Monday, September 29, 2008

No banks are immune

There is chatter on the news channels that there are banks that have not participated in this crisis and that they are not affected by the credit meltdown. The reality is that there is no bank that is immune to this crisis. All banks hold mortgages of some kind and they make their profits on the interest from lending money. This is how the market works. You put money in the bank and they get to lend it out at a 10 to 1 ratio and charge 2, 3 or 4 times the rate of return that they offer to depositors. All banks will be holding more toxic assets daily if the credit market stays frozen. Home prices will decline further, foreclosures will increase and in turn all prices of real estate in the area of bank owned homes will be pulled down. You see the larger banks scrambling to scoop up banks with massive deposit bases in order to secure their own balance sheets. They don't want the mortgages from those banks because they can use the deposits to shore up the books and when the market stabilizes they will begin to lend out against all of those deposits with the 10 to 1 ratio previously mentioned. We will have a few very large banks that hold all the deposits as well as the cards. The banking industry could end up looking more like the utility business as consumers will be given one choice of where to shop. Think about your electric bill for a minute. Is there any competition in that market? Can you switch to a different power provider if you don't like their service? I don't know of any place where you are given choice for electricity and it soon could be the same regarding our banking if we don't get the credit markets functioning again.

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