Your Tax Dollars at Work

We've already looked at one reason banks have hoarded the cash – they want cash reserves for possible credit default swap calls and other “rainy day” scenarios. We know the top lending institutions, infused with fresh bailout capital from the Department of the Treasury, have openly stated that they have no intention of trickling that infusion downwards into the local lending markets – all this is documented in prior blogs. Here is another example of how they are spending that bailout gift from us humble taxpayers (according to an Associated Press posting on AOL this morning):

“PNC Financial Services Group Inc. said Friday it is acquiring National City Corp. for $5.58 billion, in one of the first concrete signs of how banks could use fresh investments from a U.S. government bailout program.

“The deal comes within hours of PNC Financial receiving approval for $7.7 billion in cash from the government under the $750 billion government program aimed at relieving the ongoing credit crisis.”

Kind of makes you feel warm and fuzzy all over, doesn't it? And the Federal Reserve is on the verge of another rate cut – money will get cheaper for the big boys, but trust me, most of us will continue to look at a credit debacle that has frozen us out. Markets are down all over the world, because the financial world feels that we are officially in a recession at last. Not sure how you all feel about all this, but it sure looked like a recession even last summer.

Companies and governments played with the numbers to make it look like this could easily be reversed, but if you are down in the salt mines, trying to operate a small business, pay your mortgage, retire on your pension and “investments,” get some minor financing from a bank for any bona fide purchase, want to put your kids through college by using your home equity line of credit or just clinging to your job and income by a slender thread (which has snapped for way too many of us), it’s been a deep recession for quite a while now. Even where you can find a loan, take a good look at the effective interest rates; I thought they were supposed to be falling?!

We still looking for a bottom, and I suspect the “flat, lean growth period” that will follow is likely to drag on for a long while, before it staggers very slowly upwards in a distant full recovery. I believe we will get there, but it won't be easy or fun for most. Lots of panic and overreaction in the markets, but the news, basically, isn't good. Where's there any relief in sight?

There’s a lender-opt-in federal HOPE for Homeowners Program on the table that allows lenders to reduce principal on loans to 90% of the appraised value of a house (lenders hate to devalue principal, by the way) and lower interest to an affordable level (a mortgage that will be insured by the Federal Housing Administration – the FHA). Unfortunately, unless lenders are in actual foreclosure scenario – where a huge loss is certain – it is unlikely that this structure will make much difference to those who have not defaulted.

Federal Deposit Insurance Corporation (FDIC) Chair, Sheila Blair has noted that in the Emergency Economic Stabilization Act (the big bailout bill), there are tools that can reach even beyond the above HOPE for Homeowners Act:

“Loan guarantees could be used as an incentive for servicers to modify [real estate] loans. Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards. By doing so, unaffordable loans could be converted into loans that are sustainable over the long term. The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority.”

We will keep our eyes on the horizon, but someone really needs to accelerate the implementation of plans impacting ordinary working folks and homeowners. We need to intersect mortgages before they fail, freeze foreclosures now, cap interest rates on home loans... and the Treasury, FDIC and the FHA need to provide immediate federal lender guarantees to support homeowners who can sustain some meaningful level of monthly mortgage payments (the banks can tell us who they are). It’s all about the timing - now.

I’m Peter Dekom, and I approve this message.