Paul Kedrosky at Infectious Greed had a great quote that we should all get reprinted and put somewhere we can refer to time and time again. Here it is, but if you want the full impact you have to go to his site.
So the actions of people relying on history change history, and that is what people lose track of..
Tom Lindmark
Saturday, November 15, 2008
Auto Companies, Democrats And Tangled Webs
I'm on a Wall Street Journal kick today. Another good article on Friday by Kimberley Strassel dissecting the political game going on with the bailout provisions for the Big Three automakers. It's a wonderful example of how quickly campaign donations and promises can tie a party in knots.
Here are the players and the dilemma:
What do bleeding Detroit auto makers, Colombia and green groups have in common? Not a lot, unless you are Nancy Pelosi.
If there was a moment that highlights to what extent the Democratic Party has become captive to its special interests, this might be it. Mrs. Pelosi and Harry Reid have spent this week demanding that Washington stave off a car-maker collapse. What makes this a little weird is that Mrs. Pelosi and Mr. Reid are Washington. If they so desperately want a Detroit bailout they could always, you know, pass one.
Strassel is being a bit disingenuous as the Democrats still would potentially have to contend with either a Bush veto or a filibuster in the Senate. Both would be unlikely given political stakes, though. She goes on to recount how the Democrat's got cold feet as the financial crisis deepened and the car companies started looking shaky. Not wanting to get blamed for advancing money that might later get tied up in say a GM bankruptcy they hatched their plan.
The plan? Make it the Bush administration's responsibility to give Detroit cash -- namely by claiming after the event that the $700 billion rescue package for financial institutions was in fact a rescue package for auto makers. This was attempted with several hilarious "colloquys" -- pre-scripted dialogues between members that were quietly inserted into the Congressional Record after the vote, all aimed at rewriting the "intent" of the law. Say, this one, from Oct. 1:
Michigan Sen. Carl Levin: "As Treasury implements this new program, it is clear to me from reading the definition of financial institution that auto financing companies would be among the many financial institutions that would be eligible sellers to the government. Do you agree?"
Connecticut Sen. Chris Dodd: "Yes, for purposes of this act, I agree that financial institution may encompass auto financing companies."
Fun. Meanwhile, Democrats passed $25 billion in aid for Detroit, though under the careful guise of "green" funds to help it meet new fuel-efficiency standards.
It's not pleasant to see how these guys bobb and weave to get things done, is it? The article then notes that the whole apple cart was upset when Treasury Secretary Paulson dug in his heels and insisted that TARP was for financial institutions thus placing the party in what is beginning to look like a no win situation.
If that weren't enough, the administration has had the temerity to take Democrats at their legislative word, and demand the auto makers actually use that $25 billion in green funds for . . . green retooling. Which, needless to say, isn't going to help the Big Three CEOs pay their upcoming health-care bills.
And so Mrs. Pelosi has been landed with Detroit, again. The auto makers have staged a brilliant PR campaign, tying their misfortunes to today's financial mess -- never mind those decades of mismanagement. They've warned that the ripple effect of a crash could cost three million to four million jobs. Democrats have also undoubtedly been reminded by UAW President Ron Gettelfinger that those come from his union, which recently helped Mrs. Pelosi win an election.
The problem is how not to offend the other groups that just helped her win an election. The White House has intimated that its price for Democratic legislation in a lame-duck session would be the passage of the Colombia trade agreement. Yet Mrs. Pelosi has successfully sat on that deal for months at the demand of the broader union movement, which just spent hundreds of millions to increase Democratic majority.
Meanwhile, another trial balloon -- a proposal to loosen the rules governing the $25 billion in green money -- sent Mrs. Pelosi's environmental friends bonkers. They also just spent big helping Democrats, and insist the money go to building clean cars, not digging out Detroit.
The financial crisis might have well have tipped the scales in favor of the Democrats this election cycle. At the same time, the immediacy of the problems force decisions that in normal times would be worked out over months. The payback for Democrats is that their hand is getting forced while promises and money spent are very much on the minds of their supporters.
Tom Lindmark
Here are the players and the dilemma:
What do bleeding Detroit auto makers, Colombia and green groups have in common? Not a lot, unless you are Nancy Pelosi.
If there was a moment that highlights to what extent the Democratic Party has become captive to its special interests, this might be it. Mrs. Pelosi and Harry Reid have spent this week demanding that Washington stave off a car-maker collapse. What makes this a little weird is that Mrs. Pelosi and Mr. Reid are Washington. If they so desperately want a Detroit bailout they could always, you know, pass one.
Strassel is being a bit disingenuous as the Democrats still would potentially have to contend with either a Bush veto or a filibuster in the Senate. Both would be unlikely given political stakes, though. She goes on to recount how the Democrat's got cold feet as the financial crisis deepened and the car companies started looking shaky. Not wanting to get blamed for advancing money that might later get tied up in say a GM bankruptcy they hatched their plan.
The plan? Make it the Bush administration's responsibility to give Detroit cash -- namely by claiming after the event that the $700 billion rescue package for financial institutions was in fact a rescue package for auto makers. This was attempted with several hilarious "colloquys" -- pre-scripted dialogues between members that were quietly inserted into the Congressional Record after the vote, all aimed at rewriting the "intent" of the law. Say, this one, from Oct. 1:
Michigan Sen. Carl Levin: "As Treasury implements this new program, it is clear to me from reading the definition of financial institution that auto financing companies would be among the many financial institutions that would be eligible sellers to the government. Do you agree?"
Connecticut Sen. Chris Dodd: "Yes, for purposes of this act, I agree that financial institution may encompass auto financing companies."
Fun. Meanwhile, Democrats passed $25 billion in aid for Detroit, though under the careful guise of "green" funds to help it meet new fuel-efficiency standards.
It's not pleasant to see how these guys bobb and weave to get things done, is it? The article then notes that the whole apple cart was upset when Treasury Secretary Paulson dug in his heels and insisted that TARP was for financial institutions thus placing the party in what is beginning to look like a no win situation.
If that weren't enough, the administration has had the temerity to take Democrats at their legislative word, and demand the auto makers actually use that $25 billion in green funds for . . . green retooling. Which, needless to say, isn't going to help the Big Three CEOs pay their upcoming health-care bills.
And so Mrs. Pelosi has been landed with Detroit, again. The auto makers have staged a brilliant PR campaign, tying their misfortunes to today's financial mess -- never mind those decades of mismanagement. They've warned that the ripple effect of a crash could cost three million to four million jobs. Democrats have also undoubtedly been reminded by UAW President Ron Gettelfinger that those come from his union, which recently helped Mrs. Pelosi win an election.
The problem is how not to offend the other groups that just helped her win an election. The White House has intimated that its price for Democratic legislation in a lame-duck session would be the passage of the Colombia trade agreement. Yet Mrs. Pelosi has successfully sat on that deal for months at the demand of the broader union movement, which just spent hundreds of millions to increase Democratic majority.
Meanwhile, another trial balloon -- a proposal to loosen the rules governing the $25 billion in green money -- sent Mrs. Pelosi's environmental friends bonkers. They also just spent big helping Democrats, and insist the money go to building clean cars, not digging out Detroit.
The financial crisis might have well have tipped the scales in favor of the Democrats this election cycle. At the same time, the immediacy of the problems force decisions that in normal times would be worked out over months. The payback for Democrats is that their hand is getting forced while promises and money spent are very much on the minds of their supporters.
Tom Lindmark
TARP Aid For The Cities-A Few Thoughts
Last night in a post I noted the plea by several cities including my hometown of Phoenix for a piece of the TARP action. I want to follow-up with a couple of thoughts but before I do, let me update the story.
The city of San Jose has jumped on the bandwagon and wants some too. They suggested the nice round number of $14 billion. They figure they contribute 2% to the nation's GDP and thus deserve 2% of the pie. It might be overreaching a bit since their entire annual budget is $3.3 billion. If you don't ask you never receive.
Anyway, San Jose and the rest list three critical needs that cause them to come hat in hand to the TARP till. In no particular order it is immediate cash requirements, infrastructure spending and unfunded pension liabilities. Let's take a quick look at all three.
To the extent that a local governmental entity is out of cash, facing bankruptcy or whatever dire straits they might have gotten themselves into, I think it should be pretty much up to the state in which they happen to be located to work things out. Most if not all states have the ability to borrow substantial sums of money and it's in their best interest not to have their cities conducting going out of business sales. There is usually a pretty complex arrangement among states and cities with regard to how they carve up the tax revenue kitty, so let them rearrange the relevant shares and take care of their own business.
I could go on forever about infrastructure investment. Let me just do two things. One direct you to a good article in the Wall Street Journal on Friday that reminds once again that government spending for stimulus including infrastructure investment is a zero sum game. Government spending cannot create wealth, only the private sector can, so money directed to the cities for infrastructure projects only succeeds in rewarding the beneficiaries while some other part of the economy pays the price. In essence, Phoenix gets work for its unemployed while Omaha pays the bill.
Second, the cities have a propensity to allocate their infrastructure dollars, particularly the mega-federal type dollars, to marginal projects. Phoenix is a great example. We are about to open what amounts to no more than a demonstration light rail system. The project will serve a minute portion of the city yet the cost even with massive federal support is inordinately expensive. If history is any guide, operating it will only drain the city's finances more. This project was rammed through at the height of the housing bubble when Phoenix was awash in tax receipts. As we now know, it might have been wise to put some of this aside rather than investing in infrastructure.
The talk of needing TARP money to fund unfunded pension liabilities is both surprising and expected. Surprising, since for many years, local and state governments have vehemently insisted that their pension plans were in great shape while refusing to divulge the details needed to objectively verify that claim. It's expected because a number of experts have been asserting for some time that this is the issue that could cause a complete meltdown of a local or state governmental entity. San Diego has already demonstrated just how ugly it can get when overly generous benefits run up against funding realities. This is one huge problem that TARP can't solve. You might well throw the entire $700 billion at it and not make a dent. Besides, there is a vehicle that already exists at the federal level to solve these problems. It's called the Pension Benefit Guaranty Corporation.
In the WSJ today, Mark Sanford, the governor of South Carolina has an essay titled "Don't Bail Out My State." Among other reasons, here is one he cites as a reason for his opposition to directing TARP or any other type of federal aid to state and local governments:
Do you now have to be a financial "bad boy" to win?
Community bankers tell me that they are now at a competitive disadvantage for being careful about who to lend to, because others that were less disciplined will get a federal bailout. This is also true for states. Those that have been fiscally responsible will pay for or lose out to the big spenders. California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.
Was the economist Herb Stein wrong when he said that if something cannot go on forever, it won't?
Medicaid grew 9.5% annually over the past 10 years. That's unsustainable. But if Congress opens the checkbook now, there will be no reform.
At the very least, if federal money is to be thrown to the states and cities then at least let it come with strings attached. It should not be free and should be advanced in the form of a loan with a decent return to the federal government. Done in that manner, the borrowers will have to budget their expenditures in such a manner as to provide for repayment.
The city of San Jose has jumped on the bandwagon and wants some too. They suggested the nice round number of $14 billion. They figure they contribute 2% to the nation's GDP and thus deserve 2% of the pie. It might be overreaching a bit since their entire annual budget is $3.3 billion. If you don't ask you never receive.
Anyway, San Jose and the rest list three critical needs that cause them to come hat in hand to the TARP till. In no particular order it is immediate cash requirements, infrastructure spending and unfunded pension liabilities. Let's take a quick look at all three.
To the extent that a local governmental entity is out of cash, facing bankruptcy or whatever dire straits they might have gotten themselves into, I think it should be pretty much up to the state in which they happen to be located to work things out. Most if not all states have the ability to borrow substantial sums of money and it's in their best interest not to have their cities conducting going out of business sales. There is usually a pretty complex arrangement among states and cities with regard to how they carve up the tax revenue kitty, so let them rearrange the relevant shares and take care of their own business.
I could go on forever about infrastructure investment. Let me just do two things. One direct you to a good article in the Wall Street Journal on Friday that reminds once again that government spending for stimulus including infrastructure investment is a zero sum game. Government spending cannot create wealth, only the private sector can, so money directed to the cities for infrastructure projects only succeeds in rewarding the beneficiaries while some other part of the economy pays the price. In essence, Phoenix gets work for its unemployed while Omaha pays the bill.
Second, the cities have a propensity to allocate their infrastructure dollars, particularly the mega-federal type dollars, to marginal projects. Phoenix is a great example. We are about to open what amounts to no more than a demonstration light rail system. The project will serve a minute portion of the city yet the cost even with massive federal support is inordinately expensive. If history is any guide, operating it will only drain the city's finances more. This project was rammed through at the height of the housing bubble when Phoenix was awash in tax receipts. As we now know, it might have been wise to put some of this aside rather than investing in infrastructure.
The talk of needing TARP money to fund unfunded pension liabilities is both surprising and expected. Surprising, since for many years, local and state governments have vehemently insisted that their pension plans were in great shape while refusing to divulge the details needed to objectively verify that claim. It's expected because a number of experts have been asserting for some time that this is the issue that could cause a complete meltdown of a local or state governmental entity. San Diego has already demonstrated just how ugly it can get when overly generous benefits run up against funding realities. This is one huge problem that TARP can't solve. You might well throw the entire $700 billion at it and not make a dent. Besides, there is a vehicle that already exists at the federal level to solve these problems. It's called the Pension Benefit Guaranty Corporation.
In the WSJ today, Mark Sanford, the governor of South Carolina has an essay titled "Don't Bail Out My State." Among other reasons, here is one he cites as a reason for his opposition to directing TARP or any other type of federal aid to state and local governments:
Do you now have to be a financial "bad boy" to win?
Community bankers tell me that they are now at a competitive disadvantage for being careful about who to lend to, because others that were less disciplined will get a federal bailout. This is also true for states. Those that have been fiscally responsible will pay for or lose out to the big spenders. California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.
Was the economist Herb Stein wrong when he said that if something cannot go on forever, it won't?
Medicaid grew 9.5% annually over the past 10 years. That's unsustainable. But if Congress opens the checkbook now, there will be no reform.
At the very least, if federal money is to be thrown to the states and cities then at least let it come with strings attached. It should not be free and should be advanced in the form of a loan with a decent return to the federal government. Done in that manner, the borrowers will have to budget their expenditures in such a manner as to provide for repayment.
The G20 Outlind A Plan For Salvation
The G20 meeting to solve the world's economic crisis has concluded. No definitive word yet on whether or not we awaken on Monday to see that all is well again but what they accomplished can be found in this communique courtesy of the WSJ.
Now if you don't have time to read it let me tell you in a couple of sentences what they agreed upon. In general, they agreed that things have to be done and they have to talk to each other about the things that need to be done and they want their finance ministers to study the things that need to be done and get back to everyone later. They also announce that they had reached agreement on five key objectives during the conference. I found the first one to be the most profound. They reached a common understanding of the root causes of the global crisis. They chose, however, not to share this with any of us, so we are all left still wondering what went wrong.
They actually did agree, as much as you can at these sorts of things, on a few things that actually have some substance. They were:
Reject protectionism, which exacerbates rather than mitigates financial and economic challenges;
Strive to reach an agreement this year on modalities that leads to an ambitious outcome to the Doha Round of World Trade Organization negotiations;
Refrain from imposing any new trade or investment barriers for the next 12 months;
and
Reaffirm development assistance commitments and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy.
Sounds good but we'll see. If anything those goals either give Obama fits or provide him with cover to begin reneging on his wilder campaign promises. It certainly won't, however, please his friends in Big Labor or on the Left side of the party.
Tom Lindmark
Now if you don't have time to read it let me tell you in a couple of sentences what they agreed upon. In general, they agreed that things have to be done and they have to talk to each other about the things that need to be done and they want their finance ministers to study the things that need to be done and get back to everyone later. They also announce that they had reached agreement on five key objectives during the conference. I found the first one to be the most profound. They reached a common understanding of the root causes of the global crisis. They chose, however, not to share this with any of us, so we are all left still wondering what went wrong.
They actually did agree, as much as you can at these sorts of things, on a few things that actually have some substance. They were:
Reject protectionism, which exacerbates rather than mitigates financial and economic challenges;
Strive to reach an agreement this year on modalities that leads to an ambitious outcome to the Doha Round of World Trade Organization negotiations;
Refrain from imposing any new trade or investment barriers for the next 12 months;
and
Reaffirm development assistance commitments and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy.
Sounds good but we'll see. If anything those goals either give Obama fits or provide him with cover to begin reneging on his wilder campaign promises. It certainly won't, however, please his friends in Big Labor or on the Left side of the party.
Tom Lindmark
Friday, November 14, 2008
More TARP Beggars
A couple new supplicants turned up today at the TARP window.
Hartford Financial Services announced it is buying a thrift holding company, Federal Trust Corp, of Florida for $10 million in order to turn itself into a bank. As such it will then be eligible for a capital injection from the TARP slush fund. If you follow this, you can see that Hartford is going to part with $10 million and then have the government inject something on the order of $10 billion plus into the new entity. So all you have to do to become systemically important is evidently to buy a bank, no matter how puny, and then you can't be allowed to fail. Do you see the possibilities here for me and you?
If that leaves you breathless consider this. The mayors of Philadelphia, Atlanta and Phoenix sent a letter to the Treasury ask that a $50 billion portion of the TARP authorization be set aside to help cities. They suggest that the funds be used to cover infrastructure projects, fund short-term cash needs and help cover unfunded pension liabilities.
I happen to live in one of those cities, Phoenix to be specific, and I can assure you that the situation is dire. Sales tax receipts are cliff diving and an unimaginable $100 million budget shortfall that was projected in the middle of the summer has turned into a projected $250 million shortfall. I'd bet my last penny that's too small. The cuts that are going to have to be made and the sacrifices that the citizens will be called upon to bear are going to be draconian.
I will expand on this theme over the weekend. Cities, counties and states are going to slam into a wall that will devastate them. For the moment let me just observe that we are starting to get into an area that is fraught with two major problems. One, the Treasury of the United States might not have the wherewithal to bail out local governments without serious long term harm to the national economy. Two, the political friction that this will engender could be monumental as those areas of the country that have been fiscally responsible are asked to come to the aid of the spendthrifts. The restrictions that are likely to be attached to any bailout funds will likely be politically unpalatable.
Tom Lindmark
Hartford Financial Services announced it is buying a thrift holding company, Federal Trust Corp, of Florida for $10 million in order to turn itself into a bank. As such it will then be eligible for a capital injection from the TARP slush fund. If you follow this, you can see that Hartford is going to part with $10 million and then have the government inject something on the order of $10 billion plus into the new entity. So all you have to do to become systemically important is evidently to buy a bank, no matter how puny, and then you can't be allowed to fail. Do you see the possibilities here for me and you?
If that leaves you breathless consider this. The mayors of Philadelphia, Atlanta and Phoenix sent a letter to the Treasury ask that a $50 billion portion of the TARP authorization be set aside to help cities. They suggest that the funds be used to cover infrastructure projects, fund short-term cash needs and help cover unfunded pension liabilities.
I happen to live in one of those cities, Phoenix to be specific, and I can assure you that the situation is dire. Sales tax receipts are cliff diving and an unimaginable $100 million budget shortfall that was projected in the middle of the summer has turned into a projected $250 million shortfall. I'd bet my last penny that's too small. The cuts that are going to have to be made and the sacrifices that the citizens will be called upon to bear are going to be draconian.
I will expand on this theme over the weekend. Cities, counties and states are going to slam into a wall that will devastate them. For the moment let me just observe that we are starting to get into an area that is fraught with two major problems. One, the Treasury of the United States might not have the wherewithal to bail out local governments without serious long term harm to the national economy. Two, the political friction that this will engender could be monumental as those areas of the country that have been fiscally responsible are asked to come to the aid of the spendthrifts. The restrictions that are likely to be attached to any bailout funds will likely be politically unpalatable.
Tom Lindmark
Freddie Loses Big Bucks, FDIC Has A New Plan
A couple things on the housing front, neither surprising.
As reported by Reuters, Freddie Mac reported a loss of $25.3 billion today. This tidy sum puts Freddie in a negative equity situation thus necessitating a capital infusion from the Treasury. The company's regulator has already submitted an invoice to Treasury for $13.8 billion to get the company back to a positive number.
All of this begs the question as to why we are supporting two of these giant cash sucking machines. Why don't we get rid of one of them and reduce some overhead? They're mirror images of one and other so it's not like theirs some special expertise that one needs that the other doesn't have. Just a thought.
On a more amusing (sort of) note, Sheila Bair, Chairwoman of the FDIC, proposed her own mortgage modification scheme. Ms. Bair made no secret of her disdain for the plan rolled out earlier this week by Fannie and Freddie. Her plan would be modeled after the program she put in place at IndyMac. Among other things it would pay servicers $1000 for modification expenses and have the government share in 50% of any redefault losses. The IndyMac plan also calls for principal reductions which was not a part of the F&F plan earlier this week.
Ms. Bair has being beating the drum on modifications for at least nine months now. It's kind of hard to figure out what the motivation might be, though a cynical person might suggest she's angling for a bigger role in the Obama administration. So far her success with IndyMac's portfolio has been modest at best. Her report on results delivered a couple weeks ago indicated that only 3500 borrowers out of a pool of 60,000 who are eligible to participate in the FDIC plan have even bothered to respond to overtures.
I'll repeat a theme-probably not for the last time-that we have a bunch of people running around Washington absolutely no clue as to what to do save propose one program after another with no regard whatsoever for the ability of the country to pay for it.
Tom Lindmark
As reported by Reuters, Freddie Mac reported a loss of $25.3 billion today. This tidy sum puts Freddie in a negative equity situation thus necessitating a capital infusion from the Treasury. The company's regulator has already submitted an invoice to Treasury for $13.8 billion to get the company back to a positive number.
All of this begs the question as to why we are supporting two of these giant cash sucking machines. Why don't we get rid of one of them and reduce some overhead? They're mirror images of one and other so it's not like theirs some special expertise that one needs that the other doesn't have. Just a thought.
On a more amusing (sort of) note, Sheila Bair, Chairwoman of the FDIC, proposed her own mortgage modification scheme. Ms. Bair made no secret of her disdain for the plan rolled out earlier this week by Fannie and Freddie. Her plan would be modeled after the program she put in place at IndyMac. Among other things it would pay servicers $1000 for modification expenses and have the government share in 50% of any redefault losses. The IndyMac plan also calls for principal reductions which was not a part of the F&F plan earlier this week.
Ms. Bair has being beating the drum on modifications for at least nine months now. It's kind of hard to figure out what the motivation might be, though a cynical person might suggest she's angling for a bigger role in the Obama administration. So far her success with IndyMac's portfolio has been modest at best. Her report on results delivered a couple weeks ago indicated that only 3500 borrowers out of a pool of 60,000 who are eligible to participate in the FDIC plan have even bothered to respond to overtures.
I'll repeat a theme-probably not for the last time-that we have a bunch of people running around Washington absolutely no clue as to what to do save propose one program after another with no regard whatsoever for the ability of the country to pay for it.
Tom Lindmark
Thursday, November 13, 2008
Logic In Wonderland (AKA Washington)
A faint wisp of sanity wafted through our nation's capital today. The Office of the Comptroller of the Currency told the credit card companies and banks today that their proposal to defer their losses on credit cards was a non-starter.
As background, various big purveyors of credit card debt proposed that they write-off up to 40% of their credit card receivables and that the lucky recipients of their largess be excused, at least temporarily, of the need to pay taxes on this gift. In exchange for this gesture, the various creditors would not be required to recognize their losses until the remaining balances on the credit cards were paid off, assuming, of course, that ever occurred. Left unsaid was the rather obvious fact that the magic forty percent number is just about what they are going to have to declare uncorrectable regardless of whether or not their plan was approved.
The OCC saw through this subterfuge and in a letter today basically said, no way. Here is their logic:
"The OCC does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," wrote Timothy W. Long, the OCC's senior deputy comptroller for bank supervision policy. "Our long-standing policy is that banks are not allowed to attempt long-term recoveries while assets deemed uncollectible have not been accounted for as charge-offs and reported as losses. To do so compromises the integrity and transparency of financial statement reporting and public confidence in the banking system."
I rather suspect that the OCC will be brought to heel. Nevertheless, when we write the history of this period I hope their is at least a footnote that notes that at one point in time a regulator tried to cling to logic.
Tom Lindmark
As background, various big purveyors of credit card debt proposed that they write-off up to 40% of their credit card receivables and that the lucky recipients of their largess be excused, at least temporarily, of the need to pay taxes on this gift. In exchange for this gesture, the various creditors would not be required to recognize their losses until the remaining balances on the credit cards were paid off, assuming, of course, that ever occurred. Left unsaid was the rather obvious fact that the magic forty percent number is just about what they are going to have to declare uncorrectable regardless of whether or not their plan was approved.
The OCC saw through this subterfuge and in a letter today basically said, no way. Here is their logic:
"The OCC does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," wrote Timothy W. Long, the OCC's senior deputy comptroller for bank supervision policy. "Our long-standing policy is that banks are not allowed to attempt long-term recoveries while assets deemed uncollectible have not been accounted for as charge-offs and reported as losses. To do so compromises the integrity and transparency of financial statement reporting and public confidence in the banking system."
I rather suspect that the OCC will be brought to heel. Nevertheless, when we write the history of this period I hope their is at least a footnote that notes that at one point in time a regulator tried to cling to logic.
Tom Lindmark
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