A 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 , 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 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.