Let Bad Banks Go Broke – says, Howard Davidowitz – Otherwise All These Bailouts Will Crush The Economy

Howard Davidowitz is a bear on America. If you’ve watched any of the recent clips, you know he’s negative on stocks, the economy and the political system. (If you haven’t seen them, check the links below.)Much of Davidowitz’s frustrations stem from the bailout of our financial system. “If a bank is bad, you let it go broke,” he says. “The bondholders lose their money, because they should. The stockholders lose their money, because they should. Lots of people get fired job, because they should. That’s the solution to the problem.”In the 1980s, Davidowitz’s firm worked on the restructuring of then struggling retailer Toys “R” Us. “We kept the good, we cut the bad. That’s how restructuring works,” he says. The national retail chain was cut down to 13 stores, but was kept alive. Today, the company is preparing for an IPO, five years after private equity giant KKR purchased the company for $6.6 billion. Again, Davidowitz believes the same measures should have been taken with the banks. Sure, bankruptcy is a painful solution in the short-term, but he believes the government’s rescue of some of our biggest financial institutions has had, and will continue to have, catastrophic economic consequences. As economist and Carnegie Mellon professor Allan Meltzer once said: “Capitalism without failure is like religion without sin.”

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Do You Know If Your Covered? Learn FDIC Insurance Limits

What does the FDIC do?

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for up to $250,000 (through December 31, 2013).

What are the basic FDIC coverage limits?

  • Single Accounts (owned by one person):  $250,000 per owner
  • Joint Accounts (two or more persons):  $250,000 per co-owner
  • IRAs and other certain retirement accounts:  $250,000 per owner

What types of accounts are eligible for FDIC insurance?

FDIC insurance covers all deposit accounts at insured banks and savings associations, including checking, NOW, and savings accounts, money market deposit accounts and certificates of deposit (CDs) up to the insurance limit.

The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if you purchased these products from an insured bank or savings association.

Need More Information? Go to:  https://www.fdic.gov/edie/fdic_info.html#04

Dick Bove Says, Banks Don’t Want Your Business – May Cancel Your Account and Give Customers the Boot

Not happy with your bank? The feeling is likely mutual.Don’t be surprised if your bank soon decides they don’t want your business anymore, says Rochdale Securities bank analyst Dick Bove.Why?Bank regulators and Congress are looking at ways at making the system more safe and sound in order to avoid another meltdown. What on the surface seems like a wise and prudent decision, however may have unintended consequences, most notably higher fees for bounced checks, credit card balances and the like.”The way a bank discourages a customer from doing business with it is to make the cost of doing business so high the customer gets upset and leaves,” Bove says. “I think that’s the methodology,” although some unprofitable accounts will be closed by the banks, as American Express has been doing. (AmEx canceled 3.3 million cards globally in the second and third quarters, TheStreet.com reports.)Update: In another example, HSBC “has decided retail customers aren’t profitable enough and is demanding those clients remove their gold to make room for more lucrative institutional customers,” The WSJ reports.Bove says as much as 30% of U.S. households could find themselves being forced out of their banks since they’re not deemed profitable.The shift will create investment opportunities as depositors look to other companies to provide banking services. In this scenario, Bove thinks consumer finance firms, payment system companies, pay-day loan companies and pawn shops will pick up the slack.As the government moves to make the cost of banking higher for the banks, they’re going to have to pass on those costs to the consumer,” Bove says. “If the consumer doesn’t like it, the consumer is going to have to rely on these less-established methodologies of getting finance and moving money.” ———————–The FDIC fund that insures bank deposits is $8.2 billion in the hole.The Federal Deposit Insurance Corp. released its latest set of grim banking data moments ago. The FDIC had to set aside $21.7 billion for expected losses on future bank failures as the total number of “problem” banks rose to 552 from 416.There were glimmers of hope. While bad loans continue to beat up bank balance sheets, revenues are returning to the banking sector. Overall, the banking sector was profitable after a $4.3 billion loss in the second quarter and saw just $879 million in earnings last year.

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“Astounded” by Goldman’s Upgrade Banks “Heading Into the Storm” Whalen Says: Tech Ticker, Yahoo! Finance

Goldman Sachs making headlines again. Today, it’s on two accounts.First, Bloomberg is reporting Goldman could earn about $1 billion should the troubled lender CIT Group, enter bankruptcy or otherwise end a $3 billion financing agreement. I’m sure it’s adding fuel to the fire for the “Government Sachs” conspiracy theorists, who probably see it as a repeat of what happened with the AIG bailout.For those that don’t remember, Goldman received $12.9 billion from AIG after the government rescued the world’s largest insurer. That raised suspicions of conflicts of interest and unfair treatment, since then Treasury Secretary Hank Paulson also happened to be a former CEO at Goldman.Chris Whalen of Institutional Risk Analytics is a Goldman conspiracy sympathizer and someone who “doesn’t like their politics.” But, in this case, he doesn’t necessarily think anything is askew. “Like any distressed lender they have a right to their payment. They took the risk,” he admits.What strikes Whalen as more curious is Goldman’s call on the big banks. Citing a positive outlook on earnings, Goldman analysts raised the outlook on banks from neutral to “attractive” this morning. They also upgraded Wells Fargo to “buy” from “neutral”, Comerica to “neutral” from “sell”, and added Capital One to their “conviction buy” list.Whalen is “astounded” Goldman would make such a move “when the banking industry is heading into the storm.” Contrary to the Goldman call, Whalen says the earnings outlook will get worse over the next two quarters, culminating in a bloodbath in the fourth quarter. Part of the problem for Wells Fargo, according to Whalen, is the bank still has plenty of write-downs to come associated with the Wachovia merger, as detailed here. But Goldman employees and shareholders have no fear. Whalen is confident the firm will fare better than those it upgraded today, “because they’re not a bank.” Instead, he says, you must consider Goldman, “a trading operation with a private equity firm attached.”If there is a risk for Goldman, it is political. “They are so visible and so high profile,” Whalen speculates, “that if the economy doesn’t recover next year I think Goldman is in for some severe criticism.”And that, no doubt, would please the Goldman conspiracy crowd.

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Today’s Bankruptcy Law helps the Banks

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The New Bankruptcy Law is protecting Banks and Lenders more than the Consumers.

CONGRESS REVISED THE nation’s bankruptcy laws under 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, effectively making it harder for individuals to claim insolvency. The reform was seen by critics as protecting banks and lenders more than the consumers the legislation’s title claimed to help. Now, as the fallout from the subprime mess continues to expand, an uptick in bankruptcy filings may yet be another kink in the growing mortgage crisis.

Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, has long thought the revised law to be too restrictive. Now, Sommer says, it needs to be revamped again to better reflect the current mortgage market. (The original bankruptcy law dates back to 1978, when exotic mortgages were less common and foreclosure was rarely a reason to file for bankruptcy.)

Even with the toughened rules, personal bankruptcy filings for the first six months of 2007 are up 48.3% compared with the same period last year. As of June 30, 391,105 individuals filed for bankruptcy this year, up from 263,660 a year earlier, according to the American Bankruptcy Institute.

Once-confident homeowners who, during the real-estate boom, bought homes using adjustable-rate, interest-only, no-money-down mortgages are now overwhelmed by a weaker house values and crushing debts. Indeed, foreclosure filings reported in July jumped 93% from July 2006, and 9% from June.

Still, bankruptcy filings are well below pre-2005 levels. Sommer says the higher costs and increased paperwork of the new law make it too onerous for consumers to file. Ultimately, he says, that makes it harder for those facing foreclosure to use personal bankruptcy to protect their homes while they figure out how to meet ballooning mortgage payments.

“One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding,” says Sommer, who also serves as the supervising attorney of the Consumer Bankruptcy Assistance Project in Philadelphia. “Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.” Besides lowering costs, another part of his proposal involves stripping down the mortgage to the home’s current value and re-amortizing that over 30 years.

Here’s what else Sommer had to say about the bankruptcy code’s problems and his ideas to help borrowers facing foreclosure hold on to their homes.

SmartMoney.com: Why do you think the number of bankruptcy filings is higher so far this year than last year?

Henry Sommer: The number of bankruptcy filings has gone up steadily. They went way down right when the law went into effect [in 2005] — primarily because people rushed to file beforehand. Since then, it’s only at 70% of levels before…. It has been steadily going up. Certainly, people having problems with their mortgages is one reason why they’re filing.

SM: How do you propose to change the bankruptcy law?

HS: There are a couple of different types of changes we propose. One is to make filing for bankruptcy less complicated. One of the side effects of the new law — and I’d like to think Congress didn’t intend this — is the phenomenal increase in paperwork and cost associated with filing, and it’s therefore denying access to people who can’t afford them. So one type of change we’d like to see is a cutback on the paperwork and the expense of bankruptcy. The other is that bankruptcy laws be changed to give people more tools to deal with foreclosures, including these exploding adjustable rate mortgages (ARMs) you see now, where payments just go so high because of the interest rate adjustments. So we propose changes to make bankruptcy more useful.

SM: What’s an example of that?

HS: Typically, when people face a foreclosure, bankruptcy has allowed them to take up to five years to catch up on their arrearages. In a Chapter 13 case, [usually you would] start paying your monthly mortgage payment of, say, $1,000. You [pay] arrearages over 12 months…. Bankruptcy allows you to do that. That’s worked well for people who had a temporary income interruption that caused them to fall behind on payments. [Our proposal] gives three, four or five years to catch up, instead of typically two months…. The two months, or slightly longer, is how long mortgage companies will usually give debtors to catch up outside of bankruptcy.

That doesn’t work so well when your monthly payment has been bumped up because of an adjustable rate mortgage. That’s the problem suddenly facing a lot of people. It doesn’t work if you can’t even afford the monthly payment. Our proposal is to take the ARMs and re-amortize them over 30 years as a fixed rate. They’d do that as part of Chapter 13 bankruptcy. [This would apply] if your house was overappraised or it’s fallen in value. Say you got a 100% mortgage for your $200,000 house, and now it’s worth $170,000. You re-amortize it over 30 years and pay off the mortgage that way. That’s the crux of our proposal — strip down the mortgage to the current value of the house and re-amortize that over 30 years. We’re hoping that will be introduced in Congress in September.

SM: Is that considered at least a partial loan forgiveness?

HS: No, definitely not. It’s been done for years with cars. In 1978 [when the law was first established] we didn’t have these kinds of mortgages either. Even if it made sense in 1978, it doesn’t make sense now.

We’re not trying to repeal the 2005 law wholesale, but we’re trying to get rid of the excess paperwork and deal with the particular mortgage problem, which really wasn’t addressed in the 2005 revisions. One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding. Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.

SM: How much paperwork are we talking about?

HS: The paperwork is roughly doubled. Among other things, debtors must provide tax returns, 60 days’ worth of pay stubs, bank statements and complete a six-page “means testing” form. All of these are new requirements, along with the requirement of obtaining credit counseling before bankruptcy and a credit education course during the case. On top of this, the United States Trustee’s office, part of the Justice Department, often demands numerous additional documents, like six months’ worth of pay stubs, two years of tax returns, all credit card statements.

SM: Steve Bartlett, president and chief executive of Financial Services Roundtable, an organization that represents financial-services companies, in May testified in Congress that the new bankruptcy reform law is working well as evidenced by the big decrease in filings since it was enacted.

HS: I disagree with him. He’s employed by banks and other creditors. He bases that on the fact that the number of bankruptcy filings are down. He said the number of bankruptcies was down something like 40%…. But what about all the people who want to file but can’t? People aren’t filing because it’s much more difficult. It’s something of a misperception out there that you can’t file for bankruptcy anymore.

SM: Why do people think that?

HS: There was kind of a superficial publicity when the new law went into effect. Many were told that by debt collectors, which of course makes the debt collectors’ job easier. That’s another reason why that [notion] will slowly go away — when people know of others who have file for bankruptcy.

One of the things mortgage companies say is that they’ll do a loan modification, they’ll reduce the principal. But it’s extremely hard to get those. A lot of people are led down the path thinking they’ll get them and the next day they’re facing foreclosure. So what the companies claim to be doing and what they’re actually doing are two different things.

SM: What would you advise at-risk consumers do?

HS: People have tendencies to put their heads in the sand and wait for a solution to come. But the sooner they deal with it, the better…. If people think they’re going to have a problem, it’s a good time to figure out what their options are.