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Bad Bank, Good For Economy

The Federal Deposit Insurance Corporation (FDIC) announced last night that it will create a “Bad Bank” to purchase the toxic assets on the books of the nations banking institutions.  This was originally part of the TARP plan but it didn’t work out as planned.

The idea is that because of Mark-To-Market accounting, these toxic assets are killing banks and there is no real hope for financial recovery until Mark-To-Market is repealed or an outlet to dump these assets is created.  Ideally, the best scenario would be both.

The stock market is reacting favorably to the news as it is a sign that the government is making strides in the right direction.


Bailout Bill…Round 2

The senate is putting together a new version of the bill that failed earlier this week.

Reports from Washington are that the senate has been feverishly re-tooling the bailout bill with adjustments that will make it more palatable for the public and more likely to pass through the House of Representatives.  Early reports are that an increase in FDIC insurance for bank deposits is being increased for the first time since 1980 from $100,000 per depositor to $250,000.  With the national average bank balance being around $5000, this will have little practical affect on consumers.  But, it can help small businesses feel more secure, and the overall perception is likely to show that there is more for the common tax payer than the original version.

It is not yet clear what other components have been added or removed, but there is no doubt that the pressure is on Washington to do something based on the reaction of the stock market this week.  Also, given an unprecidented amount of discontent towards any bailout plan (some reports say as many as 80% of tax payers are violently opposed to the bill), there is no doubt that those who vote for it should read it carefully as the outcome will likely dictate their fate in November.

I do find it interesting how much the public misunderstands the significance of passing legislation to help this problem.  I was listening to talk radio locally here in Pensacola yesterday, and the overall sentiment is still that there is no incentive to the tax payer and that this simply bails out millionaires that made bad decisions.  Unfortunately, the actual problem is much more detrimental to the overall economy than most people realize or even understand.  For instance, many small businesses rely on credit to run their daily operations.  For a car dealer, it is their line of credit that they use to purchase inventory to put on the lot.  For the plumber that wins a bid for a large job, they need access to credit lines to purchase inventory to be able to start the job.  Given that 80% of all americans work for a small business (defined by a company with 200 or less employees), the amount of layoffs and jobless claims as a result of the business being unable to grow could be more than we have ever seen in this country.

This problem began with the deregulation of mortgages through Congress during the Clinton administration in the late 90’s, and became a widespread problem as banks were forced to make loans to certain low income borrowers or face economic sanctions from the government.  It was understood that a percentage of these mortgages would fail at the time that they were originated, but that was understood as the cost of doing business on the part of lending institutions.  This is not when Subprime loans were born, but it certainly gave them the steroids to go into the wildly risky direction that they were 3 or 4 years ago.  I’m sure you won’t hear much in the news about this because no one in Washington would ever willfully take responsibility for something that had a negative affect on the economy.  In fact, most of our elected officials do not understand the financial markets enough to even know that they created the problem.  Now that the chickens have come home to roost, it is Congress that has to clean up its mess.

No one wants government intervention less than I do.  But, the cost of a lack of action is far greater than the cost of any bill that may be passed.

Why Is The Government Bailing Out Everyone?

In an unprecedented financial crisis it seems like the tax payer is the real loser.

Bear Sterns, Fannie Mae, Freddie Mac, Lehman Brothers, AIG…..what does all of this mean to you?  Why are some companies being bailed out while others are allowed to fall on their face?  It is a complex question being answered by your tax dollars, and the answers change from one day to the next.  Just 2 days ago, the official opinion of the Treasury was that there would be no bailout of AIG (the nation’s largest insurer).  Less than 48 hours later they are writing a check for $85 billion.  So how is it in the best interest of the country to bailout these corporate executives that made bad decisions?

For starters, every situation is different, and the government is not bailing out every company that steps up to the bread line.  Those that are allowed to fail without creating widespread devastation in the economy is, in my opinion, good for the over all health of the economy.  The ability to assume risk and fall flat on your face is actually what makes a free market economy work.  IndyMac Bank for example was a huge financial institution.  Yet, they were allowed to fail because there are dozens of other companies performing similar functions in the market, and therefore it is not the responsibility of the governemt to step in and help.  In that example, since most depositors were covered by FDIC insurance, there was little affect to the end consumers and account holders anyway.

The Fannie Mae and Freddie Mac takeover was different.  With over $5 Trillion in combined assets, the collapse of Fannie and or Freddie could have widespread implications in the credit markets and significantly hinder mortgage lending.  But, in the case of Fannie and Freddie, the government took over operations.  Their business was significantly less risky than the subprime lenders that have had so much trouble.  But because of their shear size, they have been affected by the current housing market.

AIG is a much different situation than any other that we have faced.  The significance of AIG is that more than 100,000 employees work for the company, and a collapse would affect so many sectors of the economy that it could create a ripple effect that is almost immeasurable.  The $85 Billion being provided to them by the FED is actually a short term loan, and the collateral for the loan is the entire $1 Trillion dollar asset portfolio of the company.  From a simple bottom line lending standpoint, it appears to be a no brainer, and for me to say that is really something.  I’m not in favor of the government bailing out anyone, but, an $85 Billion loan backed by $1 Trillion in assets that also saves over 100,000 jobs just makes sense.

Ultimately, we are in unchartered territory and no one knows what the long term affects will be.  But there is a light at the end of the tunnel.  For those who are even remotely in the market to buy a home, the events transpiring are creating unprecedented buying opportunities.  At the same time, for those in an adjustable rate mortgage, the market is ripe for a refinance with fixed rates as low as 5.25% (see for current pricing).  In every market, there are winners and losers.  Those who have the fortitude to seek out these buying opportunities will be in a position to build wealth like nothing we have seen in generations.

Are We Looking At Nationwide Financial Collapse?

There are currently 90 banks listed on the FDIC problem list.

There is a lot of information being thrown at you in the media and in the blog-o-sphere about the pending doom in the financial markets and the banking sector.  I thought I would write a quick post for you to help lift the clouds of confusion.

The shut down of IndyMac Bank is a big deal because of the shear size of the company.  But, it is not a flag for the collapse of the entire banking system.  Right now there are approximately 90 banks that are listed with the FDIC as a concern for trouble.  This does not mean that they will fail, it just means that they are being watched because of their weakness for various reasons.  These banks are spread over many different states, and vary in size.  For obvious reasons, this list is a higher guarded secret, and should be.

Facts, Myths and B.S.

Fact – If you have less than $100,000 cash in your bank, you are protected by the FDIC for 100% of your deposit.  If you have more than that, might behoove you to diversify your accounts over a couple of different banks (diversification is a good idea in any market).

Myth – Monies deposited in stocks, bonds, mutual funds, insurance policies and municipal securities are insured by the FDIC as long as they are purchased through an FDIC insured bank.  This is not true!!  The insurance provided by the FDIC covers checking, savings, money market and CD accounts up to $100,000 per depositor, per financial institution.

Complete BS – If a bank fails, the FDIC can take up to 99 years to pay you the insured portion of your account balance.  This is not true.  It has been widely spread as rumor and urban myth, but it is 100% unfounded, and in 2007 it was debunked in writing by the FDIC.  In fact, federal dictates that in the event of bank failure, the FDIC is bound to repay money to the consumer “as soon as possible”.  In the past, it has happened as quickly as the next day.

IndyMac Bank Collapses Under Its Own Weight

IndyMac Bank closes.

IndyMac Bank Collapses Under Its Own Weight

IndyMac bank has long been recognized in the mortgage industry as a pioneer in technology and its applications to wholesale mortgage businesses.  They have specialized in unique loans for Jumbo customers and outside the box underwriting with regard to income and asset verification.

I can say from my own experiences with the company on a wholesale level that the news is not a complete shock.  It is significant in that it is the second largest bank in history to close down like this.  But, their internal customer service and general underwriting skills have been nothing to write home about (again, this is based on my personal experience with Florida based wholesale operations).

I have had 2 different friends and associates that have gone to work for the company based on blue skies and empty promises, only to run back to their previous employers begging for forgiveness in less than 90 days.  Those in California who use the bank as their retail checking and savings holders have less to worry about than may be reported in the news.  Any accounts with less than $100,000 are automatically covered by insurance provided by the FDIC.  For accounts with more than that, you still may be safe, but stay tuned to the latest news to see how you will be affected by this in the long run.

While the headlines may be a little scary, it is not the time to go put all of your cash in a coffee can and bury it in the back yard.  Don’t panic, just keep yourself informed.