Credit crisis: the pain is unlikely to end soon!

Banks Are Likely to Hold Tight to Bailout Money

Excerpt:

Since mid-2007, when the credit crisis erupted, the country’s nine largest banks have written down the value of their troubled assets by a combined $323 billion. With a recession looming, the pain is unlikely to end there. The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans.

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Every corner of the economy goes through cyclical ups and downs. But the banking downturn has acted with ferocious speed to erase past profits.

In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount.

More:

Millions owe more on their homes than homes are worth

Excerpt:

... an estimated 12 million American mortgage holders now owe the bank more than their homes are worth. And with housing prices still sliding and the credit crunch worsening, the number of so-called upside-down mortgages is expected to rise to record levels.

Within a year, Moody’s Analytics predicts, a whopping 30 percent of all U.S. mortgage holders will owe more on their homes than they are worth. In some California communities, according to real estate service firm Zillow.com, negative equity already is the norm.

The effects of this are many.

The risk of default rises — and it’s good to recall that it was people defaulting on their home loans last year that set much of the current economic crisis in motion. Home equity lines of credit — even for people who pay their mortgages faithfully — will be harder to come by. And woe to those who lose a job or get sick.

“If you have some kind of disruption to your income and you can’t make your mortgage payment, it’s going to be very hard for you to refinance or anything like that,” said Mark Zandi, chief economist for Moody’s. “This was the bedrock of most people’s savings, their home.”

Comment: I saw something on an investment TV show yesterday ... the commentator said something to this effect: "credit to the economy is like alcohol at a party". In essence, if you want to have a fun party you need booze (I dispute this but let's go with this analogy for a minute) ... in the same way the US economy has been pumped up (high if you will) on credit. The after effect of a drunken binge is a terrible hangover ... well the after effect of this credit binge is a recession. Our economy is "hung over". I just hope someone does not vomit on me!