Recently there was a letter sent to the Bernanke from several sitting Senator regarding YSP or Yield Spread Premium. As per the new 2010 RESPA laws the YSP issue no longer exist yet several sitting Senators felt the need to send the letter. Is anyone paying attention? Obama came out this morning and gave a sound bit speaking about Wall Street and the Big Four. The Big for being BofA, Wells Fargo, Chase and Citibank. So what did Obama say and is he out of touch?
For those of you that have spent anytime in a family law court room you probably felt that you are getting the truth as Obama sees it just as I. That is not meant to slam Obama but rather to point out frustration showing from Obama. What Obama is not telling us is how the FDIC protection offered to the Banks has Obama’s hands tied. So Obama is much like a kid that gets mad, picks up his toys and goes home. Obama is taking the approach that he will break up the big four if they do not do what he wants. This is a very dangerous statement and issue that everyone should be watching closely. We would not have these big banks if they would not have been allowed to take over the so called failed banks. Where is the Banking Czar and why isn’t this person talking?
If you look back at the begining of the mortgage meltdown the first major to go down was Lehman Brothers. Lehman Brothers was not a traditional bank like the big four. Lehman Brothers was an investment bank. Does anyone remember when banks were unable to offer investment opportunities? The original banking model did not allow for banks to offer investment opportunities as in stocks. If you wanted to invest into the stock market you had to use a stock broker such as Merrill Lynch, Lehman Brothers, Charles Schwab, ect. The risk was increased with the relaxing of these regulations. Or at least this is what Obama would like us to believe.
The problem is simple and easy to fix but the Obama Administration and most in Congress can not see it. The troubled assets problem, aka first stimulus money, was granted 700 billion by congress just as Bush was going out. If you recall Bush did put 350 billion of this money to work and left the other 350 billion for Obama. Obama asked for and received an additional 800 billion for a total of 1.150 trillion dollars for which most of us have no idea where the money is as no one can really tell us. Also Obama changed the rules on the 350 billion that Bush sent out before Obama came into office. Sucks when the rules change midway in a game doesn’t it?
The rule change only clouds the water but the real issue still remains. The Fed’s offered FDIC insurance coverage on Fannie Mae and Freddie Mac Securities which covers 85% of the securities face value. So what does that mean? To keep it simple, a bank funds a loan for Joe Homeowner for $400,000. The FDIC is on the hook for 85% or $340,000 of the principal amount. That means that the bank is taking a chance on only $60,000 dollars of the principle $400,000.
Now that you have the concept of the FDIC problem think about the real estate market. Home values have fallen more than 15%. In some cases they have fallen as much as 70%. So this becomes a mater of business sense which is unpopular for politicians’. If a bank had to give up the FDIC coverage and modify home mortgages then their balance sheets would drop and their “liquidity”, remember this word as Obama is going to drive it into the ground, would be a dangerous levels as per the FDIC. This could allow the FDIC to come in and take over a banking institution just like IndyMac, Countrywide, Washington Mutual and so on.
So again it becomes a business decision made by the Banks. The Fed’s are the ones now caught with butts in the ringer here. The Bank’s are private business and the Fed’s can not and do not have the right to force the Bank’s to make loans to anyone. So what can a Politian do in this case? There are only three options here, first do nothing, second continue to find a workable resolve that is equal for everyone and third dig in and fight. This third option is the course of action that Obama has chosen. Obama is now taking on a fight that he can not win. Wall Street is way to big even for our own Government to take on.
Wall Street is nearly all of us. Social Security must have Wall Street. MUST HAVE IT! I can not make that any clearer. The baby boomers are approaching retirement age and Social Security can not support them without Wall Street. Still do not understand. How much money do you think is invested in Wall Street through 401K’s? This is where the short fall of funds is going to come from. Taxes imposed upon 401K discernments. This tax is enormous and for most of us unrealized. The tax savings and money earned for the life of your 401K is unlikely to match the Tax that will be imposed. I would estimate 99% of everyone 401K out there will loose money even if they show earnings of 18% over its lifetime. Remember 401K’s are tax deferred not tax exempt. Taxes in the future are only going to be higher than they are today.
So can Obama win his fight against Wall Street or the Banks? No, he has no chance of winning. It will make him popular with some people. Those of us that pay taxes will begin to hate him regardless of party lines. So what is the answer? The answer is the same as it was back in 2007. We have to address the negative equity issue and until then everything else is academic. I have made several suggestions on how to get the people working. This will begin the money changing hands process. To get the banks loaning again is simple but the Fed’s have to own their part in the mortgage meltdown too. I am happy to see that the “Bad Brokers” have gotten some vindication in all of this.
If the Obama Administration should ever need some help with this matter my entire office staff is available and at a much considerable cost savings from your current staff. I know I can get the system working again and with reduced risk as this is our life. We understand the Banks and what the People want. Isn’t that what the role is in this situation? Stop the in fighting and let’s get to work. Contact me.