Showing posts with label bank bailouts. Show all posts
Showing posts with label bank bailouts. Show all posts

Thursday, June 11, 2009

Banks not participating in Recession


Bill English wants customers to "take banks to task" a nice attention grabbing headline and politically expedient but as I have found, my bank just isn't listening.

I mused a few months back as to why banks were not participating in the current recession, coming to the party and giving New Zealanders a break, considering taxpayers are now guaranteeing their own banks.

Lets face it, gone are the days when your bank manager knew your name and cared about the service they gave you and it seems even when it counts the most, in dire economic circumstances not seen for 70 years, they simply bury their heads in your money.

My bank's approach to the recession and what effect it might be having on me is to sack its staff, to make we wait longer in a line of other disgruntled sheep, falsely ask me at the counter what will I be doing in the weekend, ask if I want to buy insurance and then continue to punish me 25 bucks a time if I forget to have sufficient funds in my account when an auto payment is due. Its kinda like Robin Hood with a smile, except the taxpayer is paying for the arrows.

Short of forcing banks to play their part, and we don't want that, it seems the only pressure that might work is pressure from every bank customer on their bank manager.

The likelihood of that happening from the average passive Kiwi consumer is less than Lynda Carter coming back and playing the lead role in the new Wonder Woman movie.

It is worth a try though.

*Cartoon from Emmerson


Banking @ Share Investor

Bank Guarantees: Time for banks to return the favour

The Return of Bryce
Banking Madness!

Discuss this topic @ Share Investor Forum



c Share Investor 2009


Thursday, July 17, 2008

Not so sweet Fanny Mae

The Fannie Mae and Freddie Mac saga is big by world standards.

Trillions of dollars of mortgages are involved, in fact the firms between them own or guarantee about half of the $12 trillion in U.S. mortgages.

I asked a question about 6 years ago, what would happen if these two institutions tipped over? This was in the light of many US companies involved in "accounting irregularities" at the time and that Fannie and Freddie was a possible inclusion.

The immediate cause of the problems that became public at Freddie Mac in 2002 appeared to be accounting properly for the use of derivatives, what Warren Buffett has called "financial weapons of mass destruction". Under the previous accounting procedures, income for the years 2000, 2001 and 2002 was understated, with income for the future overstated. Freddie and Fannie management decided that this method would be used to “smooth out” earnings, providing reassurance to financial markets and leading ultimately to lower interest rate costs.

The President of Freddie Mac was sacked for his part in the company's "accounting problems".

While assets of the 2 big macs went up in value, via customers house prices, there wasn't a problem, but as the sub prime saga unfolded property prices were hit and Fanny and Freddie now have a big cash flow problem. They are essentially insolvent.

I now know the answer to my question and it ain't a pleasant one to stomach, especially given the problem was painfully evident years ago.

These entities will probably go under without US taxpayer funds being pumped into them and the current credit crises that the business and financial world is experiencing will get considerably worse and there would probably be a contagion effect with other banks going under. The derivatives market upon which most of Fannie and Freddie's business is backed, would unwind and explode upon other financial institutions holding theses derivatives as assets, some of them the ones we have already seen in the news and some we haven't heard from yet.

As the planet is facing tough economic times at present, for Fannie May and Freddie Mac to go under would no doubt cause a massive recession the likes of we haven't seen in generations so one could understand why Henry Paulson and the Fed are looking at bailing these turkeys out.

But, and its a big giant butt, why should the US taxpayer have to bail out even more financial institutions, this time possibly to the whopping tune of US$1 trillion?

The answer is that they will take the rest of us down with them if nothing is done. Hard to stomach, given those that didn't binge on cheap debt and over spend, were not the ones who took the risks in the first place but will suffer anyway.

In New Zealand our mainstream lenders haven't been as reckless, however, the present Labour government wants to start our own sub prime lending, so it could be a problem for us in the future.

Kiwis would be affected indirectly though by a collapse of the two macs, so it is an important story for New Zealand and every other country because a collapse would affect our fragile economy and faith in markets, lending and business even more than it already has.

The bizarre thing is though, while we have been flooded with Tony Veitch and Winston Peter's stories, coverage by our local media over Freddie Mac and Fannie Mae has been largely relegated to small pieces in the businesses pages and biz segments on TV news, not in the mainstream news, where it clearly deserves to be.

Confidence in the economy is much needed right now, Fannie and Freddie have knocked it about again. What Henry Paulson does in the next few days is going to be the difference between a complete meltdown and the status quo.

Unfortunately, I fear there are more Freddies and Fannies to come.

That just ain't sweet.

Related Share Investor Reading

Global credit squeeze: There is no free lunch
Lenders must come clean over losses to restore faith in credit markets

Global Market meltdown: What is Warren Buffett doing?
Credit crunch a blessing in disguise
Market meltdown: I can smell the fear from here

Mr Market gets his groove on
What happened to risk?
State backed Sub Prime mortgages in New Zealand
The global economy looks bad now, but wait theres more
NZ Sharemarket set for a Winter and Summer of discontent


Share Investor Forum -Discuss this topic

Related Amazon Reading

The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles R. Morris
Buy new: $11.86 / Used from: $0.01
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c Share Investor 2008