Word: loan
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...plan has three parts. Most people have focused on the first part, which is run by the reliable Federal Deposit Insurance Corp. (FDIC) and about which Geithner provided the most detail on Monday. It covers not the complex bundled loans that have received much attention in the media but troubled loans, like mortgages that haven't been paid for three months or more. The plan offers very favorable financing for private investors who want to buy them. In an example provided by the Treasury, an investor would pay as little as $6 for a loan that had an original value...
...Judging by current unemployment figures and mortgage delinquency rates the economy is getting worse as each month passes. According to TransUnion, a leading consumer credit reporting agency, mortgage loan delinquency, traditionally seen as a precursor to foreclosures, increased for the eighth quarter in a row. This statistic is up approximately 53% from the same period last year. Likely contributing to that rise, unemployment rose in February from 7.6 to 8.1%. And a new Reuters poll of economists forecasts that unemployment will top 10% as early as next year...
Before 1970, banks were content to make loans to consumers and business which remained on their books, collecting interest until the principal on the loan was satisfied. This approach made for a relatively illiquid market for the buying and selling of loans. Accordingly, this system insured that lenders were unable to sell their loan portfolios easily. Market illiquidity exposed the lender to the risk that individual loans would default or that rising interest rates would force the lender's interest cost higher than its income on the individual loan...
...Asset backed securities ("ABS") gave banks the opportunity to bundle loans into a pool that could then be sold to other banks. The bank purchasing the loans would then hold them as an investment or resell them in the secondary market. This market improved the ability of banks to lend by transferring the risk of the loan default to a third party while providing financing to the bank to make new loans. In time, the public grew accustomed to the increased availability of credit. (See pictures of the printing of money...
...plan is enough so that it would be fair to guess that it has less than a 50/50 chance of succeeding. The toxic assets that may be bought from financial company balance sheets are only a part of the problem that banks face. Consumer, commercial real estate, and business loan defaults are almost certain to undermine money center results for the rest of this year...