Schwarzenegger Seeks Rule Changes on Mandates and Social Programs To Ease $21 Billion Budget Gap

California is back in the hole and digging deeper. It is now $21 billion in the hole again and digging deeper every day.

In response to the growing problem, Schwarzenegger Seeks Obama’s Help for Deficit Relief

California Governor Arnold Schwarzenegger, anticipating a $21 billion state budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion.

The Republican governor plans to seek the relief, according to a California official who asked not to be identified because details haven’t been resolved. Instead of seeking one-time stimulus money or a bailout, the most-populous U.S. state wants the federal government to reduce mandates and waive rules stipulating expenditures on programs such as indigent health care, the official said.

“The problem is that there are no easy solutions left,” said Jean Ross, executive director of the California Budget Project, a Sacramento-based research group concentrating on issues facing the poor. “Where do you go to cut that doesn’t permanently compromise the level of public services that this state needs to remain economically competitive and to have some semblances of a safety net left for vulnerable populations.”

“We’ve already gone after the low-hanging fruit and the medium-hanging fruit and the higher-hanging fruit, so it’s going to get tougher and tougher now to balance the budget,” Schwarzenegger told reporters in November.

The governor has said he won’t increase taxes again to close the gap. That means more cuts, complicated by mandated expenditures for programs such as Medicaid health-care for low- income residents. With reductions already made to programs for the poor, additional trims jeopardize those federal funds.

Biggest Issuer

“In terms of programmatic reductions, we have to keep an eye on the fact that in some areas -- be it education or health and human services -- if you run afoul of federal maintenance of efforts requirements, you risk the loss of federal dollars,” said Schwarzenegger’s budget spokesman, H.D. Palmer. “As tough as 2009, these factors are going to make 2010 even more challenging.”

Moody’s Rating

California’s general-obligation debt rating from Moody’s Investors Service is Baa1, the company’s eighth-highest investment grade, and A from Standard & Poor’s, the sixth- highest. By comparison, Greece, the poorest member of the 16- nation euro region, is rated two steps higher at A2 by Moody’s and two lower at BBB+ by S&P.

“California, which is more than three times bigger than Greece, is running out of money,” T.J. Marta, chief market strategist at Marta On The Markets LLC, a financial-research firm in Scotch Plains, New Jersey, told Bloomberg Radio today.

A Standard & Poor’s/Investortools index of California state and local debt has returned 13.1 percent this year through Dec. 23, about 1.5 percentage points less than the national average.

Investors have demanded higher interest rates from California, compared with other borrowers. The state’s 10-year bonds yielded 4.6 percent by the end of last week, 1.51 percentage points more than top-rated municipal borrowers, according to Bloomberg indexes. Three months ago, that difference was as little as 1.06 percentage points. Greek 10- year bonds yield 5.72 percent, Ireland’s 4.78 percent and Spain’s 3.93 percent.

“When you are looking at a deficit in the size we have, everything needs to be on the table,” Assembly Speaker-Elect John Perez, a Democrat from Los Angeles, told reporters on Dec. 11.

If "everything" is on the table, then why isn't anyone mentioning union contracts, pensions, prisons, privatizing services, property taxes, proposition 13, state mandates, and illegal immigration?

California is in a mess because in practice "nothing" is on the table. Democrats do not want to cut services. Nor do Democrats want to address unions, pension problems, or illegal immigration.

Meanwhile Republicans do not want to raise taxes and I certainly cannot blame them on that score.

Schwarzenegger's idea to ease mandates and minimums on social programs is a good one. It should apply to every state. However, if Obama goes along, California will only save $8 billion but the hole is $21 billion and rising every month.

Jean Ross, executive director of the California Budget Project, says "there are no easy solutions left". Jean Ross is not phrasing the problem correctly. There are many easy solutions starting with illegal immigration, cutting pension promises, cutting union benefits, and privatizing the prison guards.

The problem is there is no political will to do what absolutely must be done.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Oppenheimer: There are Two Unrelated "Oppenheimer" Funds with the same "Fixed Income Core" name.

With thanks to Felix Salmon asking Did Oppenheimer’s Core Plus funds rise or fall in 2008? I now see there are two Oppenheimer mutual fund strategies from unrelated companies, but using the same Fixed Income Core name. Felix writes:

Mish has found something very odd indeed from Oppenheimer Funds. Its Fixed Income Core Plus strategy was marketed to the Illinois Bright Start college savings plan, with disastrous results.

But at Oppenheimer’s website, the information on the Core Plus fund shows positive returns for both 2008 and the year to date. It’s all very odd...

Update: Mystery solved! There are two Oppenheimers. There’s Oppenheimer Funds, which sold the disastrous investment to Illinois; its Core Bond Fund did indeed plunge in value in 2008. And then there’s Oppenheimer Investment Management, which Mish linked to, which also has a Core bond fund, but which is not part of Oppenheimer Funds at all; instead it’s an affiliate of Oppenheimer & Co, the boutique where Meredith Whitney used to work.

Here is the chart from the correct OppenheimerFunds Core Bond Fund.



In Oppenheimer's College Fund Loses 38% Using Borrowed Money To Buy Mortgage-Linked Securities and again in Oppenheimer College Fund Fraud Investigation I posted performance charts for the wrong Oppenheimer Core Bond Fund.

When you make a mistake, the first thing you do is apologize. So I offer a sincere apology to Oppenheimer Investment Management.

Here is the chart of Fixed Income Core Plus Performance straight off the Oppenheimer Investment Management website.

Core Plus Annual Performance



I will add an addendum to my earlier posts.

Are The Oppenheimer Companies Related?

Please consider OppenheimerFunds FAQ.

Is OppenheimerFunds related to Oppenheimer & Co. or Oppenheimer Capital?

No. OppenheimerFunds was formed in 1960 as an affiliate of the brokerage firm Oppenheimer & Co, Inc., but is now majority-owned by Massachusetts Mutual Life Insurance Company (MassMutual) and is a member of the MassMutual Financial Group. OppenheimerFunds has no corporate ties to Oppenheimer & Co., Inc. (formerly named Fahnestock & Company, Inc.) or Oppenheimer Capital, an independently operated investment unit of Allianz Global Investors. For further details, see our Company History.

OppenheimerFunds History ...

OppenheimerFunds traces its origins to Oppenheimer & Co., a brokerage firm founded in the early 1950s. In 1960, Oppenheimer & Co. decided to create a separate subsidiary to manage its mutual fund business and organized Oppenheimer Management Corporation to act as the investment adviser for the Oppenheimer Fund, which was first offered to the public on April 30, 1959. Oppenheimer Management Corporation was renamed OppenheimerFunds, Inc. in 1996.

The disastrous results were from OppenheimerFunds which bills itself as "The Right Way To Invest".

To tie a ribbon on the package please see Oppenheimer Investment Management History.

Founded in December, 2004, Oppenheimer Investment Management (OIM) is an institutional asset management firm. OIM is an indirect subsidiary of Oppenheimer Holdings Inc. and an affiliate of Oppenheimer & Co. Inc. (New York, NY). OIM is built on a foundation of the traditional investment firm culture with employee ownership, performance-based compensation and a horizontal management structure.

Again apologies are offered to OIM for initially adding to the confusion. This should straighten it out.

If you were a victim of OppenheimerFunds, please see Oppenheimer College Fund Fraud Investigation for the name of a firm handling a fraud investigation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Arizona Governor Jan Brewer: "We face a state fiscal crisis of unparalleled dimension"

If you did not know Arizona was having immense budget problems, you do now. Here is Arizona Governor Jan Brewer on the Arizona Crisis of "Unparalleled Dimension".

Dear Fellow Arizonan,

We face a state fiscal crisis of unparalleled dimension – one that is going to sweep over every single person in this state as well as every business and every family.

That is why I held an emergency cabinet meeting yesterday morning where I outlined for our state’s elected leaders and business leaders the ills our state faces. As I told them yesterday, we ARE faced with some of the worst days in our 97-year history.

We can debate how we got here, but we CANNOT remain paralyzed in our efforts to address the situation. We must set aside partisan politics and face the problem head on.

So here’s the TRUTH:

• The state has a budget deficit for the current fiscal year of $1.5 billion.
• Next fiscal year, 2011 -- a budget year that begins in just six months -- is even worse. Next year’s budget deficit stands at $3.4 billion. As of today -- right now, that MUST change.

..

This problem did not happen overnight.

• Five years of spending nearly doubled state government.
• The economic recession has reduced state revenues by almost 40 percent in just 3 years.
• Population growth in school children, university students, health care and welfare populations and inmates in our state prisons has fundamentally ruled out simplistic solutions like rolling the state budget back to levels from five, six, or more years ago.
• Federal and voter mandates prevent us from touching nearly two-thirds of the state budget.
• And procrastination, denial, and lack of will have allowed these problems to fester.

We must solve these problems and we must solve them now. More than calling for cooperation, today I had state government implement various emergency measures meant to ensure Arizona’s fiscal solvency. Among them:

• I ordered the Arizona Department of Corrections to return to the custody of U.S. Immigration and Customs Enforcement (“ICE”) -- as soon as possible -- all non-violent criminal aliens as is allowed under existing law. These inmates are the responsibility of the federal government (as is securing our border with Mexico). Arizona should not have to bear this cost.
• I am restating my Arizonans-only directives to state agencies to ensure that public benefits are provided only to those who are legally in this country and who reside in this state.
• Effective immediately, I have ordered all state agencies who benefits to citizens to implement means testing and sliding fee schedules. While the government safety net must stay in place, we need to secure help only for the neediest among us.

...

We owe it to the citizens of this state -- our children and grandchildren -- to adopt and approve a solution.

Sincerely,

Jan Brewer

Governor

Arizona Budget Status

Inquiring minds are digging into Arizona Budget Status FY 2010 and 2011 Presentation given by Jan Brewer. Here are a few screen shots.

Click on any screen shot for sharper image.



Revenue Vs. Expenditures


Operating Cash Balance



Peak Employment



Jobs Projection



Arizona Base Revenue



Reasonable Admission Of Problem

This is the most reasonable admission of a huge budget problem by any governor to date. However, the governor fails to point out the role of unions, pensions, and bloated government bureaucracy in the mess. Otherwise it is a good start.

The jobs projection seems realistic. Please note however, the chart depicts a jobs projection, not an unemployment projection. If it does take 7 years to get back to even, Arizona's unemployment may be the same or even higher than it is today.

To properly analyze the jobs situation one needs to factor in demographics: The birth rate + immigration - boomer retirees.

One could easily create a spreadsheet to do just that based on the one I created for the US as a whole.

For details, please see ....

• Mish Unemployment Projections Through 2020
• Mapping Unemployment - You Make The Call - Downloadable Spreadsheet

Arizona is first up to the confessional especially in regards to the grim employment picture. Who is next?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Oppenheimer College Fund Fraud Investigation

In response to Oppenheimer's College Fund Loses 38% Using Borrowed Money To Buy Mortgage-Linked Securities I received a helpful email link pointing to a law firm investigating Oppenheimer fraud.

Please consider Investigation Results into Oppenheimer Fund Fraud.

We have completed our investigation into the Oppenheimer Champion Income Fund (OCHBX, OPCHX and OCHCX) and the Oppenheimer Core Bond Fund (OPIGX) Fund and plan on filing FINRA arbitration lawsuits to recover investment losses in the Funds for fraud and the failure to disclose the material risks of the Fund. Unknown to most clients, the Funds were defacto hedge funds, investing in extraordinarily risky derivatives that were highly illiquid.

Unfortunately, in the solicitation of the Funds, these risks were not made known to investors. According to the findings of our investigation, the Funds were pitched to investors either as a conservative high income fund (Champion) or conservative intermediate fund (Core) or at least a high income or intermediate funds that were not dramatically riskier than the high income/intermediate fund peer group.

According to our investigation, investors at major brokerage firms like Wachovia, Merrill Lynch, Linsco Private Ledger LPL, Citigroup Smith Barney, ING, UBS, Gunn Allen and Stifel were not informed of the true risks of the Fund. As a result, many investors who thought they were receiving a high income fund with the standard risks associated with it instead have suffered losses of approximately 80% in 2008 and 35% in the Core Bond Fund. The Champion Fund dropped a stunning 55% in November of 2008 alone. For calendar year 2008, Champion Income has lost 79.1%, a record eclipsed only by a high income fund of southern based Regions.

...

Summary of Wrongdoing: Undisclosed Bets In High Risk Derivatives

The Fund took a massive bet in high risk derivatives in the form of mortgage backed securities and credit default swaps. The full risks of the Fund’s illiquid, speculative derivatives were not meaningfully disclosed to investors. The Champion Income Fund was portrayed as a garden variety high income fund. Unfortunately, starting in late 2006, Angelo Manioudakis, the 42 year old head of the firm's Core Plus team responsible for managing the Fund, concentrated the Fund in total-return swaps.

These are highly illiquid, speculative and complex agreements between parties to exchange cash flows in the future based on how a set of securities performs. Specifically, the Fund was betting that top-rated commercial mortgage-backed securities would rally in 2008. The Fund gambled, and lost, with money for investors that was not supposed to be gambled with.

Additionally, the Fund was also concentrated in credit-default swaps (CDSs). The CDSs declined $238 million through September alone. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.

According to our findings, the Champion Income Fund also increased its gamble, in effect doubling down, on falling mortgage related bonds in 2008. For example, mortgage securities tied to Washington Mutual Inc. with a $9 million principal value were valued at only $3 million at the end of September 2008. A set of five Freddie Mac mortgage-backed securities with a combined principal amount of $20 million were valued at just $2.5 million. As defaults continued to rise, the mortgage related holdings plummeted. While this sort of sector bet might be appropriate for a sector fund or hedge fund, the Champion Income Fund was not meant to be a sector or hedge fund. Many conservative clients have been financially devastated.

...

To determine if some or all of the investment losses in the Champion Income Fund are recoverable through a FINRA securities arbitration lawsuit, please contact Stoltmann Law Offices in Chicago. We work on a contingency fee basis for investors across the U.S.

Seek Legal Representation

I spoke with an attorney at Stoltmann Law offices and they are still accepting clients. Only the state of Illinois "Bright Start" program and a similar program in Oregon have settled.

I have no stake in this matter, except to see justice served.

If you have been harmed, it may be in your best interest to contact Andrew Stoltmann at the Stoltmann Law Offices. A phone number and email address is available in the above link.

Addendum:

I removed some text and performance charts above because they were from the wrong Oppenheimer Core Bond Fund.

For details, please see Oppenheimer: There are Two Unrelated "Oppenheimer" Funds with the same "Fixed Income Core" name.

The disastrous results and the lawsuit above are in relation to OppenheimerFunds which bills itself as "The Right Way To Invest".

Oppenheimer Investment Management (OIM) offers a Fixed Income Core Plus strategy that had positive results. OIM is not related to OppenheimerFunds.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Geithner: No 'Second Wave' To Crisis

One sure way we know a second wave to the crisis is likely coming is the preemptive denial of it by those who never saw it coming. Please consider Geithner: There Will Be No 'Second Wave' Crisis.

"We are not going to have a second wave of financial crisis," Geithner said in an interview with National Public Radio. "We cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable."

Geithner, interviewed on NPR's "All Things Considered" program, rejected the idea that a serious new crisis could be triggered by lingering problems with commercial real estate loans or with a sudden weakening in the value of the dollar.

"We will do what is necessary to prevent that and that is completely within our capacity to prevent," he said.

However, in a separate interview he conceded that it would take several months before the economy yields positive job growth. Job losses have been easing in recent weeks but the economy still saw 480,000 new claims for unemployment benefits last week. That number is expected to shrink just a bit this week.

Geithner on NPR

Inquiring minds might be interested in the complete NPR interview. Please consider Geithner Voices Confidence About Economic Rebound.

Here is the Transcript of the interview with Michelle Norris. Some snips follow ...

NORRIS: You know that businesses are spending again. The administration has been asking the banks to try to free up more money for small business in particular. And I want you to help me understand something because on one hand the administration is telling the bankers that they need to take fewer risks, that they need to deleverage, that they need to have higher capital reserve. And at the same time you're also telling them that they need to lend more money. Those two things don't seem to square.

Sec. GEITHNER: It is very important that we work with Congress to pass legislation that can put in place financial reforms that can prevent the next crisis. So it's pretty important in the future we build a more stable financial system. We constrain risk taking in the future. But right now the real risk we face is that banks are not lending enough and not going to provide the capital businesses need to grow for the economy to strengthen going forward.

NORRIS: So it's okay for them to take risks right now?

Sec. GEITHNER: Absolutely. Right now the real risk is that the pendulum having been too soft and easy on the lending side. Right now the risk is that banks overcorrect or that supervisors overcorrect. And that's something we need to work against, lean against, because, again, the strength in recovery will depend in part on credit being available to businesses across the county.

NORRIS: You know, pardon me for presenting you with all these doomsday scenarios, but as you know, many people are worried about a second wave of systemic crisis, that either because of commercial real estate or the value of the dollar...

Sec. GEITHNER We're not going to have, Michele, a second wave of financial crisis.

NORRIS: You're that confident? You're certain of it.

Sec. GEITHNER: We'll do what is necessary to prevent that. We cannot afford to let the country live again with a risk that we're going to have another series of events like we had last year. That's not something that is acceptable. And we will prevent that. We will do what is necessary to prevent that, and that is completely within our capacity to prevent.

NORRIS: You're saying you're confident that it won't happen. What levers can you press or pull to make sure that does not happen again?

Sec. GEITHNER: As people saw, when you have the will to act, we have substantial ability to prevent that, and we'll do what's necessary.

The arrogance and ignorance of Geithner are both appalling.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Oppenheimer's College Fund Loses 38% Using Borrowed Money To Buy Mortgage-Linked Securities

With the help of Oppenheimer, at least one of Illinois' "Bright Start" College Funds is in the gutter.

"Core Plus", a supposedly conservative fixed income strategy was marketed to parents whose children were at or near college as a way to protect their investments. The strategy managed to lose 38% in 2008, resulting in a lawsuit and a subsequent settlement.

Investors are now finding out that the settlement will be less than expected because losses were greater than expected. Please consider the Chicago Tribune article Illinois Bright Start college fund settlement less than expected.

The losses in a mutual fund that was part of the Illinois Bright Start college savings plan totaled about $150 million in 2008, more than double what the state had previously disclosed. As a result, families will recoup about half of what they lost, where six months ago some expected to recover a higher percentage of their losses.

The $77 million settlement with OppenheimerFunds Inc., announced Tuesday by Treasurer Alexi Giannoulias and state Attorney General Lisa Madigan, would partially reimburse about 65,000 account holders.

But in finalizing the settlement, the treasurer's office said the $85 million in losses occurred between April 2008 and the end of 2008. The pact covers a longer period -- between Jan. 1, 2008, and Jan. 25, 2009 -- and the losses over those 13 months were about $150 million, the treasurer's office said.

The additional $65 million in losses occurred from January through March of 2008 and in January 2009, Giannoulias spokesman Scott Burnham said.

The losses occurred for investors in Oppenheimer's Core Plus Fixed Income Strategy, one of Bright Start's 21 mutual funds. Core Plus was supposed to be a conservative investment but lost 38 percent of its value in 2008, state officials said. By comparison, the bond index used as the fund's benchmark rose 5.24 percent in the same period.

"Thousands of 529s, 401(k)'s and pension funds experienced enormous losses over the last year, this is one of the few funds in the country where investors are going to get some money back," Giannoulias said.

The Core fund borrowed money to buy mortgage-linked securities that plunged in value when the residential real estate market collapsed. Burnham said those investments were outside the bounds of what was allowed and that Illinois was the first state to notice the problems with the fund and launch an investigation.

Oppenheimer marketed Core Plus to parents whose children were at or near college as a way to protect their investments. A tentative settlement was announced in June but a final agreement took longer than anticipated because of the complexity of issues and the number of states involved. Bright Start participants who had losses of at least $20 as of Sept. 30 will be eligible for settlement proceeds.

Conservative College Fund?

Borrowing money (ie using margin leverage) in a plunging real estate market is well beyond stupid. Even more so for what was marketed as a conservative college fund.

Please consider this description of Fixed Income Core Plus, off Oppenheimer's website.

The OIM Core Plus Fixed Income strategy is rooted in the idea that individual security selection produces the best opportunity for risk-adjusted excess returns over time. Through an extensive, bottom-up research process, our portfolio management team focuses on optimal bond selection of investment grade corporate bonds, mortgage-backed securities, US Government Treasuries and taxable municipal bonds. The team employs a tightly controlled duration discipline and closely manages all portfolio risk factors. The portfolio management team’s objective is to produce predictable, consistent excess returns net of fees over the Barclay's Capital Aggregate Bond Index.

Excuse me for asking but ....

• Where was the "extensive, bottom-up research process"?
• Where was the "optimal bond selection"?
• Where were the "predictable, consistent excess returns"?
• Where was the "tightly controlled duration discipline"?
• Most importantly where was the "close management of all risk factors"?

Where Are The Losses?

As long as we are asking "where" questions. Where are the losses?

That might seem to be a strange question to be asking in light of 38 percent reported losses, and a $77 million settlement that will not begin to cover those losses. However, I just cannot see any losses.

Actually, what I mean to say, is Oppenheimer's website is not reporting any losses for the strategy in question.

Please consider charts from Fixed Income Core Plus Performance straight off Oppenheimer's website.

Core Plus Annualized Performance



click on chart for sharper image

Core Plus Annual Performance



click on chart for sharper image

Losses? What Losses?

Forgive me for asking so many questions but I am in an inquisitive mood today.

Pray tell why does the above chart show the strategy gained 1.69% in 2008 and is solidly in the green in 2009 if there were huge losses?

Did Oppenheimer put the Bright Start teachers' fund in something other than Core Plus Fixed Income? If so what? And why? And who is to blame? And why do multiple articles mention Core Plus Fixed Income as the problem child?

On the other hand, if the teachers' fund was in Core Plus Fixed Income, losing money, then why do the above charts show Core Plus Fixed Income was not losing money?

Regardless of anything else, if Oppenheimer did use leverage and mismanage the funds as reported, Oppenheimer ought to refund all of the losses, period.

Instead, in Agreement reached after college fund losses ABC is reporting ...

OppenheimerFunds Inc. has agreed to pay Illinois more than $77 million. That money will be given to thousands of eligible Bright Start account holders who lost money.

The problem -- and this settlement has to do with one of them -- Oppenheimer's Core Plus fund, which lost over a third of its value in part because of mismanaged investments.

Six states went after Oppenheimer, and Illinois now becomes the first to settle on recouping some of the losses. The agreement means Core Plus investors will get back 57 cents on the dollar.

Inquiring minds might be interested in Illinois Attorney General on Oppenheimer Core Plus Underperformance.

Final Question

Is there anyone, anywhere in the business capable of saying "We are sorry, we were grossly negligent, and therefore we will reimburse your losses?"

Here's the deal. Losses are one thing and I would not expect any fund to reimburse losses made in accordance with the fund's stated strategy. However, losses caused by gross negligence and wild deviation from a fund's stated strategy are another thing altogether.

If Oppenheimer has a response to my questions I will gladly post it.

Addendum:

The question of reported performance has been resolved.
There are two unrelated Oppenheimer Mutual funds using the same name.

For details, please see Oppenheimer: There are Two Unrelated "Oppenheimer" Funds with the same "Fixed Income Core" name.

The disastrous results and the lawsuit are in relation to OppenheimerFunds which bills itself as "The Right Way To Invest".

Here is the chart from the "Bright Start" College Funds OppenheimerFunds Core Bond Fund.



Oppenheimer Investment Management (OIM) offers a Fixed Income Core Plus strategy that had positive results. Those are the charts in the main body of this post. OIM is not related to OppenheimerFunds.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Corrupt Politics and Imprudent Bailouts are Two Peas in Same Pod

In a study that confirms what anyone with common sense already knew, Banks with political ties got bailouts.

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.

Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan's Ross School of Business.

Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.

Political influence was most helpful for poorly performing banks, the study found.

Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP's Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.

President Obama said in October that despite the bailout, there was still too little credit flowing to small businesses.

Appearances Are Deceiving

The reason there appears to be "too little credit flowing to small businesses" is simple.

1. Banks are undercapitalized
2. Demand for loans is down
3. What demand does exist is from questionable risks

For details on those points please see Fictional Reserve Lending And The Myth Of Excess Reserves.

Politicians For Sale

Some of the comments to the article hit the nail on the head.

In response to a statement in the article “The banking industry has long been criticized for using political influence to obtain bailouts.” here is this gem of a comment:

How about, “The politicians have long been criticized for granting political favors in exchange for campaign contributions.”

If the politicians weren’t for sale, they couldn’t be bought.

Indeed, politicians are for sale and the results prove it, in spades, with disastrous consequences.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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