Thoughts from my friend David -

One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value. This will allow institutions to hold securities of unknown value on their books without any valuation reserve or write-down (Regulations on the freeze action have not been released). This is exactly what the Japanese banks did in the 90’s when they did not quickly clean up their balance sheets and deal with the problem, and many of them still have bad debt from the late 80’s on their books. SO, the result of this is that there will be a ticking time bomb in the banking / financial system AGAIN.



This action is too late to make any real impact on the housing problem. Real estate prices everywhere have already fallen and will continue to do so until there is something of a more normal relationship between real estate prices and their historic place in the proverbial “basket of goods”. Again, the last time real estate markets peaked in the middle of the decade was in the 1920’s (1925 to be exact) and they did not begin to level out until 1934 and not rise until the early 1940’s. Today’s action only moves off the inevitable day of dealing with these underwater loans and thereby creates a longer-term problem than would otherwise be the case. This freeze requires homeowners to have 3% equity in their property in order to qualify, as prices continue to decline this will be fewer and fewer. Unfortunately, the ball has already gone over the edge of the building



This action is very similar to the actions taken in the early part of the S&L disaster when the sick institutions were allowed to keep “goodwill” on their balance sheets and classify it as core capital… and we all remember where that mess ended up. Not dealing with real problems in the financial and banking systems always ends in disaster eventually. However, it allows those in power a quick fix and allow them to pass the problem on the next administration to deal with… Regan did it to old Bush and now little Bush is doing it to whomever…



Earnings at the financial institutions will appear to be significantly improved soon as they will not have to make any of those HUGE (billions of dollars) write-downs on their portfolios any time soon, but they will come.