Test 3 Extra Credit

Test 3 Extra Credit

Test 3 Extra Credit

7 points

I’ve posted to my website five articlesthat provide an overview of how our financial system has evolved into a series of bailout entitlements for a selected few and the risks that entitled financial institutions impose on our economy. Also find a list of questions for each article to be answered for extra credit on Test 3. Answers to the questions may be found in relative order within the body of the articles. Be sure to read the articles in the order they are provided for clarity.

Article 1:The Treasury And The Federal Reserve – Investopedia, November 7, 2008 [3 pages]

Article 2:The Real Housewives of Wall Street – by Matt Taibbi, Rolling Stone Magazine, April 12, 2011. [5 pages]

Article 3:Cyprus Bailout, Part I -- This Crazy Cyprus Deal Could Screw Up a Lot More Than Cyprus… - by Henry Blodget, Business Insider, Saturday, March 16, 2013 [3 pages]

Article 4:Cyprus Bailout, Part II – IT’S OFFICIAL: Banks In Europe May Now Seize Deposits To Cover Their Gambling Losses – by Henry Blodget, Business Insider, Monday, March 25, 2013 [2 pages]

Article 5:When Risk Is Disconnected From Consequence, The System Itself Is At Risk- by Charles Smith, from Of Two Minds, February 22, 2012. [2 pages]

Print the following list of questions, and as you read the articles providehandwritten answers on the same page beneath the respective questions. Some questions will require only a short phrase or sentence for an answer, and other questions will require more explanation. Be sure to answer each question completely.

The Treasury and The Federal Reserve - Investopedia, November 7, 2008

  1. What is the Treasury Department’s official role as it relates to:
  1. Tax Assessments
  1. Currency
  1. The Federal Reserve serves as this country’s Central Bank. What specific services does the Central Bank provide regarding each of the following areas:
  1. Available Credit
  1. The Social Security and Federal Government Payroll system
  1. Raising Cash for the Federal Budget
  1. The article describes the Federal Reserve as a Nonprofit Company.
  1. At the end of each year [after expenses are paid], what happens to Federal Reserve Profits?
  1. What do you expect happens in the event of a substantial loss at the Federal Reserve?
  1. During a recessionary period, the Federal Reserve and Treasury Department work in concert to help support government sponsored entities and nongovernmental corporations to stimulate economic growth. This support is often referred to as “Bailouts”.
  1. How would the Federal Reserve and Treasury support a government sponsored entity or nongovernmental corporation during a severe recession?
  1. If there are losses incurred as a result of the bailouts, where does the money to cover those losses come from?

The Real Housewives of Wall Street - Matt Taibbi, Rolling Stone Magazine, April 12, 2011

  1. Taibbi speaks of two (2) National Budgets. What does he mean by that? Give a brief description of each budget to which he is referring.
  1. Several members of Congress [a bi-partisan group] recently pushed through legislation that basically forced the Federal Reserve to open its books to Congress after the 2008 financial crisis. The records revealed a program of bailouts that were distributed to whom – for example…
  1. What was the Waterfall TALF Opportunity, and who were its chief investors?
  1. Who is Christy Mack?
  1. Who is Susan Karches?
  1. What is the technical [full] name of the Federal Reserve program that gave money to Waterfall TALF Opportunity?
  1. Who is John Mack?
  1. Waterfall TALF Company participated in the Federal Reserve bailout program.
  1. How much capital did the owner’s put into the joint venture?
  1. How much did Waterfall TALF Company get from the Federal Reserve in near-zero interest loans?
  1. What did the Waterfall TALF investors buy with the Federal Reserve loans?
  1. Taibbi describes a bailout system that started with a legitimate purpose – and soon got out of control. It first started with a bailout of Bear Stearns and AIG, then the Federal Reserve tried to stop bank failures by purchasing toxic loans and mortgage backed securities directly from investment banks. How did it get further out of control? Explain….
  1. TALF is an acronym for the Federal Reserve bailout program. How does it work exactly? Who gets the money (near-zero interest loans); what are they to do with the money; who keeps the profits; and who pays the losses? Explain…..
  1. Christy Mack and Susan Karches of Waterfall TALF Company bought a large pool of high-risk commercial mortgages with their Federal Reserve near-zero interest loans. Where did they get the commercial mortgages, and who owned the company from which they bought the mortgages?
  1. Has Waterfall TALF Company paid back the Federal Reserve for the $220 million in near-zero interest loans they receivedfrom the bailout program as of the date of this article?

More important, is Waterfall TALF Company required to pay back the Federal Reserve for the loan?

  1. Senators Chuck Grassley of Iowa(R), Bernie Sanders of Vermont (I), [Congressman Alan Grayson of Florida (D), Congressman Ron Paul of Texas (R)], the General Accounting Office of the US Government (nonpartisan), and other public officials have written letters to and asked for formal inquiries with the Federal Reserve to get answers to questions they have regarding the bailout transactions. What has been the response from the Federal Reserve?
  1. Was the TALF bailout program the only risk-free money distributed by the Federal Reserve during this period?
  1. How has more bailout money been distributed to the five biggest investment banks in this country? Describe the process…..
  1. During this period, John Mack’s Investment Bank – Morgan Stanley and Goldman Sachs received how much money in near-zero interest government cash?

1) Morgan Stanley –

2)Goldman Sachs –

What was the combined profit of the two banks shortly after that Federal Reserve windfall?

  1. Taibbi goes on to identify many other recipients that benefited from the Federal Reserve near-zero interest loan bailout program. Name at least 8 (eight) more recipients that we know to have received money from this program.

1)5)

2)6)

3)7)

4)8)

Note:

The loan recipients of the Federal Reserve bailout programs buy high-risk assets from the investment bank’s Balance Sheets at whatever value the banks claim they have. The assets are transferred to the Federal Reserve as collateral. If the assets payout, the profits go to the recipients of the near-zero interest loans. If the assets fail [do not payout], the recipients of the near-zero interest loans walk away and suffer no loss. The losses are effectively dumped on the American taxpayers.

End Result: The banks get bailed out and suffer no consequence for their high risk activity that created the “toxic” assets in the first place. Those well-connected, fortunate individuals that participated in the Federal Reserve bailout program [by taking near-zero interest loans in order to purchase the toxic assets] get ridiculous amounts of free money and are guaranteed to suffer no negative consequences.

Cyprus Bailout, Part I- This Crazy Cyprus Deal Could Screw Up a Lot More Than Cyprus… - by Henry Blodget, Business Insider, Saturday, March 16, 2013.

  1. Last weekend, Saturday, March 16th, the world became aware of what’s going on in Cyprus. What is the “short version” of what’s happening in Cyprus according to the author?
  1. On the weekend of March 16th, the Eurozone leaders arranged a bailout for Cyprus banks. What were the specific conditions of this original bailout plan? Explain who would have paid in the original plan and how much.
  1. What has the bailout plan triggered among the depositors and Cyprus citizens?
  1. What happens to banks when there is a “run on the bank”?
  1. How could the Cyprus bailout plan disrupt the financial system throughout Europe?

Cyprus Bailout, Part II - IT’S OFFICIAL: Banks in Europe May Now Seize Deposits To Cover Their Gambling Losses - by Henry Blodget, Business Insider, Monday, March 25, 2013.

  1. How is the final Cyprus bailout deal in Europe different from the original plan just a week prior?
  1. What will happen to deposits over 100,000 euros – “uninsured deposits” in the Cyprus banks?
  1. The European Central Bank (ECB) has taken a different approach to bank bailouts compared to our Federal Reserve. How might this new precedent affect countries within the European Union that have weak banks?

Update: Cyprus banks have been closed for more than a week to solve this crisis. They have limited withdrawals by depositors, and those limits (or “capital controls”) are expected to continue when the bank reopens). There have been riots and protests in the streets of Cyprus during the bank’s closing period. Cyprus banks are expected to reopen on March 27th. Under the final plan, uninsured deposits [those greater than 100,000 euros] in Laiki [2nd largest bank in Cyprus] will likely lose between 80-100% of their deposits. I’ve read several reports that suggest that loss will be closer to 100%. Uninsured deposits in the Bank of Cyprus [1st largest bank in Cyprus] will probably lose between 30-50% of their deposits. This form of bailout is referred to in the financial media as a “deposit grab” or a “bail-in”.

We’ll soon see how high the final cost will be and what happens next….

I will post additional articles to my website with updates on Cyprus for those interested. Additional articles are not part of this assignment.

When Risk is Disconnected From Consequence - Charles Hugh Smith, Of Two Minds courtesy of Zero Hedge, February 22, 2012.

  1. Charles Smith says the entire global economy’s financial instability can be traced to one simple rule of nature. What is that rule?
  1. When risk is disconnected from consequence what happens to the price of capital and risk?
  1. If risk-takers no longer suffer negative consequences, what is the inevitable result?
  1. The author leads the reader through an example where two gamblers are in a casino. One gambler must use his own money, and the other benefits from a consortium or group of people willing to pay for all of his losses up to $1 million. Negative feedback for the gambler that has losses guaranteed is eliminated.

Briefly explain how in theory one gambler in the casino can bring down the entire system.

  1. The author uses the casino example as ametaphor for the global financial system. In the global financial system,
  2. Who are the risk-takers disconnected from negative consequence?
  1. Who represent the consortium or group of people absorbing all the losses while reaping no benefit or gains?
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