This dismantling of the so-called “New Federalism” will be readily apparent again this week as the federal government is once again at the forefront of the most-closely watched  crisis-fighting initiatives at hand: With Congress pushing forward on an $827 billion stimulus plan and the Treasury Department planning to unveil its new banking bailout blueprint on Tuesday, economists and other experts say the federal government is taking its biggest role in the economy in a generation.

States that once pushed away from the federal government as part of the New Federalism are now essentially begging it for financial support, banks and Big Business that once viewed near-total deregulation as Corporate America’s Holy Grail are now seeking federal financial aid and new regulatory protections (and in many cases are becoming actual business partners with the government), and individuals are asking for tax relief.

Alan Viard, a Bush administration economist now at the American Enterprise Institute, may well epitomize this reversal of thought: He’s one of the economists who initially rejected the need for a fiscal stimulus, stating that the right size for a government spending bill was “probably zero,” believing that federal interest rate cuts and existing unemployment benefits would be enough to do the trick. But he now sees the package as necessary.

“Things have gotten so bad so quickly,” Viard told The Washington Post. “We have now lost 3.6 million jobs, a stunning loss. But what’s more horrifying is that half that loss has occurred in the last three months. This is a severe recession.”

The exact shape and size of the package matters less than the timing, and any delay will be very damaging, economists say.

“Most of the things in the package, the big dollar amounts, are things that are pretty quick stimulus and need to be done,” Alice Rivlin, who was former president Bill Clinton’s budget director and a critic of aspects of the proposed stimulus, told The Post. “Is it a perfect package? Of course not. But we’re past that. Let’s just do it.”

Signs of the Stimulus

The U.S. Senate late Friday reached agreement on the estimated $827 billion stimulus bill, setting the stage for what’s expected to be some tough negotiations with the House of Representatives over tens of billions of dollars in aid to states and local governments, tax provisions, and programs focusing on education, health and renewable energy.

Congress is pushing hard to complete the legislation this week. But that figures to be a challenge. The House bill was passed without any Republican support, while the Senate version passed Friday night between Democrats and three moderate Republicans.

During a rare floor session on Saturday, Republican opponents continued to criticize the entire stimulus proposal – even though they clearly don’t have the votes to stop it. The bill is expected to be passed in the next few days.

The price tag for the Senate plan is only slightly more than the $820 billion measure adopted by the House late last month. Both plans seek to resuscitate the U.S. economy with similar one-two punch strategies:

• Fast-acting tax cuts designed to jump-start consumer and business spending.
• And longer-term – albeit slower-acting – spending on public works programs and other projects that are projected to create more than 3 million jobs.

Despite these seemingly similar philosophies, the two plans rely on approaches that are very different. The higher-priced House bill emphasizes help to states and municipalities that would otherwise be facing major cuts in services and layoffs of public employees, while the Senate slashed $40 billion of that kind of funding from its version of the bill.

The Senate plan focuses more on tax cuts, lowers a proposed increase in food stamps and provides health-care subsidies for the unemployed that are much less generous than the House version. The Senate plan also creates $30 billion in tax incentives to encourage Americans to buy homes and cars within the next year.

House Speaker Nancy Pelosi, D-Calif., said the emerging Senate cuts to the stimulus program “very damaging” and that she was “very much opposed to them.” But after the Senate reached a deal, Pelosi expressed resolve to complete the legislation in the days ahead.

U.S. President Barack Obama has made the economic recovery effort the centerpiece of his agenda since even before he officially took office. But President Obama now intends to get much more involved, and much more aggressive: He will conduct a “town-hall-style” meeting in Indiana today (Monday), followed by a formal “prime time” White House news conference – the first of his term – tonight.

The president will then pitch the plan again in Florida tomorrow (Tuesday) and again in Virginia on Wednesday.

Senate Majority Leader Harry Reid, D-Nev., said final passage of the Senate bill is expected Thursday, after which congressional leaders say they will hurry to get the House and Senate versions into conference with the hope that a passed bill can be sent to the White House by the end of week, the San Francisco Chronicle reported.

Banking Plan Overhaul Unveiling Tomorrow (Tuesday)

Busy new U.S. Treasury Secretary Timothy F. Geithner last week promised that the Obama administration would unveil its new blueprint for rescuing the U.S. banking system today. Over the weekend, however, the administration said the rollout would be delayed until Tuesday, so that the focus could remain on passage of the stimulus package, Bloomberg News reported.

But that doesn’t mean the banking bailout plan isn’t key.

According to a recent analysis, the Obama administration has a multi-pronged strategy for quelling the financial crisis, including:

• A program to insure banks against extreme losses on mortgages and other loans.
• A new round of investments in banks.
• Help for homeowners facing possible foreclosure.
• The broadening of a U.S. Federal Reserve program to ramp up lending.
• The Treasury Department could also look at purchasing toxic assets from banks – possibly with the aid of private-sector financing.

This would represent an overhaul of the $700 billion Troubled Assets Relief Program (TARP) initiated by the Bush administration. As the name implies, TARP was initially concerned with buying troubled assets – but it quickly evolved into a direct-government investment into the banks.

This new Obama plan reflects Geithner’s personally held view of how governments should respond to financial crises. Geithner believes all available financial tools should be used – and used aggressively. Any such effort would include direct efforts to deal with the financial sector’s massive losses, since that would help renew public confidence in the financial system.

Too small a government response during a crisis poses more risk than too much response, he said during his confirmation hearing.

Many of the details of what Geithner will announce remained in flux, although the broad outlines were becoming clear, published reports state. But one thing is certain: Even the ideas that are continuations of the initiatives started by former Treasury Secretary Henry M. “Hank” Paulson Jr. will have a unique Geithner twist.

One example: The government will almost certainly continue to invest in banks. But past investments consisted of a form of “preferred stock” that granted the federal government no say in how the bank was run, or how the money would be used.

As a Money Morning investigation revealed, that lack of control allowed banks to use taxpayer-provided TARP money as financing for buyouts. And then the banks refused to detail how they spent the money – and why not? They weren’t required to.

Under the new plan, there will still likely be new government investments in banks. But Geithner will likely call for those new investments to be convertible into common stock after some fixed period of time, perhaps seven years. If the banks are unable to raise private capital in that span, government control would escalate.

Banks receiving money also will probably have to report to the government and to the public, and the government is likely to insist that the new capital be used to expand lending.

Geithner has also been looking for a way to bring back the original TARP concept, which Congress passed on Oct. 3. Paulson pitched the plan to Congress as a program to buy troubled assets off of banks’ books, then shifted the plan and opted to invest directly into the banks instead.

Paulson’s chief worry – and the reason that he changed direction – was that asset purchases would involve too many technical complications, meaning it would take too long to enact. And that delay could be costly to a system where banks were teetering on the precipice of failure.

After struggling with those same issues, Geithner and his team appear to have settled on an approach that amounts to financial triage, meant to give investors confidence that banks will not encounter vast new losses so that they are willing to invest private money, The Post reported.

In addition to buying bad assets, the Fed and Treasury in the next few weeks are expected to expand a program that should jump-start lending outside the banking system. In November, the agencies launched a program – the “Term Asset-Backed Securities Loan Facility” – that would devote $200 billion for credit card, auto, student and small-business loans.

That program will be extended to include residential real-estate mortgages and into the commercial real estate sector. Geithner may also announce an initiative that would inject government money into companies known as mono-line insurers. These firms are key players for states and municipalities when it comes time for those state and local government bodies to borrow money. With the implosion of the housing bubble, and the subsequent implosion of the commercial real estate business, mortgage-related losses by the insurers have made it harder for states to issue the municipal bonds that would help them ride out the recession without aggressive tax increases or budget cuts.

Geithner is likely to roll out a plan, worth $50 billion to $100 billion, to encourage the modification of mortgages for homeowners who would otherwise likely face foreclosure. It could be based loosely on a strategy for foreclosure relief engineered by Federal Deposit Insurance Corp. (FDIC) Chairman Sheila C. Bair, when the FDIC took control of the failed bank IndyMac Bancorp Inc. (IDMCQ) last year.

Market Matters

On the corporate front, United Parcel Service Inc. (UPS) posted a profit (though revenue declined) and then announced new cost-cutting measures.  Motorola Inc. (MOT), The Walt Disney Co. (DIS), Time Warner Inc. (TWX), and Costco Wholesale Corp. (COST) reported disappointing results.  Visa Inc’s (V) earnings jumped by 35%, though management warned of tougher times ahead.

Bailout plan recipients have tried to cut back excessive spending (and the associated bad PR) as Goldman Sachs Group Inc. (GS) (Miami) and Well Fargo & Co. (WFC) (Las Vegas) canceled huge boondoggles. Bank of America Corp. (BAC) is selling off corporate jets, and Citigroup Inc. (C) may be attempting to get out of the $400 million marketing deal with the New York Mets.

C-SPAN must be enjoying stellar ratings as investors seem obsessed with the inner-workings of Congress and their debates on the stimulus and bailout.  The markets disregarded much of the dire earnings and economic data (terrible unemployment report…see below) and focused on the newfound optimism that politicos can work together to get the country moving in the right direction.

Economically Speaking

Just how long until a stimulus package starts creating jobs?  That answer can’t come soon enough for the almost 600,000 people who moved to the unemployment line in January, the most devastating month for job losses since 1974.  The unemployment rate climbed to 7.6%, forcing many economists to (upwardly) revise their projections for the rest of the year (and beyond).

Since the recession “officially” began in December 2007, the country has lost more than 3.6 million jobs, with most of the losses coming in the past three months.  The rest of the data released during the week did little to contradict the lousy unemployment picture.  Factory orders fell for the fifth straight month and the ISM index revealed that purchasing managers still look for contraction in the manufacturing sector. Though the services sector showed a slight rebound in its ISM survey, the index reported a fourth consecutive month of declining activity.  Residential construction spending experienced its worst annual decline ever recorded (since 1993), though optimists are hopeful that a stimulus package that focuses on infrastructure growth will prompt a renewal in non-residential building.

With the Fed stuck looking for creative ways to get involved (now that the benchmark Federal Fund rate stands at about 0%), its international counterparts took action (or inaction) of their own. The Bank of England (BOE) cuts its primary lending rate to a record low 1.0%, while the European Central Bank chose to leave its rate unchanged (for now) at 2.0%.

Weekly Economic Calendar

Source: As Stimulus-Package Debate Continues in Congress, New-Look Bank Bailout Plan is Set to Debut This Week

This from Money Morning:

When federal banking regulators last week seized the Houston-based Franklin Bank SSB (FBTX), it became the 18th bank failure this year amid the ongoing credit crisis. With total assets of $5.1 billion and total deposits of $3.7 billion, Franklin wasn’t the largest bank failure this year – that honor belongs to IndyMac Bancorp Inc. (OTC: IDMCQ), which had more than $30 billion in estimated assets when it was seized by U.S. banking regulators in July. At the time, IndyMac was also the third-largest bank failure in U.S. history, reaching all the way back to 1934, U.S. News & World Report said at the time.

That begs the question: Is your bank safe? And perhaps a second question: Why should you care? After all, aren’t deposits guaranteed by the Federal Deposit Insurance Corp. (FDIC)? And weren’t the limits on covered deposits raised from $100,000 to $250,000 as part of the $700 billion banking bailout deal?

Those all are true points. So long as we continue to see a bank failure here and another one there, everything should be copacetic.

But here’s the thing: By the end of 2009, about 110 U.S. banks with assets of more than $850 billion will fail – and that could cost the FDIC as much as $200 billion more than it has, says Christopher Whalen, co-founder of the Los Angeles-based Institutional Risk Analytics, a risk-management and consulting firm with an expertise in the financial-services industry.

Most banks are fine, IRA says. But even industry insiders say the banking business is in for some rough times.

“It’s not going to be Armageddon,” Mark Vaughan, an economist and an assistant vice president for banking supervision and regulation at the Federal Reserve Bank of Richmond, told Bloomberg Markets magazine recently. “But it’s going to be bad.”

If bank failures accelerate, and the FDIC insurance fund goes bust, there will probably be a taxpayer bailout. But no one knows what form that could take or what the payout ratio might be. And industry experts do expect dozens of banks to fail in the months to come.

So why take the chance?

You shouldn’t. But how can you tell if your bank could be one of them?

Ironically, if you look to the Federal Deposit Insurance Corp. (FDIC) for guidance – as most investors do right now – you won’t have a clue. That’s because its list of so-called “troubled institutions” is a closely guarded secret. The FDIC will tell you that 117 banks were on the list recently, up 30% from 90 at the end of the first quarter. And, in its desire to be ever so helpful, the agency also will tell you that the combined assets of troubled banks recently rose to $78 billion, a jump of 200% from only $26 billion at the close of the first quarter. Capital-loss provisions rose 240% to $50.2 billion.

But the FDIC won’t tell you – no matter how politely you ask – which institutions are most at risk (nor which are the healthiest) even though the government has this information at its fingertips. The FDIC says that it maintains this secrecy to prevent a run on troubled banks and enhance the overall stability of the banking community.

To me that seems an awful lot like asking investors to buy insurance after they’ve crashed their car.

So, we’ve got to turn to other sources in an effort to protect our capital.

One of our favorites is the IRA Bank Industry Stress Index published by Whalen and his colleagues at Institutional Risk Analytics. What makes the IRA Stress Index so compelling is that it’s based on the FDIC’s own data. That means it’s sort of like a financial X-ray that allows you to see what’s really under the hood – even though the government won’t tell you.

“Problems in the financial industry are of a scale that most people simply can’t imagine,” Whalen says. “Existing ratings and research coverage are clearly inadequate. That means we’ve got to come up with new ways to look at bank safety and soundness – particularly when it comes to increasing consumer awareness of transparency. And safety.”

Martin Hutchinson, a fellow editor here at Money Morning and a 30-year veteran of the banking industry, agrees, noting that “knowledge, after all, is power. Particularly when consumers are caught in the middle like they are now.”

Although this financial intelligence originally was designed for institutions trying to make sense of the FDIC’s database, IRA recently created a personal report that allows individual investors to X-ray their own banks. Available for $50, the report classifies data into six broad categories at combine to create what IRA calls the “Key Safety and Soundness Indicators:”

• An overall “Stress Rating.”
• Return on Equity (ROE).
• Loan defaults.
• Capital.
• Lending capacity.
• Efficiency.

In contrast to other free services that simply provide a numerical grade or a star ranking without much in the way of helpful context, IRA provides an industry benchmark for each category so that investors can make “apples-to-apples” comparisons between banks. It also helps investors judge for themselves how risky any U.S. financial institution tracked by the FDIC actually is – or isn’t.

Whalen notes that the IRA model frequently provides early warnings, too. In the early months of 2006, for instance, he noted that the “Overall Industry Banking Stress Index began climbing at a time when most of Wall Street was in denial.”

Pointing to a sample report on Washington Mutual Inc. (OTC: WAMUQ), which he shared with Money Morning, Whalen said that, “in June 2008, just before Uncle Sam crashed WaMu’s party, the beleaguered bank had an Overall Stress Rating of 21.6 – versus an industry average of 1.4.”

In other words, according to IRA’s calculations, WaMu was more than 10 times riskier – which equates to more than a full order of magnitude – than the average bank. WaMu has since been purchased by JPMorgan Chase & Co. (JPM).

Obviously, WaMu is hardly alone. And it won’t be the last bank to fail.

According to Whalen, the IRA Overall Industry Banking Stress Index is still rising, which is why as many as 110 banks are at risk of failure.

But individual investors no longer have to fly blind, for they now have a tool to gauge whether their bank is likely to be on the FDIC’s watch list.
To find out more, please click here.

Source: Credit Crisis Safety Plays: Banking Ratings Report Can Provide Peace of Mind and Warn You if Your Bank is Weak