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We Are All Equal, But Some More Than Others

The BBC reports that US banks make shock status switch

The last two major investment banks in the US have changed their status to become bank holding companies, allowing them to take deposits from investors.

The changes should enable Goldman Sachs and Morgan Stanley to raise more funds by opening commercial banks.

The move – part of a huge restructuring effort on Wall Street – will also give them access to Federal Reserve support.

Analysts speculated that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.

Instead, the banks filed requests with the Federal Reserve to change their status.

And late on Sunday, the Fed said in a statement it had granted the requests.

Regular people have to wait until Monday if they have a problem after 5PM Friday, but these guys get decisions from the Federal Reserve on Sundays. Now we have to protect the FDIC in addition to all of the other problems.

September 21, 2008   4 Comments

How Bad Were The Loans?

Susan Taylor Martin, St. Petersburg Times, provides some background: A financial crisis built one bad loan at a time

Jackson, who said he handled marketing for the builder, bought 14 units between April and August of 2006 and financed them through several different lenders. He was vague on how much he actually paid for the condos although transfer taxes on the deeds reflect purchase prices of $320,000 apiece for eight of the units and $329,000 for the other six.

Jackson paid the higher amount for Units 404 and 418, according to the transfer taxes. BNC Mortgage loaned him $256,000 on each condo at 8.75 percent — a so-called “subprime” rate typically given to borrowers with less than sterling credit.

Eight units at $320K, plus six at $329K equals more that $4.5 million dollars to a guy who lives in a trailer park and rides a bicycle because of DUI convictions. He needs $9,940 to cover the taxes and condo fees every month. What would possess any rational lender to extend him credit?

September 21, 2008   16 Comments

Missing The Point

The New York Times offers “News Analysis”: A $700 Billion Rescue Plan for Wall St., but Will It Work?

“It goes a long way; it ameliorates it very substantially,” said Alan S. Blinder, an economist at Princeton and a former vice chairman of the board of governors at the Federal Reserve, who has said for months that the government must step in forcefully to buy mortgage-linked investments.

If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

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September 21, 2008   6 Comments