Where does it end? Why are we propping up institutions that should be allowed to fail? In this case bailing out GMAC and GM is bailing out the United Auto Workers union.-Lou

Treasury plans to inject around $3.5 billion into GMAC

Washington — The Treasury Department plans to announce as early Wednesday afternoon that it will give GMAC Inc. around $3.5 billion in additional capital, sources told The Detroit News.

Detroit-based GMAC and the Treasury Department have been in talks for months to finalize the amount of money the company would receive. The Treasury Department said earlier this year it would invest up to $5.6 billion more in GMAC — on top of $13.4 billion GMAC has received over the last year.

GMAC spokeswoman Gina Proia declined to say how much the company expected to get.

“As we have previously stated, GMAC has been conducting a strategic review of its business and evaluating options to address the challenges at ResCap and the mortgage operations,” Proia said referring to GMAC’s residential mortgage unit. “Critical objectives in the process would be to take actions that position GMAC for improved financial performance and to repay the U.S. government.”

GMAC obtained bank holding status last December making it eligible for Treasury aid. However, unlike other financial institutions that went through “stress tests,” the Detroit-based auto finance company wasn’t able to raise enough outside capital to assure regulators that it was prepared for a new downturn.

The Treasury Department holds a 35.4 percent equity stake in the company. An official announcement on new funding is expected in the coming days, officials said.

GMAC is the primary lender to most GM and Chrysler dealers and customers, and its financial health is critical to the domestic auto industry’s turnaround.

GMAC replaced its CEO last month and asked Treasury to hold off on making the new capital infusion until the new management team could review the situation.

Michael A. Carpenter, a GMAC board member who was named CEO last month, said in interview in November that the company was working to repay taxpayers “as soon as we prudently can.”

GMAC’s mortgage business “has been a drain on the company’s ability to execute its primary mission,” Carpenter said last month.

Options on the table include a sale, spinoff or bankruptcy filing of certain mortgage assets, he said.

More…

This interesting video (going viral on the web) explains how we can deal with our frustration with bailouts of the big banks while Main Street suffers under the weight of deep recession. Simply move your money to healthy community banks and out of the “Too Big Too Fail” ones. Watch the video then click on link to find community banks in your area rated “B” or better than Move Your Money,-Lou

From The Huffington Post:

The idea is simple: If enough people who have money in one of the big four banks move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it becomes again the productive, stable engine for growth it’s meant to be. It’s neither Left nor Right — it’s populism at its best. Consider it a withdrawal tax on the big banks for the negative service they provide by consistently ignoring the public interest. It’s time for Americans to move their money out of these reckless behemoths. And you don’t have to worry, there is zero risk: deposit insurance is just as good at small banks — and unlike the big banks they don’t provide the toxic dividend of derivatives trading in a heads-they-win, tails-we-lose fashion.

Think of the message it will send to Wall Street — and to the White House. That we have had enough of the high-flying, no-limits-casino banking culture that continues to dominate Wall Street and Capitol Hill. That we won’t wait on Washington to act, because we know that Washington has, in fact, been a part of the problem from the start. We simply can’t count on Congress to fix things. We have to do it ourselves — and the big banks are the core of the problem. We need to return to the stable, reliable, people-oriented approach of America’s community banks.

So watch Eugene’s amazing video, then go to www.moveyourmoney.info to learn more about how easy it is to move your money. And pass the idea on to your friends (help make this video — and this idea — go viral!).

JP Morgan/Chase, Citi, Wells Fargo, and Bank of America may be “too big to fail” — but they are not too big to feel the impact of hundreds of thousands of people taking action to change a broken financial and political system. Let them gamble with their own money, not yours. Let’s turn big banks into smaller banks. We’ll all be better off — and safer — as a result.

Make it your New Year’s resolution to move your money. We can’t think of a better way to start 2010.

More…

In 2010 we will witness the bankruptcy of at least one large state. The question is what will the Feds do about it. Will they bail out the states with freshly borrowed (or more likely printed) billions, or leave the states to handle it themselves. My guess is they will be bailed out, after all, we are a bailout nation. The problem is that there are as many as 11 states in imminent danger of insolvency, will they all be bailed out?-Lou

California Pushes For Federal Help

Facing a $21 billion shortfall through June 2011, California leaders want billions of dollars in budget relief from Washington that could head off deep cuts expected to state programs.

Gov. Arnold Schwarzenegger will ask the White House to waive rules that require the state to spend its own money on certain programs to receive federal funds, according to California officials briefed on the Republican’s coming budget proposal.

Such relief, combined with additional stimulus funds, could save the state as much as $8 billion in the next 18 months, the officials said.

State Senate President Darrell Steinberg, a Democrat, will visit Washington in coming months to lobby Obama administration officials and the California congressional delegation for aid. His message: The national economy will depend on California’s recovery.

Messrs. Schwarzenegger and Steinberg will also use a longstanding argument that the state sends more tax dollars to Washington than it receives in return.

“Under President Clinton, we got 94 cents back on every dollar we sent,” said gubernatorial spokesman Aaron McLear, citing data compiled by the nonpartisan Tax Foundation. “Now it’s 78 cents on every dollar. It makes no sense that California should be subsidizing programs in other states.”

The state has a fairly good chance of receiving additional federal assistance, especially from what remains in the stimulus package, said Barbara O’Connor, director of the Institute for the Study of Politics and Media at California State University, Sacramento. California has “a fairly persuasive case as to why we deserve it now,” she said.

Arturo Perez, a fiscal analyst with the National Conference of State Legislatures, said states’ requests for waivers on federally mandated spending are common, especially when states face budget deficits. Federal departments usually handle the requests; some are approved, though many are denied, Mr. Perez said.

The governor once dubbed himself the “Collectinator” for his efforts to get more federal money. He has made his case to President Barack Obama and cabinet secretaries this year. “You can expect even more of that this coming year,” Mr. McLear said.

The White House said it hadn’t received a formal request from Mr. Schwarzenegger for such assistance.

“We understand the difficult situation that many states, cities and towns face,” said Kenneth Baer, spokesman at the White House Office of Management and Budget. He cited $144 billion in state and local fiscal relief included in the stimulus package.

Mr. Schwarzenegger last week sent a letter to House Speaker Nancy Pelosi and the rest of the California congressional delegation, saying the proposed national health-care overhaul would cost the state $3 billion to $4 billion a year.

Even with federal assistance, state leaders face a formidable task in closing the $21 billion gap in the $85 billion general-fund budget over the next 18 months. Lawmakers struggled to close a cumulative $60 billion budget shortfall this year by raising taxes, cutting spending and using one-time accounting gimmicks and federal stimulus funds.

More…

In early January of this year I issued my 2009 Financial Forecast . My 2008 forecast was eerily accurate, let’s review the year and see if I was able to repeat my 2008 performance.

Economy

Forecast: “the US economy will continue to contract at a rapid pace in 2009. GDP will likely decline 5 to 6 % over the first 6 months of 2009″

What Happened: GDP fell 5.5% 1st quarter 2009 and 0.7% 2nd quarter or a total of 7.2% over first 6 months of 2009. I slightly underestimated economic weakness

 Unemployment

Forecast: “By the end of 2009 the official unemployment rate will exceed 9% (was 6.7% in January 09), when part time and disgruntled job seekers are counted, the rate will actually be 15-20%.

What happened: As of December 1 the official unemployment rate was 10%  and when disgruntled and part time workers are counted it is 18%

 Foreclosures

Forecast: “Foreclosure rates will continue to rise throughout 2009 as thousands of adjustable rate mortgages rest interest rates in 2009. Rising unemployment will only add to the stresses”

What happened: We saw record foreclosure rates throughout all of 2009.

Housing Prices

Forecast: ” I expect housing prices to fall by at least another 10-15% in 2009″

What happened: Housing prices dropped 18.5% in 2009, worse than my forecast.

 Stock Market

Forecast: “I expect the U.S. stock market to hit new lows by the end of the first half of 2009. The Dow Jones Industrial Average may fall as low as 6,500 before a historic rally begins in the summer or fall as inflation rears it’s ugly head”

What happened: The stock market hit a low of 6,485 in March (started the year around 8,700) and a historic 60% rally from the lows followed. Nailed that one

 U.S. Bond Market

Forecast: The interest on the 10 year treasury bond will rise from 2.10% to 4.5% by end of 2009.

What happened: The 10 year yield is currently 3.82%, shy of my 4.5 forecast. The Federal Reserves purchase of treasury bonds has dampened the rise in rates.

 U.S. Dollar

Forecast: “I believe that the big story in 2009 will be the dramatic decline in the U.S. dollar. The U.S. dollar will decline 20% against both gold and foreign currencies.

What happened: The U.S. dollar did drop dramtically against both gold (29%) and foreign currencies (after a brief rally early 2009 the dollar fell 17%)

 Gold and Silver

Forecast: “Gold (currently $850) could rise to record highs in 2009. I expect gold to trtade above $1,200 in 2009. Silver will join gold and trade above $20 ounce (currently $10.80)”

What happened: Gold did indeed trade at record highs in 2009 topping $1,200 (1,224) in mid December before correcting back to $1,100. Silver hit a high of $19.60 early this month. Spot on with this forecast

 Oil

Forecast: I expect oil prices to bottom in early 2009 at $32. As inflation picks up in late 2009 I expect oil to move to a range of $70-80.

What happened: Oil did bottom in early 2009 at $32 and change and is now trading at $79 a barrel. Nailed this one.

Banks

Forecast: Although only 26 banks failed in 2008, I expect that number to exceed 300 in 2009.

What happened: This was my worst forecast as “only” 140 banks were closed by the FDIC in 2009. I believe if they wanted to closes all the banks that are insolvent they could have closed more than 300. Their lack of manpower and the depletion of the FDIC insurance fund resulted in the delay of some bank closures.

All in all I am pleased with how many forecast played out. It is obviously impossible to be 100% accurate on such things as the economy and financial markets but for the second straight year I think I got most if it right.

This weekend I will unviel “The Financial Physician’s 2010 Economic and Financial Market Forecast” and it isn’t pretty.

Lou Scatigna

Fannie Mae and Freddie Mac are now gigantic financial black holes. The U.S. taxpayer will now be subsidizing all homeowner mortgages. 

The companies have lost a combined $188.4 billion in the past nine quarters. The federal government now holds almost 80 percent of the equity in each of the entities.

The deficit will continue to widen and the Fed money printing will go on and on. If the mortgage giants won’t really need the extra money, why did Congress take off the cap? Nice to see the top exectutives getting paid millions to run the companies into the ground. How can anyone argue that the dollar is not going to continue to depreciate resulting in hyper-inflation?-Lou

 
Treasury Removes Cap For Fannie Mae and Freddie Aid

NEW YORK – AP-The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.

The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government’s estimate this summer of $170 billion over 10 years.

Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.

By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.

While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government’s commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.

“The companies are nowhere close to using the $400 billion they had before, so why do this now?” said Bert Ely, a banking consultant in Alexandria, Va. “It’s possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets.”

Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Without government aid, the firms would have gone broke, leaving millions of people unable to get a mortgage.

The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high. The two companies, facing mounting losses from mortgage defaults, were taken over by the government in September 2008 under the authority of a law Congress passed in the summer of 2008.

So far the government has provided $60 billion to Fannie Mae and $51 billion to Freddie Mac. The assistance is being provided in exchange for preferred stock paying a 10 percent dividend. The Bush administration first pledged up to $100 billion in support for each company, an amount that was doubled to $200 billion for each by the Obama administration in February.

The news followed an announcement Thursday that the CEOs of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies’ dismal performances this year.

Fannie’s CEO, Michael Williams, and Freddie CEO Charles “Ed” Haldeman Jr. each will receive $900,000 in salary, $3.1 million in deferred payments next year and another $2 million if they meet certain performance goals, according to filings with the Securities and Exchange Commission.

Here is another article on the state of Fannie and Freddie

The status of the U.S. trucking industry is shaky. reasons why you should be paying attention to the trucking industry at the current moment. Arrow Trucking just belly up on Christmas Eve halting all operations, canceling fuel cards, and telling drivers to return their rigs to the nearest Freightliner dealer. Many drivers were stranded since they were low on fuel and their gas cards were canceled. Why should you be concerned about the dire situation with the trucking business?

Trucking Bankruptcies threaten 3 major necessities:

1. Food
2. Goods/Materials (commodities necessary for everyday life
3. Fuel Delivery

If the economy is really improving (it is not) then the trucking industry would not be in such bad shape. The bankruptcy of trucking companies may result in shortages of basic necessities, especially if inflation and inflationary expectations accelerate.-Lou

US Trucking Operators YRC And Arrow Struggle In Difficult Times

– Less Than Trailer Load (LTL) freight truck specialists YRC Worldwide, who were dropped from the Dow Jones Index earlier this month are still renegotiating their near $537 million debt for equity swap to ensure the groups continued survival. Last night the company was still claiming it was making progress with its lenders to ensure their continued support having moved the goalposts on its original proposal. The Kansas outfit originally stated that it would get 95% approval from bondholders but this fell short and the company are now apparently seeking only 80% support.

YRC have already postponed the deadline for acceptance of their terms on three occasions but the matter needs a rapid conclusion if the haulier is to avoid bankruptcy. The group needs to repay almost $20 million in interest on their loans and it seems New Years Eve is the likely deadline. YRC have received substantial credit assistance leading to other US trucking companies calling foul, and been supported throughout their problems this year by staff in the main represented by the Teamsters .Yesterday however International Brotherhood of Teamsters President James Hoffa asked U.S. Securities and Exchange Commission and New York State Attorney General Andrew Cuomo to review “questionable promotion” of credit- default swaps by YRC.

Meanwhile Arrow Trucking of Tulsa have reportedly gone into bankruptcy leaving over two hundred office staff and fourteen hundred truck drivers with no jobs and many with no rigs as the company collapsed. Truckers have been left with unpaid wages and gas bills and very little information as the company website vanished and telephones remain unanswered. The sudden demise is likely to leave the company open to prosecution under the Federal WARN act which requires them to give staff two months notice.

More…

YRC Has Until Yearend to Corral Bondholders, Avert Bankruptcy

Dec. 18 (Bloomberg) — YRC Worldwide Inc. has less than two weeks to persuade bondholders to accept a debt exchange and prevent a bankruptcy filing that its employees’ union says may force the biggest U.S. trucking company to liquidate.

YRC, which has pushed back the deadline for the swap three times this month, must complete the tender by Dec. 31 to avoid a $19 million payment of interest and fees that would leave the trucker in an “unsustainable” position, the Overland Park, Kansas-based company said yesterday in a regulatory filing.

Bonds and shares fell yesterday as the company, which posted more than $1.7 billion in losses in the past five quarters, said the percentage of creditors who agreed to the exchange fell to 57 percent from 75 percent on Dec. 15. YRC, facing a slump in freight demand, is locked in a struggle with a group of bondholders who own derivatives that would profit if the company defaults, people familiar with the situation say.

“Bondholders are in the driver’s seat,” said David Ross, a Baltimore-based analyst at Stifel Nicolaus & Co. who has a “sell” rating on the stock. “They could force the company to file if they don’t tender enough notes, and then there is a high chance the business is liquidated.”

YRC took on debt when Yellow Corp. acquiredRoadway Corp. in 2003 for $1.07 billion and then bought USF Corp. in 2005 for $1.37 billion. The company has $1.6 billion of loans and bonds, according to data compiled by Bloomberg.

Economy Not Helping

Chief Executive Officer Bill Zollars said during an earnings conference call on Oct. 30 that YRC wasn’t anticipating growth from the economy for the rest of this year, and at least the first half of 2010.

Concern is growing that the company wouldn’t survive a bankruptcy filing because customers would defect, said Iain Gold, a director in the strategic research department of the International Brotherhood of Teamsters, which represented about 40,000 YRC employees as of January.

More….

Listen to this week’s “The Financial Physician” radio shows on WOBM AM 1160 and the national program on XM Satellite Radio.

Listen Here

Cruise with me and boost your financial health!

I’m very excited to announce that I will be hosting a seven day springtime cruise on the Celebrity Summit May 16-May23. We will be leaving from Port Liberty, New Jersey, we will visit Newport Rhode Island, Boston Mass., Bermuda then arriving back in New Jersey on May 23rd. (No airplane flights needed in the New York, New Jersey area)

I will be hosting many events on our trip including, welcoming cocktail party, farewell gala dinner and I will be conducting a number of 60-90 minute lectures on the economy, investments, estate planning and personal financial managment. I will hold a question and answer session and be available for  personal consulations.

I have been preparing for this cruise for some time and am sure it will be worth your while. Join me ,”The Financial Physician”, for your financial wellness cruise, it will be the best investment you can make plus we are going to have a fun time together. Check out the fares, they  are incredibly affordable. (check with your tax expert, part or all of the trip can be considered an investment expense and be tax deductable)

There are a limited number of people we can accomodate on this cruise so sign up early. If you register by January 31, 2010 you will receive a complimentary tour of Boston hosted by me and an historical expert.

During these turbulant financial times it’s more important than ever that you stay informed on financial matters, I’m excited about having the opportunity to spend quality time with as many of you as possible.

I look forward to seeing you on “The Financial Physician Cruise” on May 16th aboard the beautiful Celebrity Summit’

Find Out More Here  (make sure you click on “Download Brochure” For all the details)

More talk about replacing the U.S. Dollar. The ramifications of that will be devastating to the Average American. Higher prices for everything and a lower standard of living for all of us.-Lou

Do we need a new reserve currency?

A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America’s economy and the greenback is fuelling a “currency-regime crisis”, says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar’s role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Account deficit

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. “You can’t have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

“So I agree with this. And I’m absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that’s not sold by just adding another couple (of currencies). It actually means having a global money.”

Indeed, Wolf said he’s in complete agreement with China’s Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency “most credibly and convincingly”.

“On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it,” said Wolf. “Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession, the dollar is not adequately supported.” The US currently has a national debt in excess of $12 trillion (Dh44trn) or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108bn. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

More…

The price we will pay in the future for giant deficits and running the monetary printing press will be much higher interest rates in the future.-Lou

Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits

Dec. 28 (Bloomberg) — If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale.

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgagesto 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

Investors are demanding higher returns on government debt, boosting rates this month by the most since January, on concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades.

“When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said in a telephone interview. “Market signals will ultimately spur some policy action but I’m not naive enough to think it will be a very pleasant environment.”

Yields on the 3.375 percent notes maturing in November 2019 climbed 4 basis points to 3.84 percent at 11 a.m. in London today, according to BGCantor Market Data. The price fell 10/32 to 96 5/32. They have risen 65 basis points this month, the most since April 2004, as government efforts to unfreeze global credit markets lessened the appeal of the securities as a haven.

Treasury Futures

Speculators, including hedge-fund managers, increased bets that 10-year note futures would decline more than fivefold in the week ending Dec. 15, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 52,781 contracts on the Chicago Board of Trade. It was the biggest increase since October 2008.

More…