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.
Banks forced by the US GOvernment to make loans they knew were risky, all in the name of diversity.
I had this discussion with my lib cousin last spring. This result was nearly inevitable.
Let those who made the idiotic decision to enter into a contract they would never be able to afford move out, and then sell the homes to reasonable persons at realistic market prices.
One word. Gold standard. Well, two words.
Actually, I’m OK with this, assuming the Treasury dept. didn’t actually pay the banks any money to do it, and it appears that they did not.
Antiquated idea that isn’t possible today unless we wish to severely limit economic growth and make it nearly impossible to lend money even to responsible people.
Thanks for playing.
There you go.
Aside from calling the people “victims” I have little issue with it.
People seem excited about the possibility of recession/depression because it will hurt those “stupid people” without realizing all of us will be affected.
You prefer the current situation? Obviously the financial situation will have to get much worse before a return to the gold standard but it will eventually occur. Hopefully I will be gone from this mortal coil before then because the pain will be real.
With the gold standard, you are faced with a limited supply of money which creates several major obstacles to economic growth:
-zero-sum economics - with a fixed supply of money (gold) one man cannot become rich without impoverishing others
-limited ability to lend money - even a guy wiht 30% down an a 700 credit score might not be able to get a mortgage because a bank literally “runs out” of money to lend
-banks could lie about gold reserves actually existing - which is one reason the gold standard was moved away from in the first place
Not even close to $600 billion. Not even $200 billion.
Forced? Please provide a reference.
It wouldn’t be a Bush administration without a bail out of some sort of financial institution. With his old man it was the Savings & Loans, now it’s the banks.
even a guy wiht 30% down an a 700 credit score might not be able to get a mortgage because a bank literally “runs out” of money to lend
Yep, the current system is so much better (sarcasm). Just print more “money”. That has never worked in history and won’t work much longer.
I’m not saying we should just indiscriminately print more money.
Just that the gold standard is not desireable unless you wish to return to the days of a few upperclass landowners being the only ones that can buy real estate, and only those already rich could ever get a business loan, etc...
When has it “never worked in history?” Source?
No bail-outs for anyone- banks or homeowners. I say let the market sort this out.
They’re already going down. Just the fact that lending standards are tighter is making them go down.
“This plan has an appeal.”
Not to me, the banks and the irresponsible borrowers should both suffer with no help!
Tell them to wait!! I need a couple of days to withdraw all of the equity out of my house via a teaser rate ARM so that I can scam the system, too.
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