Fixing America's banks: by Economist Peter Morici 3/9/2009

Outstanding mortgages total $11 trillion plus. Half were financed through Fannie Mae and other government banks. The balance were written by commercial banks, held as straight mortgages or bundled into collateralized-debt-obligations (CDOs) held by banks and fixed-income investors.

As housing prices fall, mortgage losses mount and will likely reach another $1 trillion. Banks take charges against capital to cover losses and could deplete capital and become insolvent. Through TARP, Treasury is boosting bank capital by buying dividend paying preferred shares, and is financing these purchases by selling $750 billion in bonds. As housing prices fall, loan defaults and losses rise, and the CDOs held by banks fall in value.

Housing prices are down by 27 percent since August 2006, and could easily fall another 15 or 25 percent. About $400 billion in TARP funds are committed, and with housing prices dropping faster than Galileo’s rock, the remaining $350 billion will not be enough. The Treasury is performing stress tests on the 19 largest banks to determine whether their common share equity could cover prospective losses. Citigroup and others will come up short if Treasury is honest about how much housing prices could fall. Bankers usually include preferred shares and other assets when measuring capital adequacy to cover prospective losses, and by those measures, Citigroup and others remain well capitalized for now.

Treasury has offered banks the option of converting its preferred shares to common stock, eliminating the dividend on those shares but diluting private shareholder equity. At Citigroup, Treasury is offering to convert $25 billion of preferred shares to common stock, if Citigroup suspends dividends to most private preferred shareholders and significant numbers convert to common shares. Choosing between preferred shares paying nothing and high risk common shares worth just a bit, most will likely take the plunge.

These tactics essentially confiscate private equity—a government taking.Washington’s stress tests and sacking of Citigroup motivate general fear among investors and are driving down most bank common stock prices. Coupled with the need for more government funds as housing prices fall, these make the government the inevitable controlling shareholder of the largest banks. No solution to preserve private banking can be found without halting the freefall in housing prices. That will require an aggregator or bad bank to purchase about $2 trillion in mortgage-backed securities from banks. Leaving alone mortgages that will be repaid, reworking those that could be repaid with some adjustments in principal and interest, and foreclosing on the rest, the aggregator banks could fix the number of foreclosures and limit the fall in housing prices. As many mortgages would be saved, and the aggregator bank, like the Savings and Loan Crisis Resolution Trust, would likely earn a profit. Hence, it could be financed with TARP funds and private investments. The banks, though not free of other problems, would be strong enough to raise new capital, buy back the government’s preferred shares, and contribute to economic recovery.

Peter Morici is a professor at the University of Maryland Smith School of Business

'Card Check' Legislation Ramps Up

FROM: Jade West, Senior Vice President-Government Relations National Association of Wholesaler-Distributors (NAW, of which NAHAD is a member association)

We have been hearing for several weeks that pro-labor leaders in the U.S. Senate and House of Representatives – Congressman George Miller (D-CA) and Senator Ted Kennedy (D-MA) – are getting ready to introduce their card check legislation, the mis-named "Employee Free Choice Act." Labor union leaders are now claiming that the legislation will be introduced as soon as next week, March 9th or March 10th.

As you know, this legislation would remove secret ballots from union organizing campaigns and subject employers to the threat of binding interest arbitration in negotiating first contracts and to new unfair labor practice charges and fines.

This legislation was defeated in the U.S. Senate in 2007 when pro-labor forces failed to obtain the 60 votes necessary to close down debate, or "invoke cloture" on the bill. Even though pro-labor forces gained a number of seats in the Senate last November, we can still defeat this dangerous bill. Even some Senators who voted for EFCA two years ago are reported to be re-thinking their position.

But we will only win if Senators hear from businesses in their states – and hear from a LOT of us. Please contact your Senators today and tell them to VOTE AGAINST CLOTURE on the Employee Free Choice Act.

And don’t forget, if you have operations in more than one state, you can write to every Senator who represents any of your employees. Be sure to identify yourself and/or your business in your communications with Senate offices.

IMPORTANT: It is best to email or FAX your messages. You can do this easily by using our "E-ALERT" on-line program. Go to: http://www.naw.org and click the TELL CONGRESS button in the top right corner of your screen. You will be linked to NAW’s TAKE ACTION E-Alert Program.

Click on CONTACT SENATORS TO VOTE NO ON CLOTURE on the Employee Free Choice Act.
Easy to follow instructions, including talking points, will take you through the rest of the very quick process. Go to http://www.naw.org and click TELL CONGRESS now.

Many thanks.

Stimulus, or Stymied??

President Obama's signature on the American Recovery and Reinvestment Act of 2009 will provide $787 billion in tax cuts and spending between 2009 and 2019. What's the reaction from the distribution community to this enormous bill, and how will its impact be felt in terms of truly stimulating business activity and reinvestment?

Adam Fein of Pembroke Consulting, a past presenter at NAHAD conventions and an NAW Fellow, tales a stab at finding the answer to these questions in a recent study. Among his findings: "72 percent of executives at wholesale distribution, manufacturing, and technology companies expect the economic stimulus bill to have no impact on their company's business strategies in 2009. Surprisingly, twenty-one percent of executives claim that the economic stimulus now makes it less likely for their companies to invest in growth-oriented strategies!"

Read Adam's survey results on his Blog at http://www.distributiontrends.com/2009/03/stimulus-skepticism.html

Give us your opinions and thoughts on this topic by posting to this Blog.

Welcome to Hosewatch

Greetings, NAHAD members, industry professionals and colleagues,

I am pleased to initiate this new blog, as a service to NAHAD members, designed to help keep you posted on various U.S. regulatory and legislative matters that could, or will, impact your business.

In this age of restricting economic forces, heightened national security and ever-narrowing margins, businesses need all the help we can get to weather the storms of uncertainty and to continue to produce quality goods, keep people employed and protected, while all the while bearing the pressures of tax and regulatory policies and government intrusion.

With your help, input and action, we can do the right thing for our companies, our valued employees and our nation. I invite you to join me in this effort. With your help, NAHAD's, we'll ensure that our futures will be bright, secure and successful.