Citi Is Eager to Pay Back Bailout Aid

 
Manuel Balce Ceneta/Associated Press

Vikram S. Pandit, Citigroup’s chief executive, has been trying to win permission from federal regulators to repay its remaining $20 billion in relief funds by selling new stock.

By Eric Dash for The New York Times, December 9, 2009

A year after accepting two taxpayer bailouts, Citigroup is racing to raise billions of dollars in the stock market to repay the aid, a crucial step in freeing itself from Washington’s grip.

Even if Citigroup were to pay back all or part of its bailout funds — a move some analysts warn might be premature — the giant financial services company would still be beholden to the government because of other federal support it is receiving.

Citigroup is redoubling its efforts to reimburse taxpayers now that Bank of America and many other of its big rivals have repaid the bailout money they received last year at the height of the financial crisis. Doing so would help Citigroup shed the stigma associated with being the last Wall Street giant still tied to Washington.

If Citigroup can convince the government that it is strong enough to stand on its own by repaying the money, and persuade investors to buy new shares, the accomplishment would be another milestone in the recovery of the nation’s financial industry. Few analysts had expected Citigroup to repay the government so soon.

But whether Citigroup will be allowed to repay the money it received under the Troubled Asset Relief Program, or TARP, is uncertain. Regulators are nearing a consensus on the amount of capital that the bank needs to repay by the end of the year, according to a person briefed on the situation, who spoke on the condition he not be named given the delicate negotiations underway.

Citigroup executives and federal regulators are also discussing whether to let the bank out of a government insurance policy that guarantees almost $301 billion of Citigroup’s most troubled assets. Citigroup paid for that insurance selling preferred stock to the government. It is unclear how Citigroup would disentangle itself from that policy.

No final decisions have been made and the talks remain fluid. If Citigroup does not reach an agreement with its regulators in the next few days, however, it would be difficult to undertake a stock sale before mid-January, given that many investors will soon depart for the holidays. The bank also could run into disclosure issues if it released new information ahead of its first-quarter results.

While Citigroup executives have been discussing a payback plan with its regulators for months, they stepped up their efforts late last week after Bank of America was approved to repay its relief money.

Over the last few days, Vikram S. Pandit, Citigroup’s chief executive, has been trying to win permission from federal regulators to repay its remaining $20 billion in relief funds by selling new stock, according to the people briefed on the talks. The government, which provided $45 billion in taxpayer relief, converted $25 billion of its investment into common stock earlier this year. That gave it a one-third ownership stake.

At first, Treasury Department and some Federal Reserve officials appeared willing to let Citigroup repay the government as long as the company raised enough money to at least partially offset the $20 billion. Officials from the Federal Deposit Insurance Corporation, who have a frosty relationship with Citigroup executives and deeper financial exposure, had been demanding that Citigroup raise more than that.

It is unclear if Citigroup would be required to raise money by selling additional businesses or assets — one of the terms of the Bank of America’s deal to repay the relief funds. Any new stock would dilute the value of Citigroup’s existing share, a prospect that has caused their value to tumble this week. A Citigroup spokesman declined to comment late Wednesday. Officials from the Treasury, F.D.I.C. and the Federal Reserve declined to comment, too.

Citigroup executives are under pressure to cut a deal that will satisfy all of the bank’s regulators, and tension is running high inside the company’s Park Avenue headquarters.

The stakes are huge. While much of Wall Street is recovering, Citigroup remains plagued by rising losses in its consumer lending business and could face additional strain if does not get some relief from regulators when it moves billions of off-balance-sheet assets back onto its books by the end of this month.

Bank executives fear they could lose dozens of talented bankers and traders without a repayment plan in place before bonuses are paid early next year. Citigroup also faces an additional hurdle as the only relief recipient, aside from GMAC Financial Services, to convert government-issued shares into common stock.

Any effort by Citigroup to get out from under the government’s thumb will probably require the Treasury to begin selling those 7.7 billion shares in the company. That is a complex multistep transaction that is unlikely to happen before the end of this year.

Americans Are Furious at Wall Street

A new Bloomberg National Poll shows them angry at banks and brokers—and furious about bonuses

By Alison Fitzgerald for BusinessWeek, December 9, 2009

Wall Street firms are recovering—but their standing with the American public is not. The public rage directed at Wall Street banks and brokerages remains at high levels, according to a Bloomberg National Poll of 1,000 U.S. adults conducted on Dec. 3-7 by the Des Moines firm Selzer & Co. Two-thirds of Americans say they have an unfavorable view of financial executives. More than half say big financial companies, which are expected to pay record yearend bonuses, are out only to enrich themselves and also should not have received government aid.

Banks that got taxpayer help through the Troubled Asset Relief Program—the $700 billion financial rescue plan passed by Congress last year—shouldn't pay any bonuses, according to 75% of those polled. And this includes 39% of respondents who say they disapprove of bonuses even when the banks have paid the government back. "The fact that they're even in existence should be bonus enough," says Cassie Swihart, a 58-year-old retired registered nurse from Warsaw, Ind. Adds Elijah Brown, 42, an unemployed union contractor from California: "Why would you want to give somebody a bonus who put us into this situation?" Brown is among the 64% of people who said bailing out banks was a bad idea.

Many large banks have roared back to profitability as the financial markets and broader economy have recovered this year. Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase's (JPM) investment banking unit will hand out a combined $29.7 billion in bonuses, according to analysts' estimates. That's a record, beating the $26.8 billion in 2007—and up 60% from last year, when all three banks took billions in support from the Treasury to weather the financial crisis.

The Bloomberg poll also questioned Americans about the Obama Administration's performance, the challenges confronting the economy heading into 2010, and the war in Afghanistan. For the full poll data, go to bx.businessweek.com/obamas-economic-policy/reference/.

A.I.G. Units Omit Name and Excel

By Mary Williams Walsh for December 9, 2009

Just months after dropping the telltale “A.I.G.” from its sales brochures, the company has leapfrogged its competitors and reclaimed a title it held for many years before its bailout — the top seller of fixed annuities to bank customers.

People buying the annuities in bank branches may be surprised to know they are signing up with A.I.G. The contracts are being offered under the names of two subsidiaries, Western National Life and First SunAmerica. Until last June, they carried the name of A.I.G. Annuity.

The booming annuity sales are a bright spot for American International Group, which must raise cash to pay back the federal government.

But some competitors and consumer advocates are questioning A.I.G.’s comeback, saying its ability to keep drawing federal money is giving it an unfair advantage just a year after its government rescue.

Often sold as alternatives to certificates of deposit, fixed annuities are insurance contracts that guarantee a set rate of return, unlike variable annuities, whose returns may track the ups and downs of the markets.

The people who buy them in banks tend to be looking for something safe, but which pays more than a certificate of deposit. Fixed annuity contracts usually run for many years, and even before A.I.G.’s bailout last year, its customers began to have qualms about tying up their money with a company whose future was uncertain.

After the bailout, they accelerated their withdrawals from A.I.G., even if they had to pay a penalty to get their money back. Most new buyers sought out other insurers, like Transamerica and New York Life, which had higher ratings and did not get assistance through the Troubled Asset Relief Program.

But since June, and the name change, the A.I.G. subsidiaries have slogged their way back to the top. In the third quarter, Western National sold more fixed annuities in banks than any other insurer, according to Kehrer-Limra, a research and consulting firm that tracks sales of insurance and investment products in banks.

New York Life, which had claimed the lead in the first half of this year, has now fallen back to third place, and Transamerica is fourth. Other former contenders, like Genworth and MetLife, are not in the top five anymore.

Even though fixed annuities can bring their issuer a lot of cash quickly, like bank deposits, they can also erode an insurer’s capital faster than sales of other types of insurance. That is because they require the company to set aside very large reserves from the outset.

The risks this can pose are not just theoretical. Another A.I.G. subsidiary — one that the Federal Reserve Bank of New York recently took a $9 billion stake in — sold such a large volume of fixed annuities through Japanese banks that it wound up with insufficient capital to support its businesses.

A spokesman for A.I.G., Mark Herr, said the unit, the American Life Insurance Company, had restored its capital by transferring risks “using coinsurance and modified coinsurance,” among other techniques. He said the problem had not recurred since 2007.

In normal times, only well-capitalized insurers tend to promote fixed annuities heavily, to avoid stretching their resources too thin.

But these are not normal times. Western National was one of a dozen A.I.G. insurance subsidiaries whose investment portfolios were dipped into by A.I.G. Securities Lending — an affiliate that pooled more than $80 billion worth of the insurers’ assets and lent them out to banks and Wall Street firms, to use in trading.

The securities lending program imploded. Western National’s share of the losses was $7.9 billion, and the company was recapitalized as part of the federal bailout of A.I.G.

Joseph M. Belth, editor of the Insurance Forum, a consumer-oriented newsletter that tracks the financial strength of insurance companies, said that at the very least, purchasers were entitled to know the extent to which A.I.G., the parent, was standing behind the annuities of its subsidiaries. Only the subsidiaries are monitored to make sure enough money stands behind their promises.

Competitors said they believed Western National was using the new money from the Treasury to finance some of the highest teaser rates in the industry.

“Some insurers are selling annuities at rates that suggest that they are either building more risk into the investment portfolio than might be prudent, or using this as a way of raising cash, perhaps to pay off other obligations,” said Gary E. Wendlandt, the chief investment officer and vice chairman of New York Life.

Judith Alexander, of Beacon Research, which tracks annuity terms, confirmed that Western National was offering some of the higher “bonus rates” on fixed annuities through banks, allowing customers to capture more than 5 percent for one year, but she said it also offered contracts that guaranteed lower rates, in the neighborhood of 2.6 percent, over a longer period.

The chief executive of Western National, Bruce R. Abrams, said customers were opting for the longer terms.

“We’re not selling much bonus-rate product,” he said. “It’s the multiyear guaranteed rate. That’s what the customers are looking for, and that’s what we’re selling them.”

He also cited Western National’s longstanding relationships with banks, which he said allowed the company to negotiate individual terms with banks every week, giving them a high degree of flexibility. For example, he said, if a bank wanted to capture the attention of customers by offering them a higher interest rate than Western National proposed, Western National might arrange for them to do so by offsetting the cost with a smaller commission. The bank would then try to make up the difference on volume.

“That’s unique,” he said. “We’ve been doing that for over 15 years.”

 

Bankers Lose to Congressmen Amid Furor Over Bonuses

 
Photographer: Andrew Harrer/Bloomberg

By Alison Fitzgerald for Bloomberg, December 10, 2009

Wall Street firms are recovering. Their standing with the American public isn’t.

Executives at financial firms, coming off two years of failures, bailouts and writedowns, are less popular than Congress, lawyers and insurance companies. As they prepare to give out year-end bonuses, they risk another wave of public fury, according to a Bloomberg National Poll.

Two-thirds of Americans say they have an unfavorable view of financial executives. More than half say big financial companies are only out to enrich themselves and also say they shouldn’t have received government aid. And most Americans don’t want to see bankers collecting fat checks at the end of the year if their companies were bailed out by taxpayers.

“The fact that they’re even in existence should be bonus enough,” says Cassie Swihart, a 58-year-old retired registered nurse from Warsaw, Indiana, who responded to the poll of 1,000 U.S. adults, conducted Dec. 3-7 by Selzer & Co., a Des Moines, Iowa-based firm. The margin of error is plus or minus 3.1 percentage points.

Banks that got taxpayer help through the Troubled Asset Relief Program — the $700 billion financial rescue plan passed by Congress last year — shouldn’t pay any bonuses, according to 75 percent of those polled.

Of those, 51 percent say even the banks that have paid the government back shouldn’t be rewarding their employees so soon.

“Why would you want to give somebody a bonus who put us into this situation?” said respondent Elijah Brown, 42, an unemployed union contractor from California.

Bailouts Bad Idea

Brown is also among the 64 percent of people who said bailing out banks was a bad idea. To avoid future rescues, just over half of respondents said banks should be subject to stricter regulation. A minority, 31 percent, would allow troubled banks to fail and an even smaller number, 10 percent, favor breaking up big banks.

President Barack Obama has chastised financial companies for “bloated bonuses.” He has proposed an overhaul of financial rules that avoids breaking up large, healthy companies or that throws big banks in financial trouble into bankruptcy. A majority of respondents say Obama strikes about the right balance, coming off as neither pro- or anti-business.

Doubling Unemployment

The public opposition to Wall Street firms paying bonuses shows the widening disconnect between executives such as Goldman Sachs Group Inc.’s Lloyd Blankfein, who argue they need to pay generously to retain good employees, and the broader public that blames big banks for an economic collapse and doubling of the unemployment rate in two years.

General Electric Co. Chief Executive Officer Jeffrey Immelt said yesterday in a speech that the U.S. is at the end of “difficult generation of business leadership” and that the bottom quarter of the nation’s population is poorer than it was 25 years ago.

“Tough-mindedness, a good trait — was replaced by meanness and greed — both terrible traits,” Immelt said at the U.S. Military Academy in West Point, New York. “Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us instead of bringing us together.”

The U.S. economy fell into its deepest recession since the Great Depression in December 2007. More than 7 million jobs have disappeared. Some economists, including Federal Reserve Chairman Ben S. Bernanke, say the recession has likely ended. Unemployment, at 10 percent in November, has been slow to recover.

Record Bonuses

Many large banks have roared back to profitability on the leading edge of the recovery. Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.’s investment banking unit will hand out a combined $29.7 billion in bonuses, according to analysts’ estimates. That’s a record, beating out the $26.8 billion in 2007 and up 60 percent from last year when all three took billions in support from the Treasury to weather the financial meltdown.

Goldman alone set aside $16.7 billion for compensation and benefits in the first nine months of 2009, enough to pay each worker $527,192. Goldman has paid back $10 billion in TARP money with interest.

Goldman, the most profitable firm in Wall Street history, today announced its top 30 executives won’t get cash bonuses this year and instead will be paid in “shares at risk” that they can’t sell for five years. The company can also claw back those bonuses if they lead to losses and the executive did not adequately account for risk.

New Goldman Policy

The company also said shareholders will have an advisory vote on compensation.

“There is so much anger out there and I’m not quite sure how to ameliorate that, other than to moderate things and to recognize that Goldman and every other firm benefited from the actions of the Federal Reserve Board and the Treasury Department,” said Goldman board member William George in an interview Dec. 9, before the company’s announcement.

“If you cut bonuses it will just let people go elsewhere. It will be a talent drain from the U.S.,” said Garson Li, 27, a Houston-based consultant at Deloitte who was among the 23 percent of poll respondents who approved of banks’ paying bonuses if they took government aid.

Compensation Limits

Banks are rushing to pay back the Treasury to get out from under compensation limits that come with accepting taxpayer largesse. Bank of America Corp. said last week it will repay the $45 billion it borrowed as it tries to recruit a new chief executive to replace the outgoing Ken Lewis.

Goldman’s bonuses, likely to be awarded in January, will come as Congress tries to complete an overhaul of financial regulations aimed at cutting the risk-taking that drove outsize profits and triggered huge bonuses, and ultimately led to the financial crisis and recession.

Devin O’Leary, 41, a film critic from Albuquerque, New Mexico, welcomed tougher oversight. “They’ve had little control up to now and if you give a big corporation little control, they’re going to do everything they can get away with.”

Karen Thomas, 65, who runs a land-surveying business with her husband in Greeley, Colorado, said the government should let teetering banks fail, a view shared by 31 percent of poll respondents.

“That’s our capitalist system,” she said. “No one’s going to bail us out and I wouldn’t even ask for it.”

To see the methodology and exact wording of the poll questions, click on the attachment tab at the top of the story.

 

Will Obama Tax the Banksters?

By John Cassidy for The New Yorker, December 9, 2009

With his approval ratings dropping below fifty per cent, can it be long before President Obama looks across the pond for some advice on how an unpopular government can attempt to rally its supporters?

In a sop to public anger at greedy financiers paying themselves small fortunes a year after receiving big taxpayer bailouts, the British government today announced it would tax bank bonuses at a rate of fifty per cent. The banks that issue the bonuses would pay the new tax, and the recipients would also be taxed at the regular rate of income tax, which for high earners is fifty per cent. In effect, this means all bank bonuses above about forty thousand dollars would be taxed at a punitive rate of seventy-five per cent.

As Alistair Darling, the Chancellor of the Exchequer—that’s Britspeak for Treasury Secretary—explained to the House of Commons, there is economic logic as well political calculus behind this move. Most of the profits the banks are making are derived, in some way, from the government efforts to bail out the financial sector. These rescue efforts, which include artificially low interest rates, official debt guarantees, and various lending programs, were designed to help the banks rebuild their capital, much of which was wiped out when the real-estate market collapsed. But rather than hoarding the profits they are making, many banks are paying out large sums to their staff in the form of annual bonuses. At a time of mass unemployment, this is generating outrage.

“There is no bank which has not benefited, either directly or indirectly, from [government] help,” Darling said. “This should be a time for banks to rebuild their capital base and become stronger. However, there are some banks who still believe their priority is to pay substantial bonuses to their already high-paid staff. So I am giving them a choice. They can use their profits to build up their capital base. But if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.”

I would wager a substantial sum that some of Obama’s political advisers are pressing him to copy Darling’s populist move, which the opposition Conservative Party, traditionally the party of big business, is supporting. (It doesn’t have much choice. Bankers are so unpopular in the U.K. that some of them are forced to lie about their professions when they go to pubs or restaurants.)

The question now is whether the President and his economic advisers will sign on. If I were Tim Geithner or Larry Summers I certainly would. As of now, both of them are widely regarded as shills for Wall Street. Whether justified or not, this public perception is handicapping the Administration’s efforts to reform the financial sector and undermining its claim to represent change. What better way for the Administration to show its independence from the moneymen than by spoiling their Christmas dinners with the announcement of a surtax on their beloved bonuses?

Over to you, Mr. President…

AXA: Management Changes Aim To Boost Group’s Effectiveness

By Mimosa Spencer (Dow Jones Newswire) for The Wall Street Journal, December 10, 2009

French insurer AXA SA (AXA) Thursday announced a series of management changes to improve the group's effectiveness, adding Gerald Harlin will become the company's Chief Financial Officer.

The heads of the company's French and U.S. operations, Francois Pierson and Christopher Condron, respectively, will also be in charge of the group's property and casualty insurance, and the life and health insurance in addition to savings products.

AXA is also reorganizing its support functions it said. Chief Executive Henri de Castries will supervise the group's human resources and communications departments, with a new human resources director Shu Khoo, who replaces Alain Rohaut.

The company said the changes would be effective in January next year.

 

 

U.K. Banks to Swallow ‘Poison Pill’ of Bonus Tax

 
Alistair Darling, U.K., chancellor of the exchequer, holds a copy of the pre-budget on the steps of HM Treasury in London, on Dec. 9, 2009. Photographer: Chris Ratcliffe/Bloomberg

By Andrew MacAskill and Gavin Finch for Bloomberg, December 10, 2009

British Chancellor of the Exchequer Alistair Darling’s plan to levy a 50 percent tax on bonuses will make banks choose between punishing shareholders or employees.

Darling yesterday imposed the tax, to be paid by all banks operating in the U.K., on bonuses they pay employees until April 5. The measure, which the Treasury says will raise more than 550 million pounds ($890 million), will affect about 20,000 people.

Banks will have to decide whether to maintain payments to employees, allowing the additional tax expense to boost the cost of compensation and reduce profits for shareholders, or to protect profits by slashing bonuses. In some cases, firms may have to pay out bonuses because the terms have already been agreed with staff, said Jo Keddie, an employment lawyer at London-based Dawsons LLP.

“It’s a poison pill,” Keddie said in a telephone interview. “Either shareholders are going to take home less, or banks are going to have to punish their employees who have done very well,” she said. “It’s potentially shareholders that are going to lose out because many of the bonuses have already been agreed.”

Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, and U.K. banks including Barclays Plc and Royal Bank of Scotland Group Plc are most affected by the levy because they have the largest bonus pools, said Shaun Springer, chief executive officer of Square Mile Services Ltd., which advises London financial firms on pay.

‘Most to Lose’

Goldman Sachs, based in New York, set aside $16.7 billion to pay employees in the first nine months of the year. RBS’s directors are seeking to increase the amount the Edinburgh-based lender allocates for bonuses by at least 50 percent to 1.5 billion pounds, the Sunday Times reported Dec. 5, without saying where it got the information.

“Goldman has the most to lose,” said Springer. “Banks that employ the most U.K. citizens will be next in line.”

Barclays Capital, Barclays’s securities unit, employs about 20,000 people, and RBS employs about the same amount at its investment-banking division worldwide. Officials at Goldman Sachs, Barclays and RBS declined to comment.

International securities firms such as Goldman Sachs and JPMorgan Chase & Co. both base their European headquarters in the square mile, as London’s principal financial district is known. Goldman Sachs International Ltd., one of the firm’s more than 25 U.K. divisions, employed 5,831 people and allocated a total of 81 million pounds in gross wages and salaries in the year through November 2008, according to filings at the Cardiff, Wales-based registrar Companies House.

‘Bankers’ Folly’

U.K. financial firms were preparing to set aside as much as 6 billion pounds in bonuses for 2009, 50 percent more than 2008, according to an October report by the Centre for Economics & Business Research Ltd., a London-based research firm.

Rising bonus payments sparked anger among politicians and labor unions after the government provided more than 1 trillion pounds to prop up lenders including Royal Bank of Scotland during the credit crisis.

“It’s just not on to make nurses, social workers, dinner ladies, cleaners and hospital porters pay the price for the folly of the bankers,” said Dave Prentis, general secretary of Unison, the U.K.’s largest public employees’ union. “The people who earn most should pay the most.”

The U.K. will force banks awarding discretionary bonuses of more than 25,000 pounds to pay the one-time levy. Employees will still have to pay income tax on bonuses, the Treasury said. The top tax rate on earnings of more than 150,000 pounds will rise to 50 percent in April, a measure announced earlier this year. The bonus measure may be extended beyond April if the Treasury finds banks are deferring payments.

Thatcher, Blair

“On a bonus of 1 million pounds, the new tax will be 500,000 pounds, National Insurance will be 130,000 pounds, and personal income tax is 400,000 pounds,” said Chris Maddock, tax director of Vantis Group Ltd. “This makes a total of 1.03 million pounds for the Treasury.”

Bankers aren’t the first to be subject to an industry- specific tax. In 1981, the Conservative Party under Margaret Thatcher imposed a 2.5 percent levy on bank deposits, saying that rising interest rates were generating unearned profit. Almost two decades later, Tony Blair later put a windfall levy on utility companies.

Package Differently

“It’s something that the banks are probably going to have to pay up on this year and hope it doesn’t happen again,” said Daniel Naftalin, a partner at Mishcon de Reya in London. “This isn’t really a tax on individual bankers, so the government is a lot less open to legal challenges than it could have been.”

Taxes on bankers pay may extend beyond the next general election even if the Conservative Party who are leading in the polls take power, said Mark Wickham-Jones, professor of politics at the University of Bristol.

“One of the by products of the banking crisis is that it has marginalized bankers and turned them into a sort of bogey man,” he said. “The Conservative Party may continue with similar measures arguing the taxes are functional. They will just package the rhetoric differently.”

 

House Votes to Boost Taxes on Private Equity Managers

By Ryan J. Donmoyer for Bloomberg, December 9, 2009

The U.S. House voted to more than double a tax on income earned by executives of private equity and venture capital firms to pay for the renewal of dozens of tax breaks.

The House voted 241-181 today, largely along party lines, to end fund managers’ ability to pay the 15 percent capital- gains tax rate on the share of fund profits they are paid as compensation. The proposal, unlikely to pass the Senate, would tax those payments – known as carried interest – as ordinary income with a top 35 percent rate.

“Those who invest their own money will continue to receive capital gains tax treatment,” said Michigan Democrat Sander Levin. “Those who manage other people’s money will have to pay ordinary income tax like everybody else who performs services.”

House Democrats have twice before passed the tax increase over the objections of Republicans who say it would discourage investment. The measure would renew 45 tax breaks due to expire Dec. 31, including a research credit that businesses use to hire workers, and tax benefits for restaurants, retailers, teachers and college students.

The tax breaks would cost $30 billion over the next 10 years. Today’s measure would renew most of them for a year. The tax increase for fund managers would raise $24.6 billion over a decade, according to an estimate by the non-partisan congressional Joint Committee on Taxation.

The bill also contains new provisions intended to stop Americans from evading taxes by stashing money in offshore accounts, which would raise more than $7 billion.

‘Temporary’ Relief

“What we are being offered here is a temporary tax relief for one year with permanent tax increases,” said Michigan Representative David Camp, the top Republican on the Ways and Means Committee.

Senate Finance Committee Chairman Max Baucus of Montana prefers to address the tax on fund managers’ income in the context of a broader tax overhaul, his spokesman, Dan Virkstis, said last week.

Baucus said he may seek Senate renewal of the tax extensions in the next week while lawmakers await a cost estimate on their latest health-care overhaul proposal.

House Ways and Means Chairman Charles Rangel of New York, while supporting today’s measure, said its renewal of expiring tax breaks underscored the need for a fundamental tax overhaul. “The taxpayers really deserve better than this,” he said.

President Barack Obama proposed raising taxes on fund executives in his first budget earlier this year. An increase would affect general partners at buyout firms, hedge funds, venture capital firms and other partnerships including real estate and oil and gas investments.

20 Percent

Managers typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profits is treated as a capital gain.

The proposal would tax that money at ordinary income tax rates instead of capital gains rates. The top ordinary rate is 35 percent and is scheduled to increase to 39.6 percent in 2011; the capital gains rate is 15 percent and will rise to 20 percent in 2011.

The private equity industry, along with similar investment partnerships such including real estate, oil and gas, and venture capital, defends the preferential tax treatment for managers’ share of profits.

“Carried interest is appropriately taxed as a long-term capital gain because it represents the profit that an investment partnership earns by buying a capital asset” and “and eventually selling it for more than the purchase price,” said Douglas Lowenstein, president of the Private Equity Council, a Washington trade group founded by firms such as Blackstone Group LP.

Research Credit

Among the tax breaks being renewed is a research and development credit created in 1981 on a temporary basis and extended more than a dozen times. Thousands of companies including Dow Chemical Co., Microsoft Corp. and CA Inc. lobby for its renewal, saying 70 percent of the benefit pays the wages of U.S.-based researchers.

“The R&D tax credit is pretty much a key component of our ability to hire,” said James Barry, senior vice president of corporate technology development at Boston Scientific Corp., maker of coronary stents and other medical devices.

The House bill would renew a $4 billion benefit allowing U.S.-based companies like General Electric Co. to defer tax on income from overseas lending. The measure would retain faster depreciation schedules for restaurant operators such as Darden Restaurants Inc., owner of the Red Lobster and Olive Garden chains.

Other expiring provisions include deductions for college tuition and for state and local sales tax payments, which would save individuals $1.5 billion and $1.8 billion, respectively. The legislation also would renew benefits for films and television shows produced in the U.S., and an incentive for producing rum in Puerto Rico and the U.S. Virgin Islands.

“Allowing these provisions to expire would amount to a tax increase at a most challenging economic time,” said Representative Shelley Berkley, a Nevada Democrat.

 

Geithner: Bailout program extended to October

By David Shepardson for Detroit News Washington Bureau, December 9, 2009

The Obama administration will extend the $700 billion Wall Street and auto bailout fund until October, Treasury Secretary Timothy Geithner told Congress on Wednesday.

In a letter to congressional leaders, Geithner said he was using the Treasury's authority under a 2008 law to extend the Troubled Asset Relief Program, or TARP, which has provided about $82 billion to rescue automakers and auto finance companies.

"As a result of improved financial conditions and careful stewardship of the program, losses on TARP investments are likely to be significantly lower than previously expected. We now expect a positive return from the government's investments in banks," Geithner said

"We also expect to recover all but $42 billion of the $364 billion in TARP funds disbursed" this year.

The Government Accountability Office said in a report issued late Wednesday that the government's current estimate of losses is $30.48 billion — down from $43.7 billion.

Geithner said the government plans to "use significantly less than the full $700 billion. … As a result, we expect that TARP will cost taxpayers at least $200 billion less than was projected in August."

The Treasury doesn't expect to use more than $550 billion of the program.

The immediate impact to automakers is that the government can still make new emergency loans. GMAC, the Detroit auto finance company that has received $13.5 billion in government support, has been in talks with the administration about a new capital infusion of up to $5.6 billion. This move means the action doesn't need to be completed by Dec. 31. The Treasury holds a 35.4 percent equity stake in GMAC.

The Treasury said it will use new funds for: mitigating home foreclosure for some homeowners; additional efforts to facilitate small business lending and increasing its use of the Term Asset-Backed Securities Loan Facility.

President Barack Obama has stepped up rhetoric in recent days, saying he didn't like having to bail out banks and automakers. Wednesday, he called it "distasteful."

"Because of distasteful but necessary steps to help our auto industry recover and stabilize our banks, we've pulled our economy back from the abyss," Obama said.

The government won't use more bailout funds "unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability. As a nation, we must maintain capacity to respond to such a threat," Geithner said.

Geithner said the program will end Oct 3.

Rep. Dave Camp, R-Midland, the ranking member of the House Ways and Means Committee, said the program should be ended and called it a "revolving slush fund." He called on the administration to use unused funds to pay down the deficit.

Camp said the administration was right to rescue General Motors.

"At the time to have a company as large as GM go under would have been devastating, so I think that was an important policy point," Camp said. "I was not as excited about the Chrysler help."

Administration officials were split in March over whether to rescue Chrysler.

Camp said he was pleased with some of the things he heard from Chrysler CEO Sergio Marchionne during a meeting between the auto executive and Michigan lawmakers Tuesday.

"They are going to have create new products that people want to buy," Camp said of Chrysler. "It's a big challenge for them."

General Motors Co.'s new chairman and CEO Edward Whitacre Jr. said GM may opt to pay off its $6.7 billion in government loans in a lump sum. GM had said previously it would make its first $1 billion payment on Dec. 31.

The government swapped about $42 billion of its $50 billion in loans to GM for a 61 percent equity stake. The government will try to recoup its investment by selling those shares in chunks over the coming years.

Chrysler Group LLC, which received about $12.5 billion in government loans, must repay $6 billion, but hasn't said when it plans to begin doing so.

Fiat SpA, which controls Chrysler and received a 20 percent interest in the company for no cash investment, can't acquire a majority interest until Chrysler repays its government loans.

 

Was The Bank Bailout Effective?

By Daniel Indiviglio for The Atlantic, December 9, 2009

The Congressional Oversight Panel overseeing the Troubled Asset Relief Program (TARP), also known as the bank bailout, issued its year-end audit results (.pdf) today. Overall, the report found that the TARP was effective in stabilizing the financial sector. It also, however, lists quite a few criticisms of the TARP. With Treasury Secretary Timothy Geithner asking for the TARP's extension today, considering its failures is particularly timely. I agree with much of the report, though it included few revelations.

First, here's the mission accomplished declaration about stabilizing banking:

Because so many different forces and programs have influenced financial markets over the last year, TARP's effects are impossible to isolate. Even so, there is broad consensus that the TARP was an important part of a broader government strategy that stabilized the U.S. financial system by renewing the flow of credit and averting a more acute crisis. Although the government's response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence.

I actually don't think the effects of the TARP are particularly difficult to isolate. It's pretty clear that the U.S. government used it to establish an implicit guarantee of large financial institutions. That calmed markets. While the Federal Reserve also had a great many programs, its work was more focused on market logistics and macroeconomics, rather than calming panic.

And to that end, the TARP was indisputably successful. I mean, it would almost have to be by definition. Anytime the government, particularly the U.S. government, will stand behind something no matter the cost, you can assume it's quite safe. After all, if the government can't manage to live up to that promise, then the country will have much bigger problems than just a credit crunch.

So, yes, government guarantees calm people down. No surprise there. But that doesn't mean that the TARP was completely effective. In fact, there are seven ways in which the TARP failed, according to the report. I wanted to go through those briefly, and add one more:

Getting Credit Flowing

No matter how red-in-the-face Congressmen got during hearings, they just couldn't get the bailout banks to lend more. And that's not surprising: the TARP contained no tangible mechanism with which to require them to do so. But that's okay — it shouldn't have. By forcing banks to lend more in their fragile state, such a strict lending requirement could have endangered the very capital cushion that the TARP sought to create. So I think this was more of a misguided goal of the legislation. In fact, this end was better accomplished by the Federal Reserve through its programs like the Term Asset-Backed Securities Loan Facility.

Regional Bank Failures

While the TARP did a great job in healing the big banks very quickly, the same can't really be said of the smaller regional banks. I wrote about this problem yesterday, so I won't rehash all of that analysis here. As the report says, since January 1, 2008 there have been 149 bank failures. As commercial real estate struggles, there may be more to come. So while Wall Street is stabilized, regional banking is hardly out of the woods.

Removing Toxic Assets

The original purpose for the TARP was to purchase toxic assets from banks, as its name indicates. For whatever reason, former Treasury Secretary Hank Paulson couldn't make that happen, so it used the fund as a blunt instrument to recapitalize banks instead. That worked for stabilization purposes in the short-term. But in the long-term, these bad assets continue to plague bank balance sheets. No effort to purge them with the TARP has been successful. At this point, banks will likely slowly sell some here and there and just allow the others to run off, with the losses spread out over time.

Preventing Foreclosures

The homeowner bailout, a sub-bailout within the TARP, hasn't done particularly well. Foreclosures continue to soar. I reported yesterday on how poorly the Treasury's program has done modifying troubled mortgages, according to Chase Bank's statistics. It's got around an 8% success rate for trial foreclosures that manage to be made permanent under the TARP-funded program. Obviously, the success rate is even lower for the total number of applicants who apply for the government program, as many probably don't even make it into the trial period. From any measure, that's a pretty awful result.

Slowing Job Losses

This is one of the few areas where I disagree with the COP report. I didn't see slowing job losses as a direct goal of TARP. I guess you could argue that, by making sure credit was available, fewer businesses would need to lay off workers. So, maybe in some indirect manner twice-removed, job loss prevention was a goal. But I don't think you can really blame unemployment on the TARP.

The Market Still Reliant On Government

This problem overlaps with a few others. So, while I find it legitimate, I'll defer to the next failure which better addresses this worry.

Created An Implicit Government Guarantee Of Big Banks

This is one of the most serious problems resulting from the TARP. Big financial institutions are now seen as having an implicit government guarantee. I was watching CNBC this morning and the COP chairwoman Elizabeth Warren actually made an interesting comment regarding this guarantee.

When asked whether she worried that banks were now rushing to pay back their bailout money before they were really ready, Warren cited this implicit guarantee as the reason why she wasn't so concerned. She said that, even if big banks appear to run into trouble again, the market won't worry, because it understands that the government will continue to stand behind the big financial institutions. So after paying back Uncle Sam, banks will still have the benefit of the government guarantee without any of those pesky pay constraints.

Here's that whole CNBC clip if you want to watch it. She makes some other interesting comments as well:

http://plus.cnbc.com/rssvideosearch/action/player/id/1354237681/code/cnbcplayershare

 

Of course, this implicit guarantee isn't an entirely good thing. It creates significant moral hazard for banks to continue taking risks, because everyone assumes the government will just bail them out again, if necessary. The TARP report notes this problem. If financial regulation is done right, however, this issue can be quickly eliminated. With a non-bank resolution authority in place, bank failure plans will be submitted. Then the systemic risk regulator can weigh if those plans will work, and if not the institution will be deemed too big to fail and will be broken up. At that time, the market should understand that the government will not stand behind any firm going forward.

Staying On Task

There's one final pretty clear flaw in the TARP that the report only kind of mentions in passing. The plan called for in the legislation barely resembled what actually occurred. Toxic assets were not purchased. To make matters worse, the money started being used for purposes other than stabilizing the financial market, like bailing out U.S. automakers. TARP never should have become the Treasury's a slush fund. If the Obama administration ends up using it for another jobs stimulus without Congressional approval, then it would be hard to describe it as anything other than that.