Saturday, August 20, 2011
How banks are at it again. They'll get the elevator and we get the shaft
Trying to unravel the onion of the recession and the banking crisis. It is at best difficult to peel back the layers on this beast. But I'm beginning to see what happened and is happening. Banks although appearing to have boatloads of profits aren't in as good a shape as they might appear. Yes we did bail them out even though some refused the money. The biggest faux pas made which was the start of the great economic melt down was when banks were permitted to meld with investment houses. That's like trying to mix oil and water. They were split up way back in the last century for a reason. Because that system didn't work. Modern doesn't mean better when it's an idea from a failed past.
So in digging through the bank fails I did a bit more research as to what exactly happens when a bank fails. We've all seen the images of the closed sign on the doors while the folks from the FDIC march in and start going through the books. And we know that the FDIC already had the next big bank all lined up so that it would be business as usual with a different name on Monday morning. But what of the assets and what of the debts? Ah, here's the part that's not mentioned. In looking into some of the agreements Big Bank agrees to take over the assets of little community bank with an exception. At the end of the agreement is that little phrase "with the exception of some brokered assets". And I think you can guess what those assets are. That would be all the crap loans neatly packaged as CDs and sold to millions. They were sliced and diced to the point that nobody knew what they were invested in but it's pretty obvious that these were all the sub prime and lesser tier mortgages.
Exactly what is going on here one might ask? Simply put the big banks are willing to take all of a failed banks' good assets and dump the bad on the taxpayer (in this case the FDIC which is really us). That is why you see more home for sale signs with HUD on them. But then there's a few more problems in all this. What to do with an asset when there's no set market value. We know that values have gone down because they were inflated to begin with but in a bad economy exactly how do you set a current value?
The only way I can see to set a realistic value would be to take the price of the home when it was first sold and factor in inflation. That is assuming it was not first sold at the height of the housing bubble.
We are now at a turning point in our economic and mortgage crisis. Two things are about to happen or are in process as I writ this. The Alt-A loans those less than prime loans are about to peak. The insurance companies that backed these worthless loans are in the process of suing the big banks that created the mess in the first place. Investors who were told this paper was solid gold want their money back as well. You see a perfect storm brewing here? An Alt-A loan for those that don't know is:An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or "prime", and less risky than "subprime," the riskiest category. These were the bulk of the garbage loans that you saw advertised on TV. You know "no income verification", "borrow 125% of the homes value",etc. And most people who got these loans were doing so to buy investment property. They're the ones most likely to walk away when inside down in that mortgage.
So from looking at the charts and graphs the storm should hit any time now. I'd say between now and November would be my guess. And you just know congress will be sitting on their thumbs watching the shit storm in progress with no clue as to what to do. The past legislation that was meant to stem this tide will do little to help as bankers have been fighting tooth and nail against the changes (see Dodd Frank bill).