AN

ASSIGNMENT

ON

SUB PRIME CRISIS IN USA OF BANKING SECTOR

SUBMITTED TO:

SHAKTI DODIYA

FACULTY MEMBER

S.K.SCHOOL OF BUSINESS MANAGEMENT (M.COM)

[HNGU, PATAN]

SUBMITTED BY:

VADHER ANSUYA {57}

MCOM : (SEM- II)

1. WHAT IS SUBPRIME CRISIS ON BANKING IN U.S.A

Definition

A situation starting in 2008 affecting the mortgage industry due to borrowers being

approved for loans they could not afford. As a result, a significant rise in

foreclosures led to the collapse of many lending institutions and hedge funds. The

financial crisis in the mortgage industry also affected the global credit market

resulting in higher interest rates and reduced availability of credit.

The U.S. subprime mortgage crisis was a nationwide banking emergency that

coincided with the U.S. recession of December 2007 – June 2009. It was triggered

by a large decline in home prices, leading to mortgage delinquencies and

foreclosures and the devaluation of housing-related securities. Declines in

residential investment preceded the recession and were followed by reductions in

household spending and then business investment. Spending reductions were more

significant in areas with a combination of high household debt and larger housing

price declines.

The expansion of household debt was financed with mortgage-backed securities

(MBS) and collateralized debt obligations (CDO), which initially offered attractive

rates of return due to the higher interest rates on the mortgages; however, the lower

credit quality ultimately caused massive defaults . While elements of the crisis first

became more visible during 2007, several major financial institutions collapsed in

September 2008, with significant disruption in the flow of credit to businesses and

consumers and the onset of a severe global recession.

There were many causes of the crisis, with commentators assigning different levels

of blame to financial institutions, regulators, credit agencies, government housing

policies, and consumers, among others. A proximate cause was the rise in

subprime lending. The percentage of lower-quality subprime mortgages originated

during a given year rose from the historical 8% or lower range to approximately

20% from 2004 to 2006, with much higher ratios in some parts of the U.S.A high

percentage of these subprime mortgages, over 90% in 2006 for example, were

mortgages. These two changes were part of a broader trend of lowered lending

standards and higher-risk mortgage products. Further, U.S. households had become

increasingly indebted, with the ratio of debt to disposable personal income rising

from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-

related.

When U.S. home prices declined steeply after peaking in mid-2006, it became

more difficult for borrowers to refinance their loans. As adjustable-rate mortgages

began to reset at higher interest rates (causing higher monthly payments), mortgage

delinquencies soared. Securities backed with mortgages, including subprime

mortgages, widely held by financial firms globally, lost most of their value. Global

investors also drastically reduced purchases of mortgage-backed debt and other

securities as part of a decline in the capacity and willingness of the private

financial system to support lending. Concerns about the soundness of U.S. credit

and financial markets led to tightening credit around the world and slowing

economic growth in the U.S. and Europe.

The crisis had severe, long-lasting consequences for the U.S. and European

economies. The U.S. entered a deep recession, with nearly 9 million jobs lost

during 2008 and 2009, roughly 6% of the workforce. One estimate of lost output

from the crisis comes to "at least 40% of 2007 gross domestic product". U.S.

housing prices fell nearly 30% on average and the U.S. stock market fell

approximately 50% by early 2009. As of early 2013, the U.S. stock market had.

2. WHAT IS BANKING IN U.S.A?

Definition:

Banking is one of the key drivers of the U.S. economy. Why? It provides the

liquidity needed for families and businesses to invest for the future. Bank loans and

credit means families don't have to save up before going to college or buying a

house, and companies can start hiring immediately to build for future demand and

expansion. Credit has gotten a bad name, thanks to the 2008 financial crisis, but

that's only because it was unregulated, used for consumption instead of investment,

and allowed to create a bubble.

Here's how banking works. Banks provides a safe place to save excess cash, known

as deposits. That's because deposits are insured by the Federal Deposit Insurance

Corporation. Instead of sitting uselessly under the mattress, banks can turn every

one of those dollars into ten. That's because they only have to keep 10% of your

deposit on hand. They lend the other 90% out. Banks primarily make money by

charging higher interest rates on their loans than they pay for deposits.

What are the Top Banks in America?

Several top banks in the U.S. received over $135 billion in combined funds from

the Treasury Department's Troubled Asset Relief Program (TARP) and even more

emergency funds from the Federal Reserve. Even after the huge government

bailout, the top banks in America still manage to do well in investment banking

and trading. In 2010 the top five U.S. banks made a combined profit of over $60.4

billion.

Bank of America

Headquartered in Charlotte, North Carolina, Bank of America has about $2.8

trillion in assets. BofA received $5 billion from TARP as well as an additional

$118 billion for troubled Merrill Lynch, acquired in 2008. They also own

Countrywide Financial Corp., formerly the nation's largest housing finance bank.

Bank of America may require additional funding from TARP in the coming years.

JPMorgan Chase

A major U.S. bank with over $2.1 trillion in total assets, JPMorgan Chase received

$25 billion from TARP. An international bank with large investment banking

operations, Chase bought Bear Stearns and Washington Mutual in 2008 with the

help of the federal government. Shareholders got paid a quarterly dividend of 38

cents per share in 2008.

Citigroup

The third-largest bank in the U.S., Citigroup has about $1.9 trillion in assets.

Citigroup also received $45 billion from the U.S. Treasury in TARP money, with

an additional $301 billion in guarantees of assets. Finally forced to sell off its

controlling interest in the failing Smith Barney brokerage firm to Morgan Stanley,

the bank reduced dividend to just a penny per share. A large and diverse company,

Citigroup remains strong and has a number of good assets in spite of financial

troubles.

Wells Fargo

This small bank based in San Francisco has assets of about $1.3 billion and took

$25 billion in TARP funds. When Wells Fargo acquired Wachovia Corp. late in

2007, they became a major player among U.S. banks even though they had to soak

up an $11 billion loss. However, Wachovia's acquisition of Golden West Financial

in 2006, a California mortgage bank, places Wells Fargo at risk. This bank posted a

net loss in the fourth quarter of 2008 of nearly $2.5 billion. However, this bank

seems solid and has no need for any additional funding.

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3. THE SUBPRIME CRISIS AND THE EFFECTS ON THE U.S. BANKING INDUSTRY

Over the last 30 years the U.S. retail and investment banking systems

Have become enormous. The largest banks in the U.S. have a hand in almost

All financial transactions. This has made the recent credit crunch a worldwide

Contagion. Individuals and institutions have found it harder than ever to finance

Purchases or projects. In order to understand how we got to this point,

One must understand: the development of the housing bubble, the parties involved

In the creation of it, and the misaligned incentives that exasperated

The problem. These parties include: mortgage lenders, investment banks, and

Credit rating agencies. A series of misaligned incentives existed throughout

the network which linked these three parties. These incentives encouraged

the development of a housing bubble, whose pop prompted a worldwide financial

Crisis.

According to experts, credit is the lifeblood of an economy. Both firms

And individuals find it hard to make large purchases without the use of credit.

Credit is simply defined as: “Money loaned” by Forbes Magazines web site

(“Credit”, 2009). In the United States, much of this money is loaned by the

U.S. banking system.

Traditional banks make their money by holding savings for individual or

institutional

Clients and then either investing this money or loaning it to other clients.

In investment banks the process is more complicated but the concept is

Consistent: banks borrow money at one interest rate and then lend or hope to

Invest it at a higher interest rate. When markets are rising and delinquencies

on loans are low, banking is a very prosperous business. When markets are

Falling and delinquencies are high, banks begin to lose money and therefore

Become more reluctant to loan the money they still have. The second scenario

Is very similar to the circumstances facing banks right now.

During the 1990s, a new type of mortgage loan originated: the subprime

Mortgage (O’Quinn, 2008). Subprime mortgages are extended to customers

With less than favorable credit scores or customers with income levels below

The approved income requirement. They are intended to get potential home

Buyers into homes that they cannot currently afford but should be able to afford

in the future. Subprime mortgages are not inherently evil, if the lenders

are prudent about whom they extend credit to. Without prudence, subprime

Mortgages can be very risky. Subprime borrowers are understandably more

prone to default on their loans, as large numbers of them have done over the

Subprime Crisis and The Effects on the U.S. Banking Industry last two years. The

crisis had a significant and long-lasting impact on U.S. employment. During the

Great Recession, 8.5 million jobs were lost from the peak employment in early

2008 of approximately 138 million to the trough in February 2010 of 129 million,

roughly 6% of the workforce. From February 2010 to September 2012,

approximately 4.3 million jobs were added, offsetting roughly half the losses.

In spring, 2011 there were about a million homes in foreclosure in the United

States, several million more in the pipeline, and 872,000 previously foreclosed

homes in the hands of banks. Sales were slow; economists estimated that it would

take three years to clear the backlogged inventory. According to Mark Zandt, of

Moody’s Analytics, home prices were falling and could be expected to fall further

during 2011. However, the rate of new borrowers falling behind in mortgage

payments had begun to decrease.

The NYT reported in January 2015 that: "About 17% of all homeowners are still

'upside down' on their mortgages...That’s down from 21% in the third quarter of

2013, and the 2012 peak of 31%." Foreclosures as of October 2014 were down

26% from the prior year, at 41,000 completed foreclosures. That was 65% below

the peak in September 2010 (roughly 117,000), but still above the pre-crisis (2000-

2006) average of 21,000 per month.

Research indicates recovery from financial crisis can be protracted, with lengthy

periods of high unemployment and substandard economic growth. Economist

Carmen Reinhart stated in August 2011: "Debt de-leveraging [reduction] takes

about seven years...And in the decade following severe financial crises, you tend to

grow by 1 to 1.5 percentage points less than in the decade before, because the

decade before was fueled by a boom in private borrowing, and not all of that

growth was real. The unemployment figures in advanced economies after falls are

also very dark. Unemployment remains anchored about five percentage points

above what it was in the decade before.

4. WHAT HAPPENED STOCK PRICES?

Stock represents a piece of ownership of a particular company. When you purchase

a stock of a company you immediately become one of its owners. As a result you

have right over the profits the company makes and some voting rights depending

on the type of the stock. So, if you consider the stock profitable and beneficial you

should strive to purchase as much shares of it as possible.

The price of the stock is set following certain rules. Generally, stocks are traded on

the stock market, which tends to determine the value of the company on daily

basis.

The major factor that determines the value of a stock is its earnings. They are

mostly in the focus of attention. Every company makes a report of the profits it has

made every quarter. These numbers are of great interest to most investors, since

they tend to base their investment decisions on them. Investors use earnings per

share as an indicator of the current state of the company and its future position.

A positive attitude is awarded to companies that report quick growth in their

earnings as well as earnings growth that is stable. Many investors target companies

that don't experience positive earnings, but are predicted to shift their losing

position into a winning one in the near future. What is not looked at with a good

eye is if the company sustains losses for which no good reasons are provided.

Additionally, the market will not accept companies that have a declining earnings

trade.

Stocks are generally characterized as experiencing an upward trend over the long

term. However, this is not guaranteed in whatsoever way especially when we

consider individual stocks. You will enjoy profits from stocks only if their price

increases.

You should keep in mind that no company is insured against going bankrupt. If the

company of which you own shares does go bankrupt you will lose your

investment. Fortunately, this doesn't happen every day. The company may

experience short term problems, but if its management is effective enough it will

manage to overcome them and put its price back to balance.

As you can see, stock investing carries a certain degree of risk. However, there are

ways in which you can control the level of risk to which you are exposed. The key

is in diversification. This means that you should strive to include in your portfolio

different types of stocks. If a fall of one stock is experienced it will be

compensated by an increase in another. Additionally, you should try to get the best

out of compounding.

When you purchase a stock of a company, you are assigned the right to vote on

different issues concerning the company. A Board of Directors is elected, which

tends to supervise the management of the business. The major goal of the

company's management is to increase the value of the equity the company possesses. If the

management fails to accomplish this goal, the shareholders are in their right to

remove it.

Being an individual investor you should not think that you will be able to

accumulate enough stock to govern the company. Instead the major influence is in

the hands of institutional shareholders or a group of company's insiders. So, when

you select companies you should include management examination as

part of your analysis

The so called subprime mortgage crisis - the crisis that brought the global financial

system down - how did it happen? How did we let it happen - me, you, the Wall

Street people and the people who are now on the verge of losing their homes?

Let's get back to the time when the crisis was still just a big "ordinary" speculative

housing bubble. Back then, and for the most of the history of banking, banks would

refuse to lend money to people with poor credit history or no income. The

qualification guidelines to get a mortgage were pretty tight

.

The Excess Capital

At that same time, back in the early 2000's, there was an excess capital globally.

The world did not even imagine there would be a global financial crisis and all

investment managers were concerned about was where to invest their capital in

order to make it grow. Generally, the demand was for low risk investments that

paid some nice return.

However, such investment options were not easy to find. This pushed a great

amount of money straight into the US mortgage market thanks to the unique and

wonderful (on principle) vehicle - securitization.

Here is the big picture and how it works:

An individual gets a mortgage loan from a broker. Then the broker sells the

mortgage to a bank, which in its turn again sells the mortgage but this time to an

investment firm on Wall Street. Such firms collect thousands of mortgages in one

big pile. This in fact represents thousands of mortgage checks coming every

month, a monthly income that was supposed to continue for the life of the

mortgages. And of course, the firm in its turn sells shares of that income to

investors who are willing to buy.

Mortgage backed securities seemed like the perfect solution to the great demand of assets. After

all, in the beginning they were wonderful, safe investments - built out of mortgages with big

down payments, proven steady income and money in the bank.

And investors loved them - and not only US investors but investors from all over the world.

The Heavy Demand for More Mortgage Backed Securities

The demand for those great, safe mortgage backed securities was really high. In

fact, so high, that there was a point somewhere in 2003 when everyone who

qualified for a mortgage got one, and still the global pool of money wanted more.

Thus, things needed to change. And they did. The mortgage qualification

guidelines did.

At first, the stated income, verified assets (SIVA) loans came out. People didn't

have to prove their income any more. They just needed to "state" it and show that

they had money in the bank.

Then, the no income, verified assets (NIVA) loans came out. The lender was no

longer interested in what you do for a living. People just needed to show some

money in their bank accounts.

This wasn't enough to satisfy the huge appetite of global investors. The

qualification guidelines kept going looser in order to produce more mortgages,

more securities.

This leads us to NINA. Have you heard of NINA?

NINA is an abbreviation of No Income No Assets. Basically, NINA loans are

official loan products and let you borrow money without having to prove or even

state anything. All you needed to have in order to get a mortgage was a credit

score.

Why would a bank loosen its criteria for lending money so much? Well, banks

didn't keep these mortgages. They didn't care whether they are risky and the

borrower will ever pay them back simply because they sold the mortgages to Wall

Street. The Wall Street then sold them to global investors ... as low risk

investments.

The Risk

Why would any investor consider mortgage backed securities low risk

investments?

Well, investors use a special system to assess risk. Credit rating agencies, such as

Standard & Poor's, Moody's, and Fitch, give ratings to every type of bond

according to its risk. Letter grades mark the safety of the investments - triple A is

given to the safest ones, for example US government bonds.

And in this case, the credit rating agencies blessed most of the mortgage backed

securities with AAA rating.

The problem with this high rating is that agencies used the wrong data to estimate

the risk. Looking back historically, what they saw was a very low rate of

defaulting, a very low foreclosure rate. However, the current situation was

different - with new qualification requirements, new mortgages given to people

who would never have gotten them before, and of course, a big speculative housing

bubble that was eventually going to pop.

The Housing Bubble

Up to 2006, the housing market in the US was flourishing.

It was easy to get a home loan, so more people wanted to buy a house. The

increased housing demand increased in return the prices. The increased prices

attracted investors who were looking to buy houses as an investment, only to sell it

later for more.  This further created more demand and further increased the prices -

a classic speculative housing bubble.

And because of the rising prices, the consequences from all the "bad" loans given

to people who could not afford them were delayed. Whenever people experienced

difficulties making their mortgage payments, they could easily take another loan

against the value of their house, simply because now it was worth more.

Basically, they went into more debt in order to pay off their debts. Thus, the

housing bubble made home equity loans and home equity lines of credit extremely

popular.

The Breaking Point which Turned the Problem into a Crisis

However, in contrast to the rising house prices, the average household income

didn't increase. Thus, despite all the incentives and exotic mortgage products,

people just couldn't afford those high prices and it was only a matter of time for the

problem to come out.

And it did. The big housing bubble burst, the property values stopped increasing

and the whole thing came to a point when the mortgage lending industry started

witnessing something new - many people defaulted on their very first mortgage

payment.

What happened was a chain of reactions very similar to those in the housing

bubble but only in the opposite direction. The number of people who defaulted on

their mortgages increased more and more which in return increased the number of

houses on the market. The oversupply of houses and lack of buyers pushed the

house prices down till they really plunged in late 2006 and early 2007.

That was the point when people on Wall Street started to panic. They no longer

wanted to buy risky mortgages. Mortgage companies, which used to sell risky

loans, experienced the devastating consequences of going out of business.

Unfortunately it was already too late for everybody.

The market has already absorbed enormous amounts of these securities. All kinds

of investors from all over the world - individuals and big financial institutions -

basically have bought these AAA rated mortgage securities thinking that it was

almost as safe as putting money in a savings account. Now that the complexity and

the real risk of these securities came out, most of them are already worth less than

half their initial value and all those investors lost a great deal of money.

Moreover, foreclosures keep springing up. In the past mortgages were held in the

books of financial institutions such as banks, who had real interest in working with

their borrowers and making sure that everything possible is done to pay back the

loans. However, in the current situation, mortgages have been sold and resold and

pooled together into securities and sold to investors in the financial market. It is

really really hard to even find who the actual current owner of mortgage is. And it

is just as hard to prevent foreclosures.

5. BANKRUPT OF SUB PRIME CRISIS IN USA

last year's edition of "The Year in Bankruptcy," we referred to a "looming specter

of recession" in the U.S. near the end of 2007 triggered by the subprime-mortgage

meltdown and resulting credit crunch. The recession arrived in 2008. What's more,

it proved to be global rather than American. Anyone brave enough to follow the

positively depressing financial and economic news stories of 2008 received a crash

course on subprime loans, mortgage-backed securities, naked short selling, Poznan

schemes, and the $62 trillion (yes, trillion) global credit default swaps market, as

well as frightening insight into the intricacies of executive compensation and the

financial condition of U.S. automobile and parts manufacturers, banks, brokerage

houses, homebuilders, airlines, and retailers, to name just a few. More than 1

million U.S. homes have been lost to foreclosure since the housing crisis began in

August 2007, according to RealtyTrac, an online marketer of foreclosure

properties. At year-end, the (nonfarm) unemployment rate in the U.S. spiked to 7.2

percent, the highest since 1992, with 3.6 million U.S. jobs lost in 2008.

A record $7.3 trillion of stock market value was obliterated in 2008, under the

Dow Jones Wilshire 5000 index, the broadest measure of U.S. equity performance.

Commodity prices both soared and crashed during 2008, spurring outrage directed

at unscrupulous speculators accused of driving up prices. The price of light, sweet

crude oil peaked at $147 a barrel on July 11 and plummeted to $34 a barrel on

December 21. The average price of a gallon of regular unleaded gasoline in the

U.S. reached $4.11 on July 17 (the highest ever), only to finish the year at

approximately $1.67. The price of copper struck its highest-ever peak March 6 at

$4.02 per pound, surpassing the previous record set on May 12, 2006. Globally,

food prices continued to soar during 2008. From the beginning of 2006 through the

end of 2008, the average world prices for rice, wheat, corn, and soybeans all rose

well over 100 percent.

2008 was also the year in the U.S. of the "economic stimulus" package and

government bailouts of financial services companies, banks, at least one major

insurance company, and the beleaguered U.S. auto industry. On a worldwide basis,

relief packages consumed more than $2 trillion in taxpayer assets as of the end of

2008, with little prospect of abating any time soon.

By any account, 2008 was a banner year for commercial bankruptcies and bank

and brokerage-house failures; 136 public companies filed for bankruptcy

protection, a 74 percent increase from 2007, when there were 78 public-company

filings. Private companies, particularly private equity companies, fared equally

poorly, with no fewer than 49 leveraged buyout-backed bankruptcies in 2008,

according to a January 5, 2009, report posted by peHUB, a web-based public

forum for private equity. Hardest hit among private equity-backed companies in

2008 were the automotive and retail sectors (each with eleven chapter 11 filings),

airlines (six chapter 11 filings), media properties and consumer products vendors

(three chapter 11 filings), and restaurants (two filings). All told, there were 64,318

business bankruptcy filings in calendar year 2008, compared to 28,322 in calendar

year 2007, according to figures provided by Jupiter resources, LLC's Automated

Access to Court Electronic Records. In 2008, 10,084 chapter 11 cases were filed,

compared to only 6,200 in 2007, representing a 62.6 percent increase. Fiscal-year

statistics released by the Administrative Office of the U.S. Courts on December 15

reflect that for the 12-month period from October 1, 2007, through September 30,

2008, there were 38,651 business bankruptcy filings in the U.S., up 49 percent

from the business filings reported for the 12-month period ending September 30,

2007. Chapter 11 filings during fiscal year 2008 numbered 8,799, also a 49 percent

increase from the previous year.

No fewer than 25 federally insured U.S. banks failed in 2008, pushing the Federal

Deposit Insurance Corporation to the wall to cover $373.6 billion in insured

deposits by inducing healthier institutions to step in when other banks foundered

due to extensive holdings in subprime assets. The Federal National Mortgage

Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation

("Freddie Mac"), which own or guarantee nearly half of the U.S.'s $12 trillion

mortgage market and which back nearly $5.2 trillion of debt securities held by

investors worldwide, were essentially nationalized by the U.S. government due to

liquidity concerns related to the subprime crisis when they were placed into

conservatorship by the Federal Housing Finance Agency in 2008. Failures of other

U.S. financial giants were averted in 2008 only because the government

the companies on the Top 10 List for 2008 were involved in the banking or financial services

business—all direct casualties of the subprime-mortgage and credit crises.

6. REVIVAL OF SUBPRIME CRISIS IN USA

WASHINGTON — Two housing advocates who raised some of the earliest

warnings in 2005 about the impending housing crisis are calling for a return to

subprime lending.

Bob Gnaizda and John Hope Bryant realize it's a bit of a head-scratcher.

Nevertheless, they are making the rounds in Washington and on Wall Street to

promote their prototype for a responsible, alternative mortgage for less-than-prime

borrowers.

"Talking about 'subprime' today is like talking about the devil," Bryant, the chief

executive of Operation HOPE who serves on the president's advisory council on

financial capability, said in an interview. "Nobody wants to use the word subprime,

but frankly, we think that's the future."

Bryant and Gnaizda, the general counsel for the Black Economic Council, the

Latino Business Chamber of Greater Los Angeles and the National Asian

American Coalition, say the pendulum has swung too far in the other direction in

the wake of the subprime crisis. Enhanced regulatory scrutiny has made lenders

reluctant to offer loans to borrowers without pristine credit histories and hefty

down-payments. That has had the unintended effect of redlining low- and

moderate-income — and often black and Hispanic — borrowers.

Borrowers with lower incomes and those receiving smaller loans were more likely

to receive higher-priced loans in 2011, according to a Federal Reserve analysis of

Home Mortgage Disclosure Act data. Black and Hispanic borrowers also faced

notably higher denial rates than Asian or white borrowers, the data showed.

Gnaizda and Bryant are proposing what they call the Dignity Mortgage, a loan that

could be made to non-prime borrowers with built-in protections and incentives for

both borrowers and lenders.

Under the proposal, Dignity Mortgages would only be available to people who

complete certain financial literacy training, who have an income of 120% or less

than the regional poverty level, and who are buying homes at 95% or less than the

median price in the region.

In order to adjust for risks, lenders would be able to charge 1.25% above the lowest

prime rate for a 30-year fixed-rate mortgage. If, however, the borrower makes

timely payments for the next five years, the rate would be lowered to the lowest

fixed-rate at the time, and the 1.25% premium would be applied to reduce the

homeowner's principal.

In addition, a borrower could take advantage of a "reset clause" that would allow

him to suspend payments temporarily during an emergency — such as job loss or

the death of a spouse — provided he has made timely payments for a certain period

of time.

And the kicker: if the loan met all of the above terms, Fannie Mae and Freddie

Mac would be required to purchase the loan with limited or no recourse against the

bank.

Bryant and Gnaizda suggest that the loans could represent only 20% of the market

for the first three years, and should be treated as the equivalent of qualified

mortgages for the purpose of calculating capital requirements.

Gnaizda, the former general counsel for the Greenlining Institute, said lenders

should also be able to get credit for the loans under the Community Reinvestment

Act, not only for lending but for service and investment.

eMarco] wants to do."

Still, Stewart said, there are investors looking for lenders who can originate

subprime mortgage loans "Ultimately, the Dignity Mortgage could be a benefit to

both borrowers and lenders, Bryant said.

"You get your dignity back, (and) you get a chance in a capitalist society to reset

your life without being called a bum or being pursued financially, or your credit

ruined," Bryant said. "And the lender gets to not have Wall Street cite a bad credit

and have the regulators call for more capital.

"Maybe, just maybe, if we bake that in, you can actually sell that into the

secondary markets and the GSEs and create a new norm," he said.

Gnaizda and Bryant, along with National Asian American Coalition President and

CEO Faith Bautista, said they've been meeting with high-level officials at the

banking agencies, and may appeal to lawmakers or the White House for support.

Bryant insists such loans wouldn't require legislative action, just a change to

current regulations.

They also need banks on board — large institutions — that would be willing to

pilot test the program. Gnaizda said they have shared the proposal and received

feedback from eight financial institutions, ranging from $1 billion of assets to $300

billion, including Wells Fargo & Co. (WFC), Regions Financial Corp. (RF), U.S.

Bancorp (USB) and Union Bank N.A.

The challenge, Bautista said, is that both sides are waiting for the other to make the

first move. Banks don't want to wade into this area without assurances that

regulators are on board with the loans, and regulators often are reluctant to weigh

in on an untested product.

"When you talk to the regulators, they're waiting for the banks to do it, and when

you talk to the banks, they're waiting for the regulators to give them a green

signal," Bautista said.

Gnaizda said many of the bankers they've spoken with are positive about the

concept and don't believe that the problem of lower lending rates for African-

American and Hispanic borrowers lies with them.

"They don't want to redline and we agree with them that we don't think they do, but

they said there are unintended consequences of many federal rules and

regulations," he said.

One banker, who reviewed the proposal but asked not to be identified because his

company is not affiliated with the program, said he agreed with Gnaizda and

Bryant's hypothesis — the cost of managing risks makes lending to borrowers with

checkered financial histories next to impossible right now.

"How do you insulate from problems? Big down payments and bullet-proof

FICOs," he said. "It's the end consequence of everyone trying to drive the banking

industry to no mistakes, no losses, nothing."

He said he would need "very clear bright lines" that would prevent Fannie and

Freddie putbacks if the loan met certain criteria.

Jason Stewart, the director of research at Compass Point Trading & Research, said

the loans would have to be guaranteed by the government for the program to be

feasible.

"Otherwise, under Basel III or any other regulatory capital scheme it's going to be

very punitive," he said. "If you remove the government guarantee, there's no

chance it happens."

But a government guarantee comes with its own problems, including who pays if

the mortgage becomes delinquent.

"This is completely at odds with what the market has been saying about

introducing private capital and reducing government support," Stewart said. "It just

doesn't seem to fit in with what [Federal Housing Finance Agency Chairman Ed

Dat a risk-adjusted rate that makes sense."

"This is a great business right now," he added. "It's not a dirty word if it's done properly."

Bryant said he knows the proposal will meet resistance, but it's just a starting point for a

conversation.

"What nobody can say is that this is a stupid idea," he said. "We vetted it with the regulators —

nobody said this is crazy. There's no piece of this that's a poison pill that absolutely just can't be

done

7. GOVERNMENT AIDS ON SUB PRIME CRISIS IN USA

Results at Bank of America, Citigroup hammered by global financial crisis.

Citigroup unveils reorganization; Merrill’s buyer gets more government aid.

NEW YORK — Shares of Citigroup Inc. and Bank of America Corp. fell more

than 8% on Friday after the giant banks reported big fourth-quarter losses and took

more drastic steps to try to stay afloat.

City unveiled further plans Friday to dismantle its financial-services empire and

Bank of America got billions of dollars in new government support. Citigroup

posts loss, splits up the bank.

 Bank of America cut its quarterly dividend to a penny a share.

“The economy and subsequently the credit markets literally hit a wall, starting in

September and culminating late in December, with the greatest impact of my

almost 40 years in banking,” Bank of America Chief Executive Ken Lewis said

during a conference call to discuss the latest results. “As you have seen in earnings

reports so far, nobody operating in the capital markets or lending to the consumer

has been immune.”

Although the company managed to turn a $4 billion profit in 2008, it experienced

more than $10 billion in capital market losses and $27 billion in credit costs.

“The economy is experiencing a severe recession. Receding home prices, rising

unemployment and bankruptcies make it difficult to predict the timing of an

economic rebound,” Lewis added. “We believe the economy will continue to be a

challenge throughout 2009, with some potential early signs of stabilization during

the second half of the year.”

Bank of America’s credit-card business took a hit in the fourth quarter as losses

rose to more than 7%.

“Clearly, it was a brutal quarter for the company with the main culprit being

further and significant asset-valuation write-downs and trading losses attributable

to severe capital-markets disruptions that were heightened in the fourth quarter

even from previously poor levels,” Stifle Nicolas analysts wrote in a note.

“Summing the equity investment losses, trading losses and all other capital-

markets related losses during the quarter would equate to approximately $7.8

billion,” they estimated.

More TARP money

The U.S. government earlier announced a plan to inject $20 billion into Bank of

America and to guarantee another $118 billion of losses. See full story.

Bank of America is struggling to digest the acquisition of Merrill Lynch, where

losses have been higher than expected.

The new guarantee at B. of A. is similar to the one City got late last year. In that

transaction, the government agreed to guarantee most of a $306 billion pool of

troubled assets if losses exceed $29 billion.

Soon after that, City Chief Executive Vikram Pandit decided the company’s

financial-supermarket business model should be changed drastically. End of Story

Alistair Barr is a reporter for Market Watch in San Francisco.

Greg Moorcroft is Market Watch’s financial editor in New York.

The following are just comments, not from the author of this article. Please leave

your views afterwards:

FOR SALE: One slightly used money press, plates are slightly wet as they just

completed printing 1.8Trillion ones. Five and Ten plates are also available for sale.

.

8. Conclusion

There is still a great deal of uncertainty concerning the U.S. financial system.

Because banks have begun to slow lending, the contagion has spread

Into the economy as well. Both individuals and institutions have lost large

Sums of money in financial markets over the last two years or so. This loss of

Wealth coupled with the loss of availability of credit has caused many households

to cut back on spending. With consumers slow to spend, even the businesses

With capital to spare are slow to produce and invest in innovation.

Lawmakers are attacking the problem on two fronts. One goal is to

Reinstate confidence among consumers and businesses. The governments

Remedy for this problem is the economic stimulus package passed in February.

The other problem is shoring up the U.S. banking system. This may be

a more complex problem because the financial system is so opaque. The

Federal Reserve has exhausted all of its traditional measures, and anything

Done within the banking system from here is new territory for Americans. All

Americans can do is hope that government officials and banking executives

Will act responsibly to free up lending, so that the credit markets can return to

Normalcy.