Let's talk about the banking crisis

[mantis308]

Being at an FI, I can see how a banking holiday could occur, but I don't see what the purpose would be. Atash is right, almost all transactions are electronic, and thus largely dependant on computer systems. Large core processing systems are difficult to change overnight, so if there were a banking holiday, it will be long time- 2 weeks or so. This would give FIs enough time to become compliant with whatever regulations are passed making the holiday necessary.

I do think that having a sum of cash stored at home somewhere would be best however, because cash is money in hand, and you can't buy anything when the phone lines are down or electricity doesn't work. Be prepared.

[MountainMeg]

So here's some more crisis to pile on.

http://news.yahoo.com/s/afp/20090305/pl_afp/financeeconomyusbankinggovernment

"Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative," she wrote.

But, it is in a letter to banks defending the increase in FDIC fees, so I'm not sure if it's imminent or a scare tactic.

[Atash Hagmahani]

It really is on the up-and-up, MountainMeg. Unfortunately, our banking system really is exceedingly fragile at the moment.

The increased FDIC premiums will take a while to amount to much, and they are a further strain on an already weak system.

The big banks already had too much toxic debt, and they ate some more swallowing small banks not to mention Wamu that was a huge bank. Just Indymac alone wiped out something like 10% of the FDIC fund, and the bank failures are accelerating. They have turned over some of their toxic assets as questionable collateral, but they are just sitting on the funds collecting interest. They're not making as much/many loans as they would need to, to raise profits for paying their own expenses. They are dying even after being bailed out (as is true of a number of other bailout beneficiaries).

Part of the problem is that banking failures are not an "insurable event". Ask Tom about this--it's not a real insurance system. Even Dr. Milton Friedman used to brag that it was all a confidence-building scheme--he called it a "free good" because the idea was to reassure the public to prevent runs on banks.

But what really prevents runs on banks is lack of any alternatives. They won't let you withdraw any truly substantial deposit in currency; they just hand you a check that you can only spend by going to ANOTHER bank. That was the whole point of this system; it locks you in, by design.

[MountainMeg]

It really is on the up-and-up, MountainMeg

That's what I thought.  Hopeful wishing that it was anything else.   

[opsec]

Could they solve this problem by dropping the coverage back down to the pre-Obama level of $100k?

[mantis308]

Could they solve this problem by dropping the coverage back down to the pre-Obama level of $100k?

Doubtful. This occured after many of the banks failed, and the FDIC and NCUA is largely insolvent because the financial system is based on fractional reserve banking and monetized debt. $100 in real assets equals $100,000 in bank assets, which is why a bank run is so devastating.

[mantis308]

Just wanted to let you all know- our regulator notified us today in writing that we will be required to comply with the new law on the books: Home Affordable Modification Program http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf
All you have to do to qualify is prove (no idea how yet) that you are in over your head, and can't pay your mortgage. We have never bowed to pressure to do sub-prime loans, and as a result have had next to nothing in the way of deliquent mortgages. We've had a few people already asking for this.

This is probably going to cost us a tremendous amount of money, and I have heard comments from our real estate folks that they are already massively tightening the standards on who can get loans. In otherwords.. if you can pay for a house in cash, we'll loan you the money.

I'm suspecting that many community institutions will cease giving real estate loans, and try to sell as many as they can to bigger more well funded (read- bailed out) institutions.

 



 

[Atash Hagmahani]

Thanks for the update. This is weird. A program like that will have to have some sort of bad, so-called "unforeseen" consequences.

[Dame]

This looks like it will wipe out any financial institution which did not get a bail out.  These guys apparently have really effective lobbies as well as bonuses.  Big business does not pay bonuses for nothing.

[oscar615]

So it seems they are required to drop the monthly payments to 31% of a persons income.  Couldn't they do that by extending the payment period, say 40 years vs. 30 years, rather than dropping the interest rate?  Wouldn't this drop the payment but still allow the bank to make even more money?

[opsec]

If they extend the mortgages out to 40 years, they run the risk of large numbers of people dying of geriatric causes before they can pay off their mortgages.

[oscar615]

LOL

[mantis308]

If they extend the mortgages out to 40 years, they run the risk of large numbers of people dying of geriatric causes before they can pay off their mortgages.

Believe it or not, this is a factor in determining risk. Probably not a legal factor, but if you have a person coming in for a 30 year mortgage, and is 90... would you give them a loan?

[Rusty Shackelford]

If they extend the mortgages out to 40 years, they run the risk of large numbers of people dying of geriatric causes before they can pay off their mortgages.

The average mortgage only runs 7 years - everybody gets 30 years, but they sell out or refinance before then.

[MountainMeg]

We're in the process of refinancing now and feel lucky to have gotten a great rate, low fees.  My dad tried 2 weeks later and was basically told they could only help him if he was late on his payments.  The man has one paid for property, one property that costs 12% of income and enough cash + retirement to cover the entire loan.  But -- the bank is only working on lower cost loans for those who can't afford it.