Banks Allowed Greed to Drive Them - Banks were originating mortgage products and loans as fast as they could generate them in recent years and a large amount of those loans are turning out to be no good and will probably fail.
Lots of Big Investors Are Left Holding This Trash - These bad loans got chopped up and sold as part of more and more complicated investment vehicles that have hurt many people and not just the banks. Investment funds, retirement funds, school districts, and lot’s of other people are now left holding poor loans as collateral for money they parted with.
For example, $14 billion of the state of Florida investment fund for public schools was invested in these mortgaged backed Structured Investment Vehicles (SIV). Orange County in California said that 14% of the $6 billion in short-term investments are in SIVs as well. Montana has 25% of its short-term assets in these SIVs also.
Banks Taking Huge Losses - Banks are taking huge write downs on their loans portfolios to reflect the crap loans they hold. Banks that we trust to know better are getting slapped across the face with these as well. UBS, CitiBank, HSBC, Wachovia, Bank of America, Halifax Bank of Scotland and many more, are all taking huge losses on their books with these crappy SIVs.
Banks like Northern Rock in England actually fell into a run on the bank when they found the bank credit markets had contracted so much they could no longer run to borrow funds to continue their operations at the same pace.
Banks Not In Love With Each Other - The interest rate that banks charge each other to borrow amongst the banking club have been increasing. So access to more funds to lend to consumers is getting tight and expensive also.
Consumers Enjoyed the Credit Buffet - Consumers have consumed loads and loads of easy credit while lenders were dishing it out. People have created lifestyles based on a cornerstone of credit from credit cards and home equity or paper wealth. This is nothing more than lifestyles fueled not by income but by easy credit.
The Banks Take Their Ball and Go Home - Lenders will be less likely to lend or will lend at higher rates. As the credit crisis becomes more apparent the danger is that we’ll see banks tightening up in lending to steam the blood losses. This pressure applied to the wound will impact consumers.
Lots of Bad Loans Still Ticking - Many subprime mortgages are still waiting for rate adjustments. The crisis is not over and the US announcement of mortgage assistance was a big show but not a real plan for most in trouble. Only about 12% of mortgage holders would benefit, if that.
Consumer Confidence Slipping - People are becoming more worried about the economy and with worry come a slowdown in spending. That causes a slowdown in the creation of jobs and stuff that creates income and welth.
Credit Cards Come to Banks Rescue - Banks have been shoveling out credit card offers in hopes of making up for poor loan performance in the mortgage area. The banks were convinced that cards were a lower-risk and higher-margin business. Oh those silly banks.
Central Banks Cut Interest Rates - The Federal Reserve and Bank of England have both cut interest rates in hopes that it would stimulate lending and reduce interest rates to borrowers. However now all lenders are passing on those rate reductions. Many are simply increasing their profit spread in hopes of increasing income to make up for losses elsewhere.
Credit Card Delinquency Rates Increasing - Big surprise, extending more easy credit to people that are having money stress leads to higher delinquency and late payment rates. Because of this banks will probably tighten credit card lending and even start proactively reducing credit limits to reduce their risk and exposure.
Summary - Banks got greedy. Banks made stupid loans. Banks sold those loans to investors. Banks don’t trust each other. Interest rate cuts are not stimulating the economy. Consumers are worried. Consumers left holding the bag, as always.