Financial Planning, Retirement Plan, 401k, Investment Blog

Financial Planning, Retirement Plan, 401k, Investment Blog

Banking on American Banks: Why US Financial Institutions Will Survive the Crisis

Posted March 16, 2009 by Bernz

So far this year, the news has been pretty frightening. Banks have been taking huge bottom line hits on their assets. Some banks have teetered on the edge of financial collapse before receiving a $700 million life line from the federal government. Specters of the Great Depression dominated financial markets and, for the first time in two generations, people started wondering if their money was safe in some of the largest banks in the country.

To understand the banking crisis and why US banks will survive it, you have to understand the sub-prime mortgage fiasco. Most of us know that sub-prime mortgages were home loans made to those who couldn’t qualify for conventional bank mortgage financing, making them high risk. Most of these loans contained a low-interest teaser rate to attract new borrowers, but, buried deep in the fine print of the contract, lurked a much higher rate after the first few months. As the rates went up, so did defaults and the mortgage assets weren’t worth as much to banks. What made the situation worse is that banks and other financial institutions bundled these loans up into packages called mortgage-backed securities and sold them to various investors. Many of these investors were not aware of the risk of the underlying loans. Those securities that sat on banks’ balance sheets rotted away until no one was sure what their true value was, if any. As their assets deteriorated, banks ran into a liquidity crises where their current assets were in danger of not being sufficient to meet their current liabilities. That’s when the federal government stepped in with their bailout.

There is good news on the horizon. The sub-prime mortgage is dead. No more of these inscrutable and volatile assets are being created. Bailout provisions are still being discussed but, at this point, it appears that that the government will set up a single bank to buy all of these assets from other banks to get them off of bank balance sheets. Once banks divest themselves of the sub-prime assets, their financial health will improve. People will always need to deposit or borrow money. Banks will always provide that service.

Historically, US banks have been among the strongest and most stable in the world. Once this financial crisis has ended, they will be again.

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One Response to “Banking on American Banks: Why US Financial Institutions Will Survive the Crisis”

1. Banking on American Banks: Why US Financial Institutions Will Survive the Crisis Says:
   March 16th, 2009 at 7:53 am

   [...] Random Feed wrote an interesting post today onHere’s a quick excerptSo far this year, the news has been pretty frightening. Banks have been taking huge bottom line hits on their assets. Some banks have teetered on the edge of financial collapse before receiving a $700 million life line from the federal government. Specters of the Great Depression dominated financial markets and, for the first time in two generations, people started wondering if their money was safe in some of the largest banks in the country. To understand the banking crisis and why US banks [...]

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