Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (30712)	12/26/2008 5:44:08 PM
From: DuckTapeSunroof	Read Replies (1) \| Respond to of 71588

AIG Now Fed's Vehicle for Buying Toxic Assets by: Michael Steinberg December 26, 2008 \| about stocks: AIG seekingalpha.com The Washington Post (from Bloomberg News) "With Fed's Help, AIG Unloads $16 Billion in Credit Default Swaps" reports that American International Group (AIG) retired another $16B face value of credit default swaps for $6.7B by purchasing the underlying securities and canceling the contracts. The insured (counterparties) were able to keep the more than $9B in collateral that AIG posted. The counterparties were taken out at par. So far, the Fed’s Maiden Lane III special purchase fund has purchased $62.1B face value of CDOs from AIG’s counterparties. The Fed has committed to purchase up to $70B face value of CDOs from AIG’s counterparties at roughly 50% of par. Each time the Fed is allowing the counterparties to keep all collateral. Why has the Fed completely removed the risk of AIG as a counterparty in CDS transactions? Perhaps the Fed views moral hazard as a foreward-looking constraint and AIG is just trying to unwind past regrettable activities. More likely the Fed is viewing AIG as a conduit to funnel capital into favored financial institutions. By forcing counterparties to sell the underlying CDO securities in order to receive full recovery, the Fed is liquidating toxic assets and preventing pure speculators from participating. But by paying close to par, when posted collateral is included, the benefit of price discovery is missing. AIG told shareholders that the Fed would negotiate the CDO purchases on AIG’s behalf and AIG’s participation in any price appreciation would be limited. The implication was that the Fed would use its strength to be an advocate for AIG. Quite the opposite turned out to be true. Instead the Fed used its strength to force a weakened AIG to make whole its stronger counter parties. Let’s compare AIG’s “loss mitigation” on credit insurance with the monolines. Ambac (ABK) and MBIA (MBI) and others have commuted some of worst CDS and continue to negotiate the remainder. The transactions were always under par and the counterparties always retained the underlying CDOs. Collateral posted was always included as part of the price. The monolines still retained the right to recover their losses from the mortgage originators. The key difference is that negotiations led by New York Insurance Superintendent Eric R. Dinallo always held out the monolines’ solvency and the possibility of rehabilitation (receivership) as a risk. Counterparties had to consider that some payment was better than no payment. The New York Insurance Superintendent clearly strengthened Ambac and MBIA in the negotiations to commute CDO policies, while the Fed’s efforts on AIG’s behalf are questionable. If the Fed had AIG’s best interest at heart, they would have simply reinsured AIG for a fee. Instead, the Fed is contriving one way after another to profit from and execute policy objectives through AIG. AIG has become the Fed’s Fannie Mae (FNM) and Freddie Mac (FRE). The Fed keeps pushing AIG to the brink. If they go too far, the Fed will lose its 79.9% investment, and might not even get paid back. As pure speculation, I think that the government’s relationship with AIG will change under President Obama. The Fed and Treasury created a multitude of opaque programs which on the surface appear to follow the free market mantra of President Bush. In January, true agendas will no longer have to be hidden and strengthening AIG, Fannie and Freddie as independent companies and large employers could be objectives. All three need to be viable, publicly traded stocks as an incentive to keep their best employees. While Paulson and Bernanke spoke of public mission superseding shareholder benefits, I believe that Obama understands that is not a viable path forward. Disclosure: Author is long AIG, ABK, MBI, FNM and FRE.

To: TimF who wrote (30712)	12/27/2008 10:28:15 AM
From: Peter Dierks	Read Replies (3) \| Respond to of 71588

Defense Spending Would Be Great Stimulus All three service branches are in need of upgrade and repair. By MARTIN FELDSTEIN The Department of Defense is preparing budget cuts in response to the decline in national income. The DOD budgeteers and their counterparts in the White House Office of Management and Budget apparently reason that a smaller GDP requires belt-tightening by everyone. That logic is exactly backwards. As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer. Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting. That's why the Obama team will propose a package of about $300 billion a year in additional federal government outlays and grants to states and local governments. A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community. The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern. For the military, the increased spending will require an expanded supplemental budget for 2009 and an increased budget for 2010. A 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. A 5% rise in spending on operations and maintenance would add an additional $10 billion. That spending could create about 300,000 additional jobs. And raising the military's annual recruitment goal by 15% would provide jobs for an additional 30,000 young men and women in the first year. An important challenge for those who are designing the overall stimulus package is to avoid wasteful spending. One way to achieve that is to do things during the period of the spending surge that must eventually be done anyway. It is better to do them now when there is excess capacity in the economy than to wait and do them later. Replacing the supplies that have been depleted by the military activity in Iraq and Afghanistan is a good example of something that might be postponed but that should instead be done quickly. The same is true for replacing the military equipment that has been subject to excessive wear and tear. More generally, replacement schedules for vehicles and other equipment should be accelerated to do more during the next two years than would otherwise be economically efficient. Industry experts and DOD officials confirm that military suppliers have substantial unused capacity with which to produce additional supplies and equipment. Even those production lines that are currently at full capacity can be greatly expanded by going from a single shift to a two-shift production schedule. With industrial production in the economy as a whole down sharply, there is no shortage of potential employees who can produce supplies and equipment. Military procurement has the further advantage that almost all of the equipment and supplies that the military buys is made in the United States, creating demand and jobs here at home. Increased military spending should involve more than just accelerated replacement schedules. Each of the military services can identify new equipment and additional quantities of existing equipment that can improve our fighting ability in Afghanistan and our ability to protect our military forces while they are in combat. Military planners must also look ahead to the missions that each of the services may be called upon to do in the future. Additional funding would allow the Air Force to increase the production of fighter planes and transport aircraft without any delays. The Army could accelerate its combat modernization program. The Navy could build additional ships to deal with its increased responsibilities in protecting coastal shipping and in countering terrorism. And all three services have significant infrastructure needs. Although some activities like ship building cannot be completed in the two year stimulus period, the major part of the expenditures can be brought forward in time by acquiring components and materials quickly and holding them in inventory until they are needed in the ship building process. Such a departure from just-in-time inventory management would be wasteful under normal conditions, but makes economic sense when there is temporary excess capacity. Now is also a good time for the military to increase recruiting and training. Because of the current very high and rising unemployment rates among young men and women, it would make sense to depart from the military's traditional enlistment rules and bring in recruits for a short, two-year period of training followed by a return to the civilian economy. As a minimum this would provide education in a variety of technical skills -- electronics, equipment maintenance, computer programming, nuclear facility operations, etc. -- that would lead to better civilian careers for this group. It would also provide a larger reserve force that could be called upon if needed by the military in the future. The budgets for homeland security, for intelligence activities, and for the FBI have increased substantially during the past decade. The greater terrorist threat fully justifies these additional funds. The current two-year stimulus period provides an opportunity for additional temporary spending increases with high payoffs. Investments in port security would reduce a major homeland vulnerability. Expanding the government's language training programs for new intelligence community recruits would provide more translators who can monitor the terrorist communications that we are able to intercept. Additional infrastructure for the FBI would remove an important constraint on the number of new FBI agents. The Obama team's goal of sending a stimulus package to Congress before the end of January may not leave enough time to work out the details of expanded military and intelligence budgets. If so, the stimulus plan should ask the Congress to provide a total of at least $30 billion a year of increased outlays in these budget categories. A substantial short-term rise in spending on defense and intelligence would both stimulate our economy and strengthen our nation's security. Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors. online.wsj.com

To: TimF who wrote (30712)	2/23/2009 9:30:35 AM
From: Peter Dierks	Read Replies (1) \| Respond to of 71588

How the GOP Should Approach TARP 2.0 Obama is not instinctively wary of government FEBRUARY 23, 2009 By ED GILLESPIE As the administration of George W. Bush was developing the $700 billion Troubled Asset Relief Program (TARP) last fall, the perils of moral hazard and government control over our nation's financial sector were well understood. Like the president himself, I was loath to see a massive government intervention in the financial markets. But I also heard the president's top economic advisers tell him that a failure to act decisively could plunge us into another Great Depression. As the world awaits the details of the Obama administration's version of TARP, two things have changed since last fall: First, we're not facing the same massive, day-to-day market volatility and frozen credit markets that were the context of the original TARP decision. Second, our new president doesn't have the same instinctual resistance to government intervention as his predecessor. Consequently, the next iteration of TARP is likely to be much more far-reaching. Democrats appear poised to impose many intrusive conditions on our financial institutions. This will present Republicans in Congress with a far more difficult debate than they faced with the stimulus package earlier this month. Republicans benefited in the stimulus debate from offering an alternative approach to creating jobs, with a focus on lower taxes for small business owners, and from ridiculing outrageous pork-barrel spending. Critiquing an expanded TARP and providing a positive alternative will pose a much greater challenge. An early indicator can be found in the stimulus bill just passed, which included limits on executive compensation that are much more stringent and broadly applied than anything even Mr. Obama put forward. These provisions are so heavy-handed they are likely to have perverse effects in the marketplace, driving away the talented traders necessary to restore TARP-funded firms to prosperity and eventually repay the federal government. In fact, the conditions might even drive talent from American firms to foreign firms not eligible for TARP money. Unfortunately, Republicans will realize that there's not much political gain to be had opposing legislation over stringent executive compensation limits. And that may only be the beginning. You can just hear House Financial Services Committee Chairman Barney Frank (who is currently under investigation for tax fraud) chastising financial companies for the scarcity of women in their executive ranks: Surely these firms can improve the gender balance by five percentage points over the next three years? And to help encourage them to meet that goal, maybe these firms should be penalized a premium on the interest due on their TARP funds if they don't. Nor is it difficult to imagine the Senate Banking Chairman Chris Dodd (with his V.I.P. loan problems) bemoaning the lack of alternative-fuel vehicles in a TARP recipient's fleet. A mandate to purchase more environmentally friendly cars would not only help stem climate change, he might say, but would help auto companies meet the strangling requirements imposed by the California emissions standard the Obama administration appears poised to let go into effect. The grave threat of the next TARP is that it will set in motion a downward spiral, beginning with government-imposed conditions diminishing corporate profitability, which in turn could necessitate another injection of taxpayer money, along with further government conditions. This, on top of the vast sums of nonstimulative spending just enacted, will be a drag on economic growth. It's a slippery slope that Republicans must oppose from the outset. If unable to stop this threat, Republicans can work toward two goals. First, add workable provisions that allow financial institutions benefiting from TARP funds to work themselves off the government's ledgers -- and out from under any political conditions imposed on them over Republican objections. Second, we need to insist that any conditions imposed on financial institutions are limited to only those companies benefiting from TARP funds. The original rationale for TARP was to prevent the giant oaks of America's financial forest from bursting aflame and burning the whole forest to the ground. Now the Obama administration and its Capitol Hill allies appear set to impose conditions that will amount to a deadly infestation that kills those oaks slowly over time. Republicans need to fight for the restraint that will allow healthy new trees to sprout through the decay of those dead oaks. Mr. Gillespie served as counselor to President George W. Bush and was chairman of the Republican National Committee from 2003-2004. online.wsj.com