FED Loans Backing AIG, Bear Repaid

Federal Reserve Says AIG, Bear Stearns Rescue Loans Paid By Jody Shenn and Zachary Tracer - Jun 14, 2012 4:59 PM ET The Federal Reserve has been repaid for its roles in the U.S. government bailout of American International Group Inc. (AIG) in 2008 and the rescue of Bear Stearns Cos. earlier that year. The central bank’s $53.1 billion of loans to vehicles called Maiden Lane and Maiden Lane III, created to help save the companies, were paid back with interest, the Federal Reserve Bank of New York said today in an e-mailed statement. A separate entity, Maiden Lane II, finished being unwound through sales of mortgage assets earlier this year. “This is a major milestone for the bank and for the public,” New York Fed President William C. Dudley said in the statement. “The Maiden Lane entities were established to protect the U.S. economy at a time of great economic stress, and I am pleased we were able to accomplish that policy objective and be fully repaid.” Taxpayers remain at risk in the wake of the September 2008 bailout of AIG, once the world’s largest insurer, which swelled to $182.3 billion in value. The Treasury Department still owns 61 percent of the New York-based company and needs to sell the shares at an average price of $28.72 apiece to break even. The Fed may still generate profits as it disposes of remaining assets in the vehicles. The district bank this year has been selling mortgage debt acquired in the AIG bailout after halting a series of 2011 auctions following a selloff in credit markets. AIG has said it’s been among buyers. The Fed has continued to sell assets from the Bears Stearns-tied Maiden Lane. Fed’s Lessons The repayment of the Fed’s loans may help inform future central bank strategies, said Robert Eisenbeis, a former research director at the Atlanta Fed and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “There’s been a lot of precedent set in terms of the extent to which the Fed will feel free to use a lot of different methods” to aid markets during crises, Eisenbeis said in a telephone interview. AIG advanced 2.4 percent to $31.03 in New York trading. It has gained 34 percent this year. The government’s cost basis for its shares in the insurer was $47.5 billion, excluding unpaid dividends and fees of $1.6 billion. The Treasury recovered more than $17 billion in three share sales, cutting its stake from 92 percent. That leaves an investment of about $30 billion. AIG retired a Fed credit line last year. Strong Demand AIG SunAmerica Chief Executive Officer Jay Wintrob said yesterday that proceeds from asset auctions were sufficient to repay the Fed for its loans to Maiden Lane III. “We’re pleased that the Federal Reserve has decided to cash in now and capitalize on the strong demand,” Wintrob said at a conference held by Morgan Stanley in New York. The Fed took unprecedented steps in 2008 in a bid to thwart the deepest financial crisis since the Great Depression. Its assumption of assets in AIG’s bailout followed a template used in the rescue of Bears Stearns through that investment bank’s emergency sale to JPMorgan (JPM) Chase & Co. Maiden Lane was created with $30 billion of Bear Stearns assets, including mortgage securities and loans, that JPMorgan didn’t want to take on as it agreed to buy the 85-year-old company for $2 a share in March 2008. Bear Stearns faced a funding squeeze that had led the Fed to offer to lend $13 billion through JPMorgan earlier that month. Its sales price was later raised to $10 a share, or about $2.3 billion. Buying Assets The Fed created Maiden Lane II to buy about $39 billion in residential-mortgage securities owned by AIG, as well as Maiden Lane III to purchase $62.1 billion in collateralized debt obligations. The debt was purchased at about half its face value, reflecting markdowns AIG had already taken, with the Fed lending the facilities a total of $43.8 billion. Maiden Lane III was used to cancel credit-default swaps that AIG had sold to protect counterparties against losses. The insurer needed to be rescued after it was unable to meet collateral calls from banks including Goldman Sachs Group Inc. (GS) and Societe Generale SA. The facility bought the CDOs that AIG insured from the companies, sparing the Wall Street firms from losses and sparking criticism from lawmakers who called it a “backdoor bailout” of banks. The move drew reviews by the Troubled Asset Relief Program’s special inspector general and the Government Accountability Office. Fed’s Profit Sales of $19.2 billion of Maiden Lane II assets to Credit Suisse Group AG and Goldman Sachs in January and February helped the Fed unwind that vehicle at a profit of $2.8 billion. The bonds in Maiden Lane II packaged individual home loans, while the CDOs in Maiden Lane III sliced mainly mortgage-backed securities into new debt with varying risks. The New York Fed is scheduled to auction tomorrow $5.2 billion of CDOs in Maiden Lane III created by TCW Group Inc. under former chief investment officer Jeffrey Gundlach, according to its website and data compiled by Bloomberg. TCW managed almost twice as many CDOs that ended up in Maiden Lane III as anyone else. As the rest of the Maiden Lane III assets get sold, AIG will receive the first $5 billion of proceeds following the repayment of the Fed’s loan, about $600 million in accrued interest, and then one-third of additional money, according the New York Fed’s website and Wintrob. “That will provide funding for the company to pursue buybacks,” Josh Stirling, an analyst at Sanford C. Bernstein & Co., said by phone. JPMorgan Loan JPMorgan’s $1.2 billion subordinate loan to Maiden Lane will be repaid first with the proceeds of sales of its remaining assets, after which the Fed will receive the rest, according to the website. Dealers acquiring the CDOs in the central bank’s sales have been reworking the debt before reselling it to investors. Deutsche Bank AG and Barclays Plc unwound $7.5 billion of commercial-mortgage CDOs they bought in April to sell the underlying holdings, while Bank of America Corp. split an $850 million class of a CDO tied to better-quality home loans it acquired last month into two pieces, with a $510 million slice receiving an investment-grade rating of BBB from DBRS Inc., according to data compiled by Bloomberg and a statement from the grader. To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net.

Ron Paul Slams Ben Bernanke on Currencies and Inflation 2-29-2012

Fed Ponders Why Inflation, Deflation Threats Declined

Some states asking the tax man to get tougher

Some states asking the tax man to get tougher Reluctant to raise taxes, some states push the tax man on tougher collection enforcement By Dave Gram Sun, May 27, 2012 11:55 AM EDT

MONTPELIER, Vt. (AP) -- Dentist Frank Illuzzi was stunned when Vermont tax collectors began demanding a 6 percent sales tax on the value of toothbrushes and floss he hands out to patients. Senior care facility operator Jay Grimes was similarly surprised to get a $350,000 bill slapping a 9 percent restaurant tax on the meals served to residents in the dining room. Landscaper Richard "Buckwheat" Lowe got $18,000 in bills taxing him for the first time ever on the mulch he sells. Vermont is among a handful of cash-strapped states getting more aggressive about collecting every tax owed — hiring more collectors, hounding scofflaws and exploiting corners of their tax laws that haven't been enforced in years. It's an effort to avoid what politicians from both parties are dead set against: raising taxes. "You don't want to raise taxes until you're very sure the taxes that people are supposed to pay are being paid," said Rep. Janet Ancel, chairwoman of Vermont's House Ways and Means Committee. Under adamant no-new-tax Democratic Gov. Peter Shumlin, Vermont has added about 10 new tax compliance auditors and has stepped up efforts to scour records in rural areas, and add greater scrutiny to businesses ranging from auctioneers to Internet-based cloud-computing services. But for all its aggressiveness, Vermont's results have been mixed. The state reaped about $57 million during the 12 months that ended in June, up from about $50 million five years earlier — a net gain of $7 million. That's a tiny fraction of the state's $1.3 billion general fund, but it has helped lawmakers close a budget gap that at the beginning of this year was projected to be $46 million. Other states have had much more success. Idaho hired 48 temporary auditors and collectors in fiscal 2011 as part of Gov. C.L. "Butch" Otter's effort to boost revenues without raising taxes and narrow the so-called "tax gap" — the amount of taxes in the state that are due but go unpaid, either by error or by intent. The added staff brought in more than $26.3 million, more than double the original estimate of $11.5 million. All the positions were made permanent this fiscal year. Idaho's additional tax receipts are just a sliver of its roughly $2.7 billion budget, but they helped the state post a budget surplus for the first year since the Great Recession began in 2008, money that helped give state workers their first raises in five years. Oklahoma added about 30 people to its tax collection staff since 2010 in an effort to help close a $900 million budget shortfall. The state collected nearly $35 million in delinquent taxes during the 12 months that ended in June, and overall sales tax revenues jumped by about $159 million from the first 10 months of fiscal 2011 to the same period in fiscal 2012. States have a variety of strategies for following up when audits find tax scofflaws. One tactic in California is public shaming: The state publishes lists of individuals and businesses behind on income or sales taxes. Others take a kinder approach. New York responded to the recent recession by stepping up its program to forgive parts of back payments due from taxpayers in economic distress. Gale Garriott, executive director of the Federation of Tax Administrators, a Washington-based group that tracks state tax policy, said the handful of states that have taken a tough approach by hiring more auditors have generally been rewarded with more revenue. "The return on investment is quite good. They bring in several times more than their salaries," he said. Vermont's get-tough approach, however, is measured in hard feelings as well as dollars. Some aggrieved taxpayers have been contacting lawmakers, and debates in which legislators try to rein in what some see as an overzealous tax department have become a regular occurrence. Illuzzi, a Brattleboro dentist, complained to his brother, state Sen. Vincent Illuzzi, about the demands for sales tax on the free toothbrushes, toothpaste and floss he gave out. He won an amendment to a tax bill just before the Legislature adjourned in early May — a bill Shumlin later signed into law — that exempts the dental goods from the sales tax. "Some dentist wants to give a kid a toothbrush and they want to tax it. That's outrageous," the senator said. A similar legislative change came after The Gables at East Mountain, an independent living community for seniors near Rutland, was hit with a $350,000 back-tax bill dating back eight years, with the state saying the meals it served should have subject to the 9 percent state meals tax for restaurants. Lawmakers protested that the Gables' dining room wasn't like a restaurant, because it served residents of the facility, and people aren't taxed when they eat at home. As lawmakers changed the law affecting the Gables going into the future, the state canceled its past tax bill. "We were obviously flabbergasted to get a tax bill like this the week before Christmas," said Grimes, executive director at the Gables. "It was absolutely crazy." But Grimes said he was pleased with the outcome after local legislators intervened. Lowe, the landscaper, hasn't been so lucky. He operated his landscaping business for nearly all of its 36 years with the understanding that bark mulch, soil additives and similar products he sells were exempt from Vermont's 6 percent sales tax. That changed in 2006, but no one told him, Lowe said, until he got past-due tax bills for $18,000 last year, which he is now fighting. "You don't just change the taxes and laws and not tell somebody," he said. Steve Jones, owner of the Metowee Mill Nursery in Dorset, said he also missed the 2006 tax law changes that removed the agricultural exemption from sales tax for several of the products he sells. Vermont's tax department sent out a letter at the time talking about changes affecting beer and footwear, he said, nothing about garden products. He said he didn't realize there was a tax until he got a letter demanding $41,000 in back taxes, interest and penalties in December. "Just educate me, tell me. I want to pay my fair share," said Jones, who is appealing the bill. State Tax Commissioner Mary Peterson acknowledged some taxpayers might be confused about the changes, and she said her agency is working on improving how it educates the public about tax policy. But she also defended the tougher tax collections. "It certainly is your responsibility when you have a business to be keeping up on the rules," she said. ___ Associated Press Writers John Miller in Boise, Idaho; Sean Murphy in Oklahoma City; Judy Lin in Sacramento, Calif.; and Michael Virtanen in Albany, N.Y., contributed to this report.

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The Amazing Obama Budget He's proposing higher spending and deficits this year Federal budgets are by definition political documents, but even by that standard yesterday's White House proposal for fiscal year 2013 is a brilliant bit of misdirection. With the abracadabra of a tax increase on the wealthy and defense spending cuts that will never materialize, the White House asserts that in President Obama's second term revenues will soar, outlays will fall, and $1.3 trillion annual deficits will be cut in half like the lady in the box on stage. All voters need to do is suspend disbelief for another nine months. And ignore the first four years. The real news in Mr. Obama's budget proposal is the story of those four years, and what a tale they tell. • Four years of spending of more than 24% of GDP, the four highest spending years since 1946. In the current fiscal year of 2012, despite talk of austerity, Mr. Obama predicts spending will increase by $193 billion to $3.8 trillion, or 24.3% of GDP. The top chart shows the unprecedented four-year blowout. • Another deficit of $1.327 trillion in 2012, also an increase from 2011, and making four years in a row above $1.29 trillion. The last time that happened? Never. • Revenues at historic lows because of the mediocre recovery and temporary tax cuts that are deadweight revenue losses because they do so little for economic growth. The White House budget office estimates that for the fourth year in a row revenues won't reach 16% of GDP. The last time they were below 16% for any year was 1950. • All of this has added as astonishing $5 trillion in debt in a single Presidential term. National debt held by the public—the kind you have to pay back—will hit 74.2% this year and keep rising to 77.4% next year. The bottom chart shows the trend. Economists believe that when debt to GDP reaches 90% or so, the economic damage begins to rise. And this doesn't include the debt that future taxpayers owe current and future retirees through the IOUs in the Social Security "trust fund." But, lo, says the White House, all of this will change in 2013 if Mr. Obama is re-elected. Next year, revenues will suddenly leap to 17.8% of GDP thanks to tax increases on the wealthy, which we are supposed to believe will have little impact on growth. Meanwhile, spending will fall by one percentage point of GDP to 23.3%, thanks to the automatic cuts in last year's debt-ceiling bill. But more than half of those are scheduled to come out of defense, which even Mr. Obama's Defense Secretary says are unacceptable. They will be renegotiated next year no matter who wins in November. The cuts also include an estimated $1 trillion in savings in domestic discretionary programs that also won't happen, especially because Mr. Obama's budget proposes to add $350 billion to these programs. His budget also proposes no meaningful reforms in entitlements, which are the fastest growing part of the budget and will grow even faster once ObamaCare really kicks in. The only thing that you can be certain will become law in this budget if Mr. Obama is re-elected is the monumental tax increase. His plan would raise tax rates across the board on anyone or any business owners making more than $200,000 for individuals and $250,000 for couples. These are the 3% of taxpayers that Mr. Obama says aren't paying their fair share, though that 3% pays more in income tax than the rest of the other 97%. A central contradiction of this plan is that the White House predicts accelerating real GDP growth of 3% in 2013 and 4.1% by 2015 even as the economy is whacked by these tax increases. The President's plan would also cancel the investment tax rate reductions that have been in place since 2003, impose a new investment income tax hike of 3.8%, and introduce the new "Buffett rule" on the rich. Tax rates will rise as follows: capital gains to 30% from 15% today; dividends to 30% from 15%; the estate tax to 45% from 35%, and don't forget the end to the temporary payroll tax cut that Mr. Obama is making such an issue of now. He only wants it to last for another 10 months.

And there will be more. Yesterday, Mr. Obama's chief economic adviser, Gene Sperling, reported that the President wants a new "global minimum tax." Mr. Sperling said the new tax is necessary "so that people have the assurance that nobody is escaping doing their fair share as part of a race to the bottom or having our tax code actually subsidize and facilitate people moving their funds to tax havens." He didn't offer specifics but said the White House will be saying more, "perhaps not in gory detail, but in more detail," by the end of the month. You would think amid all of its other tax increases that the White House wouldn't need another. But its problem is that other countries rudely compete for capital by keeping their tax rates low, so Mr. Obama wants to punish Americans who dare to take that advantage rather than cut the U.S. rate to 25% to make America more competitive. Despite its tax increases, the White House still predicts that the annual budget deficit will be $901 billion in 2013 and never fall below $575 billion in any of the next 10 years. Democrats denounced George W. Bush for allowing so much red ink, but his deficits averaged only 3.5% of GDP if you don't count 2001 but do include the 10.1% of 2009. Mr. Obama's deficits have averaged 9.1% of GDP if you count 2009, as you should because his $800 billion stimulus passed that February. The political reality of budgeting is that voters should only believe what they can see, which is what politicians are proposing now. Promises of future spending cuts are a mirage. Mr. Obama needs to point to the mirage because his fiscal record is the worst in modern American history.