Friday, November 6, 2009

What's Ailing the Financials

Wondering what's been ailing the Financials?

First we had Citibank Raising Credit Card Interest Rates to 29.99% for Good Credit Customers
Sound desperate, right? It sounds like a gamble to me.  They're basically giving consumers two choices, pay a loan shark / mafia interest rate or default.  Think about what that does to consumer spending, foreclosures and default rates.  Citibank despite receiving billions in bailouts has decided to throw a hail mary and hope that enough cash strapped consumers will have no choice but to pay the huge interest rates giving the bank a chance at surviving.

Then Wells Fargo with this nugget Wells Fargo Modifying Option ARMs into Interest Only
To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country's worst-hit regions, along with a rise in consumers' income, will eventually combine to cover the bank's billions in underwater Pick-A-Pay debt.
Now anyone that understands option arm mortgages knows that a majority of these buyers make the minimum payment.  Normally the difference between the minimum payment and the interest only payment is substantial and my guesstimate is an increase at minimum of roughly 30-40% over the existing negative amortizing payment.

We think this only incents homebuyers to walk away from their homes and enter strategic defaults.  What in heaven's sake would compel Wells to make this type of a drastic move?

Let me guess, they're thinking that the economy is recovering and consumers should be able to make the interest only payment.  Or could it be that by converting to interest only mortgages, it stops the balance from rising thereby helping Wells earnings?  Not an expert on financial earnings.  But whatever the reasons, the end result is more foreclosures.

Add in to the mosaic, John Mack is looking to leave, Jaime Dimon is looking to leave and BAC's CEO just announced his retirement.  The picture isn't pretty.  The CEOs are bailing out, seeing no future potential for hundreds of billions in bonuses.

Sure, the recovery is going to be strong.  I can hear the printing presses already running into overdrive.  Only a matter of time before the Treasury Bailouts are back.

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