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One Lenders Take On The Bailout Proposal
4 CommentsA very good friend of mine is a commercial loan officer for a bank, so it was interesting to see his take on the bailout proposal. The bank he works for is not one of the ‘high risk’ banks that is in trouble because of the many bad loans. They kept with a conservative and safe loan structure, even as other banks were loosening credit and getting into trouble.
But, as my friend pointed out, even their bank is getting affected negatively now, and banks like his could be at risk if the ‘troubled’ banks do not get help. The point being that once things start going south, there won’t be anything to protect any bank or financial institution. Thus, even though it will in a sense reward those institutions that made bad decisions, he believes that the bailout is necessary because of the bigger picture.
With his permission, I am including some of his feedback on the situation. Given that his job is to directly with issuing credit, he has firsthand knowledge of what’s going on and the potential impact. His insight was refreshing and eye-opening.
Currently with all of these bank failures, there have been days when banks have stopped lending money to each other, due to liquidity shortages. [This relates to] supply versus demand. This in turn has force the LIBOR funding rates to go to record levels. What this means for each of you, is that for every tick it goes up, banks are forced to increase interest rates. Do you want 20% interest rates again? The only reason banks are failing today, is that there isn’t enough capital currently in the markets. Their requests for capital can’t be met. This in it’s self is scary. If the bailout doesn’t happen, several banks that made good sound decisions could fall into the same group of failing banks, which I believe we’d all agree is not the approach we want to see.
So basically, I’m saddened by anyone that says to hell with all of the people that made bad decisions, because it’s much bigger than that. The thing you have to remember, is that the federal government isn’t going to do anything where they aren’t going to make a buck out of it. They are basically going to be purchasing non-conforming loans from institutions for primary residences only, NOT investment homes that people took risks on. These loans that are deemed to be “non-conforming” were loans that were being paid as agreed until the rates jumped up to 20% or whatever the crazy rates are. If the government buys these, and is able to give a rate in the 5-6% range, which is todays market rate anyways, how is this not a good idea? I’d rather keep families in there homes rather then giving them no other option than to walk away. That’s not good for home values or anything else.
Big picture I view this plan, if structured properly, as a good thing. These are my main reasons:
(1) It hopefully stops the rapid decline in home values by keeping millions of people in their homes.
(2) It helps stabilize a volatile interest rate environment. Trust me, you don’t want to see what will happen if this plan doesn’t get approved.
(3) Banks will be able to have capital needs, hopefully with stricter regulations, to continue operations at least for the time being and hopefully years to come.Hopefully I did a good job to explain how this is a much bigger issue than us just bailing out stupid consumers, because it’s much bigger than that.
I think he did a great job and thank him for his contribution.
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Published on September 27, 2008 · Filed under: Economy;
4 Responses to “One Lenders Take On The Bailout Proposal”
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Global Warming IS REAL said on September 28th, 2008 at 5:42 pm
What is stated above is what most people feel.
I am an outspoken critic.
People all around, not just the commercial loan officer quoted above, state that if this wouldn’t have passed, we’d be in for economic disaster….that it is actually not a bailout of Paulson’s rich banking friends, but a bailout for the American taxpayer because it avoids millions of job losses and lots of bankruptcies.
THIS IS A BANDAID. Everbody needs to realize that somebody is going to have to bite the bullet eventually. The more bandaids you put on failing banks now, the worse the pain is going to be in the end.
In the 90s, the Japanese did the same thing that is going on now. They would not let banks fail. Economic historians agree that the 90s was the lost decade in Japan.
People forget, but the U.S. did same thing in the 70s where everybody in sight was propped up. The 70s were one of the worst economic decades in American history where there was high inflation, high interest rates and a collapsing U.S. dollar.
The Fed and Paulson have made lots of mistakes over the past year. It is comical that we, as Americans, have entrusted them to now come up with this solution.
Barnanke said under oath for the past 2 years, in front of Congress, that there was no problem in the housing market. Paulson said the same thing.
Let some people go bankrupt and clean out the system.
In 1966, every financial firm in Japan went bankrupt. They cleaned out the system, started over and Japan became the greatest growth story over the next 20 years.
In 1907, every financial institution in America went bankrupt. Wall Street was cleaned out, they started over and America became the greatest country in the 20th century.
As history shows, it is not the end of the world when banks go bankrupt, despite what people try to say.
People say, “if we let banks go bankrupt, markets will fall and 401Ks will go down…” People want the gov’t to do something about it all.
Guess what? Over the recent past, the gov’t has been doing something about it and the stock market is down 20-25%. What is the gov’t going to do when the market is down 40-45% The gov’t is not going to have any bullets left to do anything when the market is down 55-60%!
1. Let the bankruptcies happen
2. Let a shart decline in the markets occur
3. Clean out the system and start overWith this $700 B bailout, I’m afraid that nothing gets fixed and I’m afraid that the assumption the gov’t is making that their investment will turn out good is not a guarantee.
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