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This is a copy of Sy's weekly (weekend) newspaper column 'Being Street Smart', which appears in a few newspapers and on a number of financial Internet sites. You may post this as content on your own website as long as full credit is given exactly as at the bottom of the article.
BEING STREET SMART
by Sy Harding
Is Washington Finally Getting Into It? November 30, 2007.
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
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
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., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!
