Your local bank is in fine shape, thank you

Earlier today, Chris Dodd – senator from Connecticut and Senate Banking Committee chairman – stopped by the Sheraton Hotel at Bradley Airport to meet with Connecticut business and labor leaders. He hoped the market would react positively to the federal government taking over a good chunk of the U.S. housing market.

As of noon ET, it’s not working out too well. But something mentioned at the bottom of an AP article in the Hartford Courant should be highlighted.

First, some comments on the crisis. From the AP piece

The rescue package allows the government to spend billions of dollars to buy bad mortgage-related securities and other devalued assets from troubled financial institutions. If the plan works, advocates say, that would allow frozen credit to begin flowing again and prevent a serious recession.

Dodd said approving the package was a necessary, but unfortunate step. “This was avoidable,” he said. “It was not a natural disaster.”

Treasury Department officials must make reports to Congress every 48 hours, Dodd said. The rescue package also created a permanent inspector general and a separate audit to oversee the use of the $700 billion.

Dodd said he expects to see the $700 billion to start distributing sometime next week. He said it is important to get the “poison paper” out of the credit market.

So, the federal government is going to use chunks of that $700 billion to buy up the “poison paper.”

They say that if the plan works – this bailout comes with no guarantees – credit that is frozen currently will begin to flow again.

But credit for people who qualify for mortgages, auto loans and other personal loans is not frozen. People all over the country have been calling banks and asking if money is available to borrow. Those who qualify can get loans.

So is Congress hoping credit will be able to start flowing again to people who can not afford it? Talk about a vicious cycle.

Now to the last few paragraphs of the article, my emphasis added.

Meeting with community leaders, bankers and business people Monday was a good for step for him, Dodd said. Local banks are not suffering the same problems as the bigger institutions, he added.

“None of my community bankers gave out ‘no doc’ loans or bad mortgages,” Dodd said.

William J. McGurk, president and chief executive of Rockville Bank, attended the meeting and said local banks are not facing the problems with failed mortgages and bad loans.

“Community banks give to borrowers who can pay us back,” McGurk said.

I love McGurk’s statement. That sums up the policy that should have been in place since day one. And by the way Senator, they are not your bankers.

I’m not exactly certain how the local community banks stayed out of this mess. Maybe because they were small institutions – as compared to the mortgage monsters – they were able to stay under the radar.

Here is my take on what happened.

  1. Lenders would not loan money to people who could not afford to pay it back.
  2. People cried racism, and the government demanded lenders loan money to people that can not afford to pay back the loan. Thus begins the 100 percent financing, interest only, sub-prime revolution.
  3. Lenders started to balk – investors did not want these high-risk mortgages in their portfolio.
  4. To keep credit flowing, the government allowed Fannie Mae and Freddie Mac – government sponsored entities – to buy up loans from anyone and everyone.
  5. Lenders saw two options. Stand up for what is right and loan only to people who can make their payments, or suffer the wrath of shakedown artists like Jessie Jackson who would call their companies racist institutions run by rich white folk and demand a boycott.
  6. Lenders kept making loans and sold them to the government sponsored entities. Lenders made profits and had little risk since they sold the paper.
  7. Housing values decrease, people who could not afford their loans can not pay.

And here we are. That about sums it all up for ya.

Of course, the media is now taking cover positions for the Democrats and the GSEs.

Related:

Hot Air has Was sub-prime lending ever a good idea?

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  1. […] Oct. 6, I posted Your local bank is in fine shape, thank you, and I quoted from an AP piece on the Courant. Bill McGurk from Rockville Bank said it best. […]

  2. […] at Ace, Right Voices, Hot Air and Malkin. My post earlier today lists out the basics of what […]

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