News and commentary

The Rescue Plan

By Richard Suttmeier
Updated: Tuesday, September 23 2008 09:09:AM

The Rescue Plan changes all financial rules of the game. Kind of like playing baseball without first base.
 
The plan will not make bad loans solvent, and the known bad loans are the tip of the iceberg. The tip of the iceberg is in a sea of $183 trillion in notional amount of derivative contracts, which includes the $60 trillion mortgage-related, which Warren Buffet called, "The Financial Weapons of Mass Destruction."
 
Here are the Top-Five Problem Loans below the Subprime “Tip of the Iceberg” - None of these are toxic mortgage securities. On that score the $1 trillion in Alt-A mortgages just started to reset in August, and this will be a bigger wave of failures than subprime!
 
5 - Credit Card Debt has surged to nearly $1 trillion. Many consumers unable to make monthly payments on mortgages and unable to tap the declining equity of their homes are falling behind on credit card debt.
 
4- Home Equity Loans have surged to $647 billion at the end of the second quarter of 2008, up 3.5% sequentially, and 12.2% year over year. Homeowners are now having lines of credit rescinded and pinched consumers will make payments on primary mortgages before making payments on home equity loans. At particular risk are home equity loans where the primary loan is current at a different servicing bank.
 
3- Commercial Real Estate Loans known on the FDIC Quarterly Banking Profile at nonfarm, nonresidential ended the second quarter of 2008 at $1.02 trillion, up 2.9% sequentially and 10.3% year over year. These loans are backed by rents from apartment buildings and office buildings and include some condo exposure. These become vulnerable given reduced needs and canceled new projects for strip malls and small business offices. Vacancy rates are on the rise, which puts pressure on these loans.
 
2- Construction & Development Loans (C&D) declined 0.9% sequentially in the second quarter to $627 billion, but still up 4.4% year over year. New homes sales are difficult to sell yet banks continue to lend in an attempt to complete projects. C&D loans represent 35% single-family homes, and 65% multi-family and commercial, but this 65% also includes condos. Noncurrent C&D Loans are on the rise.
 
1- Notional Amount of Derivative Contracts totals $183.3 trillion among FDIC insured institutions at the end of Q2, which is up 0.9% and 18.4% year over year.