Series I Savings Bond Rate Update (May 2010)

Treasury Direct Series I Savings BondsAs we near the end of April, we also near the announcement period of Series I Savings Bond interest rates. For the uninitiated, here’s a quick recap – Series I Savings bonds are Treasury bonds whose interest rate is pegged to the rate of inflation. The rate is determined by an equation (I just use my Series I bond rate calculator) involving the bond’s fixed rate and the inflation rate, announced in May and November.

I think Series I bonds are great if you need something 100% safe and a respectable interest rate. My favorite part is that the interest is free of state income taxes plus federal if used for qualified educational expenses. If you have a short term need, like education in a few years, that you want to still accrue interest but not put in the market, a savings bond isn’t a bad idea.

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On The Brink by Henry M. Paulson Jr.

On the BrinkOn The Brink by Henry Paulson is the first book I’ve read cover to cover in the last year. You’re probably not surprised to hear that I don’t read every single page of the books I review on Bargaineering but for On The Brink, I read every last page. On The Brink is Henry Paulson’s, then Treasury Secretary, account of the financial crisis that nearly brought the United States, and must of the world, to its knees. Throughout the crisis, I was reading all the news stories about various rescues, bankruptcies, etc. but I always knew there was more to the story. I knew that there were things going on behind the scenes that we wouldn’t hear about for quite some time and I didn’t expect to read about it in a book so soon.

If you want to learn what happened, what caused it, and what some of the most brilliant and hardworking financial minds in the world did to prevent a complete meltdown, then you need to read this book. It reads like a novel, Paulson is frank (which is awesome), and you walk away feeling like you actually understand what happened and why certain things were done. And for $14, it’s a bargain.

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The Mints of the United States

United States One Dollar Proof CoinIf you’ve ever looked at a coin, chances are you’ve been interested in what was on it. There’s the year it was stamped, various Latin sayings, some images of buildings or famous individuals from US history, and there usually is a random letter. You probably know that the letter corresponds to the Mint facility that produced the coin, but what letter stands for what? How Mint facilities are there? Where are they located?

The United States Mint is the agency in the United States Government responsible for the production of coins used in the US. It was created in 1792 by the Coinage Age of 1792 and put within the State Department. Later that year, the Mint opened its main branch in Philadelphia, PA and soon expanded to include several facilities across the United States. In 1799, with the Coinage Act of 1873, it was made an independent agency.

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Series I Bonds Inflation Rate Update (Nov 2009)

Treasury Direct Series I Savings BondsUpdate: The Treasury Department announced the fixed rate component on new Series I bonds would be 0.30% for the bonds issued in the next six months. Coupled with the inflation component we all know ahead of time (see below), the new Series I bond rate will be 3.36% for the next six months.

For the last six months, my Series I Savings Bonds have been earning exactly 0.00% APY interest. If you remember from the Savings Bond Foundation post, Series I savings bonds earn interest based on an equation that has both an inflation rate component and a fixed rate component.

The inflation rate component is set twice a year, November and May, and calculated based on six months of inflation data. The November rate is set based on inflation between March and September, the May rate is set based on inflation between September and March (see how that works out?).

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Basics of Treasury Bonds & Securities Explained

Between the various bailouts, rescues, and spending packages, the United States Treasury has been working overtime issuing debt. If you’re like me, you’re probably wondering how this is even possible and how the government goes about doing it. During the First World War and World War Two, we went through a similar period where the government needed to borrow a lot of money to help fund the war effort. That gave rise to the patriotic posters that called for ordinary Americans to buy war bonds to support our soldiers fighting the enemy on foreign soil. That same mechanism, public debt, is what we use today to help fund many of our programs. This makes it a prime topic for the third installment of the Foundation Series.

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 Government, Personal Finance 

The $700B Bailout Bill (Update8)

Update8: It’s done, both chambers have approved the updated bailout bill that contains a ton of other stuff… House Republicans got what they wanted. Bush just signed it.

Update7: The Senate will vote today, after sundown in observance of Rosh Hashanah, on a tweaked version of the bailout bill that the House rejected on Monday. There are a couple changes to it, none of which really affect the terms of the bailout itself but could sweeten the pot for House Republicans:

  • The FDIC insurance limit to be raised from $100,000 to $250,000.
  • Renewable energy tax incentives for individuals and businesses – this is something the Senate hopes will help get some House Republicans on board. (details)
  • Alternative Minimum Tax relief.

Update6: The bill didn’t pass the House. Back to the drawing table, lawmakers are working on a new bill.

Update5: The details of the agreed bailout bill have been released and they are:

  • As mentioned earlier, the $700 billion would be disbursed in stages with $250 billion made available immediately.
  • If the Treasury pays fair market value and if they overpay, the President would have to propose legislation to recoup the loss from the financial industry. The Treasury could also take ownership stakes in bailed out companies.
  • The government can adjust the mortgages that it takes over.
  • Executive compensation for firms that participate will be capped and companies can’t deduct any pay above half a million dollars. No golden parachutes for the top 5 executives of a company that goes into bankruptcy or if they fire those executives.
  • There will be two oversight board. The Financial Stability Oversight Board would protect taxpayers and the economic interests of the company. It will include the Fed chairman, the SEC chairman, the Federal Home Finance Agency director, the HUD secretary and the Treasury secretary. The second board is a congressional oversight panel that would review the state of the market, regulatory system, and the Treasury’s use of the funds. That panel would consist of 5 experts appointed by House and Senate leaders.
  • The Treasury must also establish an insurance program, with premiums paid by the industry, to guarantee the assets that were purchased before March 14th, 2008.

All that remains is the vote in both chambers and the President signing the bill. Whew.

Update4: A deal has been reached and all that remains is to put it on paper. The plan, according to a release by Speaker Pelosi’s office, stated that the plan “gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full — if other protections have not actually produced a profit.”

The $700B would be broken up into three phases: $250B available immediately, $100B “upon report to Congress,” and the last $250B available upon Congressional action. There are additional details in the WSJ article.

Update3: It appears as though the once 3-page bailout bill has now gotten up to 102 pages but progress is being made and now the ETA appears to be Sunday. I don’t know about you but for once I’m glad a bill swelled in size, the thought of $700B in spending passed in a mere three pages was a little disconcerting (not to mention there was no oversight!).

Update2: Uh oh, looks like there have been some problems. From the front page of CNN: “Sen. Richard Shelby, ranking Republican on the Senate Banking Comittee, emerged from the White House to declare of the bailout plan: ‘It will not solve problems, it will create more problems.'” Yikes! But it sounds like only the House Republicans are having problems with it

Update1: Reports are coming in that an agreement in principle has been reached. According to the Wall Street Journal, the $700B package would come in installments with $250B available immediately with $100B to follow as necessary. The balance would be doled out as needed and Congress can block it. Word is that executive pay for bailed out firms would be limited, the government would get a stake in the companies, and most other major issues are resolved.

Original: If you’ve been watching the news, you’ve probably heard of this massive $700B bailout bill that Henry Paulson, the White House, and Congress have been arguing over for the last week. Republican presidential hopeful John McCain suspended his campaign yesterday and threatened to cancel Friday’s debate unless a bailout bill agreement was reached. Both candidates will be heading to Washington today to get in the way and take photographs.

Last night, President Bush gave an address in which he proposed “that the federal government reduce the risk posed by the troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending.” and that “Our entire economy is in danger.”

My eyes have popped out of my head for the fourth time in two weeks at the numbers being thrown around… it’s like each bailout is trying to top the prior bailout. This time it’s seven hundred billion dollars.

What’s In The $700B Bailout Bill?

The Treasury wants the authority to buy up to $700 billion in “troubled assets.” In reality, the proposal wasn’t much more than that and took up a mere three pages. At first, that proposal included language that gave the Treasury complete authority with no oversight from anyone (for the first time in history, I’m happy Congress was designed to move “deliberately”). Fortunately that was scrapped and oversight was included in future versions. Here are other provisions the Democrat Congress wanted included:

  • Curb executive pay at companies that sell assets to the Treasury (something the White House agrees to),
  • Let the government have the option of taking an equity stake in companies that participate (news reports say this has been incorporated into the final bill),
  • Require the government to encourage foreclosure prevention for the troubled loans it purchases.
  • Allow bankruptcy judges to rewrite mortgages for consumers nearing foreclosure (this is a “nonstarter” for Republicans and unlikely to make it into the final bill).
  • Proceeds the government gets from the bailout to to a fund to pay for housing for poor families (Republicans don’t like it, they see it as a backdoor means of funneling money to liberal political groups, so it likely won’t make it either).

As of this morning, they’d gotten close to reaching an agreement. This page will update as more details emerge.

Why Do We Need This?

Why is this bill necessary? Our financial system depends heavily on financial institutions being able to lend money to one to one another. When you deposit $100 into a savings account, the bank can lend 90% of it away to borrowers (car loans, mortgages), to other banks, and to the government (Treasuries). If they lend it to another bank, that bank can in turn lend around 90% of it and if it lends it to another bank, that bank can lend 90% of that. So your $100 turns into far more when it flies around in the economy and that has fueled our tremendous growth.

What role does bad mortgage debt play and why do we need a $700B+ package to buy up this bad debt? The simple explanation is that financial institutions no longer trust one another. Let’s say I lend you money and you put your house up as collateral. If you default, we could always sell your house and I can get some of my money back. If we’re suddenly in an economic environment where your house could be worth far less than what your appraisal says… I’m going to slow down and maybe not lend you as much money (or none at all). That’s kind of what’s going on now. With all the bad debt rolled up in good debt, financial institutions don’t trust one another and that’s why it could cripple our economy.

Why is it better to shift the debt off a company’s shoulders and put them on MY shoulders? That’s an excellent question and I don’t have a good answer for you. We will have to see how the plan goes forward to really know but I believe the reasoning is that the bad debt can improve in the long run, much like how housing prices will go up in the long run, and the U.S. Government can wait that long. Ultimately, the belief is that this bill will infuse life in the same financial markets that have fueled prosperity in the last few decades and I think that helps everyone (but we’ll have to see!).

This is similar to the logic behind the AIG bailout. AIG had its credit rating reduced, forcing it to raise collateral in a short period of time. The government swooped in to keep AIG solvent and took an 80% piece. From what I’ve read, AIG’s subsidiaries were all profitable, it was just a short term liquidity issue. Is that the whole story? Who knows, that’s just what I, and everyone else, read in the newspapers.

As news breaks, I’ll keep this post updated.


WIN: Freddie Mac, Fannie Mae Bailed Out

300 Billion Cost of Freddie Mac Fannie Mae BailoutThe estimated cost of the bailout of Freddie Mac and Fannie Mae is $300 billion, that’s if their loan books only suffer 5% loss. For some, that 5% guess is a little low, for others it’s on target.

Freddie Mac & Fannie Mae 52-Week Stock Price RangeWhen Freddie Mac (FRE) and Fannie Mae (FNM) were taken into conservatorship, their common stock was essentially rendered valueless. The numbers you see are their 52-week stock price ranges as of Wednesday (9/10/08) and it’s a pretty grisly sight isn’t it? Why are people buying the stock? You never know what can happen. Bear Stearns was sold for $2 a share yet people kept buying it, a week later the price was revised to $10 a share. You never know!

$24M Freddie Mac & Fannie Mae CEO Executive CompensationWant to get fired up about something? How much do you think you can get to run Freddie Mac into the ground? What about Fannie Mae? Exiting CEO Syron of Freddie Mac may get between $12m and $14m. Exiting CEO Mudd of Fannie Mae could get anywhere from $7m to $9m. [Newsday] It’s hard work getting the “sponsored” out of “government sponsored entities.” (apparently it was harder at Freddie Mac!)

$12 trillion housing marketAnd, to put all these numbers in this perspective, the mortgage market is about $12 trillion a year.


Freddie Mac, Fannie Mae Failure Imminent

It’s no longer imminent, Freddie Mac and Fannie Mae have been assumed by the Federal Housing Finance Agency.

It seems extremely likely that the government will be taking over Freddie Mac and Fannie Mae.

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