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[Dave]

Banks are choosing not to make payments on TARP loans apparently because the US will not force them into bankruptcy.

Normally, when a company fails to make payments to regular creditors, the creditors can force the bank into bankruptcy. Not so when the money is owed to the US taxpayer-- apparently by right, according to Treasury:

"For some banks, it may be prudent to exercise their right not to pay dividends in a particular month."

USA TOday: 34 banks don't pay their quarterly TARP dividends

The U.S. taxpayers' investments in smaller banks are increasingly at risk.

In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding.

"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial.

The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative."

"Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking."
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Suresh]

Bloomberg: GMAC Said to Discuss U.S. Aid Package of $3 Billion or More

GMAC Inc., the home and auto lender that counts the U.S. government as the largest stakeholder, is discussing with the Obama administration a third bailout of $3 billion to $4 billion, said a person familiar with the matter.
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GMAC received two rounds of government aid totaling $13.5 billion as it struggled with losses at home-mortgage operations, which include Residential Capital LLC, known as ResCap.
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“We question why GMAC needs this capital,” CreditSights Inc. analyst Adam Steer said in an interview. “If you look at where the losses are coming from, it’s not coming from the core automotive business, it’s coming from the legacy portfolio at ResCap.” Steer has called for GMAC to cut ties to the home lender or place it in bankruptcy.
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GMAC was ordered by the Federal Reserve in May to raise as much as $9.1 billion in new Tier 1 capital to withstand a possible prolonged recession, after government stress tests of finance companies. The U.S. gave the lender $3.5 billion toward that goal, leaving a capital hole as large as $5.6 billion to be filled by Nov. 9.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

It's hard to believe that GMAC couldn't raise capital in the private markets. More likely, GMAC couldn't raise capital at a cost that was any where near what the federal government would request.
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Washington Post: U.S. takes majority stake in GMAC, giving lender $3.8 billion more in aid
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The government now owns majority ownership stakes in those three firms, General Motors and insurance giant American International Group. It also holds large stakes in Citigroup and Chrysler.
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Treasury said that it will increase its stake in GMAC to 56 percent from 35 percent. The government also will hold about $14 billion in what amounts to loans that GMAC may eventually repay. The government plans to appoint four of the company's nine directors.

Wednesday's announcement is a coda to the stress test of 19 large banks conducted earlier this year. GMAC, which was required to add $9.1 billion to its capital reserves against unexpected losses, was the only bank unable to satisfy regulators by finding private investors.

"We said, if you do not go raise capital from the private markets, if you are unable to, we will put capital into you because it is important to the stability of the system," Treasury Secretary Timothy F. Geithner told the Congressional Oversight Panel earlier this month. "It was never going to be possible for GMAC. They are in a unique and difficult situation."
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Hussman Funds: Inflation Myth and Reality
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To understand inflation, it helps to know a little bit about “marginal utility.”
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If you hold a dollar in your wallet, you might be giving up some potential interest earnings, but you're willing to hold it anyway because that dollar of currency provides certain usefulness in terms of making day-to-day transactions and so forth. If that dollar is held as reserves against checking accounts at a bank, that dollar is implicitly providing a certain amount of banking services. So a dollar bill has a certain amount of marginal utility, by virtue of legal factors like reserve requirements on checking accounts, and convenience factors like the ability to buy a nutty sundae with cash at the ice cream truck.

As a result, the prices of various goods and services in the economy, in terms of dollars, will reflect the ratios of marginal utilities between “stuff” and money.

The dollar price of good X is just the marginal utility of X divided by the marginal utility of a dollar.

So how do you get inflation? Simple.

1) Increase the marginal utility of “stuff”: This happens either if the supply of goods and services becomes more scarce, or if the demand for goods and services becomes more eager.

2) Reduce the marginal utility of dollars: This happens either if the supply of dollars becomes more abundant, or if the demand to hold dollars becomes weaker.
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Fiscal Policy versus Monetary Policy

The importance of fiscal policy in determining inflation is immediately apparent if we think in terms of the full or “general” equilibrium imposed by a government budget constraint.

See, if you're a banana republic and want to run a huge government spending program, you're not likely to go through the etiquette of issuing government bonds or setting a proper marginal tax policy. You'll just print up pieces of paper. Friedman's first dictum that “inflation is always an everywhere a monetary phenomenon” is largely a reflection of a long history across many countries that heavy government spending financed by printing money predictably leads to inflation. In particularly unproductive economies, it leads to hyperinflation.

But what if the government spending is financed by issuing bonds? It's tempting to think that somehow printing money means an increase in spending power, while issuing bonds means that the government is taking something in return for what it spends, but it's important to focus on the general equilibrium. In both cases, regardless of whether government finances its spending by printing money or issuing bonds, the end result is that the government has appropriated some amount of goods and services, and has issued a piece of paper – a government liability – in return, which has to be held by somebody. Moreover, both of those pieces of paper – currency and Treasury securities – compete in the portfolios of individuals as stores of value and means of payment. The values of currency and government securities are not set independently of each other, but in tight competition.
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Milton Friedman is widely known for two phrases, one which is half right, and one which is exact. The half-right dictum is that “inflation is always and everywhere a monetary phenomenon.” It's half right because a government spending expansion, regardless of the form, will tend to raise the marginal utility of goods and services while lowering the marginal utility of government liabilities. It's very true that the major hyperinflations in history have been triggered by currency expansion, but as long as a government appropriates goods and services to itself in return for pieces of paper that compete as stores of value and means of exchange in the portfolios of investors, you'll get inflation.

The completely correct dictum from Milton Friedman is this: “the burden of government is not measured by how much it taxes, but by how much it spends.”
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BP 2010Q1
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Nomura Securities Chief Economist Richard Koo discusses how to fix a balance sheet recession, wherein households and corporations are overladen with debt after the bursting of an asset bubble. He notes that in a balance sheet recession, the private sector shifts from profit maximization to debt minimization. That is, the private sector deleverages. Savings and debt repayment is not lent back out because of a lack of borrowers. Continued deleveraging creates a deflationary recession from which the economy cannot enter self-sustaining growth until the private sector balance sheets are repaired.

Mr. Koo argues that lax monetary policy, e.g., zero interest rates, alone will not resolve a balance sheet recession because the private sector is in debt minimization mode. To avoid a deflationary recession, Mr. Koo argues for speedy, sustained, and substantial government spending to counteract the contraction in private sector demand.

He sees the biggest danger is a cutback in government spending while the private sector is still repairing its balance sheets, thereby risking a reversion to a deflationary recession.
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Zero Hedge: The One "Must Read" Inteview With Nomura's Richard Koo

One of the most insightful interviews with Nomura's Richard Koo.
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Full Interview with Richard Koo in the 11 September 2009 issue of Welling@Weedon.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Back in October 2009, we noted that 34 banks had missed their TARP dividend payments. Now, we find out that 20 banks have missed 4 or more such payments, and 8 banks have missed 5 payments.

Where is the outrage? There is none. Perhaps, an explanation for such lack of outrage can be found in Simon Johnson's and James Kwak's book entitled 13 Bankers. Messrs. Johnson and Kwak explain that bankers have developed three types of capital: financial capital, human capital, and cultural capital. Financial capital buys political influence concerning banking activities. Human capital in the form of political appointees guides regulation concerning banking activities. Cultural capital is the change in public perception about the need and role of banking in a modern economy. Bankers have managed to change the public's perception of banks from being mere intermediaries or servants of industry to masters and drivers of industry. So, now we Joe Six-Packs in the public are too fearful to contemplate what might happen if we force banks that we bailed out to make their TARP payments. Nicely played, bankers.
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CNBC: More Than 90 Banks Miss TARP Payments
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The statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.

The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November.

SNL Financial's analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.