[brewer12345]

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Originally Posted by tryan I don't see it ... yes, lots of banks will go under (and they NEED to). BUT lots of banks did NOT get sucked into the caze. Smaller banks stuck to thier principals.

I think that we need to be a little more careful with language here. Actual banks mostly did not make the really hideously stupid loans that are going bad in droves. The worst subprime loans are the 2/28 loans that were very popular through early 2007. This structure has a fixed rate for two years, then the rate adjusts (higher, most likely). The idea is that after two years you have either fixed your credit, refinanced, or sold the house. Most of these loans were not made by actual banks that are backed by the FDIC (with a few notable exceptions). They were made by non-bank lenders who either sold the loans into the capital markets or held them and financed them. Why didn't banks make these loans? Because the bank regulators wisely held the banks to higher standards than the non-bank lenders, which meant that when the stupidest loans were being made, it was done by non-bank lenders because the regulators wouldn't let the banks be that loose. Some actual banks made subprime loans, but they generaly underwrote the loans a lot better and didn't make use of the 2/28 structure, so their loss experience has been much better.

And so who has blown up? Mostly, the non-bank lenders: New Century, Novastar, Saxon, etc. Actual depository institutions that blew up are few and far between. So I think that this demonstrates that bank regulations do work, if imperfectly.

What is putting pressure on all the banks now is that there has been credit market contagion that has spread throughout the mortgage market. The capital markets entities that financed a lot of mortgages (and not just subprime: prime jumbos, Alt A, etc.) have been shut down or hamstrung, and many of them ae being forced to liquidate in a stressed market. That means that banks that usually made loans and sold them in the ordinary course of business can't sell and ended up keeping lots more loans than they intended to. So these banks didn't (mostly) make droves of bad loans, they just ended up with a bigger balance sheet than they planned. Until they can delever a bit or sell some of these loans, many banks are pulling back on lending so as not to overstress their capital. And therein lies the problem for the wider economy. A widespread contraction in credit is a big damper on economic growth.

I see some signs that things are starting to loosen up a bit. I see some deals getting set up to sell or securitize some pretty squeaky clean loans (prime jumbos, etc.), so maybe this is a sign that the machinery of the mortgage part of the capital markets will get unstuck. I sure hope it happens soon, though, because we will all feel the effects pretty quickly if it doesn't get going soon.