Feds pulled another $800B out of their ………………hat? Taxpayer hat that is.

Actually that’s not even accurate. The Fed is essentially creating the $800B first to purchase debt and then using taxpayer money to weed out the bad loans. The initial plan to purchase bad loans from banks was scrapped but has now been restructured to buy $500B worth of higher quality mortgage securities.

In addition, the Feds will purchase bundles of consumer debt, credit card debt, student loans and car loans in an attempt to free up the seemingly frozen solid credit markets.

Let’s stand back here and take a look at how the surviving banks made out. The industry has been criticized for booking tremendous profits while taking huge risks and then being propped up, bailed out, and then practically having all loans now guaranteed by the Feds. We even fund the loan loss reserves on the guarantee.

It’s probably not fair to say that the banks have refused to lend trying to leverage consumer pain into a government handout but it looks like that to some. The Feds have done everything possible to get banks to lending to consumers again before Christmas.

Everything except loaning directly to consumers but that will be coming if the banks don’t fork over loans. We can call it the “Consumer Loan Administration” or CLA.

We might as well have the profit if we are going to guarantee it all. Lastly, the bad loans are still sitting on bank books and tax payers will eventually have to ante up again to buy those as well.

It’s been absolutely amazing how the Feds have been able to orchestrate such historic moves while still maintaining a sense of confidence in the banking industry.

Who would have thought that the investment banking industry would have collapsed in such a short period of time? It’s inconceivable that so many investment banks cut off their head, shot themselves in the chest, broke both legs and then jumped into a volcano to ensure there could be no survivors.

And all for a buck.

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It has become apparent that all the fist shaking and rhetoric going on between the Feds and the banking industry regarding consumer lending is going nowhere.

I wondered just how Congress can mandate a bank to lend money.  No matter how you cut it, lending money is a matter of choice for banks.  You might dictate the circumstances as congress has done with housing but not the choice.

As long as a bank does not decline a loan due to the protected under the Equal Credit Opportunity Act (among other legislation), you are out of luck.  Our banks simply raised the standards when faced with losing profits.

Can you blame them?  I don’t think you can.  The standards will rise until the reward meets the risk. They are a For Profit business.

What I do think is the government will be forced into directly lending, buying or guaranteeing almost all consumer loans for the time being.  This could be done through a new entity created with private and bank capital backed by the government.  After all, the Federal Reserve Bank was created in the same manner.  Now you just have to deal with consumers.

There will be of course, a whole lot of belly aching going on from many sides on this idea. However, the Feds are backing literally every lending aspect anyway.

In the end, consumer credit has been driving this bus for a long time. And it seems without a license or practically blind.

Take the bus driver off a bus and see if the passengers can complete a route.  Now make sure you replace that driver with an educated high income sort of guy. See where he thinks the route should be driven. A bunch of folks will never even see the bus.

I see the government needing to get a new bus driver.

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A prior post of mine stated the banks were hoarding cash. That was met with a bit of attitude by a couple of folks. Apparently they disagreed with me. The facts are the banks have borrowed far more money from the Feds than they have loaned to consumers or other banks.

The Feds are in a dilemma right now. They have no leverage to force banks to lend. They can’t even stop the “overall compensation” to EXECUTIVES as banks claim they need to pay them to keep these valuable employees.

That’s a bunch of baloney. A whole lot of it actually.

Any executive that was that valuable was aware of the risks the bank was taking and should not be rewarded.You can bet the service employees will bear the burden. Make no mistake about the Big 9 being forced to step up first to take the money. That would be including Wells Fargo. All of them would be insolvent if held to the mark to market value standards and a good old fashioned tough audit.

They just had the biggest most powerful investor in the world make an investment into their bank guaranteeing their existence. What we will see is more direct government lending. Consumers will borrow from a Fed program to obtain the extra down payment needed to purchase properties. But we will have of course higher lending standards. Not sure how all those congressman who pushed affordable housing through to borrowers with less than stellar credit will handle that small problem.

What we are seeing is a dusting off and reforming of the SBA financing program. The SBA will be a businessman’s best friend. All student loans will be government guaranteed directly or indirectly. Even car loans will be an indirect Fed backed loan if the bailout umbrella covers the industry.

The Fed will eventually back almost everything in an effort to get the economy moving and bank loaning money. The Feds are already backing a bank to bank loan to encourage lending. The major industries will all have a federally backed loan in some form.

I’d bet a dollar that if the banks hold out long enough, the Feds will not only bail them out but also back all of their loans to the consumer in many cases.

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The multifamily purchase market is almost at a standstill right now.  Seems like the entire investment market has taken the rest of the year off. 

A multifamily investment lender like an insurance company has basically folded their tents for the year leaving even less choices.  We have two insurance companies still willing to make an investment in the sector putting very good loans on their books.  I'll say that again. Very good loans.

The general consensus is the multifamily investment market is more than holding it's own in both performance and cash returns.  Occupancy is up but collections are as well washing each other out.  Surveys indicate that the multifamily investment is capable of high returnswhile maintaining its value better than most other real estate investment options.  Even out pacing the NNN properties. 

Thank goodness for the Fannie and Freddie Multifamily programs as the backing has kept something going in real estate for both agents and investors.  More than a leap of faith, it's actually making a profit.

Refinancing is taking a large percentage of the business right now. Multifamily investors are becoming a bit comcerned over bank balloon notes and calling more often. 

No one is able to predict how the banking industry will be handling maturing notes.  What we do know is they want deposits right now and not risk.

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It’s hard to feel sorry for someone who makes a $24B mistake.  Wachovia’s former chief Ken Thompson was quoted as saying “It’s a dream come true” when the bank came to an agreement to buy Golden West in mid 2006. 

Golden West was a well known thrift that had been around for some 20 years in the western markets.  The empire was built almost solely on one product known as an “Option ARM” or “Pick a pay”.   In fact, 99% of the mortgage portfolio was this one program.  But they had branches and deposits that evidently blinded Thompson.

Golden West was the baby of a Herbert and Marion Sandler.  The Sandler’s were made famous recently in a skit by Saturday Night Live.  The Sandler’s reaped a profit of more than $2B on the sale. 

There was a lot of housing bubble talk in mid 2006 and accusations after the agreement that the Sandler’s were selling out knowing their portfolio was going down the tubes.  The talk was dismissed as a “bunch of garbage”.

An old time banker like me could clearly see that times were a changing and borrowers were becoming more and more stressed.  Although no one predicted a complete meltdown, the riskier mortgage products were going to be in trouble. 

What really peeves me off is the need for taxpayers to shoulder the burden of such outrageous decisions made by so small a number of people.  Ken Thompson was the driver of the deal for Wachovia eventually writing off more in losses than they paid for Golden West.  And the portfolio is still losing money today.

Of course, Wachovia wasn’t the only bank who made a disastrous entrance into various mortgage markets but it illustrates the stupidity that created such a huge meltdown.  Now the once 4^th largest bank in the nation will be just a memory and a mistake the tax payers will pay for.

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Wow, it’s been a wild ride this year so far. Multifamily investments and performance are all over the board depending on which survey you read.

One thing for sure is a real slow down in purchases most likely caused by the presidential election. Multifamily investors reap great benefits utilizing aggressive accounting strategies so any discussion among candidates about a tax increase generally slows down the purchase market.

Surveys have indicated that rents have leveled off for most areas. I think this is fair to say. It’s always more difficult to raise rents in this environment. However, demand may increase as more borrowers are turned down. Overall costs of maintaining even a rental home is more than many want to take on in money or time.

Most surveys reported that expenses are going up as well. I hope no one actually got paid for that survey result. That’s sort of “duh”. A lot of wholesalers and energy suppliers have imposed increases due to the energy costs. Is anyone going to lower them now that their energy costs are actually lower?

Long term results of the surveys all pointed to multifamily investments being one of the best to purchase or own. I agree with that if for nothing else, investors can’t buy investment that is as highly leveraged as multifamily.

Vote for somebody on Tuesday!

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I read a couple of articles that finally made me feel a little better about all the bailout talk and shenanigans going on lately.

If you are a home owner and fall behind in payments, you may be eligible for a new fangled program. If you are a home owner who struggles, makes tough decisions like not going to the doctor but make your house payments on time, you are out of luck.

The banking industry knows full well the next huge issue for them will be credit card losses. These losses cannot be blamed on anything or anyone except the lending decisions banks made to earn more profits. Consumers took to the cards sort of like the lottery. Can’t blame an alcoholic if he drinks the beer you gave to him can you? Then again, some can blame him. It’s his choice. No one made him drink.

So there is some ground swell to having bailout money set aside to enable the banks to forgive a large portion of the credit card debt consumers currently owe. This is not as simple as it may seem either. Any forgiven debt is actually considered taxable income so the IRS must sign off on the deal as well.

Forgiving the debt would help the consumer with a new start and option rather than adding a new bankruptcy stat and foreclosed home. It may be on my tax payer back to make that happen but we have bailed out some really rich folks this year. Can't say we have really bailed out the consumer yet that I can tell.

The credit card debt is on the minds of banks big time. And will further delay the economy and improved banking health if not addressed soon. And you know if the industry has introduced the idea, there is a lot potential losses coming out later about it.

A happy banker beats the heck out of an unhappy one. Just ask the Feds.

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Capital One - $3.55 billion
SunTrust Banks - $3.5 billion
Regions Financial Corp. - $3.5 billion
Fifth Third Bancorp - $3.4 billion
BB&T Corp. - $3.1 billion
KeyCorp - $2.5 billion
Comerica Inc. - $2.25 billion
Northern Trust Corp. - $1.5 billion
Huntington Bancshares Inc. - $1.4 billion
First Horizon National Corp. - $866 million
City National Corp. - $395 million
Valley National Bancorp - $330 million
UCBH Holdings Inc. - $298 million
Washington Federal Inc. - $200 million
First Niagara Financial Group Inc. - $186 million

Some of the banks are not failing, just propping up capital reserves.  A couple intend to use the funds to purchase "ailing banks".  A couple are a bit shaky.  If your bank is on this list, it's actually a good thing.  The Feds have declined a few banks borrowing needs and those will most likely be on a short list which is not a good thing.

Lending money to banks to buy out smaller troubled banks may be a good idea.  Saves the FDIC reserves and earns a little bit of interest for the Feds.  That point ought to be disclosed though but any negative news on failing banks regardless is always top secret.

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