Treasury eyeing bank deals

I do not understand the logic of this idea. The governement is going to take a ownership role in banks. When the governmnet audits banks (each bank is audited every year) and they get a bad report is the government going to step in and make sure they get a better grade because they are worried about stock. Are they going to make laws out to help the banks they own stocks in. Is the government going to push for or against jobs because of their influence, either one could be bad depending on what kind of position the bank is in. If the governement buys bank stock the stock price will proabably go up. What happens when they sell the stock, probably go down. Are they going to get insider information to help them time the market leaving the everyday consumer picking up the pieces. There just to me seems to be too much influence, too much conflict of interest and ways this can go wrong.

America Can't go Cold Turkey

(CNN) -- My family doesn't use credit much. We pay off our charge cards every month. We drive used cars. We paid off our house mortgage early and have not refinanced. We carefully live well within our means. In fact, until very recently, my "apartment" in Washington has been my office.I'm pretty well-known as a cheapskate.
So when I said recently that I would be willing to give up my seat in Congress in order to pass the financial rescue package, it turned some heads.
It's because I understand what's at stake and because I hope to be a part of reforming our financial system so that we don't have these problems again.
I have spent my career as a business, finance and bankruptcy law professor and lawyer. I have helped individuals and institutions get out of financial trouble. More important, I have studied ways to make sure they don't get into trouble in the first place -- and drag all of us down with them.
Some politicians -- and a few economists -- would say that America is drunk on credit and just needs to go cold turkey. But it's more accurate to say we're addicted to credit. Too much credit. Good credit, bad credit, anything that lets us live the high life. We have mistaken growth in the value of financial paper for real economic growth.
Getting clean will not be so easy. When credit is quickly withdrawn, everyone in the business of lending panics. Credit becomes scarce and is not available at a reasonable interest rate. Institutions that need to use credit daily start to fall like dominoes. The financial fallout -- bank failures, risking a stock market crash, worthless retirement and pension funds -- could kill us. We need to reduce our dependence on credit gradually but steadily and with no excuses.
Deep down, we all know that a financial rescue is necessary. I voted for the plan that was defeated today because, to paraphrase Rep. Spencer Bachus, I'm unwilling to play Russian roulette with the financial lives of my children and grandchildren. Although the bill was imperfect and wildly unpopular, I believed that those of us in Congress needed to suck it up, vote for it and let the chips fall where they may.
But the plan has failed. I hope the economists who have warned of an imminent collapse are wrong. To paraphrase Franklin Roosevelt, what we have to fear is fear itself. If people can take a deep breath and avoid an immediate panic, it is my hope that we can improve this plan and still act in time to save our financial future.
My own strong preference is that it focus less on acquiring mortgage-backed securities and be more of a tightly focused effort to minimize foreclosures and home vacancies that drive down property values for all of us. For these non-prime mortgage notes, I would give bankruptcy courts the power to modify mortgage payments to make them more realistic. I would limit the pay of not only top Wall Street executives but the traders who made millions by making this problem worse.
I hope we can get a plan that includes at least some of those elements. But most important, we need a bill that can attract enough support to pass.
Then the hard work begins, and that is the work I want to be a part of in the months ahead: Making sure this doesn't happen again. That's why you run for office, or at least why I did. If I have not, in fact, given up my seat because of my vote, I'll be back to work on that myself.

U.S. Rep. Jim Marshall, a Democrat serving his third term in Congress, represents Georgia's 8th Congressional District. He serves on the House Armed Services and Agriculture Committees.

Let Risk-Taking Financial Institutions Fail

Let Risk-Taking Financial Institutions Fail
By Ari J. Officer and Lawrence H. Officer Monday, Sep. 29, 2008
The Administration and Congress have felt compelled to do something about the "financial meltdown," so an inefficient and inequitable "bailout plan" has been rushed through the legislature despite harsh criticism from the right and left. That's unfortunate. Both presidential candidates were stalling by qualifying the plan. Whichever candidate had had the courage to reject outright this proposal would have had the better claim to be President.
Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."
At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.
Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.
Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.
Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.
The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.
Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.
Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.
— Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is a professor of economics at the University of Illinois at Chicago.

Home Loans Harder to get

NEW YORK (CNNMoney.com) -- Wall Street's meltdown has put the squeeze on all sorts of lending, and home loans are no exception. Now, even some very well-qualified home buyers are getting turned down for mortgages.
"A lot of good, well-qualified people are being turned away for no good reason," said Mark Savitt, president of the National Association of Mortgage Brokers and a mortgage broker in West Virginia. "The wheels are coming to a grinding halt."
Sometimes the rejections seem completely inexplicable. Long Island, N.Y.-based mortgage broker Bob Moulton had one client with substantial income and assets who planned to put down $1.2 million on a house selling for $2.2 million. For this borrower, a mortgage should have been a snap. But it wasn't.
The hitch: The buyer was a few days late with a single mortgage payment last year when he was away on vacation. That lowered his credit score to 679, which is the reason the lender cited when it denied his loan.
"Just a little ding on his credit report, one late payment a year-and-a-half ago," said Moulton. "Everything else was fine."
Higher rates
Another example comes from Savitt. One of his clients was buying a home for $205,000, putting down 20%. The buyer had an excellent credit score in the mid-700s, and the house was appraised at a little higher than the sale price.
The problem here: The borrower's debt to income ratio would be at about 45 - slightly higher than what most banks like to see, but by no means excessive. And his other risk factors were great.
"The bank turned it down over excessive debt ratio," said Savitt. "That's crazy."
And higher interest rates are making it even harder for borrowers to get a loan. The 30-year fixed rate has shot up in the wake of the financial crisis - to 6.09%, compared with 5.78% last week - making monthly mortgage payments higher as well. That's raising the debt to income ratio for most borrowers, which means more will have their loan applications rejected.
"
It used to be that if most of a borrower's qualifications were quite strong - income, assets, credit score and the value of the home itself - lenders would use their judgment to make exceptions if one factor was a bit weak.
A lender might accept a less than stellar credit score, for example, if the borrower was making a big down payment, or forgive a modest income if the borrower's bank account was fat enough.
Not any more, says Alan Rosenbaum, president of New York City mortgage broker GuardHill Finance.
"There are no exceptions today," said Rosenbaum. "If an application does not meet each of the guidelines - and those guidelines themselves have gotten more strict - it's denied."
That means many more people simply no longer qualify for a mortgage.
A numbers game
"I get as many phone calls as I got two years ago," said broker George Hanzimanolis, of Bankers First Mortgage in Pennsylvania, "but I bet you 40% of the people calling in, we can't do anything for, versus 5% a year ago."
And Hanzimanolis say it's gotten worse in the last few weeks. One recent client who had excellent assets and income wanted to refinance his first and second mortgages. The house was valued at $1.6 million, and he was looking for a $1.2 million loan. That's an excellent loan-to-value ratio of 75%; the banks like it to be no more than 80%.
But these days many lenders are anticipating that home prices will continue to fall, so they're automatically discounting every home's appraised value by 10%.
That dropped the value of the borrower's home to $1.44 million, which put him over the 80% loan-to-value ratio. So the loan was turned down.
Things like that make brokering mortgage loans today a struggle, according to Moulton.
"Nothing is making sense. Everything is torture right now," he said. "We're getting things done but it takes enormous effort. You think a deal is vanilla and it turns out to be rocky road."
By Les Christie, CNNMoney.com staff writer

Largest Ever Bank Failure

NEW YORK - As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.
One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.
Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.
"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.
WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.
JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital.
The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.
WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.
"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."
Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.
The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, on the sidelines empty handed.
WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.
Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.
At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.
As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.
At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.
In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.
The bank in July reported a $3 billion second-quarter loss — the biggest in its history — as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.
JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.
JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches.
The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.
"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.
By MADLEN READ, AP Business Writer

Welcome to the world of Big Brother

NEW YORK (CNNMoney.com) -- And then there were none.
Federal regulators converted Wall Street's remaining stand-alone investment banks - Goldman Sachs and Morgan Stanley - into bank holding companies Sunday night.
The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. The shift also is aimed at removing them as targets of nervous investors and customers, who brought down their former rivals Bear Stearns, Lehman Brothers and Merrill Lynch this year.
But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.
And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives.
"The separation of investment banking and commercial banking has come to an end," said Bert Ely, an independent banking consultant.
The conversion is but the latest in a series of unprecedented events on Wall Street as it convulses through the global credit crisis. In the past eight days, the federal government announced a $700 billion plan to rescue the financial sector by buying up troubled mortgage assets and an $85 billion emergency loan to insurance titan American International Group. Also, Lehman filed for bankruptcy and Bank of America took over Merrill Lynch.
Morgan (MS, Fortune 500) and Goldman (GS, Fortune 500), whose shares plummeted last week before the $700 billion bailout was unveiled, will likely avoid those fates with the conversion, experts said.
"They were afraid they'd get killed if they didn't [convert]," said Christopher Whalen, managing director of Institutional Risk Analytics. "The Fed is scrambling to take the remaining targets off the radar."
Beefing up the retail banks
The duo is expected to quickly add to their tiny existing retail banking divisions, which will give them access to a cheaper and more stable source of funding - customer deposits - rather than the volatile short-term funding they rely on. The companies, which both requested the conversion, signaled as much in separate press releases Sunday.
They have plenty to pick from now that the credit crisis has devastated the banking sector.
Morgan, which has $36 billion in deposits, may already have a partner in mind. Rumors have flown on Wall Street in the past week that it would hook up with Wachovia (WB, Fortune 500), a large but troubled bank. Sunday's shift would make such a merger easier.
With $20 billion in deposits, Goldman said it plans to grow its deposit base through acquisitions and internally. It is also shifting assets from other divisions into its Goldman Sachs Bank USA, which will become one of the 10 largest banks in the United States with $150 billion in assets.
Access to the Fed funding
The action also solidifies their standing with the Fed. While the investment banks received emergency access to the Fed funding in the wake of Bear Stearns' demise in March, Goldman and Morgan will now have all the same privileges at the Fed lending window as their banking peers.
As part of Sunday's move, the Fed extended additional credit to Goldman and Morgan, as well as Merrill, allowing them to pledge a wider array of collateral.
The companies also hope the shift will end investors' fears that the investment banks are not solid enough to survive.
"This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position," said John Mack, Morgan's chief executive. "It also offers the marketplace certainty about the strength of our financial position and our access to funding."
"We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources," said Lloyd C. Blankfein, Goldman's chief executive
Turmoil on Wall Street
The Fed's decision is just the latest in a dizzying series of events over the past week representing a dramatic reordering of the financial world.
All eyes now turn to the troubled traditional banks, such as Washington Mutual (WM, Fortune 500) and Wachovia, which are scrambling to shore up their books as lending has frozen up and investor confidence has sunk.

Are Banks Next?

When you read reports coming out about the economic crises that we are currenlty in one of the questions is who is next to fall. A lot of people are pointing to Washington Mutal and other banks. Most people think this is one in the same but they are different. Washington Mutal is a savings and loan. Which means they historically hold on to their loans for a longer period of time especailly mortgages. While most banks originate the mortgage and sell them off in a package to Freddie Mac, Fannie Mae or a mortgage servicing agent. So the bad mortgages that is causing alot of these companies to fail are off the books on most banks. Not so with Washington Mutal they kept most of the mortgages they originated. Since a lot of their branches are located in California and Florida, two of the hardest hit places, they currently have a very high number of bad mortgages. This is not to say that all banks are free from the mortgage fall out. Banks could have bought mortgage backed bonds to help manage liquidity or they could have also made loans to commercial contractors that build houses and with the surplus of new and forclosed houses this has led to a very high number of bankruptcies for this type of compnay if they didn't set aside a reserve to ride the slow times. For years housign contrators were making tons of money and didn't have houses sitting without being sold for an extended period of time but with the economy in the shape that it currently is in houses are setting for a much longer period of time. Also the value in the houses has dropped so this means a cut into profits for theses companies. This will effect banks that loaned heavily into these companies. So some banks could fail but not as many as most people think and only banks that were located in areas that were the hardest hit by the mortgage bubble bursting. Banks are so heavily regulated and audited by FDIC and Federal Reserve each year that they know which ones are in trouble and have programs to help them out. If you want an extra piece of mind that your money will be safe make sure you have less than $100,000 at each bank. If you want to piece of mind and ease of working with one bank, ask your bank if they offer CDARS. To make this short and sweet CDARS program allows you to have all your money FDIC insured. Let me give you an example, if you have $500,000 and you want it fully FDIC insured. You can put into the CDARS program which will send it to 6 banks (your bank plus 5 others) breaking the money up evenly all each under the FDIC $100,000 insurance limit. You money is sent out to other banks and in return your bank get the same amount of money back from someone else doing the same thing. So you will get a statement from your home banks saying you have $500,000 at their bank but in reality you have $500,000 FDIC insured at 6 different banks. Don't worry this is perfectly legal and could help you out if you are one of the fortuate people that have over $100,000 in you checking and saving accounts.