I found an interesting article on Anna's blog, entitled: "Bailout Tab". We all have heard on a weekly basis how the government has come up with some new bailout program with some interesting name and a cool sounding acronym. Her article caught my interest as I have never really thought of how much the government has spent in total on all the bailout programs, where they are getting all the money from and how they could ever repay all the money.
I found this interesting article in the New York Times that makes a perfect summary of all the money that has been spent and borrowed by the government and where it was allocated. Through April 1st, the government has made total commitments of $12.1 trillion and they have also spent a total of $2.5 trillion. As an investor, the government has made a commitment of $7.7 trillion and has spent $1.4 trillion. Secondly, government as a lender has committed $2.3 trillion and spent $680 billion. Lastly, government as an insurer committed to $2.1 trillion and spent $340 billion. For further details please see the article.
In Anna's blog she asks the question: "But where do they get this money?". The first answer is obviously the taxpayers money. But could our taxes possibly be enough to cover all the bailout expenses and keep the country running at the same time? No, so thus the government creates new money, as Anna also stated in her blog and this results in raising the countrie's already huge deficit. According to deficitsdomatter.org, the US national deficit is currently over $11 trillion and it is constantly increasing. Check out the link it is cool to see how fast the national deficit is increasing every second.
This brings me to another question; how will they ever be able to repay all of this deficit? Anna makes a valid point as she says that the government should not rely on people to repay their loans, as it was these exact same people that defaulted on their initial loans and caused part of the crisis. I agree with her on this point and I believe that the government should have some regulations in place where they can help in guiding the banks to select the appropriate people to lend to. This will in turn lead to the banks receiving some of their bailout funds if the banks become profitable again. When it comes to the remainder of the deficit that needs to be repaid, I do not have any solutions or thoughts, and that is why I am glad that I am not the president. Any thoughts are welcome.
Monday, April 20, 2009
Sunday, April 19, 2009
Banking Nationalization VS. "Good bank, Bad bank"
Banking Nationalization is becoming a very big possibility in the US, through the government bailing out the big banks and taking in large stakes of ownership in these banks. Nationalization refers to a government that acquires a majority interest or full interest in a bank. The government, being the largest shareholder, would make all the decisions such as replacing the management team and wiping out the existing shareholders. Then, once the bank has fully recovered, the healthy bank is sold back to private investors and the bank could continue as a healthy, private bank. Bank nationalization had been practiced by several countries and the best known example of this is when Sweden nationalized their banks in the 90's and successfully recovered their banking system. Even though banking nationalization has been proved to work by countries such as Sweden, the US is a firm non-believer in banking nationalization. This was shown when US top economic advisers, recommended that Japan should not have nationalized their banking system during the Japanese economic depression in the 90's. The US is now however facing similar challenges to Japan and they are currently doing the exact opposite as they advocated almost two decades ago.
As many US economists and politicians oppose the proposed solution of a nationalized banking system, someone needs to come up with an appropriate alternative. On proposed solution is the "Good bank, Bad bank" strategy. This kind of plan would split an institution (bank) into two parts: First is the "Good bank", which will receives all the good assets and some of the firms remaining capital. This well then be a healthy institution and continue to be a productive private company. The "Bad bank", will receive all the bad assets and the remaining capital of the firm. Even though there will not be enough capital to cover these bad assets, new capital would likely come from taxpayers money.
Now you would think that whether we as the taxpayer pay for a nationalized banking system, or whether we are paying to adopt this "good bank, bad bank approach. Why would it matter which strategy we choose. Common sense tells us that we should go with the nationalized banking approach, since at has been proven to work in the case of Sweden. But, Alan Blinder who is a economics professor at Princeton and also the former vice chairman of the Federal Reserve thinks otherwise. He states in a NY Times article that there are several reasons why a national banking system would not work. Firstly, Blinder describes a "domino effect" where he says that if the government takes control over a few banks, the rest of the banks would soon not be able to compete with the government owned banks and would soon default, thus causing a domino effect. Secondly, the US government would have a near impossible task to be able to manage thousands of banks that make up the world's largest economy. The swedes were successful, since they only had a handful of banks to manage. The third and most important factor, is that of a political stance. Since bank nationalization could almost be considered as a taboo subject in the minds of many Americans, politicians will have plenty of obstacles to overcome the American disbelief in nationalization.
So looking at all the obstacles that lie ahead of initializing a national banking system, I would prefer to see a different strategy put in place, such as the "good bank, bad bank" strategy. Bank nationalization may have worked successfully in other countries, but I believe that in the democratic system that we live, no policy will survive that most Americans do not believe in and also at this scale would the US government really have the man power and skills to pull off such a daunting task?
http://www.nytimes.com/2009/01/26/business/economy/26banks.html
http://www.nytimes.com/2009/01/16/business/16banking.html
As many US economists and politicians oppose the proposed solution of a nationalized banking system, someone needs to come up with an appropriate alternative. On proposed solution is the "Good bank, Bad bank" strategy. This kind of plan would split an institution (bank) into two parts: First is the "Good bank", which will receives all the good assets and some of the firms remaining capital. This well then be a healthy institution and continue to be a productive private company. The "Bad bank", will receive all the bad assets and the remaining capital of the firm. Even though there will not be enough capital to cover these bad assets, new capital would likely come from taxpayers money.
Now you would think that whether we as the taxpayer pay for a nationalized banking system, or whether we are paying to adopt this "good bank, bad bank approach. Why would it matter which strategy we choose. Common sense tells us that we should go with the nationalized banking approach, since at has been proven to work in the case of Sweden. But, Alan Blinder who is a economics professor at Princeton and also the former vice chairman of the Federal Reserve thinks otherwise. He states in a NY Times article that there are several reasons why a national banking system would not work. Firstly, Blinder describes a "domino effect" where he says that if the government takes control over a few banks, the rest of the banks would soon not be able to compete with the government owned banks and would soon default, thus causing a domino effect. Secondly, the US government would have a near impossible task to be able to manage thousands of banks that make up the world's largest economy. The swedes were successful, since they only had a handful of banks to manage. The third and most important factor, is that of a political stance. Since bank nationalization could almost be considered as a taboo subject in the minds of many Americans, politicians will have plenty of obstacles to overcome the American disbelief in nationalization.
So looking at all the obstacles that lie ahead of initializing a national banking system, I would prefer to see a different strategy put in place, such as the "good bank, bad bank" strategy. Bank nationalization may have worked successfully in other countries, but I believe that in the democratic system that we live, no policy will survive that most Americans do not believe in and also at this scale would the US government really have the man power and skills to pull off such a daunting task?
http://www.nytimes.com/2009/01/26/business/economy/26banks.html
http://www.nytimes.com/2009/01/16/business/16banking.html
Tuesday, April 14, 2009
Response to Universal Currencey
In this post I am writing in response to Unique's post on Universal Currency. I agree completely with Unique's negative point of view of adopting a universal currency system. I have found several further evidence that dates back over a century that outlines some of the essential problems of using a universal currency system.
From a New York Times article published on January 28, 1858, the editor of the NY Times wrote an article suggesting the "ignorance" and foolishness of economists to try and adopt a universal currency system. The editor suggests that gold and silver had been used for centuries for "a half civilized and Barbaric" world and that no advancement had been made to currency valuable enough to replace gold and silver. Even when all the countries in the world have their own currencies now, I still believe that we are still ultimately "a half civilized and barbaric" world. Just look at all the investors buying gold as soon as the value of the dollar dropped. Look at the U.S. and their huge stockpile of gold at Fort Knox. According to the World Gold Council, in September 2008, the US still had 8,133.5 tonnes of gold reserve. When the state of one's currency is in doubt, we as the human race tend to resort back to our ancestor's currency in the form of gold and silver.
The next valid and the most crucial point the the editor of the NY Times make, is that you would have to find someone powerful enough to force your currency or the newly proposed currency on all the nations of the world. The editor proposes this person to be of equal fame as "Alexander or Julius Caesar". For the proposed currency to take affect, the world would need a world leader who would be able to convince the rest of the world that it would be in their best interest to partake in this option, which could be very unlikely.
So for now, in my opinion, a universal currency sounds like an ideal, yet unpractical idea. Through much research and many negotiations, I believe that it can be achieved and this is proven by the most of the countries in Europe taking part in the Euro, but I do not see it being a success in the near future.
From a New York Times article published on January 28, 1858, the editor of the NY Times wrote an article suggesting the "ignorance" and foolishness of economists to try and adopt a universal currency system. The editor suggests that gold and silver had been used for centuries for "a half civilized and Barbaric" world and that no advancement had been made to currency valuable enough to replace gold and silver. Even when all the countries in the world have their own currencies now, I still believe that we are still ultimately "a half civilized and barbaric" world. Just look at all the investors buying gold as soon as the value of the dollar dropped. Look at the U.S. and their huge stockpile of gold at Fort Knox. According to the World Gold Council, in September 2008, the US still had 8,133.5 tonnes of gold reserve. When the state of one's currency is in doubt, we as the human race tend to resort back to our ancestor's currency in the form of gold and silver.
The next valid and the most crucial point the the editor of the NY Times make, is that you would have to find someone powerful enough to force your currency or the newly proposed currency on all the nations of the world. The editor proposes this person to be of equal fame as "Alexander or Julius Caesar". For the proposed currency to take affect, the world would need a world leader who would be able to convince the rest of the world that it would be in their best interest to partake in this option, which could be very unlikely.
So for now, in my opinion, a universal currency sounds like an ideal, yet unpractical idea. Through much research and many negotiations, I believe that it can be achieved and this is proven by the most of the countries in Europe taking part in the Euro, but I do not see it being a success in the near future.
A small sign of stabilizaion on Wall street
Goldman Sachs is the first of the big banks that are attempting to pay back federal money allocated by the Troubled Asset Relief Program (TARP). Goldman announced profits of $1.66 billion or $3.39 a share for the first quarter. They also announced record revenues $6.56 billion largely due to the lack of competition from Bear Stearns and Lehman Brothers. This would be a breakthrough for the financial system as it is showing positive signs that one of the big banks are finally on a road to recovery and are attempting to pay back federal money.
Funny enough, Goldman is being scrutinized for their desire to pay back federal loans and some even say that this might not be good for the financial system as a whole. So much so, that Goldman needs to wait for approval from the treasury to be able to pay back the funds and they are subject to a stress test from federal examiners that determines their eligibility to pay back the funds. I feel that if the company managers feel comfortable enough to pay of debt, they should do that. This seems to me like the responsible decision to do with incoming revenues unlike AIG that used money to pay bonuses. This situation could be compared to you and I, that might want to pay off our home mortgages sooner by paying higher monthly payments, but the bank tells us that we cannot do it. As for the financial system as a whole, if Goldman decides to pay off their debt, they will surely be able to allocate more funds to other aspects such as bonuses and high stock dividends. This in turn will make Goldman the bank to work for on Wall street and this might also motivate other big banks to follow in Goldman's footsteps for financial success.
Goldman should also not be scrutinized for wanting to be independent of government funds. They have very legitimate reasons for doing so. By paying off these government loans, they receive independence from the government's rules and regulations that stipulate what Goldman should spend their loan money on.
Goldman should definitely be allowed to repay their TARP money. This could only be good for the economy. This kind of news could set an example for other banks to follow, put some confidence into employees minds to keep up a good and honest work ethic and lastly could establish some confidence in the capital market and make people invest again by buying new shares.
Goldman Using Share Sales to Return Bailout Money
Funny enough, Goldman is being scrutinized for their desire to pay back federal loans and some even say that this might not be good for the financial system as a whole. So much so, that Goldman needs to wait for approval from the treasury to be able to pay back the funds and they are subject to a stress test from federal examiners that determines their eligibility to pay back the funds. I feel that if the company managers feel comfortable enough to pay of debt, they should do that. This seems to me like the responsible decision to do with incoming revenues unlike AIG that used money to pay bonuses. This situation could be compared to you and I, that might want to pay off our home mortgages sooner by paying higher monthly payments, but the bank tells us that we cannot do it. As for the financial system as a whole, if Goldman decides to pay off their debt, they will surely be able to allocate more funds to other aspects such as bonuses and high stock dividends. This in turn will make Goldman the bank to work for on Wall street and this might also motivate other big banks to follow in Goldman's footsteps for financial success.
Goldman should also not be scrutinized for wanting to be independent of government funds. They have very legitimate reasons for doing so. By paying off these government loans, they receive independence from the government's rules and regulations that stipulate what Goldman should spend their loan money on.
Goldman should definitely be allowed to repay their TARP money. This could only be good for the economy. This kind of news could set an example for other banks to follow, put some confidence into employees minds to keep up a good and honest work ethic and lastly could establish some confidence in the capital market and make people invest again by buying new shares.
Goldman Using Share Sales to Return Bailout Money
Tuesday, April 7, 2009
Response to Internal Control
Mike Corby wrote an interesting summary regarding internal control in one of his posts. Even though I do not think that his article was incorrect by any means, I found it very interesting. I thought that I would extend his post and also relate it to my previous post, where I discussed credit rating agencies and their failure to properly rate the companies that partook in risky trading.
Internal control, as mentioned by Mike, is a well executed check and balance system throughout a company that uses audits to oversee operations. These internal audits ensure compliance of regulations by creating ways to lessen risks and loss of assets. Mike is spot on with this definition of internal control, but he failed to mention both aspects of internal control. According to Wikipedia there are two aspects to internal control. The first is from an accounting perspective, which is what Mike was referring to, and secondly is from an organizational perspective. The organizational perspective involves detecting and protecting the company from fraud and also safeguards the company's resources, both physical and non-physical.
When it comes to three credit ratings; Finch, Moody's and S&P failed to have some internal control system in place. They disregarded a check and balance system to make sure that they have the correct rating system and that old ratings were not used over and over even if they were not updated and correct. This was clearly shown by these agencies as they gave high ratings even to companies that partook in risky mortgage-backed securities. If a proper internal control system was in place, this disaster may have been averted and these credit agencies might still have a good reputation.
The SEC now requires corporations to include an internal control report during their annual report. The Sarbanes-Oxley Act, requires companies to have a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting and also management's report of the effectiveness of the company's internal control system. Lastly, this act also requiers an auditor to substantiate the management's report mentioned above.
The SEC seems to be taking the right steps in regulating companies, but another section of this act states that all companies need to report these internal control statements except for registered investment companies. I feel this is a thoughtless move on the part of the SEC. Why would they regulate everyone else, but not investment companies? I feel that the SEC should regulate everyone and not favor a select few and tragedies like the Madoff corporation will not happen again. So should the SEC not favor the the three big credit rating agencies and allow more competition to enter the market and also strictly regulate them, thus also resulting another check and balance system.
http://www.nysscpa.org/cpajournal/2007/1007/essentials/p34.htm
Internal control, as mentioned by Mike, is a well executed check and balance system throughout a company that uses audits to oversee operations. These internal audits ensure compliance of regulations by creating ways to lessen risks and loss of assets. Mike is spot on with this definition of internal control, but he failed to mention both aspects of internal control. According to Wikipedia there are two aspects to internal control. The first is from an accounting perspective, which is what Mike was referring to, and secondly is from an organizational perspective. The organizational perspective involves detecting and protecting the company from fraud and also safeguards the company's resources, both physical and non-physical.
When it comes to three credit ratings; Finch, Moody's and S&P failed to have some internal control system in place. They disregarded a check and balance system to make sure that they have the correct rating system and that old ratings were not used over and over even if they were not updated and correct. This was clearly shown by these agencies as they gave high ratings even to companies that partook in risky mortgage-backed securities. If a proper internal control system was in place, this disaster may have been averted and these credit agencies might still have a good reputation.
The SEC now requires corporations to include an internal control report during their annual report. The Sarbanes-Oxley Act, requires companies to have a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting and also management's report of the effectiveness of the company's internal control system. Lastly, this act also requiers an auditor to substantiate the management's report mentioned above.
The SEC seems to be taking the right steps in regulating companies, but another section of this act states that all companies need to report these internal control statements except for registered investment companies. I feel this is a thoughtless move on the part of the SEC. Why would they regulate everyone else, but not investment companies? I feel that the SEC should regulate everyone and not favor a select few and tragedies like the Madoff corporation will not happen again. So should the SEC not favor the the three big credit rating agencies and allow more competition to enter the market and also strictly regulate them, thus also resulting another check and balance system.
http://www.nysscpa.org/cpajournal/2007/1007/essentials/p34.htm
Monday, April 6, 2009
The SEC and the Credit Rating Agencies
In today's lecture, Prof. Grace mentioned how the big three credit ratings; Moody's, Standard and Poor's and Fitch, are in a monopoly and how it is virtually impossible for competition to enter the market. I found this very interesting and I decided to investigate why the SEC would want to prevent more companies from entering into this market.
Connecticut Attorney General, Richard Blumethal, questioned why the big three credit rating agencies were given over $400 billion of the bailout money and why six of their smaller competitors were shut down. This money was intended to restore credit markets and Blumenthal questioned why it was given to the credit rating agencies when they were some of the main contributors to the current economic crisis. They did this, as Prof. Grace said today, by not adjusting their credit ratings appropriately with portfolios that dealt with mortgage-backed securities.
The credit rating agency is a $5billion-a-year industry and Blumenthal describes it as an "Old boys club" of Wall street, a complete monopoly that needs to be broken up. In my opinion these three agencies need to be regulated and double checked. Obviously there is no check-and-balances system in place between the three main agencies and they have a "scratch my back, scratch your back" attitude. Mary Schapiro, the chairman of the SEC suggested to ask congress for more supervision and regulation for the Wall street credit rating agencies. Schapiro, was given this authority in 2006 and also wanted to reduce the industry's dependence in these credit rating agencies.
A good way to bring in a system of checks-and-balances is to create monopolistic economy by bringing in new competition (new credit rating agencies). Know, Prof. Grace also mentioned today that the SEC prevents competition from entering the market. This obviously contradicts my previous statement where I said that SEC wanted to reduce the dependency on these agencies and also to regulate them. I tried to research this statement by Prof. Grace, but I couldn't find anything about how the SEC denies new credit agencies to enter the market.
So please feel free to reply to this post, either supporting or negating my opinion.
Associated Press
Connecticut Attorney General, Richard Blumethal, questioned why the big three credit rating agencies were given over $400 billion of the bailout money and why six of their smaller competitors were shut down. This money was intended to restore credit markets and Blumenthal questioned why it was given to the credit rating agencies when they were some of the main contributors to the current economic crisis. They did this, as Prof. Grace said today, by not adjusting their credit ratings appropriately with portfolios that dealt with mortgage-backed securities.
The credit rating agency is a $5billion-a-year industry and Blumenthal describes it as an "Old boys club" of Wall street, a complete monopoly that needs to be broken up. In my opinion these three agencies need to be regulated and double checked. Obviously there is no check-and-balances system in place between the three main agencies and they have a "scratch my back, scratch your back" attitude. Mary Schapiro, the chairman of the SEC suggested to ask congress for more supervision and regulation for the Wall street credit rating agencies. Schapiro, was given this authority in 2006 and also wanted to reduce the industry's dependence in these credit rating agencies.
A good way to bring in a system of checks-and-balances is to create monopolistic economy by bringing in new competition (new credit rating agencies). Know, Prof. Grace also mentioned today that the SEC prevents competition from entering the market. This obviously contradicts my previous statement where I said that SEC wanted to reduce the dependency on these agencies and also to regulate them. I tried to research this statement by Prof. Grace, but I couldn't find anything about how the SEC denies new credit agencies to enter the market.
So please feel free to reply to this post, either supporting or negating my opinion.
Associated Press
Monday, March 30, 2009
The New Exit Strategy
Foreclosures are becoming a daily story with friends and their family's losing their homes and all the equity that they have built up for years and years. After investigating short selling I came across an interesting article that suggests that short selling is a better option to take than foreclosing your house.
As we discussed in our lecture today, "in a short sale, the lender allows the property to be sold for less than the total amount due on the loan. In some cases, the lender forgives the remaining debt." So you are probably thinking why this is such a good idea? You are still losing a lot of your equity.
There are several advantages to doing a short sell as opposed to a foreclosure. The first and probably the most important, a short sell is much less detrimental to your credit record than compared to a foreclosure. Short selling also takes much less time and is much less expensive than a foreclosure.
Now you are probably thinking if short selling is so much more advantageous, why is everyone not doing it instead of foreclosures? Well, there are also several negative aspects to a short sell. The first obstacle that you as the homeowner would have to overcome is finding a real estate agent that will work for much less commission than in normal circumstances. Secondly, you would have to convince a lender to short sell a property, which could be very difficult. Also, once you have convinced the lender to engage in a short sell, the amount that the lender forgives is also taxable by the government.
Even though short selling is the clear choice over foreclosures, it is till the best idea to try and work out late payments with your lender and avoid putting yourself in the situation where you would have to choose between a foreclosure or a short sale on your home.
http://www.tucsoncitizen.com/daily/local/42927.php
http://real-estate.lawyers.com/residential-real-estate/Selling-Your-Home-For-Less-Than-You-Owe.html
As we discussed in our lecture today, "in a short sale, the lender allows the property to be sold for less than the total amount due on the loan. In some cases, the lender forgives the remaining debt." So you are probably thinking why this is such a good idea? You are still losing a lot of your equity.
There are several advantages to doing a short sell as opposed to a foreclosure. The first and probably the most important, a short sell is much less detrimental to your credit record than compared to a foreclosure. Short selling also takes much less time and is much less expensive than a foreclosure.
Now you are probably thinking if short selling is so much more advantageous, why is everyone not doing it instead of foreclosures? Well, there are also several negative aspects to a short sell. The first obstacle that you as the homeowner would have to overcome is finding a real estate agent that will work for much less commission than in normal circumstances. Secondly, you would have to convince a lender to short sell a property, which could be very difficult. Also, once you have convinced the lender to engage in a short sell, the amount that the lender forgives is also taxable by the government.
Even though short selling is the clear choice over foreclosures, it is till the best idea to try and work out late payments with your lender and avoid putting yourself in the situation where you would have to choose between a foreclosure or a short sale on your home.
http://www.tucsoncitizen.com/daily/local/42927.php
http://real-estate.lawyers.com/residential-real-estate/Selling-Your-Home-For-Less-Than-You-Owe.html
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