Thank goodness that last week is over with. What with one major investment bank, Lehman Brothers, disappearing (or two, if you consider the merger between Bank of America and Merrill Lynch, for $50 Billion dollars, arranged over a weekend!) along with a thousand-point roller coaster ride in the DOW, causing other world indexes to follow the same sickening loop-the-loops that it followed, it’s a GOOD thing the weekend is over.

In order to stop one of the biggest downturns in the industry, after the government bailed out AIG but refused to bail out Lehman Brothers, forcing them to declare bankruptcy and dropping a boulder into the worldwide financial pond, the government has reconsidered it’s actions and has announced a course of action that is making the bloodied banking loan-sharks simply salivate at the thought. So much so, that the market recovered everything it had lost the previous 3-4 days.

And the Script Goes Like,…

While details are still sketchy, the plan is to create a separate entity (of some kind) to accept bad debt from large banks/financial institutions (how big is still a question), and ‘hold’ that debt for a while before re-selling it when the markets recover somewhat from the housing bubble and the credit crunch. This is very similar to the Savings and Loan plans of the mid-late ’90s, but in this case, rather than liquidating the companies outright, they only take the debts the banks don’t want and leave them standing!

It reminds me a lot of a section of Monty Python and the Holy Grail

BEN BERNANKE:

[clang] Bring out your debts! [clang]

Bring out your debts!

BANK IN TROUBLE:

Here’s one.

BEN BERNANKE:

Nine percent interest.

DEFAULTED LOAN:

I’m not in default!

BEN BERNANKE:

What?

BANK IN TROUBLE:

Nothing. Here’s your nine percent interest.

DEFAULTED LOAN:

I’m not in default!

BEN BERNANKE:

‘Ere. He says he’s not in default!

BANK IN TROUBLE:

Yes, he is.

DEFAULTED LOAN:

I’m not!

BEN BERNANKE:

He isn’t?

BANK IN TROUBLE:

Well, he will be soon. He’s four months past due.

DEFAULTED LOAN:

I’m getting caught up!

BANK IN TROUBLE:

No, you’re not. You’ll be in foreclosure in a moment.

BEN BERNANKE:

Oh, I can’t take him like that. It’s against regulations.

DEFAULTED LOAN:

I don’t want to go on the auction block!

BANK IN TROUBLE:

Oh, don’t be such a baby.

BEN BERNANKE:

I can’t take him.

DEFAULTED LOAN:

I feel fine!

BANK IN TROUBLE:

Well, do us a favor.

BEN BERNANKE:

I can’t.

BANK IN TROUBLE:

Well, can you hang around a couple of months? He won’t be long.

BEN BERNANKE:

No, I’ve got to go to the Bank of Americas’. They’ve lost nine today.

BANK IN TROUBLE:

Well, when’s your next round?

BEN BERNANKE:

Thursday.

DEFAULTED LOAN:

I think I’ll go for a re-finance.

BANK IN TROUBLE:

You’re not fooling anyone, you know. Look. Isn’t there something you can do?

DEFAULTED LOAN: [singing]

I feel happy. I feel caught-up.

[whop]

BEN BERNANKE:

< looks around, then acquires the loan while no one is looking>

BANK IN TROUBLE:

Ah, thanks very much.

BEN BERNANKE:

Not at all. See you on Thursday.

With banks so eager to unload their bad debts onto the government, it’s no wonder everyone on Wall Street is acting like they’ve just one the lottery. In a sense, they have!

It Coulda’ Been Worse

The scariest part of this last week, is that all things considered, it could have ended up being much worse. The Leahman Brothers reaction by the investors, plunging the Dow down almost a thousand points, could have been just a ripple compared to what would have happened if the government hadn’t reconsidered and bailed out AIG. Think of the same thing that happened, x 10, and you start to get what most financial experts were foretelling was going to happen if something wasn’t done to re-establish faith in the banking system.

The government’s creation of this ‘agency’ to acquire bad debt from banks is exactly what the banks wanted to happen. Take away the toxic debts that had gotten them into so much trouble, and allow them to continue business as usual.

The big ‘But’ to this strategy, is that now the American Taxpayer assumes the risks for all of these loans, instead of the banks. Instead of having to face up to the fact that they screwed up, they get a ‘get out of jail free’ card from the Federal Reserve and the government. There might be some repercussions for the bank, but nothing like the looming plunge into bankruptcy, which was in store for many of the over-leveraged banks.

If things go seriously wrong, it’s going to be a Trillion dollar default for the American Taxpayer. If not, it saves the economy and the Fed breaks even (maybe makes a little money). HUGE risk, for not much reward.

But it coulda’ been worse.

What do you think of the governments plan to take over bad debt?? Let us know by leaving a comment!