PRESIDENT OBAMA SAYS: Ending the nation’s economic crisis requires us to stabilize the financial system and get banks to resume lending.

“We are creating a new lending fund that represents the largest effort to help provide auto loans, college loans, and small business loans…We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times… I intend to hold these banks fully accountable for the assistance they receive, and this time, they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer.”

DMI SAYS: “If major financial institutions collapse, the nation’s economic crisis would dramatically worsen, devastating middle-class Americans already facing difficult times. But as President Obama recognizes, the Bush Administration’s approach of giving a blank check to banks has failed to stabilize the system or reignite lending. Transparency, though, is just the beginning: in providing needed capital to troubled banks, the government must ensure that middle-class taxpayers are not forced to take on the costs of bank shareholders’ failed investment strategy. When major banks are effectively insolvent, the government must take decisive and direct control and sell off their toxic assets in a way that shifts risk and liability to shareholders, and away from taxpayers.” 

• At the core of the President’s bank bailout plan is a process to evaluate bank health and boost lending capacity. This includes a “stress test” to determine the financial health of financial institutions.  After undergoing this test the Treasury will make capital investments, which will be placed in a separately managed trust, and take an equity position in the bank.   The administration should use the stress test as opportunity to secure a foothold in the bank and take temporary control of it if the bank is deemed to be failing, much in the same way the FDIC temporarily seizes institutions, scrubs them of their bad assets, and then re-sells banks to investors.
  
  
• Instead of taking direct control over banks, the Treasury Department has suggested it will create a so-called “bad bank,” a pool of troubled assets that will be purchased through public and private funds.  Buyers from the private sector will set the price for the asset. Unfortunately, as many economists have noted, in this scenario, middle-class taxpayers would assume any losses and private investors would reap the rewards if there is a substantial appreciation in assets.
  
  
• The U.S. Treasury and the Federal Reserve have committed up to $1 trillion to help private investors buy up consumer-backed and business-backed securities, thus adding liquidity to credit markets and lowering the cost of consumer and business credit. This important measure will enable middle class families to access credit and provide them much needed leverage to meet their education, housing and transportation costs, as well as other vital needs.
  
  
• In response to the public outcry that banks were not asked to explain how they used bailout money in the past, Treasury Secretary Geithner created transparency requirements for banks that are given public funding.   Banks that accept taxpayer dollars must show how they are using that money to increase activity, and then must file monthly lending reports which will be available to the public. This is a common sense approach that will help ensure that public money is used in the way it was originally intended to be used.
  
  
• Also responding to reports that corporate executives have given themselves lucrative bonuses as their companies are failing, and that banks were using public money to make business deals, Secretary Geithner imposed dividend and acquisition restrictions, and executive pay caps on banks receiving bailout money.   Giving the public say on executive pay, again, is a minimal check on the kinds of corporate excess that helped cause the economic downturn in the first place.

RELEVANT STATISTICS:

• Amount of assistance provided to AIG, Citigroup, and Bank of America under TARP, respectively, in dollars: 40 billion, 50 billion, 45 billion
  
  
• Percent ownership stake in Fannie Mae, Freddie Mac, and AIG held by the United States government: 79.9
  
  
• Percentage of the federal government’s stake in Citigroup now being considered by the Obama Administration: 40
  
  
• Value of assets received for every $100 the Treasury Department spent on the ten largest TARP investments, in dollars: 66
  
  
• Value of securities received by Berkshire Hathaway for each $100 it invested in Goldman Sachs in September of 2008, in dollars: 110
  
  
• Estimated amount the Treasury Department paid for assets worth $176 billion through TARP capital purchases made in 2008: 254 billion
  
  
• Percentage decline in the share price of insurance provider AIG during a two-week period in September 2008: 78

FINANCIAL REGULATION

PRESIDENT OBAMA SAYS: We need to overhaul financial regulations to prevent future financial collapses. 

“[T]o ensure that a crisis of this magnitude never happens again, I ask Congress to move quickly on legislation that will finally reform our outdated regulatory system. It is time to put in place tough, new common-sense rules of the road so that our financial market rewards drive and innovation, and punishes short-cuts and abuse.”

DMI SAYS: “The verdict is in: The financial services industry cannot regulate itself.  News that the Obama Administration is moving rapidly to re-order the current alphabet soup of regulators and give the financial regulatory system an extreme makeover is positive, no matter how vague these policy prescriptions are at the moment. Wall Street has mishandled and decimated the investments and retirement savings of the American middle class. A new regulatory system will safeguard the economy for future generations and allow ordinary Americans to realize the fruits of their labor. In addition to increased transparency, disclosure and accountability, we strongly encourage the President to seize this moment to strengthen fair lending laws and to radically re-envision the Community Reinvestment Act.” 

• In the past, the President has flagged poor government oversight of the financial services industry as a major problem to be addressed by new regulations.  The subprime mortgage meltdown was marked, in particular, by unconscionable permissiveness on the part of federal bank regulators who allowed abusive and risky lending practices to go virtually unchecked. These practices not only harmed consumers, but proved to be self-destructive to the lending institutions themselves.  Existing fair lending laws, along with relevant enforcement mechanisms, proved woefully inadequate. The Center for Responsible Lending has gone as far as calling for the dismantling of the Office of Thrift Supervision (OTS) for its allowing bad lending practices to proliferate.  The Obama Administration must make the establishment and enforcement of stronger fair lending standards a central part of the new regulatory order.
  
  
• The Obama Administration has indicated through a report - issued by a committee that was headed by senior economic advisor to the Obama Administration, Paul Volcker – that many financial institutions and complex financial instruments will be brought under tighter direct regulatory supervision.  For example, there would be stricter rules for hedge funds; mortgage brokers would be closely overseen;  the SEC would more directly supervise mortgage backed securities; credit default swaps, which factored prominently in the demise of investment banks, will be traded centrally, thus making them easier to monitor; new rules would be devised to eliminate credit rating agency conflicts of interest that led them to ignore the risk presented by exotic products and practices.  These kinds of policy changes will go far towards making sure this nation is not soon revisited by the current financial crisis.
  
  
• The Administration should also consider a new Community Reinvestment Act that is in synch with a newly modernized financial services industry.  The financial crisis, and string of industry abuses that precipitated it, underscore the need to compel banks and all consumer lending institutions to make quality credit and financial services available to working families and neighborhoods of color in a responsible and affordable way.

RELEVANT STATISTICS:

• Number of federal agencies regulating the financial services industry: 9

• Percentage of U.S. financial institutions that had substantial operations in more than one financial sector (banking, securities, and insurance) in 2000: 62

• Number of major Wall Street investment banks still functioning: 0

• Percentage of subprime loans made by institutions fully governed by the Community Reinvestment Act: 25

• Earliest month in which Harry Markopolos, a financial fraud analyst, claims to have provided evidence to the SEC that Madoff’s fund was a fraud: 7/2000

• Date on which Bernie Madoff was indicted for securities fraud: 12/11/2008

Go to the next section: Home Mortgage Crisis

DMI on the 2009 Presidential Address to Congress