Treasury Secretary Henry M. Paulson Jr. confirmed Wednesday what was already becoming apparent -- that the government will not use any of its $700 billion financial-industry bailout fund to buy toxic assets from banks and other institutions.
Those purchases were the basis of the Troubled Asset Relief Program that Congress approved last month. The argument was that removing distressed assets such as mortgage-backed securities from the books of those companies would ease fears about their solvency, free up capital, encourage lending between companies and thaw a frozen credit market.
But in a quick turnabout, the Treasury Department has decided that making direct capital investments in banks is a better way to stimulate lending.
The Treasury Department has already approved the purchase of $170 billion in preferred stock in more than 40 financial institutions. The bulk of that money, $125 billion, was allocated to nine large banks that have already received their cash.
American International Group Inc., the big insurance company, will get $40 billion from the fund under a revised rescue plan announced Tuesday. That investment -- the biggest yet under the program -- means that $165 billion of the relief fund will go to just 10 companies.
The benefits of the program will be further concentrated by the pending merger between Bank of America Corp., which got $15 billion from the TARP fund, and Merrill Lynch & Co., which got $10 billion.
What's more, billions in additional money that AIG received from the Federal Reserve as part of a broader $150 billion rescue package likely were likely paid out to some of the other big TARP recipients through settlements of certain investment contracts.
According to media reports, the companies collecting from AIG included Goldman Sachs Group Inc., the firm formerly headed by Paulson; Merrill Lynch and Morgan Stanley. The latter investment firm got $10 billion in new capital from the Treasury Department.
Paulson announced the change in the Treasury Department's strategy for the TARP fund at the same time that some politicians, including President-elect Barack Obama, have raised the possibility of using $25 billion of the money to aid the
Insurance companies and credit-card issuers also are looking for ways to tap into the rescue fund, as are some of the nation's biggest cities. The mayors of
The current Congress has authorized $350 billion of the $700 billion in spending envisioned for the TARP program. The remainder of the money is not likely to be allocated until the new Congress is seated in late January.
THE REAL MEANING OF THE BAIL OUT
Many people today are probably wondering what the bail out means for main stream Americans and what is the bail out is really about. For those who think the bail out is ONLY about Wall St big fish.
Here are my thoughts. Could it be that the US had planned the financial crisis for a while in order to be able to enter the most profitable industry in earth for a cheap price?
Let's start by analyzing the chain of events.
Financial Services Modernization Act of 1999 The proposed Financial Services Modernization Act of 1999 would do away with restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933, one of the central pillars of Roosevelt's New Deal after the financial crisis of 1929. Under the old law, banks, brokerages and insurance companies were effectively barred from entering each others' industries, and investment banking and commercial banking were separated.
Many investment and commercial banks jump head first into the housing market lending game.
2005 JOhn Thain, Goldman Sachs CFO is appointed Chairman of the NYSE. While all the casino investment was goin on, and nobody complained. He amassed $300 million in Goldman stock. It was widely believed that Mr. Thain was also a front runner to head Citigroup. The same group that is now "saving" all the other banks. Or should I say cashing on the mistakes of other banks?One must wonder after amasing such a fortune at Goldman Sachs where these people loyalty lays.
2006 Hank Paulson, CEO of Goldman Sachs leaves the company to serve as Secretary of the treasury, After questionable investments in Patagonia, Argentina that ended up as a property of a non profit run by his son. Oh, did I forget to mention this piece of property is floating in petroleum? Opps, my mistake.
2007, the sub prime loan crisis start showing signs of the truth underlying the sourness of loans backed by air.
March we had the failure of Bear Sterns, to whom the Fed came to rescue and arranged for a purchase at 7% of their original share price.
July 2008, the Fed takes over Freddie and Fannie, the number one instruments through which the American dream of home ownership is made possible.
We had the fall of Lehman Brothers, all time number # 1 competitor of Goldman Sachs, whom the Fed of course lead by Hank Paulson allowed to fail. I wonder why....
AIG was rescued with a credit line of 85 billion dollars from the fed and an additional 35 billion. I wonder who will be chasing the interest on those loans and who will be the underwriter of all those debt instruments now that ONLY two investment banks are left.... Could it be Goldman? Hmmm nobody knows.
In a brief explanation this is how the picture has been forming. Now Hank Paulson is asking for 700 billion dollars to "rescue" the economy.
But what do these 700 billion mean to the US government and the investment banks. Why would the government do that?
Now that the lending to 3rd world countries is drying off because they are outsmarting this game just as China did?. Could it be that the US has turned to lending to big institutions and is trying to turn their own citizens into suckers that will pay taxes, that will in turn be lent back to them in the form of Home mortgages to make a profit that they will never see?
Could it be that some investment banks not only knew about this but also facilitated this situation by coaching the government on how to do it?
I don't know, but it seems to me that these few investment banks that are left had something to do with everything and positioned themselves just like a kid under a pinata waiting for the free candy to fall in the floor. Because that is exactly what the price of these "rescued" banks were, "free candy".
These so called bad loans are not 100% bad, there is a lot of money to be made and not only the government has the money to purchase them, but also the power to work a deal once they have been purchased, so delinquent borrowers are able to stay in their homes and pay at least some of the debt.
Think about it, you buy the loan for 0.20 cents of the dollar, settle with the delinquent borrowers into making the loan worth 0.50 cents of the dollar and it becomes, a win situation, if you add the interest that the borrower will still pay on that loan, voilá, you have a ton of money in profits that the tax payer will never see. This would translate into the government buying a delinquent $300,000 loan at a price of $60,000 and settling with the borrower as if the price of the "new government Aided loan" were of $150,000 instead of the 300,000 they previously owed. Do you think that would solve the problem of delinquent loans? I definitely think so, and the government has the power to do it. and there is still plenty of profits to go around.
I think this is exactly what the bail out is all about.
The big question is, will this be enough as a strategy to maintain the dollar as the #1 world currency? The safe heaven? What will happen to the dollar when investors realize that US brilliant GDP was based on consumer spending originated by this home equity loans backed by thin air? What will happen when foreign investors realize that the US is a non producing country whose business have been surviving for the last 1o years may be more, by short term loans from commercial paper and ultimately IPO's that transferred the cost of the business loans to institutional investors like Wachovia that purchase these securities with American's retirement money?
Will we survive as the empire we once were or will we become the cheap labor market?
What do you think folks?