Oct

Why The Financial Bail-Out Was Signed Into Law

Financial Observer on October 4th, 2008

Okay, I must admit that this bill would not have been my first and best bill from any Congress. I really don’t care for big government or the $700 billion barn burner that passed today, but it needed to be done.

Somehow, some way, the Feds needed to shore up the American economy, by providing banks some kind of backstop against the bad mortgage paper in the financial market.

One area where the pundits had it wrong these last two weeks is that the bailout was designed not to backstop the greed and corruption of Wall Street, but the greed and corruption of predatory lenders on Main Street USA.

On the bill’s first pass through the House of Representatives, the bill was shot down, because the American people were pissed that they were being asked to bail out Wall Street. Granted, Wall Street was going down in flames, and now we have no U.S. based investment banks left in the marketplace and billions were lost by the investors who had invested in these great institutions. But, Wall Street’s only blame was for having bought bad paper from Main Street Banks who had taken advantage of their customers, writing bad loans and selling loan packages full of bad paper to Wall Street.

As described in our previous post, the financial catastrophe that nearly sent the global economy (foreign banks own a lot of American debt, so our problems would have rippled through the global economy in days) into the next Great Depression (it is not that much of a stretch to suggest that) was affecting Main Street USA in a desperate way.

Banks could not risk loaning money to each other, and as such, many of the biggest banks in the country and many of the smallest were teetering on the edge of bankruptcy. Some of the banks fell, and others are breathing a great sigh of relief tonight.

But the problems in Main Street USA banks - the lack of trust between lending organizations - was negatively affecting the entire global economy:

Banks were unable to sell their loans in packages to other banks and investors, because no one knew how much bad paper was in those loan packages.
Since banks were unable to sell their paper to others, banks had to tighten up on all lending, because many were pushing against the asset / lending ratios dictated by the U.S. Federal Reserve, which regulates all banks in the United States.
Since banks were holding all of their own paper, other banks worried about how much bad paper their neighbors held in account. So banks began withholding money from each other.
As banks felt all of these mounting pressures, many had to turn away their lending customers. Sonic Restaurants had their credit line closed. Then McDonald’s Restaurant had their credit line closed. And if government had not taken any action at all, one of the largest corporations in the world General Electric could have fallen, as they had their credit lines drying up too.
Banks and major corporations rely on a multitude of short-term loans to ensure that payrolls can be met and product purchases can be made. Without freely accessible capital, businesses would drop like flies, dead where they fell.
Once again, this mounting credit problem in the United States could have bankrupted Main Street banks across the country, and it could have bankrupted the businesses that keep Americans working. The auto industry has been facing this crisis for more than a year, as banks could see the writing on the wall, and they were refusing auto loans across the board for everyone except those with double-A and triple-A credit ratings… and some of those triple-A’s were being refused loans as well.
As employers failed across the country, Main Street USA would have found itself standing in unemployment lines that would stretch for blocks.

As this chain of events illustrates, this $700 billion bail-out was ABSOLUTELY necessary, even though we all wish it would never had come to this.

Right now, Wall Street is America’s favorite dog to kick, but Wall Street’s only blame was in trusting that Main Street Banks across this grand country were doing as they should have done. They were trusting that the people who had bought homes could afford to pay for those homes, as it is the banks responsibility to ensure that people can pay back their loans.

Personally, I feel that it is an excellent idea for banks to be able to sell their mortgages in order to replenish their financial assets to fuel more lending.

Where the problem begins is when predatory lenders on Main Street USA can loan money to anyone under the sun and then sell that bad paper to someone else. Once the bad paper is sold to another, then the predatory lender is no longer responsible for having made bad loans, because they have passed the buck and the bad paper to someone else.

The predatory lenders in your town and in my town have preyed on the innocent, who simply desired to buy a home, and they preyed on the investors who were willing to invest in those mortgages.

And as the recent two weeks illustrates beautifully, the predatory lenders get off scott-free and get to dodge any blame, because the American people love to kick the rich and the Wall Street tycoons who were unfortunate enough to buy large portfolios of bad loans from predatory lenders.

It really is too bad that those lenders in your town and my town got the opportunity to take advantage of so many and then to successfully dodge the blame for their bad behavior. Now, you and I and everyone else on Main Street and Wall Street are going to have to pay the price for predatory lending, because honestly, if we had chosen not to support this bail-out of the American banking system, we would have met a financial meltdown more full and more crushing than the one felt by our grandparents just eighty years ago.

Your Financial Observer

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