Posts Tagged ‘bailout’

The Claw[backs]

Friday, July 8th, 2011

noosey-neckties.jpeg
(photo credit: mangpages)

It’s kind of an understatement to say that taxpayers were peeved when they ended up footing the bill for the government bailout of the “too big to fail” banks. So they may take some comfort in a new FDIC rule that will seriously punish the leaders of failed financial institutions. Among other things, it says that any executive responsible for the collapse of a major financial firm is subject to spooky-sounding “clawbacks.”

Clawbacks are the equivalent of making an executive return two years worth of their salary to the government if a government agency has to step in and handle the collapse. Big banks will also be required to have a plan in place before they go up in flames, to avoid the kind of sweeping support the government was forced to provide in 2008 and 2009.

That’s a lot of pressure on a relatively small number of people. What do you think – whose responsibility is it to keep a financial institution on the straight and narrow? Should employees lower on the corporate totem pole be punished as well?

What’s up with Greece?

Wednesday, June 22nd, 2011

Greece.jpeg
(photo credit: David Spender)

You’ve heard that there’s a little trouble brewing in the glittering blue southeast corner of Europe, right? If you haven’t, Greece is in the middle of a nasty thing called a debt crisis. Basically, they can’t pay their bills, they’re gasping for air, and they’re pulling at ropes thrown by their European Union friends. So…

What’s the big deal? Why not let Greece’s failed economic policies fail? Who cares?

Fortunately for Greece, lots of people care. European nations (and investors throughout the world) see the Greek debt crisis as an infection that could spread throughout the EU and cause serious damage. Because nations in the eurozone all share the same currency (the euro), an economic disaster in one country will drag down the value of the currency for everyone.

So why hasn’t the problem been solved yet?

This (unbelievably) is the short answer, and definitely leaves out some of the finer points of the problem:

>>> Other EU nations have already stepped up and injected more than $100 billion into the Greek economy as a kind of bailout, but it’s just not enough. The Greek government has to cut spending and raise taxes in order to qualify for more aid, but citizens (and their powerful government reps) aren’t exactly excited about losing services and a bigger chunk of their paychecks.

>>> The government is also required to privatize some of its assets, which means selling valuable things like ports and banks and water utilities to private companies to raise cash. This also is not so popular – residents like their beautiful Greek coastline!

>>> Finally, private creditors (people who are owed money by Greece) have to agree to voluntarily hold onto and buy up more Greek debt (like government bonds). This is a hard sell in any case, but because publicly traded companies are legally obligated to act in the best interest of their shareholders, it may be especially hard to convince them that buying low-return debt in a failing economy is good for anybody.

What’s going to happen now?

Well, pretty much everyone involved agrees that they need to maintain a stable eurozone and a strong currency. So European nations are likely to keep trying to fix the problem any way they can. We’re not wizards over here at TILE, so we can’t say whether it will work, not work, or kind of work.

We will say that Greece is probably a pretty fun place to go right now if you’re looking for adventure civil-unrest-style!

Philosophers Take On the Ethics of Big Banker Bonuses

Friday, February 18th, 2011

You may have an opinion about the compensation practices of Wall Street firms, but what would Aristotle do?

We had to look across the pond to get an answer, but the BBC has done a pretty bang-up job of using classic philosophy to talk about modern issues. And the comments below the story are just fantastic.

Aristotle aside, what do you think about the big bonuses? Does your opinion change after reading the article?

U.S. Becoming Less Trustworthy? TILE Two-Liners 1.10.11 >> 1.14.11

Monday, January 10th, 2011

MONDAY

  • Portugal promises to pay you a handsome 7% interest rate if you lend it some money by buying a bond. Of course, the country may go bankrupt trying to pay you back. (BBC News)

TUESDAY

  • Economic growth in China, U.S., France, and Japan may lead the way to a good year for the rest of the world. (The Wall Street Journal)

WEDNESDAY

  • Whew! Portugal doesn’t have to bribe bond buyers with handsome rates after all. European markets stop freaking out about a potential bailout. (The Washington Post)

THURSDAY

  • Mother nature shows interest in finance, dumps water on Australia. Flooding could cost the country up to 1% in economic growth this year! (BBC News)

FRIDAY

  • You’re not the only one who should be worrying about your credit score – because of rising debt, the U.S. may lose its sparkling AAA credit rating. (The Wall Street Journal)

Ireland’s Cuts Don’t Touch Corporations

Thursday, November 25th, 2010

Ireland is in pretty big financial trouble, and the government is looking everywhere for extra money. But it seems like it forgot to look at the super-low corporate tax rate.

  • Ireland is the next European country up for a bailout from its neighbors, but it will only receive the money if it manages to scrape together $20 billion on its own.
  • So far, the government has lowered the minimum wage and raised taxes on homeowners, but it hasn’t raised its famously low corporate tax rates.
  • The emerald nation attracts big multinational corporations because they benefit from these low tax rates. Corporations bring jobs and money, but many have found ways to funnel most of their profits outside of the country.

Facts & Figures

  • Facebook, Google, LinkedIn, and Pfizer all operate partially in Ireland
  • Google alone employs 1,500 Irish workers
  • Multinational corporations paid more than half of all corporate taxes last year

Best Quote

“People feel that on the one hand, corporations, including Irish banks, caused the crisis, and therefore the whole corporate sector should pay. On the other hand, because people are so nervous about the future, they know that the corporate tax is one of the factors that attracts foreign direct investment, and therefore it would be a delicate time to touch it.” – Paul Sweeney, Economic Advisor at the Irish Congress of Trade Unions

U.S. Taxpayers Actually Profit From TARP

Friday, October 22nd, 2010

The mere mention of TARP sends many people into grumble-mode, but the emergency measure to bail out large financial institutions has actually turned the government a profit.

  • The Troubled Asset Relief Program traded banks much-needed capital in exchange for partial government ownership.
  • Now that two-thirds of TARP recipients have paid the money back, the government has seen a profit of about 8.2%. That’s more than the return on any U.S. Treasury bond, high-yield savings account, money-market fund, or CD.
  • Despite the return on investment, the public is not happy about TARP. Several politicians have lost primary elections this year because they voted in favor of the program, and authorities say the return rate is misleading because it doesn’t take into account the other costs of the bailouts.

Facts & Figures

  • The government has earned about $25.2 billion so far on $309 billion in TARP investments.
  • The return rate on 30-year Treasury bonds averaged 4.1% during the last two years.
  • Over the same period of time, high-yield savings rates averaged 0.36% – 0.92%.

Best Quote

“From the perspective of the taxpayers getting their money back, TARP has been a great success. But there are other costs as the government made it possible for the banks to pay back TARP. Those costs can turn out to be larger, and their legacy could last longer.” – Todd Petzel, Chief Investment Officer at Offit Capital Advisors LLC

Why Greece’s Debt Is Our Problem

Wednesday, June 23rd, 2010
Will Europe’s shaky financial situation cross the pond to the U.S.?
  • Moody’s – a major credit rating agency – handed Greece an awful credit score on Monday, and Wall Street reacted with a distinct slump.
  • The low credit score means low confidence in Greece’s ability to dig out of its debt crisis. Even the bailout plan set out by Greece’s neighbors wasn’t enough to convince the analysts at Moody’s that things would turn around anytime soon.
  • The fact that the U.S. market reacted so directly to this news illustrates the strong link between the European and U.S. economies. Still, analysts predict that the U.S. economy will continue to grow despite this temporary setback.

Facts & Figures

  • The DJIA was down 20.18 points (-0.2%) by the end of Monday
  • At the same time, the value of Bank of America stock fell 1.22% and JPMorgan stock dropped 2%

Best Quote

“It was not a huge surprise that Moody’s is following suit. But it is another reminder of the negative news stream coming out of Europe.” – Win Thin, Currency Strategist, Brown Brothers Harriman

Bailing Out From The Bailout…

Friday, September 25th, 2009

Some banks are doing their best to free themselves of the regulatory requirements imposed on them to ensure the TARP bailout money is put to good use.

  • Early repayment of bailout funds may be a sign that the financial industry is recovering from last year’s crisis, but it’s not yet clear whether banks that repay will change any of their business practices.
  • These ten companies will no longer be subject to TARP-related oversight and restrictions by the government, giving them a potential competitive advantage over companies that have not repaid.
  • The U.S. Treasury began buying stakes in struggling financial institutions in October 2008, with the expectation that it would hold onto those investments for at least 3 years. But Congress recently forced the administration to allow some banks to exit the arrangement just eight months later.
  • The federal government will no longer have a direct stake in banks that repay, but it will continue owning warrants and, according to President Obama, will continue to closely monitor the business practices of all financial institutions.

Facts & Figures

  • Since October, the government has spent $199 billion on TARP funding for 600 different companies. The 10 companies now repaying the funds represent $68 billion of that total.
  • The big ten: J.P. Morgan, Goldman Sachs, Morgan Stanley, U.S. Bancorp, BB&T Corp., American Express Co., Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., and Northern Trust Corp.
  • TARP restrictions addressed: “executive pay, dividend increases, hiring certain foreign workers for U.S. jobs, and lavish spending on corporate jets and conferences, which fueled a public backlash.”

Best Quote

“These are challenging times, and that’s not going to change simply because we repaid TARP.” – Michael Cavanagh, CFO at J.P. Morgan

A Bailout is…

Friday, August 21st, 2009

A bailout is major financial support from a government to a failing business so that it doesn’t collapse and cause even greater harm to the economy as a whole. Usually the business will be subject to tighter government regulation as a result of accepting the financial support.

TARP is…

Friday, July 17th, 2009

TARP, which stands for the Troubled Asset Relief Program, is the program that started in 2008 through which the U.S. government has been buying assets and equity from struggling financial institutions to strengthen the stability of the financial sector and of the financial markets.