Banks facing down-turn: how much should the government/taxpayer be expected to do?

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In summary, the conversation discusses the ongoing financial crisis and the role of the government in bailing out banks. There are differing opinions on whether or not the government should intervene and what the consequences of such actions would be. The conversation also touches on the impact of the crisis on the housing market and the potential for increased regulation and oversight in the future.
  • #1
Schrodinger's Dog
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Ok this is becoming quite a hot topic and I'm sure most people have heard of the Northern rock fiasco? But do you think your government should step into bail out banks? And what sort of interest should they charge, to ensure the taxpayer is not forced to foot the bill? Clearly the banks suffering has knock on effects, but should we be giving businesses special treatment because they are losing money or even going under? What is the banks credit rating? :smile:

What should be done, and what shouldn't be?

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/04/17/ncrisis117.xml

Gordon Brown: Banks must admit the truth

Banks must disclose the size of their debts from poor quality home loans, Gordon Brown said on Wednesday night, amid signs that the impact of the global credit crisis may be even worse than suspected.


In a meeting with leading Wall Street bankers, the Prime Minister called on lenders to be more open about the bad debts that have created turmoil in the mortgage markets in the past six months.

Gordon Brown and Michael Bloomberg, the New York mayor
Gordon Brown and NY mayor Michael Bloomberg. Mr Brown urged banks to be more transparent

His intervention came amid fears that the banks are becoming more wary of lending to one another than even the official data suggest.

The crisis, which has left banks and building societies short of money to lend to home buyers, is now so severe that the Treasury is preparing to approve a multi-billion pound emergency loan package for mortgage lenders next week.

Senior officials are ready to agree the plan, whereby the Bank of England will lend billions of pounds to banks - secured against their residential mortgage portfolios.

However, critics said that taxpayers could be saddled with large losses if the housing market falls and the Bank ends up with the bad debts.

The developments came on another troubled day for the market, during which:
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• The biggest mortgage lender, the Halifax, increased the rate on its two-year deals by half a percentage point - one of the biggest single increases since the start of the credit crisis - adding £1,000 a year to a £200,000 home loan.

• The market for buy-to-let mortgages suffered a blow as 16 lenders, including NatWest, were found to have pulled out of the market - including four in the past week.

• A study by Equifax, a credit research agency, showed that half of all first-time buyers were considering pulling out of potential house purchases, which could have a serious impact on the market.

• Figures suggested that 150,000 home owners could have their properties repossessed this year.
 
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  • #2
Well, everyone who owned a home was happy to see housing prices escalating. Those waiting or hoping to buy a home were not. As far as I can tell, it was another case of irrational exhuberance, since too many folks expected home prices to continue to rise. Then too many folks took out 'home equity loans' to finance somewhat extravagant lifestyles. When I was in the UK over a year ago, I was shocked by the high cost of living and high price of real estate. Now it's time for the adjustment.

As for the banks, those that lended inappropriately and irresponsibly should be penalized. As to what that is remains to be seen. Certainly there needs to be increased regulation and oversight.
 
  • #3
Astronuc said:
Well, everyone who owned a home was happy to see housing prices escalating. Those waiting or hoping to buy a home were not. As far as I can tell, it was another case of irrational exhuberance, since too many folks expected home prices to continue to rise. Then too many folks took out 'home equity loans' to finance somewhat extravagant lifestyles. When I was in the UK over a year ago, I was shocked by the high cost of living and high price of real estate. Now it's time for the adjustment.

As for the banks, those that lended inappropriately and irresponsibly should be penalized. As to what that is remains to be seen. Certainly there needs to be increased regulation and oversight.

I agree, but that's my point, if the government is going to step in it shouldn't be at the expense of the tax payer, banks should have to pay appropriate rates of interest on loans, to cover the loss to the treasury. That seems fair. Also I don't have a lot of sympathy for those paying ridiculous prices for mortgages and the creation of negative equity, everyone knew this was going to happen. People who can't buy because banks refuse to loan money however I feel sorry for.

This is an as you sow situation IMO, banks who have relied too heavily on debt to finance themselves deserve everything they get IMO. Self inflicted injury.
 
  • #4
I heard recently (but haven't substantiated it) that approximately 125,000 homes in my state are at risk of foreclosure!

Apparently a large number of adjustable rate mortgages (ARMs) are schedule to kick into higher rates during May and June, and some officials expect a surge in defaults/foreclosures during the 3rd and 4th quarter in the US. So now is not a good time to buy a house, and probably won't be until 1st quarter of 2009.

I suppose also that the liquidity crisis will continue. The question then is have the banks written down all there is too lose, or is there more and how much more. That is what has the markets worried.

It's also complicated by the activity of hedge funds, and so right now no one knows the true impact (loss of wealth), and probably won't until it happens.
 
  • #5
An update, as of this afternoon, the government have issued bonds as collateral against banks lending to each other; these do not depreciate, ie they are index linked, crisis at least for the moment over...ish.

All I can say is thank de lord for fixed rate mortgages. :eek:
 
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  • #6
Schrodinger's Dog said:
I agree, but that's my point, if the government is going to step in it shouldn't be at the expense of the tax payer, banks should have to pay appropriate rates of interest on loans, to cover the loss to the treasury. That seems fair. Also I don't have a lot of sympathy for those paying ridiculous prices for mortgages and the creation of negative equity, everyone knew this was going to happen. People who can't buy because banks refuse to loan money however I feel sorry for.

This is an as you sow situation IMO, banks who have relied too heavily on debt to finance themselves deserve everything they get IMO. Self inflicted injury.
I'm confused by this. Are you under the impression the treasury gifts money to banks in trouble? If so that is not the case. The gov't lent money to Northern Rock (at higher than the market rate btw) and then nationalised the bank, they didn't gift it. Again when the gov't inject liquidity into the banking system they don't give the banks money they lend it but at a lower than the prevailing rate, the benefits of which theoretically should be passed on to the banks customers. Problem is the banks are being greedy and pocketing the differential.

Northern Rock were pretty hard done by really. They were screwed by the other banks during the interbank credit squeeze which allied with careless comments from the B of E and gov't ministers led to a run on the bank by it's deposit customers.

They recently released their results for the past year which showed despite the terrible press they received they made only a relatively small loss of £168 million (which included a write down in assets - £496 m and the costs of nationalisation - £51 m) vs year ago profits of £600 million; hardly a figure to drive a bank under.

Meanwhile the gov't who were a major source of Northern Rock's woes has seized the bank taking a multi-billion £ asset for free and so it is not the tax payer who is carrying the can it is the shareholders who have been stripped of their company.
 
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  • #7
Awww capitalism gone capitalist, pardon me if I don't shed too many tears. And no it was precisely the fact that the gov was using our taxes for a loan that they should have put a high borrowing rate on it, that and the fact that it's credit rating was appalling of course. :smile: I don't think anyone was particularly happy with the government bailing them out to be frank. Sink or swim, it's not our responsibility to bail out any business, if the banks won't lend then you sink, that's the way it works. Even the Bank of England shouldn't be expected not to behave like a bank, sorry computer says no mate you're screwed. :smile:

If you live by the sword then you die by the sword. Anything else is not capitalist. I wouldn't of risked it myself, could of back fired, let them go under or be bought out by a takeover. What does the government think it is, a business or a government?
 
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  • #8
Astronuc said:
I heard recently (but haven't substantiated it) that approximately 125,000 homes in my state are at risk of foreclosure!

Apparently a large number of adjustable rate mortgages (ARMs) are schedule to kick into higher rates during May and June, and some officials expect a surge in defaults/foreclosures during the 3rd and 4th quarter in the US. So now is not a good time to buy a house, and probably won't be until 1st quarter of 2009.
I'm not quite following - why does that make it a bad time to buy a house?
 
  • #9
russ_watters said:
I'm not quite following - why does that make it a bad time to buy a house?
With a huge amount of houses about to hit the market through foreclosures supply and demand dynamics would suggest a further downward correction of house prices is in the offing. This coupled with a likely interest rate hike which would further depress the price of houses would equate to not the best time to buy a house.
 
  • #10
Independently of that banks are putting high interest rates on mortgages, or not giving mortgages out at all because they can't borrow against them, at least over here, or at least they were until recently. I'm not sure if something similar is going on over there, but seeing as over here the housing market has peaked any house bought at the moment may well be worth x% less in a year, and as high as 5x% less in five years. Thus you'd of paid say £120,000 for a house that is now five years later worth say £110,000 and perhaps even ten years later worth say £100,000. The negative equity trap.
 
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  • #11
Citicorp is one of the big losers.


Three months ago




Yesterday



Whats next??

A lot of the adjustable rate loans in my area were for three years. That appears to mean that we haven't seen the bottom yet.
 
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  • #12
Astronuc said:
I heard recently (but haven't substantiated it) that approximately 125,000 homes in my state are at risk of foreclosure!

Apparently a large number of adjustable rate mortgages (ARMs) are schedule to kick into higher rates during May and June, and some officials expect a surge in defaults/foreclosures during the 3rd and 4th quarter in the US. So now is not a good time to buy a house, and probably won't be until 1st quarter of 2009...

Art said:
With a huge amount of houses about to hit the market through foreclosures supply and demand dynamics would suggest a further downward correction of house prices is in the offing. This coupled with a likely interest rate hike which would further depress the price of houses would equate to not the best time to buy a house.
Well unless one expects to turn over the house immediately then May / June would be a good time to buy. Certainly the market is historically low in the US.
 
  • #13
The banks had to have seen this coming.

From 2005:

With the average rate on a one-year, adjustable-rate mortgage at 4.39% and housing prices continuing to rise in many areas, buyers seeking to keep payments low are opting for ARMs. But some economists warn that homeowners might run into trouble if interest rates are higher and their payments rise when their fixed-rate period ends, typically in one to seven years.



http://www.usatoday.com/money/perfi/housing/2005-03-30-arms-usat_x.htm
 
  • #15
The problem with bailing out failed banks is that it leads to more of the "irrational exhuberence" that created these problems in the first place. Why bother taking reasonable risks when there's zero accountability for you?

Remember, the CEO that destroyed Bear Stearns walked away from the rubble with $60 million in his pocket.
 
  • #16
Art said:
With a huge amount of houses about to hit the market through foreclosures supply and demand dynamics would suggest a further downward correction of house prices is in the offing. This coupled with a likely interest rate hike which would further depress the price of houses would equate to not the best time to buy a house.
Well yes - it is likely to get better over the next 6 months to a year, but it sounds like you would agree with me that now is a better time to buy a house than any time in the past two years.
 
  • #17
russ_watters said:
Well yes - it is likely to get better over the next 6 months to a year, but it sounds like you would agree with me that now is a better time to buy a house than any time in the past two years.
Yes I do agree and it looks like things are just going to keep getting better and better :biggrin:

Didn't you buy a house not so long ago Russ. Has negative equity affected you? Personally as a longtime house owner I never give a second thought to the current value of my house as one buys and sells in the same market but for people who for one reason or another have to sell negative equity can drive them to bankruptcy which would be a very unpleasant place to be.
 
  • #18
Art said:
... Personally as a longtime house owner I never give a second thought to the current value of my house as one buys and sells in the same market ...
No house property taxes in Ire? Happily mine have gone down.
 
  • #19
mheslep said:
No house property taxes in Ire? Happily mine have gone down.
Nope, abolished in 1977 for all but the most expensive houses but as this was never collected that too was abolished.
 
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  • #20
Art said:
Didn't you buy a house not so long ago Russ.
I bought my house in April of 2006, within a few months of being around the worst time to buy a house in the current cycle (in the past 8 years or so -- not exactly sure how long). House values were about at their peak, but mortgage rates hadn't gone up too much yet. I paid something like 5.75% and I know people who paid as much as a full percentage point less a year or so earlier.
Has negative equity affected you?
I have a 5 year ARM that I may refinance later this year depending on where the rates settle out. I don't think the FED is finished dropping rates, but they are close. We'll see. Otherwise, there is no reason why negative equity would affect me yet.

I'm not sure what houses in my neighborhood have been selling for lately, but according to Zillow.com (if that's accurate), my house is worth a couple of percent more than I paid for it.
Personally as a longtime house owner I never give a second thought to the current value of my house as one buys and sells in the same market but for people who for one reason or another have to sell negative equity can drive them to bankruptcy which would be a very unpleasant place to be.
Yes, I haven't given my equity situation much thought either, but someone in a bad spot would now be in a really bad spot. Still, I have a friend who last year streamlined her budget to save up to buy a house and may be ready to do that later this year. Some people win, some people lose. That's how markets go sometimes.
 
  • #21
russ_watters said:
Well yes - it is likely to get better over the next 6 months to a year, but it sounds like you would agree with me that now is a better time to buy a house than any time in the past two years.

Yep, it's a gamble right now. It might stabilize or might keep dropping. But, the same rules should apply that did several years ago while the market was still climbing. If you're planning on moving into a house and living there the rest of your life, and can buy it on a fixed-rate mortgage, the timing doesn't matter much at all; in the 30 year term, the value will continue to go up. If you are looking at a more short-term purchase (i.e, a starter home with plans to move into something larger once a family is begun, or someone in a volatile job likely to need to relocate in a few years), then it's as risky now as 5 years ago whether the market will hold, increase or drop.

I'm not as inclined to think the government should be bailing people out for bad financial decisions. If banks are losing money when the ARMs increase beyond the affordability of the person with that loan, they could cut their own losses by not raising interest so far for people holding those loans and make it so they can keep paying. If the bank wants to force people into bankruptcy and sell the house at a fraction of what they paid for it, then that's not the government's job to bail them out for stupidity.
 
  • #22
Local banks here are taking a hit from defaults on contruction loans to builders.
 
  • #23
The government should not involve itself with private institutions. The idea is that government is limited on how much it can effect individuals, I would think that using taxpayer money to help out poor business decisions is not a very free market act. Besides the government is using taxpayer money to bail these banks out, I didn't make the decision to have a life that was beyond my means, I chose to stay where I could afford the housing prices. I guess what I am getting at, is it right for individuals to bare the cost and misfortune of others, that is what it really comes down to.
 
  • #24
t-money said:
The government should not involve itself with private institutions. The idea is that government is limited on how much it can effect individuals, I would think that using taxpayer money to help out poor business decisions is not a very free market act. Besides the government is using taxpayer money to bail these banks out, I didn't make the decision to have a life that was beyond my means, I chose to stay where I could afford the housing prices. I guess what I am getting at, is it right for individuals to bare the cost and misfortune of others, that is what it really comes down to.

Wow someone agrees with me? That has to be a first for P&WA? :smile::tongue2:
 
  • #25
Schrodinger's Dog said:
Wow someone agrees with me? That has to be a first for P&WA? :smile::tongue2:
If a bank was allowed to fail the direct consequences would be that the people who deposited money in that bank would lose their savings. These are not people who have speculated in property or people who have lived beyond their means, these are just ordinary folk guilty of nothing but having a bank account, a necessity in the modern world.

If Northern Rock had been allowed to fail the knock on effect would likely be a run on all the other banks causing them to fail too and a total collapse of the banking sector which is not in anyone's interest and so you as a UK citizen benefited directly from the gov'ts intervention to bolster Northern Rock as did everybody in the UK who has a bank account which would be just about every tax payer.
 
  • #26
Art said:
If a bank was allowed to fail the direct consequences would be that the people who deposited money in that bank would lose their savings. These are not people who have speculated in property or people who have lived beyond their means, these are just ordinary folk guilty of nothing but having a bank account, a necessity in the modern world.

If Northern Rock had been allowed to fail the knock on effect would likely be a run on all the other banks causing them to fail too and a total collapse of the banking sector which is not in anyone's interest and so you as a UK citizen benefited directly from the gov'ts intervention to bolster Northern Rock as did everybody in the UK who has a bank account which would be just about every tax payer.

The bank was still a considerable asset, it would most likely have been bought out by one of the other banks since it was not technically about to fall, or would it have been close to bankruptcy if it had been floated by another major player. Thus I think I agree with him: the government should of let it get snatched up by the other big players. If it failed because no one wanted it then that is sad, but I think it is also very unlikely. This is essentially why there was such a great fuss made over Northern Rock and it being bought out by the government using tax payers money. usually what happens if a bank goes bankrupt is that the account holders are covered by bankruptcy clauses that cover the account holders, although I'm not 100% sure on that. I seem to remember that was going to happen before Nat West bought out The Bank of Scotland, if I'm not misremembering the whole thing.

I think people felt the government was taking a risk with money that wasn't technically there's to take a risk with, or that it was not a business so to act in that way was not necessary or apt.
 
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  • #27
I suppose this is relevant here as well it looks like the banks are going to be hit with more debts as well because of the decision that bank charges are unfair in the High Courts.

http://news.bbc.co.uk/1/hi/business/7364422.stm

Banks lose overdraft charges case

Mr Justice Andrew Smith's decision will affect millions of bank customers

The UK's biggest banks have lost a test case about overdraft charges.

A judge has decided that the Office of Fair Trading (OFT) can rule on the fairness of the charges, which many customers have been trying to reclaim.

Mr Justice Andrew Smith said his judgement did not necessarily mean the charges were unfair.

But the decision opens the door for the OFT to demand that banks cut their charges, unless any subsequent legal appeals are successful.

Thousands of cases currently on hold in the county courts will be frozen until 22 May, by which time the banks must decide whether they are going to appeal against the ruling.

Any additional High Court hearings after that date may further delay those claims.

Aww bless if they weren't such evil manipulative gits I'd actually feel sorry for them. :biggrin:

I think they've pretty much been trying to force everyone into as much debt as possible and then when they've become indebted themselves expected to be bailed out. I'm not surprised people have been so pissed off with Banks in the UK and so unsympathetic generally. ~ 1 in 162 people in this country have sued the banks or ~375,000 people and got ~750 million pounds back already, they stand to lose much more than that once the flood gates open, if they do indeed. I don't think their reputations could sink much lower, nor do many people feel any more than passing sympathy for them, I personally think that I feel sorry for the customers and not sorry at all for them, as I said earlier if you live by the sword you die by the sword, and no one should be bringing you back to life.
 
  • #28
Art said:
If a bank was allowed to fail the direct consequences would be that the people who deposited money in that bank would lose their savings. These are not people who have speculated in property or people who have lived beyond their means, these are just ordinary folk guilty of nothing but having a bank account, a necessity in the modern world.

If Northern Rock had been allowed to fail the knock on effect would likely be a run on all the other banks causing them to fail too and a total collapse of the banking sector which is not in anyone's interest and so you as a UK citizen benefited directly from the gov'ts intervention to bolster Northern Rock as did everybody in the UK who has a bank account which would be just about every tax payer.

Most (if not all) banks are insured by the FDIC for $100,000 per account in the US, the way I understand it. People are not going to lose their savings. Most "smart" people diversify their investments long before they let that kind of money just sit in a savings account so it's not likely it is all in one account at one bank. If a bank is going bankrupt, most likely another bank would step in and take it over before that would happen. At least this is what the financial talking heads I hear are saying. The consequence of government bail outs is government getting it's hooks into the system. Not a favorable position for a free market.
 
  • #29
drankin said:
Most (if not all) banks are insured by the FDIC for $100,000 per account in the US, the way I understand it. People are not going to lose their savings. Most "smart" people diversify their investments long before they let that kind of money just sit in a savings account so it's not likely it is all in one account at one bank. If a bank is going bankrupt, most likely another bank would step in and take it over before that would happen. At least this is what the financial talking heads I hear are saying. The consequence of government bail outs is government getting it's hooks into the system. Not a favorable position for a free market.
In the UK it is very different, there are only 5 or 6 high street banks and deposits are not gov't secured.

In the case of Northern Rock the gov't waited to see if any other bank would take them over which didn't happen. It now transpires the reason why not appears to be the other major banks in the UK are in far worse trouble than Northern Rock ever was. Recent reports say Bank of Scotland for example is trying to raise £12 billion through a rights issue to shore up it's balance sheet with Barclay's Bank expected to follow suit. All this on top of the help they have already received with the Bank of England swapping $50 billion of the banks' dodgy mortgage debt for guaranteed gov't bonds.

The whole of the British banking sector is in crisis.
 
  • #30
Yeah but the bonds will help, I doubt any of them will go under, as they can now lend to each other and borrow with no real cost. That seems like a better solution than buying them out. Hope it works, I may hate banks on a personal and thus trivial level, but I'm not stupid enough to want them all or any of them to die that would be disastrous. That said if only the fit survive then that is business. When the wounds are self inflicted though it is hard to rouse much sympathy.
 
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What caused the down-turn in banks?

The down-turn in banks is typically caused by a combination of factors, including economic recession, mismanagement of funds, and risky investments. In some cases, external events such as natural disasters or political instability can also contribute to the down-turn.

Why should the government/taxpayer be expected to help banks?

The government and taxpayers are often expected to help banks during a down-turn because banks play a crucial role in the economy. They provide loans and credit to businesses and individuals, which helps stimulate economic growth. Additionally, the failure of a major bank can have a ripple effect on the entire financial system, causing widespread economic damage.

How much financial assistance should the government/taxpayer provide?

The amount of financial assistance provided by the government/taxpayer can vary depending on the severity of the down-turn and the specific needs of the affected banks. In some cases, the government may provide loans or bailouts to help stabilize the banks. However, it is important to carefully consider the potential long-term consequences and ensure that the assistance is used effectively.

What are the potential risks of government/taxpayer intervention in the banking sector?

One potential risk of government/taxpayer intervention in the banking sector is the moral hazard problem. This occurs when banks take on excessive risk, knowing that the government/taxpayer will bail them out in case of failure. Additionally, there may be a backlash from taxpayers who may feel that their money is being used to support irresponsible or corrupt banks.

What measures can be taken to prevent future down-turns in the banking sector?

To prevent future down-turns in the banking sector, regulations and oversight can be put in place to monitor and control bank activities. This can include stricter lending guidelines, stress tests to assess the stability of banks, and increased transparency in financial reporting. Additionally, promoting a diverse and competitive banking sector can help mitigate the impact of a down-turn in one bank on the entire economy.

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