratic Congressional leaders were hoping for some improvement to embolden their plan to write sweeping legislation of social change and spending. Democratic disappointment is evidenced by the split off of 15 Democratic Senators led by Senator Evan Bayh (D-IN) who appear to no longer to believe their political futures lie with the massive spending proposed by President Obama and endorsed by House Speaker Pelosi and Senate Majority Leader Reid.

Despite the nearly $800 billion stimulus plan and monetary policy by the Federal Reserve the CB0 predicts the economy will actually continue to “deteriorate for some time”. Republicans have opposed the stimulus program saying it will create unmanageable debt that will be borne for generations to come and give China who is now the major U.S. creditor too much power over American interests.

Today White House Press Secretary Gibbs was heavily assailed from reporters about the significant difference between the Presidents suggestion that half of the deficit can be repaid in four years while many other authorities including the CBO and the respected Brooking Institute say that only further deficit will occur. Gibbs responded that the White House forecasts are really just slightly higher then the CBO estimate but appear to be greater because of the effect of time. He said that no one can make good predictions far into the future and that the White House was confident that they could ultimately produce more economic growth by investing heavily now in education and health care. Many experts say that the amount of Gross Domestic Product (GDP) going into debt payment under the Obama plan could reach as high as 15% which would basically put a halt to any economic growth.

Two different reports now contest the optimistic and some are saying unrealistic predictions of the Obama administration. The CBO report sees contraction of the economy until next year and then a gradual increase to 4% in 2011. Despite the hope that the economy will start to grow again next year the forecast for the increasing deficits was actually increased to $9.3 trillion from 2010 to 2019. In February the Brookings Institute published The Economic Crisis and the Fiscal Crisis: 2009 and Beyond, an independent forecast by Alan Auerbach and William Gale, which predicted that even if the economy returned to full employment and the stimulus package was stopped after two years the deficit will still average at least $1 trillion per year for the next 10 years. They were even more troubled by a “bleaker long term”. Saying that for the first time in history the possibility of a default occurring on the Treasury debt could occur.

President Obama’s optimism that big government will help the economy is unwarranted and dangerous. The American taxpayer has seen billions of dollars wasted in the TARP program which has to date been of no real significance in benefit. Despite good intentions government is never efficient at replacing private commercial enterprise with public ones. Thousands of pages of law have been written of which not a single member of Congress has read according to statements made by California Congressional Representative Maxine Waters today on MSNBC. She admitted they rely on unelected staff to write and read the law the affect the pocket book of everyday Americans.

There is a lot wrong with corporate leadership and corporations need to return to owner based not management based principles. However, this does not mean that we should put the future of the American economy solely in the hands of government. This week’s revelations of the problems of government managing AIG and Citigroup should be prove enough. If they had never received a bailout they would declared bankruptcy and their executives would never have gotten taxpayer subsidized bonuses.

The American public must demand that Washington change course immediately for a path to fiscal responsibility.

Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Revew