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.
Cash will be king and responsible savers and investors will be able to invest at rock-bottom prices.
You have some peculiar ideas of how the gold standard operated. Gold operated as the monetary base, not the sum of all bank money and credit money in the banking system. Von Mises Theory of Money and Credit is a good source for learning how it worked.
Alexander Hamilton built a large quantity of money for the US on a small stock of gold by accepting paper dollars or bank money for taxes, and paying out gold for interest on the debt, if gold was requested. Being on a gold standard didn’t confine the economy to the tiny amount of gold on hand in the Treasury.
Just like the Great Depression. The 25% unemployment rate was a drag, other that that.....
Unless their investments decline in value with a real-estate fueled depression...I think that’s what RC was getting at.
I assume you’re counting on FDIC for that cash, because the sort of price collapse you’re talking about will lead to a lot of bank failures.
There are many investments that are isolated from this debacle.
What percent of the bad loans are to illegal aliens who have stolen someone’s identity or social security number? 2003 is when the gubmint started requiring mortgage lenders to give loans to illegals with phony numbers and other nerdowells with undocumented incomes.
There are far more that are not.
And the borrowers can’t claim ignorance.
They had to sign a thousand pages of informed consent.
Choose wisely, grasshopper!
I think you should do some reading up on the Depression of the 1890s.
I would also like to know how many illegals have defaulted on their loans. My guess is that info will not be forthcoming.
“Cash will be king and responsible savers and investors will be able to invest at rock-bottom prices.”
That’s why I never keep more than 2 months cash in a bank account, that I can afford to lose.
I’ve never borrowed to buy anything but one home and that mortgage has been paid off for over 15 years, everything else I took my upbringing to hart that if you don’t have the cash to pay for it you don’t need it.
That included an airplane that I saved for yesrs for the $64,000 I paid for it.
Yes, well as in many other of life's ventures Nice Guys Finish Last. Hedonism Rules, especially when you can stick the squares with picking up the check.
If the GOP wants to placate the voters, a bail out is not the answer. Finding the ones responsible for the fraud, quick trial and a public execution would guarantee a GOP victory in 2008.
It might be here somewhere:
http://www.hispanic.cc/immigration.htm
I sure as HELL do not want to pay the payments on a bunch of dead beats who can’t make their payments. Let the Banks Fail. Let the Economy adjust itself. No Socialism and redistribution of wealth from the wise to the greedy or foolish.
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