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Wednesday, February 4, 2009

What's Up With U.S. Banks?

Last fall the Congress passed the $700 billion Troubled Asset Relief Program which helped troubled financial institutions. Frederick Cannon, a banking analyst, recently said, "Money is moving throughout the system, but there is increasing recognition that these institutions don't have enough capital to withstand the losses from all the crazy loans they have."

Something is wrong with the the bank bailout, or at least the terms of it. Banks that received TARP funds are helping the pharmeceutical company Pfizer buy Wyeth. As a writer for Online Journal pointed out, the buyout will not help the American people. 

Another good example is Citigroup paying $400 billion to have its name put on the New York Mets new ballpark. Bank of America is paying $140 billion to have its name on the NFL's Carolina Panther's stadium. Both Citigroup and BofA received $45 million in TARP funds. JPMorgan Chase & Co. spent $66 million to have its name on the Arizona's cardinal's ballpark. JPMorgan received $25 billion in TARP funds.

Rep. Dennis Kucinich (D-OH) called the banks' spending "frivolous," on a few days ago said he plans on holding hearings. 

Meanwhile, banks are still in trouble. Last Sunday, Obama said to NBC News, "some banks won't make it," but assured the American people there deposits would be safe. "The banks, because of mismanagement, because of huge risk-taking, are now in a very vulnerable position." Obama issued a warning to banks and financial institutions that "they've got to abide by certain conditions" if they received TARP funds.

Reportedly, Timothy Geitner, new Treasury Secretary for the Obama administration, is considering buying up troubled assets from banks. A BusinessWeek article reported the following:

Daniel Clifton, Washington policy analyst for Strategas Research Partners, says Treasury is considering starting the bank with $100 billion from TARP, then adding leverage from the Fed and the Federal Deposit Insurance Corp. so $1 trillion in funding is available to buy bad assets. Ultimately, he adds, Administration officials believe they could need up to $2 trillion.
Senator Charles Schumer (D-NY) criticized creating a "bad bank" to buy banks' troubled assets. He told CNBC the idea has two problems. "One is the cost – its usually expensive – and, second, if you have the bad bank where the government has to buy the assets at the price right now, you don’t know how to value them.”

Another idea reportedly being considered by the Obama administration is offering banks guarantees which would limit their losses on troubled assets. BusinessWeek characterized that option as a "thinly veiled nationalization of the worst banks."

Speaker of the House Nancy Pelosi, said, "If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization." She furthered said she didn't favor "total ownership." 

Economist Lena Komileva said the important part of a solution is to "get market structures working again and restart private capital flows."

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