International Herald Tribune (Link) - Edmund L. Andrews (January 16, 2009)
Last fall, as Federal Reserve and Treasury Department officials rode to the rescue of one financial institution after another, they took great pains to avoid doing anything that smacked of nationalizing banks. They may no longer have that luxury. With two of the nation's largest banks buckling under yet another round of huge losses, the incoming administration of Barack Obama and the Federal Reserve are suddenly dealing with banks that are "too big to fail" and yet unable to function as the sinking economy erodes their capital.
Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders.
And the new ground rules laid down by Obama's top economic advisers for the second half of the $700 billion bailout fund, as explained in a letter submitted to Congress on Thursday, call for the government to play an increasing role in the major activities of the banks, from the dividends they pay to shareholders to the amount they can pay executives.
"We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "We are going to go back to a time when the government controlled the banking system."
The approximately $138 billion aid package on Thursday for Bank of America — including injections of capital and absorbed losses — as well as a $300 billion package in November for Citigroup both represented displays of financial gymnastics aimed at providing capital without appearing to take commanding equity stakes. Treasury and Fed officials accomplished that trick by structuring the deals like insurance programs for big bundles of the banks' most toxic assets.
Instead of investing tens of billions of taxpayer dollars in exchange for preferred shares in the banks, which has been the Treasury Department's approach so far with its capital infusions, the government essentially liberated the banks from some of their most threatening assets. The trouble with the new approach, analysts say, is that it is likely to conceal the amount of risk that taxpayers are taking on. If the government-guaranteed securities turn out to be worthless, the cost of the insurance would be much higher than if the Treasury Department had simply bailed out the banks with cash in the first place.
Christopher Whalen, a managing partner at Institutional Risk Analytics, said the approach also covers up the underlying reality that the government is already essentially the majority shareholder in Citigroup. "There's nobody else out there to invest in them," Whalen said. "We already own them."
Ben Bernanke, chairman of the Federal Reserve Board, outlined the elements of what could become the Obama administration's new approach to bank rescues in a speech on Monday. Speaking to the London School of Economics, but addressing American audiences as much as European ones, Bernanke warned that the U.S. government had no choice but to put more money into banks and other financial institutions if it had any hope of reviving the paralyzed credit markets.
Known officially as the Troubled Asset Relief Program, or TARP, the rescue program has infuriated lawmakers in both parties, who complain that Treasury Secretary Henry Paulson Jr. has doled out money to banks without demanding accountability in return. Obama and his top economic advisers convinced enough lawmakers that shoring up the banks was essential to preventing a broader financial collapse, and offered written assurances that they would address the lawmakers' biggest complaints.
But Bernanke proposed an array of alternative approaches to dealing with the banks in the months ahead, and all of those options reflected a fundamental shift from the original assumptions of the Bush administration.
Paulson had insisted that the government would be investing only in healthy banks, some of which might take over sicker rivals. The Treasury would invest taxpayer dollars in exchange for preferred shares, which would pay a regular dividend and come with warrants that would allow the government to profit from increases in company stock prices.
By contrast, Bernanke proposed various ways to fence off the troubled assets, from nonperforming loans to mortgage-backed securities that investors had stopped buying at almost any price. Bernanke's options included guarantees for bank assets, which was at the heart of the rescue packages for Bank of America and Citigroup. Citigroup received its rescue package in November, but it is expected to report additional losses on Friday that could top $10 billion.
In both of those deals, the U.S. government set up a complicated arrangement that would limit the banks' losses on hundreds of billions of dollars worth of their worst assets.
Citigroup's deal in November covered $300 billion in assets. Citigroup agreed to absorb the first $29 billion in losses. The Treasury agreed to take a second round of losses up to $5 billion, and the Federal Deposit Insurance Corporation agreed to take a third round of losses of up to $10 billion. The Federal Reserve then agreed to lend Citigroup money at low interest rates for the value of the remaining assets.
As a second option, Bernanke and other Fed officials have proposed putting a bank's impaired assets into a separate new "bad bank." The effect would be much the same as providing a federal guarantee: the bank would be able to free itself from the need to set aside reserves for extra losses.
Both the idea of a government "wrap" and a government-backed "bad bank" have the virtue of protecting the bank's common stockholders from being wiped out by the government.
By contrast, the Bush administration's original approach to recapitalizing banks — injecting capital in exchange for preferred shares with warrants to convert to common stock — had the effect of squeezing out the common shares. That was because any losses would have to first wipe out common stockholders before the bank could stop paying dividends on preferred shares.
"One of the problems with TARP has been a result of the government not wanting to own the banks," said Fred Cannon, chief equity strategist at Keefe, Bruyette & Woods. "If you get losses, there is less common stock. What we are hopefully moving toward, to the extent that the government guarantees some of the assets, is a structure that protects common shareholders and allows the company to go out and raise common shares through the market."
But a growing number of analysts warned that the approach may be too clever, because it gives policy makers too many ways to conceal true problems at banks and true risks to taxpayers. "What we have is a weird, shadow nationalization," said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm in Washington. "The government does not want to and should not want to own banks. But if they get forced into that situation, they should resolve that situation. Here, what you have is a huge diversified financial services industry with recognized losses and looming losses in every aspect of its operations. There's nothing straightforward about it."
I would just like to point out that according to Bible prophecy, the time will come when a person cannot buy or sell without a mark and a pledge of loyalty to a man who will call himself God. Looking from where we are at now this may seem odd, but for those who believe the Word of God, this continued nationalization of banks should be of concern. These are baby-steps to fulfill that end goal and while some may scoff at that idea now, just remember that the pledge to the man of sin allows people to buy or sell.
This is done with money now but in the end it will be reliant on a mark. Technology has brought us the ability to uniquely mark items or people with RFID and the development of plastic money for the past few decades has set up the infrastructure of electronic payments, all baby-steps. It seems to me that if there is going to be a New World Order of global governance that will later be taken control of by the man of sin, that governments in control of banking is a pretty big part of bringing that about... even if it may not seem apparent at the time.
“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands, and the Republic is destroyed.” | Abraham Lincoln, 16th President of U.S.: 1861~1865. In a letter written to William Elkin less than five months before he was assassinated Nov. 21st, 1864
“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society.” | Edward L. Bernays, (Sigmund Freud's nephew and author of Propaganda: How the Media Molds Your Mind 1928)
“Lucifer comes to give us the final ... Luciferic initiation ... that many people now and in the days ahead, will be facing -- for it is an initiation into the New Age. ... No one will enter the New World Order unless he or she will make a pledge to worship Lucifer. No one will enter the New Age unless he will take a Luciferian Initiation.” | David Spangler, Director of Planetary Initiative, United Nations Reflections on the Christ [Book: 1978], quoted in 'Unicorn in the Sanctuary', by Randy England, 1978, Interconnections Must-read link
2 Thessalonians 2:6-15
And now ye know what withholdeth that he might be revealed in his time. For the mystery of iniquity doth already work: only he who now letteth will let, until he be taken out of the way. And then shall that Wicked be revealed, whom the Lord shall consume with the spirit of his mouth, and shall destroy with the brightness of his coming: Even him, whose coming is after the working of Satan with all power and signs and lying wonders, And with all deceivableness of unrighteousness in them that perish; because they received not the love of the truth, that they might be saved. And for this cause God shall send them strong delusion, that they should believe a lie: That they all might be damned who believed not the truth, but had pleasure in unrighteousness. But we are bound to give thanks alway to God for you, brethren beloved of the Lord, because God hath from the beginning chosen you to salvation through sanctification of the Spirit and belief of the truth: Whereunto he called you by our gospel, to the obtaining of the glory of our Lord Jesus Christ. Therefore, brethren, stand fast, and hold the traditions which ye have been taught, whether by word, or our epistle.I believe that there is a grand conspiracy for the very souls of mankind and that the mystery of iniquity works through ordinary men and women who may not even realize what they're working toward. When it comes to wickedness and the mystery of iniquity, we are dealing with a fallen angel and his followers who work in deception toward the eternal spiritual destruction of as many in God's creation as they can. What may seem just like politics and business has an ultimate goal foretold in the Word of God and it will come to pass.
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