General Motors & Obama Administration – Misleads Press & Public – Loans Repaid With New Bailout Money

As it turns out the Obama Adminstration’s hand pick CEO for GM, Ed Whitacre, was talking out of both sides of his mouth when he proclaimed, “GM has turned the corner” while the Obama Adminstration trumpted the alleged repayment of one of GM’s  ”bailout” loans.

What are the facts?

GM SIMPLY USED OTHER BAILOUT FUNDS TO REPAY A BAILOUT LOAN.

Yep, taking cash out of one pocket and putting it in another – all of the cash is taxpayer cash – not GM earnings.

GM has at least three outstanding “loans’ made at taxpayer expense. A $60 Billion plus loan that the Government has accepted ”securites for”, an $8 billion dollar “cash loan” that GM allegedly repaid and an open ended “escrow account” that provides GM “operating cash” provided by the Obama Adminstration at taxpayer expense.

What did GM do? GM took cash ourt of the “escrow account” funded by the taxpayers to “payback” the $8 billion dollar cash loan.

Did this “slight of hand” reduce the amount of money GM owes the US taxpayer or reduce GM’s total debt? Heck NO! The “transaction” just changed which account the money was owed to. Just like when people use one credit card to pay another credit card …. a sure sign of financial recovery.  

How dishonest of GM, President Obama, VP Biden and the News Media. Shame on all of them!

Grassley Slams GM, Administration Over Loans Repaid With Bailout Money 

…… the struggling auto giant was only able to repay its bailout money by dipping into a separate pot of bailout money…… accused the Obama administration of misleading taxpayers about General Motors’ loan repayment, saying the struggling auto giant was only able to repay its bailout money by dipping into a separate pot of bailout money…… the charge was backed up by the inspector general for the bailout — also known as the Trouble Asset Relief Program, or TARP….. Watchdog Neil Barofsky told the Senate Finance Committee, that General Motors used bailout money to pay back the federal government …… ”It appears to be nothing more than an elaborate TARP money shuffle,” Senator Grassley said in a letter Thursday to Treasury Secretary Timothy Geithner …. Grassley called on Geithner to provide more information about why the company was allowed to use bailout money to repay bailout money, and how much of the remaining escrow money GM would be allowed to keep…… “The bottom line seems to be that the TARP loans were ‘repaid’ with other TARP funds in a Treasury escrow account. The TARP loans were not repaid from money GM is earning selling cars, as GM and the administration have claimed in their speeches, press releases and television commercials,” he wrote….. Barofsky said, “I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn’t from earnings. … It’s actually from another pool of TARP money that they’ve already received,” he said Wednesday. “I don’t think we should exaggerate it too much. Remember that the source of this money is just other TARP money.” 

Barofsky told the Senate Finance Committee the same thing Tuesday, and said the main way for the federal government to earn money out of GM would be through “a liquidation of its ownership interest.” 

Grassley criticized this scenario in his letter. 

“The taxpayers are still on the hook, and whether TARP funds are ultimately recovered depends entirely on the government’s ability to sell GM stock in the future. Treasury has merely exchanged a legal right to repayment for an uncertain hope of sharing in the future growth of GM. A debt-for-equity swap is not a repayment,” he wrote, refering to the $60+ billion dollar loan which the Obama Administartion allowed GM to convert to an “unsecured”, ”security”.

http://www.foxnews.com/politics/2010/04/22/grassley-slams-gm-administration-loans-repaid-bailout-money/

Geitner’s Flawed Assumptions: TARP & TALF Funds Enrich Investors At Taxpayer Expense – Report By Harvard Business School & Princeton University Center For Finance

The Pricing of Investment Grade Credit Risk 

Joshua D. Coval, Jakub W. Jurek, and Erik Stafford

March 30, 2009

Our analysis suggests that the dramatic recent widening of credit spreads is highly consistent with the decline in the equity market, the increase in its long-term volatility, and an improved investor appreciation of the risks embedded in structured products.

In contrast to the main argument in favor of using government funds to help purchase structured credit securities, we find little evidence that suggests these markets are experiencing fire sales.

[McAuley’s World: This finding directly challenges the veracity of Treasury Secretary Geitner’s claims and the necessity for additional Government intervention – later the report confirms that investors are being unjustly enriched at taxpayor expense]

On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products. The government’s view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals: Many analysts appear to be looking at large recent price changes and concluding that we must be witnessing distressed pricing and widespread market failure. This conclusion is based on intuition. Our analysis suggests that the dramatic recent widening of credit spreads is highly consistent with the decline in the equity market, the increase in its volatility, and an improved investor appreciation of the risks embedded in these securities.

Our results suggest changes in fundamentals, as reflected in the equity market, account for a large portion of the repricing of credit that has occurred. In particular, the dramatic increase in the price of low cash flow states can account for most, if not all, of the rise in credit spreads for cash bonds. The spreads on credit default swaps, which currently trade at a large and negative basis relative to the underlying bonds, appear too low relative to risk-matched alternatives in the equity market.

We also find that the repricing of the investment grade structured credit securities suggests a correction of an ex ante failure of investors to appropriately charge for systematic risk.“An initial fundamental shock associated with the bursting of the housing bubble and deteriorating economic conditions generated losses for leveraged investors including banks … The resulting need to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales … [The Public-Private Investment Program] should facilitate price discovery and should help, over time, to reduce the excessive liquidity discounts embedded in current legacy asset prices.”

Policymakers are rapidly moving towards using TARP money to purchase toxic assets primarily tranches of collateralized debt obligations (CDOs) from banks, with the aim of supporting secondary markets and increasing bank lending. The key premise of current policies is that the prices for these assets have become artificially depressed by banks and other investors trying to unload their holdings in an illiquid market, such that they no longer reflect their true hold-to-maturity value. By purchasing or insuring a large quantity of bank assets, the government can restore liquidity to credit markets and solvency to the banking sector.

The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals. A structural framework confrms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased.

The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing.

If prices currently coming out of credit markets are actually correct, and not reflecting fire sales,this has several important implications. First, correct prices in the secondary market for these assets essentially imply that many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities. In turn, any positive valuation assigned by shareholders to their equity claim arises solely from their anticipation of value transfer from firm debtholders or resource transfers from US taxpayers.

Similarly, using government resources to support these markets by insuring assets against furtherl osses amounts to providing insurance at premia that are significantly below what is fair for the risks that the US taxpayer will now bear.

Third, while the pricing of these securities is dramatically different from the way it was a year or two ago, this is because it was wrong then, not now. Efforts to restart this market are focused on resuming the flawed pricing of the past, when there was no charge for risk and investors relied on the accuracy of ratings. Investors have learned from their mistakes and now seem to be pricing these securities in accordance with their true risks.

Conclusion

Second, if current market prices are fair, any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities. To the extent that these assets reside in banks that are now insolvent, the owners are essentially the bondholders of these banks. The reason their bonds are currently trading far below par is that the assets backing up their claim are just not worth enough (nor expected to become worth enough when their bonds mature) to repay them. And so while they will be cheered by any government overpayment for the toxic assets backing up their claims, their happiness will be at the taxpayer’s expense since – to the extent that current prices are fair – they will be receiving more than fair value for their investments.

The main objective of this paper is to determine whether fire sales are required to explain prices currently observed in credit markets.

Other potential sources of repricing include a correction of  ex ante mispricing due to incorrect forecasts of expected losses (i.e. incorrect ratings – earnings expectation), a correction of ex ante mispricing arising from a failure of investors to charge for systematic risk, and rational change in prices reflective of a change in fundamentals.

A key distinction between the fire sale view and the other possibilities is that only the fire sale view requires that current prices are incorrect. (If the current prices are correct – massive Government spending will only serve to manipulate the market to reward investors at taxpayer expense – the market manipulation will create temporary gain – then the market will seek equilibrium again)

And given that fundamentals have changed dramatically during the past 2 years, and that ex ante mispricing was likely present in many of the structured credit markets, the conclusion that the large spread changes are evidence of fire sales is, at best, a premature one.

From this perspective, policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen  – the day of reckoning.

Read the full paper (with formulas & footnotes) here: http://www.anderson.ucla.edu/Documents/areas/fac/finance/CJS_2009_v1.pdf

Coval: Harvard Business School; jcoval@hbs.edu. Jurek: Bendheim Center for Finance, Princeton University ;jjurek@princeton.edu. Sta¤ord: Harvard Business School; esta¤ord@hbs.edu. We thank Stephen Blythe, Ken Froot,

WHAT FORMULA IS GEITNER USING FOR HIS “STRESS TESTS”? WHY IS IT A SECRET FORMULA? WHY DOES THE FORMULA CHANGE FROM BANK TO BANK?

Ask your Congressperson if they know the answer. Ask them if they have read this report: http://www.usa.gov/Contact.shtml  

TARP & TALF Based On Faulty Assumptions: Report By Harvard Business School/Princeton University Center For Finance

The Pricing of Investment Grade Credit Risk 

 

Joshua D. Coval, Jakub W. Jurek, and Erik Stafford

March 30, 2009

Our analysis suggests that the dramatic recent widening of credits preads is highly consistent with the decline in the equity market, the increase in its long-term volatility, and an improved investor appreciation of the risks embedded in structured products.

In contrast to the main argument in favor of using government funds to help purchase structured credit securities, we find little evidence that suggests these markets are experiencing fire sales.

[McAuley’s World: This finding directly challenges the veracity of Treasury Secretary Geitner’s claims and the necessity for additional Government intervention – later the report confirms that investors are being unjustly enriched at taxpayer expense]

On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products. The government’s view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals: Many analysts appear to be looking at large recent price changes and concluding that we must be witnessing distressed pricing and widespread market failure. This conclusion is based on intuition. Our analysis suggests that the dramatic recent widening of credit spreads is highly consistent with the decline in the equity market, the increase in its volatility, and an improved investor appreciation of the risks embedded in these securities.

Our results suggest changes in fundamentals, as reflected in the equity market, account for a large portion of the repricing of credit that has occurred. In particular, the dramatic increase in the price of low cash flow states can account for most, if not all, of the rise in credit spreads for cash bonds. The spreads on credit default swaps, which currently trade at a large and negative basis relative to the underlying bonds, appear too low relative to risk-matched alternatives in the equity market.

We also find that the repricing of the investment grade structured credit securities suggests a correction of an ex ante failure of investors to appropriately charge for systematic risk.“An initial fundamental shock associated with the bursting of the housing bubble and deteriorating economic conditions generated losses for leveraged investors including banks … The resulting need to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales … [The Public-Private Investment Program] should facilitate price discovery and should help, over time, to reduce the excessive liquidity discounts embedded in current legacy asset prices.”

Policymakers are rapidly moving towards using TARP money to purchase toxic assets primarily tranches of collateralized debt obligations (CDOs) from banks, with the aim of supporting secondary markets and increasing bank lending. The key premise of current policies is that the prices for these assets have become artificially depressed by banks and other investors trying to unload their holdings in an illiquid market, such that they no longer reflect their true hold-to-maturity value. By purchasing or insuring a large quantity of bank assets, the government can restore liquidity to credit markets and solvency to the banking sector.

The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals. A structural framework confrms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased.

The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing.

If prices currently coming out of credit markets are actually correct, and not reflecting fire sales,this has several important implications. First, correct prices in the secondary market for these assets essentially imply that many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities. In turn, any positive valuation assigned by shareholders to their equity claim arises solely from their anticipation of value transfer from firm debtholders or resource transfers from US taxpayers.

Similarly, using government resources to support these markets by insuring assets against furtherl osses amounts to providing insurance at premia that are significantly below what is fair for the risks that the US taxpayer will now bear.

Third, while the pricing of these securities is dramatically different from the way it was a year or two ago, this is because it was wrong then, not now. Efforts to restart this market are focused on resuming the flawed pricing of the past, when there was no charge for risk and investors relied on the accuracy of ratings. Investors have learned from their mistakes and now seem to be pricing these securities in accordance with their true risks.

Conclusion

Second, if current market prices are fair, any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities. To the extent that these assets reside in banks that are now insolvent, the owners are essentially the bondholders of these banks. The reason their bonds are currently trading far below par is that the assets backing up their claim are just not worth enough (nor expected to become worth enough when their bonds mature) to repay them. And so while they will be cheered by any government overpayment for the toxic assets backing up their claims, their happiness will be at the taxpayer’s expense since – to the extent that current prices are fair – they will be receiving more than fair value for their investments.

The main objective of this paper is to determine whether fire sales are required to explain prices currently observed in credit markets.

Other potential sources of repricing include a correction of  ex ante mispricing due to incorrect forecasts of expected losses (i.e. incorrect ratings – earnings expectation), a correction of ex ante mispricing arising from a failure of investors to charge for systematic risk, and rational change in prices reflective of a change in fundamentals.

A key distinction between the fire sale view and the other possibilities is that only the fire sale view requires that current prices are incorrect. (If the current prices are correct – massive Government spending will only serve to manipulate the market to reward investors at taxpayer expense – the market manipulation will create temporary gain – then the market will seek equilibrium again)

And given that fundamentals have changed dramatically during the past 2 years, and that ex ante mispricing was likely present in many of the structured credit markets, the conclusion that the large spread changes are evidence of fire sales is, at best, a premature one.

From this perspective, policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen  – the day of reckoning.

Read the full paper (with formulas & footnotes) here: http://www.anderson.ucla.edu/Documents/areas/fac/finance/CJS_2009_v1.pdf

Coval: Harvard Business School; jcoval@hbs.edu. Jurek: Bendheim Center for Finance, Princeton University ;jjurek@princeton.edu. Sta¤ord: Harvard Business School; esta¤ord@hbs.edu. We thank Stephen Blythe, Ken Froot,

WHAT FORMULA IS GEITNER USING FOR HIS “STRESS TESTS”? WHY IS IT A SECRET FORMULA? WHY DOES THE FORMULA CHANGE FROM BANK TO BANK?

Ask your Congressperson if they know the answer. Ask them if they have read this report: http://www.usa.gov/Contact.shtml  

Taxpayer’s Investment In Bank Bailout Losing Money

AP IMPACT: Some bailout holdings down $9 billion

Stock intended to eventually earn taxpayers a profit as part of the Bush administration’s massive bank bailout has lost a third of its value — about $9 billion — in barely one month, according to an Associated Press analysis. Shares in virtually every bank that received federal money have remained below the prices the government negotiated.

Most of the Treasury Department’s investments since late October have been in preferred bank stocks, more than $180 billion worth, with investments in giants like Citigroup and JPMorgan Chase, and many small community banks. But the government also negotiated options to buy up to 1.2 billion shares of common bank stock that was valued at $27 billion.

The Treasury Department said it did not expect these common stock options to be profitable immediately and negotiated them so taxpayers could share in the wealth if the bank stocks recover.

Now, however, the value of that common stock is worth less than $18 billion. If the government exercised all its warrants to purchase the stock today, it would lose money on 51 of its 53 agreements. Taxpayers would be out $9.1 billion.

The markets are saying this plan isn’t going to work for the banks,” said Ross Levine, Tisch professor of economics at Brown University. “They’re asking where this plan is going.”

Potential losses among these common stocks include more than $3 billion for the administration’s biggest deal, a $45 billion injection into Citigroup Inc. The government gave the New York-based giant $25 billion on Oct. 28. In addition to preferred stock worth $1,000 per share, the deal included warrants to pick up 210 million shares of common stock at $17.85. In late November, the White House put together a plan to give Citibank another $20 billion. The deal also included warrants to pick up 254 million shares, with the price set at $10.61.

Citigroup stock has since fallen below $8.

More companies would be in the black, but the government used a 20-day stock price average to set the warrant price, meaning it willingly negotiated to pay roughly 25 percent more than the stock was worth on the day it signed the deals on behalf of taxpayers.

Nara Bancorp, created in 1989 to serve Southern California’s growing Korean-American community, borrowed $67 million from taxpayers on Nov. 21, when its stock was trading at $7.50 per share. But the government negotiated the option to buy 1 million shares of Nara common stock at $9.64, higher than its stock is currently trading.

“It’s a complete mistake to think this is a good investment for us,” said Paola Sapienza, a finance associate professor at Northwestern University’s Kellogg School of Management, who spearheaded a September protest of the bailout by more than 200 of the nation’s leading economists. “It’s a gamble. It’s like going to Las Vegas.”

http://news.yahoo.com/s/ap/20081205/ap_on_bi_ge/bailout_returns

 

“TARP” Bailout – Where Are Funds Going – Auditors fault oversight of bank bailout funds

The government must toughen its monitoring of the $700 billion financial bailout to ensure that banking institutions limit their top executives’ pay and comply with other restrictions, federal auditors said Tuesday in the first comprehensive review of the rescue package.

The Treasury Department has no mechanism in place to track how institutions are using $150 billion in taxpayer money that the government injected into the banking system as of last month, the Government Accountability Office concluded in its report to Congress.

The auditors acknowledged that the program, created Oct. 3 to help stabilize a rapidly faltering banking system, was less than 60 days old and has been adjusting to an evolving mission.

But the 72-page report was bound to feed congressional concern that banks and other institutions are not being monitored properly and are not using the money to increase lending.

Auditors specifically cited weaknesses in determining whether institutions that received bailout money are complying with limitations on executive compensation and dividend payments. For instance, some top executives at institutions that receive rescue funds must repay any incentives or bonus pay that was based on inaccurate financial statements.

“Treasury has not yet determined how it will monitor compliance with this or other requirements such as limitations on dividend payments and stock repurchases,” the report states.

Auditors recommended that Treasury work with government bank regulators to determine whether the activities of financial institutions that receive the money are meeting their purpose.

In a response to the GAO, Neel Kashkari, who heads the department’s Office of Financial Stability, said the agency was developing its own compliance program and indicated that it disagreed with the need to work with regulators.

“The GAO’s discouraging report makes clear that the Treasury Department’s implementation of the [rescue plan] is insufficiently transparent and is not accountable to American taxpayers,” said House Speaker Nancy Pelosi, California Democrat.

So far, the government has pledged to pour $250 billion into banks in return for partial ownership. It also has agreed to provide $40 billion to troubled insurer American International Group. In addition, $20 billion of the money was invested in Citigroup, and another $20 billion went to the Federal Reserve to help ease credit stresses. [AIG HAS NOW BEEN GIVEN $152 Billion in Funds]

Treasury Secretary Henry M. Paulson Jr. initially said the money would be used to buy distressed mortgage-related securities from banks. His switch in strategy drew criticism from lawmakers as a confusing mix of messages to the public and investors.

http://www.washingtontimes.com/news/2008/dec/03/auditors-fault-oversight-of-bank-bailout-funds/

%d bloggers like this: