Busted: Bankers and The Global Economy

August 10, 2008

Banks Eat Billions; Credit Crunch Expands

paranoid banking firms gamble on their importance

paranoid banking firms gamble on their importance

The Securities and Exchange Commission stepped in and decided that auction-rate securities have been improperly sold to the public. They haven’t said much else as they carefully watch over the fold of now paranoid bankers. Investment bankers have plenty of egg on their face with punitive action in the immediate future by the Feds.

Citigroup and Merrill Lynch have decided to buy back billions of dollars of securities without admitting liability officially because of state regulator pressure. Bank of America and Countrywide are firmly ensconced in trouble. Swiss giant UBS is in the throes of negotiating a payout that could be in the 25 billion dollar region. As private citizens and investors, we know the reality of the situation. Bankers have tried to play us for fools for the almighty dollar and perhaps investors bit off too much, too soon in the haste for profit.

In theory, when times get better larger investors and even banks should be able to sell off the securities once the markets ease and there’s more credit in the system. That is the public line, but the truth is probably altogether different. Selling off investments with major liquidity issues is a big maybe considering the quantity of these beleaguered banking instruments. Following the aftermath of the subprime mortgage debacle, this is yet another blow to the reputation of investment banks, who may struggle to sell such “sweet deals” in future times even at fire sale prices.

British banks are taking huge hits as a result of the credit crunch with increased pressure to perform for stockholders. Lloyds, Halifax and Alliance & Leicester have been fairly decimated profit-wise. Now RBS and Barclays are taking turns with profit thrashing. British banks haven’t found the credit crunch much easier than U.S. banks. Housing prices continue to drop in the U.S. and the United Kingdom. Foreclosures are a uniform blight in both economies while bankers and economies struggle to adjust. The U.S. market has lost nearly a million homes to foreclosure with more on the way: the worst since the Great Depression.

July 26, 2008

EU Wants Tighter Controls on Securitized Loans

The European Union has looked long and hard at the mortgage debacle in the United States and is planning to take regulatory action at home. Bankers have proved that they cannot be entirely trusted where profits and internal banking instruments are concerned. The European Commission is on top of the matter to avoid a management crisis by EU banking bodies. Naturally, bankers are concerned with their profit margins more than safety or the possibility of fraud.

The EU wants to allow banks to buy so-called securitized loans, loans repackaged as securities, if the selling institution holds back 10 percent in reserves, says a European Union Commission draft for new banking rules. The intent is to implement the rules in the autumn. EU governments and the European Parliament have not approved the plan.

The plan has alarmed the financial industry. The industry claims that the ruling could restrict lending in Europe by driving up the price of loans for companies, home buyers and consumers. Banks think that Europe’s banking and financial market is at risk of becoming overregulated. Clearly, the EU knows that commercial bankers have their brains in their wallets.

Banks are also worried about EU plans to limit the size of loans for interbank lending. The draft plan requires banks to commit no more than a quarter of equity capital for interbank loans. Bankers fear that such a move would lead to new liquidity shortages in interbank dealings.

July 22, 2008

Batten the Hatches, Reverse Course on Inflation

The Federal Reserve is unhappy. Inflation is not on course. Prices are not stable. Charles Plosser, president of the Philadelphia Fed, expects the Federal Reserve to take action before any signs of recovery are seen. While this may seem to be news, the Fed has already expected this turn of events in their policy.

The Fed’s is concerned that (more…)

July 14, 2008

July 13, 2008

EU: Investment Banking Exposed

The European Union is working on what banks fear the most: transparency to investors. Investors will soon find life easier by having the ability to compare financial statements from banks in the European Union, thus helping to avoid more surprise writedowns and installing confidence.

Governments want to improve transparency in the global financial market that is gripped by the credit crisis. About a year has passed as banks continue write-off huge sums invested in securitized products hit by defaulting U.S. home loans. The European Union sees this as a winning idea that protects investors and the government. Apparently, bankers in trouble will be sacrificed on the altar of “bad luck”.

Beginning in August, EU banks “will be able” to publish their accounts, government sources eagerly announced. Ministers said full disclosure by banks and other financial institutions of their exposures to such distressed assets and off balance-sheet vehicles was essential to bring back confidence in the market. Has the EU considered the possibility of economic backlash? Perhaps, this move is an indicator of the health of EU banks in general. Clearly, government officials in the EU are thinking very differently from the hush-hush economic atmosphere in the United States.

July 10, 2008

Foreclosures Threaten to Consume Economy

Lately, it has been a cruel world for home buyers and banker types alike. The grim cloud of foreclosure hangs in the air like a dark panic. Today, politicians, Wall Street and media pundits spoke about what would happen if Fannie Mae and Freddie Mac were to collapse, revealing the fact that they are already effectively bankrupt. The fact that the president is openly discussing the plight shows the seriousness of the matter, even though he suggests that the potential of such a collapse is remote at best. The administration suggested that avoiding a collapse through the necessity of bailing out the government mortgage houses would create a U.S. (more…)

July 9, 2008

Securitized Loans and Economic Whiplash

U.S. citizens have known for years that the U.S. government is involved directly in home loans. This is done chiefly through Freddie Mac and Fannie Mae. What may have been assumed is that the government is simply involved in old-fashioned business of old-fashioned home loans, while profiting from making ordinary interest on those loans.

These “for profit agencies” were set up by the federal government with a special role. They buy large pools of mortgage loans made by banks and other lenders, attach a guarantee that the loans will be repaid and then sell securities backed by the future payments on those mortgages. The federal government of the United States supports, backs and profits from sell securities back by mortgages that these agencies purchase.

Bankers are not alone in having destroyed the economy along with adversely affecting the global economy. This is part and parcel of why the (more…)

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