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Stress Test Results Officially Announced

After weeks of speculations and leakage, it is finally confirmed: some of the nation’s largest banks need additional capital. Federal regulators finally announced last May 7 that 10 out of the 19 banks that underwent the stress test “failed” it.

Leading the pack is Bank of America which needs an additional $33.5 billion. Meanwhile, Wells Fargo needs $13.7 and it is closely followed by GMAC LLC which needs $11.5 billion. Citigroup and Morgan Stanley need $5.5 billion and $1.8 billion respectively. Among the banks that were given a clean bill of health are JP Morgan Chase, Goldman Sachs, US Bancorp, Bank of NY Mellon, and MetLife.

In spite of the vulnerable state the banks are still in, the government is confident about the financial industry. The Obama administration believes that even if the banks are not totally out of the woods yet, it is fast getting there. Almost half of the banks that have taken the stress test passed them. Even those that didn’t were actually in better financial shape that people originally thought.

Fed Chairman Ben Bernanke expected the report to restore investor confidence. And indeed, his projection proved to be accurate. Markets have improved steadily since the results were announced with rising share prices, better liquidity, and other signs of a stabilizing market. Regulators were also happy that capital marketers were willing to fill in the holes the stress test revealed at the banks.

The stress test showed that some of the major banks required a $74.6 worth of additional capital to ensure that they can withstand worst-case scenarios. Both Morgan Stanley and Wells Fargo sold over $15 billion worth of bonds and shares the following day. On the other hand, Bank of America said that it planned to sell 1.25 billion shares when they saw that investors were positive about their relatively small shortfall.

The Obama administration is pleased with this development. This is because if the banks are able to raise the necessary capital halfway by next week, the administration would not need to ask Congress for more bailout money.

Who is Obama’s Housing Plan Really Helping?

For our first entry in Wednesday’s Washington Weekly, let’s discuss an issue that has been a topic of conversation in almost every American home-the housing crisis.  Millions of Americans are feeling the effects of the subprime mortgage meltdown.  Many have lost their homes or are currently in danger of meeting that same fate, as they cannot afford mortgages that at one time appeared affordable.  No matter where you want to point the finger-at the lenders, at the borrowers, at the brokers-the next step in this discussion needs to focus on the solution.

So what is President Obama’s proposed solution?  How does our new commander-in-chief propose that we dig ourselves out of this crisis?  Obama’s “Making Home Affordable” plan aims to work with lenders to modify loan terms and to create more affordable fixed-rate loans.  Approximately 4 million Americans will benefit from the modified terms, while 5 million Americans will be granted the more affordable fixed-rate loans.  The 9 million Americans who will reap the plan’s benefits must fall in the category of borrowers who owe up to 5 percent more than their home’s current value.  If you fall into this category, you must submit your most recent tax return, two pay stubs, and an “affidavit of financial hardship.”  The conditions of the housing plan dictate that borrowers will only be allowed to have their loans modified once; furthermore, the loans needs to have been granted on or before January 1, 2009, and must either be backed by Fannie Mae or Freddy Mac.

So how is Washington responding to the fact that the “Making Home Affordable” leaves out the rest of homeowners who owe more than 5 percent of their home’s current value?

Secretary Tim Geithner commented:

“Two weeks ago, the President laid out a clear path forward to helping up to nine million families restructure or refinance their mortgages to a payment that is affordable now and into the future.  Today, we are providing servicers with the details they need to begin helping eligible borrowers.”

This is only the beginning of a plan that will, over time, trickle down to help other Americans caught in the midst of the subprime mortgage crisis.  A crisis of this size, with this much money involved, cannot be solved overnight.  For more information regarding the details of President Obama’s housing plan, visit www.financialstability.gov.

What does Obama’s State of the Union Mean for Me and for My Financial Situation?

Obama has expressed the importance of our country coming together and making the effort to better the current financial and economic situation.  He called in state governors and city mayors, vowing to hold them accountable for every dollar they receive from the federal government.  He used his State of the Union address this past Tuesday to reiterate the importance of every individual moving forward; more importantly, he explained how his plan will work to help everyday Americans.

The message the White House has been sending this past month has been that today is the day that change has come.  Tuesday’s speech was no different.  We need to change our ways as people when it comes to spending, lending, and borrowing. More importantly, President Obama told congress that today was the day they have to stop putting off reform.  In order to better understand the situation, we have to realize how we got to this point.  Congress allowed banks to exercise past lending practices and to push bad loans Reform was put off.   Discussions about Healthcare and Educational reform was put off for the next year and for the next administration

As the leader of this next administration, Obama has given us access to a website, recovery.gov, as a place to go and follow exactly where every tax dollar is being spent.

The importance of credit in our economy has never been so visible.  Obama said if credit isn’t flowing, then the process of recovery we must go through twill not begin.  If people cannot get loans then they cannot buy homes or cars. Aspiring students will not be able to apply for student loans.  If credit is not freed, stores cannot stock their shelves and sales cannot be made.  If lending is not opened up, then businesses cannot make payroll and people get laid off.  So banks stop lending to individuals and each other and eventually credit dries up.

We need to put an end to this destructive cycle and restore confidence and lending.  President Obama has laid out a three part plan to do this.  The first part of the plan comes in the form of the new lending fund, the largest effort ever made to increase lending to the following people: auto loans for consumers, business loans for entrepreneurs, and education loans for students.  The second part of Obama’s plan is a housing program to help responsible home owners lower their monthly payments and refinance their mortgage.  The third part of the plan aims to restore money and confidence to the banking system.

From the top, this plan looks like an effort on all fronts to encourage lending, the true question is just how much will this cost us over time?

Where did the Banks Spend the Bailout Money?

Obama and Geithner are now cracking down on the banks.  They are saying that in order for banks to receive more money from the bailout funds, they will have to cap their pay.  They will also be held accountable for where the money is being spent and used.

Okay, let’s back track.  What happened to the first round of funds that was distributed while the old administration was running the show?  Well, no one really knows.  As a result of the government not holding banks accountable, the funds ran out.  The public learned of these banks’ continued spending, along with the $18 billion in bonuses that these bank executives earned.

When consumers apply for a loan or a mortgage, their financial past is put under a microscope during the underwriting process.  Banks need to know details about the potential borrower’s income, any outstanding debt and financial track records.  If this is standard procedure, why aren’t banks subjected to these checks when they ask to borrow money from us??  Why can banks borrow money from public funds and not have to show where it is being used or spent?

Thankfully it looks like Obama and Geithner will not allow this lack of accountability to continue with the second round of funding.  With the first round of funding distributed,  I have not seen any evidence of credit markets opening back up.  So where exactly did the money go?  We may never know where the first round of funds were spent.  Moving forward, hopefully the public will see evidence of more transparency when it comes to detailing how the rest of the funds are being used.