The Common Good

By S. Randy Lampert, from Morgan Joseph & Co

Like the institutions its designed to recapitalize, the TARP program needs to be restructured.  The strategy of injecting liquidity is sound. However, its implementation is failing to restore credit to American businesses and consumers, to strengthen the weakened financial underpinnings of the global economy and stimulate aggregate demand. TARP, as now constituted, fails to recognize that policy prescriptions are macroeconomic in implementation but microeconomic in effect. By ignoring the effects on the economic actions of consumers and institutions alike, it has failed to induce credit expansion and market stability.  Moreover, the program has resulted in a direct subsidy to shareholders of financial institutions. 

To cite just one example, with inexpensive TARP funding, PNC acquired National City Bank.  PNC can now repay more expensive liabilities with the billions in tax benefits derived by the IRS’s relaxation of tax loss carry forwards rules.  And given the size of Nat City’s loan losses (estimated at $19 billion), PNC will have paid virtually nothing for Nat City and will actually receive additional billions from tax loss carry forwards.   TARP has done little to motivate lending and investing, and instead chiefly benefits shareholders.

Treasury Secretary Paulson and Federal Reserve Board Chairman Bernanke are avoiding the mistakes of the 1930’s by providing liquidity. However, they have forgotten the subsequent history of our markets, namely, the use of monetary policy to coax, and not coerce, the market; and to encourage lending and discourage capital containment.  The Treasury and FRB, by deciding which financial institution should “accept” their funds and which are denied, have arrogated for themselves the role markets normally play in determining capital allocation.   It is not unlike a planned economy where the Politburo decides which institutions receive government largesse.

Credit, meanwhile, remains unavailable for three basic reasons: the continuing detritus of troubled assets eroding the capital bases of most financial institutions; the losses arising from sales from participants shrinking their asset base; and, lastly, the inability of the market to absorb these liquidations.

TARP funding has only focused on restoring the liability side of financial institutions, not the asset side. Troubled assets range from mortgages to investments in MBS’s, CLO’s, synthetic CDO’s and other highly complex structured financing products.  The rescue program has been singularly unwilling to relieve institutions’ balance sheets of these troubled and troubling assets, with the result that institutions are forced to liquidate into a market characterized by few buyers and a surfeit of sellers. 

The focus must be on combining the concepts of asset relief and capital injection   For instance, each dollar at face value of a troubled asset purchased under TARP, the institution might get cash equal to the asset’s market or carrying value and issue preferred stock for the difference between face and market value.  This would restore the capital loss created by the impaired asset.  Second, it generates additional cash available for reinvestment in new performing assets.  Third, it would provide an enlarged capital base to induce greater credit creation than TARP was designed to promote.

Under the prevailing program, we are seeing a mad rush from institutions of all types of companies to tap TARP preferred funding because the government funds are is priced far below private market alternatives.  I would propose a preferred stock that has three characteristics designed to discourage abuse, align management motivations with monetary policy needs and provide for the orderly restoration of our capital allocation process.. 

• First, make the preferred stock capital as expensive as any private market alternative by setting the dividend rate equal to the institutions target rate of return on equity (generally around 15%).  It would weed out opportunistic institutions, while serving to encourage accurate accounting by needy institutions of the true carrying value of the investment By setting the price at a level that approximates an institutions’ equity cost of capital, it enables the institution to recapitalize without the government subsidizing its shareholders.  And by using a dividend rate paid at the shareholders expense, the institution is incentivized to expand credit more quickly, rebuild its business sooner and accelerate repayment of the preferred.
• Second, once the underlying assets are sold in an orderly way, the amount of preferred can be adjusted up or down to reflect the difference between the original purchase price paid for the assets by the government and its subsequent selling price.   To further ensure an accurate, original conveyance price, each institution should be forced to accept two dollars of the new, expensive preferred stock for each dollar loss the government experienced on its investment in the underlying asset.  This will discourage abusive pricing at the time the Fed purchased the security while discouraging excessive asset sales to the government.  As markets returned to normalcy, these positions can be liquidated in an orderly way, eliminating the volatility and downward pricing spirals that have bedeviled the efforts of the Fed and wreaked havoc on balance sheets worldwide.  An orderly sale of these securities would also minimize the long term losses born by the institutions and, ultimately, the taxpayers.
• The third investment element is key to restoring capital expansion.  Capital invested in banks should result in a six to ten fold increase in loans; therefore, for each dollar of preferred received, the institution must increase its lending activities by the targeted multiplier.  If not, the dividend rate on the preferred increases beyond the return on equity to the detriment of the shareholders and management.  This punitive effect would go away as banks increase lending.   At present, there is no requirement that the recipients of capital utilize it to originate new credit. 

In the final analysis, banks pay dividends to ensure the continuing support of their shareholders.  For recipients of low-cost TARP funding, capital is coming in the front door and escaping through the rear door in the form of dividends.  The fact is that in addition to the economic subsidy provided to shareholders, the government’s proceeds are being used to maintain an artificially high dividend payout rate. 

Boards of Directors have been loath to tamper with their dividend policies for fear of further erosion in share values.  If the government decreed that no TARP recipient can pay dividends until the governments funding has been repaid, additional capital for credit expansion would be preserved while avoiding the adverse stock market consequences that arise from company specific dividend cuts.

A program of this type would minimize the government’s role in selecting survivors, while encouraging sound economic behavior and preventing the unintended consequences of current policies that promote capital concentration in institutions rather than credit expansion.    The result would be to encourage capital formation and expansion.  To do less will doom us to the ravages of a depressed economy, depleted savings and depreciating assets.

Please join Bobby Kennedy, Jr. on Tuesday, December 2nd at ‘Inside Park at St-Bart’s - 50th Street & Park Avenue 
“One of the Heroes for the Planet” - TIME MAGAZINE

US Representative for New York’s 14th District, Carolyn B. Maloney is coming and will be introducing Bobby Kennedy, Jr.

TOPIC: “Our Environmental Destinies”

Mr. Kennedy serves as Senior Attorney for the Natural Resources Defense Council, Chief Prosecuting Attorney for the Hudson Riverkeeper and President of Waterkeeper Alliance. He is also a Clinical Professor and Supervising Attorney at Pace University School of Law’s Environmental Litigation Clinic and is co-host of Ring of Fire on Air America Radio. Earlier in his career, he served as Assistant District Attorney in New York City. He has worked on several political campaigns including the presidential campaigns of Edward M. Kennedy in 1980, Al Gore in 2000 and John Kerry in 2004.

Bobby Kennedy’s bool for children, “American Heroes: Robert Smalls, The Boat Thief”, will be available on site.

The luncheon will be held from 12:15pm to 1:45 pm at the restaurant Inside Park at St-Bart’s, 109 East 50th Street (at Park Avenue).

BOB SHRUM

Dont’ go wobbly - THE WEEK
Time to Ask McCain: Have You No Sense of Decency Left?- HUFFINGTON POST

KELLYANNE CONWAY Quotes

The Polling Company
Media’s attack on Palin’s clothes is an example of elitist snobbery or “classism.” - Newsmax

DAVID KUHN

Media sweats over exit poll accuracy - Politico. com
Obama leads among white independents - Politico.com  

 RICK KLEIN

Hope’s Float - ABC, The Note
Tabled Motions - ABC, The Note

Luncheon Panel “Election 2008 - Prognoses and Predictions”

Our events leading into the party Conventions were all about the economy and the financial crisis with Robert Hormats , former Secretary of Commerce Pete Peterson and prescient author Kevin Phillips, who indeed had dire predictions for the financial markets — along the lines of what we are witnessing today.

Now that we are deep into the hugely important election cycle, you won’t want to miss our next panel about the presidential elections.

Bob Shrum is a political consultant and has served as senior advisor to the 2000 Gore and 2004 Kerry presidential campaigns. He is also the author of “No Excuses: Concessions of a Serial Campaigner

Kellyanne Conway is CEO and President of The Polling Company Inc./Woman Trend. Ms. Conway has provided advice for many Republican clients and is one of the most quoted and noted pollsters on the national scene. she co-authored “What Women Really Want” with Democratic pollster Celinda Lake.

David Kuhn is a senior political writer for Politico and is the author of “The Neglected Voter: White Men and the Democratic Dilemma.”

Our moderator - Rick Klein is ABC News’ Senior Political Reporter and author of ABC’s The Note, a daily political blog and tipsheet. He is a regular contributor to the “World News Webcast,” and the “This Week All Week” webcast with George Stephanopoulos.

Don’t miss out our next event with Bobby Kennedy, Jr. on December 2nd to discuss environmental priorities

TOP NAMES IN MEDIA, POLITICS AND ENTERTAINMENT

HOSTED BY The Common Good

TUESDAY, AUGUST 26TH, COLORADO HISTORY MUSEUM 2:00PM “CULTURE WARS” - a Panel Discussion on the Role of Race, Gender, Ethnicity, Religion and Values in the Fall Campaign 

Moderated by: Dan Abrams, Chief Legal Correspondent, NBC News

OUR PANELISTS:

- Gov. Bill Richardson(NM), 

- Sen. Amy Klobuchar (MN),

- Rep. Harold Ford, Jr., DLC Chair, 

- Rep. Carolyn Maloney (NY),

- Tucker Carlson, MSNBC,

- Markos Moulitsas, DailyKos,

- DeeDee Myers, Former White House Press Secretary

- Faye Wattleton, Center for the Advancement of Women,

- Richard Wolffe, Newsweek

9:00PM POST GAVEL CELEBRATION with celebrity hosts Chevy Chase and Debra Winger and featured speakers from the Democratic Party:

Sen.  Amy Klobuchar, (MN), Gov. Janet Napolitano (AZ),
Gov. David Paterson (NY), Gov. Bill Richardson (NM),  Gov. Bill Ritter (CO), Rep. Carolyn Maloney (NY), Mayor  Antonio  Villaraigosa  (LA), Mayor Gavin Newsom  (SF)

The Common Good, a non-profit, non-partisan organization that encourages civil discussion and effective participation on the pressing issues of the day by bringing together leading political, business, media and entertainment figures, is joining forces with the Hispanic Institute to sponsor two major events at the Democratic Convention on Tuesday, August 26.  The Colorado History Museum, located 1300 Broadway, will be the site of an afternoon panel discussion at 2pm on “Culture Wars: The Role of Race, Gender, Ethnicity, Religion, and  Values in the Fall Campaign.”  A post gavel celebrity-filled celebration will begin at  9pm. Participants in the two events include Dan Abrams, Tucker Carlson, Chevy Chase, Rep. Harold Ford, Jr., Sen. Amy Klobuchar, Rep. Carolyn Maloney, Markos Moulitsas, DeeDee Myers, Gov. Janet Napolitano, Mayor Gavin Newsom, Gov. Bill Richardson, Gov. Bill Ritter, Mayor Antonio Villaraigosa, Faye Wattleton, Debra Winger and Richard Wolffe. Other notables from the Democratic Party and the entertainment industry are also expected to attend. 

Patricia Duff, Chair and Founder of The Common Good said:   

Over the years, we have brought together the best and the brightest for open and frank exchanges, airing controversy to help build common ground. At the Democratic Convention on Tuesday afternoon we have a diverse and distinguished panel to discuss the very things the electorate doesn’t always like to talk about – race, gender, ethnicity, values, religion – and how these and other intangibles may have a greater impact on the election than ‘hard’ issues such as the economy or war. At our evening celebration, stars of the entertainment industry will salute some of the best Democratic leaders in government service and the diversity of opinion, talent and effort that makes America so great.   We are honored that the Hispanic Institute is sponsoring this with The Common Good.” 

The Common Good will be hosting a special panel discussion and cocktail party at the Democratic National Convention at the Colorado History Museum on Tuesday, August 26th.

The Panel
2pm at the Colorado History Museum about “Culture Wars: The Role of Race, Gender, Ethnicity, Religion and Values in the Fall Campaign.” (more details to come soon)

The Cocktail Party
8pm at the Colorado History Museum will be attended by VIPs, delegates and media attending the Convention, including nationally renowned press seated on our special panel.

Please join us if you are in Denver during the Convention!

DNC 2008 OFFICIAL WEBSITE here…

Kevin Phillips will discuss his new book “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism” on Tuesday, June 17th, at the Friars Club from 12:15 to 2pm.

“Bad Money” is a devastating follow-up to his last best-seller, “American Theocracy.” Kevin Phillips describes the consequences of our catastrophic economic policies, our mounting debt, our collapsing housing market, our diminishing oil, and the end of American domination of world markets.

Kevin Phillips is an American writer and commentator, on politics, economics, and history. Formerly a Republican Party strategist, Phillips has become disaffected with his former party over the last two decades, and is now one of its harshest critics. He is a regular contributor to the Los Angeles Times and National Public Radio. Phillips was a senior strategist for Richard Nixon’s 1968 Presidential campaign, which was the basis for his book, “The Emerging Republican Majority.” That book is widely regarded as a “classic” — one of the most influential recent works in political science for its trenchant prediction of a conservative realignment in national politics.

MORE ON KEVIN PHILLIPS and “Bad Money”…

ALSO ON PHILLIPS…

We are incredibly privileged to have the brilliant, multi-successful and outspoken Peter Peterson to discuss “The Crisis We Don’t Like to Talk About” about the current economic situation.

Our co-hosts for this event:

Loreen Arbus * Gayle Perkins Atkins * Bruce Colley * Art Eisenberg * Roger Erickson * Gail Furman * Matt Gohd * Coppy Holzman * Bill Hubbard * Robin Hubbard * Seth Kaplowitz * Mason Slaine * Kim Taipale * Felicia Taylor * Peter Worth * Patricia Duff

Pete Peterson is a highly distinguished investment banker, fiscal conservative, author, and politician whose most prominent political position was as United States Secretary of Commerce. He is Chairman Emeritus of the Council on Foreign Relations, and Senior Chairman and Co-Founder of the private equity firm, the Blackstone Group. He is the founding Chairman of the Peterson Institute (formerly the Institute for International Economics), renamed in his honor. He is the author of several books, including ‘Running On Empty: How the Democratic and Republican Parties are Bankrupting Our Future’ and ‘Will America Grow Up Before It Grows Old?’.

The lunch will take place at the Friars Club from 12:15pm to 2pm

More about Pete Peterson here…

Don’t miss out the upcoming lunch with Kevin Phillips on June 17th at the Friars CLub from 12:15 to 2pm. He will discuss his new book ‘Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.’

New York Representative CAROLYN B. MALONEY will discuss her new book on Monday, May 19th, 12:15-2PM at the Home of Peter Worth.

Host-committee: Gail Furman * Jennifer Gardner * Bill Hubbard * Robin Hubbard * Seth Kaplowitz * Mason Slaine * Peter Worth * Jordan Wright * Tom Zschach * Patricia Duff

Our “tenacious, resilient legislator” (as TIME Magazine described her), Rep. Carolyn Maloney will join us to discuss her new book ‘Rumors of Our Progress Have Been Greatly Exaggerated’. You’ve heard the rumors: The glass ceiling has been shattered. Gender discrimination has gone the way of the woolly mammoth. Violence against women is on the decline. When Carolyn B. Maloney, a Democratic Congresswoman and one of the nation’s leading advocates for women, hears such things, she can’t decide whether to laugh or to cry. In her new book, Congresswoman Maloney mixes wit with withering criticism to expose where progress for women is being stalled, and sometimes even reversed.

Learn more about Congresswoman Carolyn Maloney…

Don’t miss out…PETER PETERSON, Former US Secretary of Commerce on Tuesday, June 3, 12:15-2pm at the Friars Club

This event will be lively and fun. You first heard of him from the War Room of the Bill Clinton presidential campaign, helping elect the young, long-shot candidate in 1992. You’ve seen him on hundreds of talk shows and CNN. Paul Begala is one of the smartest political strategists in the country. He’s dynamic, fresh and always provocative. Reserve now for our luncheon with one of the smartest guys to ever serve in a campaign War Room.

Join The Common Good for lunch with Paul Begala, Tuesday, April 22nd, 12:15 to 2:00pm at the Friars Club (57E. 55th Street). The event is free for Members and $80 for non-members.

Paul Begala is a political contributor and Democratic strategist on CNN’s The Situation Room. Begala was formerly co-host of Crossfire, CNN’s political debate program. He first entered the national political scene after his consulting firm, Carville & Begala, helped elect President Bill Clinton in 1992. Serving in the Clinton administration as counselor to the president, he helped define and defend the administration’s agenda and served as the principal public spokesman.

More about Paul Begala…