All Blog Posts from Econwatch

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Special Inspector General for TARP (aka "SIG TARP") Neil Barofsky said something we've all known for a while: the government gave away the farm when AIG failed.

If you recall, AIG's failure meant that the companies on the other side of all of its contracts (counterparties) were going to be left holding the bag. Under normal cases of bankruptcy, the court would impose haircuts to the amount of money due to counterparties, but because AIG didn't actually declare bankruptcy, the counterparties claimed that they were owed 100 cents of every dollar. The only bank that even considered taking a haircut was UBS - the Swiss, for goodness sakes - hard to imagine that a Swiss bank could make US banks look bad, but here's a case in point.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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While the world continues to be distracted by the sideshow over executive compensation, there was finally a bit of good news from Washington yesterday. The House Financial Services Committee (in conjunction with the Treasury Department) finally released details of financial regulatory reform. Under the proposal, the Fed would become the primary systemic risk overseer, with input from a council of regulators. I like to think of this as the nation's superheroes - admittedly, a somewhat aspirational vision.

The proposed legislation gives the FDIC resolution authority - that is, the power to resolve financial holding companies that fail. Instead of the taxpayers being on the hook for the bill, the burden of bailouts would be on the financial industry itself. Firms with more than $10 billion of assets would pay for the rescue or unwinding of a collapsed competitor.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Why is everyone surprised to learn that Treasury Secretary Timothy Geithner's speed dial is filled with Wall Street CEOs? Even before the financial crisis, when he was running the New York Fed, Geithner was delighted to act as the nerdy wanna-be for the exclusive power club, garnering invitations to corporate dining rooms from his former mentors.


In fact, Geithner was chosen as Treasury Secretary precisely because he was wired into the big banks. There's a reason that Wall Street cheered his nomination to the post. For all of its talk about change, the Obama Administration is filled with recycled Clintonistas, like Geithner and Lawrence Summers, who were at the forefront of deregulation.

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Uncle Sam's guarantee for money-market funds expires today. This emergency measure from "The Week That Shook Wall Street" (cue the appropriate scary music), was one of the few decisions that actually calmed ordinary investors at the time.

Money market mutual funds were created in 1970 to allow small investors to pool assets to gain access to short-term, higher yielding US government bonds. At the time, government bonds were paying about 3% more than savings accounts, but could only be acquired in ten-thousand dollar increments. The funds were priced at a dollar per share and while they were not backed by government nor insured by the FDIC, they were considered safe.


As the industry evolved and government bond yields dropped, many money market funds expanded their investments to include commercial paper, the short-term debt that companies use to fund their on-going operations. That's where our story last year begins.

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Bank of America is looking to pay back a portion of its federal bailout money in an effort to relieve some regulatory pressure, according to a Wall Street Journal report ($) Tuesday.

At the same time, the U.S. is pushing the bank to pay up to $500 million dollars to get it to abandon a tentative agreement that would have had the government absorb potential billions in losses.

According to the report, which cites sources familiar to the matter, both issues pertain to Bank of America's acquisition of Merrill Lynch in January – a transaction that required an extra $20 billion in taxpayer funds. The bank received $45 billion overall as part of the Troubled Asset Relief Program.

Bank of America wants to pay that $20 billion back, which would remove it from the list of "exceptional" aid recipients – a designation that brings increased government scrutiny, including reviews of executive compensation.

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Dismantling AIG may turn out to be a pretty lucrative venture for Wall Street banks and law firms, according to a Wall Street Journal report ($) Thursday.

Firms stand to get in the area of $1 billion in fees from the Federal Reserve to handle initial public offerings of spin-off companies and other transactions associated with selling off parts of the insurance giant, which is nearly 80 percent-owned by the government after receiving more than $100 billion in federal aid, according to the report.

That puts some of the very same banks that also got billions in taxpayer money in a position to profit from the government-supervised sell-off, raising possible conflict of interest questions. As the report questions, will the government implement stricter regulations – as it has pledged to - on banks that they are now employing?

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The White House is moving closer to recommending the creation of a single agency to regulate all banks, according to a Wall Street Journal report Wednesday.

That would move the U.S. away from the network of federal regulators that was seemingly powerless to protect the country from the financial crisis that has choked the economy since last year.

Treasury Secretary Timothy Geithner and other officials are expected to include the recommendation in a proposal to Congress in the next few weeks, according to the report.

Under the plan, which the Journal say is still in flux, the Federal Reserve and Federal Deposit Insurance Corp. would be stripped of their supervisory roles, though both agencies would gain other powers. The Office of the Comptroller of the Currency and the Office of Thrift Supervision would be also consolidated.

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With the government set to release the results of bank stress tests, Congress' bailout watchdog says it's a "real moment for Treasury."

"All the chips are on the table," Elizabeth Warren, chair of the congressional oversight panel for TARP funds, said on CBS' The Early Show Thursday.

While the tests are designed to evaluate the financial health of the country's 19 largest banks, they also serve as a test of the government's ability to manage the credit crisis that has choked economic growth in the nation.

Warren noted the changes in the Treasury's approach from October, when the original $350 billion cash infusion into banks implemented by Bush Treasury Secretary Henry Paulson received a "lot of backlash." Timothy Geithner, Treasury's current head, placed more restrictions on banks receiving federal aid, but the stress tests will be a pivotal moment for the Obama administration.

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The Treasury Department has reviewed Bank of America's financial health and concluded the troubled institutions needs nearly $34 billion, The New York Times reports.

Should the bank be unable to raise the $33.9 billion, it would have to rely on government aid, which is roughly $45 billion from the Troubled Asset Relief Program, a bank executive told the newspaper.

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Government stress tests for the banking industry aren't supposed to be made public until Thursday, but that hasn't stopped a steady stream of reported results from flowing in.

The Federal Reserve plans to release those results to bank executives Tuesday and they may show about 10 of the 19 largest banks in the country need additional capital to withstand a hypothetically worsening recession, according to a Bloomberg report.

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