Wednesday, March 10, 2010

Why banks are not lending, a continuing series...

Not only are capital markets in flux for large money center banks, but political capriciousness is a major risk as well. This is a blogpost about the second lien issues banks are facing. The article makes some strange assumptions regarding default rates, but the second lien issue is an important one. This, combined with Commercial Real Estate and the option-ARM resets in the next two years, will keep banks holding on to capital for dear life.

This all could have been ameliorated or (albeit unlikely) avoided if the bottom-up solution of an immediate tax holiday was instituted, but the Fed and the Treasury still hold on to policies that have little applicability.

And so, banks now must gauge whether or not the policies suggested by an already embattled Treasury (such as paying an "extinguishment fee" to banks willing to liquidate their second lien assets) are politically viable.

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