Posted on 09/12/2007 7:09:23 AM PDT by Hydroshock
+-The meltdown in the mortgage market and its impact on the credit markets may have some historical precedent; the collapse of the savings and loan industry and its subsequent government bailout in the late 1980s and early 1990s was also a major lending debacle.
The collapse of the S&L industry was the result of flawed deregulation, poor regulation and reckless lending practices, which in some case, included balance sheet fraud. Political inaction, once the severity of the problem was evident, also helped led to a debacle.
As part of the bailout, Congress passed legislation creating the Resolution Trust Corporation to liquidate real estate and other assets of failed S&L through equity partnerships. Its mission complete, the RTC was dissolved in 1995.
Though the RTC was extremely successful, the federal S&L bailout cost taxpayers an estimated $150 billion. Now some 20 years later, there’s talk of another bailout.
(Excerpt) Read more at cnbc.com ...
Hmm... time to research what made money during the S&L crisis.
Do that for the children, sir.
The deregulation was the result of the government trying to keep S&L's in business after Volcker hiked rates too high.
1,043 S&L's were shut down by the government. That's some bail out.
Pardon me if I don’t see the similarities but savings and loans are Federally insured and the sub-prime market is private.
If private companies want to make bad loans I have no objections, so long as taxpayers do not have to bail them out.
The ripple effect form the mortgage shams will bleed into the credit card, auto loan, and commercial loan industries in the form of higher interest rates invariably trashing consumer spending this Holiday Season. Then, the flood gates will open. Watch what is going to happen in the next 9 months and what the gov is going to do to try and stop it and will just make it worse in the long run.
Those who invested in the sub-prime markets need to pay, not me. It's like drilling for oil. It was a gamble and some struck it rich early on.
The sub-prime markets and all those involved in the deceit to 'qualify' borrowers who should not even have gotten mortgages, (flippers, etc.) need to pay their bills.
Many, including some here are calling for a federal bail out.
Thank you...my sentiments exactly.
Paying off insurance claims on deposits cost the taxpayers $124 billion. The rest was paid by the S&L industry.
NO BAILOUTS!!!
Raise rate to fight inflation, do it for the children. By the way wheat has hit a record, $9 a bushel. Do you eat?
Why, to protect Fannie Mae and the banks? The dollar is in the toilet right now.
>Raise rate to fight inflation
Exactly. The Fed should raise rates here, based on the inflation telegraphed by moves in commodities such as wheat, oil, and gold.
In practice, hedge funds issue short term commercial paper to carry the riskier asset backed securities issued by off balance sheet trusts created by Wall street investment banks and mortgage lenders. The less risky parts were parked in banks. Banks also gave the hedge funds back up credit lines as alternatives to their commercial paper. The beauty of this set up is that the regulated balance sheet growth of the banks ceases to be a practical limit to the scale of credit issuance.
But in the last couple of months, over $300 billion of commercial paper could not be rolled over as it matured. The banks cut off the hedge funds. As a result, the spread between T-bills and commercial paper, normally 10-20 basis points, has grown to more like 1.5-2% - and issuance has seized up. This forces the hedge funds to liquidate their collateral at whatever price they can get, to pay off their short term commercial paper as it matures.
Repaying debt on a massive scale effectively reduces the money supply. At the same time, new mortgages cannot be initiated in the old manner - because the lenders are bankrupt, because the hedge funds cannot extend themselves further to take the risky parts, because the banks do not want to take full loans without someone else bearing the top tranch risks, with house prices as elevated as they are.
It will not clear until mortgages go bad, go through foreclosure, house collateral is auctioned by the banks, this forces house prices down 20-50% to affordable levels and clears the overhang of unsold houses. The underlying problem is that only about 20% of the population can afford houses at these prices - only bubble equity lets older buyers hold. The prices should fall, but aren't because the losers refuse to take their losses and just wait instead. Banks will not be able to wait once they own all the foreclosed properties.
Short term, what is needed is to get the existing machinery working again by providing a market for the low quality tranches, but at their depressed prices, so bad choices carry a real penalty. Next and hardest, to audit and clean scads of off balance sheet trusts and restore the credibility of credit ratings given to them. This may also involve wholesale liquidations in which regulators force banks to take them back onto their balance sheets, and use loss reserves etc.
Last, to actually auction off the reams of property that wil flow through the foreclosure system. It will be better to do this in a centralized way, with a purpose built agency, than to let it get gummed up in the usual legal retail red tape. When a loan goes south, banks should be able to sell it to such an agency for 60 cents on the dollar or whatever the proper range of figure is, to do the workout. The agency should ruthlessly push stuff through to immediate auction as fast as possible, cutting prices as far as necessary to get the market to clear.
Done right, this can all be behind us within 2 years, with both house prices and the financing system fully rationalized. Done wrong, we will have 5-7 years of unsold overhang, illiquidity, and spreading credit failure and bankruptcy - which the Fed will try to counteract with another round of reckless near-zero rates. Which will only dig us another such hole of misallocated capital.
The lawyers.
I have, read teh treads ont he Bush’s plan to help the home debters. Also the large number who are begging for a lower rate, inflation and the value of the dollar be hnged.
BINGO - this is more or less a private, Wall Street matter, not generally contacted to financial institutions - although some financial institutions were in the sub-prime market directly and indirectly.
I say, do not decrease rates as inflation will go through the roof, plus housing costs needs to come down and this is really the only way for that to happen quickly.
What many don’t get about inflation is that the current mortgage mess is going to suck billions out of the economy. It already has, in fact, and it’s only going to get worse. A rate cut will not entirely help this, but it will help. The Fed needs to get in front of this before it’s too late.
A rate cut is NOT A BAILOUT. It is the right policy move, and if the Fed waits too long it will be too late, even for those of us who don’t have irresponsible mortgages or didn’t buy more house than we can afford.
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