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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 SteveRussellOnline.com 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.

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