Thursday, October 23, 2008

“A Once in a Century Credit Tsunami”



Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief.” Words of reassurance from the former Chairman of the Federal Reserve (he left in 2006), Alan Greenspan testifying before the House of Representatives Committee on Oversight and Government Reform about the incredibly stupid Wall Street feeding frenzy regarding those horrible and virtually unregulated “default insurance” instruments – the credit default swaps – that I have been ragging about.

Thedeal.com reviewed Greenspan’s concern about risk exposure and overzealous investing back in 2005, but the former Fed Chairman still noted: “this crisis, however, has turned out to be much broader than anything I could have imagined.” The only scarier Halloween costume I can think of than an Alan Greenspan mask would have to be one with Treasury Secretary Henry Paulson’s face. Looking at the overall economic picture, Greenspan warned that he expects this financial “tsunami” to get worse before it gets better. And remember those cash-hoarding financial institutions not funding the credit markets until they see a clear bottom? Doesn't look like they'll be shaking out cash for lending to the hoi polloi (us chickens and small businesses) any time soon!

We also heard today from SEC Chairman, Christopher Cox, who in all fairness is a recent appointee and was not present when the SEC deregulated the biggest financial institutions from prudent debt ratios in 2004 (see earlier blogs). He just stated the obvious: "The lessons of the credit crisis all point to the need for strong and effective regulation, but without major holes and gaps.” Woo hoo! So what do we do in the meantime, since obviously no one in Washington is reading my blogs?

We should all rest assured that the federal “regulators” – the guys at Treasury – told the Senate Banking Committee that they are working on a new plan could include creating standards to change mortgages structures and rates, making them more affordable and giving loan guarantees to banks that meet those new standards. Keep working guys; we know where your priorities are.

The Associated Press notes that even other branches of government are complaining about too little, too late being done by the Treasury to help individuals in trouble: “Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the same Senate panel that the government needs to do more to help tens of thousands of home borrowers avert foreclosure, including setting standards for modifying mortgages into more affordable loans and providing loan guarantees to banks and other mortgage services that meet them… ‘Loan guarantees could be used as an incentive for servicers to modify loans,’ Bair said. ‘By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.’” Gee, why didn't I think of that? Oh, I did, with more details!

Funny how the feds instantly came up with a plan to bail out the big boys – the cash-hoarders – but they need more time to help those who are losing their jobs and their homes now.

I’m Peter Dekom, and I wonder when this madness will end.

No comments: