ESTATE


Why Sanford doesn’t want bailout $ ?
2009/04/02, 7:03 pm
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America’s states are laboratories of democracy. They are both affected by, and relevant to, the larger national debate. What we’ve found in our own corner of the country is that carrying a substantial debt load limits our options when it comes to running government.

A recent report by the American Legislative Exchange Council ranked us 47th worst in the nation for annual debt service as a percentage of tax revenue. Our state dedicates nearly 11% of its annual tax revenue to paying debt. On top of that, South Carolina has another $20 billion in unfunded, long-term political promises for pensions and other liabilities. The state budget has already been cut four times in recent months as the national economic downturn has impacted South Carolina and driven down tax revenue.

President Barack Obama recently signed a “stimulus” bill that will spend about $2 billion through “programmatic means” in South Carolina. In other words, the federal government will put this money directly into existing funding formulas and programs such as Medicaid. But there is an additional $700 million that I as governor have influence over, and it is the disposition of this money that has drawn the national spotlight to South Carolina.

Here’s the background: Before the stimulus bill passed, I asked for states not to be bailed out. After it was signed into law, I said that a state bailout would create more problems than it solved, and that we shouldn’t spend money we don’t have. That debate was lost, so I looked for a reasonable middle ground. I asked the president for his support in using the $700 million to pay down state debt.

If we’re going to spend money we don’t have at the federal level, it becomes all the more important that our state balance sheet is in good order — particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months — at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I’ll be safely out of office. But it would be irresponsible.

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money — not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years — just as paying off a family’s mortgage early frees up money for other uses.

When you’re in a hole, the first order of business is stop digging. South Carolina is in a hole, and it’s not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds — the largest recorded level in state history.

Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina’s prosperity. Though well-intended, it forestalls hard choices we must make.

One of Mr. Obama’s central campaign themes was his pledge to do away with politics of the past. In his inaugural address, he proclaimed “an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics.”

This idea connected with millions of voters, myself included. I’ve always believed ideas should rise and fall on their merits. In fact, I saw such historical significance in his candidacy and the change he spoke of that I published an op-ed on it before South Carolina’s presidential primary last year. It was not an endorsement, but it did note the historic nature of his candidacy and the potential positive change in tone it represented. That potential may now be disappearing.

Last week I reached out to the president, asking for a federal waiver from restrictions on stimulus money. I got a most unusual response. Before I even received an acknowledgment of the request from the White House, I got word that the Democratic National Committee was launching campaign-style TV attack-ads against me for making it.

Is this the new brand of politics we were promised? Instead of engaging with me and other governors on the merits of our dissent, I am to be attacked in television ads? In the end, I just don’t believe a problem created by too much debt will be solved by piling on more debt. This doesn’t strike me as an unreasonable or extremist position.

Nevertheless, the White House declined my request for a waiver yesterday afternoon. That’s unfortunate. But in coming months we’ll continue advancing the debate at the state level about the merits of debt repayment. The fact remains that while we’d all like to spend unlimited dollars on the very real needs that exist in our state, we must spend in the context of what is sustainable.

Mr. Sanford, a Republican, is the governor of South Carolina.

http://online.wsj.com/article/SB123759827524401409.html



Gov. Sanford on the bailout
2009/04/02, 7:01 pm
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What do you think about AIG’S new bailout?
2009/03/03, 4:25 am
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Will it ever stop?

AIG Band-Aid offers no cure

The latest bailout of the struggling insurance giant did little to calm fears about the financial sector as investors worry about more troubles ahead.

Colin Barr, senior writer
March 2, 2009: 2:23 PM ET

NEW YORK (Fortune) — The government has a new remedy for sickly financial giants — but signs of healing remain scarce.

On Monday, the Treasury Department unveiled yet another plan to support struggling insurer AIG (AIG, Fortune 500), which posted a 2008 loss of $99 billion.

Treasury said the latest restructuring in AIG’s bailout — the third since the company first received an $85 billion loan last September — “will help stabilize the company, and in doing so help to stabilize the financial system.”

There was no such stabilization on Wall Street though Monday. Financial stocks plunged for the second straight session.

Investors are worried that more pain lies ahead as the economy deteriorates and policymakers struggle to devise a workable solution to the financial meltdown.

The Dow Jones industrial average is down 17% since Feb. 10, when Treasury Secretary Tim Geithner disappointed Wall Street with a vaguely worded financial stability package.

“The market wants to see the government get ahead of these problems, instead of receiving a drip feed of plans and possible plans,” said Benn Steil, director of international economics at the Council on Foreign Relations. “The next few weeks we’ll just keep hearing the same questions about what’s next.”

For now, the Treasury plans to provide New York-based AIG with a $30 billion equity line that can be drawn as needed. The government also will convert its $40 billion preferred-stock investment into new shares that “more closely resemble common equity and thus improve the quality of AIG’s equity and its financial leverage.”

The conversion plan resembles last week’s rescue of Citigroup (C, Fortune 500). In that case, the government agreed to convert as much as $25 billion worth of preferred stock into common shares, matching similar moves by private investors.

The latest moves to prop up AIG and Citi appeal to policymakers on two fronts. First, they add to the common equity bases of the two companies. Officials seem to hope this will relieve fears that shareholders will be totally wiped out in a government takeover.

Second, by converting from preferred shares to common stock, the government does not have to kick in much in the way of new funding upfront. That’s a key consideration as the government’s support for troubled banks grows more unpopular with the public.

But observers say the latest interventions fall short because they don’t answer two key questions: Will the government be forced to take full control of struggling financial firms? And if so, on what terms?

Geithner and other officials have repeatedly stated their preference for a privately owned financial system. But many economists doubt the U.S. can stage an economic recovery without first doing a sweeping restructuring of troubled financial firms – an option derided in some circles as “nationalization.”

Douglas Elliott, a fellow at the Brookings Institution, said Treasury is constrained in dealing with problems at firms like AIG by the decisions policymakers made in the earlier stages of the crisis.

“You could choose to stop the flow of money, but the likelihood is you’d lose huge amounts,” said Elliott, referring to the $150 billion the government poured into AIG in previous rescues last fall. “You really have no choice but to look at the money that has already been invested as water under the bridge.”

So AIG, which initially was paying a double-digit percentage interest rate on its Fed loan, has since had the rate sharply reduced in a bid to stem the bleeding.

In the same vein, the government is trading preferred shares that paid 10% annual dividends for shares that pay much smaller dividends.

What’s more, the dividends on the preferred shares were cumulative, which meant that if AIG missed a payment, it would be forced to pay it the following quarter. With the common stock, if AIG misses a payment, it will not have to make it up.

In essence, the government is giving AIG more latitude to conserve cash by cutting dividends. There was a similar agreement regarding some of Citi’s preferred shares last week.

But while the conversions will ease the cash drain at Citi and AIG, they have done nothing to quell investor fears that other firms are next for this new type of bailout. Shares of Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500) each fell more than 10% in late afternoon trading Monday, while JPMorgan Chase (JPM, Fortune 500) was down 6%.

Steil said the Obama administration’s failure to lay out a comprehensive and detailed response to the financial sector mess is making matters worse and only serving to add to the cost of cleaning it up.

“The government has been in denial,” Steil said. “Right now, they’re trying to do a little bit of everything at once — and the risk is that you create a whole new phase in the crisis. There doesn’t seem to be any end game.” To top of page

Find this article at:
http://money.cnn.com/2009/03/02/news/aig.plan.c.fortune/index.htm?postversion=2009030214


Rescue Effort Includes Commercial Real Estate
2009/02/12, 8:13 pm
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The U.S. Treasury’s announcement that commercial mortgage-backed securities will now be accepted as eligible collateral for the Term Asset-Backed Loan Facility (TALF) will encourage investment in the commercial real estate market, according to the NATIONAL ASSOCIATION OF REALTORS®.

Over the past year, the broader credit crisis that has permeated the world’s capital markets has increasingly curtailed commercial lending activity. Banks have tightened their credit standards and reduced loan volume while the commercial mortgage-backed securities market has stopped functioning effectively. Without liquidity, commercial borrowers face a growing challenge of refinancing maturing debt and the threat of rising delinquencies and foreclosures.

“A severe lack of credit threatens commercial real estate and poses significant risks for the whole economy,” said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth. “Expanding the TALF and opening it up to commercial mortgage-backed securities is a movement in the right direction, and welcome news for the American economy.”

The announcement implements policy directions recommended and endorsed by NAR’s REALTORS® Commercial Alliance through its Commercial Economic Stimulus Work Group. The work group developed a plan to address high-priority issues like lack of credit to avoid further losses in the commercial real estate markets as a part of the national economic recovery plan.

“Though much still remains to be done, this policy decision will help reassure investors in the vital commercial real estate sector, which provides more than 9 million jobs and generates roughly 70 cents out of every dollar in local government budgets,” said RCA Chair Robert Toothaker. “There is no secondary market for commercial mortgages, so it is important to encourage lenders and investors whose activity will be essential in refinancing the performing commercial real estate loans in the marketplace, many of which are due to reset soon.”

Under the new approach, TALF credit facilities will be extended to newly originated AAA-rated securities backed by commercial real estate loans. “This important measure will enhance liquidity and ease the lending crisis facing commercial markets,” said Toothaker.

Expanding the TALF program to include commercial mortgage-backed securities has been a key part of NAR’s message to policymakers and is integral to the commercial economic stimulus plan developed by the association’s commercial leaders.

“NAR is encouraged by this positive announcement and will continue to work with Congress and the regulatory agencies as further policy options are considered to address the crisis in the credit market and ensure overall economic recovery so that real estate will once again lead the economy to recovery,” Toothaker said.

Source: NAR