President Hopes For Another Fiscal Assistance Package For States

President Obama can't help but see the fiscal disaster at the state and local level. Every day there's a new headline about the dire fiscal situation, threats of shutdowns, and state spending that has to be slashed because taxpayers are in a foul mood and aren't going to stand for still higher taxes.

So, what's he preparing to do? He's trying to rally support for another federal aid program to the states - $50 billion that the federal government doesn't have to help states that are fiscally irresponsible and got themselves into a ticking fiscal time bomb of epic proportions.

Of course, the president is trying to use the old saw - the plan is necessary to prevent the layoffs of teachers, policemen and firemen.

The states could have avoided this mess by not ramping up spending at several times the rate of inflation over the past decade and imposing taxes at ever higher levels and then watching it all come crashing down with the recession. Some states responded to the changing financial circumstances by taking prudent measures to limit spending and revenue adjustments that didn't include broad based tax hikes like Colorado and Utah. Those states are in better shape than those that kept on spending - like New York and California.

As I've repeatedly argued - the federal government's repeated bailout of states over the past two years has meant that the states in the worst fiscal shape could avoid having to make long-delayed and necessary decisions to bring them onto a sound financial footing.

The infusion of billions of dollars in New York means that the state can avoid asking why it needs the size state workforce it has, why it can't adjust benefits packages to make them on par with private-sector jobs, why the state shouldn't switch from defined benefit to defined contribution plans, and why hundreds of agencies and departments exist when their jobs could be consolidated and/or eliminated. Moreover, it means everyone can ignore the soaring medical costs that are one of the drivers of the huge New York budget.

Repeat that scenario around the country and you simply extend the misery because the states simply will not reduce their spending to match revenues and instead seek to raise taxes or plead for a federal bailout to help them along.

This Is What The Financial Industry Waited For?

Treasury Secretary has announced his latest effort to try and create a program that deals with the toxic assets on the books of lenders. It still puts the onus of moral hazard on the government and taxpayers are on the hook for all the money should the valuation be off.

Under the new so-called "Public-Private Investment Program", taxpayer funds will be used to seed partnerships with private investors that will buy up so-called toxic assets backed by mortgages and other loans.

The goal is to buy up at least $500 billion of bad assets -- such as subprime mortgages that are now in danger of default. Doing so would help cleanse the balance sheets of many of the nation's largest banks, which continue to suffer billions of dollars in losses.

The government will then run auctions between the banks selling the assets and the investors buying them, hoping to effectively create a market for these assets.

To kickstart things, the administration said it will commit $75 billion to $100 billion and would consider how the program is progressing before committing more money.

So, this version "only" commits $75 billion to $100 billion in the first wave, as thought that's nothing to sneeze at.

It's no wonder that there are quite a few pros who are balking at the latest plans and think they're going to make the problem worse.

The biggest problem is that the government has repeatedly failed to figure out a reasonable valuation for banks involved in this crisis. While some experts think that due diligence is the key to the success of this program, the government has repeatedly shown that it has avoided doing due diligence throughout this entire crisis.

The Bush Administration pushed bailouts without taking the time to assess whether the money was going to the right portion of the market - lenders or borrowers and whether they were the right parties to even receive money given that they were in essence rewarding bad behavior. The bailouts shifted the risk of loss from the businesses and bad business decisions onto taxpayers, which any business would applaud simply because they no longer have to worry about making bad decisions since the government was backstopping their downside. It was precisely the wrong message to send to the markets.

It fosters still more fiscal irresponsibility.

Then, you've got the failure of the government to properly value major banks like Citigroup or Wachovia or Washington Mutual.

UPDATE:
At the same time Congress keeps pushing confiscatory taxes that would hit the heart of the financial industry in NYC, destroying the local economy. I don't think that is change that Mayor Mike Bloomberg or Gov. David Paterson can believe in because they are heavily reliant on Wall Street to fund all the tax and spend programs - and therefore require higher taxes from those very folks and industries (along with everyone else through sales tax that are going to hit folks who can least afford it during a recession.

UPDATE:
Paul Krugman notes the voodoo economics coming from the Obama Administration and Tim Geithner over the latest bailout plan. He correctly notes that the math just doesn't add up. I can't believe that I'm citing to Krugman again, although using one of the most influential lefty economists to bash Obama's economic plans does provide me with some entertainment.

Bank of America's top management was calling on investors to sell after today's rally because there's going to be less profits in the sector. And more government intrusion and domination over compensation and all other aspects of the industry, regardless of their actual necessity or constitutionality.

So, what was the reason for today's big jump in the DJIA? Was it because of Geithner's do-over or was it the better than expected real estate sales figures? It was probably a bit of both, although the real estate sales has a larger effect since it was done without direct government intervention - real estate prices have come down and result in more affordable homes to people who can pay for them.

UPDATE:
Henry Blodget slams Geithner's latest attempt to repackage the trash train that is the toxic paper. He offers up the five myths about the toxic paper crisis that people don't quite get based on the media coverage. Top among them is that the banks aren't lending. They are lending, but just to those people who they think will repay their obligations. In other words, they're no longer providing the free and easy credit to subprimes. That's the area of the market that the Administration wants to see turbocharged, even though it was a prime player in the real estate and market meltdown.

Washington Mutual Sues Feds Over Firesale

Washington Mutual's holding company is suing the FDIC over its seizure and subsequent sale to JPMorgan Chase at a bargain basement $1.9 billion. The company argues that the actual value of the company was worth far more than that had the company been properly liquidated.

I tend to agree.

It isn't the first time that the government screwed up in this arena. They tried to force the sale of Wachovia to Citigroup. Wells Fargo proffered a far higher bid ($2.2 billion versus the Wells Fargo $15.1 billion) for the company and the government sought to block the acquisition and lost. Weeks later, we came to learn that Citigroup was in dire fiscal shape and needed a bailout of its own (that came with executive compensation strings attached unlike the AIG bailout that got Congressional approval and broke out the phony outrage this past week).

The government has consistently gotten the value of these companies wrong, and attempted to force transactions that would have been bad for the taxpayer. They clearly underestimated the severity of problems at Citigroup and severely undervalued the price of Wachovia.

Taken together, and one sees clear problems with further interference in the markets by the government. They are bound to make the situation worse, not better by meddling in the markets and interfering with the market valuations of these companies.

Phony Outrage Alert

The Administration and Congress have been slamming AIG this past week for doling out executive compensation packages and bonuses to employees despite AIG receiving TARP money (and for the record, AIG is being used as a conduit to prop up banks around the world for the credit mess that started with the "affordable housing" mess and credit defaults and toxic paper outside the TARP regime). They're busy railing on the $165 million (or is it $218 million) that AIG is going to be sending out to its employees in the next few weeks.

Congress, led by Rep. Charles Rangel (D-Tax Cheat/NY), has pushed for a 90% confiscatory tax on all income earned by individuals receiving the bonuses from companies that have received $5 billion or more in TARP aid. That ignores the economic benefits that the bonuses have on the NYC metro area economy, let alone the ancillary benefit that such money has around the nation. It also ignores that the bonuses reflect a fraction of a percent of what the government has doled out to the banks and AIG thus far in their quest to prop up the banking system. The amount here is a rounding error under usual Government math practices, but the real crime isn't the AIG bonuses, but the bailouts in the first place.

It's hilarious to hear President Obama claim that he was blindsided by the bonus situation, especially since Obama was busy railing on the bonuses back in January. His Administration also knew that these bonuses would be paid out and his Treasury Secretary knew that the bonuses would be paid because he and Sen. Chris Dodd (D-AIG/CT) pushed to get language inserted into the porkfest stimulus package to authorize those payments. The situation with the bonuses has been known for months, and yet Congress declares its outrage and demands accountability from the new CEO of AIG, who had nothing to do with the bonus compensation packages in the first place and was brought in to clean up the mess left by the prior leadership group.

Keep in mind that Congress provided a bailout to Citigroup, and set conditions on its executive compensation and bonuses. It chose not to do so with AIG.

Why is that the case? Well, AIG has quite the record with its lobbyists. They got quite the return on their dollar; spreading the money among top Democrats, including Barack Obama (in his capacity as US Senator), Chris Dodd, and others. Speaking of Dodd, it seems that his actions require far more scrutiny from the media and his fellow Senators. He's skated along despite clear evidence of benefiting from cozy arrangements with Countrywide Home Finance (friends of Angelo plan) and inserted the AIG provisos that enabled the bonus money.

The real issue is that the government is engaging in outrage and attempting to cover its tracks for its miserable handling of a mess that it initiated all those years ago in the name of affordable housing. One bad policy was tacked on to the next, like a house of cards, and the current bailouts are exacerbating the mess by throwing trillions of dollars into the marketplace to unstick the credit markets because banks don't know how much they have on their books and don't want to lend to those who are a credit risk (despite Congress demanding that they continue providing subprime mortgages).

Rangel Leading Charge On Executive Compensation Taxation

You can't lose the irony on any of this. Rep. Charles Rangel, the New York Democrat who's managed to avoid paying taxes on real estate transactions for years, run afoul of House ethics rules regarding his parking spot, and generally thinks himself as being above the law, is leading the charge to impose a confiscatory tax of 90% on persons receiving the bonuses (executive compensation) at AIG and other companies receiving a bailout from the federal government.

The House is scheduled to vote today on a bill that would levy a 90 percent tax on bonuses paid to employees with family incomes above $250,000 at companies that have received at least $5 billion in government bailout money.

"We figured that the local and state governments would take care of the other 10 percent," said Rep. Charles Rangel of New York, chairman of the tax-writing House Ways and Means Committee.

Rangel said the bill would apply to mortgage giants Fannie Mae and Freddie Mac, among others, while excluding community banks and other smaller companies that have received less bailout money.

House Democratic leaders unveiled the bill as the head of embattled American International Group Inc., which has received $182 billion in bailout money, testified about $165 million in bonuses paid out in the past week to about 400 employees in its Financial Products unit.

Funny, but no one in the House leadership is clamoring for the House to slam Rangel for his tax evasion or ethics troubles. The Senate had no problem confirming tax cheat Tim Geithner to head up the very Department that oversees the IRS - Treasury.

And yet, here we are with tax cheats demanding that those who are entitled to their compensation get taxed on such compensation at rates not seen since the 1950s.

What is all the more galling is that none of this would have been necessary had the necessary safeguards been put in place when the bailout packages were first announced. Instead, Democrat Chris Dodd of Connecticut stripped out those provisions in favor of language strictly protecting such compensation packages and lied about his role in doing so.

The Democrats own this mess and their outrage over the compensation packages is itself outrageous because the government ended up rewarding companies for failure with massive amounts of money to prop up businesses that made bad business decisions. If rewarding failure of executives is bad, how does spending 100 times that amount on the very companies that made those decisions make things any better? It does not.

Also keep in mind that AIG CEO Edward Liddy was chosen to clean up the mess at AIG and can say what he wants about trying to get his people to voluntarily give up their executive compensation packages.

What is truly galling is that the Democrats in Congress, along with the President, are trying to stoke populist anger against AIG and other corporations, all while skirting the truth that it was Congress itself that was responsible for this mess - the bailouts along with the allowances for executive compensation. If there is anger, it should be directed at the President and Congress, both of which knew that this executive compensation was to be paid.

Now, Congress and the President are rushing to try and fix their own mess by imposing the confiscatory taxes - with the charge led by tax cheats Rangel and Geithner. Classy.

UPDATE:
Tigerhawk makes the point about CEO Liddy more than I did above. Simply put, Liddy was brought in to clean up the mess, and yet he's the one that Congress is raking over the coals and demanding mea culpas from. An Instapundit reader also weighs in on the Congressional hearings yesterday and finds them wanting.

UPDATE:
Obama blames Congress for not informing him of the bonus provision (once again clearly showing that Obama did not read the porkfest before signing the monstrosity into law), but Rep. Chris Dodd (D-AIG) says that he inserted the bonus provision into the porkfest at the behest of the Administration.

Senate Banking Committee Chairman Christopher Dodd said the Obama administration asked him to insert a provision in last month’s $787 billion economic- stimulus legislation that had the effect of authorizing American International Group Inc.’s bonuses.

Dodd, a Connecticut Democrat, said yesterday he agreed to modify restrictions on executive pay at companies receiving taxpayer assistance to exempt bonuses already agreed upon in contracts. He said he did so without realizing the change would benefit AIG, whose recent $165 million payment to employees has sparked a public furor.

That part about him saying he didn't realize the ramifications to AIG employees is nonsense. Of course he knew what these packages are and what was inserted. If he didn't it shows his incompetence to lead the Banking Committee.

The Washington Post reports that the Fed sat on the knowledge of who was receiving bonuses, but didn't inform the President. Well, that falls on both Geithner and President Obama who has failed to fill the hundreds of positions at Treasury to help Geithner administer the organization during the current economic crisis.

This is the gang that can't shoot straight, but they sure know how to tax everyone all while avoiding those taxes themselves.

UPDATE:
Michelle Malkin links. Thanks!

UPDATE:
Here's the text of Rangel's legislation. The bill's effective date means that payments received prior to December 31, 2008 are not affected, but any such qualifying payments made between January 1 and the date of passage would be hit with the 90% tax. This is needlessly complicated, and everyone would have been better served had the original TARP legislation been read through by the members and Dodd prevented from inserting the critical text allowing the bonuses to go forward with the blessing of Congress and the Administration via the Fed.

UPDATE:
Qualified compensation that will get whacked at the 90% level is defined as "TARP bonus." That means any individual for any taxable year, the receiving the lesser of the aggregate disqualified bonus payments received from covered TARP recipients during such taxable year, or the excess of-- the adjusted gross income of the taxpayer for such taxable year, over $250,000 ($125,000 in the case of a married individual filing a separate return).

TARP recipients are any person who receives after December 31, 2007, capital infusions under the Emergency Economic Stabilization Act of 2008 which, in the aggregate, exceed $5 billion, Freddie Mac and Fannie Mae, and any person who is a member of the same affiliated group or partnership who received the $5 billion in TARP funds.

Of course, lost in all this is the fact that the Treasury hasn't been able to track who got all that money, but there are hints of the large number of banks that would get hammered by it. It is probably one of the reasons that so many bank CEOs are rushing to get out of TARP - so as to avoid getting whacked by Congress wielding the confiscatory tax stick. They don't want to see their own compensation packages go up in smoke, because the government has decided to declare war on the banking industry.

Make no bones about this. The government is declaring war on the bankers with this move, which is unprecedented in history. They are singling out a single class of people who were lawfully entitled to compensation under their employment contracts and engaging in a massive tax grab all while ignoring the fact that their own members voted to allow precisely this kind of compensation package when first considering TARP.

This will further destabilize the markets and the banking system, and it will do little to encourage lending or for people to work with the government going forward since the government has shown that it can and will change the terms at will - without regard for the economic or social damage done.

GM Says It Doesn't Need $2 Billion From Gov't In March

The AP reports:

DETROIT – General Motors Corp.'s chief financial officer says the company will not need the $2 billion loan installment for March that it requested from the U.S. government in February.

CFO Ray Young said Thursday in an interview with The Associated Press that GM told the Obama administration it won't need the money so soon because its cost cuts are starting to take hold.

GM borrowed $13.4 billion from the government earlier this year. Last month, it said it would need up to an additional $16.6 billion to keep operating, including $2 billion in March and $2.6 billion in April.

Young would not say when the company will need more government loans or whether it would reduce its total financing request

This is good news and a sign that the troubled automaker is starting to get its house in order. GM is one of this nation's largest employers and its failure would have an absolutely catastrophic effect on the economy. For those who said they could not do what it looks exactly like they are doing, I can only say patience is a virtue. Cuts take time to trickle to the bottom line. Its not a magic wand, but a process that takes time to show results. We will see further results when the union makes similar concessions for GM like they just did for Ford.