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Bank Failure
July 13, 2008
With the fall of Indy Mac and the recent announcement by Hank Paulson that the Treasury was going to lend financial support to Fannie Mae and Freddie Mac, more and more investors believe they'll be a significant number of bank failures in the coming months. Lenders like Indy Mac and Wachovia used to be major players in the risky Alt-A , like interest only and stated income, mortgage market but have come on hard times in recent months. These loans are of higher quality then the bad credit home loansthat were funded by lenders like Ameriquest.
"More than 300 banks could fail....", said RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150.
In the last major bank crisis, thousands of banks failed. The difference today is the "list" is smaller but the lending institutions are much larger. A possible problem in the future is that Americans loose faith in the banking system and start to pull their money out in an effort to protect their savings. This would be devastating to an already weak banking structure that is loosing billions of dollars per month. The greatest fear is for regional banks as the large national institutions are believed to be able to weather the storm. And if not, investors believe the Federal Government will step in and never let a Wells Fargo, Bank of America or Citi Bank fail.
In the coming months, disruptions in the mortgage backed securities market is almost certain as more and more people foreclose on their property. The latest actions by the Federal Government, The Treasury, Congress and the Federal Reserve are an attempt in trying to find a solution to the mortgage crisis. In 2007 there was the start of The ARM Time Bomband the beginning of the mortgage crisis. In 2008 we are seeing the start of what could be the biggest bank crisis the US has ever seen.
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