Wednesday, February 11, 2009

Banks Of America

Banks Of America
Today was a special day for the heads of major Banks in the US as they had to march to the capital hill to answer the law makers, on questions regarding the
financial crisis they are widely believed to have created. All the major bank heads, including citibank and Bank Of America were grilled by members of the
congress on their past practices and future plans. Future plans would be their plans on how to make more money from the tax payers money they just borrowed
as part of the TARP (Troubled Asset Recovery Program) funds. Couple of days before, this time across the Atlantic in the UK, the Bristish Bank majors were
grilled in the House of Commons. The meeting became famous after all the bosses mentioned the word "sorry". Recently the Pope had to ask for "sorry" too, may
be that is why the Banking bosses too felt asking for "sorry" could probably be divine. They would be alright, as long as the government doesnt ask for the
money they took in previous years in compensation packages, when their institutions were going down in value and making bad acquisitions.
Banks in the western world were always considered to be more customer friendly and are well known for generous loans and business practices. These were signs
of economic progress and nation building. The credit history of individuals were monitored closely, and the credit worthyness of the borrowers were more
often done correctly. The technology was always there to help them do this. They invested huge amount of money in information technology, and revolutionised
the way banking worked. if you had seen any Banks in south asian countries, which are mostly developing countries, the physical structure would be a shaddy,
dim place. its mostly government owned and operated in the lesser scale of attractiveness. On the other hand, the banks in the west were operated as
corporate entities and had huge structures, investments on their offices, massive investment in advertising. Its a altogether a different kind of entity.
Charlotte, North Carolina remains the biggest city for bankers in the US. Both Bank of America and wachovia have their head quarters in charlette and a
casual drive in the city would give a glimse of how big they are, and how much they own. They own not only huge skyscrappers, but also football grounds. They
are really really huge than any corporations in the world.
As the saying goes, when things are good they are really good and when things are bad it may be really be worse. American banks in the last decade gave loans
to potential house buyers. As the interest rate was kept low artificially by then treasury chairman Alan Greenspan, there was an artificial boom in the
housing industry. After the tech bubble burst in the 2000/2001 period, the Government wanted to boost the economy. It was the housing that the government
started encouraging, in the name of increasing the home ownership across the country. The housing boom in the past 4-5 years has been in effect to get over
the hangover caused by the tech bust. As the banks started lending to boost housing, the lending standards came down as the years rolled on. Fannie Mae and
Freddie mac is a government sponsored entities (GSE) that was partly owned by government and the private investor to facilate funding for banks. They are the
intermediaries between the banks that do the lending and the private investors who would like to fund it. The Banks make a profit for the investors on the
mortgage lent. So basically the bank increased lending with the help of these institutions. More and more they lent, there were more and more investors
willing to fund the bank hoping for higher returns. GSE companies sold these mortgages to investors as Mortgage backed securities. These are securities
created by the system to fund the mortgage industry in the US. These securities were sold all over the world in multiple forms. They were in turn sold over
and over again across the world. Investors mostly where soverign wealth funds and banks in other countries which were sitting on top of lot of money
depositted by their customers in their respective countries. The House prices in the US started climbing to historical levels across the country. Mortgage
were available in plenty and ordinary people pounced on the boom, hoping to make some easy money. The bubble started to grow and grow until it burst. During
the boom period Banks relaxed their lending standards so much that they began giving mortgages to risky borrowers. The money lent to risky borrowers are
usually referred to as NINJA (No Income No Job or Assets) loans. This was caused because of increasing competition among lenders to grab the market and the
value of properties which kept on raising. There became a general view that the real estate market would not come down. Much of the buyers were tempted by
AMR (Adjustable Mortgage Rates) by lending companies. Here, you pay a low interest for the initial period and the repayment rate increases after a period of
time, drastically. This would come with a very low or no downpayment and the ordinary customer was ready to take the risk. After all he doesnt loose much, as
he thinks he is going to make a big sale out of it, and would eventually cash it after the value of the property rises in value. There are also allegations
that the people who worked for lending firms, sold AMR lending to buyers, without explaining the risks they might face in future when things dont work well.
This went for quite a while and the housing bubble burst with the subprime borrowers defaulting to pay. what started as a subprime crisis moved slowly to the
wider mortgage industry, and as of now there is a full blown housing crisis. The value of homes are going down. There are more houses in the market than
people willing to buy. The gradual increase in unemployment has checked the house affordability of people and foreclosure has become common. People who
bought houses during the peak of the boom, have come to realize that their houses are no longer worth the money they bought it for. To avoid further loss on
their income, they simple go for foreclosure or just walk away, defaulting on loans. Lots of AMRs are up for reneawal as the years roll on, and the crisis
could get only worse.
In the whole mess, banks were caught naked. The loans started defaulting, and the mortgage backed securities, which once was considered a safe haven was just
running for cover. Except the name there was absolutely nothing "secure" about that. Huge capital in hedge funds and money market securities started
collapsing at the weight of the subprime crisis at the start, followed by the mortgage industry in general. GEC companies started to loose values as their
exposure to bad loans surfaced in the market. Fannie and Freddie fell from their peak of $40 to meare penny stocks. A huge sum of money was just lost by
these GSE. The government has to finally step in to save these firms to avoid further damage as they owned or guaranteed half of total US housing. The demise
of fannie and freddie stocks made inroads to the real economy. With Bear Steans collapsing in the March of 2008, the market assumed it could be a one-off
case. JP morgan bought it for a throw away price. When everything was seemed to have controlled the next big upset came in the form of Lehmann brother
collapsing fully on September 15 2008, after the market came to know of its enormous exposure to mortgage securities and their shares plunged. Merryl Lynch
was acquired by Bank Of America the same day. It was a sad day for those corporate giants who had ruled the corporate world for decades. When they came down,
it was just like the titanic, the legacy wasnt going to save them.
Until September, the Banks were considered relatively doing ok, but the stock holders started to lose confidence in the banks and went in for huge sell offs.
Banking stocks took a huge beating in the last quarter of 2008. Bigger names such as Washington Mutual (well known as WaMu) and Wachovia had to lose market
value so fast, that the government had to step in to save them. WaMu was bought by JP Morgan and Wachovia went to Wells Fargo, after a bitter competition by
rival Citibank. The largest US Bank lost the battle for buying Wachovia to Wells Fargo only to later realize that they wouldnt survive either. Being the
biggest US bank in the world, the government stepped in to save it one more time. Next the Citibank was Bank Of America, which was considered relatively
safe. But there was always skepticism in the Market, since their deal with Countrywide. Any one who would have watched television in the US in the last few
years would know, what country wide is. They were the largest mortgage lenders... remember the guy in the AD saying, 'No one can give you what countrywide
can give, because we are the largest mortgage lending company in the country". The deal was always in a sea-saw, and Bank Of America had threatened to walk
away from the deal many times. Bank Of America bought countrywide after countrywide started failing and was unable to re-pay the bank's loan. Most loans
given through countrywide were bought from Bank Of America. Before they could digest the countrywide deal, they were forced to buy Merry Lynch by the
government in september immediately after Lehmann Brother collapsed. The Government guranteed some of Merryl's loses and bank of America was basically forced
to be patriotic. Struggling with two huge deals, Bank Of America soon realized the Merrly Lynch deal was so toxic, and it had more loses than it was
initially thought. It fired John Thain, who made that deal and has also threatened to walk away from deal. But the Government has backed it to avoid market
So, as of now, most big banks are not doing well and are in emergency units, only to be taken care by government. these Huge Banks and its executives were
supposed to be the masters of universe months before, and the tide has changed now. There are about 10,500 FDIC insured banks in the US. Almost ninety
percent of the deposits are with the top few banks. John Thain has made his money and walked away in spite of spending 1.2 million on his office, when the
company was in dire loses. The loses made by people like him is now in the hands of the government as there are no takers. The whole banking system has
collapsed in the western world as a result of this. The boses of these firms have almost nothing to defend. The people's representative are asking questions,
as why did you give loans to subprime borrowers, and immediately following up with another question, why are you not lending the TARP money to borrowers now.
Its a poor state of affairs.
Historically, banks were not supposed to be for profits. Just think for a minute that there were no banks in the world. People have to carry money in their
pockets or have it in their home. This was risky as it might get stolen or they may be lose it. So banks were created so that, people could keep their
belonging, money - safe and get it as and when its needed. This is how the initial banking system should have started. Over the years innovations came in and
as the human civilisation started maturing it was used for other purposes as well. Now the banks in the west has reached a point where "making more money"
has become the primary responsibility than to "preserve" customers money. Too much innovation in the money market has brought about negative climate to the
financial system. Usually when the government owns a entity and its being privatised, private people rush to buy. it might be a loss making entity, but still
the private ownership wants to buy it with the hope that it can run it for profit as the whole infrastructure already exists and all it had to do is to do
good management. On the contrary, the banks of americas are up for sale and no private buyers are willing to part their money on it... which is left out :
only the government (poor guy) steps in to buy it. its a low end of greed in private sectors, and lack of responsibility on those people who managed it. who
is to blame for this? The government, i would say. it should have regulated at the right time. Bubbles will burst and even the mighty banks are no exception. As Peter Schiff out it, When a
teacher leaves a bag of chocolates in the class for a sometime and is back to see all the chocolates are eaten by the students.. who do you blame... can you
blame the kids for eating them? Of course the teacher who left it there.

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