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Bondholder’s $3 Billion Rescue Not Enough to Shield CIT

The $3 billion worth of CIT bondholder pledge might not be enough to avoid a CIT failure. According to Renee Dailey, CIT has “indicated they have significant upcoming maturities”. The commercial lender has around $10 billion of debt that’s maturing next year. It also has to deal with dwindling market share, mounting loan defaults, and other problems related to the economy.

CIT just announced its agreement bondholders; the rescue funding is designed to keep the 101-yr-old institution stable enough to avoid bankruptcy. The first $2 billion of the deal is immediately available while the rest will be received in the succeeding 10 days. While these efforts are certainly commendable, it is not nearly enough. Already, the company has said that this is just the first step. It is also asking debt holders to decrease their claims. In addition, there is a bigger restructuring plan on the drawing board.

What Brought CIT on the Brink of Collapse?

The first question in everyone’s mind is, was CIT as irresponsible as some of the country’s largest banks? It would seem that they were more of a victim of adverse economic conditions rather than a perpetrator of it. Over the last eight quarters, this century-old company has had to deal with $3 billion worth of losses from student loan, home mortgage, and commercial defaults.

However, unlike Citibank and company that were deemed “too big to fail”, it would seem that the government thought CIT shouldn’t get second cash infusion. It is fortunate that the group of bondholders stepped in after the government declined CIT their request. The loan extended to the company is said to be backed by a mix of corporate debt, medium-sized company loans, and even aircraft credits. To get this funding, CIT has pledged assets that have a face value of $30 billion.

Is A Second Stimulus Package “Necessary”?

As the unemployment rate in the United States continues to rise, top Obama aides are beginning to think that a second economic stimulus package might become necessary. The unemployment rate has risen to dangerous levels and if it is allowed to continue, joblessness might cripple the economy. However, senior officials “do not want to have this fight now” according to Financial Times reports. This is because of the outcry the previous stimulus received from Washington and even the public.

For practical and economic reasons, decisions about a second bailout are likely to be delayed until the later part of 2009 or the early months of 2010. Right now, Obama and his economic teams are trying to steer clear of talks about more actions.

Ever since the $787 billion recovery program was approved in February, two million more jobs were lost. One question that economic advisers are dreading right now is “Did the $787 billion stimulus package work?” Some sectors might say yes but Republicans will certainly give a resounding “no”. The Fox News reported that the $57 billion already released gave jobs to 150,000 workers.

So was the plan worth it at $380,000 investment for every job? There are still arguments over the exact benefits of the recovery plan. Even the Democrats show big divisions in their stance. What is apparent though is that a lot of independent economic analysts believe that the previous stimulus plan was a very bad idea:

Karl Rowe from the Wall Street Journal reports that Obama had promised a “new wave of innovation, activity, and construction”. He further noted that the president claimed that billions will create four million jobs. Well, it seems that the exact opposite happened. He concludes that “Mr. Obama’s words on fiscal matters are untrustworthy”.

On the other hand, the USA Today has observed that the federal assistance worth billions of dollars was unjustly directed towards Obama counties. States that had supported the President during the election received “overwhelmingly” high amounts of money. They have reaped about twice as much aid per capital compared to states that supported McCain.

Meanwhile, House Minority Leader John Boehner from the Politico made a statement that the President and Vice President lied about the economy. He said that they made a complete “fabrication” when they said they didn’t realize how bad the economy was. It was the greatest lie he heard in all the years he’s been in office, according to him.

Beneath the Surface: Problems of the TARP

While consumers are thinking how lucky the nation’s largest banks are for being rescued by the government using taxpayer’s money, the banks themselves are regretting their action. Some bank executives certainly aren’t grateful to the government for the “help”. This is because when Hank Paulson and Tim Geithner worked on the $700 billion bailout plan, bankers initially thought that this was designed to jumpstart the economy.

Neither the banks nor the government might have expected the severe public backlash as well as lawmaker’s posturing attitudes that resulted from it. The Troubled Asset Relief Program (TARP) might have made its way through Congress but it came at a very high price. At the meeting where the TARP funds were allocated to the financial institutions, the bankers found out that the Obama administration as changed the plan’s original design. The government will now own a significant share of their banks.

It came as no surprise that some bank representatives balked at the offer. However, Paulson wasn’t taking no for an answer. He believed that leaving the country’s biggest banks at that point in time would leave them exposed. And more failures in the financial sector are bound to spook investors and the public. So certain banks were left with bailout money they don’t want.

Before you think that the TARP money is a bad idea both for the taxpayer and the banks themselves though, it is important to remember that the program did help some institutions greatly. Everyone knows that Citigroup Inc. will no longer exist in its existing structure were it not for the bail-out funds. But some banks are starting to resent having ever receiving the TARP money in the first place.

Around four months after they agreed to the offer, the CEOs of the big banks were asked to go before a House committee where they were called “captains of the universe” to their face by a certain lawmaker. In addition, another one told them that no one trusts them anymore. But the friction between the government and the banks really came to a head during the public outcry regarding AIG’s $165 million in retention bonuses.

Capitol Hill sought to ease public tension by passing a 90% tax on bonuses. With this, the initial good intension of the TARP fund became steeped in bad sentiment. A mere eight months after the TARP was implemented, the banks have already returned $68 billion in total and they are scrambling to pay everything back.

Federal Reserve Bank’s Additional Powers – Weekly Round-Up

This past week, talks in Washington centered on regulating the financial industry. The Obama administration has proposed to give the Fed systematic powers in overseeing the banking sector as a whole. A lot of lawmakers are criticizing this plan, arguing that giving too much power to the Fed might be risky. There is currently limited disclosure about the Fed’s multibillion-dollar lending programs. If they weren’t transparent in the past, why would they change in the future? Another concern is the structure of the Federal Reserve itself. Regional branches are not classified as government agencies.

Meanwhile, other lawmakers cite that the Fed has a conflict of interest. If it tasked to conduct monetary policy then it might not be the best body to supervise banks. Senior Fed officials have argued, however, that the two tasks are actually complementary. Since the agency is involved in crisis stabilization, they need to have other roles in the financial system.

Whatever the case may be, ultimately, it is the public who has to pay for the decisions made on Capitol Hill. Bloggers from all over the country have expressed their opinions about these developments. Here is a list of blogs that talk about the Fed’s proposed systematic role, the criticisms of the system, and how it will affect ordinary Americans:

Paul Joseph @ Prison Planet wrote an insightful blog post entitled “Ron Paul Slams Federal Reserve’s New Dictatorial Powers“. Here, he provides a lot of quotes from Ron Paul and explains his argument. The criticism of Obama’s proposal is centered on giving the Fed additional authority. It might be too risky for the industry as a whole.

The Look at Vietnam blog provides updated information about the news in Capitol Hill. One article uploaded this week is titled “Geithner Says Federal Reserve Best Positioned for Super Regulatory Role“. It explained the position of the Treasury Secretary. He also said that the plan will only give the Fed a modest amount of additional powers.

Sudeep @ the Wall Street Blog wrote an in-depth blog post, “Financial Regulation: Congress Takes on the Federal Reserve“. It basically outlines the arguments lawmakers have over Obama’s proposed reform and the administrations answer to these concerns.