Mortgage Secrets…Learn What the Experts Say

The Bush Administration including Treasury Secretary Henry Paulson, Federal Chairman Ben Bernanke, and FDIC Chairman Sheila Bair announced a plan to use $250 billion of the $700 billion financial rescue bailout bill recently passed by Congress to buy directly into American banks.  The government will begin by buying stock in nine of the largest banks including Bank of America, JPMorgan Chase, and Citigroup.  This is a very good idea and we continue to be impressed with the efforts of the government to stabilize the financial markets.  As we have talked about, the over leveraged banking system is mostly due to accounting regulations.  As losses are taken, it reduces (on paper) the net worth of institutions, which then see their ratio of loans to capital skyrocket.  The only ways to deleverage are 1) to sell off the loans - and in this market, that means at “fire sale” prices, which add to losses. exacerbate the problem, and this is why we are where we are.  2) To raise capital.  But it is hard to do in this market.  So the Feds plan today says they will buy non-voting or preferred shares.  This is a way to help banks raise capital.