The AGA Weblog

The TARP Refund: What To Do With It?

By: Robert Maitner Jr., CGFM, PMP

Robert Maitner Jr. is senior managing consultant with IBM Public Sector Financial Management.

Imagine this situation. You have encountered an unexpected expense that you had not planned or budgeted for, say perhaps a medical bill. So you take a loan in the amount of $500 to cover the expense. When the bill comes, you are pleasantly surprised that is for only $300. What do you do with the remaining $200? Should this be considered a windfall? Or should it be applied to the $500 loan amount? If the $200 would go toward basic necessities, such as food or shelter, the temptation is there to hold on to the cash. If it would mean a few more dinners out, then perhaps applying the money to the loan balance makes more sense.

This is the same scenario we see with the Troubled Asset Relief Program (TARP).

President Obama recently announced that the bank bailout cost about $200 billion less than expected, telling reporters, “It means that some of that money can be devoted to deficit reduction.”

Democratic leaders want to see those leftover TARP funds used for a new jobs bill. That may not be possible, however. The TARP legislation states that any unused money must go toward reducing the national debt, which sits now at a whopping $12 trillion. The Wall Street Journal explains that the Treasury secretary has some latitude in deciding how to use the funds, but that he first must consider taxpayers’ interests by maximizing overall returns and minimizing impacts on the national debt.

The debate here is a matter of priorities—what is more critical at this time, jobs creation or reducing the national debt? If you’re one of millions of Americans still out of work, you’d most likely opt for the jobs bill. If you’re not out of work, and hawkish about our growing national debt, you may say that the money should be applied back to the loan amount (the debt). It’s all a matter of perspective.  

Perhaps some sort of split would make sense here as well. What about using half of the funds for a jobs creation bill, and apply the second half to reduce the national debt? What do you think?

The Myths of Financial Innovation

By: Sunil Datt, MS, MBA, MA, CGFM, PMP

Sunil Datt, MS, MBA, MA, CGFM, PMP, is Senior Managing Consultant, IBM Global Business Services.

One of the enduring myths of the recent financial system crisis has been the oft-repeated belief that financial innovation left regulation far behind; that so many financial products and institutions were created that nobody really understood what was going on. And the other myth now is that we have the danger of over-regulation stifling innovation; innovation that is essential for the efficient functioning of markets, for efficient intermediation between investors/savers and producers/borrowers, and so on. All overstated.

If you boil it down to the essentials, the crisis was a simple case of over-leveraging on a massive scale; binging if you like. There were new institutions and products involved, but those were not innovations.  There were many types of non-banks involved, but those have been around for sometime; nothing new there. There were complex new securitized products, but then again securitization has been around for decades. If you create a more complex financial product, or one that serves a particular segment of the investor community, or even just one major investor, that to my mind is just re-jiggering, or renovation, or adaptation…whatever; not innovation.

By the way, my view is not cynical. Just trying to be a tad more objective here. For an almost cynical view, sample John Kenneth Galbraith. He wrote in his book A Short History of Financial Euphoria that financial innovation through the ages is merely the quest for new ways to create more debt that is leveraged against limited assets. “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version,” he wrote. The same trick gets played over and over again under a new guise. Kind of true if you take the over-leveraging aspect of this crisis! Yet Galbraith was too sweeping. The financial system does many things. Among others, it provides a means of payment and exchange; it transfers the spare cash of savers to those with investment opportunities; it allows assets to be traded; and it provides insurance, whether in conventional contracts or in such instruments as swaps, options and other derivatives.

In all these areas, innovation has provided tangible benefits. Computerization has improved the payments system, while technology such as automated teller machines has been a huge convenience to retail bank customers. The Internet is transforming the availability of financial information and is lowering transaction costs in broking. Like many other innovations in retail finance, these advances do not involve the creation of debt. One would have to admit though, that these latter innovations were really financial sector adoptions of technology, rather than true financial innovations in of themselves.

The other view of financial innovation is that it happens because of the desire to escape the heavy hand of regulation. Merton Miller, the late Nobel laureate, declared in a 1986 paper that “the major impulses to successful financial innovations have come from regulations and taxes.” In an extreme version it has even been argued that in the credit bubble, much of the impetus for driving loans off bank balance sheets into securitized form came from the risk-weighted capital regime introduced by the Basel committee of international bank regulators. By encouraging off-balance-sheet activity, the regime turned banking into a shorter-term, more transactional business. Once again an extreme view, but with an element of truth.

True innovation usually brings a paradigm shift. The best example in the physical world, of course, being the cell phone. For the first time, almost anyone could afford to talk to another wirelessly. Not only talk, but also leverage. My favorite story is of the poor Indian fisherman, who would come late in the evening with his catch, only to find that all the traders were gone. The fish would rot. Now, as soon as he has a catch, the fisherman calls five traders, compares prices, and strikes the best deal—all on his cell phone. When he comes ashore late in the evening, the specific trader is waiting to take delivery with cash in hand!

So let’s come to some needed innovations that may really help. The FDIC reports that 60 million Americans are un-banked or under-banked. Un-banked are those who do not have a checking or savings account, and the under-banked are those who do have a checking or savings account but still use check-cashing services, pay-day loans etc. Now financial innovation would occur if products and services were found that encouraged the un-banked and under-banked to walk into bank branches, or bank from their cell-phone! A paradigm shift. Financial innovation would occur if a product or service was found for millions of ordinary investors to manage their 401K accounts with minimal risk. We need some real financial innovation!

Audits by GAO Will Compromise Fed Independence

By: Christopher Hanks

Christopher Hanks is a mathematician and defense analyst. In his work at defense think tanks over the last 30 years, he has focused on logistics processes and models, revolving-fund operations and business reform efforts.

Triggered by the current economic difficulties, a debate is now raging about whether the Government Accountability Office (GAO) should audit Federal Reserve operations. The issue is whether GAO audits would compromise the Fed’s independence in setting and implementing monetary policy.

The Fed’s monetary-policy decisions influence the supply and flow of money in the economy. Usually the Fed is able to implement its decisions by taking actions—for example, adjusting interest rates and dictating capital-reserve levels—generally regarded as routine, even if they are not always popular. Sometimes however, as the economic developments over the two years have shown, the Fed finds itself taking highly non-routine actions—making large emergency loans to major financial institutions, for one—in order to prevent a total collapse of the economic system. As a result of actions the Fed has taken of the latter type, legislation is now making its way through Congress calling for the Fed to be audited by the GAO.

In order to decide whether GAO audits would compromise the Fed’s independence, it is first necessary to be clear about exactly what happens when the GAO “audits” a government agency. The GAO’s own website provides a commendably clear description:

“Our Work is done at the request of congressional committees or subcommittees or is mandated by public laws or committee reports. We also undertake research under the authority of the Comptroller General. We support congressional oversight by

·      auditing agency operations to determine whether federal funds are being spent efficiently and effectively;

·      investigating allegations of illegal and improper activities;

·      reporting on how well government programs and policies are meeting their objectives;

·      performing policy analyses and outlining options for congressional consideration; and

·      issuing legal decisions and opinions, such as bid protest rulings and reports on agency rules.

We advise Congress and the heads of executive agencies about ways to make government more efficient, effective, ethical, equitable and responsive.

Our work leads to laws and acts that improve government operations, saving the government and taxpayers billions of dollars.”

Bullets one and three in above description make it clear that when GAO  “audits” an agency’s operations, what it actually does are program evaluations —that is, investigations aimed at determining whether agency policies and programs are “meeting their objectives” and spending federal funds “efficiently and effectively” toward that end.

Actual financial audits, as opposed to program evaluations, did once represent the core of GAO’s work, but those days are long gone. Over the last 50 years a succession of Comptroller Generals (Elmer Staats, Charles Bowsher and David Walker )—all acting with the support of the Congress—have converted the GAO into something much more akin to a management-consulting agency rather than an accounting organization.

Indeed, as 40-year GAO veteran and director of GAO’s Office of Quality and Continuous Improvement Michael Motley noted in 2008: “At one time, GAO was mostly concerned with finances, but today only 7 percent of our work is solely financial.”

The fourth bullet in GAO’s work description above, however, is the one most critical for the current debate. As that bullet states, when GAO “audits” government agencies, it will do its own policy analysis and it will then make recommendations (“outline options”) to Congress about what needs to be done.

In other words, once it begins auditing the Fed, the GAO can be expected to begin making its own recommendations to the Congress—based on its own analysis, not the Fed’s—about what the Fed should have done (or should not have done, or should be doing) with regard to monetary-policy decisions and actions. If the Congress then enacts the GAO’s recommendations into law—as it has shown a ready willingness to do (some relevant examples are:  the FMFIA of 1982, the CFO Act of 1990, the GMRA of 1994, and the FFMIA of 1996)—control of monetary policy will have passed from the Federal Reserve to the Congress.

Given the Congress’ oft-demonstrated inability to take a disciplined approach to financial matters, that would be a disaster.

Leverage Technology—Don't Worry About TBTF

By: Sunil Datt, MS, MBA, MA, CGFM, PMP

Sunil Datt, MS, MBA, MA, CGFM, PMP, is Senior Managing Consultant, IBM Global Business Services.

When acronyms begin to appear, you know a debate has gone on for too long. So when I saw TBTF (Too Big To Fail) in an article, I knew the time for discussion was over, and it was time to act. Of course, in spite of my advice to the contrary, Mervyn King took the hatchet and sliced up a couple of banks in the U.K. Never mind, he took action! At least he got the banks scared for some time. But here, back home, the debate is festering, and some smart cookies have already proposed Jamie Dimon (CEO of JP Morgan Chase) as the next Treasury Secretary.

Jamie, of course, is quick to act. He already wrote in the Washington Post of Nov. 13, 2009, that the term TBTF should be banished from our vocabulary. Instead, he proposes an orderly winding down of an institution, no matter how large. Easier said than done. Remember, Lehman’s demise was catastrophic not because of its size, but because of the number of counterparties it put at risk globally. And the systemic risk arises not just from actual losses, but from the vaporization of confidence in even the largest or most respected players in the system. Markets seize up, and that starts the domino effect.

Anyway, the issue is why are we thinking like undertakers, and not like preventive care physicians? As I wrote in my previous weblog, “The real issue is the interconnectedness and the tight integration of global financial markets in today’s world. The dominos don’t stand individually and get knocked down one by one. They hold hands and dance together. And they infect each other virally. From that perspective, ‘smart’ regulation lies in a combination of better reporting requirements from all major financial players, highly automated processing of submitted data, and sharp quick analysis to detect seeds of systemic risk. Stress testing all new financial instruments would be part of such a regime.”

So the question arises, is this possible? Is it humanly possible to collect such vast amounts of data and process it meaningfully, and point out incipient symptoms of sickness? The answer is yes, because we have the technology. We have the Web for filing of information, we have super computers like IBM’s Blue Gene for processing at super speeds, and we have tons of software for storing, aggregating and analyzing data. In fact, it is possible to collect risk parameterized data from every financial institution in the nation, and process and analyze it in pretty short time frames. But that will not be necessary. Collecting data from all financial entities that have assets of say, over a billion, should serve the purpose.

As a matter of fact, on a smaller scale the Federal Deposit Insurance Corporation (FDIC) has been doing this for the Federal Financial Institutions Examination Council (FFIEC), that consists of FDIC, the Federal Reserve and the Office of the Controller of the Currency, since 2006. Using the XBRL (Extensible Business Reporting Language) standard, FDIC collects quarterly call report data from 8,200 banks in a highly automated environment, and then shares it with the other members of the FFIEC. As compared to earlier methods, this automated environment has resulted in the following improvements:

1. Cleaner data—95 percent compliant with definitions as compared to 66 percent previously.
2. More accurate data—100 percent mathematical requirements met as against 70 percent prior.
3. Faster data inflow—Data received within one day of quarter close as against weeks in the previous system.
4. Increased productivity—Each analyst could now handle up to 600 banks as against 450 banks previously.
5. Faster analysis—Analyst workload completed 15 percent faster.

Now, the Securities and Exchange Commission (SEC) has mandated a phased program of filing annual and quarterly reports in XBRL by reporting firms, starting June 2009, and then of risk-return statements by mutual funds. The data will be available not just to analysts but to the public in general.

The FDIC and SEC are, however, still collecting data in the traditional formats for the traditional regulatory functions viz. capital requirements. As the Basel II type requirements have been proven to be insufficient for containing systemic risk, the parameters for risk measurement have to be revised. In any case, the massive disintermediation away from banks requires fresh thinking in this area, clearly requiring regulation of large non-banks. It is instructive that between 1977 and 2007, the assets of all depository institutions plunged from 56.3 percent to 23.7 percent of total financial sector assets. Meanwhile, the assets of pension funds and mutual funds rose from 21.0 percent to 37.8 percent, as these institutional investment pools came to provide the dominant channels for household saving and investment flows. At year end 2007, the financial assets of pension funds and mutual funds totaled $21.9 trillion, as compared to $13.7 trillion for banks. Talking of TBTF!

 

The Dance of Dominos

By: Sunil Datt, MS, MBA, MA, CGFM, PMP

Sunil Datt, MS, MBA, MA, CGFM, PMP, is Senior Managing Consultant, IBM Global Business Services.

When Mervyn King, Governor of the Bank of England, recently said: “Break up the banks,” I was inclined to hand him the hatchet; and set up a small business distributing hatchets to Ben Bernanke (chairman of the Federal Reserve) and other central bank chiefs around the globe. Since my writing about inattention to systemic risk in this weblog exactly 10 months ago, much noise and little action has taken place for addressing the issue (you see, secretly I was hoping that all central bank governors read this weblog). And more noise there was, as Alistair Darling, the Chancellor, opined with a stiff upper lip that “the situation was more complex” than what the Governor suggested, and his solution was “not right for the 21^st century.” That last comment, of course, referring to the separation of banking from trading activities via the Glass-Steagall Act after the Great Depression. I was inclined to cheer for Darling’s modernist outlook, but then I realized that it is the practice to chose one side and cheer for it irrespective, as a ball is being kicked around, in the great British sport of soccer! But I digress; back to King’s argument.

Says King: “There are only two ways in which the problem can—in logic—be solved. One is to accept that some institutions are ‘too important to fail’ and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low. The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society. Any solution must fall into one of those two categories.”

His arguments against the first approach are convincing, and I will come to those. So logically, says he, we should let certain institutions fail, and his approach is to divide the large banks into the ‘utility’ bank and the ‘casino’ bank. The utility bank effectively provides for payments, deposits and loans; the casino bank undertakes some of the riskier financial activities such as proprietary trading. As we have a common interest in ensuring continuity of utility services, those banks can be considered too important to fail. The casino banks, on the other hand, can bear the consequences of their own actions. “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion."

One method under the first approach, says King, is of course higher capital requirements. But these reduce, not eliminate, the need for taxpayers to provide catastrophe insurance. Also, the “riskiness” of a bank’s activities and the liquidity of its funding can change suddenly and radically as market expectations shift. This means that what appeared to be an adequate capital or liquidity cushion one day appears wholly inadequate the next. “Indeed, the Achilles heel of the Basel regime is the assumption that there is a constant capital ratio which delivers the desired degree of stability of the banking system.”

The second method under the first approach would be to require banks to take out insurance in the form of ‘contingent capital’, that is capital in a form that automatically converts to common equity upon the trigger of a threshold that kicks in before a bank becomes insolvent. This is different from subordinated debt, which banks have been permitted to count as capital under the Basel regime, but which do not provide a reliable capital buffer until too late—after the bank has failed. 

I think the insufficiency of Basel-type requirements by themselves containing contagion is by now widely accepted. The problem is that King’s proposal for the ‘utility bank’ and the ‘casino bank’ is fairly arbitrary too. Take for example, mortgages. If the utility bank originates the mortgage, and the casino bank buys the mortgage to develop and trade structured products (mortgage backed securities), what prevents the utility bank from generating ‘weak’ mortgages exactly as it happened recently, and the same problem starts all over again. 

The real issue is the interconnectedness and the tight integration of global financial markets in today’s world. The dominos don’t stand individually and get knocked down one by one. They hold hands and dance together. And they infect each other virally. From that perspective, ‘smart’ regulation lies in a combination of better reporting requirements from all major financial players, highly automated processing of submitted data,, and sharp quick analysis to detect seeds of systemic risk. Stress testing all new financial instruments would be part of such a regime. Of course, the devil is in the detail, and a weblog is no place for that. So suffice to say, bury the hatchet King, there still is work to be done!

 

 

Ending Short-Termism—Is That Enough?

By: Sunil Datt, MS, MBA, MA, CGFM, PMP 

Sunil Datt, MS, MBA, MA, CGFM, PMP, is Senior Managing Consultant, IBM Global Business Services.

In my weblog of Aug. 20, 2008, Thoughts on Post Sustainability Models, I had pointed out that among other things, “A Wall-Street driven continuous and uninterrupted quarterly growth expectation of all publicly held companies is not a sustainable model of corporate vitality.” It is therefore heartening to see that the Aspen Institute has issued a manifesto, “Overcoming Short-termism,” signed by 28 luminaries including Warren Buffett and Peter G. Peterson. Not that I was the first to talk about it; the CFA Institute held symposia on short-termism in 2005, issuing in a paper titled “Breaking the Short-term Cycle” in 2006; William Donaldson, the then-SEC Chairman, exhorted business leaders in 2003 to avoid short-termism; and Warren Buffett addressed the issue in a letter to shareholders in 2000. Of course, it took a worldwide meltdown for the issue to be raised again, and we shall see what finally gets done. And then I have the question if ending short-termism is enough.

In my post-sustainability weblog I had mentioned that “The spread of awareness and consequent behavioral change are good, but not enough… Good old economic incentives and disincentives, I think, are still the best model for achieving real results”; but in the case of Wall Street, we have to stand the model on its head. Wall Street is very well attuned to economic incentives! What it needs is the behavioral change that recognizes a concept of ‘trusteeship’ or ‘systemic awareness’ if you will, where one’s behavior is governed by a recognition that you are part of whole, and your own welfare is inextricably related to the welfare of society as a whole.

The Aspen call to action focuses on three key leverage points:

Market Incentives—A. Capital gains tax rates might be set on a descending scale based on the number of years a security is held. B. Remove limitations on capital loss deductibility for very long-term holdings, now capped at $3,000 per year for losses related to holdings of any duration. C. In exchange for enhancing shareholder participation rights, consider adopting minimum holding periods or time-based vesting.

Fiduciary Duty—A. Apply a higher degree of accountability and enhanced fiduciary duties to financial intermediaries, by requiring increased disclosures on compensation, incentives, trading policies on proxy voting and other matters that indicate compatibility (or lack thereof) with the fund’s stated objectives, and the goals of the ultimate beneficiaries. B. Modify ERISA (Employee Retirement Income Security Act) allowable investment practices through rule changes to promote long-term investing by those investors holding equity in tax-advantaged accounts. C. Ensure, through clearer and more rigorously enforced fiduciary duties, that investment advisers of all types take into account, and clearly inform investors of, tax and other implications of changes made to encourage long-term holding as recommended herein. D. Pursue regulation or policy to base the compensation of long-term oriented fund managers on the fund’s long-term performance and extend to such funds the compensation disclosure requirements that are currently applicable to operating companies.

Transparency—The advent of increasingly complex non-traditional structured and derivative arrangements has enabled some investors to influence corporate decision-making without being subject to duties to disclose the existence or nature of their positions or their plans. Updated disclosure rules that take into account these complex but increasingly common arrangements can play a significant role in helping corporations maintain a long-term orientation by encouraging investment behavior consistent with longer term value creation and providing corporate decision-makers with a better understanding of the corporation’s shareholders and their motivations.

The CFA Institute focused somewhat similarly on earnings guidance, incentives and compensation, leadership, communications and transparency, and education.

I am hoping that financial short-termism will get washed away in a wave of ‘sustainability’ thinking, the likes of which is getting reflected in the report submitted by Joseph Stiglitz and Amartya Sen (Nobel prize winners in economics) to Nicholas Sarkozy. "Our economy is supposed to increase our well-being; it is not an end in itself," said Stiglitz at the launch of the report, commissioned by Sarkozy last year. "GDP statistics were introduced to measure market economic activity. But they are increasingly thought of as a measure of societal well-being, which they are not." Just as quarterly earnings guidance are not a good measure of the real health of a corporate entity, or its contribution to the well-being of society!

Time to Bring Truth in Budgeting and Accounting to Washington

By: Joseph J. DioGuardi, CPA

Joseph J. DioGuardi, CPA, is a former congressman who represented Westchester County, NY, and leads Truth In Government, a nonpartisan, nonprofit organization.

According to recent CBS/New York Times and NBC/Wall Street Journal polls, public concerns over super-sized federal deficits and the increasing national debt are overtaking concerns over our failing economy. In 1980, our national debt stood at about $800 billion, accumulated over 200 years. In less than three decades, that debt has increased 12-fold. The national debt exceeded $11 trillion at the end of 2008, and is projected to exceed $20 trillion by 2020. (Even if interest rates stayed at around 5 percent, the annual interest on the national debt alone will be well over $1 trillion in 10 years.) And this does not include the big problem we face, the tens of trillions of dollars in unrecorded and unfunded liabilities, primarily for Social Security and Medicare, that seems to disappear whenever we focus on the annual deficit and national debt. Worse still, we are being left hostage to countries that clearly do not share American values, like China, which currently is owed the largest portion of our $2 trillion debt to foreign nations. 

And, when you examine the real numbers, the reality is beyond dire. As reported by the Peter G. Peterson Foundation, there is a $56 trillion hole, and counting, in our nation's finances, not the $11 trillion national debt that is widely publicized. Lost in all the outrage over the fast-rising federal deficits and national debt is something that every Certified Public Accountant knows and virtually all politicians do not like to acknowledge—that the financial management failures of U.S. corporations cannot come close to rivaling the budget and bookkeeping shambles of the U.S. government. At the federal level, there are myriad off-budget gimmicks, unrecorded liabilities, and financial manipulations on a scale that would put many executives of publicly traded companies in prison for securities fraud. In my view, therein lies the foundation of America's budget and accounting fiasco today—a double standard that enables the Congress and the president to fudge the real numbers and collectively misrepresent the financial condition of the U.S. government.

It is past time to restore integrity to the budget process. The "unified budget," which was implemented under President Lyndon Johnson, reputedly to disguise the real cost of the Vietnam War, must be done away with. By offsetting annual surpluses in the so-called trust fund accounts, like Social Security, against the deficit from all other annual government operations and activities, we are grossly underreporting the U.S. annual deficit. This allows for a "Ponzi scheme" on a grand scale against unrepresented future generations. And the budget reforms that followed the misguided and unfair "unified budget," like the 1984 "Gramm-Rudman Deficit Reduction Act" and the 1990 "Budget Enforcement Act" (that tried to implement a pay-as-you-go mechanism), have all failed to contain federal deficit spending and to balance the budget. The Founders should have provided a balanced budget requirement in our Constitution. But they did not.

Deficit reduction and effective fiscal management require a sound budgeting process and fair and objective accounting and reporting standards. But, most of all, they require political will. Congress, driven by its primary motivation for reelection, makes the situation worse by deferring meaningful reform. Everyone in Washington decries the federal deficit, but no one there seems to have any real plan or intention to solve it. What is lacking is the leadership of CPAs and those with the financial expertise (like Certified Government Financial Managers, Project Management Professionals, Certified Fraud Examiners, Certified Management Accountants and other financial professionals) to rise up as informed citizens to persuade Congress to straighten out our government's fiscal policies and financial records, and to lead America to an economically sustainable future. 

The most important financial reform would be to convert the current cash basis accounting system, used in the federal budgeting and bookkeeping process today, to the system of "generally accepted accounting principles." GAAP is required of public corporations by the SEC, not to mention all 50 states and 84,000 local governments, to protect future generations from being unfairly burdened by the excess (and disguised) spending of the current generation. It is time to separate the promulgation of numbers—that is, the budget, accounting and reporting process—from politicians. A good place to begin to control federal spending would be to use GAAP to disclose all spending and all commitments to spend. Another would be to make the chief financial officer's function (based on a proposal that I made in 1986) a cabinet-level position in order to take financial management and reporting away from the Department of the Treasury.

As a CPA and former congressman who served on both the Government Operations and Banking Committees, and now as a volunteer public advocate for fiscal responsibility, I strongly believe that we must require independence and objectivity in setting both monetary and fiscal policy in order to remove any political influence over our government's accounting, reporting and auditing. In a July 16, 2009, New York Times commentary justifying the independence of the Federal Reserve System, Rob Cox and Richard Beales concluded that, to insure effective monetary policy, the Fed should be removed from politics, because its decisions can be politically inconvenient. We need to do the same for fiscal policy by creating a new independent function, like the Fed, to implement a sound budgeting, accounting and reporting process. In this way, we can finally bring real accountability and transparency to America through a system of accounts and financial reports built on fairness, independence and objectivity—hopefully devoid of any conflicts of interest.

TARP: Where Is It Now?

By: Robert Maitner Jr., CGFM, PMP

Robert Maitner Jr., CGFM, PMP, is a senior managing consultant with IBM Public Sector Financial Management.

It seems like with all the emphasis lately on stimulating the economy, and the efforts of the American Recovery and Relief Act (ARRA), we do not hear much these days about the original Troubled Asset Relief Program (TARP), the plan from late 2008 that infused hundreds of billions of dollars into the American banking system. In fact, we hear more on the news lately about the White House beer summit than about the status of the TARP.

I think it’s certainly time to check in on the TARP to see what’s going on. In October of 2008, the U.S. Department of the Treasury was authorized to purchase or insure up to $700 billion of troubled assets. Much of the impetus for this arose out of the housing crisis, which threatened the existence of thousands of financial institutions, particularly mortgage lenders. TARP also targeted collateralized debt obligations, which were sold while things were going well (until 2007), but declined sharply once the housing crisis hit. And TARP was also designed to encourage financial institutions to begin lending to consumers again within the midst of the tightest credit crunch in this country since the Great Depression.

And now indications are beginning to point to relief and improvement in the economy. Housing prices are starting to stabilize, and sales of existing homes have increased for the last three consecutive months (something that has not happened since 2004). And on top of it all, in the last month several key financial institutions have reported hefty profits (both Citibank and Bank of America, recipients of TARP funds, reported profits in the billions for the past quarter).

So 10 months into the program, what is the latest? And given the strong profits for some lenders, is money starting to be paid back? According to the Treasury Department, as of May 31, 2009, the Treasury received nearly $6 billion in dividend payments and just more than $200 million in interest payments. More recently, that amount has been estimated at $8.4 billion, counting dividend payments on preferred stock. This does not nearly put a dent in the original $700 billion; of course not all institutions are doing well yet, so we do need to give it time. And what about the portfolios of assets that the U.S. purchased? The Treasury has been under pressure recently to provide more details about the value of these assets. In other words, what did we buy and what is it worth now? Others contend that TARP repayment is going well, citing the full payment of the initial investment from American Express in addition to several small firms, such as Old Line Bancshares of Bowie, MD, who recently paid all of its $7 million in TARP funds.

Of the financial institutions that received TARP money, 80 percent report that it has gone to help support enhanced lending to consumers. Increased lending was of course one of the primary goals of TARP.

All in all, has it been worth it? And have the taxpayers who footed the bill for this program started to see some relief?

The Nation's Long-Term Fiscal Outlook: Two Nightmare Scenarios

By: Sheila Weinberg

Sheila Weinberg is the CEO for the Institute for Truth in Accounting.

On Thursday, April 30, the U.S. Government Accountability Office issued “The Nation’s Long-Term Fiscal Outlook, March 2009 Update.” This report indicated that “GAO’s updated simulations continue to show escalating and persistent debt that illustrates the long-term fiscal outlook is unsustainable.” Does this mean that their computers started to smoke? As trillion-dollar deficits are predicted as far as the eye can see, what will happen to our government when our debt does get to a point that we cannot sustain?  Does anyone know what our lives will look like when the federal government cannot be kept going? When will we reach this unsustainable point? Will anyone bail out the U.S. government?

A few years ago I came across two possible nightmare scenarios.

The first scenario is called “Death by Panic”,^[i]  a plot that is quickly taking shape. With our rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of record-breaking size.^[ii] America is already leaning heavily on foreign investors and governments, especially Japan and China, to buy the government debt that funds the deficits. Currently, foreign ownership of our public debt is more that 48 percent, with China holding more than $700 billion and Japan more than $600 billion.

This nightmare is playing out as foreign investors are starting to realize that we are not going to come to grips with our deficits. The rest of the world is losing confidence in our fiscal management. Is it just a matter of time before foreign investors give up on the United States’ long-term ability to pay our debt?^[iii] 

“We have lent a huge amount of money to the United States,” Chinese Premier Wen Jiabao recently said. “Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried.” Other governments are also losing confidence. Czech Prime Minister Mirek Topolanek, whose government holds the European Union presidency, labeled our government’s current policies as “a road to hell.”[iv]

This nightmare scenario foresees that the financial markets of the world will be flooded by the sell orders on U.S. bonds, notes and bills that no one will buy. Desperate for buyers, the U.S. will have to raise interest rates to usurious levels, and practically overnight the dollar will become nearly worthless.^[v]  The U.S. government will be completely broke and have no way to borrow the money it needs to run. The government will have to shut down. Social Security and Medicare benefit checks cannot be printed. Even if the checks were printed, they would be returned to the retirees stamped “Insufficient Funds.”

We have already also started to experience the second nightmare scenario, called “Death by Hyperinflation.” On March 18, the Federal Reserve decided to purchase up to $300 billion of long-term Treasury securities over the next six months.[vi] This is a way the U.S. Treasury will finance our exploding federal debt. When the Fed buys Treasury’s securities it simply writes a check and the Treasury puts the money in the bank. The bank credits the deposit even though the Fed will not actually have real money to back up the check. The moment the Treasury cashes the check, new money will be created.^[vii]   

But creating new money without corresponding economic growth will lead to inflation. As the government needs more money to pay its bills more and more new money will be created without corresponding economic growth, so more and more inflation occurs. Inflationary cycles will intensify to the point where hyperinflation takes over.

The value of the dollar has been on a steady decline for some time. This is one of the reasons that China and other countries are calling for a global currency. Foreign holders of our dollars foresee Treasury increasing the supply of dollars, thereby pushing down their value.

As this nightmare scenario continues, workers will find it takes more dollars to buy their groceries, clothing, housing and other products and services. Retirees will find their savings dollars are less valuable and will not cover their living expenses. Eventually the dollar becomes virtually worthless. Foreign investors will swoop down and buy up entire industries “dirt cheap.” Banks will cancel all credit cards because they cannot collect money fast enough to keep pace with the rapidly falling value of the dollar.

As Americans wake up in either one of these nightmares, they will have no jobs, no savings and no prospects. Black markets will spring up, workers will strike, people will storm Capitol Hill and the White House, riots and anarchy will spread across the nation.^[viii]

Many Americans are already starting to live these nightmares. Your thoughts on these scenarios would be appreciated.

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i. Harry E. Figgie, Bankruptcy 1995, Boston: Little, Brown & Company. 1993, p. 26.

ii. Elizabeth Becker and Edmund L. Andrews, “IMF: U.S. deficits a global time bomb,” Chicago Tribune, Jan. 8, 2004: p. 3.

iii. Shawn Tully, “The Deficit: American’s Credibility GAP,” Fortune, March 8, 2004

iv. Alex Lantier, Global Research, “Global investors ponder implications of US dollar collapse,” March 26, 2009

v. Harry E. Figgie, Bankruptcy 1995, Boston: Little, Brown & Company. 1993, pp. 26-27.

vi. FRB Press Release, FOMC statement, March 18, 2009

vii. John R. King, Chaos in America, Tehachapi: America West Publishers, 1990, pp. 73-74.

viii. King, pp. 74-75.

Think Big! Act Courageously! Make a Difference!—Are YOU Stimulated?

By: William Morehead, Ph.D., CGFM

William Morehead, Ph.D., CGFM, a member of AGA’s Jackson Chapter, is the chair of Accountancy, Computer Information Systems and Finance at Delta State University in Cleveland, MS. He is AGA’s National President-Elect.

In the past two weeks, our Congress passed and our President signed into law the American Recovery and Reinvestment Act of 2009. State and local governments are anxious to receive their share of these monies to help alleviate their budget woes and jumpstart the construction of numerous infrastructure projects. Now, after the stimulus bills of 2008 and 2009, our country has a record deficit and record debt. As we say in Mississippi, we are in debt up to our eyeballs!

Does this get you stimulated? Angry? Excited? Concerned? Sure, I was glad to receive my stimulus check in 2008; and I look forward to any personal benefit I might receive as a result of the 2009 Act, but at what cost? I do not have any children or grandchildren to pass this debt onto, but I do have a niece and nephew—and most of you have young ones—who will inherit this debt. Much is being discussed about ways to reduce this debt and perhaps we will soon see some improvement.

Nevertheless, as government financial management accountability professionals, we owe it to our children and grandchildren, as well as every citizen and ourselves, to rise up and assume our positions—that of accountability professionals who are being “called to active duty” to help secure our country as it manages the hundreds of billions of dollars in stimulus money. I believe the monies authorized in the 2008 and 2009 stimulus bills, as well as those expended for the wars in Iraq and Afghanistan and Hurricanes Katrina, Rita, Gustav and Ike, will ensure we government financial management accountability professionals have job security for the next 20 to 30 years as monies are distributed, reported and audited.

Let’s use our positions wisely. Let’s exercise great leadership at this time in our nation’s history. AGA can, and as well we should, lead the way. Let’s “Think Big! Act Courageously! Make a Difference!”