Interesting Bank developments over the weekend

Looks like a possible bailout of the banks and subprime borrowers may be in the works as of today.

This could be a bullish development for the stock markets and would address some of the concerns in my Risk vs Reward update yesterday.

Charts to come soon; for now still looking neutral to slightly bullish short-medium term.



Paulson Crafts Subprime Deal to Prevent Second Bush Recession
By Kevin Carmichael and Rich Miller

Dec. 3 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson, struggling to prevent a second recession in the presidency of George W. Bush, will today discuss plans to keep troubled subprime borrowers from losing their homes.

The Treasury is negotiating with lenders to fix interest rates on some mortgages to prevent a surge in defaults as borrowing costs on 2006 loans rise from initially low rates. Paulson speaks at a conference in Washington at 10:30 a.m.

Paulson and Federal Reserve Chairman Ben S. Bernanke are concerned that falling home values will throttle consumer spending, which has driven much of the six-year expansion. By heading off further deterioration in the $11.5 trillion mortgage market, officials are also aiming to stem losses on securities backed by subprime loans.

``They were caught behind the ball and now they're trying to catch up,'' said Daniel Clifton, head of research in Washington for Strategas Research Partners LLC, which provides economic and policy research to institutional investors. ``The initial assessment both from Bernanke and Paulson was that this was small and isolated.''

The two spent most of the year playing down the risks that the real-estate downturn posed to growth and financial markets. On June 20, Paulson said ``we are at or near the bottom'' of the housing decline, while the Fed insisted in early August that inflation was the biggest danger. The central bank has since cut rates twice, and may do so again on Dec. 11.

Foreclosures Climb

U.S. home foreclosures almost doubled in October from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages, Irvine, California-based RealtyTrac Inc. said on Nov. 29.

Subprime loans, given to people with poor or incomplete credit histories, typically offer a low introductory rate for the first two or three years. The rate then resets for the duration of the mortgage, usually 30 years. About 100,000 such loans will reset each month over the next two years, according to research by UBS AG.

``We need to do everything we can to help get the industry ready to meet the growing number of resets that are going to be coming,'' Paulson said in an interview with ABC News on Nov. 30, according to a transcript on the network's Web site.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., has been working with Paulson and favors extending introductory rates for between five and six years. The Office of Thrift Supervision, which hosts today's conference, advocated a three-year freeze.

Kroszner Frustrated

Three months ago, regulators asked lenders to work with borrowers to minimize foreclosures. They have been disappointed by the results. ``It would behoove the industry to go further than it has,'' Fed Governor Randall Kroszner said at a forum in Philadelphia on Nov. 30.

The negotiations have become more urgent as the economy falters after a third-quarter spurt. Growth may cool to an annual rate of less than 1 percent in October to December, economists say, following an expansion of 4.9 percent in the prior three months.

David Rosenberg, North America economist for Merrill Lynch & Co., is among analysts who foresee a recession next year. The last recession was from March to November 2001, according to the National Bureau of Economic Research, the arbiter of U.S. business cycles. The last president to oversee more than one recession was Dwight Eisenhower, who served from 1953 to 1961.

Evolution of Policy

``Early on the administration was seemingly worried about interfering too much and too early, and leaving themselves open to the charges of a bailout,'' said Michael Barr, a professor at the University of Michigan Law School and a former aide to Robert Rubin, who was President Bill Clinton's Treasury secretary from 1995 to 1999. ``I'm glad that Treasury is now at the table and pushing this.''

Paulson, 61, said in the ABC interview that homeowners who can tolerate higher interest rates won't be offered a ``freeze.'' People who are unlikely to be able to keep their houses even if rates are fixed will also miss out.

``We're focused on those in the center -- the middle group -- that are going to have a problem meeting their payment,'' he said.

Political Context

For the Treasury and the White House, failure to broker a voluntary accord would give Democrats in Congress an opening to capitalize on the downturn. It may boost chances that Congress passes a bankruptcy law that bypasses lenders and bondholders and allows judges to change loan terms.

``Voluntary loan modifications under regulatory duress is a softer version of the `cram down' bankruptcy bill being considered in the House,'' said Andy Laperriere, Washington- based managing director at International Strategy & Investment Group.

House Speaker Nancy Pelosi, House Financial Services Committee Chairman Barney Frank and other Democrats plan this week to call for foreclosure prevention, quicker loan modification and increased aid to distressed homeowners.

Democratic presidential candidate Hillary Clinton is expected to call for a 90-day moratorium on foreclosures and a five-year hold on adjustable mortgage rates, the Wall Street Journal reported, citing an interview with the New York Democrat.

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net Last Updated: December 3, 2007 00:09 EST