Program to Help Prevent Foreclosures Falls Short

By SEWELL CHAN

Click here to read the complete story at Livinglies's Weblog.

President Obama is expected to sign the new financial reform bill, known as the Dodd-Frank Act, by the end of this week.  Although I have not read the actual text of the bill, I did read the Press Release sent out by the Committee on Financial Services… and there are some very interesting developments.  If you have any interest in what Congress has and hasn’t done, its worth reading, and I certainly plan to take it apart and write more about it in the days to come.

Perhaps most notably, but least mentioned, the bill requires the credit rating agencies, Moody’s, Fitch, and Standard & Poors, to not only be more transparent, but also potentially liable for issuing “bad ratings” on bonds.  The role of the bond market and the credit rating agencies in the financial meltdown is not widely understood, I’m aware, but it’s nice to know that Congress is aware, and this is evidence that that’s the case.  Here’s what the Committee’s press release has to say on the matter as far as the ratings agencies are concerned:

New Requirements and Oversight of Credit Rating Agencies


New Office, New Focus at SEC: Creates an Office of Credit Ratings at the SEC with expertise and its own compliance staff and the authority to fine agencies.  The SEC is required to examine Nationally Recognized Statistical Ratings Organizations at least once a year and make key findings public.

Disclosure: Requires Nationally Recognized Statistical Ratings Organizations to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record.

Independent Information: Requires agencies to consider information in their ratings that comes to their attention from a source other than the organizations being rated if they find it credible.

Conflicts of Interest: Prohibits compliance officers from working on ratings, methodologies, or sales; installs a new requirement for NRSROs to conduct a one-year look-back review when an NRSRO employee goes to work for an obligor or underwriter of a security or money market instrument subject to a rating by that NRSRO; and mandates that a report to the SEC when certain employees of the NRSRO go to work for an entity that the NRSRO has rated in the previous twelve months.

Liability: Investors can bring private rights of action against ratings agencies for a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source. NRSROs will now be subject to “expert liability” with the nullification of Rule 436(g) which provides an exemption for credit ratings provided by NRSROs from being considered a part of the registration statement.

Right to Deregister: Gives the SEC the authority to deregister an agency for providing bad ratings over time.

Education: Requires ratings analysts to pass qualifying exams and have continuing education.  Eliminates Many Statutory and Regulatory Requirements to Use NRSRO Ratings: Reduces over-reliance on ratings and encourages investors to conduct their own analysis.

Independent Boards: Requires at least half the members of NRSRO boards to be independent, with no financial stake in credit ratings.

Ends Shopping for Ratings: The SEC shall create a new mechanism to prevent issuers of asset backed-securities from picking the agency they think will give the highest rating, after conducting a study and after submission of the report to Congress.

It should come as no surprise that the ratings agencies do not like this aspect of the bill one bit.  Fitch has gone so far as to notify its clients that they should not use its ratings “in prospectuses and registration statements at this time.”  Here’s what Fitch sent out to its clients, as reported by Tara Perkins on Globe Investor:

“Immediately after the Dodd-Frank Bill is signed into law an issuer will need to obtain Fitch’s written consent to include a Fitch credit rating in a Securities Act registration statement and any related prospectuses.”

“Fitch will be potentially exposed to ‘expert’ liability under section 11 of the Securities Act, liability to which Fitch is not currently exposed. Fitch is not willing to take on such liability without a complete understanding of the ramifications of that liability to Fitch’s business and the means by which Fitch may be able to effectively mitigate the risks associated therewith. While Fitch will continue to publish credit ratings and research, given the potential consequences, Fitch cannot consent to including Fitch credit ratings in prospectuses and registration statements at this time.”

Fitch is not a fan of the new rules and, ironically, argues that it should not be considered an “expert” under the Securities Act “since ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts.”

There’s more. The Dodd-Frank Act says that the SEC should remove the exemption for credit rating agencies from the Fair Disclosure Rule within 90 days of the enactment of the new law. That threatens to dramatically cut back the amount of information that rating agencies receive.

“The exemption for credit rating agencies from Regulation FD permits issuers to provide the credit rating agencies with material non-public information without requiring public disclosure of such information,” Fitch notes. “To the greatest extent possible, Fitch will work with the issuer community to put in place appropriate mechanisms so that Fitch can continue to receive confidential information as part of the rating process.”

Well, one thing I can say about this: In terms of news regulations, it’s not nothing.

My personal view as to the role of the ratings agencies has always leaned towards acknowledging that to great degree, they were manipulated by the bankers, Goldman Sachs and the rest.  I understand that they were paid for their involvement, and that they didn’t do nearly enough to prevent the problems from occurring, but I think one also has to recognize that, compared with the bankers, the amounts the ratings agencies received represented nickels and dimes.

In addition, Wall Street’s bankers plainly took advantage of the ratings models, submitting securities in such a way as to exploit the holes they knew existed.  So, all in all, while I think the ratings agencies were complicit in certain ways, I don’t think they should share equally in the blame, by any means.

Nonetheless, I’m encouraged by the inclusion of this new area of regulation, it’s obviously had its intended impact already, and regardless of who did what in the past, it seems that this is certainly a big step in the right direction at least as far as preventing future fraud as a result of improperly rated debt securities goes.

So, alrighty then… score one for our side.

Mandelman out.

And thanks to the blog, Naked Capitalism for bringing this to my attention.  Naked Capitalism is a super smart and all-around terrific blog, by the way.  It has many contributors, but is the home of Yves Smith, who is like one of the smartest people on the planet.  She currently heads up Aurora Advisors, a New York-based management consulting firm that specializes in corporate finance.  Her past gigs include Goldman Sachs and McKinsey & Co. and you don’t get a more impressive resume than that, and she’s a graduate of Harvard College and Harvard Business School… big surprise there.

(Actually, Yves… Harvard Business School?  Really?  What happened… back-up school?  Why not Wharton?  Harvard Business School is across the river from Harvard, and I mean that both literally and figuratively.  You know what I mean, right Yves?)

Click here to read the complete story at Mandelman Matters.

People write to me all the time asking what they can do to help change what’s happening in this country as related to the tragedy that is the foreclosure crisis.  They read articles I’ve written and say, ” Yes, I agree… but what can I do to help change what’s going on?”

I could answer by saying that you have to “speak out,” but what the heck does that really mean?  I could say, “Write to your congressional representative,” but for most people, that feels like it will be about as effective as trying to remove sand from the beach with a teaspoon.

I want to answer the question today of what you can do to help change what’s being allowed to go on in this country as far as your fellow citizens are concerned, but before I do I want to make sure everyone understands two things:

1. There’s no magic bullet here, no single thing that’s going to do the trick.  But, that’s not a reason to do nothing.  Doing “The Wave” at a baseball game starts with a handful of people, and soon that “wave” pulses through a stadium packed with 50,000 people.  Changing what’s happening in this country is the same thing.  It’s how you eat an elephant, right?  One bite at a time.
2. If you don’t believe that a “grassroots” movement can overpower or even compete with the power of the banking and financial services industries, I would ask you to consider that our current president is an African American, who was the Junior Senator from Illinois, by the name of Barack Obama.  Does anyone think that the day he began his campaign he or anyone else for that matter, thought: “This is a lock.  No way we can lose?”  Unlikely, don’t you think?
3. And if you don’t believe Congress will ever be responsive to the demands of the people, I’d ask you to consider that just over a year ago, when there were people marching in the streets, expressing their outrage over $165 million in AIG bonuses that were about to be paid out to the very executives responsible for AIG’s financial ruin, it took Congress less than two weeks to pass an entirely unprecedented law that would have taxed those bonuses at the rate of 90%.  That bill died quietly in the Senate, of course, but it isn’t the point.  That 90% bonus tax bill being passed in less than two weeks should have proved beyond any doubt that Congress actually can take action quickly on behalf of the people in this country… if they are motivated to do so.

Okay, so what can you do today… right now, as a matter of fact… to start changing the course our nation is currently following?  And, let me assure you of something: If we don’t change that course, if we allow the foreclosure crisis to continue unabated, we will most assuredly increasingly experience the pain of a nation whose economy in an ongoing decline… for years… and by “years” I mean decades.

In 1929, on one day of the stock market’s crash, the NYSE traded 16 million shares.  The next time it would trade 16 million shares it was 1969… 40 years later.  On January 1, 1960, the DOW was roughly 700… on January 1, 1970, it was 800, and on January 1, 1980, the DOW was 838.  That’s 20 years, between 1960 and 1980, and the DOW basically went from 700 to 800.  People in this country today have never really experienced “hard times,” but that doesn’t mean they’ve never happened or won’t happen again.

So, what am I suggesting you do?  Have a “Plunder Party!”

PLUNDER – The Crime of Our Time, is a movie produced and directed by Danny Schechter, that shows what Wall Street did to destroy our economy.  It’s the first movie that clearly shows that what’s happened over the last several years was not a natural disaster, nor was it a market correction.  The destruction of our credit and financial markets, along with the housing market was not caused by irresponsible borrowers, it was the result of financial terrorism… a series of criminal acts perpetrated by Wall Street’s bankers who made billions as a result.

I don’t care what your views are today… they will have changed after you watch PLUNDER – The Crime of Our Time.  It’s entertaining, never boring, and it’s never “over anyone’s head”.  Anyone who watches this movie will at least be angry, but if enough watch it, they’ll be ready to take action… the next step, whatever that step turns out to be.  Think of it as the foundation upon which we can begin to call on the citizens of this country to speak out and demand real change.

I think everyone has a friend or family member who thinks the crisis was caused by irresponsible sub-prime borrowers, who are now lowing their homes and should be.  They’re wrong, and you know they’re wrong, but it’s a tough argument to win.  More than a few of my readers have contacted me over the last year saying that they wish I could come over and set their special someone straight, and frankly I wish I could too, because no one… and I do mean no one… has any chance of winning that argument if I’m involved, and not because I’m such a brilliant debater, but because they have their facts wrong… they are misinformed.  I am not, and neither is Danny Schechter.

“A hard-hitting investigative film by Danny Schechter. The “News Dissector” explores how the financial crisis was built on a foundation of criminal activity uncovering the connection between the collapse of the housing market and the economic catastrophe that followed. To tell this story Schechter speaks with bankers involved in these activities, respected economists, insider experts, top journalists including Paul Krugman, and even a convicted white-collar criminal, Sam Antar, who blows the whistle on intentionally dishonest practices.”

It’s easy to have a PLUNDER PARTY… and even if you don’t want to have an actual party… start by ordering the DVD by clicking the link below.  When the DVD arrives, watch it.  It will make you mad, it may make you cry.  The make the decision… who would you like to have over to watch it with you?  Make a list, it doesn’t matter whether you invite two people… 20 people… or 200 people.  Make popcorn… serve lemon aide… set up chairs so your guests are comfortable.

Tell everyone why you think this is such an important film to watch.  Write to me and I’ll help you write something, help you plan it out.  If you want, you can even set up a speaker phone and call me after the movie has ended and I’ll answer any questions you guests might have… I’m sure I can get Danny Schechter to be on many of those calls too.

People, let’s do this… really do this.  It’s not the only thing we’ll do… but it’s a starting place and it’s something we all can do now.  For what it’s worth, I’m having my own PLUNDER PARTY in early August, and I’ll be sure to film it and post it on my blog so you’ll be able to see how it went.

I’m thinking of setting out a metal tub filled with apples and a sign that says “Apples 5¢,” just like during the Great Depression, and serving chili, but calling it “Rabbit Stew,” or something like that.  Maybe I’ll even dress in clothes that look like I just walked out of The Grapes of Wrath, if you remember that book or the movie with Henry Fonda.

I don’t know… I think it’s going to be a hoot!  A lot more fun than one of those Pampered Chef parties I got dragged to a few years ago.  (Sorry, I’m just saying…)

So… get started now… click the link in the red box and order the DVD from Amazon.com right now… while you’re thinking about it.  And yes… in the spirit of full disclosure, I’m an Amazon affiliate, so I’ll make 6.5% of the $16.99 sales price, which is about a buck.  Just so you know…
“Plunder -

What’s next?  Here’s what I think should be next.  It’s called “A Hundred Thousand Homeowners – Voices of Hope & Change“.  Click the link and find out how you can join 100,000 homeowners in sending a message to Washington that will be heard.

Click here to read the complete story at Mandelman Matters.

The other day, I posted an article about how a deal had been negotiated in Congress that would make available $1 billion in federal bridge loans for homeowners who, due to unemployment or illness, are unable to make their mortgage payments.  You can find it here: New Legislation to Offer $1 Billion Fund for Unemployed

I came out saying I support the idea, basically because my expectations of what my government is capable of have been reduced to essentially nothing.  Everyone knows how much I love sarcasm… or at least have come to love sarcasm writing about the foreclosure crisis… and on this article I think I might have taken my sarcasm to such a level that readers, especially those that read quickly, may have missed it.

Anyway, I say this because I received an email last night from a reader and our conversation back and forth follows.  I thought it would be worth reading it for numerous reasons… but, it’s of course up to you… Mandelman

THE MANDELMAN MATTERS READER WRITES:

How can an unemployed person taking on even more loans, for what is most likely a well-underwater home mortgage situation, be a good thing?  I still believe the only thing that will work to help resolve this gigantic mess is principal forgiveness, not more loans.  Use a tax on banks, hedge funds, Wall Street firms of all types, to help reduce principal.  Start with those of us who had fully documented income when we got our loans, have lost income due to the negligent (and intentional egregious behavior of various banking types), and help us out with reductions.  I’m surprised that you would think this new program is a good idea (unless I’m reading it wrong).

MANDELMAN RESPONDS:

Well, when you look at it from the perspective of coming from a federal government that has not even come close to doing anything that even gets down the runway, let alone launches…

Bush’s Hope-4-Homeowners plan, which had a $320 billion authorized by American Jobs Creation Act of 2008, ended up modifying one loan and spending essentially nothing.

Obama’s HAMP was authorized at $380 billion and more than a year into it, has spent essentially nothing… $200 million.

Obama’s 2MP program, which was launched 14 months ago, has NOT modified one single solitary second mortgage.

Um, what else… I’m sure there’s more, but I’m tired. When you consider that kind of track record, and the fact that federal employees from two administrations, the entire congress and God knows how many others have been working on this for 3 years… Well, it would seem to me that you either leave the country, eat a gun, or start having some pretty diminished expectations as to the potential for competency that exists.

I mean, it’s like if you were listening to a game of one-on-one being broadcast on the radio, and you were rooting for your player, but he never seemed to be able to hold onto the ball, let alone shoot or score, and then you found out that the guy you were rooting for was playing against Kobe, but was actually a 7 year-old autistic dwarf with Down Syndrome… Well then you clap when he manages to bounce the ball and it doesn’t hit his own foot and rolls out of bounds… Right?

So, with that in mind… A billion in loans for people without jobs, while you allow the market to remain in a freefall with millions of foreclosures ongoing, and at this point nothing even on the drawing board that could potentially stop them… After three years and that many working on the problem…

So… YAY! loans for the unemployed!! YAY! Look, honey, he almost bounced the ball that time. Almost! I know, he hit his toe again, and Kobe got the ball, but the last time he just threw it directly out of bounds, while he shit his pants, slipped on the excrement and fractured his femur… So look how much better this time was!!!

So, YAY!!!’ Loans without jobs!!! That’s the way guys!!! GOOD JOB!!! Assuming they actually do end up making any of the loans that is. If I find out that there’s a requirement attached to the program that says that it only applies to unemployed homeowners with 700 FICO scores and above, and that the bill forgot to consider who the loan originator might be and then they forget to either print or distribute the applications… Well, then that will just be more of the status quo and I’ll have to stop cheering.

AND THE READER REPLIES:

No, it’s another useless program. You’re not applauding a handicapped kid; it’s applause for the Emperor-with-No-Clothes. Its not a kid that can’t do any better; it’s another administration who cant push through a difficult but necessary program.  More loans to underwater homes is simply pushing back the day of reckoning by a few months to a couple years. Another misguided program is worse than doing nothing.

AND MANDELMAN RESPONDS:

Well, of course it’s a useless program, in the sense that it is entirely devoid of thought or potential.  As in, more loans targeted for people without the ability to repay them?  That’s the answer?  Well, if they weren’t going to lose their homes, they certainly will now.  But then, maybe that’s the goal right?  (My sarcasm on this point may have gone too far.  Hey, is it okay if I print our interchange if I leave your comments anonymous?  MA

ONE MORE THING FROM MANDELMAN TO THE READER…

Oh, one more thought… I should add that in some ways, I am quite seriously in favor of the program.  Because our government has proven itself so entirely incompetent, people have taken their own lives and perhaps this program will delay even one person from committing suicide.  It probably won’t stop them from doing it, but maybe because of this program, they’ll do it a year later, and at this point… since this is the best case type of accomplishment I’ve come to expect from the government in this country… then good.

It’s the absolute pinnacle of incompetence… something I’d expect in a novel by George Orwell, or Ray Bradbury… a people conditioned to be happy because at least their government managed to delay one suicide by spending a billion dollars… because the other untold billions they’ve spent or tried to spend, accomplished even less.

And there you have it… ain’t life grand?

Click here to read the complete story at Mandelman Matters.

Fed Chair Ben Bernanke testified to Congress this past week on the topic: “Economic and financial conditions and the federal budget.”  I had hoped to watch it, but as it turned out I didn’t have the time that day, so later that evening I went online to find a transcript of Bernanke’s testimony.  It wasn’t the least bit hard to find, the Federal Reserve posted it on its site, federalreserve.gov.

It wasn’t particularly long, so I read it right away, and it was chilling.  Finally, I thought, Bernanke has said it in no uncertain terms: We’re in deep, deep trouble; the answers are going to mean widespread pain, and the impact essentially permanent.  Based on what the Fed Chief said, our economic crisis is not something we can expect to follow the course of past recessions, to the contrary, what’s ahead for this country is not the same America as the one we’ve known over the last 30 years.

Like I said, it was chilling.

You have to understand, Ben Bernanke worked on his testimony for weeks.  It was written, edited, re-written and re-edited.  Many times.  A lot of people worked very hard to make sure that his testimony’s outlook would come across as being as positive as possible, without being accused of misinforming Congress or the nation.

And yet, when I finished reading the Fed chief’s testimony, I knew the outlook was anything but positive.

So, wasn’t I surprised to wake up the next morning to find the press reports about Bernanke’s testimony trumpeting only its positive aspects?  His more sobering, or chilling comments were nowhere to be found.

I’ll present several examples here.  And I think it’s very important that you take note, because knowing what’s ahead, while it may seem depressing at the moment, much more importantly allows you to make plans so as to optimize the future reality, which in my mind is infinitely better than knocking your head against the wall in frustration as you sail into, what is certain to be, the headwind of the century.

Ladies and Gentlemen, I give you excerpts from the testimony given by Chairman Bernanke before the Committee on the Budget, U.S. House of Representatives, Washington, D.C. on June 9, 2010…

(And, any emphasis added, was added by me.)

“Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget.”

… The latest economic projections of Federal Reserve Governors and Reserve Bank presidents, which were made near the end of April, anticipate that real gross domestic product (GDP) will grow in the neighborhood of 3-1/2 percent over the course of 2010 as a whole and at a somewhat faster pace next year. This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued.

Let’s see the $8,000 tax credit expired, as did the rebates for energy efficient appliances, and then building materials plunged 9.3 percent, and housing fell off a cliff, and that can’t be good for big ticket items like appliances going forward. Now what? More rebates and tax credits?  There’s a difference between actual demand and subsidized demand. It should be clear that there is very little actual demand.  The only demand we’ve seen has been the result of tax credits and subsidies.

Retail sales were up huge year-over-year but that’s not much of a comparison. Regardless, general merchandise sales are up less that 2%.

The truth is that retail sales are far lower than reported for several reasons.  One is the methodology being used.  According to the Advance Sales Report:

“The advance estimates are based on a sub-sample of the Census Bureau’s full retail and food services sample. A stratified random sampling method is used to select approximately 5,000 retail and food services firms whose sales are then weighted and benchmarked to represent the complete universe of over three million retail and food services firms.”

There’s another factor that skews the retail sales reports.  There have been many stores, Circuit City as just one example, that have gone out of business since the recession began, and Best Buy’s sales certainly benefited from Circuit City going under, for example.  But, some of the sales from closed stores have disappeared… for good.  And that’s not showing up in the happy news “advance sales” reports.

The right way to assess retail sales is by looking at sales tax receipts, and those have been miserable across the board and are about to take a turn for the worse.

… Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity.

Likely to diminish?  So, that’s it for the stimulus, right?  Because we’re out of money, right?  We’ve pumped trillions of dollars into our economy, without it positively affecting unemployment, retail sales, or foreclosures.  How bad things would be without that stimulus?  Now we’re going to start seeing the answer to that question.

… At the same time, significant restraints on the pace of the recovery remain. In the housing market, sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit.

Okay, so finally it seems that the Fed chief has stopped pretending that the housing market has recovered and is admitting that there has only been a temporary boost made possible by tax credits.  And, firmed just a little since mid-2009?  As I recall, things weren’t so red hot in mid-2009 as far as the housing market was concerned.  So, with incomes still falling, and unemployment still rising, I wonder what Bernanke thinks housing will do now?  No, actually I don’t.

… the labor market was hit particularly hard by the recession, but we have begun to see some modest improvement recently in employment, hours of work, and labor income. Payroll employment rose by 431,000 in May, but that figure importantly reflected an increase of 411,000 in hiring for the decennial census.

Ben, Ben, Ben… this is almost to sad to write about.  Why would you quote payroll employment increasing in May, when your next sentence admits that it was only due to the once a decade hiring of census workers… who will all be out of work by August?  Sad, just sad.

Unemployment is inn a terrible state, with the number of people out of work over 30 weeks going nowhere but up.  And with foreclosures rising, spending dropping, and government stimulus ending, there should be little question as to where things might go from here.

Also, remember that the methodology for calculating unemployment isn’t an exact science.  The Bureau of Labor Statistics uses it’s “birth-death model,” which estimates where we are in the economic cycle and then tries to guess at the number of companies hiring and firing.  In April, the BLS said we created 288,000 jobs, you might recall, but ADP’s report said the number was 35,000.  Anyone want to bet on which one ends up being right?

… Private payroll employment has risen an average of 140,000 per month for the past three months, and expectations of both businesses and households about hiring prospects have improved since the beginning of the year. In all likelihood, however, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009.

Improved since the beginning of the year… when things were dire?  Watch out for these type of comparisons.  The government and others are using them all the time lately to make things sound way better than the reality of the situation.

And, when the Fed chief says “a significant amount of time,” he means something along the lines of a decade or longer.  Otherwise, he would have given a range, like 3-5 years.  He couldn’t do that with a straight face, so he went with “a significant amount of time”.

… On the inflation front, recent data continue to show a subdued rate of increase in consumer prices. Over the past two years, overall consumer prices have fluctuated in response to large swings in energy and food prices. But aside from these volatile components, a moderation in inflation has been clear and broadly based over this period.

A subdued rate of increase in consumer prices means prices are going down, otherwise known as “DEFLATION”.  But deflation is a scary word, so we’re having a subdued rate of increase.  Again, with trillions having been pumped in, we shouldn’t have falling prices were the recovery they speak of real.

… By early May, financial strains had increased significantly as investors focused on several interrelated issues, including whether the fiscally stronger euro-area governments would provide financial support to the weakest members, the extent to which euro-area growth would be slowed by efforts at fiscal consolidation, and the extent of exposure of major European financial institutions to vulnerable countries.

It’s no secret that Europe is in trouble in so many ways.  Geithner was at the G20 meeting of finance ministers from 20 nations last week, and France and Germany both told him to pound sand.  They’re not going to continue to try solving the problem by papering over it with money, they’re going to cut back and pay off debt.  The British Prime Minister has said that the cuts and changes “will affect our very way of life”.  That doesn’t sound like a recovery, does it?

And as far as fiscal stimulus goes, Europe’s throwing money at the problem is likely to work about as well as ours did, wouldn’t you think?  Expect Greece, Hungary, Spain and perhaps others to continue circling the drain in the year to come.

And, you also might find it interesting that Geithner’s speech at the G20 told the other nations that they could not depend on the America consumer’s spending to bring their economies back this time.  Uh oh.

… U.S. financial markets have been roiled in recent weeks by these developments, which have triggered a reduction in demand for risky assets: Broad equity market indexes have declined, and implied volatility has risen considerably. Treasury yields have fallen as much as 50 basis points since late April, primarily as a result of safe-haven flows that boosted the demand for Treasury securities. Corporate spreads have widened over the same period, and some issuance of corporate bonds has been postponed, especially by speculative-grade issuers.

No one wants to be in anything risky when things are so risky.  Flight to safety means, look out below.  And bond offerings being postponed means that they can’t sell them, because no one wants to take a chance that they won’t be able to pay the debt back, which would not be the case were there an actual recovery underway.

… European leaders have put in place a number of strong measures. Countries under stress have committed to address their fiscal problems.  A major assistance package has been established jointly by the European Union (EU) and the International Monetary Fund (IMF) for Greece. To backstop near-term financing needs of its members more generally, the EU has established a European Financial Stabilization Mechanism with up to 500 billion euros in funding, which could be used in tandem with significant bilateral support from the IMF.

Like I just said a few comments back… the European stimulus is only expected to “backstop near term financing needs,” no one thinks it’s going to solve any of the problems the EU countries are facing.

… Nevertheless, history makes clear that failure to achieve fiscal sustainability will, over time, sap the nation’s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.

I didn’t know OUR history made that all that clear, but if he says so.  I’ve never heard a Fed chief say that something might sap our nation’s vitality, or reduce our living standards… IN MY LIFE.  Have you?

“… Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession.”

Okay, this one made me queasy.  So, we’ve “deteriorated appreciably since the onset of the financial crisis”.  Well, I’ve known that throughout, but now Bernanke’s admitting this to Congress?  Remember, he wanted to be as positive as possible when testifying and worked on what he would say for weeks.

… The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets.

Again, he now sees the problem clearly, and we’re in trouble… deep trouble.  We have to start paying down the enormous debt we’ve built up trying to stimulate our economy.  It hasn’t worked, as he said just above, and now we have to pay some debt down… but how?  This is going to be painful and change our standard of living going forward.  We’ve waited too long to step in and change things.  There’s no other option now.

… Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.

We’re on an unsustainable path.  The Fed chief has finally admitted that we are on an unsustainable path.  And that’s EVEN AFTER we’ve returned to normal, whatever the new normal will be.

… Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits.

The 78 million baby boomers are not going to behave the same way they used to because they’re older.  They won’t buy new cars every two or three years.  They won’t spend as much period.  And the generation behind them, just isn’t that big or that rich.  Social Security is about to start sweating as is Medicare.

… To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.

“Sharp shifts in spending and tax policies,” means cutting Social Security… rising taxes by 33%… you know… fun stuff like that.

… Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.

So, in other words, absent our “strong commitment to fiscal responsibility,” which we undoubtedly have not made… we won’t have economic growth or financial stability in the future?  Why would we have made such a “strong commitment to fiscal responsibility,” when all we’ve been hearing is how recovery is right around the corner?  And Ben Bernanke talking about a strong commitment to fiscal responsibility is the very essence of irony.  You first, Ben, you first.

~~~~~~~~~~

People… we have to stop the foreclosures. They breed more foreclosures.  They reduce spending and lower tax receipts.  They cause increased unemployment.  They cause more bonds to default.  They make our banks insolvent.  They are a “HOLE IN THE BOTTOM OF OUR BOAT.  It doesn’t matter what else we do… as long as we allow the foreclosures to continue unchecked… we are doomed to a future that none of us would want for our children.

Notice how the Chairman of the Federal Reserve Bank, during his testimony to Congress, didn’t even really mention the FORECLOSURE CRISIS.  Why, doesn’t that seem the least bit strange to anyone else?

Because we can’t stop the foreclosures, can we?  Nope, it seems that we can’t.  Why?  Because more than half of this country still believes that the foreclosure crisis was caused by irresponsible borrowers buying more house than they could afford, as opposed to Goldman Sachs selling worthless bonds and credit default swaps to every country and pension plan on the globe.  So, now we can’t get the political support to help those irresponsible borrowers, and because of that educational deficiency… we’re going down.

Great… absolutely great.  My daughter’s future is going to be spent in a nation that used to be economically vibrant, but is now mired in decades of recession because of people jealous of their neighbors, happy at their plight, that can’t seem to listen, and won’t read a damn book or two.  It’s not funny, people… not funny at all.

Mandelman Out.

Click here to read the complete story at Mandelman Matters.

Our nation’s economic recession and foreclosure crisis, brought out some of the worst America has to offer.  People who saw those at risk of losing homes to foreclosure, not as a tragedy, but as an opportunity, seemed to appear out of nowhere, looking to scam those in distress out of the little money they had left.  There’s no way to know how many “scammers” there were, or are, out there, but recognizing that even one is one too many, the call to Congress to act to protect consumers was heard loud and clear.

This has always been an issue that has only one side; there’s never been a “pro-scammer” movement.  The question has always been how to protect consumers, without putting the legitimate firms helping consumers out of business at the same time, and this debate intensified when the proposed new rules threatened to take lawyers out of the mix.

In the beginning, back in late February of 2009, when President Obama delivered his speech introducing the Making Home Affordable program, many believed that homeowners wouldn’t need to hire anyone to help them get their loan modified.  As the President said, you could call your bank directly, or call a HUD counselor… simple as that.

By the middle of last summer, however, that notion had long since faded into distant memory for many homeowners.  After trying what the president had suggested, sometimes for months, many distressed homeowners decided that they either needed or wanted to hire a lawyer to help them persuade their lender or servicer to modify their loan.

Most of the early proposals, at both state and federal levels, focused on eliminating up front fees, and that meant, even if you were a lawyer, you couldn’t be paid for all of the months of work involved when attempting to modify a loan, you could only send your bill once the loan was modified.

Clearly, the unintended consequence of such a rule would be that a distressed homeowner would no longer be able to hire an attorney when at risk of losing his or her home, because no attorney would, or could ever work for 6-12 months, and then hope to be paid once the loan was modified.

The State Bar of California task force has continued to argue that they’ve been investigating hundreds of lawyers for possible involvement in loan modification scams, and have already suspended some and gotten resignations from others.  The task force maintains that there is more action to come, but the numbers are certainly not in the hundreds as the State Bar has implied.  Their latest press release says:

“Besides the two involuntary inactive enrollments, the State Bar’s Office of Chief Trial Counsel has obtained the resignations of 13 attorneys involved in loan modification misconduct since creation of the Loan Modification Task Force in April 2009.  Five loan modification trials are pending. Another 2,000 active investigations related to loan modification are being conducted.”

Carol Needham, who teaches professional responsibility at the Saint Louis University School of Law says:

“The question becomes whether such legislation is done with a scalpel, precisely going after the harm, or with the more blunt force of a cudgel.  The financial reform bill can be like the health care reform bill, with a lot of unintended consequences.”

For a while it really seemed touch and go (you can find my latest article on the FTC’s proposed rule here), but finally it seems that the tides have changed, and cooler heads are prevailing.  According to the ABA Law Journal:

“A growing list of more than a dozen state bars and the ABA have asked for changes in congressional legislation aimed at protecting consumers from financial fraud because it contains language so broad that the everyday work of lawyers in various practice areas would be swept into the web of federal regulators.”

The competing House and Senate bills that are now headed for conference committee both aim to regulate anyone involved in offering a “consumer financial product or service.”  The House version exempts lawyers engaged in the practice of law, along with staff directly supervised by them, or “in matters incidental to the practice and within the scope of attorney-client relationship.”

The Senate version of the bill, however, provides no such exemption, and the ABA and state bars are now asking the U.S. Senate to add the same “practice of law” exemption as found in the House bill.

Thomas Susman, director of the ABA’s Governmental Affairs Office in Washington, D.C. had the following to say:

“We’re not asking them to exempt someone with a JD who sets up some sham-façade non-law business where people think they’re dealing with a lawyer but aren’t being protected by the legal disciplinary arm.  When we talk to people on the Hill, they say that kind of activity is the problem. The Senate solution as crafted is much too broad and doesn’t address it.”

The House-Senate conference committee is scheduled to begin negotiating changes to the two bills on June 15, and expect to complete their work by the end of the month. The House bill, H.R. 4173 is called the Wall Street Reform and Consumer Protection Act of 2009 (PDF); Senate bill S. 3217 is called the Restoring American Financial Stability Act of 2010 (PDF).

But that’s not all.  Whenever you have an issue this politically charged in an election year, you’re going to have more than one federal agency looking to make its mark on protecting the American consumer.

The U.S. Department of Housing and Urban Development, is proposing a rule that would define any lawyer helping clients negotiate loan modifications as a “loan originator” or “third-party loan modification specialist,” and the result would be newly required federal licensing and registration.  This proposal, it’s worth noting, may also allow licensed real estate and mortgage professionals to become licensed and registered to assist homeowners with loan modifications.

And the FTC is proposing a rule, under the banner of Mortgage Assistance Relief Services, that would allow lawyers to represent homeowners seeking loan modifications, but would also establish a specific fee structure that lawyers would have to employ whenever helping clients renegotiate mortgages or avoid foreclosure.

And… the ABA says that it has asked both agencies to expand exemptions for lawyers engaged in the practice of law.

So, while it’s not a slam dunk, by any means, it does seem to me that the powers that be have finally come to understand that many homeowners do in fact need help when attempting to avoid foreclosure and obtain a loan modification.

It also seems, as I have always believed in my heart of hearts would be the case, that my country would not take away my ability to hire a lawyer to represent my interests when I feel I need one.  And thank the good Lord for that.  (At least not in an election year.)

Stay tuned to Mandelman Matters for updates and insight on the House and Senate Bills, and for updates on both the HUD and FTC proposals.  Because when the law will have an impact on homeowners, Mandelman Matters will have an impact on the law.

WHY TAKE CHANCES?

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Click here to read the complete story at Mandelman Matters.

Since the Great Depression, a period marked by widespread runs on banks, the FDIC has done a good job of fulfilling its mandate. So how are they doing in this crisis?

In a nutshell, they are in trouble.
The FDIC insures 8,246 institutions, with $13.5 trillion in assets. Not all of them are going bankrupt, of course. Yet as of late July, a disturbing 64 banks had gone belly up this year – the most since 1992 – costing the FDIC $12.5 billion. At the end of Q1, the agency was already asking for emergency funding.

And worse, much worse, is likely yet to come. The following chart shows the total assets on the books of the FDIC’s list of 305 troubled banks. The list doesn’t include the biggest banks that are considered too big to fail, as they are being separately supported with bailouts. By contrast, if the banks on this list fail, the FDIC is on the hook to have to step in and take them over and, of course, make depositors whole.

Other measures of how serious the losses at banks are becoming can be seen in the chart below, which shows charge-offs and non-current loans at all banks. You can see that the Net Charge-offs remain stubbornly high, with banks charging off almost $40 billion in bad loans in the last two quarters alone. And the number of non-current loans – loans where payments are not being kept up – is soaring.

Together, these measures indicate the potential for more big failures and more big bailouts coming down the pike.

About Those Reserves…

Into the battle against bank insolvency the Fed brings a level of reserves that can best be described as paper-thin. From almost $60 billion last fall, the FDIC’s reserves have been drawn down to only about $13 billion today, a 16-year low. A quick look at the FDIC’s own data shows us how inadequate those reserves are compared to the deposits they are now insuring.

The chart below says it all:

As you can see, the Federal Deposit Insurance Corporation currently covers each dollar on deposit with a trivial 2/10ths of a penny…

“Disenfranchisement” [Definition]  – the revocation of the right of suffrage  (the right to vote) to a person or group of people, or rendering a person’s vote less effective, or ineffective.

This accurately describes the reality of EVERY United States citizen today who is NOT an elected official. In every sense of the words, our vote is “less effective or ineffective.”  When’s the last time you were approached (by your US Senator or State Representative) for your no BS opinion on a real issue? On any issue? On the issue of the bailouts… NO ONE I talk to and I mean NO ONE thinks this is right. Even the media is in agreement with this and it’s hard to find an issue where I agree with media or vice versa.

So, if the masses are truly against the bailouts and the MASSIVE spending approach to dealing with a recession, how is that our elected officials are voting FOR these bailouts? That, my friends, is “disenfranchisement.”

The regular guy’s vote doesn’t count. Let’s face it. No one’s asking mine or your opinion… our elected officials have come to believe that THEIR vote is OUR vote; and somehow, we’ll all just go along with it because we’re not smart enough to understand the issues and the “details.”

Disenfranchisement, in any of its forms, is unconstitutional. Your vote and my vote needs to be effective. In order for it to be effective, it must be asked for and it must bear weight.

Think on these things… I don’t have any magic solution in the moment but I do think we all need to figure out how our voice can be heard and our vote, especially on these major issues affecting not only us but our children and grandchildren, MUST be counted. No one called me to vote on these bailouts of corporate America and I was given no forum to place my vote. Were you?

To read the United States Constitution, CLICK HERE.

Everyday, I read the headlines and half of me can’t believe what’s happening… and it keeps happening; the other half completely believes this madness. Our government officials are out of control. They’ve lost it… I mean completely lost their marbles but we’re to blame because we’ve elected these looney tunes to office and we continue to do so. The average American is being fleeced. We are going to get taxed beyond comprehension. Mark my words. It’s coming. It will come in all sorts of nasty realities. We’re on the hook for $700 Billion. $350 Billion has just been slammed through the system. Gone. And what do we have as a result? More foreclosures, more write-downs, more people losing their homes, their jobs.

And today, I get the word… us taxpayers are going to fund some more acquisitions. The M&A Departments are singing all the way to the bank – oh, excuse me, they are the bank… Bank of America was going to buy Merrill Lynch BUT they got cold feet. The bank, already the recipient of $25 billion in committed federal rescue funds, said that it was unlikely to complete its Jan. 1 purchase of the ailing Wall Street securities firm because of Merrill’s larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.

So our good friend and consumer advocate, Hank Paulson, is coming to the rescue. “We can’t let this happen! Bank of America needs more! $25 Billion isn’t enough. The US economy will crash if Merrill Lynch fails and B of A doesn’t complete this M&A! Get ‘em more… get ‘em more!”

Since when did it become OK for the US taxpayer to fund a private company’s buyout of another private company? Excuse me? I don’t give you permission to use my tax dollar to do this! I sure hope someone out there has something to say about this. Write your US Senator… Write your Congressman/woman… Let them all know that they are going to  lose their seat if they continue to back this craziness. We’ve got to send strong messages. We’ve got to get out of our comfort zones of being too busy to get involved and start the barrage of emails and phone calls. Folks, this is the only way. It’s going to take a concerted effort from the masses. YOU have to do your part and hold your friends, family, neighbors and co-workers accountable to the same.

For more on the latest B of A news… read this article from the Wall Street Journal.

Wednesday, January 14, 2009
WASHINGTON — The U.S. government is close to finalizing a deal that would give billions in additional aid to Bank of America Corp. to help it close its acquisition of Merrill Lynch & Co., according to people familiar with the situation.

Discussions over these funds began in mid-December when Bank of America approached the Treasury Department. The bank, already the recipient of $25 billion in committed federal rescue funds, said that it was unlikely to complete its Jan. 1 purchase of the ailing Wall Street securities firm because of Merrill’s larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.

Treasury, concerned the deal’s failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C., lender on the “formulation of a plan” that includes new capital from the $700 billion Troubled Asset Relief Program, according to the person familiar with the talks. The amount and terms are still being finalized, this person said. Details are expected to be announced with Bank of America’s fourth-quarter earnings, due out Tuesday.

Any possible arrangement might protect Bank of America from losses on Merrill’s bad assets. There would be a cap on the amount of losses the bank would have to absorb, with the federal government being on the hook for the remainder, said one person familiar with the matter.

Both the Federal Reserve and the Federal Deposit Insurance Corp., alongside the Treasury, are involved in the negotiations, say people familiar with them. That suggests that the aid could take a similar form to the hand extended to Citigroup Inc. late last year.

The commitment of funds is further evidence of the banking system’s delicate condition and its hunger for more capital, despite billions of dollars already invested in financial institutions by the government. So far, the U.S. has already injected $25 billion into Bank of America, which includes $10 billion that Merrill Lynch would have received if the sale to Bank of America had not closed.

The talks with Bank of America were driven by Treasury Secretary Henry Paulson, people familiar with the matter said, because he was concerned that without help the deal wouldn’t close, leaving Merrill adrift. When the merger closed at the beginning of this year, it was with the understanding the two sides would hammer out a plan afterwards, said a person familiar with the talks.

The Treasury has committed the entire first half of its TARP funds, although some of it remains unspent. Earlier this week, President George W. Bush formally notified Congress that he was seeking access to the second half of the funds on behalf of President-elect Barack Obama. Congress has yet to release the money.

One person familiar with the matter said Bank of America would receive TARP funds, making use of the difference between the money committed and spent. In essence, as it did with aid to Detroit, the Bush administration is spending funds not yet approved by Congress that would otherwise go to an Obama Treasury.

Lawmakers, who are widely unhappy with how the TARP program has been run, have spent the week discussing what kinds of new conditions they would like to impose on recipients of funds in the second tranche. They would like to see more spending on aid for homeowners. Obama officials have expressed their desire to gain access to the additional funds quickly. A key vote in the Senate could come Thursday or Friday.

Federal Reserve Board Chairman Ben Bernanke said Tuesday that he’d like to see much of the second half spent to support the financial system, where continuing weakness is causing alarm among policymakers.

In the end, investors and financial institutions could face as much as $2 trillion of losses from bad U.S. loans and bonds, far more than anybody thought even a few months ago. A sustained recovery for markets and the economy is unlikely until the hole is filled. Bank stocks are falling sharply as investors come to grips with the worsening outlook for loan losses.

Analysts at Goldman Sachs were the latest to raise estimates of potential U.S. loan losses. In a report released late Tuesday night, Goldman economists estimated that losses from delinquent U.S. residential mortgages alone would hit $1.1 trillion as home prices sink, up from an earlier estimate of $780 billion.

Add in losses from commercial real estate, credit cards, auto debt and business debt, and Goldman’s loan-loss estimate hits $2.1 trillion. Only half of those losses have yet been recognized. Many will be borne by investors and banks overseas. The estimate doesn’t count losses that U.S. institutions will take on bad overseas loans that they hold.

Bank of America is expected by some analysts to report a loss for the fourth quarter, or at least a smaller profit than expected. It is not known exactly how much Merrill lost in the same time period. Merrill’s problems largely stem from the deterioration of assets on its books and trading losses, said a person familiar with the matter.

Bank of America’s heft and diversity helped buffer it through the early stages of this financial crisis. But the U.S. bank is now broadly exposed to the nation’s economic ills. With its recent acquisitions of troubled California mortgage lender Countrywide Financial Corp. and Merrill, the bank is now a major player in every corner of the battered U.S. financial system. It has its hand in credit cards, home mortgages, underwriting, merger advice and wealth management, all areas that are under stress during one of the deepest recessions since World War II.

The deal between Bank of America and Merrill was forged during the hectic weekend last September that saw Lehman Brothers Holdings Inc. collapse and giant insurer American International Group Inc. start to unravel. Merrill Chief Executive John Thain, worried his firm would be next, pressed for a quick deal.

In the aftermath of Bank of America’s acquisition of Merrill — valued at $50 billion when it was announced and worth $19.36 billion when it closed — its chief executive, Kenneth D. Lewis, was viewed as a savior of the financial-services industry, having rescued both Merrill and Countrywide without government assistance. Mr. Lewis had also argued that Bank of America didn’t need the first round of federal rescue funds that the Treasury offered last fall.

“These were funds we did not need and did not seek,” Mr. Lewis told employees late in 2008.

The request for additional funds may feed criticism that Mr. Lewis overreached during a time of crisis to expand his operation. Mr. Lewis “has hit a stumbling block here — the economy,” said Nancy Bush, a banking analyst with NAB Research LLC in Annandale, N.J. “I think he will have to stop doing deals.”

Analysts, worried about rising unemployment and a pullback by U.S. consumers, have been slashing Bank of America’s estimates for the fourth quarter. Some are predicting a loss and arguing that Bank of America will be forced to cut its dividend once again as a way of shoring up capital.

Jeffrey Harte of Sandler O’Neill & Partners revised his fourth-quarter forecast this week to a loss, citing capital-markets losses and rising credit costs. He predicted $2.3 billion in write-downs associated with collateralized debt obligations and subprime-mortgage-backed securities. Citigroup Inc. analyst Keith Horowitz said the bank might record a $3.6 billion fourth-quarter loss.

Bank of America is also reeling from two high-level Merrill departures within a week and concerns about cultural tensions between the two firms.

Mr. Lewis has already recommended his board not award top executives bonuses for 2008, warning that performance would be below expectations. Having received billions in federal aid, he faces pressure to show the bank is grappling with its problems — beyond the 30,000 to 35,000 job cuts it has already announced — and is making significant contributions to a U.S. recovery.

To that end, the bank intends to break out new loan originations made during the fourth quarter, a first-time disclosure it hopes will mitigate concerns about new lending.

Well, here’s just another outrageous aspect of the “bailout.”

The Bailout Funds (ie. TARP Funds) were to be used to help “struggling” banks get a cash infusion so that they would continue to lend money to consumers to keep the economy going. At least this is what our pal “Hank” Henry Paulson said to us American citizens and Congress to sell this craziness to us. You know, it was an emergency and in order for the US economy to survive, we gotta get these banks liquid so that they’ll continue to lend. All that…

So here’s the real deal… US Banks are using the money alright but they’re stingier than ever when it comes to lending. Less people are getting approved right now, today than were 6 months ago. FACT. Oh, and the money, you know, the $350 BILLION TAX PAYER DOLLARS that has already been spent… where has that gone. Well, it seems that Congress didn’t see fit to actually mandate how that money could be spent so guess what banks are doing with the money? Buying other banks. Oh yeah, us taxpayers are helping, no not helping, funding banks to buy other banks. Oh, and it also seems that some pretty neat little language was slipped into that bailout bill by our friend Hank that allows any bank which buys another bank to WRITE OFF ALL OF THEIR BAD DEBT. A yeah, they can just take all that bad debt and get a tax write off for it.

Folks, this is beyond criminal. I’m sorry but this just gets me steamin mad and I hope it does the same to you! We have got to put an end to this. We are collectively being  used by government and special interests to make the rich richer. We are being hosed and lied to on a regular basis.

If you want some proof of this, read on. I welcome all comments.

TARP Funds Fueling Global Buyouts, Not Lending (CLICK HERE to link to story)

Bank of American Corp. (BAC), which is getting $15 billion from the U.S. government as part of the Treasury Department’s $250 billion “recapitalization” effort, is doubling its stake in state-owned China Construction Bank Corp., and will hold a 20% stake worth $24 billion in China’s second-largest lender when that deal is finalized.

PNC Financial Services Group Inc. (PNC), which will get $7.7 billion from Treasury’s Troubled Assets Relief Program (TARP), is using that cash infusion to help finance its $5.2 billion buyout of embattled National City Corp. (NCC).

And U.S. Bancorp (USB), which received a $6.6 billion capital infusion from that same rescue package, has acquired two California lenders – Downey Savings & Loan Association, F.A., a subsidiary of Downey Financial Corp. (DSL), and PFF Bank & Trust, a subsidiary of PFF Bancorp Inc. (OTC: PFFB). U.S. Bank agreed to assume the first $1.6 billion in losses from the two, but says anything beyond that amount is subject to a loss-sharing deal it struck with the Federal Deposit Insurance Corp. (FDIC).

While the Treasury Department’s investment of more than $250 billion in U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, buyout deals such as these three show that the recapitalization plan has actually had a much different result – one that’s left whipsawed U.S. investors and lawmakers alike feeling burned, an ongoing Money Morning investigation continues to show.

Those billions have touched off a banking-sector version of “Let’s Make a Deal,” in which the biggest U.S. banks are using government money to get even bigger. While that’s admittedly removing the smaller, weaker banks from the market – a possible benefit to consumers and taxpayers alike – this trend is also having a detrimental effect: It’s reducing the competition that’s benefited consumers and kept the explosion in banking fees from being far worse than it already is.

This all happens without any of the economic benefits that an actual increase in lending would have had. And it does nothing to address the billions worth of illiquid securities that remain on (or off) banks’ balance sheets – as the recent Citigroup Inc. (C) imbroglio demonstrates.

In fact, Treasury’s TARP program has even managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers are furious – but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.

One could even argue that since this first bailout (the $700 billion TARP initiative) has fueled takeovers – and not lending – the government had no choice but to roll out the more-recent $800 billion stimulus plan that was aimed at helping consumers and small businesses – a move that may spur lending and spending, but that still adds more debt to the already-sagging federal government balance sheet.

At the end of the day, these buyout deals are bad ones no matter how you evaluate them, says R. Shah Gilani, a retired hedge fund manager and expert on the U.S. credit crisis who is the editor of the Trigger Event Strategist, which identifies trading opportunities emanating from such financial-crisis “aftershocks” as this buyout binge.

“Why in the name of capitalism are taxpayers being fleeced by banks that are being given our money to grow their businesses with the further backstop of more of our money having to be thrown to the FDIC when they fail?” Gilani asked. “Consolidation does not mean that bad loans and illiquid securities are somehow merged out of existence. It means that they are being acquired under the premise that a larger, more consolidated depositor base will better be able to bear the weight of those bad assets. What in heaven’s name prevents depositors from exiting when the merged banks continue to experience massive losses and write-downs? The answer to that question would be … nothing.”

Lining Up for Deal Money

In launching TARP, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the government’s goal was to restore public confidence in the U.S. financial services sector – especially banks – so private investors would be willing to advance money to banks and banks, in turn, would be willing to lend.

“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said.

Whatever Treasury’s actual intent, the reality is that banks are already sniffing out buyout targets, while snuffing out lending – and the TARP money is the reason for both.

Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, says Louis Basenese, a mergers-and-acquisitions expert who is also the editor of The Takeover Trader newsletter. “When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”

Indeed, banking executives have been quite open about their expansionist plans during media interviews, or during conference calls related to quarterly earnings.

Take BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the government program. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would likely accept the money in order to finance its expansion plans, The Wall Street Journal said.

“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.

And BB&T is hardly alone. Zions Bancorporation (ZION), a Salt Lake City-based bank that’s been squeezed by some bad real-estate loans, recently said it would be getting $1.4 billion in federal money. CEO Harris H. Simmons said the infusion would enable Zions to boost “prudent” lending and keep paying its dividend – albeit at a reduced rate.

Sounds good, right? Not so fast. During a conference call about earnings, Zions Chief Financial Officer Doyle L. Arnold said any lending increase wouldn’t be dramatic. Besides, Arnold said, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”

Buyouts Already Accelerating

With all the liquidity the world’s governments and central banks have injected into the global financial system, the pace of worldwide deal making is already accelerating. Global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer for that to happen this year than it did a year ago.

At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial-sector deal making.

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $250 billion in TARP money, or other deals that Paulson & Co. are helping engineer – JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ), for instance.

If You Can’t Beat ‘em… Buy ‘em?

When it comes to identifying possible buyout targets, M&A experts such as Basenese say there are some very clear frontrunners.

“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climates – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.

There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors.

The afore-mentioned stealthy shift in the U.S. Tax Code actually gives big U.S. banks a potential windfall of as much as $140 billion, says Gilani, the credit crisis expert and Trigger Event Strategist editor. What does this tax-change do? By acquiring a failed bank whose only real value is the losses on its books, the successful suitor would basically then be able to use the acquired bank’s losses to offset its own gains and thus avoid paying taxes.

“While everyone was panicking, the Treasury Department slipped through a ruling that allows banks who acquire other banks to fully write-off all the acquired bank’s bad debts,” Gilani says. “For 22 years, the law was such that if you were to buy a company that had losses, say, of $1 billion, you couldn’t just take that loss against your own $1 billion profit and tell Uncle Sam, ‘Gee, now my loss offsets my profit, so I don’t have any profit, and I don’t owe you any tax.’ It was a recipe for tax evasion that demanded an appropriate law that only allows limited write-offs over an extended period of years.”

Given these incentives, who will be doing the buying? Clearly, the biggest U.S.-based banks will be the main hunters. But The Takeover Trader’s Basenese says that even foreign banks will be on the prowl for cheap U.S. banking assets.

Basenese also believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders.” Each will use TARP funds to help accelerate its transformation from an investment bank into a bank holding company. The changeover will require each company to build up a big base of deposits. And the best way to do that is to buy other banks, Basenese says.

“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said. “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”

Not everyone agrees with that assessment. Investors who play the merger game correctly will do well. But the game itself won’t necessarily whip the industry into championship form, Gilani says.

“While consolidation, instead of outright collapses, in the banking industry may serve to relieve the FDIC of its burden to make good on failed banks, it in no way guarantees fewer failures,” he said. “In fact, it may only serve to guarantee, in some cases, even larger failures.”

These collective officials have the gall to spend $350 billion of our tax dollars without demanding strict accountability. The committee they selected to be this “watchdog” has to come out and say “hey, we’re here to do this and you’re not letting us hold you accountable and you’re not being transparent about where this money is going.” Unreal… If only it was truly not real. Read the story below from the Wall Street Journal.

TARP Oversight Panel Urges Transparency and Accountability

By DAMIAN PALETTA and MICHAEL R. CRITTENDEN

WASHINGTON — U.S. lawmakers should demand more accountability from the government’s $700 billion financial rescue package before releasing the second half of the funds, the head of the program’s watchdog panel said Friday.

Elizabeth Warren, who chairs an oversight committee set up by Congress to oversee TARP, photographed during a December interview.

“We would urge Congress to consider the accountability and transparency questions, the question of whether money is going to be used for foreclosures, and the overall strategy issues as part of any additional requests made for more money,” said Harvard Law School Professor Elizabeth Warren, who chairs a bipartisan panel charged with overseeing the Treasury Department’s Troubled Asset Relief Program.

The Obama administration is already looking at a broad revamp of the program, which has faced criticism from Democrats and Republicans over its implementation. Obama’s team is expected to launch a major program to prevent foreclosures. House Financial Services Committee Chairman Barney Frank (D., Mass.) said he is working with the Obama administration to try and come up with restrictions on how the second installment of the fund is used, including aid to cities.

Ms. Warren said she was “very pleased that the incoming administration is focused on these issues.”

The Obama’s administration will likely work closely with congressional leaders before asking for the rest of the TARP money, as Congress can pass a resolution disapproving of any request. President-elect Barack Obama could veto any disapproval resolution, but that could prove politically risky and unsettling to markets.

The new report by Ms. Warren’s panel, the second released since Congress created TARP in October, illustrates the controversial nature of the program. She said Treasury has still not adequately explained how it is selecting banks for its $250 billion program to inject capital directly into the financial system.

“The panel’s initial concerns about the TARP have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury,” the report said. It said Treasury had “not yet explained its strategy” for stabilizing the financial markets.

The report said long and short-term credit spreads suggest Treasury has effectively forestalled a financial collapse by injecting billions of dollars into the financial system. Still, the panel suggested that the efforts have “not affected liquidity in credit markets or reassured the capital markets that large financial institutions are strong credits.”

“Although half the money has not yet been received by the banks, hundreds of billions of dollars have been injected into the marketplace with no demonstrable effects on lending,” the document goes on to say.

Neel Kashkari gives an update on the TARP program in Washington on Thursday.

The report faulted Treasury on a variety of fronts, saying it has: no ability to ensure banks lend the money they’ve received from the government; no standards for measuring the success of the program; and that it ignored or offered incomplete answers to panel questions.

These shortcomings, the report suggests, could undermine the goal of various programs. “For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore,” the report said.

The bipartisan panel reserved its most strident criticism for Treasury’s approach to dealing with the foreclosure crisis at the root of the ongoing economic turmoil.

“The bailout money doesn’t require a specific approach,” Ms. Warren said. “It entrusts Treasury with developing an approach, and that’s what Treasury should be doing.”

Treasury officials debated whether to use part of the TARP program to prevent foreclosures but ultimately decided against it, worried about any program’s effectiveness and the possibility it would discriminate against homeowners who’ve been struggling to make their mortgage payments.

They have instead relied on industry-led efforts by Fannie Mae, Freddie Mac and others to voluntarily modify troubled loans into more affordable products.

Additionally, the report faulted Treasury for not explaining why it declined to force all TARP recipients to adopt a Federal Deposit Insurance Corp. mortgage loan modification plan. Citigroup Inc. had to agree to use the program to streamline loan changes as part of its help from the government in November.

“Treasury’s refusal to answer this question is one of the most troubling aspects of their letter,” the report said of the Dec. 30 letter sent by Treasury to the panel in response to submitted questions.