“An old fashioned run on the Bank”

Washington Mutual Bank was seized by government regulators and it’s branches sold to J.P. Morgan Chase & Co in the biggest bank failure in U.S. history. According to the Office of Thrift Supervision, bank customers withdrew $16.7 billion dollars causing it to become “unsound”.

Calls for Excessive CEO Compensation for Failed Companies are falling on deaf ears.

As shocking as it is to see the largest bank failure in American history, is even worse to hear about the compensation going to the CEO that has been in charge for only three weeks. It is being reported that Washington Mutual CEO, Alan Fishman, who took over as CEO on September 8th, 2008, will receive a total of 20 million in compensation. This is truly outrageous that the Board of Directors would award this package; and also that Fishman would actually accept it. With Congress still deadlocked on the 700 billion dollar bailout package, one of the main talking points of the proposal has been not to reward CEOs that presided over the bank failures and the companies that need to be bailed out. This truly shows how out of touch some of corporate America really is. No wonder Main Street does not want to bail out Wall Street. This is a prime example why there is so much outrage by American Taxpayers.  With all due respect to Mr. Fishman, what did he possibly accomplish to earn even a fraction of this windfall in three weeks time ?

What should be done?

Hopefully, clearer heads will prevail with the Board of Directors and Mr. Fishman with regard to his compensation. Mr. Fishman should do the right thing as a sign of good faith for the betterment of the shareholders and employees of Washington Mutual and either refuse to receive, or return the majority of the outlandish compensation . CEOs deserve to be paid handsomely when they perform and create shareholder value; however, they should NOT be paid 20 million dollars for becoming the captain of a ship whose mast was already in the water and then, watch it sink to the bottom in less than three weeks.

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As we wrote yesterday, AIG was indeed bailed out by the Federal Reserve. Despite putting out the word on the street that they were not going to use taxpayer dollars for a bailout, the Fed went ahead and did it anyway. They probably looked at AIG’s books really closely and calculated the kind of global tsunami that would ensue and how many other companies that would fall like dominoes in the carnage.

This is the statement from the Federal Reserve’s website: ”

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries.  These assets include the stock of substantially all of the regulated subsidiaries.  The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.”

The language of the terms of the loan, as it is written clearly states that the assets of AIG will be liquidated to repay the principal and interest. It  is called a loan and clearly has a stated interest rate and term; however, it is a loan that could never be paid back in full with interest by the sale of AIG’s assets.  The reality of the situation is that the Fed paid 85 billion dollars for a 79.9% equity interest in AIG to bring order to the chaos that may have cratered the financial system worldwide. They will own and control the company. Now what happens with AIG as a going concern?  Is Chairman Bernanke going to take out an insurance debit book and start collecting insurance payments from AIG policyholders? He clearly is not; but the Fed is now one of the largest insurers in the world.

How many bailouts are left in the Fed’s bag of tricks? What is the smell test now for a bailout? Has the Lehman bankruptcy become the over/under for a bailout? A company that has liabilities equivalent to  Lehman’s size or below is allowed to fail, and a company with bigger problems than Lehman gets bailed out? These are clearly both crazy and scary economic times we are living in today. There is no telling how far-reaching this credit crunch is going to go; when it is going to end. These questions that have been put forth are just a tip of the iceberg. Stay tuned, it should be interesting.

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The credit crunch has reared its ugly head again. Lehman Brothers, the venerable 158 year old Wall Street firm, was allowed to fail when there would be no guarantees from the Federal Reserve for Lehman’s toxic paper for a potential white knight  Ala the J.P. Morgan/ Bear Stearns deal. All the potential suitors packed up and went home when they couldn’t get a sweetheart deal from the Fed like J.P. Morgan got for Bear Stearns. Why was Lehman not bailed out like Bear Stearns, Fannie Mae and Freddie Mac?

With political pressure from Congress and in the media, it certainly does appear that Lehman Brothers was a sacrificial lamb. Despite denials from the company, the financial problems that they might have been facing have been well documented in the media the last few months; and did not have a warp speed cash crisis that developed with  Bear Stearns. Why was there no action taken to thwart a Lehman bankruptcy and the repercussions, Vis-a-vis  the counter-party risk fallout? Was Lehman allowed to fail because of all the negative sentiment in the media of our nation becoming a Socialist power since the Fannie Mae/Freddie Mac bailout and the taxpayer’s outrage that ensued?

By all accounts, AIG is in the midst of a crisis that places them to be next in line for failure. They have asked for a 40 billion dollar lifeline from the Fed to avoid a credit ratings downgrade which may be their death knell. According to  Credit Suisse analyst Thomas Gallagher, who  wrote in a research note”Liquidity is clearly under pressure now with over $13 billion of additional collateral posting required for (the company) in the event of a ratings downgrade,”. NY State announced today that AIG will be allowed to borrow 20 billion from AIG subsidiaries. Where is the other 20 billion dollars going to come from? If Warren Buffet does not come to the rescue, my guess is that the money comes from the Federal Reserve and the United States Treasury.

There is certainly a lot of blame to go around for Lehman’s failure starting with senior management as to why their balance sheet had so much leverage and bad bets. There was also ample time to come up with a rescue/restructuring plan to possible avoid bankruptcy. With the Federal Reserve having to deal with the  AIG crisis at the same time, and possibly many other problem companies right around the corner, may have allowed Lehman Brothers to become a political sacrificial lamb.

What do you think? Your feedback is welcome.

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The United States government takes over Fannie Mae and Freddie Mac to save the markets from potentially trillions of dollars in bad mortgage paper overwhelming the markets. For starters, there is great debate about government bailouts in general using taxpayer dollars to bail out the rich. The Federal Reserve stepped in on Bear Stearns, and basically loaned the money to JP Morgan to acquire Bear Stearns, in a sweetheart deal by guaranteeing the Bear’s bad paper. Now the  government’s takeover of Fannie Mae and Freddie Mac will costs taxpayer’s into the billions; and the cost will end up being a heck of a lot more than the estimates that are being thrown around now.

What does this mean to consumers that need credit to secure home mortgages? What does it mean to credit card users? The U.S. Treasury Plan calls for Fannie and Freddie to reduce the size of their portfolios by 10% a year starting in 2010 until they reach 250 billion. Who will buy all of their mortgage paper – and for what price? This will guarantee an additional supply of mortgage paper hitting the markets for years to come. Consequently, according to legendary investor Jim Rogers, who called the whole situation, “a mess” stated it will harder to get a mortgage, and  that this bailout will ensure that housing prices will continue to go down. Credit cards may also be harder to obtain, and credit limits slashed until banks can get total control of their balance sheets.

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Right now most banks want a 700- 720+ credit score to receive the best mortgage rates available. It looks like that will continue to be the norm because there is very few buyers for mortgage paper that isn’t the highest quality. Gone are the days of people buying the million homes with the true ability to buy only a three to four hundred thousand one; people are going to have to really be able to afford the house that they are buying.   In addition to having a strong credit score, consumers will also be faced with having to also put down greater amounts of equity. Even though mortgage rates initially dropped a quarter point after the bailout announcement, it will take time to see how the Fannie and Freddie bailout will influence the U.S. economy and individual consumers over the long-term as it reverberates through the financial system.

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Since the cost of fuel has risen so much in the last year, it is important to look at ways one can ease the burden of higher gas prices at the pumps. One way to lower your costs and increase your rewards is with a gas credit card.

The advantage of using a gas credit card over a general rewards card is that a general gas card is that you lock in a savings rate with a gas card, according to Doug Miller, an analyst from Corporate Insight. Typically, with a general rewards card, the terms of the rewards can change at anytime, even after you have accumulated the points.

Let’s take a look at two gas credit cards; one that is a general gas card, and one that is tied to a specific gas company. The first one is the Discover Open Road(SM) Card.

  • You can get 5% cash back bonus on gas and other car maintanence purchases up to the first $100 you spend every month.
  • 5% to 20% Cashback Bonus at top online retailers*
  • Up to 1% Cashback Bonus on all other purchases
  • Unlimited cash rewards
  • Increase, even double, the value of your rewards when you redeem for gift cards from  100 Cashback Bonus Partner.
  • No annual fee.

The second  card is the BP Visa Card. This card gives you savings only at BP stations. Here are the features of this card:

  • 0% APR for up to 6 months
  • No Annual Fee
  • Double Rebates for two months
  • 5% rebates on all participating BP location purchases
  • 2% rebates on all eligible travel and dining purchases
  • 1% rebates on all other eligible purchases
  • No limit on rebates
  • Redeem every $25 rebates for: BP Gift Card, cash, donation to the Conservation Fund.
The big difference between the two is the no limit rebate feature on the BP card for Gas. If you are spending more than $ 100.00 a month on gas, ( most people are these days) this card may be the better choice. BP has 14,000  service stations in the U.S; so the chances are pretty good to have one close by.
Having a gas credit card can definitely help relieve the high gas prices that we are all seeing at the pumps by putting some of the expense back in your pocket. Take the time to read the fine print of each offer and look for a card that will give you rewards based on your gas consumption and spending habits.
You can visit totalcreditoffers.com to read about these gas rewards credit cards and many others.
* See the online application for details about terms and conditions for these offers. Every reasonable effort has been made to maintain accurate information. However all credit card information is presented without warranty. After you click on the offer you desire you will be directed to the credit card issuer’s web site where you can review the terms and conditions for your selected offer.

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With the increased volatility in the Gold Markets in the last few weeks, there has been some talk in financial circles that Gold and the Dollar are being manipulated . I think that markets have definitely been manipulated at certain times to avoid complete meltdowns in the system ( ex: the PPT that was put together after the ’87 crash); however, in the case of Gold or the U.S. Dollar currently, I don’t believe there is any manipulation in the these markets.

Gold basically bottomed in 2001 at roughly $280oz.( shortly before the U.S. Dollar topped out in January, 2002) It has enjoyed an almost uninterrupted bull run for the last 7 years that was spawned by a historically low federal funds rates . These low interest rates slowly ignited inflation and the general bull run in commodities. The Fed has signaled to the markets that they are no longer going to pour gasoline on a “raging commodities fire” by continually cutting rates.  Also, recent economic news out of the Euro zone hasn’t exactly been rosy.

Remember, historically, bull markets start when no one is expecting them at all – and clearly most of the  world is short the Dollar.( and correctly so, for a long time) Gold is also way overdue for a meaningful correction/fibonacci retracement after rising nearly four fold. The jury is still out if this is the beginning of a cyclical bull market within a continued secular bear market for the Dollar. I suspect as long as we continue to have naysayers and extremely negative sentiment, the Dollar may continue an upward trend at least for the intermediate term.

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Business Week reports that small business owners are are turning to credit cards to finance their businesses. Banks are tightening credit so much that some business owners feel to have no choice to pay upwards of 30% interest on business credit cards.

Take for example, James and Heather Hills, a couple who started a Elgin, Illinois, internet marketing startup, turned to credit cards when they were turned down at three banks for loans. At first things went smoothly for them, paying only 11.74% interest; but after a joint venture went sour, the Hills were left with $10,000 in credit card debt. When a couple of payments were late, their interest  soared to over 30%.

The growth in small businesses using business credit cards is steadily growing according to a federal reserve survey. This survey showed that the percentage of small businesses using these types of credit cards has risen from 34% in 1998 to 48% in 2003. According to Visa, small business spending should hit 4-7 trillion dollars in 2007, but spending on small business debit and credit cards are only 283 million, according to Mercator Advisory Group, an industry researcher. The credit card companies will no doubt be looking to grab a bigger piece of small business going forward.

As the banks continue to tighten credit, small businesses will continue this trend of turning to small business credit cards to finance start ups or use as working capital. Financing a small business with credit cards can provide capital when there is no other alternatives; however , these small business owners have to closely read the terms of their credit card agreements and realize that interest rates can vary with each issuer. Payments can sky rocket if monthly minimum payments are not paid on time, potentially leaving the business and it’s principals faced with monthly payments they are not prepared for.

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According to a USA Today article, thieves are using hard to detect equipment to steal consumers credit card information. They then use the information to create duplicate cards to use at the cardholders expense. This type of theft was normally seen at ATM machines but has become so popular because it is a very inexpensive crime to perpetrate. Law enforcement, including the Secret Service is cracking down on this type of crime. Major investigations are occurring around the country and most notably in Nevada, where it has been reported that hundreds of victims suffered losses in their accounts between 1 and 3.5 million dollars. Greater security measures are needed to be put in place at gas stations to detect these illegal devices to prevent this type of identity theft. It is hard enough paying the high prices at the pump, never mind worrying about having your identity stolen to boot.

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