Financial Commentary

TASA ID: 322

How did we get to this point?

Even before the previous banking meltdown of the mid-1980s to mid-1990s, the banking and mortgage banking industries recognized that it was desirable to standardize - you might say "commoditize" - mortgage loans so that they could be more easily sold into the secondary market and then resold as a more liquid commodity than mortgage loans previously had been perceived to be.  Standardization measures included standard Fannie Mae and Freddie Mac forms, standard underwriting procedures, private mortgage insurance, PC guaranty certificates, and other measures.

Then, in order to facilitate the application and approval process, lenders borrowed a page from the credit card lenders and began looking more to credit scores than to other more reliable measures of credit quality, such as verified income, verified deposits, verified assets, verified employment, etc.  This experiment in streamlining the application and approval process has proven to be problematic for many lenders.

The reason for developing this process was to produce high-yielding investments.  Even though these investments were produced and did perform for a period of time, as explained below, their initial success was illusory, and large numbers of them now are failing to perform as the investors had hoped.

What is happening?

Several things are happening now that exacerbate the situation.  First, adjustable rate loans that were made with artificially low teaser interest rates or payment amounts have been readjusting, in many cases, to levels that are beyond the payment ability of the borrowers.  Second, as loans fail and properties are foreclosed, the plethora of foreclosed properties that are on the market are undermining the regular market for new and resale real estate, causing problems for developers of new properties and others.  Third, in many cases, the performance of the related bond portfolios was guaranteed by the existence of credit default swaps.  Credit default swaps totaling $58 Trillion were outstanding at the end of 2007.  It is easy to see how widespread defaults in the bond markets could cause concomitant problems for the issuers of credit default swaps.  (AIG was widely exposed in this market, and the government felt that it had to be rescued so that the many financial institutions that relied upon AIG's contracts would not fail).

What tools are being used to resolve the situation?

As for the tools being used by the government to deal with the hydra-headed problems extant in the financial markets, it is a work in progress.  However it seems fair to say that due to the far-ranging size and extent of the problems, the means of resolution will include an "all of the above" approach, meaning everything that they think has a chance of reducing the impact of the problems.  So far, we have seen the following:

• Traditional bank failures:  IndyMac and others.
• Bank failures (various) with select assets and liabilities acquired by a healthier bank.
• Investment bank government-assisted bailout and acquisition:  Bear Stearns/JPMorgan Chase Bank
• Investment bank acquired by a commercial banks at the suggestion of the regulators:  Merrill Lynch/Bank of America
• Investment banks converting to commercial bank and holding company structures:  Goldman Sachs, Morgan Stanley.
• Insurance company bailout via a huge government loan and equity stake in the company:  AIG.
• The effective nationalization of Fannie Mae and Freddie Mac by the federal government.

Expect all of these resolution measures and other innovative measures to be used in the future as problems rise to the surface and must be addressed.  It is highly likely that some of the techniques from the last banking meltdown will be utilized this time around as well, including some resurrected form of the Resolution Trust Corporation, good bank/bad bank scenarios, and tax benefits as an incentive for the purchasers of troubled assets or troubled institutions.        

About the Author

This expert provides consultation, fact examination and analysis, advice, Affidavits, Declarations, reports, and sworn testimony at deposition and in court for parties engaged in litigation involving lending, loan closing, and all areas of banking and finance.

His expert witness experience and background includes over 400 cases for plaintiffs and defendants nationwide, over 100 testimonies, and 12 courthouse settlements in all areas of banking, finance, FACTA issues, real estate, economic damages, identity theft, business valuation, intangible asset valuation, and many related matters going back to 1989.  He renders impartial opinions and is privileged to be listed in the databases of recommended expert witness consultants of both the Defense Research Institute and the American Association for Justice.

This expert's clients have included 8 of the top 10 banks in the country, over 60 banks worldwide including 12 of the top 45 banks in the world, 8 of the top 10 mortgage banking companies in the country, 33 of the country's top 250 law firms, and numerous governmental clients including many banking regulators (FDIC, FSLIC, RTC and others), IRS, USAID, U.S. Air Force, State of New York, State of Texas, World Bank, International Accounting Standards Board, and hundreds of others.

His employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, Bank of America, Regions Financial, and Guaranty Bank, as well as a two-year stint as a high-level governmental financial institution regulator.

This expert holds a B.A. degree from the University of Alabama, and completed postgraduate and executive education work at Alabama, the University of Houston, Southern Methodist University, Spring Hill College, and the Harvard Business School.

In addition to lending and banking, this expert provides consulting services in many additional areas including business valuations, intangible asset valuations, business plan writing, feasibility studies, marketing studies, bank taxation matters, anti-money laundering policies and procedures, policy and procedure manuals for financial institutions and other organizations, merger and acquisition due diligence and assistance, research, and many other related areas.

As part of his wide-ranging consulting activities, this expert has been called on by clients in 27 countries for work assignments involving 56 countries.

He is widely published on banking and financial subjects and is often sought out by the media for interviews and comments.

This expert serves clients worldwide from his office in the metro Atlanta, Georgia USA area.

This article discusses issues of general interest and does not give any specific legal, medical, or business advice pertaining to any specific circumstances.  Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.

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