Normally, I have a lot of respect for Bloomberg.com, but their recent article on the US Government’s pledge of 7.7 trillion to ease frozen credit seems a little absurd all things considered. Their numbers include some of the following expenses:
$3.18 trillion — Already been tapped by banks and other financial institutions
$2.4 trillion — Set aside to buy short-term notes, or commercial paper, that companies use to pay bills
$1.4 trillion — Used by the FDIC to guarantee bank to bank loans
$29 billion — To help with the Bear Stearns takeover by JP Morgan Chase and Co
It’s becoming more and more obvious that the problems with the American economy are going to continue for the next several years. If for no other reason then the knee-jerk reaction that banks and financial institutions are taking to limit their exposure to real estate related investments. There is no greater example of this then the recent lawsuit filed by Donald Trump against lenders looking to reduce their exposure on the Trump International Hotel and Tower – a 92 story hotel and condominium high-rise architected to be the second-tallest building on United States soil.
Unlike most Trump stories – this isn’t really about Trump or his ego or even about some grandiose plan to expand his empire. This story is about terminology, bank loans, and whether you believe that the “unprecedented financial crisis in the credit markets” is equivilent to a force majeure equal to an act of war or a natural disaster. If you believe Trump (or anyone looking at the first page of a foreclosure document), you would consider the financial markets some sort of natural disaster, and that would require an extension and additional funding as provided in the original Trump loan package.
Amid increasing turmoil, the financial sectors continue to get battered with ever worsening statistics, facts, and losses. Even once steadfast companies like Citigroup are seeing lines of of defaulting homeowners looking around for help and their share of the bailout. In what may be good news for some of these homeowners, Citigroup has announced that they are putting a temporary moratorium on foreclosures for all clients who are willing to work in good faith to restructure and repay their mortgages.
Some experts contend, and I would assume that they are correct, that the 158 year old Citigroup is simply postponing the inevitible if things don’t change in the economy as a whole. Of course, it will curb the ever increasing number of foreclosures, but until the underlying problems get resolved its impossible to know what the long-term benefits of this halt will be.
Most of us can clearly remember the day – way back in September – when they woke up to hear that they were loaning AIG $85 billion to keep it from failing. There was a tremendous amount of debate as analysts went back and forth about whether or not this would be good for the American people or not. Apparently AIG was too big to fail, and apparently that remains true today, but now the terms are a little different and the potential benefit to the American consumer is significantly less than it was before, and if you think that’s bad, keep reading, it gets worse.
So the original terms were pretty good – assuming that AIG could repay – but with very little fanfare the original $85 billion line of credit was supplemented by another $38 billion which was then added to additionally when AIG was allowed to sell another $21 billion of commercial paper to the US Government. These are big numbers, we’re talking about nearly $150 billion in since September, and some economists are questioning if this will be enough! But this is where it gets really good…