All told, the government is currently facing $8 billion in losses on the 10 biggest investments it made – and that’s after accounting for the $424.1 million paper gain on Morgan Stanley (MS Quote) shares and the $271.6 million paper profit on Goldman Sachs (GS Quote) shares. 

For those keeping score, the Treasury owns almost $200 billion in preferred stock from 532 firms, but 8 firms account for $134 billion. In all, the bailout is now more than $3 trillion, which is just about as much as the entire federal budget for last year. Morgan Stanley and Goldman Sachs are the only 2 out of the 10 biggest government investments that are in the money. Aside from those two bright spots, the only other good news for taxpayers is that the government collected $2.5 billion in dividends from its banking investments through March 31. 

So my recommendation to Treasury Secretary Tim Geithner is to take the money and run if any banks are ready to buy back the preferred shares and repay the bailout money they took. If taxpayers have to wait for the shares of these banks to top the strike price, we may be stuck with these investments for a very long time.

Several major banks that underwent the government stress tests of their ability to withstand a severe economic downturn have asked to repay TARP as soon as possible. The government has not yet announced who and when, and does not expect to until around the second week of June. Recommendations will likely come in batches rather than one bank at a time, the official said. 

But regulators worry that banks trying to get out of TARP are overestimating their prospects and could be forced to return for more money if the economy falls off a cliff. Experts believe the government will allow TARP recipients to repay funds only over time, perhaps 12 months, rather than all at once. Goldman Sachs Group Inc, JPMorgan Chase & Co, and Morgan Stanley have applied to repay TARP funds. 

Earlier this month, regulators told nine of the 19 big stress-tested banks that they did not need more capital. The government created TARP last fall to unlock the flow of credit after credit markets were brought to a near halt by shocks such as Lehman Brothers Holdings bankruptcy. At first, banks viewed TARP money as a positive, signaling government confidence. But TARP also allows the government to unilaterally impose restrictions, including on pay back, and many investors now believe holding bailout money signals weakness. 

Many banks have met major requirements to repay funds, including sales of debt not backed by the government. However, regulators have not made clear what other factors they are considering, such as how much can be repaid at once and on what terms, or what they will charge banks to buy back warrants giving the government a right to buy stock over time. Policymakers are causing confusion among large banks about what the Treasury Department must see before deeming a bank safe outside TARP, said a financial industry source familiar with the talks about repayment.  The Treasury Department is also concerned that if it lets some banks repay TARP but not others, investors will punish those banks deemed to be falling behind. 

Several analysts said many members of Congress are tired of throwing taxpayer money at the banking system. Lawmakers are eager for repayments but do not want the funds to go back into TARP, where the money could be available for future rescues.

The Fed met with 19 of the top financial institutions to go over the stress test results. In some cases, some of the tests with each party took less than 30 minutes.  In addition, several of the banks, when tested, mentioned a need for more capital, but no one yet knows who those banks are.  In fact, not all of the identities of the 19 financial institutions that were subjected to federal stress tests have yet been learned. Analysts believe that they likely include regional banks with large exposures to commercial real estate in the Midwest and Southeast. Those few that are familiar with the matter said at least three banks are in this position.

Government officials believe most banks, in need, can improve their capital footing without taking money from the government bailout fund. This could be done by raising funds from private investors or converting the government’s existing investments in banks into a new type of equity that would better cover banks in case of future losses. In another scenario the U.S. could end up owning large chunks of banks, raising the specter of something akin to nationalization. Federal officials have said any such move would be temporary.

Some banks could end up requiring a cash infusion from the U.S. Treasury. For those banks  it will become very difficult to obtain private funding.  The word from the Fed from all of their meetings was to zip up about the results of the test. However, as this is Washington, we should  know just about everything by Monday or Tuesday.

China is raising concerns about the U.S. dollar’s dominant position in the world economy. The head of China’s central bank this week said the world should consider creating a new international reserve currency. Russia this month took a similar position and so did a United Nations panel.

A former chief economist at the International Monetary Fund, says it’s no coincidence that China, Russia and other countries are getting nervous. They all have come to the conclusions that our Treasury bills might not be worth so much five or 10 years from now. There is a strong chance of inflation and therefore the countries like China and Russia are starting to rethink whether there should be an international reserve currency run by an organization like the International Monetary Fund.  

The Chinese government earns massive reserves each year with its exports, and it has for years tied its own currency to the U.S. dollar. If the U.S. dollar were to be displaced as the international currency, Chinese export earnings could suffer but that is a chance they may be willing to take. How funny is it that an average annual income in the U.S is $48,000 and in China it’s $2,100. Is there a better example of the poor bailing out the rich than this?   China is now a creditor, a major creditor, and it will start to think about its interests globally more as a creditor and less as just an exporter. 

Other countries have reasons for backing the idea of a new international currency. They’ve noticed that as long as the dollar is the major safe haven, the United States can borrow hundreds of billions from the rest of the world at low interest rates. That’s a big advantage for the U.S. Right now, world governments buy U.S. dollar assets because they seem like they are the best investment. Economists point out that just because the world creates an international reserve currency doesn’t mean governments would actually use it unless compelled to do so.  Some experts believe that a second currency option should be created so that countries could invest in as an alternative to the dollar if they so choose.

Could this be the path the world financial markets will take in the years to come? One thing is for sure, the U.S lost a lot of credibility with the recent “almost” collapse of the banking system.  No longer can the U.S. say we have a model financial system.  It appears the world is catching up to us and they could very well not need the U.S. dollar in the years to come as much as they did in past years

At the heart of the proposal is a plan to expand the new Term Asset-Backed Securities Loan Facility, or TALF, to start the Public-Private Investment Program for Legacy Assets — a partnership to acquire the bad loans. TALF would buy the loans from banks and then bundle them into privately administered investment funds that would be partially guaranteed by the Federal Deposit Insurance Corp.