Here We Go Again: Obama’s Stimulus Two Program by Gregory Hilton

President Obama announced $150 billion in new government spending on Tuesday. He is calling it a jobs creation program but this is another stimulus style spending initiative. Many observers believe the results will be no different from the first stimulus, and it will not significantly assist our economic recovery.
The President says the entire $150 billion is coming from money which has been repaid to the Treasury because of George Bush’s TARP. The funds have been repaid, but using them for “Stimulus Two” violates the original law and is just going to add to the deficit.
“The policy of this administration is if you’ve got it, spend it,” said House Republican Conference Chairman Mike Pence (IN). Rep. Eric Cantor (VA.), the House Republican Whip, said “Clearly the White House has taken the position that deficits don’t matter.”
There is a big difference between Bush’s TARP (the toxic asset recovery program) and the two Obama stimulus programs. The Bush deficit had declined significantly until early September of 2008 when the global economic crisis began. Bush responded with the $700 billion TARP which avoided a catastrophic meltdown of the economy by offering financial institutions government loans.
TARP was approved by Congress in October of 2008 as a program to buy toxic assets from banks, but was immediately converted into a fund for the Treasury to make capital injections into ailing banks. The Stimulus Two program was made possible by the announcement earlier this month that the cost of the taxpayer-financed bank bailout would be about $200 billion less than projected. This was thanks to Wall Street paying back the loans at a faster rate than expected on the heels of a gradually improving economy.
Just yesterday Bank of America repaid its $45 billion in TARP funding. There are now only two major banks still holding US government capital from the TARP program: Wells Fargo and Citigroup. Both are trying to complete repayments by the end of the year.
Goldman Sachs, JP Morgan Chase, Morgan Stanley, American Express, Bank of New York Mellon, BB&T, Capital One, State Street and US Bancorp have all repaid the government and have passed their stress test.
Bush spent $350 billion of the $700 billion in TARP funds. He passed the other $350 billion on to Obama. A total of $600 billion has been drawn down so far, and the new stimulus will reach the $700 billion limit. There will be some losses from TARP, but 80 of the funds are expected to be repaid. The results of the first stimulus appear woeful when compared to TARP.
Once again, the Obama administration is claiming they will use $150 billion of the $200 billion in repaid loans for its new stimulus style jobs program. “This concept that ‘TARP money’ can be used is a total fraud,” says Senator Judd Gregg (R-NH). “It’s nothing more than political cover. There is no TARP money to use. TARP was authorized to draw down debt by $700 billion. They’ve drawn down about $600 billion, so theoretically there is $100 billion more they could draw down, but then they would have to issue more debt.”
There are some good aspects of his program (the zero capital gains rate for small businesses during a one year period), but many parts are as misguided as the first stimulus. The money will be going for infrastructure spending on highways, railroads, bridges, tunnels, airports and seaports, but all of this is just adding to the deficit.
What Obama is doing is a bait-and-switch, if not an outright violation of the public trust. Rep. Jeb Hensarling (R-TX), the only Member of Congress on the TARP Congressional Oversight Panel, says it is “unacceptable to turn TARP into a permanent revolving slush fund available to advance any liberal cause the president sees fit.”
The Congressman says the money saved shouldn’t just be spent elsewhere. “That money belongs to the taxpayer. The stimulus law says funds repaid go to the Treasury,” he said, adding, “I’m sure I could find millions of reasons to spend money that we do not have.”
The most useful thing Congress can do with that $200 billion? Reduce the federal debt before it gets so out of hand, inflation and interest rates explode and “we look longingly at the Carter years. . . Nothing else they can do could have a more benevolent impact on job creation,” Hensarling said. Hensarling voted against both Bush economic packages in September and October of 2008.
Senator Gregg agrees with him that the TARP law is clear. The New Hampshire Republicans says “Using these funds for stimulus projects is not legally allowed. The law is precise — I wrote it. The funds are meant to address systemic risk and financial crises. Building roads and giving dollars to local projects is not that. The money they want to use doesn’t exist.”
There will be a positive return from the government’s TARP investments in banks. The AIG, GM and Chrysler loans, however, are expected to be a loss. The Government Accountability Office yesterday said that U.S. taxpayers will lose $30.4 billion from the auto-industry bailout, down from a prior estimate of $43.7 billion. The GAO report predicted a similar loss of $30.4 billion from AIG.
PHOTO: Executives from the financial institutions who received TARP funds, (L-R) Goldman Sachs Chairman and CEO Lloyd Blankfein, JPMorgan Chase & Co CEO and Chairman Jamie Dimon, The Bank of New York Mellon CEO Robert P. Kelly, Bank of America CEO Ken Lewis, State Street Corporation CEO and Chairman Ronald Logue, Morgan Stanley Chairman and CEO John Mack, Citigroup CEO Vikram Pandit, Wells Fargo President and CEO John Stumpf testify before the House Financial Services Committee on February 11, 2009.

Why Investors Are So Worried About General Electric by Gregory Hilton

GE shareholder value was destroyed this past year when the stock fell 80%

Why Investors Are So Worried About General Electric by Gregory Hilton–
One of the hottest topics on Wall Street right now is the future of the world’s most successful conglomerate, General Electric. It has the fourth most recognized global brand name, worth almost $49 billion. It is one of my favorite companies because it’s holding are a broad reflection of both the U.S. and world economy.
The current debate is best illustrated in two messages I received in the past few days. One friend wrote “I see a 60%+ return between now and the end of the year if you buy today. We all know the bad points, but GE will be fine. This is a rare buying opportunity which comes around only once every 10 or 20 years.”
Another colleague continues to be pessimistic, and is hoping there will be a divorce from GE Capital. He concluded his e-mail with “If G.E. is in serious trouble, God help us all. We are talking about more than 323,000 jobs if GE fails. If GE goes than expect a 3500 Dow before the end of the year.”
General Electric is one of six companies in the S&P 500 with a triple-A credit rating. GE shareholder value was destroyed this past year when the stock fell 80%, which is far worse than the broader market which is down 46.4%. The stock is now at a 17-year low, trading below $8 a share. GE was at $60 in the late 1990s, and it was at $33 in the summer of 2008. GE has fallen by 3- 8 percent almost everyday for the past several weeks.
The company has been paying a regular dividend for more than 100 years but this was reversed last week when GE slashed its quarterly dividend by nearly 68% in a move to save its investment-grade credit rating. Reducing its dividend to 10 cents a share from 31 cents will save the company $9 billion annually.
GOOD POINTS
1) The company had $18 billion in profit last year, and it is sitting on $45 billion in cash.
2) Several Wall Street experts are still betting on GE. Warren Buffet just entrusted them with $3 billion. He is not known for throwing money down the drain.
3) If you’re investing for anything beyond 12 months, this could be an excellent buy.
BAD POINTS
1) If any agency downgrades the credit rating on GE Capital four notches from its current AAA credit rating below AA- , they would be forced to pay out more than $8 billion immediately.
2) Primarily because of GE Capital the company is now carrying more than $500 billion in debt. It is this debt load which is crushing GE shareholders today. Investors fear GE Capital’s reserves for losses are too low in comparison with the top U.S. banks.
3) The stock will continue to be under pressure because dividend-oriented mutual funds might be selling their holdings on the heels of the recent cut.
I do not believe GE is going to vanish but that AAA rating is questionable. The turmoil at GE is very similar to what we saw at Bear Stearns, Lehman Brothers, A.I.G., Merrill Lynch, Citi, and Morgan Stanley.
In the interest of full disclosure, the guy who is so optimistic about GE also said Citigroup would weather the storm, AIG was too big to fail and Lehman Brothers would never fall. I hope the GE cheerleading is accurate but the stock has dropped from $13 to a little over $7 in 60 days. GE at $7.00 is bargain that can’t be ignored but so was Citigroup, AIG, Fannie Mae, Hartford Financial, DryShips and on and on.