White House considering taking over some banks, says AP, anonymous source.
The big news this morning is a rumor that the White House is considering taking over ownership of certain banks — the latest move in the government’s “Whack-a-Mole” approach to dealing with the current financial market crisis.
According to the Associated Press:
An administration official, who spoke on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.
This official said all the new powers granted in the legislation were being considered as the administration seeks to deal with a serious credit crisis that has caused the biggest upheavals on Wall Street in seven decades and continues to roil global markets.
This rumor comes on the heels of yesterday’s emergency interest rate cut by the Fed, which reduced its key rate from 2 percent to 1.5 percent. In an effort to stave off the spread of the U.S. finance market woes, other global central banks followed suit, including the Bank of England, The European Central Bank and the central banks for Canada, Sweden, Switzerland and China.
Details on the possible U.S. government takeover of select banks are sketchy, but proponents of the plan argue it will inject fresh capital into banks, help them clean up their balance sheets and allow them to resume lending.
The problem with this proposal (like nearly every other tactic that’s been employed over the past three weeks) is that it treats a symptom, rather than the cause. While market psychology is complex, much of the current panic is being driven by a fear of more mortgage defaults, which will add additional “bad debt” to already troubled balance sheets of banks and financial institutions that hold these loans. Buying out the bad debt isn’t the solution. You’re just transfering the problem from private institutions to public ones — in this case, the Federal government.
A better solution, which is what we are advocating here at “A Solution That Works,” is to have the Federal government and private lending institutions work together to immediately refinance the worst loans (those in most immediate danger of foreclosure) by reducing the interest-rate dramatically, waiving prepayment penalties (which makes it cost-prohibitive for homeowners to improve their situation) and refinance individuals out of risky loan programs and into safe, secure, fully-amortizing 30 year fixed loans.
There is no need to tamper with the principal amount or have the government “buy up” bad debt (both of which were proposed by John McCain this week), because the homeowner is given affordable, long-term fixed rate financing that allows them to afford and make their monthly payments. Once you’ve accomplished that, the risk of foreclosure on these mortgages is immediately and dramatically-reduced. This makes lending less risky, reduces the future risks associated with having these loans on the books, and as foreclosures slow, would start to stabilize property values.
While the homeowner may still be in a negative equity situation, they at least have hope at the end of the tunnel and chance to equalize their equity as property values stabilize, and hopefully grow.
We’ll be watching this one closely …
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