Bailout explanation for the rest of us

If you’ve ever been angry about the economy, and wondering why the big banks get all the bailouts while the common person suffers, a new report to Congress today might be helpful to read.  The nice thing about this quarterly report from the special inspector general for TARP (bank bailout program) is that it’s written for the common person.

When a Bank Gets Into Trouble
The balance sheet problems affecting many banks during the current credit crisis stemmed from losses from two of their primary types of assets. First, many banks saw the value of their loan portfolios (mortgages, home equity, or other loans) decline as some of their loan customers defaulted on their debts. Second, many banks owned MBS or derivative instruments that ultimately took their value from mortgages, which also dropped in value as homeowners began defaulting on their mortgage payments. When a bank forecloses on a property, it must be able to re-sell the property to recover as much as possible of the loan value. Given the nationwide decline in real estate values, many banks faced losing not only the stream of income they had enjoyed from the loans as the homeowner made payments on the mortgage, but also faced being forced to accept losses officially on the difference in the value of the loan and the value they would get in re-selling the property in a depressed market. Similarly, the market for the mortgage-related securities had also declined and many of the securities the banks held could no longer be sold in the open market for more than a fraction of what they had paid. These developments affected the banks’ balance sheets in various ways.

BTW, Scribd (where this new report to Congress is posted in full) is a great resource for all sorts of documents. The blog OptionArmageddon suggests reading pages 61-67, if nothing else.


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