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Banks Recover as Housing Foreclosures Hit Record Highs

FinalCall.com, News Report, Adrianne Appel Posted: Jun 20, 2009

Just months after massive handouts from Uncle Sam, big banks say they are ready to repay the money.

The banks are selling stock and debt, and seeing returns on mortgages, loans, high credit card rates and refinancings.

Goldman Sachs, JPMorgan and Morgan Stanley, indicate they can begin to pay back the billions they were given by the U.S. Treasury in December.

Meanwhile, home foreclosures in April reached an all-time high of 342,000 while the national unemployment rate rose to 8.9 percent, the highest level since 1983. Some communities are just barely hanging on.

There's an enormous impact of the foreclosure crisis and the unemployment crisis on people of color, said Rinku Sen, executive director of the Applied Research Center, a public policy institute advancing racial justice through research, advocacy and journalism.

Because they were so concentrated in communities of color, the larger system didn't pay attention, Ms. Sen said. The banking system didn't send out any red flags, and local and state officials didn't start looking into the crisis; there wasn't the scrutiny there should have been, given the millions of people affected.

The National Association for the Advancement of Colored People has filed suit against some of the larger banks that appear to have targeted people of color for loans with higher than average interest rates and poor termsmany of the same ones that received a bailout.

Under the bank bailout, nine big banks received $125 billion, followed by smaller banks, for a total of about $400 billion awarded to 586 banks, insurers and auto companies. The U.S. government received warrants to buy stock in the banks, in a deal many economists say was a giveaway.

Is it possible taxpayers will get their money back 10 years from now? Yes, but it's not likely. It's clearly a massive subsidy, said Robin Hahnel, economics professor emeritus at American University.

Larry Summers, the handpicked economic advisor to President Barack Obama, and U.S. Treasury Secretary Timothy Geithner, are not doing right by U.S. taxpayers, Prof. Hahnel said.

My position is they are mismanaging this so badly they need to be fired immediately. They are putting us at terrible risk, Prof. Hahnel said.

Some banks are in a position to repay because they've made money the old-fashioned way, by borrowing at low rates and lending at significant interest rates, said Timothy Canova, economics professor and associate dean at Chapman University School of Law.

The banks borrow money from the Central Bank at nearly zero percent interest and then loan it out at five or six percent, he said.

The entities that took the Treasury money have had to comply with rules that restrict salaries and bonuses to executives, and limit the hiring of non-U.S. citizens. The rules were only enacted after public outrage over millions in bonuses paid to individual executives.

The main motivation for returning the money is that the bank officials would like to be able to start rewarding themselves again with higher compensation packages, Mr. Canova said. They don't want the strings attached.

Mr. Canova predicts that while more banks will be paying taxpayers back, additional banks will be seeking bailout monies.

Nineteen big banks with more than $100 billion in assets recently conducted financial self-reviews called stress tests, at the request of the Federal Reserve.

The Fed asked them to predict their own potential losses and liabilities under the two scenarios. Banking supervisors chosen by the Fed met with bank management to evaluate the estimates, all performed within 45 days, resulting in an announcement that nine banks are in the clear and 10 will need $74.9 billion more, under a best-case economic scenario. Under the worst-case scenario, they would need up to $600 billion.

Conservative and progressive economists have called that forecast unrealistic, and Mr. Canova said even the worst-case scenario seems overly optimistic.

It's quite possible the GDP will continue to decline and then the banks may need twice that amount of money, Canova said.

The banks that need cash can request a handout from the U.S. Treasury, in exchange for stock valued at slightly below what it traded for in February.

But more likely, they can get the cash from the private market by selling stock and seeking investors, Sec. Geithner said.

If these institutions are essentially solvent, as Mr. Geithner suggests based on the stress test results, then it seems appropriate to put an end to these taxpayer subsidies, said economist Dean Baker, co-director of the Center for Economic and Policy Research while May 19 speaking to the Oversight and Investigations Subcommittee of the House Committee on Science and Technology.

Is there really a need for the special lending facilities that have been created by the Fed and have more than $2 trillion outstanding in loans to the banks and other institutions? Mr. Baker said.

In June the U.S. government will begin purchasing up to $1 trillion of the bad assets now held by banks, he said.

Bank stock rallied following the release of the stress test results and banks wasted no time in taking advantage of it.

Within a day of the test results, Morgan Stanley sold enough stock to raise $3 billion, more than the $1.8 billion called for in its stress test results. It will eventually need to give back about $10 billion in bailout funds to the Treasury.

Many banks will continue to make significant money on credit cards, charging interest rates of 21 percent or more, plus fees and penalties. The credit cards are issued by many major banks, including Bank of America, Citigroup and JP Morgan. A credit card reform bill was signed by President Obama in May.

According to recent hearings in the U.S. House and Senate, 78 percent of all U.S. households have at least one credit card, and they have paid an average of $15 billion in penalty fees annually.

The legislation will not go into effect until 2010 at the earliest.

In the meantime, Edward L. Yingling, president of the American Bankers Association, told reporters the industry would continue to raise interest rates, this time on its best credit card customers, to make up for the revenue it expects to lose with credit card reforms. (IPS/GIN)

Related Articles:

Housing Crisis Erases Wealth of Blacks, Latinos

Yard Sales Boom In Recessionary Times

Recession Continues to Curb Blacks' Dream of Home Ownership

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