The Obama Administration has outlined details of its proposal to regulate over-the-counter derivatives, one of the leading causes of the downfall of AIG. A summary of the proposal is available here.

The top leaders of the Senate Banking Committee — Sen. Chris Dodd (D-CT) and Sen. Richard Shelby (R-AL) — have reached an agreement on a bill that will rein in various practices of credit card companies. A vote in the Senate is expected later this week or next week. The bill restricts credit card companies from raising rates on outstanding balances and gives consumers more protections against a variety of deceptive tactics used by credit card companies. A summary of the bill from the Senate Banking Committee is available here (PDF). The House has already passed its own version of the bill, and President Obama has been a strong supporter of the legislation. Key parts of the Senate bill are below (from the Senate Banking Committee):

–Protect consumers from arbitrary interest rate, fee and finance charge increases and prohibit universal default on existing balances
–Prohibit interest charges on paid-off balances from previous billing cycle (also known as a double-cycle billing ban)
–Require payments to be applied first to the credit card balance with the highest interest rate
–Protect students and other young consumers from aggressive credit card solicitations
–Ensure that payments are fairly allocated to the account with the highest interest rate first
–Require greater disclosure of rates, terms and billing details by credit card companies
–Establish tougher penalties for companies that violate the law

The White House Council of Economic Advisers has released a report that supports the administration's claim earlier this year that the $787 billion stimulus bill will create or save 3.5  million jobs over the next two years. The full report is here (PDF).

The Obama administration has backed down on a high-profile campaign pledge to temporarily waive the tax penalty on individuals who take an early withdrawal from their retirement accounts, according to senior Treasury officials on Monday.

One senior official said the proposal, developed by the Obama campaign in the weeks leading up the general election, will not be part of the President’s 2010 budget, adding “there has been a lot of crystallization of tax proposals and tax relief proposals since then.”

Under current tax law, taxpayers under the age of 59 who withdraw funds from an Individual Retirement Account (IRA) or 401(k) plan must pay a 10% penalty, in addition to regular taxes.

At the height of the campaign, Obama promised to temporarily suspend the penalty on early withdrawals, up to a $10,000 limit. “This will help families get through this crisis without being forced to make painful choices like selling their homes or not sending their kids to college,” he told an audience in Toledo, Ohio where he released his “Rescue Plan for the Middle Class,” a seven-page document that included the proposal.

Under the heading “Penalty-free hardship withdrawals from IRAs and 401(k)s in 2008 and 2009” the document reads: “Obama is calling for legislation that would allow withdrawals of 15% up to $10,000 from retirement accounts without penalty (although subject to the normal taxes). This would apply to withdrawals in 2008 (including retroactively) and 2009.”

He also emphasized the proposal as one of four specific action items for the middle class during a debate with Republican nominee Sen. John McCain.

“Let's allow them to access their IRA accounts without penalty if they're experiencing a crisis,” he said during the third presidential debate.

Senior Treasury officials downplayed the campaign pledge, saying there has been little interest in the proposal since the election. They also disputed the notion that many taxpayers relied on the pledge in deciding whether to take an early withdrawal from their retirement account.

“That was something suggested before the election as a potential measure,” said the senior Treasury official. “It’s not been something that’s gotten a whole lot of discussion since then.”

Another senior official said on Monday that the administration would consider “taking another look at the idea” if there was interest on Capitol Hill.

The White House has increased the amount of the expected budget deficit for fiscal year 2009 by an additional $90 billion. The budget director explained that greater-than-expected deficit on his blog:

The change in the deficit estimates reflects upward technical revisions in light of new information regarding the collection of receipts, financial stabilization efforts, and other federal programs. (Technical revisions reflect additional data on, or expected changes in, government receipts or expenditures, other than because of changed assumptions about major macroeconomic variables such as the size of the economy, the rate of inflation, or the unemployment rate. The latter are called economic revisions.) Treasury now estimates that overall federal revenue will be less than was projected in February by between $30 billion and $50 billion in each of this year and next. We also have more information about the severity of the financial crisis facing the nation, and this is reflected in new, higher estimates for the cost of financial stabilization efforts undertaken through TARP and by the FDIC.  

The Treasury Department has released its "General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals" report – widely know as the "Greenbook" — that outlines the major tax policy proposals of the administration. A PDF of the document is available here.

The White House has released on its website an interactive map that details the affects of the administration's 2010 budget proposal on a state-by-state basis. Available here.

Princeton economist Paul Krugman writes in his New York Times column on Friday that the Obama administration's strategy of allowing banks to slowly heal overtime through increased profits — but without massive capital infusions or government takeovers — could result in a lagging economy for years to come:

What we’re really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health. It’s a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again…Can the economy recover even with weak banks? Maybe. Banks won’t be expanding credit any time soon, but government-backed lenders have stepped in to fill the gap. The Federal Reserve has expanded its credit by $1.2 trillion over the past year; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance. So maybe we can let the economy fix the banks instead of the other way around. But there are many things that could go wrong.

The Treasury Department released the following statement from Secretary Timothy Geithner following the release of the stress test results: Read More…

The Federal Reserve has released the full report of its stress tests on the 19 largest banks. The full report is available here.

Ahead of the 5:00 pm release of the results of the stress tests on the 19 largest U.S. banks, media outlets have been reporting some of the leaked results. Most outlets are reporting that Bank of America, Citigroup, Wells Fargo and GMAC will need to raise new funds, with Morgan Stanley needing to raise about $1.5 billion for its acquisition of Citigroup's Smith Barney unit. Other banks expected to be required to raise capital are: State Street, Regions Financial, Fifth Third Bancorp, and Key Corp.

Table of Leaked Stress Test Results (Calculated Risk)
Morgan Stanley capital need reflects brokerage JV (Reuters)
BofA, Citi, Wells Fargo Need Funds (WSJ)
Results of bank stress tests leak ahead of report (Salt Lake Tribune)

The Congressional Oversight Panel that oversees the $700 billion federal bailout fund has released a report that calls into question the effectiveness of the Term Asset-Backed Securities Loan Facility (TALF) aimed at restarting the market for a variety of consumer loans. The full document is available here. From the report's executive summary:

The Department of the Treasury’s new initiative through TALF raises two important questions:

• Is the TALF program well-designed to help market participants meet the credit needs of households and small businesses?

• Even if the program is well-designed, is it likely to have a significant impact on the access to credit of small businesses and consumers?

The first question is whether the TALF program is well-designed to attract new capital. The program should be attractive to investors in asset-backed securities. The investors must contribute a portion of the purchase price for the securities (5-16 percent in the May offering), with the government financing the remainder. If the securities increase in value, the investors reap a substantial portion of that benefit. If, however, the securities decline in value, the investors could default on the government loans, forfeiting their investment but leaving the taxpayers to absorb any remaining losses with only the collateral to cover the loan amount. On the other hand, there are also some reasons why investors would not want to participate in the program. There are restrictions on sale of the securities, so that investors are “locked in” to their investment for a number of years. The interest rate payable on TALF loans may be higher than the investors could get from other lenders. There are also restrictions on the internal operations of participants, and investors fear that they may be subject to additional restrictions in the future. With these uncertainties, and the fact that so far there have been fewer issuances under the program than expected, it is not yet clear that the program has been well-designed to meet its purpose.

The second question is whether any securitization program, no matter how well designed, is likely to help market participants meet the credit needs of small businesses and households. While small businesses are experiencing significant credit constriction, it is not clear whether that constriction is primarily the product of reduced creditworthiness of borrowers or of tightening in bank lending. TALF cannot address the creditworthiness issue. It can provide more funds to the lenders for lending, but asset-backed securities have never been the source of significant funding for small businesses. This report raises the question of whether TALF will have a meaningful impact on small business credit.

Consumer lending raises a very different aspect of the question of the likely effect of TALF efforts. Leading into this recession, families were already awash in debt. Larger economic forces have left families with little savings, while declines in the value of housing and in the stock market have shrunk household net worth by 20 percent in just over a year. As wages have stagnated and unemployment has risen, the ability of households to manage ever-larger debt loads is increasingly unlikely. Any reduction in consumer lending may be the result of reduced demand as families try to cut costs or changes in banks’ lending decisions as they assess the deteriorating creditworthiness of American households.