Stimulus and More Bailouts

The House passed the $819 billion stimulus package.  The bill extends unemployment insurance benefits, expands access to health care for the unemployed and allocates $125 billion for public education (plus many many extras).  While the size of the stimulus, which almost equals the entire cost of annual federal spending under Congress's discretion, may seem shocking, it is chump change compared to the numbers flying around concerning the "bad bank."  According to the Wall Street Journal, Government officials are discussing spending ANOTHER $1 to $2 trillion to help restore banks to health.  One of the proposals, involves seeding the "bad bank" with $100 to $200 billion in TARP funds and then borrowing as much as $1 to $2 trillion by issuing debt.  If this proposal comes to fruition, I would highly recommend a new moniker: Big Bad Leveraged Bank.  It would be sort of like combining all of the stupidity from the past few years, into one big ugly operation run by the government, and then piling on some leverage for good measure.  Sure this proposal is bound to make bank stocks rally, but it scares the living daylights out of me.

Meanwhile, the bailout du jour involves credit unions.  Federal Regulators guaranteed $80 billion in uninsured deposits and injected $1 billion of new capital into the largest of these wholesale credit unions, US Central Federal Credit Union of Lenexa, Ka.  According to the WSJ, the vast majority of regular credit unions are financially sound, however, a few of the wholesale or "corporate" credit unions were invested in mortgages (uh oh).  The corporates are owned by the retail credit unions and provide services to the retail credit unions.  Consequently, a failure of the corporates would affect the nearly 90 million Americans who hold deposits at credit unions.  As of November, five of the largest institutions posted unrealized losses on their investments of $11.6 billion, up from $9.4 billion just a month earlier and double the level of last May.  When the aforementioned US Central chose to take a $1.2 billion writedown by permanently recognizing some unrealized losses, regulators (The National Credit Union Administration) grew concerned and felt the need to take action.  The $1 billion in new capital into US Central came from the NCUA's $7 billion insurance fund.  Simple math tells me that the insurance fund now has $6 billion left and the industry has over $10 billion in unrealized losses, much of which will likely end up being real.  The NCUA better work fast to get included in the TARP.