Report: Treasury Misled Public With TARP

The Federal Reserve Chairman Also Misled the Public. The Treasury and Fed Work in Tandem. See a Pattern? A Problem?

Despite critics expressing alarm about the Fed’s immense power during the financial crisis, Ben Bernanke still insists that the Fed should be put in charge of regulating the nation’s biggest financial institutions.

Yes, the Fed Chairman actually favors this extraordinary concentration of power, despite his total inability to thwart, or even foresee, the Great Recession. Not only didn't Bernanke foresee the economic storm that was on the horizon, he actually said that things were quite rosy at US banks.

"Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.” - Fed Chairman Ben Bernanke, 2006

“Importantly, we see no serious broader spillover to banks or thift institutions from problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits” - Ben Bernanke, May 17, 2007

Clearly, Bernanke saw no reason for regulation or oversight. Everything was just fine — until it wasn't.

Perhaps realizing the Fed's failure to see what many others could, or merely bowing to political pressure, Bernanke says responsibility for monitoring broader risks in the financial system should go to a council of regulators.

But Bernanke says the Fed would be merely one of several players on the new council, and endorses the Obama administration’s proposal to have the Treasury lead that council.

How convenient, since the Treasury and the Fed are joined at the hip like Siamese twins engineered by Dr. Frankenstein.

Ultimately, the Treasury is no better than the Fed and the two work together hand in glove.

A new report on the bank bailouts says the Treasury misled the public and was the benefactor of the mega banks.

Neil Barofsky, the special inspector general who oversees the government’s bailout of the banking system, says the Treasury may have unfairly disbursed billions to the biggest banks under the Troubled Assets Relief Program.

Nine of Wall Street’s largest players were given billions of dollars of taxpayer money by the Treasury through the TARP.

Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

On October 14, 2008, Treasury Secretary Hank Paulson said that the banks were “healthy” and accepted the money for “the good of the U.S. economy,” so that they could increase lending to consumers and businesses.

In truth, regulators were concerned about the health of several banks that received that first bailout, the inspector general contends.

On October 5th, the day his new report was released, Barofsky discussed Paulson's bogus claim, and the TARP, with CNBC.

"As we disclose and describe in our audit, this just wasn't an accurate statement," Barofsky told CNBC. "The Treasury and the Federal Reserve had serious concerns about the health of some of these institutions. They didn't really do a test, they didn't really review, there really wasn't a criteria — when they made the decision to give this $125 billion — about the relative health of these institutions. And as we note in our report, those statements raised expectations and it hurt Treasury's credibility."

Barofsky believes that there is an important lesson to be leaned from all of this.

"It's very important, when we look back, to learn these lessons. And I think that one of the key ones that we learned from this is that transparency, being honest with the American people, it's important — not just for the sake of transparency, but because of the long term, unintended, negative consequences that come when we're not honest, when we're not forthcoming. The bottom line is that the American people saw very shortly thereafter that these were not all healthy institutions, and lending didn't increase. So that hurts the credibility of the program... Even in times of crisis — particularly in times of crisis — let's make sure when we're making public statements that they're accurate and that they're truthful."

Citigroup, JP Morgan Chase, Bank if America, and Wells Fargo were among the nine financial giants to receive billions in taxpayer assistance.

When asked by CNBC if he thought it was inevitable that taxpayers would wind up losing some of the TARP money, Barofsky replied, "I think it's extremely unlikely that we're going to have a dollar-for-dollar return. And I don't think the program, as designed, is made to have a dollar-for-dollar return."

So, forced to prop up banks deemed "too big too fail," the taxpayers have been burned once again.

It's said that sunlight is the greatest disinfectant. Both the Treasury and the Fed — especially — need lots of disinfectant.

Let the sun shine.

Shadow Inventory Will Impede Housing Recovery

"The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales. We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary." - Amherst Securities Group

In a September 23 report, Amherst Securities estimates that 7 million housing units are destined to default, and then be seized by lenders. This is a "shadow inventory" that hasn't yet hit the market, but soon will.

That number represents well over a year's worth of home sales. Amherst believes that this housing overhang is the single biggest obstacle to a housing recovery.

To put that into perspective, existing home sales total around 5.2 million units — so the overhang is approximately 1.35X one year of existing home sales.

This shadow inventory has grown measurably in recent years; there were just 1.27 million such units in 2005.

Based on the current pace of existing home sales, Amherst analysts say it would take 1.35 years sell these properties — assuming no other homes are on the market. Naturally, that is a highly unlikely scenario.

Amherst noted that efforts to rework mortgages and avoid foreclosure will not make much of a difference, with perhaps a reduction of 1 million from this shadow inventory. Amherst also noted that "many of these borrowers would default later, if they remain in a negative equity position."

For that estimate to be accurate, Amherst concluded that those 1 million modifications would have to be more successful than historical modifications. That makes such an outcome seem optimistic, if not unlikely.

Amherst is a securities firm specializing in trading and advising investors on home-loan debt.

Earlier this year, Barclays' analysts wrote that once it starts, the housing recovery will be dulled by a “pent- up supply” of homes from owners who have put off sales during the slump. That inventory will further dilute an already weak market.

Banks are loathe to acknowledge this large shadow inventory, for fear of what it wold do to their already troubled balance sheets. However, they can't keep this supply hidden indefinitely. At some point it will have to be acknowledged, and the supply will once again begin depressing home prices even further.

According to the Mortgage Bankers Association (MBA) Quarterly Delinquency Survey, about 55.9 million homes in the United States have a mortgage. At the end of Q2 2009, a staggering 13.54% of mortgages in the MBA survey were in some stage of delinquency.

That suggest that some 7 million are already in the delinquency pipeline and will eventually liquidate.

Unemployment Benefits Running Out for Huge Numbers of Desperate Americans

In ordinary times, unemployed workers who've lost their jobs can draw unemployment benefits for up to 26 weeks.

But Congress enacted emergency extensions during this recession, allowing laid-off workers in nearly half the states to collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s.

However, in the other 26 states, the unemployed can only collect for a period ranging from 46 to 72 weeks.

Unemployment insurance, with payments averaging just over $300 per week, is now a lifeline for nine million Americans. But that lifeline is about to run out for many of them.

That's because 1.5 million people nationwide are expected to reach the maximum threshold for unemployment insurance benefits by the end of the year, according to the National Employment Law Project (NELP).

Perhaps they shouldn't worry; Ben Bernanke says the recession is over.

Despite the Fed Chairman's upbeat attitude, U-6 unemployment - the true jobless rate - now stands at a whopping 17%.

Those who don't find work before their benefits run out will be facing a crisis.

According to Lawrence Katz, a labor economist at Harvard, for every job that becomes available, about six people are looking. That creates an enormous amount of competition and leaves many out of luck.

Dr. Katz says that when people exhaust unemployment and health insurance, many of them end up applying for disability benefits, which become a large, unending drain on the Treasury.

So, regardless of whether or not benefits are extended by Congress — yet again — the cost to the already burdened Treasury will be hefty.

Housing Collapse Turning Homeowners Into Reluctant Landlords

Despite mainstream media reports about a recovery in the housing market, the problem is far from over and is in fact getting worse.

More than 15 million homes are mortgaged for more than their value, according to an August report by real estate research firm First American CoreLogic.

If that doesn't seem like an especially large number, consider this; about one in three homes with a mortgage fall into this category.

That means that tens of millions of Americans are now "upside down," with mortgages that exceed the value of their homes.

As a result, many have become reluctant landlords, renting homes they cannot afford to sell. Some homeowners are even renting out rooms in their homes to help cover costs.

Since 2007 about 2.5 million homes have been converted into rentals, according to an analysis by Foresight Analytics. This accounts for about 85 percent of the increase in rental homes.

The rate of home ownership hit a record high in 2004 but has since decreased by about two percent, according to Census Bureau data. It's the lowest homeownership rate since 2000.

Home prices nationally are down 31 percent from their 2006 highs, according to the S&P/Case-Shiller Home Price Index.

The problem is a glut of available housing.

According to Matthew Anderson, a partner at Foresight Analytics, there was a surplus of five million housing units produced between 2001 and 2008 compared to demand. That resulted in too many homes built for too few people.

At present, there are about 4.4 million empty homes for rent, census figures show. The vacancy rate is among the highest ever recorded, according to census data that goes back to 1956.

According to Anderson's analysis, from 2005 to June 30 of this year, 3.2 million homes were converted into rentals.

At the end of 2004, there were about 36.9 million homes either occupied by tenants or empty and available for rent, census figures show. As of June 30, that number increased nearly 11 percent to 40.9 million units. Of that four-million home increase, 3.2 million were conversions into rentals.

The 4.4 million empty homes are creating a glut of rentals, forcing rent prices down, and putting pressure on apartment building owners who now have to compete with single-family homes.

And unless, or until, those homes are sold or rented. they will also continue putting downward pressure on an already depressed national housing market.

Ranks of Jobless Swelling, True Unemployment Reaches 17%

The September jobs report was released on Friday, and it was bleak.

Last month, another 201,000 jobs were lost and the "official" unemployment rate rose from 9.7% to 9.8%.

However, the so-called U-6 employment measure — the figure that includes jobless Americans who have become discouraged and those working part-time but desire full-time jobs — has reached 17%, or a total of 26.5 million Americans.

The average workweek for production and nonsupervisory workers has fallen back to 33 hours, a record low. Those workers will see their hours increase before new jobs are created.

The number of long-term unemployed — workers who have gone jobless for 27 weeks or more rose — by 450,000 to 5.4 million. In September, 35.6 percent of unemployed persons had been jobless for 27 weeks or more.

In the 21 months since the downturn began, there has been a net loss of 7.6 million jobs, wiping out all job creation this decade. This will be remembered as the lost decade of employment.

Advance Realty and Rutgers produced an issue paper last month, America’s New Post-Recession Employment Arithmetic, which noted the following:

As of August 2009, the nation had 1.3 million (1,256,000) fewer private sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

The U.S. Bureau of Labor Statistics projects the nation’s labor force to grow by approximately 1.3 million persons per year between 2006 and 2016. Therefore, the nation has to add 1.3 million total jobs per year— consisting of private-sector and government payroll employment as well as contract (nonpayroll) employment—simply to accommodate a growing labor force [as consequence of population growth].

Given conservative estimates of further employment declines (even if the recession ends in the third quarter of 2009) and the continued increase in the labor force, the nation’s employment deficit could approach 9.4 million private-sector jobs by December 2009.

Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the jobs deficit!

* Addendum: The Bureau of Labor Statistics later made the largest benchmark revision in at least the past dozen years. From March 2008 to March 2009, the BLS overestimated payroll employment by some 824,000 jobs, or nearly 70,000 jobs per month.

We now know that the government has been systematically underestimating job losses for the last three years. So as bad as the most recent employment report was, in reality it was even worse. The revision will not officially be incorporated into the job figures until February, and could be revised yet again.

U.S.S. Entitlement a Sinking Ship

According to our own government, we're just a decade away from the next two fiscal mega-crises

"We suffer from a fiscal cancer and if we don't treat it, it could have catastrophic consequences for our country. This is not only an issue of fiscal irresponsibility; it's an issue of immorality."— Former US Comptroller General, David Walker

In May, the trustees of the Social Security and Medicare programs announced some rather bleak news: the Medicare fund is expected to run out of money in 2017, two years sooner than projected last year. And the Social Security trust fund will be exhausted in 2037, four years earlier than previously predicted.

Social Security is the main source of income for more than half of older Americans.

Spending on the two entitlement programs totaled more than $1.4 trillion last year, accounting for more than one-third of the federal budget. Medicare-Medicaid cost $739 billion and Social Security accounted for $700 billion of federal spending.

And those enormous expenditures will soon exceed revenues.

Due to high levels of national unemployment, the government is collecting less of the payroll taxes that finance Medicare and Social Security.

Compounding the problem, unemployed seniors are now choosing to claim early retirement benefits, which will force Social Security to pay out more in benefits than it collects in taxes for the next two years. That hasn't happened in a quarter century.

Applications for retirement benefits are up are 23 percent from last year, while disability claims have risen by about 20 percent. That will result in deficits of $10 billion in 2010 and $9 billion in 2011, all of which will be tacked on to already bloated federal deficits.

Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.

According to the Social Security Administration, applications for disability benefits—including Supplemental Security Income—are on pace to reach 3 million in the budget year that ends this month and even more are expected next year. In a typical year, about 2.5 million people apply for disability benefits.

Social Security is projected to begin temporarily generating surpluses again in 2012 before permanently returning to deficits in 2016 — unless Congress acts to shore up the program again as it did in the early 1980s. That will ultimately result in higher taxes and lower benefits.

A resumption of economic growth is not expected to close the financing gap. The trustees’ bleak projections already assume that the economy will begin to recover late this year. However, future economic growth may be limited and any optimistic projections are highly speculative.

The Social Security trust fund — reflecting a $2.5 trillion surplus that Uncle Sam borrowed, spent and promised to pay back — will be tapped out by 2037. Barring any changes, that's the point after which the system would only be able to pay out 78% of benefits promised to future retirees.

The trust fund was callously raided by Congress over the years as it spent future retirees money on other government programs. The fund is now represented by government bonds, or IOUs, that will have to be repaid as Social Security surpluses are permanently exhausted.

The government already owes trillions in bond obligations to public and private investors, including foreign governments. You could say that Uncle Sam's obligations are ocean deep.

And Medicare presents its own pressing, and more immediate, problems.

Last year was the first year in which Medicare collected less in taxes and premiums than it paid out in benefits.

In coming years, the trustees said, Medicare spending will increase faster than either workers’ earnings or the economy over all.

The trustees predict a 30 percent increase in the number of Medicare beneficiaries in the coming decade, to 58.8 million in 2018, from 45.2 million last year.

There are 76 million Baby Boomers at present, consisting of people born between 1946-1964. They represent 25 percent of the US population.

Those born in 1946 will turn 65 in 2010 and become eligible for Medicare for the first time. Many will also begin retiring and subsequently collecting Social Security as well.

The Boomers will continue becoming eligible for both Medicare and Social Security in each of the subsequent 18 years, placing huge demands on both systems.

The shortfall will be so great that our nation's chief accountant foresaw an impending disaster.

David Walker, the former US Comptroller General, urgently sounded the alarm to anyone who would listen; our nation is in deep fiscal trouble and no one is doing anything about it.

But Walker was ignored by the Bush Administration and Congress. He warned about our $53 trillion obligation for entitlements, with zero dollars set aside for them. Ultimately, he quit in frustration in March of last year. No one in government was listening, or responding, to his urgent warnings and pleas.

The problem has only worsened since then. The federal government assumed $6.8 trillion in new debt last year—a 12 percent increase—pushing its total debt to a record $63.8 trillion, according to USA Today. That amounts to $545,668 for each household.

Clearly, our government has obligations that it will never be able to honor. That will be the bitter pill that all future retirees will have to swallow.

"The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon." — David M. Walker, former US Comptroller General

Housing Crash Will Crush Millions

The US housing crisis isn't over — not by a long shot. In fact, federal and state officials are bracing for the next tidal wave of foreclosures—adjustable rate mortgages (ARMs), particularly option payment ARMs.

Option ARMs let borrowers choose to make very low payments for the first five years. During that initial period, borrowers can pick their payment option.

That's where option ARMs differ from other ARMs; borrowers have the option to pay interest only, or a minimum monthly payment that doesn’t even cover the interest. This results in a rising loan principle, or what's called negative amortization.

When the balance of the loan reaches a certain level, or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but can then reset to a new higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, most of them are overwhelmed. In most cases, borrowers owe much more than their homes are worth, so they cannot refinance their way out of trouble.

According to Fitch Ratings, 94 percent of option ARM borrowers elected to make minimum payments only. That portends the trouble that lies ahead.

We are already in the midst of the worst housing downturn since the Great Depression, and things are about to get worse.

Next year, many option ARM payments will begin to readjust, slamming borrowers with dramatically higher monthly mortgage bills. That will unleash the next big wave of foreclosures.

Option ARMs became widespread starting in 2005, which is why the recasts and higher payments will pick up steam in 2010, five years later.

The bulk of option ARMs recast dates are spread out from 2010 through 2012, meaning the foreclosure waves could drag on for the next few years.

Option ARMs tend to be "jumbo," or for significantly large amounts, making it even harder for borrowers to avoid foreclosure. Even though most option ARMs have not yet adjusted higher, many borrowers are already defaulting anyway. That's an ominous sign of what's to come.

There are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. California will be particularly hard hit; in 2004, nearly half of all Golden State buyers took out an interest-only loan.

Banks never gave out loans with 10 percent unemployment in mind, and the massive losses will continue to burden their balance sheets.

Nationally, home prices have already declined by nearly one-third, peak-to-trough, since 2006.

However, respected banking analyst Meredith Whitney predicts that high unemployment will result in a further 25 percent drop, resulting a total decline of about 50 percent.

“I think there is no doubt that home prices will go down dramatically from here; it’s just a question of when,” Whitney told CNBC on September 10. “If you look at the drivers for unemployment, I don’t see that reversing very soon.”

There is already a huge supply of unsold homes on the market. Adding a glut of additional foreclosures will likely depress home prices for years to come.

Moody’s now forecasts that some home prices may not return to their pre-recession levels until 2030. This means that hundreds of thousands of Americans may find it impossible to sell their houses without paying off banks for underwater home loans.

At a minimum, Moody's says that many states (i.e. NY, IL, CA, FL) will not recover until sometime between 2018-2024.

If it does indeed take 15-20 years for housing to recover, that amounts to a lifetime for many older Americans.

The new reality is that Americans are going to have to return to a more traditional view of a house; a place to lay your head and make your home.

Houses will no longer be viewed as investments, much less get rich quick schemes.


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