Banks ask Congress to fill a $3 Trillion Hole

"Watch that first step, Doc. It's a lu-lu!" - Bugs Bunny

How much trouble are the banks and financial companies in relation to this housing bust?

In my previous post I demonstrated how they essentially milked out all of the equity Americans have in their homes through their fruadulent and corrupt lending practices.

In summary, back in the 90s Americans had $10 trillion in housing wealth against $5 trillion in mortgage debt. During the height of the bubble both numbers swelled to $20 trillion and $10 trillion respectively. We are now on the downslope and it will end with $10 trillion in housing wealth being backed with $10 trillion in mortgage debt.

However, it's even worse for the banks. Because 30% of the houses in this country are owned outright. This means that the endgame, is that there is $10 trillion in debt held against $7 trillion in housing wealth. The fact that the mortgaged housing stock is still "valued" at $14 trillion doesn't matter because it's shrinking every day (last month national housing prices fell almost 2%, that's $400 billion in housing wealth up in smoke).

This is what is making the banks and financial companies crap their pants. They know that $3 trillion of what they are holding is almost certain to default. Once people have lost all their equity, they'll have very little incentive to stay in the house (especially if rents are cheaper). When you also throw in the fact that we have millions of "homeowners" who never put a penny down on their homes and the debt slaves who HELOCed and Refied all of the equity out of their house these past 5 years, you have a very, very big problem.

But wait! The problem is even bigger. You see many of these banks and financial institutions went out and used this debt as collateral to leverage up their portfolio by 20 or 30 times! So one bank could have $100 million in mortgage debt receivables on their books, but they could have used that to borrow $20 - $30 BILLION more. What did they do with that money? Well they bought more debt instruments: like CDOs or US Treasuries, or Agency debt.

It was all supposed to be very safe. But when you have leveraged yourself to the hilt, a tiny move in the wrong direction (if you're leveraged up 20 to 1, it only takes a 5% move to WIPE YOU OUT!) can send you to bankruptcy very quickly.

If you want an example, look at the Carlyle group and Thornburg Mortgage. They both overleveraged their positions, the value of their collateral dropped by a small amount and generated huge margin calls. Both of these companies have been unable to sell their debt securities (because the debt markets have been frozen for months and they continue to deteriorate), so both of these companies are both going to evaporate.

Poof! Like magic, they will disappear forever.

So now these big and powerful financial firms, who made hundreds of billions of dollars on the way up are now begging the government to fix this.

The only problem is, the hole is too big!

Both the Government and the Federal Reserve are doing everything they can to try to fix and unfixable situation. In the entire history of our country (that's 232 years) we've only now been able to accumulate $9.4 trillion in debt. Now the bankers and financiers are looking for a $3 trillion handout to bail them out of their own greedy stupid mess that THEY CREATED! Shoot, the annual Federal Budget is $3 trillion!

Look at some of the crazy proposals out there right now:

• Ben Bernake wants lenders to REDUCE THE PRINCIPAL of mortgage balances for people that are underwater. I talked about this in a previous post on Debt Negotiation - THEY WOULD NEVER EVEN CONSIDER THIS UNLESS THE SITUATION WAS BEYOND GRAVE AND THE ALTERNATIVE (MEANING LET THE HOMES GET FORECLOSED ON AND TRY TO RESELL THEM IN THE OPEN MARKET) WOULD END UP COSTING MUCH, MUCH MORE!


• Congress is proposing tax credits of $5,000 to $15,000 for people to buy a home. Personally, I'm waiting for a bigger tax credit before I would buy.


• The Federal Funds rate has been reduced from 5.25% to 3% in less than 6 months and it will probably be dropped another 0.75% next week, even with inflation and commodity prices soaring and the dollar depreciating more than 10% since they started cutting interest rates!


• Fannie Mae, Freddie Mac and the FHLB have all had the limits raised on conforming mortgages. So now a conforming mortgage can be up to $729,000 in some parts of the country (so much for helping the poor afford homes).

Sorry, banks. You created a problem that's too big to fix. Everyone sees that all of these proposals don't help homeowners, they help the banks and financial institutions that created this mess.

Just look at how Agency debt from Freddie Mac and Fannie Mae have been tanking since they raised the loan limits. Everyone knows that this is just a ploy to allow companies like Merrill Lynch and Citibank to pawn off their toxic debt onto the government (meaning, us taxpayers). No one wants to come within 100 yards of this toxic debt! In the meantime we have to suffer with higher gas and food prices (along with everything else) just so they can keep their game going until at least after the election in November.

It won't work, and I don't think they can hold this thing together for another 9 months, but that's just my opinion.