It use to be on the old days that when you wanted to buy a house you had to talk to your local banker to get a loan. If the loan went bad and you did not pay the loan, you were forced out of our house and the banker had a whole lot of explaining to do to his bank. The banker had a vested interest in the buyer paying off his loan- if the borrower did not pay he was out of a job. Subsequently, bankers tracked all the loans they made, the conditions of the housing market and their customers.
However a few years ago it became much easier for banks to make loans and then resell those loans to other buyers. So the banker became a little more negligent in the loans he approved. Because the bankers incentives changed, he was no longer concerned about the qualifications of the buyers. The banker wanted to make as many as loans in order to sell them. The more loans the bank made, the more they could sell. The banks began to abandon their fiduciary responsibility of insuring the quality of the loans.
From a buyers point of view it was crazy to buy these loans. You were buying a loan from somebody else who did the credit work and from a banker who no longer had a care if the loan performed. So what the buyer did was package these loans and got an insurer to give it a AAA rating. With these AAA rated structures the buyer were then able to make fees by structuring and selling these loans to insurance companies, hedge funds, etc.
However the fact remained that the original borrower was shaky, the credit work was done by someone else and there was no real incentive for the buyer of the house to pay the loan as home prices began to decline. The market thought otherwise and as along as it had the pristine ratings-end buyers of these loans were abundant. Until the whole thing fell apart- and that is where we stand now. The values of all these loans and structures are falling in price as desperate sellers look to get out at any price. Some of the banks who sold these structures have been forced to buy back these loans- the balance sheets keep on taking more paper by the day as the balance sheets gets bloated with terrible loans. How are the banks expected to make any money as they assume more and more loans on their book? Stay away from the financials as there is still more trouble coming
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