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Friday, November 14, 2008

Credit Crunch Roundup — November 14, 2008

Items of Interest:

David Brooks / NY Times:
Bailout to Nowhere -- Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford...

related:
Daniel Gross / Slate: The Big Three Are a National Disgrace, But...
Jonathan Cohn / New Republic: Why the Auto Industry Needs to Be Rescued
Editorial / Washington Post: There Should Be No Free Lunch with GM -

discussion
:
Damian P. / Daimnation!: “A LEMON OF A BAILOUT”
Jennifer Rubin / Commentary: You Mean He Thinks Government Knows Best?
Bart Motes / The Huffington Post: Give GM real help, not guilt-driven charity
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AP / NY Times:
110 Banks Have Asked for $220B Under Bailout Plan -- At least 110 banks have requested about $220 billion from the Treasury Department's rescue fund, and many more are expected to have submitted applications before Friday's deadline.

The figures, from banks' own statements and analyst reports, indicate the requests are closing in on the $250 billion the Treasury set aside from the $700 billion fund to purchase stock in banks.

Analysts at Keefe, Bruyette & Woods estimated that 62 banks have received full or preliminary approval from the Treasury for $173 billion from the Troubled Asset Relief Program. The government said Monday that American International Group Inc. also would receive $40 billion from the program...
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Reuters:
FDIC, U.S. Treasury clash on anti-foreclosure plan -- A top U.S. banking regulator unveiled a plan on Friday to prevent about 1.5 million foreclosures, breaking ranks with the Bush administration by demanding bailout funds be diverted from banks to consumers.

The Federal Deposit Insurance Corp said the plan would modify millions of delinquent mortgages and the government would reward participating lenders by sharing the cost of defaults on restructured loans.

The dispute over housing policy during the administration's final weeks spilled into the public as a the President George W. Bush administration renewed its opposition to using money from the $700 billion bailout fund to support such a foreclosure-prevention program.

"The FDIC proposal at the end of the day is a spending proposal," Treasury Interim Assistant Secretary Neel Kashkari told a Congressional hearing on Friday...
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Zachary A. Goldfarb / Washington Post:
Aid to Fannie, Freddie May Top Expectations -- The first of the Bush administration's major financial takeovers, the seizure of Fannie Mae and Freddie Mac, is poised to get more expensive and some analysts are warning that it may ultimately cost more than the government has suggested.

Mounting troubles in the financial and housing markets have further undermined the health of the companies in the months since the government seized them in September, making it likely the Treasury will be required to pump billions of dollars into the mortgage-finance giants.

Though not a cent has been spent, some analysts are warning the tab could exceed the $200 billion that the government set aside for capital infusions into the two companies...
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Wall Street Journal:
Treasury Draws Fire for Shift in Rescue -- Lawmakers sharply criticized the Treasury Department on Thursday for saying in recent weeks it intended to buy distressed assets despite having already decided to move away from the concept.

The complaints from Capitol Hill came a day after Treasury announced it was abandoning the plan to buy illiquid assets to unfreeze credit markets. Instead, Treasury Secretary Henry Paulson said he intends to focus on investing Treasury funds directly into banks and other financial institutions, and on unclogging markets that fund consumer debt.

The move renders moot the plan to purchase troubled assets, which was conceived during two weeks of negotiations between Congress and Treasury in September...
discussion:
Andrew Jeffrey / Minyanville: Treasury Defends Bailout Bait-and-Switch
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Felix Salmon / Seeking Alpha:
Why AIG Was in the CDS Business -- The fact is that AIG didn't use "shareholders' and policyholders' cash to write protection against debt instruments". If it wanted to buy bonds, then it would have needed to come up with some cash to do so. But writing protection, by contrast, was a way of receiving money, not spending it.

When AIG wrote protection on CDOs and the like, it got insurance premiums in return, and considered those premiums to essentially be free money, since (according to AIG's own models, and those of the ratings agencies) the chances of those CDOs defaulting were essentially zero.

Now, of course, it's clear that those insurance contracts constitute an enormous contingent liability for AIG -- one so big that without government help the company would have gone bust...
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Minyanville:
Shantytowns Spring Up in Major US Cities -- Rising unemployment and widespread foreclosures have left many homeless and living in tents and makeshift huts in cities around the nation.

It’s a scene not seen since the “Hoovervilles” of the Great Depression. . .
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Paul Kedrosky / Infectious Greed:
State Default Watch: Heatmap of Budget Deficits -- Many U.S. states are set to wrong-headedly enact pro-cyclical policies –- spending cuts and tax increases -– as we head deeper into the current recession. That will almost certainly make things worse, forcing the most exposed states to the edge of default, and perhaps beyond. Only then, sadly, will we see the overdue hard choices being made about what we can and should pay for.

With the preceding in mind, here is a heat map of U.S. states compared by current deficits as a percentage of FY 2009 general revenue. California, Arizona, Nevada, and Florida are in the top five ...

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