Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

The Obama Bank Plan And The Risks It Poses


No one knows whether it will work, though if you ask seven experts, you’re likely to get eight strongly held opinions. The broad outlines of the Obama administration plan to cure the ailing U.S. banking system were revealed in February, with a much more detailed blueprint unveiled in late March. Both announcements drew both praise and criticism; some detractors were so disenchanted that they called for the ouster of Treasury Secretary Timothy Geithner. But President Barack Obama has steadfastly supported Geithner and has called the plan a “critical element” in efforts to restore faith in the economy both here and abroad. Yet it poses substantial risks.

The bank plan takes shape.The latest plan follows hard on the heels of other initiatives that tried to address mortgage foreclosures, open up lending to small businesses, and break the logjam for many types of consumer loans. It allows the government to use $75 billion to $100 billion of the funds left in the $700 billion bailout program that Congress enacted in 2008. That money will be supported by loans from the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve.

How it works.Much of the new effort is aimed at relieving banks of “toxic” assets, bad loans that are weighing down balance sheets and causing banks to hoard capital rather than lend it. Now, under a typical arrangement, if $100 in bad assets is purchased from a bank, private-sector investors—primarily institutional investors such as insurance companies, pension funds, and hedge funds—would contribute $7. The government would also kick in $7, with the remaining $86 covered by a loan from the FDIC or the Federal Reserve.

Obama administration officials believe the program could clear away more than $500 billion—and possibly as much as $1 trillion—of toxic debt. And though it shifts the bulk of the burden for those assets to the federal government, Geithner has argued that failing to take bold action could lead to a much longer recession. In his view, inaction now would force the government eventually to carry all the risk for the bad assets. One benefit of involving private investors, according to Geithner, is that they may bid against each other to acquire the troubled loans, thus increasing payments to cash-hungry banks.

Risks abound.A major question is whether the government can afford to finance the new program. The effort is pushing the federal budget deficit to unprecedented levels, and that could ultimately push down the value of the dollar against other currencies and fuel rampant inflation. Even then, there’s no guarantee the Treasury plan will succeed at ridding banks of their toxic assets. They may resist pressure to sell assets at bargain-basement prices despite the government-financed incentives, instead holding out for more than the private sector is willing to pay.

If the government ultimately needs more than the $100 billion it has proposed spending, it may be hard pressed to come up with the money. It took two tries last fall before Congress was able to pass the financial bailout, and the public mood has soured considerably since then. Many people, outraged about big bonuses for banking and insurance industry leaders, no longer buy the argument that supporting the financial industry is a prerequisite for economic recovery.

In the worst-case scenario, a failure of the Treasury plan could scuttle the stock market rebound and deepen a recession that has already cost millions of jobs. Massive U.S. efforts to help the banking system have been going on since last fall, yet credit has remained extremely tight, limiting borrowing by consumers and businesses alike.

Many economists have suggested alternative approaches, including a temporary government takeover of the banking system. That worked in Sweden during the 1990s, when banks in that country were threatened by bad commercial real estate loans. But the size of the U.S. financial system dwarfs that of Sweden, and taking control of several large U.S. banks would also require huge government outlays.

Geithner has acknowledged that the government is taking risks with this latest plan to help banks and ease the credit crunch. But he argues that this approach to solving the crisis has the best chance to succeed. Only time will tell whether he’s correct.

 


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



INDEX
  • 6 Ways To Close The Retirement Gap
  • IRS Closes Valuation Loopholes
  • Passing Down IRA Assets? Clue In Family Members
  • This Type Of Trust Is A Failure
  • Grandparents Can Become Big Spenders For Their Offspring
  • Time Your Social Security Benefits For Top Results
  • Watch Out For These 7 Retirement Ups And Downs
  • Why Would Anyone Take Their RMDs Sooner?
  • 10 Frequent Retirement Mistakes You Should Avoid
  • Tax Rewards For Year-End Generosity
  • Meeting With The Family For Elder Care Planning
  • 20 Questions On Required Minimum Distributions
  • Tie The Knot For Retirement With A Spousal IRA
  • Four Retirement Planning Rules Of Thumb To Bend
  • When Will New College Grads Be Able To Retire?
  • Last Chance To File-And-Suspend Retiree Benefits
  • You Know You're Getting Old When You Get RMD Notice
  • 10 Steps To Take On The Path To Early Retirement
  • How To REALLY Get Ready For Your Retirement Years
  • Can You Skip Over The Special Tax For Generation-Skipping?
  • What Do You Think Your Life Will Be Like In Retirement?
  • Raiding A Roth Early? No Woes
  • Live Long And Prosper: Roll Out A Stretch IRA
  • Did The Devil Make You Do It? 8 Retirement Miscues
  • Ponder These 4 Reasons For Roth IRA Conversions
  • 10 Ways To Skirt A Penalty Tax On Plan Payouts
  • Why Give Securities To Charity Instead Of Cash?
  • Will You Have To Lower Your Sights In Retirement?
  • What Will $2 Million Get You In Your Retirement?
  • Figuring Out How Much You Need In Retirement
  • Should You Borrow Against A Life Insurance Policy?
  • How Will Your Retirement Distributions Be Taxed?
  • Five Ways To Plan Smarter And For The Long Haul
  • 5 Withdrawal Strategies For Retirement Savings
  • Five Ways To Plan Smarter And For The Long Haul
  • Generation X Members Have Retirement Work Cut Out For Them
  • Booted From A 401(k)? Don't Despair
  • It's Tough To Decide If You Should Retire Early
  • Saving For Retirement At All Ages
  • Which Type Of IRA Do You Prefer?
  • Owning REIT Shares Can Help Minimize Risk
  • Roundup Of New Estate Tax Changes
  • Here Are A Dozen Part-Time Jobs For Older Americans
  • Two More Important Choices For Retirement Living
  • Will Your Retirement Assets Last?
  • The Benefits Of Working With An Advisor
  • Setting Up A Roth IRA Through The ''Back Door''
  • Eight Of The Best Tax Strategies To Use In 2012
  • 10 ''Baby Steps'' To Take If You Are Newly Widowed
  • A Case Study: Retirement Planning In Your Fifties
  • Factors In Researching An Assisted Living Facility
  • New Wrinkle In Pre-59 1/2 IRA Withdrawals
  • A Case Study: Giving Wealth Away
  • Social Security's Online Benefits Estimating Tool
  • Estate Tax Exemptions Survive Longer
  • Will New Estate Tax Rules Lull You Into Inaction?
  • The Fine Art Of Planning For Collectibles
  • Five Tips To Manage Your 401(k) Wisely
  • A Comprehensive Way To Save For Your Retirement
  • Key Factors In Conducting Your 401(k) Vendor Search
  • Assessing The Damage To Pre-Retiree Financial Plans
  • Where Have Vacation-Home Prices Dropped The Most?
  • Giving Up Control Of Your Finances
  • Estate Tax Purgatory: How To Extricate Yourself
  • Cheap Thrills: 10 Ways To Enjoy Life In A Recession
  • Adjusting To The New Reality About Your Retirement
  • What Should You Spend First During Retirement?
  • Retirement Planning Does Not Stop When You Retire
  • Part-Time Job Hunting Tips for Retirees
  • Weighing The Benefits Of Investing In A Roth 401(k)
  • Keep A Leash On Part Of Your Estate
  • Pre-Retirees, Retirees Switch To Roth IRA
  • The Obama Bank Plan And The Risks It Poses
  • New Law Suspends RMDs For Just One Year
  • The Importance Of Year-Round Tax Planning
  • Charitable Giving Rules Changed By Pension Act
  • Market Gyrations Raise Questions For Pre-Retirees
  • Passing More Than Money To Your Heirs
  • How Many Years Should You Retain Your Tax Records?
  • Key Questions For Those Nearing Retirement
  • Retirement Planning Does Not Stop When You Retire
  • Dealing With Market Risk Right After Retirement
  • Nine Estate Planning Mistakes To Avoid
  • Family Foundation Lets You Do Good For Others And Yourself
  • Treating Your Retirement As A Liability
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Understanding the Importance of a Fiduciary Standard
  • Don't Forget About Roth 401(k)
  • Free Credit Reports Available Online
  • Energy Systems Scale and Timeline
  • The Oil Patch Profit Squeeze
  • Timber As A Liquid Investment
  • Timber Facts
  • Ethanol: Salvation or Panacea?
  • Timber Facts
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Bank Loan Funds - A Primer
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • A Critical View Of The Consumer Price Index
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • The Case For Industrial Metals
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Indentity Theft: Help Is On Its Way
  • Identity Theft: Everyday Prevention
  • Indentity Theft: Tips to Protect Yourself
  • Identity Theft : Tips to Protect Yourself
  • Identity Theft: A Note About Social Security Numbers
  • Identity Theft: Which Documents Should You Shred or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Exit Gracefully: How Business Owners Should Plan For A Comfortable Retirement
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • REITs: A Great Diversification Investment
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Is Your 401(k) Plan A Failure?
  • Understanding Deflation
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Yesterday's Great Companies
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Early Retirement Incentives For Tenured Faculty Waives Fica Tax Payment
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • Under New Law Taking Social Security at 65 Makes Sense for Most
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.