So how will the extra money help?

There is a run on the banks and other financial institutions as people try to escape from the funds that invested in these shaky mortgages. These financial institutions need cash to pay off the people who are withdrawing. Unlike a mutual fund, they cannot ask a person with a 30 year mortgage to pay up early (where as a mutual fund can simply sell some of its stock). The situation will eventually calm down. Not everyone will pull out. The banks will earn money from other deals, so they will be able to pay the loans back.

-john-

Bigger banks have all sorts of way to make money, ticky tack service fees, card usages fees, overdraft fees, credit card interest, car loans, commercial loans, all sorts of insurance and fund fees, etc etc.

Brokerages and smaller banks are more exposed to credit crunches I wonder if the infusion of money will allow the bigger banks to become even bigger because they can buy these at-risk-of-default loans and absorb them more handily and find more numerous ways to offset the defaults...

Would now be an excellent time to think about holding a big bank stock/fund (that also pay dividends) in a portfolio because they would appear to be cheaper to purchase at this time?

So the assumption is that they still have a positive cash flow even after taking on these extra emergency loans. How long do they have to pay back these emergency loans? At what interest rate? What would happen if the loans were not provided? Can this money properly called a "bail out"? It seems to me that borrowing this "emergency money" in order to keep their investments in play will be very profitable to them...

I'm wondering why the government is so quick to send money to banks that made risky investments in providing these loans, but not willing to send money to individuals who made the risky move to accept the loans.

What is the definition of a "bail out"? To me, it would be providing funds to keep a bank or institution from going under and closing. That isn't the case here. If the government didn't step in, the banks would have two options. First, they would freeze these accounts, and not let people take their money out. That would give the situation time to settle down. Second, they would tighten up on lending to try to preserve capital. That means that folks could not get their money out, and businesses would not be able to borrow to operate and expand. These are bad for society as a whole, so it is proper for the government to step in and help smooth things out.

A bail out also seems to me to be a gift. Again, this is not gift money. It comes from the fed system. It has to be paid back, and it does have an interest rate. I think I heard 4%. That is about normal for fed funds right now.

You don't want to set up another welfare system, and we certainly do not want to pay people for being dumb.

-john-

Have you ever seen the movie "It's a Wonderful Life"? At one point, there is a run on the savings and loan. The savings and loan stayed open only because Jimmy Stuart had enough cash to pay off people that want to withdraw their money.

These days, the Federal Reserve is the source of cash. It lends money to banks who have sudden withdrawals beyond the usual day to day operations. This money is not lent to the banks to cover risky investments, it is lent so they can pay their depositors. These loans are temporary and made at the Fed funds rate, currently 5.25%.

Increasing liquidity is the usual response to almost any financial crisis. They did in the 1987 crash, the 1998 Long Term Capital crisis, 9/11, and now.

-- Doug

John's answer may be right, but I think there's more. Liquidity has dried up. So the next people looking to buy homes, even if they have adequate income for the mortgage they want, and loan to values that make sense (Think 'mortgage classic' 20% down, 28% of income going to the mortgage, and property tax) the money they should be able to borrow is not there. As I've referenced 'securitization' in the past, typically these loans were packaged and sold in large chunks, say $10M at a time, the conforming ones went to Freddie Mac and Fannie Mae, others were packaged into other grade notes, sub-prime among them.

The current crisis has dried up liquidity for even the good loans. I don't know if we are in for a general 'run on the banks', but I know mortgage money is drying up.

JOE

I fully expect that if a bank refused, or were unable, to give someone their money back, that would be tantamount to going under and closing.

All these foreclosures are bad for society as a whole too though aren't they? The government's decision helps the banks stay solvent, while they continue to foreclose on people.

I'm wondering though, if I made an illiquid investment (i.e. bought property) and found that I could not meet my other obligations because of that investment (which I *am* making money on.) Would you, or anybody here, think it's right for the government to give me a loan at 4%? (I have an 800 beacon if that matters.) What kind of security are these banks putting up?

Pay people for being dumb? No, I don't want to do that, just like I don't want to pay banks for being dumb.

I've heard these loans referred to as temporary from many sources now, what exactly does "temporary" mean in this case? Aren't all loans temporary?

Banks can over up as collateral any bond issued by the US government, agencies or government-sponsored agencies. This means US Treasuries, Fannie Mae/Freddie Mac corporate bonds and Fannie Mae/Freddie Mac/ Ginnie Mae MBS bonds. On Friday, banks mostly sent in MBS bonds. I guess if those mortgages default, the Fed will simply print up more money to replace it on their books.

The Federal Funds rate (FFR) is the rate at which U.S. banks lend money to each other overnight in order to meet their reserve requirements. The Federal Reserve sets a target for the FFR, which is currently 5.25%. Late last week, actual FFR was considerably higher than the target FFR, so the Federal Reserve engaged in open market operations, buying bonds from banks. When banks sell bonds to the Federal Reserve, they have more cash on hand to lend to each other, which lowers the FFR. The Fed's actions were consistent with the target FFR it has set.

The rate at which banks can directly borrow from the Federal Reserve is the discount rate, currently 6.25%. The discount rate is set 1% above the target FFR and is meant to be a "last resort".

The people in this thread have been guessing about facts that can read about in textbooks on the banking system and at the Wikipedia

The main purpose of the Fed to guarantee the "right amount" of money in the economic system for smooth business expansion. Too little and there is a credit crunch, demand inflation, and business decline. Too much and there can be bubbles and monetary inflation. Its more of an art to discover the "sweet spot". Some people complain the Fed acts too slowly, i.e when problems occur and not proactively.

Are we really sure there are "all these foreclosures"?

I read a short article by Ben Stein last week that I thought made a decent point. Here's the gist:

Subprime Mortgages account for 20% of all mortgages (even in the most heavily exposed states). Of those about 20% are reported as delinquent (4% total). Of those banks expect only half to go into foreclosure (2% total) and of those that do foreclose the liquidation of the property will recover 50% of the mortgage. That's only a 1% loss to the total market. Even if the delinquency rate doubled it would only constitute a 2% loss.

Is it possible we are over-reacting to a media scare that's really not a big deal? I also seem to remember a time when I wasn't constantly aware of the operational status of oil refinieries and how it would affect (or not affect) my gas prices.

Yes they do. I believe it's due today (monday) plus interests.

Stein reports 20%, NYT article, 15% subprime, and refers to subprime as loans to "people with weak credit histories." I am curious how the mortgages given to a good FICO scoring customer is categorized when it's an ARM with an interest only teaser. I don't know what ratios they used, but after the second adjustment, many are triple the payment than when they were written. Even a 15% loan to income blows up to 45%. So how many mortgages are failing that were never even booked as 'subs'?

JOE

So, on Thursday they didn't have enough money to meet their obligations. They were given money, and used it, then raised enough in three days to be able to pay it back?

Perhaps. Afterall, that is why it is called a liquidity crisis and not an insolvency crisis.

Xho