Posted on 12/02/2007 6:37:11 PM PST by Rockitz
It has been said that if you owe a bank $1,000 dollars and can't handle the loan you have a problem, but if you owe a bank $100 million and can't handle the loan the bank has a problem.
I think it's safe to add that if banks collectively have $billions in loan-related problems they can't handle, then the nation has a problem.
And that is the situation. Already over a dozen major banks (and brokerage firms acting as banks) have reported more than $60 billion in losses related to mortgages that probably should not have been made in the first place. Bank of America estimates that another $85 billion of adjustable rate mortgages (ARMs) are being re-set to higher rates this quarter, with another $362 billion due to be reset next year. Sources from CitiGroup to U.S. Treasury Secretary Paulson have warned that the number of mortgage defaults will continue to rise next year.
Unfortunately, the banks are probably unable to overcome their dire straits on their own. They will eventually have to be bailed out, probably by the government - meaning taxpayers.
I would have been appalled at such a suggestion six months ago. Why should they be bailed out of the messes their own greed and stupidity created?
But it isn't just the banks that will suffer if something isn't done. It's not even just the banks and the hapless homeowners who will lose their homes. It will be everyone. Think deep recession because a banking system on which business depends is barely operating. Everyone would suffer.
It wouldn't be the first time that tax-payers had to bail out banks. In the 1980s, banks, enticed by the high interest rates they could demand, made foolish loans to struggling third world countries which were soon unable to even pay the interest on the loans, let alone pay the loans back. The banks kept the problems hidden for years, saying the loans were safe since "countries don't go bankrupt". When their losses finally came to light, it put the entire banking system in jeopardy, and the U.S. government, led by then U.S. Treasury Secretary Brady, rushed to the rescue. The third world country loans were replaced with the issuance of 'Brady bonds', which were sold to investors, including the third world countries (after the banks agreed to knock down the value of the loans by 40 percent).
In the early 1990s, greed and foolishness got the banks in trouble again, resulting in the scandals and losses surrounding the infamous savings & loans collapse. Congress formed the Resolution Trust Corporation (RTC), which protected bank depositors by taking over or closing more than a thousand S & Ls and failed commercial banks, at a cost to taxpayers estimated to be more than $600 billion.
The current situation is just as serious.
In my column last week I expressed puzzlement over the absence of even the normal economic stimulus efforts that would be expected from Washington in this, the third year of the Four-Year Presidential Cycle. Such economic pump-priming has been a tradition for at least a hundred years. Washington always wants to make sure the economy is strong by the time the next election rolls around. This year, even with the economy slowing alarmingly, and financial institutions in trouble, such recovery efforts have been absent.
But there is evidence that may be changing.
The word on Friday was that the White House and the Treasury Department are negotiating with major lenders, including CitiGroup, Wells Fargo, Countrywide Financial, and Washington Mutual. The goal is to come up with a plan that would freeze (for up to seven years?) at least some of the low 'teaser-rate' mortgages lenders used to entice homebuyers into mortgages they won't be able to afford once the rates reset.
If it's true, and if it can be pulled off, it would be putting some help where it's most needed. A bailout plan that would only bail out the banks and still put their victims out of their homes would be a travesty of justice. This plan has an appeal. It should help some of the victims hold onto their houses, while forcing the lenders to suffer some by living with their teaser rates for a longer period.
For the lenders and housing market, it would raise hope that soaring default and foreclosure rates would level off. It would also likely entice bottom-fishing investors, mostly hedge funds, to buy mortgage-backed securities again. That would create a market for those securities, the absence of which created the current huge problem of no one knowing what the holdings on the books of financial institutions are worth any more.
It's the most hopeful and promising effort I've heard in awhile as at least a step in the right direction to get this mess on the way to recovery.
Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and the free daily blog www.syhardingblog.com. He also authored 1999's Riding The Bear - How To Prosper In the Coming Bear Market, which warned in 1999 of the approaching bear market just 9 months before the Dow topped out on January 14, 2000.
Also at his buy signal in October, 2002, within days of the low, he said the severe bear market was over and the next cyclical bull market had begun.
Since 1990, Sy Harding has been frequently ranked in Timer Digest's Top-Ten Market Timers for the stock market, gold, and bonds.
You need to know his current outlook and signals.
You’ll suffer too. And your neighbors, friends, parents, brothers, children...things don’t happen in a vaccuum.
Let me ask - how is it a “bail out” if all the Treasury department did is negotiate a few things? There is no evidence they gave the lenders any cash.
Two words, bad idea.
Don’t tell them that. It ruins the doom-gasm.
EXACTLY! DO IT NOW! AND STOP MAKING YOUR MORTGAGE PAYMENTS! NOW!
How are they going to decide gets to keep their "teaser" rate -- probably by whether they've been making their payments on time or not, right?
Be irresponsible and get the bailout, be prudent and get disgusted.
It keeps the bank from having to assume ownership of a lot of foreclosures and sell them at a loss. That’s the bailout.
Well not exactly. Hedge funds and investment banks were falling all over themselves in their hurry to shovel money at mortgage brokers, who were in the business of giving loans to deadbeats and charging them gargantuan fees. The mortgage brokers would take the steaming piles of option ARM loans and sell them to the hedgies and IBs, who would repackage them neatly into much larger steaming piles, put a big ribbon on top and sell them to fools with a trillion dollars of your and my retirement money. It was fun while it lasted.
Actually, from what I heard, if they paid on time before the adjustment and it was apparently only the increased rate that hurt them, they qualify.
If they were late even before it adjusted, no dice.
The Circle of Greed is complete and taxpayers and other responsible citizens take it in the @$$ again.
I’m not sure what everybody’s wailing and gnashing their teeth about, here. This is just another form of forebearance, only writ large. Slowing the pace of foreclosure will allow the market to absorb more excess housing on the market, thereby supporting resale prices, and helping to prevent a colossal loss of personal wealth in this country. It also will calm a major case of jitters in financial circles, and will go a long way to help “unfreeze” the credit market.
So, this is far superior to any of the ill-concieved political “solution” rumblings coming out of Congress, imho. Even if there were to be some sort of behind-the-scenes injection of funding, it can’t possibly be any more costly than what has already occurred, as far as attempts to shore up the financial system.
A lot of companies have already gone out of business, several thousand have lost their jobs, and several thousand have lost their homes. America has a lot more important enemies than people who got variable rate loans.
Well it didn’t cost the taxpayers anything...shouldn’t you be thankful for that?
I think it’s a reasonable solution. Let’s face it, we both know that something would have been done...whether we liked it or not.
Better this than a Hillary-type thing where you, me, and other taxpayers would have paid off other people’s mortgages.
Correction:
Option ARMS didn’t go to deadbeats.
You have to have decent credit to get them, always have.
Don’t try to inject common-sense into this debate...the doom-and-gloomers and the vultures will jump all over you.
See my post #20.
Doom-gasm: n. The climax resulting from observing the misfortunes and bad things happening to beings other than oneself, common during times of economic and social turmoil, consisting of a series of involuntary muscle contractions in the lower pelvic muscles accompanied by a sudden release of endorphins providing a feeling of euphoria.
You like?
“Doomgasm” is very good, though that makes so many of these doomtastic threads a little too “spoogy” for my tolerance.
BTW, that "behind-the-scenes injection of funding" further devalues those hard earned dollars of those seeking to invest in hard assets such as housing. Once again the irresponsible are rewarded at the expense of the responsible.
You actually think responsible savers and investors won’t be hurt, if this is allowed to snowball?
Which is why I am surprised so many people have their panties in a bind over this. This is a market solution where both parites benefit.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.