I promised you last week after outlining my belief the “frozen credit markets” was a contrivance by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, I’d spill the beans on why the dynamic duo wanted to lay their hands on $700 Billion since it wasn’t needed to thaw out anything.

So here goes..and I warn you it’s a little radical…but given this weeks events, I’m even more convinced it’s true.

My Theory on the Fed’s Bailout

As we discussed last week, the TED spread is the measure everyone is using to show how frozen the credit markets are and to repeat, this measures the willingness of banks to lend to each other.

The current story is the banks that formerly lent to each other at .5% now won’t lend to each other at 4.5%…and the TED spread proves it. Paulson and Bernanke used this “fact” to extort $700 Billion from Congress for the expressed purpose of ‘buying the toxic loans’ (I never bought that “toxic loan” story. The banks already took the hit, so how does getting a few dollars for yesterday’s writeoff help?) which are causing banks not to trust banks. Once those bad loans are taken off the backs of the banks, the fear to lend bank-to-bank will disapper…frozen credit markets thawed…crisis averted.

There’s only one thing wrong with this story…it’s not true.

Did anyone bother to ask if there might be another reason banks don’t want to lend to other banks?

The real reason the banks still left with capital (ie. Wells Fargo, JP Morgan, Bank of American…a few other mega-banks) don’t want to lend to the those banks who need it is simply because they don’t want to.

Yep, that’s right…they don’t want to.

If you were them, one of the Big Three, why would you lend to a small regional bank when withholding the loan will most likely make the bank a takeover opportunity for you at pennies on the dollar once the FDIC closes them down due to (because they couldn’t raise the capital) failure to meet reserve requirements?

You wouldn’t. You’d let them go under.

Big banks are withholding loans so under-capitalized banks fail. Once the under-capitalized banks fail, invariably the FDIC brokers a buyout to one of the Big Three or another mega-bank. This is market consolidation at gun point, but it’s working. Two more regional banks failed today.

To support my hypothesis, over the last couple of days, Paulson has saber rattled about buying a direct stake in some banks (an idea he never mentioned as the bill was getting debated in Congress) seemingly frustrated by the lack of “thaw” so far. This means the few big banks are going to get Treasury money to continue their buying spree. Buying failed banks even at pennies on the dollar costs money and they just as well use Hank’s money (I mean your money) as their own.

What Hank doesn’t spend help big banks gobble up small ones, he’ll use to appease our foreign credit buyers. A little unintended consequence of an artificially raised TED spread is a stock market tumble and confused foreign central bankers.

Simply call a quick meeting of the G7 financial leaders to calm their worries…and that is taken care of. Watching the stock market fall has it’s up side. It lends further credence to the whole “frozen market” cover story and puts even more pressure on those banks on tilt.

The biggest consolidation of banking, investment, and mortgage power, after all this over, will rest with just a handful of companies…companies hand-picked by Ben and Hank. Call me a quack, but in a few years when you have only 4-5 companies to pick from to get a checking account…it will be too late.

I really hope I’m wrong…

Photo Credit: SmileMyDay.com

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Tags: bank, banking, Credit, credit markets, housing, lending, mortgage, paulson

According to Bloomberg:

“Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world’s financial markets while they “rewrite the rules of international finance.”

Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisis “in coming days,” he said.

With a huge meeting of global financial leaders happening, what’s to come? Will the equities markets in the major economies be shut down until a global response is created or a brand new system of international finance comes into play?

Maybe its a good idea?

Tags: bailout, bank, black friday, central bankers, crash, Economy, housing, markets, stock markets

Greetings from the metropolis of Cedar Crest, NM.  Where my weekends are filled with  youth football, soccer…and then some.  As I yell at my boys from the sidelines to hustle and tackle and kick….the number 700 billion creeps into the forefront of my mind.  What in the heck is 700 billion?

What can one say about 700 Billion?

 
What does that number mean?  I cannot even fathom seven hundred billion.  I am used to using such a label on the number of stars in a constellation (I am sure I am off a billion or so).  How about the number of grains in a sand pile.   How about how old the earth is (okay…I am exaggerating now…right?)  How about the number of cells in one’s body?

Next question is …how does someone come up with the number “700 billion” as the magic number to bailout our financial institutions?

Am I the only one that finds that odd…? “Oh….700 billion should do the job!”  What is the bank failure formula?

Either way…something must be done….right?  Either way….we are going to pay for it right?  By the time this blog is posted….congressional leaders will have approved a bailout plan of some sort….at least some of us hope so.

I am not sure where I stand on this….and I realize that it does not matter.  But what I do know is there will be a lot of opportunity for those who prepared for this.  Everyone else will be in survival mode.

What is the truth?

The urgency of our congressional leaders to act was strongly worded by Bernanke during a commercial break at the most recent congressional testimony……..

“Senators, we live in a world that has bonds and bad construction loans and those assets need to be bought by men and women with balance sheets. Who’s going to do it - you, Chairman Dodd? You, Senator Schumer? I have a greater responsibility than you can’t possibly fathom. You weep for Bear Sterns and curse the banks just trying to get their collateral; you have that luxury. You have the luxury of not knowing what I know: that Lehman’s bankruptcy, while tragic, probably saved firms and that my existence, while grotesque and incomprehensible to you, saves markets. You don’t want the truth, because deep down in places you don’t talk about at parties, you want me buying assets - you need me buying assets. We use words like “foreclosure,” “Discount Window” and “TARP.” We use them as the backbone of a life trying to defend something. You use them as a punch line. I have neither the time nor the inclination to explain myself to a group of media hungry politicians who rise and sleep under the blanket of the very liquidity I provide and then question the manner in which I provide it. I would rather you just said “thank you,” and went on your way. Otherwise, I suggest that you purchase a defaulted option arm and pay par. Either way, I don’t give a dang what you think the American taxpayer is entitled to.”

Well….700 Billion seems to be the magic number NOW……unfortunately….there will probably be another magic number in the near future.

Until next time…..rob

Photo Courtesy: Jakerome - No way, no how, no bailout.

Tags: $700 billion, bailout, bailout bill, bank, banking, mortgage bailout

This article is a stretch when it comes to being about real estate but, what happened to me yesterday at the bank was so dumb that it all makes sense.

I had hired three day laborers to help me with a small house project I have been working on and as I was driving them back to where they were picked up that morning, I realized that all I had on me was $100 bills. I needed $20 bills to be able to pay them the correct amount. I figured I would go into the next bank I saw and ask them to change out the $100 bills.

The next bank I saw was a Capital One Bank. I parked (rather than going to the drive-thru) and went in. The teller waved at me and said he could help me. I walked up and placed two $100 bills on the counter and asked if he could break them for me. His response was, “Do you know your account number?”

I was a little baffled and said, “What for?” The teller then told me, “Without an account, I can only change one of the bills.”

I know it must have only been a second or two but, it felt like time had frozen as I just stood there with a blank look on my face. I reached out with both hands to take back the two bills and said, “That’s alright, I will go to another bank and I will never use Capital One for anything.” As I walked out, neither the teller or the door greeter said a word.

The next bank I went into was Washington Mutual and the teller told me she would be happy to change out the $100 bills.

Wait… There’s more!

I drove back to the Capital One, snapped a few pictures with my camera phone and scribbled down the address before dropping off the guys and going home.

This morning I decided to have some fun and I posted the incident on the home page of my website. Then I looked up the number for that Capital One branch and called to speak to the manager. After a five minute hold the manager picked up and I asked if I could have the name and number of the regional manager that oversees that branch. The manager asked who I was and I quickly gave him my name and asked if he was currently online at a computer. He said he was so, I gave him the URL and he pulled the site up and was quiet while he read.

After a minute or so I said, “I have to admit that this is the first time in my life that a bank refused to make change.” He apologized for the inconvenience and went on to tell me that they like to keep a “cash reserve” for changing currency for their account holders. I started to laugh and asked if I could quote him on that. He did not respond right away so I told him to never mind that and could I have the name and number for the regional manager. He gave me what I asked for and decided to not call the regional manager to see what would happen.

An hour later I got a call (on voicemail) from the regional manager. This is what the message said, “Hi Mr. Watkins, my name is ____ ______, I am calling from Capital One Bank, I wanted to reach out to you, I received a call from one of my managers at the south Garland location. I understand that there was an opportunity that we had to provide you a little bit better service yesterday from one of our tellers and I wanted to get more details on it. If you could please give me a call at 214-xxx-xxxx, thank you.”

I’m sorry but, I just can’t keep myself from laughing when I think about how dumb this petty little situation is. To know that the manager must have immediately called his manager to forewarn them that someone had posted information on the internet about them refusing to make change for two $100 bills. I’d like to think that the regional manager called to get me to remove the embarrassing details from my site rather than attempt to convince me that this was really poor customer service on the teller’s part.

Less than three hours after Washington Mutual made change for me, I heard they went under. The first thought that came to my mind was, “Why couldn’t it have been Capital One?”

Its sad to see the government starting to bail out some of these lenders when really they should be calling them out for making such dumb mistakes.

Tags: bank, banking, capital one, customer service, washington mutual

In a clear sign the federal government is far more concerned about the financial health of mortgage finance giants Fannie Mae and Freddie Mac than its public comments indicated as late as Friday, the U.S. government Sunday night announced what some are calling a “massive aid” package to the two shareholder owned and run companies officially cementing a government relationship that till now was only implied but never admitted to.
According to a Reuters dispatch, the plan, which will require swift approval from Congress, is designed to “head off a potential meltdown in financial markets.”

Here’s what the government is offering Fannie and Freddie:

1. Access to its emergency cash–the so-called discount window
2. A huge “temporary” increase in the line of credit available
3. The U.S. Treasury will, for the first time ever, purchase equity in both companies should it be needed
4. Investigation by the Securities and Exchange Commission to stop the spread of “false information.”

Both Fannie and Freddie are vital to the housing market–they buy mortgages from banks and other lenders and either keep them or repackage them into securities that are sold to investors.

“Welcome to the socialist state”

Strong words from some critics are already greeting the government plan. Josh Rosner, the managing director at Graham Fisher in New York told Reuters, “It’s outrageous. It’s offensive. Welcome to the socialist state. In capitalism, winners are supposed to reap rewards and losers are supposed to take losses for bad risk management. These are private companies.”

But others are deeply concerned that should Fannie and Freddie fail–though they both say they are well capitalized–the shockwaves would cause a financial meltdown world-wide.

The most troubling part of the government plan,perhaps, is the possibility the Treasury might buy equity in Fannie and Freddie. Some critics charge this could end up costing taxpayers enormous sums of money.

It will be interesting to see whether Wall Street gives the plan a thumbs up or thumbs down during Monday’s trading.

Here are 2 more articles worth reading:

• Government as the Big Lender
• Treasury Acts to Save Mortgage Giants

Tags: bailout, bank, banking, fannie, fannie mac, fed, federal reserve, freddie, freddie mae, housing bailout, lenders, mortage, paulson, subprime

INDYMAC IS OFFICALLY CLOSED!!!

In the past minutes newswires around the country and world are now reporting that the Federal Government has shut down IndyMac Bank and has handed it to the FDIC (Federal Deposit Insurance Corp.) as conservator.

Couple the shut down with the Fannie Mae/Freddie Mac troubles, and we’re in for some really rocky waters next week. I’m willing to bet a lot of money that the announcement was held back from being made prior to the close of the stock market because of fears of a massive crash. Well . . . I think we’ll be seeing that happen this coming Monday!

Fasten your seat belts, people . . . we’re in for a ROCKY RIDE!

IndyMac Bank’s assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.

The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

Yahoo Finance

In the biggest bank failure of the housing downturn to date, federal banking regulators today closed IndyMac Bank FSB, naming the Federal Deposit Insurance Corp. as conservator.

The FDIC said it will transfer insured deposits and “substantially all the assets” of IndyMac Bank, to a newly created successor, IndyMac Federal Bank, which will be operated by the FDIC.

Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks. Depositors of IndyMac Federal Bank FSB will have no access to online and phone banking services this weekend, but will regain access to them on Monday.

Inman News

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to fail today after a run by depositors left the California mortgage lender short on cash.

The Pasadena, California-based bank specialized in so-called Alt-A mortgages, which didn’t require borrowers to provide documentation on their incomes. Its home state has been among the hardest hit by foreclosures.

Bloomberg

What’s next? Anyone?

Tags: bank, bank collapse, bank default, fannie, fannie mae, freddie, freddie mac, IndyMac, subprime

In the current housing bubble, hundreds of thousands of people, if not millions got themselves into risky mortgages. Often times people will not realize that they cannot afford their home until it is too late! If you’re having problems paying your mortgage and you want to refinance, do it before falling behind or making that late payment.

According to The Mortgage Blog, “banks really look at whether or not you can handle a mortgage payment responsibly. If you’ve been late on your mortgage more than 30 days, what we call a 30 day late, that counts against you.”

That’s a tip we should all keep in mind!

Auto Loan Refinance lower your monthly bill

Tags: bank, bubble, housing, late, lender, loan, mortgage, refinance, toxic