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News that Moves: Volcker Takes on the Fed, Obama and the IMF, TARP Exit Debate


RCM Comment: IT’S ABOUT TIME!!

By Timothy R. Homan Bloomberg News Saturday, April 18, 2009
Former Federal Reserve Chairman Paul Volcker said Congress will probably review the authority granted to the Fed following emergency credit programs doubling the central bank’s balance sheet to $2.19 trillion. “I don’t think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken,” Volcker, head of President Barack Obama’s Economic Recovery Advisory Board, said today at a conference at Vanderbilt University in Nashville, Tennessee. U.S. lawmakers from both political parties have expressed concern in recent months that the central bank has overstepped its authority by creating several emergency credit programs aimed at reviving lending and ending the recession. “I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed,” Volcker said…

Obama proposes $100 bln loan for IMF
Reuters reports President Barack Obama Monday proposed a $100 bln U.S. loan to the IMF to boost the IMF’s war chest and urged a bigger stake in the IMF for emerging powers like China and India. In a letter sent to Democrat and Republican leaders in the U.S. Congress, Obama said the U.S. funding “does not represent a budgetary expenditure or any increase in the deficit since it effectively represents an exchange of assets.” RCM Comment: If you have yet to be offended by a number of nefarious comments coming out of the mouth of our president then this should do the trick. After reading this comment I was confronted with two equally uncomfortable questions: How dumb does Obama think we are? Or, how dumb is Obama? If Obama really believes this statement then he must also believe (and want us to believe) that the $700 billion+ bailout of US banks “does not represent a budgetary expenditure…” because assets were exchanged. Have we fallen down a rabbit hole? I suspect if this Carrolleusque thinking continues on Capital Hill we are days away from a headline applauding the Mad Hatter’s (Obama, for those of you not paying attention) ability to reduce the budget deficit through his brilliant plan of spending.

RCM Comment: These next two stories disturb me as it would appear the government wants to retain control of the banks even if they are healthy enough to repay the TARP loans. This is not a healthy development for the banks. We are witnessing a battle between nationalization fears vs. recovery cheers. The equity market rally has been in part a result of recovery cheers gaining momentum. This new developing story may quiet the crowd.

Geithner weighs bank repayments – WSJ
The Wall Street Journal reports Timothy Geithner indicated that the health of individual banks won’t be the sole criterion for whether financial firms will be allowed to repay bailout funds, a position that might complicate their efforts to give back the cash. In an interview, Mr. Geithner laid out some broad principles, including the need to consider the overall health of the financial system and the flow of credit in judging whether banks can repay their government investment. Among large banks, Goldman Sachs (GS) and JP Morgan (JPM) have both said they want to repay the government. “We want to make sure that the financial system is not just stable, but also not inducing a deeper contraction in economic activity. We want to have enough capital that it’s going to be able to support a recovery,” Mr. Geithner said. Mr. Geithner also said he plans to discuss signs of improvement in the U.S. economy with his counterparts at the coming Group of Seven finance-ministers meeting. But he said a “dramatic” mobilization of resources is still needed across the world to avert a deeper global recession. “We’re trying…to make sure there’s as strong and broad a global consensus on stimulus, financial repair and quick deployment of resources to emerging economies so that we can avert risks of a deeper downturn world-wide.”

Financial firms lobby to cut cost of TARP exit – WSJ
The Wall Street Journal reports the banking industry is aggressively lobbying the Treasury Dept. to make it less costly for financial institutions to get out of TARP. The move could prove controversial for the banking industry, which is busy deflecting criticism about higher fees it is charging consumers for credit cards and other products and services. At issue are “warrants” the government received when it bought preferred stock in roughly 500 banks over the past six months as part of TARP. The warrants allow the government to buy common stock in the banks at a later date so taxpayers can receive more of a return on their investment when the banking industry recovers. Many banks want to return their TARP money and, as part of that effort, want to expunge the warrants. To do that, banks must either buy them back from the government or allow the Treasury to sell them to private investors. Today, most of the warrants are essentially worthless, because their exercise price is higher than where most banks’ stocks are trading. But the government believes the warrants still have value, since they give the Treasury the right to buy common stock at a set price for 10 years. Bankers say it is unfair to charge what amounts to a “prepayment penalty,” which makes it additionally onerous to escape TARP. Bank representatives say the cost of buying back the warrants could be equivalent to paying 60% annual interest on short-term loans. That, they argue, would exacerbate banks’ existing problems.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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