Posts Tagged ‘bank rates’

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.