WSJ: Worried Bankers Seek to Shift Risk to Uncle Sam

Folks, I wrote about this late last summer - we will see more and more bailout plans, of increasing scope/size as each layer of (edited) is scraped off the surface. But now the crisis has shifted so quickly, the bankers are coming to Washington with hands out and asking us (the tax payers) to take the risk. This is what it is coming to. They make the profit in good times, the Fed thru rate cuts (enforcing bubbles, inflation, and weak dollar) bails them out in bad times, and in historically bad times, the government (taxpayers) will bear the ultimate risk. As things derail expect to see more of this talk. Quite sad, and pathetic but the the government for the corporation by the corporation is working its magic behind the scenes. Just want you to be aware of it so you know what your hard working tax dollars are eventually going to be doing. Remember this the next time "free markets with no regulation are so efficient!" and "America is the heart of free market capitalism" mantra surfaces....

Ironically this would be a boom for the stock market :) Just imagine, a world with no risk and all bad obligations shoveled off to those fools on Main Street. Nirvana. Stocks might rally 30% on such an outcome. This is the risk in holding Ultrashort Financials (SKF) in particular... at any moment the neutron bomb of government intervention can burn you to a crisp.

• The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.
• One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers. Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal.
• The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss. (not a problem!)
• The fact that the plan is receiving serious consideration suggests the level of concern in Washington as housing problems worsen and early efforts by the Bush administration fall short.
• Another plan gathering support seeks to make it easier for banks to write off part of the unpaid balance on loans that exceed a property's value, people familiar with the matter said. If that happens, homeowners would owe less, and they might be able to refinance their loans and avoid foreclosure.
• Several lenders are already considering the move, known as a "principal charge off," but are hesitant to move forward. Loan servicers -- the companies that collect monthly mortgage payments -- worry that if they take big write-offs, they might be sued by investors who hold mortgage-backed securities. However, if the industry came forward with a standard backed by the Treasury Department, the legal concerns would likely fade.
• "Everybody is looking at everything," Federal Deposit Insurance Corp. Chairman Sheila Bair said yesterday after a speech in Washington. "The door is not closed on anything."
• The Credit Suisse plan would open the way for nearly 600,000 subprime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA. (which you forestall the eventual delinquency for.... another 1 year, and then who is on the hook? you.) Some 1.3 million borrowers were either seriously delinquent or in foreclosure at the end of the third quarter, the most recent numbers available from the Mortgage Bankers Association.
• Just a few months ago, such proposals would have been considered far-fetched, but these and other unorthodox ideas are gaining credibility.

Enjoy! :)