Check this article as

CNN is starting to talk fiscal conservative:

The new new banking model

Remember when banks just took in deposits and used that money to make loans? That's what the future of banking might look like.

NEW YORK (CNNMoney.com) -- It's not easy to make a buck in the banking business nowadays.

Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500) revealed last month that they lost billions in the latest quarter, as the U.S. economic climate worsened.

Weary of their abysmal results, attacks from shareholders and the watchful eye of regulators, banks are now thinking long and hard about how they do business.

Some industry analysts predict that more financial institutions will move back towards the traditional business of taking in deposits and using that money to make loans.

"It is back to basics," said Anton Schutz, president of Mendon Capital Advisors, a firm that invests in financial stocks. "Basic banking will prove very profitable."

While the migration back to traditional banking may seem sensible given the current economic climate, some banks, particularly the larger financial institutions, may do so almost out of necessity.

The securitization market is at a near standstill. So banks that originated loans and later packaged them together as securities to sell to investors are now having to hold the loans on their books. That has forced banks to be a bit more conservative.

But if banks keep more loans, they are also going to need more capital on hand in the future.

There have been calls from industry experts and policy groups like the Group of 30, a non-profit think tank chaired by former Federal Reserve governor Paul Volcker, for regulators to raise capital requirements for banks.

Under current rules, banks are required to keep their so-called Tier 1 capital ratio - a key measure of its ability to absorb losses - above 6%. Some analysts suspect the bar could be raised to 8%, given how desperately many of the nation's largest financial institutions are trying to hold onto capital in the current crisis.

However, some experts fear that a more cautious approach by banks will have consequences for borrowers.

Eric Hovde, chief executive of Hovde Capital Advisors LLC, a money-management firm in Washington that focuses on the financial services sector, anticipates that banks will continue to take a hard look at who they lend to attempt to compensate their risk in the future by charging a premium.

"Rates are going to go up across the board," he said. "If you are a subprime or even Alt-A type credit, you are not going to get credit unless it is at very usurious rates."

But Sam Golden, head of the Financial Industry Advisory Services Group at Alvarez & Marsal, who also served as the former ombudsman of the Office of the Comptroller of the Currency, said that the packaging and selling of loans by banks won't go away altogether since it helps spread out the risk for banks and also provides liquidity for the broader financial system.

"I think the overall model philosophically is not a bad model," he said. "But I think there will be in some case a permanent abandoning of crazy kinds of [investment] products."

Many are already betting that 2009 will be a pivotal year for the nation's banks. More banks are expected to disappear -- either through outright failure or by selling to a rival.

At the same time, there is a sense that Congress and the White House will make greater demands on banks after the government rescued pockets of the industry from collapse last year.

Industry groups like the American Bankers Association are hoping that regulators take a hard look at what they believe to be the drivers behind bank losses, particularly current accounting standards that require banks to mark the value of their assets to market prices.

But many suspect that lawmakers will, at some point, craft legislation that will levy more regulation on the industry.

There is also the fear that regulators could push some of the nation's largest financial institutions to break up into smaller pieces.

The sheer size of some of these companies placed the broader financial system in jeopardy more than once during the current crisis, and regulators had to make tough decisions on which companies were deemed too big to fail.

Some banks are already moving in this direction. Last month, Citigroup unveiled plans to split into two distinct entities, effectively bringing an end to its financial services "supermarket" model.

Others have argued that large financial institutions like Citigroup and peers such as JPMorgan Chase (JPM, Fortune 500) should be restricted from indulging in risky businesses like hedge funds and private equity.

In its report last month, the Group of 30 suggested just that, adding that regulators rein in big banks' proprietary trading business, or investments made with the firm's own money.

Should regulators push hard on shrinking the nation's big banks in the coming years, Citigroup and Bank of America would most certainly be among the leading candidates.

Credit cards gone wild: Shocking rate hikes

Dayton, Ohio

Isn't it funny how Dayton City Manager Rashad Young's budget recommendations had no mention of any cuts in his office or in the office of the city commissioners? Imagine that.

As we continue to see the horrible results of the Tennessee coal sludge spill, one would hope Ohio would rethink having a similar company in the state, especially one located close to rivers that provide water for much of Ohio's population.

How about a maximum wage law to tighten the reins of greed?

I don't think the "granny robber" is being taken seriously enough. Anyone who would rob a bank is capable of committing other crimes in the future.

Has anyone noticed that gas prices are slowly trickling up while the price of oil is still trickling down? Is this Obama change or just plain old price gouging?

Is Al Gore a groundhog pundit? Whenever it gets cold, he seems to go underground.

OP-ED CONTRIBUTORS
How to Repair a Broken Financial World

By MICHAEL LEWIS and DAVID EINHORN
Continued from "The End of the Financial World As We Know It"

Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.

Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”

Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.

THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”

In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.

This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.

If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.

We should begin by breaking the cycle of deteriorating housing values and resulting foreclosures. Many homeowners realize that it doesn’t make sense to make payments on a mortgage that exceeds the value of their house. As many as 20 million families face the decision of whether to make the payments or turn in the keys. Congress seems to have understood this problem, which is why last year it created a program under the Federal Housing Authority to issue homeowners new government loans based on the current appraised value of their homes.

And yet the program, called Hope Now, seems to have become one more excellent example of the unhappy political influence of Wall Street. As it now stands, banks must initiate any new loan; and they are loath to do so because it requires them to recognize an immediate loss. They prefer to “work with borrowers” through loan modifications and payment plans that present fewer accounting and earnings problems but fail to resolve and, thereby, prolong the underlying issues. It appears that the banking lobby also somehow inserted into the law the dubious requirement that troubled homeowners repay all home equity loans before qualifying. The result: very few loans will be issued through this program.

THIS could be fixed. Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans. To work, the program needs to be universal and should not require homeowners to file for bankruptcy.

There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.

End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.

Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.

The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.


Copyright 2009 The New York Times Company

Act now.

By Mitt Romney

What is Washington waiting for? The inauguration is less than five weeks away: At the rate we’ve been going, another 500,000 jobs will be lost by then. The downward spiral is deepening and accelerating: Congress and the president must act now.

American families have lost about $11 trillion in net worth as securities and home values have plummeted. This translates into about $400 billion less annual consumer spending, net of government safety-net funding. Exports won’t grow to make this up, as the dollar has strengthened with investors worldwide clamoring for its relative security. Investments won’t make up the gap either, as bank loans and secondary-market financing have shrunk and as fresh equity is virtually non-existent.  So this is surely the time for economic stimulus. But — and this is the crucial point — the government can’t just make itself bigger and more oppressive in the guise of stimulating the economy. That would make matters worse. Nor should we forget that fiscal stimulus is but one part of the solution. As Christina Romer, Barack Obama’s designee as chairperson of the Council of Economic Advisors concluded from her study of the Great Depression, bad monetary policy was its greatest cause and good monetary policy was its most effective cure. The Fed should continue to expand the money supply. And, it should confirm that it will not tolerate deflation — the pain of inflation pales in comparison.

That being said, a stimulus plan is needed without further delay, and there are some things that Republicans should insist on.

The first is that tax cuts are part of the solution. Harvard professor and economist Greg Mankiw points out that recent research confirms that tax cuts have a greater multiplier effect than new spending — more economic bang for the federal buck. We should lower tax rates for middle-income families and eliminate their tax on savings altogether — no tax on interest, dividends or capital gains. Let’s also align our corporate tax rate with those of competing nations. These actions will rapidly expand consumption and investment, and right now, time is of the essence.

On the spending front, infrastructure projects should be a high priority. But because infrastructure projects involve engineering, environmental studies, permitting and contracting, they can take a long time to actually boost the economy. Spending to refurbish and modernize our military equipment is urgently needed, and it has a more immediate impact on the economy. A great deal of our armament was damaged or lost in the Middle East, and the rest is long overdue for maintenance.

We should also invest to free us from our dependence on foreign oil, not by playing venture capitalist, but by funding basic research in renewables, material science, combustion, nuclear reprocessing, and the like. During the 2008 campaign, virtually every candidate agreed on the need for an “Apollo-like mission” to achieve energy independence. Now is the time to start.

Cities and states will clamor for government dollars. Like the Big Three automakers, states should first take advantage of the downturn to do some needed cost cutting and restructuring. State employee numbers, pensions, and health-insurance premium sharing — as well as duplicate and ineffective agencies and programs — should be high on the hit list. State budgets should be brought in line with those of the most efficient of their comparables. And the federal government should look to ease the burden of mandates on states, like Medicaid.

Republicans should also lay down a gauntlet: All new spending projects should be selected by the responsible federal agency according to published criteria, not by congresspersons and senators based upon favors and politics. Republicans should commit to vote no on any stimulus bill with earmarks that have not been voted upon by their entire body.

There is a danger that new spending and deficits will lead to runaway inflation, flight from the dollar, and another economic crisis. It is essential, therefore, that Congress and the president commit to reform entitlement spending as soon as the economy recovers. With the footing of our long term economy at risk, with entitlements already reaching 60 percent of federal spending and with baby boomers nearing retirement, this can be delayed no longer.

We must also be careful to avoid burdening the economy with excessive regulation in response to the need to reform regulatory oversight of the financial sector. Going too far could cripple the entire industry, further tightening the credit markets. And we should make it clear that Washington will not act to virtually impose unions on small business by eliminating the right of workers to vote by secret ballot in the workplace. This “card check” payback for the AFL-CIO’s support of the Democrats would devastate business formation and employment.

The Democrats may want to wait for Obama, but the country needs action now. Republicans can — and must — play an important role in shaping a stimulus bill that makes sense for America and lays a foundation for future prosperity and growth.

— Mitt Romney is the former governor of Massachusetts.

by George Will

WASHINGTON -- In 1966, the price of eggs rose to a level that President Lyndon Johnson judged, God knows how, was too high. There were two culprits -- supply and demand -- and Johnson's agriculture secretary told him there was not much that could be done. LBJ, however, was a can-do fellow who directed the U.S. surgeon general to dampen demand by warning the nation about the hazards of cholesterol in eggs.Johnson, the last president with a direct political connection to Franklin Roosevelt, was picked by FDR in 1935 to be Texas director of the New Deal's National Youth Administration. Two years later, Johnson came to Congress, a rung on the ladder that led to glory as Egg Czar. Today, with Washington experiencing a Roosevelt revival, Johnson's spirit, too, goes marching on as the federal government permeates the economy with politics.

Or not. In an interview with Business Week, Rep. Barney Frank, the effervescent Massachusetts Democrat who chairs the Financial Services Committee, was asked, concerning the auto industry, "How do you make sure the government doesn't meddle too deeply in day-to-day operations and bring politics -- like a push for green cars -- into the equation?" Frank replied: "Oh, well, a push for green cars is very much a part of what we're involved in. We don't think that's politics." So, when the government, its 10 thumbs stuck deep in the economy, uses its power to compel an industry to pursue the objectives of the political party that controls both of the government's political branches, that is not politics.

Business Week: "Should GM acquire Chrysler?" Frank: "I'm not competent to say." Frank's humility is selective: He obviously thinks he is competent to say what kind of cars should be made.

Business Week: "Does Congress realize how few hybrids have been sold, as it pushes Detroit to make them, and will Congress give consumers greater incentives to buy these cars?" Frank: Those who are "blaming the auto companies forget to blame somebody else -- the consumers. In the recorded history of America, no one was ever forced at gunpoint to buy a Hummer. But we do believe that the combination of genuine concern about global warming and energy efficiency means people are now ready to buy these cars." Consumers are such a disappointment to Congress. But what Congress really believes is that people are not ready to buy those cars at a price that reflects the costs of making them. Why else has it voted tax subsidies for buyers?

Forty years ago, Vietnam was a disaster and the Great Society was a disappointment as Johnson limped back to Texas. Today, there is more Johnsonian confidence in government's competence than at any time since Johnson's policies shattered such confidence. The resurgence of confidence began under today's Texan president.

The 1996 Republican platform said: "The federal government has no constitutional authority to be involved in school curricula. ... That is why we will abolish the Department of Education (and) end federal meddling in our schools." One year ago, the Department of Education announced: "U.S. Secretary of Education Margaret Spellings today honored President Lyndon Baines Johnson in a ceremony officially renaming the U.S. Department of Education Building ... as the Lyndon Baines Johnson Department of Education Building."

The domestic achievement for which George W. Bush will be most remembered, the 2001 No Child Left Behind law, was the seventh reauthorization of LBJ's 1965 Elementary and Secondary Education Act, which brought the federal government heavily into primary and secondary education. NCLB requires states to define "proficiency" in reading and math, and achieve 100 percent proficiency by 2014.

Frederick M. Hess, director of education policies studies at the American Enterprise Institute, notes that unless the "proficiency" standards are risible, the goal is delusional.

It is ironic, Hess writes, that 50 states establishing divergent standards -- the decentralized approach Republicans demanded -- have sparked demands for centralization, in the form of national standards, a decade after congressional Republicans opposed President Bill Clinton's plan for voluntary national standards.

Furthermore, Hess notes, there has been striking dissonance between Republican resistance to race-conscious government policies, and NCLB "requiring states to identify every student by race and then report test scores -- and impose sanctions -- on that basis." The Johnsonian attributes of NCLB, which Hess says include "Great Society-style ambition and race-conscious rhetoric," suggest that the Egg Czar, who also was the first National School Superintendent, would feel right at home in a Washington where he could be Automotive Engineer in Chief.

In the United States, consumer spending makes up just more than 70 percent of gross domestic product, which measures a nation's economy. The U.S. savings rate is the lowest in the world. Here's a look at how U.S. spending and savings compare with other large economies.

 New Bailout Plan

as old was abandoned

by Synnove Bakke, Conservative Pundit

UPDATE 12/19

Bush made a Statement today, Dec 19th, 2008. He is now  opposed to the plan to
have an orderly bankruptcy. His economic advisers are suggesting that it would be devastating to the American economy to let the Auto makers fail.  Details will follow as soon as yet another bailout plan gets drawn.

UPDATE 12/18

by Synnove Bakke, Conservative Pundit

Update on Auto Bailout Plan

by Synnove Bakke, Conservative Pundit

12/15/08