One of the problems with approving the initial bailout plan was that there were few details about the details and the mechanics of purchasing defaulted loans. Further problems with passing the bailout was concerns whether purchasing the mortgages would actually help with the mortgage markets. Questions were also asked as to how the bailout purchases would help struggling homeowners and slow foreclosure trends.
The plan was passed after much pressure and much pork was added.
Then the plan was changed to focus more on purchases of bank stock, with the idea that adding capital rather buying defaulted mortgages would have greater impact on market liquidity.
Over the weekend it appears that bailout money might come available for other market participants, to include insurance companies, auto makers, transit agencies, hedge funds, security dealers, foreigh banks.
This is to me a scary proposition, that the funds will be misdirected and totally miss the intended purpose.
We passed a vague bill, with lots of pork, but little specifics for the main piece of legislation and little oversight.
Without a direction and a plan, we may now be about to misdirect the bailout funds so that they so diluted as to be insufficient to have the corrective impact that was hoped.
Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.
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What can I say but, I agree. It is so hard to hit the target when you don't know where it is. Even shotguns will miss the target when they are aimed the wrong direction. I especially liked the fact that one of the banks being infused with new capital was going to use it for acquisition. Now, isn't that a fine use of "OUR" money?
That is a lot of money to streamline into the systems. Combined with bank apprehension to lend, it is bogged down.
Please give it some time to loosen up. But guidelines shouldn't loosen up...the buyer needs to have skin in the game.
Richard,
Thanks for the post. Sounds like a campaign is needed to flood the offices on the hill with demands to put safeguards in place.
Richard, systemic loss is part of the issue. Many of these companies were too big to fail. There failure brought down so many otehr institutions that were connected to them. I.E. if the government lets GM go down, think of all the suppliers that go with them?
The other issue is protecting against additonal losses based on tight capitalization requirements. If the institutions are using a very loos 1 to 10 ratio, then for ever $1 iin deposits, they can ledn $10. That is great until they start losing money. It works conversely also, when they lose a $1 asset (loan) then they must raise an additonal $11 in capital. That is a fairly simplified example, however it does not take long to do the math. There are really only 2 ways to raise capital. Either sell stock, which lowers the overall value of the ntire evaluation or borrow it. Well if every intitution is faced with these loses (and don't fool yourself, 6% foreclosure rate is a lot of money), then the teller window would have to be shut down for too many institutions needing capital all at once. Then it becomes a snow ball affect. When those monoes are frozen, then credit card, construction, car loan, student loan captial needs run the system also. When the capital is frozen, then expenses eventually have to be cut and guess here that starts to happen?......you got it....jobs! It is self perpetuating and then markets forces spin out of control.
Frankly it is way to big to comprehend. One thing is for sure, it sure is going to egt uglier, before it gets prettier.
Have a happy halloween!
Bo